Agriculture

Farm bills: First principles and the political economy of agricultural market regulation

  • Blog Post Date 16 October, 2020
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Shoumitro Chatterjee

Pennsylvania State University; CPR

sc20@psu.edu

Wrapping up the Symposium on farm bills, Mekhala Krishnamurthy and Shoumitro Chatterjee contend that regulatory reforms are an important but limited part of what must be both a more comprehensive and contextual approach to policy design and implementation. Moreover, when it comes to markets, it is crucial to think through what market regulation can and cannot do and to understand the role that mandis play in India’s agricultural marketing system.

 

Over the last four months, in the midst of the ongoing Covid-19 pandemic, the past, present and future of Indian agriculture has been in the national spotlight. The source of the controversy is the introduction of three farm ordinances (then bills and now – having received Presidential assent after a short, stormy and abrupt passage through Parliament – Acts). Read together, these new farm laws represent a set of concerted actions intended to alter the manner and degree of State regulation over the exchange, storage, movement, and taxation of agricultural produce in India. This also marks the first time in Indian legislative history that central law has been brought to bear on the regulation of the critical ‘first transaction’ between the farmer and the primary buyer of their produce. The focus has therefore turned to the country’s vast and varied agricultural markets and to the vital, complex, and contested task of regulating them.

Uncompetitive markets with barriers to entry for large buyers, are considered a critical obstacle to achieving the national policy agenda of ‘doubling farmers’ incomes’. It is for this reason that the legislations have been heralded by the government as revolutionary reforms that will finally unshackle the Indian farmer and Indian farming from the stranglehold of exploitative middlemen and corrupt State-regulated APMC (Agricultural Produce Market Committee) markets – also known as mandis. But the move towards deregulating agricultural markets has also come under concerted attack for facilitating unfettered corporatisation and is viewed by critics as the precursor to the dismantling of existing systems of price support and regulatory protection.

At this time of intensifying political defence and opposition, the contributions to this Symposium dramatically scale down the rhetoric around the stated ambitions of the reforms and its criticisms. They offer grounded assessments of the possible and likely impacts of these laws. In doing so, they also call for a review of the assumptions and generalisations that abound on the subject and the need to take into account the diversity of contexts and experiences involved.

All the authors point out that in terms of the direction of change, the new acts are part of an ongoing and evolving process of agricultural market reforms over the last two decades. This is represented in multiple model acts by the Centre and numerous state-level legislative amendments, and actions that open up marketing systems enabling exchange outside APMC mandis. These include currently active provisions across a large number of states for setting up private procurement yards, private markets, contract farming and the integration of electronic marketing platforms. Therefore, this is hardly the first time such reforms are appearing on the scene. It is also true that state-level reform processes have remained partial, uneven, and in numerous cases represent longstanding underinvestment and neglect.

All the same, it is precisely the detailed understanding of these prior state-level experiences (a number of which are discussed in this Symposium) – from the complete deregulation of markets in Bihar, to the more phased amendments permitting private procurement channels in other states, and various experiments with contract farming in specific regions and commodities – that temper any expectations of transformative impacts on the ground without further support, especially in the short or even medium term. First, the evidence is pretty clear that under prevailing conditions of production, processing and consumption, on their own, regulatory reforms do very little to facilitate substantial new private-sector investments in infrastructure and supply chains. Second, ‘alternative’ channels do not, in turn, simply disintermediate markets. In fact, it is common to observe the emergence, and even proliferation, of new intermediaries especially when deregulation increases counter-party risks, as we observed in Bihar. In cases where intermediaries play important roles in keeping commodities in circulation, steps to force their removal can also hurt both farmers and consumers (Emran et al. 2020). The specific structure of intermediation and the roles that are involved are critical here. Third, these contributions among others remind us that there is much evidence that points to the likelihood that other agricultural policies and instruments (such as the onion export ban that was imposed even as the Essential Commodities Act (ECA) Amendment Bill was being introduced in Parliament) will continue to work at cross-purposes and invariably go against farmers’ realising higher prices.

