Farm laws: Roadmap for agricultural marketing privatisation

Focussing on the essence of the farm laws, which purportedly seek to promote free market competition in agricultural marketing, Dilip Mookherjee emphasises the need for reform of APMC (Agricultural Produce Marketing Committee) mandis. In his view, the sensible way forward would be to permit direct transactions between buyers and sellers, while building effective regulatory infrastructure to ensure fair competition, arbitrate disputes, and prevent opportunistic exploitation of small farmers.

Over the past months, we have been witnessing with much wonder the ‘clash of titans’ – the central government anxious to push through a set of farm laws, pitted against outraged farmer representatives firmly opposed to the impending transition to laissez faire¹ in agricultural marketing that they perceive the laws to constitute. The government has already ceded some ground, offering to postpone the implementation of the laws by 18 months, while the farmer lobbies want them permanently annulled. This hiatus provides an opportunity to think about constructive paths of agricultural reform that may yet evolve in the future. As economists, our role is to put forward suggestions for reforms that will advance the public rather than special interests, which could form the basis of actual policy proposals considered and debated in the months ahead.

I wish to focus on the essence of the farm laws, which purportedly seek to promote free market competition in agricultural marketing by dismantling APMC mandis (Agricultural Produce Marketing Committees). The protesting farmer groups are more exercised about grain procurement and minimum support prices (MSP) – an issue somewhat orthogonal to reorganising markets for private wholesale trades in agricultural produce. This is not to deny there are some connections between State procurement and reform of private markets, for instance the indirect effects of MSP on prices at which private transactions are likely to be conducted. But this is a second-order issue, somewhat peripheral to the central question of access of sellers and buyers to wholesale private markets, regulation of these markets, and associated market infrastructure. How State grain procurement affects private markets, can be discussed subsequently. To think clearly about reform ideas, it is important to sort out issues and approach them sequentially in order of priority. So, in this post, I will abstract from State procurement and MSPs and focus instead on reform of private marketing arrangements.

Need for mandi reform

It is undeniable that APMCs mandis (markets for agricultural produce)² are sorely in need of reform – improving physical infrastructure, and easing access for small farmers as well as a wider spectrum of buyers, than has hitherto been possible. Enough is known already about these problems (for example, various I4I posts by Chatterjee and Krishnamurthy (2020), Ramaswami (2020), Aggarwal, Jain and Narayanan (2017), and Mookherjee (2016)), which have restricted market access and promoted collusion. It is well-known that the vast majority of farmers do not sell directly in the mandis and sell instead to middlemen of various sorts – village traders, or commission agents of large wholesale buyers. It is important to understand that this partly owes to the need for intermediary aggregators to overcome natural ‘transaction costs’ of direct sales by millions of small farmers to a few wholesale buyers. The latter are interested in buying in bulk. They are unwilling to negotiate personally with multiple small farmers on a daily basis, and would be unable to monitor quantity and quality of produce delivered. The middlemen provide a useful service by coordinating purchases to meet daily targets, inspecting the produce, and maintaining long-term relationships with farmers, gauging reliability on the basis of past experience, besides providing trade credit if needed and overcoming lags between produce delivery and payments.

Yet, small farmers are frequently prevented from selling directly in the mandis by the APMCs, deterred by long distances to the mandis, lack of information about mandi prices, poor infrastructure (weighing and storage facilities), and high marketing fees charged. Large traders and farmers controlling APMCs are also often unwilling to allow buyers not already in a collusive relationship with them, to buy in the mandi. The APMC acts prevent ‘outsider’ buyers from buying directly from farmers, bypassing the mandi committees, unless they obtain permission from the state government. These restrictions on access mean a large number of potential sellers and buyers are prevented from participating in private markets, allowing intermediaries to earn large margins at the expense of what small farmers are paid.

Even in states where many farmers sell directly in mandis, long distances from farm to market, poor market infrastructure and lack of price information, lower what they can effectively earn. These restrictions end up reducing the volume of trade, suppressing incentives for farmers to produce by lowering their return, while jacking up prices that retail consumers end up paying. The net result is lower agricultural production and GDP (gross domestic product), while at the same time, preventing opportunities for millions of small farmers to escape poverty by earning more and diversifying into production of high-value cash crops.

On the other hand, advocates of APMCs point out the dangers of unfettered market competition, if APMCs were wholly dismantled. The worry is that giant agribusiness companies will engage in predatory pricing, drive existing supply chains out of business, and then mercilessly exploit farmers by paying them less than what they are currently getting. Contract farming may result in opportunistic behaviour by large corporate buyers in the form of refusal to pay farmers the promised prices on made-up charges of late delivery or failure to meet quality norms. There are a number of actual cases of contract farming in India and elsewhere, which illustrates these dangers. Clearly, the public interest would not be well-served if most existing supply chain intermediaries lost their livelihoods, farmers were short-changed, incurred sizeable debts and ended up losing their lands or other asset collateral.

