[Economic Survey] Ch8: National market for agriculture, NSEL

crisis mrunal.org
1. R1: APMC Act
2. Why do we need a National Market for Agriculture?
1. How to setup national market for Agriculture?
2. Budget 2014 announcement
3. R2: Commodity market
1. What is NSEL crisis?
2. Who is Jignesh Shah?
3. Steps taken to fix NSEL crisis
4. Why do we need Commodity markets?
5. Commodity trading Policy uncertainty
6. WDRA
4. R3: Productive vs Production
5. R5: small-marginal farmers= less productive?
6. R6: Farm Mechanization = why necessary in India?
7. Overall Reforms required
Prologue
Economic Survey 2013: Chapter 8 on Agriculture. 4 subparts.
1. Schemes and budget 2014 announcements
2. Food Subsidies: MSP, Nutrient based subsidy, FCI, Bali problem.
3. Overall reforms- APMC, National market, Commodity market etc. (Mostly, mains fodder
but not much for prelims, so you may skip this one for now.)
4. El-Nino, its impact on Indian agriculture. (Old article but updated with points from
Economic Survey).
Indian Agriculture: Strength/potential
1. Share in GDP: 14% (Service > Industries > Agriculture)
2. Share in employment: ~49% (Agri > Services > Industries)
3. 1st rank in Milk (17% of world production)
4. 1st rank in Mango, banana, coconut, cashew, papaya, peas, cassava and pomegranate
5. Largest producer and exporter of spices
6. Overall, second largest producer of vegetable, fruits and fishes
7. Weather permits multiple crops throughout year.
Why focus on Agriculture
BRICS study: 1% Growth in Agro=2-3 times more effective in poverty removal (than
equivalent growth in industries or service sector).
Canada, US: mechanized agriculture, large track of land = they lead in wheat and corn
production.
Game collapsed when FMC ordered them to settle all contracts
within ten days (T+10)
India has large population = can focus on labour intensive high value agriculture example
saffron, fruits and vegetables.
India can be a producer and exporter in all these areas = high income for everyone=a
livelihood in agriculture does not have to be a promise of poverty.
Aids in women empowerment. HOW?
~10% of total rural households headed by a woman.
Women play productive roles in all facets of the agriculture, dairy and sericulture.
Therefore agri reforms => income rise => women empowerment.
R1: APMC Act
What is APMC act, how does it lead to
harassment of farmers, what is Model
APMC act.all topics covered in detail
under [Food processing] series, click me.
Why do we need a National Market for
Agriculture?
After LPG reforms in 1991, Industrial
sector allowed to buy from, and sell to,
anyone in the world
But Under State APMC Acts, the Indian
farmers are still required to buy and sell
only in the government-designated
Mandis known as Agricultural Produce
and Marketing Committees (APMC).
Farmers are not allowed to sell their produce directly to the consumers.
The monopoly of government-regulated mandis has prevented development of a
competitive agriculture marketing system in the country.
These Mandis dont even have proper physical infrastructure = fruits/veggies damaged +
nuisance of middlemen = they charge commission and involve in hoarding of onions and
potatoes.
Ultimate result: food inflation.
To solve this issue- union Government circulated the model APMC Act 2003 to states.
Some states adopted it, but overall, even the reformed APMC act has not solved the
problem.
Therefore, Survey recommends a national market for food / agriculture
Jaitley budget promises to do the same.
Challenge: To create a national market the central government needs to use powers
under the Union List and the Concurrent List of the Seventh Schedule of the Constitution to
end the APMC.
How to setup national market for Agriculture?
Survey recommends following steps:
1. Parliament should pass a new law, to setup a national market for agriculture.
2. Parliament should also create a statutory Commission to monitor this national market, to
prevent any cartels and anti-competitive practices.
3. Itll override statewise APMC laws.
4. Farmers and traders will be free to buy/sell across state borders.
5. APMC mandis can continue functioning but farmers will have no legal obligation to sell
produce in them.
6. Also, Permit sale and purchase of all perishable commodities such as fruits and
vegetables, milk and fish in any market, and exempt market fees on them.
7. Reduce commission charges on agricultural/ horticultural produce.
8. Encourage self-help groups (SHGs) to organize farmers markets near urban centres,
malls, etc. that have large open spaces. - At least one agriculture market within 5 km
radius.
Existing direct marketing initiatives
Apni Mandi Punjab
Uzhavar Sandhai Tamil Nadu
Shetkari Bazaar Maharashtra
Hadaspur Vegetable MarketPune
Rythu Bazar Andhra Pradesh
Krushak Bazaar Odisha
Kisan Mandi Rajasthan
If company helps setting such direct agriculture markets, count it under corporate social
responsibility (CSR) activities under Companies Act 2013. (so company can fillup their
mandatory 2% CSR quota).
