Agriculture

Unified agricultural markets: Where are the reforms lacking?

  • Blog Post Date02 January, 2017
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Nidhi Aggarwal

Indian Institute of Management Udaipur

nidhi5.2003@gmail.com

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Sudha Narayanan

Indira Gandhi Institute of Development Research

sudha@igidr.ac.in

In April 2016, Modi government launched the e-National Agriculture Market (e-NAM) platform – a pan-India electronic marketplace for trading of agricultural commodities. However, rather than ushering in a revolution, concerns have been raised regarding lack of traded volumes on the platform. To understand the reluctant progress of e-NAM, this column analyses the experience of the state of Karnataka that embarked on agricultural market reforms in 2007.



Since its launch in April 2016, the electronic-National Agricultural Market (e-NAM) platform has garnered much attention, with the government claiming that it is one of the most important initiatives undertaken in recent times to address the challenges faced in agricultural marketing in India. The e-platform aims to create a single national market that would enable seamless trading of agricultural produce across the country, replacing the current system wherein traders are issued permits to trade in specific mandis and farmers are mandated to sell at specific regulated mandis1. By linking farmers and traders located in disparate geographies through the online platform, a unified market would expand the market by bringing in more players and would ensure more competitive prices for the farmer, better price discovery and transparency in agricultural marketing.

However, within six months of the launch, rather than ushering in a revolution, concerns have been raised regarding lack of traded volumes on the platform. To understand the reluctant progress of e-NAM, it is useful to look at Karnataka´s experience with market reforms. Karnataka, an early pioneer, took significant steps to unify agricultural markets within the state. Its experience therefore offers compelling inputs for ongoing efforts to implement e-NAM.

The Karnataka model

Karnataka embarked on reforms in as early as 2007, with the amendment of the Karnataka Agricultural Produce Marketing (Regulation and Development) Act, 1966 in line with the provisions of the Model Agricultural Produce Marketing Committee (APMC) Act, 20032. Yet, in those early years, most of the focus was on mandi modernisation, an effort that allowed tendering for commodities to take place electronically3. However, this effort suffered from various drawbacks. For example, the programme did not envisage new possibilities, such as credit of sale proceeds to the farmer´s bank account directly. Further, different mandis had independent IT systems and worked on different platforms making integration of markets difficult and resulting in high maintenance costs. Consequently, on 27 August 2010, a comprehensive auction system, developed by National Commodity and Derivatives Exchange Limited (NCDEX) was approved, a precursor to a unified electronic platform with ‘end-to-end’ tracking of transactions, that could monitor every connected market in real time.

It was during the second phase of reforms which began in 2011 that unification of markets within Karnataka began. The cornerstone of this second phase was a new legal framework codified in the APMC rules4. These amendments not only allowed for a single unified licence to traders but also paved the way for warehouse-based sales, among other things. To implement these reforms, a Special Purpose Vehicle, Rashtriya e Market Services Private Limited (ReMS) was created, a crucial institutional innovation that separated implementation from regulatory functions and combined accountability of the public sector with the nimble decision-making of the private sector. The ReMS has also been working to provide assaying facilities in mandis, online payment to farmers, facilitation of warehouse-based sale of produce, and commodity funding for all stakeholders.

The survey

To understand the state and impact of implementation of mandi reforms, we conducted field visits to 10 mandis spread across different districts of Karnataka (Figure 1). These mandis together accounted for 23% of total mandi fee collected in Karnataka in 2011-12 and were selected based on location, degree of modernisation, and type of crops traded. The visits were undertaken in December 2015-February 2016, when market arrivals were consistently high. As part of each visit, we interviewed traders, commission agents, farmers, as well as mandi officials. Our interviews focussed on the process of a typical transaction in the old system and the new, and the elements of modernisation that worked well for the respondents and those that did not.

