A common complain from farmers is that they were never a price taker in the market
Date : 18/05/2024
This is Part 2 of a series of articles by the author on the implications of new laws governing agricultural marketing in India. Access Part 1 here: https://indiachapter.in/article/1/7,16,20/47
The concept of Minimum Support Price (MSP) emerges from the concept of Reservation price in micro economics. The reservation price is equal to the minimum point of the average variable cost of production, to at least cover the total variable cost of production in the short run, to enable the firm to continue in the business. According to Shanthakumar committee report1 considering all the paddy farmers who sold in 2012, about 13 % of farmers sold to procurement agency and in wheat, about 16 percent farmers sold to procurement agency. In Karnataka, the impact of MSP has been distinctly different. First, the proportion of sale in APMC has been impressive (Fig 5) and second the proportion of produce sold, receiving price above MSP (Fig 6) is also impressive. More than 30% of cereals, pulses, vegetables were sold in APMC markets. And more than 60 percent of cereals, pulses and vegetables prices above MSP serving its purpose. However, while this proportion is impressive, it still leaves 70% of the marketed surplus out of the reach of APMCs unattended, due to imperfections in APMC markets. Thus, in order to improve economic position of farmers, market reforms are crucial.
Source: Karnataka Agricultural Prices Commission, Feb 2019
Further, it is crucial to note that 97% of commercial crops were sold above MSP, followed by 76% vegetables sold above MSP, 73% of cereals, 63% pulses and 62% of all crops were sold above MSP.
Source: Karnataka Agricultural Prices Commission, Feb 2019
Indian farmer is born in debt, lives in debt and dies in debt
Till the farmers are freed from the clutches of middleman in APMC, the adage, Indian farmer is born in debt, lives in debt and dies in debt holds. A common complaint from farmers was that he/she was always a price taker in the market. Since last 18 years the discussions were on in the Lok Sabha and several State legislatures to reform the APMC Act to provide freedom for farmers to sell produce to any body of his/her choice wherever he/she wants to sell at what ever price he/she wishes to. With the new Act, Farmer/group of farmers can become trader/s by integrating the produce and involve in marketing as long as they have a PAN (Permanent Account Number) number. However, as APMCs are governed by State Acts they will continue to operate and the new Act only empowers the farmers in marketing their produce, by providing multiple possibilities for farmers to sell.
Thus, with the new Act, farmers have the flexibility and liberty to make choice regarding where to and to whom to sell their produce to APMC or to any of the farmers, or group of farmers, or individuals or companies holding PAN card or to Agricultural Coop Societies or to Farmers Producer Organizations or to processors, exporters, those who wish to store and resell and so on. The farmers themselves can form a small consortium and act as traders by pooling their resources and undertake purchasing, selling and other marketing activities. Further, under this Act, the State Governments / Commission Agents, Mandi Merchants are prohibited from levying any market fee or cess or levy on farmers during purchase including through electronic trade platform. At present APMC fees and commission varies from State to State and the fees and other dues are meant to be paid by traders, but they are deducted mercilessly during payment to farmers impoverishing them to the tune of 8 to 15 percent of the value of the produce in different States. Further the merchants keep illegal unfair deductions from the produce in the pretext of donation, quality, and the farmer is further impoverished due to such deductions. With the new Act, since farmers have a wide choice of buyers to whom they may sell their produce including to merchants in APMC, farmers can sell wherever they get remunerative prices as also who ever follows fair trade practices in proper weighment, including those who do not deduct the produce and those who pay them at the earliest after the produce is sold by them. Most farmers are under the clutches of the merchants, traders in APMC as they are forced to sell their produce to them due to the hand loans extended. Such interlocked markets constrain farmers in realization of remunerative prices for their produce leading to perpetual indebtedness.
Does this affect the Federal structure
There is an argument that the Central Govt is interfering in the powers of the State affecting the Federal structure. Agriculture is a state subject. However, it is to be noted that all aspects of agriculture are not under the State list. The creation of physical market such as in APMCs is under entry 28 which is under the State list. However, according to entry 26, States can regulate trade in agricultural commodities subject to entry 33 which is in the concurrent list, which deals with trade with food stuff, cereals and so on. Thus, agriculture trade is in concurrent list, and Parliament has powers to legislate the law under entry 26. Thus, while market is in the state list, trade comes under concurrent list. Doubling farm income has to happen with such market reforms.
