Chapter 8: A National Market for Agricultural Commodities- Some Issues and the Way Forward

Presently, markets in agricultural products are regulated under the Agricultural Produce Market Committee (APMC) Act enacted by State Governments. This Act notifies agricultural commodities produced in the region and provides that first sale in these commodities can be conducted only under the aegis of the APMC through the commission agents licensed by the APMCs setup under the Act. Various taxes, fees/charges and cess levied on the trades conducted in the Mandis are also notified under the Act.

 There are about 2477 principal regulated markets based on geography (the APMCs) and 4843 sub-market yards regulated by the respective APMCs in India. Effectively, India has not one, not 29 but thousands of agricultural markets.

Issues related to APMCs

A multiplicity of fees of varying magnitudes arising from the operation of the APMCs.

1. They charge a market fee of buyers, and licensing fee from the commissioning agents.
2. Commissioning agents charge commission fees on transactions between buyers and farmers.
3. They charge small licensing fees from a whole range of functionaries (warehousing agents, loading agents etc.).
4. The rate of commission charged by the licensed commission agents is exorbitant, because the commission is charged on the entire value of the produce sold.
5. The license fee charged from various market licensed operators is nominal, but the small number of licences granted creates a premium, which is believed to be paid in cash.
6. The levies and other market charges imposed by states vary widely and are a major source of market distortion.
7. APMC operations are not subjected to scrutiny because they do not require the approval of State legislature to utilize the funds collected.

Such high level of taxes at the first level of trading have significant cascading effects on the prices as the commodity passes through the supply- chain.

APMC levy multiple fees, of substantial magnitude, that are non– transparent, and hence a source of political power.

Even the model APMC Act  treats the APMC as an arm of the State, and, the market fee, as the tax levied by the State, rather than fee charged for providing services. This acts as a major impediment to creating national common market in agricultural commodities.

ESSENTIAL COMMODITIES ACT, 1955 VS APMC ACT

The scope of the Essential Commodities Act (EC Act) is much broader than the APMC Act. It empowers the central and state governments concurrently to control production, supply and distribution of certain commodities, including pricing, stock-holding and the period for which the stocks can be kept and to impose duties.

The APMC Act on the other hand, controls only the first sale of the agricultural produce.

Apart from food-stuffs which are covered under the APMC Act, the commodities covered under the EC Act generally are: drugs, fertilisers, and textiles and coal.

MODEL APMC ACT

Since these State Acts created fragment markets (2477) for agricultural commodities and curtailed the freedom of farmers to sell their produce other than through the commission agents and other functionaries licensed by the APMCs, the Ministry of Agriculture developed a model APMC Act, 2003 and has been pursuing the state governments for over a decade now to modify their respective Acts along the lines of the Model APMC Act, 2003.

The Model APMC Act:-

1. provides for direct sale of farm produce to contract farming sponsors;
2. provides for setting up “Special markets” for “specified agricultural commodities” – mostly perishables;
3. permits private persons, farmers and consumers to establish new markets for agricultural produce in any area;
4. requires a single levy of market fee on the sale of notified agricultural commodities in any market area;
5. replaces licensing with registrations of market functionaries which would allow them to operate in one or more different market areas;
6. provides for the establishment of consumers’ and farmers’ markets to facilitate direct sale of agricultural produce to consumers; and
7. provides for the creation of marketing infrastructure from the revenue earned by the APMC.

Many of the States have partially adopted the provisions of model APMC Acts and amended their APMC Acts. Some of the states have not framed rules to implement the amended provisions, which indicate hesitancy on the part of state governments to liberalize the statutory compulsion on farmers to sell their produce through APMCs.

Why states are hesitating to amend APMCs?

There is a perception that the positions in the market committee (at the state level) and the market board – which supervises the market committee – are occupied by the politically influential. They enjoy a cosy relationship with the licensed commission agents who wield power by exercising monopoly power within the notified area, at times by forming cartels. The resistance to reforming APMCs is perceived to be emanating from these factors.

Some states —— such as Karnataka —— have however adopted changes to create greater competition within state.

KARNATAKA MODEL

In Karnataka, 51 of the 155 main market yards and 354 sub-yards have been integrated into a single licensing system.

Rashtriya e-market Servies Ltd. (ReMS), a joint venture created by the State government and NCDEX Spot Exchange, offers automated auction and post auction facilities (weighting, invoicing, market fee collection, accounting), assaying facilities in the markets, facilitate warehouse-based sale of produce, facilitate commodity funding, price dissemination by leveraging technology.

The wider geographical scope afforded by breaking up fragmented markets has enabled private sector investment in marketing infrastructure.

INADEQUACIES OF MODEL APMC ACT

Model APMC Act failed to create a national – or even state- level common market for agricultural commodities. The reason:

1. Model APMC Act retains the mandatory requirement of the buyers having to pay APMC charges even when the produce is sold directly outside the APMC area, say, to the contract sponsors or in a market set up by private individuals even though no facility provided by the APMC is used.
2. Though the model APMC Act bars the APMCs and commission agents from deducting the market fee/commission from the seller, the incidence of these fees/commission falls on the farmers since buyers would discount their bids to the extent of the fees/commission charged by the APMC and the Commission agents.
3. Though the model APMC Act provides for setting up of markets by private sector, this provision is not adequate to create competition for APMCs even within the State, since the owner of the private market will have to collect the APMC fees/taxes, for and on behalf of the APMC, from the buyers/sellers in addition to the fee that he wants to charge for providing trading platform and other services, such as loading, unloading, grading, weighing etc.

ALTERNATIVE WAYS OF CREATING NATIONAL MARKET FOR AGRICULTURAL COMMODITIES

• Central government will work closely with the state governments to reorient their respective APMC Acts to provide for the establishment of private market yards/private markets.
• The state governments will also be encouraged to develop farmers’ markets in towns to enable farmers to sell their produce directly.
• Incremental moves may need to be considered to get the states on board. For example, first, it may be possible to get all the states to drop fruits and vegetables from the APMC schedule of regulated commodities; this could be followed by cereals, pulse and oil seeds, and then all remaining commodities.
• State governments should provide policy support for setting up infrastructure, making available land etc. for alternative or special markets in private sector, since the players in the private sector cannot viably compete with the APMCs in which the initial investment was made by the government on land and other infrastructure.
• Liberalisation of FDI in retail could create the possibilities for filling in the massive investment and infrastructure deficit which results in supply-chain inefficiencies.

USING CONSTITUTIONAL PROVISIONS TO SET UP A COMMON MARKET

If persuasion fails (and it has been tried for a long time since 2003), it may be necessary to see what the center can do, taking account of the allocation of subjects under the Constitution of India.

There are provisions/entries in List III of the Seventh Schedule (Concurrent List) in the Constitution which can be used by the Union to enact legislation for setting up a national common market for specified agricultural commodities, viz., Entry 33 which covers trade and commerce and production, supply and distribution of foodstuffs, including edible oilseeds and oils raw cotton, raw jute etc. Entry 42 in the Union List, viz., ‘Inter- state Trade and Commerce’ also allows a role for the union.

Once a law is passed by the Parliament to regulate trading in the specified agricultural commodities, it will override the state APMC laws, paving the way for creating a national common market. But this approach could be seen as heavy- handed on the part of the center and contrary to the new spirit of cooperative federalism.