Between November and December 2005, I worked as a consultant on a World Bank project to create market linkages for self help groups in Andhra Pradesh through the private sector. What follows is a story I wrote about that experience.
eleven in the morning. the tired, dessicated landscape of telengana, its aged, withered hills, its omnipresent boulders, sprawls all around me. it has been an hour since the car turned right at Siddipet, quit the highway connecting Hyderabad with Karimnagar, and began trundling down this narrow road that will lead us to the village of Mulkanoor. This is a fact finding trip. The rural cooperative bank at this village has managed something of a feat. It has created its own market linkages. Every harvest, it buys its members’ produce, processes it, and ships it directly to buyers as far away as Surat, Bangalore and Mumbai.
it was february. i was in the south indian state of andhra pradesh. and market linkages had been the flavour of the three months gone by. over the past eight or so years, 78 lakh women in andhra had come together to form self help groups. a stunning number — seventy eight lakh women translates to 86% of all the rural poor households. And, in the 620,000 or so SHGs that had been formed, credit discipline had been inculcated, lines of credit had been arranged, the women themselves had graduated from borrowing to cope with unexpected crises to borrowing for starting small businesses – rearing livestock, stitching, running small kirana shops in their villages… but, in the absence of market linkages, most businesses started by the women centred on the village economy. This put a cap on how much they can earn.
and now, the world bank, which was bankrolling the andhra pradesh rural poverty reduction programme, had concluded a profit-oriented, private sector linkage was the most sustainable, most scalable alternative. And so, focusing on a handful of industries that employ the rural poor — agriculture, dairy and non timber forest produce – it was trying to interest companies in those verticals into using the social infrastructure that had been created for social empowerment, for economic development, as an alternative procurement and distribution chain.
it was a stunning thought. partly because previous attempts to create market linkages have floundered in this country. cooperatives fell to political meddling. linkages provided by the state, through the Markfeds and the Food Corporations of India, with pricing mechanisms more attuned to political insecurity than market demand, offer uncertain sustainability.
partly because a development agency as powerful as the World Bank now wanted to harness the private sector as linkages. Parmesh Shah, Lead Rural Development Specialist at the Bank, and the manager in charge of the Andhra project, described the idea as the “next generation of bank projects”. he had just started work on a similar poverty reduction programme in Bihar and there too he planned to create linkages through the private sector from the beginning. Other states like Tamil Nadu, Rajasthan and Madhya Pradesh were making similar noises as well.
and partly because the stakes are so high. late in december, addressing a world bank seminar called to evangelise this concept, ck prahalad, who wrote <I>The Fortune at the Bottom of the Pyramid<I>, reminded the audience that markets can be exclusionary. right now, he said, “700 million people in India are not privy to the benefits markets bring in their tow. They are not participating as consumers, with global access to products and services. They are not participating as producers, with better livelihoods and global access to markets.” What was happening in andhra, he said, through self help groups, through village-level empowerment, was nothing less than the next phase in the democratisation of commerce.
between november and december, working as a consultant to the world bank on this project, I had a ringside view as the developmental process took shape. Interesting as the notion was, it threw up a lot of questions. would it work? Can the private sector be used as an engine for development? Or, would it, given its nakedly commercial outlook, impoverish the poor further? These were not woolly left-wing concerns. It’s the reason why the Andhra government was balking at the thought of working with the private sector. There were other questions. Given that the poor are so vulnerable, how does one shield them from market risk? What is the role the state should play in the creation of linkages? Should it micro-manage the whole process from group formation to interactions with the markets? Or should it stop somewhere in between? If it went the whole way, what did that imply for empowerment? For local level participation?
and so, once the project ended, I travelled on my own, talking to the main actors in this debate, trying to understand matters in more detail.
