Monday, 7 May 2018

Economic Diplomacy for Development

The “Deccan Dialogue” is a conference jointly organised by the Ministry of External Affairs, Government of India and the Indian School of Business on the theme “Economic Diplomacy for Development” on 6th May 2018, in Hyderabad.

Here’s a summary of my remarks in a panel discussion at the conference, the session’s theme being, “Taking economic diplomacy to the grassroots for strengthening development partnership”

Friends, I will use the time allotted for my opening remarks to make three brief points, and pitch with the Conference Organisers for one action at the end!

Firstly, the word “development” in the conference theme, auto-suggests that one sector we should strategically focus on is “agriculture”. Because agriculture engages half of our workforce, with per capita incomes that are just about one-fourth of that of the rest of the professions. For this reason, we should work on raising incomes of the farmers, with as much importance as we give to creating new jobs. On the other hand, providing food security to the growing population of the world is another developmental concern. At a global level, one calculation estimates that we need to produce as much food in the next forty years to feed the people, as we had produced in the last eight thousand years in aggregate. Yes, you heard it right! Can you visualise how daunting the task is?

Growing more food by increasing farm productivity sounds like a simple solution that can raise farmer incomes and feed the world simultaneously. No, actually doing it is not as easy! That brings me to the second point I wanted to make. That solution to this problem lies in elevating the issue to the level of economic diplomacy, the other part of this conference theme, rather than treating it as business-as-usual activity. Because, we need to increase the farm productivity factoring the twin realities of ‘changing climate’ and ‘depleting natural resources’ such as water and top soil. These mega-challenges require collective action at global level and access to technology seamlessly across borders. This requires diplomatic engagements. Also, while the Hon’ble PM has given the call for “Doubling Farmers Incomes” and the Centre supports the implementation with several schemes, agriculture is a State subject and onus of action lies with the States. Given the extent of Agro-climatic heterogeneity among states, the other phrase much-mentioned since morning, “Competitive Federalism” comes into play. Each state must make efforts to raise their farm productivity within the realities of their states and must therefore look for global country or state partners who have natural reciprocal dependencies to enter into sustainable arrangements for mutual benefits.

In this context, economic diplomacy must move beyond the routine Trade & Investment Policies, FTAs etc. These policies and agreements, of course, do lay the necessary foundation. They must also move beyond placing Economic Attaches in the Embassies. Such presence also, of course, we must have, to assist exporters, and we did experience significant progress on this front. The third point I wanted to make is about the role of the Track II Diplomacy, involving the Private Non-Government Sector. Even assuming, global collaborations are done and access to technology is arranged through Track I, at the point where the till hits the soil, to translate these agreements into income for the farmers and products for the consumers, it is the private sector that has to play a crucial role. Just more production won’t be enough, robust value chains must be built. Chains that transmit demand signals to the production system and for linking the produce to the markets with minimal waste. To facilitate management of production and market risks. To process and add value. Even to help Governments identify reciprocally beneficial global partners relevant to each ecosystem. And so on…

Finally, I would like to pitch for one action before I close: Since morning there has been a lot of chatter about formalising Deccan Dialogue along the lines of the ‘Raisina Dialogue’ in Delhi and the ‘Gateway of India Dialogue’ in Mumbai. I urge this forum to create a permanent Agricultural Track in the ‘Deccan Dialogue’ in Hyderabad to carve out a niche position for itself.

Thank you 😊

Saturday, 3 March 2018

Creating Cross-sector Partnerships for a Sustainable CSR

This is an outline of my talk at the CSR Conference organized by the Madras Chamber of Commerce and Industries, Chennai on 2 Mar 2018

A partnership becomes meaningful when its accomplishment as a whole is greater than the sum of achievements of its parts! As is self-evident, the word “part” is an integral part of a “partnership” J

Let’s take a step back, look at the parts in the context of today’s conference, understand their roles and achievements todate:

Some five thousand years ago, our society organized itself into three broad parts.
  1. For Profit Businesses: Provide goods & services to consumers, create employment, generate wealth, pay taxes 
  2. Governments: Foster competition among businesses, tax them, deploy the resources on common physical & social infrastructure for the welfare of people 
  3. Not for Profit Non Govt Organisations: Keep a tab on 1 & 2 on behalf of people, for their general well-being
One can granulate further and make more parts, like academia (but they could be made up of any of these parts, as in academic institutions for profit or set up by Government or not for profit), or media (again could be any of these three parts). There are also For Profit Social Enterprises and Not for Profit Businesses. Keeping those nuances aside, for the sake of ease, let’s recognise these three parts for our narrative and move on.

