The Road To Agricultural Hell is Paved With Good Intentions

5 comments Written on January 2nd, 2014 by
Categories: General

Ila Patnaik talks about the terrible situation created by the concept of the APMC (Agricultural Produce Marketing Committee)

APMC acts were passed by states during our socialist past. They restrict whom farmers can sell to, who can get a licence to buy produce, and where trading can take place. This has given rise to a system with substantial barriers to entry in the trade of agricultural products. The freedom of farmers and other citizens to buy or sell as they like has been abrogated - farmers are forced to sell to traders who hold APMC licences at APMC prices.

As with many other state structures in socialist India, APMC regimes rapidly turned into rackets. Hardly 30 per cent of the mandated "open auctions" are actually open or transparent. New licences are mostly given to persons who already have shops and godowns in the prescribed market area. Shops in these areas are limited and are mostly available only to friends and relatives of existing traders. There are no transparent criteria for sale or for getting a licence. There is no time-bound application processing period during which a licence is either granted or refused.

Anyone with a brain cell can figure out how this is counterproductive for the Indian food supply chain. Farmers can only sell in mandis, and not directly to say an industry or an FMCG company. Mandis have become areas where getting in is impossible unless you knew someone. Transparency has been shot.

But how did it all begin? It started off with “good” intentions.

Farmers didn’t have markets to sell and there was no way for farmers to easily advertise that they have some crop for some price. There were no phones to speak of, and road transport was terrible. You had to get to a town and hope someone bought you out, and there was no law enforcement of any real sort to protect you from getting robbed. Supply was truant because some large company would go buy all the crops in one area for their factory, leaving nothing for the locals to buy.

The saviour was APMC. The government would set up a “mandi”, where farmers could come and safely sell their goods in an “open” transparent auction. To avoid industry and large companies stealing food at higher prices even before farmers came to a mandi, the government said that farmers couldn’t sell ANYWHERE but at a mandi.

The traders that formed the mandi first were good people. They weren’t corrupt, they really wanted to change the system for the better. The auctions were initially transparent and favoured the farmers. Since people saw the open auctions, prices were more uniform, and everyone bought from the mandi which became a bustling marketplace.

With time the concentration of power showed its evil face.

Realizing farmers couldn’t sell anywhere else, the traders at the mandi cartelized to drive down the prices. After all no one else but the traders at the mandi with a licence could bid. (Remember the Libor scandal? Similar)

Then if you had to be at the mandi to be able to buy from a farmer, then it’s quite easy to ensure that only relatives of traders get in. After all even that might have been “transparent” but eventually turned opaque due to the concentration of power.

Disbanding APMCs is the only real solution not because they are evil, but because they are designed to provide power to a few. Eventually, no matter how “democratic” the system starts off, it eventually rests in the hands of a few leaders precisely because they have the power.

I fear the return of the APMC in every facet of our life, with the kind of politics we’re seeing nowadays. We aren’t fighting corruption with freer markets and a fierce response to any form of cartelization - we are instead responding by concentrating more power in the hands of a different few. The bureaucrat is now the mohalla sabha is now the khap panchayat is now the godfather.

What we need is better regulation, but also freer markets. We need more players. We need farmers to be able to sell to anyone, we need agricultural markets to be created (by zoning laws) but also, allows buyers and sellers the freedom to transact anywhere. We need to get the government out of the “procurement” game. We need the farmers to be free to sell their land to whoever they please.

Instead, what we’ll get is - “Fry Amitabh Bachchan for saying he’s a farmer to buy agricultural land!” because this is the shape our outrage has taken. Maybe we deserve the socialism we get because we want it. But something, somewhere tells me there is a part of this very agitation that realizes that doles, handouts and subsidies or concentrations of power are the problem, not the solution. Instead, we should just allow ourselves the freedom of trade, transport and discovery.

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5 comments “The Road To Agricultural Hell is Paved With Good Intentions”

All this should be changed. We are not living in dark ages. This hurts the pocket of the consumer that is us.

“Farmers can only sell in mandis, and not directly to say an industry or an FMCG company. Mandis have become areas where getting in is impossible unless you knew someone. Transparency has been shot.”

Farmers do sell directly to companies. All chip companies buy Potato directly from farmers all over the country. Many actually prefer intermediaries to avoid taking on the work of sorting, grading and transportation themselves. Same goes for FMCG companies that require agriculture products for their output. I say this with some authority on the subject.

