Mumbai: I have not studied much at school,” says 60-year-old Kantilal Surana, who dropped out in the sixth standard, and is today among the biggest onion traders of the country. “My education has been in the mandi (wholesale market), where I started learning about the onion trade at the age of 10.”
Surana was the largest onion trader at Lasalgaon mandi in December 2010 when a sudden jump in onion prices attracted the attention of several government agencies. He was suspected of colluding with a few other traders to manipulate prices.
Lasalgaon, located around 220km north-east of Mumbai in Nashik district, is Asia’s biggest onion market.
Onion prices across the country move in tandem with prices in Lasalgaon, so collusion among traders here matters for the rest of India as well, especially since politics and economics often intersect when onion prices rise. Higher onion prices have not only added to high food inflation, but also rattled governments over the years, for example contributing to the defeat of the Bharatiya Janata Party in state elections in Delhi in 1998.
Lasalgoan is in many ways a case study of dysfunctional agricultural markets in India, dominated by trader cartels under political patronage.
A Competition Commission of India (CCI) investigation showed that Surana’s firm, Saibaba Traders, accounted for nearly one-fifth of trading in December 2010. The preliminary investigation let Surana and other traders off the hook, citing lack of evidence to establish malpractice. Subsequent raids by officials of the income-tax department met a similar fate.
After CCI delivered a split verdict in April 2012, it asked a team from the Institute for Social and Economic Change (ISEC) in Bangalore to take a closer look. In a December report to the commission, a team led by agricultural economist P.G. Chengappa pinned down collusion among agricultural produce marketing committee (APMC) traders as the key factor behind the onion price rise, though it did not name any specific trading firm.
“It is wrong to paint us as some kind of mafia that drives up prices,” says Nandakumar Daga, a member of the Lasalgaon APMC, which regulates the mandi, and head of the traders association, who rubbishes the ISEC report. “Seasonal variations in output cause volatility in all markets.”
However, the ISEC report pointed out that seasonal fluctuations cannot fully explain the price volatility over the past few years. The ISEC team found that rising arrivals of onions at the mandi were often accompanied by rising prices, violating a basic principle of competitive markets.
What undermines competition in the mandis is collusion during auctions. Eight hundred trucks laden with farm produce roll into Lasalgaon every day. The number of traders and commission agents is nearly 450.
But on any trading day, only a handful of traders are present. At the auction, traders sample onions before making the bids for each lorry load separately. Only two-three traders on an average actually bid for any lot; other traders just move ahead to lots they are interested in. The auction of a lot gets over in the blink of an eye. Dominant traders frequently use a strategy of bid rotation: they bid by turns for different lots, to avoid competing with each other.
A 2012 report on onion markets by the National Council of Applied Economic Research, which, like the ISEC report, identified collusion as a key limitation of wholesale markets, pointed out that 8-10 traders dominate trade in almost all mandis.
Today, Surana is no longer Lasalgaon’s top onion trader. Yet, he continues to be among the big five, led by Raka Traders, which accounts for most of the onion traded at Lasalgaon. Surana’s name does not figure among the list of purchasers in the official records of Lasalgaon mandi, though. His son, Prashant, who lives in Pune, about 170km away from Nashik, figures on that list as a top commission agent. A commission agent is a broker who charges a commission of 4-6% from the farmer for arranging the sale of his produce.
All big traders are also commission agents. But it is a common practice to acquire separate licences in the name of their relatives, as Surana has done. This allows the trader to pocket the broking margin at the farmer’s expense, by bending, rather than breaking the law. The familial links between the commission agent and the trader is only one among the many nodes through which onion traders control the supply chain, and one that is most evident.
The entire range of intermediaries comprising the commission agent, wholesaler, transporter, storage chain owner, and even the railway agent, usually belong to the same family, says agricultural economist Chengappa. Across major onion markets in India, a network of a few families controls the supply chain, and effectively blocks new entrants, he adds. Such a closed and monopolistic nexus allows middlemen to enjoy a fat margin, widening the gap between what a farmer earns and what a consumer pays. For example, onions at the Lasalgaon mandi are being sold at a modal price of Rs.10, but cost 70% higher in Mumbai.
The absence of genuine competition at the mandi and numerous transaction charges distort prices, and the lack of viable alternatives to the mandi limits investments in better infrastructure, leading to high wastage across the supply chain. These factors have played a crucial role in pushing up onion prices rapidly over the past decade despite a threefold increase in production.
