Saturday, 15 December 2012

Inclusive Agriculture

Food and Agriculture Organisation (FAO), as a part of the process to prepare their Country Programming Framework 2012-17, organised a Workshop on Indian Agriculture, today, at the Central Research Institute for Dryland Agriculture (CRIDA) in Hyderabad.  

I was a panelist in the session on "greater inclusion of women and disadvantaged social groups, and marginalised areas", along with Dr Suman Sahai of Gene Campaign and Dr Geetha Kutty of Kerala Agricultural University.

This is a summary of my remarks:

Before we can figure out "what we can do to include these people", we need to understand "why they are excluded" and "how they are coping"...

There are multiple causes for exclusion and several ways in which people cope with the situation. So, the solutions also need to be varied, to be effective.

Based on the experiences from around the world, FAO may like to prepare a 'Tool Kit' to enable the practitioners easily analyse the context, and mix & match the solution themes, rather than starting with a zero base each time.

Here are the answers that came top of my mind, for each of these questions. 
Q1: Why are women, disadvantaged social groups, and marginalised areas excluded?

I think they are locked-up in a vicious circle by some centripetal forces. Such forces include
  • historical and cultural reasons (especially true for women, and socially disadvantaged groups)
  • vested interests that benefit by locking these people in a cycle of dependency, after helping them out of a tricky situation (eg. informal money lenders in the villages)
  • natural resource constraints and other risks inherent to agriculture (eg. water scarcity in rainfed areas, challenges of hilly areas, commodity price risk).

While the efforts of the Government succeeded only partially to date, the markets have not been interested in these people either as producers (because of no marketable surplus) or as consumers (because of low income). As a result, most of these people stay locked in a vicious circle.

Q2: How are they coping?
  • Some are resigned to their fate, while some are satisfied with a low-level equilibrium
  • some resort to violence and extremism to change the situation, while
  • some aspire for a better future and rely on their entrepreneurial energies

Yet, a large majority are still stuck in a vicious circle!

Q4: What are the solution themes?

Logically, the only way this vicious circle can be broken is by applying sufficient centrifugal force. Sources of such force include
  • disproportionate deployment of resources at strategic points (currently the Government spends are spread across several initiatives, as a result they are not able to break the vicious circle anywhere)
  • orchestrating synchronised interventions at multiple points through a collaborative effort (markets get interested as they now see profits in raising incomes of the poor, instead of competing for a share of small wallets. eg ITC eChoupal ecosystem)
  • collective action by the affected people themselves (eg Amul, SHGs supported by SERP in Andhra Pradesh)

Several activities form part of these solution themes, such as:
  • capacity building of the groups before investing in physical assets
  • expand income streams that put cash in the hands of the women (dairy, agarbatti making)
  • evolve institutions for risk management (insurance for weather risk, futures & options for price risk)
  • leverage technology (ICT, micro irrigation, drudgery reducing - not labour displacing - farm equipment suitable for women and other labour)

Thursday, 8 November 2012

Promoting Exports of Agricultural Products from India

A top of mind question anyone will have, when we talk of agricultural exports is, "what happens to the availability and prices of food in the domestic market?"

After all, India has 17% of world's population, but only 12% of arable land and 4% of fresh water resources... Should we be exporting at all?

But, exports not only have the potential to improve farmer incomes - an important necessity, given the low per capita GDP of the farm sector in India - but also, quite counter intuitively, can keep the domestic prices low and stable!

Such a possibility is real today because the world is transiting from a policy of self sufficiency at national level to a philosophy of resource efficiency at global level. Instead of all the countries trying to produce every food product they need - an approach started after the first world war and intensified after the second world war - each country is now moving towards maximising production of what they are good at, given their natural endowments, and importing what they have to. That's the only way to feed a larger, richer and more urban global population by 2050. In any case, the goal of self sufficiency is unsustainable - per an estimate, when the per capita food consumption of developing nations reaches today's global average (mind you, not the average of world's rich nations), we need two more earths to satisfy the demand even after factoring the productivity gains from all known technologies! 