Setup supply chain infrastructure- similar to the e-Choupal initiative of ITC Ltd.
Tie-up with commodity exchanges to help farmers know spot and futures prices of
agricultural commodities. So, they can decide next crop accordingly.
Budget 2014 announcement
We will work closely with the State Governments to re-orient their respective APMC
Acts.
This will help setting up private market yards/ private markets.
Well encourage state governments to develop Farmers Markets in town areas to
enable the farmers to sell their produce directly.
R2: Commodity market
Farmer deposits his wheat in a warehouse.
He gets a warehouse receipt.
He can mortgage this warehouse receipt to a banker to get loans. OR
He can trade this WR @Commodity exchange.
In commodity exchange there are variety of trade agreement
Game collapsed when FMC ordered them
to settle all contracts within ten days (T+10)
Game collapsed when FMC ordered them to settle all contracts within ten
days (T+10)
Typewheat price interpretation
T+2 Rs.1400 Ive to pay within 2 days to farmer, and he gives me the WR.
T+20Rs.1800 Ive to pay within 20 days, this much money and farmer must be give WR.
Usually, longer duration contract has higher price.
But Farmers usually sell on shorter duration because they need quick money for next
crop. So if I bought a WR in T+2 and sold to another guy @T+20, I would make profit. Well
and good.
What is NSEL crisis?
NSEL is a commodity exchange
platform. In BSE, shares are bought
and sold. Similarly @NSEL, the
warehouse receipts are bought and
sold.
NSEL launched an E-series
platform to do online trading of
commodities.
Problem comes with entry of
middlemen- they asked investors
to give money, with following
promise
1. We use your money to buy WR
(from farmers @cheap cost).
2. We sell those WR to other parties (when prices are favorable), and make big profits for
you. (This is one way how hoarding happens, because someone has stock in warehouse,
but not selling it in hope of higher prices in future).
Who is Jignesh Shah?
NSEL => parent company FTIL => its boss Jignesh Shah.
Jignesh Shah and the middlemen connived and began make contracts using fake
warehouse receipts e.g. T+20, T+30. etc.
Their gameplan was to arrange genuine receipts within those 20-30 days (using
investors money).
This scam ran for long. Something like this- you go to a bookstore, owner lies to you
Ive book in godown, just wait for 20 minutes.and in the meantime, his assistant
arranges book from another store.
NSEL CEO Anjani Sinha & other executives turned blind eye, because NSEL would
earn ~2% commission on every contract. (And Jignesh was boss of their parent company.)
How did the scam collapse?
July, 2013: FMC sensed some wrongdoing ,and felt long duration contracts to be culprit
behind food-inflation.
FMC banned such 20-30 days-walla contracts. Ordered the traders to settle within 10
days i.e. T+10 system.
Obviously Jignesh gang couldnt arrange genuine receipt within short time, thus the
game collapsed.
Size of the NSEL crisis
Brokers such as Motilal Oswal, Indiainfoline have made contracts worth Rs.700
Total contracts worth 5500+ crore
Total investors more than 15000.
Steps taken to fix NSEL crisis
1. NSEL began auctioning commodities from its warehouses. But its not generating
sufficient money to settle the claims of investors.
2. Government banned E-series system of NSEL and formed panel under Arvind
Mayaram.
3. Forward market commission started investigation against NSEL. Gave directives to all
commodities exchanges regarding board of directors appointments and investment limits.
4. Chindu transferred the control of FMC from consumer affairs ministry to finance ministry.
5. Income tax department began investigation against NSEL board members, and their
allied companies.
6. NSEL CEO, Anjani Sinha arrested and chargesheeted.
7. May 2014: Jignesh Shah arrested.
Anyways, back to the topic. so far we learned that commodity market leads to speculative
hoarding and scam. So, should be ban commodity market system altogether? Answer is no.
Why do we need Commodity markets?
Gives bargaining power to farmer.
Commodity market, acts a messenger of future price trends.
The contracts for successive months- they signal future price trends. Government can
take pre-emptive action, whenever required
BUT Information asymmetry is a major market barrier. Big traders know world agro-price
movement, farmers dont. Thereby traders buy cheap and sell high.
If we want the farmers to take informed decisions about cropping pattern, marketing
strategies, price bargaining.then they MUST know the price movements in commodity
market.
Therefore, the FMC is implementing the Price Dissemination Scheme via
AGMARKNET system.
