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Agribusiness in India: Lessons and visions (1996)

 

Working Paper 97

Rajagopal

Institute of Rural Management Anand 388 001

February 1996

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Contents

Abstract

Agribusiness in India: lessons and visions

Performance

Market arrivals

Procurement

Market control mechanism in commercial crops

Policy interventions

Retrospects and prospects

 

Abstract

Agribusiness is one of the principle components of the overall agricultural economy of the country. However, the scope of agribusiness has been narrowed down to the marketing of foodgrains and commercial crops through regulated and non-controlled marketing channels till early nineties. The change in the perceptions of agribusiness emerged prominently after the introduction of the new economic policy highlighting the trade liberalisation as one of the main reforms.The performance of agribusiness has improved thereafter with an increasing competition in regulated and open market which attracted increasing arrivals of foodgrains and commercial crops. The policy of Commission on Agricultural Costs and Prices (CACP) has also been favourable to promote agribusiness. Besides, the implementation of consortium financing for agribusiness for capital intensive projects like floriculture, has attracted foreign investments in farm sector. Yet, the chronic lacune in the agribusiness sector could not be totally wiped off. The present paper discusses the growth of agribusiness in the new economic environment, policy perspectives and review the strategies suggested by the High Power Committee of Agricultural Marketing. The paper also attempts to draw some inferences from the overall agribusiness pattern in India and delineates a few strategies ahead.

 

 

Agribusiness in india: lessons and visions

Agricultural production of selected food crops has increased in the subsequent years since the end of Seventh Five Year Plan in the country. There has been a significant increase in the production of foodgrains in the post-independence period from 1949-50 to 1992-93 which accounted for 1250.9 lakh tonnes. The production of foodgrains was 549.2 lakh tonnes in 1949-50 which increased to 1800.1 lakh tonnes in 1992-93 with an annual growth of 2.71 percent. During the post-green revolution period the growth of foodgrains was assessed at 2.84 percent per annum which accounts for increase of production from 950.5 lakh tonnes to 1800.1 lakh tonnes in 1992-93. The index of agricultural production marked an increase of 3 percent over the increase of 21.7 percent registered during 1988-89. This increase resulted due to significant production of rice, wheat, pulses, oilseed, jute and mesta, sugarcane and other commercial crops.

 

 

Performance

It has been observed that in the post-independence period the government of India considerably emphasised the implementation of the agricultural Produce Marketing Act through the state governments. In all, there were 6,752 regulated markets functioning in the country as on the end of March 1993. However, due to increasing disputes in the regulated markets and lack of infrastructure, the intervention of private traders in procurement of foodgrains and sales to terminal and retail markets has significantly increased. The private traders intervention in the transactions of commercial crops like bidi tobacco, sugarcane, oilseed, pulses and spices were found dominant. The liberalisation policy introduced in 1991 in the country has further made easy the entry of private traders in the domestic marketing and export of agricultural commodities.

 

Market arrivals

The wholesale price index for the cereal crops has shown an increase of 9.3 percent at 260.6 during 1993-94 as compared to 238.5 during 1992-93. The market arrivals of wheat during the above mentioned period marked an increase of 21.5 percent as compared to rice, which had shown an upward trend by 13.4 percent. However, the market arrivals of Sorghum during 1993-94 registered a fall of 23.9 percent with the volume of arrivals of 3.14 lakh tonnes as against the volume of 4.13 tonnes during 1992-93. Similarly, the market arrival of Maize also decreased by 13.9 percent as compared to the arrivals of 1992-93 in the selected 394 markets in the country. Table I exhibits the status of market arrivals of major foodgrain crops for the above mentioned period.

