A Sector in Transition: How Data and Evidence Can Set India’s Agricultural Markets on the Path Toward a Successful Future
As policymakers look to optimize the agricultural sector, they will need synthesized data to inform their policies. This is the second in a series of articles by IDinsight, that provide analysis of existing data and draw attention to gaps for researchers to fill in over the coming months. The first article can be read here.
Farmer protests in New Delhi have dominated headlines in India in recent weeks. An estimated 250 million farmers are protesting against a series of Indian farm bills that were passed into law in September. Much of the anger has come in response to the Farmers’ Produce Trade and Commerce (FPTC) Act, which fundamentally aims to shift the structure of agricultural markets away from traditional state-regulated market yards (mandis) and toward a more open market system.
Historically, sales of agricultural goods in India have occurred under a tight regulatory scheme. These regulations were set up to reduce the risk of exploitation of farmers by local middlemen who could otherwise offer unreasonable prices and use other coercive techniques to instigate sales. Generally farmers were required to sell their produce at mandis that were regulated under state marketing boards, which meant they were selling only to people who had a license to buy inside those mandis. Over time, many of these mandis have come to be dominated by licensed traders who procure agricultural goods from farmers and sell them to retailers locally and around the country. Many argue that the market power of these traders has led to increased transaction costs, higher prices and slower food supply chains.
The central government argues that by reducing regulations on agricultural transactions, the new FPTC Act will establish alternate sales channels for farmers, leading to increased farmer wealth. Experts may differ on whether the FPTC Act will indeed “free” the Indian farmer and revolutionize agriculture, or lead to further exploitation of already impoverished smallholder farmers. But there is widespread agreement among economists that India’s agricultural systems are in need of reform.
This article outlines the underlying challenges facing India’s agricultural market systems, the pros and cons of the government’s approach, and the ways that data and evidence can help leaders set agricultural markets up for a successful future.
Challenges Facing India’s Agricultural Market Systems
There are three underlying challenges that the agricultural market systems in India seek to overcome:
- Information Asymmetry: The systems aim to share relevant information transparently among all buyers and sellers. However, this is particularly difficult given the great diversity among stakeholders within the Indian agricultural sector.
- Market Access: The systems aim to provide equitable and inclusive access to physical trading space, and access to the marketplace for a diverse set of both buyers and sellers. This accessibility is particularly important for more vulnerable sellers, such as female farmers and those from less privileged castes.
- Coordination Challenges: The systems aim to coordinate mutually interested buyers and sellers who wish to transact. However, given the unbelievably large number of both buyers and sellers, this is an immense coordination challenge.
Market systems seek to overcome these challenges by providing support through regulations, and by facilitating efficient price discovery and, consequently, fair sales prices for agricultural products. Through efficient transactions at fair market prices, the exploitation of sellers is minimized and prices reflect market forces.
But given the diversity of India’s agricultural sector, there is no one-size-fits-all market solution appropriate for all crops and all geographies. A recent study undertaken by our team at IDinsight, in collaboration with the Development Data Lab, highlighted these major differences (as shown in Figure 1 below). This data was collected by IDinsight’s Data on Demand service via phone surveys with over 4,500 Indian households, and it illustrated the variation in sales avenues across different states. For instance, Figure 1 shows how certain states, such as Madhya Pradesh and Rajasthan, distributed over 40% of agricultural goods through state-regulated mandis, while other states, such as Bihar and Uttar Pradesh, distributed less than 5% through mandis.
Pros and Cons of India’s Agricultural Market Reforms
Proponents of the FPTC Act argue that deregulating mandis and leveraging market forces is the most optimal way to overcome the three persistent challenges of India’s agricultural market systems that we outlined above.
- Information Asymmetry: Allowing private players to buy from farmers outside mandis in unregulated “trade areas” will drive competition and afford greater bargaining power to farmers.
- Market Access: More private players entering the market will lead to much-needed investment in infrastructure, as buyers seek to attract sellers and reduce transaction frictions.
- Coordination Challenges: “Trade areas” will bring together buyers and sellers, unhindered by license requirements. Competition in these markets will lead to the development of more efficient value chains in agriculture.
Critics of the FPTC Act assert that the new law mischaracterizes existing issues with mandis, does little to address these core challenges and could lead to increased exploitation of farmers at the hands of large, private corporations.
