Protect The Chain, But At What Cost?

Recently the West? Bengal State Marketing Board chairman Naren Chatterjee had to say this about Metro?s entry into the state, ?have heard that they will sell directly to the trade then what will happen to the people in the chain, they will become jobless. We will not allow any one who disturbs the chain.? Similar protests have been on against organized retail, and competition in the agricultural supply chain in various parts of the country.


What I?m going to talk about is quite simple. The basic concept is that you can?t simultaneously ensure high profits for farmers, high margins for the supply chain and low prices of consumers. You could maybe choose two of these, and try to influence them ? but that would happen only at the cost of the third. Given that the government has control over it by way of policy, it would be interesting as to who would get left out.

Now, given the amount of attention and newsprint dedicated to inflation, and the government?s supposed concern for the aam aadmi, it is imperative that the end consumer be protected from excessive price rise. Agricultural products form a fairly large part of the consumption basket, so keeping their prices under check would obviously help contain inflation.

So that leaves the farmers and the intermediaries, and the government?s stand on agricultural procurement policy effectively boils down to a choice between these two constituencies!

On one hand it is noble to side with the farmers, and be seen as the protector of the tiller of the soil. Moreover, farmers also constitute a large part of the country?s population. On the other, traders are more organized as a constituency and have much more political awareness and clout. Politically this might be a tough decision to make, but a little thinking will result in the government taking the farmers? side. Among other things, no government would want to risk an ?anti-farmer? label?

There are a number of other factors too which would dictate that the government side with the farmer. Firstly, shortening the supply chain would among other things reduce transport and handling and transaction costs. It would also result in lesser spoilage which in effect also improves supplies ? thus pushing down prices as well as reducing the needs for imports. Then there are ?global? issues such as sustainability, and the importance of a strong farm sector in sustainable development. There are also issues like rural employment opportunities.

The central government has done its bit in this regard by framing a Model APMC amendment act. There is excellent documentation of this act here. To summarize, the amendment removes the monopoly status for the Agricultural Produce Marketing Committees with respect to agricultural procurement and distribution. The new act allows direct purchase and contract farming, and also lays down rules for the same, trying to ensure that farmers aren?t exploited. There are several other recommendations, related to things like IT and making warehouse receipts a negotiable instrument.

Several states have taken the center?s cue and acted on this amendment. It was no surprise that Reliance Fresh started its operations in Hyderabad ? Andhra was one of the first states to usher in the amendment. A number of other states have also implemented it. Others including Bengal and Karnataka have been dilly dallying, mostly because of pressure from the trader?s lobby. You could check out where your state stands on this issue here.

Now, it would be interesting to see what the current supply chain could do in the changed scenario. It is very unlikely that they will sink without a trace. Food World and Big Bazaar and Nilgiris have been around for a long time now. That hasn?t led to local kirana stores have had to shut shop. They have taken advantage of the fact that they are superior when it comes to customer relationship management, and have used their carefully built customer base in order to thrive.

The same will happen to the general agricultural supply chain also. For example, retailers could source from Metro rather than from the mandis. The mandis themselves could become more efficient by streamlining themselves and offering services to the farmers that the big guys can?t offer. It is not actually the loss of livelihood that the traders are protesting against ? it is the loss of the current source of livelihood.


One thing, however, is clear ? that the demolition of the current monopoly will prove beneficial for everyone in the long run. It is now up to the governments to look ahead and do the needful.

There is some excellent material on this topic on the agmarket website. Do check it out if you are interested in this topic.

Cross posted at The Indian Economy Blog. I will try and reply to all comments here, but can’t promise the same regarding the IEB.

Put Comment