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RBI Notifications

Time for govt, RBI to rethink bank architecture

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various policy rates of the RBI.

Mains level : Paper 3- What were the measures announced by the RBI to deal with the impact of Covid-19 on economy and how far were the measure successful in achieving the intended goals?

To deal with the damage inflicted by the corona crisis on the economy, both the RBI and the government are planning various monetary and fiscal measures. In its latest measures, the RBI has further reduced the reverse repo rate. This article discusses the impact of these measures and explains why the first round of measures failed in achieving the desired result.

What was announced in the second round of policy measures by the RBI?

  • RBI reduces the interest on money banks keep in the central bank (reverse repo down by 25 basis points).
  • RBI gives ₹50,000 crores to banks through targeted long-term repo operations or TLTRO 2.
  • And another ₹50,000 crores to Small Industries Development Bank of India (Sidbi) and National Bank for Agriculture and Rural Development (Nabard) to lend to microfinance institutions (MFIs) and non-banking financial companies (NBFCs).

Banks not transmitting the money

  • Banks globally have a problem.
  • They are not transmitting the money that central banks are providing to businesses that need the money.
  • Imagine that the world has been put into a business coma as we wait for the pandemic to recede.
  • Money to pay rents, interest and salaries is needed by the business to stay alive during this period and banks are showing reluctance to step in.
  • Firms and tiny entrepreneurs need to borrow to stay afloat.
  • Banks typically lend to the larger part of the market and NBFCs and MFIs to the rest—they provide the last mile that banks do not.

Measures by the RBI to increase the money supply in the market

  • The US Fed buying bonds directly: The US Federal Reserve has taken to buying corporate bonds directly rather than through banks.
  • RBI has not gone that far, but is using its firepower to nudge banks to lend to those who are credit-worthy and who desperately need the money.
  • It has done two things to facilitate this.

What reduction in Reverse Repo rate by the RBI means?

  • What is reverse repo rate? This is the rate at which banks lend to the central bank—they keep their surplus money with the RBI and get some interest on it.
  • Banks borrow from RBI at the repo rate, which is 4.4% right now.
  • A few weeks ago, the central bank had reduced the reverse repo by a larger percentage than the repo to decrease the incentive to banks to keep money with RBI.
  • But that had a limited impact as on 15 April, banks still had almost ₹7 trillion with the RBI under this window.
  • In the second round, RBI has cut the reverse repo by another 25 basis points to 3.75% to increase the difference between the borrowing rate and the lending rate.
  • What would be the impact of the second reduction in the reverse repo? The RBI is hoping that this would make banks lend to firms, rather than keeping their money safe with RBI.
  • The difference between the rate of borrowing and lending is now 65 basis points.

An issue of monetary policy transmission is a recurring one. The RBI always try to ensure the transmission but there are several factor that prevent it. Make note of these factors.

Risk aversion of the banks

  • Banks are displaying deep risk aversion—the desire to keep their capital safe rather than risk investing in investment-worthy bonds.
  • The first round of money put into the system through TLTRO 1.0, brought ₹1 trillion.
  • TLTRO is long-term (one-to-three years) funding to banks at the repo rate or a short-term rate.
  • TLTRO money didn’t reach small and medium firms: Banks took the cheap loan and lent to high-rated public sector units (PSUs) and AA-plus firms—essentially entities who had enough liquidity.
  • The money did not find its way to smaller and medium firms, NBFCs and MFIs—entities that actually reach the last mile.
  • RBI has put another ₹50,000 crores as part of TLTRO 2.0.
  • Banks can only get this money if they lend to NBFCs and MFIs.
  • For A and A-minus (these are still investment-worthy) bonds issued by firms in these sectors, banks stand to get a return of between 10-14%.
  • Banks are borrowing at 4.4% and have the option to lend at a multiplier.
  • That is the incentive given by the RBI to get money down the pipeline.
  • Banks stand to lose 65 basis points if they seek the safety of money with the RBI or stand to gain almost 6-10 percentage points in interest if they lend.
  • It remains to be seen if banks take this nudge and begin lending to lower than the highest safety bonds.

