The yawning gap between farm gate and market prices of agricultural commodities, including food and vegetables, and the role of distortions in agricultural produce marketing in fueling food inflation have been in the news in recent months, and were discussed in the meetings of the Union cabinet. The view that marketing reforms are vital to reducing this gap has now been endorsed by a group of chief ministers on food prices, headed by Gujarat chief minister Narendra Modi. The Modi group’s report was submitted to the prime minister last week. The CM’s panel has recommended liberalisation of agricultural markets by allowing direct marketing and contract marketing. It has sought an end to the monopoly enjoyed by agricultural produce marketing committees (APMC) in routing farm produce to consumers, recommending greater involvement of private organised sector or cooperatives in retail trade. The group favours a single market in agricultural produce, evening out inter-state disparities in the prices of agricultural commodities. Others, including the National Commission on Farmers, headed by noted farm expert M S Swaminathan, have made some of these suggestions before. Even the common minimum programme of the United Progressive Alliance had committed itself to an end to controls on farm goods trade and sought a common market for agricultural produce in India.
The Modi panel has lent its weight to these ideas and has suggested that a ministerial-level coordination mechanism at the national and regional levels be created to ensure implementation of its proposals. To ensure smooth operation of the proposed extended market, the panel has called for a system of collecting and disseminating information to all stakeholders on production, imports, stocks and availability of essential commodities. The CM’s panel has also suggested enlarging the scope of priority sector lending to including agricultural marketing. While all these are good ideas, even if not all new, the group’s proposal to keep essential commodities out of futures trading for now, militates against its generally pro-market approach. The group believes that there is no strong link between spot and futures markets and so, futures trading is unlikely to make an impact on spot prices. The committee has failed to recognise that the futures market, if allowed to operate fairly and freely, can perform the purpose of price discovery, giving advance signals of impending price rise for timely remedial action. Various studies, including one by the RBI, have absolved futures trading of the charge of pushing up spot prices. Indeed, even the finance ministry has taken this view. There is far too much mythology about the negative effects of futures trading and this needs to be debunked rather than given the imprimatur of a CM’s committee.
In another doubtful recommendation, the Modi committee has mooted “unbundling” of the Food Corporation of India (FCI) operations in terms of procurement, storage and distribution functions. Such a move could create more problems than resolve existing ones, and only add to the administrative cost of running the FCI. Of course, the FCI’s functioning leaves much to be desired but its fragmentation into more number of equally inefficient entities would complicate matters further. Overall, the Modi panel report is a vital intervention on food prices and agricultural marketing and should be taken up in all seriousness by the government, especially because this is the view of the states, who are responsible for managing agricultural production and policy.