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INSIGHTS - Simplifying UPSC IAS Exam Preparation

Agriculture Marketing: APMC Act and Related Issues

insightsonindia.com/2014/11/20/agriculture-marketing-apmc-act-related-issues/

INSIGHTS

Table of Content

1. APMC act

1. Purpose

2. Shortcomings in old APMC acts

3. Model APMC act

4. Economic Survey on APMC act

2. Alternate Marketing Channels

1. Direct Marketing

2. Contract Farming

3. Futures Contracts and Negotiable Warehouse Receipt System

3. Importance of International Trade

4. Essential Commodities Act

Topics from Syllabus Covered

1. GS paper 2 –

1. Government policies and interventions for development in various sectors

http://insightsonindia.com/2014/11/20/agriculture-marketing-apmc-act-related-issues/


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and issues arising out of their design and implementation.

2. Welfare schemes for vulnerable sections of the population by the Centre andStates and the performance of these schemes; mechanisms, laws,institutions and Bodies constituted for the protection and betterment of these vulnerable sections

3. Issues relating to poverty and hunger.

2. GS paper 3 –

Issues related to direct and indirect farm subsidies and minimum support prices;Public Distribution System- objectives, functioning, limitations, revamping; issuesof buffer stocks and food security; Technology missions; economics of animal-rearing.

Introduction

Marketing and trade, as an activity comes at latter part of the value chain for any

commodity and yet it is the most important determinant for all other activities. All theinput expenses for labor, materials and capital are rewarded at this stage, which shallinclude some incentive over and above inputs. Agricultural products, in a developingcountry remain in uniform demand throughout year, while production of most of them isconcentrated in some part of the year. This results in fluctuation in prices which canchange equations of profit for the farmer. Apart from this, in a federal and diverse countryevery state or region has diverse resources, consumption patterns and rules regardingtaxation, levies, sale etc., which makes numerous hurdles in interstate trade. Integration o


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all the regional markets into national market is desirable in interest of both farmers andconsumers. Farmers will get rewarding prices even if demand is not there in their region,on other hand if there is less production in a state, consumer will still be able to getproducts at reasonable prices. Same is true for international markets, we have seen fewyears back when prices of sugar were up swinging, and then sugar imported from Brazilcame to rescue Indian consumers. However, integration of national and international

markets, at times can make domestic and regional farmer vulnerable because of externalforces. For these reasonable regulation is imperative.

In last article we read about procurement and disbursal by government which involvesabout 33% of total production of food grains. Another, 33% is captively consumed byfarmers and residue is left for open markets. Trade of this quantity is also heavilyregulated by the government through APMC act and various taxes and levies. So, lessquantity left in market is in itself a strong reason for price rise, which is furthersupplemented by monopoly of government in open market. Further, under current system

there are number of intermediaries who add little value to the product, but increase pricedramatically by commissions or trading margins. This all coupled with lack of integrationof market leaves farmers and consumer vulnerable alike.

1. Agricultural Produce Market Committee (APMC) Act

a) Purpose

Agriculture is a state subject and almost all state governments enacted APMC act

in 1950’s or so, to bring transparency and end discretion of traders. This isextension of overall government policy which is directed toward food security,remunerative prices to farmers and fair prices to consumers. However, widespreadperception for this act is that it has worked contrary to almost every statedobjective, atleast in recent past.

It should be noted that though current system controlled by APMC is quiteinefficient, yet it is far improvement from pre-APMC/50’s era. At that time there wasno control at all. Money lender, traders, bankers etc. were often one person. This allin one role of middleman resulted in perpetual indebtness of farmer.

Under the APMC acts, States are geographically divided in to markets which areheaded by market committees and any production in that area shall be brought to amarket committee for sale.

This is applicable to ‘notified agricultural products’ which differs from state to stateand generally includes most of the important cereals, vegetables and other


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horticulture products. Notified products are meant to be brought to the marketcommittee and auctioned in presence of the farmer.

