The Evolution of India’s Food Supply Chain

The Value of Price Information in the Context of the Agricultural MarketingSystem of India and its Recent Reforms

Fabian Brix

January 21st, 2014

Swiss Federal Institute of Technology Lausanne (EPFL)

College of Humanities (CDH)Center for Area and Cultura Studies (CACS)

Thesis for the Minor in Area and Cultural Studies

The Evolution of India’s Food Supply Chain

The Value of Price Information in the Context of the AgriculturalMarketing System of India and its Recent Reforms

Supervisors Christine Lutringer-Gully PhD andMarc Laperrouza PhD

January 21st, 2014

Fabian BrixThe Evolution of India’s Food Supply ChainThe Value of Price Information in the Context of the Agricultural Marketing System of India andits Recent ReformsThesis for the Minor in Area and Cultural Studies, January 21st, 2014Supervisors: Christine Lutringer-Gully PhD and Marc Laperrouza PhD

Swiss Federal Institute of Technology Lausanne (EPFL)Center for Area and Cultura Studies (CACS)College of Humanities (CDH)

Contents

1 Introduction 31.1 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.2 Problem Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2 Review of Literature 5

3 The Agricultural Marketing System 93.1 The State Acts on Agricultural Produce and Marketing (APM) . . . . . . . . 93.2 The Supply Chain Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.3 Problems of the APM Act & its Implementation . . . . . . . . . . . . . . . . 12

3.3.1 Infrastructure & Waste . . . . . . . . . . . . . . . . . . . . . . . . . 123.3.2 The Situation of Smallholder Farmers . . . . . . . . . . . . . . . . . 133.3.3 Middlemen, Nepotism & Malpractice . . . . . . . . . . . . . . . . . 14

3.4 Private Market Extension Services . . . . . . . . . . . . . . . . . . . . . . . 16

4 Government Reforms 194.1 The Agricultural Produce Marketing Development & Regulation (APMR) Act 19

4.1.1 Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204.1.2 Levy of Market Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 204.1.3 Special Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204.1.4 Private Market Yards . . . . . . . . . . . . . . . . . . . . . . . . . . 204.1.5 Contract Farming . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214.1.6 Public Private Partnerships (PPPs) . . . . . . . . . . . . . . . . . . . 214.1.7 Market Extension Services . . . . . . . . . . . . . . . . . . . . . . . 21

4.2 Farmer Producer Organisations (FPOs) . . . . . . . . . . . . . . . . . . . . 22

5 The State of Karnataka: A Case Study 255.1 Reform Adoption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265.2 Innovative Approaches Using ICTs . . . . . . . . . . . . . . . . . . . . . . . 27

5.2.1 The Market Information System . . . . . . . . . . . . . . . . . . . . 285.2.2 The E-Tendering System . . . . . . . . . . . . . . . . . . . . . . . . 29

6 Conclusion 31

Bibliography 33

1

1Introduction

„Happiness is when what you think, what you say, andwhat you do are in harmony.

— Mahatma Ghandi

1.1 Motivation

The dawn of Information & Communication Technologies (ICTs) has revolutionized theIndian economy which is now creating services for the rest of the world. However, ICTs alsoshow great potential in accelerating development in a broader context. Here, Kenya is therole model where innovative rural market extension, financial & insurance services are beingor have already been created. ICTs harbour a great potential as a facilitator of development,because they allow information gathering and exchange at scales and speeds unimaginableonly a couple of decades ago. Especially the high coverage of cellular networks and ubiquityof mobile phones allow for a great innovation potential in terms of delivering information inthe rural parts of India as well.

In this context, this paper explores the value of market prices for food commodities andthe potential of their dissemination to farmers and traders upstream India’s government-regulated agricultural supply chain. Scholars expect price information to have a beneficialimpact by improving the bargaining power of farmers with traders, thus enabling them toachieve better prices and by reducing arbitrage and wastage. The aim of this paper is tocompare the effects of available, reliable price information in the context of agriculturalmarketing reforms undertaken by the Indian Government or Indian State Governments.

1.2 Problem Statement

The problems addressed in this paper are deeply rooted in the nature of the Indian Agricul-tural Marketing System. Before we review literature relevant to the thesis, we proceed witha short explanation.

In the modern era, agricultural marketing does not just involve buying and selling, agri-cultural produce is passed through a supply chain via transfers until it finally reaches theconsumer. In India, unlike in Europe and the United States, where supply chains arelargely by corporations, the Government of India controls agricultural marketing. The majorstakeholders in this system are farmers, agents and traders. It needs to be noted that theagricultural sector provides livelihood and employment to more than 70% of India’s rural

3

population in this regard. The majority of Indian States has enacted a series of AgriculturalProduce Marketing Committee (APMC) Acts that bind farmers to selling their produce ingovernment owned markets or mandis for most commodities. Originally envisioned toprevent exploitation of farmers by local landlords and foreign multinationals, the mandishave come to serve the opposite of their intended function. The system produces signifcantamounts of food waste, aggressive pricing towards farmers and also introduces additionalmiddlemen which increases consumer prices. As a consequence, many farmers are indebtedand live in extreme poverty earning less than $1 per day.

The Indian government has taken measures to reform its agricultural supply chain in orderreduce malpractice and inefficiencies and improve the livelihoods of the farmers who stillmake up about 24% of the Indian workforce.

4 Chapter 1 Introduction

2Review of Literature

„Failure comes only when we forget our ideals andobjectives and principles.

— Jawaharlal Nehru

In this literature review we study the effect of price information on the bargaining power andmarketing strategy of farmers and prices achieved for their produce in rural India. We firstestablish that the increase of information exchange, facilitated by introduction of Information& Communication Technology (ICT) such as mobile telephony, can have a positive effecton the efficiency of markets in developing economies and then go on to review these veryeffects in the case of rural India where the produce for the Indian Agricultural MarketingSystem is sourced.

ICTs can play an important role in promoting welfare in developing countries (Jensen,2007). An increase in information exchange, facilitated by mobile phones for example,allows markets to produce efficient (pareto-optimal) outcomes in an ideal setting. Wheninformation is limited or costly as it is the case in many developing countries today, marketagents are unable to engage in optimal arbitrage, that is exploiting a price difference betweentwo or more markets, until price draw level across markets. This fact leads to price dispersion,so that the same good does not cost the same at different places, and an inefficient allocationof goods. In this context, ICTs have the potential to aid market mechanisms and increasewelfare for both buyer and seller, often smallholder farmers in the case of India. Between1997 and 2001, cellular networks and mobile phone services were introduced throughoutKerala, a state in South West India with a large fishing industry. Before the introduction,different markets often harboured excess buyers or sellers. The result was that fishermenon the coast of Kerala who arrived at a market and found no sellers dumped their catchin the sea with the consequences of high wastage rates, inflation and price volatility. Afterthe introduction of cellular networks fishermen’s profits increased by 8% and consumerprices declined by 4%, because fishermen’s arbitrage of ports lead to more efficient markets.Fishermen out at sea, could with sufficient network coverage, use their cellphones to inquireabout market prices and fish demand at different ports along the coast. In case there existeda better opportunity than at their home port, a different port could be targeted to sell thecatch. Although this incurred an increased cost of fuel, the significant increase in revenuecould more than make up for it.

Jensen’s study demonstrates that the adoption of mobile phones by fishermen and whole-salers was associated with a dramatic reduction in price dispersion, and near-perfect ad-herence to the Law of One Price, that is the price difference between two different placesis explained by transport cost. The author himself sees the study as a “demonstration ofimportance of information for the functioning of markets and the value of well-functioning

5

markets”, because “information makes markets work and markets improves welfare”. Thepaper further exemplifies that the benefits of ICTs in India can not only be found amongsoftware engineers or call-center workers, but very importantly also among fishermen or inan extended theory among farmers. To describe these gains caused by the market effects ofICT-enabled information sharing, he coined the term “digital provide”.

