Agritech Startups Are Rooting For An Effective Supply Chain Management, Better Financial Incentives From The Government
This article is part of the special coverage of the upcoming Union Budget 2018 from the lens of Indian startup ecosystem. In this pre-budget series, we’ll shed light on major expectations of the startups from Budget 2018 for various industries like agritech, logistics, across all the key areas including taxation. To read all the stories of this special coverage of Union Budget 2018, click here.
“The farmer has to be an optimist or he wouldn’t still be a farmer.”
With India holding the record for the second-largest agricultural land in the world, with around 60% rural Indian households making their living from agriculture and more than 300 agritech startups now functional in this space, it does seem to be brimming with optimism! More so when the Union Budget is just a day away.
No wonder the central and state governments are proactively pursuing policies to stoke their hopes and to improve the lives of farmers in India.
PM Modi’s government laid out an agenda last year to double the average farmer’s income by 2022. Also since 2019 is going to be an election year, the government may have plans to woo its vote bank which primarily includes farmers and the labourer community.
Already, the GST council has taken the decision to reduce the rates which directly affect this community, be it a reduction of tax rates on dining in restaurants or on farm equipment. The target is to boost rural demand, increase wage income and support small and medium scale enterprises.
At a time when 50% of the entire workforce is associated with agriculture and allied sectors accounting only 13-14% of the GDP, clearly, there has been a huge gap in terms of productivity, efficiency and technology implementation. And, this is where startups in the agritech space are filling in the gaps – optimising climate forecasting, recognising crop diseases at the earliest by infusing IoT and AI, channelising the farm-to-fork way and more.
In the last year’s Union Budget, though the Modi government had raised the funding to agriculture and allied sectors by 24% to $29.4 Bn (INR 1.87 Tn), it appears that the actual spending has been less than that of previous year’s budget spending in agriculture.
Let’s take a look at some of the other measures taken by the government with respect to agriculture in the last Union Budget:
Agriculture In The Last Union Budget
During the Union Budget 2017-18, the government announced several steps for the sustainable development of agriculture. These are geared in the direction of initiatives to double the income of farmers by 2022. These include:
- The total allocation for rural, agricultural and allied sectors for FY 2017-18 that has been increased by 24% year-on-year to $28.1 Bn (INR 1,87,223 Cr). The government is committed to double the farmers’ incomes in the next five years.
- The target for agriculture credit was fixed at $157.38 Bn (INR 10 Lakh Cr or 10 Trillion) up from $141.6 Bn (INR 9 Trillion) targeted last year.
- The Cabinet approved the extension of tenured loans under Credit Linked Subsidy Scheme of the Pradhan Mantri Awas Yojana from 15 to 20 years.
- The government decided to issue soil health cards and set up a mini-lab in Krishi Vigyan Kendras.
- For the flagship crop insurance scheme, Pradhan Mantri Fasal Bima Yojana (PMFBY), the budget increased the allocation from $865. 59 Mn (INR 5,500 Cr) (budgeted estimate in 2016-17) to $1.4 Bn (INR 9,000 Cr) in 2017-18. The target next year will be to bring 40% of the cropped area under insurance and take it to 50% next year.
- A dedicated micro-irrigation fund to be set up by National Bank For Agriculture And Rural Development (NABARD) to achieve the goal of ‘Per Drop More Crop.’ Its initial corpus will be $786.9 Mn (INR 5,000 Cr). To improve access to irrigation, the Union Budget 2017 provided an additional $3.14 Bn (INR 20,000 Cr) for the long-term irrigation fund under NABARD. A similar amount was allocated last year while setting up the fund.
- A dairy processing infrastructure fund to be set up under NABARD, with a corpus of $1.25 Bn (INR 8,000 Cr).
- To help farmers get better value for their produce, the Government planned to revamp the old model Agriculture Produce Marketing Committee Act (APMC Act) and carve out provisions on contract farming into a separate law to form a new Contract Farming Act.
- Additionally, the government reiterated its earlier goal of bringing in more regulated agricultural markets on the electronic National Agriculture Market (e-NAM) platform.
