Parking Space for the Poor: Restrictions Imposed on Marketing & Movement of Agricultural Goods in India

Mayank Wadhwa

60% of our workforce is still employed in agriculture, but its contribution to our GDP is 26.8%. It provides for 20% of the country's exports. 80% of farmers are small and marginal, and 75% of the poor reside in rural areas. Probing into the plight of the poor farmers, this paper examines the restrictions imposed on marketing and movement of agricultural goods in India, and their associated fiscal and efficiency costs on the economy.

Agricultural markets in India have been regulated since 1928 with the inception of the "Royal Commission of Agriculture." Policy intervention in agriculture was virtually absent till the Bengal Famine of 1943, in which more than a million people died. The famine provided a major impetus for formulation of a comprehensive food policy in India. The Food Policy Committee which was set up after the disaster, suggested an interventionist government policy in the food grain market. Intervention began in the form of administrative controls, monopoly procurement schemes and public distribution, but it now encompasses a wide array of restrictive tools. This was done on the premise that private trade would function efficiently in normal periods but in periods of drought and crop failure, the profit motive would lead them to hoard supplies and earn abnormal profits. Ever since, the Indian government has followed a policy of de-control and re-control of agricultural markets.

The Essential Commodities Act

In 1955, with the good intention of helping the poor, the Government of India (GOI) promulgated the Essential Commodities Act (ECA) to control and regulate production, manufacturing and distribution of essential commodities in India. ECA is "An Act to provide in the interest of the general public, for the control of the production, supply and distribution of, and trade and commerce, in certain commodities". In order to control the vagaries of the market, it gives the State the power to control the tools of the market. The Act specifies a list of essential commodities on which the government can from time to time introduce control Orders in situations of short supply. As of June 2001, there were 30 items in this list. Furthermore, it is an enabling act allowing the state governments to frame rules under this central act. The Act itself does not lay the rules and regulations of the game but allows the states to issue orders in case of malpractices like hoarding and black marketing. Since the state authorities can invoke this act at any given time it provides a potential threat to trade in agricultural commodities. Besides being a potential threat there are inherent problems in terms of implementation, and punishment (in case of failure to abide by the act).

Under the act, various orders with respect to foodgrains have been made by the central and state governments. These orders broadly relate to:

Licensing of dealers/retailers for trade in food grains

Private traders are required to obtain a government permit to transport grain out of a particular state or even district, but the criterion varies from state to state. Permits are difficult to obtain when the procurement by the FCI or state governments for the public distribution system (PDS) and buffer stocks lags behind targets.

Restrictions on movement of foodgrains

Government authorities restrict interstate movement through notified orders. These have been sporadically enforced in the recent years. Since 1993, the central government has decided to treat the entire country as a single food zone, but the states seem to be unaware of this and restrict movement. The state wise position on restrictions on movement of agricultural goods is given in Appendix-I.

Regulations of storage limits

While exercising the powers delegated by the central government under the ECA, several states have also imposed limits on stocking foodgrains and agricultural produce, which have been frequently revised and sporadically enforced in recent years. They vary according to the severity of supply shortfalls and price rises. The state wise position is given in Appendix-II.

Control-quota regime (compulsory sale to the government)

Under the control-quota regime or the "levy-price" system, private individuals are forced to sell a fixed quota of their produce to the government (FCI and state government agencies) at the procurement price or the minimum support price (MSP). Currently such a system is in place for rice and sugar. In the case of sugar, the levy quota stands at 15% from an earlier 30%, leaving the free sale quota to be 85%. Private rice mills can be forced to sell anything between 7 to 75% of their produce.

These controls had little justification at times of severe food shortage and scarcity. Not only has the country has attained overall self-sufficiency in most commodities, but it also surpluses in foodgrains and other primary commodities. Thus the restrictions have only hampered private productive activities and acted as disincentives to production and distribution of agricultural commodities. A case in point is the free movement of foodgrains, which takes place from surplus areas to deficit areas like the Northeast. In the process, it stabilizes prices by reducing the prices in deficit areas and raising prices in surplus areas.

Though the Act was introduced with the good intention of protecting the poor from the vagaries of the market, it has over the years been transformed into an effective harassment tool in the hands of the state. Mitra and Dasgupta (1998), view the reason to be sheer shortsightedness and ignorance on part of policy makers who have never seemed to realize the importance and potential of the vital sector. A majority of farmers have to operate under severe restrictions and regulatory measures.

