In thrall of market

Ashok K Nag

The Indian Government has recently enacted 3 bills1, collectively known as Farm Bills 2020, which have been hailed by reputed agricultural economists, commentators and journalists for setting free the Indian farmers from the clutch of local traders, middlemen and politicians who collude to exploit both end of the supply chain – producing farmers and consumers of agricultural items. The noted agricultural economist Ashok Gulati has compared passing of these bills as a “1991 moment for agriculture”,   a piece of legislation which is expected to “help build more efficient value chains in agriculture by reducing marketing costs, enabling better price discovery, improving price realisation for farmers and, at the same time, reducing the price paid by consumers”. (here  ,here, here)

At the same time, passing of these 3 bills  has been condemned by an influential section of farmers and opposition parties as corporatization of Indian agriculture by making the farmers as “contract producers” without any significant role in the farming decision making process (here, here, here). The main worry of the agitating farmers is that these new bills are precursor to gradual withdrawal of the state from the agricultural sector. It appears, as opposed to “1991 moment”, passing of these legislations could be considered as independent India’s “Indigo (or Nil Vidroha)” moment.. To recall, in 1859, the peasants of Bengal rose in revolt against Indigo planters who had initially persuaded and subsequently coerced the peasants to plant indigo instead of food crop. These planters provided loans to switch over to indigo, a cash crop with a large export market and in due course made these farmers almost bonded labourers.

It would be ante-diluvium to argue that Indian farmers do not need a free-market for their outputs and inputs. But market, particularly a boundary-less pan India one, is not created by legislation only. Market is a social institution.  The critical role that robust institutions play in fostering economic growth is now well established. According to Douglas North, institutions are “the rules of the game in a society, more formally, are the human devised constraints that shape human interaction”2. The state, community or society at large may define the rules and lay down the constraints but without them institutions exist only as ideas. Market is an economic institution. Even a weekly village hat has a set of rules – the frequency of its operations, roles, implied or otherwise, assigned to various participants etc. As Acemoglu has written: “economic institutions are collective choices of the society”.  And because of their influence on the distribution of economic gains, not all individuals typically prefer the same set of economic institutions. This leads to conflict of interest among various groups and individuals over the choice of economic institutions and the political power of the different groups will be the deciding factor”(italics in original).

Free-market, being an economic institution, must also be subjected to rules and regulation. It is undeniable that stock exchanges, commodity and financial future markets are free-markets. Dabba-trading, taking place out the regulatory boundaries is a punishable offense. Brokers are licensed entities. Earlier stock exchanges were a mutual or co-operative association of brokers and through a demutualization process these institutions were converted to a public company.

So, brokers, investors and listed companies have only bounded freedom of choice and not an unfettered one. From this point of view to designate Agricultural Produce Market Committee (APMC) as non-free market betrays lack of understanding of market as an economic institution. No new markets were created when stock exchanges were demutualized and converted to a limited company. Only rules and constraints were restructured.

Restructuring of Indian Agriculture Produce Market: An Ongoing Process
Such restructuring has been an ongoing process in respect of markets created under APMC Acts of various states also.  In 2003, the Ministry of Agriculture, GOI came out with a model act on agricultural marketing. It was expected that individual states would suitably amend the extant APMC act to deregulate agricultural marketing. In 2007 draft Model Rules were issued to all states for them to adopt it with suitable modification. In 2017, another model Act titled “Agricultural Produce and Livestock Marketing (Promotion and Facilitation) Act, 2017” was issued by Ministry of Agriculture and Farmers Welfare. But none of these amendments proposed by the GOI evoked a sustained protest by a large section of farmers at large, or remonstrations by many state governments. The key features of these proposed amendments are aimed at creating a more competitive agricultural produce market, but within the broad framework of APMC Act. In corroboration of this claim a comparison is given below only for APMC Act vis-à-vis The Farmers’ Produce Trade and Commerce Act 2020. A similar comparison of other two bills is not attempted as these ones can be considered as auxiliary bills to the main one.

