Government involvement in Indian agriculture remains pervasive and deeply intrusive. The machinery of government support and regulation that survives today has its roots in the enormously successful era of the Green Revolution, and in the mindset of food security. The reality is that this system of government intervention has not evolved to keep up with the substantial structural changes that have taken place in agricultural markets over the years, leading to outcomes that are now economically seriously suboptimal, but politically logical.
At the heart of the framework of government involvement in the "farm to fork" agri-supply chain lies the Agricultural Produce Marketing Regulation Act. Ratified by the states during the 1960s and early 1970s, this Act was intended to be enforced by agricultural produce marketing committees (APMCs) managed by elected representatives of farmers to protect the latter's interests vis-a-vis traders and intermediaries. The Act requires that the sale or purchase of any notified commodity take place only in specified market yards or mandis equipped with suitable infrastructure, through an open auction supervised by an official of the market committee to ensure fair and transparent price discovery. At the time this legislation was introduced, the volume of agricultural surplus available for marketing was modest and could be handled through a small number of mandis. In the initial years, the system was quite effective in empowering farmers and securing a fairer deal for them. But over time it has become progressively distorted.
There are over 7,200 regulated markets across the country, the bulk of which were created before 1991. But over the past two decades we have seen less than a 1,000 new regulated markets come up, or less than a 20 per cent expansion in market infrastructure even as the volume of the agricultural marketable surplus has grown at a much faster pace. In order to cope with the sheer volume of market arrivals, farmers and APMCs turned to arhtyas or middlemen and commission agents for help, even as the governance of APMCs deteriorated. In several states, elections to the marketing committee stopped being held and their management was taken over by the bureaucracy. Over time, arhtyas re-inserted themselves into the marketing chain with a vengeance, capturing to different degrees the governance of the APMCs across states. This has resulted in higher commission fees, in the proliferation of rules that make the use of commission agents mandatory; and in the imposition of restrictions on the ability of farmers to sell their produce outside the mandis and the control of their designated commission agents. In effect, the APMCs have turned into monopsonist buyers acting in collusion with a growing army of middlemen, who ironically, have regained the very bargaining power over farmers that the original legislation was intended to prevent.
On an average there are now five to six intermediaries between the farmer and the final consumer. In the case of the fruit and vegetable supply chain, the intermediation mark-up is 60 to 75 per cent. Research on pulses indicates that in Maharashtra, for example, the price received by farmers for arhar increased by 5 per cent per annum over the period 2000-2010, whereas the wholesale and retail price of arhar daal rose by more than 10 per cent per annum over the same period. The dysfunction of the agriculture marketing chain has come to benefit the middlemen at the expense of farmers and consumers.
The APMC system has become further encumbered by proliferating charges and taxes levied by state governments over and above the commission fees of the arhtyas. In many states, these taxes and charges have become significant sources of revenue and are often diverted into the state budget instead of being ploughed back into developing the supporting physical infrastructure for the mandis. Consequently, the mandis suffer from an acute shortage of critical physical infrastructure. About 80 per cent of mandis do not have any facility to grade or sort the commodities they handle; cold storage facilities are available for only 10 per cent of the volume of marketable fruit and vegetables; and most importantly, scientific storage capacity is less than a third of what is required. This results in massive waste, with post-harvest losses running in excess of 20 per cent in the case of fruit and vegetables.
Dysfunctional APMCs is only one half of the story of the agri-supply chain. The other half is the government policy of procurement and distribution that seeks to appease farmers and consumers alike. The waste and distortions associated with the minimum support price (MSP) and public distribution system (PDS) schemes have been largely documented in the public discourse, and need not be repeated here. There is, however, one aspect that bears particular emphasis. For the longest time, but especially over the past decade, these central government-sponsored schemes have been heavily focused on the Green Revolution staples of wheat and paddy, contributing to a serious imbalance in agricultural commodity markets. This policy has systematically raised the effective price of wheat and paddy relative to other crops, diverting cultivable land away from coarse grains, pulses and edible oils. It has, inter alia, resulted in the excess supply of wheat and paddy and a chronic shortage of pulses and edible oils.
Not coincidentally, this policy has also tended to favour farmers in states where the Congress has been politically influential for at least a part of the past decade. Thus, in states such as Punjab, Haryana, Kerala and Andhra Pradesh, as much as half to three quarters of the production of wheat and paddy has been procured at the rapidly escalating and above market MSP. This pattern of central government patronage has provoked Opposition-held states not benefitting from centralised procurement to create their own state specific MSP and PDS schemes. Thus, Bharatiya Janata Party (BJP)-controlled Madhya Pradesh (MP) started offering a bonus over and above the already hugely elevated MSP for wheat set by the central government in 2008. In parallel, the MP government also put in place its own procurement machinery independent of the Food Corporation of India such that by 2010, it was buying almost half of the state's wheat production at a price that was significantly higher than market. As a consequence, annual wheat production in MP has grown by almost 50 per cent in five years. A similar story can be told about paddy procurement and production in Chhattisgarh, also a BJP-controlled state.
Having appeased the farm lobby in their respective states, the Congress and the BJP both then came together in their support for the food security Bill, reinforcing the political establishment's unanimous commitment to the most important constituency of all, the poorer household consumer.
What should be clear from the above is how intensely our agricultural policies have been shaped by political calculations. In effect, policies and regulations have morphed to accommodate the full range of interest groups. Traders and middlemen have been accommodated by allowing them to capture APMCs and fatten up their margins. Farmers in states important to both the Congress and the BJP have been looked after through a combination of centrally-sponsored and state-level price support and procurement schemes. And to placate the consumer, who might otherwise be put out by the impact of these policies on the cost of food, the entire political establishment has come together to vastly expand the scale of subsidised food distribution. The economic cost of this policy mix is clearly not perceived to be as high as the potential political gain. This is how rice paddy becomes curd rice.
The author is executive chairman, IDFC
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