Privatisation of agricultural marketing

Yet the experience with privatisation of agricultural marketing, entry of large agribusiness, and contract farming in many other developing countries has not been an unmitigated disaster. There are also several success stories within India and in many African nations, where smallholder farmers have managed to diversify into high-value cash crops and increase farm incomes substantially (Minten et al. 2009, Barrett et al. 2012, Rao et al. 2012, Reardon et al. 2009, Swinnen et al. 2011). Direct trading between farmers and agribusiness enables developing countries to tap into global value chains based on superior technology at all levels: seeds, production methods, transport and storage infrastructure, national and global marketing. As long as the gains are shared evenly between the agribusiness companies and farmers, the result can be higher growth accompanied by higher farm incomes and lower poverty.

The fear that agribusiness conglomerates will destroy existing mandis and supply chains also seems vastly exaggerated. Contract farming is likely to be restricted to a select number of fruits and vegetables and a subset of (at least moderately large) farmers. The vast bulk of farmers will continue to produce most generic agricultural commodities and sell them through local intermediaries, who in turn will continue to resell them in mandis. Transaction costs will continue to pervade direct transactions between thousands of small farmers and remote agribusiness buyers. Hence, if agribusiness does seek to procure generic commodities on a large scale, they will have to tap into existing supply chain intermediaries. This has been the experience of most other developing countries as well.

Therefore, the sensible way forward would be to permit direct transactions between buyers and sellers without requiring them to seek approval from APMCs or state governments. And at the same time, set up institutions that allow small farmers opportunities for collective bargaining; and a regulatory infrastructure to ensure fair competition, arbitrate disputes, and prevent opportunistic exploitation of small farmers. Our attention should be focussed on the design of such market institutions. Below, I offer a number of suggestions.

Designing regulatory infrastructure

First, separate spot (immediate) from forward (contract) transactions. For spot transactions, the regulatory problems are less substantial. The ITC Ltd. experiment with e-Choupals (term used to refer to a desktop with internet access, in the experiment) in Madhya Pradesh during the 1990s (Goyal 2010), provides a possible model for spot transactions. Buyers could set up e-Choupals in villages, operated by a local agent hired by the buyer, where prices are offered for delivery of commodities on a daily or weekly basis. The e-Choupal stands ready to pay cash for commodities supplied to its booth within the village, or neighbouring warehouse, obviating the need for farmers to transport their crops to distant mandis. The local agent is incentivised by commissions amounting to a fraction of the sales value. The e-Choupal can also provide useful price information, for example, prevailing prices in neighbouring mandis that serve as a point of comparison with what they themselves offer.

Contract buying requires a more elaborate regulatory infrastructure. There are two important elements of this structure. First, buyers should be required to contract with farmer-producer organisations (FPOs) that aggregate procurement with groups of local farmers. The possible role of FPOs have already been mentioned in the farm laws, but there is very little that is known about how they are currently set up and function. FPOs are essentially farmer cooperatives, but as is well-known, the experience with farmer cooperatives is mixed at best – very successful in some parts of the country and some specific commodities (for example, Maharashtra sugar cooperatives, Amul milk cooperatives) but not in other parts of the country or other commodities (for example, oilseeds). Most importantly, effective and well-functioning cooperatives do not happen overnight, nor can they be engineered top-down by state governments. They require a combination of local social homogeneity and economic equality among the farmers, and active assistance of NGOs (non-government organisations) and/or local governments. There are various possible models of FPOs that could be experimented with – for example, those managed by local panchayats, others by NGOs, or by existing farmer organisations.

The other essential component of the regulatory oversight institution would be to include dispute settlement mechanisms – third-party verification of quality, arbitration, quasi-judicial bodies to enforce contractual terms – and a ‘fair agricultural trade commission’ (FATC) at the state level to monitor maintenance of competition. Contracts between external buyers and local FPOs would need to be registered with the state FATC. Buyers would need to avail of third-party verification of quantity and quality of produce. This would make it difficult for large buyers to short-change farmers post-delivery on grounds of inferior quality. Moreover, it would enhance buyer credibility in the eyes of the farmers. If disputes arise, the case can be referred for arbitration, and if not settled there, sent to the quasi-judicial body for a decision. Decisions would have to be made speedily, to prevent buyers from delaying payments to farmers endlessly even when the produce actually meets standards. Existing courts would not be able to undertake this kind of burden, so new legal bodies would have to be set up by state governments.

Such institutions are necessary for any market economy to achieve inclusive growth and poverty reduction. Agriculture being a state subject, actual policy efforts ought to be carried out at the level of state governments. This also has the advantage of avoiding one-size-fits-all kinds of policies, taking advantage of local information and benefits of learning from experimentation with diverse reform efforts in different states. Which institutions will ultimately work will emerge from nationwide learning from a trial-and-error process. The farm laws ought to explicitly incorporate flexibility to provide the scope for heterogeneity and evolution.

I4I is now on Telegram. Please click here (@Ideas4India) to subscribe to our channel for quick updates on our content

Notes:

Laissez-faire refers to the theory or system of government that upholds the autonomous character of the economic order, believing that government should intervene as little as possible in the direction of economic affairs.
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.