APMCs hold key to retail reform
Business Line, November 25, 2011
Unless State APMC laws are implemented, benefits from investment in retail won’t reach farmers.
Amidst opposition, including from its own coalition partners, the UPA government has approved 51 per cent FDI in multi-brand retail and 100 per cent FDI in single brand retail.
This sets the stage for the proposal to be placed in Parliament for passage. The government has justified this reform as an important pillar for fighting the double-digit inflation in the country.
The popular debate on FDI in retail has focused largely on the impact that unfettered introduction of corporate modern retail would have on the traditional retailers and their employment/livelihood concerns. This debate is likely to be renewed in the days to come.
But an important stakeholder group in the retail distribution chain are the multitude of small farmers and small agro-processors, who receive the most miniscule share of the revenue pie, and whose concerns are almost always overshadowed by the better lobbying power of the intermediaries in the agricultural supply chain. Here, we examine the impact that the new retail policy will have on this group of producer/consumer, as also the effect on inflation.
India has been undergoing considerable structural change in the post-liberalisation period. While the farm sector is slowly diversifying and its share in growth is declining, it continues to support or provide a living to more than half the country’s populace. But farming isn’t a remunerative profession, especially in India.
The absence of a functioning agricultural market and an unviable minimum support price (MSP) for rice has forced farmers in Andhra Pradesh to leave their lands fallow in this cropping season; the movement is spreading to other states. Since the mid-1990s, an estimated 1.5 lakh small farmers have committed suicide, most of them due to debts, according to the Centre for Human Rights and Global Justice at New York University.
Most analysts and policymakers favour modernising distribution networks and shortening supply chains to make it easier for retailers and food processors to buy direct from farmers, which would potentially improve the returns to investment made by the farmer. But despite the existence of a draft model Agriculture Produce Marketing Committee (APMC) Act, not all States that have adopted it enforce this Act in the right spirit, and some have only partially amended/introduced amendment Bills.
According to Agriculture Ministry data, out of 35 states and Union Territories (UTs) only 17 states have amended their APMC Act to allow direct marketing, contract farming and markets in private and cooperative sectors. Key grain producing states, such as Haryana, Punjab and Madhya Pradesh, have initiated only partial reforms.
Also, seven states and UTs don’t have any APMC Act to govern agricultural trade. And in the states that allow retailers to do this outside the regulated local markets known as mandi, in practice, poor infrastructure makes that difficult. As a result, the supply chains are fragmented and often involve several layers of middlemen between tractor and table.
HURDLES TO DISTRIBUTION
We conducted a survey of experts in the sector, in order to understand the effect of intermediaries in the supply chain on business models and profitability and productivity, and on how to improve state of play in the regulatory regime.
The not-so-surprising finding was that the large geographical area of India and its relatively weak infrastructure were the most important constraints on creating a proper distribution system.
Combined with the multiple tax jurisdictions and various inter-state border barriers, this has resulted in fragmentation of the fresh food and groceries market, both from the procurement and retailing perspectives. This latter has, in fact, resulted in levelling the sourcing field in so far as all retailers (large and small, including the hand-cart retailers) necessarily have to make procurements from the mandis.
Our discussions with large corporate retailers (domestic and JV units) and cash-and-carry wholesalers reveal that even with the investments made in the backend infrastructure and tying up direct sourcing, around 60-70 per cent of the total procurements are still from the mandis and the consolidators (importers/trading houses).
But the more important understanding was that the mandis are usually managed/controlled by a few traders, who often collude and form cartels, and thereby prevent the farmer from selling to the best buyer. Furthermore, not only are trading licences given according to the norms set by the market governing councils, these entrenched interests also don’t allow private mandis to operate, that would allow for free competition in the market.
In a rare example, Delhi has six mandis and seemingly enough competition, but the muddled nature of the operating laws and their opaque implementation make the mandis de facto monopolies. Hence, farmers are denied the right to sell their produce outside the mandis and directly to consumers, retailers or food processors, while the retailer pays inflated prices when procuring from the intermediaries.
IMPLEMENT STATE-LEVEL LAWS
A reform of the APMC Act will require huge political will to break these agricultural cartels, in addition to harmonising the implementation of the Act in the different states that create market distortions. But unless state-level APMC laws are altered and implemented to conform to the spirit of the model APMC law, the benefits from the increased investment in the retail sector and new infrastructure creation won’t reach the small farmers and small agro-processors.
Creating an effective choice of multiple and competitive market channels for farmers by means of APMC reform will be the first step towards fighting the persistent inflationary conditions assailing the country
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