Not ready yet for Nilekani model

 The Hindu Business Line

The Nilekani panel's proposal on direct cash transfer of subsidy to farmers in phases involves daunting logistic challenges.

The Task Force (TF) on ‘Direct transfer of subsidies on kerosene, LPG and fertilisers' headed by Mr Nandan Nilekani, Chairman, Unique Identification Authority of India (UIDAI) has, in its interim report, recommended a road-map for direct cash transfer of fertiliser subsidy in three phases:

Create software capability and tech support to track movement of fertilisers from retailer to farmers;

Set up infrastructure to facilitate direct cash transfer to bank accounts of retailers; and

Enable a system where farmers buy at market rates from retailers and get cash transfers to UID-linked accounts. Currently, fertiliser subsidy is disbursed at the level of manufacturer or importer. The Ministry of Fertilisers allocates funds to Department of Fertiliser (DOF). DOF in turn, passes on to the manufacturer who adjusts retail prices according to the subsidy.

Manufacturers/importers are required to sell urea at controlled price (MRP) and collect subsidy from the Government equal to excess of cost of production/import and distribution. Permissible cost to producers is determined under ‘New Pricing Scheme' (NPS).

NBS policy

Manufacturers of decontrolled phosphorus and potassium (P&K) fertilisers are given subsidy under the nutrient-based subsidy (NBS) policy. Subsidy rates under NBS are fixed on per nutrient basis. Unlike urea, these producers have the freedom to fix MRP.

The thrust of the subsidy policy is to keep fertiliser price to farmers ‘low'. Price connects with their capacity to pay. There are 107.6 million small and marginal farmers constituting 83.3 per cent of 129.2 million farm households. Large farmers (holding more than 10 hectares) are only 0.8 per cent.

While continuing the subsidy, TF proposes to shift the point of disbursal from manufacturer to retailer/farmer. Under the scheme, DOF will transfer money to the nodal bank which will credit to account of retailers/farmers in a network of banks after checking with CSMS (Certified Software Measurement Specialist).

In the second stage, the retailer will buy fertilisers from manufacturer at market price and sell it to farmers at a lower price enabled by subsidy. In the third stage, retailer will sell at market price; however, ‘effective' price paid by farmer will be lower due to subsidy.

Flawed perception

What has prompted such a drastic shift? This is based on a perception that extant system is prone to leakages! This is flawed. A fairly rigorous system of subsidy payments is in place to prevent any misuse. On other hand, benefits are huge.

The Government has to deal only with a handful of manufacturers (29 urea units and 19 DAP and NP/NPK complex plants). And, that helps in keeping cost of administering subsidy low. Fertiliser Industry Coordination Committee under DOF does this job.

Any apprehension that producers can exploit system is ‘unfounded' as under NBS for decontrolled fertilisers, they are paid on ‘uniform' per nutrient basis. For urea too, the Government has promised to shift to NBS. This will also help correct the imbalance in fertiliser use. Increase in fertiliser subsidy is often linked withmisuse. This too is a wrong notion. There has been no increase in MRP (10 per cent hike last year came after eight years) while there has been a steep increase in prices of feedstock and other inputs besides an increase in fertiliser use. Hence the rise in subsidy bill.

In 2008-09 thus, subsidy zoomed close to Rs 100,000 crore. This was primarily due to skyrocketing international crude price and steep increase in prices of feedstock and imported fertilisers. In 2009-10, it dropped to Rs 52,000 crore, as prices cooled that year.

Gyrations in subsidy

We will have to live with gyrations in subsidy irrespective of the chosen delivery point as subsidy is a function of ‘target' MRP on one hand and cost of production/import and distribution on the other. It is not a factor of how it is administered. Clearly, there is no justifiable basis for the proposed change. Still, if we take a plunge, this could have disastrous consequences. There are 2,76,313 fertiliser sale points. From a handful of manufacturers now, the government will have to deal with lakhs of retailers.

Setting up the required infrastructure is a huge challenge by itself. But, the biggest worry is the States do not have wherewithal and the will to do the job right. Infotech companies can provide software/tech support, but the crucial job of tracking and authenticating has to be done by States.

In 1991-92, the government exempted small and marginal farmers from increase in MRP of all controlled fertilisers by 30 per cent (except ammonium sulphate, CAN and ammonium chloride which were decontrolled). The money equivalent of this increase was given to States to be transmitted ‘directly' to beneficiaries. The result was a fiasco. A meagre 3.5 per cent of farmers benefited from it. Subsidy amount involved then was around Rs 400 crore. Now, we are talking of astronomical Rs 50,000 crore to be paid on certification by States!

