Food Inflation Will Remain Unless The Politicians Running APMCs Are Removed

Over the last few years, sudden spurts in the prices of vital vegetables, fruits and pulses have 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 (MSP). 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, 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:

Hence, the farmers have to sell compulsorily 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:

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:

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 percent 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 percent of national production by value.

Devendra Fadnavis, the Chief Minister of Maharashtra, is trying to take on the monopoly of APMC traders. On 13 July 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 farm gate, 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:

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

This article was originally published in Vivek Kaul’s Diary—a newsletter that cuts through the noise and presents actionable views on socio-economic developments in India and the world. He is the author of a trilogy on the history of money and the financial crisis. The series is titled Easy Money.