The Union Finance Minister Nirmala Sitharaman recently urged states to move away from the Agricultural Produce Market Committee (APMC) framework and push for greater adoption of the electronic National Agriculture Market (or e-NAM). Sudha Narayanan of the Indira Gandhi Institute of Development Research tell Udit Misra the issues plaguing APMC Act.
What ails with the APMC framework? Why have the reforms not worked?
To understand why the APMC framework is viewed as problematic, we need to understand that both “agriculture and“markets” are state subjects as per the Indian constitution. Each state has therefore historically had its own APMC Act, with provisions that can vary quite a bit. This lack of uniformity, or rather compatibility, has led to the fragmentation of agricultural markets, where each state functions as a separate market.
The original purpose of these Acts was to prevent the exploitation of farmers by traders, by bringing all trade into regulated markets. We know now, that creating fragmented markets also enabled restrictive practices and collusion among traders. It also led, inadvertently , to excessive dependence of farmers on middlemen, who are financiers, information brokers, providers of storage facilities, all rolled into one.
The architecture of state-specific APMC laws also introduces a lot of friction in inter-state trade. To trade, each state requires its own licence and in some states, these are specific to each mandi and state-specific fees and taxes. Studies suggest that for a staple product like wheat, these charges may be as low as 0.81 per cent (of the MSP) in Gujarat and as high as 14.5 per cent in Punjab. As commodities move across market areas, they typically attract multiple fees. These transaction costs lead to large price dispersions between the producer and consumer.
Reforms of APMC across many states have allowed for more space for private players – allowing private market yards, contract farming, direct purchases from farmers and so on. I would not say that reforms have not worked – rather, different states have reformed their APMC Acts (or not) in different ways – in ways that serve local interests. In 2006, Bihar, for example, chose to repeal it. Different states also choose to enforce some aspects of the Acts more than others. In short, states don’t necessarily consider the consequences of state-level reform beyond their narrow, local interests.
How does e-NAM correct for the weaknesses of APMC Act?
The e-NAM is an online trading platform, constructed with the goal of creating a seamless national market where buyers and sellers can transact without being in the same location. When this happens, more buyers can bid for a specific lot. Given that they are dispersed and bid anonymously online, it reduces the opportunities traders have for colluding. This is the main advantage of e-NAM.
For this to materialize, however, e-NAM needs a legal framework across states that is mutually compatible. Therein lies the challenge. So, rather than the e-NAM correcting for the weakness of the APMC Act, the e-NAM requires the weaknesses of the APMC Act to be corrected first, as a precondition, for its thriving.
The Model APLM Act of 2017 sought to provide a reference point for states so that they can align state-level laws to enable e-NAM. But as I mentioned before, it is politically difficult for state governments to do so. So the e-NAM is only a shade of what it can be.
Are there any downsides with eNAM?
The eNAM is reportedly functional in several states – it is not clear though how it is doing and whether it has the potential to reach a threshold where it can begin to make a difference. Apart from the issue with legal frameworks, we just discussed, there are several practical issues. For a trader to bid from another location, there needs to be a reliable way to assess the quality of the produce. It requires adequate infrastructure, but reports are that even with this, during peak arrivals, assaying each lot is virtually impossible. Also, traders often prefer and trust visual inspection by their own agents. Settlement of trade with immediate online payments is also an intrinsic part of e-NAM – here too we find that traders, understandably, are reluctant to pay until they receive the goods. Traditionally, the commission agent absorbed these risks, paying farmers immediately and getting paid by traders after delivery. In a way, given the role played by middlemen, for storage, credit and assaying, many farmers and traders prefer to rely on them to mediate trade as opposed to anonymous online trading. Lack of clarity on dispute settlement is also an impediment if buyer and sellers are located far apart.
The e-NAM, therefore, does not work as one might imagine and is definitely work in progress. Many of these issues have been highlighted in the recent Ramesh Chand Committee Report.
Is there anything else that the government can do to make farming more remunerative for farmers in this context?
This opens up a whole universe of issues, well beyond marketing. I would focus on some urgent and immediate actionable policies.
Export bans really hurt farmers, because higher international prices even if not transmitted fully, does manifest as better producer prices. The recent ban on onion exports is a case in point. While the current procurement system leaves a lot to be desired, in the short run it is important to put in place a credible procurement system that is geographically dispersed, reaches as many farmers as possible. Again, the paradox of high onion retail prices and low producer prices – procurement can dislodge these vested interests if used judiciously.
There are more serious structural issues that need to be addressed, but these have been well articulated in several reports by expert committees over the years. The Ramesh Chand Committee report on the integration of spot and derivatives markets being the most recent.