From bad to worse?

Following the severe droughts of 1980 and 1981, poor agricultural production, and the rampant practice of hoarding and black marketing of daily necessities, the brutal Essential Commodities Act was amended to the draconian Essential Commodities (Special Provisions) Act. The preamble of the Act states: "An act to make certain special provisions by way of amendments to the ECA, (1955) for a temporary period for dealing more effectively with persons indulging in hoarding & black marketing of, and proliferating in, essential commodities & with the evil of vicious inflationary prices for matters connected therewith or incidental thereto." The government had initially introduced the Act for a period of 5 years, as it was in agreement that such legislation would not be required permanently. However, the Act has been extended 4 times and each time by 5 years, since its inception.

In order to deal more effectively with persons indulging in malpractice, steps were taken on two accounts; a) Harsher punishments and b) Immense power in the hands of implementing authorities. All offences, even minor technical discrepancies, would now result in non-bailable imprisonment and/or fine. Not only were they earlier cognizable, but even the power to grant reduced penalties for adequate and special reasons were also withdrawn.

What made the situation worse was the grant of immense power in the hands of the implementing authorities, which could even be at the level of a constable in the local police station. Mitra and Dasgupta point out "The Act also empowers authorities to search the premises and arrest as well as seize / confiscate and sell the stock under dispute on mere suspicion and even before the guilt is established. It is against the common principles of jurisprudence to impose three penalties simultaneously, namely arrest, seizure or confiscation, and sale of the entire stock." The result is obvious: corrupt practices and misuse of granted powers. The magnitude of this can be gauged by the fact that in 1995, against 80,927 raids only 2,719 persons were convicted (3.36%)and during 1996, 45,500 raids resulted in 2,177 convictions (4.78%) . The rest had to undergo unnecessary humiliation and harassment. Moreover the Act does not allow variations in stocks due to climatic conditions and loss in transit. With such stringent laws and regulations, it violates the most basic rules of jurisprudence.

This setup has resulted in a harsher regime of agricultural controls, where penalties have become more important than the initial objective of smooth distribution of essential commodities. In the light of these facts, one needs to ask, does the Act benefit the poor? If not then, what purpose does it serve? If its only purpose is as a regulatory tool in the hands of the government to harass farmers and traders, then why not abolish the Essential Commodities Act?

Prevention of Black Marketing and Maintenance of Supplies Act, 1980

To make matters worse, in 1980 came the "Prevention of Black Marketing and Maintenance of Supplies Act." It is an "Act for detention in certain cases or the purpose of prevention of black marketing and maintenance of supplies of commodities essential to the community and for matters concerned therewith". The enactment of this Act led to a duplication of the Essential Commodities (Special Provision) Act, 1981. Why do law enforcers have two laws for prevention of malpractices like black marketing and hoarding? Parth J Shah, President, Centre for Civil Society, explains this morass of controls by the "Potato Chip Theory of Regulation": One restriction creates situation that demands further restrictions, which in turn require more restrictions. Once a bag of potato chips is opened, it’s hard to stop at one or a few chips. So while enjoying the chips, lawmakers seldom realise the negative impact it has on the poor farmers. Thus the Act merely acts as another restrictive weapon against the unarmed agricultural sector.

Informal controls

Informal controls are a major obstacle in free movement of agricultural goods between states. Largely State implemented and enforced to help implement the orders issued as per the ECA, they come down harshly on the farmers and traders in the form of harassment by the local authorities. A common practice followed by the local officials at state borders is, to stop and check trucks carrying goods. Though on the excuse of a routine check, trucks normally get held up for days on end. This results in unnecessary harassment and imposes a heavy price on private traders, in the form of lost time and the bribes paid. Let’s take the example of wheat in the surplus areas of Punjab, Haryana, and Western Uttar Pradesh. Here informal restrictions have been imposed so that the Government can procure wheat for PDS and buffer stocking at the official procurement price. Farmers lose the right to sell their produce to anyone offering better prices—making the government restriction akin to extortion.

Informal restrictions on movement or on participation of private traders cause corruption within states and at state borders, in turn, forcing farmers to switch to other crops that are free from such controls. Therefore, even if orders are lifted on paper, steps need to be taken to remove such superfluous controls.

