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Part-2: What is the current condition of Indian agricultural supply chains

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Vinod is a HR leader for a leading tech company in the Silicon Valley. He writes on topics including the economy, science and education. He is an alumnus of IIT Bombay, Cornell University and the University of Wisconsin-Madison.

Currently there are 10,000 suicides a year among farmers in India. 70% of them are tenant farmers who do not even own their land. In the present system, 70-80% of the value is captured by middlemen. For example, a farmer in Nashik gets Rs 35 per kg of onion when the consumer pays more than Rs 100 per kg. While both consumers and farmers complain, the middlemen laugh their way to the bank. There have been times when farmers sell onions for Rs 5/kg and the consumer buys for Rs 100/kg. Economist Ashok Gulati notes that there is an additional 40% markup after passing through Mandis because of the intermediary administrative, procurement, distribution and stocking expenses.

Mandis and traders have been known to form cartels. 35% of India’s onions passes through Asia’s largest market in Nashik. 20% of onions procurement is controlled by just 1 firm.  IT raids which broke this cartel in 2017 revealed that “a few traders purchased the onions at lower rates and then sold them at four to five times that rate” which ensured price fixing profits of 42 crores a day.

Current Supply Chain model of Indian Agriculture
  • Increased inefficiency: Currently if a farmer wants to sell his produce in an adjoining Mandi a couple of miles away, he is prevented by the Mandi system. He will have to sell wherever his regional Mandi is, even if it is hundreds of kilometers away. The entire cost of transportation and inefficiency will fall on the farmers. Hence, he needs to involve the aggregator (Bania) to pool in produce and transport to Mandis, adding to the farmer costs. Mandis in turn jack up the price of produce by 10-15% without adding any value. They charge hefty commissions from the farmers and exorbitant taxes from the traders. Even an unskilled Punjabi laborer in Mandis who does loading and unloading in a Mandi is currently paid an exorbitant salary of more than 1 lakh a month which more than what many IIM graduates make. Somebody is paying for all this inefficiency, either the farmer or the consumer.
  • Overproduction: The government procures foodgrains from Mandis and stores them in FCI godowns. Because states like Punjab and Haryana keep overproducing wheat and rice every year and exclude every other crop, the Central government is stuck with foodgrain stock which it doesn’t even have facilities to store. Compared to an annual uptake of 30-40 million tons, godowns are overflowing with produce. The overall current stock is already around 97 million tons, around 2.5 times the annual uptake and well above international norms.
  • Wastage: As per current trends, 25% of produce in godowns is being wasted or spoilt. This wastage is only bound to increase in the future as there is no additional storage facility left. This 25% wastage and rotting foodgrains translate to around 48000 crores. Tens of thousands of crores will be spent in buying grains nobody wants and will anyway go to waste. The government has made tall promises of more procurement next year without talking about enhancing storage or logistical facilities. This is what farmers need to be questioning.
  • Stagnancy and inability to change: Because the government is spending around 1.5 lakh crores buying foodgrains every year, farmers too see no reason to change food crops as they have an assured buyer promising rates above market. Since the government can’t sell the produce in the open market, without crashing the price of rice and wheat, the overall prices are also kept artificially high. The only option available to the government with their stock is to keep giving the foodgrains free in the public distribution system. But as the wealth of India improves, the poor will want to replace foodgrains with milk, poultry, fruits and vegetables. It is only a matter of time before the poor start demanding cash payments in lieu of foodgrains, so that they can buy the food they want. Once that happens, the government can pretty much dump all its excess unsold foodgrains straight to the ocean, so that atleast the government can save on storage and inventory costs. Because farmers are short sighted, they fail to understand their best welfare is to notice economic trends in the market. They need to move towards less water intensive and more remunerative options like poultry, milk, fruits and vegetables like other agricultural economies. This would even fetch them higher profits compared to the small profits they make currently.

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Vinod is a HR leader for a leading tech company in the Silicon Valley. He writes on topics including the economy, science and education. He is an alumnus of IIT Bombay, Cornell University and the University of Wisconsin-Madison.

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