In this Market committee (popularly called Mandi) there are commissions agents(called arhatiyas) who hold license and are allotted a shop in the market. Farmerand buyer have discretion to go to any agent in this market, based on personalrelations. Normally farmers chose agents from their own village and are influencedby age old relations of money lending. There are huge numbers of commissionagents in a particular APMC dealing in same crop, which results in constant pricediscovery and adjustments for that particular crop.

At same time buyers, which may be rice mill, flour mills, cotton ginning mill owners,come to procure these products. They make their bids and if these bids are fair, willgive best return to farmers. But unfortunately this is not so.

An APMC Yard

b) Shortcomings in Current APMC system

1. Monopoly of APMC – Monopoly of any trade (barring few exceptions) is bad,whether it is by some MNC corporation by government or by any APMC. Itdeprives farmers from better customers, and consumers from original


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suppliers.

2. Cartelization – It is quite often seen that agents in an APMC get together toform a cartel and deliberately restraint from higher bidding. Produce isprocured at manipulatively discovered price and sold at higher price. Spoilsare then shared by participants, leaving farmers in lurch.

3. Entry Barriers – License fee in these markets are highly prohibitive. In manymarkets farmers were not allowed to operate. Further, over and abovelicense fee, rent/value for shops is quite high which keeps away competition.At most places only a group of village/urban elite operates in APMC.

4. Conflict of Interest – APMC play dual role of regulator and Market.Consequently its role as regulator is undermined by vested interest inlucrative trade. They despite of inefficiency won’t let go any control.Generally, member and chairman are nominated/elected out of the agentsoperating in that market.

5. High commission, taxes and levies: Farmers have to pay commission,marketing fee, APMC cess which pushes up costs. Apart from this manystates impose Value Added Tax.

6. Other Manipulations – Agents have tendency to block a part of payment forunexplained or fictitious reasons. Farmer is sometimes refused payment slip(which acknowledges sale and payment) which is essential for him to getloan.

c) APMC model act

Taking these concerns into cognizance, Central Government appointed a workinggroup which recommended a Model APMC act. Salient features are –

1. Farmer doesn’t need to bring his produce to APMC Mandi. He can directlysell it to whomever he wants. But, if he doesn’t bring his produce to Mandi,then he can’t stand for election in that APMC marketing committee.

It allows alternate markets such as direct purchase centers, private marketyards/mandis.

2. It increased responsibility of APMCs on following lines –

1. Full payment should be made on day of sale itself.

2. Quantity brought and prices should be displayed near arrival gate. Itsbeing done electronically in many APMCs


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3. Promote private partnership in management of APMCs

4. It shall make efforts to build facilities for Processing and other valueadditions

5. Ensuring transparency in Pricing and Transactions in the market

3. It allows Public Private Partnership in the ‘management and development’ of

agricultural markets in the country for post-harvest handling, cold storage,pre-cooling facilities, pack houses etc.

4. It not only allows, but strongly advocates for contract farming. It alsoprovides for dispute resolution mechanism.

5. It mandates establish ‘State Agricultural Produce Marketing StandardsBureau’ for Grading, Standardization and Quality Certification.

6. It provides for abolishment of commission agent system. Payments will be

made for facilities such as grading, sorting, and processing.

APMC model act is a sort of roadmap for states for their respective APMCacts which shall be amended. States has adopted Model APMC in piecemealmanner as per vested interests of various pressure groups. Most of stateshaven’t abolished system of commission agents as they constituteinfluential people.

Bihar repealed APMC act in 2006, while Kerala never had any APMC act, but

situation is no better there as thrust on development alternate markets islacking. Demand is just to dismantle monopoly of state regulated APMCsand increase competition. APMC can continue and with competition theycan get efficient overtime.

Why model APMC Act is also considered inappropriate?