We have now established the beneficial effects of improved information and communicationin developing markets. However, the setting of Jensen’s study does not allow us to draw directconclusions with respect our area of interest, rural India, for several reasons. Firstly, transportrequires infrastructure on the mainland. Challenges are, as Jensen himself mentions, thepoor quality of roads may and the cost of transport. Therefore, the ability of improvementsin information to enhance market performance remains limited, because arbitrage mayremain too expensive. Secondly, the fishermen are already organized in groups duringfishing and transport possibly reducing the cost of communication since one mobile phoneper boat is sufficient. In rural India with its fragmented landholdings, farmers toil their landseparately.

It is therefore necessary to explore the value of market, especially price information, inthe agricultural setting of the Indian mainland and what has to be done to reduce pricedispersion and food wastage there.

The study by (Fafchamps and Minten, 2012) on information dissemination via the commercialextension service Reuters Market Light (RML) puts Jensen’s findings into the rural perspective.RML sends SMS to farmers with information on prices, weather forecasts, crop adviceand news items. Here, the price information is expected to improve farmers ability tonegotiate with buyer, increased bargaining power, and enable them to arbitrage better acrossneighbouring markets so far their geospatial distribution allows this.

For the experiment, five pairs of a differnt district of Maharashtra and a different cropwere chosen: Pune for tomatoes, Nashik for pomegranates, Ahmadnagar for onions, Dhulefor wheat and Latur for soya. In total, 933 farmers were sampled from 100 villages in acontrolled randomized trial. These farmers, who had not previously used a commercialextension service, were given an RML subscription. During the study farmers associated RMLinformation with a number of decisions they made, giving some evidence that treatmentaffected spatial arbitrage and crop grading. However, the magnitude of these effects issmall. Overall, (Fafchamps and Minten, 2012) found no statistically significant averageeffect of exposure to RML information on the price received by farmers for most crops.The surveyed farmers sell almost exclusively to a wholesale agricultural market near theirhome. Essentially, the spatial arbitrage is limited to some farmers deciding to sell at a districtwholesale market instead the farm gate where they previously sold to “itinerant traders”.These results are in line with low take-up rate of the RML service after its introduction inMaharashtra in 2007.

Given the infrastructure and transportation limitations in the Indian countryside farmersfind it difficult to find the means and Organisation to take their produce to a mandi inanother district, there is only one large wholesale market in every district, where pricesmay be better. On land, target markets cannot be arbitraged by the producers the same

6 Chapter 2 Review of Literature

way as in the study by Jensen where fishermen have a reliable means of transportation thatcan take them anywhere a long the coast at a certain cost. This cost can easily be offset bythe resulting profits. In the case of mainland wholesale markets the assumption is that thetraders have the comparative advantage in transport and can therefore evade markets whereproduce is sold at a higher price because of high competition among traders. Given thisconstellation it is not suprising that the availability of price information did not translateinto higher revenues for farmers. The markets are too far apart, have a large catchmentarea, and therefore attract a steady flow of buyers and sellers. Moreover, a lack of storagecapacity makes farmers more vulnerable. In case they are selling perishable goods like fruits,mangos in the study, or vegetables, they have to sell their produce as soon as possible whenthey visit a market. They may have to sell directly at the farmgate if taking the produce to amarket would require a long journey. In summary, the benefits of RML appear minimal formost farmers even though RML is associated with changes in where farmers sell their crop,especially among younger farmers. This circumstance points to lack of competition amongtraders.

To solidify the impressions gained through reviewing the previous papers, we consult a studyof potato farmers in West Bengal (Mookerjee et al., 2013). Its theme is about middlemenmargins and the role of assymetric price information between potato farmers and local tradeintermediaries. To conduct the study, farmers in randomly chosen villages were providedwith daily information on prices in neighboring wholesale markets where the itinerant villagetraders re-sell the potatoes acquired from the farmers. The results show that access to betterinformation on prices in wholesale or retail markets, whether delivered via cellphones orother channels, are unlikely to benefit the farmers selling their potatoes at the farm gate.In contrast to the other studies reviewed above, the farmers’ produce is bought by villagetraders and farmers either do not have or do not choose to have direct access to wholesalemarkets because it incurs transport costs. Therefore, the information made available doesnot increases farmers’ opportunities for arbitrage. The researchers estimated a lower boundon average trader margins, using the net value of transport and storage costs, rangingfrom 34 to 89% of farmgate prices in 2008. “Information provision did not change averagemargins, but caused traded quantities to shrink (resp. expand) significantly for farmersfacing low (resp. high) wholesale prices”. The mesage of this quote is that farmers choseto sell less when they were informed of low prices. However, the lack of direct access towholesale markets depresses farmers’ outside options and prevents the price informationfrom benefitting them monetarily.

The researchers see limited competition for farmers’ produce in the villages as the funda-mental problem, suggesting that easier access to markets for farmers and new buyers couldplay a significant role in improving the prices farmers receive. “Encouraging backwardintegration by retail chains via forms of contract farming is a possible way of increasingcompetition amongst buyers that will both help farmers realize a higher price and deliverhigher output. These policy options are of course subject to other hazards: the possibilitiesof collusion among government regulators and buyers of produce in wholesale markets, andof predatory pricing by retail chains.” The study ignores effects of information on farmerdecisions about storage and timing of sales, yet the researchers expect to obtain the sameresults when incorporating these scenarios into their models.

7

The reviewed literature, although of a very rigorous nature, has to be put into treatedwith caution. India is a large country on a subcontinent with diverse geography andcropping patterns so that different constraints apply in different places. Therefore, thereviewed studies do not necessarily represent a general picture. Nevertheless, the findingsof (Fafchamps and Minten, 2012) and (Mookerjee et al., 2013) suggest that the valueof price information for bargaining, sales planning and arbitrage is limited due to toolittle competition among traders, bad infrastructure and the limited financial resources ofproducers. In the following chapter we take a closer look at the Agricultural MarketingSystem to gain a better understading of these constraints.

8 Chapter 2 Review of Literature

3The Agricultural MarketingSystem

„The forces in a capitalist society, if left unchecked,tend to make the rich richer and the poor poorer.

— Jawaharlal Nehru

In order to establish the value of price information to India’s Agricultural Marketing System,we first have to gain a thorough, although not exhaustive, understanding of the features anddrawbacks of this system.

3.1 The State Acts on Agricultural Produce andMarketing (APM)

The current state of Agricultural Marketing in India has its roots in the State APMC Actsintroduced mainly in the 1960s. After India’s independence, agricultural marketing wasbadly organized. Prices for produce were low and the supply chains incurred large physicallosses which resulted in high marketing costs. The idea behind establishing AgriculturalMarketing Committees in every state and subsequently districts was to create and regulate alarge number of market yards so as to ensure that farmers receive fair prices for their produce.This policy was effective in feeding the country. While there were only 268 wholesale marketsat independence in 1947, this figure increased to about 6300 by 2007 (Chauhan, 2008) in(Minten et al., 2011). 98% of these large wholesale markets are regulated in some mannerfollowing state law adoptions of the APMC act (Acharya, 2004) and (Minten et al., 2011).

The mandate of the Agricultural Produce Marketing Committees (APMCs) under the variousstate acts is extensive. A committee has the power to establish markets as well as controland regulate the admission of traders through the attribution of licenses. In order to payits infrastructure and subsistence an APMC charges market fees, license fees as well as rentfor dedicated storage areas in the markets. The APMC act guidelines by the Minisry ofAgriculture are implemented to varying degrees in different Indian States. According to theMinistry (Government of India, 2003) “the salient feature of a typical (non-amended) APMAct is that all notified agricultural commodities grown in the notified area of the market(encompassing its legally defined primary catchment area) are required by law to be soldonly in these markets”. As a result, farmers who produce notified commodities in a certainarea are required by law to sell at a government-regulated market. Of course, the numberof notified commodities changes by state and market location (Minten et al., 2011). Thetransactions take place via an open-outcry auction managed by government-licensed traders

9

or brokers, so-called commission agents, who do not take possession of the produce (Mintenet al., 2009). A case study of APM implementation in the state of Karnataka is to follow(Section 5).

