Grain of truth

Liberalising APMC acts will calm fruit and vegetable inflation in the long run. But what about cereals?

Congress vice president Rahul Gandhi has asked all Congress-ruled states to remove vegetables and fruit from the purview of their respective agricultural produce marketing committee acts by mid-January. This move is widely seen as a long-term solution to the runaway food inflation overall food inflation was 20 per cent and vegetable inflation was 92.5 per cent in November. In 2003, the UPA had circulated a model APMC act and encouraged states to modify their legislations accordingly. However, so far, even in key Congress-ruled states, reforms have been patchy.

At present, state APMC acts restrict trading outside state-controlled mandis. A licence is required to trade within the mandis. With space being limited and licences hard to come by, this barrier to entry has created a complex of entrenched and politically powerful insiders. Licenced traders have come to function as cartels. Given that prices are rarely discovered through auction, and the poor storage infrastructure, farmers selling perishable produce have few options. They get a price much lower than the retail price the retail mark-up being two to three times the wholesale price. There will be opposition to the dismantling of entry barriers. But with three of the four biggest mandis in India Vashi in Navi Mumbai, Bangalore and Hyderabad, where 43,000, 7,000 and 6,000 tonnes, respectively, of fruit and vegetables arrive daily in Congress-ruled states (Azadpur in Delhi is the largest at 50,000 tonnes), Gandhi's suggestion can make a real impact on food prices in the long term.

Once trade in fruit and vegetables is liberalised, retailers including large corporate groups will be able to procure directly from farmers, who will realise better prices simply because more actors will be allowed to buy straight from them. Consumers will also face lower prices in the absence of cartels, commissions of middlemen, mandi taxes etc. Large retailers will have the incentive and opportunity to invest in back-end infrastructure, create credit facilities for farmers and develop well-oiled supply chains. On cereal inflation, however, the Centre may be missing another trick. The FCI is holding cereal stocks that are approximately 2.5 times the government's enhanced food security obligations. If it were to offload 10-15 million tonnes of grain in the market, not only would cereal inflation be instantly tamed, but the government would also get some much-needed cash and the grain would be prevented from rotting.

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