It provides real-time prices on 1700 Mandis, Kisan Vikas Kendra and other places
where farmers make frequent visits.
Commodity trading Policy uncertainty
In recent years, Government suddenly puts ban and lift bans on future trading of onion,
potato, sugar etc.
This has hampered the development of commodity market as a platform for price
discovery. Consequently,
Farmers cannot make rational decision on cropping pattern and investment
intensity of cultivation or price bargaining.
And food processing companies cannot get necessary supply of raw material.
Thus, despite being a leading producer major agricultural commodities, India has not
taken on the role of a global price setter.
Economic survey recommends Government to have a stable policy on commodity
trading and export.
WDRA
Warehousing Development and Regulator Authority (WDRA)
Statutory body to regulate warehouses and their Negotiable warehousing receipts for 40
agricultural commodities including cereals, pulses, oilseeds, and spices.
FMC directed all commodity exchanges to register with the WDRA. (Because NSEL
crisis = traders used fake warehouse receipts to make future contract.)
Warehouse Development and Regulatory Authority (WDRA) has begun setting a public
information setup. So all farmers, traders, public can get information about performance of
warehouses across the country.
R3: Productive vs Production
Our agriculture productivity are far below global standards
Rice-wheat has hardly increased after green revolution.
YET, rice-wheat production has increased. How? because more area under cultivation
because of higher MSP + cheaper Urea.
So, is it good or is it bad?
More Area under rice-wheat = less cultivation of oilseeds and vegetable = food
Area
inflation comes, anyways.
More area under cultivation = reduced forest cover, water table.
+mindless use of fertilizers = soil fertility declined in Punjab, Haryana.
Therefore, we must focus on R&D to increase agro. Productivity RATHER than
bringing more area under cultivation.
MSP
Wheat + rice production increased because government raised MSP.
But this also increased the amount of rotten grains, due to inefficiency in FCI and
PDS.
Therefore, DESPITE bumper production of foodgrains, 25% of all undernourished
people in the world are living in India.
Besides, Government only focuses on giving rice-wheat to poor. But to combat
malnutrition, youve to increase consumption of milk, fruits and vegetables as well.
THEREFORE, Survey recommends giving DBT / Food stamps to poors, to let them
decide what to eat.
Focus on Agro research to raise productivity
>85% agriculture investment comes from private sector. But within that, Private sector
doesnt contribute much to investment in Agri.research.
Therefore Government needs to allot more money here and Empower Indian universities
to produce world class research.
R5: small-marginal farmers= less productive?
Empirical studies indicate that small land holdings are not a deterrent to increasing
productivity.
Because productivity depends on modern inputs, appropriate technology, and innovative
supply chain.rather than on farm size.
Therefore, Government should organize the small and marginal farmers through farmer
producer organizations (FPOs) and provide market linkages to them.
R6: Farm Mechanization = why necessary in India?
Although India is one of the top countries in agricultural production, farm mechanization
~25%, against >90% mechanization in first world.
Farm mechanization can raise productivity by ~80,000 crore rupees per year. (ICAR
report).
Farm mechanization can generate employment for rural youth and artisans for the
production, operation, service and maintenance of farm machines.
Farm labour wages have increased (due to MNREGA created labour shortage).
Therefore, higher levels of farm mechanization are necessary for sustaining productivity
and profitability.
although easier said than done because
Different soil and climatic zones,
Small land holdings with limited resources.
Overall Reforms required
1. a National Common Market for agricultural commodities with uniform taxes in the
domestic market
2. Stable policy for agricultural export and commodity trading.
3. Focus on the rural non-farm sector, manufacturing sector, and labor-intensive segments
of services. This will reduce no. of farmers => land consolidation =>Mechanization.
4. Crop protection and insurance schemes need to be revamped.
5. Fresh look at policies towards FCI procurement, marketing, transport, storage, and
processing.
6. To farmers: give subsidy via Direct Benefit Transfer (DBT). Bring Urea under Nutrient
Based subsidy regime.
7. To poors: food stamps / DBT, instead of giving rice+wheat.
If above steps taken then possible to sustain the 4% growth rate in agriculture.
[Economic Survey] Ch9: Public Sector Undertakings, CPSE-ETF, Disinvestment, NIF,
Mini-Nav-Maharatna
[Economy] Companies Act 2013: Salient features, types of Companies, public ltd. vs
private ltd, Independent Directors, SFIO, SEBI Corporate governance norms
[Economic Survey] Ch9: Micro Small & Medium enterprises (MSME), Definitions, SSI
reserved items, SIDBI, SIDF, Sick industries, Budget 2014