- The central government urged state governments to delist perishables such as vegetables and fruits from Agriculture Produce Marketing Committees (APMCs) and allow farmers to sell such items directly to consumers to get a better price. At present, farmers are required to sell such produce in markets managed by the APMCs.
- On the soil health card scheme, the Finance Minister said mini-labs for soil testing will be set up in all 648 Krishi Vigyan Kendras (farm research institutes) across India. These will be run by rural entrepreneurs who will be assisted by the government.
- The Ministry of Labour and Employment planned to amend the Minimum Wage Act to raise the daily minimum wage of unskilled agricultural labour in C-class towns from the current wage of $2.4 (INR 160) per day to $5.2 (INR 350).
- . The participation of women in the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has increased to 55% and allocation to the scheme has been increased to a record $7.2 Bn (INR 48,000 Cr) () for FY 2017-18.
- Short-term crop loans up to $4,500 (INR 300,000) () at a subsidised interest rate of 7% per annum would be provided to the farmers. An additional 3% incentive is provided to farmers for prompt repayment of loans within due date, with an effective interest rate of 4%.
Moving ahead in the same direction, the government needs to devise more schemes and financial allocation in Union Budget 2018 to ensure greater application of technology to increase agricultural yield, efficient utilisation of resources, reduction in input cost, growth in agricultural wages, remunerative and stable prices and also give proper forward and backward linkages to the farmers.
A Look At The Indian Agritech Space
As per the Inc42 Datalabs Tech Startup Funding Report for 2017, the agritech sector in India witnessed$46 Mn in funding in 2017. Though there isn’t much data regarding agritech funding available for the last few years, looking at the pace at which agritech startups got funded in 2017, it appears agritech will continue to garner investor interest in 2018 beyond.
The startups in this space are also leveraging technology in the area of market linkages such as retail, the B2C and B2B marketplaces and digital agronomy startups. They are now able to address input challenges of agriculture in India from the very beginning. Accenture estimates that the digital agriculture services market will hit the mark of $4.55 Bn by 2020, thus highlighting the ample scope of growth for agritech startups in the country.
Because the central government has an aim to double an average farmer’s income by 2022, agritech become the new buzzword in the Indian startup ecosystem in 2017. Even Taizo Son, younger brother of Masayoshi Son (founder of SoftBank) launched an accelerator ‘Gastrotope’ to boost the startups working in the ‘farm to fork’ ecosystem in India.
Salient features of Indian agritech space:
- The entrepreneurial activity in Indian agritech in 2017 reached a new peak with more than 300 agritech startups working towards solving problems of Indian agriculture. This number was less than 50 about five years back.
- India’s $350 Bn food-and-agro-economy provides non-linear scale opportunity for agritech startups.
- Investors who have invested in the hyperlocal groceries space realise the inefficiencies of the agriculture output chain, which has driven them towards agritech.
- Mobile penetration and the increasing role of digitisation in agriculture is boosting growth in the agritech space.
However, challenges galore in this space and much needs to be done. The foremost issue is the increasing difficulty of farmers to sustain themselves. Every day, newspapers reverberate with the gory news of the increase in the number of farmer suicides in the country, with debt cited as the prima facie reason.
Furthermore, a drop in landholdings (average 1.4 hectares), small and fragmented land holdings, a decreasing agricultural land versus a growing population, decreasing groundwater levels, poor quality of seeds, lack of mechanisation, low yield per unit crop, dependence on middlemen, are some of the many afflictions which saddle the Indian agricultural sector.
Then, there are challenges like how to increase crop production, improving the nutritional value of the crops, reduction in input prices for farmers, improving the overall process-driven supply chain, reducing wastage in the distribution system and enabling connectivity of farmers with the masses by interlinking the consumer and producer.
Inc42 talked to some of the agritech startups in the space, who are trying to solve these challenges through technology to understand what they want from this year’s Union Budget.
