Reforming markets, lessons from Bihar

The Model APMC Act 2003 provided a road map for the states to amend their APMC Acts in order to provide choice of channels to farmer for sale of produce in the form of direct purchase and contract farming, besides private wholesale (non-APMC) markets.
Almost all states have by now amended their Acts and now it is possible to undertake contract farming or direct purchase by any buyer under the relevant state Act. There are many cases, in all major agricultural states, of contract farming as well as direct purchase by exporters, processors, food supermarkets and other traders of farm produce. In some states, buyers still need to pay the full market fee, in others at reduced rate and yet in others, none at all. What has not materialised so far on the ground officially and formally is the private wholesale markets.
It is interesting to note that Bihar was and still is the only state to have abolished the APMC Act in 2006, instead of amending it. A recent visit to the semi-urban and rural areas of Bihar revealed that private markets of a different kind have come up where there are no wholesale produce markets under the APMC Act anymore — APMC or non-APMC. There are new private wholesale markets in all major fruit and vegetable pockets of the state which function in the morning hours (from 7 to 10 am) from roadsides with no infrastructure in place. Participants include farmers from nearby villages, wholesale buyers and sellers, including local fruit and vegetable vendors who come on bicycles, rickshaws, auto-rickshaws, motor bikes, and pick-up trucks. These markets are set up by individuals who charge both farmers (2 per cent) and buyers (per lot size) a fee for transactions. There is hardly any facility for buyers or sellers other than the roadside space for the transaction of produce. The mandi operator monitors the functioning from a few make-shift sheds
Farmers can bring in any lot size and sell it directly to any buyer — wholesale or retail. A large number of vegetable growers could be seen selling their wares. In a mandi in Vaishali district,  enquiries revealed that farmers seem happy that the markets have come closer to their growing areas, and therefore, they can directly access these markets even for selling small lots on a daily basis, unlike earlier where every farmer could not afford to take his produce to faraway markets. These private, unregulated wholesale markets provide easy access to small farmers who want to sell directly. The farmers end up paying a market fee of 2 per cent, which was not paid in regulated APMC markets. There is no competitive price as there is no open auction of the produce in such private local mandis. If there is a malpractice, farmers or buyers cannot approach any agency, unlike earlier.  It is a free-for-all situation, with no major facilities or processes followed. Even wholesale produce was being weighed with handheld scales which can only take a few kilos at a time. Why could not such small market places be created closer to the farmers and their growing are as under the APMC system? This is the very purpose of the Act and the state agricultural marketing boards. Therefore, it is important to examine whether denotification of fruits and vegetables from the APMC Act is useful for farmers. If it is assumed that such markets will provide a fair and remunerative competitive price to farmers for their produce, then that is very unlikely. There is no open auction and no monitoring of market practices in these mandis by any agency. There is no assurance that these markets will continue to operate for a long time. Business interests of such informal players change and they move on, unlike the APMC markets which are part of a legal mandate.If the purpose of denotification is to make fruit and vegetable purchase and sale hassle-free, why could not it be done by providing for direct purchase from farmers or undertaking contract farming with them for the given crop under the APMC Act? To encourage new mechanisms, buyers could be exempted from market fee if they procured directly or undertook contract farming. Doing it without any logic defeats the very purpose of this step. Lower food inflation due to such a denotification is not likely as buyers still pay mandi fee to the private operator, then move the produce to urban areas at more cost. When fruits and vegetables are denotified from the APMC Act, what is the assurance that any buyer will involve the farmer in contract farming? They may simply buy from the wholesale market without bringing any change in the competitive scenario for farmers. Food supermarkets have been buying A grade produce at wholesale market (APMC)-based price from farmers in various vegetable pockets of the country which adds no value for the farmers as he still ends up selling his second and third-grade produce in APMC markets.
APMC markets are very important for marginal and small farmers in states like Bihar, where they account for more than 90 per cent of farmers. These markets need to be reformed and made to deliver by liberalising APMC licensing, opening more APMCs in local areas, enabling e-payment of market fee, giving representation to farmer producer companies, denotification of commission agents (arthiyas) like in Madhya Pradesh, and introducing quality and open auction-based price discovery.
These markets are important for small farmers and a benchmark for those seeking contract farming and direct purchase prices by farmers. There is no need to throw the baby with the bathwater in the rush to reform agricultural markets. It is easier to dismantle institutions than build them and the consequences could be very serious for the farm sector and the farming community.
The writer teaches at IIM, Ahmedabad