Development Policies and Agricultural Markets

RAMESH CHAND

Agricu
a ering products from sources to consumers. But, in a broad
disco
In ering sense,
sense, atheir
narrowroleproducts
extends totheirtransmitting
sense, rolemacroeconomic
from extends the sources role to of to transmitting agricultural consumers. markets macroeconomic But, in is a broad deliv-
and th
signals to producer firms, providing incentives to producers to
market
attain the desired growth in agri-food output, improving the
welfare of producers and consumers, balancing demand and
distort
supply, and promoting the efficient use of resources in the pro-
inadeq
duction and distribution systems. These roles require a com-
While
petitive environment, strong physical and institutional infra-
bargain
structure, and a favourable regulatory system. These conditions
success
cannot come up on their own, particularly in a developing country
like India. Therefore, agricultural market policies are treated as
cooper
an integral part of development policies and their functioning
provid
has remained an important part of public policy in India.
Meanw This paper discusses various policies related to agricultural
in markets since the early 1960s,tune
a time when major steps were
taken for their transformation. It analyses how these policies
various
have performed and their relevance, given changing produ-
improv
ction and consumption patterns, and technological and
essenti
commercial developments.
price s
Policy Interventions in Agricultural Markets
Policy interventions in agricultural markets in India have a
long history. Till the mid-1960s, it was mainly meant to facili-
tate the smooth functioning of markets and to keep a check on
activities that were considered inimical to producers and/or
consumers. Subsequently, the country opted for a package of
direct and indirect interventions in agricultural markets and
prices, initially targeted at procuring and distributing wheat
and paddy. This gradually expanded to cover several other
crops/products and aspects of domestic trade in agriculture.
The present policy framework for intervention in agricultural
markets and prices can be broadly grouped under three cate-
gories - (a) regulatory measures; (b) market infrastructure
and institutions; and (c) agricultural price policy.

Regulatory Measures
The regulatory framework for agricultural markets consists of
two sets of measures. One, measures for the development and
regulation of wholesale markets; and two, a series of legal
instruments for regulating the functioning of markets and
trade activities.

Agricultural Produce Market Regulation Act

All wholesale markets for agricultural produce in states that
Ramesh
have adopted the Agricultural Produce Market Regulation Act C
Agricult
(apmra) are termed "regulated markets". Apart from Kerala,

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Jammu and Kashmir, and Manipur, all other states in India the private sector from farmers and contract farming have
have enacted marketing legislations, known as Agricultural grown in some parts of the country. However, private invest-
Produce Marketing Committee (apmc) Acts. The Act is imple- ments in agricultural marketing have not been commensurate
mented and enforced by apmcs established under it. It man- with the commercialisation and diversification that have taken
dates that the sale/purchase of agricultural commodities noti- place in the agriculture sector. The Model Act, so far, has not
fied under it are to be carried out in specified market areas, succeeded in persuading the private sector or cooperatives to
yards or sub-yards. These markets are required to have the set up agricultural marketing infrastructure as an alternative
proper infrastructure for sale of farmers' produce. Prices in to the state-owned mandi system.
them are to be determined by open auction, conducted in a
transparent manner in the presence of an official of the market Deficiencies in the Existing System
committee. Market charges for various agencies, such as com- and Need for Integrating Supply Chain
missions for commission agents ( arhtiyas ); statutory charges, As mentioned, the apmc Acts improved agricultural markets in
such as market fees and taxes; and produce-handling charges, several respects and considerably diluted mercantile power in
such as for cleaning of produce, and loading and unloading, them. However, over time, the balance of power in transactions
are clearly defined, and no other deduction can be made from has moved back in favour of middlemen and the trading class.
the sale proceeds of farmers. Market charges, costs, and taxes It is interesting to see how these sections have entrenched
vary across states and commodities. themselves in mandis. When the apmra was enacted by
On the whole, the apmc Acts have served some important various states in the mid-1960s, the country was facing a seri-
purposes. They got rid of several malpractices and imperfec- ous food shortage and desperately seeking to achieve a break-
tions in agricultural markets, created orderly and transparent through in food production. It was strongly felt that it would
marketing conditions,1 and ensured a fairer deal to farmers not be possible to attain and sustain food security without
selling their produce (Acharya 2004). It was a pressing need at incentivising farmers to adopt new technology and make
the time and it transformed agricultural markets in most states investments in modern inputs. Therefore, high priority was
of the country. Besides improving the way markets functioned, attached to enabling farmers to realise a reasonable price for
the Acts created an environment that freed producers-sellers their produce by eradicating malpractices from markets, pro-
from exploitation by traders and mercantile capital. tecting them from exploitation by middlemen, and creating a
In recent years, pressure has mounted to change this market competitive pricing environment. Simultaneously, the hold
regulation and remove its various restrictions. It is argued that traders and commission agents had over them by providing
the Act was relevant when private trade was underdeveloped, credit was diluted by increasing the supply of institutional
exploitative, and controlled by mercantile power. The market- credit. This, along with technology-led output growth, resulted
ing monopoly provided to the state by the Act is seen as pre- in increased farm incomes, making farmers less dependent
venting private investments in agricultural markets. The res- on the trading class for credit and cash requirements. It also
trictive legal provisions of the Act, such as "all agricultural gave farmers the freedom to choose markets and buyers
produce brought into or processed within a market area shall for their produce.
pass through the principal yard or sub-yard and shall not be The spread and success of the green revolution during the
bought or sold at any other place in the market area2 or no 1970s and 1980s led to an increase in the political power of the
such person shall carry on business and trade in agriculture farming class and their clout in policymaking. This was ref-
produce into market area except one who holds the licence lected in the creation and strengthening of farmer-friendly
issued by the market committee", have prevented new entrants institutions and a policy environment favourable to farmers.
from coming in, thus reducing competition. Because of all this, Marketing institutions like market committees, state-level
the Inter-Ministerial Task Force on Agricultural Marketing agricultural marketing boards and many others in the public
Reforms (2002) recommended that the apmc Acts be amended and cooperative sectors served the interests of the farming
to allow for direct marketing and the establishment of agricul- community. Over time, as the country moved close to food
tural markets in the private and cooperative sectors. The ratio- self-sufficiency, public policy began losing its focus. The
nale behind direct marketing is that farmers should have the marketing system and marketing institutions were plagued
option to sell their produce directly to agribusiness firms, such by inefficiencies, bureaucratic control, and politicisation. The
as processors or bulk buyers, at a lower transaction cost and in growth in market facilities did not keep pace with the growth
the quality/form required by the buyers. in market arrivals, forcing producers to seek the help of
In response to this, the union ministry of agriculture pre- middlemen in the market, which, in turn, led to dependence
pared a Model Act in 2003, which state governments could on them. There was also a reversal in the credit situation after
adopt to modify their Acts (agricultural marketing is a state 1991, making farmers more dependent on commission agents
subject). Under the Model Act, the private sector and coopera- and traders for loans.3 The trading class quickly regained its
tives can be licensed to set up markets. It also allows for con- marketing power over farmers by meeting their credit re-
tract farming and direct marketing by private traders. Barring quirements with interlocked transactions, robbing producers
a few, all states and union territories (uts) have either fully or of the freedom to decide where they would sell and whom
partly adopted the Model Act. As a result, direct purchases by they would sell to.