The perfect solution
it was less debatable if companies were interested. they were. indian companies have never been more interested in the opportunity that rural india connotes. and yet, between low volumes, high operating costs, high attrition among employees, the absence of local knowhow and relationships, most of their forays have failed.
take godrej agrovet. this mumbai-headquartered company sells cattlefeed. nearly all its business comes from individual cattle farmers. Seventy percent of whom have just a cow or two tied up in the backyard. the cost of converting these small and marginal dairy farmers to organised feed is killing the company. today, to convert a block of 100 villages, agrovet stations 10 executives in that area for anywhere between 8-10 months. they audit demand, study current feeding practices, tom-tom the product, customise the feed to the cattle’s palate (really), monitor to ensure that farmers don’t give up on the feed halfway through the course, and so on. it was an expensive model. ar subbarao, the affable senior manager at godrej agrovet, calculated that it cost the company rs 25 lakh to develop such a block. once developed, he said, it would generate rs 3 crore in sales in the first year, about 3.6 crore in the second year, and then settle down to a gentle 10% growth rate. margins, he said, are not too high in this business. And so, it might take the company anywhere between 5-7 years to recover that initial investment.
The bank wanted Agrovet to try selling through the SHGs. Being in the village, they could develop markets cheaper. Once the concept took root, they could switch to selling the feed itself. It would be a win win. The women would gain a livelihood. Agrovet would gain a new, lower-cost salesforce.
It was not as though agrovet would have to tap individual SHGs. All the groups in a village report to the village organisation. All the VOs, as they are known, report to mandal samakhyas. Which, in turn, report to the zilla samakhyas. Which, in turn, are overseen by a Hyderabad-based organisation called SERP (the Society for the Elimination of Rural Poverty, a quasi-government body staffed by bureaucrats and funded by the World Bank and the state). To work through the groups, all agrovet would have to do is contact SERP, which would then organise the training sessions at the Zilla and mandal levels, and then, the SHGs would take over and tomtom the cattle feed across the state.
This was a practicable proposition. Some months ago, sbi life decided to sell a life insurance policy though the groups. just twenty days after the concept was introduced to the Mandal Samakhya, the first policy was issued in the village. Or listen to markfed. Till two years ago, in keeping with its mandate to provide a support price for farmers, this state-run procurement agency used to pick up cereals and pulses from the mandis. It was a suboptimal solution. Small farmers, knowing they would gain little by lugging their sack or two of marketable surplus to the mandis, kept selling, even below the MSP, to the village-level aggregators. Larger farmers who went to the mandi faced other problems — they would have to wait for 3-4 days, sometimes a week, before the sale was done, then, there were the faulty weights, the delayed payments…
In 2003, it decided to try buying through the village organisations. When I met MT Krishna Babu, the head of AP Markfed, a month-and-a-half after the workshop, he was ebullient. The value of procurement through the village procurement centres, he reported, had climbed from Rs 10 million in the first year to Rs 1,000 million in 2005. It would, he hoped, touch Rs 10,000 million by 2007. Farmers were selling their produce faster, at the MSP. As for Markfed, not only did decentralized procurement help it meet its mandate, it was far more cost effective. Similar gains, he insisted, could be made by any company that used this network.
Incidentally, Agrovet was just the sort of business Shah wanted to bring aboard. Its cattle feed, the company swore, would boost milk yields by anywhere between 20-30 percent. Indeed. Sort through the companies eyeing the opportunity that the bottom of the pyramid connotes, and you will find four categories. Those that boost rural incomes through traditional (agriculture, handicrafts) and non-traditional (BPO) means; those that sell productive investments to the poor (like Agrovet); those that, while doing nothing to boost incomes directly, make the poor far more financially robust (weather insurance, health insurance schemes like Narayan Hridayalaya’s Yeshasvini, the commodity exchanges); and, then, those that rejig their product and distribution mix to make the product more accessible for the poor (HLL’s Project Shakti). In this last category, while there might be some incremental job creation, the impact on the village economy (in terms of whether more monies flow in or out) is still open to debate. It is a tad simplistic to tar the entire private sector as extractive and harmful for the rural poor.
That, then, was the proposition. Shah badly wanted companies to begin working through these community-based organisations. Talking at that workshop, he said: “When the World Bank finishes with all these projects, there will be 2 million SHGs across India. There will be thousands of village organisations. Each of them is capable of generating a consumer business and an output business.” Companies, he insisted, had to begin using such social organisations as franchisees.
And interest among the private sector was high. At the end of the workshop, 17 companies– in contract farming, animal feed and extension services, using the groups to market financial products, two wheelers… — had evinced interest. The problem lay elsewhere.
