February 27, 2018

BACKGROUND

At the time of independence, one of the primary points of focus for the newly formed Indian Government was protecting the lifeblood of the economy i.e. agriculture. Towards achieving this goal, the Government introduced a bill in 1938 for regulating agricultural produce markets. This bill formulated guidelines and created a template on agricultural marketing legislation that could be adopted by the various States desirous of implementing a system of regulation and standardization of agricultural markets.  However, since the Constitution envisaged agricultural marketing as a State subject i.e. a subject for which the State government has the authority to legislate on and not the Central government, it became the various States’ prerogative to adopt this bill. The bill was not adopted by majority of the States and hence local agricultural reform was put on the backburner. As a result of the States’ unwillingness to adopt the bill, there was a vacuum in agricultural reform for half a century.

The liberalization of the Indian economy in 1991 opened up unchartered avenues for the service sector. The external trade economy was de-regulated in order to accommodate the new liberalized policies. On the flipside, the agricultural sector suffered as a result of the lack of attention paid to it. This was evidenced from the growing disparity in output growth rates of agricultural sectors when compared to non-agricultural sectors. Lack of price incentives, arbitrary fragmentation of markets, inefficiency of unscientific and low-scale methods of production combined with a tangled mess of middlemen and brokers were already prevailing problems in the agricultural sector. The liberalization of the economy aggravated the already bad state of the agricultural sector with new problems such as rural influx of farmers into urban areas and subsequently, the growing imbalance between the agricultural and service sectors.

2003 MODEL APMC ACT & ITS GENESIS

As per the 1938 bill, the whole geographical area in the State was to be divided into separate territories, and each one was appropriated a market area to be managed by the committee constituted by the State Government (“APMC”). The APMCs consisted of representatives of farmers, traders, warehousing entities, registrar of cooperative societies etc. The State Government was also directed to constitute a market board to supervise these APMCs. The market board generally consisted of chairmen of all State APMCs and representatives from the relevant Government Departments.

After a particular area was declared a mandi (colloquial term for market area) and fell under the jurisdiction of a specified APMC, the wholesale marketing activities of that particular area was to be regulated by the local APMC. A few States adopted this bill post-independence, notably Maharashtra and Andhra Pradesh among others.

Improving on earlier iterations of a template legislation, the Ministry of Agriculture came up with the State Agricultural Produce Marketing (Development and Regulation) Act, 2003 (“Model APMC Act”) and requested the State Governments to suitably adapt and amend their corresponding legislations accordingly. The purpose of enacting the Model APMC Act was to facilitate the efficient allocation of agricultural produce markets to certain State territories and subsequently to achieve an efficient system of buying and selling of agricultural commodities in these markets aka mandis. The Model APMC Act mandates that the mandis under APMCs shall be the point of first sale of certain notified agricultural commodities produced in the region. The sale must be conducted by licensed agents of the APMC, subject to payment of various taxes and fees. The producers of agricultural products are thus forced to conduct their first sale in these markets.

ISSUES CREATED BY THE APMC SYSTEM

The APMC system was introduced to prevent distress sale by farmers to their creditors, and to protect farmers from the exploitation of intermediaries and traders.  It also aimed at ensuring better prices and timely payment for their produce through the auctions in the APMC area.

However, the APMC system also has the following drawbacks:

  1. It restricts the farmer from entering into direct contract with any processor/ wholeseller/bulk processor as the produce was required to be compulsorily routed only through the APMC markets.  Therefore, it curbs farmer freedom in choice of point of sale.
  2. APMCs charge a market fee from buyers and a licensing fee from the commissioned agents who mediate between buyers and farmers. They also charge small licensing fees from various other ancillary entities such as warehousing agents, loading agents etc. In addition, commissioned agents charge additional unwarranted fees on transactions between buyers and farmers. All these levies adding up to hefty amounts, create strong entry barriers for willing participants and discourage both producers and buyers.
  3. Further, multiple licences are necessary to trade in different mandis in the same State. This has led to a highly fragmented and high-cost agricultural economy, which prevents economies of scale and seamless movement in intra-State trade.

Over a period of time, these mandis have acquired a notorious reputation as being unnecessarily restrictive and harming the farmers rather than helping them to realise competitive prices for their produce. This is a stark contrast to the manufacturing and services sectors that were opened up to the market forces by liberalization and where the price was determined by the free market forces. The agricultural sector was not liberalized, in that the farmers were forced to sell their produce in a fixed and highly regulated marketplace, thereby never realizing the market-determined value of their produce.

 NAM

The motivation for a unified market platform can be traced back to the Rashtriya e-Market Services (ReMS), an initiative of Karnataka State Agricultural Marketing Board with National e-Markets Limited (NeML), erstwhile National Commodity and Derivatives Exchange (NCDEX) Spot Exchange, started in 2013. The joint venture has integrated 55 out of 155 principal APMCs into a single licensing system and accommodated many farmers and traders in the electronic auctioning of pulses. Using Karnataka APMC model as the basis for reform, the newly elected Modi government, in the 2015 Union Budget proposed the introduction of a unified common market platform. Such platform was to incorporate technological innovation and infrastructural standardization for the benefit of local farmers. The Cabinet Committee on Economic Affairs approved the abovementioned proposal after a year. It also allocated INR 200 crore from the Agricultural Technology Infrastructure Fund for this project. This fund allocation was appropriated towards integration of a targeted 585 APMCs into a common market platform till 2018. This project was christened the National Agriculture Market (NAM).

