THE BLOG

Cash Crops In India Are Seeking Venture Capitalists

03/12/2015 12:08 PM IST | Updated 15/07/2016 8:25 AM IST
NEW! HIGHLIGHT AND SHARE
Highlight text to share via Facebook and Twitter
MANJUNATH KIRAN via Getty Images
An Indian shopper examines pulses and food grains at a shop at the Agricultural Produce Marketting Committee (APMC) Yard in Bangalore on October 29, 2014. AFP PHOTO/Manjunath KIRAN (Photo credit should read MANJUNATH KIRAN/AFP/Getty Images)

The recipe for reviving any sick company starts by infusing capital to attract the right mix of talent, technology, scale, and services. Entrepreneurs pursuing a high risk-high reward strategy find them particularly attractive.

India's 22 cash crops are similarly ailing. They are desperately seeking intrepid entrepreneurs who can stimulate production by offering new and better ways of doing things. But what appears a no-brainer for the rest of the economy is the biggest crisis in farming. Instead of inviting private capital, public policy is scaring it away.

Pulses are the perfect example of the conundrum of poor returns in a growing market faced by India's ailing cash crops. No one is queuing to invest in pulses because the price signals sent by us don't reach the value chain. Otherwise, farmers would eagerly invest in hybrid seeds, drip irrigation and crop protection chemicals as they did in cotton. That would attract agri-input companies. Modern processors and efficient supply chains would come forward. Traders would invest in warehousing production so that we can buy pulses throughout the year. Indian households would benefit from affordable protein supply. For pulses and indeed every crop, prices are the best fertilizer.

World over, commodity derivatives markets do the job of transmitting these price signals. And like equity markets, they are the platform for incentivizing efficient allocation of capital to crops. The present abundance of food at a global level is partly due to the capital reaching agriculture after the price spikes of 2011-12. Contrary to public perception, private investment is not the cause of higher food prices, as the success stories of Brazil and Indonesia show us.

Contrary to public perception, private investment is not the cause of higher food prices, as the success stories of Brazil and Indonesia show us.

When pulses touched Rs 200/kg, the government's objective should have been to keep an eye on the long term by tiding over the present shortage through trade without distorting the price signals. Instead, it frightened even the meagre capital in the value chain through actions like stock limits and raids against stockists. When the market is left with no idea what authorities would do next, panic sets in. Traders sold off stocks and retired hurt. We are still buying arhar for Rs180/kg because the shortage is genuine.

Government action became an 'unseen' tax on future supply. No one sees any long-term incentive in pulses, leaving us trapped in the vicious cycle. The results of the government's own investment in cash crops through irrigation, research, mechanization, seeds are visible from the sector's dire straits. Wheat and rice were its only success story. There too, the policy distorted market signals and made them into a political, ecological and economic millstone.

Rising population and prosperity is expected to increase India's food consumption from Rs 23 lakh crore in 2014 to Rs 42 lakh crore by 2020, says the Boston Consulting Group. According to McKinsey, in 2025, Maharashtra's 128 million residents are expected to have a purchasing-power parity similar to Brazil's today. Goa's and Chandigarh's 2025 purchasing-power parity will mirror that of Spain today.

That is wonderful news for farming, which is fundamentally entrepreneurial. But farmers can't be entrepreneurs without capital, whether it is their own savings, loans or investment from others. Unfortunately, long-term bank credit for building assets such as poultry and dairy farms, machinery, tractors and pump sets is barely 7% of agri GDP. It is this poverty of capital that makes farmers feel suicidal amidst the wealth of potential.

Unfortunately, long-term bank credit for building assets such as poultry and dairy farms, machinery, tractors and pump sets is barely 7% of agri GDP. It is this poverty of capital that makes farmers feel suicidal amidst the wealth of potential.

Ironically, there is no dearth of private capital waiting in the wings. Large-scale investment in agri-inputs picked up after the 2011 spike in global and domestic food prices. Foreign direct investment in agricultural services and machinery was less than 1% of the total inflow in2000-2014 but can pick up.

Private equity has injected more than $100 billion into 3,100 Indian companies in the past 13 years. It is now turning to agriculture. Venture capitalists are funding start-ups focused on agricultural productivity, food technology, and "killer apps" that reduce waste, use of chemicals, conserve resources, and improve distribution. Everything depends on the ideological consistency between the government's attempts to woo foreign and Indian investors and its day-to-day policy towards price management.

Modern markets are about turning scarcity into abundance. To feed itself, India urgently needs an agriculture that is efficient and resilient to climate change. The movers of money and credit do the economy a great service by the market signals they provide to entrepreneurs. Cash crops are signaling they need help. Unless the government lets capital go where the opportunity lies, we will all end up less well off.

Like Us On Facebook |
Follow Us On Twitter |
Contact HuffPost India

Also see on HuffPost:

9 Addictive Foods, According To Science


More On This Topic