India has a great opportunity in this backdrop, because (1) we have rich & diverse agro-climatic conditions, and (2) there is significant headroom for improvement in farm productivity.

But the game has to be played differently, to grab this opportunity. Today, we are less than 2% of global agri exports; of our own total exports, agri constitutes just about 10%; and, within agri, share of value added products is not even 10%

The new way of playing this game is to adopt a two pronged strategy, with three distinct action areas under each strategy...

Strategy 1: Focus on specific crops & products where India has comparative advantage.

This is key, because, to date, India has been an adhoc exporter of whichever commodities left over as surpluses after domestic consumption.

Action Area 1: Ministry of Commerce already has schemes such as Focus Product Scheme and Market Linked Focus Product Scheme. What is required is an institutionalised mechanism within the Ministry of Agriculture to select the products from the agri & allied sector. Such a mechanism could actively involve the exporters too, besides the representatives from the State Governments.

My first cut recommendation would include spices, marine products, processed cereal products, fresh vegetables and processed fruits, and meat products.

Action Area 2: As important as the task of selecting the products to be focused upon, and more important than offering some standard financial incentives to such products as is being done conventionally, it is critical to tailor-make country level strategies suitable to specific competitive contexts of those products.

For example, the Duty Draw Back on chilly exports from India is 1%, which does not even neutralise the incidence of direct and indirect taxes, while China offers an export subsidy of 5% on whole chilly exports and 15% on processed chilly products. The Tariff Rate Quotas imposed by the USA on leaf tobacco blunts the competitiveness of Indian leaf tobacco; and India is denied duty free access given by the EU to similar imports from the LDCs. India must take up such cases of discrimination strongly in the international fora.  
Action Area 3: Value added exports must be encouraged, to retain more value within India, rather than relying on basic commodities. A key first step in this regard would be to announce a stable export policy, instead of banning exports every now & then. Only then exporters will invest in product development and branding. To keep the domestic supplies in tact in years of shortage, the exporters could be asked to balance the stock by importing.

Additionally, differential incentives, as described in the Chinese chilly example mentioned earlier, for raw and processed products will help push value added exports and build Indian brands.

Strategy 2: Enhance the inherent competitiveness of Indian agriculture. In the focus products, to start with.

Action Area 1: Transform the current supply-driven value chains into demand-driven value chains. This requires transmission of real-time demand signals from the consumers to the producers, so that they are able to align production and quality to serve the market. New technologies need to be inducted to raise farm productivity. Active engagement of private sector in agricultural extension and marketing is essential to accomplish these two objectives. Reforming of APMC Acts allowing 'Direct Marketing' and 'Contract Farming' is a prerequisite to enable such an engagement.

Action Area 2: Reduce costs along the agricultural chain. This could be done by minimising tax incidence and improving infrastructure efficiencies.

Ironically, even the taxes exempted in spirit are incurred by exporters of agri products, given the agri-specific market dynamics, because of the way the exemption provisions are written. For example, sales tax is exempted on purchases made for export purpose; but, it is mandatory that the purchases must take place after procuring the export order to qualify for such exemption. In case of agricultural products, given their natural seasonality of production, purchases have to be made in season without necessarily having export orders on hand; otherwise one has to sell in distress. Or pay the sales tax!

Larger investments into agri infrastructure could be attracted by removing the caps on subsidies applicable to warehouses built under Grameen Bhandaran Yojana and the Scheme to strengthen Agricultural Marketing Infrastructure. Also, the Zero Duty EPCG Scheme may be extended to cover investments in the entire agricultural value chain.

Action Area 3: Reduce risks in farm production and output prices, by building institutional mechanisms such as Weather Insurance and Commodity Derivative Markets.