A disagreement in andhra
T Vijay Kumar was not convinced. And since he heads SERP, that put something of a spanner in the World Bank’s plans. He didn’t think the private sector could do any good in this context. Partly because he felt it was extractive – an impression that has only been reinforced by the recent suicides among women who had taken loans from private MFIs in andhra. Partly because when he looked around, wondering how to connect lakhs of the rural poor to the markets, he could barely see any any business initiative that has achieved scale — KRBL, one of India’s largest basmati exporters, has contract farming agreements with 24,000 farmers; Global Green buys from about 12,000 farmers. Partly because he was chary of taking the poor into unfamiliar territories, unknown crops.
And partly because he thought the big opportunity lay elsewhere – in the internal consumption market that the poor of andhra constitute.
There are, he would tell me, some staples that all houses in andhra consume — rice, pulses, tamarind, oil, chillis and so on. No village was self sufficient in more than two or three of these. And so, he wanted to use this social infrastructure of SHGs and village organisations and mandal samakhyas and zilla samakhyas to create trade between villages. There would be some commodities that cannot be procured at a village level. Those orders would be escalated a step higher to the mandal level, or higher yet to the zilla level. For producers, it would create an alternative to the mandi. It would lock value within the community. And, along with the producers, the consumers – who, as poor prices, have paid a penalty in higher prices – would gain as well. In the longer term, said Kumar, the model would cover the state’s urban poor as well – creating a two-way flow of goods between the hinterland and the cities.
What about the private sector? Those linkages would come in, said Kumar, but only in categories like cotton where production could not be soaked up by internal demand.
It was an idea that left Shah cold. Yes, he would say when I met him in Delhi, there are definite opportunities in selling to the internal market, but it cannot absorb more than 30-40% of what the state produces. Also, going forward, the state’s role in procurement will diminish, agribusinesses’ will grow, and he wanted Andhra’s poverty alleviation programme to be geared for that future. A third factor was more implicit. As the thrift movement grew larger, it was getting politicised. After the congress came to power, it had slowly replaced all project directors (the rung that interacts between the government and the zilla samakhyas) with its loyalists. And they were starting to push the ZS to favour party loyalists. Worried they might yet go the cooperatives way, Shah wanted to free them from the state. Profit-oriented private sector linkages were one way to ensure sustainability.
It was an extraordinary situation. Two managers, both very commited to their jobs, both working on the same project, and both with such contradictory ideas on how to connect the poor to the markets. much, much later, when I met him, itc’s sivakumar would describe both shah and kumar as victims of immediacy. Chagrined at the steady politicisation of the network, shah had concluded that only linkages with the private sector could free the groups from their dependance on the state. at the same time, also mindful that the typical World Bank manager doesn’t stay too long on a project, and that there was no telling who his successor might be, he intended to move fast.Unfortunately, Kumar suffered from similar anxieties. As a bureaucrat, he could be transferred as easily as Shah. And so, like Shah, he was convinced he had the right idea, and that time was running out. the result: both were digging their heels in.
one morning, wondering which of the two approaches was better, I called a senior manager in a private sector bank who had attended the workshop. His anger was palpable. Mark my words, he said, “Velugu will be dead and buried in five years time.” No one, he said, his words rising to a shout, can ignore the market. It is too strong. The world is getting more complex. The poor cannot manage all that complexity on their own. The private sector is the best placed to deal with that complexity.
cut to pastapur, a small village in andhra’s medak district, and home to the deccan development society. that evening, i sat on the ledge flanking the walls of periyapatna’s ochre-red house, listening to him talk about the villagers’ experience with private sector market linkages. Some years ago, some villagers entered into a contract farming agreement for gherkins with a local company called vazir sultan. things went awry. the company could not buy what the villagers had grown. And it cited quality issues to reject the whole lot. the villagers lost everything.
back in november, soon after starting work on the project, I attended a hugely interesting meeting between two world bank consultants, annu ratta and vijay kalavakonda, and vikram puri, the new head of mahindra shubh labh. that morning, kalavakonda was doing most of the talking as he tried to gauge Puri’s receptiveness to the idea of allying with the community based organisation in andhra. puri was interested. His company was going to kick off a contract farming business, and export niche horticulture crops like gherkins. And so, he was looking for 2,000-3,000 small and marginal farmers who could grow these small cucumbers. Even at two crops a year, he said, they would make Rs 30,000 in profits in a year.