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 REVIEW OF RURAL AFFAIRS

Taking advantage of the lax attitude of state governmentsprice determination. The direct sale of produce leaves this
towards marketing, the trading class consolidated their poweroption with farmers. The system of having to go through regu-
in mandis. The so-called unorganised traders, individually lated mandis also places small producers with less to sell in a
small but numerically large, acquired power by organisingdisadvantageous position.
themselves, which proved to be a potent factor in electoral
Small Traders Dominant
politics. The ascent of the Bharatiya Janata Party (bjp) pro-
vided considerable clout and power to the trading class to Agricultural markets in the country are crowded with small
influence public policy. And with populist politics, no statetraders who operate on a small scale in a limited market seg-
government wanted to undertake any market reforms thatment. In agriculturally advanced Punjab, there are as many as
were opposed by the trading class for fear of losing its support. 22,000 commission agents; one for every 50 farmers. Then
As a result, traders, commission agents, and other function-there are a host of other middlemen such as wholesalers,
aries organised themselves into associations, which do not transporters, labour contractors, and brokers in each market.
allow the entry of new players, stifling the competitive func- As the size of their business is small, they seek large margins
tioning of markets (Acharya 2004: 106). Middlemen success-on small volumes of business. Thus, the channels for market-
fully turned marketing policies to their benefit, dictating terms ing of agricultural produce remain long and fragmented and
to producers, and thwarting modern capital from enteringlack economies of scale. On an average, four to six transactions
agricultural marketing. Some examples of this are: (i) increas- take place before the produce reaches consumers from the
ing the commission rates of arhtiyas without any justification;4point of sale by producers. As each transaction involves cost
(ii) rejecting direct payment to producers, which would bypass and some margin for intermediaries, the price spread between
commission agents;5 and (iii) determining prices through non-consumers and producers becomes quite large, without any
transparent methods. real value addition. Some of the middlemen are found to
These developments speak of the political clout and influencerender no real service - they simply earn rent. Even the Model
that middlemen have acquired in agricultural markets. ThereAct has failed to change the status quo. So, producers feel that
are also reports of collusive behaviour by wholesale buyers in they do not get value for their produce and consumers feel that
markets (Banerji and Meenakshi 2001). Commission agents they have to pay an unjustifiably higher price. The only way to
sometimes charge exorbitant fees for carrying out auctions.address this is to integrate the supply chain, reduce the number
According to Gulati (2009), farmers at the Azadpur fruits and of intermediaries, and allow economies of scale in market op-
vegetable market in New Delhi have to pay commission agents erations. This is not possible if there are no alternative market-
a fee ranging from 6% to 10% for an auction that lasts foring options to government mandis.
A grave fallout of the present market system is declining
about five minutes. Similarly, in Vashi market in Mumbai, the
commission agent's fee is 8% and even goes up to 15%. competitiveness. This means increases in prices at the con-
The various problems facing the agricultural marketingsumer level, which are the result of various factors, are not
system were summarised by the Twelfth Plan Working Grouppassed on to farmers. A classic example of this is the case of
on Agricultural Marketing (Planning Commission 2011). arhar (pigeon peas) in Maharashtra, where the benefit of price
• Too many intermediaries, resulting in high cost of goods increases has been captured by middlemen without any bene-
and services; fit to farmers, as is shown in Figures 1 to 3 (p 56). The price
• Inadequate infrastructure for storage, sorting, grading, and spread between the farm harvest price (fhp) of arhar (whole
post-harvest management; grain) in Maharashtra and the wholesale price (wsp) of arhar
• Private sector unwilling to invest in logistics or infrastruc- dhal7 (split and polished grain) in the Mumbai market in-
ture under prevailing conditions; creased from less than 25% to more than 70% between 2000
• Price-setting mechanism not transparent; and 2009 (Figure 1). Thus, in just 10 years, the margin middle-
• Ill-equipped and untrained mandi staff; men earned recorded a threefold increase in the same state for
• Market information not easily accessible; and the same type of product. Between 1999-2000 and 2009-10, the
• Essential Commodities Act (eca) impedes free movement, price received by producers for arhar increased by less than 5%
storage and transport of produce. per year, whereas wholesale and retail prices of arhar dhal
Thus, the apmc Act, which was enacted to protect farmers' increased by more than 10% per year. Figure 2 also shows the
interests and increase market efficiency and transparency, is change in minimum support price (msp) of arhar announced by
now being used to deny them opportunities to get better prices, the central government relative to the change in the wsp of arhar
to prevent competition, and to guard the interests of middle- dhal. The msp for arhar at the beginning of the last decade was
men. Various researchers have reported findings on these more than 50% of the wsp of arhar dhal in the Mumbai market.
lines.6 A serious consequence of selling at a designated place, The level of support declined steadily to one-third by 2009-10.
the yard of a mandi, is that once agricultural produce has been Thus, an increase in the msp of arhar, even though notional, did
brought to it, it is seldom taken back in the event of any unfair not keep pace with the increase in market price in this period.8
deal. The costs already incurred in bringing the produce to the This illustrates a policy (price) failure in the case of pulses.
market and in cleaning and unloading it prevent this. This robs The main reason for requiring that produce be sold and
the producer of whatever little bargaining power she/he has in purchased only in a regulated market is revenue generation

