Commodity Options: New-age MSP mechanism that can trigger a Rainbow Revolution

Options can certainly be a win-win instrument not only to hedge farmers’ risk effectively, but also by replacing expensive subsidies with an efficient market-based mechanism.

A new future for Indian farmers dawned in 1960s with the Green Revolution. Another such turning point is emerging today, with an opportunity to craft the next leap for Indian agriculture. An instrument that played a pivotal role in translating the green revolution technologies into increased food production was the Minimum Support Price (MSP) assured to farmers. Institutions such as Food Corporation of India executed this instrument, complementing the research and extension services rendered by the ICAR-led public research system.

That was half a century ago. Rapid globalization since then, coupled with increasing purchasing power, have made today’s consumers seek a variety of food products, such as vegetables, fruits, meat, and milk, going beyond the green revolution crops, namely, rice and wheat. For the farmer, this requires a paradigm shift to bring consumer-preferred traits into crops, in addition to further improvements in productivity. This implies new risks for the farmers, which cannot be dealt with by the MSP that covers only a few commodities in a few states. 

If the cost of implementing MSP in two crops and three-and-a-half states itself is so taxing on the exchequer, one can only imagine the massive resources that would be required to support at least a dozen crops spread across not less than 15 states. A new “Rainbow Revolution” is now required to take the baton from a tiring Green Revolution. Technology already exists for such a revolution; we just need a new MSP-like instrument that can cover many more crops and several states. Instead of relying on a government-administered subsidy alone, a more efficient mechanism would be to create a market-based instrument as also build and strengthen institutions that can take such an instrument to the farmers. Market-based instruments will reduce the need for the state to engage in commodity operations directly, yet giving government the power to intervene and influence prices in the public interest by participating in such a market whenever required.

Commodity derivative markets offer such an instrument. Even though there are opponents to derivatives such as futures and options, the fact remains that they provide the best safeguards to farmers, simultaneously facilitating a swifter alignment of production with demand. Today, farmers make planting choices based on the prices received for previous season’s crops. There couldn’t be a more inefficient way! Derivatives open up new possibilities for farmers by assuring them of a post-harvest price before they take a decision on what to sow.

Trading in futures is currently permitted, but it doesn’t really help the farmers manage their risk, as it ties them down with an obligation to deliver at the contracted price, even if the market moves up after harvest. Farmers are looking for an MSP-like instrument, where they are assured of a minimum price before planting a crop, and still have the choice of taking advantage of the market if prices go up later. Options provide such flexibility. By buying a put option, the farmer gets a right to sell at a pre-determined future price, but without any obligation to deliver if the market moves up. This assurance not only provides the best hedging solution to farmers, but also builds their capacity to invest in productivity-enhancing and quality-improving technology and practices, in turn raising production and containing inflation without bringing farmer incomes down.

To make this happen, the Forward Contacts (Regulation) Act needs reform to permit “options”. The high premia typically charged for options can discourage farmers from extensively participating in the derivatives market. This can be dealt with by permitting exotic derivatives like caps and collars. The government could also step in to popularize the use of options for hedging or subsidize the premia since that would entail far less an outgo than direct subsidies (see box). Given the small lot sizes of farmers, as well as the complexities involved in operating in the derivative markets, it is also important to recognize “aggregators” under the Act who could offer the simpler “options-embedded Over the Counter (OTC) contracts” to farmers.

Options can certainly be a win-win instrument not only to hedge farmers’ risk effectively, but also by replacing expensive subsidies with an efficient market-based mechanism. Do we really have a better option than permitting “options” to achieve a rainbow revolution?

Farmers Hedging in Mexico After joining the North American Free Trade Agreement in 1994, the Mexico government moved to liberalize the agricultural sector. The government designed a sustainable programme of guaranteed minimum price through the use of options to transfer risk from growers to international markets. The Support Services for Agricultural Marketing Agency (ASERCA), a decentralized body providing commercial support to farmers, offered the farmers a chance to participate for a fixed fee in a programme guaranteeing minimum cotton price. ASERCA offered a guaranteed price and hedged its own risk by using the fee to purchase a put option on the New York Cotton Exchange (now ICE Futures US). The put option gave ASERCA the right to sell cotton on a specific future date at pre-specified price ( that is, strike price). When the prices dropped, ASERCA paid farmers the difference between the New York price at harvest and a minimum price (equivalent to the payoff value of put option). If prices rose instead, ASERCA made no payment to farmers. By paying a fee and participating in the programme, a farmer purchased insurance against a drop in prices below a certain level. ASERCA, in effect, acted as an intermediary between producers and commodity brokers. The Mexican government, through ASERCA, subsidized 100% of the premium payment in 1994. Source: Innovative Agricultural Insurance Products and Schemes (by Kang, M. G.)