Figure 1. Mandis covered in field visits, December 2015-February 2016

Implementation status

In each mandi, we examined the degree of automation of operations, unification of markets, provision of assaying facilities, and online payments to farmers - the key elements envisaged in the reforms (Figure 2). In terms of automation of operations, we examine:

  • Electronic entry: Commodity arrivals were recorded at the gate electronically at two out of 10 mandis. In the remaining mandis, it was either not implemented, or abandoned because long lines of trucks waiting for entry disrupted traffic all around.
  • Electronic bidding: In nine out of 10 mandis that we visited, the e-bidding system was in place and, in theory, systems were enabled to allow unification. However, e-bidding seemed to have been adopted only for commodities with high arrivals in a mandi. Even for these commodities, trading on the electronic platform was only on select days of the week. On remaining days, the commodity was traded manually.
  • Information dissemination: One of the objectives of automation was to reduce the information asymmetry that a farmer faces, by disseminating price information through text message (SMS), microphones, display screens at mandi office, and printed slips. Different mandis were using different methods for information dissemination, though a majority were using printed slips and microphones/loudspeakers. Display screens were seldom used.
  • Electronic permit: All 10 mandis had the e-permit system that generates exit passes to allow a traded commodity to exit the mandi.

Reforms such as warehouse-based sales and commodity funding were yet to be implemented. In general, automation has happened more successfully than unification. We learnt that while all the 10 mandis were in theory, unified, few bids came from traders who were located elsewhere. Though assaying instruments were available in some mandis, they were rarely used. Pilots were conducted for online payment to farmers, but were abandoned due to widespread opposition, though this initiative seems to be gaining traction in some mandis.

Figure 2. Process flow after mandi modernisation

Source: NCDEX

The hits

One of the greatest achievements yet of the reforms are the benefits derived from automation. All our interviewees concurred that the automated system is fast and convenient, with the winning bids being declared within few seconds once the bidding time is over. Farmers no longer had to stay at the mandi until 8 or 9 pm. Several felt that returning home before dark reduced the risks of being robbed. This savings in transaction costs is especially beneficial for farmers who trade in small quantities, but nevertheless have to incur a fixed cost in terms of time. In addition, there were now fewer errors and mistakes in declaration of winning bids, which has reduced the scope of disputes. Likewise, e-tendering left little room for manipulation whereas earlier the bids could be ´adjusted´ retrospectively.

The misses

The more significant benefits of automation and unification, in terms of new players and greater transparency in price discovery, are however yet to be achieved. Our interviewees mentioned, for instance, that no bids were currently being received from traders in other mandis, despite the fact that trading across mandis was now possible. Nor had there been any increase in mandi arrivals due to automation, something one would expect if more farmers now saw the benefits of a unified market.

It emerged that a key reason for the virtual absence of cross-mandi bidding was the strong preference of traders for visual inspection. It seemed that traders preferred to rely on commission agents for assessments of quality rather than the mandi’s assaying facilities. Assaying for most commodities was available on voluntary basis, but neither farmers nor traders trusted the quality based on assaying. While traders felt that scientific assaying methods were a poor and inadequate substitute for visual inspection, farmers felt that assaying actually reduced the price of the commodity and were reluctant to part with produce for assaying. Furthermore, assaying of a sample can take anywhere between 10 minutes to one hour or more, depending on the commodity and attributes being tested. This is not feasible during peak times – when arrivals were so large that it would take several days to assay all the lots. There is neither enough space nor enough personnel to get all mandi arrivals assayed. Unavailability of credible assaying facilities has limited the ability of traders to place bids in distant mandis.

With no new participants, the new system is as vulnerable to the threat of collusion as the old system. At the Tiptur APMC mandi, for example, all traders apparently placed their bids around the bid of a big trader. At another APMC mandi, the commission agents and traders had colluded to boycott e-trading. Further, trading on e-tendered commodities, in some cases, has moved to non e-trading days, and in others, has moved outside the mandi in the form of unregistered trades. Accounts suggest that in the absence of outside traders, local traders and agents continue to exert control over trade.

The other key initiative of this phase of reforms: payment to farmers´ bank accounts, is also facing severe challenges. The greatest resistance is coming from commission agents, who feel that the government is trying to weed them out. Commission agents were strongly opposed to e-payments since it would only allow them to take the permissible commission of 2%. Commission agents typically acted as aggregators, quality testers, provided post-trade services, storage facilities, acted as guarantors of quality, and took on the risks of rejection of produce by the traders. Besides, they said that traders make payment to commission agents in about two weeks- to six months, while farmers are paid by them on the same day or in a day or two. Direct payments would prevent them from charging for these services, and hence they celebrated its withdrawal.

