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Modi Gov should abolish the APMC Act – Crisil

Among the sectors crying out for reform under the new Narendra Modi government is agriculture and food production. Crisil, arguably India’s biggest credit rating and economy research house, has called for the new government to abolish the Agricultural Produce Market Committee Act or APMC to curb high food price inflation.

food-inflation

The APMC Act prohibits farmers from selling their produce outside a government monitored mechanism of mandis or markets. The idea, initially, was to ensure that the government had a level of control over the prices at which the vegetables and fruits were being sold, and direct buyers, like companies, did not exploit farmers.

However, in the last few decades, an elaborate network of middlemen and traders have sprung up in the mandis, who often collude to drive down prices that the farmers are able to get for their crops. The crops have to be brought physically to the mandi to be sold, and farmers are often in no position to take back the produce if they find the prices low.

As farmers are not allowed to sell directly to companies, and have to go through APMC mandis, they are not able to get a higher price even as the price of fruits and vegetables have doubled in the last three years.

“The APMC Act should be abolished altogether. Specifically, delisting of fruits and vegetables from the APMC can help lower prices. This will allow markets in agricultural products to develop. Farmers will get to trade freely with private buyers, the role of middlemen will be reduced and it will also incentivise private players to invest in back-end facilities,” Crisil Research said.

Many super-market chains, such as Bharti and Walmart, have sought exemption from APMC Act to be allowed to enter into purchase transactions directly with the farmers. In the states where this has been allowed to a small degree, the companies often provide technical help to the farmers to ensure a bumper crop. An abolition of the APMC Act would also enable companies to provide money in advance to farmers and enter into future transactions at a specified price with them. This would ensure that farmers would get a predetermined price irrespective of fluctuations in market rates, and that companies would get their raw materials at a fixed prices, instead of being dependent on market rates.

It would also open the way for more effective crop insurance, as companies are often ready to take the risk of crop damage if they are given suitable financial incentive for doing so in the form of a steady supply of raw material.

“Some progress on reforming the APMC act has begun with notifications by states to delist fruits and vegetables from the Act. But these are unlikely to have a considerable impact on price till the major grower-states — Punjab, Maharashtra and Uttar Pradesh — also step up to the plate,” Crisil said.

The current situation, in which middle men fleece the farmers, has assured India of high rates of fruit and vegetable price inflation.

“The Agricultural Produce Market Committee Act, put in place to help farmers sell their produce in the market, has actually left them vulnerable to price manipulation by traders and agents. Commission agents help farmers sell their produce to traders and the government. They are driven by the incentive to maximise the number of transactions they undertake rather than getting the highest price for the farmer. In addition, they can collude and manipulate prices.

“The produce typically goes through 3-4 layers of middlemen before reaching the consumer, with each layer adding a mark-up leading to the final price. The higher the number of middlemen, the lower is the price the farmers get. In addition, the government mandis where traders buy the produce do not have proper storage or infrastructure facilities, leading to wastage. Thus, layers of intermediaries and wastage
lead to an increase in inflation.”

Walmart has been lobbying with the government to be allowed to strike deals directly with farmers and to buy produce in advance. Walmart is ready, for example, to install cold storage facilities if it is able to source fruits and vegetables with more certainty.

Other factors have also contributed to high price inflation, Crisil said.

“The increase in minimum support price (MSP) over the years has provided a floor for food grain prices, making them rigid on the downside. For example, the MSP for paddy has more than doubled since 2004-05 to 2013-14, resulting in sticky inflation. High MSPs have also kept the cropping pattern biased towards food grains like rice and wheat, and have led to excessive production. But the government’s inability to intervene and release excess food stocks on time has allowed prices to hold firm at higher levels. Inflation has remained close to 9% even as the government’s stocks of rice, wheat and coarse cereals have more than tripled since 2008.”

Similarly, a demand-supply mismatch in proteins — pulses and non-vegetarian foods, also contributed. “Loose fiscal policy, rising demand for high– value food items and substantial increase in wages – especially rural wages, as a spillover the rural employment guarantee scheme – have translated into higher demand for proteins. This has raised the prices of items such as milk & milk products, egg, fish and meat as supply falls short of demand. The production of milk and eggs has risen only 3-4% a year, compounded annually, during 2009-10 to 2012-13, while inflation in this category has risen 14-15% a year.”

Another reason is the shift to faster-growing and higher-value non-food crops. “The pattern of land use has tilted in favour of these crops with growth in the area under non-food grains rising considerably (2.9% average growth in 2005-13 vis-à-Vis 0.1% in the previous decade).”

“The land cultivated is still majorly under cereals, particularly in Punjab, because of ever-rising minimum support prices. That’s why there is excess stock of rice and wheat despite only a marginal increase in productivity.

“Additionally, although fertiliser usage has gone up, it has become more unbalanced. The ideal NPK ratio is 4:2:1 but the current level is 6.7:3:1 (2012-13). The subsidy on nitrogenous fertiliser has led to excessive use of urea and distorted the nutrient balance in the soil. Clearly, urea subsidy needs to go if long-term damage is to be avoided.”

Wastage has been another problem.

“The value of fruits and vegetable wastage stood at Rs 700 billion in 2010-11 and Rs 630 billion in 2009-10 – or a third of the entire production… A good two-thirds of the wastage was found avoidable.”

In the medium term, the government needs to focus on improving procurement, storage, marketing and logistics, it added. “Last fiscal, for every Rs 100 worth of wheat and rice bought, the government incurred an additional cost of Rs 51 and Rs 66, respectively, towards procurement costs (including state taxes), and storage and distribution.”

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