It is also not a fact that state/ region level politicians who control and steer the functioning of state governments have been creating hurdles towards reforming and liberalizing APMC centered agricultural marketing regime. By the end of the FY 2016-17, as many as 21 states have adopted the key liberalizing features of the Model APMC Act   -(establishment of private market, direct sale to traders, contract farming etc.) - that have been cited above.   

However, the new The  Farmers’ Produce Trade and Commerce (Promotion and  Facilitation) Act, 2020 (FTPC) makes one radical change to the previous model APMC Acts drafted by the GOI – that is complete emasculation of state governments from the regulation of agricultural produce markets. In fact, the proponents of complete de-regulation of agricultural produce marketing regime always wanted to achieve this.  For example, the competition assessment of Model APMC Act, 2003 commissioned by the Competition Commission of India lamented that “ the Model Act allows interference of state governments in the regulatory mechanism” (italics in original). Even if we disregard any alleged violation of the extant constitutional provision in this regard, it would be rather childish to ignore or downgrade   the role of state government in enforcement of market rules at the village/block/taluka/district level.

Interestingly, the new act has not provided for compulsory registration of traders although it has kept an enabling clause –“The Central Government may, if it is of the opinion that it is necessary and expedient in the public interest so to do, prescribe a system for electronic registration for a trader, modalities of trade transaction and mode of payment of the scheduled farmers’ produce in a trade area”.

This key feature of by-passing of the state governments stands in stark contrast to all budget speeches by erstwhile finance minister Mr. Arun Jaitly. In his budget speeches of successive years, he talked about the agricultural marketing reform initiative of the Centre in collaboration with the states. The excerpts are provided in the Annexure I.

It is obvious that there has been a sea change in the thinking of the central government about the roles that various stakeholders will be allowed to play in the agricultural reform path that it wants the country to tread in near future.

It is also apparent that the grand idea of “One Nation-One Market” is a primary driver of these Farm Bills 2020. Keeping aside the concept of “nation” in this hyphenated slogan that motivates millions, we need to debate whether new laws are situated in a robust  understanding of the concept of “market” or not. Buying and selling by itself does not define a market. Furthermore, capitalist path of development is not synonymous with free-market development. (see the Singapore’s story here3).

What is the Optimal Market Design for Indian Agricultural Produce?
All “well-functioning markets depend on detailed rules”.  (Alvin Roth).  According to Roth, for a market to function properly three things must be done correctly:
1. Appropriate level of market “thickness”- i.e. a properly functioning market should bring together “a large enough proportion of potential buyers and sellers to produce satisfactory outcomes for both sides of a transaction.”
2. Right incentive to reveal confidential information or to bring asymmetry of information between buyer and sellers to an acceptable level
3. Transactional time to be as low as possible. It means access to information about quality and volume of supply and demand and processing thereof should not be so much consuming that it would be worthless by the time a transaction can actually be concluded.

Without disputing the relevance and indispensable requirements all the three attributes as above, there is one thing missing in the above list and which is a must in respect of the Agricultural Produce Markets is the needed trust between producers and buyers.  Given the immense variety and quality even of a single commodity like rice, information is highly localized and may not be amenable for standardization by a centralized authority. In fact, the Chinese agricultural reform started with dismantling of centralized planning system that the country initially adopted. To enable this local information to be integrated with other markets spanning the entire country is a complex activity and needs resources and government intervention. As Roth has said “Market design turns out to be about details, such as the nature of the transactions in question, the opportunities to conduct transactions outside the market, and the distribution of information”. 

These new Bills are eloquent about its objectives which are per se laudable but awfully laconic about these operational details. The protagonists of the new Farm Bills are walking on the same path that policy makers of APMC market design followed- describe the destinations correctly without stating how to reach the destination and mechanism of steering the journey to the destination.

