Cluster-based business organisation were started to hand-hold small farmers’ businesses, but now control the FPCs instead
One of India's major private companies, ITC Limited, has achieved a remarkable feat in the past few months. Between November 2022 and February 2023, it has helped formation of 78 farmer producer companies (FPC). Usually, it takes months to start an FPC.
FPC is a registered company, owned and operated by farmers. It is a type of farmer producer organisation (FPO) that deals in aggregated produce of a large number of member-owner farmers, helping them achieve economies of scale, increase their farm-level efficiency as well as the ability to negotiate prices in the market.
Creating an FPC is a long-drawn process, involving mobilisation and training of farmers to run a company; but ITC achieved the feat by reaching out to farmers already registered on its e-Chaupal website for selling produce.
In helping formation of FPCs, ITC acted as a Cluster-Based Business Organisation (CBBO), a concept introduced in Union Budget 2019-20 under Formation and Promotion of 10,000 Farmer Producer Organisations — a Central scheme with an outlay of Rs 6,865 crore — to provide hand-holding support to FPCs and to meet the target of creating 10,000 FPOs by 2024.
Any legal entity registered in India can be a CBBO, and receives Rs 25 lakh from the government over a period of five years for every FPC it helps create or run. There are several other criteria an organisation needs to meet to be a CBBO (such as a minimum annual turnover of Rs 2 crore in the plains and Rs 1 crore in the hilly areas) which have resulted in mostly big organisations being able to qualify for the role (see Here is how producer organisations evolved in India).
With the announcement of CBBOs, the formation of FPCs has seen a huge rise, from about 5,000 in 2018 to over 16,000 in 2023, with some 6,000 FPC registered in the peak COVID-19 year of 2020-21, as per data with the Union Ministry of Corporate Affairs.
But a Down To Earth (DTE) analysis finds that this increase has come at a cost — FPCs formed by big companies acting as CBBO are often unable to act independently in decision-making or be farmer-centric, which defeats the purpose of their creation. In ITC's case, for instance, its FPCs are likely to sell it their produce, even if they are offered a higher price elsewhere.
“Essentially, ITC will get volumes of produce through the FPCs. ITC gives them seeds and other inputs,” Neeraj Soni, assistant zonal manager at Skills Art and Beyond, a non-profit working with ITC to form FPCs, tells DTE. “The 78 FPCs were formed quickly keeping in mind the coming wheat procurement season,” informed Soni.
Another benefit for CBBOs is in tax savings while purchasing produce from FPCs. Earlier, ITC would purchase products from farmers at agricultural mandis, which required it to pay a mandi tax on the purchase. “Now, that tax burden is passed on to the FPC, through its mandi licence,” said Soni.
FPCs can also end up being a captive market for goods produced or marketed by its CBBO. Ashok Tiwari, chief executive officer of Madhya Pradesh-based Sironj Crops Producer Company Private Limited, one of India's oldest FPC, formed in 2005, explains: “ITC wanted to sell us a certain pesticide, but we refused because the product was costlier than the one we use. But if ITC asks an FPC that it has floated to purchase that pesticide, the FPC will find it difficult to refuse.”
Farmers say the real purpose of CBBOs for helping FPCs is to get cheap raw material. “Earlier, big companies never made efforts to organise farmers. They are doing it now to get raw material at cheap prices. But the purpose of FPCs was to help farmers—not big companies—get more money,” said Yogesh Dwivedi, CEO of Madhya Pradesh Consortium of Farmers Producer Company Limited, a conglomerate of FPCs.
The biggest challenge, say experts, is that CBBOs can squeeze the FPCs for margin. Agencies that empanel CBBOs (see Here is how producer organisations evolved in India), such as Small Farmers Agri-Business Consortium (SFAC), have tie-ups with players like ITC, which can quickly form FPCs, said C Shambu Prasad, professor at Institute of Rural Management Anand (IRMA).
“Given their size, the big companies and agencies are probably able to reach out to farmers easily; so it is helping the government meet its target. But it is a very top-down (centralised) scheme which is highly target driven,” said Prasad. “The farmers find some benefit in this setup, but the key thing is whether they are benefitting a lot or not. Unless the farmers' company is strong enough, it will not be able to negotiate a good deal,” Prasad said.
The experience of Molasar Sarvodaya Kisan Samruddhi Producer Company Ltd in Rajasthan’s Nagaur district with its CBBO, Indian Grameen Services (IGS), an affiliate of Hyderabad-based agriculture and financial services company BASIX Group, has also been unpleasant.
