Articles : April 2008

The Indian farmer is trapped in poverty for various reasons, and an important one is that he gets only a fraction of what the consumer spends on the farm product as he is not linked to the consumer directly.

Perpetuation of poverty

Given the large number of farmers and the even larger number of final consumers, there is no dearth of competition among sellers at the farm gate and buyers at the retail outlets. Alas, between the farm gate and the final buyer there are intermediaries at different stages.

By virtue of their monopsonistic/monopolistic position in the intermediary chain, they are able to earn more than what they would in a competitive market. Retail prices are often significantly higher than the farm gate prices. Thus, the farmers earn low incomes and, therefore, have insufficient resources for investment. This leads to perpetuation of poverty.

Mechanics of exploitation

Why is there a lack of competition at the farm gate and at the other intermediary stages before the purchase by the final consumer?

The large size of the market and poor transport, infrastructural and marketing facilities ensure that many isolated regional markets exist for farm produce. The wholesalers and processors in these markets enjoy significant clout and are therefore able to buy farm produce at a low price.

Such wholesalers/processors then converge on to the next level where the markets are again isolated because of poor infrastructure and are characterised by fewer sellers relative to buyers. This enables the intermediary at each stage to earn a sizeable margin over his buying price.

Effect of globalisation

With globalisation the problem of lower earnings over subsistence might worsen if the current situation of a long chain of intermediaries characterised by absence of competition persists.

This is not a drawback of globalisation per se. In fact, when import tariffs for products are reduced, prices in the domestic wholesale markets become closely tied to the corresponding global prices which are lower than the domestic prices under autarky (closed economy case).

As prices dip in the domestic consumer markets there will also be a downward impact on the prices that farmers obtain. This is precisely the case of cotton in the country.

Preventing the slump

How do we prevent the downward slump in the revenues of certain farmers following globalisation? Globalisation will have some beneficial effects as the lower prices will benefit consumers, including large segments of the farmer population who are net buyers of farm produce.

However, farmers who are net sellers might see their incomes shrink in certain cases. This would imply lower surpluses, lesser reinvestment and stagnation in yields. As other countries improve their yields, global prices (in constant rupees) might fall further and lead to a tightening of the noose around the Indian farmer’s neck.

This can be prevented by diluting the market power of buyers at the farm gate and by introducing competition. This would imply that a large portion of the current mark-up of the retail price over the wholesale price could be recovered by farmers. Thus, even during falling global prices, generation of competitive forces in domestic markets for farm produce can bring about an increase in the income that farmers receive. Thus, it might be possible for both consumers and producers to benefit.

The intermediary chain

One way of reducing the length of intermediary chain and generating competition among intermediaries is through better physical connectivity (roads, railway connections, lorry facilities, etc), which removes geographical isolation of markets and brings the farmer closer to the consumer, and infrastructure for storage (warehouses, cold storages, etc). Second, easy and swift credit (microfinance facilities, traditional banking, etc) will help improve the bargaining power of the farmer and invite competition for his produce.

In the Indian context, this is largely the responsibility of the Government. However, there are other measures too.

Currently, three measures are being undertaken, though not on a very large scale, to shorten the intermediary chain and promote competition:

E-commerce initiatives that ease the information constraint of the farmers relating to prevailing prices and other variables;

Contract farming which entitles the farmer to sell a fixed quantity of a product at a stipulated time and price to a buyer; and Direct farming or the direct interaction between farmers and final buyers at the retail or wholesale level.

The first method enables the farmer to have information about several markets, thus giving him the freedom to make a choice from various sales alternatives.

The second method not only alleviates price risk for the farmer but also brings the urban wholesaler or large retail chain into direct contact with the farmer, thereby removing a large section of the traditional chain of intermediaries.

If there is more than one contract buyer vying for the farmer’s produce then contract farming can be a means of enhancement of competition in agricultural markets.

Direct farming by definition involves the almost complete elimination of intermediary chains. When direct farming is undertaken on the basis of choice facilitated by the provision of information to the farmer on prices in different markets, then it also results in a greater competition for the farmer’s produce.

Regulated markets

The Agricultural Produce Market Regulation Act (APMRA) has introduced regulated agricultural markets in the country so that producers get higher prices for their product.

But due to inadequate infrastructure such markets have not been successful in ensuring effective competition and guarding the producer’s interest. These markets succeeded partially in regulating the conduct of intermediaries but have not paid any attention to breaking the long chain of intermediaries stretching from the farmer to the consumer at the retail level.

The farmer still cannot reach out to large wholesalers from urban areas directly. By introducing requirements of licensing for traders, regulated markets restrict the entry for many traders. Such entry restrictions could have increased competition for farm produce and resulted in farmers getting a better price.

(Mr Mehta is Secretary General, CUTS International, and Mr Singh is Fellow, CUTS Centre for Competition, Investment and Economic Regulation)
 

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