Payment hassles

Under the present system, manufacturers get subsidy on ‘dispatch' — 90 per cent on account payment and the balance on verification. When, it comes to dealing with lakhs of retailers, it will be dangerous to continue with on account payments. Will the entire payment be released after sale? Will a retailer have enough cash to pay full/market price in the very first place?

All the more so, when subsidy component accounts for two thirds (for DAP) of price paid by him. Under extant system, subsidy payments to manufacturers often get delayed due to budget constraints and other reasons. The government has issued ‘fertiliser bonds' to them in lieu of cash. This had its own problems. One cannot dream of bonds being issued to dealers!!

There is thus a real danger of dealer network collapsing due to liquidity squeeze in an event of subsidy payments getting delayed. The Government could be putting the fertiliser supply chain to serious risk. Eventually, farmers would be hard hit.

In the third stage, problems of reaching subsidy to 129 million farm households will be of unimaginable proportions. How will they buy at market price? When will they get paid? Will they be ‘fully' compensated? Will subsidy go to the ‘right' persons?

(The author is Executive Director, CropLife India, New Delhi.)

(This article was published on August 31, 2011)

Food inflation to soar as farmers shun pulses

The Economic Times-KOLKATA/KOCHI/AHMEDABAD: Food prices may not cool substantially in the coming months as farmers shift from grains and pulses to cash crops like cotton and sugar cane. Acreage in cereals and pulses continues to lag last year's numbers, with only rice being sowed in excess of last year.

Overall acreage for major summer crops has gone up by 3% at 98.3 million hectares over the same period last year. Summer is India's most closely-watched growing season since it produces the bulk of the country's grains, pulses, oilseeds, sugarcane and cotton.

Paddy sowing is up by 12% at 35 million hectare over the same period last year. "Almost 89% of sowing is over and we expect sowing to get complete by August end or the first week of September," said TK Adhya, director of Hyderabad-based Central Rice Research Institute. The government has targeted 102 million tonne of rice output in the crop year ending June 2012, higher than 95.32 million tonne produced in 2010-11.

Paddy is still being sown in major producer Andhra Pradesh due to late arrival of rains. Sowing on around 17.5 lakh hectares has been completed. "Till last week, the total acreage covered was 13.07 lakh hectares. But good rains have helped increase the pace," said Dr P Raghuram, professor of Department of Agri Economics in S V Agricultural College in Tirupati.

Rice cultivation in Andhra Pradesh extended to 20 lakh hectares during the last kharif season. This year, the target is 29 lakh hectares. Usually, paddy sowing gets over by August but this time it has been extended by delayed rains, Raghuram said.

The shift in acreage may impact food prices, said analysts. "With lower production this year, we might see high inflation (in food grains, for sure).

Given the dynamics between acreage and production and production and inflation, with food grain acreage still below last year, we see risks to the degree of moderation that markets have been expecting in December," said Indranil Pan of Kotak Securities in a research report last week.

However, others are taking comfort from the overall good summer harvest prospects. Till the week ended August 24, cumulative rainfall in rain-dependent areas improved to 3.4% above normal from 2.9% above normal in the preceding week. Reservoir levels stand at 71% of capacity.

This has raised hopes of better rural incomes this year. Farm income jumped 32% in the 2010 kharif harvest.

"This should reap a good autumn kharif harvest (7% of GDP) that consolidates rural demand. We also expect a bumper winter rabi crop with the Indus that irrigates the wheat fields in the north running at 37.9% higher than average. Rural support for domestic demand is becoming critical given that our US economists have upped US recession risk to 40% from 35% on Friday. Besides, a good harvest should also douse agflation (and inflation) by late 2011," said Indranil Sen Gupta, Emerging Asia Economist at DSP Merrill Lynch (India) in a report last week.

Area under cotton, which contributes a third of India's agricultural GDP, is up by almost 10% in the current kharif season as higher returns earned during the last year has attracted farmers towards this cash crop.

Till last week, cotton acreage in the country was up to 11.7 million hectares compared to 10.6 million hectare in 2010 in the same period. India's leading producer, Gujarat, has registered an increase in sowing of cotton to 29 lakh hectare against 26 lakh hectare in the last year at the cost of groundnut.

FCI needs Rs 85,359 cr to pay for foodgrain procurement, dues

The Hindu Businessline - New Delhi, Aug. 29: 

Food Corporation of India (FCI) needs Rs 85,359 crore to pay for procurement of foodgrains and clear dues, the Rajya Sabha was informed today.