It is not mandatory for a farmer to sell only in a APMC Mandi. Nor is it mandatory for the farmer to sell in a specific Mandi. Farmers are known to take their produce hundreds of kilometres to sell if the net benefit is higher.

Many extraction plants and Mandis tried to procure directly from farmers in the past few years but gave up because of the complications involved. For one, they had to employ people to do cleaning and grading, deal with hundreds of farmers and their transactions instead of half a dozen traders. All this drove costs up. Fruits and Vegetables are bought by traders who come in from major consumption markets directly to the point of production and directly purchase from the farmer / orchard owner.

So it isn’t market restrictions that are causing problems. Farmers are increasingly aware of their rights, prices and willing buyers across a wide geography now, thanks to the mobile phone. The issues lie elsewhere.

As I’ve said on twitter, this is not universal or in any way significant. (Only contract farming is). Most of the produce is sold in Mandis because it has to be, or sold to specific industries (sugar) because it has to be. You can’t create another agri market in most states because it’s not allowed.

But good point about not physically having to sell in a mandi – a sale can be registered there. However because it must be, the concept lends itself to further corruption. Sugar wise – there is a requirement to sell only locally in most states.

Also good point about there being issues elsewhere, though I think the APMC act issues override all. Even in the CCI order mentioning how traders collude (http://www.cci.gov.in/images/media/completed/AO.pdf) – I don’t agree with the recommendations though – the concept is that the markets themselves tend to get closed early or there are secret auctions etc. all of which I attribute to the market structure that doesn’t allow private markets or allows cartelization etc. And you’ll see that most farmers sold in APMCs, and many of them simply because other options didn’t exist.

What I meant by the above points also was that these were the rules. Some have been eased. Bihar has removed APMC completely. Other states have toyed with partial restrictions. There is no single APMC act across India, but the concept needs to be disbanded where there is a concentration of power, such as the disallowing other agri-produce markets (non APMC, or privately owned) from existing.

“As I’ve said on twitter, this is not universal or in any way significant. (Only contract farming is). Most of the produce is sold in Mandis because it has to be, or sold to specific industries (sugar) because it has to be. You can’t create another agri market in most states because it’s not allowed.”

Farmers for most crops have the option of selling directly to a trader. Here’s why they don’t:

1. APMCs give them a choice of buyers through auctions (in most places). Direct sale does not.
2. Payments are more or less assured (under threat of buyer’s license revocation) while this is not normally so with direct sale.
3. Price discovery is more reliable at the APMC, which is essentially a market run by a body of farmers+traders (or their representative politicians). A privately run market would end up run by them too.
4. APMCs are very convenient for farmers, traders and commission agents to get together, because of the time they have been around. MH alone has around 250 APMCs. Any private mandi will find it hard to match this level of penetration.
5. Many farmers have long-term relationships with traders and commission agents, including that of a borrower and lender. They prefer the comfort of that relationship.

Companies like ITC tried buying from farmers directly. They set up markets and bought vast quantities of Pulses, Soybean in MP, MH and many other states. Their operations folded up simply because they eventually found it more efficient to buy from existing markets too. Several of them had a tough time reacting to fast moving markets. Tina Oil Mills in Latur is one good example of a oil plant buying vast quantities of produce from farmers. It was bought out by ADM a few years ago. I believe they still buy directly from farmers. If so, they are one of the very few to do so.

A mandi license is required for this, and is available from the government on fulfilment of certain norms. Therefore, it may be incorrect to say that private markets are not allowed. The government had also allowed setting up of private Terminal Markets in the country. I don’t think any of these found takers. Safal tried to create a exchange that folded up without making a dent in the system.

States like Tamil Nadu have a mix of regulated (government run) and unregulated markets. Farmers go wherever they like to sell their produce. You can see a lot of cross border sales happening too. Farmers from Karnataka border often bring over their produce to MH because they get better prices and a more liquid market in Latur.

Trader collusion: You wouldn’t be able to stop this from happening anywhere. Collusion is very difficult to prove and prevent.

Secret auctions: Isn’t this private market activity? ;-) Secret auctions happen and cannot really be controlled. But then, this is essentially what most of us want, right? Eliminating APMCs will make all trade private and probably secret.

As I said earlier, farmers always have the option of selling directly to whoever. They choose not to.

I have been reading about Gandhi and his thoughts about de-centralization of power. http://en.wikipedia.org/wiki/Swaraj

This is another classic example of power from top to bottom rather than bottom to top.


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