Interview: ‘We have underestimated the extent of India’s jobs crisis. It is far more serious’

and gosh. one more frikking q&a.

On Thursday, a political storm boiled over after Business Standard reported that, between 2017-’18, unemployment numbers in India reached a 45-year high. The newspaper based its report on a survey, conducted by the National Sample Survey Organisation, called the Periodic Labour Force Survey that the government had not made public. 

According to the report, the country’s unemployment rate climbed from 2.2% in 2011-’12 to 6.1% in 2018-’18. Once disaggregated, these numbers look even worse. Joblessness is higher in urban areas than rural areas – 7.8% versus 5.3%. For instance, unemployment among rural men in the age group of 15-29 years rose from 5% in 2011-’12 to 17.4%. 

The report corroborated what the government’s critics have been saying – that demonetisation and the ham-handed rollout of the Goods and Services Tax have resulted in large job losses. In a press conference called on Thursday evening, the government hit back. It claimed other datasets – like that of Employees’ Provident Fund Organisation – show employment in the economy is rising. At the event, Amitabh Kant, the chief executive officer of Niti Aayog, also suggested results of the Periodic Labour Force Survey, based on a new methodology which conducts quarterly surveys, is not comparable with older NSSO surveys.

Do these various reasons offered as defence hold up to scrutiny? Scroll.in asked Himanshu, an associate professor at Jawaharlal Nehru University.

Excerpts from an interview.

One year after GST, India’s smaller companies are on the backfoot

On July 1, 2017, India introduced the Goods and Services Tax to replace the patchwork of indirect taxes that existed at the time and to improve tax compliances. As the tax regime completes its first year, Scroll.in reporters interviewed people running a variety of businesses: handicraft-makers in Guwahati, textile manufacturers in Surat and Tirupur, paper-goods dealers in Mumbai, weavers in Banaras, large and small engineering units in Hosur. Most of them were people Scroll.in had spoken to a year ago to understand their hopes and apprehensions about the new tax. This time around, they were asked a different question: what were their experiences with GST like? The sum of their observations provides the answer to a larger pattern: how GST is reshaping India’s manufacturing economy.

On the six factors which cumulatively added up to India’s unprecedented cash squeeze

India’s current cash crunch is a real enigma.

To begin with, there is its sheer unprecedented nature. In all the years since Independence, India has never seen something like it. “We have heard of coin shortages but never a cash shortage,” said MS Sriram, visiting faculty at the Indian Institute of Management-Bangalore’s Centre for Public Policy. “I certainly have not in my life. This is new.”

How the shortage played out is odd too. It is acute in some states but not in others. For instance, in Tura, the largest town in Meghalaya’s Garo Hills, an official at the main State Bank of India office, which disburses cash to the bank’s other branches in the region, told Scroll.in that cash reserves had dwindled to almost a fifth of the required amount. “There is pressure from other branches to release money, but we have not been able to give even half of what they have been demanding,” the official said.

A clutch of other states – including Bihar, Assam, Maharashtra, Telangana and Karnataka – are facing shortages too. But states like Delhi are less affected.

The discrepancy is visible within states too. In Maharashtra, Mumbai is fine but Nashik is not. In Tamil Nadu, big banks in Hosur say they are getting all the money they need but their counterparts in surrounding villages say the situation is bad. “We contact our sister branches to see if any of them has surplus cash,” said the manager of a public-sector bank in Belathur, a village about 20 km west of Hosur.

There are other puzzles. The cash squeeze showed up not gradually but suddenly. Reports began coming in from several states from February. If the cash squeeze was only due to a growing mismatch between cash supply and the demands of the growing economy, it should have shown up gradually, experts say.

As a report in Scroll.in noted earlier this month, several theories emerged to explain the shortage, covering the gamut from obvious to plausible to off-the-wall. Shortly afterwards, several Scroll.in reporters fanned out across the country, speaking to people in both cities and villages, to try to identify the genesis of this shortage.

Here is what we found.

Out today, with my colleagues Abhishek Dey, Mridula Chari, Vinita Govindrajan and Arunabh Saikia, a more deeply reported piece (than the previous one) which seeks to trace this cash squeeze back to its (idiotic) origins. Do read.

Why small businessmen in Gujarat are quitting industry and turning to financial speculation

Two major trends are playing out in Gujarat’s economy.

On one hand, small industrial units are shutting down. This is not a recent development. Micro, small and medium units in the state started getting into trouble about five years ago, well before the central government demonetised high-value currency notes in November and introduced the Goods and Services Tax in July. As Scroll.in reported from Surat, several factors were at work – rising imports from China, the entry of bigger players with greater economies of scale, and government policies such as import duties that favoured bigger companies over smaller ones.

On the other hand, financial investments have boomed in Gujarat. Two years ago, a sharebroking firm in Rajkot, Marwadi Shares, was adding about 1,000 new customers every month. That is now up to 6,000 new customers a month, said Ketan Marwadi, its managing director.

Data for the last five years shows the state’s people are investing more in fixed deposits, mutual funds and small savings accounts.

Businessmen in the state say the two trends are related – an industrial slowdown is leading to a rise in financial investments.

Two months in, How is GST affecting Surat’s textile hub?

Three months ago, when the central government was getting ready to roll out the Goods and Services Tax, the textile industrial cluster of Surat, Gujarat, India’s biggest manufacturer of synthetic fabrics, was distinctly nervous.

At play were two conflicting views of how the new tax regime would affect India’s predominantly informal business sector. The government said GST would make it impossible for firms to evade tax. Even small companies would enter the tax net, boosting both the formalisation of India’s economy and tax revenue. Companies in the Surat cluster, however, were unsure if they could pay these taxes and remain competitive.

Such fears, dismissed by GST supporters as no more than a desire to avoid paying taxes, resulted in the industry petitioning the government several times. When that failed to deliver relief, they went on a general strike in mid-June. The government still did not yield. There was a police crackdown, and the strike petered out. GST was rolled out as planned on July 1.

Two months on, where do things stand? What do these early days of the new tax system tell us about which scenario is playing out? Are businesses formalising? Or are they heading into trouble?

Beyond Surat’s GST strike: New technologies, Chinese imports are causing a churn in textile sector

At one time, the neighbourhood around Surat’s textile markets was noisy.

The street resounded with the clacketing of powerlooms – five or six machines in dark, poorly ventilated rooms with split levels. Most of these were family-run businesses. The looms were on the groundfloor with families working by day and sleeping upstairs at night.

Now, the inner city is more quiet. There are still powerlooms aplenty in the industrial clusters around the town. But within the town, they increasingly show up in junkyards and the shops of scrap merchants. The premises that used to house them now lie empty or have been repurposed. Some are used by people in the embroidery trade. Others serve as parking spaces for two wheelers.

The castes that traditionally operated these looms – Khatris and Ghanchis – have left the trade as well. Some have entered new businesses. This reporter met some driving rickshaws. Others have given out their premises on rent and live off that income.

This silence – and the departure of weavers from their traditional trade – reflects something important. Surat’s small and medium businesses were struggling even before the government announced that it would implement the Goods and Services Tax from July 1, subsuming all indirect taxes, from octroi to service tax, into one rate that would be consistent nation-wide. This reflects the situation Scroll’s Ear To The Ground project found in the other states we reported from as well. There too, small and medium enterprises were in trouble.