The APMC laws have served to protect the interests of trader-cartels rather than those of farmers and consumers, says Girdhar Patil, a Nashik-based activist of the Shetkari Sanghatana (a farmer’s body) and a member of the agriculture cell of Arvind Kejriwal’s Aam Aadmi Party.
Introduced during the British Raj in the late 1930s to reform agricultural markets, the APMC Act was strengthened after the Bengal famine of 1942 to break the stranglehold of village moneylenders, and to encourage higher production by facilitating competitive markets.
In the 1960s and 1970s, most state governments set up a large number of APMCs to increase food procurement. Public focus on institutions such as market committees waned as the country neared self-sufficiency in food, and these were captured by trader lobbies in collusion with local political elites, agriculturists say.
“Meant to reform the system, the APMC Act created deformities in the supply chain,” says Patil.
Each APMC has representatives from trading members, but little direct representation from farmers. Instead, it has several indirect representatives who are elected by panchayat (village council) officials. The financial muscle of the trader lobby ensures that its nominees win all the votes of panchayat officials, says Patil. Traders’ sway over APMCs is evident from the reluctance of the committees to issue new licences and induct new traders, he adds.
Over the years, traders have built up powerful ties at two levels: with other intermediaries, to minimize the risks across the supply chain, and with local politicians, to protect their networks, says agricultural economist Chengappa. Although Maharashtra has introduced several amendments to the APMC Act, it has hardly added any vibrancy in the major onion markets, he adds.
The reason why wholesale markets appear to be closed networks is because they are typically dominated by one community or sub-caste, says Shirish Kotwal, the member of legislative assembly from Chandwad, the constituency under which Lasalgaon falls.
Kotwal, who also heads the Chandwad APMC, refutes charges of political patronage and argues that caste networks dominate the food supply chain across the country, as they substitute for the lack of formal institutions, and allow intermediaries to trust each other in the absence of formal contracts.
Mumbai-based anthropologist Mekhala Krishnamurthy, who wrote her doctoral dissertation based on the study of a Madhya Pradesh mandi, agrees that caste networks play a significant role across commodities and regions. There are several factors that restrict the role of large organized firms, allowing traditional intermediaries to thrive, she argues.
For one, different states have different laws relating to procurement and marketing, and policies keep shifting. Secondly, agricultural production and agro-processing conditions differ significantly across commodities and regions, making channel control difficult for large firms.
Such conditions prove to be fertile ground for traders such as the Suranas to entrench their networks over several decades. According to Prashant Surana, Kantilal’s success as a trader owes it to his ability to mitigate risks by locating alternative markets where he can sell at attractive prices.
But the fluctuations in onion prices over the past few years have harmed them, says Prashant, who has a day job as a software engineer, and works during the evenings to manage the export segment of his father’s business. That and a change in business strategy, which entailed a shift from trading high volumes to acquiring quality produce, have reduced their market share.
“Sometimes our bets go right and at other times, they go wrong and we end up losing money,” says Prashant, comparing his business to share trading. Traders have to maintain adequate margins during good times to build up capital and compensate for the losses they suffer in bad times, he says, although he refuses to specify his average profit margins.
It is imperative to develop alternatives to existing mandis to break the monopoly of traders, and reduce their role in the supply chain, says agricultural economist Chengappa. There are a few initiatives from farmer associations and companies across the country; these ventures need to be supported and scaled up, he adds. Maharashtra has amended the APMC Act to allow direct marketing of farm produce, but a direct purchaser still has to obtain a licence from the state. This is a disguised restriction to limit entry, says activist Patil.
Meaningful APMC reforms in many cases are a response to effective alternatives, says anthropologist Krishnamurthy. The APMCs in Madhya Pradesh felt the need for reforms only after ITC Ltd opened up its e-Choupal hubs in the state. Innovations such as e-auctions will hold the key to improve transparency, Chengappa says.
“Personally, I am not too fond of the traditional model, and am in favour of open markets as long as it does not harm established traders,” says Prashant Surana. Modernization will involve formal contracts and lower risks of trading, he says. “Right now, we have no recourse when our clients delay payments or simply refuse to pay up, citing various excuses,” he adds.
At the Lasalgaon mandi, there is quite a bit of resistance to change though. Traders are not keen on new entrants, APMC officials say.
“If someone waters a sapling and helps it grow into a big tree, doesn’t he deserve the fruit?” questions Daga, the Lasalgaon APMC member, referring to the long tenure of traders at the mandi. “New traders may default on payments to farmers and harm the credibility of the mandi.”