Agriculture: A Revolution Waiting to Happen Beyond the Mandis

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ABOUT: The highly restrictive Mandi system has been the bane of India's agricultural marketing and distribution. It's not just trader-centric, leaving the farmer to fend for himself, but is also blamed for hoarding, collaborative price surges and spoilt farm produce. It may have run its course. But what's the alternative? Dilip Mookherjee, Director of the Institute for Economic Development, and Professor of Economics at Boston University, who specialises in incentives and institutions, suggeststhe path to a more efficient and transparent agri supply chain.

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How would you like to see a five times increase in production of crops and a three times increase in incomes of small farmers in India, all within the next decade? This would raise the Indian economy's growth rate, and nearly eliminate poverty and food price inflation. An impossible dream? Yet, this is what happened in the remote northwestern Chinese Gansu province in the past 15 years. It did not require large investments in infrastructure or productive facilities. Instead, the trigger was a revolution in marketing organisation. Local governments formed marketing associations that brought together small potato farmers and negotiated on their behalf directly with wholesalers and retailers. Bypassing middlemen enabled farmers to realise a three-fold rise in prices for their potato. This incentivised farmers to raise potato yields by 50 per cent and cropped area by 300 per cent, resulting in dramatic output and income growth.

Is there scope for something like this to happen in India? Isn't Indian agriculture performing well enough already? Production technology in Indian agriculture has grown by leaps and bounds over the past 50 years, thanks to the Green Revolution and large irrigation investments. However, while the country now produces sufficient quantities of grain to feed itself, supplies of non-staple crops such as fruits and vegetables are failing to keep up with demand, resulting in high rates of food price inflation. The agricultural sector is struggling to meet growing demand for food quality and safety from domestic consumers. It is failing to integrate into global value chains, thereby, missing lucrative exporting opportunities. Meanwhile, the bulk of the population - small farmers and landless workers - remain trapped in low productivity occupations.

Therefore, the time is opportune for a corresponding revolution in agricultural marketing. As numerous researchers have documented, agricultural marketing arrangements in India are caught in a time-warp, resembling those in the Middle Ages or sub-Saharan Africa. Large parts of India still rely on the traditional arrangement of a long vertical chain of intermediary middlemen who earn hefty margins. Farmers sell to local middlemen (kachha arhatiyas, phorias, village banias) who re-sell to (or are commission agents of) wholesale traders, who in turn sell in large mandis to wholesale buyers and retailers. Middlemen margins in West Bengal potato, for instance, range from a quarter to a half of the wholesale price. Conservative estimates show that West Bengal potato middlemen earn at least as much as the farmers themselves, implying that farmers receive half or less of the actual wholesale price. In other words, if there were a way for the farmers to sell directly to wholesale buyers, the price they would receive would double or treble. Just as it did in Gansu province.

In some Indian states, marketing organisation is regulated by the state APMC (Agricultural Produce Market-ing Committee) regulations. Farmers take their produce to the mandis where it is auctioned off to wholesale buyers under the oversight of APMC-appointed overseers. The APMCs severely limit the set of buyers that can participate in the auctions, besides prohibiting direct sales by farmers. The auctions are conducted in a perfunctory manner; there is much evidence of collusion among buyers who are not prevented and, perhaps, even facilitated by the state-appointed overseer. The net result: farmers realise low prices and have only limited incentives to raise yields or expand cropped areas.

The farmer price realisation problem is compounded by poor infrastructure at the mandis. Manual weighing, single-window systems and lack of modern grading and sorting processes create long delays and measurement errors that tend to be biased against the seller. There are long queues of farmers waiting to sell their produce, with limited ability to take their produce elsewhere if the price is below other outlets. The delays result in large post-harvest losses to the tune of 4-6 per cent for cereals and pulses, 7-12 per cent for vegetables and 6-18 per cent for fruits. Total post-harvest losses were estimated at `44,000 crore at 2009 wholesale prices.

Lack of storage facilities limit opportunities for farmers to store crops for sale at later times rather than at the time of harvest when their price is depressed. Lack of adequate refrigeration and sanitation at the mandis result in lower food freshness and quality, compounded further by similar problems in transportation and retail markets. Measurement of quality is difficult and there is no awareness on food safety standards that need to be maintained.

Further cutting into farmers' price realisation is a large range of taxes levied by APMCs, of which only a small proportion is ploughed back into the mandi infrastructure. Market fees range between 0.5 per cent and 2 per cent of the sale value. In addition, commission charges vary from 1-2.5 per cent in foodgrain and 4-8 per cent in fruits and vegetables. Other charges include purchase tax and weighing fees charges. The resulting total burden of charges can go up to 15 per cent in some states. On the other hand, state spending on mandi infrastructure accounts for only 1 per cent of public spending on agriculture.

