* Government concedes to farmers ahead of key state elections
* Modi says failed to win the argument with small farmers
* Laws to be repealed in upcoming parliament session
* Farmers to continue protest in Delhi until laws repealed (Updates with impact on agriculture, food processing sectors)
By Mayank Bhardwaj and Rajendra Jadhav
GHAZIABAD, India, Nov 19 (Reuters) - In a surprise announcement on Friday, Indian Prime Minister Narendra Modi said he would repeal agriculture laws that farmers have been protesting against for more than a year, sparking celebrations for what farmers called a hard-fought victory.
Modi's decision is a significant climb-down for the combative leader and comes as state elections in politically important grain-belt states loom.
The legislation - three laws introduced in September last year - was aimed at deregulating the sector, allowing farmers to sell produce to buyers beyond government-regulated wholesale markets where growers are assured of a minimum price.
Farmers, fearing the reform would cut the prices they get for their crops, staged nationwide protests that drew in activists and celebrities from India and beyond, including climate activist Greta Thunberg and pop singer Rihanna.
"Today I have come to tell you, the whole country, that we have decided to withdraw all three agricultural laws," Modi said in an address to the nation.
"I urge farmers to return to their homes, their farms and their families, and I also request them to start afresh."
The government would repeal the laws in the new session of parliament, starting this month, he said.
The concession on laws the government had said were essential to tackle chronic wastage and inefficiencies comes ahead of elections early next year in Uttar Pradesh (UP), India's most populous state and long a key political battleground, and two other northern states with large rural populations.
Modi's capitulation leaves unresolved a complex system of farm subsidies and price supports that critics say the government cannot afford.
It could also raise questions for investors about how economic reforms risk being undermined by political pressures.
Protesting farmers, who have been camped out in their thousands by main roads around the capital, New Delhi, celebrated Modi's back-track.
"Despite a lot of difficulties, we have been here for nearly a year and today our sacrifice finally paid off," said Ranjit Kumar, a 36-year-old farmer at Ghazipur, a major protest site in Uttar Pradesh.
Jubilant farmers handed out sweets in celebration and chanted "hail the farmer" and "long live farmers' movement".
Rakesh Tikait, a farmers' group leader, said the protests would only be called off when parliament repealed the laws.
VULNERABLE TO BIG BUSINESS
Modi's Bharatiya Janata Party (BJP) government said last year there was no question of repealing the laws. It attempted to break the impasse by offering to water down the legislation but protracted negotiations failed.
The protests took a violent turn on Jan. 26, India's Republic Day, when farmers overwhelmed police and stormed the historic Red Fort in New Delhi after tearing down barricades and driving tractors through roadblocks.
One protester was killed and scores of farmers and policemen were injured.
Farmers say the changes would make them vulnerable to competition from big business and they could eventually lose price support for staples such as wheat and rice.
The government says reform of the sector, which accounts for about 15% of the $2.7 trillion economy, would have meant new opportunities and better prices for farmers.
Modi announced the scrapping of the laws in a speech marking the birth anniversary of Guru Nanak, the founder of Sikhism. Many of the protesting farmers are Sikh.
He acknowledged that the government had failed to win the argument.
The farmers are also calling for minimum support prices for all of their crops, not just rice and wheat, a new demand that has gained traction among farmers across the country.
Some agriculture experts said Modi's reversal was unfortunate because the reforms would have brought new technology and investment.
"It's a blow to India's agriculture," said Sandip Das, a New Delhi-based researcher and agricultural policy analyst.
"The laws would have helped attract a lot of investment in agricultural and food processing - two sectors that need a lot of money for modernisation."
The Confederation of Indian Industry (CII), a group that represents top corporations, had pinned hopes on the laws to pave the way for modernising India's decrepit post-harvest infrastructure.
Also, the $34 billion domestic food processing sector would have grown exponentially, thanks to the laws, according to CII.
Another industry body, the Federation of Indian Chambers of Commerce and Industry, late last year said the laws should spur startups, and technological interventions would help cut wastage and bring efficiency in the agriculture sector.
Seizing on opportunities, global and Indian venture capitals have already started funding agritech startups that aim to run the entire food supply chain, currently prone to massive wastage, often as high as four to five times that of most large economies, experts say.
Anil Ghanwat, head of a farmers' union and a member of Supreme Court appointed farm panel, said the laws promised farmers freedom from middlemen and their repeal would leave them open to old exploitation.
The opposition has been keen to take advantage of the acrimony between farming communities and Modi's party and Rahul Gandhi of the main opposition Congress party, said the "arrogant" government had been forced to concede.
"Just the beginning of many more victories for people's voices," Mahua Moitra, a lawmaker from the Trinamool Congress Party and one of Modi's staunchest critics, said on Twitter.
State elections are also due soon in Punjab and Uttarakhand in the north.
Modi's party looks well placed to fend off challenges in the next general election, due by 2024, but in a worrying sign for him, a regional party swept to power in West Bengal state in May. (Reporting by Mayank Bhardwaj, Rajendra Jadhav and Krishna N. Das; Additional reporting by Shilpa Jamkhandikar; Editing by Muralikumar Anantharaman and Raju Gopalakrishnan)
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