As per the RBI guidelines, corporates are allowed to hedge their price risks in the international commodity exchanges only if the position is backed by export / import contracts. In concept, this is very similar to the sales tax exemption procedure. Exporters of Agri commodities need to purchase raw material stocks during the season, not only for export orders on hand, but many times also in anticipation of future export orders. Thus the exporter who wishes to manage the price risk inherent in such domestic raw material purchases in advance, against fluctuating prices in international market, does not have an option to hedge on international commodity exchanges. As a result, the exporter is subjected to price risk till the time he obtains an export order for his product.

To reduce the price risk in exporting agri products, Indian exporters with an open stock position, even without prior export contracts should be allowed to hedge on the international commodity exchanges.
This is a summary of the presentation made to the Committee of State Agricultural Ministers on Marketing Reforms in Tirupati on Oct 30, 2012. 

Tuesday, 16 October 2012

Agricultural Cooperatives - Key to Feeding the World

“Agricultural Cooperatives - Key to Feeding the World” is the theme of World Food Day 2012. I spoke on the subject, earlier today, at an event organised by the Hyderabad Chapter of Association of Food Scientists & Technologists (India), South Zone of OilTechnologists Association of India and the National Institute of Nutrition.

This is a gist of what I spoke:

The challenge of ‘feeding the world’ has many dimensions:

Firstly, we need to produce more food. Per an FAO estimate, we need to produce 50% more cereals and 75% more meat by 2050, to feed the growing population and rising per capita consumption. We also need to more than double the fruits & vegetables production.

If it was only just this bit – i.e. produce more food – it wouldn’t probably be such a big challenge. We know that our current technologies are capable of getting us there. The six riders that come along make it severely complex!

Rider 1: We need to raise the farm yields to raise the total food production, because there isn’t much more land that we can bring under cultivation – a luxury we had enjoyed in the past.  

Rider 2: We need to add value to this food, aligned to the consumer demand. This means more variety, better quality, assured safety, enhanced convenience, and so on...

Rider 3: We need to transfer a “fair” share of this added value back to the producers, to incentivise production. Majority of the farmers are poor, and their income has to increase, in any case.

Rider 4: We need to protect bio-diversity while raising the farm productivity, because the productivity depends on soil micro-organisms, pollinators, predators of agricultural pests, and the genetic diversity.

Rider 5: We need to manage the natural resources (e.g. water and soil) judiciously, as the rate of depletion is already far exceeding the regeneration capacity of the earth.

Rider 6: We need to minimise the green house gas emissions from agriculture. With high emissions from fertiliser volatilisation, wetland rice cultivation and livestock digestion systems etc., agriculture accounts for a sixth of all global emissions.

There are, of course, solutions to deal with each one of these riders viz. improved crop varieties through plant breeding for better yields; supply chain management and processing for value addition; inclusive business models for fair trade; integrated crop management practices to conserve bio diversity; micro-irrigation, precision farming and other water management systems; good practices framework for soil & nutrient management; minimum tillage and other conservation agriculture techniques...

Implementing these solutions on the ground through hundreds of millions of small farmers is the tricky part!

This involves raising their awareness, transferring know-how, making sure the resources are available, and trigger income incentives to get them to act.

It is not easy to do all this because the bargaining power of small farmers is weak, limiting their resource base. Every input they buy is bought at retail prices at the end of a long chain, and the output they sell is sold at wholesale price at the beginning of another long chain! So, one challenge is to bring the ‘power of scale to the small’.

Also, because the ecology & natural resource challenges do not usually impact the individual in the short term, and because any investment to solve them benefits others who may not have invested, we also need to deal with the ‘tragedy of commons’. As is well known, people tend to overuse commons and eventually deplete them beyond repair, even though it is not in their best interest to do so; because no one has any incentive to do otherwise.

It is in this context that the cooperatives become important.

