Shifting markets from the informal sector to the formal sector has several advantages. Prompted by demonetisation and e-payments, the debate has veered to cashless mandis, with farmers remaining unpaid as traders hesitate to shift to e-payments. While it is well known that transactions, when conducted informally, keep activities out of the tax net, what is perhaps less known is the crucial role played by information in revealing the presence of cartels and of collusion which distorts the function of markets. The lack of critical information saw the attempt by the Competition Commission of India to break a cartel in the onion market reach a dead end. Insights gained from the case have convinced me about the need to hasten the process of modernization and formalization of payments. Digital payments force markets to modernize.

December 2010 saw an unusual rise in the prices of onions, peaking at Rs70 a kg in the Delhi markets and Rs40 a kg in other markets, persisting for over two weeks. The possibility of speculative activity was suggested by several economists, including the then chief economic adviser Kaushik Basu, prompting the Commission to constitute a suo-motu enquiry into the onion market. On the basis of investigation, the Commission arrived at the conclusion that the data examined revealed no unusual patterns in price and quantity movements for the period under review. With no material evidence of meetings or agreements between traders, the requirement of Section 3 (3) of the Competition Act was not met (Majority Order, Suo-motu Case No.01/2011).

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Data used in the investigation was from the agricultural produce market committee (APMC) website, the official record of transactions in agricultural markets. Correlations were run on arrivals in the Azadpur Mandi (Delhi) and prevailing market prices. Records at the auction platforms at Lasalgaon and Pimpalgaon, the main onion markets of India, and the books of traders or arthiyas were examined. The extensive exercise revealed no discernible spike in prices or evidence of speculative hoarding during the period under investigation. Given the preponderance of evidence pointing to normalcy, the Commission closed the case.

The conclusion of the Majority Order was not convincing with regard to the source and nature of data analysed and whether the data was appropriate for establishing the presence of cartels in informal markets (Minority Order, Suo-motu Case No.01/11). Informal markets in their functioning have an impact on data accessibility, authenticity and reliability. APMC data, although official, displays these inaccuracies . First, the information sourced pertained to rates at the auction platform under the APMC. This data gives no indication of the transactions pre-auction between farmers and traders. Second, there is a time lag between transactions at different stages of the supply chain and the hosting of data on the APMC website. Distortions are to be expected with time lags. Equally disturbing is the authenticity of data as APMC data is based on information provided by the arthiyas. Third, the possibility of collusion between auction officers and arthiyas cannot be ruled out. Last, the use of modal data from the APMC in the analysis may fail to capture deviations in the onion market.

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Do e-payments help? A brief look at the manner in which informal markets function would help to understand the advantages of digital payments. The indebtedness of farmers to traders for loans is well documented and a major source of data distortion in the onion market. Loans are given by traders against the collateral of standing crop. Records of these loans are not maintained as they are sanctified by social relationships. This places traders in a position to exert downward pressure on the crop prior to harvesting and definitely before the produce reaches the auction platform. The floor price at the auction is, therefore, already fixed as arthiyas are the licensed traders at the auction. The entire produce may not reach the auction market at all. Again, no records are either maintained or available.

Arthiyas are the main source of information for the APMC. As licensed traders, the arthiyas’ word carries weight, with single traders having market shares as high as 13%. It is common for a single trader to have multiple licences. The assumption of free auctions, where sellers and buyers meet as independent agents and auction prices are competitively arrived at, lacks credibility.

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Digitization of payments prevents this opacity in data records that is possible in informal markets. All transactions where payments are involved, including payments to farmers by traders, get recorded. A major advantage is that once a transaction has been effected, data cannot be manipulated or deleted, unlike in informal markets. Plugging data gaps and building databases both temporally and spatially are essential for detecting cartels. This enables the application of forensics and econometric techniques to pick out variations in patterns of trading. Juxtaposed with the underlying data on weather, these patterns indicate whether cartels were the cause of the spike in prices in the onion market—or, as claimed in December, the rise in prices was purely on account of untimely rain. For identifying cartels, the existence of databases is where modern markets score over informal markets.

The Commission vested with wide powers to requisition data from all sources can proceed fully once e-payments are in place. Section 36 (2)(b) empowers the Commission with the same powers as a civil court. The director general has the powers of an inspector under Section 41, with permission to conduct dawn raids. Regulation 41 permits admission of all records, including email and mobile telephone records, that meet the requirement of material evidence as in Section 3(3).

Cartels do not end with digitization. But digitization does make cartelization a more difficult process to hide. Once the initial glitches of transition to a cashless economy are over, the Commission should revisit the onion market as suggested in the Minority Order.

Geeta Gouri is a former member of the Competition Commission of India.

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