Table I Market Arrivals of Selected Cereals (Thousand Tonnes)

Crop

No of Markets

1992-93

1993-94

Percent Change

Wheat

515

4230.8

5138.8

21.5

Rice

591

3946.9

4476.1

13.4

Sorghum

524

413.0

314.2

-23.9

Bajra

524

326.2

298.1

-08.6

Maize

394

294.8

253.7

-13.9

Source: Agricultural Situation in India, August 1994

It has been observed that the market arrivals of foodgrains and commercial crops are closely associated with the price structure. It consists of the support price announced by the government and the open market trend. However, as a protection measure the designated agriculture produce like rice, wheat, cotton, jute, coffee, Flue Cured Virginia (FCV) tobacco are procured by the respective government agencies under the support price patronage in case of a fall in the open market price. The policy of announcing the support prices for foodgrains and commercial crops on one hand protects the interests of the farmers and on the other, of the consumers by making available the supplies at reasonable prices.Table II exhibits the trend of support prices announced by the government since 1992-93 for different foodgrains and pulses.

The data reveals that there has been a continuous increase in the support price for all the foodcrops and pulses. However, it has been observed that in spite of the increase the farmers are getting marginal profit. The major reason for the low support price structure is that the cost escalations of inputs and infrastructural overheads are not taken into consideration at the current prices of an agricultural season.

Table II Minimum Support Prices for Agricultural Produce (Rs Per 100 Kg)

Commodity

Variety

1992-93

1993-94

1994-95

Foodgrain

       

Paddy

Common

270

310

340

Wheat

FAQ#

275

330

350

Coarse Cereals

FAQ

240

260

280

Maize

FAQ

245

265

290

Gram

FAQ

500

600

640

Red Gram

       

Black Gram

FAQ

640

700

760

Green Gram

       

Oilseed

       

Groundnut

FAQ

750

800

860

Soyabean

Black

475

525

570

Soyabean

Yellow

525

580

650

Sunflower

FAQ

800

850

900

Rapeseed/Mustard

FAQ

670

760

810

Safflower

FAQ

640

720

760

Copra

Milling

2150

2350

# FAQ: Fair Average Quality

Source: Directorate of Economics and Statistics, GOI

There has been a marginal hike of Rs per 30 quintal of paddy in 1994-95 as compared to the support price of 1993-94. However, the cost of production of paddy increased in the same period by Rs 48 on an average1. The increase in the support price for the coarse variety of foodgrain like sorghum, bajra and maize in 1994-95 was Rs 20 against the announced price of previous year. The Statutory Minimum Price (SMP) of sugarcane was also raised by the Government of India from Rs 31 per quintal in 1992-93 to Rs 34.50 for 1993-94 and Rs 37 per quintal for 1994-95 linking to a basis of recovery of 8.5 percent. The Minimum Support Prices (MSP) for oilseed is being fixed by the government on the basis of the recommendations of the Commission for Agricultural Costs and Prices. It has been observed that the support prices for various oilseeds varied substantially during 1993-94 as compared to the preceding year. The MSP for oilseeds in 1994-95 increased marginally over the preceding year. However, for copra of milling variety increase of Rs 200 per quintal is observed during 1994-95 over the MSP of 1993-94.

 

Procurement

The purchase operations in foodgrain is launched in view of two major objectives of meeting the requirements of the Public Distribution System (PDS) and maintaining the buffer stocks. The co-operatives and public agencies like Food Corporation of India and other commodity co-operatives have been engaged in performing this task. It has been observed that the procurement of rice and wheat were higher during 1993-94 than the preceding year. The quantity of rice procured during 1993-94 was 142.13 lakh tonnes as against 129.98 lakh tonnes in 1992-93. Similarly, the procurement of wheat during 1993-94 marketing season was higher at 128.35 lakh tonnes as against 63.80 lakh tonnes procured in 1992-93 season. However, it has been estimated that about 69.87 percent of the foodgrain had been transacted through private channel comprising commission agents, processors and wholesalers. The co-operatives procured the foodgrain to the tune of 18.45 percent of the total marketed surplus during 1992-93 while the margin of commission agents ranged between 2 to 7 percent depending upon the quality of produce and volume under transaction. The National Cooperative Marketing Federation (NAFED) was designated as the central nodal agency to procure oilseeds under the MSP operations. NAFED had purchased a sizable volume of edible oilseeds in some of the states during 1993-94 to arrest the fall in the prices of oilseeds in the markets. During 1993-94, NAFED procured 21.8 thousand tonnes of Sunflower seeds from Madhya Pradesh and Karnataka while 5.05 thousand tonnes of Groundnut from Orissa, Andhra Pradesh, Karnataka and Tamil Nadu. It also procured substantial quantity of safflower worth 15.7 thousand tonnes from Maharashtra, Madhya Pradesh and Karnataka during 1993-94.

