Unless Politicians Running APMCs are Kicked Out, Food Inflation will Remain - Vivek Kaul's Diary
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Unless Politicians Running APMCs are Kicked Out, Food Inflation will Remain

Jul 15, 2016

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Over the last few years' sudden spurts in the prices of vital vegetables, fruits and pulses, has become a regular phenomenon. One reason for it is the fact that the demand is greater than supply. This is true for pulses, at least.

What does not help is the fact that the government buys rice and wheat directly from farmers at a minimum support price. This discourages farmers from growing fruits, vegetables and dal. As the Economic Survey of 2014-2015 points out: "High MSPs result in farmers over-cultivating rice and wheat, which the Food Corporation of India then purchases and houses at great cost. High MSPs also encourage under-cultivation of non-MSP supported crops. The resultant supply-demand mismatch raises prices of non-MSP supported crops and makes them more volatile. This contributes to food price inflation that disproportionately hurts poor households."While, the government of India announces MSPs for 23 crops it largely buys rice and wheat, and some cotton, at that price.

Having said this, the sudden spurts in the price of vegetables and fruits is not always about the demand outstripping supply. Many times it is just about the way the agricultural markets in the country operate.

Agricultural markets across the country are regulated under the state level Agricultural Produce Marketing Committees (APMC) Act. As Vilas M Kadrolkar writes in a research paper titled Role of APMCs in Agricultural Marketing in India- A Study: "The whole geographical area in the State is divided and declared as a market area wherein the markets are managed by the Market Committees constituted by the State Governments. Once a particular area is declared a market area and falls under the jurisdiction of a Market Committee, no person or agency is allowed freely to carry on wholesale marketing activities."

Hence, the farmers have to compulsorily sell what they produce at the APMC. The state governments have set up APMC mandis in many towns, across the length of breadth of India. As the Economic Survey of 2014-2015 points out: "There are about 2477 principal regulated markets based on geography (the APMCs) and 4843 sub-market yards regulated by the respective APMCs in India." Nevertheless, the stipulation that the farmers have to sell their produce at APMC mandis has ensured that a competitive marketing system hasn't emerged.

As Vijay Joshi writes in India's Long Road-The Search for Prosperity: "APMCs putatively run by elected representatives of farmers, are in control of marketing. According to the APMC Act, trade between farmers and buyers of produce (mainly wholesalers) is supposed to take place only in specified mandis (i.e. market yards) through an auction system. The original idea behind this was to protect farmers from exploitation."

But that hasn't turned out to be the case. The local and state level politicians have turned this into another revenue generating exercise for themselves. As Joshi writes: "The system has evolved in such a way that trade takes place, in practice, through licensed intermediaries who have captured APMCs, in cahoots with local politicians. The APMCs contrary to intention, have become monopoly buyers who dictate terms to small farmers."

And any monopoly can't possibly be good. As a report titled Competitive Assessment of Onion Markets in India, commissioned by the Competition Commission of India a few years back, points out: "Collusion was observed among traders in selected markets in Maharashtra and Karnataka, For instance, a visit to Ahmednagar APMC revealed that there was collusion amongst traders. While bidding on certain lots was taking place, traders started with about Rs 300 per quintal and kept bidding higher prices till one trader quoted Rs 400 per quintal and another bid at Rs 405 per quintal. The commission agent stopped the auction and produce was shared between two wholesalers. In fact, about 60 per cent of farmers in Washi [Vashi] market reported that their sale was undertaken through secret bidding."

Given this, it isn't surprising that the onion prices have gone up the way they have, over the last few years. Maharashtra dominates onion trade in India and produces around 45 per cent of national production by value.

Devendra Fadnavis, the chief minister of Maharashtra, is trying to take on the monopoly of APMC traders. On July 13, 2016, the government of Maharashtra issued an ordinance to exclude fruits and vegetables from the list of agricultural items that need to be compulsorily sold through APMCs.

This is a good economic reform that will make a genuine difference to the lives of people if allowed to go through. It will allow farmers to sell their produce not just at the APMC mandis but to others as well. This will ensure that both the buyer as well as the farmer get a better price. As The Financial Express points out: "Once the move is finalised, it will allow large buyers, like say a Wal-Mart, to contract directly from the farmgate, to even enter into long-term contracts with farmers for such supply."

But Fadnavis needs to do much more than this and learn from the Delhi experience. In Delhi, food and vegetables were excluded from the APMC Act in September 2014. Nevertheless, the Azadpur mandi has seen no discernible change in sale of vegetables and fruits.

To give farmers a real option, the state government needs to encourage the setting up of more private markets where the farmers can sell their vegetables and fruits, and not get caught up with the middlemen who dominate the APMC mandis. This will call for pushing through an entirely new way of doing things which will challenge the existing rentier system as it has evolved.