Farmers lack information about average prices prevailing in different mandis, despite widespread diffusion of cellphones. Neighbouring mandi prices for specific commodities are rarely in public domain, with the exception of a handful of areas under organisations such as Agmark. However, such price information is valuable to farmers only in the presence of effective competition among buyers for their produce. That is, if they have options of selling directly to multiple alternative outlets within a comparable transportable distance. These conditions do not prevail in many parts of the country. Randomised field experiments in West Bengal (a non-APMC state) and Maharashtra (an APMC state) with provisions of mandi price information failed to result in increased price realisation for farmers. The Bengal experiment also resulted in greater volatility of price received by farmers, which made them worse off. On the other hand, access to price information provided through ITC's e-choupals enabled soybean farmers in Madhya Pradesh to realise only 1-2 per cent rise in prices. Apart from information about prices prevailing in neighbouring mandis, the e-choupals represented an additional selling option to farmers. Therefore, lack of effective competition is the constraint that really binds; information access is valuable only in the presence of effective competition.

With few exceptions, APMC regulations prevent supermarkets, retailers or agro-processing exporters from procuring directly from farmers. This prevents widespread emergence of contract farming, which vertically integrates the supply chain of high-value cash crops. Such vertical integration allows end-users to upgrade and coordinate varieties planted by farmers with those that customers demand and meet safety standards. End-users can additionally provide credit and transfer risk from farmers, and invest in modern transport and storage facilities. Contract farming has emerged in production of gherkins, medicinal herbs, potatoes, poultry and horticulture products in a few states (Tamil Nadu, Punjab, Karnataka, Himachal Pradesh) that have permitted them, with encouraging results for growth of output, export and farmer incomes.

Yet, contract farming also raises a variety of regulatory challenges ranging from scope for opportunistic and possibly exploitative behavior by buyers. Defaults by farmers also frequently occur. Such hazards are well-known from contract farming practices during the 19th century, and seem to recur in a number of recent case studies.

Even if contract farming becomes more widespread, its incidence is likely to be limited to a specific set of high-value cash crops. The bulk of agricultural production will continue to be handled through more conventional distributional channels. What is essential in bringing about the required revolution in agricultural marketing is to raise effective competition for the farmers' produce, which will be facilitated by co-existence of multiple sales channels. If farmers are free to decide between contract farming options and more conventional mandi sales, market competition will induce the necessary discipline on exercise of monopsony power by either type of buyer. Such salutary benefits of farmers' option to sell to ITC's e-choupals were observed in Madhya Pradesh mandis and prices offered by arhatiyas to farmers.

The first ingredient of the necessary marketing revolution is therefore a deregulation of the state APMC acts and removal of barriers to effective competition for farmers' produce. Contract farming or direct purchases by retailers or agro-processing exporters need to be legitimised and encouraged throughout the country. Farmers need to be free to sell to whichever outlet they choose. Dismantling the permit raj is the first and primary imperative, which has the potential to unleash a growth momentum in agriculture analogous to the de-licensing reforms in industry and trade during the early 1990s.

But deregulation by itself is not going to be enough. A new regulatory framework and creation of supporting market institutions is needed. An unregulated laissez faire will confront problems of inadequate competition for various reasons. These include scale economies in transport and storage, that will tend to generate oligopolistic cartels of middlemen that provide these services. Mandi infrastructure needs to be overhauled to bring them into the 21st century. Third-party quality evaluation and certification needs to be provided. Contract farming needs to be subject to regulatory oversight to prevent opportunistic behaviour. A large supermarket chain or agro-processing exporter is likely to have considerable market power while bargaining independently with a large number of small farmers. Farmer collective organisations will be needed to ensure parity of bargaining power, and play a role in enforcement of contracts.

Most small farmers lack the literacy needed to operate e-portals that provide information about price movements and engage in e-commerce transactions with distant buyers. They lack the liquidity and credit access necessary for engaging in futures market transactions. Here again, local collective organisations such as panchayats can play an important intermediary role. This is what worked in China's Gansu province. Alternatively, local banks, rural credit agencies or buyer confederations could provide outlets similar to ITCs e-choupals, which engage local agents on a commission basis. Such outlets can provide farmers a package of market trading opportunities along with related credit and risk management services. ICICI had started a credit franchise programme a few years ago along these lines, but these were subsequently banned by the RBI. There is an urgent need to permit and re-introduce such agricultural marketing service outlets.

Ultimately, the agricultural marketing revolution will require political will and leadership. Existing middlemen coalitions will mount strong opposition. Political leadership at both the Centre and state levels will be necessary to deal with lobbies and the loss of their contributions to their parties. The resulting gain in support of farmers and consumers should hopefully compensate, as the political pendulum continues to move towards effective governance as the key to political success. State governments need to reduce the burden of APMC charges, and view them less as revenue sources and more as user fees that fund mandi infrastructure investments. Fortunately, the momentum has been building in Central and state governments since the past decade, culminating in the 2013 report of Committee of State Ministers in charge of Agricultural Marketing headed by Harsh Vardhan Patil. A National Agricultural Market online portal was cleared by the Cabinet Committee for Economic Affairs in July 2015. These represent hopeful beginnings. But most of the action still lies ahead.