Refinance to three institutions

  • Another ₹50,000 crores is being provided as a refinance to three institutions-Sidbi, Nabard and National Housing Bank.
  • These banks reach the small-scale firms, rural sector, housing finance firms, NBFCs and MFIs.
  • Again, this should help money reach the last mile.
  • Clearly, there is too much competition at the top end of the market—everybody wants the safe paper and deals.

The UPSC could ask a direct question with reference to the issue of policy transmission and how it is a serious challenge in crisis such as Covid -19. So, following are some suggestions to deal with this issue.

Way forward

  • Rethink the bank architecture: With transmission, or the liquidity given by the central bank not going down the line, maybe this is a good time for the government and the RBI to rethink its bank architecture.
  • Develop bond a corporate bond market: There is very little action at the middle and lower end of the market. The development of a robust corporate bond market will help.
  • Early alarm system: The setting up of an early alarm system as proposed by the Financial Resolution and Deposit Insurance (FRDI) Bill to prevent a financial firm failure that takes the whole system down would be a step in the right direction.

Back2Basics: What is the transmission of monetary policy?

  • Monetary transmission refers to the process by which a central bank’s monetary policy signals (like repo rate) are passed on, through the financial system to influence the businesses and households.
  • There are many monetary policy signals by the RBI; the most powerful one is the repo rate.
  • When repo rate is changed, it brings changes in the overall interest rate in the economy as well.
  • As a result of a decrease in repo rate, the interest rate on loans by banks also changes and this encourages consumption and investment activities of businesses and households.
  • In an economy, both consumption and investment are often financed by borrowings from banks.
  • As the repo rate brings changes in market interest rate, the repo rate channel is often referred to as interest rate channel of monetary transmission.

Coronavirus – Health and Governance Issues

A virus, social democracy, and dividends for Kerala

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Social democracy.

Mains level : Paper 2- What were the factors that helped Kerala deal most effectively with the Covid-19 pandemic?

This article is an analysis of Kerala’s success in dealing with the Covid-19. Factors that emerge are-strong emphasis on the social democracy, the participation of civil society and strong social compact between the government and citizenry. We have also covered the same subject in a previous article but focus there was more on the administrative level.

Kerala’s success story

  • Kerala was the first State with a recorded case of coronavirus and once led the country in active cases.
  • It now ranks 10th of all States and the total number of active cases (in a State that has done the most aggressive testing in India) has been declining for over a week and is now below the number of recovered cases.
  • Given Kerala’s population density, deep connections to the global economy and the high international mobility of its citizens, it was primed to be a hotspot.
  • Yet not only has the State flattened the curve but it also rolled out a comprehensive ₹20,000 crore economic package before the Centre even declared the lockdown.

Why does Kerala stand out in India and internationally?

  • Kerala’s much-heralded success in social development has invited endless theories of its cultural, historical or geographical exceptionalism.
  • But taming a pandemic and rapidly building out a massive and tailored safety net is fundamentally about the relation of the state to its citizens.
  • From its first Assembly election in 1957, through alternating coalitions of Communist and Congress-led governments, iterated cycles of social mobilisation and state responses have forged what is in effect a robust social democracy.
  • The current crisis underscores the comparative advantages of social democracy.

Kerala’s success is built on social democracy in the state. Following are the factors that constitute the social democracy in the state which is helping it fight against the Covid-19 pandemic with considerable success. These factors are also important from the Mains point of view if the question is framed on Kerala’s success story.

How social democracy is practised in Kerala?

  • Social democracies are built on an encompassing social pact with a political commitment to providing basic welfare and broad-based opportunity to all citizens.
  • In Kerala, the social pact itself emerged from recurrent episodes of popular mobilisation.
  • Popular mobilisations include the temple entry movement of the 1930s to the most recent various gender and environmental movements.
  • These movements nurtured a strong sense of social citizenship.
  • These movements also drove reforms that have incrementally strengthened the legal and institutional capacity for public action.
  • Second, the emphasis on rights-based welfare has been driven by and in turn has reinforced a vibrant, organised civil society.
  • This civil society demands continuous accountability from front-line state actors.
  • Third, this constant demand-side pressure of a highly mobilised civil society and a competitive party system has pressured all governments in Kerala.
  • The pressure made governments to deliver public services and to constantly expand the social safety net, in particular a public health system that is the best in India.
  • Fourth, that pressure has also fuelled Kerala’s push over the last two decades to empower local government.
  • Nowhere in India are local governments as resourced and as capable as in Kerala.
  • Finally, all of this ties into the greatest asset of any deep democracy, that is the generalised trust that comes from a State that has a wide and deep institutional surface area.
  • That on balance treats people not as subjects or clients, but as rights-bearing citizens.