There is one possible short-term impact that Hussain, Ramaswami, and Singh all point out in their comments. That is in the case of Punjab and Haryana, where, under the new central Act, the FCI (Food Corporation of India) might now actively try to move its MSP (minimum support price) procurement operations outside the physical territory of the APMC mandi system and thereby avoid paying mandi fees and taxes. If this happens, it will have significant fiscal consequences for these states. As long as procurement continues as promised, however, farmers could still sell to the government at MSP outside the APMC market areas. But, as Siraj Hussain highlights, farmers in these states are concerned that the Acts signal an intention to implement earlier recommendations (specifically, the Shanta Kumar Committee Report) to limit procurement and the coverage of rations under the National Food Security Act (NFSA). Given the scale and dependence of these two states on the food grain procurement regime currently in place – and their huge, mobilised networks of farmers and commission agents – the widespread protests in India’s northern granaries reflect their genuine and specific anxieties.

The conflation and interlinkage between the fate of APMC mandis and the future of MSP procurement is unique to Punjab and Haryana. But it does reveal the danger of the Centre pushing market reforms in a complex state subject and vital livelihood system without openly and explicitly sharing its larger vision for Indian agriculture and how its future plans for different, yet interrelated state interventions fit in. Regulatory reforms are an important but limited part of what must be both a more comprehensive and contextual approach to policy design and implementation. Moreover, when it comes to markets, it is important to think through what regulation can and cannot do and to understand the role that mandis play in India’s agricultural marketing system.

It is common to think of APMC mandis as sites for revenue extraction by the State and as entrenched local markets controlled by powerful local commission agents and traders. Both are indeed features of most such marketplaces. However, the original reasoning behind setting up local physical wholesale markets in agricultural regions was to give farmers access to a publicly regulated marketplace, where they could sell their produce to the highest bidder in an auction, benefit from standardisation and vigilance in assaying and weighing, and expect that their payments would be honoured in full and on time. Marketing regulation has never restricted farmers from selling anywhere and smaller itinerant aggregators who bought from farmers were expected to eventually sell this produce in the local market itself. But regulation did seek to license all major buyers interested in purchasing produce in the local market area. Given the small size of the majority of producers across India, commission agents have long been important figures in these markets, facilitating exchange between sellers and buyers and often extending credit to both.

Conceived as multi-seller and multi-buyer market sites, mandis were intended to function as primary spot markets, enabling competitive price discovery, market information and knowledge exchange, on-site dispute resolution, and counter-party risk assurance. Here, farmers could organise collectively, and an elected local committee – dominated, in principle, by farmers but with trader, commission agent, labour and cooperative and other agency representatives – was put in charge of overseeing activities. When in place, well-functioning mandis are public goods and their presence has spillover effects on the prices of non-mandi transactions, where the current mandi rate typically serves as a benchmark for negotiation. This is why it has been commonly observed that private corporate buyers rely on local mandi prices to set prices for procurement outside mandis.

On the ground, of course, as we know from numerous government reports and myriad field accounts over the decades, most states and regions did not invest in building enough mandis, existing market yard infrastructure remained woefully deficient, and APMCs are deeply compromised in practice (Krishnamurthy 2015, Ministry of Agriculture and Farmers’ Welfare, 2017). Yet even with all their many infirmities, empirical data show us that wherever they do exist, mandis matter for farmers. Using micro-data on mandi prices, one of us shows that a one standard deviation1 increase in APMC mandi density is associated with 3-5% higher mandi prices after controlling for local demand and supply conditions (Chatterjee 2019). This, of course, does not mean that creating more markets anywhere will improve prices perpetually. In Punjab, where most paddy is procured at MSP, creating more markets might make logistics simpler but will have no relationship with prices. However, in other states and commodities, where prices are determined by market forces, more mandis potentially facilitate greater competition and hence help price realisation.