The second (and concluding) part of our article on Surat’s textile cluster gets into more detail — and asks pointed questions about India’s vapid claims of manufacturing competitiveness.

In Surat’s textile hub, small businesses are afraid of GST – but big companies are not

Rajesh Mehra is desolate.

A big-boned man in his mid-fifties, he is a trader in women’s blouses.

Until ten years ago, Mehra used to take orders from garment wholesalers in big cities like Mumbai, Kolkata and Bengaluru, buy the cloth and thread he needed from garment clusters like Silvassa, and get the blouses stitched in Amritsar.

But this business model ran into trouble when blouse-making units came up in Surat, one of India’s biggest synthetic fabric and sari-making clusters. Enjoying advantages like proximity to cloth- and thread-makers, these units made cheaper blouses than their counterparts in Amritsar.

In response, Mehra made a hard call. He left his family behind in Amritsar and moved to Surat, working on the assumption that having a perch in that city would help him sell better.

Now, as India readies to overhaul its tax regime for businesses, replacing a welter of sales and income taxes with a single tax called the Goods and Services Tax, Mehra has run out of ideas. “Kya hoga?” he asked. “Kaise chalega yeh sab?” What will happen? How can this business continue?

Anxieties about how GST will impact their businesses have prompted textile traders to go on a nationwide strike over three days this week. But not everyone in Surat’s textile hub is worried.

No more than 20 minutes away from Mehra’s shop in the basement of a building opposite Surat’s old Ratan Cinema, in the heart of the town’s textile market, lies the soot-blackened industrial estate of Pandesara. This is where Sanjay Saraogi works.

Saraogi, who looks far younger than his 46 years, is the managing director of Rs 450 crore Laxmipati Saris.

Described by his peers as one of the sharpest minds in the Surat textile industry, he entered the family business at 14 when his father fell very ill – he would go to school in the morning and spend the rest of the day in the shop. Over the last ten years, he has steered Laxmipati beyond trading into sari manufacturing.

When it comes to GST, he is relatively unconcerned. It will be good for businesses like ours, he said.

The contrasting responses of Mehra and Saraogi offer a picture of how GST will affect people and companies in India’s manufacturing economy.

‘Is the pain worth it?’: 50 days after demonetisation, rural South India has a few questions

On November 9, life suddenly came to a standstill in Chikka Tirupathi, Bagalur and Hosur. As in the rest of India, the first day of demonetisation in these towns abutting the Karnataka-Tamil Nadu border was marked by problems in conducting day-to-day trading for small businesses and a frenzied hunt for Rs 100 notes for families.

The response to the government action was mixed on that first day. As the cash crunch sank in, small traders figured out that their businesses would take a hit until they replaced their Rs 500 and Rs 1,000 notes. Slightly larger enterprises, such as Jivita who runs a tailoring shop in Bagalur in Karnataka, were more optimistic. “We have enough money for rotation [working capital] for a week,” she said.

On the whole, it was a day of uncertainty. Notebandi was a sweeping decision. People weren’t sure how long it would take to exchange their old cash and for the situation to return to normal. At a branch of the Indian Bank in Bagalur, a bank official was calm. “We will open tomorrow morning,” he said. “People can come with their passbooks and exchange their notes.”

On December 28, Scroll.in travelled the 30 km stretch between Chikka Tirupathi and Hosur one more time. How were people we spoke to on Day One doing on Day 50?

That is it. The last story of 2016. It has been a good year. Intense and packed with learning. Now to see what 2017 is like.

Happy new year, too. 🙂

An update from Patna’s Maroofganj mandi

ten days into #notebandi, patna’s Maroofganj mandi had frozen.

As demonetisation enters its second week, traders in Patna’s Maroofganj mandi are seeing something unprecedented.

In the last seven days, the supply of new stocks in this wholesale market, which supplies cooking oil, spices, rice, wheat and pulses to shopkeepers across Patna, has plummeted. The supply of cooking oil, for instance, is down by 80%.

Talk to traders selling spices, grains or pulses and you hear similar numbers. “Do you see how quiet this market is?” said an accountant at a rice shop. “Till 10 days ago, you would not have been able to walk down this street.”

In the same period, orders from shopkeepers have fallen steeply as well. Most of them cannot buy as much stock as before, said Abhijit Kumar, who runs a wholesale shop for spices, because they have only Rs 500 and Rs 1,000 notes – both derecognised as legal tender by the government.

The strange thing is: despite the contraction in both supply and demand, commodity prices are stable.

30 days later, around the 10th of December, i went back to the mandi seeking an update on how it is doing. Here is what we found.

Dilip Kumar Singh said the situation at the mandi was the result of some traders travelling to Gaya, Muzaffarpur and beyond to take advantage of low prices in parts of the hinterland. However, the traders this reporter met denied this. Instead, they flagged other concerns.

Sanjib Kesari, a wholesaler, said business had improved and more customers were now coming to the mandi. Prices, too, were moving – cooking oil, for instance, had risen Rs 3-Rs 4 in the last 20 or so days. But, the situation was nowhere near normal.

Wholesalers’ volumes remain modest. According to them, two factors are at work…

Ground report: In Bihar, murmurs of protest break the sullen silence against demonetisation

Banka was the last stop before returning to Patna in this reporter’s travels from North Bihar to South Bihar, to get a sense of how notebandi was impacting the structures of everyday life.

The journey had started with Raxaul, on the India-Nepal border, on November 18, exactly 10 days after notebandi was announced. Heading south, stopping at Bettiah, Gopalganj and Darbhanga and Gaya before reaching Bhagalpur, the common finding along the road was predictable.

As in other parts of the country, economic activity had fallen steeply in every town – be it Raxaul, Bettiah, Patna or elsewhere. In each of them, cash was in short supply, people were struggling to find work. Farm prices had collapsed in parts of the state. In other places, vegetables were being rerouted to bigger markets where there was still some purchasing power. Migrants had returned from the towns where they had been working.

Given this litany of hurt, what was less easy to understand was the popular reaction. As in the rest of India, despite grave difficulties, people had stayed calm. In the weeks gone by, several hypotheses had been advanced to explain this. Did people support notebandi despite difficulties? Did they think, as some people in a village near Gaya said, that notebandi would result in lower inflation and reduce inequality?

In that village, support for notebandi had stemmed from anger about greater inequity over land ownership. One zamindar owned 1,200 acres – which he had stopped giving out to his fellow villagers for sharecropping. The result? Every household in the village eked out a living by either working as labour in Gaya or migrating outside Bihar to work in brick kilns even as the land in their village lay fallow.

That explanation, interesting as it was, did not explain the calm in Bihar’s towns and cities.

And so, when we asked the people of Banka why they were silent, we got some fascinating answers — each far more convincing than the condescending bilge trotted out by pundits sitting far, far away.

Money is trickling into the banks of Bihar – but is not being distributed evenly

A month after Prime Minister Narendra Modi announced the scrapping of Rs 500 and Rs 1,000 notes on November 8, cash availability is starkly uneven across Bihar.

In relatively affluent parts of the capital city of Patna, the long queues outside ATMs seen in the first week of notebandi, when the government invalidated 86% of the currency in circulation, creating a massive cash crunch, are history. In poorer parts of the city, however, one can still see 50-odd people lined up outside ATMs at most times. Travel outside the capital and this pattern repeats itself.