How the built-in social democracy is helping in dealing with the pandemic?

  • A government’s capacity to respond to a cascading crisis such as the COVID-19 pandemic relies on a very fragile chain of –(1)mobilising financial and societal resources, (2)getting state actors to fulfil directives, (3)coordinating across multiple authorities and jurisdictions and maybe, most importantly, (4)getting citizens to comply.
  • First, an effective response begins with programmatic decision-making.
  • From the moment of the first reported case in Kerala, Chief Minister convened a State response team that coordinated 18 different functional teams.
  • The CM held daily press conferences and communicated constantly with the public.
  • Kerala’s social compact demanded no less.
  • Second, the government was able to leverage a broad and dense health-care system.
  • The health-care system, despite the recent growth of private health services, has maintained a robust public presence.
  • Kerala’s public health-care workers are also of course highly unionised and organised, and from the outset the government lay emphasis on protecting the health of first responders.
  • Third, the government activated an already highly mobilised civil society.
  • As the cases multiplied, the government called on two lakh volunteers to go door to door, identifying those at risk and those in need.
  • A State embedded in civil society — the women’s empowerment Kudumbasree movement being a case in point.
  • Kudumbasree movement was in a good position to co-produce effective interventions, from organising contact tracing to delivering three lakh meals a day through Kudumbasree community kitchens.
  • Fourth, you can get the politics right and you can have a great public health-care system, but its effectiveness in a crisis like this will only be as good as the infamous last kilometre.
  • And this is where two decades of empowering local governments have clearly paid off.

Conclusion

At a time when India is dealing with this unprecedented crisis, it is important to be reminded that Kerala has managed the crisis with the most resolve, the most compassion and the best results of any large State in India. And that it has done so precisely by building on legacies of egalitarianism, social rights and public trust. Other states and the Central government must learn from Kerala’s experience.

Anti Defection Law

Institutional fixes and the need for ethical politics

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Anti-defection law.

Mains level : Paper 2- What are the solution to the issue of bypassing of the anti-defection law by the political parties?

The article discusses the recent event in Madhya Pradesh where a group of legislature resigned bringing down the government. A most important issue arising out such incidents is circumventing of the laws made to avoid such things from happening. Several such issues along with their solutions are described here.

New method to bypass the anti-defection law

  • The political activities in Madhya Pradesh represent a new method of bypassing the anti-defection law and toppling elected governments.
  • The government in Karnataka was brought down in July last year in a similar manner with 17 MLAs of the ruling coalition resigning and joining the BJP.
  • What method was used? Under this novel method, a set of legislators of the party in power is made to resign from the Assembly to reduce the total strength of the House enough for the opposition party to cross the halfway mark to form the government.
  • In the ensuing by-elections, the members who resigned were then fielded as ruling party candidates (most of whom have been re-elected in the case of Karnataka).
  • The same practice is likely to be repeated in Madhya Pradesh soon.

A question based on anti-defection law and its implication for healthy debate in the parliament was asked in 2013. And that issues still persist. So, take note of these issues.

Exploiting the loophole in the Tenth Schedule

  • This method of mass defection circumvents the provisions of the Tenth Schedule of the Constitution (better known as the anti-defection law)
  • What is the Tenth Schedule? The tenth schedule prescribes the grounds for disqualification of legislators: voluntarily giving up party membership and voting or abstaining to vote against party directions.
  • Resignation is not mentioned as a ground for disqualification.
  • However, the Speaker in Karnataka disqualified them for the rest of the Assembly’s term, thereby barring them from contesting the by-polls.
  • While the Supreme Court upheld the disqualification.
  • It stuck down the bar from contesting by-polls.
  • In Madhya Pradesh, since the Speaker has accepted the resignation of the MLAs, the defectors can in any case contest the by-polls.

