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Should mandis be broken up?

By Hindol Sengupta

From the trail of onion peels in the mud and the pungent odour evident even a kilometre away, it’s clear there’s a market nearby. In this case, it’s Asia’s biggest wholesale mandi (market) at Lasalgaon, spread across 17 acres of Maharashtra’s hinterland close to Nashik, a five-hour drive from Mumbai. Lasalgaon handles more than 25,000 tonnes of produce a day, 90% of it onions. (Maharashtra grows a third of India’s onions.) Apart from the pungent bulb, Lasalgaon does brisk trade in pulses, tomatoes, and soya bean. It also supplies to neighbouring Bangladesh, Pakistan, and other South Asian markets. Scores of farmers who bring their produce here from surrounding regions sell to about 200 licensed traders.

Known as middlemen or commission agents, these traders check quality, decide prices at two auctions, and sell the goods to wholesale merchants. The entire process is over in the blink of an eye, overseen by the Maharashtra State Agricultural Marketing Board, a government body. For their trouble, the board collects 1% of the value of the trade done in its mandis while traders charge around 6%, depending on location and demand-supply arbitrage.

Since the 1950s, states have set up marketing boards or committees under the Agricultural Produce Market Committee (APMC) Act, to run organised wholesale markets. The act has two principles: Stop rich village heads or moneylenders from exploiting the poor farmer at the farm gate, and ensure the right value for his goods at auctions in the yard. Every state has several APMC mandis; typically, there is one for about 450 sq. km. area, but this can vary between 74 sq. km (Punjab) and 2,257 sq. km (Assam). India has 7,246 mandis, each run by a chairman and a group of bureaucrats, and elected members from farmers and licensed traders.

Till 2003, APMCs restricted farmers to selling only in the mandis. Since then, some states have abolished the act in favour of cooperative and private market systems; others allow  farmers to sell outside the mandis; and many still  follow the act. This muddle is one of the main reasons for India’s agriculture purchase-and-supply chain bottleneck. It is also responsible for the sky-high food price inflation over the past five years. While world food prices rose by 96% from 1990 to 2013, prices in India soared by 514%. About 16% of India’s gross domestic product comes from agriculture. Experts say that in the medium to long term, India’s food price inflation cannot be controlled because its distribution system is broken and dominated by a network of middlemen at every stage. The consequences are severe: stubbornly high inflation apart, India has one of the highest suicide rates among farmers; in 2011 it had a farmer suicide rate of 163 in a million.

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Over time, APMCs spawned red tape and middle-men. Bureaucrats rule the roost and bribery is rampant as every stakeholder (except farmers) needs a licence to operate in the mandis. Middlemen form cartels, and collude with wholesale merchants to keep prices low while hoarding stock, taking a fat cut. They also charge a hefty commission from both buyers and sellers. Overall, APMCs have set up pockets of agricultural monopoly, thus depriving croppers of their rightful earnings while raising consumer prices.

There is a 100% difference, sometimes up to 150%, between what a farmer gets for his produce and what the consumer pays. “The power of fixing prices lies with traders,” says a Lasalgaon farmer, requesting not to be named. According to him, auctions are only in name—it has been thus for decades. Data from the National Horticulture Research and Development Foundation show that between 2008 and 2013, Lasalgaon sold 40% of the onions harvested at less than the production cost. In 2011-12, nearly 66% of the harvest was sold below cost, and in 2012-13, it was around 46%.

“The APMC is designed to give farmers a better deal, but it cannot help when there’s a 5% to 10% cost increase at every stage once the trucks leave the farm gate,” says Nanasaheb Patil, chairman of the Lasalgaon APMC. Between Lasalgaon and Mumbai, about 200 km away, produce trucks are stopped at Vashi for entry tax, and arrives to another set of middlemen in the city market, before reaching the local grocers. For a customer in Mumbai, the closest major market to Lasalgaon, price has gone up by 30% from what the farmer received at the mandi.

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India’s food economy is also largely closed. Here, the government fixes a minimum support price (MSP, at which it will buy grain), raises import tariffs in surplus years, and restricts export during shortfall. All these add to food price rise. Absence of an MSP is also a problem. “Being an essential commodity, onion farmers are unable to stock the goods for a better price,” says Patil. He adds that the agricultural supply chain needs reconstruction. 

