Reforming the Three I’s: Investments, Incentives and Institutions

I. Investments
Problems: Lack of infrastructure and organized market structure stand in the way of successful
diversification.
Supply Chain Management
 In the case of Horticulture produce, the farmers receive only 12-15% of the price paid
by the retail consumers in export market.
 In the Value chain for mango and litchi in Bihar, a significant amount of consumer price
is lost in transport and wastage and farmers receive only 34% and 42% respectively of
that price.
Public Resource Allocation
 75% of public resources are subsidies on fertilisers, irrigation and power.
 25% of the public resources are public investment in agriculture (out of which 90% is
on major an d medium irrigation.)
 Culture of proliferating subsidies crowds out public investment and distorts cropping
pattern and posing environmental stress.
 Over exploitation of groundwater in Punjab due to extensive paddy cultivation
encouraged by free power.
 Gujarat’s Jyotigram experiment wherein the feeder lines have been separated for
agriculture.
 Technical solutions to distributing power subsidies directly to the farmers through
‘smart cards’ that enable electronic meters to operate.

Solutions:
 Private sector responds better to incentive framework; thus private investments should
be encouraged to transform Indian agriculture.
 Public resources should be allocated on agricultural R&D, rural roads and electricity
where returns are the highest.
 Investment in supply chain to reduce the difference between what the farmers receive
and the amount paid by the retail consumers in the export market. Moreover, supply
chain management requires more investment to protect farmers from the loss in
consumer price due to transport and wastage.

1
 II. Incentives
Price and Marketing Policy is getting ‘prices right’
Problems:
 The 1991 reforms helped to reduce ‘implicit taxation’, however occasional intervention
by the Government such as export bans on wheat and rice or the limits on stocking
grains by private trade persuade private sector to withdraw from investing in
agriculture.
 MSPs have become de-facto Procurement price and this discourages farmers to
diversify into high-value crops that do not have support or Procurement price.

Solutions:

 Delink Minimum Support Price(MSP) from Procurement Price(PP). Actual

procurement price should be market price driven not MSP driven
MP<MSP, farmers gain.
MP>MSP, farmers incur a loss
Procurement prices >>higher than MSP
PP is based on the MSP.
Thus, for farmers to incur gains, we need to link it to MP not MSP.

@which Government will buy.

Minimum Support price Meant to serve as “floor” price, below which Government will not allow prices to fall.
Based on COP (Cost of Production)

@which FCI will purchase food grain for PDS distribution system
Procurement price
Procurement prices >>higher than MSP

 Abolition of all levies on rice and sugar

 Free mobility of goods across the country
 Abolition of stocking limits, export bans, bans on future markets and on private trade
 Unified national market for agri business

2
 III. Institutions

A. Marketing and Warehouse Facilities

 Abolish Essential Commodities Act,1955 for agriculture
 Reform the Agricultural Produce Marketing Committee Act (APMC)
Problems: The Acts were implemented to protect the farmers from the exploitations in
marketing their produce. However, this resulted in excessive government control.
Solutions: Reforms would trigger private sector investment in developing regularised market
logistics and warehouse receipt system, futures markets and also in infrastructure (cold storage,
quality certification) for imports and exports
What is ECA?
While India is a market economy where prices are decided by demand and supply, certain
laws empower the Centre to intervene in the market to protect consumer interests.

Government regulates the production, supply and distribution of a whole host of

commodities it declares ‘essential’ in order to make them available to consumers at fair prices.
The Centre can include new commodities as and when the need arises, and take them off the
list once the situation improves.
How does it work?
If the Centre finds that a certain commodity is in short supply and its price is spiking, it can
notify stock-holding limits on it for a specified period. This improves supplies and brings
down prices.
What is the flipside?
Almost all crops are seasonal, ensuring round-the-clock supply requires adequate build-up of
stocks during the season. So, if prices are always monitored, farmers may have no incentive to
farm.
Why should we abolish ECA, 1955 for agriculture?
Stock limits curtail the functioning of food processing industries which maintain large
stocks of commodity to run their operations smoothly. Thus, large scale private investments
are unlikely to flow into food processing and cold storage facilities.
Removing stock restrictions from agriculture commodities will lead to organised trading,
improve scale and logistics benefit .

3
Reform APMC
Agricultural marketing covers all the activities in the movement of agricultural products
from the farms to the consumers.
What is a regulated market?
The regulated market aims at the elimination of unhealthy and unscrupulous practices,
reducing market costs and providing benefits to both producers as well as the sellers in the
market.
Drawbacks of regulated markets
Under this regulation, no exporter or processor could buy directly from farmers. It discouraged
processing and exporting of agricultural products.
Private players were discouraged from setting up markets and investing in marketing
infrastructure.
Reform APMC
Solution: Amendments in APMC Acts
The APMC Act be amended to allow for direct marketing and the establishment of
agricultural markets by the private and co-operative sector to provide more efficient
marketing and creating an environment conducive to private investment.
There will be no compulsion on the growers to sell their produce through existing markets
administered by the Agricultural Produce Market Committee (APMC).
National Agriculture Market (NAM):
NAM, announced in Union Budget 2014-15, is a pan-India electronic trading portal which
seeks to connect existing APMCs and other market yards to create a unified national market
for agricultural commodities.
NAM is a “virtual” market but it has a physical market (mandi) at the back end.
NAM creates a unified market through online trading platform both, at State and National
level and promotes uniformity.
The NAM Portal provides a single window service for all APMC related information and
services.
While the material flow of agriculture produce continues to happen through mandis, an online
market reduces transaction costs and information asymmetry.

4
 B. Reforming Land and credit markets
Legalising Lease markets
Legalising lease markets protects the interests of the retailers /processor and enables to
undertake larger investments.
Registration of land deeds and computerisation of land records for bringing larger transparency
and reliability.
Marketability of land
Marketability of land will enhance access of farmers to institutional credit.
80% of the indebted farmer households have availed 50% of their loans from non-institutional
sources.
The interest rates are as high as 30%.
One way is to bring moneylenders into the organised network as NBFI’s.
Reforming Land and credit markets
High value agriculture has the potential to create both farm and off-farm employment
opportunities.
Agriculture can no longer be concentrated to farming and needs to be concentrated to off-
farming activities such as input supply, logistics and warehousing, processing,
retailing/wholesaling.