The objectives of NAM, as stated on its website are as follows:

  • To establish a national e-market platform for transparent sale transactions and price discovery in regulated markets. Implementing States may accordingly enact suitable provisions in their respective legislation for promotion of e-trading by their APMC.
  • To implement a liberal licensing system for traders/buyers and commission agents without any pre-condition of physical presence or possession of shops/premises in the mandi.
  • To prevent a multiple licensing regime and ensure a single license for a trader, valid across all markets in the State.
  • To ensure harmonisation of quality standards of agricultural produce and provision for quality testing infrastructure in every market to enable informed bidding by buyers.
  • To prevent multiple points of levy of market fees.
  • To provide for Soil Testing Laboratories in/or near the selected mandi to facilitate visiting farmers to access this facility in the mandi itself.

RATIONALE

The basic rationale behind instituting an online national agricultural market is reducing pricing anomalies at the wholesale and primary rural markets. A unified market platform is expected to have several benefits such as bringing transparency in the price discovery process, making farmers financially literate, exposing them to spot trading mechanics and enabling primary stakeholders to compare commodity prices across the secondary and terminal markets that could reduce their information searching costs. Moreover, the common market platform will facilitate a single licensing system across the implementing States, connecting APMCs, and thereby ensuring a single point levy of market fee instead of multiple points of payment due to non-standardization of markets. The rationale behind creating an online portal for this market platform is to enable the buyer to transfer funds directly to the farmer’s account and the concerned APMC’s accounts after the delivery of produce from the farmer to the purchaser is ensured.

Various stakeholders, including farmers have lauded the simplicity of adopting a model which maximizes farmer benefit and through regulation keeps the middlemen, who dilute the farmers’ revenue share unfairly, at bay. However, farmers are now faced with a new challenge altogether. The power to issue licenses is in the hands of the respective APMCs. The reasonable apprehension here is that, due to the very nature of constitution of the APMCs, which interestingly remains unchanged, the age-old problem of corrupt licensing machinery could crop up. It may also lead to the arrival of a new breed of middlemen who facilitate such licensing.

Further, the organization of mandis under a regulated and standardized licensing format would require them to fulfil an additional compliance which was not required of them in the unorganised setup. The digitization of the trading exercise needs to be accepted and reconciled by the farmers who are predominantly tech-illiterate.

Thus, this well-intentioned move by the Ministry of Agriculture could end up being just that – a well-intentioned move without the teeth required to bite deep into the real-world considerations of rural market trading. However, like any new initiative, it would only be fair to allow transitory mistakes and adjustments for a reasonable period of time.

CONCLUSION

So far, 470 mandis in 14 states have been integrated with the eNAM platform, launched in April 2016. The implementing State Governments have promised to link 109 more mandis on the platform by February, 2018.  States have responded positively to the government’s call of action. It is now time to assess the real time impact of APMCs and whether this move has had a real quantifiable impact on market conditions or not.

The Ministry of Agriculture has come up with a new model Agricultural Produce Market Committee (APMC) Act (“New Model APMC Act”) to be enforced by the implementing States. This New Model APMC Act proposes a single-point levy of market fee across the State and a united single trading licence for ease of compliance and subsequently the ease of transaction. It has also suggested abolition of fragmentation of market within the State by removing the concept of notified market area in so far as enforcement of regulation by the APMC is concerned. Agriculture Minister Radha Mohan Singh has remarked that he is hopeful that most States would adopt the New Model APMC Act.

Despite the nobility of this initiative, it would be prudent to keep in mind the Dalwai Committee Report on Doubling Farmers’ Income. This report has pointed out that the share of farmers in consumer’s price is as low as 15 to 40 per cent. The increasing intervention of middlemen is primarily responsible for farmers not realising a reasonable price for their produce, lowering farm income and profitability. The agriculture markets are crowded with middlemen and commission agents. There are as many as 22,000 commission agents and innumerable middlemen in each market. According to Ashok Gulati, former chairman of the Commission for Agricultural Costs and Prices, commission agents in Delhi charge exorbitant fees ranging from 6 per cent to 15 per cent.

In the author’s humble opinion, the key to this initiative’s success would be to prevent a new class of middlemen from cropping up and intervening in the licensing procedure under NAM. The agricultural sector can take inspiration from other sectors that have undergone regulatory overhaul such as the telecom sector with the institution of TRAI and the insurance sector with IRDA. By instituting an autonomous body, either at State or Central level (sans participation from market stakeholders, unlike APMCs) that is tasked with issuing, renewing, revoking and maintaining licenses independent of the corresponding APMCs, the licensing procedure will be insulated from the ills of middlemen and agents.

Another method of realizing the untapped potential of national produce is by adopting a public-private partnership model championed by the Maharashtra grape cluster or the Mahagrapes, as it is more popularly known. The Mahagrapes initiative combined primarily private participation through the various grapes’ co-operatives in the State of Maharashtra with financial backing from both the Centre and the State. This is a useful model to emulate because it is governed by an underlying need to collate the farmers and farmer groups into manageable clusters, the same objective as NAM.

Image Credits:  Neil Palmer (CIAT)