The state of the Indian agriculture sector is a matter for perpetual debate. From farming techniques to crop yield, input cost in farm to crop MSPs, irrigation related issues – the list never ends and all these issues still awaits for pragmatic solutions. 60% of rural households are dependent on agriculture for their livelihoods. So, needless to say that a boost in the sector will be directly related to alleviation of the poor out of poverty.
My year in the fellowship was spent dealing with this sector to solve the issues for the small and marginalised farmers. One of the major problems which has already surfaced is the shrinking size of the land holdings. The major reason behind this is the continuous division of property among the siblings with no new piece of land being purchased by any generation, normally. As a result, the size/area of the land holdings is becoming smaller and fragmented generation after generation. This in turn is making the production business economically more unviable for them and subject to high level of exploitation by the market forces.
Contrary to the notion, small farmers work physically more and use the land more efficiently and stretch it to its limit, still they fail to make it profitable. As per the analysis, they don’t have the edge to drive a bargain in the competitive market on price, quantity or input materials. With this focus in mind and to drive the growth, govt. started to look for solutions to this menace. Around 2012-2014, the farmer producer organization model was proposed by the government. The aim of this was to institutionalize agriculture in order to streamline it.
Since, combining and clubbing up of small landholdings to make it large in terms of area is difficult, India lags in maintaining the land records, it becomes impossible to carry out this process. Hence, FPOs work well in this case. A group of farmers come together and get themselves registered as a business entity under the Indian Companies Act. This results in consolidation of smaller pieces of land. Also, a formal structure will encourage them to treat their produce as products just like an FMCG company does to generate profits and create jobs for the local people required to manage the affairs.
Initially this idea/model emerged in Europe followed by the Africa in the late 90s. Europe adopted the model really well and transformed their farming sector. In Africa, after the cooperatives failed, farmers started looking for alternatives to regroup and unionize against exploitative forces. It did manage to improve the conditions to some extent. After the successful stint of the dairy cooperatives in India, FPOs looked to be the next logical step to address the problems and double the income of farmers.
Agricultural income supplemented by other sources of income provides farmer the necessary cushion to bear the shocks and necessary push to progress economically. Keeping this goal in mind, the fpo/fpc model has the self-owned producer company structure. The farmers of the group are the stakeholders of the organization. This has two benefits – as owners the profit earned comes back to them. Secondly, the value addition i.e. processing of the produce requires work force, therefore boosting the job market in the local economy making them entrepreneurs (igniting the spirit to start venture at an individual level) instead of bonded labours.
The model is apt. in areas where small farmers are higher in numbers. Such was the demography of the area of my work. I got a chance to work closely with one such FPO – Chetna Nature Farming Producer Company Ltd. It worked with farmers on chemical free farming i.e. without using any pesticides and fertilizers in farms. The area has high density of marginal farmers which makes it the perfect place for creation of a FPC. It had the SHG groups as its stakeholders. During my fellowship, one thing that still exist is the lack of realization among farmers that the fpo is a company which they own and needs to be run by them. The perception of this is that of a govt. policy which will give only benefits and requires zero input. This leads to loss of ownership among them.
One of the side effects of this is the inefficient mobilization and difficulty in retention of farmers. During a conversation with one of the farmer, he said – “There is no point of becoming a member of the FPO as there are no benefits in the short term. मेहनत ही करनी है तो अपने घर में ही ना कर ले |“. This pointed to the lack of clarity among them regarding the concept and need for such a model. A social problem which I observed is that the caste divide plays out, when attempts are made to bring everyone on a same platform. This can also be observed in how numerous farmer unions exist instead of one, despite all raising similar issues. Each outfit paying allegiance to one ideology or the other. All this weakens the platform; counterproductive.
Another aspect witnessed was linked to the processing of produce into finished goods. This part created job opportunity for the women who were members of the stakeholder SHGs. In a way, it acted as an extra source of income in addition to their agricultural income. Based on the interaction with customers of the FPO, cleaning and grading of end products was an issue as a result of which items failed to meet the quality of similar items available in the market. There are two reasons behind this – the absence of machines and lack of training being imparted to farmers. The thinking was that the items are being prepared for households in urban areas. This hindered the management from moving them to a professional style of operations where women get the due training and execute the process accordingly. The failure to realize the system as a company which is here to stay and considering it as a scheme / project which has a limited duration prevented the stakeholders from building sustainable processes around the tasks
In my opinion, treating the FPC as a start-up would have solved a lot of issues for the organization. Another important aspect which did not allow to build the self-sustaining capability of the system was the failure in developing the local leaders at the village level. They would have been an important asset in managing the operations.
A centralised processing unit is advised to be set up in order to maintain the quality and streamline the process. But as we all are aware how the credit system works, our fpc also starved to get funds for the same. But as per the saying – the show must go on. Hence, the team tried variety of things to sustain.
For example, in the absence of a unit, we took out the data of which crop is grown in abundance in a particular village in our field area. Like in a village named Ekghara, very few farmers grow rice in particular but the next few village had abundant number of rice growers. Then with the help of the area map, mapping was done based on the produce type for every village. It helped us in making clusters of villages for specific types of crops. These kind of experiments can be tried to bring down the cost of operations. When one village will only deal with one specific crop, it will be easy for the workers to focus and master one single / particular process. This will also ease the work load and create livelihood opportunities spread throughout the area.
