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Transformational Change in Rural India ITC : An Inspiring Agenda
 - 26 Jul 2002

TRANSFORMATIONAL CHANGE IN RURAL INDIA
ITC : AN INSPIRING AGENDA
 
Speech by the Chairman, Shri Y.C. Deveshwar,
at the 91st Annual General Meeting of ITC Limited
in Kolkata, India on July 26, 2002
   

It gives me much pleasure to welcome you to this 91st Annual General Meeting of your Company. I also take this opportunity to welcome the shareholders of the erstwhile ITC Bhadrachalam Paperboards Limited who are now part of the larger ITC shareholders’ family. The amalgamation of the paperboards business marks yet another significant strategic milestone towards enlarging the wealth generating capability of the enterprise. While the amalgamation had a positive impact on earnings per share of your Company, it simultaneously benefited the shareholders of the erstwhile ITC Bhadrachalam Paperboards Ltd. by virtue of their immediate entitlement to dividends as ITC shareholders. The integration of the paperboards business has also created a new opportunity to strengthen the competitiveness of your Company’s Pulp, Speciality Paper and Paperboards segments by unlocking synergies inherent in these businesses.

   THE FINANCIAL SNAPSHOT

The financial results of 2001-02 stand further testimony to the robustness of your Company’s strategy. Despite difficult trading conditions, gross turnover grew by 13% to Rs. 9840 crores. Foreign exchange earnings at Rs. 948 crores represent a growth of 36% in rupee terms and 30% in dollar terms. Post-tax profit at Rs. 1190 crores registered a growth of 18%. Cash flows from operating activities increased by 78% to Rs. 1770 crores. These strong cash flows enabled retirement of debt, further reducing interest cost. The balance sheet of your Company thus stands substantially strengthened. As a ready indicator of progress since I assumed leadership, I give below a snapshot of key financials. During this period, despite substantial investments to support competitiveness, efficiency in terms of Return on Average Net Assets employed improved significantly from 30% in 1996 to 41% in 2002. The growing strength of the balance sheet and the world-class quality of your Company’s human capital together constitute the strong foundation for the fulfilment of your Company’s abiding vision.

(Rs. crores)

ITC: Financial Snapshot 1996 - 2002

 

1996

2002*

CAGR (%)

Gross Income

5188

9982

12

Profit After Tax

261

1190

29

Return on Average Net Assets (%)

30

41

 
Net Assets Employed

1886

4699

16

Net Worth

1121

4414

 
Market Capitalisation

5571

17243

 
As at 31st March; *assumes shareholder approval as proposed

CAGR: Compound Annual Growth Rate

   

   GROWTH THROUGH COMPETITIVENESS


In my communication to you last year I had outlined ITC’s vision of enlarging its contribution to the Indian economy. Your Company’s aspiration to create enduring value for the nation provides the inspirational motive force for its employees to sustain growing shareholder value. I had called this compelling vision "A commitment beyond the market". The task of accelerating economic growth in India has been rendered even more challenging by the slowdown in the global economy and the adverse impact of world events over the past year, making it all the more imperative to reaffirm this commitment. The urgency for viable growth solutions is even more pressing in view of the manifold increase in competitive challenges posed by fast globalising markets. Countries and enterprises that successfully make the transition towards global competitiveness would be rewarded handsomely, whilst those that do not will be penalised heavily. It is in this context that over the past few years I have been stressing the need for a quantum improvement in the competitiveness of the Indian economy as a whole and the need for Indian companies to embrace the wider challenge of engendering competitiveness across entire value chains of which they are a part. A crucial contributor to the competitiveness of Indian companies is the health and vitality of the larger Indian economy as a supplier of inputs in terms of quantity, quality and cost. Vitality of the economy and its growth potential can be realised by accelerating the reform process so as to create a climate in which investment in India can become productive and internationally competitive. The reform agenda itself is vast and needs to embrace all aspects of the socio-economic and political life of our society, including the broader structures, institutions and policies. In particular, the urgency of strengthening and upgrading the social and physical infrastructure is critical to make India a preferred recipient of domestic and international capital. The role of companies in shaping the economic well being of a country is impactfully highlighted by Jeffrey Sachs and Michael Porter in the Global Competitiveness Report 2001-2002. As important as the macro-economic factors are the micro-economic factors that create conditions and motivation for companies to compete and win. Vitality of companies operating in an economy makes the decisive difference in the capacity of a country to create wealth. This includes dynamism of leadership, ongoing rapid accumulation of core competencies, closeness to market and the unique insights that are derived from it, and learning and adaptive capabilities. Such vitality also strengthens the ability of an enterprise to forge productive linkages with other organisations to secure the most appropriate resources from the global environment. Enterprises that attain such vitality can then compete effectively and in turn set in motion sustainable virtuous economic cycles with their multiplier impact on the larger economy.

