AGRICULTURE AND ENVIRONMENTAL SERVICES DEPARTMENT 77954 N O T E S ISSUE 3 MAY 2013 Information Provision and Rural Market Performance — Impact of e-choupals in India BY APARAJITA GOYAL INTRODUCTION Farmers often do not have access to information about High transport costs, a lack of reliable price information, market conditions prior to selling their produce. Processors and an inability to verify the quality of produce leave many are also unable to perfectly monitor the traders. Access to farmers who produce cash crops in developing countries information as well as direct interactions between farmers subject to exploitation by the intermediaries with whom and processors can therefore have a potentially important they do business. The effect this exploitation has on effect on the price received by rural producers and on their farmers’ profits, and on their incentives to invest time and behavior. Knowledge of prevailing prices enables farm- resources into quality control, leads to adverse impacts in ers to reap the gains from a broader market search. An terms of both equity and efficiency, and the costs associ- increase in returns can induce farmers to re-optimize their ated with these are a matter of growing recognition on the decisions about how to allocate land between alternative part of economists and policymaker). In the case of soy- crops. beans, a major cash crop in the central Indian state of Mad- hya Pradesh, farmers sell their produce to traders operating in government-regulated wholesale agricultural markets THE E-CHOUPAL INITIATIVE AND ITS known as mandis. The traders, in turn, sell the produce to IMPACT processing companies. There are approximately 230 main Beginning in October 2000, ITC Limited, a large buyer and mandis in Madhya Pradesh where farmers periodically sell processor of soybeans, decided to eliminate intermediaries their produce through an open outcry ascending bid auc- to gain control over the quality of produce, as well as to tion. The auction begins when a government employee lower its transaction costs though the implementation of visually inspects the quality and sets the initial bid. From a unique e-Choupal intervention in Madhya Pradesh. The there, the traders bid upward until the crop is sold. Govern- intervention had two dimensions. Internet kiosks were set ment regulated mandis were specifically established to up in villages that enabled farmers to access daily whole- protecg farmer, and open auctions were considered the sale prices of soybeans, both in the local mandis as well most effective safeguard against traders accumulating as the price offered by ITC. In addition, warehouses (called excessive influence. However, the ability to collude among hubs) were established that enabled scientific testing of a relatively small number of traders in each mandi led to quality and facilitated the sale of soybeans by the farmers the extraction of a significant share of profits leaving little directly to the private company. After comparing the price for the farmer who had no alternative method of selling. in nearby mandis and the price offered by ITC at the hubs, While these traders provide farmers with some useful ser- farmers could now decide where to sell their produce, vices that make up for the lack of transport infrastructure thereby providing farmers with both an outside option as and storage facilities in rural areas, they are also far better well as relevant price information. Furthermore, ITC is able informed than farmers about prevailing prices in different to judge the quality of soybeans that it purchases directly markets and about the prices being offered by processors. from the farmers at different prices. By the end of 2004, in districts that had ITC hubs and kiosks, 4.08 percent of the annual company, the effect of the hub on the mandi price is a priori am- soy production was sold directly to ITC, making the intervention biguous, and is therefore ultimately an empirical question. sustainable because it is profitable for the private company to im- The location and installation date of each Internet kiosk and hub, plement it, and profitable for the farmers to use it. The lack of such available from the private company, provide the spatial and time a co-benefit has been an important reason why many of the efforts patterns of the implementation of the intervention in Madhya undertaken by governments and NGOs to remove intermediaries Pradesh. The outcomes, monthly wholesale price and volume of or provide information services to rural producers in developing crops sold in government regulated mandis in the state from April countries have not met with the same success. 2000 to September 2005, are available from the Madhya Pradesh This Note summarizes the results of a recent paper that examined State Agricultural Marketing Board. Measuring output response the impact of this innovative initiative on the price received by to this intervention is crucial for understanding the effect of this soybean farmers in the mandis and on their subsequent plant- intervention on farmers’ behavior. Annual district level data on area ing decisions. A simple model wis developed that explains how cultivated, production and yield of crops from 1998 to 2004 is avail- the provision of information and the presence of scientific testing able from the Commissioner of Land Records, Madhya Pradesh. together affect the price of soy in local markets. Improving the This is the first attempt to collect mandi-level data on the price price information that is available to farmers through the use of and volume of crops to examine the impact of a change in the kiosks is very likely to reduce the trader’s monopsony power lead- procurement strategy of a private buyer on the functioning of ing to an increase in the offer price of the good in the mandis. The rural markets in India. Using differential timing in the