Farmer Unrest in India: Weak Infrastructure and Vulnerable Supply Chains

Posted by Reading Time: 6 minutes
By Bradley Dunseith

On June 1, 2017, farmers in the Indian state of Maharashtra began a statewide strike – crippling shipments of milk, vegetables, and fruit to major cities like Mumbai and Pune. The strike spread to the neighboring state of Madhya Pradesh where clashes with the police left five farmers dead.

The strike, which lasted just under two weeks, offers a candid glimpse into India’s vulnerable supply chains, poor rural infrastructure, and the delayed repercussions of the Modi government’s policies.

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Farmer strike a reaction to government policies

The farmer strike occurred not in reaction to a drought or natural calamity, but in response to a series of government policies.

In November 2016, the Modi government demonetized India’s high-value currency: taking 86 percent of the country’s legal tender out of circulation overnight. Between February and March, 2017, the Bharatiya Janata Party’s (BJP) state government of Uttar Pradesh (UP) successfully campaigned on a pledge to waive farmers’ loans if elected. Finally, in June, the government enacted strict, new rules for livestock markets, making it difficult – if not impossible – for rural farmers to re-sell unproductive cattle: an additional income many farmers relied on. 

Demonetization crushed farmers’ liquidity in a mostly informal, cash driven economy. The new Livestock Rules spread further disenchantment among farmers towards the ruling government. Finally, the loan waivers announced (though, importantly, not yet enacted) in UP galvanized indebted farmers from other states.

India’s agricultural industry remains heavily dependent on the informal economy. Farmers, laborers, middlemen, and retail outlets all rely on cash payments for informal – yet essential – transactions that bring produce from the countryside to the city. An informal economy connects different industries and sources of income in unique ways. This means that policies targeting one industry (for example, beef trade) can have serious ripple effects in another (produce, leather). 

Foreign investors need to be aware of the interconnectedness of India’s informal economy, where, say a decision to ban livestock markets, can create the conditions for labor unrest among produce and dairy farmers.  

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Vulnerable supply chains

Over 90 percent of fruit and produce brought into Indian cities comes from farms smaller than five acres. These farmers send their produce to cities through lengthy supply chains that can involve upwards of four middlemen or intermediaries before reaching a market.

The farmer strikes in Maharashtra and Madhya Pradesh highlight the importance of understanding a business’ supply chain – from beginning to end – and not simply relying on intermediaries.

In fact, to counter this fragmented and expensive system, big players in India’s food retail industry are creating their own, more direct, supply chains.

Traditional retail model

In this model, farmers sell their goods to an agent. The agent then sells the farmer’s goods to a wholesale market (though as many as four intermediaries may be involved in this step). Retailers – whether restaurants, push-cart hawks, or market vendors – buy produce from wholesale markets and then sell to end consumers.  

This is not only the most common supply chain model for food retail in India but also the most expensive and inefficient.

Hub and spoke model

In this model, farmers and contract farmers sell their goods to buying centers, ideally located near farmland. The buying centers proceed to transport farm goods to ‘spokes’ – strategically located warehouses, which service retail outlets. The individual retailer owns both the buying centers and spokes – giving the retailer power to work directly with farmers and avoid intermediaries. However, the spoke model still intermittently relies on goods sourced from wholesale markets to supplement retail selection.

The hub and spoke model is a semi-autonomous supply chain network utilized by most major Indian supermarkets. The hub and spoke model avoids major food wastages with cold storage infrastructure and privately owned warehouses. Further, the hub and spoke model contracts farmers to grow goods directly for the retailer.

Value chain model

This model sources directly from farmers; creating its own supply chain independent of traditional methods. Here, farmers (whether contracted by the retailer or else sourced directly) deliver their goods to strategically located consolidation centers. These consolidation centers ship goods regularly to spokes, which then supply to retail outlets.

Sourcing through the value chain model offers retailers the most direct access to farm goods without any additional costs incurred through intermediaries. This model does, however, require sophisticated cold storage infrastructure in both warehouses and transportation. 

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Poor infrastructure ensures cyclical problems for farmers

On June 11, Devendra Fadnavis, the Chief Minister of Maharashtra, waived the farm loans of 3.1 million marginal farmers while establishing a committee to look into widespread loan waivers. The BJP state government called it the biggest loan waiver in the history of Maharashtra.

While the loan waiver will – at least partially – taper farmer outrage, it does nothing to address the core problem of farmer strikes and suicides: small scale farming, in its current guise, is no longer profitable.

According to the government’s own statistics, between January 1 and April 30, 2017, 852 farmers committed suicide in the state of Maharashtra alone. The prices of farm commodities have failed to keep up with the rising costs of production.

But, investment in cold storage infrastructure and connectivity can make farming more profitable – for both farmers and investors. India lacks basic storage and cold storage infrastructure for adequately transporting and utilizing harvested food.  

Improved storage infrastructure, for instance, would lead to both – more exports and more value added products. Low quality onions, for instance, are routinely thrown out in India instead of being used to process into value added products like sauces.

India now allows 100 percent FDI in infrastructure and food retail (so long as foodstuff is sourced domestically). India’s food retail – online and offline – has huge potential for foreign investors. The online retail giant, Amazon, is currently waiting for the federal government’s approval on a US$500 million investment plan in this segment in India.

Conclusion: Future supply chain disruptions and infrastructure opportunities

The farmer strikes of Maharashtra and Madhya Pradesh highlight India’s volatile and inefficient supply networks, which Indian cities depend on for fruit, grain, and cereals.

India is the second largest food producer in the world; foreign investors have already begun to identify opportunities in food retail as well as the food processing industry. Scaling up India’s convoluted supply chains and improving storage facilities will not only reduce food wastage but will also create new opportunities in food retail while enhancing the current growth potential.

Making India’s food supply chains more efficient helps famers, reduces labor unrest in agricultural markets, and can turn waste into profit.

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