- Information Asymmetry: A key challenge for farmers is their lack of market power relative to traders. Critics argue that the FPTC Act does not provide any regulatory oversight over buyers, nor does it provide an effective means of redress for farmers who may have complaints. They argue that without such measures, exploitation of farmers will continue – either at the hands of those with existing vested interests, or by incoming, private corporations.
- Market Access: Critics of the FPTC Act also argue that the issues with the current system are not due to the traders and mandis, but rather to the enabling environment surrounding them. For instance, in many states, farmers cannot physically access mandis due to poor investment in infrastructure. Accordingly, the FPTC Act’s promise to “unshackle” farmers and open sales channels may be misplaced. The core challenge of providing convenient access to mandis will continue, and without investing in core infrastructure, the FPTC Act will not succeed in providing a meaningful choice to farmers.
- Coordination Challenges: Proponents of the law argue that it will remove many of the traders and middlemen from the system, who currently create higher transaction costs due to their market power. But critics counter that allowing the entry of private corporations into the market may not lead to the dis-intermediation of food supply chains that proponents of the FPTC Act seek. Instead it may lead to the entry of new middlemen that no longer are required to meet government licensing requirements – and consequently will not be subject to regulatory oversight.
Taking an Evidence-Based Path Forward
Whatever the strengths or weaknesses of these various arguments, one thing is clear: As decision-makers seek to forge a path into the new agricultural market future, data will be vital in setting up appropriate market systems. Below, we’ll discuss how data can address each of the three core challenges these systems are facing:
- Information Asymmetry: Intermediaries or middlemen have become necessary in India’s agricultural supply chains. They offer informal credit to farmers, purchase farm products from them (sometimes at their villages), sort the goods by quality to maximize sale price (“grading”), and bring them to physical markets to sell them to consumers. So they add value through procurement, sorting and transportation, along with the role they play in price discovery. Irrespective of the market systems that are developed in the future, it is vital that decision-makers deeply understand the gap that these middlemen fill, and identify appropriate ways to either regulate their operations or provide effective alternatives. The solutions sit on a continuum between either middlemen filling the void and extracting monopoly-level profits (i.e.: the traditional approach), or complete disintermediation, in which anyone (including large corporations) can conduct end-to-end procurement and distribution. While there are states in India where selling only in physical markets has been abolished legislatively, similar to what the FPTC Act aims to do nationally, their agriculture markets have not witnessed a revolution toward large corporations entering this procurement chain. So it’s uncertain how significantly the new laws will increase corporate involvement. But it is clear that all the stakeholders have roles to play in this evolving market structure, and it will be important to safeguard the benefits that the traditional approach has delivered to producers (and consumers). It is here that data and evidence can play an important role in designing and tracking this evolution. Additionally, the FPTC Act does not provide for any guidance on monitoring agricultural transactions outside of mandis. There is a need for contemporaneous data on agricultural transaction volumes and prices, in order to assess the effectiveness of the alternative systems and regulations that will be put in place.
- Market Access: Prudent public sector investment is needed in rural infrastructure, to prevent potential implementation gaps and attract private investment. State-level farmer surveys focused on market access would help identify opportunities for cost-effective investment. Additionally, with increasing access to mobile phone technology, India has great growth potential for agriculture technology interventions. Robust evaluations of ag-tech interventions would facilitate iterations on promising programs that could minimize the challenges of accessing physical markets.
- Coordination Challenges: With the new laws, there is a potential role for aggregators to collect, grade, process, store and sell agricultural products at existing markets. Outside of mandis, the role of these aggregators could be taken by either existing middlemen channels, independent farmer producer groups or regional business hubs, to list a few. These models need to offer higher profit sharing (because selling outside of mandis may save on costs like market fees and licenses) and to support farmers’ needs, like credit and transport. They not only need to be sustainable from a business point of view, but also must offer viable reasons for farmers to sell outside of mandis. Given the heterogeneity in India’s markets and the multitude of risk factors in agriculture production and sale, these structures need to be carefully designed and informed through rigorous assessments and trials. While these models can be fairly complex to set up, thorough needs assessment to identify business gaps would help address the different supply and demand-side variations and assess the potential for scalability.
The new agricultural market future has arrived in India. And while no one-size-fits-all market system is appropriate, it is important that the leaders designing and implementing new models deeply understand the needs of farmers and purchasers, and leverage data and evidence to facilitate sustainable and equitable agricultural growth. If they do, the systems they build will set the country’s agricultural sector – and the farmers and other stakeholders who depend on it – on the path to greater success.
Photo credit: Nithi Anand.