First published in Economic Times on 5^th August 2014, at http://epaperbeta.timesofindia.com/Article.aspx?eid=31818&articlexml=COMMODITY-OPTIONS-NEW-AGE-MSP-MECHANISM-THAT-CAN-06082014005017

Decoding the Union Budget 2104: Agri Sector

Very few sectors are as important, yet as beleaguered as agriculture in India. Engaging more than 50% of the country’s workforce, it offers livelihoods to 75% of the population living below the poverty line. It consumes 80% of the nation’s fresh water resources, a quarter of the total electricity and more than 70% of central government subsidies. However, it accounts for just about 14 per cent of GDP.

Indian agriculture is heavily dependent on rainfall, with just about a third of the total arable area being irrigated. In recent times, temperatures as well as the variability in rainfall have been increasing, adversely impacting the farm production.

Consequently, the policy agenda must aim to contain food inflation, yet making farming profitable; make agricultural production and the farmers more resilient to weather variations; improve productivity of the subsidy spends, and minimise their market distortion impact.

Regrouping the proposals along the above lines will help decode the Budget.

Contain food inflation, yet making farming profitable:

Since this objective has an inherent conflict, the Government is using five different strategies to tackle the complexity, viz (1) funds have been allocated to set up two more research institutions of excellence, two additional agricultural and horticultural universities, and a Kisan TV, (2) substantial resources have been provided for upgrading the warehousing and agri-tech infrastructure, besides creating a corpus for ‘Long Term Rural Credit Fund’ to boost investments, (3) financial support has been extended to Bhoomi Heen Kisan through NABARD, and to set up a Producers Development and Upliftment Corpus (PRODUCE) to build the capacity of the producers organisations, (4) promised that the Central Government will work closely with the State Governments to reform the APMC Acts, and (5) proposed to establish a Price Stabilization Fund to mitigate the distress from price volatility.

Make agricultural production and the farmers more resilient to weather variations:

Besides giving impetus to watershed development through a new programme called Neeranchal, a new scheme called Pradhan Mantri Krishi Sinchayee Yojana has also been announced. If the Sinchayee Yojana is implemented as well as the earlier Pradhan Mantri Gram Sadak Yojana that made a significant difference to the rural road, we can hope for better days ahead in irrigating farms. Funds have also been allocated to establish a National Adaptation Fund to mitigate the challenges arising out of climate change. One would have liked to see some funds allocated to a reworked crop / weather insurance scheme too. That didn’t happen.

Improve productivity of the subsidy spends, and minimise their market distortion impact:

Quite rightly, it has been announced that MNREGA will now be substantially linked to agriculture and allied activities. Shortage of labour during the peak agricultural operations was a major problem of the farmers so far. It is also good to see the Government’s commitment to restructure FCI, and improve the efficiency of food grain management in the country. Perhaps the most important announcement related to agriculture in the Budget is the scheme to provide to every farmer a soil health card in a Mission mode. This will go a long way in scientifically rationalising the fertiliser usage and reducing the subsidies.

In sum, all of these steps will put more money into the hands of the farmers!

 

First published in the Rural Marketing Association of India's Special Budget Edition at http://www.rmai.in/pdf/rmai%2021-07-2014.pdf

Curb food prices without harming the farmers

Various measures have been deployed to combat food inflation. Subsidies on food and fertilisers, imports of food as well as regulations to prevent hoarding of farm produce did succeed in stabilising prices from time to time. But such crisis management has been able to provide only short-lived relief, and prices have gone up from 2007.

Bringing down food inflation will benefit the consumer, but make prices unattractive to farmers. This will accentuate poverty. Unremunerative prices discourage investments in agriculture, causing supply-side shortages, fuelling inflation further. So, the most effective way of tackling this issue is to focus on bringing down consumer prices, ploughing a larger share of the consumer spend back to the farmer.