In bigger towns, residents and bank managers said the cash flow has improved. In North Bihar’s Darbhanga, Ramakant Mishra, manager of a Punjab National Bank branch in Qila Ghat, brings out cheques encashed by his customers on November 30, the day this reporter visited his branch. Most cheques ranged between Rs 10,000 to Rs 24,000…

…However, venture deeper into the Gaya district and you will find that cash is just as hard to come by as it was in the days immediately after the demonetisation was announced.

Demonetisation: In a hamlet in Bihar, income and expenditure is down, but hopes are up

The last 30 days have not been easy for the people of Bhindu Paimar.

The standard demonetisation narrative has played out in this tola (hamlet) in Karjara panchayat in Gaya, Bihar, about 20 km from Gaya city, on the road that leads to the ancient Buddhist university of Nalanda.

Earnings have fallen. Most people in the village work as daily-wage workers in Gaya, earning anywhere between Rs 225 and Rs 250 a day.

Before demonetisation, we used to get work 20 days in a month, said Bhim Kumar, a young man in the village. However, the demand for labourers has dried up in the town since November 8 when the demonetisation announcement was made. At the same time, the local grameen bank is not letting people withdraw more than Rs 2,000 a week. “We are borrowing from here and there to make ends meet,” said Kumar.

Talk to others in the village – like Lallan Paswan, who has a small shop selling household provisions right next to the highway – and you hear a similar narrative. The monthly turnover at his shop is down by half. His monthly income has dropped from Rs 5,000 to Rs 2,500.

Despite these difficulties, support for demonetisation is high in this village, which is what this reporter also saw while travelling southwards from Raxaul, on the India-Nepal border, towards South Bihar. In Raxaul, Bettiah, Gopalganj, Darbhanga, Patna and now Gaya, public opinion has split over demonetisation.

This split is not easy to understand. Not everyone hurt by demonetisation opposes it. Similarly, not everyone relatively insulated from its worst fallouts supports it. In short, there are complex reactions to demonetisation.

The demonetisation effect on border town Raxaul: Income loss, dependence on Nepalese currency

My second field trip in Bihar took me from Patna to Raxaul in the far north. A couple of days there, and then I began trickling southwards. Bettiah. Gopalganj and then Darbhanga. And then Patna again. I will head further south tomorrow — towards Gaya — before turning northeast towards Nalanda and then straight east for Bhagalpur. The task of trying to understand how Bihar is doing continues to flummox and bewilder. Along the way, I am also trying to understand how DeMonetisation is affecting the people of Bihar. This was the first dispatch from the north. On its impacts at Raxaul, and how public opinion is split over “notebandi”.

Cauliflower sells for Rs one a kilo in Bihar as demonetisation depresses demand

At first glance, it looks like any other day at the mandi in Bettiah.

Trucks stand next to the concrete arch that leads into the fruit and vegetable market in this small town in northern Bihar. Inside the mandi samiti, as the precinct is called, hawkers sit with baskets bursting with vegetables. The shops seem well-stocked.

But the abnormality shows up when you ask traders and hawkers about the impact of the government’s decision to demonetise Rs 500 and Rs 1,000 notes. Vegetable prices have collapsed, they say.

Cauliflower or phool gobhi, said Mahfooz Alam, a wholesaler at the mandi, was selling for Rs 12 a kilo just before the announcement on November 8. “It is now selling for one or two rupees.”

The prices began to fall within 2-3 days of the Prime Minister’s announcement on November 8, said Muhammad Islam, a fruit trader.

Baingan (aubergine) fell from Rs 15 per kilo to Rs 2-Rs 3. Patta gobhi (lettuce) has slumped from Rs 15 per kilo to Rs 5. And saag (spinach) has dropped from Rs 10 to Rs 2.50 per kilo.

These are jaw-dropping falls. What explains them?

How four families have survived two weeks of demonetisation

reported for this story.

Prime Minister Narendra Modi’s decision to do away with Rs 500 and Rs 1,000 notes has not been good for Guddu Sharma’s family. Sharma, 24, lives with his wife and two sons near Patna’s Boring Road, and runs a men’s salon about 30 minutes away. Since the prime minister’s announcement, he said, earnings have fallen. His salon, which charges Rs 40 for a haircut, used to make anywhere between Rs 1,000 to Rs 1,200 on the weekend. But now, he said, that has fallen to Rs 500. Regular customers – the ones who used to show up every week – have stayed away. If they do drop by, they are asking if they can pay later.

Demonetisation has left India’s food markets frozen – and the future looks tense

As demonetisation enters its second week, traders in Patna’s Maroofganj mandi are seeing something unprecedented.

In the last seven days, the supply of new stocks in this wholesale market, which supplies cooking oil, spices, rice, wheat and pulses to shopkeepers across Patna, has plummeted. The supply of cooking oil, for instance, is down by 80%. Talk to traders selling spices, grains or pulses and you hear similar numbers. “Do you see how quiet this market is?” said an accountant at a rice shop. “Till 10 days ago, you would not have been able to walk down this street.”

In the same period, orders from shopkeepers have fallen steeply as well. Most of them cannot buy as much stock as before, said Abhijit Kumar, who runs a wholesale shop for spices, because they have only Rs 500 and Rs 1,000 notes – both derecognised as legal tender by the government.

The strange thing is: despite the contraction in both supply and demand, commodity prices are stable.

‘All these notes suddenly have no value:’

this field report on Day One of demonetisation.

In the borderlands of Chikka Tirupathi and Hosur, the first day of the demonetisation of Rs 500 and Rs 1,000 notes by the Indian government was marked by problems in day-to-day trading for small businesses and a frenzied hunt for Rs 100 notes for families.

Shankar, who runs Ishwar Digital Studio at Chikka Tirupathi, a temple town about 20 km east of Bengaluru, saw much lower business at his photo studio on Wednesday. On an ordinary day, the photographer, who shoots everything from stills to video for functions, earns between Rs 2,000 to Rs 3,000. On Wednesday, he earned just Rs 100. “People do not have change,” he said.

The story across the border in Tamil Nadu was the same. In the industrial cluster at Hosur, Ahsan Basha was sitting idle in his auto rickshaw near a bus stand when Scroll.in spoke to him. Earlier in the day, he had given Rs 800 back as change to a passenger who gave him a Rs 1,000 note for a Rs 200 fare. He had no more change – and so, no more business.

In the 22-km drive from Chikka Tirupathi to Hosur, this is a narrative this reporter heard often – from Anand, a flower-seller in a market in Hosur and from those running a motley set of businesses – petrol pumps to hardware stores and auto rickshaws.

These companies are changing the way labour is hired (and fired) in India

Heard of a company called UDS?

Like India’s IT companies, it hires workers and sends them to client locations. There’s just one difference: while the IT companies supply white-collar workers to firms across the world, UDS provides blue-collar workers to offices, factories, airports in India. They run assembly lines, do housekeeping, handle packing and loading, among other things. The workers are drawn mostly from rural India. UDS trains them and places them in companies in return for 7-10% of their pay.

Such outfits are called manpower supply companies, even though they employ both men and women. In the last decade, as companies scale back their permanent staff and increase their reliance on contract workers, these firms have come to account for ever-greater chunks of industrial and service sector employment in the country. UDS alone has 40,000 workers on its rolls. Its client roster includes manufacturers like Hyundai and glass-maker St Gobain. The work done by its workers occupies a long continuum from housekeeping to assembly-line production, and some of it quite technical.