there was a catch, however. Puri wanted an agreement that bound the farmers to mahindra shubh labh. without it, his supply chain would be hammered if the farmers sold their produce elsewhere. It was a knotty question. mahindra shubh labh is struggling. After seven years ofbeing around, it has inched up to a rs 21 crore turnover, and is hoping to turn around next year. In its new avatar, it would be competing with far more established players in the market, like Global Green, that focused on these crops. incidentally, at last count, 22 companies were exporting gherkins from india.
it was fascinating. exclusivity was essential for the company but could hurt the groups. in the runup to the workshop, as the prospect of allying the community organisations with the private sector threw up many such bewildering questions, something strange was happening. The world bank was micromanaging the show. It spoke to the companies, pressed them to attend, it tried to cobble alliances.
Here, the haste complicated things. it created schisms within the bank team. one set of managers wanted to work out the specifics and then create linkages. The other lot, in a greater hurry, wanted to go out and create linkages, and then hammer out the problems as they cropped up.
it was a problematic thought. Thanks to the haste, both shah and kumar ran the risk of trying to decide for the local community. This became painfully evident during the first day of the workshop itself. A group of village women sat through the first session, impassively hearing the inaugeral addresses. they sat through the second session, hearing the project leaders from the world bank’s poverty reduction programmes in madhya pradesh, uttar pradesh, andhra pradesh and tamil nadu, talk about their poverty reduction efforts, the scale they had reached, and the commodities they could supply to companies. and then, after lunch, in the third session, one of the speakers, while talking about the women who run the village procurement centres, asked them to stand up. they stood up. were gaped at, and then sat down again. end of participation in workshop on how to empower the poor (note – the women did speak the next day. but that was after they told the organisers that they wanted to share their experiences).
this underlying condescension came in for flak. India, prahalad would caution, is not a monolith. there is no universal solution for a billion people. ICICI Bank’s Nachiket Mor agreed as well. “One way is to sit in judgement somewhere and make decisions about the occupational choices people must make or the skills they must acquire. That approach has been tried out several times in the past. But it probably doesn’t sustain very well. It might be a better option to stay patient, letting people express what they want — in a real way, not an interview, but through the occupational choices they make.”
At the workshop, Mor was also unsure if contract farming was the way forward. As markets and opportunities expand, he said, farmers and producers might not be willing to work in the tight framework of a contract. “We have seen this in wheat and rice where, when the market price is higher, nobody honours the contract. When the market price is lower, they buy from their neighbours and sell to you.” A better option, he said, was to connect the poor directly to the national market – through the private sector mandis (like the Safal Mandi outside Bangalore) and the commodities exchanges. These markets, he said, will not distinguish between big and small farmers. In the commodity exchanges, he said, it is just a matter of time before you can go down to a fairly granular piece. In the wet markets, at Safal, even very small lot sizes can already be traded. There is still a need for CBOs to move the produce to back and forth from this market. But certainly for the generic products, tomatoes, potatoes, bananas, mangoes, he said, these markets could offer an interesting and a more stable, long-term view.
Reflections on it all
And then, finally, the reporting ends, other commitments, like applications for higher studies and so on end as well, and I am back in this cool, dark room where I do all my writing. impeccable logic, I think, market linkages. take a bunch of desperately poor people languishing in rural india. connect them to larger markets outside. the producers would find more buyers, better prices. the consumers would find more suppliers, better deals, lower prices. and yet, the deeper one went, the more confusing things got.
Micromanaging looked like a faulty idea. partly because this is work that the local community needed to do if the model is to achieve any semblance of sustainability. and partly by trying to derisk by choosing the companies, the bank ran the risk of presuming what the poor wanted. A better way was to create systems that would not let the poor get hurt. Like an escrow account where any company wanting to source from the poor would have to make an upfront payment. And yet, to some extent, the bank’s hands were tied. a lot of the new systems called for SERP’s participation — it would have to tabs on the negotiations, ensure that commitments were honoured. But, with kumar balking at the thought of working with the private sector, the world bank was working solo.