First we need to lower transaction costs. The Agricultural Produce Market Committee (APMC) Acts mandate all farm produce should be brought to mandisfor auctioning, making these platforms virtual monopolies. The farmer pays to transport his produce over long distances, before knowing the price at which his produce would be sold, or whether any other market would have paid a better price.

The journey from farm to consumer involves multiple levels of transportation, handling expenses, commissions of agents and a mandi cess, adding nearly 20% cost to food prices. This absurdity was acknowledged years ago, and anew Model APMC Act recommended by the Centre in 2003.

This Model Act must be implemented in all states. Unless farmers have the freedom to sell at farm-gate or other transparent platforms directly to buyers, transaction costs will remain high and drive consumer prices higher. Next, we need to cut wastage. Anywhere from 5% to 40% of food is wasted along the chain, depending on the perishability of the crop and the season. First, market instruments must empower farmers to produce as per tomorrow's demand, rather than be guided by yesterday's prices.

If the Forward Contracts Regulation Act (FCRA) is amended to permit trading in options, farmers are assured of a minimum price when sowing, based on future projections simulated by a market consensus. This will align production volumes to future demand conditions and minimise wastage. We need large investments to set up climate-controlled infrastructure to enhance the shelf life of farm produce. The private sector has the capacity to invest and add value to such infrastructure.

But regulations like the Essential Commodities Act (ECA), which impose stock limits and curb movements, create uncertainty, acting as a deterrent to such long-term investments. We need to add value to farm produce by facilitating food processing on a much larger scale. Food processors do not find it worth their while to engage with farmers directly due to APMC restrictions. And the ECA does not distinguish between hoarders and genuine market players. The risk management capacity of food processors is squeezed, because options are not permitted under FCRA. So, reforms in APMC, ECA and FCRA are critical to mobilise investments in the food processing sector.

India's agricultural yields are far below the best-in-class. Depending on the crop, productivity improvements can range from 20% to 100%. Though Indian farming has seen progress, induction of technology and mechanisation is still below par. Agriculture is still exposed to high climate variation risks. Given that around 65% of India's total sowed area meets its requirements from rainwater alone, it is imperative to invest in technology to make agriculture climate- and weatherproof.

These include introduction of specially-developed seeds that withstand extreme weather, diverse soil conditions and various biotic stresses. Solutions like crop and weather insurance are also essential to whet the risk-taking capability of the farmer, who can then invest to step up productivity, participate more effectively in agricultural value chains and garner alarger share of consumer spends.

Market-distorting subsidies have to be rationalised to make agri-business more viable and bring investments into the sector. Private enterprises engaged in agribusiness must focus on research and innovation to make agriculture remunerative to farmers and ensure the products are relevant to consumers.

First published in Economic Times on 27th June 2014 at http://economictimes.indiatimes.com/opinion/curb-food-prices-without-harming-the-farmers/articleshow/37280685.cms
 

Why are food prices rising unabated? What can we do about it?

This is the transcript of an interview given for the forthcoming issue of CII's Economy Matters:

Why are the food prices rising unabated despite several measures taken by the government?

Firstly, let's set the context correctly. The government has an unenviable task of walking a tightrope between the diametrically opposite expectations of the farmers for higher prices and the consumers for lower prices. Given that the majority of our farmers are small and resource-poor, and the consumers are largely low or middle-income, the government cannot short-change either constituency for the sake of the other.

In this backdrop, let’s recount the key actions taken by the governments from time to time, and the limitations of such actions, because of which the prices continue to rise.

When the objective is to balance conflicting interests, any government’s first strategy is to subsidise. Subsidies on inputs like water, power, credit, and fertiliser to keep the cost of production low; and then subsidies on food itself by buying at high support prices from the farmers and selling at lower prices to the poor consumers through the public distribution system. No doubt, subsidies have delivered the expectations to a large extent. But, given the fiscal position of the government, this strategy is neither scalable nor sustainable beyond a point. Once that point is reached, as we have now, the subsidies strategy leaves both the farmers and the consumers dissatisfied despite consuming massive amounts of money. Additionally, the resultant market distortion discourages the private investment in the sector, and the value chains remain under-developed.

Another strategy that's adopted is to import food products, or ban the exports in times of shortage. Given the fleeting speed at which the international commodity markets move, our responses are often too late. The problem is further compounded by the weak market intelligence system the governments typically have, and the complex logistics of the global trade. In times of shortages, expectedly, the domestic prices are sky-high while the crops are standing in the fields, raising the price expectations of the farmers; then the import consignments usually arrive just about the time the farmers are ready to harvest their crops, and the prices start falling like there is no bottom!