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REVIEW OF RURAL AFFAIRS

Figure 1 : Ratio of Wholesale Price of Arhar Dhal in Mumbai to WSP and FHPessential commodities. The Act provides for instruments like
of Arhar in Maharashtra
licences, permits, regulations and orders for (a) price control,
(b) storage, (c) stocking limits, (d) movement of produce,
(e) distribution, (f) disposal, (g) sale, (h) compulsory pur-
chase by the government, and (i) sale (levy) to the govern-
ment. A very large number of control orders have been put
into force by the central government and state governments
under the eca.
To encourage quality and promote consumers' confidence in
agricultural products, another Act known as the Agricultural
Produce Grading and Marking Act was passed in 1937. It
Source: Farm Harvest Prices of Principal Crops in India, Department of Agriculture and defines standards of quality and prescribes grade specifica-
Cooperation, Ministry of Agriculture, New Delhi, various issues; Agricultural Prices in India, tions for a number of products. The Act authorises an agricul-
Department of Agriculture and Cooperation, Ministry of Agriculture, New Delhi, various issues.
tural marketing adviser in each state to grant a certificate of
Figure 2: Trend in Prices of Arhar in Maharashtra and Arhar Dhal in Mumbai
authorisation to persons or corporate bodies who agree to
grade agricultural produces as prescribed by it. There are
AGMARK grade specifications for 212 agricultural products, but
the use and awareness of it have remained low despite a better
understanding of quality attributes among consumers.
The main aims of the various regulations were to check the
exploitation of producers and consumers by private traders
through collusion and hoarding, to stabilise prices, and to raise
the standards of markets and improve their performance.
Many changes have taken place in the marketing and trade
Source: Same as Figure 1 .
environment since these regulations were framed. The devel-
Figure 3: Annual Growth Rate in Price of Arhar in Maharashtra and Arhar opment of transport and communication, an expansion of
Dhal in Mumbai
marketing, and increased competition make it possible for the
private sector to play a larger role in agricultural marketing. It
is felt that excessive control and intervention by the govern-
ment have hampered the participation of private trade in agri-
cultural marketing, which is counterproductive (Debroy and
Kaushik 2002; Jha et al 2010). As a step towards liberalisation
of agricultural trade, the union government issued an order on
15 February 2002, which removed licensing requirements and
all restrictions on buying, stocking and transporting specified
commodities, including wheat, rice, oilseeds and sugar. They
were further decontrolled after this. Similarly, the dairy sector
Source: Same as Figure 1 .
was liberalised through various amendments to the Milk and
Milk Product Order, beginning in 1992. The main purpose of
through collection of mandi fees and taxes. But this often stops
these changes was to allow increased participation by the
farmers from selling produce outside the state for better price
realisation. While the mandi fee is a service charge for using
private sector in marketing agricultural commodities. In
its services, other taxes are for state revenue. It needs to be
response, private-sector investments in the dairy sector have
carefully worked out whether revenue considerations areincreased and it has healthy competition between coopera-
more important than increments in price realisation to pro- tives and the private sector.
ducers from selling produce outside the mandi, and whetherHowever, the experience of liberalising grain trade has not
there are ways to take care of the state revenue from agricul-
been very encouraging. The 2002 change in the eca attracted big
ture marketing if produce does not pass through mandis. domestic and multinational players like itc, Cargil, Australian
Wheat Board, Britannia, Agricore, Delhi Floor Mills and Adani
Legal Instruments Enterprises to the grain trade. This came after the government
Apart from the apmc Acts, the activities of market function-
had accumulated excessive foodgrain during 2001-03. But
soon, the domestic foodgrain demand and supply balance,
aries are regulated by several other legal instruments promul-
gated and revised from time to time by the central and stateparticularly for wheat, turned adverse and India had to import
governments (Acharya 1998, 2001: 131). The most important more than 6 million tonnes of wheat in 2006-07. The imports
regulation is the eca (1955). Almost all agricultural commo- were arranged with great difficulty and at a high price because
dities, such as cereals, pulses, edible oilseeds, oilcakes, edible
India's wheat shortage coincided with a period of high global
oils, raw cotton, sugar, gur, and jute, are included in the list of
prices, which culminated in the global food crisis of 2007-08.