What has this socio-economic structure achieved in terms of wealth, welfare and well-being in these five thousand years? 
  1. As of this evening, we have lived through 17% of this year 2018. That's two out of twelve months. But, do you know that we have exhausted 29% of the natural resources our earth can regenerate in the same twelve months? Which means, we have lived on the resources borrowed from our children and their children. Actually, stolen from them! This description is just a recast of Earth Overshoot Day, some of you would be familiar with. That was 2nd August in 2017. 
  2. Top 1% of the richest people on earth own 50% of all wealth. And, the bottom 50% own a meagre 1%. A statistic we can all be very shameful of…      
These "inglorious" achievements were recognized a few decades ago and we have set for ourselves what we called Millennium Development Goals then. We didn’t get very far, so we have re-set for ourselves Sustainable Development Goals, now to be achieved by 2030.

For a more balanced achievement of wealth, welfare and well-being, as envisaged in SDGs, we need to see ourselves as “partners” in the mission than merely as “parts” doing our own bit. All hands must be on the deck. 2030 will just be here, like tomorrow! Each part does have a different and complementary role in this new “partnership” approach.
  1. Government: For scale. Not just for funds, but for its machinery that’s spread across the nook and corner. 
  2. NGOs: Terrain knowledge. Social mobilization. Community empowerment. For, there’s no better bet than empowered communities to achieve sustainable development. 
  3. Businesses: Surely, not for the CSR money they are manadated to spend. The mandatory CSR spend, aggregating to Rs 25,000 crores, doesn’t even add up to four days of Government’s budget on welfare! It’s actually for their project and financial management capabilities. More importantly, for their entrepreneurial energies, innovation, and for designing the much-needed impact-making interventions. 
  4. In addition to the three parts I had outlined earlier, I will call out a fourth part: Technical & Scientific Establishments - these could be from any of the three sectors - for their domain knowledge and for continuous action learning. For designing best practices based on science and evidence. Otherwise, the interventions end up shortsighted.
It’s easy to play the words, parts and partners, but it is not easy to actually forge and foster partnerships. There are more broken and failed partnerships, than there are successful ones. It’s important to recognize the barriers to partnerships before we move any further.  
  • Entrenched prejudices colour actions and communications:
    • Businesses and Governments think NGOs are too micro-focused and inefficient.
    • Governments and NGOs think Businesses are too profit-minded and there’s always something ulterior in their social motives.
    • NGOs and Businesses think Governments are just outlay focused and its officers are corrupt.
    • Work cultures and practices lead to operational friction and frustration:
      • NGOs can’t fathom the need for institutional systems & controls. “Can’t you just trust us?” is their exhortation. 
      • Government is too siloed and procedure oriented and end up pushing all action to the last quarter of a year! Do you know that some 27 approvals are required to translate an MGNREGA project idea into a reality? 
      • Businesses expect execution like clockwork, which doesn’t make sense when social capacity of underprivileged communities needs to be built.
    • And, once partnering starts, there’s a new problem! Of adversarial posturing by each partner, due to perceived threat to their respective territories.
      • We know our bit. You don’t need to tell us!
    With odds stacked so badly against partnerships, how do we make partnerships work? Let me share a three-point formula, based on our experience of implementing ITC’s CSR projects in partnership with some 85 NGOs, 9 Governments, and 15 Technical & Scientific Institutions:
    1. Co-create projects from the beginning. Conceptualise multi-stakeholder projects after explicitly recognizing the complementary strengths of each partner, and how without any one of them the outcomes would fall short of the community needs. 
    2. Design a predetermined review rhythm. A platform of key members of each partner to review progress and remove roadblocks. This way, the engagement becomes more evidence based and resolution focused; otherwise, there’s lot of finger pointing based on different perceptions. 
    3. One of the partners must become an Orchestrator of the partnership and take on the primary responsibility for the project outcomes. To convene and harness the collective power. To make things work.

    Thank you.

    Wednesday, 29 November 2017

    Agriculture: Twenty Years from Now...

    Following is a summary of my remarks in an “Agri Panel” at the Global Entrepreneurship Summit earlier today, in response to the question, “What do you think will be game-changing about how we think about agriculture, twenty years from now?”

    Soon after the panel moderator sent me this very interesting question a couple of days ago, the first thing I did was to post this question on Twitter, Facebook, and LinkedIn to crowdsource thoughts from my friends. There were nearly two hundred unique responses! They added up to twenty pages of text, without counting the number of pages in the links I received. Overwhelming, isn’t it?

