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January 19, 2021

Indian Economy|Development Strategy


By Nitin Desai






The new laws on  agricultural marketing  seem to be designed to make it easier for food processing companies and retail chains to deal directly with farmers. This has provoked a strong protest from farmers who are not convinced that the laws are  in their interest. However many economists have been supportive because they believe a freer market based system will ensure prices more reflective of the supply-demand balance and lead to more rational cropping patterns.  


What this argument misses is the distributive dimension. Agricultural marketing systems should lead to fair prices for both producers and consumers and only normal profits for intermediaries. It must also be consistent with food and nutrition security at the national level. In the Indian context it is unlikely that a free market in agricultural products will do that because the market for agricultural products is substantially different from that for manufactured products 

  • In agricultural markets there are lakhs of sellers and a limited number of wholesale buyers. In the usual market for manufactured products there are lakhs of buyers and a limited number of sellers.  
  • The supply in agricultural markets is highly seasonal while the demand does not vary much by season, thus giving an advantage to large buyers who have the storage capacity and the financial resources to hold stocks.  
  • The demand curve for agricultural products is inelastic and very steep  and therefore prices tend to fall sharply when there is a bumper harvest and rise sharply when there is a harvest shortfall relative to demand.  


The imbalance in the seasonality of supply and demand leads to large intra-year variations in prices, particularly for perishables.  The monthly averages for ten years ending March 2020 show a price difference between peak and trough, after correcting for trends, of 23% for vegetables, with tomatoes, onions and potatoes showing even higher seasonal factors of 65.6%, 40.4% and 35.6%.1  


The imbalance in the market power of farmers and wholesale buyers gets reflected in a high ratio between the price that a consumer pays and the price that a producer receives which ranged between 28% and 78% in a survey conducted by the RBI, with perishables at the lower end. Intervention in agriculture markets is a necessity not just to protect the interest of sellers but also that of consumers.2 


Looking beyond free markets there are basically three options for each  agricultural product market 

  • substantial direct public sector involvement in wholesale procurement and distribution,  
  • dependence on private sector wholesalers and distributors with market monitoring and intervention  when necessary by public entities and  
  • cooperatives or producer companies of farmer producers with stakes in the value chain right up to the consumer.  


Public sector procurement at present is more or less restricted to rice and wheat which account for only 23% of the total value of crop production and that too mainly in Punjab, Haryana and West UP.. Of late the decentralisation move has helped, particularly for paddy procurement in Odisha, Madhya Pradesh and Chhattisgarh. Extending the principle of decentralisation and assisting States  to procure crops that need guaranteed marketing support can be an option.. 


Private procurement already operates as the principal marketing mode for many agricultural commodities like vegetables oils, fruits and vegetables, spices, plantation  products, cotton, etc. The real need here is for organised and regular intervention in markets with a high degree of price volatility like those for potatoes, onions and tomatoes. 


Neither the public nor the private procurement option gives farmers a stake in the value chain up to the consumer. This can be done only through cooperatives or producer companies of farmers which can enter the  processing industry. This third way can do what we most need now, which is to shift farmers from staples to higher value crops for which demand is increasing in a growing economy. 


Indias system of dairy cooperatives is a fine example of the third way. It involves three levelsvillage level cooperatives for procurement, district level unions for processing, and State-level Federation for marketing of milk and milk products. This structure gives farmers a stake in the entire value chain. Its origins lie in a confrontation over prices between the farmers of Kaira District in Gujarat and a monopsonist private sector company in the mid-1940s. 


Today, India has become the largest milk producer in the world and the value of the gross output of the dairy sector is nearly 50% more than that of rice and wheat combined. Per capita per day milk availability has gone up from 112 gms in 1968-69 to 394 gms in 2018-19. The market in milk and dairy products is stable as it as a shown by the lower level of seasonal fluctuations in price of just 0.6%. The dairy cooperatives and their  State level federations, for example that of Gujarat, whose brand is Amul, are market leaders and have a larger share of competitive markets in processed milk products compared to the MNCs and corporate houses who operate in this area. 


No one option will be ideal for a country as diverse as ours. All three, public sector procurement agencies, private wholesale purchasers, including retail chains, and cooperative/producer companies are required. Public procurement can operate in different ways in each state for guaranteeing prices for crops where this is required to promote technological advance or changes in cropping pattern.  Cooperatives or producer companies can be encouraged for perishable products, where processing is necessary to reduce wastage which is in the range of 5-16 percent, and for products where processing and cooperative marketing can add a great deal of value.  Private wholesalers can operate in other areas as they do now.  


The diversity of relevance of the three options means that the Centre must respect the fact that the choices for  agricultural marketing must be left to the States as required by the Constitution and for practical reasons given the diversity of the agricultural economies in India.  


One area where the Centre plays a dominant role is the policy on international trade in agricultural products.  The record on how it has exercised this authority is not very inspiring as it has often mistimed decisions to ease export restrictions or allow imports. Free trade in agricultural products is hardly possible in a global trading environment where trade restrictions are the norm. But what is possible is a policy that normally allows free trade, particularly for exports to encourage appropriate investments by farmers, and imposes restrictions only as an exception. 


An agricultural marketing system designed to reflect the diversity of the Indian agro-economy and the interests of  small farmers and low income consumers will  be consistent with efficiency, equity and national security.  

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