Imposing stock limits to prevent hoarding of farm produce is yet another measure that's commonly used to control prices. This action does soften the prices, but only temporarily. However, because this measure cannot actually increase the availability of food in the season as a whole, the prices do go up eventually. Besides, since the government doesn't distinguish between hoarders and the genuine Agri Businesses / Food Processors, such restraints render investments along the supply chain and processing unviable, and the value chain participants remain fragmented.

One can possibly refine these strategies a bit more, viz. sharper targeting of subsidies, proactive imports through real-time market intelligence etc., and keep the prices under check a few weeks longer. The longer-term food inflation cannot be truly tamed unless the key drivers are appreciated and managed. 

What according to you are the key drivers of food inflation?

While quite a few reasons have been cited for triggering food inflation, demand outpacing supply is definitely the key cause, to my mind. Increasing incomes and changing lifestyles & aspirations have spurred the demand for food items, especially high value products such as fruits, vegetables, milk and milk products, eggs, fish, and meat. Per capita consumption of many of these products in India is still significantly below that of comparable countries, suggesting the likelihood of this trend continuing in the years to come. Given this scenario, it is crucial that the supply rises substantially to meet the rapidly expanding demand for food.

That brings us to supply side drivers. Though farm yields in India have grown significantly over years, they are still largely dependent on the annual monsoon rains and other vagaries of weather. In certain crops like vegetables that are more vulnerable, adverse weather conditions result in serious damages, leading to exorbitant prices for a few months almost every year in some corner of the country. Rising Minimum Support Prices for certain key commodities, especially wheat and rice, have pushed the prices of those crops up. With the introduction of the Mahatma Gandhi National Rural Employment Guarantee Act, agricultural wages have risen as a result of labour shortage, contributing to rising costs of production. Then there are chronic supply chain deficiencies (high transaction costs due to long chains, huge wastages due to broken chains, increasing cost of transportation due to rising fuel costs) that don’t let a fair share of the consumer price flow back to the producer. The supply chain deficiencies also prevent the demand signals from flowing seamlessly to the farmer. In the absence of such a mechanism, most farmers produce crops based on the prices obtained for the previous crop rather than the prices expected for the crops being planted. This results in huge price swings due to supply-demand imbalances around the harvest time.

As a combined effect of all these complex factors, the food prices in India kept moving up since 2007 when supplies fell short of demand globally; all that the various price control measures achieved was temporary respite from time to time. In these seven years, prices of cereals rose unabated, at an average of 10% per annum; the vegetables also started at a similar rate of 10% per annum, but accelerated to an average annual rise of 30% in the more recent years.

More broad-based reforms in the agricultural policy framework, together with the creation of certain market based institutions and instruments only can deal with these complex factors and solve the problem of food inflation in the long run. Otherwise, one would have to fire-fight every few months to deal with the crisis.

What are those reforms, which can really contain food inflation in India?

There are four areas of intervention that will make a difference:

Reforming the APMC Act along the lines of new Model Act recommended by the central government in 2003 is the first step. The alternative marketing models envisaged in the Model Act, viz. Direct Marketing, Contract Farming, and Private Mandis will provide a healthy competition to the conventional Mandis and offer a choice to the farmer. These models will be customised to different contexts, eliminating the non value adding transaction costs that came into being only because the conventional Mandi was mandated as the only mechanism for a farmer to market his produce. APMC reform will also help in changing the purely transaction oriented relation between an Agri business / Food Processor and the farmer in a Mandi set up, to a reciprocally dependent partnership. This will motivate Businesses to engage with farmers to raise farm productivity and align crop quality to consumer demand in mutual interest. This will also lead to complementary investments in storage and handling infrastructure along the supply chain that reduces wastage.

Secondly, the Forward Contracts Regulation Act (FCRA) must be amended to permit trading in ‘Options’. Farmers will then be assured of a minimum price at the time of sowing itself, based on the future projections of demand simulated by a market consensus. This will help adjust the production volumes to the future demand conditions, thus minimising the potential shortages as well as avoidable wastages, and the consequent price volatility.

Solutions like crop and weather insurance are also essential to enhance the risk-taking capability of the farmer, who can then invest in the required technology and inputs to step up productivity.