So, how can this change? There is a clamour for abolishing APMC and dismantling its mandis. Early last year, Congress Party-ruled states were asked to allow farmers to sell fruits and vegetables outside the regulated mandis, and later, the Bharatiya Janata Party (BJP) government put onions and potatoes under the Essential Commodities Act to prevent hoarding and stop farmers or traders from raising  prices by bringing the produce to the mandis after long intervals.

Some say that giving farmers direct access to consumers, or allowing foreign direct investment in multi-brand retail  could be the other solutions. As companies like Walmart enter, they could help build cold chains, eliminate middlemen and raise farm income. After all, there is enormous opportunity in the food segment in India. A 2013 McKinsey report says that as India’s GDP triples between 2012 and 2030, food consumption will rise 4% every year, doubling the value of the food sector to $414 billion. No matter what, at the heart of India’s inflation woes is the APMC Act and the mandis. The argument is in favour of repeal and complete overhaul of both.

Bharat Ramaswami of the indian Statistical Institute compares mandis to 1970s New York, controlled by the mafia. Though impossible to prove, mandis with their combination of men, muscle, and money power have a symbiotic relationship with political parties. For instance, it is widely believed that depending on the political colour in a particular region, mandi traders are cadres of either the BJP, Congress, Shiromani Akali Dal, and so on. “The people who control the mandis have strategically aligned with power centres in various parts of the country,” says Muralidhar Rao, national general secretary of the BJP and long-time member of the Rashtriya Swayamsevak Sangh, the ideological parent of the party. According to him, a critical reform of mandis will be to get more farmer representatives on the APMC boards.

Caste is another cog in the mandi wheel. Economic researcher Chandra Bhan Prasad says that traditionally, the middlemen in mandis have been the Adhatiyas, an upper-class trading community, who prevented others from participating in the trade and often discriminated against lower-caste farmers. Rao says there has been a ‘caste expansion’ in agrarian trade. “From the Vaishya (trader) caste monopoly, it has moved to a state where there is no community which is not present somewhere on the other in this trade.” Rao himself comes from a farmer family. Prasad feels it is in the interest of the lower-castes and the Dalits to support FDI in multi-brand retail. “Only big capital can neutralise caste.”

Ramaswami dispels the fears that foreign investment will take over the mandis and trigger job losses. “No corporate  house wants to take over the mandi system. It doesn’t make sense. The supply chain is too disparate, fragmented, and the profits are too slim for any large corporate’s liking.” According to him, they could be, at best, interested in a small part of the market, in some fruits and vegetables business, where margins are bigger.

The National Bank for Agriculture and Rural Development, which provides loans and other services to the agrarian community, warns that fragmented land holdings are one of the biggest threats to India’s agricultural productivity. Cultivable land has remained constant at 140 million hectares while the number of farmers has doubled from 70 million. India is among the top five producers of grains, vegetables, and fruits (and the biggest grower of cereals) in the world, but its agrarian productivity is less than half of China’s, and many times lower than that of the U.S. or even Brazil.

Ramaswami points out one of the successful areas of private enterprise in Indian agriculture—seed companies—that are mostly small independent businesses. “One Reliance can buy all the seed companies servicing crores of farmers, and not feel it on its balance sheet. But it would never get into the business. It needs huge manpower, is difficult to scale up, and the margins are wafer thin.” He points out that to the contrary, when big corporates like Reliance or the Future Group (owner of Big Bazaar) deal with agriculture here, they recruit the existing middlemen as agents since they know the lay of the land and can negotiate the best prices.

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Age-old practices: India’s regulated markets have done little to store grain in a closed, modern environment

To the argument of repealing or reforming APMCs, Ajay Vir Jakhar, head of the advocacy group Bharat Krishak Samaj, a farmers’ association, says, since it is a state subject, there is no one-size-fits-all solution. The state governments modify the APMC Act according to their needs, and determine what can be sold inside and outside respective mandis. Punjab, Haryana, and Madhya Pradesh, for instance, have initiated APMC reforms by allowing contract farming, but operate through licensed traders. Bihar and Kerala don’t follow the act at all. Gujarat, Maharashtra, Rajasthan, and Odisha have introduced reforms such as direct marketing and contract farming. Jakhar says it is, therefore, difficult to pinpoint APMC as the root cause of India’s agrarian problems because of its varied applications. 