Damaging the underpinnings of democracy

  • The recurrence of this model of defection signals the exploitation of the inherent weaknesses of the anti-defection law.
  • While solo legislators jumping ship might have reduced now, “horse-trading” seems to have gone from retail to wholesale.
  • This threatens the underpinnings of India’s electoral democracy since such surreptitious capture of power essentially betrays the people’s mandate in a general election.

Kihoto case is an important case in relation to the anti-defection law.

Time to reframe the anti-defection law

  • In this context, it is important to examine whether the anti-defection law fulfils any purpose.
  • This law raises fundamental concerns regarding the role of a legislator in a parliamentary democracy.
  • Issues with the law: It denies the legislator the right to take a principled position on a policy matter and reduces her to an involuntary supporter of the whims of party bosses.
  • Challenge to the constitutionality: The constitutionality of the Tenth Schedule was challenged for violating the Basic Structure of Constitution with regard to parliamentary democracy and free speech.
  • Judicial review of the Speaker’s decision: The Supreme Court in Kihoto Hollohan v. Zachillhu (1992) in a 3-2 verdict upheld the law while reserving the right of judicial review of the Speaker’s decision.

What are the shortcomings in the anti-defection law?

  • Restriction on the freedom of legislator: The anti-defection law, on the one hand, severely restricts the freedom of a legislator and makes her a slave of party whips.
  • Failure in preventing the horse-trading: On the other hand, it has not been able to meet its primary objective of preventing horse-trading and continues to be circumvented to bring down elected governments.
  • This calls for reforms that address concerns at both ends of the spectrum.

Following two are the solutions offered here. They are important from Mains point of view. As solutions are often asked for the pressing issues.

Dinesh Goswami Committee and other suggestion

  • Restrict the scope of the binding whip: For addressing the first issue, as the Dinesh Goswami Committee also suggested, the scope of the binding whip should be restricted to a vote of confidence.
  • For addressing the second issue, it is best to institutionalise the Karnataka Speaker’s decision to bar the defected members from contesting in the ensuing by-poll, if not for a longer period.
  • This will disincentivise MLAs from jumping ship.
  • These reforms would require a constitutional amendment to the Tenth Schedule, an uphill task under the current circumstances.

Conclusion

We are facing a deeper challenge of the corrosion of India’s parliamentary system, for even in jurisdictions without such anti-defection laws, we do not see “horse-trading” and “resort politics”. Hence, beyond institutional fixes, we also need a popular articulation of an ethical politics that causes the public to shun such political manoeuvres.


Back2Basic: What is the Tenth Schedule?

  • The Tenth Schedule was inserted in the Constitution in 1985.
  • It lays down the process by which legislators may be disqualified on grounds of defection by the Presiding Officer of a legislature based on a petition by any other member of the House.
  • A legislator is deemed to have defected if he either voluntarily gives up the membership of his party or disobeys the directives of the party leadership on a vote.
  • This implies that a legislator defying (abstaining or voting against) the party whip on any issue can lose his membership of the House.
  • The law applies to both Parliament and state assemblies.
  • Exceptions under the law: Legislators may change their party without the risk of disqualification in certain circumstances.
  • The law allows a party to merge with or into another party provided that at least two-thirds of its legislators are in favour of the merger.
  • In such a scenario, neither the members who decide to merge nor the ones who stay with the original party will face disqualification.
  • Is there any time limit to decide on the matter? The law does not specify a time period for the Presiding Officer to decide on a disqualification plea.
  • Given that courts can intervene only after the Presiding Officer has decided on the matter, the petitioner seeking disqualification has no option but to wait for this decision to be made.

Coronavirus – Economic Issues

How the RBI is handling ‘The Great Lockdown’?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various terms mentioned in the newscard

Mains level : RBI measures to boost the pandemic stricken economy

To deal with the crippling effects of the pandemic on the economy the government has unveiled certain fiscal measures. After announcing the first round of monetary measures the RBI has unveiled the second round of policy announcements to align itself with the government in its efforts to review the economy. Following are the measures announced by the RBI in its second such announcement.

