As India weighs the prospects of adopting a decentralised approach to battle the COVID-19 pandemic, the question of formulating a calibrated approach for re-opening the economy has assumed importance. Two weeks into the world’s biggest lockdown, our food supply chain is struggling, causing existential distress to producers, and consumers alike. Reports from ground suggest that the supply chain has collapsed on account of closure of wholesale markets, and the disruption in the transport system. While it is abundantly clear that the government cannot, and ought not to re-start economic activity with the flick of a switch, we need to recognise the structural issues which continue to plague India’s agricultural marketing policy.
Are Agricultural Produce Marketing Committee (APMC) Acts responsible for causing market failure?
Agricultural marketing policy in India continues to be guided by State intervention in procurement, and distribution of farm produce. Most States have enacted Agricultural Produce Marketing Committee (APMC) Acts, to regulate, control, and monopolise the functioning of markets. The original idea behind setting up of APMCs was to protect farmers from commission agents, and middlemen. It was believed that these markets would be fair, efficient, and offer competitive prices to farmers. However, experience suggests that the legal framework may be counter-productive to the stated object of the aforesaid Acts. Empirical evidence suggests that APMCs have fallen prey to the very habits they were supposed to mend, and this makes for a strong case for institutional reform.
Understanding Principles of Market Design
Nobel Laureate Alvin E. Roth’s authoritative work in the field of market design explains how market failures need to be addressed. He argues that in order to function properly, markets need to do at least three things. One, they need to provide thickness— that is, to bring together a large enough proportion of potential buyers and sellers to produce satisfactory outcomes for both sides of a transaction. Two, they need to make it safe for those who have been brought together to reveal or act on confidential information they may hold. Finally, they need to overcome the congestion that thickness can bring, by giving market participants enough time—or the means to conduct transactions fast enough—to make satisfactory choices when faced with a variety of alternatives. When evaluated against the touchstone of competitive market designs, APMC Acts fall woefully short of optimising income from agrarian produce.
Power tends to corrupt, and absolute power over economy corrupts absolutely.
APMC Acts empower State Governments to demarcate their geographical region into various ‘market areas’. Thereafter, a Market Committee, inter alia, comprising of traders, farmers, and government representatives is established for every notified market area. The power to regulate trade is consequently conferred upon the said Committee, by authorising it to set up a market yard, where exclusive trading of agricultural goods take place. This highly monopolistic structure is not only antithetical to the cause of agricultural competitiveness, but also gives rise to various other practical problems.
Concerns of Trade Cartelisation & Conflict of Interest
APMC Acts typically declare the purchase, sale, storage, and processing of agricultural produce outside the yard set up by the Market Committee, unlawful. A case in point is the Punjab Agriculture Produce Markets Act, 1961, which under Section 8, bans the sale and purchase of produce except by license granted by the Committee, and further makes the same an offence by providing for imprisonment under Section 37. A 2012 Order by the Competition Commission of India is a case in point, in as much as it notes significant trends of cartelisation in agricultural markets, specifically with reference to the onion market. Further, studies by economists from the Institute for Social and Economic Change in Bengaluru and the National Council of Applied Economic Research in New Delhi have also confirmed collusion among traders in our highly monopolistic market.
Furthermore, given that local traders, and politicians are often members of the Market Committee, there is a direct conflict of interest in allowing new participants, and fostering competition. It evidently follows that the power to issue licenses should not be bestowed upon Marketing Committees. The said function of regulation should be limited in law, and ought to be performed by an independent Authority.
Restriction on Freedom to Sell
The present legal framework is not in consonance with the letter and spirit of APMC Acts, in as much as it negatively impacts the ability of the farmers, to sell their produce at the best available price. APMCs have kept the market highly controlled, resulting in the emergence of multiple levels of intermediaries. A study by Global AgriSystem of Fruit & Vegetable Supply Chain in Four Metros (Delhi, Mumbai, Bangalore and Kolkata) revealed that on an average, there are 5-6 intermediaries between the primary producer, and the consumer. The total mark-up in the chain was accordingly estimated to be upto 60-75%. It consequently follows that primary producers were estimated to receive only 20-25% of the consumer price. Moreover, multiple handling by different intermediaries results in an estimated wastage of around 15-25% of the economic value.
The intention to offer the farmer, the best available price is laudable in spirit, but the present arrangement fails to justify why the same calls for restricting the farmers’ freedom to sell. If the price offered by the APMC Mandis is indeed the best one, then the farmers would choose to sell there on any given day. There is, therefore, no merit in restricting choice.
It must be conceded that over a period of time, some States have relaxed some provisions, by allowing traders to buy directly from the farmers. However, this has not necessarily led to optimum income realisation. A case in point is Section 12 of the Andhra Pradesh (Agricultural Produce and Livestock) Markets Act, 1966, which provides that even when traders, and farmers do not use any APMC infrastructure, the Market Committee is empowered to levy fees on its sale, by creating a presumption in law, to the effect that the said sale took place within the market area.
It has been estimated that the all-India average area served by a regulated market is 487.40 sq km, as against the recommendation of the National Farmers Commission (2004), that a regulated market should be available to farmers within a radius of about 80 sq. km. For most farmers, selling at APMC Mandis would, therefore, ordinarily entail increased transaction cost in terms of transportation & loading expenses, market fees, weighment charges, entry tax, etc.
Every crisis is an opportunity, and the present one is appropriate for the purposes of undertaking institutional reforms, which may improve the market design of agricultural produce. Attention may be drawn to the 2016 decision of the Government of Maharashtra, to delist fruits, and vegetables from the purview of APMC Acts. All reports suggest that the same was beneficial, in as much as it led to an increase in income realisation for farmers, some of whom now chose to sell at the farm-gate. Further, end consumers also benefitted as intermediary margins decreased. There can, therefore, be no denying to the fact that guaranteeing freedom to sell in a more liberal framework, will go a long way in increasing farmers’ income. In order to achieve the said object, there is a pressing need to reduce intermediation in the supply chains, by ‘thickening’ the market, and providing alternative marketing channels.
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