The Consumer Affairs, Food and Public Distribution Minister, Mr K.V. Thomas, said during Question Hour that against the allocation of Rs 47,239.80 crore for 2011-12, actual subsidy requirement for FCI this fiscal would be about Rs 67,742 crore.

“Due to shortfall in allocation for the current year, arrears of past years and additional requirement due to declaration of bonus on procurement of wheat, increase in MSP of paddy and additional allocations of foodgrains, the total requirement of subsidy for FCI is now estimated at Rs 85,359 crore,” he said.

“The mater has been taken up with the Ministry of Finance for allotment of additional subsidy for FCI,” he said. “It is a fact that there is a financial crunch but we are managing the situation,” he said.

Mr Thomas said after the passage of the Food Security Bill, food subsidy will rise to Rs 100,000 crore.

In July-September quarter, FCI needed about Rs 11,635 crore for payments to be made for procurement of foodgrains.

Against this, “initially we had only Rs 4,000 crore (and) later the Finance Ministry released Rs 7,635 crore and all the dues have been paid,” he said.

As procurement is higher this year because of high food production, FCI requires Rs 85,359 crore. To meet this, cash-credit limit with banks is being enhanced to Rs 50,000 crore from the current Rs 35,000 crore. Besides, the Finance Ministry is being requested to earmark more funds in the coming Budget.

“We are confident whatever due FCI has to give, we will be able to complete our commitment,” he said.

How the world burnt its fingers

The story has been one of concentration of economic power, with anti-trust laws in Germany and Japan mitigating the effects somewhat.

There has, of late, been a public relations overdrive for foreign direct investment in multi-brand retail. The bureaucrats want to move ahead with it. And politicians from the ruling party have expressed the need to build a political consensus. There appears to be a divide between the two. Those facing the electorate know the ground reality. In this matter, I hope the survival instinct of the politician prevails.

This business cannot be about ramming policy changes through, using PR. It is about the lives of people. How will they be affected? Who will pay the price? What are the likely social consequences? What can we learn from other countries, to protect India's interests?

First, some explanation about the nomenclature “FDI in multi-brand retail”. A leader of a national trade group told me that many of his constituents do not even understand what it means. The phrase is classic bureaucratic obfuscation.

The bureaucrats are justifying such FDI by saying it will improve supply-chain infrastructure for perishables, which is but a fraction of the retail industry. Using this excuse, what is proposed is that the entire retail world will be thrown open to foreign retailers. They should really call it “Inviting foreign companies to compete with all retailers and traders” so that everyone understands what it means.

The foreign retailers are likely to start with dry goods, as they tend to do around the world. These dry goods can be sourced from any part of the world. Every class of retailer, across product lines — garments, footwear, home furnishings, personal products, laundry, cleaning products, pharmaceuticals, furniture, kitchen and home appliances, white and brown goods, auto parts … you name it — will come under attack.

All sorts of retailers, and traders and intermediaries, run the risk of elimination. Manufacturers of merchandise will come under pricing pressure, and face the threat of a shut-down. All of this in the guise of improving “supply chain infrastructure”, which has no relevance to these categories.

Concentration is the game

In markets around the world, Big Retail has steadily edged out smaller players, leading to unfair concentration. In the grocery business, market shares range from 20 per cent to as high as 80 per cent plus for just a few retailers. Entire countries depend on them, as they control the supply of food.

Their shares, by country, are: Sweden 86 per cent, Belgium 79 per cent, Australia 78 per cent, Germany 75 per cent, Mexico 70 per cent, Canada 69 per cent, the UK 63 per cent, France 55 per cent, Brazil 38 per cent, Thailand 32 per cent, the US 30 per cent and Indonesia 20 per cent. In Brazil, Thailand and Indonesia, these shares have been achieved in just over a decade (see Table).

The social upheaval comes about because Big Foreign Retailers will aim for concentration, and this results in elimination of local retailers, fewer number of stores, and less employment.

In Thailand, over 30 per cent of independent small retailers were taken out in 10 years! We have 25 million chief wage earners in retail (Source: IRS). One percentage loss equals 250,000 jobs, comprising people who are not easily redeployed. If 30 per cent is lost, as in Thailand, this would impact 75 lakh jobs and 3.75 crore people (at five people per household). Readers can make their own estimates. The most poignant example of reduction in number of stores, and employment, is in the US. Between 1951 and 2011, the population of the US doubled from 155 million to 312 million. Yet the number of stores has actually declined from 1.77 million in 1951 to 1.5 million in 2011. The number of independent stores (with less than ten employees) has declined from 1.6 million to 1.1 million in the same period (see Table).

