In Mint’s pre-budget debate held in Mumbai on 19 February, Ajit Ranade, chief economist of the Aditya Birla Group, offered an unconventional recommendation to boost Indian agriculture: policy interventions that help farmers start and manage their own companies.
Farmer-owned firms, or ‘producer companies,’ allow small farmers to consolidate their buying and selling, and earn more by eliminating middlemen and shortening the value chain. Small farmers, who dominate Indian agriculture, enjoy higher yields compared to large farmers but earn lower incomes because of lower bargaining power and information asymmetries.
Farmer-owned firms could be a key means to end many of India’s farm woes but have never received the policy focus they deserve. According to a 24 February Business Standard report, the government may announce easier lending and financing norms for such companies in the Budget. Such steps are long overdue and welcome, but it will require much more to turn significant numbers of small farmers into thriving capitalists.
The concept of producer companies, technically a hybrid between private companies and traditional cooperatives, is more than a decade old. A special section was introduced in the Companies Act in 2002 that allowed primary producers to start their own companies while retaining the cooperative principle of “one share, one vote”, on the recommendations of a committee led by economist Y.K. Alagh. The concept took time to gain acceptance as there was hardly any supporting policy, or institution to promote such firms.
Over the past couple of years, with a sharp spurt in the number of farmer firms , things have begun to change. There is growing awareness about the benefits of this model that allows small farmers to collectively tie up with corporations while avoiding the usual drawbacks of coops: excessive politicization and high debt. For retail and consumer firms that want to strengthen their supply chains, dealing with farmer firms lowers costs and minimizse political risks.
Policymakers seem to be more responsive now than earlier but there are big hurdles still in the path of farmer firms. First, and most crucially, the very legal status of such organizations is under a threat: the new Companies Bill does not recognize farmer firms as companies. If implemented in its current avatar, the Bill will take away most of the gains made in recent years. The opposition of industry lobbies to the inclusion of producer companies in the new Companies Bill is justified on technical grounds. But such opposition is both uncharitable and myopic, as Alagh pointed out in a recent column.
Second, producer companies face hurdles in raising loans because they are formed by resource-poor farmers, and have a low equity base. The government is yet to devise a way to enable these firms to raise external equity without diluting farmers’ control over their organizations.
Third, supporting agencies such as the Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural Development (Nabard) are yet to frame detailed guidelines for bank lending to such organizations. It is worthwhile to keep in mind that bank lending to self-help groups grew phenomenally in the 1990s only after RBI and Nabard jointly framed guidelines for such groups, and prodded banks to step up group lending.
For long, India has tried to keep its farmers hooked to a steady, addictive and unhealthy dose of subsidies. The effort has drained the exchequer and benefited a creamy layer of farmers, without raising incomes of small farmers substantially or sustainably. At a time when India’s food and retail sectors are headed for rapid growth, it will pay to change track and allow small farmers to gain a fair share of the pie. Farmer firms will hold the key to that transformation.