The new Acts do not repeal existing state marketing acts or legislate on the functioning or taxation of existing APMC mandi yards. But, by declaring all the territory outside these state-regulated premises as tax-free ‘trade areas’, there are now multiple regulatory regimes operating in and across states. It has also been pointed out that these new trade areas do not have even minimal requirements for mandatory registration and no mechanism in place for market intelligence. What’s more, if recent events are an indication, as Sanjay Kaul and others note, this now seems to be heading into a turf war between states and Centre for regulatory control. This is a very counterproductive outcome. Equally, as others have also pointed out, forcing private buyers to purchase at the MSP would also be misguided and potentially disastrous. It will push traders outside mandis instead of increasing competition within them. But both price support and procurement policies and income-support measures for farmers, as well as a whole range of public investments to strengthen farmers’ terms of engagement in markets, do need to be carefully considered. Efficient markets will not necessarily yield ‘remunerative’ prices for farmers.

Markets are, however, a vital part of any overall strategy and as increasing competition is the objective of these specific regulatory reforms, it makes much more sense for states and the Centre to prioritise strengthening the coverage and quality of primary physical wholesale market sites. This will require carefully addressing multiple and persistent problems with regulatory design and capacity, all of which have riddled the APMC mandi system in different ways in the past (Krishnamurthy 2020). This must include a coherent regulatory and institutional framework for exchange in multiple channels outside mandis, but as Sukhpal Singh repeatedly points out in his I4I post, this requires much greater definitional clarity on all aspects of exchange. States must take the lead and there is a greater need than ever for Centre-state and inter-state consensus-building and coordination.

Finally, a word on the other objective of the farm legislations: integration – facilitating free movement of produce across the country. While this is a reasonable goal to have, integration comes with two major caveats that we must be cognisant of. First, any form of integration creates winners and losers and therefore has distributional consequences (see Chatterjee 2019 for exposition of one such force). Although we would expect that the net gains are positive for farmers, some benefit more than others. Importantly, there will be some farmers who will indeed be worse off. Second, integration also makes incomes more volatile (Allen and Atkin 2016). In the absence of any functioning insurance policy, this again has serious welfare consequences for farmers. Therefore, as we have emphasised earlier as well (Chatterjee and Krishnamurthy 2020), pushing for greater market integration does not only require far greater institutional capacity, public investment, regulatory innovation, and context-specific implementation. It also must be supplemented by much greater acknowledgement of and preparation for both the gains and losses from integration and their consequences for the millions of lives, livelihoods and economic and social transitions involved in the process.

Notes:

  1. Standard deviation is used to measure the amount of variation or dispersion of a set of values from the mean (average) value of the set.

Further Reading

  • Allen, T and D Atkin (2016), ‘Volatility and the Gains from Trade’, National Bureau of Economic Research, No. w22276.
  • Chatterjee, S (2019), Market Power and Spatial Competition in Rural India. Available here.
  • Chatterjee, S and M Krishnamurthy (2020), “Understanding and Misunderstanding eNAM”, in Seminar, Vol. 725 (‘India 2019’, January 2020).
  • Chatterjee, S, M Krishnamurthy, D Kapur, and MM Bouton (2020). ‘A Study of the Agricultural Markets of Bihar, Odisha, and Punjab’. Center for the Advanced Study of India, University of Pennsylvania.
  • Emran, MS, D Mookherjee, F Shilpi, and MH Uddin (2020), ‘Credit Rationing and Pass-Through in Supply Chains: Theory and Evidence from Bangladesh’ , National Bureau of Economic Research, No. w26615.
  • Krishnamurthy, M (2015), ‘The Political Economy of Agricultural Markets: Insights from Within and Across Regions’, in IDFC Foundation (ed.) India Rural Development Report 2013-2014, Orient BlackSwan, 1 June 2016.
  • Krishnamurthy, M (2020), Mandi Acts and Market Lore: Regulatory Life in India’s Agricultural Markets, Rethinking Markets in Modern India: Embedded Exchange and Contested Jurisdiction (pp. 179-205), Cambridge University Press, Cambridge.
  • Committee on Doubling Farmers’ Income (2017), ‘Report of the Committee for Doubling Farmers Income’, Ministry of Agriculture & Farmers’ Welfare, August 2017. Available here.
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