Reforms that will change Agricultural Image post-COVID-19:
India stands at the 8th place in agriculture exports, with about 96 million hectares of the land being used for the process (largest in the world) and providing employment to a majority of the rural population. However, the process involved in the produced goods finally reaching the customers isn’t as easy as it is for other sectors since the product cannot be sold to the customers directly.
Get complete CFA Online Course by experts Click Here
The agricultural produce is firstly sold to the designated “market area”/mandi, which are regulated by the Agricultural Produce Market Committee (APMC), formed of local farmers, government representatives, and agri-commodity traders. The process of selling the products in the mandi is more of a bidding process, wherein the produce, after being cleaned and sorted, is displayed for bidding with the help of an agent and auctioneer. Interested buyers then start the process of bidding and the highest bidder then finally is now the new owner of the produce, after providing the required amount to the farmer. The process of auctioning seems to be a fair enough method in order to provide the farmers with the amount they deserve. However, the process isn’t as fair and as transparent as it seems. The bidders, instead of competing against each other for the produce, work collectively and deliberately bid low which leads to farmers ending up with only 20-25% of the actual consumer price, at times. The situation is extremely difficult for the farmers, who already are crippled with heavy debts and live at the mercy of seasons and rains. Adding to their woes, are these unfair practices and restrictions which further make it difficult for them to earn enough to make both ends meet. The farmers are incapable of sending their produce outside the state or to different mandis in order to make better profits, because of the legal issues. As such the farmers get only a ‘one quote’ which is described as a monopolistic marketplace by economists. In such a marketplace the price is decided by only one buyer, leaving no opportunity for the provision of a fair quote.
The only scenario for an efficient price realization is when the competition is unbiased and clear. As such if the farmers are allowed to sell to whomsoever they want to and if a healthy competition is stirred on the buying side, there are possibilities of the farmers getting their due profit. This has been one of the strategies which have grown the interest of the government as well, which wants to open the market more to provide the farmers with increased choices. The government aims at limiting the intermediaries and boosting the farm income along with completely redefining the sales of agricultural products in India. However, the process does raise a number of concerns, firstly the role of state/central government and the Agricultural Produce Market Committee (APMC) in the whole process. The best fit situation is the case when the farmers are able to move their products in between the states, thereby enabling the central laws on the produces. Therefore, the farmers will be able to choose between different contenders for their products and get the best price. In such situations, the APMCs shall also have to play fairly and increase the bidding process in order to compete against the traders from different states.
Get complete FRM Online Course by experts Click Here
Another concern is about the ‘free-market forces’ i.e. the high-profile corporates who by using their size, scale, and bargaining power try to exploit the small-scale farmers. The solution to this concern lies in the farmers getting together in order to scale themselves up and taking full charge of their produce.
The agricultural industry depends heavily on the seasons and the rains, along with being a seasonal activity. As such the farmer has to wait for a whole season before his produce can finally reach the market and so does the public. This issue can be addressed by storing the produce in order to adequately balance the demand-supply curve. However, now the issue is that the storage facilities in India are incompetently inadequate, which leads to the price of the products dwindling between highs and lows and in situations wherein the prices reach the extreme ends, the consumers and farmers are forced to come put on the roads and protest against the happenings, leading to an ugly scenario of unrest in the country.
One of the very basic solutions to this problem is expecting the government to do its job and build more warehousing capacities in the country to prevent such happenings. But as the reputation of public-sector institutions is not exactly efficient the way it should be, it raises doubts and the other alternative left is to encourage the private-sector institutions for taking up this job by providing them incentives. With all this said, the question arising is whether the private sector is actually lacking any incentives or it is something else that is stopping them from investing in these areas. The answer to this is that although the private sector industries are readily interested in improving such facilities in order to provide their customers a stable supply of their daily requirements, yet the issue which stops them from doing so is The Essential Commodities Act (ECA). This is a central law by the Government of India which confers upon state governments the power to moderate supply & storage of certain essential commodities (like pulses, onions, fruits, and vegetables). The state governments, most often, achieve this by imposing stocking limits, which makes the situation extremely vulnerable for the private-sector industries, who are at constant risk of being asked to liquidate their stocks at any point of time, in case of a disturbance in the demand-supply ratio of the product in the market.
Get complete CFA Online Course by experts Click Here
For instance, a wholesale trader has a stock of around 200 tonnes of tomatoes in the warehouse. However, in the market, the tomato prices start increasing causing unrest amongst the public and the government starts believing that this is because of greedy hoarders who are unwilling to let the supply loose. As such it issues an order under the ECA, that any trader is not allowed to stock up more than 75 tonnes of tomatoes, with the expectation that the release of the excess goods (above the designated amount) into the market will lower down the prices and therefore bring back the situation to normalcy. But this issue plays a major factor in reducing the interest of the private-sector industries to indulge in improving the storage facilities of the agricultural products since at any point in time they can be forced by the government to release their stocks. The added issue with this practice is that controlling the stocking limits doesn’t really affect the prices at all, defying the whole purpose of the process. In short, we have a central law that does not do what it is supposed to, and further reduces the incentives of the private investors for making investments in storage and warehousing. The Government has chosen to dilute the legislation by doing away with the “stocking provisions” of the Essential Commodities Act.
Author: Abhay Kanodia
About the author: An undergraduate student from the Birla Institute of Technology and Sciences, Pilani(BITS Pilani). Exploring the fields of finance and data analytics and its applications in other different domains.
Related:
Covid-19 Effects on Textile Industry