    THE CHALLENGE OF INCLUSIVE GROWTH


It is imperative for the Indian economy to not only sustain high rates of growth over many years but also that such growth is inclusive so as to free millions of disadvantaged citizens from the indignity of poverty. The requisite high rates of inclusive economic growth can only be sustained by putting in place an effective growth strategy for rural India. Rural India is home to 72% of the Indian population and 75% of its poor. Its 309 million strong workforce represents 75% of the country’s workforce. As observed by the Honourable Finance Minister recently, secular economic growth would crucially depend upon increasing their capacity to consume. Herein lies the challenge. The unique characteristics of Indian agriculture render the task of fashioning growth strategies for rural India even more complex. Fragmented land holdings make extension services unviable. Further, oft-quoted prescriptions advocating economies of scale through corporatisation of farms and contract farming have not proved popular with farmers due to fears of large scale displacement of labour and apprehensions of exploitation at the hands of more powerful corporate entities. Therefore, endeavours in this regard have not met with much success. In addition, large variations in agricultural production due to biotic and abiotic stresses add to the uncertainty of rural incomes, thereby further eroding the domestic demand base for Indian industry. Urgent structural reforms are necessary to secure competitiveness of India’s agri sector, thereby unlocking the latent potential of rural purchasing power. The entry of China into the WTO brings home renewed urgency in view of their competitive advantage arising from much higher levels of agricultural productivity. The imperative of enhancing global competitiveness of Indian agriculture therefore requires:

  • Substantial increase in yields – the average yield per hectare of rice in China is about twice that in India, while in the case of wheat it is one and a half times higher. Increase in productivity would enable higher farm income and concurrently reduce cost of calorific intake for the poor;

  • Diversification of land use to optimise farmer income by better aligning produce with needs of the market, both domestic and international;

  • Effective linkages with the food processing industry to develop and market value added products in the domestic and international markets;

  • Efficient aggregation mechanisms and logistics to service the requirement for high quality inputs and knowledge at the farm end on the one hand, and to assist in output marketing on the other, making cost of transaction and logistics internationally competitive.

    ITC: LEVERAGING RURAL PARTNERSHIPS
 
Your Company, with its agri sector linkages nurtured over many years, is uniquely positioned to make a distinctive contribution to the rural sector. Your Company’s initiatives related to the farm sector are so fashioned as to be an integral part of its own competitive strategy to create shareholder value.
Your Company’s diverse farmer partnerships enable its businesses to participate in various value chains from the farm to the consumer. The gamut of these partnerships is wide and deep, covering multiple crops and geographies, encompassing the value chains associated with soya, wheat, rice, marine products, tobacco, coffee, wood fibre etc. across 14 States of the country. The inter-dependence between your Company’s agri-based businesses and the farm sector therefore constitutes a sustainable platform to enlarge ITC’s contribution to the Indian rural sector. While Governments have to play the primary role in creating rural infrastructure, both physical and social, ITC’s strategy adopts a three pronged approach to leveraging its rural partnerships to enhance competitiveness of the Indian agri value chain, namely:          
  1. leveraging information technology to bring about knowledge-based empowerment of the Indian farmer
  2. creating an IT-enabled infrastructure for agri supply chain management and rural distribution, which would not only generate better value for farm produce, but also effectively service the farmer as a consumer
  3. leveraging biotechnology to support large-scale farm and social forestry together with watershed management to create additional avenues of income for the rural poor.

ITC: Leveraging IT for Rural Transformation

Your Company is engaged in imparting a revolutionary dimension to its rural partnership by leveraging information technology to elevate the Indian farmer to a new order of empowerment. The ‘e-choupal’ initiative of your Company is a powerful illustration of the potential of information technology to transform rural economics, notwithstanding the structure and size of land holdings in India.

This alternative model leverages information technology:

  1. To deliver real-time information and customised knowledge to improve farmers’ decision making ability, and thereby better align farm output to market demands and secure better quality, productivity and improved price discovery

  2. To aggregate demand in the nature of a virtual producers’ cooperative and thereby access higher quality farm inputs and knowledge at lower cost and

  3. To set up a direct marketing channel virtually linked to the mandi system for the purpose of price discovery, yet eliminating wasteful intermediation and multiple handling, thus reducing transaction costs and making logistics efficient.