The haste was not the only thing complicating the world bank’s plans, the ideology was doing so too. Should we connect the poor to the markets? if so, what is the best way to do so? through the private sector? through a model that sequestered the poor? were intervention required to create linkages, or would the markets create them on their own anyway? what about anonymous markets? who decides all this anyway?
market linkages invite ideology. there was kumar. A believer in the Amul philosophy of creating producer-controlled organisations. The only difference was that unlike Kurien, who created an organization that served the local community by selling their produce but was controlled, ultimately, by technocrats, he was even more to the right.
he wanted to create an organisation for the poor, run by the poor, with the technocrats working as a staff function. In other words, all the village, mandal- and zilla-level organizations would be managed by the locals. These would be flanked by a bunch of support organizations, all staffed by the technocrats, who would advise the groups on the more technical aspects. he, as sivakumar would say, comment when we met, “would choose the toughest, most complex, hardest to succeed choice, just because it happened to be ideologically correct.” And then, there were the pro markets people. ideological in their own way. and then, there were others, like periyapatna, who felt that linkages were not needed at all.
ideology is dangerous. it makes one decide what the poor should do. back at the workshop, talking through the video-conference, prahalad made another astute point. “It is time for us to stop using the poor as an ideological battleground. Whether social justice must be precede economic justice or economic growth has to come first. Can poor people think for themselves or if they should just be told what is best for then, and then force the solution on them… Let (the) people at the grassroot level decide because they know what is good for them. Will they make mistakes? The answer is yes. We all do. But I do believe the poor people at the Bottom of the Pyramid (BOP) market are more sensitive, because they cannot afford to make mistakes. Therefore they are going to check with their neighbours and others who have used the products. They will be a lot more discriminating.”
It raised the question about the role that the state had to play. In a sense, mahajan hit the nail on the head. At the workshop, arguing against anonymous markets, he said that “such a suggestion ignore(d) hundreds of years of reality that these people who are left out, some of whom are even below the bottom of this pyramid, require some hand-holding, some support. And they require that support not only in form of purchasing power, but also psychological and institutional support.”
Days later, another piece of the puzzle fell into place after I met sivakumar. he said there are three phases to creating market linkages. in the first phase, one creates small interventions that help markets operate more normally – this could be information access, warehousing… a lot of such distortions exist because of the lack of alternative solutions for these needs. these are quick, one time interventions that will fix the problem hugely. These are also low tech enough to be managed by the community itself. such interventions, he said, can result in incomes rising by as much as 20-50%…
the second intervention, he said, takes people into processing, packaging, grading and so on. it is this that the rural cooperative bank at mulkanoor had managed. many years ago, the cooperative here began shipping local produce directly to the mandi, and then, finding that the gains made by disintermediating the village level aggregator were too low, it began appropriating other functions hitherto performed by the mandi and its buyers, and began selling directly to the mandi’s customers. the margins changed. Lakshma Reddy, one of the leaders of the cooperative, told me that “If we just sell paddy without any value adition to it, we will make an additional Rs 10-15 on 650 per quintal. If we dehusk, that goes upto Rs 40-50 per quintal. Parboil, and that goes higher still, to Rs 60-70.”
It was quite a feat. Elsewhere in this country, cooperatives have failed. In Andhra too, around the Eighties, the state decided that the cooperatives were a great way to consolidate their political base. Loans went to the undeserving. Debts were written off. The institutions slowly got corrupted. After coming back to Hyderabad, I met Praveen Reddy, another leader at the cooperative, and asked him what made Mulkanoor survive? Leadership, he said. Leadership that was strong enough to fight off any pressure at all. that is essential.
And now, as the bank planned the third stage, connecting the people to global value chains, it was racing towards an acid test of its second role — educating people to let them decide what is in their self-interest. That is what made Mulkanoor survive all this time – awareness and its ability to withstand pressure.
For his part, shah felt that the groups were there. that they could act in self interest now. They had, he would tell me, a mind, a value system, of their own. They buy from the smallest farmers, the guys with one or two acres, first. And then work their way up to the larger guys. They can deliver quality, and so both companies and the private sector will want to buy from them anyway. And now, he said, he wanted them to be opportunistic. To sell to whoever looks like the best bet for them — to the private sector, to the public sector, or to the companies of the poor. Others, like kumar, were less convinced.
As I write this, it is impossible to predict how things will shape up. at one end, the first pilots on the linkages are coming up. for these areas, the acid test is coming on up. Has the project been able to educate people to let them decide what is in their self-interest. elsewhere, the standoff between the state and the bank continues. in the meantime, the networks continue to get politicised…