Despite their rapid growth, the manpower companies are a poorly understood commodity. Before they arrived on the scene, employers sourced contract workers from the informal economy’s labour contractors. Most of the workers led bleak lives – low salaries, no job security, no safety nets for accidents or retirement. The only guarantee they had was of their pay and prospects of landing work shrinking as they neared 40 and their capacity to work dimmed.

In the grim and unregulated world of labour, manpower supply companies represent something new: the entry of the formal sector.

What has been their impact?

the great rural land grab

For the longest time, the price of farmland in Vadicherla stayed below Rs 20,000 an acre.Ten years ago, that began to change. “In 2003, an acre cost Rs 25,000. By 2006-07, it had climbed to Rs 2 lakhs,” says Byru Veeraiah, sarpanch of this village in Andhra Pradesh’s Mehbubnagar district, “By 2010, an acre cost Rs 3 lakh. And Rs 12 lakh by 2012.” It was a puzzling spike. This village with its 700-odd families is nowhere near big cities. Warangal, the nearest big town, is 50 kilometres away. Nor is it close to any highway. The Vijayawada-Hyderabad highway is a good 15 kilometres away. Nor is any farmland in the village or its vicinity being acquired by the government or companies.

Vadicherla is not alone. In the last ten years, the price of an acre in Ramavarapadu, a village next to Vijayawada, has leapt from Rs 7 lakh to Rs 7 crore. Or take Mardi, 15 kilometres off Solapur, Maharashtra. The price of an acre in this village, says Prakash Arjun Kate, a local, has “climbed from Rs 20,000-25,000 ten years ago to Rs 10 lakh now.”

Ramavarapadu, Vadicherla and Mardi are not isolated instances. Microstudies and anecdotal information suggest almost all of rural India is seeing a similar climb in farmland prices. If the trend suggested by the villages — and the microstudies and other anecdotal inputs — is indeed correct, then a large change is playing out in rural areas — their farmland markets are getting activated.

And the question is: Why now? And why are markets across the country waking up at the same time? And what does this mean for food security, rural livelihoods, migration patterns, you name it?

For all that, see story one: on the reasons for this spike, and its implications for farmers, food production and suchlike. Also, a PDF of the page, here.

(Also see the next post: story two, on the quantum of land leaving agriculture)

ps – while on the question about the fallouts of such escalations on village india, i cannot help remembering my year at tihi (see this and this), a village in malwa, madhya pradesh, near indore, studying the village level impact of itc’s e-choupal project. it was an enlightening time. in part because tihi was a village in flux. it was close to the industrial cluster of pithampur. it was close to indore, one of the major industrial cities in madhya pradesh. abutting, as it did, the road linking pithampur and indore, tihi was seeing a lot of schools, factories, what have you, coming up on that road. what amplified those trends for the village were two other factors. one, the bombay-agra bypass was cutting thru the village fields to the north-west. and then, there was a proposed rail line for cargo. between them all, land rates in the village were rising fast. they stood at about Rs 44 lakhs to a bigha when i got to tihi. A couple of years later, they stood at a crore.

this change had epic impacts on the village. the younger son of the richest farmer in the village became a land broker. other villagers, especially the youngsters, began trying to copy his example. and began talking to other villagers asking them if they wanted to sell land. with each kid telling farmers to come to them if they wanted to sell. “i will get you a good rate”, etc. there were other changes. villagers confused by the rapid changes around them began yielding to what their kids — more in sync with the processes at work if foolhardy and impulsive about the desire to sell land — said. households began diversifying their livelihoods. working as labour in pithampur, etc. this was, of course, as contract labour. which suggested an uncertain future. i remember how suspicious some villagers were towards me — some right till the end, suspecting i was there to buy land for the company or something.

Inside the mysterious world of the microfinance agents

this is the draft of a story on microfinance agents that never got published. i could not conclusively prove the existence of these microfinance agents. but it is an interesting read nonetheless, on how the informal economy subverts the formal sector’s best laid plans. take a look.

In xx, while auditing the books of an Indian microfinance institution (MFI), Deepak Alok, partner at a microfinance portfolio-auditing firm called m2i from Gurgaon, noticed something intriguing. Locals — rickshaw pullers, small-time politicians, husbands of MFI clients, etc — were bringing it clients in return for a commission. Some of these clients were genuine. Women who needed loans but lived in villages the MFI did not cover.

Others, however, were borrowers who needed larger loans of Rs 1 lakh or so but could not get those from the formal banking channel. Consequently, they were approaching these intermediaries. Who, in turn, would present this loan to the MFI as Rs 10,000 loans for 10 women. The women would fill out the form and furnish documents for verification. In return, they would get Rs 500 up front for filling the form out and another Rs 10 every week for attending the MFI-mandated weekly meetings. But the repayment itself would be done by the final borrower, via the agent.

That is one vignette from the world of the microfinance agents. The folks who have been in the news over the past few days, getting blamed for harassing microfinance borrowers in Andhra Pradesh to a point of such desperation that 30 (and counting) of them killed themselves.

There’s is a shadowy, little-glimpsed world. The agents rarely crop up in popular discussions about MFIs. And yet, operating at the intersection between the MFIs and their borrowers, they can be powerful forces. Large agents command enough clout to be able to direct women borrowers to stop repayments. They can redirect their loans to others. Needless to say, every time a loan is redirected, there is a failure of KYC norms with cascading implications for the MFI and the bank. Not knowing who got the loan, they cannot follow up in the case of a default. Then, as recent events in Andhra Pradesh show, agents’ egregious conduct can land MFIs in the dock.

Remember Kolar where MFIs took a collective hit of Rs 60 crore after the local Anjuman Committee issued a fatwa barring women from transacting with MFIs? That was due to the agents. Or take Lucknow, in late-2008, agents were responsible for another microfinance NGO, Nirman Bharati, almost shutting down.

For all that, not too much is known about the agents. Who are they? Are they an isolated phenomenon or are they more widely spread? What are the implications for the MFIs and the banks whose money is at stake?

Inside the microfinance industry, opinions are divided. Most say that the agents are nowhere as pressing a problem as the multiple loans borrowers are stacking up (see “Quest for fast growth lands India’s microfinance institutions in soup”, 8 March, 2010, Economic Times). Others say the agents are a more serious problem than that.

To find out more, the Economic Times spent two weeks on their trail. At this time, two points seem to be fairly evident. One, while more studies are needed to quantify individual MFIs’ exposure to agents, the structural reasons responsible for their entry into microfinance are widespread.– which includes the MFIs’ disregard for financial prudence in their search for growth and valuations.

A closer look at the agents
In the MFI model, women are formed into joint liability groups of five or so members each. Each group is headed by a group leader. A bunch of these groups combine to constitute a centre. Which in turn is headed by one member who is appointed centre leader. A collections meeting is held every week, where the women have to sit in queues corresponding to their groups. the MFI’s centre manager arrives, the women recite the oath, and then the centre leader and the centre manager collect instalments from every woman.

It is this model that is being distorted.

1. The field staff starts charging commissions from the borrowers. on the whole, says an SKS ex-employee, s/he might walk off with as much as Rs 1,000/2,000 from a Rs 10,000 loan.

2. The centre leader, usually a more affluent woman, uses her position to hold on to some of the borrowers’ loans. If she oversees, say, 8-10 groups (about 40-50 women), she retains and uses a part of the overall loan portfolio — for consumption, or to put into her own business. While the loans continue to be in the names of the members, the centre leader makes the repayments.

