The Placid Reform

Amidst the brouhaha over the upcoming GST reforms, and more recently around the demonetization move by the RBI and the Government, a prolific reform, brewing for over a decade lies ignored. The APMCs (Agricultural Produce Market Committee) as they function today will be replaced by a national e-market for agricultural produce. 

Why is this necessary?

In the 21st century, India has journeyed from a being a 476bn USD economy to a 2trn USD powerhouse (implying a CAGR of 9.3%). The largest sector (by employment) however missed out on this journey and have only registered a CAGR of 6.5% in the same time period. What is even more disheartening for over half of the nation's population employed in agriculture and allied services, is that the middlemen have eaten away from this sub-par growth leaving them declining real earnings at times over the last decade. The consumers on the other hand faced double (and at times triple) digit percentage point inflation in the prices of foodstuffs. This resulted in abnormal profits for the middlemen but excluded half of all Indian households from benefiting from the gains in pricing of their own product. 

59% of India's GDP relies on private consumption. For India to, therefore, become an economic growth engine participation of the masses is vital. Half of the households that are employed in farming and related activities can no longer be excluded from our growth story.

The Draconian Way

As the system stands today, the local APMC must be the first point of sale for the farmer. The limited number of licenses per APMC in such a system, gave a rise to a bandit of politically favored traders that colluded to lower the prices paid to the farmer while inflating the retail price by controlling the flow at times. 

To add to their horrors, each APMC had its own structure of levies and market fees that imposed on all participants. Additionally, they also had a menu card for any of the services that the farmers would have to avail from them. 

The Contemporary Way

Adopting the spirit of the Model APMC Act passed in 2002 and combining the same with the digital advancements the world has seen since, the Government of India will now replace this with a national e-market. 

The tenets of the Model APMC Act that this initiative will entail:

• Single license valid across the nation
• Uniform fee structure applicable for levy at a single point
• Consumers, Corporates and Contract farming sponsors to be able to purchase directly.

While this gives the farmers more autonomy over their produce, it is the tadka of the national e-market that really aids in redistribution of wealth and power from the middlemen to the producers. A preview of this move is on display in the state of Karnataka.

The e-market there enables the farmer to deposit their produce at any APMC in the state. The APMC then tests for quality and grades the produce and updates the detail of the same on a statewide online portal. Any registered bidder (trader, corporate, etc.) can place a bid for the produce and can up the bid at any point of time as well based on competitiveness of the bid. At the end of the day the farmer receives a SMS with the best bid and can accept or decline with a click of the button. If he/ she does accept the money gets transferred directly into their bank account. 

Why is this significant?

By March 2018, 585 of the 2000+ major Mandis in this country will be on the national e-portal. The software for the same will be provided by the Department of Agriculture and Cooperation in addition to an allowance of 30lakhs per Mandi to implement this platform. 

APMC is hardly an exciting topic that is absolutely incapable of inspiring an invigorating discussion but surely warrants one. It redistributes wealth and control by preventing its concentration in the hands of the traders/ middlemen. But more silently, a transparent nationwide price discovery mechanism enables an environment of structurally low inflation vs. the 100% rise in onion prices we see oh so frequently. In light of food and beverages constituting of 54% of India's CPI index, this move is monumental to say the least. 

Are they thinking again?

The recent launch of the NM App warrants the question, "Is the ruling party doubting their move?" or perhaps, "Are they now skeptical of their own estimation of the opposition's ability to turn this to their advantage post the by-poll results?"

The following graphic from Bloomberg Quint illustrates succinctly how the ruling party may have wrongly estimated people's willingness to "suffer" for the greater good.

In Lakhimpur, Assam, the BJP may have retained their vote share but demonetization has surely helped the INC to consolidate the opposing vote share and increase their share by eight percentage points! 

Political Maneuver? Think Again.

17th November 2016

Whether one hailed the Prime Minister's move to demonitise currency notes of Rs. 500 and Rs. 1000 or found themselves obloquious of the same, everyone seemed to agree that this move was timed well for UP and other upcoming local and state elections. We too gave into the notion and thought for a while that we were right; after all it did indeed claim a victim as well- AAP in BMC polls (or the timing of the same was fortuitous).

Alas, be it sheer altruism or mis-calculation of risk (in politics always believe the latter) it seems that this move could very well be BJP's undoing in the upcoming local and state elections. The evidence of this is seen in the front page ad of the newspapers today articulating and reiterating the difference between a bad loan write-off and waiver. The PSU banks are writing off 63,000 crores worth of bad loans as they are flushed with liquidity and have (finally!) the ability to provide for the same in their balance sheet. The sheer amount of financial jargon I have used in the previous sentence demonstrates the ease with which the opposition parties/ forces can convince people that a loan write-off constitutes as a waiver. The strain the farmers find themselves in today make them a vulnerable target for such disinformation; the strain for which the government cannot be blamed but can be held responsible for now, thanks to the multitude of its opposing forces.

District Co-op Banks are not allowed by the RBI to participate in the exchanging of demonitised currency notes. Customers are simply allowed to withdraw from these banks- the problem herein being, there are no new currency notes stocked with them. Time and again RBI studies have suggested money laundering activities being facilitated by such banks.  Reports of politicians using the technologically challenged co-op banks to issue back-dated FDs post the PMs announcement surfaced post which the RBI, in a statement dated 14th November 2016 excluded the banks from this process (opposition parties' officials at the helm of these banks could also be a motivator). The price of one another shall pay.

Of the 8 crore cultivator households in India, 7.5 crore take some form of loan for cultivation from a financial institution. 3 crore of these take it from these banks, though the share of these co-op banks in the credit flow is at a lower 29%. 66% of the loans made by such banks go to small and marginal farmers, a proportion higher than the 55% for commercial banks.These banks have an unsurpassed outreach at the grass root level and therefore crippling them, even for the right reasons, would agitate the farmers.

Loans against warehousing receipts by NABARD are not viable as well since the farmers are unable to move their produce. 50% of the country's truck drivers are currently idled- to an extent, possibly purposefully. The harvest is piled up at farms (a gross but not entirely incorrect generalization on our part) inhibiting income flow and co-op banks are disallowed from the currency exchange program hindering credit flow. We may face an issue of food price inflation before the promised wonder of structural disinflation kicks in.

In view of such a liquidity crunch faced by the farmers during the Rabi season preparation time, the local political forces  seem to be milking the situation to the greatest extent possible by claiming a PSU bank's write-off, to be a 63000 crore central government waiver to the industrialists.

Add to this potent mix, the local politicians giving away their accumulated unaccounted cash to farmers as a short term crop loan (interest- free!) and voila! not that smartly timed after all it seems. The government's intention were not in anyway misplaced, but they underestimated Indians' aptitude for engineering (financial included) and overestimated the nobility of their opposition/ peers (though when not in power they would have possibly done the same).