Unlocking Value in India’s Country-Side

Imagine you are the CEO of a firm which wastes up to 15% of whatever it produces, even though similar firms internationally have managed to control this wastage to 5-6%. Now imagine the urgency with which you would solve this issue when you know that this wastage is worth $13 billion annually.

Successive Indian governments have failed to display any urgency to improve the broken agricultural supply chain in India, even though 600 million people in India are dependent on agriculture. A plethora of issues ranging from multiple intermediaries between farmers and consumers, and lack of storage and transportation facilities has created a situation where the average Indian farmer gets ~30% of what the customer pays at the retail point, a far cry from the ~70% that a farmer in the USA gets.

I draw from my work with 1,500 farmers around the National Capital Region in India and multiple visits to mandis (marketplaces for agricultural produce) in 4 Indian states to highlight a few of the most pressing challenges that plague Indian agriculture:

Unlocking-Value

  1. Lack of access to the market: Small and marginal farmers (those with landholding <2 hectares) sell their produce to village level aggregators because the farmers do not have enough resources to take their produce to the mandi. The problem is made worse by insufficient transportation facilities and poor road infrastructure. The aggregators buy from multiple farmers in a village and sell the produce at a local mandi. This lack of access with the farmers allows the aggregator to ensure point #2. In some cases I observed that a few small farmers had tried to organize themselves, but their efforts were thwarted by powerful caste landlords in the village.

    Various state governments have made efforts to organize the farmers in cooperatives or FPOs (Farmer Producer Organizations) to enable them to pool resources and know-how. The Union Ministry of Agriculture observed 2014 as the year of the FPO. However Rambir Singh of Rohtak, Haryana summed the government’s efforts well “An official visited us two years ago and told us how an FPO would change our lives. We haven’t seen him since then.”

  1. Information asymmetry: Since the farmers do not have ready access to the markets, they are unaware of the prevailing prices and demand trends, thus selling to the aggregator at the prices determined arbitrarily. In our pilot study, we observed that simply providing farmers with market price information allowed them to negotiate a 23% higher price from the aggregator.

    In recent times, Govt of India and private entities such as the Reuters Market Light have started providing real-time mandi prices to the farmers. These initiatives have been well received but low literacy levels and lack of digital infrastructure limit their impact.

  1. Legal framework: The law forbids farmers to sell their produce directly to buyers (such as super markets, food processing units, exporters etc.). Instead farmers are forced to sell to Agricultural Produce Marketing Committees (APMC) which are government mandis controlled by a select few traders. These mandis levy multiple fees for loading/unloading and selling, and the traders engage in rampant cartelization and hoarding. Thus APMCs essentially charge steep commissions for passing the produce from farmer to consumer without adding significant value.

    The Union government amended the APMC Act in 2003 to allow farmers to sell directly to buyers. However, agriculture is a state subject and hence states need to pass this law individually. APMC traders are politically connected and have consistently opposed any changes in the law. So far only 10 states have completely or partially amended the act.

  1. Insufficient food processing infrastructure: Processing food reduces spoilage by de-activating pathogenic micro-organisms. This increasing the shelf life and enables food to be transported longer distances. India has abysmally low food processing levels at 6%, compared to 80% in USA and 40% in China.

    Food processing has been a focus area of Prime Minister Modi’s Make In India. To that effect, the Ministry of Food Processing Industries has approved setting up of 5 Mega Food Parks and another 42 are in the pipeline. The government has provided tax incentives to set up food processing units apart from providing cold storage, warehousing and logistics facilities. These parks are supplemented by village-level collection centers and primary processing centers through a hub-and-spoke model.

The logistics and infrastructure of agriculture have long been neglected. This apathy has translated into a harsh environment for farming. Prime Minister Modi has set a target to double farmers’ income by 2022. It remains to be seen whether his government is willing to walk the talk and push ambitious reforms needed to achieve this target.

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Akshat Mittal is currently working as an External Consultant with The Boston Consulting Group (BCG) and has extensive experience of working in public sector projects. He has also managed several national and regional election campaigns in the past.