“IGS came as a CBBO in 2018 and appointed its own people as the CEO, and drew salaries. Their main job was to give us hand-holding support, mobilise farmers and strengthen marketing, but nothing happened on these fronts. Instead, their people used to sign agreements with other companies on their own, without taking the farmer-members into confidence. They also received some government grant under the scheme but did not use it on the FPC,” claimed CEO Parsa Ram.
As a result, the FPC, which was formed with government support in 2015, filed an application against the CBBO, said Ram, following which the CBBO winded up its operations in 2019, before completion of the duration of the project, which was till 2020.
“Our FPC, with 1,005 registered farmers from 25 villages, is in a much better position now,” said Ram. “Now that we are successful, IGS approached to be our consulting partner and share the income, but we refused,” he said. Ram also claimed there are at least four FPOs in the district promoted by IGS that are defunct.
A study by Centre for Management in Agriculture, Indian Institute of Management (IIM), Ahmedabad on understanding performance of producer companies promoted by different agencies, published in the journal Sociological Bulletin in 2022, showed ten cases of failure of FPCs promoted by BASIX Consulting and Technology Services Limited in Uttar Pradesh.
It also found that some FPCs were organised just to meet the target and there was no owner-member involvement in their functioning.
There are also cases when CBBO could not perform well. Khandar Agro Producer Company in Rajasthan’s Sawai Madhopur district got defunct in 2020, after being promoted by Indian Society of Agribusiness Professionals (ISAP), a non-profit development agency based in Delhi, for three years.
“The CBBO did not implement the project properly. Its main job was to mobilise the farmers but ISAP kept changing its district coordinators and officials. Farmer-members did not get much exposure to run the company,” said Vinod Chaudhary, who was a farmer-member of the FPC and a social worker.
Such CBBOs end up creating FPCs where member-owner farmers have little knowledge of running the company, or even of their rights in the company.
The IIM study on understanding performance of producer companies promoted by different agencies in five states—Rajasthan, Uttar Pradesh, Madhya Pradesh, Tamil Nadu and West Bengal — showed that with the exception of Uttar Pradesh, about 30 per cent members in all states did not know who owned the FPC; in West Bengal, 45 per cent did not know that they were part owners of the company.
Around 78 per cent farmer-members joined it due to encouragement and persuasion by promoters and employees, while some joined heeding to their friends’ advice. “CBBOs should train FPC members, CEO and board of directors and impart business knowledge. It takes years for an FPC to become profitable,” said Tiwari, sharing the example of his own FPC which started in 2005 but became profitable only in 2014.
NO NEGOTIATING POWER
Even after formation, the most common complaint FPC have is their lack of bargaining power against big companies recommended by their CBBO.
The experience of Bina Krishak Producer Company Limited in Madhya Pradesh in dealing with big brands explains this. In 2020, the FCP agreed to have Grant Thronton Bharat LLP, a major consultancy firm as its consultant. At that time, Bina Krishak Producer Company, which started in 2015, was facing financial and marketing troubles.
Grant Thronton Bharat helped it get financial support in the form of cash credit, with a limit of Rs 10 lakh, from Bank of Baroda. Along with that, it enabled procurement contracts with corporates Adani Enterprises, ITC and some oil manufacturers, said Brajesh Sharma, CEO of Bina Krishak Producer Company.
Though the measures increased the FPC’s turnover from Rs 15 lakh in 2019-20 to Rs 67 lakh in 2022, the tie-up with big firms led to a loss in its negotiation power.
“Recently, we sold soybean to Adani in two trucks. They okayed the produce in one truck but deducted Rs 10,000 for the produce in the second, saying there was some problem. We asked for the reasons but received no specific response. In such cases, we are not in a position to negotiate,” said Sharma.
Tiwari of Sironj Crops Producer Company Private Limited narrated a similar incident. “In the 2022-23 procurement season, we sold the same quantity of produce to ITC and to Samunnati, a Chennai-based private company. While the latter deducted Rs 2,300 in the whole season for poor quality of produce, ITC deducted Rs 1.19 lakh. Supporting, opening up of FPCs has essentially become a business model,” said Tiwari.
“The only plus point of tying-up with big players is an assured market and a fixed buyer for our produce,” he added.
Dwivedi of Madhya Pradesh Consortium of Farmers Producer Company Limited also said the FPCs under the consortium have mostly faced losses working with big brands and now they have reduced their transactions with them.
“The contracts are always unilateral. When a big FPO consortium like ours cannot negotiate, how can small farmers?” he asked.