Since the 1960s there exist special rules for wheat, rice, pulses, sugar and edible oils whichthe Food Corporation of India, as mandated by the government, stocks and distributes viathe Public Distribution System (Artiuch and Kornstein, 2012). The Food Corporation ofIndia guarantees the farmers a Minimum Support Price (MSP) for these products. TheMSP, however, mainly benefits the states of Punjab and Haryana where the scheme isaccompanied by major procurement policies (Shetty and Gowda, 2013). Food price inflationproblems caused by the Food Corporation of India withholding its stock resulted in the PublicDistribution System featuring in the news frequently. This topic, although highly interesting,is out of the scope of this paper.

3.2 The Supply Chain Structure

As we have established above, the public sector aims to promote organized marketing ofagricultural commodities through a network of regulated markets, so-called mandis, tovarying degrees in the States of India. Accordingly, the area of a state is subdivided intosourcing areas or districts for these markets. They are managed by district AgriculturalMarketing Committees subject to State Government law (Government of India, 2003). Theoriginal acts, mainly from the 1960s, force farmers to sell their produce to governmentlicensed traders at the mandis if they live in an area where the jurisdiction applies. Therefore,retailers cannot buy “notified agricultural produce” directly from producers but have topurchase their goods in a wholesale market at the later stages of the supply chain after theproduce has passed through the hands of several middlemen. According to the Directorateof Marketing & Inspection (DMI) of the Ministry of Agriculture (Marketing Infrastructure &Agricultural Marketing Reforms) 7521 regulated markets existed in India in 2005, 7293 ofwhich were wholesale markets, serving on average 459 square kilometers as opposed to thegoal of 50 square kilometers set by the National Commission of Agriculture in 1976. Thereis little to no information given as to the distribution of these markets.

While the majority of non-staple foods is sold directly on the wholesale markets by ruralproducers, staple foods pass through the series of markets starting at the local level as can beseen in Fig. 3.1. It is important to note, however, that regulation applies almost exclusivelyto the more advanced part of the supply chain. As described in (Haveripeth, 2013) theSupply Chain consists at the base level of Rural Primary Markets and Rural Secondary orAssembly Markets. While the former serves the local demand, the function of the latteris to aggregate produce for transportation to regulated wholesale markets. In ChapterVIII, the Regulation of Trading, of the model government APM Act, section 39 states that“APMC act rules do not apply for sale of produce for domestic consumption in quantity (ortransfer of produce to cooperative society) up to four quintals” or 400 kg. The Departmentof Agriculture and Cooperation states on its website on the topic Marketing Infrastructure &Agricultural Reforms that there are 27294 rural periodical markets where the mentioned partof the produce can be sold. It also states that around 15% of these markets are regulated,which is in contradiction to the figures mentioned earlier and likely to be much less. These

10 Chapter 3 The Agricultural Marketing System

Fig. 3.1: Note. A rough schema of the government-regulated Agricultural Supply Chainin India using information published on (Marketing Infrastructure & AgriculturalMarketing Reforms) by the Directorate of Marketing & Inspection (DMI) of theMinistry of Agriculture. Apparently, 7521 regulated markets existed in India in2005.

rural and tribal markets occur mostly on a weekly basis, are outside of the developmentfocus and do not possess any form of advanced infrastructure, including storage (Haveripeth,

3.2 The Supply Chain Structure 11

2013). Sourcing produce for the agricultural marketing system is mostly done by villagetraders at this level. From the rural assembly markets, of which an unknown percentageare regulated, produce brought in by farmers or traders is shipped in truckloads to largerSecondary Wholesale Markets outside district centers. Once arrived, the produce can beeither sold directly to local retailers or shipped on to Terminal Wholesale Markets in thebig cities from where city markets, supermarkets and restaurants are served. From heredifferent types of produce, Himalayan Apples for example, are further transported to partsof the country where they cannot be grown domestically.

3.3 Problems of the APM Act & its Implementation

Now, we have a rough overview of the agricultural policies in place and the structure ofthe supply chain, it is time to analyse some of the problems and decide which of these arerelated to (price) information.

3.3.1 Infrastructure & Waste

According to (Artiuch and Kornstein, 2012) some of the key problems identified lie ininfrastructure. Roads in the countryside are poor and distances to markets long. AlthoughAPMCs collect significant sums through imposed fees, market infrastructure is in a bad state.The majority of wholesale markets are neither paved nor do they provide sufficient shelterfrom the climatic onslaught. Not depending on whether the markets only treat staple ornon-staple crops, very few grading or cold storage facilities are available. Non-availabilityof cold storage and cold chain transportation mean perishable horticultural produce willbegin to rot quickly during transportation and intermediary storing. Generally speaking,storage space is insufficient for large harvests. High percentage figures of up to 40% foodwastage are often cited in calls for more Foreign Direct Investment (FDI) in retail. However,these figures have to be treated with care. The figures gathered by the Central Instituteof Post-Harvest Engineering and Technology (CIPHET) (Jha et al., 2013) seem to paint adifferent picture: Figure 3.2 shows a maximum annual loss of 18% for fruits and vegetablesand 6% for cereals. Table 3.1 exemplifies that losses vary significantly between differentcrops. With the humid climate in India and non-availability of cold storage and cold chaintransportation a significant waste of fruit and vegetables is inevitable. Food processing andpackaging, at around 2.2% of total production in 2012, therefore appears as a viable optionto alleviate some of these issues.

Even if the figures for food wastage are in truth higher, this does not render Indian supplychains wasteful per se, since food utilization is near 100% once the food has reached theconsumer. This is in stark constrast to the United States or Europe for example, where upto 50% of food is thrown away at retail level (find source). Still, the verdict remains thesame. The reduction of post-harvest losses through better storage and increased processingare, according to the CIPHET, one of the most important goals in order to attain sustainabledevelopment of India’s supply chains. As we will see in a later chapter, modern ICT-enabledbrokerage at wholesale markets can reduce transaction time and thereby have a beneficialeffect on the amount of waste created by unnecessary, intermittent sorting of produce.

12 Chapter 3 The Agricultural Marketing System

Horticulture

Cereals

Oil seeds

Pulses

Poultry

Milk

18

6

10.1

6.1

3.7

0.8

Percentage of Harvest

Maximum Annual Cumulative Wastage Percentage

Fig. 3.2: Note. Overview of harvest & post harvest Losses (in %) for selected commoditiesat the national level in India. Gathered from (Jha et al., 2013).

Mean Total Loss in %Crop Farm operations Storage Overall

Apple 11.06 1.20 12.26Banana 4.18 2.42 6.60Mango 10.64 2.11 12.74

Mushroom 11.03 1.51 12.54Onion 5.17 2.34 7.51Potato 6.73 2.26 8.99Tomato 9.94 3.04 12.98

Coriander 6.81 0.51 7.31

Tab. 3.1: Note. Overview of harvest & post harvest losses (in %) for selected fruits, veg-etables and spices at the national level in India. Adapted from (Narayana et al.,2013).

3.3.2 The Situation of Smallholder Farmers

While agriculture amounts to about 20% of India’s GDP it still employs roughly 50% ofthe population when including labourers (Artiuch and Kornstein, 2012). Most of thelandholdings in India are small holdings of less than 1 hectare (Figure 3.2), a patch ofland less than 100m by 100m, making it hard for their owners to find investment capital.Likewise, the government has the hard task of trying to disseminate best practices in farming.Furthermore, due to the small size of their holdings, farmers are extremely dependent onthe prices they receive for their crop. However, consumers and producers suffer from thehigh number of middlemen downstream the supply chain who inflate consumer prices anddeflate market and farm gate prices. Furthermore, “government funding of farmers is stillat a nascent stage and most of the small farmers still depend on the local moneylenderswho are leeches and charge high rates of interest” (Haveripeth, 2013). Typically thousands

3.3 Problems of the APM Act & its Implementation 13

of small to medium farmers bring their produce to a relatively small number of licensedtraders at the nearest market where quantity counts over quality for far. The large numberof farmers selling to a small number of licensed buyers results in the farmers having verylittle bargaining power. Contrary to what was advocated by (Jensen, 2007) technologicalprogress has not spread quickly to rural areas, but is confined to urban areas. Farmers dohave mobile phones, but many cannot read and write SMS due to illiteracy. This meansfarmers have no access to information about prices in other markets or about the pipeline ofarrivals into the same market, which also has an impact on prices. There is need for rigorouscapacity building in terms of education. We will revisit this issue at the end of this paper.