    All I am doing now is to simply synthesize those inputs and share with you J

    The future of any system is shaped the current aspirations of the key stakeholders. Let’s take a look at the aspirations of the consumers, producers and the society at large…

    Consumers want sufficient quantity of food (because we would be nearly nine billion by then, and on average richer than today), that is tasty (although, a friend did say in lighter vein, “since we will have nano-bots in our blood streams, and since our memories could be uploaded on to cloud, maybe we don’t need food and therefore no agriculture; we probably just need some electricity, or batteries, or just a few hours of exposure to sun ;-), is safe (you are all consumers here, don’t you agree that harmful chemicals in food is your topmost concern?), nutritious (scientists say that most of the world is suffering from invisible hunger), and all of these at reasonable prices!     

    Farmers want higher incomes (as you know, per capita income of farmers around the world, especially in emerging economies, is far lower than the general per capita) with lower risk (weather and disease related production risks, price volatility). Their labour deserves more dignity (as it is, hardly any youth from the next generation wants to be a farmer) and they deserve better quality life (as in, the conveniences and comforts that are common in urban settings).  

    Society at large would like agriculture to conserve natural resources (water and top soil, for example) and where possible, actually renew them. Agriculture needs to be resilient to climate change (the summer rains and warm winters, extreme climate episodes like heavy downpours on one hand and droughts on the other, etc), and again, where possible, positively impact climate change (sequester carbon, minimize greenhouse gas emissions etc).

    An interplay of these different - at times conflicting - aspirations gives rise to three distinct scenarios, all of which will co-exist in twenty years. Let me label them: Farms as Factories, Homes as Farms, and Back to Basics!

    Farms as Factories: By using the metaphor of factories, all I am saying is that the consistent quality of output will be produced, crop after crop, by leveraging the evolving technologies – both farming (like seed, nutrients, farm-equipment, agronomy practices etc) and digital (IoT, block chain, hyper-spectral imaging, GPS / GIS etc). A friend called them, “hardware, software, and liveware”). Another friend went to the extent of visualising a self-managing seed! These seeds will analyse the experienced conditions like soil, weather, water etc and invoke the necessary embedded features that would maximize the yield and quality. This may sound like fantasy today, but those of you who are familiar with experiments on seeds with multiple layers of coating in the past may very well say this could be a reality in twenty years!

    Homes as Farms: I am sure, you have heard of vertical farming, balcony farming, kitchen gardens and such other names. Once supply chains are established to supply DIY-type mini production units, seeds, nutrients etc to the households, this phenomenon will expand more rapidly. This food is safe without any doubt in the consumer mind, and zero carbon miles! Business Models are also in the works for another kind of service. If you are not adventurous enough to grow crops in your backyard yourself, you can simply let out the space to Service Providers who can grow crops on a BOO model. Besides experts growing the crops in this model, a colony-level kitchen garden is more optimal than a household level garden. And a third model, which is not a ‘home-as-farm’ strictly speaking, is a partnership between a group of, say, five thousand, consumers and a community of, say, five hundred farmers. I know of several such partnerships across cities, built as WhatsApp Groups integrating even the e-commerce functionality.       

    Back to Basics: Much of today’s ills of agriculture are due to chemical-intensive mono-cropping paradigm. A more sustainable future scenario would be an integrated farming system consisting of polyculture, permaculture, organic compost, bee-keeping, animal husbandry, renewable energy. In fact, I already see some farms where solar energy brings larger revenue than the conventional crops.  
    As the panel went forward, there were other questions, but for now I am wrapping up this post without covering them.

    As always, comments are most welcome J This is a live and lively topic! 

    Thursday, 17 August 2017

    Andhra Pradesh: A Role Model in Agriculture & Allied Sectors - Marching towards Doubling Farmers’ Incomes

    This article was originally written for Andhra Chamber of Commerce, Chennai for their 90th Anniversary Souvenir

    The State’s strategic location and bountiful natural resources, supplemented by smart investments in infrastructure made it a leader at an all India level
    Andhra Pradesh’s significant contribution to India’s agricultural sector is validated by the leading position the state occupies in the production of several major crops. The state is not only known as the “rice bowl of India”, but also ranks either first or second in the production of maize, groundnut, mango, papaya, lemon, chilli, turmeric, fresh water fish and prawn.
    The state’s abundant natural resources – river systems such as Godavari, Krishna, Tungabhadra, Penna etc., and a wide variety of soils – support a diverse cropping pattern across the five agro-climatic zones. On its part, the Government has ensured propagation of sustainable farming practices, making Andhra Pradesh a pioneer in technologies such as micro irrigation and balanced fertiliser use based on soil health mapping.

