Indian agriculture is coming free of the traditional mandis, with the spread of credit to farmers, involvement of the corporate sector and futures commodity exchanges Indian agriculture is once again on the threshold of vast changes that could transform the nature of agricultural operations in the country over the next decade. This change is unlike the green revolution of the 1970s, which dramatically increased agricultural productivity through technological breakthroughs in seeds, adequate supply of water and fertiliser and the transfer of modern techniques to farmers by government. This time the changes will come from freeing the agricultural markets from the traditional mandis, the spread of credit to farmers, the growing involvement of the corporate sector in contract farming and marketing, the discovery of prices for farmers for their produce through the futures commodity exchanges and the removal of minimum support prices (msp) that will push farmers into more lucrative areas, such as horticulture, rather than stick to food grains. Capital formation in agriculture has dropped from 2.2 per cent of gdp in the late 1990s to 1.7 per cent in 2004-05. While, in the 1990s, public investment stagnated, it has moved up in the last six years from Rs7,754 crore in 1999-2000 (17.8 per cent of total investment of Rs43,473 crore) to Rsl2,591 crore (29.2 per cent of the total of Rs43,123 crore) in 2004-05. The rest is private investment -mainly investment in their fields by farmers. With falling or stagnant investment, the rate of growth of agriculture has declined from 3.2 per cent in the Seventh Plan (1985-90) to roughly 1.5 per cent in 2002-06, the first four years of the Tenth Plan. Apart from increasing capital investment, changes in marketing regulations and a shift in production from food grains to fruits and vegetables is necessary, if the rate of agricultural growth is to rise to 4 per cent. A recent research report Resurgence of Indian agriculture by Deutsche Bank strikes an optimistic note, with a statement right at the beginning: "The restructuring of Indian agriculture has begun. This process will improve productivity, reduce prices, improve farm income and boost consumption in rural India. The government is driving this process by changing legislation and enabling corporate participation." A major constraint in Indian agriculture has been the big gap between what the farmer gets and what the consumer pays. In wheat, for instance, the farmer is paid around Rs6.50 per kg, while the consumer pays around Rsl8 - the balance is taken up by various intermediaries from the commission agent, the distributor, the transporters, the wholesaler and the retailer. It is the heavy cost of this chain that has crippled Indian agriculture. Physical losses in the supply chain are as high as 30 to 40 per cent. Adds to cost This also adds to cost for the consumer. "The supply chain for agriculture is rather long and inefficient," states K.J. Taori, dgm, agri-corporate and institutional relationship at State Bank of India (sbi). "And too many intermediaries add to the cost but little to value." Now this is changing. "The big change is that the umbilical cord with the existing apmcs (agricultural price marketing committees) or mandis has been broken," maintains Sunil Porwal, secretary, co-operation and marketing, government of Maharashtra. Earlier, a farmer could only legally sell his produce in the mandis or government-recognised marketing centres. Equally important are the dilution of the Essential Commodities Act and the proposed integration of 16 separate pieces of legislation on food processing into a single act. Though theoretically mandis were meant to free the farmers from the arthiyas or commission agents, in practice, the agents formed cartels and pushed down prices for farmers. Now, with the revision in the apmc Acts in many states, farmers need not sell only through the mandis. This has broadened the channels available to farmers, giving them higher prices. "Now, the options are opening up. Anyone can buy but has to be registered with the state agricultural marketing board," says Porwal. This broadening would lead to better prices for farmers, which, in turn, would increase productivity as "incentives to invest will increase", maintains Porwal. Another development is the emergence of three national futures commodity exchanges like the Multi Commodity Exchange (mcx). Joseph Massey, deputy managing director of mcx, explains the advantages of futures trading: "Farmers benefit by discovering farm produce prices in the future months (through the exchanges) to take informed decisions in cropping pattern, timing, storage and selling at the best price, in the best market and at the best time." The problem is that few farmers have the education or the sophistication to trade in futures. But, the commission agents, who are the first level of direct interaction with farmers, and deal with several score or even hundreds of farmers