[Economic Survey] Ch8: National market for agriculture, NSELcrisis mrunal.org

1. R1: APMC Act

2. Why do we need a National Market for Agriculture?

1. How to setup national market for Agriculture?

2. Budget 2014 announcement3. 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

4. R3: Productive vs Production5. R5: small-marginal farmers= less productive?

6. R6: Farm Mechanization = why necessary in India?

7. 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 fromEconomic 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 cornproduction.

Game collapsed when FMC ordered them to settle all contractswithin ten days (T+10)

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, Industrialsector allowed to buy from, and sell to,anyone in the world

But Under State APMC Acts, the Indianfarmers 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 acompetitive 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 andpotatoes.

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 theproblem.

Therefore, Survey recommends a national market for food / agricultureJaitley 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 toend 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, toprevent 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 sellproduce in them.

6. Also, Permit sale and purchase of all perishable commodities such as fruits andvegetables, 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 initiativesApni Mandi Punjab

Uzhavar Sandhai Tamil NaduShetkari Bazaar Maharashtra

Hadaspur Vegetable MarketPuneRythu Bazar Andhra Pradesh

Krushak Bazaar OdishaKisan 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 theirmandatory 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 ofagricultural 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 toenable 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. ORHe can trade this WR @Commodity exchange.

In commodity exchange there are variety of trade agreement

Game collapsed when FMC ordered themto settle all contracts within ten days (T+10)

Game collapsed when FMC ordered them to settle all contracts within tendays (T+10)

Typewheat price interpretation

T+2 Rs.1400 I’ve to pay within 2 days to farmer, and he gives me the WR.

T+20Rs.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. Welland 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 andsold.

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 followingpromise

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 10days 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+ croreTotal 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 ArvindMayaram.

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 cantake 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, marketingstrategies, price bargaining….then they MUST know the price movements in commodity

market.

Therefore, the FMC is implementing the Price Dissemination Scheme viaAGMARKNET system.

It provides real-time prices on 1700 Mandis, Kisan Vikas Kendra and other placeswhere 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?

More Area under rice-wheat = less cultivation of oilseeds and vegetable = food

Area

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 farmerproducer 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.

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