 

Market control mechanism in commercial crops

Cotton is one of the major commercial crops in the country. The production of cotton is localised in some parts of Gujarat, Maharashtra, Western Madhya Pradesh and Western Rajasthan. It has been observed that the price of cotton had increased in the wholesale markets due to loss in the crop during the end of 1993 which continued till the first quarter of 1994. The prices of cotton rose abnormally in 1993-94 and the government took various corrective measures in order to arrest the spurt in the prices of cotton in the domestic markets. Some of the major measures taken by the government in controlling the price hike in cotton markets are as under:

1. Cotton exports were restricted and at a point of time all the contracts were kept in abeyance;

2. Duty free imports to the extent of 5 lakh bales of raw cotton during 1993-94 were permitted. This exemption was extended to all units having their own licensed spinning capacity in the country;

3. Cotton hoarders were punished under the Essential Commodities Act and advances against the cotton stocks were banned on the recommendation of the Reserve Bank of India and

4. The government re-introduced the Selective Credit Control measures on cotton.

The production of jute is largely contributed by the states of Assam, Orissa, Bihar and West Bengal. It has been observed that the area under jute crop was declined in 1993-94 by 17.62 percent in Assam, 33.97 percent in Orissa and 3.6 percent in West Bengal as compared to the areas under production during 1992-93. However, there has been an increase of 12.75 percent of net cultivated areas under the Jute crop in Bihar in 1993-93 as compared to the preceding year. The wholesale prices of raw jute during 1993-94 had shown a mixed trend. In absolute terms there had been temporal and spatial variations in the prices in 1992-93. As a measure of price support and commercial operation the Jute Corporation of India (JCI) had attempted to purchase the jute bales but could not perform efficiently due to the paucity of funds. In 1993-94 the JCI could purchase only 7 thousand bales of 180 kgs each as against 9.16 lakh bales purchased during 1992-93.

Market intervention in FCV tobacco has been initiated through the Tobacco Board which allows the sale of FCV tobacco only through auctions with a view to providing better remunerative prices to the farmers under competitive bidding conditions. The Tobacco Board arranged the sale of FCV tobacco worth 31.15 million tonnes in 1992-93 and 32.84 million tonnes in the subsequent year in Karnataka. In Andhra Pradesh during 1992-93, 125.6 million tonnes of FCV tobacco had been purchased at the unit price of Rs. 20.75 per kg while the price in the same year in Karnataka was Rs 27.14 per kg. The price had declined in the following year in Karnataka by 23.43 percent while a marginal increase of 0.96 percent was observed in Andhra Pradesh. Export of tobacco is promoted by the government under Open General Licensing policy under quality control of AGMARK. The FCV tobacco worth Rs 366.97 crores and 324.60 crores has been exported during 1992-93 and 1993-94 respectively.

 

 

Policy interventions

In the post-independence period, the Government of India has taken various measures to streamline the agricultural marketing activities through the intervention of Directorate of Marketing and Inspection (DMI) at central level. The basic thrust in the process has been to safeguard the economic interests of the producers against exploitation by large number of intermediaries. However, inadequacy of infrastructure and administrative arrangements at the level of various state governments and some deficiencies which are experienced in the existing state of affairs in the state marketing boards are responsible for weak enforcement of market regulation legislation. The Ministry of Rural Development at the Centre therefore had set up a high power committee on agricultural marketing (HPC) in 1992 to review the present State Marketing Acts and recommend appropriate measures for streamlining and strengthening the regulated markets in the country. Some of the major recommendations made by the HPC are as detailed below2.