    Further, the State’s strategic location with 980 kms of coastline, fortified by several ports, makes it a gateway to the East and South East Asia, promoting the agri-exports from the State.

    The inspiring vision of the Hon’ble Chief Minister is to make Andhra Pradesh amongst the three best states in India by 2022 and the most developed state by 2029. Agriculture sector has a vital role to play in achieving this goal, with the sector currently contributing 23% of the GSDP, and offering livelihoods to nearly 60% of the state’s population. A corollary objective is also to double farmers’ incomes by 2022.  

    Agriculture in Andhra Pradesh has immense potential: Realising this requires regionally differentiated strategies and sharper market orientation
    Raising the agriculture budget for 2017-18 by 12% over the previous year, to Rs 18,214 Crores, the state has already demonstrated its commitment to the cause.
    In addition to the ambitious Pattiseema project that brought water to the drought-prone Rayalaseema region besides stabilising the Krishna Delta, several drought-proofing technologies have also been deployed in the rainfed districts of the state, making state’s agriculture more resilient. Various other steps to raise the productivity, viz. seed supply, farm mechanisation, access to credit, extension services to popularise scientific practices etc., will all go a long way in raising the growth of agricultural sector and increasing farmer incomes.
    Actually, as a state-wide average number, the per-capita income of an Andhra Pradesh farmer is already higher than the national average. The focus must now shift to dealing with the regional variations within the state, which are quite significant. A Guntur farmer earns four times that of a Srikakulam farmer, while a Nellore farmer more than twice that of a Kurnool farmer.
    Raising productivity is a very important task, given the head-room that’s available, but higher productivity does not necessarily lead to larger farmer incomes, as a tomato farmer in Madanapalle can woefully vouch for, or the mango market in Nunna is a mute witness to, every time the production of those crops is bumper.
    Only a fundamental shift in the approach can mitigate this risk. We must move away from finding markets for whatever is produced to producing what the consumer wants. Such demand-driven value chains can bring enormous benefits to the farmers if they are able to align production to market signals. This means a more regionally differentiated and sharply market-oriented production strategies.    
    For example, diversifying into horticulture and mastering the associated post-harvest operations are more critical for Kurnool, while communicating the nutritive value of millets to consumers in metro-cities is a prerequisite before the production is stepped up in Anantapur. The same objectives could be achieved by raising the food-safety quotient for chillies in Guntur and prawns in Nellore in order to service the global customers. On the other hand, the secret might be in putting special efforts to market the organic coffee from Araku valley that could help multiply farmer incomes from that region.   

    This strategy also provides a great opportunity for extensive corporate participation in execution, supplementing Government’s efforts  
    In a way, such participation by corporates is also an imperative, given their ability to build consumer-focused businesses more effectively. Recognising this, Government of Andhra Pradesh has already initiated a Public Private Partnership Project linking Farmer Producers Organisations (FPOs) with Corporates in 2016, with an explicit goal of doubling the farmers’ incomes.
    This partnership approach provides a comprehensive crop production & marketing framework, integrating the strengths of all the stakeholders to support the small & resource-poor but very resourceful farmer. The government provides a favourable business ecosystem through investments in basic infrastructure in the project area, and converges all the subsidies being given to the farmers under different schemes. Agri Business / Food Processing companies bring in market linkages and the required technology along the full crop value chain as per global standards, and also be responsible for the overall project management and the deliverables. Where necessary experienced NGOs are brought in to assist in formation of farmers’ groups and their capacity building.
    ITC Limited is also a committed partner in three such projects covering agriculture, horticulture and aquaculture segments, targeted at both domestic and export markets. By the time these projects scale, ITC intends to further widen the scope by integrating the various initiatives into the “digitally plug & play ready” e-Choupal 4.0 to support a large number of IT-based agri-services start-ups in reaching out the farmers across the state.

    With these innovative initiatives, the State is well on its way from the Green Revolution days to the Golden Revolution era in the agriculture sector as an integral part of the Swarnandhra Vision 2029   

    Tuesday, 25 July 2017

    ITC e-Choupal 4.0

    This was an interview given to Commodity India Magazine. Reposted here: 

    CI: We came to know that you are about to launch the next version of ITC e-Choupal, called 4.0. Can you tell us something about that? Actually, please tell us about e-Choupal 1.0 to 3.0 first.

    SK: In a sense, it’s not the next version, as much as it’s the next tier, because e-Choupal 1.0 to 3.0 continue to operate and reinforce one another…

    The e-Choupal 1.x series is about re-engineering the agricultural supply chains to make them more efficient and effective.

