In December 2020, in line with the Central Farm Laws, the Government of Karnataka passed an amendment to the Karnataka Agricultural Produce Marketing (Regulation and Development) Act, 1966. This amendment reduced the scope of the Agricultural Produce Marketing Committees (APMC) by effectively ending their status as the only place (with some exceptions) where wholesale agricultural trade was permitted by law. Despite the three Central Farm Laws being repealed after the year-long farmers’ struggle, the Government of Karnataka has not yet repealed its amendment to the APMC system.

State Law Minister J. C. Madhuswamy had stated at the time of introducing this amendment that farmers would be free of exploitative intermediaries with these reforms. He claimed that the private companies involved in food processing can go right up to the doorstep of the farmers’ houses and directly purchase the product from them. To quote him, “Farmers are free to sell their produce at APMC yards or private markets. The choice is up to the farmer.” So, has the reform benefited the farmers? While the question is complex, given the heterogeneity of Indian agriculture and the short period since the amendments have been introduced, I attempt to provide some insights from information obtained on market arrivals and prices, and interviews conducted at the Bangalore APMC.

A scene at the Yeshwanthpura APMC market during FAS field visit.

APMC System and the Reforms

One of the key functions performed by the APMC markets is to act as a platform for price discovery. The transactions inside APMC market are a result of interactions between various economic agents. The farmer brings produce to the market, which is then arranged for sale by commission agents, who markets the product as a representative of the farmer. The commodity is then displayed to the traders who determine the prices through a regulated (including auction) mechanism. The whole system is supervised by the elected committees. The revenues earned from these transactions help APMCs in meeting their expenditure and for investment in market infrastructure.

Some economists have argued that the current structure has many infirmities and these were addressed by the (now-repealed) Farm Acts. Arguing in favor of the amendments, proposed at the Central level, Ramesh Chand said that deregulation in Indian agricultural marketing will boost competition, destroy the monopsonist clutch of the agent-trader cartel, lead to efficiency, and maximize economic surplus. Similarly, Gulati et al. argue that farmers’ bargaining power, in terms of the selling price, lower commission, accurate weighing, and faster payment, increases with access to multiple marketing channels.

However, as pointed out by many others (eg. Krishnamurthy, Aggarwal, et al ), these arguments do not take into account several features of the situation on the ground. The implicit assumption in deregulating agricultural marketing is that the transacting parties are well-informed and have equal bargaining power, which is not supported by reality. There is an income/endowment imbalance, and information asymmetry between the private firms/traders, commission agents, and farmers. Very often farmers are at a position of disadvantage than others. APMCs, by way of having standards for weights and means to enforce payments, are better placed to protect the interests of weaker farmers.

But this does not necessarily mean that all farmers access APMC. A large proportion of Indian farmers sell their produce soon after harvest as they lack storage facilities and adequate credit facilities. According to the 77th round of the National Sample Survey, a large proportion (55 – 93 per cent for various crops) of agricultural production reported at households gets sold in the local market. Only 3 – 22 per cent reaches the APMC markets, while the government procures around 2 – 14 percent. Some of the reasons reported by farmers for not accessing the APMCs or other government procurement centres are lower-than-market prices, poor weighing systems, delayed payments, and loan repayment withdrawal. While this implies that the current working of the APMC system is not satisfactory, the results also dispel the notion that farmers are shackled to sell their goods in the APMC markets.

An Illustration from Karnataka

Let us now look at what has happened specifically in Karnataka. Since Karnataka is a large State with a diversity of cultivated crops that are marketed in specific regions, I chose onion in Bengaluru (Yeshwanthpura) APMC for studying the specific effects of the APMC amendment. Onion is one among the biggest traded commodities in Yeshwanthpura. Since it is a widely-consumed perishable commodity and given that Bangalore provides good infrastructure and other amenities, private agencies can set up their markets with relative ease, if they are interested in taking advantage of the APMC amendments. I visited the Yeshwanthpura APMC with my colleagues from the Foundation for Agrarian Studies to understand the effects of the APMC amendment. To examine the changes across time, I also compared the data on weekly market arrivals (in tonnes) and average prices (rupees per tonne) of onions in Yeshwanthpura APMC for four agricultural years (July-June).

There were several interesting observations from the visit to the Yeshwanthpura APMC. First, onion come from different parts of Karnataka and even from neighbouring States, such as Maharashtra, catering to a wide range of buyers and sellers spread across India. Secondly, the interviews with commission agents and officials point to a decline in market arrivals of onion. But rather than the APMC amendments, they attributed this decline to a decrease in production of onion in Karnataka. However, production estimates before 2021 do not point to a State-wide decline and estimates after 2021 are not available yet. Thirdly, according to the interviews, the network of commission agents and traders at Yeshwanthpura provided a superior alternative to selling farmers. Available opportunities at farmgate for a farmer can never be a match for this established network, which provided a competitive marketplace for buyers.  From our interaction, it does not appear that the APMCs are losing any relevance immediately, despite the amendments.

The analysis of secondary data also points in this direction. If it was indeed the case that private competition was curtailed by the existing system, the new amendment would have resulted in an increase in trade shifting towards private markets. That is, the market arrivals in APMC markets would have decreased after the reform. The arguments for deregulation also suggest that increased competition, by way of allowing private players, would increase producer surplus, that is the prices realized by farmers. Consequently, the data from the APMCs after the reforms should show both a decreased market arrival and an increased price.

Figure 1 shows that the peak arrivals in the agricultural year 2021-22 (dark black line) have declined compared to other years. The only year lower than the year 2021-22 is the year 2020-21, which is partly accounted for by disruptions due to the Covid-19 pandemic. Graphically, however, the decline in 2021-22 does not deviate too much from the other years. Figure 2 traces the weekly modal prices of onions. As we can see, despite the reduction in the arrivals, the prices in 2021-22 have not been substantially higher than in the other years. The two graphs show that there may have been other factors at play for this situation, which have to be investigated in detail.

Concluding remarks

Economic reforms take a long time to show their effect. Since our evaluation period is relatively short, the full impact of the reform may not yet be visible.  It may also be the case that different crops are impacted differently considering the variations in marketing conditions. But an  examination of the APMC system brings out two important realities.

First, better price discovery requires competition amongst both the buyers and the sellers and supervision of transactions, something that is facilitated by APMCs even with all its limitations. The smallholder cultivators at the village level will inevitably have fewer options than what is provided by APMCs, since increased transaction costs will disincentivise the buyers. Secondly, the operations of APMCs, that act as a key network in agricultural marketing, would be affected if their revenues are impacted, which are crucially dependent on market arrivals. While there does not appear to be a very large reduction in market arrivals due to amendments to the APMC Act, this possibility cannot be ruled out completely.

Deregulation of the APMC markets premises its rationale on the ineffectiveness of regulated markets. While broad-basing APMCs and providing more opportunities for marketing are required, the current context of reforms is not focused on achieving these objectives. The arguments about collusion by traders, entry barriers, lack of warehouse infrastructure, improper assaying facilities, and a fragmented and low-density market, should all be seen along with the basic benefits offered by APMCs in terms of price discovery, network of buyers and sellers, and grievance redressal systems. A simple shift toward a free market mechanism, without considering these necessities and the complex socio-economic realities of farmers, can be counterproductive.