Thursday, Oct 23, 2014

Constricted by law

Written by Ila Patnaik | Posted: January 2, 2014 12:13 am | Updated: January 9, 2014 9:50 pm

APMC acts impair the freedoms of farmers and consumers.

Rahul Gandhi has announced that fruit and vegetables will be removed from the list of commodities under the agricultural produce marketing committee (APMC) acts in Congress-ruled states. This is an important move towards the freeing-up of markets,and will bring in competition and remove barriers to entry. It is expected that the de-listing will reduce the prices of fruit and vegetables in the long run and encourage investment in cold-storage facilities and warehouses. If the government wishes to reform agriculture and control food inflation,the reform should not stop here.

APMC acts were passed by states during our socialist past. They restrict whom farmers can sell to,who can get a licence to buy produce,and where trading can take place. This has given rise to a system with substantial barriers to entry in the trade of agricultural products. The freedom of farmers and other citizens to buy or sell as they like has been abrogated — farmers are forced to sell to traders who hold APMC licences at APMC prices.

As with many other state structures in socialist India,APMC regimes rapidly turned into rackets. Hardly 30 per cent of the mandated “open auctions” are actually open or transparent. New licences are mostly given to persons who already have shops and godowns in the prescribed market area. Shops in these areas are limited and are mostly available only to friends and relatives of existing traders. There are no transparent criteria for sale or for getting a licence. There is no time-bound application processing period during which a licence is either granted or refused. A licence is granted for a period of one to five years. Thus,the incentive for long-term investment is diminished. Regulatory capture by local trading communities is said to be the norm. These traders control the entire marketing chain,including credit,inputs,storage etc. Prices are often bundled,and there is a lack of clarity on what the exact price of the produce is,and what the interest on the credit and other items is.

These traders then sell the fruit and vegetables to wholesalers who are also APMC-licenced traders and set prices in the wholesale market. Pricing is a mark-up over costs. Various studies have identified this monopsonistic-monopolistic market structure and the lack of free entry and competition as the reason for large middleman margins. For some products,the farmer gets only 40 per cent of the price paid by the end consumer. This market structure does not permit the entry of new players who want to set up cold chains and invest in other infrastructure,keeping marketing costs high. Sometimes,the marketing cost is itself nearly a fifth of the total price paid by the consumer.

The government’s approach to reform has been to try to change the APMC acts. In 2003,the Central government circulated a model APMC act and asked the states to adopt it. Sixteen states changed their acts accordingly,though only six notified the new rules under their act. The model APMC act does not solve the problem. Though it allows contract continued…

comments powered by Disqus
Follow

Get every new post delivered to your Inbox.

Join 1,294 other followers