Monday, May 21, 2018

Will corporate India come to the rescue of India’s farmers?

Farmers across the country are extremely agitated.

A quick scan of just the English language media – which typically does not show much interest in rural India – reveals the numerous protests in which they have taken part, among the recent being the long march to Mumbai by tens of thousands of farmers. More protests are expected in the coming days.

Common to all the protests are the demands for a complete loan waiver and fair prices for farm produce. As an earlier piece explains, the returns to the farmer are barely sufficient to sustain him and often below the cost he incurs. At the same time, wholesale traders bringing the farmer’s produce to the consumer enjoy hefty margins unjustified by the value they add. The market has failed the Indian farmer and this is at the root of the farm crisis.

How is this situation to be remedied? There are two diametrically opposing views.

One view is that the state must accept responsibility for the well being of the farmer and weigh in on the side of the farmer to compensate for the fundamental asymmetry in the economic standing of farmers and traders.

The other view derives from an unquestioning belief in the efficacy of the free market. It is useful to consider this in some detail because of the influence it has on policy makers.

The free market vision

‘Free marketers’ believe that state interventions and controls in the agriculture market have distorted prices. Freed from these, the market itself would enable true price discovery and improve the terms of trade for farmers.

The specific interventions that India’s free marketers would like to see ended are the state declaring Minimum Support Prices (MSPs), procuring grains and pulses, regulating wholesale trade with farmers, controlling stocks with traders and controlling exports.

But this is not all. The free marketers would like the state to “free” land markets too so that farm land can be sold or leased freely. This would enable aggregation (by buying or renting) of farm land into large farms. An editorial in Livemint (Mar 21, 2018) lays out the wish list of the free marketers in full.

The United States is possibly the inspiration for these free marketers.

The US has 2.1 million farms compared to India’s 90 million. Just 8% of farms that are >1000 acres in size account for 70% of overall farmland (US Census of Agriculture). The large farm sizes are possible because 40% of farmland is leased. In the US, the agricultural supply chain is dominated by massive companies such as Cargill, ADM and Bunge whose operations range from global trading in agricultural commodities to transforming crops into packaged products for supermarket shelves.

In the world of agriculture envisioned by the free marketers, India would have far fewer farmers and a large fraction of agricultural land consolidated into large farms. Corporations trading in and processing food would be directly able to deal with farmers and the government would have no influence or control on the price of agricultural commodities.

But how would the farmers ousted from agriculture find alternate livelihoods when there are no jobs even for the youth entering the labour force? The free marketers will not be bothered by such questions.

While the present Indian government does not want to give up its ability to influence price and availability of agricultural commodities (by doing away with MSP, procurement and export controls), it has bought into the prescriptions of the free marketers to dismantle existing regulations governing wholesale purchases from farmers. Before delving into how this is driving policy, a brief introduction to the existing agriculture supply chain structure will be useful.

Mandis and their regulatory capture

The wholesale purchase of produce from farmers in India is governed by the Agricultural Produce Marketing Committee (APMC) Act. Agriculture is a state subject and each state has its own version of the law based on the template put out by the centre.

According to the APMC Act, wholesale transactions between farmers and traders must take place in designated market yards (mandis) and follow certain rules. These yards have been established throughout the country in agricultural production centres. The yards are managed by an elected authority with government supervision.

The concerns of this law can be better understood when seen in the context of the 60’s and 70’s when the APMC’s were set up. Small farmers were extremely vulnerable to being cheated by agents who would purchase their produce locally in the village. In the APMC yards, farmers got a better feel for the price. The sale of produce under public scrutiny brought a level of protection against being cheated on weights and measures and price. The APMC markets were clearly an advance on the situation prevailing earlier. Most trading shifted to the regulated mandis though there is still a significant fraction that takes place in the villages.

Over time, traders have established their control over the regulated markets. That this has happened is not hard to understand if one takes into account the huge asymmetry in the economic standing of traders and farmers.

The market committees are elected bodies and APMC elections too are fought with political affiliations. Traders with their economic power and ties to the major political parties end up controlling the committees. Government supervision is weak at best and cannot stand up to the economic and political clout of traders. Traders can cartelize with ease and set prices for agricultural produce right in the face of regulations meant for farmer’s protection.

Farmers are unable to stand up to this cartelization. They lack pricing power as suppliers. Added to this, they are often beholden to traders who help them through the production cycle with short term loans, transport and storage. Though aware that prices are fixed, they have no option other than to play along.

Reforming the mandis through competition

The government acknowledges the cartelization that happens in APMC markets right under state supervision. However, it does not want to acknowledge this as a governance failure. Instead, in line with the thinking of the free marketers, it argues that what is necessary are alternate channels which can compete with the regulated APMC mandis for farmer’s produce. This competition, it is claimed, will lead to farmers getting better prices and more investment flowing into the agriculture supply chain. This is thinking is behind the new (model) agricultural produce and livestock marketing (APLM) Act of 2017 that the present central government has unveiled.