  • The IMF has called the ongoing economic crisis due to Covid-19 as “The Great Lockdown” and termed it to be the worst recession since the Great Depression.
  • The total estimated loss to global economic growth is pegged at $9 trillion — more than three times India’s GDP.
  • However, while the rest of the world is certain to contract, India is hoping to be one of the few countries that expand their overall GDP, regardless of how small that increase may be.
  • In this regard, both the Centre and state governments, as well as the RBI, have been coming out with policy announcements that mitigate economic distress.

UPSC can frame the question based on the measures announced by the RBI like “What measures were announced by the RBI to deal with Covid-19 impact on the economy?”. Also, pay attention to various terms and their effect on the economy from the macroeconomic point of view. That understanding helps us to answer the question based on basic concepts.

What are the announcements made by RBI?

A) Cutting Reverse-Repo Rate

  • To begin with, the RBI has cut the reverse repo rate further by 25 basis points (100 basis points make up one full percentage point).
  • The reverse repo rate now stands at 3.75 per cent while the repo rate is 4.40 per cent.
  • The idea behind repeatedly cutting reverse repo more than the repo is to incentivise banks to borrow from it at low rates and lend it forward to customers.

B) Targeted Long Term Repo Operations

  • RBI has announced another TLTRO of Rs 50,000 crore but this time it has mandated that 50 per cent of this amount borrowed by the banks must go to small and mid-sized NBFCs and Micro Finance Institutions (MFIs).
  • Again, the benefits of this move are two-fold. One, it provides more liquidity.
  • More importantly, it also provides it targeted to those institutions that are most hit by the economic slowdown and, as such, most in need of funds to survive themselves.

C) Credit to NBFCs and MFIs

  • All India financial institutions (AIFIs) such as the NABARD, etc. will be provided special refinance facilities for a total amount of Rs 50,000 crore by the RBI.
  • This credit will help the end consumer, especially in the rural sector, small industries, and housing finance companies.

D) Expanding Ways and Means Advances (WMAs)

  • On the issue of providing liquidity and fulfilling its role as “the lender of last resort”, the RBI also announced that it will provide more funding to state governments — under the WMA facility.
  • The WMA is essentially is a facility by which state governments borrow from the RBI to meet the shortfall between their revenues and their expenditure.
  • But the WMA is a short-term measure, only meant for exigencies.

E) Easing NPA norms

  • Apart from easing liquidity in the system like in the past, the other focus has been to provide an easier regulatory regime.
  • The global lockdown has almost completely halted economic activity.
  • Under the circumstances, it is natural that business will struggle to pay back their loans and there will be a steady accretion of non-performing assets (NPAs) across the board.
  • Similarly, to ensure that loans given to real estate projects, that are getting delayed due to the crisis, do not turn into NPAs, the RBI provided an extension of another year before they are recognised as NPAs.

F) Easing LCR norms

  • Lastly, given the stress on the system and the demand for cash, the RBI has allowed Scheduled Commercial Banks to reduce their Liquidity Coverage Ratio from 100 per cent to 80 per cent with immediate effect.
  • The LCR essentially mandates the amount of cash that a bank is required to keep with itself.
  • At 100 per cent LCR, a bank would have been required to keep 100 per cent of the net cash it expects to flow out of the bank over the next 30 days.
  • With this being reduced to 80 per cent, banks would have more cash to deal with.

Though no direct question on monetary policy was asked in the recent past,  understanding the basic concepts stands us in good stead while writing the related answer in the exam. So, the terms mentioned above like-TLTRO, WMAs etc. are important from exam point of view.

RBI Notifications

OBICUS Survey by RBI

Note4Students

From UPSC perspective, the following things are important :

Prelims level : OBICUS

Mains level : Not Much

The Reserve Bank of India has launched the latest round of quarterly order books, inventories and capacity utilization survey (OBICUS) of the manufacturing sector.

OBICUS is something new than we often get to hear from RBI…. Most recent was Ways and Means Advances. We can expect prelims question like- “Order books, inventories and capacity utilization survey (OBICUS) of the manufacturing sector is held by” – with options like NSSO, Labour Bureau etc.

OBICUS

  • OBICUS survey on the manufacturing sector is published quarterly by the RBI since March 2008.
  • It provides an insight into the demand conditions faced by the Indian manufacturing sector.
  • It covers over 2500 public and private limited companies in the manufacturing sector.
  • The company-level data collected during the survey are treated as confidential and never disclosed.