State Intervention In Agriculture: A Universal Phenomenon
Finally, it has to be emphasized that state intervention in agricultural sector is a common phenomenon irrespective of the nature of the state. Even in USA, the mecca of free-market- The Agriculture Risk (ARC) and Price Loss Coverage (PLC) programs provide financial protections to farmers from substantial drops in crop prices or revenues and are vital economic safety nets for most American farms (here). John W Mellor, a former Director-General of International Food Policy Research Institute has been a champion of the view that agriculture, despite having a small share in total GDP of all developed economies, play a central role in the process of creating sustainable economic development locally and globally. He has identified the following two big ideas based on his long international experience in designing and advising polices for this sector:
1. The rapid growth of small commercial farmer dominated agriculture accelerates the economic transformation and is essential to the rapid decline in dominantly rural poverty.
2. Government has a prominent role if small commercial farmer dominated agriculture is to grow rapidly.

In fact, income support to producing farmer is a global reality. OECD has estimated producer support estimate (PSE), measured as a percentage of gross farm receipts(for details see here). The producer support estimate the annual monetary value of gross transfer to farmers from consumers as well as tax payers at the farm gate level.The following graph shows that Indian farmers are still having a negative production support and the same is borne out by the terms of trade between farmers and non-farmers.

End Notes
1. The bills are — The Farmers Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 (FPTC); The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020 (FAPAFS); and The Essential Commodities (Amendment) Bill, 2020 (ECA)
 2. North, D. C, 1990, Institutions, Institutional Change and Economic Performance, Cambridge University Press.
3, Acemoglu, D and J,Robinson  “The Role of Institutions in Growth and Development” in Review of Economics and Institutions; vol.1- No 2, Fall 2010.
4:Lim, Y.C.Linda Sigapore’s Success : The Myth of the Free Market Economy. Asian Survey Vol 23 No 6. June 1983
5. Mellor, John Williams: Agricultural Development and Economic Transformation:  Palgrave Studies in Agricultural Economics and Food Policy

Annexure I
Budget Speeches of the erstwhile finance minster Mr. Arun Jaitly
To accelerate setting up of a National Market, the Central Government will work closely with the State Governments to re-orient their respective APMC Acts., to provide for establishment of private market yards/ private markets. The state governments will also be encouraged to develop Farmers’ Markets in town areas to enable the farmers to sell their produce directly (budget speech of 2014-15).”

“While the farmer is no longer in the clutches of the local trader, his produce still does not command the best national price. To increase the incomes of farmers, it is imperative that we create a National agricultural market, which will have the incidental benefit of moderating price rises.  I intend this year to work with the States, in NITI, for the creation of a Unified National Agriculture Market” (speech of 2015-16)

“Access to markets is critical for the income of farmers. The Government is implementing the Unified Agriculture Marketing Scheme which envisages a common e-market platform that will be deployed in selected 585 regulated wholesale markets. Amendments to the APMC Acts of the States are a pre-requisite to join this e-platform. I am happy to inform that 12 States have already amended their APMC Acts and are ready to come on board. More States are expected to join this platform in the coming year. The Unified Agricultural Marketing E Platform will be dedicated to the Nation on the birthday of Dr. Baba Saheb Ambedkar on 14th April this year” (speech of 2016-17)

For the post-harvest phase, we will take steps to enable farmers to get better prices for their produce in the markets.  The coverage of National Agricultural Market (e-NAM) will be expanded from the current 250 markets to 585 APMCs.  Assistance up to a ceiling of Rs.75 lakhs will be provided to every e-NAM market for establishment of cleaning, grading and packaging facilities.  This will lead to value addition of farmers’ produce.

Market reforms will be undertaken and the States would be urged to denotify perishables from APMC.  This will give opportunity to farmers to sell their produce and get better prices.  We also propose to integrate farmers who grow fruits and vegetables with agro processing units for better price realisation and reduction of post-harvest losses.  A model law on contract farming would therefore be prepared and circulated among the States for adoption (speech of 2017-18)

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Jan 2, 2021