1. Prologue
2. Indian Agriculture: Strength/potential
3. Why focus on Agriculture
4. R1: APMC Act
5. Why do we need a National Market for Agriculture?
   1. How to setup national market for Agriculture?
   2. Budget 2014 announcement
6. R2: Commodity market
   1. What is NSEL crisis?
   2. Who is Jignesh Shah?
   3. Steps taken to fix NSEL crisis
   4. Why do we need Commodity markets?
   5. Commodity trading Policy uncertainty
   6. WDRA
7. R3: Productive vs Production
8. R5: small-marginal farmers= less productive?
9. R6: Farm Mechanization = why necessary in India?
10. Overall Reforms required

Prologue

Economic Survey 2013: Chapter 8 on Agriculture. 4 subparts.

1. Schemes and budget 2014 announcements
2. Food Subsidies: MSP, Nutrient based subsidy, FCI, Bali problem.
3. Overall reforms- APMC, National market, Commodity market etc. (Mostly, mains fodder but not much for prelims, so you may skip this one for now.)
4. El-Nino, its impact on Indian agriculture. (Old article but updated with points from Economic Survey).

Indian Agriculture: Strength/potential

1. Share in GDP: 14% (Service > Industries > Agriculture)
2. Share in employment: ~49% (Agri > Services > Industries)
3. 1st rank in Milk (17% of world production)
4. 1st rank in Mango, banana, coconut, cashew, papaya, peas, cassava and pomegranate
5. Largest producer and exporter of spices
6. Overall, second largest producer of vegetable, fruits and fishes
7. Weather permits multiple crops throughout year.

Why focus on Agriculture

• BRICS study: 1% Growth in Agro=2-3 times more effective in poverty removal (than equivalent growth in industries or service sector).
• Canada, US: mechanized agriculture, large track of land = they lead in wheat and corn production.
• India has large population = can focus on labour intensive high value agriculture example saffron, fruits and vegetables.
• India can be a producer and exporter in all these areas = high income for everyone=a livelihood in agriculture does not have to be a promise of poverty.
• Aids in women empowerment.  HOW?
  • ~10% of total rural households headed by a woman.
  • Women play productive roles in all facets of the agriculture, dairy and sericulture.
  • Therefore agri reforms => income rise => women empowerment.

R1: APMC Act

What is APMC act, how does it lead to harassment of farmers, what is Model APMC act….all topics covered in detail under [Food processing] series, click me.

Why do we need a National Market for Agriculture?

• After LPG reforms in 1991, Industrial sector allowed to buy from, and sell to, anyone in the world
• But Under State APMC Acts, the Indian farmers are still required to buy and sell only in the government-designated “Mandis” known as Agricultural Produce and Marketing Committees (APMC).
• Farmers are not allowed to sell their produce directly to the consumers.
• The monopoly of government-regulated mandis has prevented development of a competitive agriculture marketing system in the country.
• These Mandis don’t even have proper physical infrastructure = fruits/veggies damaged + nuisance of middlemen = they charge commission and involve in hoarding of onions and potatoes.
• Ultimate result: food inflation.
• To solve this issue- union Government circulated the model APMC Act 2003 to states. Some states adopted it, but overall, even the “reformed” APMC act has not solved the problem.
• Therefore, Survey recommends a national market for food / agriculture
• Jaitley budget promises to do the same.
• Challenge: To create a national market the central government needs to use powers under the Union List and the Concurrent List of the Seventh Schedule of the Constitution to end the APMC.

How to setup national market for Agriculture?

Survey recommends following steps:

1. Parliament should pass a new law, to setup a national market for agriculture.
2. Parliament should also create a statutory Commission to monitor this national market, to prevent any cartels and anti-competitive practices.
3. It’ll override statewise APMC laws.
4. Farmers and traders will be free to buy/sell across state borders.
5. APMC mandis can continue functioning but farmers will have no legal obligation to sell produce in them.
6. Also, Permit sale and purchase of all perishable commodities such as fruits and vegetables, milk and fish in any market, and exempt market fees on them.
7. Reduce commission charges on agricultural/ horticultural produce.
8. Encourage self-help groups (SHGs) to organize farmers markets near urban centres, malls, etc. that have large open spaces.  – At least one agriculture market within 5 km radius.

