States need to create alternative marketing structures for farm produce since middlemen also provide vital services that are otherwise unavailable to the farmer, says Madan Sabnavis.
One of the issues often raised in the context of high food inflation is the pressing need to change the Agricultural Produce Market Committees (APMC), the marketing boards established by state governments.
The earlier United Progressive Alliance government had asked the Congress-ruled states to remove fruit and vegetables from the ambit of APMC. Curiously, there has been little progress and the argument here is that a solution cannot be found by merely taking out products from the APMC laws.
That exercise must be aggressively supplemented with new structures. Also, though it is true that the existence of the APMC channels does inflate prices the basic cause of food inflation is supply shortages, which cannot be covered by dismantling these laws.
The APMC laws were drawn up to protect the farmer from middlemen. It was mandated that all farm produce must be sold in the state APMC where the farmer is located. After the primary sale, farmers could move out to the rest of the country.
The idea was to ensure that the farmer got a fair deal and was not cheated since the mandis have facilities for auctions, weighing, storage, display, payments and receipts. The result was not really positive.
There are auction platforms in two or three of the mandis while grading facilities are available for about a third of them. Cold storage provisions are available in less than 10 per cent.
It is alleged that the buyers who are licensed middlemen work as a cartel and keep prices low. No new licences are issued because there is no space for more shops in this area.
There are 7,190 regulated mandis and another 22,505 periodic markets in the country. Given India's size, the average coverage is 115 sq km, whereas the ideal should be 80 sq km or a radius of five km.
Therefore, access is quite difficult; it means farmers have to travel a long distance to sell their goods every day. If one tries to understand the system, it will become clear why the mandi system continues to be a preferred option.
The mandi is a known system for the farmer and the practices, though opaque, are accepted. The farmers know the adathiya or middleman and the latter is sure of a sale.
If the farmer were to sell elsewhere, he would have a problem getting a better price and as well as finding someone who will buy his "size" of the commodity.
A farmer bringing, say, one tonne of a food product would not be able to sell it across the counter in the absence of an institutional set-up.
He has to sell his produce the same day because there are no facilities to store the product outside his farm. Therefore, even in a state like Bihar, which has abolished these laws, there has been no change in the pattern of sale.
Further, though we like to criticise the middleman for buying "low" and selling "high", he actually provides a service in stocking the good. Typically, most crops have one season, kharif or rabi.
Rice and maize, though primarily kharif crops, also grow as rabi. The kharif crop is harvested between September and November, and has to be made available through the year. This job is done by these intermediaries.
And under normal weather conditions, they keep prices stable through the year. But there are costs involved such as storage, packing, transporting and, finally, selling the good across the country.
Therefore, though we do lament the high price differential between the farmer and consumer, a large part of the price difference can be explained by these costs that are due to a lack of organised systems.
Despite these structures, wastage could go up to six per cent for cereals and pulses, 18 per cent for fruit and 12 per cent for vegetables, according to a report on marketing reforms brought out by the ministry of agriculture in 2012.
Given these practical problems, merely scrapping APMC laws will not quite work. We need a multi-pronged approach to create alternative systems, a point that has been made in the past but never with any perseverance.
We need to provide competition to mandis so that they become more transparent. ITC e-chaupals had made a major impact in the soya bean market in Madhya Pradesh and we need to encourage such systems that bridge information symmetry and deliver superior solutions.
First, having electronic private mandis, like the one promoted by the National Commodity and Derivatives Exchange (NCDEX), is one solution.
But access for farmers is still a problem since we need to have multiple centres for delivery and the farmer may not always be able to deal directly on the electronic platform.
Second, periodic bazaars (Rythu bazaar in Andhra Pradesh, Shetkari bazaar in Maharashtra, Apna Mandi in Punjab and so on) should be more widespread and the responsibility lies with the state government to create create the infrastructure.
By allowing such free trading farmers would enjoy lower costs, such as 0.5-2 per cent mandi fees, commissions that can go up to eight per cent for horticulture products, weighing and handling charges and so on. This has to be subsidised through state budgets or else we will end up in the mandi-like situation.
Third, contract farming is a good idea. It is allowed in several states where the processor gets into contracts with timers for buyback. But anecdotal evidence suggests that often farmers renege on their contracts and it is not feasible for the corporate to take legal recourse.
Fourth, corporate farming should be permitted on a large scale so that large retail chains grow the crops they can sell in their stores and create the necessary infrastructure to do so.
The system of agricultural marketing is complex and we need solutions that fit the system. Farmers harvest and bring their produce periodically and have no holding power in terms of money or storage facilities.
Unlimited buyers in the mandi with an electronic auction system will provide the best result. But we cannot get rid of the middlemen who carry the risk and store the product for an entire annual cycle. Somebody has to do it. That is why this system will remain until we create alternative structures over time.
The writer is Chief Economist, CARE Ratings. These views are personal.