Agricultural intermediaries

Punjab’s small farmers need access to institutional finance in order to end their dependence on arhatiyas

Print edition : January 01, 2021

Freshly harvested paddy crop purchased by procurement agencies at a grain market in Bathinda on October 13. Photo: PTI

The scene at the Gehri Mandi grain market near Amritsar on October 7 after paddy procurement commenced. Photo: PTI

Farmers at a protest against the Central government’s new farm laws, in Amritsar on December 5. Photo: NARINDER NANU/AFP

Little is achieved by painting the arhatiya in Punjab as a villain or as a saviour of the peasantry. Instead, his presence reflects the abandonment of state intervention in agriculture.

As the protests against the new farm Acts intensify, farmers are clearly articulating their demands in their protracted engagement with the government. However, it is a bit surprising that an important entity in Punjab’s grain markets from where the protest started against the new farm laws, the arhatiya, or the commission agent, appears to have joined forces with the farmers and the farmer unions. It is significant that only a few years ago farmers had demanded that arhatiyas be abolished from the agricultural produce market committee (APMC) system. So, what has changed that yesterday’s bitter foes have turned into allies? Some farmer unions that were protesting against the recovery of farm loans by arhatiyas by taking control of farmlands have also taken them into their fold. Many farmer unions had demanded direct payment from the government for produce, in effect demanding the expulsion of arhatiyas from the market. Arhatiyas had been critical of farmer unions in the past. They alleged that the unions prevented them from recovering the dues from indebted farmers. How has the arhatiya transformed from being a parasitic bicholiya (middleman) into an essential service provider?

Why Arhatiyas are worried

The explicit purpose of the farm Acts is to remove the intermediaries in the marketing channel. There is no doubt that these entities have been cornering a large part of the APMC benefits by acting as key agents in the interlocking of the product and the credit markets on the one hand and the input and output markets on the other, by taking advantage of the weak institutional credit facilities for marginal and small farmers in most States, including Punjab. An interlocked or interlinked market is one where two or more factor or produce markets are linked together in such a way that transactions in one market are tied to those in another. Generally, one social actor controls both these markets for and at the expense of the other party (here, the farmer). But this interlinkage is problematic mainly for small and marginal farmers as large farmers are able to avoid the clutches of middlemen. In fact, owing to their resource position large farmers even dictate terms to traders and arhatiyas while engaging with them. In fact, in Punjab, some large farmers even provide funds to arhatiyas at 12 per cent annual interest so that they can lend to small and marginal farmers as a business proposition.

Also read: Farmers' protests turn into tidal wave of anger

In the absence of a level playing field for the APMCs and private markets or much bigger buyers in the new trade area in terms of a large difference in buying costs due to the new farm Acts, the APMCs will lose buyers and sellers. Arhatiyas have joined hands with the protesting farmers because they realise that they will not be able to interlock the various factor and produce markets anymore. Going by recent reports from Madhya Pradesh and other States, APMC-based stakeholders will suffer as trade will move out of the APMC market yard. In Madhya Pradesh, 47 of the 269 mandis and 298 sub-mandis recorded no business in October, and farm produce, barring wheat, was selling at half the minimum support price (MSP) rate. Another 143 mandis recorded 50-60 per cent drop in business in June-October and the State mandi board revenue fell by 64 per cent compared with that in the last year partly because of the reduction of mandi fee from 1.5 per cent to 0.5 per cent after the enactment of the Central Act in September. Only 79 mandis were functional, mainly because they deal in fruits and vegetables, which have been denotified from APMC regulation. Despite the new Acts making inter-State trade free for farmers and buyers, the State does not allow other State farmers to sell in its mandis.

Arhatiyas only get a licence to facilitate purchase and sale of agricultural produce (kaccha arhatiys, or commission agent); other aspects of their business, such as money lending, are informal and illegal. There is no monitoring of their activity. It is estimated that an arhatiyas, on an average, advanced as much as Rs.65 lakh at 24 per cent annual interest in 2008 and earned an interest of Rs.15 lakh. In fact, this makes arthiyas account for the largest share of non-institutional credit; such informal sector credit accounts for 38 per cent of all credit in the State. Of the 33,975 grain market kaccha arhatiyas and 3,515 pucca arhatiyas (traders) in the State in 2008, not many are registered under the State’s moneylending Act. In view of this informal and easy lending facility, they are described as farmers’ ATMs; some even call them a “necessary evil”.

