APMC reform a must

Financial Express, April 12, 2013

By Pradeep S Mehta

The APMC Act, designed to protect farmers from the vagaries of the market, has been turned on its head to enrich traders & politicians and harm farmers

“Famines and acute poverty too arise from faulty distribution and not for want of goods to distribute”, said the Nobel laureate, Amartya Sen. “That tradition is continuing”, to borrow from another noted literary figure, Syed Muztaba Ali. In the early 1940s, distribution channels for food and other basic needs were captured by local political powers. In the early 1950s, the government made efforts to address the situation by enacting the Essential Commodities Act. Then, in the 1970s, came the Agriculture Produce Marketing (Regulation) Act, through which agriculture produce marketing committees (APMCs) were formed to ensure remunerative prices for farmers. As of now, the situation has got distorted if one goes into the real reasons behind sudden spikes in food and other agricultural commodity prices.

Neither do our farmers receive fair price for their produce, nor do consumers benefit from low prices. The issue is not just about converting our farmers from price-takers to price-makers (as that would have further complicated the equation among farmers, distribution agents and consumers), but to balance the need of different interest groups by addressing the root causes of anti-competitive practices, which are rampant all over the country.

Quite naturally, traders indulge in speculation and hoarding, as we witnessed in the current onion crisis. A recent study done for the Competition Commission of India shows how the economic cancer of the onion cartel is operating.

The APMC Act was designed with the lofty goal of protecting farmers from the vagaries of the market, but its purpose has been turned on its head to enrich traders (and politicians) and harm farmers and, in turn, consumers’ interests adversely. The union government did produce a model law to correct the distortions, but the debate was skewed in the din of private entry, contract farming, etc. States are ineffectively carrying out APMC reforms. Amendments have been made, but rules are yet to be notified, while some states like Bihar have scrapped the law, for what was its rightful fate.

There are clear indications of collusion between the APMC officials and a powerful group of stakeholders that they deal with—that is auction, and other agents in the distribution channel. The system has been captured by the people it was created to regulate.

APMCs have been statutorily vested with the power to regulate both the creation of agricultural markets and also the entities that can participate in such markets. However, this range of exercise of powers by APMCs has resulted in collusive behaviour in the supply chain of agricultural marketing. The APMCs have, therefore, become bottlenecks as they regulate who the farmers sell to and who can participate in the market and even where markets can be established.

There is information asymmetry between the farmers and distribution agents in the system and also between the law makers and the officials implementing the law. At the same time, there is no information asymmetry among the distribution agents at different levels of the supply chain, resulting in collusive behaviour. This information asymmetry, lack of transparency in price discovery and collusive behaviour among distribution agents are some common problems in our agricultural markets, which have prevented competition to existing licensees and have given them a state-sponsored position of dominance. Coupled with political patronage, it is natural that they will abuse their dominant position.

It is not that distribution agents are feeding themselves through legitimate economic transactions with producers and consumers. There is no hope that they will change their behaviour as they are used to excessive profiteering. Neither the principals, that is policymakers and practitioners will change, as the political nexus is too strong and deeply entrenched. There is wide-spread patron-client relationship and rent-seeking of an almost de jure nature.

Should the aam aadmi suffer in silence? If the answer is yes, it challenges the raison de’etre of our fair trade regulator—the Competition Commission of India. The CCI should go deep into looking at the distribution channels of the supply chains of food and other agricultural commodities to check anti-competitive practices that causes and/or are likely to cause “appreciable adverse effects” against the two most important agents of economic transactions—producers and consumers.

However, relying on the CCI to take action will not solve the fundamental problem created by government sanction. Specific reforms measures are to be imparted to APMCs for them to function more effectively for the benefit of producers and consumers by ushering in more competition in our agriculture markets.

According to an on-going CUTS study on assessing the need for competition reforms through a National Competition Policy (yet to be adopted), this is the need of the hour. Alas, it is disheartening to note that as per the agriculture ministry, out of 35 states and union territories, only 17 states have amended their APMC Acts to open agriculture markets to more competition. Key farm states such as Haryana, Punjab and Madhya Pradesh have initiated only partial reforms.

Our states must act by reforming APMCs. As against providing lip service to our farmers such as farm loan waivers that will deny future access to bank loans, making false claims of maintaining a favourable terms of trade to agriculture as evident from differences in international and domestic prices of many commodities such as rice, wheat, sugar, the union government should provide incentives to states for spreading ‘competition culture’ to the grassroots level. In 2011 a committee of state agriculture ministers led by Maharashtra recommended a “barrier free national market” including incentives for reforms in states. But like many reports, it has not been made public or implemented.

The future of our political democracy at the local governance level will depend much on how economic democracy is promoted. And in this case, the ‘piece-meal approach’ will not work; we need a ‘big push’. This is possible if there is the right political will, because economic institutions can improve with concomitant improvements in political institutions.

The author is Secretary General, CUTS International (psm@cuts.org). Tanushree Bhatnagar of CUTS contributed to this article.

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