These are interesting times for farmers. Foodgrain prices are rising, but farmers are getting impoverished. The government has launched a massive waiver of farm loans, but farmers’ distress remains unmitigated. Farm credit increased at an annual compound rate of 24% during the 10th Plan (2002-2007) period, but farm productivity has remained stagnant and farmers’ dependence on moneylenders has risen.
Illustration: Malay Karmakar / Mint
The reason why many of the government’s well-intended measures fail is not far to seek. The actual problem that farmers face today is low incomes due to the absence of post-harvest infrastructure, low value addition and absence of organized marketing processes. The solution, in fact, lies in ensuring that farmers get a higher portion of the price paid by consumers, which will ensure higher incomes for them. This, in turn, will spur investment in agriculture, leading to increase in farm productivity and easing of supply-side constraints responsible for spiralling foodgrain prices.
Organizing farmers in a structured mode that’s conducive to efficient value addition and marketing will be in the interest of millions of small and marginal farmers (primary producers). In view of this, the Centre had amended the Indian Companies Act, 1956, in 2002-03 to provide for “producer companies” — a hybrid between cooperative societies and private limited companies — on the recommendations of an expert panel led by Y.K. Alagh. However, in the five years since then, progress on the ground has been rather slow.
Let’s take a look how these companies can work.
Producer companies, with the intention to organize farmers into a collective to improve their bargaining strength in the market, are owned and governed by shareholder farmers (or artisans) and administered by professional managers. They adopt all the good principles of cooperatives and the efficient business practices of companies and also seek to address the inadequacies of the cooperative structure.
Producer companies can be formed by any 10 or more primary producers or by two or more producer institutions, or by a contribution of both. They can undertake activities related to production, harvesting, procurement, grading, pooling, marketing, processing, etc., of agricultural produce.
Non-producers seeking to invest in these companies as shareholders are precluded under the statute concerned. Governance is democratic?as each?producer?member?gets equal voting rights irrespective of the number of shares held. There is a limitation on the amount that can be distributed as dividend. Profit is largely distributed on the basis of “patronage”, which acts as a reward for members contributing to the business. There can be 5-15 directors and expert directors can be co-opted for professional guidance.
A total of 75 such companies have been set up so far.
Vanilla India Producer Co. in Kerala was the first to be set up in 2004 to meet the challenges arising from the global crash in the price of vanilla in 2003-04. Seventeen producer companies, set up in Madhya Pradesh under the aegis of DPIP, a World Bank-sponsored programme, are engaged in marketing seeds, grains, vegetables, milk, spices, etc. Tassar silk yarn producers of Bihar and Jharkhand have been organized as a producer company Masuta by a reputed NGO — Pradan. Baif (Development Research Foundation) has formed Vapcol to market agriculture and horticulture produce of tribal farmers in Maharashtra. Rangsutra is another producer company formed by five artisan groups from Uttaranchal and Assam to bridge the distance between artisans and consumers.
The working of these companies shows that the structure is truly beneficial to farmers as it reduces the number of intermediaries in the value chain and also brings in higher income for the farmers.
However, these companies are beset with a number of problems.
There is a restriction on trading in their shares, which blocks the exit route for investors. Further, since non-producers cannot invest in the equity of these companies, it becomes difficult to mobilize sizeable funds as primary producers do not have the wherewithal to contribute large amounts to the share capital.
Besides, the companies get no support from state governments, as they are not yet eligible for state support. Donor agencies are also constrained to support them, as they are profit-oriented organizations. They do not get credit from commercial banks either, as banks are not familiar with the concept. They also face difficulties in getting the APMC (agriculture produce marketing committee) licence, which is a must for trading in agri produce.
There is a need to make concerted efforts to promote and nurture producer companies. State governments need to extend all the benefits of farmers’ cooperatives to them. The legislation concerned needs to be amended to make these companies more attractive for investors. Then awareness has to be created about this structure among banks so that they may provide term loans and working capital loans to producer companies. Since agriculture income is exempted from income tax, it would be appropriate that similar exemptions are also given to producer companies set up by farmers.
The concept is an excellent one; if implemented in right earnest, it offers great promise of being a win-win proposition for farmers as well as consumers.
Sunil Kumar is a graduate of the Institute of Rural Management, Anand, and fellow of IIM Lucknow. He has worked on development financing for about 20 years. Comment at email@example.com