The model legislation has actually given rise to a conflict of interest, as theAPMC, which is a major player, is also the regulator/registering authority.There is reluctance on part of state governments to reform the APMClegislation, as it generates huge revenues. Some states have created entrybarriers by prescribing either prohibitive license fees for setting up suchmarkets, or the minimum distance between private markets and APMCmarkets.

d) Economic Survey on APMC act


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1. The provisions of the State Agricultural Produce Marketing Committee(APMC) Acts have prevented creation of competitive conditions in thedistribution of commodities and creation of a national market for agriculturalcommodities. Multiple layers of intermediation in the distribution of foodarticles have also pushed up prices for consumers. It is therefore necessaryto focus on distribution channels and on reducing food wastage in the

supply chain.2. The liberalization of 1991 focused on the industrial sector. While industry

was liberalized and allowed to buy from, and sell to, anyone in the world,Indian farmers in many states, are still required to buy and sell only in thegovernment-designated Agricultural Produce and Marketing Committees(APMC) to licensed entities. Farmers are not allowed to sell their producedirectly to the consumers. A national market for food is yet to develop.

3. Interventions by the government are problematic. The first is the maze of

restrictions on transactions and storage. This includes state-level APMClaws, the Essential Commodities Act, and the administrative measures atlocal and state levels that distort the decision to grow and the decision tostore.

4. State APMC laws are a major hurdle to modernization of the food economy.They have artificially created cartels of buyers who possess market power.The proposed Model APMC Act 2003 is an inadequate solution, as APMCsremain a non-level playing field.

5. To create a national market the central government needs to use powersunder the Union List and the Concurrent List of the Seventh Schedule of theConstitution to end the monopoly powers of the APMCs and replace otherpunitive and coercive state laws affecting the food market.

6. Apart from breaking the monopoly and dissuading state governments fromtreating the APMCs as liberal sources of revenue, substantive efforts haveto be made to create alternative trading platforms in the private sector where

it is possible to reduce the layers of intermediation. Since this may take time,fruits and vegetables should be taken out of the purview of the APMC Actsimmediately. A processor should be able to buy directly from farmerswithout having to pay any Mandi fee/tax to the APMC.

7. 1. Permit sale and purchase of all perishable commodities such asfruits and vegetables, milk and fish in any market. This could later beextended to all agricultural produce.


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2. Exempt market fee on fruits and vegetables and reduce the highincidence of commission charges on agricultural/horticulturalproduce.

3. Taking a cue from the success of direct marketing efforts of states,the APMC/other market infrastructure may be used to organizefarmers markets. FPOs/self-help groups (SHGs) can be encouraged

to organize farmers markets near urban centers, malls, etc. that havelarge open spaces. These could be organized every day or onweekends, depending on the concentration of footfalls.

4. Include ‘facilitating organization of farmers markets’ under thepermitted list of corporate social responsibility (CSR) activities underCompanies Act 2013, to encourage companies engaged in agri-alliedactivities, food processing etc. to take up this activity under CSR andalso help in setting up supply chain infrastructure. This would be

similar to the e-Choupal initiative of ITC Ltd., but under CSR.

5. All the above facilitators can also tie-up a link to the commodityexchanges’ platform to disseminate spot and futures prices of agricultural commoditiesSome measures that would facilitate the creation of a barrier-freenational market are:

2. Alternate Marketing Channels

a) Direct Marketing

APMC model act promotes direct marketing. As farmer is allowed to sell his goodsoutside APMC, he can now under APMC model act, directly sell to consumer. Thiscompletely eliminates middleman and narrows gap between farmer’s sale priceand price paid by consumer. There are numerous successful examples all overIndia such as Apni Mandi in Punjab, Rythu Bazar in Andhra Pradesh, UzhavarSandhai in TN, Shetkari Bazaar in Maharashtra, Hadaspur Vegetable Market in

Pune, Krushak Bazaar in Odisha and Kisan Mandi in Rajasthan.

Central government sponsors ‘Agricultural marketing Infrastructure, Grading &standardization Scheme’ for development of infrastructure for direct marketing inwhich capital subsidy of 25% is available (33.33% in NE states).

b) Contract Farming

Under contract farming inputs material may be provided by purchasing party for a


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particular crop and there is a crop buyback agreement in advance Quality isspecified in advance. This is mainly entered into by big corporates who are inbusiness of food processing. So far there has been mixed results. It removesuncertainty of Income for the farmer and he can fetch good prices. But this alldepends upon ready availability of genuine information about the market trends. Itis seen that there is stark information asymmetry between corporates and farmers.

