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Wood-based industry says that it needs land, because it needs continuous and sustained supply of raw materials. In addition, there are new demands on this land. There is growing interest in biodiesel, with many Indian and foreign companies jumping into the fray to produce fuel from plants. There is the possibility of earning carbon credits, as trees sequester carbon. There is money in forests. And industry wants it.
Critics of the scheme to give land to industry say while it is the case that industry needs raw material, the question is why it needs captive plantations. The Saxena report pointed out that if this is done, then all other industries based on agricultural raw material should make their growth dependent on being given land -- for instance, the sugar industry, the textile industry and the rubber industry.
The issue, according to them, is to examine the current raw material sourcing pattern of this industry to find the best options for growing its renewable and profitable raw material. In 2004, the Green Rating Project (grp) of the Centre for Science and Environment (cse) found in its study on the pulp and paper industry that Indian companies were moving towards innovative and very viable methods of producing wood. It also found that these methods would be seriously compromised if captive plantations were allowed.
It found that by 2001 the sources of raw material of Indian industry had changed dramatically. Instead of depending on the supply of wood from government forests, it was now getting over half its wood from private sources, including farmers. In other words, by early 2002, this industry was buying as much as 1 million tonnes (of dried wood) directly from farmers and another 1 million tonnes from the open market. Farm forestry now contributed as much as 30 per cent of the forest-based raw material of large mills, the main users. This supply is bound to increase, as paper mills have encouraged farmers to invest in forestry operations. In fact, some pulp and paper mills were almost wholly dependent on wood sourced from farmers, found the study.
The shortage of raw material was a convenient bogey, possibly a ploy to get land at throwaway prices. "In the last few years there has not been even a single incident when a major wood and bamboo-based paper mill has closed down due to scarcity of raw material," says Chandra Bhushan, coordinator of grp. He points out that the performance of the mills shows that during the past five years, most mills based on wood and bamboo have operated at very high capacity utilisation, indicating no real raw material crunch.
However, he accepts that consistent supply of a single species of wood or bamboo will improve efficiency because of quality control. But he finds that quality control is happening where industry has developed tissue culture farms to sell saplings to farmers. "Farmer- and tribal-grown wood is a critical source of this industry's raw material mix and I see this trend growing substantially in the coming years, provided that captive plantations are now allowed," adds Bhushan.
Industry says in its defence that it will continue to source raw material from farmers and tribals but needs land to grow plantations for assured and consistent supply. But unfortunately, its sums just do not add up.
Firstly, its demand for land adds up to 1.2 million ha, which it says will produce 3.4 million tonnes of paper and paperboard. This assumes that it requires 4 tonnes of wood (wet) to produce 1 tonne of its product. It also assumes that it will be able to harvest wood in any given year from only 14 per cent of the land area, in other words it assumes a 7-year rotation period. Given that farm forestry based on tissue culture is beginning to bring returns within 4-5 years and that bamboo crop can be harvested in three years, this clearly underestimates the total harvest. The desire for landlordism seems to be taking priority.
Secondly, even if industry estimates are taken, its wood production will completely replace the market for farmers' produce, unless it substantially increases its installed capacity. The top 28 companies in the country which use wood produce roughly 2.28 million tonnes, accounting for 60 per cent of the country's total production. The cost of a 'greenfield' project is so high -- Rs 75,000 to Rs 100,000 for each tonne -- that new capacity addition has remained low in the country. Companies have expanded production by process improvement and not expansion of installed capacities.
But let us assume that industry will expand its capacities, from 2.28 million tonnes to say 6 million or 8 million tonnes by 2010. This would mean that industry can continue to source half its raw material from farmers and the rest will come from its own lands. The problem with this logic is that it fails to understand the dynamics of growing wood and the fragility of the market.
The real reason for industry's keen and dogged demand for land lies not in its raw material insecurity, but in its greed to maximise profits. The fact is that the cost of raw material from captive plantations is less than half the cost of raw material from the open market, or when it is sourced from farmers. This is because of the fact that industry does not pay the opportunity cost of land of the farmer, as land is subsidised.
The difference is substantial -- where wood grown in industry's own plantations would cost it between Rs 1,000 to Rs 1,500 per tonne (dried basis), the average cost of wood from other sources is between Rs 2,600-2,700. It is for this reason that critics of the scheme call this scheme the mother of all subsidies as it will destroy the farmer market for this product.
This is not an imaginary fear. In the mid-1980s, the market for wood was wilfully destroyed. This was the period when the government had launched a massive farm forestry programme and farmers were beginning to invest in a crop requiring a long gestation period. But industry wanted a quick buck. They were used to cheap raw materials. They persuaded the government to bring pulp under open general licence (ogl), making it cheaper to import pulp from Canada than to buy from Indian farmers and pulp it locally. The government stepped in with more cheap wood from its forests. In months, social forestry collapsed. Farmers plucked out their wood sapling, swearing never to trust industry and government again.
Currently also, the price of government supplied wood distorts the market. Almost 40 per cent of the wood and bamboo used by industry comes from government forests, which seriously undercuts the price for farmers. The government supplies bamboo -- largely from forests of the northeast -- on an average for Rs 2,600 per dry tonne. The minimum cost of bamboo supplied by tribals or farmers is Rs 3,200 per dry tonne. In other words, the government elbows out farmers.
It was only in the mid-1990s, when industry's efforts to secure land for plantations failed, that some industries turned to farmers again. These mills are reaping huge benefits and the examples are outstanding. Firstly, the companies have invested in developing nurseries of high-quality seedlings and tissue culture farms, so that planting material is of high quality. Secondly, they have invested in research and development to reduce the crop cycle, so that farmers can harvest more and faster. They have also successfully demonstrated that inter-cropping is possible, so that farmers can maximise benefits. It is clear that farmers will take to this crop if it is competitive and therefore, efforts of industry have been to improve productivity on marginal lands, where crop choices are limited.
This has meant that 1 million tonnes of wood come directly from farms. A conservative estimate of grp is that between 1998 and 2002, as much as 0.1 million ha of land was brought under forestry of farmers and tribals, for industry. This provides huge employment benefits. It also gives money to the rural poor. Currently, it can be estimated that industry pays Rs 280 crore directly to farmers.
The price of raw materials determines the cost of the final product and the profits of any industry. grp has computed that the raw material cost of large-scale wood- and bamboo-based mills is roughly 18 per cent of their turnover. In comparison, agro-residue-based mills spend 22-25 per cent on buying their raw material. It is also important to note that, in spite of the so-called wood shortage and the high-price bogey, the cost of raw material has remained consistent over the last few years. Even with this, the average operating profit of the top 10 companies in India in 2002 was 19 per cent of turnover. The same for five global companies was 3-9 per cent.
It is only the paper mills that are totally dependent on government-supplied raw materials which have been blessed with raw material costs as low as 12-15 per cent of their turnover. The plants that buy from farmers spend between 15-17 per cent. But these costs do not impinge on the profits. More importantly, these costs contribute directly to increasing the bottom line of thousands of people.
The proponents of this scheme clearly need a lesson or two in the economics of market and reform.