They overprice inputs, underprice produce and charge high rates of interest on loans. Further, many not only have a licence to buy produce (pucca arhatiya) but also have large agro-industrial interests that extend beyond the APMC mandis but are tied to them; this arises from their ownership of paddy mills, cotton ginning mills, oil mills, warehouses and cold storage facilities.

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The entry of Punjab’s large capitalist farmers into commission agency (aarhat) in the past two decades has been a major factor in the growth and persistence of these entities in the State’s wholesale grain markets. The emergence of Jats as arhatiyas (they now account for almost 30 per cent of all arhatiyas in the State, including some in partnership with Banias), has complicated matters further as they like to accumulate agricultural land and extend large amounts as they are more confident of recoveries by various means, including their strong social and political network, unlike the traditional caste Bania arhatiyas.

Why Interlocking

Other than wheat and paddy, which are mostly bought at the MSP by State agencies, most crops, including high-value crops such as cotton, sunflower and potato or even maize, have a minimal public procurement, despite officially announced MSPs. Farmers growing these crops are outside the scope of price protection since the produce is sold to private buyers through arhatiyas. The arhatiyas make money by underpricing the produce; they also have a direct or indirect presence in the market for farm inputs such as seeds, pesticides and fertilizers which are bought on credit extended by them to farmers. The arhatiya finances in cash or kind (through parchi, or handwritten slip system) and there is overpricing of such products bought on credit. Thus, the arhatiya is able to interlock produce, credit and farm input markets. Besides making money on farm produce (both from commission and margins as many of them are also pucca arhatiyas who can buy farm produce) and inputs, they also charge interest ranging from 18 to 36 per cent on such loans depending on the credit rating of the farmers in terms of the volume of produce they bring or the land they own which (the latter) can be used to recover such loans by mortgaging it or buying it. The arhatiya also charges interest on unpaid loans and on the outstanding principal after every season. Thus, the arhatiyas adopt multiple methods to exploit the farmer.

Although farmers have Kisan Credit Cards (KCCs) or cash credit limits (CCLs) from banks and primary agricultural cooperative societies (PACS) on the basis of their land and cropping pattern, when they are unable to repay crop loans at the end of the crop season it is the arhatiya who steps in and lends them money so that they do not default in loan repayment for the next season. The farmers borrow again from the banks/PACS after repaying the previous loan and return the borrowed amount to the arhatiya. An open auction of the land of a farmer who has defaulted is seen as public humiliation in rural India. This is also one of the reasons the arhatiya-farmer relations are projected as nau-mas ka rishta (flesh-and-nail like relations) and not exploitative even by farmer unions. More recently, the Punjab government openly defended arhatiyas and assured them that they had nothing to worry on the policy front.

Also read: Why are farmers of Haryana and Punjab angry?

Although there are arhatiyas in Punjab’s fruit and vegetable mandis too (1,022 pucca and 2,933 kacha arhatiyas in 2008) and they get 5 per cent commission as against 2.5 per cent in grain markets, there is no MSP or public procurement for produce sold in these mandis and even for some cereal crops such as Basmati paddy. Therefore, interlocking is not widely prevalent as the arhatiya’s risk in lending will be higher in the case of sales made without public purchase. Arhatiyas associations in the past have advised their members not to lend to Basmati growers as there was no guarantee of repayment backed by public procurement at an MSP. Arhatiyas know that they will not be able to successfully carry on lending without public procurement of grains and that is why they have been protesting and not willing to make direct payments to farmers in the past 10 years. The previous State government only paid lip service to the demand by farmer unions when it asked arhatiyas to pay the farmers within 10 days of buying the produce. Arhatiyas argued that they would not pay as the buying agencies did not pay quickly enough, and that unless they were paid within two days they would not be able to pay farmers within seven days. They even threatened to boycott procurement of paddy if the Food Corporation of India (FCI) paid directly to farmers. It is only after the enactment of the new Acts that for the first time the Cotton Corporation of India paid cotton farmers directly, in this procurement season.

