Diagnosing and overcoming sustained food price volatility: Enabling a National Market for Food

by Anirudh Burman, Ila Patnaik, Shubho Roy, Ajay Shah.

We have a new paper, Diagnosing and overcoming sustained food price volatility: Enabling a National Market for Food, on the difficulties of Indian agriculture, and an implementation strategy for achieving a national market for food.

The problems of Indian agriculture

High food price volatility is a persistent difficulty of Indian agriculture. Policy responses have ranged from restricting or liberalising exports or imports, increasing or decreasing procurement and procurement prices. We conjecture there may be an element of Samuleson's Cobweb model at work, where high output leads to a crash in prices, that causes producers to reduce output, leading to a spike in prices.

The food market today is characterised by many small-to-medium producers, cartelisation, complicated administrative and legal structures that pre-date the economic reforms of 1991, and monopoly of, and intervention by, the State. The restrictions in the Indian agricultural economy hinder an efficient transmission of price signals from consumers to producers. Hence, the system teeters between boom and bust.

Restrictive policies and administrative bottlenecks have given a low elasticity of supply. Very high changes in prices are required to clear small gaps between supply and demand. With respect to most other goods and services, India has graduated into a normal market system, with the progressive removal of administrative and fiscal barriers to their trade within India. This allows for a normal transmission of information regarding demand and supply. This has not happened in agriculture.

The four missing elements

The solution strategy lies in four foundations of agricultural markets:

Warehousing

With well functioning storage, food could be transmitted from one time point to another, thus reducing the peaks and troughs of prices.

Futures markets

Well functioning futures markets can give guidance to private persons on decisions about sowing and storage.

International trade

The world market can act as a buffer stock: when there is a glut in India, food would be exported, and vice versa.

National market

A national market is required to achieve smoothing between the large number of micro-markets within the country. Food would move from areas with high output to areas with low output.

Our paper focuses on the implementation strategy for the fourth element, the national market.

Building a national market

Unlike other commodities, agricultural products cannot be transferred freely throughout the country without being subject to state-specific restrictions. Markets in agricultural food products are governed by legal requirements or restrictions which were put in place with the intention of creating markets (such as APMCs) but have had the effect of keeping markets non-competitive, segregated and localised. For most other commodities, there are no restrictions on who can purchase or sell goods. Usually, a simple registration under the shops and establishment laws allows for trade in all consumer goods. The present provisions and rules of any APMC laws enact and enforce similar rules for agricultural products.

In recent years, state governments have made gradual progress towards removing some of these barriers. A number of states including Meghalaya, Uttarakhand, Haryana, Assam and Andhra Pradesh, recently issued notifications delisting fruits and vegetables from their respective APMC laws. Bihar, Kerala, Daman and Diu, Lakshwadeep, Andaman and Nicobar islands, Manipur and Dadra and Nagar Haveli have no APMC Acts. Bihar repealed its APMC Act in 2006 and privatised its agricultural marketing infrastructure.

These reforms are, however, incremental and do nothing to remove the legally mandated monopsonies in the food market. These reforms are narrowly targeted at removing food products out of the ambit of APMCs rather than enabling a competitive national market.

While most scholars agree that a national market in food is essential, it is generally felt that this will require an agreement between all or most state governments. This is considered a difficult challenge, as the GST negotiation shows.

Our analysis shows that the process of creating competitive local markets in food markets can be done by the Union Government using its powers under the Constitution of India. By doing so, the Union Government can create the legal infrastructure for an integrated national market for food. This would override the existing framework currently in place for most states. This policy strategy requires no coordination with state governments.

Legal analysis

Article 301 of the Constitution states that trade and commerce throughout India shall be free, while being subject to reasonable restrictions imposed in the public interest. At present, the following restrictions exist in the food market:

1. Legal restrictions placed by states: APMC laws, storage limits, and other legal requirements that promote oligopsonies with cartels of buyers.
2. Technical barriers to trade: checks placed on APMC borders, checks placed on state borders, etc.

Achieving a national market requires removing these constraints.

Article 301 of the Constitution of India, along with entries in the Seventh Schedule of the Constitution grant the Union Government the power to do both: (a) Regulate all inter-state trade and commerce, and (b) regulate intra-state trade and commerce in, and the production, supply and distribution of "foodstuffs including edible oilseeds and oils." (List I Entry 42, List II Entries 26 and 27, and List III Entry 33) The Central Government can use these powers to create an integrated national market by removing limits and restrictions placed by APMC laws, and by creating institutional mechanisms to continuously identify and review administrative barriers to trade in the food market.

The creation of a national market in agriculture is thus something which is feasible for the Union government without requiring a complex negotiation with state governments.





The authors are researchers at NIPFP, Delhi.