Currently, the country has around 5000-6000 registered FPC/FPO. In the recent budget, the government has set a target of establishing 5000 more entities like these. This may seem to suggest that the administration has taken a decisive step and a clear strategy is in place to transform the system. But, the ground realities are different. These structures failed to bring the impact which they were supposed to bring in. Hardly, 1-2% of these are making profits or have become self-sustaining in nature. Rest of them have become defunct or operating in loss. The condition is such that a majority of them don’t the necessary capital required to run the operations. This makes the procurement from farmers and supply of processed goods inconsistent. As a result, farmers start ignoring such institution and fall back on the mandis / local market.
The problem does not lies in the model but in the eco system developed around the entity. Few reasons behind the failure are as follows:-
- Lack of financial support – The access / availability of capital becomes important in a FMCG company compared to a service based company. Same is the case with these FPCs. Though the member farmers are made to put in some money as working capital, there is a limit to which the money can be accumulated since majority of them are marginalised. Timely payment to farmers for the procurement of their crops also require high liquidity in the system. Setting up of units is also a costly affair. Any such entity needs some time to stand independently and break even. All this makes it critical for the fpo to have continuous flow of funds. There is a lack of positive attitude in financial institutions to provide credit linkage to them. As a result of this, they depend on the grants received from govt. backed agencies or foundations which are often inconsistent in nature, leaving them vulnerable.
- Failure to build the capacity of the management personnel – Since, the entity belongs to people at ground level, it becomes necessary to turn them into leaders, if one intends to focus on sustainability. Failure to have a leadership at village level results in falling apart of the fpo. A possible solution given to the issue is to hijack the management from the hands of the members and handover it to experts. This has many problems – It is difficult to afford the high salaries of experts in an already cash starved system unless backed by a funder in the initial years. This step defeats the goal of creating local jobs in the area. Lastly, this also makes the structure a typical FMCG company susceptible to market slowdown / boom. At the same time, having local competent managers will provide a cushion in managing salary costs in the times of distress.
I remember a meeting held in Lucknow with a US based ngo who have 2-3 fpos in the region. They boasted about how their fpos were having a turn-over of 2-3 crore in a year. In a while, questions were raised around the management staff. It was told to us that the management is being done by them for effective working. This helps no one. The moment organization exits from the area, the fpos will start to depreciate. Lack of ground leaders also slowdown the expansion pace which becomes another issue in the process of adding up the farmers.
- Lower market share – Creation of market for the products is integral to create a consistent demand. India being one of the largest market for goods also makes it a market with abundant number of suppliers. Since, the majority of consumers are from middle and lower class, it becomes a price competitive market. Quality does matter to a section of people but price still remains a priority. This kind of a scenario makes it difficult to acquire some percentage of market share. In case of fpcs, initial years of operations witness more work being done manually by people instead of machines due to fund crunch. This brings down the efficiency and has its own limitations in meeting quality standards. As a result of lower efficiency, the price goes up making it difficult to compete with other goods. This leads to having fluctuating demand / orders making it difficult to bring down the operational costs.
- Absence of a policy roadmap – The government did a great job by trying an alternative and actively promoting FPOs. This year’s budget was in sync. But mere forming and encouraging these is not proving enough. There is a complete lack of a road-map, how the govt. plan to take these entities to next level towards high growth where they start bringing the change at micro level. As per a government study, around 1 lakh FPO/FPCs are required to transform the sector and double the income of farmers in its truest sense. With this goal in mind, they plan to increase the count at record pace. But there is absolutely no strategy how they intend to drive the growth of these FPCs or the support system they have in place to manage the entities which falters. As a result of this, govt. is getting some success in increasing the number of registered FPOs but most are becoming defunct in the initial years.
Despite the not so encouraging performance of the FPOs, the model has the potential to bring a decisive impact. The sector has largely been unorganised resulting in a high degree of inefficiency at every stage and in turn denying the profit to the farmers. This system will give the necessary structure and direction to the ecosystem along with imparting business sense to the community to prosper. It does not have any structural problem in particular, what lags behind is the support eco-system around it.
The first and foremost thing that is required is access to finance. The current practise of one time grants has to go and a continuous flow of funds should be there. It can be uniform as per the need. In my opinion, giving banks loans to these entities instead of giving it to individual farmers is in the interest of both the parties. For the banks, the return on the loan amount will be high in comparison to the same amount lent in fragmented parts. This also mitigates the risk of loan turning into non performing asset. High interest will also be yielded by banks. As far as farmers are concerned, I have discussed it in detail in this older blog piece, how the loan taken to progress becomes the reason behind depletion of their current situation.
Once the machine is built, it requires people to run it and do the maintenance at regular intervals. I have talked about how realization can do wonders in another blog piece. This should be supplemented by initial support in business management to set up systems and processes. To my mind, this is where the govt. can actively play a key role by setting up of incubators specially designed for FPCs at district level consisting of agriculture experts and agri business executives. It will also enable the government to directly come in contact with the farmer. As a result, administration can slowly push the farmers towards modern and efficient farming techniques which otherwise seems to be an impossible task for govt. machinery.
A detailed road map in terms of policy for growth of such entities need to be put out by the government. This will set the course for them to create its own market space along with the expansion strategy. Policy level change is advised to make space for them in the market. The possible counter argument will be of protectionism and maybe perceived by many as anti-capitalist move. To some extent, this argument does hold some ground but it is the need of the hour. Just like the new born baby requires extra care, same is the case here. The Indian agriculture system is so volatile in nature because of some controllable and uncontrollable factors that it needs some buffer space to mitigate the shock effects.
In the end, I would like to say that the initiative taken by the administration of introducing the fpc/fpo model can be termed as the step taken in the right direction. It was a necessary step but certainly not a sufficient one.