He also echoes Ramaswami, saying that the mandi system cannot be broken by large corporate houses or foreign investment alone. “It requires many, many touch points between the customer and the farmer.” He explains that traders provide short-term loans to farmers, and organise transport and storage. “Analysts forget that throughout the year it is the traders who are available to the farmers for any help they need. Which corporate has the bandwidth to provide such granular services to millions of small farmers?”

For Jakhar, the solution lies in promoting a ‘mixed’ format, where there are many farmer markets, like the one set up about 10 km from Delhi’s Azadpur mandi, after the state removed fruits and vegetables from APMC control early last year. The 1.6 acre kisan mandi (farmer’s market) has been developed by SFAC (Small Farmers’ Agri-Business Consortium), a loose grouping of 300 farmer associations backed by the government. “To reform mandis, we must think in terms of competition of all kinds, and not just large corporates,” he says. Pravesh Sharma, managing director of SFAC, says since there are no middlemen in his kind of farmer markets, prices are less by up to 20%.

The cry for infrastructure development and a unified market is common in the debate on both sides. Says food and farm activist Devinder Sharma, “The APMC does not exist in states like Bihar. So why isn’t it flooded with private investments in agriculture? Why aren’t farmers in Bihar making more money than in any other part of India?”

According to him, agriculture is an interlinked business across the country—some states grow one product, others something else. “It needs to work like a chain and cannot be fixed in parts. Where is the countrywide infrastructure to buy, transport, stock, and resell?” He, however, adds that some of the alarm about food prices is ridiculous. Prices of all things have soared, “but suddenly when it comes to food prices, we have an expectation that they will always remain really low. How is that possible? The price of every input into farming has increased, how can food prices remain the same?” In case of Lasalgaon, the cost of onion seeds grew by 300% between 2007 and 2014, fertiliser cost by 143%, plant growth regulator more than 200%, fungicide 110%, and pesticide 80%.

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“We are better off today than 10 years ago,” says the Lasalgaon farmer. Indeed, they now have mobile phones to check rates across markets. But if the deal is raw, he really doesn’t have an option since it is not easy to quickly shift the large amount of produce, especially perishable goods such as onions and tomatoes, from one market to another. There are bottlenecks such as bad roads or no road at all, insufficient and inefficient cold storage, and disparate state taxes. Process management major Emerson’s research shows that India wastes food worth Rs 13,300 crore due to poor infrastructure, including refrigerated transport and storage.

The Central Institute of Post-Harvest Engineering and Technology says that around 18% of fruits and vegetables produced in India are wasted because there aren’t enough food processing units. India has around 6,300 cold stores of around 30 million metric tonne capacity—half of what it needs. In fact, India needs an investment of Rs 55,000 crore just to manage the food it currently produces. 

Rahul Mirchandani owns Aries Agro, which makes micro nutrients for plants and animals. He says that poor logistics and lack of irrigation (60% of farmland is dependent on rain) remain critical hurdles, which private participation in mandis cannot solve. 

Sanjay Kaul, managing director of National Collateral Management Services, one of India’s biggest agriculture inventory management and trading companies, says India cannot attract big investments because storing is useless if there is no ease of mobility to transport and sell the produce swiftly. That, in turn, is impossible until GST (the proposed Goods and Services Tax which would make India one uniform taxation regime) is implemented. The policy has been hanging fire for many years now. “Today, we don’t see India has a single common agriculture market. We think in terms of Punjab’s market and Tamil Nadu’s. There is no common approach,” says Kaul. 

This is something Puneet Jhajharia knows first-hand. The Wharton graduate’s startup CropConnect runs a farm-to-fork project that takes kiwifruit from Arunachal Pradesh to states in the north and the west. “Transport cost is one of our biggest challenges. Kiwifruit imported from New Zealand to Delhi are often cheaper than those from Arunachal,” says Jhajharia, who notices, wistfully, the splendid road network that China has built across the border. “Without infrastructure, talking about a better deal for farmers and consumers is a lie. It just does not mean anything.”