Why is India’s Agri Supply Chain broken and How

to fix it
Author : Venkata Subramanian – Founder and MD
eFarm(www.efarm.in)
venky@matchboxsolutions.in

The fact that India is world’s leading ‘producer’ of agricultural products in several
categories but unable to meet its own demand and reduced to importing even basic
commodities is often unexplained. Though several attempts have been made by
government ,private sector and socially conscious organizations over the years ,
they have failed to scale up to ‘bell the cat’. In this paper we would look deeper into
each of these solution ideas, identify why they failed and offer some guidelines for
future agri business entrepreneurs and policy makers . The idea again is not to find
faults, but rather gain from these experiences . Also, as agriculture industry has
always been a low growth, low attention sector for several years, there are several
myths and misconceptions . We have attempted to unravel these through a
‘question & answer’ type approach , so that key issues and solutions can be grasped
by even a lay person.

Is there really a crisis in Indian agriculture ?

For most urban people, the real depth of the agrarian cris iis has not hit beyond the
occasional price hikes, and media publicity on farmer suicides. Agriculture has
always been seen as a ‘government’s problem to resolve , and the key agenda just
prior to any election. The fact that we are importing food to meet domestic
demands ii, witnessing large scale migration of villagers to city has not yet sunk
into the common man’s mind .

Though urban people may be fascinated by the simple village life , reality is that,
life isn’t all that easy in the villages. The aspirations of rural folks is to seek out
greener pastures in the nearby metros and educate their kids and push them out of
the village . Hence statistically, food supply is dwindling and demand is shooting up
– we are all sitting on a largescale socio economic ‘time bomb’.

Isn’t the government providing subsidies and loan waivers to

assist farmers?
Most farm related industries – such as fertilizer companies, drip irrigation companies
and farm equipment manufacturers have all been benefitting from high
subsidiesiii.Banks typically sanction loans against land as collateral. Most marginal
farmers operate on leased land and hence are outside the purview of such loans.
Thirdly, owing to high levels of corruption in the agencies which dole out such
grants, farmers hardly get any such benefits.

Most farmers are still funded by local money lenders who also double up as local
buyers, making this a vicious cycle – huge subsidies on one end iv, v/s deteriorating
financial condition on other. Though this is no secret to any government in
power,since agriculture is a very touchy subject , no one wants to shake the boat.v

Can’t we solve this by increasing yield and productivity of the

farmlands with more scientific cultivation?
Agrarian lands are fast loosing out to large scale real estate development &
urbanization. With added issue of farming being an unviable activity, large tracts of
land are currently under utilized. With water levels reducing drastically , even the
ever prototypical rich punjab farmer is seen struggling and deep in debt. vi

Though there are several issues in the cultivation side, the real woes are in the
logistics and supply chain. With a whopping 40-50% wastage in transit and handling
, no amount of increase in productivity can make up for this sheer wastage. For an
analogy, if at your home , if 50% of all that you earn is wasted by your family and
they complain of being underfed ,

(1)would you try to work harder to earn more money or

(2) try to reduce the wastage first ?

Though option 2 may be the obvious choice, strangely in the context of Indian
government, we have all along been drumming with option 1.

What about farmers directly selling to end consumers to avoid

middlemen through farmer’s markets?
This is a utopian myth for simple reason - if the farmer is expected to sit in a
market and sell his goods, then who is doing the ‘farming’ ? in most cases the end
consumer is 100s of kilometres away from nearest village. Also, selling requires a
different mind set and skill than production. Even the largest of farmers do not
harvest daily – hence have periods of frequency ranging from a few days to a
month. Also the volume per harvest is too large for direct retail sales. Hence they
have to resort to selling off to a middlemen who breaks the bulk. Hence most
government promoted ‘farmer’s markets’ have failed their objectives. vii

