The Middleman Problem: Why Indian Farmers Earn Less as Prices Rise

Introduction

India has a penchant for promoting itself as one of the fastest growing large economies in the world. Ironically, those who cultivate the crops that sustain the economy are among the most underpaid workers in the nation. This report addresses a systemic problem in the Indian agricultural market. That is, the disparity between the price a consumer pays to purchase a commodity and the money received by the farmer who produced the commodity. This report uses the APMC mandi system as an example, and the example of tomato price, to claim that a commission based system is an abysmal failure for those who sustain the economy and is effectively a subsistence price for farm families.

The Tomato Example

At multiple APMC mandis, the commission charge on tomatoes is around Rs. 15 to Rs. 20 per kg. After all the effort over several months to cultivate, harvest, and transport 100 kg of tomatoes, a farmer receives a total of Rs. 1,500 to Rs. 2,000. The situation of a group of smallholder farmers is worse. For example, when 30 smallholder farmers each take 3 kg of tomatoes to a mandi, it is a total of 90 kg which is sold at a rate of Rs. 15 per kg, amounting to Rs. 1,350. The mandi collects a commission of between Rs. 81 and Rs. 135. Each farmer therefore ends up with Rs. 15 and gets it after several weeks of work. Systematically, the mandi gets all advantages over the farmer. The mandi commission rates vary from 1.5% to 10% of the sale value. For perishable items which leave the farmer with no negotiating power, the commission rates are in the upper range. Adding the mandi fees, cess, and other statutory charges, it can be over 20% of the transaction value before the farmer receives any money.

Where the Money Actually Goes

The numbers back this up: a price build-up analysis showed that village merchants, middlemen, wholesalers, commission agents and retailers made more money off the sale than the farmer did only 20% of the final consumer price returned to the farmer. A 2019 RBI survey of 16 state mandis found that the share of food retail prices attributable to farmers was, in most cases, 28% to 78% and was dependent on the crop and the market; gaps can be even more extreme in 2010, prices for wholesale and retail onions in Bangalore diverged by 132%. Some of this can be accounted for by the way things work. Agents in a mandi can be trusted to collude and keep prices low, and the fees they charge often elude real oversight from any laws, which maintains opacity throughout the whole system. Traders need to get different licenses to operate in every market area, even within the same state, and this remains a fragmented system which keeps farmers from earning the rewards of economy from scale and from cross-state trade.

Debt, Accessibility and Alternatives

Theoretically, selling to private buyers means no middleman, so farmers get better prices. Practically, selling crops privately doesn’t pan out. APMC mandis are typically 5–7 km away from villages, but private buyers can be much farther away. With the increasingly expensive diesel, that added distance makes private sales even less appealing. Farmers would rather sell to the nearest mandi, knowing the price will be worse.The financial squeeze continues as farmers have to lease farmland, rent or borrow tractors, buy seeds and fertilizer (as well as pay for storage) in unfavorable seasons. With mandi prices causing a cap on income, farmers are pushed to take out bank loans to try and expand their farms and yield, but the interest on loans adds even more exposure with no guarantee that the prices will be able to cover the cost.The toll this has taken on farmers is difficult to quantify. According to the National Crime Records Bureau, there were 10,677 suicides in the farming sector of India in 2020, accounting for roughly 7 percent of the total suicides that year. Much of the debt and stagnant income is central to this crisis. The 2020–2021 farmer protests in Punjab were a direct result of concerns about the fragile state farmers were in and the potential for further disruption of an already thin margin if the proposed changes to agricultural marketing were to be enacted.

Conclusion

APMC Mandis were set up to protect farmers from exploitative middlemen. Now, new variants of middlemen are profiting and farmers are shouldering the extra costs, increased borrowings, and market risks. For farmers to be a part of the growth that they provide to the nation, India must reform agricultural marketing. This means better prices, fewer barriers for private buyers, and stronger negotiating power for farmers. This is not a luxury, but essential for the economy as a whole.