Existing direct marketing initiatives

Apni Mandi	Punjab
Uzhavar Sandhai	Tamil Nadu
Shetkari Bazaar	Maharashtra
Hadaspur Vegetable Market	Pune
Rythu Bazar	Andhra Pradesh
Krushak Bazaar	Odisha
Kisan Mandi	Rajasthan

• If company helps setting such ‘direct agriculture markets’, count it under corporate social responsibility (CSR) activities under Companies Act 2013. (so company can fillup their mandatory 2% CSR quota).
• Setup supply chain infrastructure- similar to the e-Choupal initiative of ITC Ltd.
• Tie-up with commodity exchanges’ to help farmers know spot and futures prices of agricultural commodities. So, they can decide next crop accordingly.

Budget 2014 announcement

• We will work closely with the State Governments to re-orient their respective APMC Acts.
• This will help setting up private market yards/ private markets.
• We’ll encourage state governments to develop Farmers’ Markets in town areas to enable the farmers to sell their produce directly.

R2: Commodity market

• Farmer deposits his wheat in a warehouse.
• He gets a warehouse receipt.
  • He can “mortgage” this warehouse receipt to a banker to get loans. OR
  • He can trade this WR @Commodity exchange.

In commodity exchange there are variety of trade agreement

Type	wheat price	interpretation
T+2	Rs.1400	I’ve to pay within 2 days to farmer, and he gives me the WR.
T+20	Rs.1800	I’ve to pay within 20 days, this much money and farmer must be give WR.

• Usually, longer duration contract has higher price.
• But Farmers usually sell on shorter duration because they need quick money for next crop. So if I bought a WR in T+2 and sold to another guy @T+20, I would make profit. Well and good.

What is NSEL crisis?

• NSEL is a commodity exchange platform. In BSE, shares are bought and sold. Similarly @NSEL, the warehouse receipts are bought and sold.
• NSEL launched an “E-series” platform to do online trading of commodities.

Problem comes with entry of “middlemen”- they asked investors to give money, with following promise

1. We use your money to buy WR (from farmers @cheap cost).
2. We sell those WR to other parties (when prices are favorable), and make big profits for you. (This is one way how “hoarding” happens, because someone has stock in warehouse, but not selling it in hope of higher prices in future).

Who is Jignesh Shah?

• NSEL => parent company FTIL => its boss Jignesh Shah.
• Jignesh Shah and the middlemen connived and began make contracts using fake warehouse receipts e.g. T+20, T+30…. etc.
• Their gameplan was to arrange “genuine” receipts within those 20-30 days (using investors’ money).
• This scam ran for long. Something like this- you go to a bookstore, owner lies to you “I’ve book in godown, just wait for 20 minutes”….and in the meantime, his assistant arranges book from another store.
• NSEL CEO Anjani Sinha & other executives turned blind eye, because NSEL would earn ~2% commission on every contract. (And Jignesh was boss of their parent company.)

How did the scam collapse?

• July, 2013: FMC sensed some wrongdoing ,and felt long duration contracts to be culprit behind food-inflation.
• FMC banned such 20-30 days-walla contracts. Ordered the traders to settle within 10 days i.e. T+10 system.
• Obviously Jignesh gang couldn’t arrange genuine receipt within short time, thus the game collapsed.

Size of the NSEL crisis

• Brokers such as Motilal Oswal, Indiainfoline have made contracts worth Rs.700
• Total contracts worth 5500+ crore
• Total investors more than 15000.

Steps taken to fix NSEL crisis

1. NSEL began auctioning commodities from its warehouses. But it’s not generating sufficient money to settle the claims of investors.
2. Government banned E-series system of NSEL and formed panel under Arvind Mayaram.
3. Forward market commission started investigation against NSEL. Gave directives to all commodities exchanges regarding board of directors’ appointments and investment limits.
4. Chindu transferred the control of FMC from consumer affairs ministry to finance ministry.
5. Income tax department began investigation against NSEL board members, and their allied companies.
6. NSEL CEO, Anjani Sinha arrested and chargesheeted.
7. May 2014: Jignesh Shah arrested.

Anyways, back to the topic. so far we learned that commodity market leads to speculative hoarding and scam. So, should be ban commodity market system altogether? Answer is no.

Why do we need Commodity markets?

