Supply-chain efficiency

Improvements can reduce food price spikes

Episodes of food-price volatility are not unusual in India. Given that higher food prices are driving the headline inflation rate, it is important — for better preparedness — to understand the usual causes of a spike. Demand-supply imbalances and geopolitical tensions, along with the El Niño effect, are being seen as the key drivers of food inflation. At the same time, however, supply-chain inefficiencies may also be playing a role in keeping food inflation high. In this context, a recent research paper by economists at the Reserve Bank of India examined supply-chain dynamics and the role of markups charged by different agricultural-market intermediaries in creating a wedge between farm-gate and retail prices. The authors analysed data from a pan-Indian survey covering agricultural markets, or mandis, at 85 centres across 16 states for 15 kharif crops.

It is not uncommon in India to see agricultural markets fraught with inefficiencies, with farmers receiving only a minimal share of the price paid by consumers, and multiple intermediaries taking a large proportion. The paper estimated that the average share of farmers in consumer prices varies between 33 per cent and 70 per cent. The high markup charged by traders and retailers includes membership fees, transport costs, shop rentals, local taxes, and storage costs. Farmers also incur post-harvest costs, including commissions, and charges for loading and unloading, packing, weighing, and grading. Expectedly, the paper found evidence of higher markups for perishable commodities like fruit and vegetables. Non-perishables like pulses and oilseeds, on the other hand, enjoy relatively low price wedges, reflecting farmers’ differential bargaining power in the price-formation process for each commodity. However, the markup for perishables has decreased since the previous survey held in 2018, indicating an improvement in farm-level storage structures, market-level cold storage facilities, and transport infrastructure. Further, in the movement from farm to fork, there are stages where products are lost within the supply chain. In this regard, the researchers noted that retailers enjoy a higher markup than traders across all commodities, reflecting significant product loss at the retail stage.

Export restrictions on agricultural products add to the existing woes of farmers. The paper found that the majority of traders seemed to have lowered the procurement prices paid to farmers in response to price-based export restrictions. Dominant use of cash in settling payments at mandis may add to the price wedge, motivating an increased adoption of digital payments by farmers and other agents along the supply chain. Further, better road infrastructure, increased market and teledensity have helped reduce markups for traders and retailers. High mandi concentrations in local areas can help farmers realise higher prices through spatial competition. Government initiatives in this direction, such as the creation of a unified national agriculture market (e-NAM), significant budgetary allocations for development of a robust agri-logistics system, and integration of the Kisan Rath mobile app with e-NAM are welcome steps for connecting farmers, farmers producers organisations, and traders, for seamless movement along the supply chain. In sum, increased competition in the supply chain, development of agri clusters, and digital modes of transaction can make the agricultural supply chain more efficient and contain spikes in food prices, thereby helping manage the overall food economy.