Rationalise Mandi taxes to enhance competitiveness of Punjab farmers and agri-processors
In the context of Government of India asking Punjab Government to reduce Mandi taxes on procurement of wheat and paddy to 2 per cent, it is pertinent to revisit the evolution of agriculture marketing system and the tax structure during the last six decades. Punjab was the first state to implement Punjab agricultural produce markets act 1961, mandating sale of agriculture produce in the Mandis for price discovery through open auction and use of standard weights to prevent exploitation of farmers by traders. Under this act, 153 agriculture produce market committees (APMCs) were established. Each APMC has one main agriculture market, some sub-yards, and several temporary wheat and paddy procurement centres. At the apex level, agriculture marketing operations are managed by Punjab Mandi Board.
High yielding seeds and assured procurement of wheat and paddy at minimum support price (MSP) by Food Corporation of India (FCI) since 1967 have considerably expanded Mandi operations. Arhtiya commission, market fee and rural development fund are the three taxes levied on sale of agriculture produce. Around 2014 Punjab levied additional 6 per cent infrastructure development and purchase tax on food grains to show inflated tax collections before transition to GST regime. The FCI refused to pay these.
Arhtiya fee
About 28,000 registered Arhtiyas (commission agents) are an integral part of agriculture marketing system. They are intermediaries between producers and buyers, and an important source of credit and agriculture inputs for the farmers through interlocking transactions. They were paid 1.5 per cent purchase price as commission by the buyer which was raised to 2.0 per cent in 1988 and 2.5 per cent in 1998. As wheat MSP and quantity procured increased every year, total commission paid in 2021–22 was more than 180-folds the amount paid in 1966–67. The increase in commission paid for paddy was higher. What was the justification to raise it by 67 per cent when it automatically increased with annual raise in MSP?
Mandi and rural development funds
Punjab was charging 3 per cent mandi development fee (MDF) when procurement at MSP was launched in 1967. It started levying 3 per cent rural development fund (RDF) in 1987. Haryana is the only other state which levies RDF. Both MDF and RDF are managed by the Mandi Board. Punjab did a commendable job of upgrading Mandi infrastructure and constructing rural roads. These roads linking villages with towns transformed Punjab economy by facilitating marketing of farm produce, access to farm inputs, education and health services, and production of high value perishable milk and vegetables. Punjab’s early mover advantage during food scarcity era ensured that all farmers benefitted from universal procurement of paddy and wheat at MSP.
Initially, Mandi Board provided the funds, and construction was undertaken by Public Works Department (PWD). Over time this was done in-house for obvious reasons. Except for a few marketing experts, the Board rarely had competent agribusiness, value-chain, and commodity-forecasting experts, critical for going up the value chain. In terms of expenditures, the Board and APMCs appear like PWD construction subsidiaries rather than agile and futuristic agriculture marketing entities.
Earlier, 65 per cent Mandi taxes were used in the jurisdiction of the APMC and 35 per cent were used for state level activities. During the last two decades, allocations have been centralised. These funds are kept out of state budgetary process for discretionary use, avoiding scrutiny by the Comptroller and Auditor General. Sangat Darshan grants during Akali-BJP regime were from RDF. In 2017, the Congress government raised bank loans of Rs 6,000 crores against future income from RDF and MDF to waive off farmer (Rs 4,600 crores) and landless labourer (Rs 511 crores) loans.
High taxes disadvantage farmers and agro processing industry
At present, other states (except Haryana) levy 2–3 per cent tax on agriculture commodities but Punjab is persisting with high 8.5 per cent tax. Transportation costs from land-locked Punjab are also high. The FCI paid full MSP to farmers and all Mandi taxes up to Kharif procurement season 2020–21 but has withheld RDF payments for the last three procurement seasons.
Private buyers factor-in all taxes and offer correspondingly lower price. Thus, Mandi taxes are an indirect tax on the farmers. High taxes are not only impacting FCI balance sheet but are also hurting competitiveness of Punjab farmers and agro processing industry. Premium wheat flour brands do not buy from Punjab. Rice and flour millers of Punjab prefer transporting Basmati and wheat from UP. Rice millers are annoyed with new industrial policy promising Mandi tax exemption to new shellers. In the last procurement season, private traders paid Rs 100–150 per quintal above wheat MSP in Rajasthan and MP but not in Punjab. Many cotton-ginning mills have closed. Excessive focus on tax collection and marketing rigidities are hindering development of farmer producer organisations which can help farmers in receiving a higher share of consumer price.
Bureaucrat politician nexus
During 1960s, the APMCs were elected entities. Unlike democratic APMCs in Maharashtra, Karnataka, and Gujarat, no elections have been held in Punjab since 1970s. All APMCs are headed by political appointees. During government transition, these are headed by sub-divisional magistrates. Mandi Board Chairman, vice-chairmen, and non-official members are also political appointees. Consequently, the APMCs and Mandi Board have become insular organisations with little accountability to farmers and other stakeholders.
The way ahead
After constructing need-based rural roads connecting most of the villages by 1985, Mandi Board and APMCs continued constructing more roads. Many villages have more than 2–3 roads without concomitant economic returns. This has created annual liability of Rs 1,600 crores for their maintenance in six-year cycle. Massive expansion of manpower had created big pension liability. Once cash-rich Mandi Board has defaulted on repayment of Rs 600 crore bank loan instalment. Imprudent use and diversion of funds in the past has created fiscally unsustainable liabilities. This is not a rational justification for continuing with high taxes.
With 23 and 16 states contributing rice and wheat, the centre of gravity of food security has diffused away from Punjab. However, the mindset of 1970s persists when Punjab contributed more than 70 and 40 per cent wheat and rice respectively to national stocks of food-deficit India.
By using geographical interface system software, Mandi Board should identify village roads which are critical for connectivity with the towns and allocate funds for their maintenance only and not for the entire 64,878 km network. Strategic practicalities demand that Punjab should lower Mandi taxes to 2–3 per cent, at par with major wheat and rice producing states. This will provide level playing field to Punjab farmers and agro processors.
Punjab Government should conduct APMC elections instead of appointing Aam Aadmi Party persons as APMC chairmen like predecessor Congress and Akali regimes.