Farm-size Category Size of Holding(in ha.)Individual Holdings(million)

Joint Holdings(million)

Total Holdings(million)

Number Area (ha.) Number Area (ha.) Number Area (ha.)Sub-Marginal Below 0.5 56.14 13.32 8.44 2.10 64.68 15.44Marginal 0.5 - 1.0 23.99 17.53 4.12 2.91 28.15 20.47Small 1.0 - 2.0 21.35 30.40 3.39 4.79 24.78 35.24Semi-Medium 2.0 - 3.0 8.19 19.63 1.44 3.49 9.65 23.16Semi-Medium 3.0 - 4.0 3.49 11.95 0.74 2.56 4.25 14.54Medium 4.0 - 5.0 1.99 8.79 0.43 1.94 2.43 10.76Medium 5.0 - 7.5 2.03 12.20 0.47 2.87 2.51 15.13Medium 7.5 - 10.0 0.72 6.13 0.20 1.76 0.93 7.94Large 10.0 - 20.0 0.59 7.67 0.20 2.70 0.80 10.49Large ≥ 20.0 0.10 3.21 0.06 2.09 0.17 6.42

Tab. 3.2: Note. Number of landholdings and area covered (total includes negligible numberof institutional holdings) in India as recorded by the 2010-11 Indian AgriculturalCensus, taken from http://agcensus.dacnet.nic.in on Dec 29th 2014.

Farm-size Category Size of Holding(in ha.) Individual Holdings Joint Holdings Total holdings

Marginal <1.0 0.39 0.4 0.39Small 1.0 - 2.0 1.42 1.41 1.42Semi-Medium 2.0 - 4.0 2.7 2.77 2.71Medium 4.0 - 10.0 5.73 5.89 5.76Large >10.0 15.73 18.3 17.38All - 1.1 1.39 1.15

Tab. 3.3: Note. Average size of landholdings (total includes negligible institutional holdings)in India as recorded by the 2010-11 Indian Agricultural Census, taken fromhttp://agcensus.dacnet.nic.in on Dec 29th 2014.

3.3.3 Middlemen, Nepotism & Malpractice

Farmers suffer for two reasons to do with fragmentation. On the one hand, the fragmentationof the supply chain upstream, where the produce is passed on from trader to trader until itfinally reaches its destination, puts downward pressure on them. On the other hand, thefragmentation on the producer side due to small landholdings, does not allow farmers tobargain from a position of strength.

Explaining the reasons for the first point is simple. Under the original acts market fees andcommissions are due in every market the produce passes through in a state, because of thejurisdictions of different district market committees. Moreover, when produce is transferredto other states additional transit taxes are collected and time lost since interstate movement

14 Chapter 3 The Agricultural Marketing System

in India is regulated. Shipments can take as long as 72h according to (Artiuch and Kornstein,2012).

Furthermore, the management of the APMCs is very bureaucratic and prone to corruptionand occurrences of buyer collusion. Under the original APMC jurisdiction, every commissionagent and trader requires a license from every market yard they wish to do business in. So ifone wanted to buy from all the established market yards in the country, one would needabout 7200 licenses. However, in certain states, one can only get a license if one owns ashop in the very market yard one wants to do business in. Finding space in decades oldmarkets is virtually impossible, because the shops and limited number of trading licensesare kept through nepotism. This is due to the fact that awarded licenses can easily berenewed annually and members of the same family transact business at the same shop overseveral generations. Therefore licenses are rarely returned (Minten et al., 2009) and it ishard for outsiders find a way in. Trader organizations fiercely oppose reforms, making itnear impossible for new traders and commission agents to enter a market and offer better,market-linked prices. Another proof for the morbitity of the system is that, while at the outsetof the agricultural marketing scheme half of the members on a committee were representingfarmers, elections are now held irregularly and the committees are mainly administered bybureaucrats with ties to licensed traders (Acharya, 2004) in (Minten et al., 2011).

Moreover, the government model act on agricultural marketing defines commission agents“as a person who on behalf of his principal trader and in consideration of a commission orpercentage on the amount involved in such transaction buys agricultural produce and makespayment, keeps it in his custody and delivers it to the principal trader in due course or whoreceives and takes in his custody agricultural produce sent for sale within the market areaor from outside the market area, sells the same in the market area and collects paymentthereof from the buyer and remits the sale proceeds to his principal trader.” (Ministryof Agriculture, 2007). According to this definition commission agents can be both thebrokers that handle transactions in a regulated market or traders that venture to collectproduce directly from rural areas. On top of the upward price pressure these middlemencreate in the supply chain and the resulting gap between farm-gate, wholesale and retailprices, there are serious incidents of malpractice. “Middlemen collude to restrict supplyto achieve higher prices through lower shipment quantities (especially in remote regionswhere there are few buyers)” (Artiuch and Kornstein, 2012). Rules stipulate that the “priceof the notified agricultural produce shall be paid on the same day to the seller in marketyard”. Often farmers have to wait the whole day for payment or are even told to return ata later date to fetch their payment forcing the burden of additional travelling costs upon.These misconducts occur frequently although licensed commission agents have the libertyto charge commission of 2.5%-6% of the transaction value (Artiuch and Kornstein, 2012).As stated by (Mahendrakumar and Mamatha, 2013) these commissions are often chargeddoubly, once when taking charge of the produce from farmers, an action which is illegal inmost states, and once when passing it on to the principal traders. Not only does it occur thatfarmers that visit regulated markets pay the agent’s commission, they also have to bear thecost of transportation which usually amounts to 10% of the price their produce fetches atthe market (Minten et al., 2011). Although 94% of the farmers in the study by (Minten et al.,2011) use motorized transport, little aggregation or pooling takes place at the village level,so that 62% of farmers bring only their own produce to the market. On average the farmers

3.3 Problems of the APM Act & its Implementation 15

spend 4 hours travelling to the market place and back after spending another 3.5 hoursconducting business. The farmers surveyed valued this opportunity cost at US$75. Dataanalyzed in (Shalendra, 2013) shows that at least in Karnataka, most of the farmers thatbring their produce to wholesale markets are farmers with medium-sized landholding largerthan 2 ha. Concerning the fate of small and marginal farmers there is little informationavailable. Nonetheless, one can assume that their produce is picked up at the farm gate, asobserved by (Fafchamps et al., 2008), if they choose not to sell on rural markets.

Fragmentation on the producer side and a lack of market extension also hands traders theinformation & finance monopoly. Often commission agents in markets and as village tradersare often the sole available source of financing for farmers. In the case where there is only alimited number of such agents in remote areas this makes the farmers very dependent. Inthis case, the farmers however also may depend on the commission agent as the sole sourceof information regarding market trends which is not a favorable position to be in. Withthe growing ubiquity of mobile phones farmers can, however, exchange among themselvesas exemplified among fishermen in the study by (Jensen, 2007). Overall, the average(smallholder) farmer is financially dependent and has reduced bargaining power due tothe limited amount of produce he can offer. In consequence the farmers’ bargaining poweris very limited. In this situation, even the increased access to information may have littleimpact as discussed in the literature review.

The obvious approach to tackling the second issue is to organize farmers in collectives andhave them buy and sell in bulk as a legally registered entity. Larger orders and offers willmake them regionally less dispensable and consequently put them in a better position toconduct business. Reforms in this area are introduced in the next chapter (Section 4.2).

3.4 Private Market Extension Services

In this section we delve briefly into commercial extension services that were reffered to inthe literature review. It is meant to give a short overview to provide a base for comparisonwith the systems described in Chapter 5.

In a review of modern ICT for agricultural development in India (Mittal, 2012) identifiesinformation, distributed through both voice message and SMS based services, as one ofthe key enablers for the growth of agricultural productivity. Farmers need informationon the weather, crop planting patterns, where and when to buy seeds and market priceupdates. The National Sample Survey Organization’s, (Mittal, 2012) p.10, 2003 surveyon farmers’ information sources found out that while a higher percentage of (32.5%) offarming households has access to extension workers on a seasonal basis, most farmers accesstraditional modes of communication (television, radio and newspapers) on a daily or weeklybasis to meet their information needs. 16.7% of farmers got their information on a dailybasis from other progressive farmers in their villages. Progressive farmers and input dealersare contacted by farmers mainly seasonally and when need arises. Back in 2003 the centralgovernment did not have a general, ubiquitous information extension service at its disposaland it does not provide one to this date. Attempts have been made such as the Agmarket

16 Chapter 3 The Agricultural Marketing System

platform and state initiatives, for example in Karnataka, data quality is often poor and theinformation does not reach the farmers that need it.

