India’s plan to collectivise millions of small and marginal farmers may fall short

India’s plan to collectivise and support millions of small and marginal farmers into profitable business groups may fail without significant reforms in the existing funding and support ecosystem for farm collectives, experts say. In five years to 2023-’24, the government plans to set up and support 10,000 new farmer producer organisations, where farmers come together as shareholders to expand the production and marketing of their agricultural output.

Apart from shareholder funds and bank credit, these groups also receive some initial financial support from government agencies.

Upto 86% of landholdings in India are small and marginal, with low outputs and paltry incomes – the average monthly income per agricultural household was estimated to be Rs 6,426 in 2014. Many farmers’ groups are struggling to survive or expand because small farmers find it hard to pool in enough money as shareholders and banks do not find them creditworthy enough to give them loans, we found. The low availability of funds also does not permit collectives to employ professional managers with business skills.

Under the new farmer producer organisations guidelines, the government will provide financial support of upto Rs 18 lakh to new organisations for the first three years. But new farmer producer organisations need support for at least five to seven years to grow and stabilise, and existing cooperatives must get better access to bank credit at low rates in order to compete with rich private companies, said experts.

Take the example of Devnadi Valley Agricultural Producer Company, a Nashik-based farmer producer company, included in the broader category of farmer producer organisations under part IX A of Companies Act. It was set up in 2011 and in the nine years of its existence, the company has seen three profitable years – all in the last five years. Its membership has grown 34 times to 850, comprising mostly small and marginal vegetable farmers.

However, the company is still struggling to build and expand into a viable business because of inadequate financial support from the government, said farmer and managing director Anil Shinde. Devnadi’s infrastructure for packaging and storing its products – mostly onions, tomatoes and other vegetables – is still not good enough to ensure efficient delivery.

Devnadi’s problems – access to government funds, problems with raising bank loans to be able to compete with big traders in mandis and rich private players – reflect the hurdles most existing farm collectives face and new ones are likely to run into.

A farmer producer organisation can grow as an institution that helps mitigate farm risks only if the government makes timely and sufficient investments over time, said C Shambu Prasad, professor, Strategic Management and Social Sciences at Institute of Rural Management, Anand. “A good farmer producer organisation cannot be formed in less than five years based on our experience,” he said.

Cooperatives have existed in India over a century. Dairy collective Amul in Gujarat is one of the best-known and successful of these. But over time, these groups became dependent on government funds and thus prone to bureaucratic and political interference. To address these issues, the YK Alagh Committee (2000) recommended the creation and introduction of producer companies that allow the cooperative spirit to co-exist with the operational flexibility of corporates. Over the years, various state and national initiatives have helped form farmer producer organisations and producer companies.

There are no consolidated data on how many such groups already exist in India but there are two available estimates – 4,235 supported by the National Bank for Agriculture and Rural Development and 876 by the Small Farmers’ Agri Business Consortium promoted by the Ministry of Agriculture, Cooperation and Farmers’ Welfare.

The ruling Bharatiya Janata Party-led government has promised to double farm incomes by 2022 – the average monthly income per agricultural household, as we said, was estimated to be Rs 6,426, according to 2014 government data. But there have been several protests against the new farm laws aimed at achieving this target.

No consolidated figures for farm collectives

Seven months after the July 2019 budget, when the Centre announced its intent to form 10,000 new farmer producer organisations, a government order approved a dedicated central sector scheme for their promotion and support and allocated a budgetary support of Rs 4,496 crore ($607 million) until 2023-24. New operational guidelines for promoting and supporting 10,000 new farmer producer organisations were released in July.

As of now, there is no consolidated database on farmer producer organisations, so the Centre does not know how many exist already. They were formed mostly with the support of different government agricultural bodies such as NABARD and Small Farmers’ Agri Business Consortium, both of which maintain different databases. This makes it difficult to design or implement any interventions or create regulatory mechanisms to promote the growth of farmer producer organisations.

A March report, Farmer Producer Companies: Past, Present and Future, by Azim Premji University scholars showed that 7,374 producer companies had been registered with the Ministry of Corporate Affairs until March 31, 2019, but this was twice all previously published estimates.

This confusion over numbers is a “concern, as there is a renewed thrust to start more farmer producer organisations”, said a December 2019 report by Shambu Prasad of Institute of Rural Management, Anand. Reliable data are a must for policy design and implementation, and for regulation of different categories of farmer producer organisations.

The NABARD database consists of only farmer producer organisations registered 2014 onward after it launched a fund for the support and promotion of farmer producer organisations – the Producers’ Organization Development and Upliftment Corpus. But there are no figures available from before 2010, the Institute of Rural Management, Anand report noted.

To rectify this, the new guidelines have suggested a National Project Management Agency to function as a national-level data repository which will maintain an integrated portal for farmer producer organisations. In addition to data-related requirements, it is expected to function as a digital platform for maintaining records on membership, activities, business growth and annual accounts of farmer producer organisations.

Poor government support

Farmer producer organisations are expected to run like businesses though they are formed by small and marginal farmers with few resources and little business acumen.

Farm cooperatives have a problem mobilising funds on two fronts – one, creating sufficient paid-up capital from shareholders, and two, obtaining credit from banks to sustain daily operations. Banks do not see small farmers as creditworthy because of previous unpaid loans and their lack of capacity to develop business plans, as we explain in the next section.

As for the shareholders, it is unrealistic to expect poorer farmers to contribute large share capital, pointed out Annapurna Neti, a co-author of Azim Premji University’s report. “If the intention is to increase farm incomes, we need to enable farmer producer companies to operate well as their [primary] aim is to provide better incomes to a vulnerable population for whom farming is their primary livelihood,” she said.

An early-stage farmer producer organisations will need to mobilise a minimum capital of Rs 3 lakh to Rs 5 lakh from shareholders to take up business activities and investments worth Rs 15 lakh to Rs 20 lakh to begin operations, estimated Nabkisan, a NABARD subsidiary for promotion and expansion of agricultural and allied enterprises.

Devnadi, for example, has raised Rs 8.5 lakh as paid-up capital from its shareholders by selling shares at Rs 1,000 per unit. In India, 86.4% farmer producer companies are like Devnadi – they have less than Rs 10 lakh as paid-up capital, as per the Azim Premji university report. Half of them have a paid-up capital of under Rs 1.1 lakh.

Just 20 farmer producer companies – mostly working in dairy and plantation – have raised 60% of the total paid-up capital of Rs 844 crore raised by India’s 6,926 active farm companies, the report said. This indicates the inequalities in Indian agriculture where older sectors such as dairy and plantation do much better than new companies in other sectors.

In 2014-15, NABARD introduced Producers’ Organization Development and Upliftment Corpus, a fund that offered every farmer producer organisations Rs 9 lakh over three years to help them become self-sustaining. This is not enough, said Prasad, because early-stage farmer producer organisations need funds for multiple reasons – to run daily operations, pay employees and other liabilities. The World Bank’s District Poverty Initiatives Project, a rural poverty alleviation programme, gave Rs 25 lakh to new farmer producer organisations with a provision of working capital, he pointed out.

There are additional funds available from organisations like NABARD for farmer producer organisations that can meet certain milestones such as a high turnover target or increased membership. But given their limited ability to expand, most farmer producer organisations may not meet these targets, said Hiren Borkhatariya, manager, farmer producer organisation facilitation centre, Yuva Mitra, a resource support agency for NABARD in Maharashtra.

Why new fund infusion may not be enough

Under the new farmer producer organisation guidelines, the government will provide financial support of upto Rs 18 lakh to new organisations in their first three years, as we said. This support, which will not include management costs, will last till 2027-’28 with the addition of Rs 2,370 crore to the government’s farmer producer organisation kitty. In all, the government’s total budget to support farmer producer organisations upto 2027-’28 will be Rs 6,866 crore ($927 million).

This support is expected to make farmer producer organisations “sustainable and economically viable”, as per the new guideline. From the fourth year onwards, farmer producer organisations are expected to manage without this assistance.

Earlier, there were no specific or separate schemes to promote and support farmer producer organisations, but the new policy guideline has changed that, said Neelkamal Darbari, managing director of Small Farmers’ Agri Business Consortium. In terms of funding support from the Small Farmers’ Agri Business Consortium, “the new scheme envisages increase in support [from Small Farmers’ Agri Business Consortium] from Rs 1,000 per shareholder to Rs 2,000 [equity grant] and membership [requirement] of farmer producer organisation has been decreased from 1,000 to 300 farmers”.

Although the government has increased hand-holding and financial support for new farmer producer organisations based on its own experience and the feedback from companies, this may be inadequate, said experts. For example, the government is still silent on the need for working capital in the short term.

Some of the guidelines, such as those on the release of funds on the basis of the execution of business plans, are “unrealistic”, said Prasad. “In agriculture this is difficult, and sticking to a business plan for five years is unrealistic,” he said. “This is counter to learning from the startup culture that appreciates the need to iterate while running an enterprise.”

Although the new Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 has little to say about farmer producer organisations, it has allowed farmers to sell outside the mandi or agri market yard which are influenced by middlemen, powerful traders, and commission agents.

But the relationship between the trader and farmer goes beyond transactions. “The trader provides inputs and buys produce at the farm gate,” said Neti of Azim Premji University. “There are a range of services which a farmer producer company needs to offer to compete with the trader.”

Farmers like Rajesh Krishnan who heads the Thirunelly Agri Producer Company, a farmer producer company, feel that the new farm laws will not support farmer collectives as they do not help create support structures. Through the new farm bills, “it looks like the government wants farmer producer organisations to support structures and supply-chain for big private players,” he alleged.

Bank loans hard to come by

For producer companies with existing loans and no collateral, it is difficult to raise credit from banks. “Our fund requirement depends on demand and production,” said Shinde of Devnadi. “Farmers need immediate cash payments. Often it takes five or six days to receive the amount [for customers]. We sometimes give a post-dated cheque if payment cannot be made right away to convince farmers.”

Banks are not accustomed to dealing with entities like farmer producer organisations – they are mostly used to giving loans to individual farmers. Further, banks are unsure of the creditworthiness of farmer producer organisations due to issues of debt and loan repayment among farmers and their low initial capital, as we said. With few business skills, farmer producer organisations cannot create the kind of robust business plans that impress banks.

Take the example of one of the more successful farmer producer organisations, TAPCO that buys special traditional varieties of paddy. On a seasonal basis, the company needs upto Rs 40 lakh for procurement from almost 200 farmers. In 2020, this amount is expected to go up by another Rs 15 lakh to Rs 20 lakh because the company is expecting an increase in the number of farmers and their yield, Krishnan estimated.

But TAPCO’s Krishnan complained that banks are charging his company “unfair” market rates on loans – 10.5% – while individual farmers are given loans at subsidised rates.

“Banks are quite happy giving us loans now as we have not been defaulting on repayments,” said Krishnan. But the problem is that the repayments will end up eating into the company’s turnover and profit, he added.

Devnadi reported a similar problem of having to pay a market interest on loans. The company is required by an organisation like Small Farmers’ Agri Business Consortium to maintain a certain amount of produce as stock (like fertilisers, seeds, etc.) to renew its credit guarantee fund. To ensure that stocks are maintained, the company needs regular fund flows but the banks’ 12% interest on loans has to be paid even in bad years, said Shinde.

Other farm business groups may not be as lucky especially if they are dealing with goods that are listed under government procurement prices or the minimum support price. This pricing system is vulnerable to distortion because it may be set high despite low demand or end up depressed due to the release of old stock, estimated GV Ramanjaneyulu, executive director, Centre for Sustainable Agriculture, a resource organisation that supports training of Farmer Producer Organisations formed by NABARD in Andhra Pradesh and Telangana. This distortion does not allow small farmers’ groups to get remunerative prices, reducing their ability to compete with mandis and big players.

Management skills wanted

With poor fund availability, farmer producer organisations are unable to attract employees with the kind of business acumen that farmers’ collectives lack. For example, NABARD provides Rs 9 lakh over three years and of this amount, the farmer producer organisations receives Rs 5 lakh and the promoting organisations such as NGOs, Rs 4 lakh. With this kind of funding it is hard to offer attractive salary packages, said Krishnan.

In the case of TAPCO, there are three employees including Krishanan, and they cannot be shareholders as per the law. “We have kept our salaries low so that we can be viable. The CEO receives Rs 15,000 per month at par with wage labour. We want to improve staff salaries once business improves,” he said.

As companies, farmer producer organisations are obliged to file tax returns and comply with related laws as large corporations do. This needs understanding of legal and compliance-related complexities. Also, while farmers are exempt from income tax, registered companies are not. This makes it essential for farmer producer organisations to find qualified employees who understand the nuances of building a business.

Although the government announced a five-year tax holiday for farmer producer organisations with turnover of upto Rs 100 crore in the 2018 budget, they are not exempt from paying Minimum Alternate Tax, a provision to limit tax exemptions for companies. “We are taking up with the government on providing by working on exemption for Minimum Alternate Tax,” said G.R. Chintala, chairperson, NABARD.

The way forward

IndiaSpend spoke to experts and members of existing farm business groups and collated suggestions on how farmer producer organisations can be supported better.

• Invest in existing farmer producer organisations and institutional structures that have evolved over decades. All three implementing agencies – Small Farmers’ Agri Business Consortium, NABARD, National Cooperative Development Corporation – need to develop policy by regularly engaging with the farmer producer organisations.
• Invest in resource institutions and promotional organisations. Create steering committees on farmer producer organisations support and formation at district and state levels that include organisations with farmer producer organisation experience.
• Create state-level consortiums to design farmer producer organisation policies because the state is a vital unit in the agricultural sector. Federated models like Amul, not individual farmer producer organisations, can be considered for this.
• Create incubation systems for new farmer producer organisations and help them integrate government support services.
• Facilitate onboarding of business expertise and promote agencies based on the maturity of farmer producer organisations considering they may need five to seven years to stabilise operations.

‘Sound business plan needed to increase farm profits’

How will the government plan to promote 10,000 new farmer producer organisations by 2023-’24 tide over the limitations of the existing farm cooperative system? Edited excerpts from our interview with GR Chintala, chairperson, NABARD.

How will the new farm laws and farmer producer organisations guidelines improve the functioning of farm cooperatives?
NABARD is one of the implementing agencies under the Central Sector Scheme for the promotion of 10,000 farmer producer organisations and will promote around 4,000 farmer producer organisations across the country. The programme will be implemented through select Cluster-Based Business Organisation. As an implementing agency of the scheme, the role of NABARD is to select, guide and monitor Cluster-Based Business Organisations in the promotion of farmer producer organisations, channelise the financial and equity support for their management, among other objectives. [We will] take forward the message of recent agri reforms to the farmer producer organisations and their members through an active outreach programme, presently being undertaken.

The SFAC and NABARD have differing data on the farmer producer organisations. What changes will the new policy introduce by consolidating all data through the National Project Management Agency (NPMA) it has suggested?
Under the new scheme, Small Farmers’ Agri Business Consortium will promote farmer producer organisations that will be registered under the Companies Act while NABARD will promote farmer producer organisations both under Companies Act and Cooperative Societies Act. The variation is in the legal structure of the farmer producer organisations, which will impinge only on compliance, whereas the activities / functions of farmer producer organisations will obviously remain the same. At the national level, the National Project Management Agency will be set up to provide overall project guidance, data maintenance through integrated portal and information management and monitoring. The existing data available with NABARD and Small Farmers’ Agri Business Consortium will be integrated with [the] new portal to be developed by the National Project Management Agency.

The new farmer producer organisations will be backed till 2023-’24 with a budgetary support of Rs 4,496 crore. But the farmer producer organisations also need capacity-building support and may need hand-holding for at least five years, experts tell us.
As per the new policy guidelines, in addition to Rs 18 lakh management cost available to farmer producer organisations, there is a provision of Rs 25 lakh per farmer producer organisations for the Cluster-Based Business Organisations. This cost covers the training and capacity building and handholding support expected to be provided by Cluster-Based Business Organisation for a period of five years. At the national level, Bankers Institute of Rural Development (BIRD), a training establishment of NABARD (along with LINAC, a training and research institute for cooperatives), has been identified as Nodal Training institute. BIRD will develop a training framework for the entire programme in terms of developing modules, developing content and also delivery of programmes in an online mode or through partner agencies.

What are the challenges faced by organisations that NABARD supports in terms of developing the overall ecosystem? How do you ensure procurement remunerative prices, ease of doing business (including legal compliance)?
The challenges for the development of the overall ecosystem are the lack of professional management, weak internal governance in farmer producer organisations, under-capitalisation to take up activities and also absorb credit, inadequate credit linkages, access to market and inadequate access to infrastructure.

The key elements of successful farmer producer organisations are financial resources and market linkages. Sound business models require to be developed to achieve the objective of increasing the margins for farmers. To enable that, NABARD at ground level, through the network of partners, government departments at district and state level, will facilitate linkages for farmer producer organisations with markets.

Also, we will attempt to integrate these farmer producer organisations into digital marketing channels such as e-NAM [National Agriculture Market] and NCDEX [National Commodity & Derivatives Exchange]. Farmer producer organisations will be encouraged to prepare a sound business plan for their business activities. Farmer producer organisations will mobilise equity support, as well as credit guarantee cover for bank loans.

The government has provided exemption on payment of income tax for five years to those farmer producer organisations having turnover below Rs 100 crore. In addition, we are taking up with the government on providing by working on exemption for Minimum Alternate Tax.

As far as legal compliances are concerned, it may be mentioned that the scheme guidelines necessitate the need for five professionals in each Cluster-Based Business Organisation, including those with knowledge of legal compliance. This will help ensure adequate hand-holding support to farmer producer organisations.

This article first appeared on IndiaSpend, a data-driven and public-interest journalism non-profit.