Role of the State

This business of moneylending is facilitated by the MSP policy and public procurement of grains from APMC markets. This enables arhatiyas to lend without risk as their dues are recovered from payments by buyers, including the FCI. As far as the buyer is concerned—the FCI mainly—payment for the farmer’s produce is made in the name of the arhatiyas they deal with, not in the farmer’s name. The poor priority sector credit policies of the Government of India have also helped the arhatiya as now priority sector targets by banks can be met by various means without necessarily lending only to farmers. The norms for farm lending have been tweaked so that lending to agriculture is no longer about crops and farms alone; they include loans for agribusiness activities such as cold storages and food processing. Also, if banks cannot lend to meet the target of priority sector lending (PSL), they can deposit the money in Rural Infrastructure Development Funds with NABARD and also buy priority sector loan accounts from other banks that have exceeded their targets.

Since the State is involved in permitting these players to operate in grain markets by granting licences and since the State has not conducted elections to the APMC bodies on which arhatiyas have representation along with farmers and traders besides some cooperatives and the government, they are able to dominate the APMCs. The State Agricultural Marketing Board (SAMB) and APMC-level appointments have been made through nomination for the past many years. The SAMB now has three positions of chairperson—chair, senior vice chair and vice chair. These are Cabinet rank positions, highly contested between farmer unions and arhatiya associations and often offered under political patronage.

Also read: Long march to peasant unity

Though it is argued that the Madhya Pradesh Congress government’s decision in the 1980s to end the kachha arhatiya system in the APMCs was aimed at garnering farmer support politically and weakening the rival political party, it was a good step that ultimately freed the farmer from the intermediary who could have otherwise continued interlocking credit and produce markets as in Punjab. Now, all buyers, including the government, buy directly from farmers and pay them directly unlike in Punjab where payments are routed through arhatiyas. Punjab’s amended APLM Act, 2017, retains the arhatiya as the central agent in the procurement system and farmer payments are made indirectly through arhatiyas, including allowing the arhatiya to pay some part in cash.

Way forward

The rise of the arhatiya as an important player must be placed in the context of three features of agricultural policies that have evolved in the past several decades. First, there has been a significant deterioration in the APMC’s structure, particularly its democratic character, whereby farmers, especially smaller ones, have little say over their functioning. Naturally, this lack of oversight leads to less transparent processes, which result in losses to farmers. The second feature, which has allowed the arhatiya greater space to play with, is the utter collapse of agricultural credit from institutional sources. The third feature has been the general withdrawal of support services such as extension services. It was but natural that smaller peasants would have been affected by these developments. Such a perspective would explain the rise of the arhatiya as an agent who filled this vacuum caused by the withdrawal of the state from these crucial responsibilities in agriculture. Little is achieved by painting him as the chief villain; even less is achieved by seeing him as a saviour of the peasant.

Also read: On the endemic contradictions in India's path to agricultural modernisation

Obviously, the arhatiya’s interest should not determine policy if the intention is to help farmers realise better prices. Would not the arhatiyas have other businesses to rely on? Would they not find new roles sooner than later in the new trade area or in other market channels? If the arhatiya system is to end meaningfully for farmers, the State needs to make arrangements for direct purchase of produce and ensure payment directly or through farmers’ collective agencies, or, if need be, by bringing in agencies such as the PACS and producer companies for public procurement. It is surprising that Punjab has not moved towards using the warehouse receipt system under which farmers can obtain bank credit against their produce, thereby avoiding distress sales and the kind of inter-locked transactions that result from the presence of arhatiyas. Unless small farmers are provided adequate access to institutional finance, they will depend on these agents. This implies that the solution to their marketing problems lie outside the produce markets, too.

Professor Sukhpal Singh teaches at Indian Institute of Management Ahmedabad. The views expressed are personal.