A shining example what can be achieved with a potent extension service is the e-Choupalmodel created and maintained by the Indian Tobacco Company (ITC) (Rao and Annamalai,2003). The company initiated the e-Choupal effort in 1999 by placing computers withInternet access in rural farming villages where the so-called “e-Choupals serve as both asocial gathering place for exchange of information (choupal means gathering place in Hindi)and an e-commerce hub”. What began as an effort to re-engineer the procurement processfor soy, tobacco, wheat, shrimp, and other cropping systems in rural India has also created ahighly profitable distribution and product design channel for the company—an e-commerceplatform that is also a low-cost fulfillment system focused on the needs of rural India. Inmid-2003, e-Choupal services reached more than 1 million farmers in nearly 11,000 villages,and is expanding to this date. ITC gains additional benefits from using this network as adistribution channel for its products (and those of its partners) and a source of innovationfor new products. This feat was achieved although transport, electric power, and informationinfrastructure were, and still are to a certain extent, inadequate in rural India.

With the mobile density in India growing on average towards 70% in 2010 (Mittal, 2012),a number of commercial services were called into existence, such as Reuters Market Light(2007), Warna Unwired (2007) and Nokia Life Tools (2009), to name just a few. ReutersMarket Light had 300’000 users at the end of 2010, but by far fails to achieve the marketimpact a concerted government effort could have.

3.4 Private Market Extension Services 17

4Government Reforms

„The season of failure is the best time for sowing theseeds of success.

— Paramahansa Yoganada

The previous chapter established that price information is hardly useful in the current, rigidand corrupt structure the Agricultural Marketing System of India displays. Policy reformsclearly need to adress the issue of competition among traders and the put an end to marketingcommittee nepotism. In this chapter we address government reforms meant for the StateAgricultural Marketing Acts and the organisation or defragmentation of producers.

After decades of inaction, the government of India realized the need for a liberalization ofIndia’s agricultural markets. The main aims were to increase integration and effectivenessand growing a domestic food processing industry. In 2000 the Ministry of Agricultureappointed an expert committee followed by an inter ministerial task force to review theagricultural marketing system. The reforms suggested by their respective reports in June2001 and May 2002 were discussed by a Standing Committee of Ministers at the NationalConference of State Ministers organized by the Ministry of Agriculture in New Delhi on the27th of September 2002. In these talks the need to promote development of competitivemarket infrastructure and an increase of professionalism in market yard management wereexpressed and the need to safeguard farmers from exploitation reemphasized. Thereafter,“the Department of Agriculture and Cooperation formulated a model law on agriculturalmarketing” to guide the implementation of reforms in the states. It was coined “StateAgricultural Produce Marketing Development & Regulation Act” and circulated among thestates in 2003 (Government of India, 2003).

4.1 The Agricultural Produce Marketing Development &Regulation (APMR) Act

The APMR Model Act redefines the responsibilities of the Agricultural Marketing Commit-tees. In this section we explicitly name the reforms made in this document. The scopeof this paper makes it impossible to treat the different levels of reform adoption in allstates, for an overview of reforms by state please consult the table under the reference(ReformsByState).

19

4.1.1 Transactions

Article 26 (Ministry of Agriculture, 2007) states that Market Committee is responsiblefor ensuring that the payment of transactions taking place in the market are made onthe same day to seller/farmer. Article 44 on the Registration of Functionaries clause6 states that commission agents are not allowed to represent agriculturists/producersnor are they permitted to deduct their commission from the transaction price payable tothe seller/farmer/agriculturist. The APMR Model Act of 2003 “stipulates prohibition ofcommission agents in any transaction of agricultural produce of the farmers” (Haveripeth,2013). The States of Madhya Pradesh, Chhattisgarh, Mizoram, Nagaland and Sikkim haveamended the Act accordingly.

4.1.2 Levy of Market Fees

As before the reform, it is layed down in article 42 that market fees levied by a marketingcommittee should not exceed a maximum of 2% of the price of the produce sold in themarket yard. An additional provision is made to ensure that the specified market fee isnot levied for a second time in any market area of the state if the market fee has provablyalready been paid in the concerned market or any other market. However, to date (2013)“only 13 states have provided provisions for single point levy of market fee” (Haveripeth,2013). In case the market fees are not paid it is to be recovered on five times the marketvalue of the produce that was traded.

4.1.3 Special Markets

To speed up privatization and agro-processing the APMR Model Act provides the possibilityof creating “special markets” for specific commodities, for instance onions, fruits, vegetables,flowers etc., operated alongside existing regulated markets in any area. Implementationof these guidelines would allow a domestic food processing industry far easier and pos-sibly cheaper bulk acquisition of the required quantities of produce. How relate this toinformation?.

4.1.4 Private Market Yards

The Ministry of Agriculture further aims to facilitate liberalization of the Agricultural Market-ing mechanisms through the establishment of private market yards & direct purchasing fromproducers. Producers are no longer under compulsion to sell in APMC administered markets,except if they want to be eligible for a committee position. According to the APMR ModelAct a “Private Market Yard means such place other than the market yard [..] in the marketarea where infrastructure has been developed and managed by a person for marketing ofnotified agricultural produce holding a licence for this purpose under this Act” (Ministry ofAgriculture, 2007). The respective state enactments generally specify a minimum investmentfor the creation of a private market yard. Some states have also defined minimum distancesfrom APMC-run markets.

20 Chapter 4 Government Reforms

4.1.5 Contract Farming

The chapter on “contract farming” in the APMR Model Act serves to regulate and promotecontract farming arrangements. Contract farming is defined as “farming by a person calledContract Farming Producer under a written agreement with another person called ContractFarming Sponsor to the effect that his farm produce shall be purchased as specified inthe agreement” (Ministry of Agriculture, 2007). The term “Contract Farming Producer”encompasses individual producer, associations of agriculturists, the so-called Farmer ProducerOrganisations (FPOs) we will describe later and village Gram Panchayats that have landownership in North Eastern States. The contract farming sponsor is to be exempted frompaying the market fee levied by the APMC in the area of procurement and the acquiredproduce further does not have to be routed through special markets. Article 38 of the modelact specifies that Contract Farming Sponsors are required to register themselves with theMarket Committee and that contract farming agreements have to be recorded by the APMC.In order to protect farmers from land grabbing farmers are provided with indemnity toany claims to their land title through contract farming agreements. In a press release theMinistry of Agriculture emphasizes that “Contract Farming has the potential of combiningsmall farmers’ efficiency with economies of scale, utilizing corporate management skills,providing assured markets and reducing transaction costs in the value chain by ensuringvertical integration”.

4.1.6 Public Private Partnerships (PPPs)

Market Committees are moreover encouraged to invest funds in improving market logisticsand infrastructure notably through public-private partnerships. Partnerships with the privatesector are seen as posing a solution for better management of markets.

4.1.7 Market Extension Services

The role of the State Agricultural Marketing Boards is redefined to setting up a separate bodyfor establishing agricultural marketing standards and to invest in market-led extension andtraining of farmers and market functionaries in marketing. The mandate of the AgriculturalProduce Marketing Standard Bureaus encompasses grading, standardization and qualitycertification of agricultural produce. The funds of the State Agricultural Marketing Boardare explicitly permitted to be invested in infrastructure, quality testing in logistics. Mostinterestingly regarding the theme of this paper, the board is made responsible for themanagement of market-led extension services and innovations in this field. The Ministryof Agriculture has recognized that farmers’ information needs are not being met and theaim is to empower them by increasing the efforts of marketing committees to reach out tofarmers.