It is important to understand that a supply chain is not composed of farmers alone –

several stakeholders , such as intermediaries, transporters, distributors and retailers
all need to be in sync to enable a smooth supply chain. Schemes which are ‘only
farmer focussed’ tend to fail when they don’t accommodate other parties.
What about more cold chains to help farmers store their
products to avoid seasonal variations ?
This is the most quoted ‘silver bullet’ solution – but strangely, India has over several
cold storage houses already built and under utilized. The reasons range from the
obvious : cold storages need huge amounts of uninterrupted power supply to run,
which in India’s rural areas is a luxury. Second, it involves complex scientific
knowledge to balance the gases being emanated from the produce as even slight
variations in the chamber can have more adverse effects than leaving in open.
Thirdly, planning the inbound/outbound logistics to maintain peak utilization of a
cold storage is a highly skilled management task which is vital to maintain price
levels.

Hence any investments in cold storage rooms should take into consideration the
deamdn/supply situations and proper management of the facility to reap benefits.

What about organized logistics players and cold storage

trucks to minimize the losses in transit ?
Most organized logistics players in India avoid the F&V segment owing to risks and
complexities. The bulk of agri produce is transported using myriad of routes such as
buses, trains and independent fleet of truckers who lack the knowledge and
professionalism to handle such goods. Even basic packaging of materials is mostly
in open crates and gunny bags which are all subject to high damage and losses. The
losses in transit alone are estimated to be 40% (Rs 45000 crores)viii

Aren’t the private sector/branded retail chains solving this

problem by setting up their own modern supply chain ?
Another popular misconception is that the big name branded retailers have the
supply chain systems in place . Well, neon signboards and flashy banners not
withstanding, all branded retailers put together handle less than 1% of total value
of sales in the F&V segment. Their hunt for rapid expansion and capturing prime
real estate in urban areas , resulted in lack of adequate focus on the supply chain
aspects and resolving grass root issues first. Also, as they focused only on the
higher end customer segments, they purchased only the ‘best grade’ varieties from
the farmers , leaving the them to face the wrath of the local mandi agents with rest
of their bulk . To add to the woes, payments were often late (over 45 days) and
missed, discouraging farmers from further interactions.

Hence once seen as the ‘kirana killers’ are pathetically struggling now to find means
to keep their shelves stocked up. ix

So who are the big middlemen in this trade ? can’t we remove

the middlemen ?
Over 95% of India’s F&V produce is handled by the unorganized sector. The goods
typically change atleast 5 hands before reaching end customer , escalating prices
by over 400%. Though lot of ire has been spent on this issue, the fact is , there
seems to be some order in this chaos , as moving 8 lakh tones of perishable goods
every day is no mean task. Unlike the western countries , there are no single big
entities in this segment – only regional or product specific agents who have some
muscle over their respective domains. Though ‘remove the middlemen’ seems the
impulsive solution , any regulated market – say stock market, insurance segment ,
real estate etc all have their share of brokers and middlemen who are necessary to
‘enable’ the buyers & sellers to meet up and trade. In other industries the brokers
role is seen as a value addition , hence not that despised. Hence the concept of
middlemen as a system is necessary for market making mechanism to work
efficiently – just that we need to ensure that they are being transparent and add
value to the chain.

Why not increase the quality of products to attract better

prices from the global export market ?
Though efforts to raise India’s horticulture products to global GAP standards (such
as mango, grape,guava) , the irony is that we are still a non-player in world markets.
Our domestic logistics costs far outweigh the quality aspects , making several
export oriented ventures non viable . Further , our domestic demands are so high
that we are having to import the same products from abroad to meet needs of the
urban consumers.