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 •' • - ~ REVIEW OF RURAL AFFAIRS

Partly because of These

belowissues are discussed
normal in the section on price policy.
product
of an increase in Agricultural
procurement marketing is a state subject
byand many
privstates
agencies either slow
not could or reluctant to implement
obtain enough various reforms
wh and
government was islations
worried related to marketing,
about even though
beingthey are cona
quate quantity ofered wheat
necessary for developing the market and trade
in 2007-08 beand
domestic food improvingwere
prices the welfare of producers and consumers.
providing a Sos
private sector to experts suggest
buy wheatmoving agricultural
coming marketing to
tothe conc
th
trade in grains rent the
by list so that the required changes
private can be implemen
sector w
vate instability quickly
in and smoothly.
prices. These develop
ment to reconsider and it, along with m
decided to Marketing
reverse the Infrastructure
decision on the e
section of the Marketing infrastructure
organised has two broad dimensions
private trade - quan
(l
from the grain and quality. A simple indicator of market infrastructure is
market.
numberhave
Some researchers of agriculture markets. Progress on this
analysed the vis-à-vi
situation of wheat and other trade iss
increase in agriculture production, as seen in the index of c
(Chand 2007a, production and but
2007b), volume of in-depth
production, is presented in Table
inf
government becameBetween 1976 wary
and 1991, the total
of number of regulated mark
allowin
in the country increased
forces and the private sectorfrom 3,528into 6,217,
thea 76% incr
g
over 15
There is a need to years. In the same period, agriculture
investigate whether production
the conduct of the country increased
private trade, by 74%. Thisor showsathat marketing
fixed
the whole season frastructure
that in terms of availability
made of space kept pace with t
it difficult
manage the growth in output.economy
foodgrain After 1991, the number of regulated
in 200 mark
Tracking events grew only 22% in 17
during years, till 2008.
that periodIn the same period,
ind
drop in volume of production
procurement of wheat increased 70%.
inTheretwo has been
s
by the high increase
prices in the number of markets
offered by after 2006. Further, du
private p
situation of sorts rising
and commercialisation
it ledofthe agriculture, market arrivals
ministry
reforms in the increased market.
grain at a much higher rateIt
than the
isgrowth
very in product
p
was only indicating a widening
2005-06 in and gap between the increasethat
2006-07 in marke
Uttar surplusthe
Pradesh (up), and the number of markets.wheat-pr
largest As a consequence, m
prices higher kets are
than thecrowded, putting sellers
msp afterin a disadvantageous
a long posit
price of wheat and providing advantages
received by to buyers.
them trail
year after year (Table
Table 2: Growth in1). This
Agricultural raises
Output and Markets som
since Mid-1970s
• How can Year Crop Output Quantity
competitiveness inRegulated
the grai
while maintaining price stability?
index NumberTE1981-2=100

• How can public agencies

1976
secure suppl
rity obligations, like
1980
providing subsidi
1991 148.4 285.5 6,217
distribution system (pds), in a free ma
sector offers more attractive prices to p
2001

2008

Table 1 : Minimum Support Price and Price Receiv

Compound g
and Wheat in Highest Producing States (Rupees/Quintal)
Year Paddy Wheat 1976 to 1991

1980 to 1991

1995-96 360.0 417.00 57.00 380.0 408.00 28.00 1991 to 2001

1996-97 380.0 466.00 86.00 475.0 535.00 60.00 2001 to 2008

1997-98 415.0 580.00 165.00 510.0 484.00 -26.00 * Includes foodgra

Source: Agricultura
1998-99 440.0 634.00 194.00 550.0 544.00 -6.00
of Agriculture, New
1999-2000 490.0 543.00 53.00 580.0 572.00 -8.00 CSO-MAPM-2010,
2000-01 510.0 438.00 -72.00 610.0 529.00 -81.00 October 2010, Ann

2001-02 530.0 471.00 -59.00 620.0 540.00 -80.00

The experie
2002-03 530.0 434.00 -96.00 620.0 586.00 -34.00
less-develop
2003-04 550.0 469.00 -81.00 630.0 592.00 -38.00
help in impr
2004-05 560.0 507.00 -53.00 640.0 615.00 -25.00
structure is n
2005-06 570.0 520.00 -50.00 650.0 760.00 110.00
markets in
2006-07 580.0 562.00 -18.00 750.0 880.00 130.00
2007-08 645.0 631.00 -14.00 1,000.0 998.00 -2.00
form.The in
2008-09 850.0 696.00 -154.00 1,080.0 983.00 -97.00 and vegetabl
2009-10 950.0 772.00 -178.00 1,100.0 1,021.00 -79.00 processing,
Source: Same as in Figure 1. The Working