For this to happen, the field executive and the branch manager have to outsource the responsibility for disbursing and collecting money to the centre leader. She then decides whom to lend to.

3. In a third model, an community member — a shopkeeper, a local bigwig, a rickshaw puller, etc — offers to supply borrowers to the MFI. Over time, he becomes the local point person, and all the MFI’s work is done through him. He does the lending and he does the recollections. He might lend to the women. Or he might take their names on the application forms but lend to someone else.

There are some larger points to be made here. It is in the interest of the agent to keep the repayments on track. He/She stands to lose if the arrangement collapses. Also, the fact that agents are doing the onlending need not be bad per se. They know the market, and can customise loans far better than the MFIs – they might lend anywhere between 2000 to 200,000 to a borrower, offer flexible repayment schedules, all the while ingeniously ensuring weekly repayments are on schedule. Until, of course, an external shock throws all calculations awry.

Which is what happened in Kolar. Accrding to an MCril report on the crisis, a local agent called Sardar Khan had taken a loan in the name of 20-25 local women, and onlent it further. When he failed to repay, the MFI staff went after these women. Who in turn told Khan to pay up. In the heat of the moment, he drank poison, landed in hospital, his friends complained to the local Anjuman Committee, which issued a fatwa banning any business with MFIs.

4. The fourth model is more predatory. Here, a local political agent steps in as a local intermediary. In this case, he becomes the local agent with the intent of converting the loans into political capital. Says Mohammad Anas, a microfinance ex-employee of both SKS and Spandana: “at times some commission agents become so dominant in certain pockets that we are bound to avoid that area for the time being.”

Also, the second, third and fourth model make the branch manager very dependent on the agent. Says a Lucknow-based exemployee of SKS Microfinance, “While the MFI model is built on spreading risk across a bunch of people, here, one member carries disproportionate risk.”

The balance of power here is in the agent’s favour. If the agent leaves, the MFI will not know who its final clients were. Nor would the clients know who the MFI is – because if the MFI tries to promote itself in the village/locality, it will alienate its agent. Also, if another MFI comes in, the agent can play the two against each other. Or start representing it as well. The branch staff of the first MFI will rarely be in a position to object. Also, if the agent is not able to keep the repayments coming, the branch staff is likely to advance him/her a fresh loan to avoid a default which would expose the distortion.

All this has further implications. Says rural finance practitioner Ramesh Arunachalam, “Microfinance is a large number of small loans, disbursed in remote areas, built around weekly transactions. In all, there is a lot of cash involved. Further, once agents come in, there are no checks and balances. For that reason, they have a perfect setting in which to run all sorts of frauds. It is all a recipe for disaster.”

The bigger question is about the extent of the problem.

Omnipresent agents. Weak systems. Weak communities.

In the first place, it is incontrovertible that agents themselves are around. External interventions in Bharat– by companies and government – are surrounded by tens of thousands of people looking for ways to turn that intervention into private gain. It doesn’t help that the interventions themselves, always conceptualised with scale in mind, are rigid hierarchical structures with slow response times. Between the two, subversion is inevitable. Be it the village elite trying to get family members into position of power – as an anganwadi worker, into the panchayat. Or a farmer pushing bad stocks into the government’s procurement system by bribing the buying agent (who too is looking for his own ways to maximise his overall fitness).

Here too, the agents illustrate some of the lesser-known ways in which communities are responding to microfinance. There are others. In ‘Multiple Meanings of Money’, Smita Premchander talks about how women in her study site of Koppal, Karnataka, are unilaterally dissolving and recombining as new groups – along risk profile, risk appetite, neighbourhood, caste, etc. Working on this story, ET heard stories about field staff running off with cash.

What makes their presence even more incontrovertible is the fact that it is easy for them to spot the microfinance opportunity. One kind of agent, says Anas, “takes shape while the women are filling out their forms. He might be the son of one of the women or the husband of a centre leader. He helps them with the forms, perhaps runs around a bit and gets the photocopies, etc, arranged.” In return, the women voluntarily pay him some fee, and an idea takes root. “His brain clicks”, says Anas, “This is a good way to make money, and he starts looking for more groups to form.”

Others might see the model at work, contact a bunch of women living in the next gali, etc, who need loans but have no MFI, and puts them in touch with the MFI in return for a commission. Next, those seeking larger loans approach him, and the misrepresentation starts.

It is interesting. This intersection between the formal and the informal economy. The smaller agents lead lives of quiet desperation. Says Alok: “If the borrower defaults, the MFI will contact the women. And then, they will point him to the agent. Who will probably get hauled off to the police.”

The bigger agents raise questions about the utility of microfinance itself. They thrive on patronage. Which translates into a complete negation of what microfinance stood for. Lenin Raghuvanshi, founder and executive director of Peoples’ Vigilance Committee on Human Rights, who works with the beleaguered weavers of banaras, says communities such as these are structurally marginalised. To ensure repayment, MFIs are tying up with local Dabanng characters. “But if an MFI ties up with the local elite to disburse funds, isn’t it getting coopted into the existing semi-feudal society?” If so, what kind of qualitative change in the lives of its clients can it possibly bring about?

Says Mukul Jaiswal, managing director, Cashpor Micro Credit, “Wherever there is money, there will be agents.” The question is: under what conditions, do agents enter the microfinance business?

One. When the MFI’s systems are weak. Which happens either because it is trying to grow fast, and its systems cannot keep up. Or because competition is forcing its staff to cut corners.

Take Banaras. The city, says Anupam Tiwari, who moved from Cashpor to head the Rickshaw Sangh, a Banaras-based cooperative for rickshaw-pullers, has 12-13 large MFIs. This is quite a change from even 5 years ago when there was just Cashpor working here. As a result, he says, MFIs are competing to add borrowers. They are said to be giving cash bonuses for every new borrower a staff member brings in. In the process, several norms essential for running an MFI smoothly are being given the go by — client identification, training, group formation.

Also, agents come up most easily in areas where social relations are weak. As Jaiswal says, in a village, where people know each other, it will be stigma if the villagers figure that one of their own has been cheating others (or taking a commission that was never theirs to begin with). In the cities, less so. They belong to migrants. Fellow feeling is lower. That said, even inside the cities, there is a continuum. he says, “Multi-ethnic communities do not have great fellow feeling. Communities of a single caste/clan/ religion, etc, are more cohesive. Similarly, groups of members who live nearby form bonds that do not revolve only around the group meetings. these are stronger relationships.”

What parts of india correspond to these conditions? According to Manoj Kumar, xx, Spandana, the agents are a large problem in the cities. In Hooghley, disbursement itself has stopped.”

What is the best way to fix this?

These days, whenever an MFI hears about an agent, it stops all disbursments, and starts talking to borrowers, asking them to repay only to the MFI. The problem with this approach says Akhilesh xx, Microsave, is that getting the money back is very hard. This is because of two reasons, says Ramesh Arunachalam, a rural finance professional. One, because the women are promised a second larger loan if they repay. If there is no second loan coming in, they lose all incentive to repay. Two, when a community is steadily getting loans from the MFI, it is easier for the women to even borrow from each other to repay. When the loans dry up, it gets harder.

