Will de-listing of Fruits & Vegetables from APMC Act affect price?

Recently, the Indian Central Government requested all State Governments to delist fruits and vegetables from the Agriculture Produce Market Committees Act (APMC Act). This was to address rising price in fruits and vegetables. I was trying to understand how this would affect things going forward. A basic analysis of what I think is going to happen is given below.

Currently, the APMC Act makes it mandatory for farmers to sell their produce only to licensed merchants at mandis set up by state agriculture marketing boards. So, it is being said that delisting will eliminate these licensed merchants or middlemen who set up a cartel and raise the prices for super normal profits. So, farmers will now be able to sell directly to retailers or food processors and hence the buyers will get fruits and vegetables at a lower price.

In addition, commissions earned by the agents, mandi tax, octroi, VAT or sales tax and inter-state movement charges add to the price of fruits and vegetables. Delisting from APMC Act would enable sale of fruits and vegetables to happen without payment of commissions, mandi tax/cess. This means that delisting would certainly wipe out state revenues from mandi tax/cess and potentially reduce price but will it enable farmers to sell directly to consumers/buyers and avoid traders/commission agents?

Does the farmer sell at the APMC market even today? The Planning Commission says that 75% of farmers sell their produce at the farmgate to traders, aggregators and sometimes contract buyers. In earlier initiatives taken in Bihar or even Andhra Pradesh and a few other states, doing away with APMC Act restrictions or setting up of Farmer Markets have not been able to eliminate middle men completely and that is due to practical issues. It is mostly the aggregators or agents who take farmer certificate and sell under their name in the farmer market. For the sake of convenience, a group of farmers generally find somebody from the village and sell their produce to him and he gets a license to operate in this market as a “farmer”. This is to arrive at a commercially viable and practical aggregation volume for transportation and time saving.

This means that under current situation, farmers are not reaching the APMC mandi anyways because of practical difficulties. How will they reach the consumer directly now when the fruits and vegetables have been delisted?They will need intermediaries or they will need consumers to reach out to them directly. Consumers will not be able to reach farmers directly. Fact is, they will need intermediaries, be it the local aggregators or the corporate retailers/buyers.

Question is, how do you ensure that the intermediaries do not form a cartel that jacks up prices for buyers once again? Will this deregulation reduce strength of cartels or lead to an increase in their power? In the past, states have delisted fruits and vegetables but haven’t succeeded in breaking cartels. So it is unlikely that cartels will get demolished just by delisting. The cartel will weaken only when alternate channels are built to enable competition. Delisting enables corporate buyers to buy directly without having to depend upon intermediaries or having to enroll at the mandi and having to pay mandi cess. So, this will increase competition (at the cost of state revenues) but how will they reach farmers immediately? It is obvious that It is not going to immediately cool off the prices and it needs long term efforts in addition to just delisting. Unless multiple mutually independent market players enter the market, the pains of having to deal with high price will continue.

Another key component of the high price is spoilage that happens due to lack of appropriate cold chain facilities and change of multiple hands. So, it is important that this delisting initiative is followed by building physical infrastructure and competitive markets.

Such infrastructure has to be built by both private and public resources. Through policy stability and direction, large corporate buyers will now be encouraged to set up procurement networks deep into producing locations. It is also important that the state continues to provides alternate channels to farmers by building cold chain and storage facilities and supporting development of multiple options of storage and sale. Unless this is done, the corporate buyer may form one more cartel.

Let’s face it. Farmers will not reach retailers or consumers directly. We will need intermediaries, be it local aggregators or corporate buyers. We have to take steps to improve efficiency in movement of fruits and vegetables through these intermediary channels to ensure quality at the right price.

It is easier said than done. Delisting of fruits and vegetables is the first, easy to implement step (though politically difficult). It must be followed by a series of difficult to implement steps that promote appropriate infrastructure to improve efficiency and ensure availability of fruits and vegetables at the right price. Hopefully, after paying the appropriate mandi taxes. 

What do you think?

Payments in remote locations

Payments to dairy farmers in residing in rural remote locations is made primarily in cash across India. Every week/fortnight, the milk collection van brings in a cash box and pays the farmers the price of milk bought since the last payday. In some cases, the payment is daily.

Experience revealed that in making payments to farmers through this route, the cashier handing over the cash often held back some amount of money as a “commission” or out of plain rowdyism. The cashier/ accountant would in a lot of cases be the favourite man of the secretary of the collection centre (society) or the secretary himself. The helpless farmer would then have to part with a fraction of the money due to him to make sure s/he doesn’t rub the powerful cashier the wrong way.

