What India’s farm reforms aim to change, in three charts

On 26 September, government procurement of food crops commenced across the country, five days in advance, following the enactment of three contentious farm bills. Under the new policy regime, farmers need not sell their produce through designated markets, and can sell to whoever they want to.

The same week, reports emerged that farmers from Uttar Pradesh wanting to sell their produce in Karnal, Haryana, were stopped at the Haryana border. Later, the Haryana government clarified there was no law barring farmers from other states from selling their produce in Haryana, and they could do so after registering on a portal. This begs the question, why would farmers from one region want to sell their produce elsewhere?

Monthly data collected on wholesale prices across 122 centres by the ministry of consumer affairs, food and public distribution shows wide geographical disparity in prices. We studied this data for six key agricultural commodities in 2019, covering foodgrains, pulses and vegetables. Three commodities (rice, wheat and tur dal) were among the 23 for which the government sets a minimum support price (MSP). The other three (potato, onion and tomato) didn’t have MSP support. The largest price variation was seen for vegetables, where trade is mostly unregulated and there exists no government procurement.

So, what explains this wide geographical disparity in prices? Under the current policy regime, agricultural markets are the domain of state governments. All states that have notified the Agricultural Produce Marketing Committee (APMC) Act operate APMC mandis (markets) with specified geographical jurisdictions. Farmers are, therefore, required to sell their produce via auctions to licensed traders at the mandi in their region.

Most major states have implemented the APMC Act, with Kerala and Bihar being notable exceptions. However, there is large variation across states in terms of the scope and stringency of these APMC acts, wrote Sudha Narayanan, associate professor at the Indira Gandhi Institute of Development Research, in an article published by The India Forum. Such variations in APMC regulations have led to fragmented markets, and impeded the emergence of a single national market, according to Narayanan.

In rice, for instance, the monthly average price in 2019 ranged from ₹2,042 per quintal in Agra (Uttar Pradesh) to ₹5,102 in Gangtok (Sikkim). In vegetables, the variation is much greater. In tomatoes, for instance, the monthly average price in 2019 ranged from ₹985 per quintal in Udaipur (Rajasthan) to ₹7,605 in Mayabunder (Andaman & Nicobar Islands).

These prices offer an insight into the wide disparity in what farmers earn for their produce in different parts of the country. A quartile-wise distribution shows that in all six commodities, there are a sizeable number of centres where the wholesale prices vary sharply. In rice, for example, the average price in the bottom quartile (comprising 28 centers) was about 19% below the average for the 122 centers. In the top quartile, the average price was about 33% higher. This variance in vegetables is much higher.

To be sure, the difference in wholesale prices is also driven by transaction costs such as for transportation, and the relative demand and supply across regions. With agricultural production largely concentrated in the northern and western states, wholesale prices are relatively higher in other regions, which are net consumers of these products.

Yet, inter-state barriers do seem to play a role in driving up the price wedge across regions. An estimate by Shoumitro Chatterjee, a researcher at Princeton University, suggests that removal of inter-state barriers can increase prices accruing to farmers by up to 11%. The paper describes how restrictions on inter-state trade due to the APMC law undermine market power and, therefore, prices accruing to farmers. The author then models an alternative scenario where these restrictions don’t exist.

In an emailed response, Sudha Narayanan explained how geographical disparities in prices can indicate the presence of barriers to trade as well as high transaction costs that can aggravate these disparities. “In general, we would expect large disparities in prices to be arbitraged away by the free movement of produce to the point where any disparity is on account of just the transaction cost associated with moving the produce,” she said.

Price variation is greatest in the case of vegetables, where government procurement is zero. The absence of MSP in vegetables means they lack a price floor. Since vegetables are mostly perishable, the lack of efficient storage and distribution networks inhibits long distance trade, and markets for vegetables remain largely localized. Their prices are therefore volatile, being prone to supply and demand shocks.

The full implication of the new farm policy regime is difficult to predict. In the absence of regulation, market forces will dictate that buyers will migrate to regions where prices are low. Farmers in regions that have a relative cost disadvantage might lose out. On the flip side, barrier-free trade and more supply chain investments can increase earnings for farmers. With the new farm bill, how this plays out will be keenly watched.

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