The NDA government has shown a lot of resolution in getting things done; Jan Dhan is an example of a scheme being implemented with a fairly good degree of success. While banks kept toying with the idea of spreading financial inclusion, in a single stroke, the government has managed to get 215 million accounts opened. However, the use of these accounts in a continuous manner would be validated only with time.
The National Agricultural Market (NAM) is another government initiative to introduce transparency and flexibility in the trading of farm products. When such an initiative is taken, the choice is between creating the infrastructure first before the system; or setting up the system and then working towards creating structures.
Working approach
Both approaches have their risks. Creating the infrastructure first could take a lot of time, which can be self-defeating. On the other hand, having a system without the infrastructure can be a losing proposition to begin with, if access is not possible.
Ideally, the system should mimic the present one on a different delivery mode to work well. The government has pitched for creating systems first and then working towards the development of the infrastructure, which it assumes will evolve over time.
Currently, farmers have to sell produce in the mandis in their vicinity and hence cannot sell at a higher price to buyers from other States, even if there are offers at the first stage of sale. This is because the buyer has to pay a mandi fee which is revenue for the agricultural produce market committee (APMC).
By having a national market, a farmer can offer to sell in Nashik while the buyer can be from say, Surat. This provides a wider market for the farmer, and as it is electronic the settlement is seamless with the APMC also getting its fee.
This model looks very neat. But the reality is complex. The small farmer often is located several miles away from the mandi. He does not have access to credit channels and depends on the intermediate adathiya (commission agent).
The adathiya, contrary to the impression created, has an important function. He advises the farmer, provides credit, sells seeds, and most importantly has a buyback facility from him so that the farmer is assured of sale at a predetermined price which could be lower than the market price.
But the adathiya takes the onus of price risk and has to transport the same to the mandi for sale and take control of the other related expenses of packing, carriage, carrying cost etc. Unless we are able to provide roads and transport facilities from the interiors to the mandi, the farmer will always have problem of access and stick to the regular channels. Alternatively, all villages should have connectivity and electricity.
Standards and regulations
Next, once the farmer enters the mandi, there is the issue of grading of the commodity. Today, the grading is mostly done through physical inspection where the experts literally put their hand inside and judge the quality.
We still do not have uniform standards to classify commodities as several grades are available for different commodities. There are about 50-70 grades of rice and wheat which come in different forms. The products here cannot be standardised, which poses challenges.
Third, a uniform system of weighing is required, which though now prevalent has to be regulated well as any incorrect delivery could lead to litigation. As of today, the deal takes place in the mandi and hence both the buyer and seller see each other and the quantity that is weighed.
The moment it becomes anonymous when the trading is electronic, disputes would arise that have to be resolved. Therefore, a dispute resolution mechanism has to exist.
Fourth, the most important factor that will determine the success of this system is warehousing. When the farmer sells to a party outside the mandi locality there would be a time lag between the sale and the pick-up.
This requires robust delivery systems which are certified and have all the requisites required for storage. The issue of co-mingling has to be addressed or else the buyer may not get what he thought he would get when the deal was struck. Do we have these many warehouses?
Further, the warehouses must have adequate safeguards against rodent attacks as well as pilferage. Unless this system is perfect there will be several disputes.
Fifth, the farmer who sells goods has to be paid on time. Therefore the settlement process is important. The margining system used in the case of futures trading can run into rough weather, in case there are defaults. At the same time taking full payment upfront can lead to buyer dissatisfaction in case the product falls short of expectations. Alternatively, the NAM needs to have systems that provide refunds across the country in case the deal is rejected.
Need more awareness
Currently, the farmer gets the money once the deal is struck. In the electronic form the money will come with a lag into a bank account which means that unless such an account exists, the seller is out of the system.
Therefore, having a Jan Dhan account is necessary. The level of awareness is still low and ground level reports indicate that while accounts have been opened the deposit holders often do not have a clue as to what they are. The spread of payments banks and small finance banks should help.
The idea of a national market is alluring as it resembles seamless trading just like retail e-commerce. But agriculture is complex and unorganised and, hence, while we can be sure of what, say, a Big Basket delivers the same may not be the case if we buy rice from a distant location. This is due to the absence of standardisation.
NCDEX today runs a very vibrant spot exchange and future evolution of NAM should be borrowed from this model, which corporate buyers find useful. However, when it comes to individual wholesalers, it would still be an enigma which will be tested over time. This initiative is commendable and we have to give it time to work. Awareness is important; if we look at the futures market, which is electronic, farmers are not into trading on account of absence of knowledge.
They operate within traditional system of the ‘adathiya’, which is hard to dislodge. Therefore, the development of the NAM will be a gradual process, though the effort should be continuous and enthusiasm should not slacken.
The writer is chief economist at CARE Ratings. The views are personal
(This article was published on May 3, 2016)