Any form of aggregation - conventional cooperatives, or the new-generation producer companies, or Self Help Groups or their Unions and Federations - improves the bargaining power of farmers while buying inputs and selling inputs. Aggregation also helps in transmission of information (market signals, weather forecasts) and accessing know-how more effectively at lower transaction costs. Pooling resources helps in building infrastructure (quality testing, storage, transport etc) that can be shared, or even forward integrate into processing, branding and marketing to capture more value for the producers. Collectives carry weight and help shape policies.

Self-regulation among the members of the cooperatives solves the ecology and common property issues more effectively. User members team up to cooperatively manage the commons resource; participatory monitoring facilitates more effective management. Conflicts between members, when they arise, get resolved quickly and inexpensively.

Thus, cooperatives offer effective solutions to both the scale and commons problems.         

In theory, any member owned enterprise, run on democratic principles should deliver these benefits. Indeed there are many successful cooperatives that prove this argument. At the same time, unfortunately, there are also several failed cooperative efforts. Quality of governance and management determine the success of cooperatives. So, while supporting cooperatives as a solution to feeding the world, one must recognise these limitations too.

To overcome these limitations, yet deliver similar beneficial outcomes to the farmers, a revolutionary new model, ITC eChoupal was conceived. Farmers are "virtually" aggregated by leveraging Internet technologies, and "freedom of choice" in transactions democratises the power. Isn't that some new food for thought?

Saturday, 6 October 2012

Physics and ITC eChoupal

At a conceptual level, several ideas behind eChoupal were based on Physics. This write-up is a part of an old document; just realised this was never posted on Shiv's Third Eye...
So here goes:
Value Creation
As a physics student I was deeply fascinated by Einstein’s famous insight e=mc2. Until he figured out the implication of speed of light, energy and mass were two independent and unrelated fields. With one stroke of genius he converged the two, and the world was never the same again.
In a similar manner, capitalist markets, with self interest of the entrepreneur as the foundation, were never thought of as a means to achieve social equity.
Interest of the disadvantaged communities, on the other hand, was always considered as the exclusive domain of Government or Community based organizations or Not-for-profits.
Much later, when our experience at ITC has demonstrated that markets do deliver social equity when you co-create them together with empowered communities, I felt the same excitement as I did when I understood Einstein’s equation.
In other words, co-creation concept has converged the two independent domains of equity and markets. Equity = Markets Co-created with Empowered Communities. A new meaning to e=mc2! And the core idea behind the value creation process in eChoupal.
Value Delivery
Another metaphor from physics, Lever, helps in easily understanding the idea behind the value delivery process in eChoupal system.
People at the Bottom of the Pyramid access markets under constrained conditions because of the voids in physical or institutional infrastructure, besides limitations in some of their own capacities.
Void filling by some appropriate “lever” can force multiply the outcomes and enable an empowered market access for these people.
Investment in Information & Communication Technologies was the key lever that made all the difference in case of eChoupal, through the process of price discovery in the village.
Value Capture
Yet another physics principle, ChaosTheory, holds the secret of the most important idea in the "business" model aspect of eChoupal viz. the value capture mechanism.
In the world of chaos, an attractor ensures stability and predictability.
Much the same way, as the Orchestrator of the eChoupal ecosystem, ITC puts the network together, innovates the value capture mechanisms that do not strain the small wallets of the customers at the Bottom of the Pyramid. Win+win outcomes for all stakeholders through logistics reorganization, value through identity preserved produce are obvious examples of this phenomenon.    
Vision of eChoupal

Yet another physics metaphor! Black Holes for a Green World.

Curious? Another blog-post, in due course, will have the details.

Monday, 24 September 2012

Corporate Farming

To celebrate its 900th issue, Business India published a cover feature titled C2M (A Century to a Millennium). They asked me for my thoughts on the future of corporate farming in India. This is what I said:

Some people maintain that the next breakthrough in Indian agriculture can occur only through 'Corporate Farming', meaning corporates owning or leasing land and directly engaging in agricultural production. They advance two arguments in support; one, that the farm productivity can be raised only through substantial technology investments on large farms; and, two, that corporates are better equipped to service evolving consumer needs by vertically integrating the value chain and controlling the production system.