This open up avenues for exploitation of farmers as these are long term contracts,once agreed by farmer at lower price, market price doesn’t matter for contractperiod.

See major companies involved in contract farming here.

c) Future contracts and ‘negotiable warehouse receipts’ in agriculture

A futures contract is a contract between two parties where both parties agree to

buy and sell a particular asset of specific quantity and at a predetermined price, ata specified date in future. Let’s take example of an Exporter – Exporter sells goodsto USA at 3 month credit at $ 1 lakh. At this time exchange rate of 1$ is Rs 60. Sohe expects to receive Rs 60 lakh After 3 months. But in 3 months exchange rate cango down to Rs 57. This will cause him loss of Rs 3 lakhs.

So, at time of sale, exporter can enter into ‘currency futures’ sale contract. He willenter into contract with banker under which banker promises to

1. Buy dollars after 3 months,2. Fixed quantity i.e. $ 1 lakh,

3. At predetermined rate – whatever rate is going in market for ‘3 monthscurrency futures’

At end date, contract may be either settled by delivery of dollars by bank to exporter(at predetermined price/contract price) or by settling price difference market andcontract price in cash.

These contracts between two parties are tradable like commodities on variousexchanges. Note that, whenever exchange rate of a $ will vary, (below or beyond Rs60) it will influence value of the contract itself.

Hence, these contracts are instruments for Risk management, price discovery andtrading. This trading attracts intense scrutiny of market analysts for prediction of future trends of demand and supply, which in turn yield much useful data formanufacturers and producers. This has much utility for the farmers as they can

http://agmarknet.nic.in/ConFarm.htm


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decode future trends and plan their production accordingly. Farmer can similarlysell his production in advance in futures market and buyers can buy in futuresmarket.

In 2003 futures trading in all agricultural commodities was allowed and in 2007 TheWarehousing (development and Regulation) Act, 2007 was passed. This created‘Warehousing Development and Regulating Authority’ (WDRA).

WDRA introduced a concept of ‘Negotiable Warehouse Receipt’. There are WDRAcertified warehouses all over India, in which farmers can deposit there produce andthey will get a receipt (Negotiable Warehouse Receipt) acknowledging quantity,type, category etc. of crop.

This receipt can be used by farmers to get loans, to make payments or to settle anyother type of claim. This receipt will be accepted by any ‘certified warehouse’ in

India and possessor of this receipt can get quantity mentioned in it.

The Negotiable Warehouse Receipts (NWR) system aimed at not only helping the

farmers to avail better credit facilities and avoid distress sale but will also tosafeguard

financial institutions by mitigating risks inherent in credit extension to farmers.

However, this to work effectively need a market based economy and free

determination of prices. Various commodities are time and again banned forfutures trading which keeps farmers and investors away. Further, there was scamin commodity exchange NSEL; it was found that stock of underlying assets, onbasis of which contracts were entered, didn’t existed. Consequently, NSEL failed tosettle its contracts.

3. International Trade

India is among largest producers for products like wheat, rice, milk, pulses etc., butits share in agro global trade is much lower. This is partially due to heavy domesticconsumption and rest due to non-coherent and unpredictable policies. There arequantitative restrictions which differ from crop to crop and time to time. Few yearsback cotton exports were suddenly banned after domestic prices rise and soon banwas lifted. There are export quotas, beyond which export is not allowed.

Trade of basmati rice was liberalized in 1990’s and since then its prices are almostintegrated to international prices which are more remunerative to farmers.


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Exports of agro product were valued at USD 32.3 billion in 2013-14, a jump of 122per cent from 2008-09. But big part of this was offloading of surplus stocks by FCIin foreign markets.

Import of one lakh tons of rice was undertaken over a five month period fromMyanmar for augmenting the TPDS supplies in the north-eastern states. Suchavenues need to be explored especially as they could be more economical thantransporting rice from surplus states like Punjab or AP, and would limit FCI’sProcurement, and consequently, distortion, in the domestic market.