As the Economic Survey of 2014-2015 points out: "Recognizing the need for setting up a national market the 2014-15 Budget stated that the central government would work closely with state governments to reorient their respective APMC Acts to provide for establishment of private market yards/private markets. The Budget also announced that the state governments would also be encouraged to develop farmers' markets in town areas to enable them to sell their produce directly."

It is time that the union government and the state governments got their acts together on this front. Creating competition to the existing APMC mechanism is a major way in which food inflation can be controlled in the years to come.

The question is will the state governments get around to doing this. The answer is that it will take a lot of pushing from the union government. The state governments manage to collect a lot of revenue from APMC mandi taxes.

As the Economic Survey of 2014-2015 points out: "The levies and other market charges imposed by states vary widely. Statutory levies/mandi tax, VAT etc. are a major source of market distortion. Such high level of taxes at the first level of trading have significant cascading effects on the prices as the commodity passes through the supply chain."

Also, there is a cosy relationship between state level politicians and the licensed intermediaries who buy agricultural products at APMCs. As the Economic Survey points out: "There is a perception that the positions in the market committee (at the state level) and the market board - which supervises the market committee - are occupied by the politically influential. They enjoy a cosy relationship with the licensed commission agents who wield power by exercising monopoly power within the notified area, at times by forming cartels. The resistance to reforming APMCs is perceived to be emanating from these factors."

This basically means that unless the politicians running APMCs are kicked out, food inflation will continue to remain an issue.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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11 Responses to "Unless Politicians Running APMCs are Kicked Out, Food Inflation will Remain"

manmohan khetan

Jul 19, 2016

Hats Off ! Vivek. Sincerely believe if our PM comes to know of these facts.

Like 

`gregory dhan

Jul 17, 2016

I agree with your view. your study is cent percent true.

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Ranjit

Jul 17, 2016

Your articles r really worth reading.

Like 

Shank VAGAL

Jul 16, 2016

"This basically means that unless the politicians running APMCs are kicked out, food inflation will continue to remain an issue."

Well, well that we all know - not only in case of APMC, but in ALL issues, right? The point is how to bell this cat!

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SEETHARAM SUDHIR

Jul 16, 2016

We speech many things, There are vast stretch of lands which are not cultivated since from many years, Government should identify and taken actions on them for not growing or making lands fit for agriculture produce, Government gives loan for a person who does not properly utilize his lands for development and production of food grains, Lacuna in this angle is seen.

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Kanta Ahuja

Jul 15, 2016

Safal model of auctions that are transparent seems to be working well. The
Issue is to ensure transparency of transactions and not 'underhand below a handkerchief ' determined prices. Private and regulated markets of the APMC type both have unintended consequences .

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Kanta Ahuja

Jul 15, 2016

Safal model of auctions that are transparent seems to be working well. The
Issue is to ensure transparency of transactions and not 'underhand below a handkerchief ' determined prices. Private and regulated markets of the APMC type both have unintended consequences .

Like 

Pulin C Barthakur

Jul 15, 2016

I doubt that allowing and
encouraging private mandis
to evolve in agri market areas
for the farmers to sell their
produce directly, may be in
competition with APMCs, wil
likely have a chance to cool
down/hold the food prodcts
price line. Thanks to the
abiding character of our
political class and
establishment, it'll be only
matter of time bfore these
farmer mandis are tentacled
by hafta/goonda tax
collectors. Some more drastic
measures are called for
outside political initiatives,
perhaps, in terms of our
judiciary and the judicial
system getting more jugular
with the market distorters

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Prakash

Jul 15, 2016

CM of Maharashtra must be congratulated for this ordinance on excluding vegetables and fruits from clutches of market committees.But he should have seen that alternative selling places must be built on war footing otherwise the whole exercise will be futile.
The main problem with vegetables and fruits is their perishable nature. Unless infrastructure like cold storage are built farmers have no hold on selling prices.
The case of onion is different,there is no consistent export policy on onion,the moment onion prices start rising government restricts export and vice vice versa.There is no credible forecasting of crops before it actually start coming in mandees.
If whole agriculture business is freed from regulations like export their will be no requirement of subsidies on fertilizers,capital and electricity,but because of vested interest in government these reforms have not materialized.

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DR. KISHORE C.PADHY

Jul 15, 2016

POLITICIAN NEXUS CANNOT BE ELIMINATED.ITA A POWERFUL&RICH BODY.SO POLITICIANS CANNOT BE ELIMINATED.BUREAUCRATS TO HEAD BODY,OR GOVT REPRESENTATIVES IN THE BODY IS WORSE.YOU HAVENT SPECIFIED HOW STATE WILL SUPPORT ALTERANATIVE BODIES OR COMPETING ONES.SUGGEST THE MODE.YOUR ARTICLE OTHERWISE IS STIMULATING.

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