Instead of chasing defaulters, say sources, MFIs seem to be keeping one foot firmly on the gas pedal. That way, the proportion of portfolio at risk will never rise beyond 1% (defaults are roughly calculated as ‘total outstanding of past due loans’ divided by ‘total portfolio outstanding’). Says Alok Misra, director, rating and research, Micro-Credit Ratings International, “Even if they lose Rs 50 cr, that is nothing compared to their 5,000 crore balance sheet.”

This approach is problematic. Partly because the larger MFIs cannot possibly keep doubling every year to keep their PAR (portfolio at risk) low. An SKS has 7.3 million borrowers. And Spandana has 4.95 million.

And partly because 99% repayment itself is something of a chimera. Says the Lucknow banker: “Why should repayment be higher here than in credit cards or auto? Even if the loans are not taken with the intent to default, there will be environmental/seasonal factors that result in a default occassionally.” Indeed, every household has an absorption capacity for loans – the amount that their existing cash flows will enable them to repay. In the old days, families would borrow during emergencies and repay from these cash flows.

Now, the gush of microfinance seems to be changing that pattern. Partly because it has enabled households to borrow well in advance of any contingency. This way, they are already fully leveraged by the time any emergency arises. (Even if the borrower starts an income generating activity, it is not easy to find one which will throw up cash over a 50 week period in India’s agrarian economy which sees, at best, two spikes when money comes in).

A more permanent solution is needed. Some microfinance organisations, like Cashpore, have slashed the discretionary powers given to centre leaders and field staff. And they transfer their branch staff regularly so that they do not form linkages with the borrowers.

All this, says Jaiswal, has bought down the incidence of such complaints. But one still cannot completely rule agents’ presence out.

In his case, it might well have. Cashpore, which is not an MFI, grows at a positively sedate 30% every year. Its peers, however, continue to set an indescribable pace (see chart). Between 2004 and 2009, number of outstanding loans at six of India’s top 8 MFIs grew at over 1000%. The other two grew their outstanding loan portfolios at 500% plus clips.

There is considerable cynicism within the industry on whether their systems are keeping pace with this level of growth. Says Misra, “The 100% YoY growth is not sustainable. There is no system. Group meetings are not taking place. This is what happens when money starts chasing people.” Adds Arunachalam, “Microfinance was predicated on relationship lending and social capital. The key was that the field staff knew every individual client. That is now being replaced by something far more like Starbucks or McDonalds.”

The question is: can the MFIs slow down? Or will that reveal default rates in excess of that magical, mythical 1%?

tihi

(am writing this post in 2014 but retrospectively dating it back to dec 28, 2009. this, as things stand, is the very first set of stories i wrote for the economic times — they appeared three days before i joined the paper. the paper was bringing out an year end issue, and i wrote about some of the farmers i knew at tihi.)

story one: on radheyshyam chowdhury. story two: on jagdish maharaj.

very crappy stuff, this.

Fixing India’s Mandis

note: this is the first article i wrote on agriculture. years later, after the village stay at tihi, i read this story again and found it embarrassingly technocratic in its outlook. anyway, do take a look.

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Jawaharlal Nehru had once described agriculture as “India’s greatest living industry”. Yet, 60 years after Independence, the country is slowly coming to grips with the effects of having neglected agriculture all these years. Addressing a recent seminar on agriculture, Prime Minister Manmohan Singh said the situation was alarming. The Tenth Five-Year Plan (2002-07) had assumed that Indian agricultural production would grow by 4 per cent every year. “But the reality is that in the first three years of the Plan, we have not been able to ensure even 1.5 per cent rate of growth,” he said.

As Singh and his top team see it, if India has to grow by 7-8 per cent every year, agriculture has to grow faster. After all, despite all the industrial development and India’s high-tech image, the economy remains overwhelmingly agrarian.

Unlike the West, where agriculture provides just 3 per cent of the jobs, two out of three Indians earn their livelihood directly or indirectly from agriculture. The situation on the ground is alarming. Around 10 per cent of India’s farming households are landless. Another 67 per cent own less than one hectare of land each. Eleven per cent have 1-2 hectares of land. Yields have been stagnant. Irrigation facilities remain inadequate. Mechanisation is low. So is the use of farm inputs.

Fixing all this is not easy. But in the last one year, Manmohan Singh’s government has put comprehensive reform of Indian agriculture on top of its agenda. Managing such a systemic change on such a huge scale is daunting. Especially when agriculture is a state subject.

The changes are far too many and far too complex to be addressed in one go. So in the pages that follow, we have picked out a few issues and attempted to understand what is being done.

One big factor hobbling Indian farmers is the 7,000-strong mandi system — the large agricultural produce markets that have aggregated and dispatched grains, fruits, vegetables and the rest from farms to towns for ages now. A big effort is on to develop an alternative mechanism that will connect farmers more efficiently to markets. Competition, it is hoped, will discipline the old mandi system and also give farmers their due share.

But mere efficiency won’t help. Today, most Indian farmers don’t think enough about what the market wants before they choose their crop. The government is, therefore, trying to also bring in a new market orientation. Its new National Horticulture Mission — and its focus on high value agriculture — is part of this drive. Opening up foreign direct investment in retail could also allow big retailers to deal directly with the farms.

All these big shifts require huge investments in building hard and soft infrastructure — something that the government alone is in no position to bear. The Prime Minister has already talked about replacing publicly funded R&D in agriculture and rural infrastructure with a new private participation model. But the private sector will not step in till the larger environment itself is conducive for it to function smoothly. That is why a more favourable environment is being created — largely through an overhaul of several antiquated laws.

Today, there is renewed optimism among private sector firms. In the next two to three years, most people reckon a lot of these changes will begin to fall into place. And it could once again kick-start a new cycle of investment and growth in “India’s greatest living industry”.

But first, let us get a clearer sense of what’s changing — and why.

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Fixing the mandi

The next time you sit down for dinner, take a look at what is  on your plate. There will probably be some rice or rotis, dal, a couple of vegetables, curd, paneer or a meat dish. There might even be some fruits. Even a couple of decades ago, the plate would have looked different. Indians today are eating lesser cereals, and more vegetables, fruits, meat, eggs, fish and milk. New food habits are one of the many factors forcing dramatic changes across the Indian agricultural landscape.

Some of the changes would have certainly caught your eye. Every once in a while, the newspapers have carried stray bits of news, announcing the recast of important laws governing the sector, the rise in commodities trading volumes, the setting up of new warehouses, and the growing share of organized food retail. What is the reason for these changes?

Interestingly, unlike during the Green Revolution, the government won’t be the main driver of the change. Says Nachiket Mor, executive director, ICICI Bank: “There is no master plan shaping all the work being done in this area.” Instead, government will be the enabler and the catalyst. And a motley group of private companies, cooperatives, NGOs and farmers will learn to work together for their own self-interest to gradually revamp Indian agriculture.

What Is Changing?

Two years ago ICICI deputed P.H. Ravikumar to set up the National Commodity and Derivatives Exchange (NCDEX). The Indian farmer, he says, carries a huge load of risk on his shoulders. He plants his crops not knowing what the harvest will be like, or how much it will fetch in the market. Many things can go wrong between sowing and harvesting. His is a nervous existence, at best.

A large white server hums a floor below Ravikumar’s office in Mumbai’s Bandra-Kurla Complex. About the size of a refrigerator, it is the heart of his company. It is connected to 6,000 trading terminals in 400 Indian towns. Today, 36 commodities — 33 of them agricultural — are traded every day in this exchange. That translates into a daily turnover of around Rs 2,300 crore.