each, can take positions, while farmers are aware of futures prices at the mandis. The commodity exchanges would also lead to more and better warehousing. A big step that would give greater freedom and manoeuvrability to farmers would be if the warehouse receipts for food grain stored in mcx or other warehouses were to become negotiable instruments. Farmers could then store their grain in government recognised warehouses, take a loan against the receipt or sell it at a suitable price later. Taori goes further. He suggests that then "The government may not have to maintain its own physical stock but have a buffer stock by buying warehouse receipts." msp, the floor price at which the government buys from the farmers, has been another reason for a skewed production pattern in agriculture. During the 1990s, the msps were repeatedly raised and food stocks gradually built up to over 60 million tonnes of food grain at one point, while the required food buffer is 16.8 million tonnes. More important, the high msp in lean years ensured that farmers in Punjab, Haryana, western Uttar Pradesh and Andhra Pradesh, the main regions from which the food grain was purchased, did not diversify into other crops. The latest Economic Survey admits (p 96): "msps help only the large farmers with high marketable surpluses and marginalise the rest of them...." This view is shared by Massey who says: "The rich farmers and traders have cornered most of the benefits under the support price policy. The small farmers lack access to government and resort to distress selling." Moreover, as Massey maintains, "msp has prevented crop switching and excessive focus on wheat and paddy, even if it is at the cost of land abuse." If the farmers weren't induced by msp to stick to paddy and wheat they might have diversified into fruits and vegetables, which hold the biggest potential for Indian agriculture. This has been recognised by the National Horticulture Mission, set up by minister of agriculture Sharad Pawar, whose leadership in making far-reaching changes in agricultural policy look like giving him the best innings to far in his long career. The shift to horticulture requires several infrastructure inputs. Prime among them is the need for cold storages, better road connectivity and a larger processing industry. Massey recounts how apples grown in the US reach cold storages within eight hours, whereas here, apples grown in Himachal Pradesh or Kashmir have to be auctioned in Delhi or sometimes even Mumbai, before they can be shifted to a cold storage, a process that could take weeks. A.K. Bandopadhyay, head of economic research and analysis at Nabard, points out that, "In India, just 2 per cent of the fruits and vegetables are processed, while, in Brazil, Malaysia and the Philippines, it is over 70 per cent. Indian agriculture offers a huge potential we have not been able to take advantage of." Ambitious plans With the entry of the corporate sector, this is set to change. Bharti is involved in 50:50 joint venture with the Rothschild, Field Fresh, where it has taken 1,000 acres under contract farming for export of fruits and vegetables. The Tata group is also growing crops like grapes and mustard for export, while Mahindra has begun farming maize. Other food processing companies include Godrej Agrovet and Dabur, which procures oranges, pineapples and apples for its juice business. All these require and have built cold storages and processing plants. The most ambitious plans announced so far are by Reliance, which plans to set up agricultural marketing operations in Punjab with around 50 hubs on 1,000 acres of land, serviced by several collection centres closer to farmers. While the low rate at which the land was given to Reliance led to local politicians calling it a sell-out, the state has much to gain from the association. The company would be allowed to buy from farmers, sort and grade the produce, set up cold storages and warehouses, and process and package in these hubs. Once Reliance gets into retailing in a big way it would have the advantage of cutting intermediary costs. But there is no guarantee that existing big houses will succeed. It is not the only Indian corporates who are thinking of cutting cost by going from 'farm to fork'. Other retail chains will have to follow the same path. A major argument for allowing fdi into retail by companies like Walmart, Tesco or Carrefour is that they would be able to have a more efficient supply chain, offering better rates to farmers and lower consumer prices. The Deutsche Bank study reports that other companies that "will drive change in the supply chain, as they aspire to meet global standards of quality, cost and productivity" include Snowman Frozen Foods, a joint venture between hll and the Mitsubishi group, and the Radhakrishna group, which has set up a large food distribution and logistics network. Massey believes that within two years we will begin to see the change in Indian agriculture because