There are also concerns that directors could use FPC to benefit other companies they own. Two years ago, several directors and promoters of Nashik-based Sahyadri Farmers Producer Company (SFPCL) started a new private company—Sahyadri Farms Post Harvest Care Limited (SFPHCL)—and raised a Rs 310 crore growth capital from foreign investors, which include Belgium-based Incofin, Netherlands-based FMO and France-based Proparcosee in 2022.
“This shows that the directors are using the FPC platform for growth and expansion of private businesses,” said Dwivedi. The new private company also owns shares of SFPCL. “If tomorrow the private company sells SFPCL shares to a big private firm, the FPC would indirectly come under private control,” Dwivedi added.
One of the main job of a CBBO is to ensure that the FPC gets funds, but this has not happened in most cases, said Ashish Gupta, founding-trustee of Himachal Prades-based Gram Disha Trust, which works with FPCs in the state.
“The State of India’s Livelihood Report 2021” by Access Development Services, a Delhi-based non-profit company, also finds that just 1-5 per cent of FPCs have received funds under Central schemes introduced to promote them in the last seven years.
The government has introduced two schemes to fund FPOs since 2013-14—Equity Grant Scheme and Credit Guarantee Scheme. Under the Equity Grant Scheme, SFAC offers equity grants up to a maximum of Rs 15 lakh within a period of three years.
But between 2014 and 2021, only a minuscule 735 FPOs (5 per cent of the FPOs then in existence) could secure the grants, stated “The State of India’s Livelihood Report 2021”. In the Credit Guarantee Scheme, which provides risk cover to banks that advance collateral-free loans up to Rs 1 crore, only about 1 per cent of registered FPCs had been able to avail the benefits by 2021, said the report.
Before the concept of CBBOs was devised in 2019, local and national non-profits would aid creation and promotion of FPOs.
For an FPC to succeed it should be designed according to local, community-owned food system perspective (as opposed to commodity orientation), provide free ecosystem services (for example, soil formation, pollination, predation) and be independent from corporations for the procurement of seeds and synthetic inputs, said a study by the National Bank for Agriculture and Rural Development (NABARD) published in Indian Journal of Agricultural Marketing in 2022.
But since the guidelines for selection of CBBOs allow only those organisations that have a minimum average annual turnover of Rs 2 crore in the plains and Rs 1 crore in Himalayan and northeastern region during the past three years, smaller companies and non-profits are unable to participate.
“This has resulted in entry of international consultancies and big corporate. Basically, government is interested in scale, with its target to create 10,000 FPOs by 2024, it wants bigger players who can promote or open FPOs at a faster pace,” said Sukhpal Singh, professor at IIM-Ahmedabad, who undertook the IIM study.
“But in that process, you will really ignore civil society organisations which are community based. The big organisations have no local stakes. They will just do it as a project and move away,” Singh said.
In February 2023, India had some 16,000 FPCs registered in the country, with the biggest increase in the numbers witnessed in the last three years: 2020-21, 2021-22, 2022-23, when 65 per cent of the FPOs were registered.
“Since most of these FPCs are just two or three years old, it is difficult to say if they will survive. An institution needs five to seven years to do viable business,” said Singh.
An analysis by Prasad for a project, Living Farm Incomes, in December 2021, led by IRMA, found that 79 per cent of the FPCs registered in 2020-2021 had a paid-up capital (amount a company receives by selling its shares) of Rs 1 lakh or less, which is far too little to survive in the long run.
“While there is potential for some of these FPOs to grow, indications from the ground show that few FPOs survive beyond the project period,” the study said.
There are also doubts about how many of the FPOs formed in the recent years are sound or even active. A December 6, 2022, report in The Indian Express mentions a survey by the Maharashtra agriculture department on the 6,501 FPCs registered in the state. The survey found that just 16.2 per cent of the FPCs were active and the rest existed just on paper.
“The point of the FPO promotion scheme was to help in doubling farmers’ income. We do not have enough data or evidence that farmer income has increased with these linkages,” said Prasad.
This was first published in Down To Earth’s print edition (dated April 16-30, 2023)
We are a voice to you; you have been a support to us. Together we build journalism that is independent, credible and fearless. You can further help us by making a donation. This will mean a lot for our ability to bring you news, perspectives and analysis from the ground so that we can make change together.
Comments are moderated and will be published only after the site moderator’s approval. Please use a genuine email ID and provide your name. Selected comments may also be used in the ‘Letters’ section of the Down To Earth print edition.