So far, most of this turnover comes from companies and speculators. The companies want to hedge what they buy. Day traders and speculators bet on how much a commodity like wheat might cost three months later. They look at the spot price, the cost of warehousing the produce, followed by cost of the capital, and accordingly trade on futures of these products.

In the long run, that server below Ravikumar’s office will cut farmers’ risk. The first thing it will do is improve the way farmers decide what to grow, says Ravikumar. Now, they decide that on the basis of last year’s prices. If a particular crop gets good prices one year, everyone sows it the next year. The result: at harvest time, there is a glut in the market and prices crash.

Commodity futures serve as a better barometer for consumer demand when sowing time comes. Here is how it will work. Let us say that the mandi offers the farmer Rs 650 for a quintal of wheat, while the exchange suggests that prices will climb to 750 in three months. The farmer decides to wait. To hedge his risk, he picks up a future, committing to sell at this price three months down the line. Right now, however, there aren’t many farmers looking at the exchanges. Says Madan Sabnavis, chief economist of NCDEX: “The actual presence of the farmers (in the exchange) is very low. We only have a few large farmers.”

Some months ago, NCDEX ran a small experiment with the cotton farmers of Gujarat. It told them about the benefits of hedging forward. The farmers were not interested. “What if prices rise?” they had asked. The answer to their question lies in options.

This is how it works. In the earlier example, the farmer picks up an option on the future he holds. Three months later, if prices in the mandi are still at Rs 650, he will sell. On the other hand, if spot prices move up to Rs 850, he can decide not to go ahead with the sale, pay his disappointed buyer a small penalty, and take his stock to the mandi.

In fact, that is how the exchanges will fix the mandis; not by competing for procurement, but by helping farmers time their visits to the mandi better. In the meantime, as A. Hari Prasad, managing director and CEO of National Collateral Management Services (NCMSL), says, futures and options will keep the farmer safe if prices drop suddenly. The futures lock him into a price — ensuring his safety even if the market tanks. The options leave him free to gain if prices surge elsewhere.

Right now, says Sabnavis, NCDEX is holding seminars for traders in large towns, and telling its brokers in smaller towns to do the same. Yet there are more barriers. For example, people who want to trade have to pay Rs 30 lakh to become members of the exchange.

Small farmers cannot afford that. They will have to become clients of existing members. Also the minimum trade has to be 10 tonnes. To fix both problems, NCDEX is trying to reach out through cooperatives, banks and NGOs. “We need someone who can aggregate, and explain the finer details like margining,” says Sabnavis.

Awareness is not the only hurdle. According to Mor, the core question is reach. How does one get the prices across to Indian farmers? Today, there are 10,000-odd information kiosks in the country. “Even if each of them reaches out to five villages each, that is 50,000 villages. But India has over 600,000 villages. Even if we ignore the very small villages, we will still be left with about 4 lakh villages. The kiosk infrastructure will have to increase eight to nine times to give an adequate reach,” he says.

Also, before anything can be traded, it has to be graded and valued. But there is no grading infrastructure in the country. “For screen-based trading to work, we cannot have independent assessments of quality. We need standardized quality parameters,” says C.H. Hanumantha Rao, the chairman of Hyderabad’s Centre for Economic and Social Studies. Mandis follow a very subjective practice. The auctioneer will just look at a handful of grain from every farmer’s harvest, and set a base price. Another issue is the cost of warehousing. Farmers often need the money from their harvests immediately to finance their next crop.

Cut to Hardoi, a small town in central Uttar Pradesh. Here, in wheat country, Gyanesh Guptaji is busy solving both those problems. He works for NCMSL. The company, an offshoot of NCDEX, is setting up warehouses across India. Guptaji says these will be “open to any farmer who wants to hold his produce after the harvest instead of selling it immediately. Prices always fall just after the harvest. He can sell when prices improve”.

When the produce arrives at the warehouse, it will be graded into one of three categories: premium, standard or discounted. All the details are captured in an account that can be traded. If a farmer needs money urgently, he says, the company can give as much as 75 per cent of the value of the crop as a loan. The stock lying graded, packed and valued in the warehouse will easily serve as the collateral.

Right now, he says, the company can make this payment in a week’s time. But over time, as the banks and other parts of the jigsaw fall into place, farmers will get their money immediately. Today, NCMSL has about 100 warehouses across the country. It is planning to scale that up to a 1,000 by 2007.

In another two years Ravikumar says: “There will be an NCDEX-accredited warehouse after every 40 km.” Guptaji himself is in charge of Uttar Pradesh. He tours the state, talks to warehouse owners and persuades them to sign up with NCMSL. So far, he has selected five warehouses in Hardoi and its neighbouring districts of Shandila, Shahjahanpur and Kanpur, and sent the applications to the head office in Mumbai.

Nothing like this has ever been done before, says Guptaji. But he is sure farmers will come because they are dissatisfied with the trade. The argument that farmers should hold their produce till prices improve is intuitive. Such derivatives have existed in the traditional channel as well. A large trader might agree in advance to buy from smaller ones. The minimum support price is nothing but an option.

A Collaborative Approach

Radha Singh, secretary, department of agriculture and cooperation in the ministry of agriculture, has a tough job on her hands. She runs the department at a time when the consensus in the government is veering to the view that the public sector cannot manage Indian agriculture on its own.

Hints of how that will pan out can be seen in the National Horticulture Mission that her ministry set up last year. India, she says, grows about 146 million-150 million tonnes of fruits, vegetables, flowers, nuts and spices. The government wants to raise that to 360 million tonnes by 2011.

This is an opportunity for the poorest farmers. Says the father of India’s green revolution, M.S. Swaminathan: “High value agriculture is deeply important if you want to make any kind of meaningful dent on the poverty numbers of India.” That shift will not happen unless the linkages between farms and markets are in place.

So far, the onus for creating these linkages has rested with a Gurgaon-headquartered institution called the National Horticulture Board. It has an awful track record. In the last five years, it has managed to help (with a 20 per cent subsidy) 2,997 farmers who wanted to move to horticulture. Remember, India has 110 million farmers. Then, in the last six years, the mission has supported (with a 25 per cent subsidy) 1,354 cold storages. And has spent all of Rs 11.91 crore on 1,200 training and development projects.

So far, says Swaminathan, none of the government’s agriculture missions have fared well. While these are supposed to look at the entire chain from seeds to the market, they always interpret their role much more narrowly. Even the present NHB, he says, is more subsidy- than quality-oriented.

The government itself is disappointed with the NHB, says Singh. She plans to convert it into a technical support unit that will evaluate states’ proposals on horticulture, and so on.

From now on, the push to horticulture will come from many directions. The government has started using local NGOs to ready farmers for horticulture. Capacity building is essential, says Swaminathan. When Korea was moving into high value agriculture, he says, it set up farmer schools and methodically trained half a million farmers every year.

This support system had been in place during the Green Revolution. Back then, the government gave price incentives to farmers. That gave them social security, and the confidence to take a chance. As the Prime Minister said in a speech this year: “There is a problem as the move from a subsistence economy to an economy which uses more of commercial inputs and is dependent on selling its output in the market, risks are bound to increase.

Says Pravesh Sharma, a special senior adviser for the World Food Programme: “Back in the 1970s, after realizing that Maharashtra’s small holdings meant it could not become a cereal-producing state, Sharad Pawar pushed it into horticulture.” He covered all farmers switching to horticulture under the state’s employment guarantee scheme.

