To feed a need

A harvest under way in north-east India. Crops that meet export standards can now be sold by villagers at fair market prices

 

The village of Maheshkhunt lies on the banks of the Ganges, just one of thousands of settlements supported by the great river as it winds lazily through India’s northern plains.

Far from the glittering economic miracle of India’s metropolises, Maheshkhunt and much of the surrounding state of Bihar are mired in medieval poverty – a condition dubbed in The White Tiger, the Booker Prize-winning novel by Aravind Adiga, as the “Darkness”.

“India is two countries in one: an India of Light, and an India of Darkness,” says the book’s main character, Balram, a downtrodden Ganges villager who murders and robs a rich man to escape poverty’s clutches.

But in Maheshkhunt, there are glimmers of a new age. In one corner of the town, India’s National Spot Exchange has opened a warehouse draped with a banner that reads “The Farmers’ Friend”. It offers Bihar’s small farmers, for centuries beholden to traditional traders who buy their goods at a discount and sell them on at sometimes steep profits, the chance to obtain a fair price on the national or global electronic markets.

“The day is not far off when farmers will stop selling to the middleman altogether,” predicts Randev Kumar Keshari, a relatively well-to-do farmer and supporter of the spot exchange in Maheshkhunt.

One warehouse will not lift the hundreds of millions of Indians who live in rural areas out of poverty. But the entry of modern market institutions such as the NSE – a unit of the Multi-Commodity Exchange (MCX), the country’s largest commodity market – into neglected states such as Bihar is part of what is increasingly being recognised as one of India’s most important social and economic crusades: to extend the benefits of modern trade and finance to India’s rural masses.

It is an issue championed by Manmohan Singh, prime minister, who is an economist by training. His buzz­word is “financial inclusion” – reaching out to the more than 50 per cent of rural Indian households that have no access to any kind of credit, let alone to national commodity or capital markets.

Mr Singh, whose Congress party-led coalition won elections in May largely on the back of farmers’ votes, knows that improving rural livelihoods is the key to future electoral success. It is also essential to stemming the rising social tensions between the India of light and the one of darkness that could turn the fictional bloodshed portrayed in The White Tiger into reality. Creating the infrastructure of 21st-century agriculture, from warehouses to logistics chains and electronic commodity markets, is the most basic building block in this process.

“If you really look at any country of the world where there has been modernisation of the agricultural sector, you have to have these systems in place,” says Anil Sharma at the National Council of Applied Economic Research in New Delhi. “This is something that should happen and should have happened earlier.”

The problems in India’s rural sector are well documented. About 72 per cent of the country’s 1.14bn people live in rural areas, yet agriculture produces only about 21 per cent of gross domestic product, according to the World Bank. That leaves the majority of the population living off a small chunk of the economic pie.

Small and marginal farmers, those with two hectares (five acres) of land or less, comprise three-quarters of the nation’s farming households but own less than one-quarter of its farmland. In the poorest states, such as Bihar, small and marginal farmers comprise about 96 per cent of those working the land, industry experts say.

A lack of transport and other infrastructure forces farmers to sell their produce to village “aggregators”, the middlemen who take it to markets in nearby towns. With a better knowledge of prices than many of their poorly educated clientele, the middlemen can dupe farmers into a steep discount. They double up as money lenders, providing farmers with credit for seeds and equipment, often at crippling interest rates.

The relationship is further complicated by cultural issues. Middlemen put pressure on farmers to sell crops to them if they are of the same caste.

The government has sought to intervene by offering to procure crops under its “minimum support price” scheme. Under this system, the government agrees to buy crops at a set price, ensuring farmers a predictable income. But this service is unavailable in many areas, particularly in the poorer parts of states such as Bihar, and in some districts there are allegations of corruption between government officials and middlemen.

Sensing an opportunity, MCX and its smaller rival, National Commodity & Derivatives Exchange, have launched spot markets and begun building warehouses in rural areas to handle the physical delivery of trades. They have behind them some of the biggest names in global finance. MCX, controlled by entrepreneur Jignesh Shah, is part-owned by Fidelity, Citigroup and Merrill Lynch. NCDex is controlled by Indian institutions with an investment from Goldman Sachs.

NSE operations, which began a year ago, now span 60 locations. In April, it decided to experiment in economically backward states such as Bihar, which on development indicators ranks alongside poorer African countries.

At Maheshkhunt, a farmer typically brings his maize to the NSE’s warehouse, where it is tested for quality. If it qualifies for sale on the NSE, the farmer names his price, which is entered on the exchange’s terminals. The goods are stored in the warehouse until a buyer pops up on the exchange. In the meantime, the farmer can take the NSE receipt for the deposit of his goods and use it as collateral for a bank loan. This fulfils a key goal of financial inclusion by providing bank credit to farmers and removing them from the clutches of the moneylenders.

Once a buyer emerges, the farmer is paid immediately – again, an improvement on middlemen, who can take weeks or months to pay.

NSE officials claim that before they appeared, middlemen were buying maize in Bihar at Rs730 ($15.30, €10.50, £9.60) per quintal (100kg) and selling it on at Rs900 a quintal. Now, farmers who use the exchange are achieving a price of Rs780-Rs790. The government price is Rs840 but the state lacks the infrastructure to procure from most.

Already, the emergence of the exchange is bringing a positive “cluster effect” on the surrounding economy. Mr Keshari, the farmer, shows off a warehouse on the other side of Maheshkhunt that he has built and licensed to the NSE. Here he keeps produce to be sold on the exchange by the surrounding villagers. Previously, this would have been kept by the roadside or in fields while the farmers waited for the middlemen to collect it, leading to losses of 10 per cent or more from spoilage and wastage.