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 REVIEW OF RURAL AFFAIRS = e

Plan 2008-09.
highlighted the agmark gr
following
structure in 2010-11.
(Planning The hig
Commission
• There has was virtually
been 51,000 tonnes
no p
sale markets, except in
extremely Kerala;
low bran
• There are only 1,637
output did grading
not cros
the whole duce
country; in the countr
• Of 7,246 crore were
regulated certifie
markets
found in less agricultural
than 20% of exports
the m
• Only around 7%
The of
main the total
reasons fo
graded beforecommittees sale; did not
• The scientific storage
developing capa
infrast
required; and were siphoned off
• Cold storage facilities are available for only 10% of fruits (ii) the government m
and vegetables. has prevented the p
The appalling state of marketing infrastructure can be seen develop marketing
in Table 3, which presents data from the Directorate of Market-
ing and Inspection. It shows deficiencies in infrastructure that Institutions and A
has to be provided in regulated markets according to the apmra. Alarge number of
These statistics reveal why producers depend on arhtiyas and marketing organis
traders in primary markets. A common auction platform is not improve the marke
available in one-third of the markets, necessitating the use of and to help growers
private platforms or the conduct of auctions without the proper Private trade in Ind
display of produce. Producers are often not aware of acceptable equipped to meet t
moisture levels in their produce. Market yards are required to these institutions, s
provide common areas for drying produce before it is auc- the Cotton Corpora
tioned. This facility was available in only 26% of the regulated lopment Board
(ndd
markets. Simple facilities like benches to sit on and drinking ative Marketing Fe
Table 3: Facilities/Amenities in Regulated Markets modity boards have
Amenities others have become
Common auction platform (covered) 64
quite serious in the
Common auction platform (open)
tions. The country
Common drying yards 26
them on business li
Grading equipment 30
sector and serve the
Canteen

Drinking watertaps 28
Alternative to Man
Seating benches

Public address system

The Model Act was
Price display board
and to provide com
Source: Manuallowing
on are its salien
Agricultural P
Statistics and Programme Impl
• Establishment of
water taps
anywere
area by not
legal pe
Price information
• Contract to
farming
was not displayed
from farmers' in
fiel
facilities notified
and committee;
ameniti
them elsewhere,
• Purchase of whi
agric
The AGMARK
Table 4: Status of Grading and AGMARK directly facility
from agric
which is
Certified Produce (2010-11) • Establishment
meant to of
pr
quantity value
mote grades
direct and
sale of stan
agricu
ards, has
1 Grading at producers'
not
There has becom
level been
8,976 so
14,072
popular
Share in crop output %
(Table
growth in 4).
the T
othe
total
2 AGMARKgrading:quantitythe setting ofup pr
of a
duce
Total graded at
private the
sector. It p
is p
ducers' Share in crop output % had
level tremendous
in any su
ye
has not even reached Export
Market, a cooperat
Share in total agricultural
10 million tonnes (mt) Limited (mdfpl), an
exports %
- the highest level at- Source: curing and market
http://Agmarketnet.nlc.in/agmsta
tained was 9 mt in National Accounts Statistics
e-choupal, 2012,
a CSO.
private

