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06 September 2014

Freedom Half Won

What the permission given to farmers to sell their produce outside APMC markets of Delhi means, and how much farther the capital and the rest of India must travel to ensure fair competition in the market and, thus, higher prices for the farmer but reduced prices for the consumer

On Tuesday, Lieutenant Governor of Delhi Najeeb Jung, in consultation with the Centre, approved the proposal to cease regulation of marketing of fruits and vegetables in the market area beyond the principal yard and sub-yard at three vegetable mandis — aka APMC markets — in the city. That is, the selling has to be conducted outside the confines of the three established dalal markets at Azadpur, Keshopur and Shahdara.
Azadpur mandi traders during a strike in February 2014
The amendment in the rules would also lift the bar on establishment of new markets by other players like co-operative societies, Kisan Mandis, NAFED, Mother Dairy, Safal etc. bringing competition in the marketing of fruits and vegetables.

This is a politically wise way of ushering in competition, and thus causing reduction in prices of edibles, given the ideological aversion of the Sangh Parivar to FDI in retail. Since no foreigner is involved in the process, the ideology of nationalism that the BJP and AAP, compelled by the trading class that supports them, furthered to resist competition in the market has been rendered ineffective. Some of these lobbies are perturbed. Mahinder Sanpal of Azadpur Mandi APMC has alleged that the government is trying to bring in private players. He says APMC is contemplating approaching the court for a stay on the notification.

The Agricultural Produce Market Committee Act is among the worst anti-market forces that have come into existence since the liberalisation of the economy more than two decades ago. It virtually reduces farmers to pawns in the hands of middlemen. Prices of food items rise due to the commissions these brokers charge at various levels as well as for the act of hoarding some of them indulge in. This means that, while consumers pay sky-high prices for food, farmers get a pittance for that produce. Even Safal, which buys directly from the farmer, has been paying 1% market fee to the APMC for every kilogram of fruit and vegetable. This fee will no longer apply if the transaction takes place outside the mandis since anyone is now free to set up wholesale markets.

Under the original APMC Act of different States,
  1. A State is geographically divided and mandis are established at different places within the State; 
  2. Farmers have to sell their produce through auction at the mandis; 
  3. To operate in a mandi, a trader has to get a licence*; 
  4. Wholesale, retail traders (e.g. owner of a shop in a mall) and food processing companies cannot buy farm output directly from the farmer. They have to get it through the mandi.

* [The licensing requirement brings its own share of problems. In most mandis, the precondition to get a licence is ownership of a shop or warehouse in the mandi. That is a difficult proposition because shops and warehouses are limited in number and also dearly priced. Practically, when the licence seeker is desperate, he finds some old licence holder who wishes to leave the business due to age/health problems and his sons are not keen to join the profession. The poor chap buys his shop/licence at an exorbitant price so that other potential buyers do not outbid him. To recover this investment as also the bribes he pays to get the licence, the trader exploits the farmer and the consumer alike.]

Even after receiving the fruit/veggies/grains, the brokers delay payment to farmers for weeks and months. If the payment is done on spot, the trader arbitrarily deducts some amount under the pretext that he has not received payments from other parties! To avoid tax/cess, the traders don’t give sales slips to farmers; later it becomes difficult for the farmer to prove his ‘income’ to get loans from banks. On an average, the farmer is able to receive barely 1/4th to 1/3rd of the final retail prices.

PM Narendra Modi’s food and finance ministers are now pushing States to let fruit and vegetable farmers sell to anyone they want, ending a practice that governs more than 7,000 wholesale markets: Live Mint
The middlemen at the mandis charge commission from both the seller (farmer) and the buyer (the urban retailer/food processor), thus making the final consumer pay even more. During the peak season, when they buy from farmers at low prices, they don’t reduce the prices for the final consumer. During peak production of seasonal crops, prices drop so drastically that the farmers can’t even cover the cash expenses of transportation to markets, leave alone the cost of production. During the lean season, when consumer prices are high, the farmers do not get higher returns on their produce.

The middlemen resist any government move aimed at increasing transparency or reducing transaction cost and time. Even when electronic auction centres were established, like the Safal National Exchange in Bangalore, the existing markets did not allow transition to a transparent system.

These brokers have no facilities for grading and sorting. All they do is pass the produce from the farmer to the final consumer and charge truckloads of commission in between. Thus, post-harvest losses continue to be in the range of 18% to 40% for several commodities.

For cereals, pulses and oilseeds, government announces Minimum Support Prices (MSP). Farmers know in advance the minimum price their produce will fetch in case they go unsold in the market. But for most perishable fruits and veggies, government does not declare MSPs, thus making farmers dependent on intermediaries for price discovery.

The licensee traders and commission agents have formed informal cartels at the mandis. No auction takes place here. Even when an auction is held, these traders collectively keep the bidding low; thus, the farmer never benefits.

In every mandi, a transaction is subjected to market tax as well as market cess. The cess money is meant to build mandi infrastructure — sorting, grading, storage facilities etc. However, the money is not used for that purpose. As a result, fruits and vegetables often rot due to lack of processing, storage facilities at the mandis. Even the good produce gets contaminated due to flies and larvae, risking consumers with gastrointestinal diseases.

Government once took note of the problems above and tweaked the law in several places. Bihar repealed the Act altogether in 2006. Now, the SDM is in-charge of the unregulated markets. No market fee is charged from the farmers, but charges for loading, unloading and hamal are either in vogue or are uncontrolled.

