Growing hope for India's farms

The monsoons have failed this year, compelling the Indian government to declare almost half the country drought affected.

The country faces dire consequences from this year's poor monsoon, with the threat of diminished harvests and widespread suffering, but agribusiness has proven that it has the resources to solve the problems of management and investment. Arun Subramaniam reports A weak monsoon underscores the limits of traditional rain-fed agriculture. India faces an unprecedented agrarian crisis. The monsoons have failed this year, compelling the government to declare almost half the country drought affected.

But more alarming, recent US satellite data have revealed that despite several previous years of plentiful rainfall, India's groundwater reserves are rapidly depleting. This could stymie the country's ambitions of becoming a major player in the global food industry. The irony is that even as the consistent failure to invest in irrigation coupled with gross mismanagement of available water resources - principally through subsidised electricity and water - have finally caught up with the government. And agribusiness companies, which have the means - financial, managerial and technical - to address both these issues, have been sidelined.

"Companies that choose to enter into farming do so at their peril, as arranging for and managing large-scale land, labour, water resources will always be a challenge," says Sanjay Nandrajog, the chief executive of Field Fresh Foods, a joint venture between Bharti Enterprises, Del Monte Pacific and LM Rothschild. "There will be competing demand for production resources and corporates may have to pay a higher price to get the same volume and quality."

It is significant that most of India's successful cash-crop cultivation efforts have been in response to industrial needs, and thus driven by agribusiness. "Whether it is sugar, cotton or tobacco, the need for industrial raw materials helped discipline agriculture," says Gokul Patnaik, the chairman of Global AgriSystem, a New Delhi-based agribusiness company. "Just as with the 'bonded' area that bound specific sugarcane growing areas to a particular crushing mill under contract, textile mills took the initiative to encourage research into cotton growing techniques."

Mr Patnaik should know. A former civil servant, he has headed several state enterprises including APEDA, Punjab Agro Industries and Punjab Markfed. In the 1970s, Mr Patnaik engineered the landmark joint venture between Punjab Agro and Pepsi Foods, the controversy that "educated policy makers about the need for technology and investment in agriculture", as he puts it. The same is true of milk, where a co-operative collection and processing industry pioneered by Amul in Gujarat, and then rolled out nationally, catalysed a white revolution that has made India the world's biggest milk producer. Historically, it was the plantation sector - growing tea, coffee, rubber and spices - that saw the first corporate investments in Indian agriculture. The exemption of the plantation sector from "land ceiling" restrictions made that possible.

Land reforms in post-independence India ensured that land holdings remained small. Maximum permissible holdings varied between states, ranging from six hectares of irrigated land in Kerala to 20 hectares of unirrigated land in Punjab. Tenancy protection laws reinforced the reforms by conferring ownership rights on the tiller, which effectively made land impossible to lease. As corporate bodies are barred from outright ownership of agricultural land, their inability to secure long-term leases means they have fewer means to recover their investments, whether in terms of seeds and chemical inputs, drip irrigation systems or post-harvest infrastructure.

Although several states have encouraged companies to invest through long-term leases of uncultivated, government-owned "wasteland", the preferred vehicle for corporate farming in India has been contract farming. Here, the company enters into a contract with farmers to cultivate a specific crop over a predetermined acreage for a negotiated price. The company supplies the planting material, provides fertiliser and pesticides, arranges finance and either processes or directly markets the product. ,

Companies including ITC, Godrej, Mahindra, Reliance and Bharti have experimented with this format with varying degrees of success. "We contract directly with the farmers and provide them technical inputs, quality standards, certifications, post harvest management," says Mr Nandrajog of Field Fresh. "Today we work with nearly 800 farmers across Punjab and Maharashtra over nearly 3,000 acres [1,214 hectares] for our corn exports programme."

Field Fresh exports fruits and vegetables, and processes them for the domestic market. The key issue for corporates is accessing land on a suitable scale, says Rajesh Srivastava, the chief executive of Delhi-based Rabo Equity Advisors, which runs India's only private equity fund dedicated to agribusiness. "You have to overcome land fragmentation to create the scale critical for better farm practices."

Small and marginal farmers who cultivate less than two hectares of land account for more than 80 per cent of all holdings and almost 40 per cent of cultivated area. The second concern is the enforceability of contract. "Companies have to find ways and means to lock in suppliers. You have to earn their loyalty, whether by supplying inputs and services or by creating social infrastructure like schools, hospitals etc," Mr Srivastava says.

Thus, Rabo's first India fund of US$120 million (Dh440.7m) is targeted at companies that "have tied up their back end, have a track record of dealing with farmers and have a proven ability to manage", he says. "Typically, these are companies who are moving from producing commodities to branded products. We focus on growth and expansion, not new ventures." But given that 58 per cent of the Indian population depends for its livelihood on agriculture and allied services, any sustainable model of agribusiness would have to be seen to benefit the farmer as much as the company.

The most successful business ventures in Indian agriculture have been those whose control spans the entire value chain, from sourcing to processing - as with ITC's soya-oil business - and where there is a built-in profit sharing mechanism with the farmer, which Mahindra has pioneered. "To succeed in India, agribusiness must empower the farmer by making agriculture profitable, not by expropriating him," says Mr Patnaik.