Constricted by law

Indian Express, 2nd January 2014

APMC acts impair the freedoms of farmers and consumers.

Rahul Gandhi has announced that fruit and vegetables will be removed from the list of commodities under the agricultural produce marketing committee (APMC) acts in Congress-ruled states. This is an important move towards the freeing-up of markets, and will bring in competition and remove barriers to entry. It is expected that the de-listing will reduce the prices of fruit and vegetables in the long run and encourage investment in cold-storage facilities and warehouses. If the government wishes to reform agriculture and control food inflation, the reform should not stop here.

APMC acts were passed by states during our socialist past. They restrict whom farmers can sell to, who can get a licence to buy produce, and where trading can take place. This has given rise to a system with substantial barriers to entry in the trade of agricultural products. The freedom of farmers and other citizens to buy or sell as they like has been abrogated - farmers are forced to sell to traders who hold APMC licences at APMC prices.

As with many other state structures in socialist India, APMC regimes rapidly turned into rackets. Hardly 30 per cent of the mandated "open auctions" are actually open or transparent. New licences are mostly given to persons who already have shops and godowns in the prescribed market area. Shops in these areas are limited and are mostly available only to friends and relatives of existing traders. There are no transparent criteria for sale or for getting a licence. There is no time-bound application processing period during which a licence is either granted or refused. A licence is granted for a period of one to five years. Thus, the incentive for long-term investment is diminished. Regulatory capture by local trading communities is said to be the norm. These traders control the entire marketing chain, including credit, inputs, storage etc. Prices are often bundled, and there is a lack of clarity on what the exact price of the produce is, and what the interest on the credit and other items is.

These traders then sell the fruit and vegetables to wholesalers who are also APMC-licenced traders and set prices in the wholesale market. Pricing is a mark-up over costs. Various studies have identified this monopsonistic-monopolistic market structure and the lack of free entry and competition as the reason for large middleman margins. For some products, the farmer gets only 40 per cent of the price paid by the end consumer. This market structure does not permit the entry of new players who want to set up cold chains and invest in other infrastructure, keeping marketing costs high. Sometimes, the marketing cost is itself nearly a fifth of the total price paid by the consumer.

The government's approach to reform has been to try to change the APMC acts. In 2003, the Central government circulated a model APMC act and asked the states to adopt it. Sixteen states changed their acts accordingly, though only six notified the new rules under their act. The model APMC act does not solve the problem. Though it allows contract farming, it does not free up entry and exit into trading. It does not allow different business models to spring up. Some states allegedly adopted a few elements of the new act because there was a fiscal incentive to do so. The one state to strike a happy note in this bleak landscape is Bihar, which repealed its APMC act in 2006.

While the structure of this market is badly designed, it has not changed over the last decade. Then why has food inflation surged? Part of the answer lies in the change in consumption. The demand for non-cereals - particularly protein, fruits and vegetables - has increased with the increase in household incomes. When income rises, households do not just eat more rice and wheat. They graduate to a better diet and nutrition. Part of the answer also lies in the higher labour costs of production. The labour intensity of the production of non-cereals is higher than that of cereals. Estimates suggest that while it typically takes 55 man-days per hectare for the production of wheat, it takes 124 for onion, 110 for cabbage and 195 for tomatoes. Wage costs have also been rising since 2008.

While the increase in the prices of cereals because of the rise in minimum support prices has got a lot of media attention, the increase in the prices of fruit and vegetables has been relatively neglected. It's sometimes assumed that the supply has not responded to the rising demand. However, an examination of the data reveals that the production of non-cereals like eggs, meat, fish, fruit and vegetables has risen quite rapidly. It is not as if the market economy has not responded. The question is: at what price is the new production willing to come in?

The combination of high costs, a market structure with mark-up prices and the lack of suitable storage facilities has given rise to high and volatile prices. This is why removing these food items from the purview of the APMCs becomes important. This will foster entry, investment and competition in this key weak-link of Indian agriculture: the processes from the farm to the fork.

While it is good that fruit and vegetables will be removed from APMC lists, there is no reason to keep other agricultural items on them. For example, why should the freedom of the producers and consumers of dal be impaired? This calls the entire edifice of the APMCs into question. Why should all Congress-ruled states not match Bihar's modernisation by repealing their APMC acts?

Another element of the five-point programme announced by Gandhi is the use of the Essential Commodities Act (ECA) to attack hoarders. This flies against what is being attempted by bringing private players into the fruit and vegetable markets. The ECA does not permit private traders to hold food above certain quantities or for more than a certain number of days. The state usually does not have storage capacity. If private traders are allowed into trading and storage, food price volatility could decrease. The ECA has often been used arbitrarily to impose restrictions on the trade and holding of food. What we require is economic freedom and a competitive market. This will yield higher productivity in agriculture and lower prices for consumers, and requires getting rid of the APMC acts and the ECA.

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