In order to make the legal framework adaptable and effectively manage the regulated markets, the HPC recommended that

[i] the agricultural produce markets including the rural primary markets called haats, shandies should be brought under the ambit of Agricultural Produce Market Regulation (APMR) Act of the respective states to widen the scope of agricultural marketing,

[ii] the state governments may simplify its procedures of marketing regulation and infrastructure management,

[iii] effective co-ordination needs to be established among APMCs, Railway Board, Forward Markets Commission, Posts and Telegraphs Department, Audio and Visual Media and state planning commission or board,

[iv] each state should set up an independent cell for implementation of marketing policies of the government time and again,

[v] the constitution of the marketing committee should be brought to a standard of 11 members representing minimum 06 farmers, of which one member should invariably belong to the scheduled caste/tribe community. The tenure of the committee should be for a period of five years,

[vi] no marketing committee should be left superseded and administered in an undemocratic process, the regional agricultural marketing co-operatives should also elect their representative to work on the marketing committee, and

[vii] it is strongly recommended that an agricultural marketing tribunal may be set up in each state to handle the disputes arising from the implementation of the State Agricultural Produce Marketing Act.

The DMI has been providing financial assistance to agricultural produce marketing committees through the state agricultural marketing boards for developing marketing infrastructure as a part of the central assistance. The HPC has recommended some of the vital approaches in reference to the central assistance scheme for the development of regulated markets. These are as under:

[i] the central scheme for providing grant-in-aid to the state marketing board should continue and remain with DMI,

[ii] the central sector scheme for development of regulated markets may be revised to permit classification of the cattle markets as secondary markets and provide entitlement of grants up to Rs 20 lakhs,

[iii] the scheme of grant-in-aid may be suitably tailored in view of land norms, perishable produce, haats, etc., to enable them for the assistance of central government, and

[iv] master plans for agricultural markets may be prepared by each state on priority basis.

Apart from DMI there are many agencies helping the regulated markets in business. The marketing institutions like National Agricultural Cooperative Marketing Federation (NAFED), Food Corporation of India (FCI) and Tribal Cooperative Marketing Federation (TRIFED) have been extending their support in procurement of foodgrain and perishable produce. It is observed that their intervention in the regulated markets had not only made the flow of commodities smooth but also struck the balance between the demand and supply. The HPC has recommended the following points with reference to the public purchase agencies in agricultural marketing :

[i] the benefits of public purchase agencies should be extended to the tribal areas also,

[ii] the public purchase agencies should buy the produce from the farmers directly and not through the commission agents,

[iii] required infrastructure need to be provided in all the principal and sub-market yards to the public purchase agencies for conducting business, and

[iv] the Farmers Service Societies, may be a suitably tailored group action oriented ones may be provided the infrastructure at the market place for their shop-cum godowns.

In order to cater to the needs of marketing credit of the farmers at the place of marketing, the HPC recommended that the pledge finance scheme for providing short terms credit against the unsold produce should be uniformly adopted. However, a scheme for insurance against the price depression may also be considered by the Government of India. The HPC felt that there is an urgent need to set up a National Agricultural Marketing Bank with its branches in all the regulated markets to provide marketing finance of short and medium term to the various levels of functionaries including the farmers.

It has been observed that scientifically designed storage sheds and pre-cooling chambers for fruit and vegetables are not available to the most of the regulated markets in the country which obstructs the delayed transactions in the markets. The HPC recommends that the APMCs handling fruit and vegetables, and flowers should be provided with such infrastructure so that they can facilitate farmers for using the pre-cooling chambers and related packages. However, it would be in the interest of the APMCs that they should play an active role in guiding the farmers periodically on various aspects of the post-harvest care of perishable products.