It is misleading to suggest that Big Foreign Retail will enter India and improve employment. While these players will employ people, at the same time, they will be knocking off employment in large numbers in the overall economy. It is the net numbers that we should be looking at.

Protecting India's interests

Two nations that have not permitted their retail market to fall into foreign hands are Germany and Japan. While they have a concentrated retail sector, their major players are home-grown. They both have had strong laws regulating the retail sector, protecting the self-interests of the respective countries.

The centrepiece of German anti-trust legislation is the Gesetz gegen Wettbewerbsbeschränkungen, or GWB. Section 20(4) of this ‘Act Against Restraints of Competition' “bans all undertakings with superior market power from selling a range of goods, not merely occasionally, below its cost price, unless there is an objective justification for this”.

In essence, this means it is illegal for German retailers to sell below cost to knock out competition. German zoning laws are strict and they ensure that big stores cannot be put up, except in designated city areas. Store hours are restricted, and big retailers have to use union labour. After a decade, and unable to turn in a profit in Germany, Walmart exited that country in 2007, taking a €1-billion loss.

In Japan, the daikibokouritenpohou — the Large-Scale Retail Store Law — came into effect in 1973 to protect small retailers. This law, unchanged till 2000, regulated the amount of selling space, store opening hours, and number of business holidays in a year.

Most importantly, any proposal for a big store had to be notified and the views of the affected parties had to be sought before approval. In effect, this reduced the build-up of big stores for decades.

Predictably, the US protested, and called the Japanese distribution system antiquated. The US missed the point completely. The law was designed to serve Japan's interests, and it did that well. There is an uncharacteristic haste in India to rush through FDI in multi-brand retail. There are ways to protect national interests. The policy guidelines that have come out do not reflect them.

The politicians would do well to understand how the 10-plus crore voters in this sector will be affected. If the policy is notified, there will be a groundswell that could well sow the seed for a government change in the next elections.

(The author is Group CEO, RK SWAMY HANSA and Visiting Faculty, Northwestern University, US. The views are personal.)

Farm graduates turn grassroots entrepreneurs

Business Standard - B Ramakrishna / Chennai/ Hyderabad August 25, 2011, 0:57 IST

It's not just the well-off engineers and MBAs who are taking to setting up own businesses, but also the hard-pressed agriculture graduates. Though government jobs are their first choice, these are hard to come by and never in large numbers.This was the case with 25-year-old Md Afroz of Miryalaguda in Nalgonda district. He says he tried hard for a government job after his B Sc in agriculture, trying his luck with several exams.

He had never thought of becoming an entrepreneur before, but changed his plans after going through a two-month training programme for budding entrepreneurs that he attended earlier this year to fill his gap period.

Afroz is now in the process of getting a bank loan to fund his farm machinery venture that requires an investment of Rs 20 lakh.

Others like T Yella Goud from Dubbaka in Medak district, who is also an agriculture graduate and already had plans to set up a dairy farm, consciously decide to go for the training. The two are part of 162 people from Andhra Pradesh who went through the training till date in 2011.

The training in question is part of a central government programme called Agri-clinics and Agri-Business Centres, devised as way to balance the available human resources with the required agricultural services.

According to P Chandrashekara, director, National Institute of Agricultural Extension Management (MANAGE), the course provides exposure to business management principles, possible areas for enterprises, ways of getting bank loans, as well as one-year hand-holding support after the venture is established. It helps with bank loans of up to Rs 20 lakh, with a subsidy in the range of 36-48 per cent.As a nodal institute for the programme, MANAGE has trained 24,400 people since 2002 through 57 partner institutes across the country. Uttar Pradesh, Maharashtra and Tamil Nadu are the leading states in terms of the number of trainees.However, he says the numbers trained is not the same as numbers converted to entrepreneurship. Out of 24,400 trained so far, around 9,500 have set up ventures in 32 categories ranging from agri inputs, advisory services, veterinary clinics, nurseries, magazines and CDs, food processing and tourism, among others.

“The programme helps by turning youngsters into job creators rather than seekers, with each agri-preneur estimated to provide jobs for six other people on average. It also helps by promoting a reverse migration of educated youth from urban to rural areas,” Chandrashekara tells Business Standard.According to him, there are 48 agricultural universities in the country, producing 15,000 graduates a year and thousands of diploma holders. Though the public sector extension system provides 85 per cent of the current services, it cannot absorb such large numbers of job aspirants.The agri-preneurs trained so far can cover 2.5 million farmers in 125,000 villages. According to an internal survey by MANAGE, their services are found to have led to a 17 per cent increase in yields and 28 per cent improvement in incomes.