Lastly, the protocols for approving new technology must be scientific, made transparent and predictable to attract investments into R&D. We have some distance to cover in discovering seeds that will optimize drought tolerance, disease resistance, yield enhancement, pest resistance, enable nutritional enhancement etc.

You mentioned Food Processing briefly. Can it play an important role in dealing with food inflation?

Anywhere from 5% to 40% of food is wasted along the chain, depending on the inherent perishability of the crop and the season. This obviously reduces the actual availability of food even after the farmers have produced. Food Processing offers a solution to reduce this colossal wastage and contain inflation.

India processes just about 2% of its agri-based products compared to other developing countries such as Malaysia and Thailand who process as much as 40 %. A key constraint for the growth of the sector is the high prices of processed food, primarily because of the cascading effect of taxation along the value chain. Consequently, consumption of processed food remains low despite rising disposable incomes, adversely impacting the investments in this very important sector.

Full potential of this sector can be exploited if processed food products are made affordable at lower prices through a zero-tax regime. Such a tax regime must be extended for a minimum period of 5 years to “communicate” stability and attract investment.

With the prediction of a deficit monsoon this year due to El Nino, do you see food inflation going out of bounds soon?

Just as El Nino was showing signs of weakening, a monsoon blocker developed in Indian Ocean! It is certainly a situation that requires close monitoring. More important than the overall deficit in rainfall, is its spacial and temporal distribution. There is insufficient visibility on that count at this time. We therefore need to be prepared with contingent plans for different micro-regions, to be able to rapidly deploy them as the situation evolves. A big comfort, of course, is the large stock of wheat and rice available with the government. So, if at all something goes out of bounds, it would only be a vegetable here or a fruit there…

Sowing the seeds of a farm revival

Very few sectors are as important, yet as beleaguered as agriculture in India. Engaging more than 50 per cent of the country’s workforce, it offers livelihoods to 75 per cent of the population living below the poverty line. It consumes 80 per cent of the nation’s fresh water resources, a quarter of the total electricity and more than 70 per cent of central government subsidies. However, it accounts for just about 14 per cent of GDP. Woefully therefore, the farmer’s per capita income is less than one-fifth of the rest of the country’s average.

A four-pronged policy agenda in agriculture has the potential to achieve the much desired ‘inclusive and sustainable’ growth of Indian economy.

Weather-proofing production, and conserving life-giving natural resources

 

Arguably, there has been significant progress in making Indian agriculture resilient to recurrent droughts. Nonetheless, it remains a stark reality that the vagaries of nature can potentially cripple the sector at any time. In addition, dwindling natural resources like groundwater can have disastrous consequences. Therefore, any solution will have to weather-proof production, and replenish and conserve life-giving natural resources, using the right technologies.

The entire technology spectrum — from better seeds to precision-farming practices, from micro-irrigation to watershed development, from renewable energy to power-saving farm equipment — will have to be fully harnessed. Over the years, among other policy initiatives, liberalisation of imports of improved varieties and breeding lines has revitalised the availability of high quality seeds. The Indian seed market, estimated at over $1 billion, has grown at double the pace of the global seed market. However, there is a long way to go in developing and deploying seeds that will address extreme weather variations and poor soil conditions, besides serious biotic stresses.

A policy framework that encourages investment in research, and streamlines regulatory processes for accelerated introduction of new technologies will enable sustainable intensification of Indian agriculture.

Making farming remunerative, and enthusing NextGen in agriculture

India’s young demographic profile is a great source of strength. Unfortunately, a future in the agricultural sector does not seem to evoke enthusiasm among the youth. Income from farming is not only unattractive but also not commensurate with the risks and drudgery associated with the farm sector. This has led to farmers moving away from farms to non-farm livelihoods in villages, besides migration to urban areas.

The next horizon in agricultural progress cannot be conquered without harnessing the vitality of the youth. This will require a policy impetus that encourages two vital components: one that enables greater mechanisation of farm operations to mitigate drudgery and enhance efficiency; and the other that enables larger value creation through farming that blends traditional knowledge with new technologies.

Aligning production to changing consumption trends, and linking farmers to markets

Rising disposable incomes and growing urbanisation has brought about a dimensional change in the pattern of consumer demand. The share of cereals is reducing in the diet, in favour of vegetables, fruits, milk, and meat. Besides more variety, today’s consumer demands superior quality, enhanced safety, and added convenience while shopping or using products. This dictates a fundamental transformation.