Why is there so much fluctuation in F&V prices ? How is the

price of perishable commodities determined and by whom ?
Usually the grower has least influence on the price. Most farmers who are in the
F&V segment,don’t keep any accounts of their expenses owning to the dynamic
nature and high variable costs involved. Their plight is - not knowing COST PRICE,
and letting the market determine the SALE PRICE. Which is why we constantly hear
the outcry that they don’t get the right value for their products. x

The price of a vegetable at the mandi is set based on several factors – broadly, the
‘immediate demand/supply’ situation at the place of sale , the grade, quantity and
time. Seasonal factors such as festivals , strikes, fuel hikes can all shoot up prices at
intermediate points. The commissions agents who control each commodity in
particular market are the only ones who can sense how the buyer/seller segment
would react to a particular price and take the call which is propagated across the
chain. It is very adhoc and sentiment driven.

To come out of this , we would need more transparent demand/supply data and
price making mechanism.
What about ICT technologies implementation in rural areas to
bridge the information divide ?
Several commendable attempts have been made in creating price information
(TNAU/INDG) , or spot market trading (SNX/SAFAL) terminals which allows for price
discovery . But the issue is that ‘knowing the price’ is just the preliminary step.
Settlement processing , where goods are transported to customer and money is
paid to supplier is still a grey area , and again is dependent on volumes. Hence even
the most ambitious projects such as SNX/SAFAL have been forced to shut down for
lack of volumes and being too ahead of its times.xi

Most ambitious ICT projects have over relied on the need for the farmer to use
websites for data entry. With high levels of illiteracy and poor computer knowledge
this is too big a gap for the rural masses. Hence applications and effective
adoptions have been poor , unless a proper via medium or critical need is
established.

Also, growth of mobile phones has rapidly overtaken the internet reach ,
establishing the fact that voice will still be the killer application in the BOP segment.

What about the various successes in rural marketing by

leading FMCG goods companies ?
Most rural marketing successes in India are all one way driven – focused on selling a
particular brand of soft drink or shampoo to a farmer who has never heard of it
before. But when a farmer wants to sell something to the consumer in the city, no
such organized marketing channels exist today .

This has been the single largest cry from the growers community across India – that
they need a reliable, simple, marketing agency to reach out to end consumers. Most
urban companies tend to see farmer as a ‘buyer’ rather than a ‘supplier’ – and
hence a huge gap exists in the marketing structures in the forward & reverse
chains.

Though agricultural universities and agencies have traditionally been close to

farmers and helped in the theprodiction aspects , sales and marketing are often
outside scope of such agencies. Hence the farmers are often forced to do their own
marketing . Marketing perishable food products ,which even the great Philip Kotler
would admit , is the most difficult and highly risk prone.

Maybe we need a world class MNC to come and setup the

broken agri supply chain ?
Most multinationals base their supply chains on reliable sources from large contract
farms, and a highly efficient logistics channels. Many have struggled to establish
their presence in India owing to highly fragmented growers , lack of good roads to
connect the farms to nearest collection points, lack of standardization, and high
volatility in pricing & quality. Most MNCs are hence found scrambling for good local
partners to assist in these ground operations.

Incidentally, one of the world’s best and six sigma certified supply chain systems
exists in India – the dabbawallahs of Mumbai. xiiWorld renowned for the simplicity,
elegance and low cost solution , this tiffen delivery system is one of the longest
lasting, unbroken supply chain in modern history, and run mostly by illiterate old
men. Several foreign universities and agencies have researched about this system –
its maybe time we borrowed a leaf from our own people !

If none of the major organized forces have a presence in the

retailing of F&V, who is getting us our daily food ?
The unsung heroes of India’s agri supply chain are the millions of sabjeewallahs
(vegetable vendors) who run the streets and man street side kiosks distributing
each days fresh produce . Though individually they may seem small, collectively
their volumes are much larger than any organized retailer. Being at the fag end of
the chain, they are often seen as the ones with highest price points – but in reality
they have little control on the intermediate price hikes and are only relaying the
general trends. xiii

Very little research has been done on their sales and distribution techniques, no
professional training or support is available for them to upgrade their skills (unlike
farmers who still have access to best of research institutions), very few access to
funds or loans (as traders and hawkers don’t get loans from banks in general).