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 REVIEW OF RURAL AFFAIRS

in Madhya Pradesh. The main reasons for the private sectorfpos are obvious, they cannot be expected to come up and
not coming forward to set up an alternative market infrastructuregrow on their own. fpos require committed and sustained help
are the reluctance of states to change the existing mandi sys- from government agencies to mobilise members, help capacity
tem, a lack of enthusiasm for the Model Act, and the difficul- development, and hand-hold them in the initial stages.
ties and cost involved in acquiring land for setting up markets. Contract farming has seen appreciable growth in most
states after the legal restrictions on them were removed. This has
Innovative Marketing Mechanisms paved the way for vertical coordination becoming a viable model
Some innovative marketing mechanisms have been developedfor the food-processing industry as well as agri-commodity
in some states, which involve the direct sale of farm produce markets, and several initiatives, though on a small scale,
to consumers, the sale of produce to buyers without routing it have been taken in recent years. Yet, there are some reported
through mandis, and group marketing. Many states have dangers like the overuse of natural resources, violation of
attempted to promote direct contact between producers andcontracts, and the introduction of undesirable seeds. Keeping
consumers by making arrangements for sale at designatedthe pros and cons in view, the union ministry drafted a model
places in urban areas. Examples are Apni Mandis or Kisan contract farming agreement and a supportive legislation that
Mandis in Punjab and Haryana, Rythu Bazaars in Andhra can be inserted in the apmc Acts. The model provides for compul-
Pradesh, Shetkari Bazaars in Maharashtra, Krushak Bazars insory registration of contracts, a dispute settlement mechanism,
Odisha, and Uzhavar Sandhais in Tamil Nadu. The scale of the settlement of claims within three months, and a ban on
operation of these marketing arrangements is quite small as enmeshing farmers' land (Acharya 2006). The following are
only farmers in the vicinity of big towns can take advantage ofsome of the suggestions to make contract farming successful.
them. But this mechanism has scope for reducing the market (1) Contract farming should be made legal. If contracts are
margin and eliminating middlemen, though it cannot coverviolated, farmers as well as the company should be able to
produce separated by a geographic distance from consumers. approach an organisation or institution, which can mediate
Another successful example of linking producers to consumers and settle the dispute.
and eliminating middlemen is of Safal, a division of the nddb. (2) There should be an institutional arrangement to record all
Its method of direct procurement backed with technical sup- contractual arrangements, maybe the local market committee
port has benefited farmers immensely, even without an assur- or panchayat or some government department. This will pro-
ance on prices. Similarly, vertical integration of poultry meat mote and strengthen confidence-building between the parties
production under integrators who supply everything from in- and also help solve disputes.
puts to technical support and pay the producer a predefined(3) Contract farming should have a provision for both forward
fixed price has been very successful (Birthal et al 2005). and backward linkages. Unless both input supply and market
Farm producers' organisations (fpos) of various kinds are for the produce are assured, small farmers will not be able to
emerging as a new model for organised marketing and farmparticipate in it.
business. Such models include informal farmers' groups or(4) Contracts should be managed in a more transparent
associations, marketing cooperatives and formal organisations and participatory manner so that there is greater social con-
like producers' companies. Producers can benefit from getting sensus in handling violations, which could avoid costly and
together to sell their produce through economies of scale inlengthy litigation.
the use of transport and other services, and raise their The direct purchase of farm produce by retailers has been
bargaining power in sales transactions, while marketing steadily increasing with the growth of organised retailing in
expenses get distributed. This results in a better share of net India. This is expected to accelerate with the entry of foreign
returns. Such models are particularly required for small direct investment (fdi) to the field. Food World (of the rpg
farmers to overcome their constraints of both small size andgroup) is the leader among organised food retail chains, and
modest marketable quantities. there are many more such as FabMall, Monday to Sunday,
In response to a long-pending demand from farmers' groups, Family Mart, More for You, Heritage, and Reliance Fresh.
the government amended the Companies Act, 1956 in 2002, Most food chains are regional in nature, having one or two
allowing the incorporation of producers' companies. Accordingoutlets in the main cities, but no big presence outside their
to the amended Act, 10 or more individual producers, or two orstates. Rapid urbanisation, urban population growth, increase
more producer institutions, or a combination of both, and in incomes and consumer spending, changing lifestyles, and
cooperatives can form a producers' company. The company canaccess to technology have been the important factors behind
produce, harvest, procure, handle, pool, grade, market, sell, the expansion of food retail chains in India. Despite several
and export the primary produce of members, or import goodsfactors favouring organised retail trade, it is still in a nascent
or services for their benefit. It can also be involved in process-stage in the country.
ing, including preserving, drying, distilling, brewing, canning Integration of farmers into retail chains through contractual
and packaging the produce of its members. Such companies arrangements can fetch them higher and assured prices and
can go a long way in improving the well-being of producersallow the chains to plan the quality and quantity of supply.
through group action - in production, post-harvest activities, The other advantages of this model are reductions in transpor-
and promoting marketing and trading. Though the benefits oftation and handling costs, the absence of middlemen, an

Economic & Political weekly EH3Q December 29, 2012 vol xlvii no 52 59

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 REVIEW OF RURAL AFFAIRS =

assured while exports of rice

market, and and wheat havereduced
increased, alongside a
has limited piling up of stock. TheThough
reach. national requirement, particularlythe
of
trade will be pulses,
a hasboon
been bypassed by the price
to policy. the far
the marketing The per capitasystem,
availability of pulses, which are the main
the
organised retail
source of protein has reached
in Indian diets, suffered a decline from 25.2 a
cover and benefit
kg in 1961 to 18.7 kga
in 1971maximum
and further to 13.5 kg in 2009. This o
Therefore, the potential
was not the result of a shift in preference but because of a of
de- o
farmers should not deflect attention from the various meas- cline in their availability. This is evident from that their prices
ures that are needed to connect retail and farm prices, and
have increased at a higher rate than those of cereals. The coun-
producers and consumers. try has been importing pulses and edible oil for a long time
now. On the other hand, it has been exporting a sizeable quan-
Agricultural Price Policy tity of rice and occasionally also wheat. Except in 2006-07 and
2007-08, India has not had to significantly import wheat.
The agricultural price policy is aimed at intervening in agri-
cultural produce markets to influence the level of fluctuations
Based on these trends in demand and supply, trade and stock,
in prices and the price-spread from farm gate to the retail levelone would expect the price policy to influence a price parity in
(goi 2010). The main instruments of agricultural price policy
favour of pulses and oilseeds vis-à-vis rice and wheat. The ac-
tual experience on this is depicted in Figure 4. It shows that
have been (i) assured prices to producers through the system
of msps implemented through obligatory procurement, (ii) interthe ratio of msp of wheat relative to chickpea and rapeseed
mustard declined for almost a decade beginning 1995-96, and
and intra-year price stability through open market operations,
(iii) maintaining buffer stocks, and (iv) distributing foodgrains
increased sharply after that. Thus, the price of wheat relative
at reasonable prices through the pds. This policy has been to pulses and oilseeds remained at almost the same level where
it was during the mid-1990s. The price of paddy relative to
helpful in several ways. From a situation of massive shortages,
pigeon pea shows an annual decline of 1.2%, but it was found
India has emerged as a net exporter of food, and food security
has been attained at the national level. Prices of basic food to be statistically non-significant. Thus, during a period when
items have remained relatively stable, and India did not face
the country moved towards surplus rice and wheat and inade-
quate pulses and oilseeds, no serious policy change was fol-
the sharp price spikes experienced by many countries during
lowed to change the price parity in accordance with the
the global food crisis (Chand 2008). The policy has had a posi-
tive effect on farm income and led to economic transformation
national requirement.
in well-endowed, mainly irrigated, regions. Figure 4: Price Parity between MSP of Cereals and Pulses