Among other States, Andhra Pradesh permitted private markets with a licence fee of Rs 50,000 and a minimum project worth of Rs 10 crores. This discourages small farmers and trader associations from setting up their own private markets. Odisha has not permitted private markets for paddy/rice. Haryana only adopted contract farming-related provisions. In some States, even the private markets are subjected to mandi tax and mandi cess! Madhya Pradesh abolished the commission agent system, but some other states did not adopt this provision of model APMC. In West Bengal, which is yet to amend its outdated APMC Act, the Trinamool Congress opposes the concept of contract farming on the premise that it could jeopardise farmers’ interests.

Farmers leaving after selling off their crops at the Harda mandi in Madhya Pradesh
In Delhi, the notification from Jung, implemented under Section 3 of Delhi Agriculture Produce Marketing (regulation) Act, 1998, is not a magic wand, though. In the city-State, 118 commodities are notified under the Act, which states that no person is allowed to set up wholesale fruit and vegetable markets outside the existing wholesale markets. Now, despite the relaxation, small farmers will have to continue to sell through an agency because land rates in the capital are inhibiting and there is terrible shortage of space. Farmers, who have been paying a 6% commission and 1% market fee in the existing wholesale markets, will only have the advantage of taking their goods to the seller who will offer them the best price for their goods.

In order to clean up this mess and streamline the chain, some liberal economists — mercifully, we have a few among zillions of socialist activists — are pressuring the government with innovative ideas of clearing roadblocks. Surendra Srivastava of the Lok Satta Party says, “Much of food inflation is in respect of fruits, vegetables, eggs, milk, meat and fish. In the absence of proper logistics, the consumer pays a high price, and the farmer realises a low price. The only way of assuring the best price for the consumer as well as the farmer is to compress the elaborate market chain, and bring the producer close to the consumer. The source of investments is of little consequence as long as steps are taken to protect the interests of farmers and consumers.” He proposes:
  1. Removal of all restrictions on movement and sale of food grains within the country and across national boundaries;
  2. Removal of trading restrictions on non-food commodities such as cotton; formulate durable and predictable policies; 
  3. Rationalisation of policies for import of scarce commodities such as oil seeds coupled with incentives for boosting domestic production;
  4. Bringing in investment to create storage facilities with post-harvest management for perishable commodities, and facilities for the farmer to avail bridge financing on the stored produce, with the flexibility to sell at an attractive and remunerative price; 
  5. Bringing market yards under direct control of farmers who are the stakeholders; professional assistance can be provided on the basis of need;
  6. Deployment of all taxes and cesses related to farm produce directly only to improve infrastructure in markets, warehousing and other facilities to facilitate better access and higher price realisation; transfer these resources directly to elected market committees, under fair and firm supervision to enforce accountability and transparency; 
  7. Bringing in investment in transport, cold storage, and processing to reduce the criminal waste in perishable commodities such as fruits and vegetables (100,000 crores annually); improve farmers’ incomes, stabilise consumer prices, and ensure quality food supply;
  8. Invitation for investments in organised retail chains necessary to stimulate our agriculture, stabilise prices, create jobs and promote exports;
  9. Making significant investments in agricultural technologies, plant breeding, pest control, soil management, drought resistance, post-harvest technology, and in frontier areas of biotechnology is critical to ensure food security and protect farm incomes.
The proposals are good but suffer from quasi-socialism or idealism. In market economics, nobody invests because the investment will be good for somebody else or because it is an immensely patriotic thing to do. Presuming Srivastava is not asking government to put taxpayers’ money in infrastructure, which would again lead to a lot of inefficiency and a bit of corruption, businessmen invest only where returns are assured or likely. It is to pressure them that such market operators must come whose very fundamental is to reduce the number of middlemen between the producer and the consumer to one. Such operators are foreigners.

Can we keep infamous Wal-Mart out and let Tesco, Costco etc in, or make a policy that will apply equally to all?
If Wal-Mart has earned a bad reputation, the political hot potato can be kept out of B2C operations even as its B2B stores continue. When Carrefour — which has left India disgusted by the myriad trade bottlenecks it encountered in one State after another — Tesco, Costco etc create the infrastructure necessary to smoothen transfer of food in the country, the likes of Reliance Fresh, Big Bazaar, Bharti Retail etc will be under pressure to create their own structures. Otherwise, customers will move to the foreign retailers who can afford to sell cheaper due to their better infrastructure.

To ensure that the big fish do not gobble up the smaller ones, impose restriction on shops’ minimum floor area so that franchisees of big retail brands are not able to compete with our ubiquitous Gupta Provision Stores. And to take on Made-in-China non-agricultural products, reduce domestic traders’ costs; in particular, work on reducing the rate at which they borrow from the market.

On their part, farmers will get used to the Jung-type relaxations and evolve ways to deal with the end consumers directly. It will be easier for Punjab, Haryana, Delhi and western Uttar Pradesh where farmers are rich and also politically influential.

The middlemen will be absorbed by the new market dynamics the way insurance agents adapted to the changed atmosphere after the Life Insurance Corporation no longer had the monopoly.

Finally, the end consumer will have two choices, both of which he deserves: One, take a day out of the month to visit a distant big store, look for parking space, and buy the month’s essentials in bulk. Two, rush to the mom-and-pop store next door for replenishments.
Reproduced after being published in Niti Central.

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Surajit Dasgupta treats no individual, organisation or institution as a holy cow.