Food police of India

The Food Corporation of India was set up in 1965 under the Food Corporations Act, 1964, as a government owned nodal agency. Its function was to give the public sector a secure and commanding position in the foodgrain trade, thus acting as a countervailing force to the speculative activities of the private traders. As per the Act, FCI is responsible for functions of procurement, storage, and distribution.

As the principal executor of government policies, FCI fulfils the following objectives of the Food policy:

• Effective price support operations for safeguarding the interests of the farmers.
• Distribution of foodgrains throughout the country for Public Distribution System; and
• Maintaining satisfactory level of operational and buffer stocks of foodgrains to ensure National Food Security.

Through procurement operations, FCI implements its price support programs. Procurement or purchases by FCI agents takes place in Mandis (state operated and regulated wholesale markets) and other buying centres. Except under a levy system, farmers may sell voluntarily to the FCI at pre-announced "uniform" procurement prices or the minimum support price (MSP). MSP, announced before the sowing season, is the price at which the government would step in and buy any amount of stocks off farmers, in case open market prices fall below this floor. The idea is to provide price support to farmers in times of a glut. Procurement price, announced before the harvest season, is the price at which the government procures stocks of its own volition. The distinction between the two is important as procurement price is only issued in times of distress or bad harvests. Obviously, procurement price is higher than MSP by a bonus, which serves as an incentive to the farmers to sell to the government. Due to increasing political pressure, in 1992 the two were merged together, thus starting a trend of an ever-rising MSP.

The government, on the recommendations of the Commission for Agricultural Costs and Prices (CACP) fixes the MSP. Started in 1965, CACP is a statutory body under the Ministry of Agriculture (MoA). Ms Kevileno Angami, Deputy Director of CACP told us that the Commission had recommended a freeze on the MSP by fixing a ceiling on its increase. But the government is not legally bound to accept the recommendations of the CACP.

Whether the MSP is above or below the market price is irrelevant. The crux of the issue is that the government price support operations, with its depressing effects on food grain prices benefit only a small portion of farmers and distort resource allocation. And even if the market "fails" to provide remunerative prices to the poor, at best a subsidy in the form of cash grants could be given to the farmers, in turn, also reducing the fiscal constraint of an ever-rising MSP on the exchequer. For agriculture to ever become a commercially viable option, the government should do away with its paternalistic attitude towards agriculture, both in its protective and restrictive roles.

Do we need a food police?

Whether the FCI is needed or not can be answered by its negative impact on the economy through: (a) Mounting cost of FCI operations and (b) Stunting efficient private market operations. FCI burdens taxpayers with rising fiscal costs, which can be attributed to both pricing policy of the government and technical and operational inefficiencies. Food subsidy, the operational deficit of the FCI has alone accounted for over 7% of the country's fiscal deficit in 10 out of 12 years between 1987- 88 and 1998- 99. FCI has overgrown in every aspect of its operations. It employs 65,000 employees and over 170,000 direct contract labourers, and it manages 1,146 storage depot centres. Procurement trebled from 7-8 million tonnes in 1970s to 20-25 million tonnes during the mid-1990s, but as the scale of operations expanded so did the operation costs. Due to government's wrong policies, stocks with the central pool were 44.7 million tones (April 2001-02), which are nearly triple the stipulated 15.8 million tones. The FCI does not fall behind even in terms of storage inefficiencies, 50% of foodgrain stocks are at least 2 years old, 30%, between 2 to 4 years old; and some grain as old as 16 years old. To add to this is the cost of management, estimated at 30% of the entire operational cost of the FCI. These facts merely form the tip of the iceberg in narrating the uneconomical saga of the FCI.

To support the costly operations of the FCI, Central and State level regulations restrict private buying and selling. Moreover, FCI's operations (procurement, distribution and buffer stocking) have repressed private foodgrain marketing, hindering their potential contribution to long-term food security. A major stumbling block is the Open Market Sales (OMS) or commodity dumping operations of the FCI. It sells or buys foodgrains in the open market, to accordingly depreciate or appreciate the prices prevailing in the market. This undercuts trade of the market open to private activity. Such sales by the FCI can be sizable. From 1990-91 to 1995-96, its cereal open market sales ranged from 50,000 tonnes to 6 million tonnes. So, in the name of food security FCI has stunted efficient private market operations.