The Prime Minister was reported to have written to the chief ministers of states recently emphasising the need to “swiftly undertake market reforms of our decades old and restricted agriculture produce and marketing committee (APMC) architecture”. The government is clearly in a hurry to get the states to adopt the new law which will replace the APMC Acts.

The alternative channels to APMC markets for farmers are to be privately managed markets and farmer-consumer markets. But most importantly, large buyers such as firms engaged in food processing, large scale retail or exports will be able to bypass the wholesale markets and buy directly from the farmer.

Actually, all the above measures to “free” the agricultural market are old hat. Back in 2003, the then BJP government put together a ‘model’ regulation (APMC Act 2003) for allowing alternate channels in agricultural marketing and the Congress government notified the rules to go with the regulation in 2007.

26 states have since carried out modifications to their state specific APMC Acts in line with this model Act. Bihar has gone to the extent of getting rid of the APMC regulated markets altogether to allow free private play.

What has been the impact of these changes on the markets?

Private markets have been a non-starter. While a number of licences have been issued in Maharashtra and a few in Karnataka, Gujarat and Andhra, most licensees do not seem to be operating markets on the ground. It seems no one wants to invest in setting up market yards just to earn the market fee of 2% of transaction value.

Bihar too has seen no investment in private market infrastructure. As reported in the Hindu Business Line (Feb 8, 2015), trade happens in informal makeshift markets that have no facilities and no competitive price discovery; their only advantage seems to be the ease of access for farmers.

There are farmer-consumer markets in several states – AP, Tamil Nadu, Punjab, Haryana – variously named rythu bazar, apni mandi, etc. They have not made a difference as a whole as few farmers can afford to take their produce to these markets which need to be located near cities.

What about the ‘direct marketing licences’ issued to large firms to procure directly from farmers?

Maharashtra has been in the forefront giving licences to many large firms including Tatas, Aditya Birla, Reliance, Big Bazaar, ITC, ADM Agro and Mahindra & Mahindra. But as of 2016, their purchases represented only a tiny fraction of the total purchases from farmers - 1000 crore annually against 60-75,000 crore transactions in APMC mandi’s and 25,000 crore in village and other informal markets (Indian Express, July 21, 2016). Big retailers, it appears, prefer to recruit existing middlemen as their agents and buy in the APMC markets. This is not surprising, for which corporation would like to directly deal with lakhs of small farmers?

Pinning the hope on big corporations

The government is acutely aware of the failure of the previous reforms. There is no private investment flowing into public use infrastructure that can benefit the farmers. Neither is there any movement towards farmers getting fair prices. The government however argues that this is because private firms wishing to set up alternate channels still do not have a “level playing field”.

With this argument, the APLM Act 2017 goes beyond the earlier reforms to make things extremely attractive for private firms wanting to enter the agricultural supply chain.

Under existing law, states are territorially divided into market areas and the market committees constituted under the APMC Act exercise regulatory functions (such as collecting market fees) over their respective market areas. This also places certain constraints on the movement of agricultural produce across market area boundaries.  

The new law confines the role of these market committees to within the publicly owned mandis. Licensing and regulation of private firms and traders is vested with the state government and licensed entities can operate anywhere within the state.

The government claims that the new law by allowing the farmer to sell anywhere in the state and to whomever he chooses will help the farmer realize better prices. The fact is that farmers have difficulty transporting their produce even to the nearest market yard. It is the private firms and traders who will now have the freedom to buy anywhere and profit from arbitrage.

Further, while traders must still operate within private or public market yards, licensed firms can make their purchases in front of the existing market yards without any need for investing in private yards. They have to pay a market fee only 1/4th of what is charged in the market yards. It is not clear by what logic this number was arrived at. There are also no transparency requirements imposed on them in respect of trades.

In summary, the APLM Act 2017 goes all out to help corporations entering the food chain to buy direct from the farmers by allowing them unfettered access to aggregation centres (the existing market yards) throughout the state for a token market fee, without having to invest in their own yards.

Will the entry of a new class of buyers help farmer producers realize a better price?

The fact is that the basic lack of pricing power among farmers does not change when they deal with corporations instead of traders. The experience of the last 11 years shows that corporations tend to merge into the existing supply chain at the last mile to the farmer. There is no reason to assume that the margins they make because of bringing in greater efficiency in the supply chain will be shared with farmers. Corporate India is not going to come to the rescue of India’s farmers.

The 2003 APMC reforms did not lead to any appreciable improvement in the lives of farmers; neither will the APML Act 2017 being pushed by the present government. These reforms are not about helping farmers realize better prices, but about opening up more opportunities for corporate India.

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