Market Failure and Primary Producers

There are two factors that affect the lives of farmers - Lack of financial planning and Information Asymmetry. Let us roughly cash flow of the marginal farmer (as owner or tenant or share cropper who cultivates agricultural land up to 2.5 acres) that will fall into low-income households. The cash out flow of the household is throughout the year and peak-out during festive season, marriage or birth) and bad patches (accident/death) in the family. The farmer gets cash inflow with sales of produce only. Hence, the borrowings of the farmer limits the growth option for the household.

Let us take an excerpt from the paper - Why Don‘t We See Poverty Convergence? by Martin Ravallion  - "Banerjee and Duflo (2003) provide a simple but insightful growth model with borrowing constraints. Someone who starts her productive life with sufficient wealth is able to invest her unconstrained optimal amount, equating the (declining) marginal product of her capital with the interest rate. But the 'wealth poor' for whom the borrowing constraint is binding, are unable to do so. Banerjee and Duflo show that higher inequality in such an economy implies lower growth. However, they do not observe that their model also implies that higher current wealth poverty for a given mean wealth also implies lower growth.."

There is failure of state even in few cases as farmer sold paddy at 900 Rs. to the middleman against the minimum support price of 1250 Rs. This was bought in my notice during a meeting with SHG woman at Khaprakhol block of Balangir District. Hence, the information asymmetry is a definite factor for the problems of primary producers. Let us take the case of Cotton producers at Balangir. Most of the farmers avail credit, fertilizer and seeds from the middlemen. Hence, they are forced to sell their produce to the middlemen. They mostly sell at the price negotiated upon irrespective of the price prevalent in the market. In almost all cases the negotiated price for future output is 10 to 30% lower than the market prices.

Since the cash inflow with the farmers happens only in time of sale post harvesting season. Hence, it is very hard for farmer to negotiate with the creditors, middlemen and even local traders in terms of price of the produce. Farmer is forced to sell the producer soon after the harvest. This phenomenon is called Distress Sell. The lack of holding capacity reveals failure of credit mechanism of government. Through better connected network and information, the middlemen are always able to better estimation of price of the commodity. This price distortion has been brought lower due to reach of mobile phone connectivity. This can be countered by providing loans to hold sale of harvest for few weeks/months and installation of the mini warehouse facility at the GP level.

The market failure is typically attributed to information asymmetries—that lenders are poorly informed about borrowers. But we will go more in the topic of distress sell. Let us see State Wholesale Prices for Onion in Orissa (Rs/ Quintal) [Source - http://agmarknet.nic.in/]

Months	Wholesale Prices (Rs/ Quintal)
April,2013	1500.81
May,2013	1607.41
June, 2013	1826.3
July, 2013	2556.19
August, 2013	4954.79
September, 2013	4056.14

What we see is the clear evident of the rise of price of Onion to 150-300% soon after harvest season of April and May. So, the actual producers are not getting benefit of the high prices of onion due to distress sell while traders are making money out of the misery of customers. While we talk about food inflation greatly, it has nothing to do with supply demand constraints in India. Its simply linked to hoarding and profiteering. I don't have concrete evidence for this fact, hence will not raise this issue.

Looking from the perspective of the neo -liberal, local traders are managing risk. But, through current practices, we are making agriculture unsustainable and economically nonviable for a small farmer. There are folk idioms like "Des bigade maarwadi, sadak bigade bael-gaadi" prevelant in the rural India. Local traders (often Maarwaris) whatever their motives, have done much to built the market in our country. What we need is inclusion of small farmers as players in the market. It is only by forming networks and communities built on solidarity that marginal farmers can make a difference. The main objective is get the remunerative price for primary cultivators and distress sale should be checked. That will be explored in the future posts through topic like Producer Groups

Consumer, Producer and Market

Household final consumption expenditure constitute India's 59.5 percent of GDP in 2008-2012 as per world bank data. Household final consumption expenditure (formerly private consumption) is the market value of all goods and services, including durable products (such as cars, washing machines, and home computers), purchased by households. Consumption shows utilization of wealth but the question runs deeper than figures. Is wealth creation enough ? Is wealth reaching the poor household even with the above 5% GDP growth rate?

Lop sided nature of Indian capitalism promotes few entrepreneurs, mostly as an employees and almost all as a consumers. This is well reflected in our quest to create jobs rather than suitable ecosystem for a new venture. I am seeking attention towards our socio-economic environment where masses are looked as consumers rather than producers. By focusing only on profit making, even BOP reduces the concept of wealth to just money, and the rest – i.e., the community and the environment - are reduced as the resources for exploitation.

Most of the poor people in India are engaged in agriculture and allied activities. The markets are distorted with oligopolies of the traders and producers are not getting proper prices for their produce. Most of the markets are strongly biased in favors of traditional trading communities. One more hidden fact : Caste reduces the transaction cost in India. That is a proper conclusion coming from the research study. [Caste discrimination and transaction costs in the labor market: Evidence from rural North India]. So, pleading with the privileged traders to share their luck may be an utterly fruitless exercise. There is need of deep market reform in India. This idea has been floating from a long time. When we fail to reform markets through regulation (that turned into license raj !), we thought of creating jobs to pull worker from the field to cities. Now on realizing that cities will not absorb the agricultural workforce, schemes such as MGNREGS are created to stop migration. So we are back to square one and problem with the market remains same.

I give weight-age to an inclusive more than an efficient market. Left Parties will always see every individual looking for reform in state policies as a suspect who has succumbed to the lure of the market. And everyone knows how socialism has failed ! Market will always go for person with better information and resources. Neo-liberals cry for efficiency without even giving chance of equal opportunity to everyone. That is the problem of our neo-liberal friends who seems propagator of free market without even surveying ground for this step. Instead of finding out why the idea of regulated market has not worked, we are scrapping the idea itself gradually. In the futile chase of efficiency, we are loosing our sights. Our markets are neither inclusive nor efficient.

There are some views that don't change with the time. Once, I have written an article heading Consumer Culture 5 years ago. But in these five years, I did learn few things about markets and social justice. Still, I am undecided on final answer. Yes, I subscribe to the words of Laurence J. Peter who argued --- “Some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them.”