Producing what the consumer demands is an entirely different ball-game from consuming whatever is produced by the farmer. It is a re-orientation from production-driven supply chains to demand-driven value chains, and will entail huge investments in creating appropriate infrastructure in post-harvest, logistics, processing, packaging, retailing, and information systems.

Corporate involvement through vibrant agri-businesses and food-processing can considerably enhance value for farmers by linking them to the value-seeking markets. However, a variety of policy constraints deter any sizeable investment by the corporates today. Foremost is the non-implementation of the ‘Model APMC Act’ by many states. In addition, the ‘Essential Commodities Act’ imposes stock limits, and curbs movements from time to time, further affecting the viability of agri-businesses. ‘Forward Contracts (Regulation) Act’ also requires reform.

Currently, critical risk management tools, such as Options, are not available. Farmers can realise better prices without undue risk, by buying Options, either directly or through aggregators. This gives them a right to transact at a future price and not just an obligation, as is the case when only the Futures are available. Trade and marketing policies in agriculture will need a significant overhaul, if the farmers have to benefit from the huge consumption dividend offered by the country.

Sharper targeting of social subsidies, and vital investments in soft infrastructure

Over the years, subsidies in the farm sector have certainly played an important role in aiding resource-poor small farmers. However, subsidies can be significantly market-distorting. There is also a concern that systemic leakages significantly dilute the quantum of subsidies that finally reach the intended beneficiaries. Direct transfers of subsidies are perceived to be a more effective alternative. Policies need to sharply target the subsidies to ensure social security but in a way that does not distort markets. In the current global and national economic context, market forces are key to unleashing the true potential of the agricultural sector.

While past investments in rural areas have enhanced the quality of hard infrastructure, such as roads, telecom and irrigation, we need to invest in the complementary ‘soft infrastructure’ now. It is important to create the equivalents of ITIs in the farm sector to train rural youth and enable better implementation of best practices. Investments are also needed in soil health and other natural resource management systems, as also in the emerging agri-services.

Orchestrated action for sustained resurgence

The policy priorities outlined here need to be carried out in a concerted manner to create a springboard that can propel Indian agriculture into a higher orbit.

The ITC e-Choupal experience in empowering millions of farmers lends confidence that a synergistic and integrated rural programme can significantly raise incomes and secure a better quality of life in rural India.

Given the right policy impetus and effective public-private-people partnerships, there is enough reason to believe that the giant agriculture sector can be re-energised to offer a new promise for tomorrow’s India.

 

This article was published in the Business Line print edition dated May 14, 2014 with modified sub-heads http://www.thehindubusinessline.com/todays-paper/tp-opinion/sowing-the-seeds-of-a-farm-revival/article6006734.ece

 

Livelihoods Promotion: Quest for Scale

In spite of the creditable growth of the Indian economy over the last two decades, the proportion of rural population living in poverty is still unacceptably high. While many models have successfully supported the livelihoods of the poor, very few have achieved the desired scale.

In this backdrop, 'Quest for Scale' was chosen as the theme of one of the Panels in the 2013 edition of the Livelihoods India Conference.

Dr Rajesh Tandon of the Society for Participatory Researchin Asia, Mr Brij Mohan of ACCESS Development Services, and Dr Subhashish Gangopadhyay of India Development Foundation and I were the Panelists in this session, moderated by Dr Sankar Datta of Azim PremjiUniversity. 

I argued that the default model chosen by most organisations for 'Scaling Up' is 'Spreading Wide'. This involves codifying the solution that worked, and then executing that code in new geographies. This would work so long as the new context is similar to the one where the solution worked in the first instance. And the organisation must have capacity to manage scale, be it the management bandwidth or the quality of execution. 

For example, if a Microfinance Organisation perfected the process of social mobilisation, risk assessment of the borrowers, efficiency of cash disbursements as well as collections etc, the same process can be successfully replicated in a different geography, unless the socio-cultural or livelihoods context is quite different.

In many cases, the scale reduces the 'Unit Costs', but in several cases, the scale can raise the management costs disproportionately. One must be cognizant of these issues also before 'Spreading Wide'. 

If the new context is very different, the original solution won't work; and if the organisation lacks capacity to manage scale, the consequences can be disastrous.

There are more ways to scale than Spreading Wide. Depending on the 'transferability of the solution' and the 'capacity of the organisation', one can choose from any of the four other Scaling Models.

