Value chains and agricultural marketing in India

A discussion of value chains in India would remain superficial without a discussion of agricultural marketing in the context of the country’s Agricultural Produce Marketing Committee Act. The first Agricultural Produce Marketing Committee (APMC) Act launched in 1969 was designed to provide farmers with market infrastructure and to protect them from exploitative middlemen. The Act, however, led to unexpected negative externalities, rendering the marketing chain inefficient. Critics complained that

Table 1: Food retail establishments in India by type Type of outlet Central plazas/ bazaars Street markets and roadside standsSmall stores/kiranasMidsize stores Hypermarkets, etc.

Estimated number

1,00010 – 12 million> 6.5 millionRelatively small number

Estimated store size Groups of approx- imately 100 stalls.

Average size is 0.5-1 m² by 1-1.5

m².

Varies greatly. Can

range from a table to a lar ge shop with multiple vendors.

Less than 185 m²280 – 600 m²2,300 – 14,000 m² TypeUnorganisedUnorganisedMostly unorganised, but some organisedOrganisedOrganised Character- istics

Groups of stalls that together sell a lar

ge range of

items, usually within a building complex.

Generally little to no ambiance.

Range of products from limited amount to a wide range of goods. Generally little to no ambiance but good customer service.

Often clean and well lit. Self-ser

- vice.

Quality varies, both for the store itself and for the presentation of products.

Types of products sold A wide selection of goods, includ-

includ-ing local fruit and vegetables,

pulses,

snack foods, and spices. Some processed and consumer goods. Small amount of imported fruits.

Selection of goods can range from a handful of items at small stores to a wider range (20-30 different fresh items) at large stores. Imported fruits available.

Produce selection aver- ages 15-30 items. Also

dry goods. Some have bakeries and/or meat counters. Mainly at organised outlets: do -mestic food brands and some imported foods. Some outlets of

fer dairy and/or frozen foods.

Produce selection averages 20-50 products, although some chains of

fer

a significantly greater selection. Domestic food brands available and some imported foods.

Range of prod- ucts, e.g. domes- domes-tic and foreign origin produce, dry goods, bever

- ages, and snack

foods. Some have bakeries and meat sections.

Also non-food items. Source: Adapted from USITC, 2009

[...] the monopsonistic markets (locally known as ‘mandis’) have been exploitative of farmers with their huge presence of intermediaries like the commission agents, wholesalers, sub-wholesalers, etc, and their non-transparent methods of weighing, pricing, payment of commissions, taxes and payments for the produce. (Joseph, 2013)

In many states, mandis (wholesale markets) were non-functional. The required facilities were not provided or were provided insufficiently, especially for cold storage (Acharya & Agarwal, 2011). Preliminary interviews with Indian experts had also indicated that actual transactions often did not take place on the mandi premises: the insufficient number of mandis meant that farmers had to transport their produce over long distances to reach a regulated market. Farmers then resorted to holding transactions outside the mandis but the APMC still continued to collect market fees for the exchange. In the end, farmers ultimately paid not only the APMC market fee but also commissions for middlemen, with expenses totalling around 1 per cent of the total value of produce sold for the former and 6-8 per cent for the latter. Further, farmers selling at state-regulated mandis were reported to suffer from limited price information and from non-transparent price-setting mechanisms (Acharya & Agarwal, 2011; Joseph, 2013; GoI [Government of India], 2011b).

In 2003, the Model APMC Act was introduced to resolve these negative externalities that had arisen from the original APMC Act. Though critics indicate that the state mandis, which were regulated by local government committees, pursued business as usual under the previous Act (Joseph, 2013), the main innovation of the Model APMC Act was the creation of three new alternative marketing channels as the first point of sale for agricultural producers (USITC, 2009) (see Figure 1):

• Direct marketing: The farmer is allowed to sell his products to consumers directly.

• Private mandis: Individuals or firms can acquire a license from the state government to own a private mandi and buy directly from farmers. This allows private mandi owners to grade purchased products and increase their quality while being able to determine prices. Private mandi owners also tend to save on middlemen costs and to obtain guaranteed access to storage facilities.

• Contract farming: Farmers and firms can mutually agree upon contract terms, short-circuiting local markets. The purchasing firm is warranted with a stable supply of products at an agreed quality and price. This may contribute to reducing transaction costs when contracting with large numbers of smallholders.

Figure 1: Indian agricultural marketing and distribution structure in AMPC states stored in a central pool

(buffer stocks)

(may do direct marketing, or act as processors, wholesalers and retailers)

Source: Adapted from USITC, 2009, section 7-3

The majority of Indian farmers own very little agricultural land. According to the latest agricultural census from 2010-2011, a total of 159.18 million hectares (ha) are shared among 138 million operational holdings (of which 12.79 per cent are held by women), leaving the average farmer with 1.16 ha of lands. Holdings are categorised according to the area cultivated.

Marginal and small holdings constitute a total of 84.97 per cent of all holdings, covering 44.31 per cent of operated area, while large holdings constitute 0.73 per cent of all holdings, covering 10.92 per cent of operated area. It should be noted that the average size of holdings in India has been steadily decreasing since 1970. This trend has been caused by a decrease of

the number of medium and large holdings and an increase in the number of small and especially marginal holdings (GoI, 2012a) (see Table 2).

Table 2: Size categories of Indian holdings

Marginal Small Semi-medium Medium Large

Below 1 ha 1 – 2 ha 2 – 4 ha 4 – 10 ha Above 10 ha Note: ha = hectares

Source: GoI, 2012a

Coupled with very high to extreme poverty rates, especially in rural areas, smaller-sized holdings tend to lead to subsistence farming. Only 50 per cent of cereals and pulses, which represent the bulk of the local diet, are marketed (USITC, 2009), leaving the rest for domestic consumption. The marketed surplus output ratios of fresh vegetables are higher (for example, in 2007, a total of 79.2 per cent of vegetables output was marketed), as fruit and vegetables are usually considered as cash crops. FV cultivation is said to be geared to the expanding urban market and covers 13.7 per cent of all the operated area in India (GoI, 2012a).