Indian corporate giants are rushing to cash in on the country's vast and mismanaged agricultural sector.
By Ron Moreau and Sudip Mazumdar
Two years ago, Indian corporate giant ITC set up a computer inside the modest, one-story brick house of wheat and soybean farmer Amar Singh Verma. Powered by rooftop solar panels and connected to the Internet by a satellite dish, the desktop links Verma and dozens of neighboring farmers to ITC-designed, Hindi-language Web pages that provide district-specific weather reports, the market price of soybeans and wheat and tips on modern growing methods. By following ITC's advice and using hybrid seeds, wider spacing between plants and better application of fertilizer, Verma dramatically increased his soybean yield on a two-and-a-half acre test plot by 50 percent last year. "It was like magic," says Verma, the largest and most successful farmer in Siradi village in the central Indian state of Madhya Pradesh. This season he plans to use the new practices to grow soybeans on his entire 25-acre farm. Other farmers are following suit.
ITC is a $7.5 billion tobacco, food and hotel corporation-not an agribusiness. Yet it's only one of several Indian conglomerates reaching out from the boardrooms of Mumbai and Kolkata to the fields of Madhya Pradesh and other states. ITC is hoping to increase farmers' yields so as to bolster its food processing and export operations; along the way the conglomerate hopes to push products ranging from tractors to hair oil to increasingly prosperous farmers. Telecom giant Bharti Group plans to market fruit and vegetables to the Middle East and Europe. Industrial behemoth Tata is now growing crops like mustard and grapes for export. And Mahindra, a car and tractor maker, began farming corn and grapes under contract this year for export to Europe.
They're all hoping to capitalize on what many economists are starting to see as India's biggest untapped resource, its agricultural sector. Some 660 million Indians live off the land; the sector accounts for 21 percent of India's GDP-down from 24 percent in 2001-and a good monsoon can add as much as 2 to 3 percent to annual growth. Companies are betting that better technology and a more selective choice of crops can vastly bolster the country's agricultural exports. Already India is the world's second largest producer of fruits and vegetables after China. Many regions can produce three harvests a year, including high-value crops ranging from apples and mangos to endives and lettuce.
Until now the sector has been weighed down by poverty, appalling infrastructure and small, unproductive farms; per-acre soybean yields, for example, are one quarter those in the United States. On top of all that, the state's heavy hand on the plow acts as a disincentive to innovate: last year the government spent $5.7 billion on subsidies, largely on price supports for, and purchases from, rice and wheat growers. In the new budget released last week food subsidies will drop by some 10 percent, but fertilizer subsidies will rise more than 25 percent to some $3.7 billion.
The government's Food Corporation of India spends much of the subsidies buying wheat and rice from farmers at an artificially high price and maintaining unnecessarily high emergency grain stocks.
Under private-sector pressure, however, New Delhi is slowly changing things. Reformers in Prime Minister Manmohan Singh's government have enacted policies, including tax holidays for agricultural exporters, to modernize the rural sector. Over the past year, Singh's government has scrapped old socialist-style laws that had forced companies to buy grain and produce through government agents, and is encouraging states to dismantle similar local laws. In Madhya Pradesh, government grain buyers threatened to strike when the state government decided to allow ITC and other private dealers to buy crops directly from farmers. But now farmers in Madhya Pradesh can sell directly to ITC and get their cargo weighed electronically at an ITC hub, not on antiquated state-market scales. They are paid immediately in cash-which they can then spend at an ITC store on things like seeds and cooking oil.
Both Singh and Congress Party President Sonia Gandhi have been particularly sympathetic to calls to develop the countryside, fully aware that they owe their 2004 electoral success largely to the votes of poor, rural Indians who felt left behind by the country's information-technology boom. The new budget has earmarked nearly $2 billion for rural development, mostly to improve roads and bridges in the countryside, and some $1 billion for irrigation schemes. Even more important, the budget calls for a series of investor-friendly reforms, including allowing agricultural exporters to import seeds and capital goods duty-free, and allowing big-box retailers to sell fruits and vegetables domestically. Officials hope the new policies will attract nearly $5 billion in Indian corporate investment and nearly $2 billion in foreign funds into the rural sector during the next five years.
Companies are heartened. "The government is fully engaged," says Sunil Mittal, Bharti's chief executive. The next step is to alter the mind-set among farmers, who until now have made decisions largely based on grain subsidies. Along with agriculture's falling share of Indian GDP, its exports are dropping as well from 13 percent in 2002 to less than 10 percent of India's total exports of $75 billion for the year ending in March. To reverse the decline, India desperately needs to move into producing more valuable edible oils, fruits, vegetables and flowers.
Diversification and increased productivity are what ITC is promoting with its computer program, which seeks to increase farmers' yields, raise their income and boost their confidence to try their hands at more lucrative crops. Within 10 years, the company hopes to be electronically connected to 100,000 villages and 10 million farmers. Company strategists expect the bulk of those villagers to sell their bumper crops to, and buy products from, ITC, adding an estimated $2.5 billion in revenue within seven years.
For their part, Tata, Mahindra and Bharti are tempting farmers to move up the value-added production chain with that most powerful of all incentives: profits. They are demonstrating that by growing more valuable crops such as fruit and baby corn, bell peppers and lettuce, farmers can make $600 rather than $125 an acre on rice and wheat. The appetite for such products is only likely to grow: the more relaxed rules on food retailing have foreign chains like Wal-Mart, Tesco and Carrefour eyeing India's rural markets.
While no one is making a killing in this first wave of corporate investment in rural India, boardroom hopes are high. "The potential is unlimited," says Mittal, a stylish entrepreneur who built India's largest cellular-phone company from scratch. "Even if 100 big corporate houses like mine jump into agribusiness, there will still be room for more." And if more do jump in, India's fields may not be unproductive for long.