BackPlanting the seeds of prosperity
Planting the seeds of prosperity
PremiumGrowth story: Dyaneshwar Bodke tending to his plants at the Abhinav Farmers Club, which grows flowers and organic vegetables in polyhouses. Photo by Sandesh Bhandare/ Mint.
Pune: Dyaneshwar Bodke worked at a Pune-based interior design firm for 10 years, starting as a typist and going on to become a designer himself after attending a course in the subject, when he chanced upon a newspaper report that was to change his life. The article, about a small farmer in Sangli who earned ₹ 12 lakh a year by growing carnations, inspired Bodke to give up his job and take to farming on the 10-acre plot he owned.
That was 10 years ago. Now 41 years old, Bodke heads a 4,500-member group called Abhinav Farmers Club, which grows flowers and organic vegetables in polyhouses and sells them to retail outlets in Delhi and Mumbai; it also exports the produce to Europe. Set up in 2004 with assistance from the National Bank for Agriculture and Rural Development (Nabard), it has an annual turnover of ₹ 24 crore, with a profit margin of 30%.
The farmer, whose life has inspired a Nabard-funded book called Abhinavgatha, now has bigger plans. He has set up a producer company with 24 other farmers that plans to purchase land, build polyhouses and grow exotic flowers and vegetables for export. The company is seeking a ₹ 10 crore loan from Nabard and has hired Devnadi Valley Agricultural Producers Co. Ltd, a 550-strong producer company, to prepare a project report.
“Unlike typical farmers, we look at market demand, prices and production costs to determine what to grow," Bodke said in an interview.
The concept of farmer-owned companies goes back a decade. 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 vote, one share", on the recommendations of a committee led by economist Y.K. Alagh. Around 270 such companies have been formed so far, half of them in the past year alone, mostly by farming groups.
“Although the government passed the law, there were no supporting policies or institutions to take this concept forward and hence it has taken time to gain acceptance," said Sukhpal Singh, professor at the Indian Institute of Management, Ahmedabad, who has studied such companies extensively. “Key supporting institutions such as banks are largely ignorant of this animal, since there was no national effort to promote this."
That’s changing.
State support
“We want to demonstrate the benefits of aggregating small producers," said Pravesh Sharma, managing director of SFAC.
Coinciding with this initiative, the agriculture ministry will roll out detailed guidelines for state governments to provide benefits to producer companies, which are still not treated on a par with cooperatives.
In a letter dated 23 March, the union ministry of agriculture sent a letter to all states asking them to consider extending the benefits to producer companies formed by farmers at par with cooperatives. “The ministry is also exploring the idea of earmarking a portion of the agricultural outlay for such companies," said Sharma.
Nabard, another state entity, set up a special fund last year to provide direct loans to producer companies and cooperatives. Nabard’s fund has in fact prompted several farming groups to register themselves as producer companies, so that they are able to secure loans from the lender.
Small farmers, who dominate Indian agriculture, are more productive than their larger peers, but earn less because their pricing power is weak. The structure of a producer company has emerged as the most efficient and popular organizational form for groups of small farmers to get better prices.
The 2008 World Development Report published by the World Bank listed development of producer organizations as a key component of any strategy to raise agricultural growth and eliminate poverty faster in developing countries. Smallholders are increasingly turning to such organizations in the post-liberalization era to compensate for the withdrawal of state services and the lack of private alternatives, the report said.
Evidence from developing countries in Africa and Latin America shows that producer organizations not only allow better access to markets, credit and technology but also allow small holders greater voice. In West Africa, for instance, producer organizations are increasingly involved in framing agricultural strategies and policies.
Traditional cooperative societies offer similar advantages but they have largely fallen into disrepute as they are laden with debt and are seen as victims of politicization, especially in states such as Maharashtra. Producer companies have a cleaner image and enjoy more freedom, for instance, in forming joint ventures, working in multiple states or in hiring professionals. They are as free of state interferences as any other private company.
Indian dairy cooperatives such as Amul are considered to be among the most successful cooperatives globally, but even dairy cooperatives have begun to find merit in the producer company model. As part of its new national dairy plan, the National Dairy Development Board (NDDB) will facilitate the setting up of producer companies to expand village-based procurement systems, a 19 April statement by NDDB said.
Western Indian states such as Gujarat and Maharashtra that are used to cooperatives and cash crop growers in the southern states have been the first to take to this model, independently of state support. The other state that has seen more than a score of such companies being set up is Madhya Pradesh, where the government has been promoting such companies by providing soft loans. The Maharashtra government will also use this model to aggregate farmer groups and help them tie up with corporations, said Sudhir Kumar Goel, principal secretary, agriculture.
Fruits of growth
India’s rapid economic growth over the past decade has led to an increase in the number of companies seeking to invest in rural areas, and a rise in the aspirations of farmers, fuelling the growth of producer companies that link farms and markets.
Almost all packaged consumer goods companies have evinced interest in partnering with SFAC to strengthen their supply chains, Sharma said. Goel pointed out that tying up with farmer groups is the only viable option for both companies and farmers to grow.
“In a country like India, where the majority of the population is dependent on agriculture for their livelihoods, you cannot expect a Brazil-like model, where corporations own large tracts of farmlands," said Goel.
The corporate interest in producer companies wasn’t anticipated, said economist Alagh.
“Companies find it easier to deal with such groups as it saves costs and minimizes the political risks," he said.
Producer companies have largely been promoted by non-governmental organizations (NGO)s working with the poor farmers having weak market links. A 2011 report on producer companies by Nabard Consultancy Services Ltd, a subsidiary of Nabard, based on case studies of nine large producer companies, found almost all of them to have been promoted by NGOs.
Most producer companies face three key challenges: low equity base as no external agency can become a shareholder, the lack of a long-term plan of diversification that can minimize risks, and high cost of mobilization—especially where groups are built up from scratch.
It may also be more difficult to replicate the model for food grain producers. Producer companies seem to have been more successful with cash crops, or with crops that ensure high profits from small land holdings, said Anika Trebbin, a research scholar at Philipps University Marburg, Germany, who is writing her doctoral thesis on producer companies in India.
While the state can play a key role in facilitating growth, there are risks to state paternalism as well. In the case of Madhya Pradesh, for instance, a few producer companies promoted by the state have shut down over management issues.
To take care of the capital needs of producer companies, which are in start-up mode, a committee formed by Pradan, an NGO, and headed by former chief economic adviser Nitin Desai, suggested an amendment allowing provisions for raising external funds through preference shares, bonds and debentures. It also recommended including the financing agency on the boards of producer companies and an exemption from corporate tax in the start-up period.
Mobilizing groups in rural areas is a costly and time-consuming affair and having a strong partner with roots in the community becomes essential, said Sharma of SFAC. The challenge for NGOs is to develop an exit plan to ensure the business is sustainable, according to Trebbin.
Although a history of cooperation such as in western Maharashtra helps in forming groups, just like in any other business, it is the strength of the business model that separates the successes and the failures.
“The spirit of the collective cannot triumph (over) economic sense," said Uphar Kaushal, coordinator at Vasundhara Agri-horti Producers Co Ltd , India’s oldest producer company, which is spread across eight states.
pramit.b@livemint.com
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