Reform markets to energise agriculture

Paul Singh Sidhu

GLOBAL experience suggests that initial six months are crucial for democratically elected governments to implement critical reforms. Early indications point to an encouraging start by the Amarinder Singh government to address the problems of the agriculture sector. Revival of agriculture in Punjab should be market-driven. A key area that requires structural reforms is agricultural marketing. 

The success of agriculture in Punjab was underpinned by domestic demand for food grains. While mitigating food scarcity, the farmers reaped the benefits of producing rice and wheat. With production increasing in deficit states and per capita cereal consumption declining across all segments of the population (including poor households), India does not need Punjab's surplus rice and wheat. As inflation targeting is a stated monetary policy goal, substantial increase in the minimum support priceof paddy and wheat  in the future is unlikely. The Swaminathan Committee recommendations are unlikely to be implemented, poll promises notwithstanding. 

These realities and the fact that Punjab is becoming an ecological hot spot due to the paddy-wheat cycle necessitate a shift from from rice and wheat.  However, this shift is not possible without a surgery of the marketing system developed primarily for procurement of food grains for the central pool.

The growth rate of the national economy and rising disposable incomes have led to three strategic shifts in agriculture: (i) from food grains towards diversification to fruits, vegetables and livestock products; (ii) from yield maximisation towards quality of produce; and (iii) from production towards value-addition in post-harvest segments of agriculture value chains. The farmer is unable to benefit from these shifts because, except for paddy and wheat, he does not get a remunerative price in the marketplace even though he is competitive at the farm gate. While the medium and long-term goal should be diversification to high-value crops and livestock production, the immediate task for the new government is smooth procurement of wheat. 

Payments to farmers were inordinately delayed in the last two procurement seasons due to the inability of the state government to get timely cash credit limit (CCL) sanctioned from the Government of India (GoI)/Reserve Bank of India (RBI). Funded by a consortium of 67 banks, CCL is for meeting food grain procurement expenditure and related charges. Appalled by a gap of Rs 20,000 crore between outstanding CCL and value of physical stocks with procurement agencies (which should always match), in April 2016, RBI directed the banks to classify Rs 12,000 of the outstanding food loan as non-performing asset. The gap has now ballooned to Rs 31,000 crore due to sloppy account keeping, diversion of CCL by the cash-starved state government to bridge day-to-day ways-and-means gap, missing stocks, and exorbitant payments to transport and labour cartels. Transport and labour costs paid are, respectively, three and two times the norms of Food Corporation of India.  

Instead of plugging loopholes, the Badal government in 2016 provided Rs 1,100 crore to meet additional labour and transport costs, and paid Rs 926 crore interest due to delays in settling CCL account for food grains procured in 2015. Why should the fiscally constrained state government fund inefficiency and corruption in its procurement agencies to the tune of Rs 2,000 crore every year? Key actions for the new government are getting RBI approval and the banks on board for Rs 20,863 crore CCL, operationalising a web-based system for prompt settlement of CCL account and ensuring strict compliance, tackling transport and labour mafias, and taking food account off the state budget as done in 2004. These measures should be supplemented by action at the political level for prompt movement of wheat and shelled rice, and tackling rent-seeking, whimsical FCI field functionaries. 

There are eight steps from unloading of produce in the mandi to stacking of bags in the godown costing about Rs 20 per quintal. One option for tackling labour and transport mafias is to explore the possibility giving some of these activities to farmers by modifying procurement policy.    

Punjab occupies a poor 14th position in the ranking of agriculture marketing and farmer-friendly reforms. The reasons are dilly-dallying by the previous government in implementing marketing reforms critical for agriculture growth. Twenty states have amended Agriculture Produce Market Committee (APMC) Act, Punjab has not. Crop diversification is not possible by persisting with the rules of the game favouring paddy-wheat cultivation.

Under Punjab's APMC Act 1961, only the government of Punjab can establish mandis. Farmers have to sell to government-mandated traders. Transparent price discovery mechanisms have not been developed, enabling arhtiyas to fleece farmers. Marketing taxes are highest in Punjab, discouraging private buyers. Also, not allowed is the entry of new players and foreign direct investment critical for bringing additional financial resources, technical expertise, national and global networks for developing competitive markets and breaking entrenched cartels inimical to innovation and growth. The restrictive system has stymied market modernisation. Middleman-dominated commodity chains are long, disjointed with several pain points. Consequently, farmers get a very low share of the consumer price. 

Based on the GoI Model APMC Act and reforms successfully implemented by Maharashtra and Karnataka, Punjab needs to amend the APMC Act. (See box) Amendment of the APMC Act is a prerequisite for joining the National Agriculture Marketing platform to access the huge domestic market for the benefit of  farmers in Punjab As its fiscal health improves, progressively mandi taxes can be reduced. 

There is an urgent need to restructure the Punjab Mandi Board and develop skills to provide alternate and competitive marketing channels, (including virtual markets), critical for diversification. Otherwise the Board will continue to splurge scarce funds on white elephants like the Mohali Fruit and Vegetable Market which does not meet its operational costs, forget returns on investment. Modernisation of dilapidated Malerkotla Mandi in the heart of vegetable-growing area coupled with the reforms to attract large private investment has the potential of transforming this sleepy town into a vibrant hub supplying vegetables to northern and eastern states, Nepal, Bangladesh and Pakistan. It can offer competition to the distant Narayangaon (Pune district) mandi which sends 250 trucks of tomatoes alone every day.  

Given political realities, the reform process will need to be backed by a programme of public awareness, education and informed debate. 

The writer is a retired Senior Agriculturist with the World Bank. The views expressed are personal.