Farmers in Pakistan have to depend on arhti (commission agent) for the supply of inputs and the sale and distribution of agricultural outputs. They provide licensed warehousing facilities and related services to the farmers and charge a very high fee. In the absence of an efficient financial system in the rural areas, arhtis are also considered as the reliable and only source of credit to the farmers.
Many researchers highlighted the need of abolishing the arhti system in rural areas so that farmers can get a fair price for their products and there is an end to their exploitation.
In this paper on December 13, 2021, Dr Pervez Tahir wrote a piece, “Can the arhti be eliminated?” He mentioned a study conducted by the International Growth Centre (IGC) in 2001 in which they proposed a character similar to arhti but less exploitative. Later on March 20, 2021, Nasir Jamal did a story on Electronic Warehouse Receipt (EWR) system in Pakistan. It is the first digital system introduced by National Rural Support Programme-Agri Processing Company Limited and Naymat Collateral Management Company Ltd in Pakistan. This system is seen as an improvement and a partial solution to the end of harassment by the arhtis.
EWR replaces the paper receipt issued by the arhtis. State Bank of Pakistan (SBP) and Pakistan Mercantile Exchange (PMEX) back EWR by declaring it acceptable collateral for access to formal institutional credit. It also opens up the route to the securitisation of agricultural products. Many applauded this initiative because it solves the issue of access to formal credit to the farmers but EWR is not capable of addressing some key issues.
The first question is: if the institutional credit is the biggest issue and the SBP can accept EWR as collateral, then why can’t it accept the paper receipts issued by arhti? A warehouse receipt is considered as the currency of agriculture and accepted widely as collateral. In many countries including the USA, paper receipts were accepted as a source of collateral for loans from the formal sector for agricultural products. EWR is simply a computerised record, which can be used to generate sector-specific reports of warehousing and logistics.
Recently, India suffered from the same set of problems created by arhti. They introduced a digital payments method for kisan to arhti. This digital system served two purposes: a check on arhti so they could not charge high commissions from kisan and introduction of technology at the grass-root level.
As mentioned by the ICG report, EWR will only be acting like a new arhti (digital arhti system). It will not change the long-ingrained problems of rural society. Access to credit and distribution of subsidies require different institutional arrangements and active involvement of the state.
China took a different route to the problem. They adopted the “Going Direct Strategy”. It was identified that farmers (manufacturers) receive low income form their produce as they are unable to sell directly to the wholesalers and mass consumers due to multiple, unreliable distributional layers and lack of know-how about new marketing strategies. With the help of the “Going Direct Strategy”, consumers can buy agriculture products at lower rates without delays.
Wholesalers, farmers and logistics providers register at specific websites. Wholesalers have the aggregate data of consumer preferences. Based on the information they generate demand and farmers react to their needs. Third-party logistics are used to deliver the goods directly from farms to consumers. The simple use of technology has minimised the distributional layers but also reduced transportation and storage costs. Farmers are directly selling to wholesalers at a fair price and wholesalers are buying without delays and at much lower rates.
In China, “Pin-duo-duo” (Together, more saving, more fun) is the website used for connecting farmers to the wholesalers. Pin duo duo generates an integrated e-waybill system for registered logistics service providers and all the registered big stores.
There are many benefits associated with Pin-duo- duo strategy. It removes inventory, logistics and distributional network requirements. Farmers are producing according to the need of mass manufacturers rather than producing on the basis of what they can produce and getting a better price by optimising their production. In these direct strategies, big farmers are selling to the wholesalers and small farmers react to the needs of the direct urban consumer by using “farm-to-table platforms”. Small consumers are using sites like Taobao and Douyin for catering to their needs and promoting e-commerce activity.
Warehouse receipts may be considered a bargaining chip to sell the crop but “Going Direct” strategies are a step in the right direction. It eliminates the arhti system by optimising production and promotes the use of technology. The question of access to credit and financial inclusion can also be addressed with successful branchless
banking by the use of a similar formal platform. Faster income growth is a better strategy than indulging in debt.
The writer is an economist. She can be reached at firstname.lastname@example.org
Published in Dawn, The Business and Finance Weekly, January 10th, 2022