A second green revolution?

The first green revolution has run its course. Cereal yields are rising very slowly, water tables are plunging, and agricultural growth now averages only 2% annually.

However, optimists think a second green revolution is coming, spearheaded by the corporate sector and helped by new laws. Narender Nagpal and Krishan Daga of Deutsche Bank suggest in a recent paper that this second green revolution, focusing on fruits and vegetables, can double agricultural growth to 4% per year.

Land reform laws ban corporates from farming. But contract farming is possible: corporates contract to provide high-tech farm inputs on credit, and lift the output at guaranteed prices.

The biggest rural initiative comes from ITC, whose e-choupals will cover 100,000 villages by 2010, accounting for two-thirds of rural GDP. E-choupals are electronic buying and selling centres, which also provide information to farmers on prices, weather, and scientific farming practices. By cutting out middlemen, e-choupals can pay farmers a higher price than they get in mandis, yet lower ITC’s procurement costs. The company started with soyabeans, wheat and shrimps, and is now diversifying into oilseeds, spices and fruit.

FieldFresh, run by Sunil Mittal of Bharti Telecom, already has 1000 acres under horticulture in Punjab. Pepsi and McDonalds have started contract cultivation of citrus fruit and lettuce respectively.

Godrej is into contract cultivation of maize, used to make cattle feed.

Global Green, a Thapar company, uses contract cultivation for gherkins and other products for export, and has a turnover of over Rs 100 crore.

Paper companies like Ballarpur and ITC provide farmers with fast-growing clonal varieties of trees that mature in just four years, and buy the output.

Other big groups (Tatas, Mahindras, DCM and possibly Reliance) are entering rural areas to sell agricultural inputs and consumer goods.

This corporate upsurge is being encouraged by a new political urgency to uplift rural India, where almost 60% of the population lives. A raft of new laws aim to end historical hurdles. The Agricultural Produce Marketing Committee Act forces farmers to sell only at mandis, ostensibly to protect them from rapacious traders. But this makes contract farming illegal; companies cannot directly buy from farmers. However, six states have now repealed their versions of the APMC Act, six others have drafted new legislation, and politicians generally recognize the need to provide a sound legal basis for contract farming.

Second, India has long been plagued by a maze of 16 different food laws, some of which are self-contradictory (one law permits sweeteners in jams and another bans the practice!). Chilli paste is a widely sold product in Asia but cannot be produced in India because the law prohibits the use of thickeners. The Central government now proposes a new integrated food law to replace the old maze of laws.

Third, the government proposes a Warehousing Receipts Act, which will make warehousing receipts negotiable instruments, and thus qualify for bank financing. This, along with futures trading in the new NCDEX commodity exchange, can modernise agricultural trading just as stock market reforms earlier modernised the capital market.

Fourth, in order to curb hoarding, the Essential Commodities Act has long placed limits on commodity stocks. This makes large-scale corporate investment impossible. Now that chronic agricultural shortages have given way to surpluses, the list of essential commodities has been cut from 30 to 15, and optimists hope that the whole Act will soon be scrapped.

Fifth, tax laws and incentives are being liberalised to encourage private investment.
Sixth, banks are very keen to get into rural business, and many are now lending to self-help groups, which can enter into contracts with companies. Cheap credit from banks and corporates can facilitate horticulture.

So, is a second green revolution on its way? I would advise caution. First, companies are doing contract cultivation on some thousands of acres, a tiny proportion of India’s 400 million acres of cultivated land. Many past attempts at contract farming have foundered: farmers have refused to honour contracts if the market price exceeds the contract price. Farmers have pressured state governments to force companies to buy substandard produce, and this can ruin exports. ICICI Bank’s experience with financing contract farming has been very mixed. The legal and administrative system makes enforcement of contract difficult: banks have never been able to seize the mortgaged land of defaulting farmers. Indian infrastructure is lousy, rural electricity is totally unreliable, and cold chains for keeping vegetables fresh repeatedly break down.

So, while the potential for a second green revolution is huge, the hurdles are high too. High-tech farmers with assured irrigation will surely link up with the best companies. But progress will be slow in rainfed areas, and for small and marginal farmers. The first green revolution took two decades to spread over India. The second green revolution may take just as long.

What do you think?