InThrall of Market

Quote:  [The 1980s and 1990s saw a wave of liberalization sweep across African agricultural markets as part of broad structural adjustment plans. Inherent in the promise of these reforms was the presumption that a competitive private sector would emerge to take advantage of newly created arbitrage opportunities, with agricultural traders efficiently moving crops from surplus to deficit regions, and from harvest to lean seasons. However, recent empirical estimates suggest that agricultural markets remain poorly integrated, with prices varying widely across regions and seasons.

Estimates reveal that traders act consistently with joint profit maximization and earn median markups of 39 percent. Exogenously induced firm entry has negligible effects on prices, and low take-up of subsidized entry offers implies large fixed costs. We estimate that traders capture 82 percent of total surplus1] Quote ends

The Indian Government has recently enacted 3 bills2, collectively known as Farm Bills 2020, which have been hailed by reputed agricultural economists, commentators and journalists for setting free the Indian farmers from the clutch of local traders, middlemen and politicians who collude to exploit both end of the supply chain – producing farmers and consumers of agricultural items. The noted agricultural economist Ashok Gulati has compared passing of these bills as a “ 1991 moment for agriculture”,   a piece of legislation which is expected to “help build more efficient value chains in agriculture by reducing marketing costs, enabling better price discovery, improving price realisation for farmers and, at the same time, reducing the price paid by consumers” (here  ,here, here)

At the same time, passing of these 3 bills  has been condemned by an influential section of farmers and opposition parties as corporatization of Indian agriculture by making the farmers as “contract producers” without any significant role in the farming decision making process(here, here, here). The main worry of the agitating farmers is that these new bills are precursor to gradual withdrawal of the state from the agricultural sector. It appears, as opposed to “1991 moment”, passing of these legislations could be considered as independent India’s “ Indigo( or Nil bidroha) ” moment.. To recall, in 1859, the peasants of Bengal rose in revolt against Indigo planters who had initially persuaded and subsequently coerced the peasants to plant indigo instead of food crop. These planters provided loans to switch over to indigo, a cash crop with a large export market and in due course made these farmers almost bonded labourers.

It would be ante-diluvium to argue that Indian farmers do not need a free-market for their outputs and inputs. But market, particularly a boundary-less pan India one, is not created by legislation only. Market is a social institution.  The critical role that robust institutions play in fostering economic growth is now well established. According to Douglas North, institutions are “the rules of the game in a society, more formally, are the human devised constraints that shape human interaction”3. The state, community or society at large may define the rules and lay down the constraints but without them institutions exist only as ideas. Market is an economic institution. Even a weekly village hat has a rule – the frequency of its operations, roles, implied or otherwise, assigned to various participants etc. As Acemoglu has written: “ economic institutions are collective choices of the society.  And because of their influence on the distribution of economic gains, not all individuals typically prefer the same set of economic institutions. This leads to conflict of interest among various groups and individuals over the choice of economic institutions and the political power of the different groups will be the deciding factor”.

Free-market, being an economic institution, must also be subjected to rules and regulation. It is undeniable that stock exchanges, commodity and financial future markets are free-markets. Dabba-trading, taking place out the regulatory boundaries is a punishable offense. Brokers are licensed entities. Earlier stock exchanges were a mutual or co-operative association of brokers and through a demutualization process these institutions were converted to a public company.

So, brokers, investors and listed companies have only bounded freedom of choice and not an unfettered one. From this point of view to designate APMC as non-free market betrays lack of understanding of market as an economic institution. When stock exchanges were de-mutualized they were not demolished and new markets were created. Only rules and constraints were restructured.

Restructuring of Indian Agriculture Produce Market: An Ongoing Process

Such restructuring has been an ongoing process in respect of markets created under APMC Acts of various states also.  In 2003, the Ministry of Agriculture, GOI came out with a model act on agricultural marketing. It was expected that individual states would suitably amend the extant APMC act to deregulate agricultural marketing. In 2007 draft Model Rules were issued to all states for them to adopt it with suitable modification. In 2017, another model Act titled “Agricultural Produce and Livestock Marketing (Promotion and Facilitation) Act, 2017 was issued by Ministry of Agriculture and Farmer Welfare. But none of these amendments proposed by the GOI evoked suck kind of revolt by farmers at large, or remonstrations by many state governments. The key features of these proposed amendments are aimed at creating a more competitive agricultural produce market, but within the broad framework of APMC Act. In corroboration of this claim a comparison is given below.

