Wednesday, April 27, 2016

3 May 2016: Enabling a national market in agriculture: Components of a national market and related legal issues

Devesh Roy
International Food Policy Research Institute

The proposed National Agricultural Market (NAM) in India is conceived as a nationwide electronic trading portal that would create a network of wholesale markets (mandis) and market yards. Structured as a virtual market place, to a large extent like existing models of ecommerce, identically it requires the back end support that takes the form of both infrastructure (for example warehousing, grading, packaging and standards) as well as institutions (formal changes in laws and its implementation protocols). NAM as a virtual marketplace will allow a farmer with subscription to portal to sell his produce to the destination with the best price (net of the marketing costs). Any buyer, for example a food processor, can benefit from not having to be physically present or having to depend on traders in the relevant Agriculture Produce Marketing Committee (APMC) area. Since taxes and charges will still apply, in essence it is a common market not a single market.

NAM envisions one license for the entire state and a single point levy. Further, it envisages electronic auctions for price discovery. With these provisions, it is expected that seamless transfer of agriculture commodities within the state and beyond can take place thereby expanding the market for farmers and traders. By virtue of being a common national market, in some respects at least the NAM would have to supersede the structure of the existing APMC. Under the current system of APMC that are under the respective jurisdiction of the state governments, different licenses are needed to trade in each market. Similarly, there are market specific fees that need to be incurred.

With this background this paper addresses the following research questions with regard to NAM. How far do indicators suggest a basis for NAM? Does the current state of market exhibit lack of effective integration and in which commodities? What are the elements of the NAM on the backend? To what extent are the attributes of the existing marketing infrastructure such as backend support suited for the NAM? What changes in the backend (infrastructure and institutions) would be needed to make NAM effective?

We argue that with buyers and sellers anonymous and not proximate, NAM will need commensurate development at the backend (infrastructure and institutions) for the actual transaction to take place in a reasonably frictionless way. Based on a simple analysis of the marketing infrastructure and institutions, we believe that a lot needs to be done in order to make an arrangement like NAM work.

Institutionally also NAM would require several changes. Agriculture is a state subject and APMC act covers a wide array of commodities including cereals, oilseeds and high value items such as fruits and vegetables and meat products. In that sense, commodities that have diverse marketing requirements are more or less treated in the same manner. Even with market liberalization, allowing private trade and removing marketing parastatals are necessary but not sufficient for efficient markets to evolve. In the absence of proper infrastructure and institutions, spatially dispersed markets may continue to lack integration.

We first look at the extent of integration across markets by taking a core periphery approach where the principal market is defined based on comparatively high market arrivals. Towards this, we use prices data from the wholesale markets at high frequency and use time series techniques to assess spatial integration. We find that there are several commodities that are characterized by a lack of spatial integration. The lack of integration implies that there are frictions in markets. NAM is expected to bring down the level of frictions that would lead to spatial integration. With spatial integration, prices will tend to equalize and there will be a co-movement of prices across markets.

Minimizing friction in transactions characterized by disaffiliate buyers and sellers would require changes that go beyond merely creating the online platform. To analyze this issue, we employ a sparsely available data to map out the state of the wholesale markets that exist in the country and try to assess their readiness for NAM. In the context of food products, several physical and institutional infrastructure are necessitated by design. Example of these requirements include weighing, grading and transport infrastructure, food safety certification systems, cold storage, quality standards among others. Mapping out the wholesale markets we find that markets are severely lacking in terms of their credentials to support an initiative like NAM. In terms of the organizational structure, NAM envisions about conforming to the regulations of the each state’s Mandi act. Moreover, all transactions that actually take place would be considered a throughput of the local mandi which would continue to earn the transaction fee (SFAC 2015). Hence, the transformation of the system could be revenue neutral for the states and may even be revenue expanding depending on the elasticity of the transactions with respect to the base expansion that would likely follow from NAM.

Apart from a one single license for trading in each state and a single point levy of transaction fee, apart from the revenue implications, political economy would also play a critical role in the adoption of NAM by state governments. Note the important backend support embedded in the functioning of the common market platform in Karnataka. First, there is a single licensing system. Rashtriya e-market Services Limited (ReMS), offers automated auction and post auction facilities (weighting, invoicing, market fee collection, accounting), assaying facilities in the markets, facilitate warehouse-based sale of produce, facilitate commodity funding, price dissemination by leveraging technology. Under NAM, these amenities are going to be needed on a scale that would be many times larger.
Date: May 3, 2016
Time: 04:30 P.M.

Conference Hall, Ground Floor
R&T Building
National Institute of Public Finance and Policy,
18/2 Satsang Vihar Marg, Special Institutional Area,
New Delhi-110067(INDIA)


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