NAM: Will it be a game changer in agricultural trading?

Stabilising food inflation has emerged as a major challenge for emerging economies, including India, in the past decade. During 2006 to 2014, India experienced average food inflation at a rate of 9%, one of the highest rate of food inflation among emerging economies. Researchers and policymakers for long, have highlighted various demand-pull, cost-push and government policy related factors such as hike in procurement prices and widening fiscal deficits behind the price surge. Apart from these usual factors, recently, the role of rent seeking activities of food suppliers has emerged as the centre of debate in the country (Chengappa et al., 2012; Tomar, 2013; Lahiri and Ghosh, 2014; ASSOCHAM, 2011; Kumar et al., 2010; Carrasco and Mukhopadhyay, 2012).

The rent seeking activities of agents in both wholesale and retail marketing of food, catered by the lack of a competitive food market and required infrastructure, often cause large positive shocks to mark ups. In the backdrop of widely advocated competitive national market for food to promote greater competition and stabilise large shocks to mark ups, the Union Budget for 2014-15 proposed for a unified market for agricultural commodities, called National Agricultural Market (NAM). After a year of the announcement, on April 14, 2016, Prime Minister Narendra Modi launched the e-trading platform NAM, with the goal of integrating 585 wholesale markets under one electronic platform by 2017–18. On the first day, 21 mandis from 8 States have joined the e-NAM.

The background

The wholesaling activities of food commodities in India are conducted by the state Agricultural Product Marketing Committee (APMC). Under the APMC Act 1950, whole geographical area of a state is divided into smaller market areas which are managed by Market Committee constituted by the State Governments.

Presently, 2477 principal markets and 4843 sub-market yards are regulated by the APMCs (Economic Survey, 2015). The APMC Act primarily prevents any individual or agency to freely conduct wholesale marketing activities. The Act also prohibits farmers from dealing directly with retailers and requires them to sell their produce to licensed middlemen approved by the Committee (Singh, 2008). The buying and selling activities under APMC are largely governed by age old personal relations between farmers and commission agents who also act as money lenders to farmers. The purpose of APMC primarily has been to ensure fair prices to farmers and controlling price volatility for consumers by setting the floor price for the retailers. However, being the single wholesaler entity in the market with monopsony power against farmers and monopoly power against retailers, it has the incentive to seek rent via mark up pricing at the wholesale level. In addition, non-transparent system of multiple fees and taxes under APMC has distorting effects on pricing mechanism of agricultural commodities (Economic Survey, 2015). While NAM is a major shift in policies related to agricultural marketing, there have been decade-old efforts to enhance efficiency in agricultural trading under APMC.

The introduction of model APMC Act 2003 has been an effort to overcome some of the shortfalls in APMC Act, 1950. For instance, the model APMC act has provisions for (i) direct selling by farmers to contract farming sponsors, (ii) setting up of new market area by private persons, farmers and consumers, (iii) direct interaction between farmers and consumers, (iv) single levy of market fee on sale in any market area, and (v) replacement of multiple licensing system with single registration of market functionaries to operate in multiple market areas. Yet, the model APMC Act has grossly been a failure, due to reluctance on part of state governments to reform the APMC legislation, as the modified Act would result in huge revenue loss for them.

The key solution to the problem is nothing other than developing a competitive market. Just abandoning APMC Act without development of alternative trading system would not help. This is evident from situations in Kerala and Bihar. Kerala never adopted the APMC Act, and Bihar abandoned it in 3 2006. The situation in these two states are no better than other states. Karnataka, on the other hand, stands as an exception with a plan prepared in 2012-13 to integrate its mandis and automate the auction process using an e-trading platform. The integration process has been conducted with the assistance of National Commodity and Derivatives Exchange (NCDEX Spot Exchange) and Rashtriya e-Marketing Services (ReMS), a Private Limited Company, in a public-private partnership framework. The Karnataka model, implemented in February, 2014 finally emerged as the role model for NAM.

Consequences of restricted trading under APMC

Micro-level evidence indicates that mark up pricing by wholesaling agents under this restricted marketing arrangements, not only leads to high and volatile consumer prices, but also reduces returns to farmers (Gandhi and Namboodiri, 2002).

Analysing price margins at various levels of wholesaling activities, Gandhi and Namboodiri (2002) report that overall, the average share of the farmers in the consumer price is only around 48 per cent for vegetables and 37 per cent for fruits. The study also shows that the share of marketing costs, an indicator of middlemens’ margin in wholesaling activities, is frequently as high as 80-90% of farmer-consumer price difference. In a more recent study by ASSOCHAM (2011), intermediaries’ margin in retail prices with respect to farm prices, is found to be 70-75% for rice, wheat and maize, while it is around 60% for fruits and vegetables. A sharp rise in the gap between retail and wholesale prices, accounting for logistics costs, margins and transaction cost, reflects shock to the intermediaries margins due to hoarding and speculative activities (Kumar et al., 2010). For instance, the authors find a rise in the mark-up in retail prices over wholesale prices of rice to 12% in December, 2009 and that in wheat to 10% in 2008. In a comparatively recent study, Bhattacharya (2016) finds that mark up shocks, after five months of its occurrence, can explain 0.21–7.45% of variations in the WPI food inflation, depending on the origin of the shock. Again, shock to mark up at the retail level contributes to 8.85% of variations in CPI food inflation after 5 months of the shock.

NAM: pros and cons

The emergence of NAM, if properly implemented, is expected to be the game changer in agricultural trading and the potential source of various direct and indirect benefits to the agricultural sector and the economy. Directly, the NAM is expected to increase competition in agricultural market, eliminate cartels and price manipulations by local traders, and stabilise price mark ups at both wholesale and retail levels (Chand, 2016). Indirectly, this system would help farmers to find out the market with remunerative prices for the produce, motivating them to investment in productivity enhancement and increase production. The Cabinet Committee on Economic Affairs has approved a budget of Rs. 200 crore on July 1st, 2015 for setting up a common e-platform in 585 selected wholesale markets. The Department of Agriculture and Cooperation will provide the software to the states free of cost, along with Rs. 30 lakh per mandi for setting up the required infrastructure. Despite these initiatives to enhance competition and efficiency in agricultural trading, the success of NAM is subject to the following factors:

  • One reason for failure of the model APMC Act is the reluctance on the part of state governments to amend their APMC Act with single license and single point levy of market fee, in fear of loss of revenues. In the absence of a legal framework to replace the existing APMC Act with multiple licenses and market fees, with a system of single license across states, single point levy of market fees and provision of inter-state trade, the integration of markets across states may remain incomplete. A streamlined legal framework is also essential for settlement of disputes on quality standards of agricultural produce arising in trading of these commodities in an electronic platform.
  • Under NAM, mandis constitutes the first layer of integration. However, in general, the first layer of agricultural trade takes place at the farmgate level. Farmers, mostly the small and medium farm-owners sell off the produce to big traders or produce aggregators at the farmgate. Unless farmers in a neighbourhood of a particular mandi can collectively aggregate their produce and bring to the mandi themselves, the benefit of on-line realisation of remunerative prices at the mandi level may not be realised.
  • Even the virtual buying and selling activities in the agricultural market would actually involve physical movements of goods. If farmers individually can not access local mandis, how would they make their produce available to buyers in other states? Again the cost of transports to markets in other states may be prohibitive for small and medium farmers, and hence, taking advantage of better price realisation in other states may not be feasible for them. In a nutshell, for creating and implementing NAM successfully, it is essential to build a public-private partnership (PPP) model to maintain information and payment flow through an electronic system, to provide processing and storage facilities at the mandi level, and to provide of transport facility for smooth movements of agricultural produce from one state to another.
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Rudrani Bhattacharya is an Assistant Professor at the National Institute of Public Finance and Policy, New Delhi. Her primary research area includes inflation and monetary policy, international finance, growth, development and Dynamic Stochastic General Equilibrium modelling for emerging market economies.