Sunday, October 18, 2015

How fragmented are agricultural markets in India? How should they be unified? Consider each in turn.

1. Characteristics of agricultural markets: Three key features characterise agricultural markets.

A. Thousands of markets: 
  • India is one country, comprising 29 states. But in agriculture, it has 2,477 principal regulated markets and 4,843 sub-markets, created by the agricultural produce market committees (APMCs). This fragmentation, reflected in wide inter-state and intra-state farm-price differences.
B. Restrictive regulations and broad scope: 
  • APMCs make the first sale of agriculture produce outside the notified market yards illegal. 
  • Many state governments have brought within the purview of these Acts, not only to cereal, pulses and edible oilseeds, but also fruits and vegetables and so on.

C. Many, non-transparent levies and charges: 
  • APMCs allow the imposition of levies and other market charges on every first sale of the commodity produced. 
  • Being statutory levies/fees, these are treated akin to the taxes, rather than the fees charged for the services provided. 
  • However, they are not credited to the consolidated funds of the respective states, escaping the audit and scrutiny of regular expenditure.
Role of Commission Agents
  • In addition to these levies charged by the states, commission agents appointed by the APMCs charge a market fee. Though the APMC Acts in most states bar commission agents from deducting this market fee/commission from the seller, their incidence falls on the farmers since buyers incorporate that in their bids. Thus, farmers have benefited little from the APMC. In fact, the law has tended to help commission agents. The Act has also triggered distortions in the price-discovery process at the national level.
  • Commission or adat payable to licensed commission agents constitutes a major transaction cost, which is generally around 6 per cent of the sale price for fruits, vegetables and other perishables and about 2 per cent for non-perishables. The commission charged is, unlike direct taxes, levied not on net income, but on the entire value of produce.
These APMC taxes and commission agents' fees differ from state to state and together distort markets substantially with significant impacts on farmers and consumers. 

Distortions in MSPs !!
  • Taxes and other incidentals as a percentage of the minimum support price (MSP) range from 3 per cent in West Bengal to 19.5 per cent in Andhra Pradesh in case of rice/paddy and from 0.8 per cent in Gujarat to 14.5 per cent in Punjab in case of wheat.

2. Model APMC Act
In 2003, recognising the importance of removing trade barriers and creating a common market, the union Ministry of Agriculture formulated model APMC Act for adoption by the states.The model APMC Act provides some freedom to the farmers to sell their produce directly to the contract-sponsors or in the market set up by private entities. But it has two serious limitations. 
  • First, the contract sponsors or the private entities setting up markets are required to pay the market fee to the notified APMCs, even if they provide no services. This is akin to the tax charged by the APMC.
  • Second, though the model APMC Act provides for the creation of markets by private sector, it is inadequate to create competition. The owner of the private market still collects the APMC fees/taxes, for and on behalf of the APMC, in addition to the fee that he might charge for providing trading platform and other services, like loading, unloading, grading, weighing and so on.

3.Karnataka model
  • Karnataka has taken steps to provide for the common registration of the market intermediaries. Out of the 155 main market yards and 354 sub-yards, 51 yards/sub-yards have been integrated with the single-licensing system. 
  • Rashtriya e-market Services Ltd (ReMS), a joint venture created by the state government and NCDEX Spot Exchange, offer modern facilities for grading, dissemination of prices for different grades of the commodities in different market yards/sub-yards, weighing, loading, unloading and scientific warehousing. 
  • Electronic auction platform and scientific grading and warehousing facilitate warehouse-based sale of produce and commodity funding based on warehouse receipts. 
  • The wider geographical scope has enabled private sector investment in marketing infrastructure and has certainly provided the farmers more choices to sell their produce. 
  • However, there is scope for further reducing intra-state price differences by extending common registration to the remaining market yards/sub-yards.

4. Road map for creating national market for agricultural commodities
The Union Budget of 2014 recognises the need for setting up a national market and stated that the central government will work closely with the state governments to reorient their respective APMC Acts to provide for the establishment of private market yards/markets.

  • One possibility would be to incentivise the states (via, say, NITI Aayog transfers) to drop fruits and vegetables from the APMC schedule of regulated commodities. ( latest ...many states have done this on request of Central Govt.) 
  • This could be followed by cereals and then other commodities. 
  • Similarly, they could be incentivised to create state-wide common markets by providing for common registration of market intermediaries across market-yards/sub-yards within the state on the lines of the Karnataka model. 
  • They could also be exhorted to provide policy support for setting up infrastructure, making available land and so on for alternative or special markets in private sector, since the players in the private sector cannot viably compete with the APMCs in which the initial investment was made by the government. 
  • Foreign direct investment in retail could also be part of the policy mix to address supply-chain inefficiencies.

The above part is what is mentioned in Economic Survey, other than this some ideas towards how a National Market for Agriculture must be are as follows :-

  • One, the national market should guarantee each farmer freedom of pricing and freedom of access. The wheat farmer in Haryana should be free to sell directly to a trader in Tamil Nadu if the prices offered are better. There should be new kinds of commission agents, such as Farmer Producer Organisations and cooperatives, for better aggregation.
  • Second, it should move farmers from old-style bargaining to the exercise of choice. As consumers, we have moved from haggling the price of one kilo rice with the local grocer to shopping at the supermarket where with the price is fixed but we can see all available choices and take an informed decision. If we don’t like one supermarket, we can go to another. Farmers too need a transparent market where the selling decision becomes matter of unilateral choice rather than give and take between two parties.
  • Third, it should encourage flow of financing into commodity storage by farmers. Negotiable warehouse receipts can provide the collateral to finance farm production at minimum interest rates, which will increase a farmer’s competitiveness. He will be freed to concentrate on efficiency of production.
  • Fourthly, it should transmit price signals correctly. Production will go where the profit is, and profit is where people want production. Unfortunately, these price signals get distorted by government interference in supply management. Had the Cotton Corporation of India not procured cotton in 2014 – a year of oversupply and let prices reach their own level – farmers would have got the message and shifted acreage next year to groundnut or castor, where demand was high.
  • And finally, the national market should seamlessly connect cash, forward and futures markets so that farmers make selling decisions most advantageously. 


Moral of the Story !!!

  • Alas, it is easy to say what states must do but much more difficult to ensure that states do so. After all, there is some underlying political economy that has prevented individual states from achieving unified markets in the first place.
  • In Indian lore, the farmer has been romanticised, while the money-lender as the iconic middle-man has been pilloried. The middle-men responsible for fragmenting agricultural markets and victimising the farmer have largely escaped scrutiny. That may explain the travesty, 68 years after independence, of many agricultural Indias.

Print Friendly and PDF

Blog Archive