Contracting his warehouse to the exchange is highly profitable for Mr Keshari – he makes more from one acre of warehousing than he would from 19 acres of farming, he calculates. But while the presence of the exchange has quickly benefited entrepreneurial farmers such as him, when it comes to helping small landholders, critics say the system has a way to go.

One main issue is whether middlemen themselves come to use the NSE at the expense of smaller farmers. Unless it can radically expand its network, most small farmers will find their volumes are too low to justify lugging in one or two sacks of maize to an NSE warehouse. So they will continue to sell to the middleman.

“What would prevent the middlemen from taking the produce from farmers for the same reasons as earlier and perhaps giving him a slightly better price and then selling it in these centres?” asks Srijit Mishra, an associate professor at the Indira Gandhi Institute and co-editor of a recent book, Agrarian Crisis in India.

Mr Mishra’s arguments are borne out by a meeting in Maheshkhunt with Amerjit Kumar. Arriving at his office in a new sports utility vehicle accompanied by some henchmen, the mustachioed grain trader looks like the classic wealthy middleman character from a Bollywood movie.

Mr Kumar explains that he does not expect the NSE to have a profound impact on Bihar’s middlemen. For one thing, most small farmers struggle to meet the NSE’s strict export quality standards. In Maheshkhunt, this means producing maize with a level of moisture that he says is lower than most small farmers can manage.

“The NSE is correct that the middlemen are taking a lot of profit from the farmers,” Mr Kumar says. “But as long as the farmers remain uneducated and the quality of their goods remains poor, they can’t expect the middleman to disappear.” He adds that he has already used the NSE himself, once buying 300 tonnes of maize on the exchange.

Back at the NSE warehouse, a customer has just arrived with a tractor-load of maize. Exchange officials take out a scoop and test the grain for moisture. It does not conform and the customer drives off to find another buyer, presumably a middleman. Abhay Kumar, assistant manager of business development at the NSE in Bihar, defends the standards by saying the contract on the exchange is for export-quality grain. Other contracts for lower qualities might be introduced in future.

Linking farmers to global markets can lead to pitfalls. Mr  Mishra of the Indira Gandhi Institute says India still lacks many of the safeguards needed to shield farmers from market shocks as well as droughts and floods, such as credit guarantees and crop insurance.

Movements in global markets could lead to a devastating loss of income for hundreds of millions of farmers if they are not properly protected. “Yield failures, price shocks, family crises – we don’t have mechanisms to address them,” Mr Mishra says.

Still, many see the emergence of commodity spot exchanges in India’s hinterlands as an epochal event in the country’s rural economy. The middleman will not disappear but he will gradually be forced to adapt to an era of greater connectivity between his former captive clients, the farmers, and the global markets.

“Now the farmer has the option to either give his crop to the usual trader he has been dealing with for centuries or try a new more transparent system,” says Ramadhar, chairman of the Bihar Farmers Commission. Mr Ramadhar concedes, however, that for the electronic trading revolution truly to take hold in the darkest reaches of rural India, farmer education and awareness will be critical.

Indeed, a few months after its opening, many of Maheshkhunt’s farmers are still unaware of the exchange’s presence. Miti Sona Banjar, a small farmer working in the fields about 1km from the NSE warehouse, complains that much of his maize crop every year is spoilt by a lack of warehouse facilities. When he is told the NSE has opened up shop nearby, he says he has not heard of it.

“As I don’t have a place to store the crop I am forced to sell to the first offer that comes along,” says Mr Banjar, sitting atop one of his buffaloes. Referring to an Indian bread, he adds: “All I want is to sell to a decent buyer. I don’t want much, just some water and roti to feed my family.”

Business and rural banking

Bringing access to finance for the great bulk of Indians who are “unbanked” has become an obsession for many local companies but few more so than Vortex, inventor of the “Gramateller”, or village automated teller machine.

Founded by L. Kannan, a South Indian engineer, Vortex’s ATM not only costs one-tenth of the price of its conventional rivals but uses only about 4 per cent of the electricity.

“Over 18 months, the savings you make on electricity consumption would make our ATM pay for itself,” says Vijay Babu, the company’s chief executive. The company has so far deployed 40 machines. With financial institutions seeking to fulfil government commitments on so-called financial inclusion, he says prospects are good, with Vortex poised to clinch an order for a further 500 ATMs.

The ATM saves power partly by top-loading its notes, using gravity to feed them to the customer rather than drawing them from below on a belt like conventional machines do. It can handle grubby notes and comes equipped with fingerprint identification for the illiterate.

Others trying to open up new frontiers in low-cost Indian finance include officials such as S. Sridhar, the outgoing head of National Housing Bank.

India has a housing shortage of nearly 32m homes, much of it in rural areas. Yet most farmers cannot afford to build a house and microfinance institutions are reluctant to lend the larger amounts required for housing, Mr Sridhar says.

To get around this, National Housing Bank began providing mortgages or loans for home upgrades to members of “self-help” groups comprising 10-20 women in poor rural areas. These groups would provide guarantees for the loans, ensuring the bank received sufficient collateral.

For such people, access to credit can mean the difference between life and death. Mr Sridhar recalls the case of one woman who could not afford a door for her house. “When there were floods, the waters carried her baby away. The mother said if she had only had Rs3,000 [$63, €43, £39], she wouldn’t have lost the baby.”

Copyright The Financial Times Limited 2009.