Farmers need help with securing markets, being told how, when and at what price tosell designated food grains to procurement agencies, or enter into contract marketingarrangements with processors, wholesale traders and bulk buyers. Improving marketingpractices like standardization, grading, packaging, handling and storing shoud allow more

4.1 The Agricultural Produce Marketing Development & Regulation (APMR) Act 21

profitable marketing. The government further sees advice on product planning, especially forsmall holder farmers, as essential. Farmers need to be aided in careful selection of crops andvarieties to be grown with marketability in mind in order to make them more competitive.

Most interestingly, the APMR Model Act includes guidelines for the provision of marketinginformation to farmers. This information includes the current market price of crops, marketarrival information, forecasts of market trends, where markets are located, how they can bereached, its storage capacity, transaction system etc.

These guidelines are very relevant for the paper as it shows that the government recognizedthe importance of information in an era where mobile phones were not yet ubiquitous.Moreover, emphasis is laid upon the fact that the information should be specific: “areaspecific, crop specific buyer specific etc. there is a need that every agricultural market shouldhave an extension cell equipped with internet and other audio-video facilities necessary toeducate farmers in various aspects of marketing functions and services. The informationrequired by other market functionaries should also be collected and disseminated to its users”(Government of India, 2003).

The hope of the Ministry of Agriculture for the mentioned reforms was that it would“enable nationwide integration of agricultural markets, facilitate emergence of competitiveagricultural markets in private and cooperative sectors, create environment conducive tomassive investments in marketing related infrastructure and lead to modernization andstrengthening of existing markets.” We look into how this hard turned out a decade later aswell as looking at state organized market information services in our case study of Karnatakain the next chapter. Finally, to point out that the APM Acts are not entirely pervasive in India,the State of Bihar repealed its act with effect from September 2006.

4.2 Farmer Producer Organisations (FPOs)

With 92 million small holdings (21% of the world), India has to address the issue of howto integrate farmers, especially smallholder farmers, with the agricultural value chain sothat farmers may make profits (IARI, 1999). Just as the Prime Minister Narendra Modirecently and truthfully pointed out: “First, our farmers must be capable of providing food toour nation. Second, our agriculture should be able to fill the pockets of our farmers”. Themost common model to achieve this are producer cooperatives, however, they have beenassociated more with a focus on welfare than to do business on commercial lines in India sofar. Nevertheless, there seems to be consensus among scholars as to the steps that should betaken. According to (Shetty and Gowda, 2013), on p.82, “there should be strong efforts toorganise the small and marginal farmers together as small groups so that their bargainingpower [..] can be strengthened. In such group arrangements, if they buy fertilizers together,the supplier cannot dictate them the prices and if they sell their farm product together, thepurchaser cannot under-value their produce.” This is a call to the government to find asystem to organize smallholder farmers and thereby strengthen their bargaining positionconcerning inputs and outputs. The Indian government has ventured to do exactly that byissuing an amendment to the “Indian Companies Act” (2002) allowing for special statusfarmer collectives.

22 Chapter 4 Government Reforms

The “National Policy for the Promotion of Farmer Producer Organisations” (Ministry ofAgriculture, 2013) aims to achieve the collectivization of producers, especially small andmarginal farmers into these so-called Farmer Producer Organisations (FPOs). They are de-clared at par with cooperatives so far registered under state legislation. This approach is alsoseen by the government as one of the most effective ways to improve access to investments,technology, inputs and markets. As mentioned previously, one of the amendments to theAPMC Act is to allow the direct sale of farm produce by FPOs. FPOs are registered under thespecial provisions of the amended Companies Act 1956 with the suffix “Producer CompanyLimited”. They are member-owned bodies registered and administered by farmers who cannow access markets as bulk buyers and sellers. The key characteristics of these producercompanies are that the miminum number of producers is 10, liabilities are limited to thevalue of shared capital it has issued (minimum Rs. 5 lakh), that they can have professionalmanagement teams under the board of directors and that the members’ equity cannot betraded but transferred with the approval of Board of Directors. The preferred size of an FPOis 800-1000 farmers on 1000-15000 acres.

The process of FPO establishment is externally triggered by a promoting agency becauseoften poor people do not realize the benefits of being part of an organisation as a means tofight poverty. The Department of Agriculture and Cooperation (DAC), Ministry of Agriculture,Govt. of India acts as agency for development of FPOs. The Small Farmers’ AgribusinessConsortium (SFAC), society under the DAC, is the designated agency in support of FPOs withthe aim of creating sustainable linkages between FPOs and input suppliers, tech. suppliers,extension and research agencies and marketing and processing players.

In order to promote FPOs, the Department of Agriculture and Cooperation (DAC) of the Min-istry of Agriculture launched a pilot during 2011-12 (in partnership with state governments)implemented by the Small Farmers’ Agribusiness Consortium (SFAC). It mobilized 250’000farmers into around 250 FPOs with around 1000 members per FPO. Today, about 500’000farmers are organized in FPOs throughout the states of India. However, they are finding ithard to attract investment which is why the initiative has stalled. This is an occurrence of thesame problem as for government-regulated markets. The low cost of food makes investmentin modern (and expensive) infrastructure and logistics unattractive.

The SFAC, however, is very proactive and has further set up a management & extensionservice for FPOs called Krishidoot. Relying on a community of several hundred farmersto spread information coming in among themselves may be a viable model to address theinformation needs of farmers as already exemplified by the e-Choupal model. Recently,the first “Kisan Mandi”, where FPOs can directly bring samples of their produce to agreedeals, was opened in Delhi. A series of these markets is to follow in major trading centresthroughout the country.

The question remains open if agricultural cooperatives can internalize and galvanize excludedsmallholder and marginal farmers. In an effort to promote these structures by strengthenedorganisation at the local level, amendments 73 and 74 were made to the Constitution ofIndia to allow establishment of rural local bodies, Gram Panchayats, with direct elections atthe village, intermediate and district levels.

4.2 Farmer Producer Organisations (FPOs) 23

5The State of Karnataka: A CaseStudy

„Ignorance is always afraid of change.

— Jawaharlal Nehru

The previous chapter treated various government reforms including measures for increasedcompetition among traders, liberalization of the agricultural marketing system to introducemore traders, while cutting out middlemen, and attract investment and the collectivizationof producers. In this admittedly short case study we delve to find out how the governmentreform guidelines are implemented in a state, how they play out and what states can come upwith of their own accord. Since we started this paper with a focus on ICT-based approachesand price information, Karnataka, with an array of innovative initiatives, was the ideal pickamong the states.

The cropping pattern in the State of Karnataka is highly diversified ranging from highvalue export oriented spices to completely home market focused foodgrains (Shalendra,2013). Agricultural produce marketing happens through four marketing channels: directconsumer marketing, private wholesalers and retailers, public agencies and processors. Themarket share of the different channels varies from commodity to commodity and acrossstate regions. The regulated markets constitute an important link, moving a large shareespecially of foodgrains. The marketing of commodities is divided mainly between differentcommoditiy specific boards and market cooperatives, whereby the boards usually are incharge of marketing of plantation crops like coffee, tea and spices, cotton and tobacco.Since we are concerned with staple foods, fruits and vegetables we focused on the marketsunder the jurisdiction of the agricultural marketing committees. The “network of regulatedmarkets spread throughout the state. A total of 152 principle market yards with 352sub-yards were operational in the state during 2010-11. In addition, there are 730 ruralprimary markets to facilitate the movement of agricultural commodities from farm gateto the consumer.” The agricultural marketing in the state is practiced under the amendedKarnataka Agricultural Produce Marketing (Regulation and Development) (KAPMD) Act1966. The Act has was originally to provide a uniform law relating to the better regulation ofbuying and selling of Agricultural Produce and the establishment of Markets for AgriculturalProduce throughout the State. The Act, effective from 1st May 1968, repealed and replaceda series of act which were in force in different areas of the state. Agricultural marketingin Karnataka is administered both by the Department of Agricultural Marketing and theKarnataka State Agricultural Marketing Board (KSAMB). The Department of Agricultural ischarged with everything to do with establishment and administration of market yards. TheKSAM Board, established on 1st September 1972 as per section 100 of the KAPMD Act, actsas a link between the Market Committees and the Government of Karnataka for all round

25

Year Main Markets Sub Markets Total Markets

2000-01 141 343 4842001-02 141 342 4832002-03 144 343 4872003-04 145 350 4952004-05 145 347 4922005-06 145 350 4952006-07 146 352 4982007-08 146 352 4982009-10 146 355 5012010-11 152 352 504

Tab. 5.1: Note. Record of the number of regulated markets in Karnataka over the course ofthe last decade (Shalendra, 2013).

development of agricultural marketing in the State. The board is the policy and decisionmaking body. The executive head of the board is the Managing Director. There are fourdivisional offices at Bangalore, Mysore, Belgaum and Gulbarga.