Some milk buying companies thought of a novel way of eliminating this problem. They started paying the money directly to the bank account of the farmer. The bank account was especially opened for this purpose. So, the cashier is no longer able to play foul. But, on every payday, the farmer has to abandon work (which means loss of a day’s wage or agriculture) and go to the bank branch which would be in a “nearby” town, some 15-20 kms away. He incurs travel expenses as well. The money has to be drawn out immediately because the farmer needs the cash to buy daily items like groceries, medicines, etc. There is no other source of cash income that is as regular/frequent as dairy. Moreover, much to the disgust of the bank manager in the town, there would be a long queue of dairy farmers waiting to draw their money on every payday leading to a tremendous rush in an otherwise quiet (and understaffed) bank branch.

The innovative milk buying companies understood this problem as well and figured out a solution. They handed over bio-metric cards to the dairy farmers for each bank account and got an “agent” tied to a third-party payments company to hand deliver the cash at the doorstep of the farmer. The agent carried bags of cash to the village and after bio-metric authentication hands the cash over to the farmer at the doorstep. But then, after a few months the agent starts charging commission, lesser than the cashier/secretary in the first situation but charges some amount. The bio-metric account reads that the farmer has drawn the entire amount of money. Though this agent works with a “private” company with greater accountability, the farmer agrees to let go of the amount because otherwise he will have to travel all the way to the bank.

We are back to square one and possibly in an even worse situation. In the earlier case, the cash was sent to the remote village in a milk truck with at least two persons on board. Not an ideal situation but it was better than what we see in this system. In this system, the “agent” typically hops on to a motorcycle with the bag of cash picked from a local bank branch and rides all the way to the villages. A few agents get robbed on the way. In fact carrying a few lakhs of cash does not turn out to be a safe thing to do. But there is no other way. Cash in transit insurance saves the day for some milk buying companies but some agents get killed.

Where does this end? “Mobile money” some people say. However, till the time the local grocery shops start accepting payments through mobile phones, how will mobile money transfer be of any use?

How have these risks been handled in India and outside? What are the examples of payments in remote locations seen in other parts of the world? What kind of supporting infrastructure is required to enable a safer payments situation?

(Also published on LinkedIn.)

Elevators

Elevators permitted increases in height of buildings. In other words, density of people living per square km could go up because elevator permitted multiple floors and hence more people.

More people per square km means that a much larger number of people are using the same available space of roads to move around. Congestion.

What do you do?

a.) Wish that elevators were not invented and instead of vertical growth, the cities would grow horizontally and that instead of pockets of highly developed cities you had continuous stretches of several small cities with mid sized buildings and less congestion on the road due to lower population density.

b.) Wish that somebody invents private-individual flying cars quickly and the somebody also builds lanes of air traffic with different lanes for different levels (heights) paying different charges.

Next…what?

 

Renewable Energy.

Water.

Medical Technologies. (Detection and treatment)

Agriculture.- Food production & Food preservation.

That is where breakthrough innovation is required. We will possibly see breakthrough innovations in these areas (in that order) in future. Something similar to what we have seen in case of communication technologies over the past decade.

While Renewable Energy and Medical Technologies have received venture investments, Agri-Tech and Water are still to see mainstream venture capital investments.

Reading List – 2nd Ferbruary, 2014

1.) Framework for non-profits to have clear fundraising conversations.

Article: 10 Non-profit Funding Models

2.) Interesting article on how Amazon.com manages to be a favourite in spite of not churning profits!

Article: Amazon & nil profits

3.)Why Nokia is one of the greatest companies of the world.

Article: Nokia Bridge Programme

Reading List 21st Nov, 2013

(Was out on a vacation and hence no edition of reading list came out during the last couple of weeks.)

1.) Why drinking hits women harder and why older you get alcohol hits you harder?

Some interesting facts:

  • Body composition starts to change as early as the 30s. As people age, they tend to lose muscle mass, while fat content increases. Alcohol isn’t distributed in fat. People also have less total body water as they get older. So if several people have the same amount to drink, those with more fat and less muscle and body water will have more alcohol circulating in their bloodstream.
  • The liver gets bigger as people get older, but the organ becomes less efficient.
  • Enzyme alcohol dehydrogenase breaks down alcohol. Women of all ages tend to have lower levels of this enzyme in the stomach.
  • Moderate/safe amount of drinking is defined as up to two drinks per day for men and up to one drink per day for women, according to the latest federal Dietary Guidelines for Americans. (A standard drink is about 12 ounces of beer, 5 ounces of wine or 1.5 ounces of liquor, according to the CDC.)

Article: Alcohol

(All said and done, alcohol is best avoided.)

2.) Naps clear our “Cache’” and so sleep helps us remember more!

Article: Sleep

3.) Why do we value gold?

What is the reason behind gold being accepted as currency and other details on gold.

Article: Gold 

4.) Money transfer systems: simple explanation of the story behind the curtains on how money is transferred.

Article: Money Transfer