Establishment of private marketLegal persons, growers and local authorities are permitted to apply for the establishment of new markets for agricultural produce in any area. ((Section-3))Chapter IX with the title: Establishment and Functioning of Private Market/ E-Market, Consumer / Farmers Market and Direct Marketing addedVery broad definition of “trade Area” as “ any area or location, place of production, collection and aggregation “ but it excludesphysical boundaries of principal market yards, sub-market yards and market sub-yards managed and run by the market committees formed under each State APMC Act in force in India
Farmers are free to sale in any marketThere will be no compulsion on the growers to sell their produce through existing markets administered by (APMC)(Section-14)  It is stated in respect of e-market: The membership shall be freely available to all including farmers or their groups/ cooperatives/ companies.Any trader may engage in the inter-State trade or intra-State trade of scheduled farmers’ produce with a farmer or another trader in a trade area. No mention of any registration with the concerned state governments.
Registration instead of licensingLicensing of market functionaries is dispensed with and a time bound procedure for registration is laid down. (Section-44)  No clear rule in this regardThe act allows any person to act as trader subject to the following provision: Provided that no trader, except the farmer producer organisations or agricultural co-operative society, shall trade in any scheduled farmers’ produce unless such a trader has a permanent account number allotted under the Income-tax Act, 1961 or such other document as may be notified by the Central Government
Contract FarmingA new Chapter on ‘Contract Farming’ added to provide for compulsory registration of all contract farming sponsors, recording of contract farming agreements, resolution of disputes, if any, arising out of such agreement, exemption from levy of market fee on produce covered by contract farming agreements and to provide for indemnity to producers’ title/ possession over his land from any claim arising out of the agreement  Chapter VI Contract Farming: It is stated: Contract Farming Producer and the Contract Farming Sponsor shall be at liberty to mutually decide the terms and conditions of the Contract Forming Agreement, which shall not be contrary to the provisions of the Act and the Rules.    Allowed as in previous model acts.

It is also not a fact that state/ region level politicians who control and steer the functioning of state governments have been creating hurdles towards reforming and liberalizing APMC centered agricultural marketing regime. By the end of the FY 2016-17, as many as 21 states have adopted the key liberalizing features of the Model APMC Act (establishment of private market, direct sale to traders, contract farming etc.) that have been cited above.    

So the new THE FARMERS’ PRODUCE TRADE AND COMMERCE (PROMOTION AND FACILITATION) ACT, 2020 makes one radical change to the previous model APMC Acts drafted by the GOI – that is complete emasculation of state governments from the regulation of agricultural produce markets. In fact, the proponents of complete de-regulation of agricultural produce marketing regime always wanted to achieve this.  For example, the competition assessment of Model APMC Act, 2003 commissioned by the Competition Commission of India lamented that “ the Model Act allows interference of state governments in the regulatory mechanism” (italics in original)

Interestingly, the new act has not provided for compulsory registration of traders although it has a kept an enabling clause –“The Central Government may, if it is of the opinion that it is necessary and expedient in the public interest so to do, prescribe a system for electronic registration for a trader, modalities of trade transaction and mode of payment of the scheduled farmers’ produce in a trade area”.

This key feature of by-passing of the state governments stands in stark contrast to all budget speeches by erstwhile finance minister Mr. Arun Jaitly. In the following budget speeches of successive years, he talked about the reform initiative of the Centre in collaboration with the states.

“To accelerate setting up of a National Market, the Central Government will work closely with the State Governments to re-orient their respective APMC Acts., to provide for establishment of private market yards/ private markets. The state governments will also be encouraged to develop Farmers’ Markets in town areas to enable the farmers to sell their produce directly ( budget speech of 2014-15).”

“While the farmer is no longer in the clutches of the local trader, his produce still does not command the best national price. To increase the incomes of farmers, it is imperative that we create a National agricultural market, which will have the incidental benefit of moderating price rises.  I intend this year to work with the States, in NITI, for the creation of a Unified National Agriculture Market” ( speech of 2015-16)

“Access to markets is critical for the income of farmers. The Government is implementing the Unified Agriculture Marketing Scheme which envisages a common e-market platform that will be deployed in selected 585 regulated wholesale markets. Amendments to the APMC Acts of the States are a pre-requisite to join this e-platform. I am happy to inform that 12 States have already amended their APMC Acts and are ready to come on board. More States are expected to join this platform in the coming year. The Unified Agricultural Marketing E Platform will be dedicated to the Nation on the birthday of Dr. Baba Saheb Ambedkar on 14th April this year” (speech of 2016-17)

For the post-harvest phase, we will take steps to enable farmers to get better prices for their produce in the markets.  The coverage of National Agricultural Market (e-NAM) will be expanded from the current 250 markets to 585 APMCs.  Assistance up to a ceiling of Rs.75 lakhs will be provided to every e-NAM market for establishment of cleaning, grading and packaging facilities.  This will lead to value addition of farmers’ produce.