5.1 Reform Adoption

Karnataka is one of the first states to realize the need for reforms in agricultural marketing.From 2003 the state ammended its APMR Act as suggested by the APMR Model Act circulatedby the government. In 2004 the state passed amendment 22 to the act introducing singlepoint levying of market fees to ensure that subsequent sales of the commodity in any othermarket area will be exempted from the market fee. Furthermore the phrasing of the amendedclause is supposed to encourage agricultural processing. Already in 1991 the market feeswere set to 80% of the original fee for cooperatives: “Provided that in the case of anyco-operative society doing business in agricultural produce within a market yard, market feeshall be levied and collected at the rate of eighty per cent of the market fee payable underthis Act.” (Act, Section 65 Levying of Market Fees). The provision for special commoditymarkets was already present under section 96 of the act before the reforms by the centralgovernment were initiated.

A further amendment bill passed on July 2007 allows the private sector to buy or sell notifiedagricultural commodities either directly or through agents, not only from APMCs, but alsofrom one or more private sector market yards or farmer-consumer market yards. The removalof restrictions on agricultural marketing outside of mandi yards had been held up due toopposition from wholesale dealers who controlled the 146 government market yards in thestate and corresponding associations. According to minister Basavaraj Horatti, the renewedefforts came from the motivation to give “farmers better market access” and competitivepricing benefits and that several other states had already implemented the recommendationsmade by the central government. The debate in Karnataka centered around three mainissues: allowing private wholesale markets, permitting contract farming and direct marketingof agricultural produce following government reform recommendations through the APMRModel Act in 2003. Fees for direct purchases and contract farming are to be imposed at 70%

26 Chapter 5 The State of Karnataka: A Case Study

of the normal market fee. The regulations for levied fees do not apply to produce importedinto the state and then used for anything other than domestic consumption.

The amendment of section 72 that defines the granting of licenses introduces provisions forlicensing for the establishment of private market yards and direct purchasing, establishmentof farmer-consumer markets for direct sale by producers, grant and renewal of licenses forthese cases as well as cancellation, suspension and appeal in subsections (72A-D). ContractFarming is introduced in subsection 131C in accordance with the provisions of the model act.Moreover, the penalties for non-payment and delayed payment of produce by commissionagents are increased. According to Section 78 2) c) commission agents are required to “paythe seller in cash the price of the goods as soon as such goods are sold.”. Otherwise, inaccordance with Section 118A 2), “If any person carrying on business in notified agriculturalproduce as a commission agent in the market yard or private market fails to comply theresponsibility of payment of price to the seller [..] without any reasonable cause shall onconviction be punished with imprisonment for a term which may extend to six months andwith fine which may extend to twice the value of the price and in the case of continuingcontravention with a further fine which may extend to rupees one thousand per day duringwhich the contravention is continued after the first conviction.]”. According to section 133co-operative Organisations (and from 2013 also specifically FPOs) may be exempted fromprovisions under the agricultural marketing act, stating they may sell their produce throughdifferent channels like the aforementioned Kisan Mandis located on the peripheries of bigcities.

In July 2013 the Karnataka Assembly approved further amendments to the APMC Act to takeeffect from the 15th of January 2014. “According to the amended Section 72 of the Act, thestate government allows companies to set up private market yards with an investment of Rs100 crore each”. Amendment 4 to section 72 4) of the principal act gives the APMC directorsthe power to grant to grant state-wide licenses to traders and further requires existinglicenses to be renewed within a period of six months the resulting Karnataka AgriculturalProdcue Marketing (Regulation and Development) (Second Amendment) Act, 2013. Fourcompanies, Metro Cash & Carry, Reliance Fresh, Nilgiris and Mangalore Chemicals andFertilisers, applied for licences to open market yards in the Tumkur, Kolar, Mysore andBelgaum districts, and will finally be able to effectively procure produce directly fromfarmers more than a decade after the circulation of the APMR Model Act.

In summary, Karnataka has introduced major agricultural marketing reforms so that tradersnow require just one license to operate in all of its about 500 (Table 5.1) regulated markets.With the provision for farmer/consumer markets farmers can now sell at any warehousenear their farm. Now, that companies can set up private market yards there will be morecompetition and more competition among traders is equivalent to better prices for farmers.An increase in market yards could also lessen the strain on the crowded regulated markets.

5.2 Innovative Approaches Using ICTs

Karnataka was chosen as the state for the case study of the agricultural marketing system onthe one side to exemplify the adoption of central government reforms. On the other side,

5.2 Innovative Approaches Using ICTs 27

Karnataka drew attention to itself for its use of ICTs in the agricultural marketing system. TheKAPMD Act contains a whole chapter (XIII-C) on electronic trading as an improvement on theconventional outcry auctions. Even before these reforms were envisioned the state createda market information system to record arrivals, stocks and prices and provide additionalinformation to farmers and traders which is discussed in the following section.

5.2.1 The Market Information System

The “Krishi Marata Vahini” (KMV) market information system http://krishimaratavahini.kar.nic.in was launched in 2001 in an effort to digitize and provide a wide of range ofinformation related to agriculture for the network of regulated markets in Karnataka. In aninterview conducted for this paper Sheshagiri Rao, Vice President of Agronomy at NaturalRemedies Pvt. Ltd in Bangalore, stated that this state government site provides a diverserange of information related to: production, storage, marketing, crops, trees, vegetables,dairy, poultry etc. It is operated by the Karnataka State Agricultural Marketing Board com-plementary to the newer e-tendering system. It provides reports on arrivals of various com-modities across mandis, historical rates of commodities (daily minimum/maximum/mode,latest MSP), information related to the KAPMD Act, tender notifications submitted by tradersto the e-tendering system including prevailing rates of commodities which are also displayedin the mandis. The market rates are publicized in newspapers and broadcast through radioand text messaging. Farmers can register their mobile phone numbers to the service via anonline form. The expectations of the government are that “the availability of timely andaccurate market information considerably improves the decision-making capability of thefarmers and strengthens the bargaining power”.

In an empirical study of the market information system, (Mahendrakumar and Mamatha,2013) carried out interviews with 315 paddy growers, maize growers and red millet growersat the market yard of Bandipalya, Mysore. The market is under the jurisdiction of the APMCMysore, a district that was established already in 1950. Information sources used by thefarmers that were surveyed included the KMV website, television, radio, newspapers, mobileSMS, magazines, neighbors and in the APMC itself the traders and commission agents and(electronic) notice boards. The study reveals that the majority of farmers in the market ofBandipalya get most of their information from APMC notice boards upon arriving at themarket as opposed to television or radio. Price information is most often collected throughneighbors before going to the market. A number of farmers depend on market functionariesfor market information, especially prevailing commodity prices. The dependence differsamong crops grown. For example the study found that maize growers were fully dependenton commission agents whereas for paddy and red millet the dependence was less or evenhalf. Most of the respondents 80% of 315 growers do not access the KMV website to learnabout current prices. Only 17.5% have registered mobile phone numbers to receive perquintal (100 kg) prices via text messaging. The above is pretty damning evidence that evenwhere there are market information and extension systems in place, they fail to cater to theneeds of farmers with regards to planning. Krishi Marata Vahini works in recording pastprices, but does not meet dissemination needs of farmers. There is also a need for predictingsupplies and providing market price forecasts to farmers. According to S. Rao market pricesare good as a database, but projection of future trends, even if available through other

28 Chapter 5 The State of Karnataka: A Case Study

services is still, poor. This is the information valued the most, however, the commoditymarket is not well developed. With proven reliability of forecasts farmers could decide whenit is best for them to sell if perishability of their produce permits it, allowing for higherincome. As (Mahendrakumar and Mamatha, 2013) puts it “the intelligence disseminatedthrough” an improved system “would be adequate to enable decision-making by farmersand policy makers and would lead to effective balancing of supply in the event of beingimplemented”. However, in conclusion, this study shows that the recorded prices are notaccesible to most farmers and useful forecasts do not exist. This is an exemplification of the“digital development” lagging behind in the agricultural sector.

