Agriculture Market Policy Reforms | Part 1 - Freeing Our Farmers

Updated: Jul 28, 2020

Why talk about Agriculture-Marketing Reform now?

Recently, our Finance minister Nirmala Sitharaman had announced a series of economic relief packages amidst COVID distress. The third tranche focused on Agriculture and allied activities and had two sets of measures. The primary one was by boosting the credit flow into agricultural infrastructure (1 lakh crore), ‘Operation Greens’ (500 crores) and a few others. The details of their allocation however, are yet to be outlined.

But the more substantive part was the announcement to steer in the agricultural marketing reforms. These reforms are for amending the Essential Commodities Act (ECA) of 1955, bringing Central legislation to allow farmers to sell their products to anyone, outside the APMC mandi yard and creating a model agreement for contract farming.

If these reforms are implemented effectively, then they could potentially deliver sizeable returns in the long run.

How? We will explain this in two parts.

What was happening until now?

A. Monopsonistic Marketplace.

Farmers cannot sell their products to us-the consumers directly, but to a designated ‘mandi’ covering 80 sq. km.

These mandis geographically divided the states and were managed by the Agricultural Produce Market Committee (APMC) comprising of state government representatives, local farmers, traders, etc.

APMC agents procured the produce from farmers, sorted it out and auctioned it in the local mandis. Traders were issued licences to operate within the market. Private traders were not allowed to buy the produce directly from the farmers. The government even criminalised setting up of competing markets in the same area!

The aim was to ensure that farmers get a fair price for their produce and are safeguarded from exploitation by middlemen or large retailers.

However, corruption gradually crept in. All traders, rather than competing against one another, worked together to artificially deflate prices by bidding low. Only one price was quoted leading to a ‘Monopsonistic marketplace’. They paid farmers much less and sold at large margins to the end customers.

Hence, it was the trade cartels who benefited and not the poor farmer.

B. The 65 years old anachronistic, Essential Commodity Act 1955.

By mid-1960s when India was struggling to feed its population due to back-to-back droughts, Indo-Sino and Indo-Pak wars, Essential Commodity Act was first implemented.

It was a scarcity era legislation which empowered state governments to control the production, supply, and distribution of essential commodities. They could also impose a stock limit.

This was done to prevent hoarding and black marketing of food in the times of its shortage.

Now times have changed, India is the largest producer of pulses and second-largest of wheat and rice. We are the largest exporter of so many agri-products.

In fact, our granaries are overflowing but still, this old ECA law discourages private sector investment in warehousing and storage, as it can put stock limits on any food item at the drop of a hat. The Government itself hasn’t done much for storage and due to which either the entire 'produce' has to be brought to the market or it is left to spoil!

In the former case due to the surplus, the selling price plummets hurting the farmers.

In the latter case, since no reserve stock is left in the times of shortage, the price shoots up burdening the consumers just like what happened with onions in 2019!

See you in the next part...

Agriculture Market Policy Reforms | Part 2 - What Lies Ahead

- Srishti Singh