of the changes brought by legislation and the improvement in the supply chain. One of the first companies to enter the fray in agriculture was itc. It made a significant contribution in setting up Internet-linked kiosks in villages known as e-chaupals. These allow farmers to find out futures prices in the Chicago Board of Trade (and now in the three futures commodities markets in India), as well in the mandis. Though itc has made little money in its rural foray so far, the future looks promising. Already some 20,000 villages are linked to these e-kiosks and itc plans to cover 100,000 villages by the end of the decade -around a sixth of the total villages in the country. itc also has warehouses, where the produce can be weighed, sorted, tested and packed, and has moved into retailing of certain products. It acquired around Rsl,500 crore worth agricultural commodities last year, some 40 per cent of which would be marketed directly by the company. Not surprisingly, itc is retailing third party products, teaming up with other companies who want to sell to farmers. There are neat synergies between buying agricultural goods from farmers and selling them tractors, pump-sets, pesticides, seeds, cooking oil and other factory-made goods. Farmers can do this at the same outlet they go to sell their produce. These markets also allow them to offer extension services to farmers at low costs since they are shared; among the many companies who need to inform farmers about their products. Synergies are thus developing between companies such as itc and icici Bank and sbi for banking services, with Eicher and m&m for tractors, with tvs Motors for two-wheelers, and with companies like Godrej for household products. itc provides extension services and is able to offer a better price to farmers by reducing the number of intermediaries, and by sorting, processing, transporting and packing the produce to take it to the retail level at low cost. Not all participants take in optimistic view. "Instead of an agricultural revolution, there is an agrarian crisis. Over a thousand farmers have committed suicide in Maharashtra, Kerala and AP because of market failure, community failure and state failure," says Bandopadhyay of Nabard. Cotton is a case in point. International cotton prices have fallen by more than half over the past decade, because cotton farmers in the US are highly subsidised. "Subsidies in the US reduce prices in India," says Bandopadhyay. Farmers are not able to survive on these low prices, and often cannot pay their debts. This has led to many suicides. Porwal concurs, "Farmers commit suicide because cotton prices have been coming down over the past 10-15 years, because global prices are going down." The fate of Indian agriculture is thus tied to the massive subsidies given to farmers in Europe and the US. There is thus no alternative to tough bargaining by our negotiators at the wto. But subsidies to Indian farmeis may also harm domestic agriculture. These amount to around Rs35,000-40,000 I crore every year - mainly due to indirect subsidies on fertilisers and direct subsidies on power and water. Giving ] free power distorts the cropping paWJT tern toward water guzzling crops. If the subsidies are targeted better and rationalised, they would be more j effective. A 2004 study by AshoH Gulati and Shenggen Fan of the US-based International Food Policy Research Institute says that the decline in public investment in agriculture is primarily due to the government's emphasis shifting to subsidies. It says fertiliser subsidy increased more than 30 times from Rs260 crore in 1976 to Rs8,000 crore in 2000. At the same time, in the 1990s, public capital formation remained stagnant at around Rs4,000 crore annually. The Indian farmer would be better served by greater investment and capital formation in agriculture, which would allow him to increase output and better reach the market. As farming moves towards a more efficient supply chain and towards value added avenues like horticulture, poultry, meat production and fisheries it would be pertinent to remember the greatest success story in rural | India. The story of milk! The Amul model that had co-operatives of small milk producers marketing and processing the milk, made India into the largest milk producing and consuming country in the world, giving its people an ample supply of a nutritious food. As we contemplate similar exercises to market and process other perishable foods like fruits, vegetables, poultry, meat and fish, it is worth considering whether the Amul model can be replicated. While co-operatives see the best possible benefit reaching the widest range of producers, the present climate does not favour them. Amul has shown that supply chains and processing and marketing infrastructure can be built by co-operatives. Under the present dispensation, they will require the efforts of the corporate sector. Will it be as equitable or even as efficient as the co-operative model?