    For example, 1.1 eliminated the non-value-adding costs along the supply chains of oilseeds and grains – such as, multiple handling costs & transaction charges – by enabling competitive price discovery of the price of farm produce in the village itself instead of farmers taking their produce to the mandi, which resulted in the avoidable additional costs. Free access to Internet through the e-Choupal Sanchalak, prices published on the echoupal portal, quality assessment system and quality-factored pricing mechanism at the e-Choupals in the village have made this possible. Because of this re-engineering, farmers net revenue increased while ITC’s gross costs reduced.     

    In 1.2, the identity of each variety of a commodity (eg wheat) and its unique characteristics were preserved along the supply chain by virtue of direct buying from the farmers. Specially developed blends of such multiple varieties offered value-added products to the diverse needs of the different segments of consumers (eg atta of different colour, texture, taste, water-absorbing capacity, broken-starch content etc). Because of this re-engineering, ITC was able to build winning brand (Aashirvaad) and the farmers received better prices for the varieties in demand, instead of the usual average price that is equivalent to the lowest common denominator.

    In 1.3, the traceability is pushed one-step further upstream to the practices followed on the farm (eg prawns) to ensure food safety and deliver the same to the consumers around the world. Similar innovations in 1.4 to 1.6, each suiting the dynamics of different agricultural commodity.
    The e-Choupal 2.x series is about reimagining the infrastructure built for re-engineering the supply chains as a platform, and improving the delivery of products & services into rural India. The reverse flow…

    If 2.1 delivered agricultural extension services through Choupal Pradarshan Khets, 2.2 to 2.4 delivered agri inputs, financial services (Kisan Credit Cards, Insurance) and FMCG. 2.5 brought modern retail experience to the rural consumers by co-locating hypermarts at Choupal Saagar Integrated Rural Service Centers. Each Choupal Saagar is positioned at the hub of a cluster of e-Choupals, housing a commodity warehouse, soil testing centre, fuel station, food court etc. Similarly, 2.6 to 2.8 deliver other goods & services relevant to the rural production or consumption.

    To deliver the 2.x services effectively, ITC partnered with several businesses, governments & government agencies, not-for-profits etc combining their domain strengths with e-Choupal’s terrain knowhow and on-ground presence.

    Bundling the strengths of e-Choupal with those of the partners brought together in Tier 2.0 ITC e-Choupal became a more complete rural ecosystem. In the 3.x series, the whole ecosystem is offered as a service, as an EaaS model, to bring more platforms to the rural markets…

    3.1 connected rural youth to vocational skilling and employment markets, and 3.2 connected the farmers to the farm-machinery based service providers. Choupal Haats became 3.3, providing rural marketing services through a unique interactive engagement platform for the rural consumers. As many as ten million consumers annually across the e-Choupal geographies. More platforms are work-in-process, as we speak.

    CI: So, how many e-Choupals exist today?

    SK: Actually, after e-Choupal 1.0, the number of e-Choupals is a redundant metric. In its evolution into a platform and then an ecosystem, the media for interaction naturally expanded to mobile phones, Farmers’ Field Schools, Choupal Haats etc. So, while for record, there are 6100 e-Choupals, a better metric would be an outreach to 40,000 villages through one or the other medium.

    CI: That’s a mind-boggling evolution through three tiers in seventeen years! Now, can you tell us about e-Choupal 4.0?

    SK: In a way, e-Choupal 4.0 is an aggregation of e-Choupal 1.0 to 3.0, but more “plug & play ready” for partners in the rapidly growing digital economy.
    In addition to the conventional agri input selling and agri output buying companies, you are seeing hundreds of agri services start-ups in the recent past. From hyper-local weather forecasts to support systems for precision agriculture; from sensors for smart irrigation to drones for crop-health monitoring; from image processing for disease recognition to predictive analytics for epidemic management; from next-gen farm management to online consumer outreach directly… the list is unending!

    Most of these start-ups have brilliant technological solutions to everyday farming problems, and their business models are relevant across the country. Their technology is scalable too, but a large majority of them find it difficult to reach the farmer physically beyond their own local areas. With the rest of the agricultural ecosystem like ground-truth correlation, quality assaying, logistics, credit ratings, payment etc having not evolved enough, for each IT based solution to offer value to the farmer as a point solution.

    e-Choupal 4.0 becomes an aggregator for all such services after integrating them with the on-ground presence of ITC’s agribusinesses across 70,000 villages (this goes beyond the reach of e-Choupal 1.0 to 3.0) and offers a meta-market to the farmers.

