Direct payments to farmers will work if govts can be agile, flexible like arhatiyas

If the Modi govt wants to strengthen terms of engagement of farmers in markets, it must replace the need for multiple services that arhatiyas provide farmers.

Representational image of workers unloading produce at a mandi | Photo: Urjita Bhardwaj | ThePrint

The current debate over direct payments to farmers in Punjab raises a familiar dilemma for policymakers. If the intention of direct payments is to bypass credit-linked commission agents and improve transparency and options for farmers, the question is not only whether it can replace the traditional, informal and personal system of farmer-arhatiyas linkages overnight, but if it can also mount a new kind of pressure on the government and its capacity to become more responsive, inclusive, agile, and flexible.

For decades now, scholars of agrarian India have studied a problematic and pervasive phenomenon known as interlinked or interlocked markets. They have been especially troubled by the interlinking of credit with commodity marketing in certain agrarian systems, where farmers are forced by their circumstances to take informal loans from a moneylender-cum-commission agent through whom they must then sell their harvested produce. In repeated long-term exchanges, farmers, especially those with limited access to resources and support, grow more and more dependent on these powerful intermediaries commonly known as arhatiyas, giving rise to multiple opportunities for exploitation.

Vested interests and vital roles

The precise means by which farmers are squeezed in such intimate economic and social relationships are often subtle and usually opaque, although almost always acutely felt.

And yet, whenever the State tries to break up these ties, it faces great resistance, not only from the commission agents fighting to hold on to their positions, but also from the very farmers who the State is trying to aid. All of a sudden, traditional arrangements that have long been publicly and privately criticised are widely defended in light of reforms that aim to streamline procurement processes. This is exactly what happened in Punjab, where the state government has decried the move for direct payment to farmers as a fait accompli, and arhatiyas and farmers have expressed their anxieties about the damage that might be caused by severing their credit and commodity exchange relations. Given the deeply cultivated political capital at work in regional agricultural markets, the term ‘vested interests’ immediately — and understandably — comes to mind.

However, one must remember that in Punjab, it is the Centre and the state (through Food Corporation of India, or FCI, and state agencies) that have continued to procure and route payments through arhatiyas over the years, keeping them in steady business as creditors and commission agents. Now, if the union government is really serious about strengthening the terms of engagement of farmers in markets it must first recognise and then competently replace, or substantially reduce, the need for the multiple services that arhatiyas provide farmers in complex and volatile agrarian markets.

It is important to remember that arhatiyas in Punjab are licensed commission agents in state-regulated mandis who facilitate the sale of farmers’ produce to buyers, both public (FCI, NAFED or state agencies) and private (traders, millers/processors). Since arhatiyas get a fixed commission linked to the sale price, it is not in their interest to suppress the price that the farmer receives. In fact, they have good reason to ensure that the produce gets sold no matter the quality, and that each lot that comes to their shop gets as high a price as possible.

The problem — and major source of ‘profitability’ — comes from the arhatiyas’ informal money lending activities. This makes them quite distinctive from market intermediaries and aggregators in grain markets elsewhere (for example, in Bihar) where we typically find no evidence of credit interlinkage and slim margins. In Punjab, moreover, the credit relationship does not affect all farmers equally, but disproportionately binds those farmers who are largely excluded from formal credit channels and services — especially small and marginal farmers, tenants and sharecroppers. Fieldwork in these markets also shows that they often extend credit to the numerous farmers who are unable to repay their Kisan Credit Card (KCC) loans on the six-monthly rotation schedule, preventing default but extending indebtedness. Farmers also attest to the dependability of arhatiyas as lenders during emergencies when they are most needed, and for myriad consumption needs that formal credit fails to service.

The de-linking of credit and commodity marketing, therefore, requires a much greater commitment to expanding and adapting agricultural credit to recognise and reach diverse farmers and their dynamic requirements. In its absence, the bypassing of arhatiyas will not resolve the credit problem, but may merely displace it, and may even leave some farmers, especially those most excluded from formal systems, more vulnerable. But addressing this interlinkage, usually also requires concomitant investments and interventions in the system of production.