Does the new Act support MNCs, Corporates in marketing
There is an apprehension among farmers that the new Act supports Corporates, MNCs in marketing. It is crucial to note how many Corporates / MNCs have entered Agriculture sector eversince liberalization in 1991in crop production, marketing activities. These activities have continued to be performed by farmers. The protagonists of this argument fail to list the MNCs, Corporates involving in crop production activities. The MNCs/Corporates have largely invested in sectors which are highly profitable such as software (Google, Facebook, Microsoft, Infosys, Wipro, Apple), health (Columbia Asia, Fortis), banking (HSBC, ICICI), seeds (Monsanto, Cargil), Logistics (Amazon, Flipkart.) sectors but certainly not in farming, processing, storage, packaging and so on. Even though there is unemployment for agricultural graduates, they themselves are not taking to agriculture at least on their farm though they are technically well equipped since they are not sure of remunerative prices for their produce due to existing market imperfections. Thus, the apprehension that Corporates, MNCs have flooded agriculture sector is unfounded. For instance, when Kentucky Fried Chicken entered the market, there was hue and cry by farmers and consumers. However, the KFC did not buy poultry birds from farmers of USA, instead created market for poultry birds from farmers of India. Advantages in technology from wherever has been welcome by farmers as for instance their use of Facebook, Jio, Google, which does not mean their disrespect to local economy. The farmers have enjoyed the lowest mobile call charges in India purely due to competition with the existence of TRAI.
Why farm incomes have not doubled, despite green revolution
Green revolution technologies have resulted in doubling productivity of most crops. However, doubled productivity has not resulted in doubled farm incomes. There are two reasons for this phenomenon. One, since agricultural crops face inelastic demand and inelastic supply, with the rightward shift in the supply of farm produce, results in falling total revenue, a phenomenon called ‘paradox of plenty’. Second, the markets faced by farmers are not competitive, and due to presence of large number of superfluous middlemen, they absorb a substantial portion of consumer rupee and accordingly fail to transfer substantial share to farmers. This results in farmers receiving less than 50 percent or even up to 30 percent of the consumer rupee by farmers. The recent pan India survey study by Reserve Bank of India2 in 2019 in 16 states covering major crops obtaining field data from 9400 respondents (farmers, traders and retailers) concluded that the producer share in consumer rupee is the lowest in potato (28%) followed by onion (33%), Green chillies (33%), rice (49%), Turmeric (55%), Tur (60%), Tomato (61%), Moong (63%), Banana (65%), Urad dhal (68%), Brinjal (74%), Soyabean (75%), groundnut (76%) and Red chillies (78%). Majority of the farmers opined that MSPs and market information helped them in realising better prices. Majority of traders viewed that allowing free trade is helpful.
It is crucial to note that APMCs are an oligopsony market where a few buyers perform marketing functions for a large number of sellers (farmers). Unless the restrictions on regulated markets are removed, the market will not be able to attract different types of buyers who may enter and enhance competition in the market thereby offering remunerative prices to their produce as also avoid illegal and rampant undue deductions the mandi merchants are making in APMC market yards from farmers.
Despite falling subsidies and support to farmers in India, our farmers have demonstrated their efficiency in farm production adopting modern technologies evolved by the NARS - SAU - ICAR system. Currently India is the world’s largest exporter of rice. However, the benefits of higher international prices do not accrue to the producer as they are garnered by the middleman. Domestic market reforms are crucial and the most vital among them are to remove the restrictions imposed in the APMCs that farmers should sell their produce only in the APMC market yard to the APMC merchants.
Elasticity of price transmission
The price elasticity of transmission between domestic wholesale market and farm level price is an indicator of the strength of the relationship between the wholesale market and the farm level, thus, transferring price advantage to the farmers, from the wholesale market. It has been estimated that the price elasticity of transmission between wholesale market and the farm level is 1.04 for rice, for Maize 1.03, chickpea 0.86, rapeseed-mustard 0.883. Therefore, a 1% increase in domestic wholesale price, results in more than 1% increase in farm level price for rice and maize. A one percent increase in the price of mustard oil price in wholesale market, resulted in a 0.88 percent increase in the farm level price of mustard. Thus, even with the present degree of market imperfection, where middleman is continuously exploiting the market, the price transmission is appreciable. If there are further market reforms, this price transmission elasticity will certainly benefit the farmers due to competition.
M G Chandrakanth is Director (Retired), Institute for Social and Economic Change, and Professor (Retd), Dept of Agricultural Economics, University of Agricultural Sciences, Bengaluru
Footnotes:
1Shanthakumar, 2015, Report of the High level committee on reorienting the role and restructuring of Food Corporation of India, https://fci.gov.in/app2/webroot/upload/News/Report%20of%20the%20High%20Level%20Committee%20on%20Reorienting%20the%20Role%20and%20Restructuring%20of%20FCI_English.pdf
2RBI, 2019 (op cit)
3Ramesh Chand, 1999, Effects of trade liberalization on Agriculture in India: Commodity Aspects, The CGPRT Center, Working paper No. 45, UN/ESCAP, p 27.
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