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Friday, September 17, 2021

Market linkages to farmers through PDS

The recently passed three farm laws are though aimed at providing direct market access to the farmers and selling their produce as per their choice to the intermediaries, i.e., traders, middlemen and corporates at a price that is remunerative to them, due to the lack of access to market linkages it may end up in the farmers continuing to sell their produce to the intermediaries and also not necessarily at remunerative prices.

The three farm laws also do not have any reference to MSP (MSP is not a statutory obligation for the government as on date but it is only as a matter of convention that the government continues this MSP mechanism). Infact, it gives the farmers the option of choosing either a fixed price or a guaranteed price in case the price so agreed upon is subject to variation when they enter into contract with their buyers. Careful reading of the important clauses of the farm laws indicate:

1. There is a possibility of the processor or value chain participant installing very huge capacity of processing in order to circumvent the regulation for stock limit and effectively resort to hoarding.

2. Farmers getting forced (i.e., not necessarily by the trader but by other circumstances) to agree for a fixed price that may be lower than the market price or MSP as on the date of signing the agreement for future sale as well as current sale of the produce. This compelling circumstance will arise due to the farmers’ inability to access the markets directly since they neither have adequate storage facilities nor can they afford to hold the food stock with themselves or transport their farm products directly to the markets, all due to lack of funds.

The current three farm laws essentially provide back ward integration for traders, middlemen and corporates (i.e., from market to farmers) whereas what the farmers basically need is forward integration (i.e., farm land to market) 

The NABARD All India Rural Financial Inclusion Survey (NAFIS) shows that average agriculture household income was Rs 8,931 per month in 2016-17. Agricultural households in Bihar, Jharkhand, West Bengal, Uttarakhand, Odisha, and Uttar Pradesh have a very low monthly average incomes. Agriculture has a share of 16.5% in GDP and close to 50% of the country’s population is dependent on it. 

Category  Land holding  as a % of Total holdings
Small & Marginal farmers Below 2 hectares   86.21%
Semi medium & medium  farmers  2- 10 hectares   13.22%
Large farmers 10 hectares & above     0.57%
Total  100%

(Source: Agricultural census 2015-16)      

As could be seen from the above data majority of the farmers have very small land holdings that fetch them low incomes. They also primarily depend on micro finance companies and local money lenders for crop loans that attract higher interest rates.

As these farmers neither have direct market access nor can afford to hold the farm produce to get remunerative prices, they are normally compelled to go for distress sale to the middlemen.

Therefore, the open market access now created by the government through the three farm laws which is obviously without a level playing field will in all probability lead to corporates entering the fray along with the existing middlemen through the channel of back ward integration and have an upper hand over the farmers in procurement of the farm produce. 

Can PDS infrastructure provide forward integration and direct market access to the farmers?

There are 5,37,791 fair price shops licensed across the country out of which 5,34,786 are operational. Out of 4,87,915 ePOS supplied 4,16,059 have been active in FPSs all over the country. The main items that are available under PDS are- wheat, rice, sugar, edible oil and kerosene. 

Currently the PDS mechanism is operated as a cost centre and the government does not get any revenues out of it. In 2019-20 budget, the Centre has allocated to the Department of Food and Public Distribution (under the Ministry of Consumer Affairs, Food and Public Distribution) Rs. 1,92,240 crore. This accounts for 6.9% of the budget of the central Government and almost 1% of GDP.

However, the estimated expenditure was only Rs.Rs.1,15,240 Crores. The FPSs can be also used as outlets to sell the farm produce to the people directly by the farmers in addition to serving as PDS channels. By expanding the PDS to serve as outlets to sell farm produce in the open market the government may collect reasonable charges from the proceeds of the sale by the farmers who will still be benefited since they can avoid the middlemen and access the market directly and sell at remunerative prices.

The government can use the revenues so collected to further upgrade and strengthen the storage, transportation and FPSs infrastructure and make it on par with the market standards.

In due course, the government may convert the PDS infrastructure into a Special Purpose Vehicle under joint sector by collaborating with the small and marginal farmers who may be encouraged to form SHGs, cooperative societies, producer companies and trusts for this purpose. This will enable the small and marginal farmers to jointly own and operate the PDS to access the market and sell their produce at remunerative prices and completely eliminate the middlemen.

Let us hope the government will think in this direction and take appropriate measures. 

References- 

  1. https://www.financialexpress.com/economy/government-releases-agriculture-census-data-for-2015-16-female-participation-rising-in-farm-sector/1333275/.
  2. https://nfsa.gov.in/public/nfsadashboard/PublicFPSDashboard.aspx.
  3. https://www.nabard.org/auth/writereaddata/tender/1608180417NABARD-Repo-16_Web_P.pdf

(Featured image for representational purpose only.)


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Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 14 years of teaching, research and consulting. 100 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 20 short stories and 27 articles published in Telugu. Email id: [email protected]

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