Union Budget 2018 Should Address Basics: Rainwater Harvesting, Crop Insurance
With the increased investment in the agricultural sector and startups concentrating on agritech area, the agriculture sector is expected to perform better in the near future. Thirukumaran Nagarajan, co-founder of Ninjacart believes that effective supply chain management, better financial incentives, etc. will be the key contributor to this sector’s growth. Awareness towards ‘Genetically Modified Crops’ will improve yield for the farmers and companies planning to bring in the concept of ‘Safe-to-Eat’ will change the way agriculture is being looked in India currently.
Thirukumaran says, “The single greatest constraint for small farmers to have higher agricultural productivity and diversification is water control. With an increasingly erratic rainfall, both for supporting during the rainfall gaps in the monsoon crop and for water availability in winter and summer, it is critical as it defines the difference between viable and difficult farming. Most rain-fed large farmers are much worse off than smaller, but irrigated farmers.”
He believes this needs to be addressed by educating the farmers to build infrastructure in the village for rainwater harvesting. The government should allocate funds especially for rainwater harvesting and the infrastructure needs to be completed within a specified time frame.
He also states that the government should lay more focus on crop insurance and related measures. Though the government has taken the initiative of starting Bima Yojna for farmers, the awareness towards the same is not to the extent that is required. Hence, he believes that the FM should bring in a mechanism wherein insurance companies promote awareness towards these schemes (the way we have investors education fund by SEBI).
The state governments should be working together on this to educate the farmers. Special tax benefits to be given for warehousing, including non-cold storage units. In addition to this, the subsidy to insurance companies should be increased so that the benefit reaches the farmer.
Startups Want Emphasis On The Post-harvest Value Chain Of Indian Agriculture
The post-harvest value chain of the Indian agriculture and food sector is a vital part of Indian economy. Around 1/10th of the produce is wasted due to non-availability of proper warehousing facility as per Thirukumaran. This not only leads to the wastage of food grains but also depresses farm income. Hence, he feels that the capital subsidy under the Grameen Bhandaran Yojana should be restored.
Also, there should be a single regulator in WDRA (Warehouse Development and Regulatory Authority) to bring much-needed transparency and hence, better regulations and investments in the sector.
Additionally, he adds that capital subsidy for cold stores should be enhanced and also extended to all capital investments in the back end supply chain logistics to reduce the losses in fruits and vegetables. Investment in Solar Technology Applications for cold chain to reduce dependence on electricity in rural areas should also be increased.
One Single Ministry For Agriculture, Food Processing And Civil Supplies Ministries To Ensure No Glut, No Shortage
Manmohan Malik, founder and CEO of Himalaya Food International Ltd believes that the government needs to merge agriculture, food processing and civil supplies ministries (Farmers, Processing and Consumer Ministries) into one single Ministry with the main agenda to ensure ‘No Glut-No Shortage’ by better planning under one single Ministry.
“The merged Ministry should be given a task to balance the interest of farmers and the consumers. The Ministry should have a sharp Advisory Wing to advise on acreage, water management, government schemes and handhold the farmers to create best value from their land holding.”
Similarly, he feels that every state should have parallel Ministry on the same pattern connected to the Union Ministry.
Union Budget 2018 Should Rein In Middlemen, Empower Farmers And Improve Distribution
It is no secret that middlemen are the bane of Indian agriculture. The farmer works on the demand-side based on his region and consumption needs are supported by these local supply chains, mostly dominated by a chain of middlemen and agents who control the produce pricing. For instance, organised retailers are estimated to source 20% of their produce directly from the farmers, the rest is from the mandis (farmer markets). But mandis are not the ideal farmers’ markets they seem to be.
Manmohan believes that the middlemen in farm produce need to be reined administratively and digitally so that pricing is transparent and neither can he manipulate nor charge above certain commission.
Additionally, the government should also create the regional SMS service which informs the farmers on the daily or seasonal and future trends in prices of the crops that he is sowing or has ready stock to offer. He believes that the Block officers be delegated the job of tying up farmer produce with appropriate regional markets and the Processing Industry for the best price realisation.
Another bane of agriculture as highlighted earlier by Thirukumaran are the inefficiencies in the distribution supply chain. Manmohan also feels that in order to reduce wastage during transit, refrigerated trains be started to transport fresh produce and dairy across the country to eliminate wastages and control the prices.
