Supply Chain Frontiers issue #47
Much of India’s vast agricultural sector is rooted in rural communities, and key to realizing its full commercial potential is connecting growers to world markets. That requires a much better understanding of the rural-agricultural supply chains that deliver produce from remote landholdings to consumers. The Malaysia Institute for Supply Chain Innovation (MISI) has proposed a research project to study these supply chains and to map out a strategy for extending them beyond traditional markets.
A measure of the industry’s importance is the fact that India ranks as the world’s number one country in terms of the agricultural sector’s contribution to national GDP (18%). An industry this size has a huge influence on consumer-buying patterns. There are more than 600,000 villages in India, for example, and rural households account for well over 60% of the national demand for several product categories.
At the same time, the industry is shaped by long-established practices. Take, for example, the time-honored tradition of passing on family-owned farms to the next generation. Since the early 1970s, both the number of landholdings and the rural population in India have increased by the same amount: 1.76%. This trend broadly reflects inheritance patterns across this huge country.
If these farms are to compete globally, they must perform profitably in a food products business that is subject to the unpredictability of consumer demand, the forces of globalization, and the liberalization of markets. That, in turn, requires integrated rural and urban supply chains that enable growers to play a bigger role in the global value stream.
One possible solution is to develop centers or hubs that connect agriculture, finance, and industry. The hub concept is based on the idea that achieving true innovation requires a combination of linked activities that ultimately achieve a long-term impact. However, it is not clear how these entities would function, and what role they could play in helping agricultural communities to access global markets.
The centers would be defined by geographic areas with similar biophysical characteristics, production systems, constraints, opportunities, and intervention points. They would work locally to being together project partners including private-sector companies involved in agricultural inputs, supply and marketing service providers, processing facilities, equipment manufacturers, public-sector research and extension agencies, universities, cooperatives, water management associations, Non-Governmental Organizations (NGOs), and farmer groups.
Such centers already exist in various forms, but they tend to lack certain important linkages in areas such as procurement, and their economic viability and sustainability remain a challenge. However, they have helped farmers to connect with markets and achieve more transparency in business.
But before such solutions can be put into practice, it is necessary to unravel how existing supply chains have evolved and operate. MISI’s proposed research focuses on a number of critical structural and operational constraints that impede the performance of rural-agricultural supply chains in India.
Infrastructural issues. The lack of organized and coordinated logistics services is a major impediment to the development of a world-class agricultural industry.
In India, freight transportation is dominated by an extremely fragmented trucking industry. It is difficult to manage the plethora of carriers required to handle shipment volumes, and poor roadways compound the situation. The country has one of the world’s largest road networks, yet fewer than half of these links are paved. And while national highways account for less than 2% of the total road network, they carry 40% of the traffic.
Finance mechanisms. Another important factor is the accessibility of finance. Micro-finance loans have become a popular mechanism for financing small businesses in developing countries. However, this solution is not a silver bullet, and other sources of capital are needed. The Reserve Bank of India’s latest Financial Stability report shows that around 4.6% of agricultural loans and 4.8% of MSME loans were non-performing as of March 2012. The proportion jumped by 1.2 to 1.3 percentage points over the past year. The lack of financing options means that farming communities often use loans for purposes other than underwriting activities that generate income.
Interrelationships. Two important components of rural-agricultural supply chains are the formal and informal relationships that bind stakeholders together. The researchers will explore how such links drive trust between trading partners.
Communications. The availability of communications technology that is both affordable and relatively easy to adopt influences the success of rural growers. The use of mobile devices to connect upstream and downstream supply chain partners is an area of particular interest. With more than 4 million new mobile connections being established every month in rural India, this technology is a key factor in the future growth of agricultural markets.
The role of women. Nearly 70% of Indian women in rural areas are employed in agriculture and are responsible for 60-80% of food production. Women play a major role in animal husbandry and horticulture, primary sources of income in rural communities. Moreover, they participate in local food networks as producers, wholesalers, brokers, farmers, market directors, and heads of feeding programs for the poor. Understanding how gender influences the development of regional agricultural food networks is critically important.
Unlocking the growth potential of India’s agricultural communities by improving the supply chains that serve them not only will benefit the national and regional economies, but also could provide a significant boost for the country’s logistics industry.
For more information on the proposed research, contact Dr. Asad Ata.