Eliminating arhatiyas

In a little-known, but quite revolutionary reform implemented in the mid-1980s, Madhya Pradesh eliminated arhatiyas from major mandis for grains, oilseeds, and pulses. As I learned from my fieldwork and interviews with those who experienced this historic change, there was enormous local resistance across the state’s mandis at that time as well, because arhatiyas were a critical source of credit for farmers, they conducted auctions and facilitated exchange and transfer of agricultural produce. High-level political support and mandi-level administrative commitment and creativity were both also amply demonstrated across market sites in the state. However, the successful de-linking of credit and commodity exchange in agricultural markets like Harda mandi during this time was made possible because of conjunctural changes in the conditions of agricultural production, especially the expansion in canal irrigation and the introduction of a new cash crop, soybean.

Crucially, in the initial years, short-duration soybean was far less input and labour-intensive than the long-duration cotton that it began to rapidly replace. This reduced the need for production credit and was critical to the reorganisation of the marketing system. Over time, the soybean and wheat mono-cropping cycle that followed brought its own agro-ecological and economic challenges for farmers. But, in the mandi, the removal of the arhatiyas in the 1980s did enable farmers to sell directly to the highest bidder in an open auction run by state-appointed auctioneers. Years later, it also meant that credit interlinkages did not prevent a number of farmers from participating in new private procurement channels such as ITC’s E-Choupal outside the mandi. And it also made direct payments to farmers an immediate possibility when the state launched its decentralised wheat procurement operations in 2008.

Here, however, the documentary requirements that accompany direct payments generate their own problems for farmers, especially for landless cultivators (tenants and sharecroppers) who are often excluded from public procurement systems. This is an ongoing challenge, even for states like Odisha that have made inclusion of all farmers in their procurement database a priority. In the process, the State’s familiar obsession with errors of inclusion (in this case, preventing out-of-state farmers or traders from participating in the system) often ends up excluding the most marginalised farmers from accessing minimum support price (MSP) procurement. Until now, in Punjab’s universal and unlimited procurement system, arhatiyas have enabled these farmers from selling at MSP to the state. For many farmers, to be recognised and exploited is often the better, or the only real option, for survival — particularly if the alternative is a formal system that effectively de-recognises or mis-recognises them.

Need for flexible response

For farmers, arhatiyas are not only flexible and responsive in providing informal credit (at high rates), but as spot financiers, they are also reliable dispensers of timely cash, especially in the immediate post-harvest season when farmers are typically in urgent need of money to attend to multiple demands, on and off the farm. In other states, such as Madhya Pradesh and Odisha, where buying is done by co-operative societies (PACS and LAMPS), we have observed that even relatively short delays in bank transfers, along with the routine issues that often accompany withdrawals from rural bank branches, can prevent small farmers from selling to state agencies at the MSP, pushing them to sell at lower prices to traders instead. Confronted with this problem during the early years of its wheat procurement operations over a decade ago, Madhya Pradesh experimented with a limited amount to be provided as cash or by bearer cheque. This kind of responsiveness and flexibility is constantly required during the reforms process.

Finally, in the mandi yard, operating among multiple state agencies, arhatiyas are also closely tied up and tuned into the logistical life of public procurement, often quickly compensating for regular shortages and breakdowns in the state procurement machinery. In Hoshiarpur, Punjab field researchers observed that this was especially common when it came to dealing with shortfalls in critical material elements (such as gunny bags), and in tackling frequent loading and lifting problems that occur due to transportation delays. In such situations, arhatiyas often intervene to keep things in motion, usually incurring some costs and taking risks in the process.

None of this is to say that arhatiyas are irreplaceable or that farmers cannot and should not adapt to the new systems of procurement or credit. But it does mean that much greater care and capacity are needed to ensure that vital —and often neglected—transitional arrangements and effective decentralised institutions are put in place on the ground in pursuit of more contextual and comprehensive agricultural reforms.

Mekhala Krishnamurthy is Senior Fellow and Director of the State Capacity Initiative at the Centre for Policy Research and Associate Professor at Ashoka University. Views are personal.

(Edited by Fiza Ranalvi Jha)