While there is some merit in these arguments, there is enough and more research to show that the smaller farms are more productive! Also, converting a farmer into a labourer on a corporate farm, diminishes the entrepreneurial energy of a small farmer - the hallmark of Indian agriculture. More importantly, farmers will earn more from efficient farming than leasing land and earning nominal wages. This is important because the current per capita GDP of an Indian farmer is one-fourth of that of the workforce engaged in other sectors, and agriculture is still the primary source of livelihood for over 50 per cent of our workforce.

There are better alternative models to raise farm productivity, serve consumers, and improve farmer incomes.

Contract Farming enables pooling the resources of the farmer viz. land, labour and know-how, and that of the corporates viz. capital, technology and market linkages, creating a much larger value for the consumer and transferring a higher share of that to the farmer. However, this model works better in crops where the corporates and the farmers have a natural reciprocal dependency, for example, any produce farmed to special specifications, such as seeds, or organic products. Otherwise the relationship becomes one of zero-sum game, and one of the two contracting parties gains by reneging on the contract when the market prices turn adverse to them. The zero-sum situation can be converted to win+win through institutional solutions such as futures & options contracts where the price risk is transferred to the wider market. Farmer collectives - cooperatives, self help groups - enable equitable negotiation of contract terms. Swifter and inexpensive dispute resolution mechanism helps in better contract enforceability.

For commodity crops like grains and oilseeds, where reciprocal dependency is not natural, and also given that the institutions are still evolving, ITC innovated the eChoupal model. Leveraging the power of the Internet and co-opting the farming communities in ground level execution, a collaborative ecosystem of organisations deliver end to end solutions to the farmers under the ITC eChoupal model, viz. real time & multi local information, farm inputs including credit, and access to competitive channels for marketing the farm output. Farmer transact at their free will. Participating companies capture value at individual transaction level. Today eChoupals serve forty lakh farming families; for the model to scale even further, the Agricultural Produce Marketing Acts need to be reformed.

One of these vertically coordinated models is more socially appropriate for India than the vertically integrated corporate farming...

As told to Soneera Sanghvi (published in Business India issue dated 16th September 2012)

Tuesday, 1 May 2012

Indian Agriculture: Value Creation Opportunities

Earlier today, I spoke on the subject at a Conference in Delhi. In essence, this is what I said: 

India has successfully transitioned out of an era of food shortages, with the help of giant strides taken by Indian agriculture over years.

With the increasing per capita incomes and growing awareness, today’s consumers are seeking better quality and more variety in their food products. They prefer products that offer convenience while buying and using. Food safety is another area of concern. Much like the agricultural production system responded to the growing demand in the past, there is an opportunity for the agri-business system to respond and deliver these requirements to the consumer.

Besides adding value through conventional processing and packaging, today’s agri-businesses can also explore a number of additional sources of value creation.  For example, 

Supply Chain Management: Through supply chains that preserve product identity from farm gates to the retail shelves, or even better, supply chains that trace products to farm practices, product integrity can be maintained and safety can be assured.
Backward Integration: Through tighter integration of production systems into their value chains, agri-businesses can transmit demand signals to the farmers, transfer modern crop management technologies, coordinate delivery of farm inputs, and share production & market risk with the farmers; this will help produce crops and varieties more sharply aligned with the market demands.   
Risk Management: Through new market based risk management institutions such as Commodity Derivative Markets (Futures & Options) and Weather Based Crop Insurance Products, the production and market risk inherent in agriculture can be transferred into the broader marketplace for more effective management.

These steps will deliver value to the consumers, improve farm profitability and create sustainable opportunities for the enterprises that connect the consumers with farmers.

On its part, the Government must facilitate this transition by reforming the currently restrictive agricultural laws such as Agricultural Produce Marketing Act, Essential Commodities Act and Forward Contracts Regulation Act.