Market reforms will be undertaken and the States would be urged to denotify perishables from APMC.  This will give opportunity to farmers to sell their produce and get better prices. We also propose to integrate farmers who grow fruits and vegetables with agro processing units for better price realisation and reduction of post-harvest losses.  A model law on contract farming would therefore be prepared and circulated among the States for adoption (speech of 2017-18)

It is obvious that there has been a sea change in the thinking of the central government about the roles that various stakeholders will be allowed to play in the agricultural reform path that it wants the country to tread in near future.

It is also apparent that the grand idea of “One Nation-One Market” is a primary driver of these Farm Bills 2020. Keeping aside the concept of “nation” in this hyphenated slogan that motivates millions, we need to debate whether new laws are situated in a robust  understanding of the concept of “market” or not. Buying and selling by itself does not define a market. Furthermore, capitalist path of development is not synonymous with free-market development. (see the Singapore’s story here4).

What is the Optimal Market Design for Indian Agricultural Produce?

All “well-functioning markets depend on detailed rules”.  (Alvin Roth).  According to Roth, for a market to function properly three things must be done correctly:

1. Appropriate level of market “thickness”- i.e. a properly functioning market should bring together “a large enough proportion of potential buyers and sellers to produce satisfactory outcomes for both sides of a transaction.”

2. Right incentive to reveal confidential information or to bring asymmetry of information between buyer and sellers to an acceptable level

3. Transactional time to be as low as possible. It means access to information about quality and volume of supply and demand and processing thereof should not be so much consuming that it would be worthless by the time a transaction can actually be concluded.

Without disputing the relevance and indispensable requirements all the three attributes as above, there is one thing missing in the above list and which is a must in respect of the Agricultural Produce Markets is the needed trust between producers and buyers.  Given the immense variety and quality even of a single commodity like rice, information is highly localized and may not be amenable for standardization by a centralized authority. In fact, the Chinese agricultural information started with dismantling of centralized planning system that the country initially adopted. To enable this local information to be integrated with other markets spanning the entire country is a complex activity and needs resources and government intervention. As Roth has said “Market design turns out to be about details, such as the nature of the transactions in question, the opportunities to conduct transactions outside the market, and the distribution of information”.

These new Bills are eloquent about its objectives which are per se laudable but awfully laconic about these operational details. The protagonists of the new Farm Bills are walking on the same path that policy makers of APMC market design followed- describe the destinations correctly without stating how to reach the destination and mechanism of steering the journey to the destination.

State Intervention In Agriculture: A Universal Phenomenon

Finally, it has to be emphasized that state intervention in agricultural sector is a common phenomenon irrespective of the nature of the state. John W Mellor, a former Director-General of International Food Policy Research Institute has been a champion of the view that agriculture, despite having a small share in total GDP of all developed economies, play a central role in the process of creating sustainable economic development locally and globally. He has identified the following two big ideas based on his long international experience in designing and advising polices for this sector6:

1. The rapid growth of small commercial farmer dominated agriculture accelerates the economic transformation and is essential to the rapid decline in dominantly rural poverty.

2. Government has a prominent role if small commercial farmer dominated agriculture is to grow rapidly.

In fact, income support to producing farmer is a global reality. OECD has estimated producer support estimate (PSE), measured as a percentage of gross farm receipts. The following graph shows that Indian farmers are still having a negative production support and the same is borne out by the terms of trade between farmers and non-farmers.

End Notes:

  1. Bergquist , Lauren Falcao &  Michael Dinerstein  : Competition and Entry in Agricultural Markets: Experimental Evidence from Kenya in   American Economic Review 2020, 110(12): 3705–3747
  2.  The bills are — The Farmers Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 (FPTC); The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020 (FAPAFS); and The Essential Commodities (Amendment) Bill, 2020 (ECA)
  3. North, D. C, 1990, Institutions, Institutional Change and Economic Performance, Cambridge University Press.
  4.  Acemoglu, D and J,Robinson  “The Role of Institutions in Growth and Development” in Review of Economics and Institutions; vol.1- No 2, Fall 2010.
  5. Lim, Y.C.Linda Sigapore’s Success : The Myth of the Free Market Economy. Asian Survey Vol 23 No 6. June 1983
  6. Mellor, John Williams: Agricultural Development and Economic Transformation:  Palgrave Studies in Agricultural Economics and Food Policy