    Two prototypes are already in their second season. First one, for example, is about building a community of seed producers and consumers focusing on open-pollinated seeds in which the seed companies have low interest (because there are no hybrids) and the farmers are saddled with impure seeds (because of low seed replacement ratios). From among the same community, there are seed processors, seed certifiers, seed financiers until the planting season and so on. In effect this is a self-managing community accessing all the relevant agri services through e-Choupal 4.0 platform.

    Our plan at this time is to roll out the full-scale e-Choupal 4.0 by late 2018, by fusing multiple such communities across agriculture, skilling, health care etc.

    CI: That’s a grand vision! But, do you think rural telecom infrastructure is geared to support such a platform?

    No doubt, the infrastructure is still evolving. The penetration of low-cost bandwidth and the smart gadgets in rural India will reach an inflection point in a couple of years. The idea is to build partnerships and refine the business model by then.

    In any case, even where farmers have personal smart phones, the preference is for assisted service. Like the e-Choupal Sanchalak who was key in executing 1.0 to 3.0, service providers dedicated to each identified group of farmers will be key in 4.0 as well. The Sanchalak numbers will multiply manifold.

    CI: What’s the role of government policy in all these plans?

    SK: Right from tier 1.0 to tier 3.0, the ongoing reform of agricultural policy has played a key role in expansion and evolution of e-Choupal. When 1.1 was first conceived, the APMC Act wouldn’t allow an agri produce marketing transaction outside the mandi. Since then a few states reformed their APMC Act and e-Choupal could operate in those states. Now, as part of doubling farmers incomes goal set by the Hon’ble Prime Minister, a new Model APMC Act is being proposed. Once implemented, this will open several possibilities for e-Choupal 4.0.

    Similarly, allowing futures as a commodity derivative since 2003, and now options, the price risk management for the farmers as well as the processors like us becomes more institutionalized, laying ground for transacting much larger volumes of commodities.

    The new GST regime, where basic agricultural commodities are exempted from tax, more transactions will happen in the formal sector because the tax-evading unscrupulous do not have an advantage any more.

    Monday, 17 July 2017

    Reforms in Agricultural Marketing: A Requisite for Doubling Farmers’ Incomes by 2022

    This article was written for CII Economy Matters. Reposted here.

    Since the time Prime Minister Shri Narendra Modi gave a clarion call to double farmers’ incomes by 2022, much has been written on the subject, and many ideas have been floated. This is a complex challenge, and many paths need to be pursued simultaneously.   

    Broadly there are three paths:

    First is raising farm productivity. This will cover productivity per unit of land, water, labour, other farm inputs, and cost of cultivation in general, besides increasing the cropping intensity, by leveraging the large investments being made in irrigation – both macro and micro. Since there is enough headroom to do this, one can see a sizeable portion of the “doubling” coming from this route.

    Second is diversification into high value crops and expand the various on & off-farm activities related to agriculture. This will cover growing vegetables & fruits, agro-forestry, increased livestock activity, setting up solar farms, as well as adding value to the products on the farm through grading & sorting, and adopting organic and safe-food practices. Since a substantial segment of consumers is seeking variety and quality of the food on the plate, is concerned about the safety of food being consumed, and is willing to pay a premium for convenience, one can see a sizeable portion of the “doubling” coming from this route as well.

    Third is through linking farmers to the markets smartly. This will include lowering the transaction costs along the value chain to plough back a larger share of consumer price to the producer, as also to reach the safe & quality food to the target group of consumers thereby raising the value delivered and capturing a fair share of that value as well. It is this third route I want to write about in this piece, because without the requisite action on this front, the efforts put in the first two will only result in further distress to the farmer.

    Higher production (route 1), especially of perishables (route 2) has ironically resulted in lower prices for the farmer often, only because the market linkages are poor! Instead of doubling, we may be halving farmer incomes if we simply accelerate on route 1 and 2 without clearing the roadblocks that are existing on the marketing front!

    Actually, what I am calling roadblocks have all been excellent policy measures and institutions when they were first conceived several decades ago, and have contributed to doubling farmers’ incomes a few times since then. It’s just that the context is different now and those very instruments have become road blocks!

    Agricultural Produce Marketing Committees (APMC) governed by the different State APMC Acts (of 1960s and 70s vintage) were major saviours of farmers, who till then were at the mercy of the village traders to sell their produce. In the absence of channels for market price information, farmers had to rely on the same traders for price discovery. Under the APMC regime, well laid-out market-yards and sub-yards were constructed around the country to display individual farmers’ produce for quality assessment by the participating buyers. An auction system was put in place for competitive price discovery.