Replicating that across the country will call for huge investments. As will the investments in the supply chain, which will be needed to transport the fruits and vegetables swiftly to the market. This time, the government will not make those investments. Too much money is needed, says Singh. The government’s budgets will just be a drop in the ocean. Instead, she says: “I would like to see all the investments coming from the private sector. We can make catalytic investments, at best.”

The Tide That Lifts All Boats

That is easier said that done. The first lot of companies that entered the Indian agricultural scene got badly burnt. Take Satnam Overseas. Some years ago, the export house tried to buy basmati rice directly from farmers. In the first year, it offered Rs 1,350 for every quintal. Unfortunately grain prices stayed low, opening at Rs 1,150 and never moving above Rs 1,250. Satnam ended up overpaying.

When it tried again, says Sanjiva Rishi, general manager (brand and market development), it tried to mimic mandi prices by offering farmers the previous day’s closing price. But that year, prices were climbing fast, and the farmers refused to honour their contract. The company could not buy even 1 per cent of what it had hoped to.

All companies that entered Indian agriculture have horror tales to tell — of facing a competition that paid no taxes, of farmers who tore up contracts, of working under a policy that appeared to penalise large players, a market that was not willing to pay a large premium for quality. The Essential Commodities Act forbade companies from carting produce from one state to another. Thanks to the Agricultural Produce Marketing Committee (APMC) Act, farmers could sell only at the mandis. The Food Adulteration Act had banned entire categories of products, like blended rice.

“When India was suffering from food scarcity, it made sense to ensure that people wouldn’t build storage facilities that might lead to hoarding,” says Vijay Sardana of Centre for International Trade in Agriculture and Agro-based Industries. But now, these regulations make no sense. They just prevent the creation of a level playing field for companies. Admits Singh: “After the mid-1980s, the context for agriculture should have changed. But nothing was done.”

Since the beginning of this decade, the government has been taking a relook at a number of laws in this segment. Take the draft APMC Act. It frees farmers from having to sell only through the mandis. There are two options available. One, they can enter into contracts with companies. The draft has mooted the appointment of a local arbitrator to decide on any disputes between a company and the farmer. Then, it has suggested a new route — direct marketing. Farmers can sell directly from their farms, but after the harvest. This is a distinction that has been lost on companies so far. Contract farming, as the Satnam Overseas experiment shows, doesn’t work very well for crops where prices can see-saw wildly. Then, a new Integrated Food Law, which will allow a new range of products, has been placed before the Cabinet. Says Sardana: “Companies had been lobbying for this ever since the post-WTO imports began entering India.”

The Centre has also rethought the Cold Storage Act and the Essential Commodities Act, which now lets companies move farm produce across states. The Contract Regulation Act, 1952, has been overhauled to allow options. But it is unclear whether the stock or forward market regulators should regulate options. Having said that, the mandis are formidable competition. Creaky or not, they do control agricultural trade in the country. They enjoy enormous clout.

Try this, so far, only Karnataka and Maharashtra have ratified the new APMC Act. The rest, dependant on their mandi cesses, are dragging their feet. For its part, the Centre has borrowed a lesson from the World Bank and is linking future aid to agriculture reform. Similarly, the Integrated Food Law is shuttling between ministries.

The big impetus could also come from organised retail. In the West, supply chains were modernised after the food retailers grew up — they consolidated orders and brought in scale. Today, in India, food retail is slowly starting to scale up. The process should speed up even more once FDI is allowed in retail.

It will also accelerate the movement towards quality. “The promotion of quality is something that the private sector has to drive. But for that, you need large buyers, so that the industry sees the point in grading its stuff because there is demand for it,” says NCMSL’s Prasad. When that happens, the big question is: will there be enough farmers who can supply?

Cut to Jayant Bansal at Ambala. He works for an NGO called Rashtriya Kisan Sangathan. Over the past few months, it has pulled 1,500 farmers together into a local cooperative. In the long run, it wants to help them migrate from staples towards high-value crops. It is now training them in horticulture. This, however, is not a transition that the farmers are eager to make.

They are baulking at the thought of getting into higher-value agriculture unless the NGO can undertake selling what they grow. So Bansal and his team are getting into unfamiliar waters. They are trying to find buyers. He has been talking to corporations like Pepsi, which now wants the NGO to grow and process tomatoes.

This is a win-win. The farmers need a buyer. Pepsi cannot talk directly to 1,500 farmers; the transaction costs will be too high. Then, the farmers might ignore the deal the moment prices go up. But they cannot do that with the NGO, as they are dependent on it for input loans, future deals, and so on.

The stage has been set. Most of these changes should bring about a level playing field — for the farmers and the private sector — over the next 2-3 years. The possibilities are immense. The exchanges will bring about a convergence in prices as the traders learn that if they quote too low a price, farmers will calculate their prices backwards from the futures, subtract the cost of warehousing, and then decide to sell or hold.

As the agricultural supply chain gets restructured, the traditional intermediaries will have to change their roles, comments Brahmanand Hegde, deputy general manager, ICICI Bank. At the same time, we will see the rise of new intermediaries — the warehouses and the exchanges are just that. A whole array of agriculture-based companies are missing in India today. We will see new companies come up — in trading, food processing, commodity warehousing, grading, logistics and retail.

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Whither the small farmer?

However, the piece that seems to be missing from all the action in the agricultural sector, so far, is the small farmer. All the work that is currently being done will help only those farmers who have a marketable surplus. What about the small farmers who constitute 78 per cent of India’s farmers?

Take Shiv Prasad, who owns 2 bighas of land in Lalbalpur, near Hardoi in Uttar Pradesh. When BW met him, he and his family — wife and two small kids — were harvesting their wheat. The harvest has not been good. It had been shaping up well but, right at the end, unseasonal rains resulted in a sudden cooling. The grains are smaller. Last year he had got eight bags of wheat from the land. This year, it will fill just five sacks. “It might just last us till the next harvest,” he said. “But it will be close for the last month or two.”

The government is betting on horticulture to help such farmers. Its logic: a farmer who switches to a growing a vegetable or a fruit will earn more. But small farmers are hesitant to make the shift. If anything goes wrong, they fear, they will not even have anything to eat. Most ask for allied businesses in dairy or poultry instead. Says Mor: “Organisations like SEWA and Amul have successfully aggregated large groups of producers. However, such movements and mechanisms are not present everywhere. We would need to fill those gaps.” Earlier attempts like the small farmer agri-business consortiums have also not gone anywhere. It’s a worry.

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Plans B, C and D

Do we need alternatives to agri-businesses? They will invest in areas where returns are highest. This is an economic rule that governs all companies. For example, Pepsi buys grain from Punjab, Haryana and Madhya Pradesh; but not from Uttar Pradesh. Due to the land holdings, its transaction costs would shoot up. But the result of that is skewed development. Then, cartels can form as readily among agri-businesses as in mandis — all you need for cartels to form is great buyer clout.

One options is cooperatives. They will boost the bargaining clout of farmers. In areas where the private sector hasn’t entered, they can market the produce. But so far, few cooperatives have really worked. Also, can they compete with a private sector enterprise? The latter will have deeper pockets and, perhaps, be more efficient as well. Another way, says Sharma, would be to get a government body to aggregate farmers, and then represent them before private companies.