07/07/2015 11:18 AM IST | Updated 15/07/2016 8:25 AM IST

This Modi Government Initiative Can Be A Game Changer For India's Farm Market

SAM PANTHAKY via Getty Images
An Indian farmer works in a paddy field near Saputara, some 400 kms from Ahmedabad, on August 3, 2012. India on July 31 offered cash and subsidies to tens of millions of farmers affected by poor monsoon rains over almost half of the country. AFP PHOTO / Sam PANTHAKY (Photo credit should read SAM PANTHAKY/AFP/GettyImages)

Prime Minister Narendra Modi is planning to liberalise Indian agriculture by creating a new national market. Potentially, this reform can do for food and agriculture what PV Narasimha Rao did for business in 1991. Success will depend on how carefully the market's structure and purpose are defined.

The best way to understand contemporary agricultural markets is to imagine life in British India, when the nation was divided into principalities and kingdoms. For farm produce, by law, each state is a kingdom and each mandi is a principality.

"[T]hese mandis are the place where politics meets economics in the agrarian economy."

In most states, mandis are established and regulated under the State APMC (Agricultural Produce Marketing Committee) Acts. The state's geographical area is divided into smaller market areas, where the markets are managed by Market Committees constituted by the state government. A system of licenses bars the entry of traders from other states and other mandis. There is no formal role for warehousing, grading and sorting, bank finance, and logistics. Since there is no mechanism for clearing and settlement of dues, no one does business with strangers. In short, these mandis are the place where politics meets economics in the agrarian economy.

The result is obvious - high food prices due to geographic and tax arbitrage, while the farmer receives less than 40% share in retail prices due to the inefficient supply chain. Both consumers and farmers suffer. Clearly, India's $156-billion farm sector deserves a better deal.

As in industry, the success of a modern market for agriculture will depend on three key elements. The first is prices as signals: the price mechanism is a better guide to resource allocation. The second element is freedom to experiment with different frameworks and models in a disciplined way so that the market can adapt to change. The third is no concentration of political and economic power so that people can focus on the creation of wealth, rather than grabbing the wealth of other people.

indian farmer sowing

The proposed National Agriculture Market can deliver on all these. It has the potential to horizontally link every farmer to every buyer across time and space. And vertically link the smallest village haat to the largest derivatives exchange into one seamless whole, leaving no room for dark pools of political or business power.

So how will it work? In every mandi, farmers face perfect competition due to the presence of large number of rivals selling the same commodity. The same perfect competition can be extended to buyers and brokers by allowing them to trade freely in any state mandi on the back of a single license.

Since a person won't be physically present everywhere, this will mean shifting away from price discovery methods such as open outcry to online bids. It also means more standardization of the produce into quality grades so that there is no need for the buyer to actually see every heap. Since higher grades will fetch higher prices, farmers will have a natural incentive for grading. Online discovery of prices will make it easier to disseminate them nationally.

"Despite its enormous potential, success ultimately depends on how many state governments are persuaded to politically embrace the idea."

Farmers will have the freedom to better time their sales through the easy availability of warehousing space to store produce safely. While their crop is in storage, farmers will be able to get loans from banks and financial companies using negotiable warehouse receipts. Buyers and sellers will hedge their price risk on derivatives exchanges.

Local brokers and farmers will be able to strike a deal with unknown parties because the mandi will offer formal clearing and settlement services. Once ownership has been transferred, a buyer in, say Ludhiana, would have no problem moving goods lying in Gulbarga after paying local taxes. State governments will not be allowed to impose entry and exit barriers.

If the National Agriculture Market is not prescriptive, states will be free to experiment with different models - only APMCs, only private mandis, warehouse-based sales, or a mix of all these. Warehousemen, bankers, assayers and transporters will plug in to offer more value-added services.

Despite its enormous potential, success ultimately depends on how many state governments are persuaded to politically embrace the idea. Karnataka has taken the lead with its unified mandi platform. Andhra Pradesh, Maharashtra, Gujarat, Tamil Nadu and Orissa may follow. States will need mutual recognition of laws and licenses. And more crucially, end their rent-seeking behavior. There also has to be an institution at the Centre that goes beyond providing IT support to enshrine the three elements of a successful market into the new structure.

The National Agriculture Market can be the reform that combines the scale of the GST law with the ease of doing business promised by the Digital India initiative to bring succor to 56 million farmers and 1.2 billion consumers. All it needs is another Sardar Patel to deliver "One India, one market".

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