2.       Scaling (or Mining) Deep: This involves bringing more products and services to serve the other current needs of the existing customers. If the infrastructure and the relationships built to deliver the original solution can be converted into a platform, it can facilitate access to other relevant offerings from third parties, who otherwise find it difficult to reach out to these customers. Continuing with the same example of Microfinance Organisation, Mining Deep model could go beyond lending and bring complementary solutions such as Capacity Building, Risk Management, Access to Quality Inputs, or Linking to Output Markets.

3.       Scaling (or Evolving) Along: This involves adapting products and services to serve the evolving needs of the existing customers, as time goes by. For example, as the incomes of the current borrowers improve, or as they reach different age bracket, their borrowing needs would change. A successful push-cart vendor, selling vegetables, may like to borrow ten times as much amount and set up a Grocery Store. This might mean a completely redesigned process compared to the process used for the earlier loan size. This is an often ignored, but smart, scaling opportunity.

4.       Scaling (or Stepping) Out: This involves adapting the solution to a completely new value chain. For example, the business model that worked for building an inclusive agricultural supply chain, could very well be adapted for skilling human resources for the employment market. While the Mining Deep model works wherever morphing into platform is feasible, this model can be explored where value chains are somewhat similar.

5.       Scaling (or Multiplying) Through: This is like the conventional franchising model. The code is handed over to a franchisee or a licensee for execution. One can spread wide, scale along or out, using this model. If  the organisation would like to retain control on the franchisee, there is a need to find a 'stickiness' factor, eg. shared services at low cost riding on the scale of multiple franchisees (accounts management, quality audit, training, legal services etc).

Thus, in my view, the foremost question in the quest for scale is "which model of scaling is right for me?"

Will the new CSR mandate be a game changer?

As you may know, the new Companies Act of India mandates that companies of a certain size and profitability must spend at least 2% of their net profits on Social Responsibility activities (See Section 135 on Page 80 of the Act)

I was a panelist at the 'CII National Summit on CSR' in Delhi held on 30th September 2013. These were my opening remarks in response to the question posed to my panel, "Will the new CSR mandate be a game changer?"

The 2% CSR spend is estimated at about Rs 20,000 Crores. This money is less than what Government spends in five days, considering the annual expenditure budget of Government is some Rs 17 Lakh Crores. Subsidies alone, out of this total amount, exceed Rs 250,000 Crores! Therefore the 2% CSR spend is not going to bring in the game-changing resources...

However, if Corporate India harnesses its 'innovation capacity' and leverages the 'power of partnerships' to solve India's social and environmental problems, I am sure it can change the game!

Instead of looking at the 2% amount as 'a philanthropy budget', if companies can innovatively embed CSR into their business strategies, larger problems can be solved.

This could be in the form of 'socially inclusive business models' where the capacities of low income suppliers and distributors can be strengthened to improve their productivity, market access, and bargaining power, while enhancing the competitiveness of the whole value chain in which the company is a part. Eg. ITC eChoupal.

On the environmental front, investing in renewable energy is a low hanging fruit, given our unreliable grid power, and the high cost of diesel-generated power. Innovation of higher order is required to build 'green supply chains' that regenerate the natural resources consumed in a business. Eg. ITC FarmForestry. 

Embedding CSR into business strategies would also ensure that the CSR spends do not get impacted in times of slowdown. Of course, this whole argument is not to rule out the need for philanthropic spends in cases of extreme distress.

Now I come to my second idea. I believe four types of partnerships could contribute to game-changing outcomes:

Partnerships with other Corporates operating in the same geography or working in the same domain can create joint projects and / or knowledge platforms for experience sharing.

Partnerships with CSOs / NfPs for social mobilisation and impact audits.

Partnerships with Communities themselves for gaining deeper insights while designing and executing projects. Also, Users Groups for democratising common property management.

Partnerships with Governments to create markets for trading "social credits" ala "carbon credits", and for aligning social subsidies to develop inclusive markets rather than distorting markets. This is besides the PPPs for building infrastructure that are already gaining traction.

While no one stopped Corporates from innovating and partnering to solve societal problems - indeed several companies have done so, successfully - the new CSR mandate hopefully inspires many companies to look at this as a game changing opportunity.

Never believe that a few caring people can't change the world. Indeed it is the only thing that ever has ~ Margaret Mead