Ken Schoolland writes in The Adventures of Jonathan Gullible: A Free Market Odyssey:

Low prices might hurt the farmers, but don’t high prices hurt consumers? Aren’t farmers consumers too? An attempt to satisfy all would simply lead to an economic collapse. At the same time, the nation cannot achieve national food security at the cost of denying opportunity to farmers to operate freely. Contrary to what it is doing, the government should give incentives to the private sector and the civil society in providing national food security.

Hedging risk—agriculture futures markets

Futures contracts are standardised forward contracts that are tradable, and Futures markets, where trading of these contracts takes place. Futures contracts represent an obligation to make or take delivery of a fixed quantity and quality of a commodity, at a specific location and date. In contrast forward contracts are not standardised and are non-tradable. A futures market is an organised place, providing the facilities for futures trade; either via an "open outcry" exchange or an electronic market.

Futures and forwards contracts face a general ban with the only exceptions being six minor agricultural commodities (raw jute and jute goods, black pepper, castor seed, jaggary, potatoes, and turmeric) traded at twenty-six recognised commodity exchanges. Forward trading is allowed only in cotton lint, jute goods, raw jute, and hessian. Doubtful as it may seem today, India has had a long and well-established history of commodity futures markets dating as back as 1921. Futures contracts are governed under the Forward Contracts (Regulation) Act, 1952, which provides the government a three-tier framework for regulating futures trading activities. The Forward Markets Commission (FMC), a statutory body under the administrative control of Ministry of Civil Supplies and Public Distribution, monitors futures markets and controls the operations of the recognised commodity exchanges, which, in turn, organises futures trading in selected agricultural commodities as per its trading by-laws.

The usefulness of Indian futures markets is severely repressed by the selective and restrictive implementation of the regulatory framework. Both GoI and FMC, by intervening extensively or selectively, restrict access to futures markets. The limits imposed by the FC(R) Act on contract specifications such as transferability, have become so stringent that they make futures trading an unattractive operation.

Economic benefits from using Futures Markets

The two main economic roles of future markets are: (a) Hedging price risk and (b) As a price discovery mechanism. Though supply of primary agricultural commodities is concentrated at the time of harvest, its demand is perennial. To bridge the gap between supply and consumption, efficient storage is required. Stockists not only freeze up working capital but also face downside price risks. Futures trading allows stockists to hedge against price risks; it reduces the risk premium added to storage margins.

At the time of planting or sowing, farmers are unaware of prices that would prevail at the time of harvest. By providing a mechanism for the discovery of prices in the future, futures markets facilitate production, processing, storage and marketing decisions. It helps farmers, traders, processors, and exporters by improving price discovery in their forward planning decisions. With more competition due to opening up of world agricultural markets, such mechanisms would become more important. Futures markets also promote inter-seasonal and intra-seasonal price stability.

Opportunities and options for futures markets

Economic advantages of futures markets are reduced by government interventions on physical commodity markets. The specific and ad-hoc controls on storage, movement, and access to trade credit severely hamper the benefit by preventing the arbitrage of agricultural commodities across space and seasons in an efficient and competitive fashion.

A comparison with American and European agricultural policies clearly shows the potential and the limits that government interventions impose on the performance of futures markets, and the latter's contribution to a strategy for risk management in agriculture. This not only strengthens the case against policy intervention by the GoI, but it also tells us the government should take drastic steps to improve the working of Indian Futures Markets. The Kabra Committee (1994), formed to review futures trading in India, recommends the introduction of futures markets for more agricultural commodities. The government should remove the general ban on trading and barriers set up impeding the working of Indian futures markets.

From the horses mouth

After half a century of government initiatives agriculture is still not commercially viable. According to the Prime Minister’s Advisory Council on Agriculture:

The government has initiated a piecemeal reform process but actions speak louder than words. In March 1993, the central government announced its policy to treat the entire country as a single food zone. Following that the Chief Minister's Conference held on November 27, 1998 looked into the matter in detail. It was promised that immediate action would be taken to remove restrictions, including informal restrictions, if any, on the movement of essential commodities so that the free flow of essential commodities would be ensured. Although the government had realized that the removal of restrictions is an important pre-requisite for ensuring the economic unity, stability and prosperity of a country having a two-tier polity, a change at the grassroots is yet to be seen. The speeches have yet to turn into results.