It has been observed that the regulated markets are less popular because of the farmers’ ignorance of its advantages over the local markets. Thus, the HPC envisages that the farmers need to be trained in the state agricultural marketing colleges as is being done in Karnataka and the DMI may expand its extension service network for timely and meaningful support to the marketing boards for this purpose. An Agricultural Marketing Extension Unit needs to be set up in each regulated market to disseminate the market related information and other educational literature, audio-visual programmes and group meetings.

 

Retrospects and prospects

The socio-economic change in rural areas and development of agriculture in India are synonymous to a large extent as the agricultural economy forms the base for the development of millions of people living in the villages. We have spent enormous time, energy, resources and promotional inputs in an attempt to make agriculture a commercial proposition. Yet, these have not led to visible success. The reasons thereof have been debated at length in various forums since the new economic policy has emerged in the country. There are some scientific considerations listed below to enlighten a further debate on commercialisation of agriculture.

1. Agricultural marketing may not be looked upon only as an exchange function of farm produce, on the contrary it needs to be considered as a resource-bed for better ways of investment in farms for augmenting the production.

2. There is a need to develop agro-industrial avenues in the country to absorb the agricultural produce as raw material and pay a value added price to the farmers inculcate a business oriented attitude among them.

3. Better marketing opportunities and practices determine cropping pattern and develop logistics of agribusiness at grassroots level.

4. Innovative approaches in marketing need to be generated by evolving better marketing practices by providing infrastructural support, credit-marketing linkage, marketing extension network and effective public intervention policies.

The history of agricultural marketing since the medieval period to the end of the colonial era in India reveals the dominance of intermediaries in the trade3. After setting-up Directorate of Marketing and Inspection, the regulated marketing practice was introduced formally in the country. As of now there are about 6730 regulated markets operating all through the country. However, it could not make any significant contribution in changing the agricultural marketing scenario in the country except in some notable states like Punjab, Haryana, western Uttar Pradesh and Rajasthan, and of late, in Karnataka. The regulated markets largely suffered with the setback of low participation. This issue in a broad sense may be viewed in macro perspective of "performance trap" in agriculture4. The prominent factors which contribute to this concept are as listed below:

* low marketable surplus,

* poor performance of institutional channels,

* lack of farmers participation,

* low bargaining power of farmers,

* lack of institutional support,

* high marketing costs or price spread,

* poor market management,

* high rate of litigation in regulated markets,

* complexities in procedures, and

* lack of value additions in pricing.

In the post-independence period substantial efforts were made to organise the farmers to protect their economic interest in agribusiness. However, barring a few agribusiness co-operatives a large number of such institutions have become liabilities either on the government or the members themselves. The dissection of many sick co-operative revealed that they failed to find logical answers for some of the moot questions of a marginal farmer, hypothetically the strongest member of the co-operative, who is in agricultural occupation to fulfill his bare need of two square meals a day. These moot question are:

i. Why are farmers unorganised?

ii. What is the gulf between the myth and reality of giving agriculture the status of an industry?

iii. How far is the rural power structure from agricultural marketing?

iv. How do the factors of time and distance affect the farmer’s decision in order to bypass the conventional channel of marketing and look to the regulated markets?

v. Is it possible to eliminate the intermediaries from agricultural trade for building up an institutional image?

vi. How far are the farmers responsible for sticking to their conventional marketing practices?

vii. Is there a missing link in the entire process of commercialising agriculture, if so, where is it?

It is essential to evolve a macro framework for promoting agribusiness in the country where the socio-cultural factors are more dominating than the commercial considerations in agricultural occupation. Besides, the ratio of labour intensive methods and capital intensive investments in agriculture shows a serious imbalance for the known face of high population pressure on agriculture. It is very difficult to substantially put an argument for capital intensive agriculture development because so far we could not develop a strong alternative sector in rural areas where the disguised population employed in agriculture could be absorbed. However, our policies largely run into trade offs of the various options for developing business in agriculture. The issues for debate for and against is presented in Table III.

