Agribusiness: Making up for lost time
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Indian agriculture is approaching an important crossroad. Based on the sector’s current trajectory, the demand-supply mismatch in crops is likely to hit more than 15% by 2020, with the gap worsening to 20-25% by 2025 if unaddressed. The underlying trends (input variables if you will) are equally distressing. Agricultural productivity levels have been stagnant for the past 10 to 15 years, with our crops requiring around two to four times the average global water intensity. Wastage levels in our agricultural supply chain hover between 30% and 40%. More than a third of farmer households today live below the poverty line. These distressing trends highlight the enormity of the challenges lying ahead for the Indian agricultural industry.
The NITI Aayog recently highlighted that the sector is 28 years behind its time. So, can Indian agriculture close this gap? We believe so. As the country with the largest arable land acreage, India can not only ensure its own food security, it can also become a source of food for the entire planet.
For Indian agriculture to make up for lost time, changes will be needed across three main dimensions—farm productivity, farmer profitability and adoption of new technologies and farming business models.
Simple benchmark comparisons with other countries show that there is significant room for improvement for India’s agricultural productivity. For instance, our farmers produce an average 2.9 tonnes of rice per hectare, whereas the global mean is 4 tonnes per hectare. In Egypt, farmers produce 10 tonnes per hectare. Similarly, in case of oilseeds, India’s yield is 1 tonne per hectare, while the global average is 1.6 tonnes. Germany has an average yield of 3.7 tonnes per hectare. To fix this gap, a range of improvements will be needed on inputs, resource availability and farming methods. Around 70% of China’s rice acreage uses hybrid seeds as compared to a mere 5% in India, while India’s micro irrigation coverage of 8% pales in comparison to the US’s 63%. Adopting best practices to boost productivity will call for a significant investment in farmer awareness programmes. If our farmers have access to the best seeds, can leverage state-of-the-art treatment practices and cultivate the right crop portfolio, we believe productivity can be enhanced by 15-20% over a 10-year period.
Farmer income and ownership models
The second dimension to transforming Indian agriculture is related to improvements in farmer economic health. Several surveys and studies have highlighted the plight of the Indian farmer. Some studies have shown that 40% of farmers would quit if they had alternative employment choices. We believe this calls for a two-pronged approach. The first is to fundamentally change the economics of a farm, by not only improving productivity, but also ensuring farmer financing issues are well addressed. Subsidized rural credit, creation of innovative agri-financial instruments like sale option contracts and rural insurance are key elements that can help in this regard. Second, as farmer financial well-being is highly correlated to a robust rural ecosystem, there should be special focus on the development of supply chain-related infrastructure (warehousing), the food processing sector and logistics.
Another key issue with regard to farmer economic health are trends in urbanization and implications on land ownership. Most farm holdings in India are small. Many farm owners are ageing and their next generation is migrating to urban India for jobs. The challenges of effective land utilization will, therefore, be under further pressure in the years to come. Agricultural rentals in India have long been caught in a Catch-22 situation. Agricultural rental restrictions have not been revisited to reflect the realities of a very different India today. Many land owners keep their land fallow or underutilized. Even where informal rental agreements exist, land owners remain hesitant of long-term leases for fear of losing their land. At the same time, tenants feeling the duration of tenancies being too short and unpredictable, do not invest in productivity enhancing improvements.
The recent draft on the law to formalize leasing of agricultural land is a step in the right direction. More than just regularizing rentals, the Draft Model Act makes it possible for all the estimated 25 million farmers renting agricultural land to qualify for bank finance, insurance and other government benefits.
The third dimension relates to the adoption of new business models and technologies in the agricultural sector. Agribusiness technology applications typically fall into three buckets:
—Sensors, such as those that monitor soil, weather and crop conditions, or animal biometric collars, help agriculture by enabling real-time traceability and diagnosis.
—Automation solutions including technologies like agricultural robots that can simplify farm work in a variety of ways, e.g., plough a field in just an hour, compared to the full day taken by a human.
—Engineering solutions such as vertical farms that optimize resource consumption and effectiveness.
To illustrate one of these, consider the potential of agricultural robotics in an Indian context. The real benefit of agricultural robotics comes from the man-machine interface. Rather than being seen as a replacement for labour, robotic solutions are being considered as a way to free up farmers’ time to focus on other activities. Use of robotics in many use cases has reduced pesticide requirement by 80% in farms—a number that may seem unimaginable. This technology revolution is not a faraway dream. Agricultural robots have been modified for multi-terrain rugged surfaces prevalent in India, and lightweight low-cost drones have been designed to survey a number of crops and weather conditions. Costs of robots are also falling every year—some are expected to become cheaper by 60-70% over the next 10 years. Hence, models of community ownership, leasing or even rental services for robots may not be far off.
All of this will come together to drive ‘precision farming’, which, uses data at the level of the square metre or even of an individual plant, to optimize consumption of inputs and adjust variable characteristics within fields.
Globally, precision farming has begun to revolutionize agriculture, and we expect its influence to continue growing across applications in seeding, fertilizing and crop protection. Our study of agricultural patents suggests five clusters of patent filings, with crop protection-related patents dominating.
Government support is essential in transforming the agribusiness sector. Political will and cooperation have been a critical component of all agricultural ‘revolutions’, and will play a key role even in the next round of revamps. We have put together four imperatives for the government:
1. Build national awareness of agri best practices: This requires driving an integrated national programme involving research institutions, state administrations as well as the private sector.
2. Drive land aggregation: The government must take steps to encourage contract farming and producer companies. However, this requires facilitating lease-based models of land aggregation while protecting the land-ownership rights of farmers. Additionally, wasteland development should be used to pilot commercial farming.
3. Revamp policies related to procurement and movement of agri commodities: Three changes are critical here. Firstly, to provide remunerative incomes to farmers, procurement at minimum support price should only be done when prices go below that level. This should apply even to procurement for buffer stock and any social schemes. Secondly, the government needs to drive the implementation of a standardized Agricultural Produce Market Committees Act. Finally, to enable free inter-state movement of agri commodities, the Essential Commodities Act should be scrapped.
4. Streamline subsidies to encourage sustainable use of inputs: The current subsidy policy encourages over-use of inputs like power, water and fertilizers. These incentives can be redesigned without compromising end-goals of productivity or costs.
While some of the above solutions have been well talked about, the key is to create the right platforms to implement them, while ensuring they are sustainable over the long term. We believe several innovations will be required to make this work. For example, the government and the private sector would have to strike effective partnerships to serve multiple needs like:
—developing the agricultural supply chain
—fostering agricultural innovation and technology transfer
—building and upgrading the mandi infrastructure
—providing business development services to farmers and rural enterprises
The potential of the sector to become a growth engine for India and food provider to the world can definitely be achieved. The only question is, how soon?
Ashish Iyer is global leader strategy practice & senior partner at BCG; Xavier Sebastian is partner & director at BCG
The views expressed here are personal.