Items included in OBICUS

  • The information collected in the survey includes quantitative data on new orders received during the reference quarter, backlog of orders, pending orders, total inventories with a breakup between work-in-progress (WiP) and finished goods (FG) inventories and item-wise production.

Significance of OBICUS

  • The survey provides valuable input for monetary policy formulation.
  • It represents the movements in actual data on order books, inventory levels of raw materials and finished goods and capacity utilization.
  • These are considered as important indicators to measure economic activity, inflationary pressures and the overall business cycle.
  • The survey also gives out the ratio of total inventories to sales and ratio of raw material (RM) and finished goods (FG) inventories to sales in percentages.

Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

[pib] Software Technology Parks of India (STPI)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : STPI and thier functioning

Mains level : Role of STPI in facilitating start-ups and IT industries

Government of India has given 4 months’ Rental Waiver to the IT Companies Operating from Software Technology Parks of India (STPI) Centers.

STPI which witness multi-million transactions every day are the most promising workplaces for startups in India. They have gained popularity not among Indians, but also on an international platform for its state of the art infrastructure, world-class working conditions and amenities. We can expect a mains question like “Discuss the role of STPIs in making India a hub of ITeS exports”.

Why this waiver?

  • The rental waiver will provide relief to the industry in this crisis situation emerged due to COVID19 pandemic.
  • Most of these units are either Tech MSMEs or startups.
  • This effort is also in the larger interest of around 3,000 IT/ ITeS employees who are directly supported by these units.

What are STPI?

  • An STPI is a society established in 1991 by the Ministry of Electronics and Information Technology.
  • The objective of an STPI is to encourage, promote and boost the export of software from India.
  • STPI maintains internal engineering resources to provide consulting, training and implementation of IT-enabled services.

STPI Scheme

  • The STP Scheme is a 100 per cent Export Oriented Scheme for the development and export of computer software, including export of professional services using communication links or physical media.
  • This scheme is unique in its nature as it focuses on one product/sector, i.e. computer software.
  • The scheme integrates the government concept of 100 per cent Export Oriented Units (EOU) and Export Processing Zones (EPZ) and the concept of Science Parks / Technology Parks, as operating elsewhere in the world.

Who can get a floor on STPI?

  • An Indian company
  • A subsidiary of a foreign company
  • A branch office of a foreign company

Features of the STPI

  • The STP Scheme provides various benefits to the registered units, including 100% foreign equity, tax incentives, duty-free import, duty-free indigenous procurement, CST reimbursement, DTA entitlement, and deemed exports.
  • STPI centres also provide a variety of services including high-speed data communication, incubation facilities, consultancy, network monitoring, data centres and data hosting.

Agricultural Sector and Marketing Reforms – eNAM, Model APMC Act, Eco Survey Reco, etc.

[pib] “Kisan Rath” mobile app to facilitate transportation of farm produce

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Kisan Rath

Mains level : Supply-chain dynamics of Agricultural produce and its bottlenecks

The Union Ministry of Agriculture & Farmers’ Welfare has launched a mobile application to facilitate farmers & traders in searching for transport vehicles for movement of Agriculture & Horticulture produce.

Initiatives as such are less likely to be asked in the prelims as the name and purpose create no different analogy. But for the sake of information and mains perspective, it is vital to remember ‘Kisan Rath’ while emphasizing on Agricultural marketing reforms.

“Kisan Rath” mobile app

  • The app aims to facilitate Farmers and Traders in identifying the right mode of transportation for movement of farm produce ranging from foodgrains, fruits & vegetables, oilseeds, spices, fibre crops etc.
  • Primary transportation would include movement from Farm to Mandis, FPO Collection Centre and Warehouses etc.
  • Secondary Transportation would include movement from Mandis to Intra-state & Inter-state mandis, Processing units, Railway station, Warehouses and Wholesalers etc.
  • It also facilitates traders in transportation of perishable commodities by Reefer (Refrigerated) vehicles.

Utility of the app

  • Transportation of Agri produce is a critical and indispensable component of the supply chain.
  • Kisan Rath will ensure smooth and seamless supply linkages between farmers and the market.