Table III Issues for the Debate

Economic gains

Vs

Social costs

Blue print approaches

Vs

Collective decision

Formal control

Vs

Informal control

Institutionalising trade

Vs

Privatisation

Minimising risks

Vs

Maximising profits

Regulated markets

Vs

Socialised markets

Value based considerations in cooperatives

Vs

Member controlled

Multi agency approach in agribusiness

Vs

Single window system

Top down approach

Vs

Rapid market survey

Capital Subsidies

Vs

Price incentives

Credit-marketing linkage

Vs

Profit linkages

It has been observed in many research studies conducted on analysing the factors affecting the agricultural marketing over the post-independence period that the dominance of private traders in the agribusiness is very high in general and to the extent of 95 percent in particular to the trade of fruit and vegetables, two of the most perishable commodities. The fruit and vegetables are sold through contractors to the tune of 3 percent and only 2 percent is directly sold to the consumers. The value addition at the intermediate levels is very low and so about 68 percent of fruit and vegetables are sold in raw form only. The crux of marketing is lack of infrastructural facilities like pre-cooling units, cold storages, roads, transport, finance, forward marketing linkages and managerial support for achieving commercial propositions in the farming occupation.

The dynamics of cooperativisation in agriculture had begun since the Second Five Year Plan period with a view to building up an effective alternative marketing channel for the large number of farmers engaged in growing food crops, commercial crops, plantation crops and the like. However, the co-operative established with an intervention of government such as Large Scale Multi Purpose Societies, Forest Labourers Cooperative Societies, Agro-industrial Cooperative Societies, etc., could not be successful due to the lack of vertical and horizontal linkages pertaining to administrative decisions and members’ stake respectively. These societies had a very low expertise in marketing management with respect to performing decisions on marketing-mix components, developing professionalism in sales and maintaining business relationships. However, one of the major bottlenecks from the business point of view could be the lack of operational flexibility which a private marketeer enjoyed to position his markets. Further, the non-productive investment in these agencies was found to be very high which was borne by the state by issuing subsidies. Besides the lack of autonomy, growth of vested interests and political intervention damages the image of agricultural non-credit co-operatives having state patronage.

The new economic policy which emerged in 1991 has invited global attention and promoted the concept of high technology oriented projects in agriculture. It has become evident in floriculture where the cultivation of flowers made a dent in contributing to the export markets. Similarly, in production of fruit and vegetables also, such high technology projects have been initiated. These projects are high capital oriented and require high managerial skills. Some of the potential areas in the export processing zone of horticulture and floriculture are as designated below:

 

Vegetables

Tomato

Pea

Cabbage

Cauliflower

Carrot

Capsicum

Flowers

Rose

Orchids

Carnation

These projects are considered under consortium financing by a group of financing institutions. However, an entrepreneur has to obtain clearances from a number of organisations. These projects have an impact of WTO agreement as the entrepreneur has to import mother plants every three years but can not multiply them in the green house. If he could obtain permission for further multiplication of plants he has to impart royalty to the company as stipulated. The agro-high-technology projects require suitable land, water, uninterrupted power supply, clearance from the Reserve Bank of India, controller of exports and from the government. Besides, it is essential that the unit is registered with the Agricultural Produce Export Development Authority (APEDA). The project can only be launched with valid technical collaboration agreement with a foreign firm specifying the buy-back agreement of at least two years. These projects may be helpful in developing villages within 60 kilometres radius of prominent airports. Besides, the potential export processing zones (EPZ) are tobacco, cotton, spices, tea and coffee in commercial crops while in the allied agricultural sector are the processed dairy products, specifically, cheese has been identified as export commodity. Agribusiness thus, may see the vision of international marketing by 2000 AD.

 

References

1. Annual Survey of Agriculture (1994), "Agricultural Situation in India", August, pp.363-369.

2. Report of the High Power Committee on Agricultural Marketing (1993), Agricultural Marketing, 35(4), January-March, pp.33-38.

3. Rajagopal, "Indian Marketing: History, Development, Policy and Practice",Rawat Publications, Jaipur (in press).

4. Rajagopal (1995), "Developing Agribusiness in India", Bihar Journal of Agricultural Marketing, January-March.