Also, he feels that the Indian Agricultural Service be created within the Indian Allied Services to focus on farmers and rural areas.
More Transparency In Agriculture Schemes
Sreeram Chellappa, Chief Operations Officer at Farmlink believes that to start with, the upcoming Union Budget should encourage corporate farming to protect farmers from price risks.
“The government should strengthen recently drafted model contract farming act and encourage states to adopt it as per their needs. Small farmers usually do not benefit from the government assured Minimum Support Prices (MSPs) as they do not have enough marketable surpluses to justify the cost of transporting the crop to government corporations in the towns. Thereby, selling it to traders at rock-bottom prices.”
He adds that even, Agricultural Produce Market Committees’ (APMCs) monopoly has led to cartels of traders, commission agents and transporters being formed which have not benefited the farmers so far.
He further added that the existing crop insurance schemes have not provided any relief to the hapless farmers. The government needs to bring in more transparency in the term and conditions of the schemes, some of which are downright absurd. In addition, given the lower penetration of the crop insurance, more geography and more crops are to be covered under existing schemes.
In addition, waiving farm loans has short-term relief to a limited section of the farmer and a costly option for the banking system. Instead, the government should spend a similar amount on the improvement of agriculture infrastructure which has a much larger multiplier effect on the economy in the long run.
Lastly, the agro-research should get more funding. Indian Council of Agricultural Research (ICAR) has lost its glory over a period of time. The government should apply a mission mode approach to research for achieving the goal of doubling farmers’ income by the year 2022.
A Softer View While Imposing GST On Dairy Products
An important part of the agriculture industry is the dairy industry. Milk has the highest value in the Indian agri and food sector, more than the combined value of wheat and rice. Milk contributes close to the 1/3rd of the gross income of rural households. The livestock sector contributes to 4% of India’s GDP and the dairy sector comprises of the majority of the share.
But challenges on the quality front, poor price governance measures by cooperatives which are not based on fat measurement and affects farmer’s profitability, non-existence of extension facilities such as lack of adequate breeding and preventive care services to improve animal health, along with low access to credit and taxation on value-added products which would cause the industry to reduce the milk prices paid to the dairy farmers, are impeding factors in the industry’s progress.
Milk is highly perishable, therefore value addition such as processing, packaging and conversion to long life products, such as sterilised milk (UHT), dahi, paneer, chhachh, lassi, shrikhand and so on, is more a necessity than a luxury, believes Gaurav Haran, Chief Operations Officer at MilkLane.
He says, “It is crucial that a softer view is taken while imposing GST and imperative to create a special class for dairy products with minimum value-addition. The government should have a farmer-centric approach, as perhaps milk is the only industry that is able to pay to the dairy farmers more than 2/3 of the price charged to the consumer. No other food processing industry in India is able to meet such high expectations of the farmers.”
He adds that tax exemption on dairy industry should not be considered as a loss to the national exchequer but an investment that would spur growth in milk production, which eventually would enhance rural prosperity and increase the farmer’s income.
In addition, Gaurav believes there should be the level playing field for private players and the co-operatives. There is very low competition to co-operatives because the private sector was not allowed to participate until recently.
In addition, grants should be provided to strengthen extension services in areas of animal husbandry. Budget allocation to develop infrastructure setup in the milk procurement area for small and medium-sized operations and subsidies to encourage rural entrepreneurship in areas of milk procurement such as collection centre setup and credit correspondents will go a long way.
While overhauling agriculture in India is not a one budget exercise, yet it requires a sustained barrage of concrete measures from the government if it wishes to push through its agenda of doubling the average farmers’ income by 2022. Will this year’s Union Budget be able to address the concerns of agritech startups and take some solid steps in the direction of achieving its goal or will it end up being another populist poverty alleviation exercise – is a revelation just a day away now.
In the coming parts of the pre-budget series, we will be providing a detailed analysis of expectations from Union Budget 2018 accompanied with commentaries and diverse views of multiple stakeholders including views from the leading startups of India from different sectors. To read more articles on this series click here.