From farm mandi to bigger things

Our agrarian markets are still living in the past. Agriculture derivatives markets continue to be viewed with suspicion.

This is despite the fact that industrial policy has seen considerable reform (though the system of arbitrary and discretionary allocations of natural resources still plagues the system).

India gave up the pernicious industrial licensing system over 20 years ago because of the recognition that the licence raj regulatory framework was killing innovation and enterprise, leading to industrial stagnation.

The objective of regulating agricultural markets was to protect farmers from exploitation by intermediaries, ensure better prices and timely payments.

Over a period of time these markets ( mandis ) have become restrictive and monopolistic in character with largely opaque practices.

Modernising mandis

A major bottleneck to reform has been that the mandi Acts (APMC Acts) are State acts, as agriculture is a State subject.

However, there is a silver lining. Following the circulation of the model Mandi reform Bill by the Government of India, several States have taken steps to ease regulations and free up markets, though in large part the amendments to the State APMC Acts have been half-hearted.

Reforms in agriculture markets should be seen in the larger context of modernising the supply chain, beginning from the farm gate. An efficient supply chain need not necessarily mean that produce has to travel to traditional market yards. In fact this requirement may only add to handling costs, additional wastage and inhibit the growth of modern and efficient logistics and supply chain management systems.

India can skip several stages of modernising the mandis through a combination of two instruments — first, would be to enable direct buying, stocking and sale of produce at modern agri-logistics hubs rather than get farmers to first take the produce to poorly managed mandis .

This would eliminate the primary handling at the market yard, ensure the availability of grading and standardisation of produce at these warehousing hubs.

These professionally and privately managed hubs would include cleaning and bagging facilities, as grading and assaying facilities and would be equipped with modern storage systems, including silos.

The facility of immediate finance against the produce through warehouse receipts should be made available in cases where the farmer wishes to stock the produce till he/she gets a fair price.

The second instrument would be infusion of information technology to facilitate both buying and selling of produce to multiple buyers through electronic auctions. Such trades need not be restricted to localised geographies as is the practice in mandis today.

Interconnected market

Eliminating or abolishing existing mandis (as Bihar has done) may not be realistic or necessary.

India has over 28,000 small and large mandis across the rural hinterland of which as many 7,557 (principal – 2,428; sub-markets – 5,129) are regulated under the respective State APMC Acts.

There is no viable alternative to a market-based arrangement for the sale of agricultural produce, at least in the short run.

Existing mandis , however, need to and can be quickly modernised. Each market as a separate physical entity can get linked to a larger pan-India market, in which all mandis , including warehousing hubs, are interconnected and integrated.

Such an interconnected market structure would then function as one pan-India market system.

In each such market/warehousing hub, infrastructure for assaying and grading will have to be created and licensing conditions liberalised to encourage participation of traders, irrespective of where they come from.

Warehousing hubs can, over a period of time, take over many of the mandi functions and be treated as private mandis .

The physical market will also need to integrate with the futures market to increase the choice to farmers as well as to other market participants.

In such a physical market, price discovery would be dictated solely by the quality of the produce and overall supply and demand factors, with prices in one location differing from the other mainly on account of the cost of transportation, rather than local factors.

Private-sector initiatives in setting up such efficient and modern supply chains have been limited, primarily on account of regulatory limitations.

Another limitation is due to the requirement that private mandis or logistics hubs are required to collect mandi cess and remit it to Mandi Committees, even though the market participants have ceased to buy and sell at the traditional mandis and are not using the facilities.

Availability of land at reasonable cost to set up warehousing hubs and mandi yards is another major limitation. Leasing out mandi yards to suitable private sector entities on condition that infrastructure is modernised and management is professionalised could be the way forward.

Minimum action plan

There is no doubt that the existing fragmented and opaque market structure for agricultural produce will have to give way to a national market.

This would call for easing norms of licensing to enable seamless participation of buyers from across the country, movement of goods without restriction, harmonisation of tax laws (including a uniform GST), standardisation of grades and recognition of electronic trades.

Exchanges would also have to widen the participation by facilitating farmers to take positions through cooperative or other aggregators such as farmer producer organisations (FPOs).

In summary if there is to be visible change in the agri-marketing eco system the minimum action plan must include the following:

a) Freeing of movement restrictions on agri produce across the country, including through the introduction of a uniform GST.

b) Recognition to professionally managed agri logistics hubs as alternate choices for farmers.

c) Reforms to the APMC Acts to permit pan-India trades, electronic auctions and trading in warehousing receipts.

d) Integration of spot and futures markets within a well-regulated system.

e) Promotion to warehouse sales through warehouse receipts and warehouse receipt finance.

f) Introduction of uniform standards and reliable assaying facilities.

g) Improvement in the collection and dissemination of price dissemination.

h) Exemption of mandi cess in respect of transactions in privately managed mandi yards and warehousing hubs.

i) Facilitation of electronic trading.

j) Lease of poorly managed mandi yards to professional entities.

(The author is MD and CEO, National Collateral Management Services Ltd, an agri business company)

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