The farmers too did not seem to be uniformly enthusiastic about assaying or e-payment. They seemed to trust the commission agent, who not only gets their produce sold, but also provides agricultural credit on need basis. Further, they preferred immediate cash over bank payment which takes 24-48 hours for processing, and requires them to spend another day at the bank. They were also skeptical that through e-payment, their bank account could get linked to their loan account, and would be used to deduct interest/principal from their primary account. It is only in the highly organised markets, arecanuts, for example, where farmers were all members of cooperatives, that e-payments received consistent support.

In the presence of these issues, we found that the ultimate goals of the reforms - transparent price discovery, and reduction of collusive power of traders and commission agents, were yet to be achieved.

Implications for e-NAM

The experience of Karnataka suggests that the problem in agricultural marketing cannot be solved by merely propping up an electronic platform, nor is it merely a technological problem. Rather, it is one of redesigning the architecture of agricultural marketing, which is sensitive to the complex and deeply entrenched farmer-agent-trader relationships that characterise the agricultural output transactions in India. Reforms need to focus simultaneously on institutional reform, incentives, and infrastructure. When the three are aligned with one another, ultimate objectives of market reforms can be achieved.

Institutional reform

Institutional reform establishes and defines the rules of the game. Today, the central drawback of e-NAM is that states are eligible for assistance under NAM only if they have already reformed their respective APMC Acts and made sufficient investments in infrastructure required for such integration. These include a single point levy of market fee, a single uniform licence, and provision of electronic auction as a mode for price discovery. It is well known that even after 13 years of the APMC Model Act of 2003, only a few states have successfully amended the APMC Act in substantive ways and that significant political or financial risks are associated with these reforms. Further, even the APMC Model Act 2003 fell short of provisions for full market integration within a state. It seems that the e-NAM is less a tool to enable reform than it is a reward for reform. In short, it is not clear what the e-NAM provides beyond a software solution, with crucial institutional reforms still left to the political whims and exigencies of state governments. This requires working with state governments to establish the preconditions for unification and dispute settlement mechanisms across the states.

Incentives

The second crucial feature is incentives that attract stakeholders to actively participate in the market. Currently, commission agents do fill up for several market failures. Given the dependence, they have a strong incentive to undermine State´s efforts. There is a need to reinvent the role of commission agents and to co-opt them in the reform process. Similarly, to achieve transparency in payment mechanism, incentives on e-payment need to be provided. Karnataka is already working on measures such as bank loans to traders against which farmers can be paid upfront. Farmers´ accounts are also being de-linked from their loan accounts so that they accept payments through banks. Similar incentives need to be structured for e-NAM.

Infrastructure

The third essential feature is infrastructure. This includes physical and financial payments infrastructure to support market transactions. A comprehensive set of grades and standards for a diverse set of products and investment in assaying facilities that are quick, cost-effective and credible, is essential to incentivise traders to participate in trade across mandis.

Without this three-pronged effort, coupled with efforts that move past the mandi, the marketing revolution in India would be kept waiting, as it has been for decades.

Notes:

  1. Agricultural marketing in India is a state subject and is regulated under the Agricultural Produce Marketing Committee (APMC) Act. The Act mandates that purchases of certain agricultural commodities occur through government-regulated markets (mandis) with the payment of designated commissions and marketing fees. This constrains the farmers to sell their produce only in the mandi.
  2. The Model APMC Act, 2003 was formulated to remove some of the limitations of the old APMC Act, by opening up the markets for private sector and cooperatives, and allowed for direct farm sales and contract farming. Besides, the Act also envisaged the use of technological infrastructure for online trading of agricultural produce.
  3. Agricultural transactions in India, have historically been carried out using one of three mechanisms: open auction, closed tender, and mutual agreement. In both, open auction as well as closed tender, traders bid for the lot they want to buy. Once the bidding process gets over, the highest bidder for a particular lot is declared as the winner. While in open auction, bids are known to all bidders, in closed tenders, the bid of an individual bidder is not disclosed.
  4. Report of the Agricultural Marketing Reforms Committee (2013) proposed a series of recommendations to implement these reforms.

Further Reading

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