5.2.2 The E-Tendering System

In Chapter XIII-C, the KAPMD Act contains clauses for the regulation of electronic trading.Karnataka is the State that pioneered the implementation of the electronic tendering (e-tendering) system for APMC markets. It is a unique and innovative project in the countryinvolving the adoption of ICT at the level of primary wholesale markets. It was firstintroduced as a pilot in 2006. After the success of the pilot project in Mysore, it was takenup in 18 APMCs in the first stage (2008-09) and 24 APMCs in the second stage (2009-10)for 11 commodities in total (Shalendra, 2013). The purpose of the e-tendering system is toensure fair, transparent and competitive price discovery through electronic/online biddingand speeding up the whole procedure by having a system that automatically handles thetender auction. The exchange for trading of notified agricultural produce through electronicmedia is called spot exchange.

Although the original vocal open auction and tender system was introduced as an efficientprice discovery mechanism, the system had limited success because the price formulationprocess could be easily manipulated by entering false prices in tender slips. The originalsystem was also ineffective, because during heavy arrival season farmers had to wait entiredays or stay at market overnight due to delays in transaction completion.

The e-tendering system comes at the cost of setting up computer networks and other formsof access to the internet in the mandis. Traders also have to install private access pointsif they want to be sure to be able to access the system at all times. However, at the sametime the system reduces marketing costs by speeding up auctions. Furthermore, the systemcan automatically generate market reports and allows for the dissemination of real-timemarket and price information since it is generated automatically. The project was origi-nally implemented with the Karnataka State Electronics Development Corporation Limited(KEONICS). Recently, the software developed by the National Commodity & DerivativesExchange Limited (NCDEX) has been introduced in some of the selected markets. NCDEXplanned to cover around 50 markets by the end of financial year 2012-13. The systemshave reportedly had a positive impact on arrivals and has helped in the scientific discoveryof prices. However, there are some prevailing problems with the system. Produce arrivalsat the market, gate entry (Figure 5.1, are still underreported, an issue which could bealleviated by electronic weighing. Market functionaries pocket market fees by not declaringproduce. Payments are still being delayed and traders have the possbility of cartelization inprice determination through communication during the process. Moreover, unauthorized

5.2 Innovative Approaches Using ICTs 29

Fig. 5.1: Note. Process of e-tendering at regulated markets (Chengappa et al., 2012). Uponarrival at the market, a gate entry pass is generated for the farmer saving detailsabout the farmer and the produce including its approximate weight. The produceis then assigned to a commission agent and transported to the functionary’s shopwhere it is physically examined by interested traders. Upon examination of theproduce the traders may choose to bid for possession of the produce through thee-tendering system within the limits of a designated time period. Everyone cansee the prices being offered. The system automatically selects the winner andcirculates the successful bids through the media outlets avaible in the market. Ingeneral, the concerned farmer receives a printout of the winning bid and can thendecid whether or not to take the offer. If he agrees to the sale, the precise weightof the produce will is entered into the system and the farmer’s payment is due.

deductions of commissions from farmer remunerations is still a problem. However, Anintroduction of automatic electronic payments after a successful bid, with bids being linkedto a bank account, could end the commission agents’ control over the cash flow.

To sum up this chapter “the regulated market model of agricultural produce marketing inIndia will continue to exist along with the emerging alternative formats such as allowingprivate markets, modern retailing, public-private partnerships, contract farming, commodityexchanges etc.” (Chengappa et al., 2012). To improve upon the benefits of the e-tenderingand market information system in terms of competition and transparency of information,linkages across different regulated markets should be further. Also efforts should be madeto small farmers with regulated markets to benefit from the e-tendering system since(Chengappa et al., 2012) shows that farmers frequenting the markets tend to be mediumfarmers. Much improvement is still needed in terms of market (information) extension andconcerning their execution of the law.

30 Chapter 5 The State of Karnataka: A Case Study

6Conclusion

„Loyal and efficient work in a great cause, even thoughit may not be immediately recognized, ultimatelybears fruit.

— Jawaharlal Nehru

The aim of this paper was to assess the value of price information in the context of theAgricultural Marketing System of India. In order to achieve this, we sought evidence for theimportance of the dissemination of appropriate price information in relation to the effect ofother more conventional policy measures.

We assess that price information can assist the agricultural producer in planning a sale.Given the reforms of the Indian government which may render the agriculture system morealike to other system around the world, the reviewed literature should be compared withsimilar literature about the benefits of price information dissemination on, but not limitedto, the African Continent.

Moreover, we have assessed that the use of price information is limited for two main reasons.First, the information is neither adequate, e.g. the lack of availability of price forecasts,nor sufficiently available. Second, even if the information is available, farmers massivelyoutnumber traders at the level of production sourcing, a circumstance that severely limitsthe farmers’ bargaining power. The government has passed reforms to address the issue ofcompetition and to modernize agricultural marketing. However, there are still complicationswith regards to the rigorous implementation of the laws made at state level, a major problemalso being that model legislation drafted by the central government is not of a bindingnature.

Nevertheless, progress is being made as exemplified by the innovations taking shape in thestate of Karnataka. The respective “State Department of Agriculture and Co-operation” hasshown that the electronic auctioning system built with the help of ICTs can achieve bettertransparency and effectiveness by automatic record-keeping and handling of transactions.Still, these systems and programmes require investment and dedication up to their fullcompletion that should include outreach to farmers to achieve their full potential.

To re-emphasize: a good policy framework, implemented rigorously, including penaltiesfor misconduct, is of paramount importance. Increasing competition among traders maygreatly improve the bargaining power of farmers if they have access to price information andeven price forecasts, seeing that they have more control over when to sell, if storage permitsit. However, the traders will always also have access to the information. It is therefore

31

impossible to give the farmer an advantage. The goal is instead to ultimately achieve paritybetween farmer and treader in terms of wealth of access to information.

The farmers bargaining power could also be helped through bulk selling and buying in FPOs.Ultimately, the best way to alleviate the downward pressure on prices from upstream thesupply chain, however, is through the eradication of middlemen. Among other previouslymentioned advantages large FPOs that ship their produce directly to major centers couldeventually allow this to happen. Yet, first the problem of insufficient investment capital hasto be addressed by the government.

So far Karnataka’s reforms, a key feature of which is the transparency introduced by thee-tendering system, end at its boundaries, although they may still have a spillover effect onits neighbouring states. Nevertheless, the Modi government has an ace up its sleeve withwhich it might extend the Karnataka reforms to the whole of India. Just as the EuropeanUnion created a single agricultural market with 29 countries, India has the possibility ofdoing the same with its 29 states and 7 union territories. This move could eventually alleviatethe problems of varying reform adoption by the states and the lack of inter-state integrationin one blow. To achieve this, the Modi government could revive the “Agricultural ProduceInter-State Trade and Commerce (Development and Regulation) Bill” drafted in 2012 on thebasis of a suggestion of state agricultural ministers. Enacting the bill would come in handwith the end of inter-state barriers and the forging of a single national market. It wouldremove the need for trader registration in multiple states and the payment of market feesfor goods imported from another state. If this were to be achieved and supply and demandwere left to adjust freely, a sophisticated commodity market could develop allowing reliablerecording and scientific analysis of the prices in the Indian food commodity market.

At the moment the sharing of price information may have isolated effects like in Jensen’sstudy of Kerala fishermen or positive effects not captured in studies, but not an effect of“provision” in general. The preconditions for an impact on improved market efficiency aresimply not given. In this regard, sound policies executed in incremental steps and theirrigorous implementation cannot be beaten, especially when one looks at the infrastructureissues (energy, cellular, internet) of rural India and the illiteracy of many of its inhabitants.The “Digital Provide” will only come true in symbiosis with suitable policies and education.

32 Chapter 6 Conclusion

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