introduc- presence of a hub, however, is likely to exert two opposing forces. tion of kiosks and hubs across the districts of the state, the paper On one hand, direct buying by ITC is expected to divert part of finds an immediate and significant increase in the average price of the sales away from the mandis, leading to an upward pressure soybeans after the introduction of kiosks, lending support to the on price (the competition effect). On the other hand, scientific predictions of the theoretical model. The presence of kiosks in a testing of quality performed at the ITC hubs might induce farmers district is associated with an increase in the monthly mandi price to self-select, putting downward pressure on the price offered in of soybean by 1–3 percent (see figure below), taking into account the mandis (the composition effect). If farmers with good quality mandi and month fixed effects and district-specific time trends. soybean have a greater tendency to sell directly to the private The presence of hubs appear to have no effect on average price, implying that the composi- FIGURE. Effect of Kiosks on Market Price by Month tion effect, perhaps, offsets the competition effect, pushing the estimate of the impact of the hub on mandi price toward zero. In addition, the dispersion of soybean prices across the Coefficients affected mandis in Madhya Pradesh decreased after the intervention. The increase in price and the reduction in dispersion appeas to influ- ence farmers’ planting deci- sions. There is a significant increase in the area under Months soy cultivation due to this Source: Author’s data. intervention. 2 World Bank Photo Library The study makes two contributions. First, the results contribute to Limited of this intervention was the improvement in quality of the substantial economic literature emphasizing that information soybeans procured, from the creation of a direct marketing channl, is critical for the efficient functioning of market.. The study presents and a reduction in its transaction costs. The results in this paper robust empirical evidence that information improves the function- suggest that there can be net welfare gains to farmers resulting ing of rural markets by increasing the competitiveness of buyers. from a redistribution of surplus away from traders to the farmers and the overall gain of deadweight loss under monopsony. Second, direct interactions between producers and processors are gaining considerable interest in the developing world. While inter- The intervention implemented by a private company in the central mediaries deliver critical services to rural producers, they are also Indian state of Madhya Pradesh is associated with a significant often exploitative and there can be large efficiency gains from their increase in the monthly price of soybeans in government regu- removal. This intervention shows that it requires serious investment lated wholesale agricultural markets. On average, the mandi price to bypass intermediaries, but it is possible, and can be beneficial of soy increased by 1–3 percent after the introduction of kiosks, for both farmers and final buyers. The immediate benefit to ITC lending support to the predictions of the theoretical model. The 3 dispersion in price across affected mandis in Madhya Pradesh also appears to decrease post-intervention. Moreover, there is a significant increase in the area under soy cultivation as the result of the intervention. Inter-district variations in the timing of the introduction of kiosks and warehouses were used to isolate the causal effect. CONCLUSION The findings presented show that the provision of information is crucial for increasing the efficiency of rural markets. The analysis also contributes to an understanding of the potential benefits from direct interaction between producers and processors in the context of agricultural marketing in India. The results suggest that there are net welfare gains to soy farmers as a result of this intervention. The immediate benefit of this intervention to ITC Limited was the improvement in procurement efficiency of soy- beans resulting from the creation of a direct marketing channel and a reduction in its transaction costs. It appears that the traders are losing some of their traditional monopsony power and facing a shrinking market. The ITC initiative is part of an overall institu- tional change in the marketing environment, although traders might well be able to maneuver themselves to a more advanta- geous position in rural central India in the long run aA change in the procurement strategy of a private buyer of soybean in Mad- All images: echoupal.com hya Pradesh has had significant spillover effects on the move- ment of prices across agricultural mandis in the state. Although this study sheds light on the implications of this intervention for the functioning of mandis, the impact on total income of the farmers is an open question. If panel data were available measur- ing farmer characteristics, such as landholdings, quantity and quality of all the crops grown and harvested, transportation costs Goyal, Aparajita. 2010. “Information, Direct Access to Farmers, and incurred, number of traders and daily prices, one could measure Rural Market Performance in Central India.� American Economic accurately the individual response to this intervention. Future Journal: Applied Economics, 2(3): 22–45. research could then determine the generam effects of improved information on wages, poverty, and investment incentives faced Jensen, Robert. 2007. “The Digital Provide: Information (Tech- by farmers. nology), Market Performance, and Welfare in the South Indian Fisheries Sector.� Quarterly Journal of Economics, 122(3): 879–924. Additional Reading Bardhan, Pranab, ed. 1989. The Economic Theory of Agrarian Institutions. Oxford: Oxford University Press. 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural