Special Feature
In Search of a Food Revolution
M.S. Banga Chairman, HLL
The
slowdown in the economy is of serious concern to everyone in Government,
industry and every other sector of the economy. Our GDP growth target for the
Tenth Plan is 7.7%, rising to 8.1% in the subsequent one. Today we are at a 6%
level, which is itself below the current Plan. Even more worrying is the fact
that our growth rate has been trending down for the last 3 years.
The
sectoral components of this slowdown are very telling. Agricultural growth has
dropped to 0.9% from an average of 3.9% in the 1980's and 3.3% in the 90's.
Industrial growth too has slowed to below 6% from 6.6% in the last decade.
Importance
of Agriculture
In
the last decade, we have fairly successfully remodelled the industry and
services sector, through policy and legislative reform. The recent growth in
Information Technology is the result of Indian technological excellence and
cost-competitiveness, well supported by the necessary policy and legal
framework. However, impressive as it is, the IT boom has directly impacted less
than 500,000 people - a very small proportion of our total population.
A
high rate of economic growth is sustainable in the long-term only if it is
broad-based and benefits a majority of our people, thereby creating a virtuous
demand led growth cycle. While agriculture contributes less than a quarter of
India's GDP, over 70% of India's billion-strong population is dependent on it.
This is why it is an important potential demand base for industry and services,
in addition to being the supply base for food and raw material. Already, almost
half the demand for FMCG goods, and black & white television sets, pressure
cookers, table fans, sewing machines, watches and other consumer durables comes
from rural consumers.
Agricultural
growth therefore has a strong multiplier effect across the economy. Our
modelling shows that a modest incremental growth of 3% in agriculture would lead
to another 2.6% growth for the manufacturing sector, taking overall GDP growth
up by 1.7% - closer to the 8% mark and our Tenth Plan ambitions.
After
the success of the Green Revolution, national initiatives in agriculture have,
however, been dispersed and ineffective over the last couple of decades. In this
context, the recently announced National Agriculture Policy is timely.
It
is now essential for both Government and industry to take some bold initiatives
to ensure its implementation and bring about another structural change - a Food Revolution.
China:
A relevant Example
Every
country must adopt a growth strategy tailored to its country advantages,
population needs and resource availability. We would benefit by looking at how
another large, diverse and developing economy has leveraged agriculture for
overall growth. A lot has been written about the success of China in attracting
FDI and making infrastructural investment. However, not much mention is made of
its major strides in agriculture, making this a true growth driver for the rest
of the economy.
Agriculture
is a major force in China's economy just like in India. 70% of China's
population lives in rural areas and is economically active in agriculture. In
the 90's, China's agriculture grew at 5.1% p.a, increasing incomes across a very
broad population base. The number of rural poor declined to 50 million, bringing
a large number of new consumers into the economy and driving demand for
industrial goods and services. Agriculture thus also played a major role in
driving industrial growth and overall GDP.
Today,
China's agricultural sector accounts for only 17% of GDP (as compared to 24% for
India). Despite that, it has been accorded the top priority in the National
Economic Development agenda in their new milennium blueprint upto 2010. While
many of the specific measures that China took to achieve high agricultural
growth are not relevant in the Indian context, one aspect of their strategy is
very compelling. They have used the twin planks of productivity improvement in
agriculture and the creation of a thriving food processing sector to build a
vibrant rural economy. This has helped contain urban migration, in addition to
accelerating agricultural growth and therefore driving overall GDP growth.
The
task for us in India lies in achieving a similar end result through appropriate
strategies designed for our situation.
The
Current Paradox of Indian Agriculture
Let
us look at today's well-publicised situation on the foodgrain front. On the one
hand, we have godowns overflowing with grain but on the other, large sections of
our population still have one of the lowest per capita calorie consumption.
Simply put, this is because these consumers cannot afford to buy food at the
current prices.
Historically,
the Government has tried to increase agricultural incomes by increasing the
minimum support price or subsidies. But that is no longer possible, as even at
the current prices, food is not affordable to a large section of people. In
fact, high food stocks have led to farmers often realising significantly lower
prices.
If
prices cannot be increased any further, the only option to protect and increase
farm incomes, is to impact the other variable in the equation - i.e. Volume or
Consumption.
The
focus of our efforts, therefore, has to be on driving Consumption.
Increasing
Food Consumption
Our
economic modelling clearly demonstrates that the consumption of wheat amongst
the lower income groups will increase by over 25%, if the price was to be
reduced by Rs. 2/kg reflecting the level of unfulfilled demand. This is also
borne out by the 1997 NSS statistics, where 42% of our rural population and 49%
of urban population are shown to receive less than the accepted daily calorie
intake norm - and these proportions have virtually remained the same in the last
decade. This increase of 25% is equivalent to an incremental demand of 41 mn
tons of cereals.
Not
only do these people not eat enough, they also do not eat enough variety.
Cereals contribute over 80% of the calories of people in the lowest income
segment, decreasing to about 50% as we move up the income curve. There is thus a
need to increase the range of foods available, including value added cereals,
fruits and vegetables, to improve overall nutrition.
The
key question therefore is - how do we increase food consumption?
A
short-term imperative is to liquidate the excess stock of foodgrain that we are
currently carrying through appropriate schemes like "Food for Work"
and increasing the amount of food released through the PDS for the "Below
Poverty Line (BPL)" segment. This would not only help meet the demand gap
that exists today, but also bring down the interest and other carrying costs,
estimated at Rs. 11,700 cr p.a.
It
is clear, however, that structural change is required in the medium and longer
term. Burgeoning input costs lead to burgeoning support prices, which as we have
discussed, result in food being even further out of reach for many of our lower
income citizens. This is in effect a "Cost-Plus" model, which neither
takes into account what the consumer can afford to pay, nor indeed rewards
cost-saving and productivity improvement measures.
The
HLL Experience: From Cost-Plus to Challenge Cost
I
would like to share with you the Hindustan Lever way of working, as an option to
this "Cost-Plus" model.Being a highly consumer focussed company, we
start with our target consumer and determine the price that she is willing to
pay for the benefits that we are selling. This must be affordable and
competitively the best value for her money. We then fix the margin that we
should be making on that offering, which would be in line with our corporate
ambition and shareholder expectations. The target consumer price less the target
margin gives us the "Challenge Cost" that we have to achieve through
our expertise in R & D, manufacturing and supply chain.
Let
us see if we can apply a similar philosophy to agriculture. I have taken wheat
as an example, as we are in the business of wheat flour and other wheat-based
products, and so are quite familiar with it.
The
Economics of Indian Wheat
India
is the second largest producer of wheat in the world with an output of more than
70 mn tons. And yet, our average productivity is a mere 2.7 tons per hectare.
This is significantly lower than the best in the world, which is in the region
of 7 tons/ha. In fact, even in Punjab, we achieve only 4.3 tons/ha. There is
thus significant potential to improve productivity and hence reduce the cost per
ton.
What
then limits the Indian farmer from achieving this potential? Most aspects of the
problem are well known. The farmer is mostly uneducated, often illiterate, and
does not have access to best practices in agronomy. Some other contributory
factors are:
Low
incomes and limited capacity to invest in inputs:
At
current productivity levels and support prices, even a Punjab farmer earns a net
profit of only Rs. 10,000 per ha. The absolute earnings of an average farmer in
the rest of the country, where the yield is only 60% of Punjab and the average
landholding is less than 1 ha, will obviously be much lower. Finance is also
very expensive for the small farmer through the village money lending system.
These factors limit his capacity to invest in the requisite inputs, even though
the investment will pay back many times over in terms of increased output.
Absence
of support:
In
today's unpredictable agricultural situation, the farmer, already burdened by
expensive credit, has no crop insurance to fall back on. Nor does he have other
support facilities like demand projections for crop planning, soil testing and
weather forecasting to guide planting, inputs and harvesting.
Inefficient
Supply Chain:
The
supply chain from the farmer's field to the consumer is also quite inefficient.
The Market Committee legislations of various States mandate that wheat be
auctioned/sold under supervision only at a designated mandi.
At
the village level, the wheat crop is consolidated by the "kacha aadtiya",
to take up a truck load etc., adding on a commission. Further, 2% - 5% of the
crop is lost in spillage and transport by the time it reaches the mandi where,
once again, fees and commission charges have to be paid. The transportation and
storage facilities at all stages are very inefficient leading to significant
degradation in quality, and losses to spillage, pests and insects.
Instead,
if the food processor was allowed to buy wheat directly from the farmer, he
could save at least Rs. 500/ton of wheat through reducing commissions and
transit/storage losses.
The
Way Ahead: A Road Map
I
would now like to propose a way forward by outlining some solutions.
These
are in three areas:
-Focusing
on Precision Farming to improve farm productivity even within the current land
holding pattern and other constraints
-Creating
a structure to facilitate growth of a vibrant food processing industry.
-Identifying
various enablers for this model to work
I
shall now briefly discuss each of these.
Precision
Farming
It
is commonly believed that productivity increases can not only come from either
increasing irrigation or mechanising aggregated land holdings. In fact, there
are many steps that can be taken even by small farmers for productivity
improvement, by merely adopting good agronomical practices.
I would term this Precision Farming in our context - whereby a
farmer adjusts farm practices to match the variation of soil and terrain across
time and the area of his plot, rather than following the current practice of a
"one size fits all" approach, which manages crops at the lowest common
denominator.
Let
me illustrate this with the same example of wheat. Significant increases in
productivity have been demonstrated by ensuring the timeliness
and method of sowing and also with the timeliness
of irrigation to coincide with critical stages in the development of the
seed. Further, soil analysis has been
proven effects on output.
However,
given the profile of our small farmer, it is crucial for us to create a
sustainable structure for the dissemination of knowledge and construction of
infrastructure to support these practices. I believe that industry can play a
meaningful role in this as explained next.
A
Partnership Web for Mutual Benefit
Our
small farmer needs access to best practice in Precision Farming, affordable
credit, crop insurance, farm inputs, and modern farm equipment in order to
increase productivity. He also would benefit from direct access to the market.
As
explained, he is uneducated, with marginal resources, often dependent on
expensive village credit. There are also several intermediate stages between him
and the food processor - the "kacha aadtiya", the mandi, and other
commission agents. This supply chain structure is inefficient and expensive as
it adds commissions and fees at every leg. It also necessitates several stages
of wasteful transport between these points instead of a single movement between
farmer and food processor resulting in high costs of unnecessary storage and
associated losses. To overcome these hurdles, I would propose that we create a
partnership web between the farmer and agri-input companies, banks, insurance
companies, grain handling and storage companies, and food processors. We would
do this by establishing Farmer Service Centres with an appropriate radius of
operation.
The
Farmer Service Centre would be run
as a private enterprise between the food processor and a number of other input
providers such as a bank, fertiliser/seed producer, farm vehicels manufacturers,
and so on. Either the food processor or agri-input provider could take the lead
in establishing this model.
The
benefits of this model are very significant:
-Agri-inputs
would be made available directly to the farmer. They would now be more
affordable without the wholesale and retail margins.
-The
Farmer Service Centre would provide extension services to ensure that the farmer
has access to best practices in Precision Farming techniques.
-The
food processor would access the farm produce directly. This would eliminate all
commissions and fees and reduce transport costs.
-Specialised
grain handling equipment, transport and vertical storage would be installed
reducing both costs and spillage/losses to pests. Disintermediation in the
supply chain would also release people from the roles of village commission
agents and small traders. They could either find new avenues in the
agro-industries that will come up under this model, or as indeed has been
demonstrated in other countries, they will be absorbed by the growth in the
industry and services sector, without necessarily adding to the problem of urban
migration.
A
Win-Win for Farmer and Consumer
Such
a model will certainly drive down the cost of production of our agricultural
produce. I have modelled the reduction possible by applying this to wheat and
give this in the table below:
Rs./Ha
Yield/Productivity
Improvement (at Re.1
lower
procurement price)
6600
Agri-input
costs: Disintermediation savings 200
Village
commissions savings etc.
400
TOTAL
7200
Reduction
in farmer's cost/kg Rs.
1.50
Rs/T
Transportation
to mandis/bagging
300
Mandi
fees/commissions
400
Storage
and transportation savings
300
TOTAL
1000
Reduction
in supply chain cost/kg Rs. 1.00
Overall
reduction in cost of wheat Rs. 2.50
It
is, therefore, possible to reduce the
cost of wheat by Rs. 2.50 per kg. This benefit can then be shared between
the farmer and the consumer. If we were to go back to our "Challenge
Cost" model and reduce the price of wheat to the consumer by Rs. 2, then
consumption would increase by 25%. The farmer's efficiencies would result in
increased production and increased offtake, and add 20% to his income, despite a
lower procurement price.
Enablers
Required for the Model
For
the model to work, I have identified several key enablers. These are in four
broad areas as outlined below:
-Redirection
of Government effort
-Amendments
in the legal framework
-Rationalisation
of fiscal levies
-Mandatory
packaging of food products
I
shall now describe each of these briefly.
Redirection
of Government Effort
It
is worth remembering that our historical agricultural policy framework was
developed at a time when India was acutely short of food. Since then we have
made great strides through the Green Revolution. It is important for us now to
reorient all our policies from managing shortages to promoting efficiencies and
value addition.
Therefore,
for mature crops like wheat, rice, sugar, oilseeds etc., the Government should
move from playing a regulatory role to a supportive one. Specifically:
*
Remove all restrictions on movement and storage of foodgrains to create a Common
Indian Market.
*
Improve information availability and create a Futures Market to ensure that crop
planning is more demand driven
*
Redefine the role of agencies like the FCI to help administer the above and
perhaps be the nodal agency for exports. It is worth noting that this improvment
in productivity and efficiency will enable us to export crops like wheat without
losing money.
In
the case of emerging sectors like processed fruits and vegetables, seed
production, organic farming, floriculture - all sectors which play to our
country advantages - the Government should take on a proactive role in
encouraging investment in R & D, manufacturing, market and infrastructure
development.
Amendments
in the legal Framework
There
are several areas where our legal framework needs both simplification and
amendment across central, state and local legislation. Accordingly, it will be
crucial for us to evolve a broad-based consensus on the direction to be pursued.
Some key areas for change are highlighted below:
*
The Market Committee legislation of various States currently limit produce from
an area to be sold through the mandi in that area only. These will need to be
dropped to facilitate free movement across the country as well as direct
purchase by a food processor from the farmer.
*
Forward contract should be premitted, enabling the food processor to contract
for a crop even before it is sown.
*
Enforceability of contracts between farmers or farmer groups and the food
processor should be enhanced to protect both farmer and food processor
equitably.
*
Harmonising our food laws and housing them under one Ministry is essential.
Today, we have several laws that apply to food products (Fruit Products Order,
Prevention of Food Adulteration Act, Vegetable Oil Products Order, Standards of
Weights and Measures Rules etc).
As
these were framed separately, they often have contradictory requirements. In
addition, they are controlled by different Ministries, both at the Centre and in
the States, leading to enormous operational difficulty. We would greatly
facilitate the growth of food processing by housing the administration of all
food linked legislation under one Ministry as done in many other countries. This
Ministry should also then be charged with combining them into a single
harmonious legislation.
*
Reorienting the laws to facilitate innovation and value addition is equally
important. Currently, our laws prescribe a very restricted regime for the
formulation of food products by stipulating all the ingredients and the levels
at which these can be used. New ingredients are essential to innovation, and
getting these approved is complex and slow. Just as we have aligned many of our
other legislations with international standards, I would suggest that we bring
our food laws in line with the international Codex prescribed for food trade and
widely followed in the world. This would greatly enhance innovation, while
continuing to protect adequately the Indian cousumer.
*
Refocus enforcement more on to ensuring compliance rather than prosecution. For
example, I would recommend the formation of a National Certifying Agency to
ensure that hygiene and safe practices are followed by manufacturing units
rather than allowing prosecutions to be filed by any official as is the case
presently. In any case, all Government Laboratories used to scrutinise the
operations of the food industry must at least be certified by the National
Accreditation Board for Laboratories.
Rationalisation
of Fiscal Levies
Processed
foods are primarily derived from agricultural commodities, which often incur
multiple taxes at various stages such as Market Fee/Mandi Fee, Octroi/Entry Tax/Cess,
Sales Tax, Turnover Tax, Central Excise, etc.This multiple taxation has a
cascading effect on prices. In addition, there is a wide variation in the level
of taxes across States (from 4% to 20%). This creates a barrier to the free flow
of materials from the farm to the factory and ultimately to the consumers.
Further,
packaged goods attract higher rates of Sales Tax while the same food products
sold loose or unpackaged are either exempt or subject to very low rate of taxes.
This encourages sale of loose commodities which are often sub-standard and/or
adulterated.
A
simple solution would be to do away with such cascading taxes and replace these,
if necessary, with a uniform additional excise duty to encourage free and easy
movement of goods within the country, as has been done with tobacco and
textiles.
Mandatory
Packaging of Food Products
Packaging
of food products should also be progressively made compulsory (as has been
proposed for edible oils) to ensure hygienic availability food and eliminate the
possibility of adulteration.This will also greatly catalyse the development of a
food processing sector.
This,
then, is the road map for the future - a series of steps which would truly
revolutionise agriculture in India, by improving its productivity and creating a
vibrant food processing industry, leading to sustainable benefits for both the
farmer and the consumer.
Examples
from Around the World
Various
versions of this model have been developed and upscaled successfully elsewhere
in the world. One such case is the orange juice industry in Brazil.
Brazil
is the world's largest orange juice producer, with a 50% global market share.
The country advantages are its favourable climate and lower costs of production,
but the learning for us is in the structure they have used to convert this into
a winning model.
Multi-lateral
partnerships exist between the farmers, processors, banks and other support
agencies, governing the entire span of operations based on long-tern contracts.
Supplementary services like packaging, storage and transportation have developed
around the basic crushing industry, to make the supply chain from production to
shipment truly seamless.
The
agricultural sector, therefore, has been the nucleus which has spawned the
growth of a huge industry, through a network of partnerships, ably supported by
Government policies and laws.
Need
for Urgency
A
good monsoon will temporarily alleviate the suffering for some of our farmers
who were badly affected by drought in the last couple of years. However, given
our current policy framework, even this will only add to the growing stocks of
foodgrain, without adding significantly or sustainably to either farm incomes or
indeed increasing consumption. The model that I have outlined will bring
together various stakeholders in the food supply chain and create a partnership
web for mutual benefit. This would increase agricultural productivity, which
would in turn increase farm incomes and make food more affordable, at the same
time. Increased farm incomes will impact the majority of our population, which
would in turn drive demand for the rest of the industry and services sector,
leading to a sustainable growth cycle. Equally, increased consumption of food
will improve the quality of life and productivity of our population. The
creation of a vibrant food processing industry would add further value,
generating employment and prosperity. I have also identified the key enablers
that need to be put in place by the Government for this model to work
successfully. Urgent and effective intervention is required to make this a
reality. We as a country have responded to crises, through concerted action born
out of national consensus. The success of the Green Revolution and the White
Revolution is indeed proof of this. Now, we need a Food Revolution to foster a
virtuous cycle of regenerative, broad-based growth. We at Hindustan Lever are
deeply committed to making this happen.