• Gives bargaining power to farmer.
• Commodity market, acts a messenger of future price trends.
• The contracts for successive months- they signal future price trends. Government can take pre-emptive action, whenever required
• BUT Information asymmetry is a major market barrier. Big traders know world agro-price movement, farmers don’t. Thereby traders buy cheap and sell high.
• If we want the farmers to take informed decisions about cropping pattern, marketing strategies, price bargaining….then they MUST know the price movements in commodity market.
• Therefore, the FMC is implementing the Price Dissemination Scheme via AGMARKNET system.
• It provides real-time prices on 1700 Mandis, Kisan Vikas Kendra and other places where farmers make frequent visits.

Commodity trading Policy uncertainty

• In recent years, Government suddenly puts ban and lift bans on future trading of onion, potato, sugar etc.
• This has hampered the development of commodity market as a platform for price discovery. Consequently,
  • Farmers cannot make rational decision on cropping pattern and investment intensity of cultivation or price bargaining.
  • And food processing companies cannot get necessary supply of raw material.
• Thus, despite being a leading producer major agricultural commodities, India has not taken on the role of a global price setter.
• Economic survey recommends Government to have a stable policy on commodity trading and export.

WDRA

• Warehousing Development and Regulator Authority (WDRA)
• Statutory body to regulate warehouses and their Negotiable warehousing receipts for 40 agricultural commodities including cereals, pulses, oilseeds, and spices.
• FMC directed all commodity exchanges to register with the WDRA. (Because NSEL crisis = traders used fake warehouse receipts to make future contract.)
• Warehouse Development and Regulatory Authority (WDRA) has begun setting a public information setup. So all farmers, traders, public can get information about performance of warehouses across the country.

R3: Productive vs Production

• Our agriculture productivity are far below global standards
• Rice-wheat has hardly increased after green revolution.
• YET, rice-wheat production has increased. How? because more area under cultivation because of higher MSP + cheaper Urea.

So, is it good or is it bad?

Area	More Area under rice-wheat = less cultivation of oilseeds and vegetable = food inflation comes, anyways. More area under cultivation = reduced forest cover, water table. +mindless use of fertilizers = soil fertility declined in Punjab, Haryana. Therefore, we must focus on R&D to increase agro. Productivity RATHER than bringing more area under cultivation.
MSP	Wheat + rice production increased because government raised MSP. But this also increased the amount of rotten grains, due to inefficiency in FCI and PDS. Therefore, DESPITE bumper production of foodgrains, 25% of all undernourished people in the world are living in India.

• Besides, Government only focuses on giving rice-wheat to poor. But to combat malnutrition, you’ve to increase consumption of milk, fruits and vegetables as well.
• THEREFORE, Survey recommends giving DBT / Food stamps to poors, to let them decide what to eat.

Focus on Agro research to raise productivity

• >85% agriculture investment comes from private sector. But within that, Private sector doesn’t contribute much to investment in Agri.research.
• Therefore Government needs to allot more money here and Empower Indian universities to produce world class research.

R5: small-marginal farmers= less productive?

• Empirical studies indicate that small land holdings are not a deterrent to increasing productivity.
• Because productivity depends on modern inputs, appropriate technology, and innovative supply chain….rather than on farm size.
• Therefore, Government should organize the small and marginal farmers through farmer producer organizations (FPOs) and provide market linkages to them.

R6: Farm Mechanization = why necessary in India?

• Although India is one of the top countries in agricultural production, farm mechanization ~25%, against >90% mechanization in first world.
• Farm mechanization can raise productivity by ~80,000 crore rupees per year. (ICAR report).
• Farm mechanization can generate employment for rural youth and artisans for the production, operation, service and maintenance of farm machines.
• Farm labour wages have increased (due to MNREGA created labour shortage). Therefore, higher levels of farm mechanization are necessary for sustaining productivity and profitability.
• although easier said than done because
  • Different soil and climatic zones,
  • Small land holdings with limited resources.

Overall Reforms required

1. a National Common Market for agricultural commodities with uniform taxes in the domestic market
2. Stable policy for agricultural export and commodity trading.
3. Focus on the rural non-farm sector, manufacturing sector, and labor-intensive segments of services. This will reduce no. of farmers => land consolidation =>Mechanization.
4. Crop protection and insurance schemes need to be revamped.
5. Fresh look at policies towards FCI procurement, marketing, transport, storage, and processing.
6. To farmers: give subsidy via Direct Benefit Transfer (DBT). Bring Urea under Nutrient Based subsidy regime.
7. To poors: food stamps / DBT, instead of giving rice+wheat.

If above steps taken then possible to sustain the 4% growth rate in agriculture.