    Over time, however, since this was a monopoly system, transaction costs rose for the farmers in terms of commissions charged by the Agents licensed by the APMCs, not to mention malpractices in some mandis in terms of quality assessment, weighment and even cartelisation during price discovery. Also, since the farmer had to transport his produce even before price discovery, the sunk costs put pressure on him to sell at whatever price offered. Withdrawing the produce from auction means more costs with no guarantee of price some other day. More importantly, an unintended consequence of the auction-based price discovery mechanism is the nature of relationship between the farmer and the other players in the downstream value chain. The transactional nature of this relationship didn't lend itself to the possibilities of agribusinesses or food processors helping farmer with production technologies or post-harvest practices, barring a few exceptions.  

    Appreciating these gaps, the APMC Act was remodelled in 2003, allowing farmers to directly market to consumers / businesses, or contract-farm, as also letting private sector to set up marketplaces. Not all states have adopted that Model Act, and among those adopted, many have prescribed Rules that are not in the spirit of the Act. Although some progress has been made, this reform remained largely on paper. Meanwhile, an electronic National Agriculture Market (e-NAM) was launched last year. While this has removed the physical boundaries of a mandi in a farmer’s neighbourhood and he can theoretically sell to an Agent in any other mandi, the real benefits will accrue only after assaying and logistics systems get integrated. In any case, this doesn't solve the relationship issue. More recently, the central government has released an improved model APMC Act for stakeholder consultation. Hopefully, this time around, the adoption by the states is quicker and more widespread.

    Another important instrument used by the Government to aid green revolution, half a century ago, was the Minimum Support Price (MSP) mechanism. This removed the market price risk for the farmer and gave him confidence to invest in high-yielding varieties of wheat & paddy and fertilisers. The Government’s need to buy these food grains for public distribution (PDS) to the low-income consumers complemented the MSP system, and gave muscle to the Food Corporation of India (and some state government agencies) to be able to stabilise the price volatility. With the number of crops multiplying, and many of them being perishables, implementing such an MSP + PDS system in so many crops across India is next to impossible. Consequently, the farmer has no clue about the post-harvest price he would realise while he decides on the specific crop to plant from among several crops. Often, he decides based on the previous season’s prices. Many a time, this results in excess production of a crop that was in short supply in the previous season. It is also likely that imported stocks of the same product that were brought in to make up the previous year’s deficit. That’s a double whammy for the farmer. How often we have seen a farmer smiling at his bountiful crop that’s ready for harvest, but crying just a few weeks later, because the new market price won’t even fetch the cost of harvesting and transporting to the mandi.  

    A practical alternative to government declaring MSPs to a large number of crops – and undertaking buying operations, not knowing how to deal with the challenges of storage and marketing of fast-perishing products – is the commodity derivative markets. Both futures and options. Indeed this is how the world has been managing the risks arising out of uncertainty of prices for a long time. When we were a shortages economy, the government had banned trading in commodity derivatives, with the belief that financialisation of physical markets fuels inflation through excessive speculation. With the change in the context of food & agriculture sectors, futures were allowed to be traded in 2003 by reforming the Forward Contracts Regulation Act (FCRA). Options were also to be introduced soon after. However, this optimism was short lived when the food prices went through the roof in 2007, due to the shortfall in global food production. Futures trading in some commodities was promptly prohibited. A case of shooting the messenger for carrying the bad news! Since then, the futures were slowly opened up.

    More recently, options have also been permitted. Next steps can surely be calibrated, taking market evolution and the related risks into account, but those steps must surely be taken. There’s often a criticism that small farmers cannot directly participate in the derivative markets, so what good these institutions are for them. This is where aggregators come in, whether they are producers’ collective enterprises themselves, or agribusinesses / food processors who can price their physical transactions with the farmers by linking to the futures or embedding options into their pricing formulae. By adopting these instruments, farm production responds to the market signals continuously and creates equilibrium on a dynamic basis.

    While a reform in FCRA enables timely price discovery & risk minimisation through vibrant derivative markets, the reform in APMC Act enables real-time demand discovery & value maximisation through seamless physical markets. A surer way to double farmers’ incomes than merely raising the agricultural GDP…

    Tuesday, 11 July 2017

    The 101 of Agricultural Marketing in India

    This article was originally published by QuintBloomberg at:

    Scene 1: Attracted by the market price of Rs 50 per kilogram, farmers plant onions only to stare at a price of Rs 5 per kilogram by the time they are harvested. Often it's not even worth taking those onions to the market, as the cost of transporting and selling are also not recovered!