Epilogue–-Don’t tread on me!

In the words of Chief Vigilance Commissioner, N Vittal, "One cannot get out of the present deadlock in our food management scene unless we take imaginative action. Can the problem we face in food management today be converted into an opportunity for a better system of food management for the future?" Yes, we can. The imaginative but do-able action should be a 3-pronged agenda:

1. Movement of goods should be freed from formal and informal controls.
2. Farmers should be allowed to take part in the market.
3. Government should channelise investment into marketing infrastructure for agriculture.

Appendix-1

State-wise position on restrictions imposed by State Governments/Union Territories on movement of food and agricultural produce

Appendix-II

State-wise position on restrictions imposed by State Governments/Union Territories on storage of food and agricultural produce

References

1. Akiyama, Takamasa (ed.) et al., Commodity Market Reforms--Lessons of Two Decades, World Bank, 2000
2. Bhalla, G S (ed.), Economic Liberalization and Indian Agriculture, Institute for Studies in Industrial Development, 1996
3. Chum, B K, "CACP Suggests Major Changes in Farm Policy", Economic Times, June 20, 2001
4. Delhi Declaration on the eve of Kisan kumbh April 6, 2001 at Jawaharlal Nehru Stadium, New Delhi, Krishi Yogak Sanshodhan Nyas, Pune, 2001
5. ET In the Classroom, "What is Minimum Support Price?" Economic Times, June 25, 2001
6. Food Corporation of India, "About FCI", July 2, 2001, http://www.fciweb.nic.in
7. GoI, 2001, The Essential Commodities Act, 1955 along with the Essential Commodities (Special Provision), 1981 and the Prevention of Blackmarketing and Maintenance of Supplies of Essential Commodities Act, 1980, (Universal Law Publishing Co. Pvt. Ltd.)
8. Gulati, Ashok, "Liberalizing Indian Agriculture" Agenda for Change, Rajiv Gandhi Institute For Contemporary Studies and Centre for Civil Society March 1998, pp. 85-98
9. Gulati, Ashok "Suggestions of the Prime Minister's Advisory Council on Agriculture", July 6, 2001, located at http://pmindia.nic.in/pminitiatives
10. Jain, Suhdir Kumar, Yatindra R Naik, and Ritesh Singh, "The Indian Commodity Futures Market under New Paradigm: Opportunities and Constraints", Financing Agriculture, 2000, April to June
11. Mitra Amit and Parna Dasgupta, "Essential Commodities Act: How Essential?" Agenda for Change, Rajiv Gandhi Institute For Contemporary Studies and Centre for Civil Society, No., March 1998 pp. 61-66
12. Moses, Mohandas, "Food Security: The Need to Get to Basics", Economic Times, May 30, 2001
13. Rajgopal, "Development of Agricultural Marketing in India" Jaipur: Printwell India, 1996
14. "Removal of Restrictions on Movement and Stocking of Food and Agricultural Produce", Department of Consumer Affairs, Ministry of Agriculture, 2001
15. Schoolland, Ken, The Adventures of Jonathan Gullible--A Free Market Odyssey, second edition, Hawai: Small Business, 1995
16. "Statewise Position on Restrictions imposed by State Governments/Union Territories on Movement and Stocking of Agricultural Produce", Department of Consumer Affairs, Ministry of Agriculture, 2001
17. "Sugar Industry: High Price of Controls", Economic and Political Weekly, Vol. XXXVI, No. 2, January 13, 2000
18. Swaminathan, Madhura, "Understanding the Costs of the food Corporation of India", Economic and Political Weekly, Vol. XXXIV, No. 52, December 25, 2000
19. Thamarajakshi, R "National Agricultural Policy", Economic and Political weekly, August 26-September 2, 2000, pp. 3237-3240
20. Vittal, N, "Food for thought", Economic Times, June 30, 2001
21. World Bank, "India, Foodgrain Marketing Policies: Reforming to Meet food Security Needs" World Bank, August 17,1999, Volume I & II
22. World Bank, "Managing Price Risks in India's Liberalized Agriculture: Can Futures Markets Help?" New Delhi: Allied Publishers, 1999
23. Vyas, V S, "Agriculture: Second Round of Economic Reforms", Economic and Political Weekly, Vol. XXXVI, No. 10, March 10, 2000