Methodology of Ranking of States by the their ‘Market Friendliness’ in Wheat Markets in India
1 Since the exercise is confined to wheat markets, only those states that provided cost data for wheat under the CS scheme are selected. These are 13 states namely, Bihar, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Uttar Pradesh, Uttarakhand and West Bengal that represent almost the total wheat production in the country. 2 The ‘market friendliness’ of states is assessed with respect to seven parameters, for which data is readily available. States’ policies that impact on wheat markets are classified into the following parameters (currently there are no stock limits fixed on wheat):
i. Taxes/cesses charged (as percent of MSP) on wheat by states; ii. Additional bonus on wheat announced by states;
iii. Wheat procured by states (as percent of wheat production); iv. Extent of market reforms carried out by states (APMC Act);
v. Extent of Information asymmetry – number of price ticker boards in states;
Ease of access to markets measured by
vi. Percentage deviation from the norm of regulated markets in states; vii. Extent of Road connectivity (Road Density in states)
3 Data on most of the parameters relate to 2012-13; market reforms are as of 28.2.2013 and bonus figures for wheat are for 2013-14. Sources of data are Food Corporation of India (FCI), Department of Agriculture & Cooperation (DAC), Forward Markets Commission (FMC), MORTH, DFPD and State replies.
4 In this exercise, no subjective weights have been assigned to the parameters. Each parameter is given equal weightage, as each is considered to be equally important. Further, in the case of ranking, a lower index value implied higher degree of market friendliness and accordingly appropriate procedures were adopted; for instance, inverse ratios of parameters were taken wherever required. The methodology adopted in the construction of the MFI is expatiated in the following paragraphs.
Taxes/cesses charged (as percent of MSP) on wheat by states
5 In the case of this parameter, a lower tax/cess levied by states was indicative of lesser distortion and a ‘freer’ market. Thus states that charged no taxes/cesses obtained a lower index values.
Additional bonus on wheat announced by states
6 In the case of this parameter, a lower bonus declared by states was indicative of lesser distortion and a ‘freer’ market. Thus states that imposed no bonuses obtained a lower index values.
Wheat procured by states (as percent of wheat production)
7 In the case of this parameter, a lower figure was indicative of lesser distortion and a ‘freer’ market. Thus states whose rice/wheat procurement as a percentage of their respective wheat production was lower obtained a lower index, as it signified greater degree of freedom for private trade to operate.
Extent of market reforms carried out by states (APMC Act)
8 There are two ways of looking at market friendliness. One, have no controls on the market, and two, in case of a controlled market, adopt market friendly reforms. Both qualify as being market friendly, as the aim is to allow the market to function freely. Thus states like Bihar, which had repealed the APMC Act with effect from 1.9.2006, Kerala, which had no APMC Act, come under category one; while Tamil Nadu, which had carried out all areas of reform, comes under the second.
In the case of market reforms, there are seven areas of vital areas which have been identified under the model APMC Act, 2003, that was formulated by the Ministry of Agriculture. These are:
i. Establishment of private market yards/private markets managed by a person other than a Market Committee.
ii. Establishment of private yards and direct purchase of agricultural produce from agriculturist by a person other than a Market Committee (Direct purchasing from producer).
iii. Single registration / license for trade transaction in more than one market. iv. Provision of Contract Farming.
v. Promote and encourage e-trading. vi. Single point levy of market fee.
vii. Establishment of consumer / farmers market by a person other than Market Committee (Direct Sale by the producer to the consumers).
In this case values were assigned to states on the basis of the number of vital reforms out of the seven that were still needed to be carried out. In Punjab, partial reforms were carried out with respect to market reforms (ii) and (vii) listed above, as only enabling provisions had been provided and hence was accordingly ranked. Thus states like Bihar, Kerala and Tamil Nadu, were given values of zero and obtained lower index values as their markets were considered to be ‘free’.
Extent of Information asymmetry – number of price ticker boards in states
9 The dissemination of spot and futures prices of agricultural commodities to all stakeholders, especially farmers is considered as a major tool to bridge the informa- tion asymmetry in the agricultural market. The Forward Markets Commission (FMC), the regulator of the Commodity Futures Market, implements the Price Dissemina- tion Scheme in partnership with the Department of Agriculture and the five National Commodity Exchanges – The Multi Commodity Exchange of India (MCX), The National Commodity Exchange of India (NCDEX) National Multi Commodity Exchange of India
(NMCE), India Commodity Exchange (ICEX) and the Ace Derivatives and Commodity Exchange Ltd. (ACE). The Project endeavours to bring to the mandis both physical market prices reported by the AGMARKNET and the futures prices of all agricultural commodities discovered on the five Exchange platforms on a real time basis.
Lower the number of ticker boards in a state, greater is the information asymmetry and lower is the market friendliness. The number of price ticker boards has an inverse relationship with market distortion. Thus states with lower inverse information asymmetry obtained lower index values.
Percentage deviation from the norm of regulated markets in states
10 The National Commission on Agriculture has fixed a norm for the number of regulated markets required in a state on the basis of one market in the radius of 5 kms. As per this, the requirement of markets at all India level is 41847 whereas the actual number of regulated markets is just 7190. In the exercise, the regulated market gap in each state is calculated, that is the difference between requirement of markets and the actual number of regulated markets. Then the percentage of the gap to the requirement is calculated, which gives the percentage deviation from the norm for each state. The higher the percentage the lower is market accessibility and therefore the higher is the distortion. Thus states having lower deviation obtained lower index values.
Extent of Road connectivity (Road Density in states)
11 Road density (that is, total road length in kilometers (kms) per 1000 kms) is taken as a proxy for connectivity. Lower the road density, greater is the deprivation of connectivity to farmers. Road density has an inverse relationship with market distortion i.e. lower road density in a state implies greater market distortion or unfriendliness. Thus states with lower inverse road density obtained lower index values.
Generating an index for each parameter:
12 An index is produced for each of the seven parameters for each state as per the following formula
Sip – Minimum (S1p, S2p…..S13p)
Iip = ______________________________________
Maximum (S1p, S2p…..S13p) - Minimum (S1p, S2p…..S13p)
Where Sip is the value of the parameter p for state i. The index is constructed for 13 states and thus i ranges from 1 to 13. There are seven parameters for which indices have been constructed, p=1,2….,7. Iip is the index value derived for the ith state for the jth parameter. The states’ values of each index so obtained lies between 0 an 1, with 0 signifying lowest market distortion (or maximum market friendliness) and 1 indicating the highest market distortion (or least market friendliness) of any state relative to others.
Calculating Composite Market Friendliness Index (MFI):
13 After obtaining individual indices for all the seven parameters, a composite index for each state was obtained by finding the arithmetic mean of all the indices, as given below:
∑ Iip MFIi =_________
N
where N is the number of parameters; 7 in this case.
14 Tables giving the state wise data on the seven parameters and the indices are given in annex table 2.4 and table 2.4 (in Chapter-2) respectively.
15 After obtaining the composite index, the states were then ranked. The state with the lower composite index obtained a higher rank, as it was a more market friendly state relative to others. A simple ranking was done of the 13 states. In cases where states were tied with the same composite index values, the state that had the highest value (or 1) in respect of any index obtained a lower ranking. The states were then grouped in to 3 bands – Band 1-5 denoting the top five (green) states; Band 6-10 indicating the next five (amber) states; and Band 11-13 including the bottom three (red) states.
Table 2.4