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Although India’s Agricultural Produce Marketing Committee legislation was enacted with the noble intention of increasing farmers’ income, it has had the opposite effect over the years. It has restrained farm income. The failure arises from the basic structure of the legislation, which creates the incentives for middlemen to collude against the farmer.

History

The Agricultural Produce Marketing Committee (APMC) laws go back to the founding of the Republic in the 1950s. The government’s intent and justification behind setting up the APMCs, as seen in promotional videos from that era, was to protect farmers from commission agents – the middlemen. The idea was that these markets would be fair, more efficient, and offer better remuneration to the farmers. Since markets are a state subject under the Constitution, the states had to enact APMC laws. Most states have enacted and amended them from time to time.

The Act empowers the government to declare certain areas as market areas – the entire geographical area over which a market set up under the APMC law has a ‘monopoly’ on. This designated market is run by a committee of elected traders and farmers (from the area), with some representatives from the government. The committee then sets up a market yard with storage facilities where the trading of agricultural goods takes place. There may be sub-yards set up too, and these are covered by the same rules that govern the yards. All traders who buy agricultural goods are required to get licences from the market committee. To fund itself, the committee charges fees on all trade that takes place within the market area.

The original idea behind creation of APMC laws – to bring the traders under one roof for easy monitoring and prevent them from cheating the farmers – seems lost now. The law almost achieves precisely the opposite of its intended objective. To understand how the APMC ends up harming the farmers, let’s take a look at the law and the economics behind it.

Market Monopoly

While the APMC legislation sets up regulated markets, it criminalises setting up other competing markets, or buying agricultural produce from outside the market yard or sub-yard (except for personal consumption). Both Punjab’s Agriculture Produce Markets Act, 1961 (section 8), and West Bengal’s Act (sections 4 and 34) have these provisions.

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Such restrictions fly in the face of the argument that regulated markets are superior. If they provided better prices than other markets, farmers would naturally come to such markets. It would not require the law to other markets in a geographical area, which is arguably done to ensure that farmers are not cheated.

But by banning both unregulated and multiple regulated markets in an area, the legislation prevents competition, thereby affecting the farmers’ chances of landing a better price for their produce. In such a scenario, the price charged by the APMCs as market fees becomes a tax.

Some states have relaxed these provisions, allowing the traders to buy directly from the farmers without going to the APMC. However, even when the traders and farmers do not use any APMC infrastructure, they are required to pay the fees as long as the farmer’s land is within the market area as notified by the government. Section 12(1) of the Andhra Pradesh law is one such example. In fact, the law in this state makes it obligatory to pay fees for any transaction taking place in the entire market area and not just at the market.

Trader cartelisation

Creating a cartel is tough. Every member of a cartel has an incentive to break the rules of the cartel to make more profit for themselves. This is why the 14 OPEC members (Organization of the Petroleum Exporting Countries) rarely agree on production cuts and frequently violate them by producing more oil than their quota. In a normal market, if traders were making super-normal profits, it would attract other traders to join the business. However, we see many cartels coming up in the APMCs (regulated markets).

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Traders come together to fix prices even when they are to be determined by auction. A report by the Competition Commission of India in 2012 notes: “For instance, a visit to Ahmednagar APMC revealed that there was collusion amongst traders. While bidding on certain lots was taking place, traders started with about Rs 300 per quintal and kept bidding higher prices until one trader quoted Rs 400 per quintal and another bid at Rs 405 per quintal. The commission agent stopped the auction and produce was shared between two wholesalers. In fact, about 60 per cent of farmers in Washi market reported that their sale was undertaken through secret bidding.”

This cartel formation is possible because the legislation (for example in Tamil Nadu) requires every trader, warehouse owner, processor or even somebody weighing agricultural produce to obtain a licence from the market committee. This committee, which is supposed to comprise elected farmers and traders from the area, is usually dominated by the trader lobby. This lobby has no interest in increasing the number of licences, which affects their profits. An example of this had played out in Bengal in 2008 when the trader lobby had revoked the licence of a large international chain in the wholesale business.

The model APMC law proposed by the central government in 2003 had suggested making the state governments, and not the market committees, the licensing authorities. While this may reduce the conflict of interest, it still burdens the buyers of agricultural produce with compliance costs. They would have to apply for licences, keep detailed records of purchases, pay market fees, and be open to prosecution under the APMC laws.

There are no regulatory or market failures in the buying of agricultural produce, which requires licensing. The licensing regime only discourages or reduces the supply of buyers in the market. Restaurants, caterers or large processors are discouraged and rely on licensed traders to act as middlemen. These traders in turn reduce the price paid to the farmer and increase the price to the end consumer, and keep the difference as profits. While regular trading provides a valuable service of getting buyers and sellers together, in the case of APMCs, the traders are merely benefiting from the legal position awarded to them under the legislation.

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Do not modernise, repeal

The government’s attempts at modernising APMCs ignore principal economic drivers in the APMCs. Any legislation which coerces farmers to sell in a specified area or reduces the supply of traders through licensing will lead to exploitation of farmers. Even if the APMCs laws start without such coercion, the creation of statutory APMC automatically creates a constituency of traders who then lobby the government to close other channels of selling.

Even the modernised ‘model APMCs’ of 2003 and 2017, which have been suggested by the government as part of its measures to reform the legislation and which it wants the states to enact, retain two provisions that give rise to cartelisation: trader licensing and market monopoly. Therefore, economics predicts that monopolistic behaviour by the market committees and cartel formation by the traders will ensue – and that is because the model APMC laws suffer from the same defects that the old laws do.

APMCs are not an Indian phenomenon, variations of this law (initially promoted by the World Bank) was implemented in many countries. However, over the years, informed by experience and economic thinking, South Africa, New Zealand, Australia and others have repealed such laws. It is high time India abandoned this fundamentally flawed legal policy in all its forms.

Shubho Roy is a consultant at NIPFP

Ila Patnaik is a Professor at the National Institute of Public Finance and Policy

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