This model, in facilitating a direct marketing channel in competition with the existing mandi system, is in conformity with the reforms recommended by the Shankarlal Guru Committee appointed by the Ministry of Agriculture. Besides inducing efficiency of the mandi channel through competition, this alternative channel will also serve to conserve public resources that would otherwise be required for the expansion and upgradation of the mandi infrastructure. This digital infrastructure can also be used for channelising services related to credit, insurance, health, education and entertainment, in addition to serving as a strong foundation for creating a vibrant futures market to facilitate farmer risk management.

This model thus enables a quantum improvement in the cost and quality of extension services. In the conventional model the effectiveness of extension service is severely limited by the capability of the individual extension worker. The e-choupal model, on the other hand, confers the power of expert knowledge on even the smallest of individual farmers.

Your Company’s investment in such an e-infrastructure, whilst creating abiding value for the farmer, is in turn placing your Company in a unique position of trust with the farming community as a reliable supplier of goods and services on the one hand, and as a buyer of high quality, cost effective farm output on the other, thereby supporting its own competitiveness.

The task of adapting the e-choupal concept for different crops and regions continues to test your Company’s entrepreneurial capabilities. In addition to special commercial circumstances obtaining in each case, there are many constraints like infrastructural inadequacies, including power supply, telecom connectivity and bandwidth, apart from the challenge of imparting skills to first-time internet users in remote areas of rural India. The potential benefits of this project have spurred your Company to seek innovative solutions to overcome constraints.

Competitiveness of Indian agriculture induced through such a market-led business model, can trigger a virtuous cycle of higher productivity, higher incomes, enlarged capacity for farmer risk management, leading to higher order investments, feeding even higher levels of quality and productivity. Growth in rural incomes would also unleash the latent demand for industrial goods so necessary for continued growth of the Indian economy. Over time this will create another virtuous cycle, snowballing the economy into a higher growth trajectory. This model, with appropriate modifications, can be extended to other facets of agriculture like floriculture, sericulture, horticulture, aqua farming, poultry farming, animal husbandry etc.

International competitiveness can thus be engendered wherever it is feasible to create a structure whereby the corporate sector’s need for creating shareholder value can be enmeshed with that of the farming community in a mutually supportive, interlocking and interdependent partnership.

Starting with just 6 choupals in June 2000, this ITC model has already become rural India’s largest internet-based initiative, covering as of today 1020 choupals linking 6000 villages and serving nearly a million farmers. Your Company’s objective over the next decade is to create a low-cost IT-based interactive transaction and fulfilment channel to cover 100,000 villages, representing 1/6th of India’s villages, reaching out to millions of farmers.

The challenge of uplifting rural India towards prosperity is so vast that many, many more corporate players are required to participate in such value adding rural initiatives to supplement Governmental effort. The benefits of rural initiatives tend to be back-ended, thereby stretching corporate resources. One cannot expect everyone to be fired by passion alone. In order to mobilise wider participation of the private sector in similar endeavour, Governments, Centre and State, can play a catalytic role by crafting a nurturing policy framework.

ITC: Leveraging Biotechnology for sustainable growth

Another dimension of your Company’s involvement in the rural sector relates to its successful partnership in the wood fibre to finished product value chain. Interpretation of Landsat imagery data indicates that barely 11% of the geographical area of the country is under real forest cover, against a desirable 33%. Further, an alarming level of top soil erosion is dramatically reducing the productivity of available land resource, accelerating environmental degradation. According to estimates of the Indian Council for Agricultural Research, the average top soil loss is about 16.35 tonnes per hectare per year, which is three to five times what is acceptable, representing loss in crop capacity equivalent to 13 million tonnes annually. Your Company’s pioneering Farm Forestry programme encourages farmers to create plantations on their private wastelands. Towards this end, your Company makes available high-yielding, disease-resistant clonal planting stock developed through biotechnology based research at Bhadrachalam. About 14 million clonal saplings have so far been planted over 8400 hectares of land as a result of this initiative.

Since January 2001, your Company has also been engaged in a social farm forestry programme that targets poor tribal families, with the objective of bringing into productive use their private wastelands that have otherwise remained unutilised for decades. The programme primarily seeks to build capability at the grassroots level that would support and sustain a virtuous cycle of development in some of the most backward tribal regions of the country. This typically entails creating village level samitis and imparting extensive training in sylvicultural practices. Planting mixed species contributes to bio-diversity, whilst inter-cropping secures quicker and additional economic returns.

Over the next decade, ITC’s farm forestry and social farm forestry programmes aim to bring into productive use over 50,000 hectares of wasteland by planting about 100 million saplings. This would imply direct employment for 50,000 households, while another 30,000 households would benefit through indirect employment.