“The ideal ratio of field-level extension workers to farmers would be reached when the number of agri-preneurs reaches the critical mass of 50,000,” Chandrashekara says.He adds that the programme is at a take-off stage now, as the awareness grows among agri graduates and also indirectly through the first-generation agri-preneurs.One such 'agri-preneur,' B Krishnamurthy, who started an artificial ripening system in Hyderabad, agrees. He says, "The programme is very useful. It helps us with getting bank loans and other things. The awareness about it will also grow, but it's another matter that we were not able to attend regularly because of other work."

Urban waste, no longer trash for fertiliser firms

Hindu Business Line - New Delhi, Aug. 22: 

Marketing of organic manure from city garbage is becoming a serious business, with even chemical fertiliser companies increasingly incorporating it in their product portfolio.

Take Coromandel International Ltd (CIL), which annually sells around 35 lakh tonnes (lt) of fertilisers mainly di-ammonium phosphate (DAP) and complexes.

In 2010-11, CIL also marketed 50,000 tonnes of compost produced from municipal solid wastes (MSW), which it plans to more than double to 1.1 lt this year. That, at Rs 5/kg, would be worth Rs 50 crore – a fraction of the company's Rs 8,000-crore operational revenues. But it is a business growing by over 20 per cent a year, noted Dr G. Ravi Prasad, President (Marketing), CIL.

Besides CIL, Nagarjuna Fertilisers & Chemicals, Zuari Industries, FACT, Kribhco and National Fertilisers Ltd are also selling MSW-based compost, though the quantities they are doing are only a few thousand tonnes each.

Garbage potential

Moreover, none of the fertiliser concerns, including CIL, are manufacturing the compost themselves. The ones doing it are the likes of IL&FS Environmental Infrastructure & Services Ltd (IEISL), Hanjer Biotech Energies, Ramky Enviro Engineers and A2Z Infrastructure Pvt Ltd.

Mr Mahesh Babu, Managing Director of IEISL, estimates India's total MSW-based compost production now at 2.5 lt. The potential is much larger, given the roughly 500 lt of MSW generated annually by the cities and towns here. That works out to 140,000 tonnes a day (tpd), with Delhi and Mumbai alone contributing 9,000 tpd each, Chennai and Kolkata 5,000-6,000 tpd, and Bangalore and Hyderabad 4,000-5,000 tpd.

“From every 100 tonnes of MSW, 15-20 tonnes of compost can be made. So, from the entire 500 lt, you can get about 80 lt. And this will only go up with further urbanisation,” Mr Babu pointed out.

IEISL operates composting units at Delhi, Jalandhar, Mysore, Kozhikode, Erode, Pollachi, Mettupalayam, Udumalpet and Coonoor that can together process 1,480 tpd of MSW. By this fiscal-end, it aims to add another 900 tpd through new facilities at Jaipur and Tiruchi and expanding its 200-tpd plant at Delhi to 500 tpd (A2Z Infrastructure has the country's single biggest facility of 1,800 tpd at Kanpur, followed by Hanjer Biotech's 800-tpd unit at Nagpur).

Unique Selling Proposition

The composting firms receive the raw garbage free of cost from municipal authorities, which they process, bag and sell either to fertiliser companies or under their own brands (such as IEISL's “Harit Lehar”). The processing cost comes to about Rs 1.80/kg, with bagging and transport adding another Rs 1.30 or so.

The nitrogen (N), phosphorous (P) and potash (K) content in MSW-based compost typically ranges between 0.5 and 1.5 per cent each. These are way below the levels in urea (46 per cent N), DAP (18 per cent N and 46 per cent P) or muriate of potash (60 per cent K). But the USP of compost – which fertiliser firms are seeking to project – is its OC (organic carbon) content of over 12 per cent.

“Indian soils have very low OC, which is due to their being farmed continuously and the depleted carbon not getting refurbished through green manuring or putting back crop residues. By adding compost, not only would the OC in their soils go up, but farmers will also see a dramatic improvement in the nutrient use efficiency of the chemical fertilisers applied by them.

To that extent, they can probably reduce urea or DAP consumption,” said Dr Prasad.

Soils with higher OC also have higher water-holding capacity, while exhibiting greater porosity and tilth. “Groundnut seedlings will wilt within six days if there are no rains, whereas in compost-treated soils, they can last for 12 days.

The plants also show better root development and tillering,” he added.

IEISL, similarly, claims that farmers near Agra in Uttar Pradesh have increased per-acre yields of wheat from 16 to 21 quintals by using its compost along with regular fertilisers.