The Finance Minister has done a great job in building a policy framework driving the digitisation of agricultural supply chain and benefiting farmers and the supply chain members in multiple ways
Indian agriculture needs digitisation to make supply chain efficient, transparent, market driven and traceable. Digital technology can play an important role in enabling access of high-quality inputs to farmers, farmers’ linkages to the market, reduction in post-harvest losses, enabling access of institutional credit, insurance and direct benefit transfer to farmers.
The digitisation needs building a platform to enable access to millions of farmers (85 per cent of them being small and marginal), which can be source of accurate and real time information which can be stored, used, shared and analysed for the benefit of farmers.
The Budget announcement for building a digital platform for Indian agriculture is a big step forward to address the challenges facing Indian agriculture. The Budget also announced an accelerator fund for agri startups, enhancing Priority Sector Lending (PSL) allocation to agriculture; giving impetus to fisheries, millets, horticulture amongst several measures to boost Indian agriculture. The implications of some of these measures are:
Application of Agristack to solve problems of Indian agriculture
Credit to farmers: Agristack can be used by banks and MFIs to assess credit worthiness of farmers and then tailor-make products for each one of them. As per the priority sector norms, 18 per cent of ANBC (Average Net Bank Credit) for lending to agriculture. FY23-24 PSL target for agriculture is set at Rs 20 lakh crore. The ability of the banks to reach out to farmers, judge their credit-worthiness and monitor crops for the purpose of recovery can be facilitated by Agristack.
Crop Insurance: The number of farmers (or farm holdings) covered under the Prime Minister’s Fasal Bima Yojna (PMFBY) was about 5.75 crore in 2018-19. Majority of the farmers who availed crop insurance are the ones who have taken loan from banks. Only about 30 per cent of gross cropped area is covered under insurance. Agristack can improve the access of crop insurance to wider farmer bases (non-loanee farmers in particular) and help bring more crop area under coverage. It can also help Insurance companies to understand farmer and farm risk profile, which are needed in deciding the premium and settling the claims.
Direct Benefit Transfer (DBT): The government can use Agristack for designing and implementing schemes for farmer welfare as well as for implementing DBT. Given government’s intent to move to DBT, Agristack can play a catalytic role in this process.
Market linkages: Corporates selling to or buying from farmers can also benefit immensely with direct and targeted access to farmers. The digitisation will help improve farmers’ access to quality inputs to farmers and their ability to connect directly with multiple buyers, which can improve their price realisation.
The development of Agristack and digital maps as public goods can be a game changer for agricultural supply chain. The challenge is to make the data points and maps granular, accurate, real-time and user-friendly with least possible cost through optimal utilisation of technology and resources.
Given the importance of the sector, this is a good investment into the future for making the supply chain more efficient and transparent. In addition to standalone maps, multi-dimensional analysis of digital maps (such as mandi density x production, soil nutrition x crop type) can be very insightful to all the supply chain members and policymakers in particular. There is huge possibility of designing a host of innovations and applications on top of Agristack by start-ups ecosystem in agritech.
The digital economy cannot be made inclusive without integrating farmers into it and without democratising access of innovations to Indian farming community. Farmers have been either ignored or underestimated on their ability and intent to the use of digital tools. They are ready to embrace it and a platform like Agristack can catalyse the integration of farm and digital economy, which is much needed for Indian agriculture to leapfrog into a new era.
Agriculture accelerator fund as a catalyst to encourage agritech startups:This fund can provide the necessary capital for innovators to test their ideas for commercialisation. This will be critical in de-risking business models for entrepreneurs as well as facilitating venture investing into the sector. Availability of a catalytic fund will also go a long way in attracting entrepreneurial talent into the sector. I am hopeful that sector would have more than 10,000 startups by 2030. For this to happen, the accelerator fund’s capital needs to be channelized to:
- Validate new technologies from universities and institutions to improve their acceptability by farmers
-Catalyse investments into agricultural sector at the seed stage. The target should be to invest seed money in about 80- 100 start-ups in a span of 2-3 years
-Facilitate the flow of capital into agritech ecosystem by developing a feeder pipeline of investments for the late-stage funds
-Facilitate the sharing of the knowledge and learning distilled from innovative agritech projects with the larger ecosystem, including research institutions, corporates and policy makers
Agriculture credit target increased to Rs 20 lakh crore
This is a good step but I would also like to see use of digital tools and cashflow-based financing while lending to farmers so that a majority of farmers can get access to institutional credit.
Farmer’s access to institutional credit remains a constant challenge, despite year-on-year increase in budgetary allocation under PSL for agriculture. Approximately 30% farmers have access to institutional credit and balance 70% remain dependent on informal credit (annual interest rate ranging from 24 to 60% in informal credit against 7% under PSL).
The weighted average cost of capital (WACC) for an average Indian farm (about 1 hectare size) continues to be over 20 per cent per annum because of heavy dependence on informal high-cost credit. There are not too many businesses in the world which can make money if the WACC is over 20%, leave alone the small holder farmers in India. This is despite the fact that agriculture production has enough gross margins (farm income – cost (of inputs + labour)), but margins get eroded because of high interest cost that converts healthy EBIDTA to sick (usually negative) PBT. Unless we bring down the cost of credit by a significant margin, farm economics is unlikely to work on more than 85 per cent of farms in India, which are small and marginal (area <2 hectares).
Bankers are wary of lending to farmers and other value chain players primarily because of lack of data, market linkages, high transactional cost of lending as well as recovery, along with unpredictable loan waivers by the state governments from time to time.
Though technology cannot be a solution for loan waivers, it can certainly solve other challenges faced by bankers in farmer financing through data and digitisation to capture crop health, input usage, soil health, prices and quality of produce. It can help to build credit worthiness of farm as well as the farmer, which is key for risk assessment, monitoring and mitigation.
Underwriting for bankers is difficult without digitisation of the underlying assets be it crop in the field (for crop loans), commodity in the warehouse (for post-harvest warehouse receipt financing) or the cattle (for cattle loans). Unlike home loans or automobile loans where asset quality / value don’t change that frequently and drastically, the asset quality and value, especially in crop loans, can change in a matter of few hours /days with risks like unseasonal rain, pest attack, temperature shock, etc. In fact, the emerging climate risk warrants for more granular and high-frequency digitisation approach to predict and mitigate climate risks for anyone lending to the sector participants.
Farmers, in general, are more open to adopt innovations if purchase of farm output is assured in a given price range. The increasing organisation of the demand side, including the demand originating from institutional buyers, Horeca, ecomm, modern trade, mom and pop stores and D2C, can pivot the supply-driven supply chain to demand-driven and enable cash-flow based financing throughout the supply chain.
In summary, the Union Budget 2023 has done a great job in building a policy framework driving the digitisation of agricultural supply chain – benefitting the farmers and the supply chain members in multiple ways.
(The author is an investor, mentor and board member with many foodtech and agritech start-ups in India and overseas. He works as Venture Partner with Bharat Innovation Fund. He is also co-founder of ThinkAg – a platform for accelerating adoption of innovations in agriculture and food space. He is the chairman for FICCI task force on agri startups.)