How APMC Monopoly Is The Core Reason For Farmer Suicides In India

The corroding nature of Agricultural Produce Market Committee’s (APMC's) monopoly on Indian farming is well known. However, it's more sinister impact on farmers — that they were directly responsible for farmer suicides — is not that well known.

APMC monopoly, and the middlemen — by eating away almost all the farmers' margin — made farming a low-profit business in India, effectively bankrupting the marginal farmers. Illusionary profit margins pushed farmers into a debt trap that they could not get out of, thereby leading to the suicides of marginal farmers.

The evidence of a strong relationship between farmer suicides and APMC monopoly is reflected in data on fruits and vegetable delisting from APMCs, which immediately reduced suicides where, and when, implemented.

State after state, the data presents the same conclusion — that freeing fruits and vegetables from APMC clutches led to improved margin, better higher profitability, and therefore, fewer suicides. Some states like Uttarakhand almost eliminated the curse of farmer suicides post this delisting. As starkly, in Delhi, which in September 2014 ceased APMC regulations outside mandi yard, saw farmer suicides reduced to zero immediately and has maintained the same since then.

Prime Minister Narendra Modi's APMC reforms have the potential of wiping out the stigma of farmer suicides in India. It is a blessed and bold reform and must not be repealed.

We discuss in detail these issues in the current article.

The Blind Spot Of Indian Agricultural Economists

That APMC monopoly and farmer suicides are linked closely together should appear as evident — the monopoly is well known to eat a large chunk of margin from the farmer's produce, making farming a low profitability business in India. It is also commonly argued that farmer suicides occur in India because farming is not a profitable business.

Together, both reasonings shape up a strong causal link between two of the largest and most discussed agriculture and farming issues in India.

Given the long history of these two problems, one would expect a fair amount of scrutiny in exploring the relationship between the two. Surprisingly though, this relation remains mostly unexplored — almost as if the connection is a blind spot for India's agricultural economists.

The Immediate vs the Structural Cause of Farmer Suicides

The most common reasons cited for farmer suicides in India relate to debt burdens of farmers and vagaries of farming (i.e., crop failure due to one or the other reason). Financial analysts will argue that debt is not a problem in itself, but the lack of profits to sustain the debt leads to the debt burden. Indeed, low-margin businesses are at constant risk of debt burden.

Further, the inability to absorb any adverse impact on the business in an uncertain world can quickly wipe out the margins and lead the business towards bankruptcy. Good margins also save businesses from 'rainy days' as they provide a buffer to absorb the vagaries of a business. It also leads to the accumulation of savings, which can then be used to sustain the business in difficult times.

Low-margin business does not get any of these benefits. Most of the structurally low-margin businesses rarely can get good debt financing.

So, while the immediate or the material cause of farmer suicides can vary from debt burden to crop failures, the structural or the efficient cause of farmer suicides remains the low margins they get on their produce.

The Death Trap of APMC Monopoly

How much margins do the APMC middlemen eat away? Anecdotally, a recent interview by NDTV of farmers elicited the response that post-2020 reforms, they were getting Rs. 12/kg vs Rs. 3-4 per kg from the same produce in APMCs. The interview implies that APMCs take away 65 per cent of the overall sale value — on profit margins the share would be even higher.

It is here that the sinister nature of the APMC monopoly becomes more apparent.

For more concrete numbers, we refer to Figure 1, which represents the overall margin chain in the Indian farming business based on a 2011 survey.

The lowest tier of small/marginal farmers gets less than 10 per cent of the whole value chain's available margins. Indian farming is possibly one of those very few businesses where the traders/middlemen make more margins than the producers themselves.

Further, the perishable nature of food items gives the middlemen extra leverage to negotiate with the farmers. Just by delaying the purchase, it can push farmers in the corner to take up the produce at almost rock bottom prices.

Not only is the farmer cheated, end users also get worse off quality than they could. Typically, the larger farmer doubles up as the village level trader. They then make margins not only on their produce but on smaller farmers' produce as well.

But the sinister-ness is not limited to just taking away the margins from small farmers. By accumulating these earnings over time, the middlemen — who don't have any cost attached to them but earn a large profit — thereby build substantial monetary savings for themselves.

Anecdotally, these middlemen also double up as money lenders/working capital providers to the farmers themselves. In effect, they lend the money they have made from farmers back to the farmers, and earn interest on that too.

A very very sinister hold they have on the marginal farmers.

Functioning really on the margins, such small farmers are thus overly exposed to any vagaries that they might encounter in their work. With no savings to fall back upon, and neither a healthy cash flow that can weather the impact of vagaries of doing farming, small farmers function under extreme duress and stress.

And if such vagaries act up, they are often left with no options but to take their lives. Death may sound more attractive than to continually deal with the tensions of working in a business that hardly provides any money, despite all efforts.

And all this is backed by the laws of the land. In the existing APMC laws, the farmers cannot get away from the clutches, even if they want to. Such exploitation of farmers is promoted by law by explicitly making them not do business with anybody else other than the designated set of persons in the designated area. Having such unfettered protection of the law, intermediaries work with high impunity.

More than anything else, it is the monopolistic nature of the APMCs that promote such practices. It is shocking to think that laws of this kind have been sustained in the modern world.