4. Essential Commodities Act

The EC Act, 1955 provides for the ‘regulation and control’ of production, distributionand pricing of commodities which are declared as essential for

1. maintaining or increasing supplies or

2. for securing their equitable distribution and

3. Availability at fair prices.

Major commodities are covered under the act. Some of them are:

1. Petroleum and its products, including petrol, diesel, kerosene,Naphtha, solvents etc

2. Foodstuff , including edible oil and seeds, vanaspati, pulses,sugarcane and its products like, khandsari and sugar, rice paddy

3. Jute and textiles

4. Drugs- prices of essential drugs are still controlled by the DPCO

5. Fertilizers- the Fertilizer Control Order prescribes restrictions ontransfer and stock of fertilizers apart from prices.

The Drug Price Control Order (DPCO) or Fertilizer Control Order and such

other orders have also been issued under the powers of the ECA.

The Act is thus pro-consumer and impacts at the level of the wholesaler and retailer

The Act empowers the Centre to order states to impose stock limits and bringhoarders to task, in order to increase supplies and cool prices. Generally the Centrespecifies upper limits in the case of stock holding and states prescribe specificlimits. However in case there is a difference between states and the Centre, the act


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specifies that the latter will prevail.

In 2002 and 2003 an order was passed removing the licensing requirements, stocklimits and movement restrictions on all specified foodstuffs. These orders alloweddealers to freely buy, stock, sell, transport, distribute, dispose, acquire, use orconsume any quantity in respect of rice/paddy, wheat, coarse grains, sugar, edibleoils and oilseeds, pulses, jagery, Wheat products etc.

However, later in 2006 due to price rise in agro products, state governmentsrequested for restoration of powers under EC act and it was done by centralgovernment. Since then there have been regular on and off policy. Different statesput different limits on stock. As of now only sugar and wheat stands denotified bycentral government. Recently potato and onions were added to the list as inflationcontrol measure.

While it is true that at times hoarding of commodities can cause shortage inmarket, yet ban on stocking runs contradictory to government policy directedtoward food processing and cold storage. If an entrepreneur invests in cold storagefacility, he is supposed to stock something to utilize storage space and for profit.Ban on storage can demotivate investment storage capacities.

Further, thrust should be on dismantling incentives to stock products for longperiod. From long experience it has been seen that government has limitedcapacity to restrict illegal stocking. In this scenario inter-regional and inter-temporal

variation in prices of crops should be brought down. As already said, most cropsare produced seasonally, but are consumed throughout the year. Uniform suppliesof these crops throughout year can be insured by increasing competition at middleof supply chain i.e. between wholesalers/retailers. This shall be supplemented byadequate investment in supply chain infrastructure.

As we have seen most of these institutions were designed in 1950’s and 60’s in responseto formidable challenges of food security and farmer protection. This was followed bygreen revolution, then by liberalization of economy. This gave India abundance of grainsand new trading mechanism like futures, NWR came to fore. In all these changes,reformation and redefinition of role of these institutions was overlooked. Consequently,they gradually moved in opposite directions. To hold them together, government needs tomake a coherent policy to redefine role of these institution and underlying mechanisms.

Recognizing that a competitive market, besides adding to the welfare of the producers anconsumers also plays a contributory role in poverty alleviation, the recent Budget alsohighlighted that farmers and consumers’ interest will be further served by increasing


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competition and integrating markets across the country. While these are discretemeasures, a holistic policy with across-the-board reforms would enable the Indianagricultural market to cross the Rubicon and progress towards Achieving Paretoefficiency.

Questions –

1. ‘By and large, the APMCs have emerged as some sort of Government sponsoredmonopolies in supply of marketing services/ facilities, with all drawbacks andinefficiency associated with a monopoly’ explain and suggest alternatives. (250words)

2. What are ‘Negotiable Warehouse Receipts’? What are its benefits? Explain. (200words)

3. Why it is important to integrate National and International agricultural markets?

Examine. (200 words)

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