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Rebooting Economy 55: Farmer producer organisations best bet for small, marginal farmers

These organisations face multiple challenges ranging from low capital base, poor credit facility, lack of business know-how and skilled manpower but with government handholding they have the potential to change the fortunes of small and marginal farmers

Rebooting Economy 55: Farmer producer organisations best bet for small, marginal farmers

It would take several years and more effort to make FPOs really work for small and marginal farmers

In the din over farmers' protest over new farm laws, a major initiative to raise farmers' income, especially the small and marginal ones, has been forgotten: Farmer Producer Organisations (FPOs).

The central government launched a new scheme "Formation and Promotion of Farmer Producer Organisations (FPOs)" on February 19, 2020 to set up 10,000 new FPOs with a budgetary support of Rs 6,865 crore from FY20 to FY28.

The objective is to provide small and marginal farmers "better collective strength for better access to quality input, technology, credit and better marketing access through economies of scale for better realisation of income".

The FPOs include farmer producer companies (FPCs) registered under the Companies Act as well as farmers' cooperatives registered under the Cooperative Societies Act of state governments. FPO is now defined as "farmer" in the new Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act of 2020 for the purpose of trading in agricultural produce. Many FPOs are already engaged in public procurement from their member farmers (as in Madhya Pradesh).

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While farmers' cooperatives existed for long, FPCs emerged with the insertion of a new chapter "Producer Companies" (Part IXA) in the Companies Act of 1956 in 2003. FPCs combine the cooperative (collective) spirit and structural advantages of companies. It allows farmers to register a producer company to engage in production, harvesting, processing and marketing of agricultural produce.

Presently, there is no accurate information on FPOs or their members. Two central agencies promoting FPOs, Small Farmers' Agri-Business Consortium (SFAC) and National Bank for Agriculture and Rural Development (NABARD), have their separate lists as per which there are 5,116 (881 in SFAC list and 4,235 in NABARD list) FPOs. A NABARD paper of 2019, however, says that there are about 6,000 FPOs, of which about 3,200 are FPCs and the rest cooperatives.

A 2020 study by the Azim Premji University, "Farmer Producer Companies: Past, Present and Future", found 7,374 producer companies (FPCs) registered between January 1, 2003 and March 31, 2019 under the Companies Act, in which 4.3 million small farmers are members (shareholders). It says several farmers' cooperatives have now registered themselves as producer companies. Most of these companies are concentrated in Maharashtra, Madhya Pradesh, Tamil Nadu and Uttar Pradesh.

The first challenge, therefore, is to set up a data base on FPOs in order to analyse, regulate and support them. Writing about the central government's new scheme, Nagendra Nath Sinha, secretary in the Rural Development Ministry, recently wrote in a national daily ("Cooperatives faltered, but FPOs must succeed") that 10,000 FPOs is a modest goal and that India needs more than 100,000 FPOs.

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Advantages of FPOs for small and marginal farmers

A few studies have been carried out recently to assess their functioning and progress, one of which is by the Chandigarh-based Centre for Research in Rural and Industrial Development (CRRID), "Farmer Producer Organisations & Agri-marketing" published in April 2020. It looked at FPOs in Punjab (where they have not done so well) and Madhya Pradesh (where they have) and concluded that marginal and small farmers are the major beneficiaries of FPOs.

Prof. Satish Verma of the CRRID, who carried out the study, lists some of the benefits of FPOs: collective purchasing of quality inputs which lowers the cost of production, training in know-how, sharing of farm machinery, higher earnings through collective selling in market and/or to government agencies (MSP-based public procurement) and working as social enterprises driven by farmers' welfare and community development etc.

He lists two major reasons for poor growth and performance of FPOs in Punjab: individualist trait of Punjab farmers which makes it difficult for them to work as a cohesive group and vested market interests that do not want FPOs to get into public procurement activities.

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His study gives the example of a "mature" FPO (more than three-year-old) in Punjab which sold about 10% of the member farmers' produce (Dhira Patra FPO) while that of Madhya Pradesh (Narsingh FPO) sold 42.67%.

Madhya Pradesh was the first to promote FPOs under the District Poverty Initiative Programme (DPIP) during 2002-11, with the support of the World Bank. The state set up an umbrella organisation for FPOs in 2014, Madhya Bharat Consortium of Farmer Producers' Company Limited (MBCFPCL), in collaboration with the SFAC. The MBCFPCL is engaged in public procurement and allots quota to FPOs for procurement of food grains and pulses for government agencies.

Agriculture economists have long hoped that FPOs, the new generation cooperatives, would work to protect the interests of small and marginal farmers, in which traditional cooperatives have failed, except in some cases like the Amul in Gujarat.

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Multiple challenges to FPOs' success

The Azim Premji University's 2020 study says well-run and stable FPOs have the potential to improve farmers' incomes and reduce their exposure to economic risks. But there are multiple challenges: small number of shareholders, low procurement volumes, sub-scale operations, limited value addition capabilities, poor marketing linkages, inability to attract talent and lack of strategic thinking and planning etc.

The NABARD, which has promoted the maximum number of FPOs (more than 4,000), published a paper "Farmer Producers' Organisations (FPOs): Status, Issues & Suggested Policy Reforms" in 2019 listing the challenges: lack of technical skill and awareness about the potential benefits from FPOs, lack of professional management, weak finances, inadequate access to institutional credit (banks doubt their ability to pay back, the members being mostly small and marginal farmers), inadequate access to markets and infrastructure etc.

The challenges are many but one that overshadows all others is financial constraint. That is why government assistance and prolonged handholding becomes critical.

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The NABARD's 2019 study says around 70-80% of FPO (including FPCs) members are small and marginal farmers and that membership ranges from 100 to 1,000. It is unrealistic to expect poor farmers to contribute large sums as share capital that would make FPO financially robust.

The Azim Premji University study points out that the average paid-up capital of FPOs ranges from a few thousand to several lakhs across states. Only 90 out of 6,926 active FPOs have paid-up capital of Rs 50 lakh or more, while 86% have less than Rs 10 lakh.

As for accessing credit from the market, Sinha writes that it is ironic that while agricultural loans are available at 7-9%, FPOs have to borrow largely from microfinance institutions (MFIs) at about 18% interest. The central government's new scheme does provide credit guarantee cover up to project loans of Rs 2 crore, but in his opinion more needs to be done, especially for working capital and lower interest rates.

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Keeping these financial constraints in mind, some experts have argued that the government's handholding should be up to seven years to stabilise FPO operations.

Studies on FPOs/FPCs have made several suggestions, a large number of which relate to financial and professional help. The central government scheme seeks to address many of those. But it would take several years and more effort to make FPOs really work for small and marginal farmers.

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