Critique of Price Policy

The price policy implemented in the last four and a half decades
has mainly benefited wheat and rice among foodgrains and
sugar cane and cotton among other crops (Chand 2003). This
has resulted in a shift of land and other resources away from
pulses, oilseeds and coarse grains to wheat and paddy, which
has created serious imbalances in the demand and supply of
various agricultural commodities in the country. The country
has been facing large shortages of pulses and edible oils and
has to now meet about 15% of its demand for pulses and Source:
40% Agricultural Statistics at a Glance, Department of Agriculture and Cooperation, New
Delhi, various issues.
of its demand for edible oil through imports. These imports
have an adverse impact on producers in unfavourable drylandPolicy-induced changes in production patterns towards rice
areas, while exports of wheat and rice have been pushed and
in wheat have put a lot of strain on natural resources. Inten-
sive cultivation of these two cereals, particularly rice-wheat
some years at a huge cost to the exchequer (Chand 1999, 2001,
2005). These imbalances are against the spirit of the policy
rotation, has resulted in depletion of water, soil degradation,
specified in the terms of reference (tor) of the Agricultural
and deterioration in water quality (Chand 2010). The price policy
Prices Commission (goi 1965), which was set up to advise
practised in the country since the onset of the green revolution
ignored the tor, which recommended developing a produc-
the government on evolving a balanced and integrated price
structure. The tor require that a policy-induced incentive
tion pattern broadly in the light of national requirements and
(profitability) should move in favour of crops where theensuring the rational use of land, water, and other resources.
domestic supply and demand balance is negative, relative to
The second major criticism of the price policy is that a large
crops where it is positive and rising. The production of pulses
number of crops and states are not covered by effective imple-
mentation of the msp (Chand 2003). The prices received by
and oilseeds in the country has been growing at a slower rate
farmers are often below the msp in a large number of crops
than demand, whereas the demand for cereals has been grow-
ing at a lower rate than the growth in production. As a result,
and in a large number of markets where it is not supported by
effective procurement (Planning Commission 2007b: 67-68).
the country's imports of pulses and oilseeds have been rising,

60 December 29, 2012 vol XLvii no 52 CEE3 Economic & Political WEEKLY

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 EEEEE = REVIEW OF RURAL AFFAIRS

This can be seen There

from is the need to maintain
the a distinction
pricesbetween the msp rece
and paddy in upand and
procurement price.
West While the msp Bengal
in its present form in
The table shows the difference between the msp and fhp in should continue to be announced before the sowing season,
the government should separately announce a procurement
the two states. The average fhp in West Bengal was higher
than the msp from 1995-96 to 1999-2000. After this, the paddy
price at the start of the harvest season. This price should be used
price received by farmers has remained lower than the msp as
in a benchmark for foodgrain procurement by the government.
A cell in the ministry of food should monitor prices regularly,
all years, with the gap widening in recent years. The story of
and if need be, change the procurement price upwards or
wheat in up is similar. After 1996-97, up farmers have received
downwards (each week or day), depending on the market
a price higher than the msp in only two years out of 13 - the
situation. In this age of instant communication, there should
years the private sector was in the wheat market in a big way.
In the other years, the fhp has been lower than the assured be no problem in instructing the field staff of public agencies
price announced by the government. about the day-to-day procurement price. Under this, the gov-
ernment should procure all grain offered for sale at the msp if
Reforming Price Policy prices fall below the threshold level. If the market price is
Till now, the price guarantee to producers has been imple-above the msp, the government should not distort prices to
mented by procuring produce at the MSP/procurement price, force them to the level of the msp to achieve its procurement
in selected states and markets. It is not feasible for public
target. Rather, it should buy produce at the procurement price,
which has been adjusted to the prevailing market reality. This
agencies to procure the marketed surplus of each and every
commodity everywhere in the country to prevent pricesrequires the fci to operate alongside private players without
distorting the market, rather than seeking a space free of
falling below a floor level; nor would this be desirable.
private trade.
Honouring price guarantee through procurement, which al-
ways involve raise in price, also leads to serious price distor-
tions (Chand 2009). So, new mechanisms have to be devisedSumming Up
Agricultural marketing suffers from inefficiency, a disconnect
to protect producers against the risk of the price falling below
the threshold level. between the prices received by producers and the prices paid
by consumers, fragmented and long marketing channels, poor
One way of doing this is to provide a price guarantee for all
the major crops grown in each state either through msps or infrastructure,
a and policy distortions. Agricultural markets
minimum insured price (mip). The basis for the mip could be are not vertically integrated (Chand 2006), though they are
horizontally (Jha et al 1997). In the total value added in pro-
the paid-out cost (a2) or average price of the past three or four
duction and marketing, the share added in the post-harvest
seasons. The msp should be restricted to basic staples like
paddy and wheat, and it should be made effective throughphasea is rising and that in production is falling. In some cases,
value addition in marketing is larger than value addition in
procurement mechanism in all the districts that have a reason-
production. With farm sizes getting smaller, income from agri-
ably high surplus of the crops. All other major crops should be
culture produce can be improved by enabling the farmers to
covered by the mip. Under this, all farmers should be given the
get a share of the value added in marketing by developing and
option of registering the quantity of surplus produce expected
from their farm with the market committee, at the time strengthening
of marketing mechanisms that includes them as
partners. Urgent reforms are needed in agricultural marketing
sowing, and insuring it against the price falling below a cer-
to achieve such goals and address the inadequacies now
tain level by paying a nominal charge. If the actual market
price for the produce sold in regulated markets during the prevailing in markets.
specified marketing period falls below the insured price, theThe best marketing model for producers and consumers is
farmers covered by the mip should be compensated through where producers sell directly to consumers, either as indivi-
duals or as some sort of organisation. Such models have been
deficiency price payment (dpp). Another way of ensuring the
mip is through extending the market intervention scheme developed in some states and farmers are allowed to sell their
produce as retail to consumers in towns on certain days with-
(which is in operation in some commodities and in some states)
to all the major crops in all the states. out intermediaries. The scale of operation of these arrange-
ments is quite small and only farmers near big towns can ben-
To sustain the food security of the country, the agricultural
efit from them. Such innovative marketing should be promoted
price policy should focus on harnessing the agricultural poten-
on a large scale.
tial of low productivity regions like Bihar, east up, Odisha,
Assam, Madhya Pradesh, and Chhattisgarh. This can be done The demand pattern for agricultural commodities, both at
by extending foodgrain procurement operations involving the consumer and industry levels, has been changing rapidly
towards processed products, quality products, and specific
remunerative and assured prices through implementation of
traits. These changes favour integrated supply chains over
msps. These states have poor marketing infrastructure and
conventional marketing channels, assured markets over open
underdeveloped and exploitative private trade. Public procure-
markets,
ment would not only help in boosting the growth of cereal out- and specific produce over generic produce. Such sup-
ply chains offer tremendous scope to reduce the margins paid
put and in reaping technological gains, but also in developing
a marketing system. to middlemen. A well-functioning supply chain can reduce the

