Agricultural market in India is highly fragmented. With each farmer confined to a single mandi in many products inmany states, India currently has thousands of markets across which no arbitrage takes place.
The production, supply and distribution of certain commodities comes under the purview of the Essential Commodities Act, 1955.
These commodities include food grains, oilseeds, cotton and woollen textiles, jute, and coal, among others.
Under the Act, the central government may control the price at which any essential commodity is traded. It may also regulate licenses for its storage, transport, distribution, disposal or consumption. Agricultural markets in the country are regulated by state Agricultural Produce Marketing Committee (APMC) laws.
Under these state Acts, farmers are required to sell their produce at state-owned mandis. Over the years, several issues have been highlighted in this system.
For instance, APMC mandis currently levy a market fee on farmers who wish to sell their produce in the mandis. This makes it expensive for farmers to sell at APMC mandis.
In addition, farmers have to arrange for their produce to be transported from their farms to the nearest mandi, which brings in costs such as transport and fuel.
In transporting the produce from the farm to the store, several intermediaries are involved. These intermediaries are all paid a certain proportion of the price, as commissions. Thus, the market price which the farmer receives for his produce is significantly lower than the price at which his produce is sold to the retailer.
Agricultural marketing suffers from policy distortions, fragmentation resulting from large number of intermediaries, poor infrastructure, lack of vertical integration and stranglehold of official mandis sanctioned by the Agricultural Produce Marketing Committees (APMC) acts of the states. Under the APMC acts, farmers are required to sell a large number of commodities in the vast majority of the states in a local mandi where intermediaries often manipulate the price. These same intermediaries then sell the produce to the next layer of intermediaries.