Imagine a car company with no dealers? Imagine an FMCG company with no

retailers? How can farmers (and agriculture) survive without a strong onground
sales force? Ironically, the F&V segment’s biggest sales force is also the least
recognized, incentivized and supported . Though a lot of limelight is on the plight of
‘poor farmers’, very little is known of the ‘poor vegetable vendors’ who are the ones
selling the produce and reaching it to our doorsteps.

So what is a workable solution, considering the above

constraints and Indian context ?
To summarise, the following are the analysis and suggested solution frameworks .
These would need coordinated efforts across different partners to be made
effective.

1. Unorganized sector holds the key : Being the dominant player, Any
improvements in this segment would have the widest impact across the
chain.
2. Need a Wholistic approach : Government should come out of ‘farmer centric’
approaches , and take a more wholistic view of entire chain. One should also
realize that each of the roles in the supply chain are highly specialized , and
requires coordination amongst various players – one person or entity cannot
effectively perform all roles.

3. Standardisation : Though we have been pioneers in agriculture for over

10000 years, we are yet to bring about even basic standardization in the
trade. We should come up with simple , uniform product classification,
grading, and bulk packaging norms. Crates, bags and volumes used in
agriculture trade should be standardized to ease of trade.

4. Demand driven approach : We should focus on understanding and mapping

the key requirements of each of the customer segments – from households,
to bulk buyers (such as hotels, processors, exporters) and match our
production to tune into end customer needs.

5. Bottoms up approach : Most organized retailing concepts start and end at the
‘top of the pyramid’ failing to make any impact downstream. One should
rather prove the concept from the poorer segments , which is the largest and
most dominant force , which will effectively validate that the systems work
for higher end segments as well.

6. Incremental value addition : Instead of pushing new technologies and

processes into the chain, we should rather have small baby steps across the
chain, whereby each stakeholder realizes the value of additional input
through immediate economic gains. The ‘pull’ factor from the stakeholders
can drive change faster.

7. Voice as the killer application in ICT : Interfacing the mobile phones and SMS
based user inputs with the backend systems would be key to reach massive
scale across rural areas. Call centres & BPOs would act as the front ends to
the web portals & computer systems, thereby making even complex systems
accessible to the illiterate.

8. Awareness and recruiting of more educated and fresh blood into agri business
: Most youth have traditionally backed away from this sector. But their energy
and creativity are key to bring about rapid change in the agri sector , which is
otherwise stuck in a time capsule. Agri entrepreneurship should be
encouraged across campuses as the key to reviving India’s economy.

9. Agri marketing will usher the next green revolution : With use of modern
technology, better post harvest management and end to end supply chain
networks , it is the effective marketing of agriculture products which holds
the key to next green wave in India.
References (with links to web pages online)
i
Livemint article : India’s Green revolution pioneer sees Agrarian crisis (link)
ii
Hindu Businessline article : Agriculture hostage to knee jerk actions (link)
iii
Subsidies in India : A Wikipedia article (link)
iv
Farm subsidies- What’s your take (merinews.com article) - (link)
v
Agriculture subsidies- Who are the beneficiaries ? Vijay Paul Sharma, Hrima Thaker (IIM
Ahmedabad) 2009 (link)
vi
Grain drain in Punjab : Outlook magazine article (link)
vii
Farmer’s markets in Tamilnadu : S. Rengasamy, J. Devavaramet etc, IIED, UK (link)
viii
Post Harvest Losses in India (link)
ix
Food retail chain and supermarket evolution in India : P.G.Chengappa, VC, UAS Bangalore
(link)
x
How are vegetables priced ? Agri India blog (link)
xi
Safal snx has shutdown : Nidhi Nath’s blog in economic times (link)
xii
Beyond Six sigma A Supply chain management case study (link)
xiii
Roadside Sabjeewallahs – Agri India blog (link)