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cost of marketing by linking farmers more closely to process- competitiveness and efficiency. Given the vastness and diver-
ing firms and consumers, and guide the production to meet sity of Indian agriculture, the country requires multiple ap-
changing consumer preferences for quantity, quality, variety, proaches, including the apmc mechanism, new models, and
and safety. Modern supply chains also often have strict private scaling up successful ventures such as cooperative milk mar-
standards and this helps to standardise product requirements keting, along with organised retail. All states, in particular,
over many regions or countries, enhancing efficiency and need to promote producers' association, producers' compa-
lowering transaction costs (Chand et al 2009). The supply nies, and cooperative marketing societies to improve the bar-
chain concept can be beneficial to small holders, who domi- gaining power of producers and to raise their share in value ad-
nate India's agriculture. It has also been suggested that the dition, which is getting bigger and bigger. Most of the reforms
institution of integrators who assemble small produce and needed in agricultural marketing are proposed in the Model
sell it in the market on behalf of producers or themselves Act. The states must implement the Model Act in the right
be promoted. spirit without diluting it to serve the interests of particular
A few experiments such as direct procurement backed by groups. This will pave the way for direct marketing and verti-
technical support have benefited farmers immensely. These cal coordination through contract farming. It will also provide
indicate that the participation of cooperatives and private- alternative options to producers for sale of produce, and create
sector firms in marketing agricultural produce under specific a competitive environment for services that are now a monop-
conditions can help farmers. This calls for a thorough review oly Of APMCS.
of existing agricultural marketing policies, and implementing There is a pressing need to reorient our price policy to bring
changes to bring producers closer to consumers. it in tune with the emerging demand and supply of various
Organised retailing in India has grown steadily in the last crops, and the sustainable use of natural resources, as laid
decade. Despite official claims that fdi in organised retail will down in the tor for price policy. The country has to use mech-
provide a big boost to farmers, experience elsewhere shows anisms like deficiency price payment to avoid a bias in price
that it can help some pockets, but not serve the multitude of support to select regions.
Indian farmers. Therefore, organised retail, with or without While increased participation of the private sector in agri-
fdi, should not be seen as a panacea for addressing the prob- cultural marketing is desirable, the country also needs the
lems of agricultural marketing and it should not deflect atten- strong presence and participation of the public sector and
tion from other models and mechanisms for improving marketing models based on the participation of producers,

62 December 29, 2012 vol XLVii no 52 CEEÜ Economic & Political weekly

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 = REVIEW OF RURAL AFFAIRS

the reverse. This is strongly borne by the global experience

such as cooperatives, producers' companies and producers'
association. We feel the public sector in agricultureof the
and last six years, where in the wake of supply shocks,
food
marketing is as important to competitiveness as the countries
private like India with a strong presence of the public
sector is to improving efficiency. The public sector is also
sector in staple food succeeded in protecting the market from
priceprice
essential to serve the larger social goal of maintaining volatility, while many developing countries with no
stability through market operations. The private sector has
public-sector presence in food staples suffered seriously from
unstable
absolutely no interest in price stability, it benefits fromprices.

notes 2007-08, which was again far below the Assistance Series 6, RAP Publication 2009/15,
procurement target of the government. (Bangkok: FAO RAP).
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