11 Apr 2020
Activation of eNAM will help in addressing supply and farm income security
The outbreak of Covid-19 and the subsequent lockdown globally and in India have sparked a huge economic crisis which threatens to induce a recessionary environment worldwide. Acuité Ratings believes there is a risk of a domestic GDP contraction in the first quarter of the current fiscal and even with the expectation of a gradual economic revival in the next 3 quarters, domestic economic growth is likely to be limited to a low single digit in FY21.
Agriculture and allied activities are expected to be relatively less impacted in such a scenario given its categorisation under essential goods and services. This assumes further relevance in the current context when the Rabi crop, where the output estimates are favourable, is under harvesting phase across the country. While the pan India lockdown continues to create challenges in the availability of labour and transportation even in the agricultural sector, both the central and the state governments have taken various measures to ensure that the crop harvesting, logistics and warehousing activities are not unduly impacted in the current season.
Acuité Ratings had written earlier about the relevance of eNAM or an electronic national agricultural market in agricultural reforms and improvement in farm incomes (https://www.acuite.in/pdf/Acuit%C3%A9%20Press%20Release_eNAM_Dec_2018.pdf). We believe the onset of the Rabi harvest cycle amidst the current lockdown crisis presents a good opportunity for online sale and trading of agricultural goods across the country.
One of the key challenges in the Indian farm sector is the inability of the farmer to get a reasonable price for his produce. For long, the central and the state governments have a mechanism of minimum support price (MSP) or a floor procurement price for agricultural commodities to provide income security to the farmers. However, it has been empirically observed that farmers often do not get a fair price for their produce and particularly, when the production is higher, they are forced to sell it at lower than MSP to traders given the procurement constraints of government agencies. On the other hand, consumer prices of such commodities are uneven across the country with significant inter-regional disparities in availability. The primary factor behind such supply and price distortions in farm produce in India is the inefficiency in the Agricultural Produce Market Committee (APMC) structure at the state level for marketing and sale of agricultural goods in our country. Clearly, the APMC led market system has forced India’s agriculture trade to become extremely regional centric and discouraged large scale inter-state sale of food commodities or a national agricultural market. Given that agriculture is essentially a state subject, it has been difficult for the central government to monitor and take appropriate steps for the demand-supply imbalances in farm products at the regional level; its role primarily has been to build up food buffer stocks and ensure its distribution to the economically disadvantaged at affordable prices through the public distribution system.
A divergent food inflation landscape is clearly a reflection of regional distortions in price and supply and also highlights the need to build a pan India agricultural trading market in India. A comparison of the food inflation print among India’s 23 states and union territories reveals that the Feb FY20 CPI ranges between 3.46% (Delhi) and 8.94 % (Telangana). This is despite the 7.3% increase in food subsidy allocation to Rs. 1.08 Lakh Cr for FY20. On the supply side, higher MSPs did not help cultivators uniformly either, with farm loan waivers compensating for lower realizable prices.
Effective implementation of higher support prices via MSP has remained a challenge over the years with APMCs not able to ensure a fair price to the farmers through the mandi (local market) auctions. In our opinion, this can be alleviated by taking advantage of the eNAM or electronic national agriculture market, one of the digital initiatives of the government that can bring about significant efficiencies in the system and act as an effective tool to fight inflation or price distortions and also reduce the procurement burden on the exchequer simultaneously. eNAM will allow prices to be governed by market forces by keeping the middlemen at bay allowing buyers and sellers a fair price. The mechanism when fully operational, will allow free movement of food commodities across the country while mitigating the problems related to regional level hoarding.
According to estimates, the share of eNAM in India’s total food grain production (including oil seeds) is only 8.6% on average since inception in April 2016. This is surprisingly low, given the Government impetus on Jan-Dhan, Aadhaar and Mobile (JAM) based transactions and the renewed focus on Direct Benefit Transfers (DBT). The farmers primarily auction their produce physically at the 6,900 APMC mandis spread over the country where the buyers are mostly local traders. The legacy structure in APMC has not only been unable to provide fair prices to the farmers but it has also led to divergent inflationary trends across India.
We also propose a strengthening of the nationwide e-NAM system through the appointment of third party assayers. In our opinion, a key reason for the slow response to the digital platform is the lack of trust on the quality of agro-commodities being traded. Since there is no standardized methodology for independent assessment across APMCs, a licensed assayer system can be implemented. APMCs can systematically evolve into a logistics facilitator for assaying, transportation and warehousing activities, leaving the actual trading to the online platform.
Under the new system, the farmers may take third party assessment certification from licensed assayers and trade their produce online. Buyers on the other hand can offer a price based on the certification, obviating the need of physical inspection. The trusted online interaction between buyers and sellers will optimize demand-supply equilibrium and free the government machinery of wasteful monetary interventions. With the gradual increase in the volume of transactions in eNAM, we see a normalization of agro based commodity prices across states, thereby controlling inflation and reducing government expenditure.
It is encouraging to note that both the central and the state governments are urging farmers and traders to utilise eNAM and avoid physical presence at the auction site amidst the threat of Covid-19. It has been reported that farmers have started to bid online through eNAM platform at 585 mandis. Currently, we also understand that there is a plan to pool Rabi output across the states that can be effectively implemented via electronic identification of food commodity movements across the states. The eNAM mechanism can provide distant bidding facility for wholesale produce in APMC mandis without the need for physical presence of buyer or trader near the auction site. The electronic platform also provides e-payment facility through which traders can pay farmers after trade is executed from anywhere, be it home or office, without going to banks, thus avoiding crowds. Given it is a digital platform, eNAM provides a good avenue for social distancing in the current scenario while undertaking trade in agriculture produce seamlessly.
Table 1: Share of eNAM in total food grain production
Source: Ministry of Agriculture; Acuite Knowledge Center; *Acuite estimate
Graph 1: Inflation Disparity (Feb, 2020)
Graph 2: Food Subsidies (Rs. Lac Cr)