Ineffectiveness of piecemeal reforms in APMC laws and data that strongly points to APMC link to farmer suicides

While not going the whole leg and repealing the APMC monopoly, several governments have done piecemeal reforms of APMC laws over time. Further, none of these reforms solve the crux of the problem — middlemen and their monopoly. They underestimated the cartels' vested interests and power, earning thousands of crores of rupees without undertaking any risk, production, storage, or otherwise.

These cartels were several times able to pressurize states to make the reforms ineffective — either by scuttling the legislation itself or, if legislated, then making sure that it is not notified. And if notified, then making sure it is not implemented one way or the other.

As an example, take the case of the reform of setting up private markets. If we got through the reform history, we find that in several states where it was legislated, it was not notified for a long time. Post notification, some states did not issue new licenses to private players, effectively not implementing the legislation. Of those that did issue the licenses, several were taken up by a member of the existing cartel themselves.

In effect, the story continued unhindered despite reforms.

One reform, though, that was able to circumvent the APMC monopoly completely was the delisting of fruits and vegetables. The delisting did not prevent farmers from selling them in APMCs, but gave them the freedom to sell anywhere they desired. That farmers had a choice immediately led to the market forces working in their favour.

While most fruits and vegetables were still sold by the farmers in APMCs, the threat of losing business due to low realizations to farmers led the middlemen to share better margins with the producers.

The reform — wherever enacted well, at whatever time, immediately led to a drastic fall in farmer suicides — clearly indicating that their margins improved and their destituteness decreased.

Figure 2 shows the graph of farmer suicides for several states, and the fall immediately after the reform is well apparent. The data is evident in showing the impact of ending the monopoly of APMCs in purchasing farmer produce.

There is a fall in suicide numbers across the board. Some states like Uttarakhand, Meghalaya, Odisha, and even Rajasthan were able to almost completely overcome the farmer suicide problem.

Delhi is the starkest example. It enacted a law very similar to the current 2020 reform wherein APMC regulations were only limited to market yards. Thus, the farmers were free to sell outside the yards at whatever margins and terms they could get with buyers.

Post-September 2014, when the law was notified, Delhi has witnessed zero suicides to date. This may well become the future of India as well if the APMC reforms 2020 are well implemented.

Figure 2: Yearly Farmer Suicides and Impact of Fruits and Vegetable delisting from APMC

Concluding remarks

The current conventional thinking holds inflation cooling as the primary and direct impact of APMC reforms. The inflation cooling will occur if and when the margin benefits are passed by retailers/value chain to the end customer. That is a second-level impact and may happen in due course of time.

The immediate impact, though, occurs via redistribution of margins within the value chain to the benefit of farmers, especially the marginal farmers.

As they start getting a better realisation of their produce, their destitution may vanish. We get farmers who are paid well for their work, rather than a farmer earning meager income and continually dealing with the fear of debt trap leading to suicide.

Does the APMCs serve any purpose at all? If you will notice, the article has continuously talked about APMC monopoly rather than APMCs in themselves. It is the monopolistic character of APMCs that is the problem.

APMCs themselves, working as a large central market and with the infrastructure involved such as wholesale infrastructure, warehousing, crop insurance, cold storage, etc are the strength they have to serve the farmers.

But the monopolistic character takes away all the benefits. The monopolistic nature also prevents the agriculture value chain from modernising beyond what is provided by APMCs, thereby self-limiting agricultural value chain development. This is beyond the impact of the middlemen paraphernalia that comes with APMCs' monopoly.

Destroying this monopoly is the key, rather than disbanding APMCs themselves. The Bihar experience serves as an example. It abolished the APMC Act in 2006. With APMCs gone, most of its infrastructure also became defunct. Owing to Bihar being the single state with such an arrangement, private players may not have had enough incentive to establish their infrastructure.

This broke the agriculture supply chain badly. Moreover, we did not see a reduction in farmer suicides. Rather, a marginal increase is observed after 2006. In 2013, Bihar revived its APMCs, but sans the earlier monopoly of forcing farmers to sell via them only. With infrastructure now available via APMCs bereft of monopoly, farmer suicides in Bihar quickly dived and subsequently reduced to zero and have stayed so for the last few years.

This is also very similar to the fruits and vegetable delisting experience, which removed the monopoly of the APMCs on buying the produce, but APMCs with their infrastructure were still available.

Removing the monopoly ensures that farmers obtain free market access, thereby giving them better leverage in selling their produce and helping them on margins. This impact holds even if most of the trade still happens in APMC mandis. All other effects subsequently follow.

The current APMC reforms by Prime Minister Modi's government has not only met 20+ years of the need for the reform, it has also shown a vision in not disbanding the APMCs but removing their monopoly.

This presents the best solution possible wherein existing infrastructure is maintained, and at the same time, unleashes the good power of the market for the farmers.

The impact of this reform will be long-standing, and might carry India away from the stigma of farmer suicides within a year. It is a much-awaited vision and blessed reform and must not be repealed at any cost.

(The author would like to acknowledge the efforts of Rajat Mital and Rishi Sabarigirisan, second-year MBA students of SPJIMR, for their help in data collection for the article).

Dr. Vidhu Shekhar, an ex-Investment Banker and Hedge Fund analyst, is currently Assistant Professor of Finance and Associate Head of Centre for Financial Studies at SPJIMR, Mumbai. He is Ph.D (Economics) from IIM Calcutta, MBA (2006) also from IIM Calcutta, and B.Tech (2004) from IIT Kharagpur.