    Scene 2: You go to buy groceries or vegetables and fruits. Unless you dig to the bottom of the heap and select each piece yourself, you won’t get the quality stuff. With things like pesticide residues, you may not even be able to make that pick well, holding the produce in your hand.

    Scene 3: You pay a price of Rs 40 for a kilogram of tomatoes and complain about the high prices; at the same time, the farmer who produced them, and sold at Rs 12 per kilogram, laments about unremunerative farming!

    These are the all-too-familiar symptoms of the out-of-date agricultural marketing system in India. In a way, these pains are inevitable as our food and agricultural economy transitions from what was a ‘production driven supply chain' to a ‘demand driven value chain’ system. Although both the central government and several state governments have taken steps to facilitate the transition, the institutions built more than five decades ago still dominate the market, extending the pain for the farmers, consumers and businesses alike.

    The mechanism of Minimum Support Price assured farmers to step up wheat and paddy production, without the fear of a post-harvest price fall, and brought about a green revolution. That was then. Today’s consumer is not living in an economy with shortages anymore. She is looking for variety, quality, safety and convenience in the food basket. It is well-nigh impossible for any government to manage support price operations in grains, oilseeds, pulses, milk, eggs, vegetables, fruits, sugarcane and twenty other such commodities. The world over, such price uncertainties are managed through derivative markets.

    De-risking Volatility in Perishables

    Large farmers and farmer collectives hedge their risks by selling futures or buying options before planting. Much larger volumes are sold by farmers to the businesses operating in the agriculture space, and food processing companies, through options-embedded forward contracts. These companies, in turn, hedge their risks on the derivative markets. Only recently has the Securities and Exchange Board of India (SEBI) allowed options in commodities. One earnestly hopes that these markets start soon and mature without taking too long.

    Another way the world has dealt with the falling prices of perishables soon after harvest is through processing – freezing, pulping, dehydrating, milling, curing, crushing, and so on – for consumption through the year. Food processing in India is still very nascent compared even to many emerging economies. Given the apprehension of consumers that processing basically means adding unsafe preservatives, it is quite an effort for the authentic manufacturers and brand owners to convince the consumers that processed food is safe and hygienic. Recent efforts by the Food Safety Standards Authority of India (FSSAI) will go a long way in raising consumer awareness.

    Another challenge in making processed food popular is the price barrier. A large part of the incremental price is made up of taxes. Historically, processed and branded food has been considered a rich man’s purchase and is taxed heavily. Although the tax rates have been brought down for some products in the new Goods and Services Tax regime, there is a need for further reduction, considering this is an important vector available to raise farmers’ income.

    Bringing In Quality Checks

    Let’s look at the challenge in the second scene now. The reason why ungraded produce travels all the way and comes to the consumer is that the conventional mandi system has incentivised the same. Starting with the visual inspection based pricing done by the adatiyas (traders representing sellers) at the mandis, the produce moves along the chain, and everyone gains by passing off a bad apple or two in the average quality heap. Those of you who studied economics know the problem of information asymmetry from Nobel laureate George Akerlof's paper on “The Market for Lemons” and how the average quality deteriorates with time.

    Because of the APMC Act framework of the 1960s vintage, the buyer-seller relationships in the mandi have been purely price-based and transactional. Consequently, most agriculture businesses did not engage with the farmers directly which could have ensured product integrity, built traceability or facilitated grading at the farmers end. In the states where the APMC Act was amended in the 2000s, such direct engagement became possible. The pioneering work done by ITC e-Choupal in this space is well known.

    Intermediaries and Commissions

    As far as the difference between the consumer and the farmer prices is concerned, some mark-up is natural. After all, the produce has to move across distances, incur handling costs, bear losses on account of perishability, buffer the margins for quality variations due to visual inspection and the costs of aggregating produce from small farmers, and then disaggregation to reach out to the retail points.

    The very high markup is because the old APMC Act gave monopoly power to the mandis, which led to higher transaction costs and commissions structure.

    Because the Essential Commodities Act could be invoked at any time in any commodity, rendering the large scale investments in storage and handling infrastructure unviable, the value chains remained fragmented. This resulted in a series of intermediaries needed to connect the farmer with the consumer.

    The 2017 Model APMC Act recognises the role of legitimate players along the supply chain and expects that the provisions of Essential Commodities Act would be used only against the unscrupulous hoarders. Hopefully, this Act will be adopted by the states without wasting much time, which would then usher the necessary investment.

    Farm productivity may be raised by the different initiatives of the government, but the same will translate into higher farmer incomes only when these agricultural marketing reforms are carried out.