These programmes represent your Company’s contribution in a meaningful measure towards the larger goal of rural prosperity. Such an endeavour supplements the national effort by bringing into productive use substantial tracts of degraded private land, creating the biomass towards restoring ecosystems, providing a sustainable source of productive employment among the weakest sections of rural population, while concurrently securing a competitive source of wood-based raw material for your Company. This vital and sustainable source of competitive advantage for your Company, in turn would imply growing shareholder value and conservation of foreign exchange for the country of upto Rs. 7000 crores over the next decade through exports and import substitution.

The objective of imparting income generating capability among the rural poor drives yet another of your Company’s social endeavours – the task of eco-restoration through watershed and wasteland development. It is not very well known that although India receives about 370 million hectare metres of rainfall every year, only 43 million hectare metres is available for assured irrigation. This is so because 95% of precipitation occurs during 4 months in a year, and much of the rainfall is lost due to run-off, evaporation and seepage. In the absence of infrastructure to hold water that is otherwise available in plenty, drylands account for more than half of India’s gross sown area. Nearly 50% of the rural workforce is engaged in such drylands. Your Company, assisted by select NGOs, is engaged in bringing 1500 hectares of degraded land every year under a soil and moisture conservation programme in the economic vicinity of its business locations. This programme envisages creation of 1000 large and small water harvesting structures (percolation tanks, farm ponds and check dams) over 10 years, thereby increasing water storage capacity by nearly 1.5 billion litres. These water bodies will provide critical irrigation to nearly 15,000 hectares of farmlands in their command areas. These initiatives will thus secure significant increases in farm incomes through shift from single to multiple cropping, besides cumulatively generating at least 1.5 million person days of farm labour employment during lean periods.

ITC: Linking Farmers to remunerative markets

The e-choupal initiative in its fullness would provide your Company with an invaluable agri commodity sourcing capability to strengthen your Company’s agri trading business. It is your Company’s strategic intent to leverage this strength in conjunction with its traditional capabilities related to branding, trade marketing and distribution to create growth opportunities. As indicated to you last year, one such opportunity being actively pursued is in the area of value added branded foods. The branded foods market represents a significant opportunity for long term growth. Alongside growing per capita incomes, the Indian food consumption habit is expected to progressively evolve from basic foods to value added products. Changing consumer preferences and heightened quality awareness, together with the expected reform of the regulatory framework and tax structures, will provide a fillip to the food processing industry. Your Company possesses many a strength to exploit this growth potential, not the least of which are the specialist cuisine and bakery knowledge of its Hotels business. Your Company’s foray into the branded foods market commenced with ready-to-eat gourmet foods under the brand ‘Kitchens of India’. Your Company also recently launched the ‘Aashirvaad’ brand of packaged atta and the ‘Mint-o’ brand of confectionery. It is the objective of ITC’s Foods business to establish its product brands across segments, and towards this end the business is gearing capabilities to launch a host of high-quality value added confectionery and bakery products, and ready-to-cook convenience foods.

Growth in the value added consumer end of the market would in turn grow demand for higher quality agri commodities, thereby opening up remunerative opportunities for the farmers. Your Company believes that Indian farmers need to be supported and empowered to capture optimum value for their produce by linking them more effectively with consumers in the domestic and international markets.

Alongside the initiatives described earlier, your Company is also upgrading its internal IT architecture by creating a Virtual Private Network on which rest its Enterprise Resource Planning, Customer Relationship Management and Supply Chain Management initiatives. The expanded trade marketing capabilities, blended with the state-of-the-art information technology transaction backbone and the e-choupal rural network, provide the basis for a low cost, broadband supply chain fulfilment capability for any consumer product. Such fulfilment capability can be likened to an FMCG super highway which can be used as an effective infrastructural link to align Indian farmers with markets. It can also serve as a basis for powerful partnerships with other FMCG brand owners who wish to obtain the benefits of such a wide and deep trade marketing and distribution capability. Over the long term, such strategic partnerships are expected to be the basis for growth in revenues and value for you, the shareholders.

    CONCLUSION


Your Company has demonstrated that it is possible, nay, most crucial to enmesh the need for creating shareholder value with the superordinate goal of creating national value. I am sure you feel the same sense of pride as I do in ITC’s pioneering endeavour in forging mutually supportive partnerships with the farming community, thereby making an impactful contribution to India’s rural transformation. Your Company’s inspiring vision has sublimated the goals of its employees to the level of a fervent mission, beyond mere commercial objectives. On behalf of the world-class people that shape this unique organisation, I pledge more than our best endeavour in sustaining ITC’s position as one of India’s most valuable corporations. Towards this end, I count on your support, as always.

Thank you for your attention.