iffco foundation bulletin vol.2 no.1 june 2014 edition

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Dr Uttam Gupta Perspectives

Abstract

The article traces the evolution of the fertilizer policy in India from the 1960’s to present

date. It is an attempt to explore the policy narratives and external and internal factors that

have shaped fertilizer policy in India today. Upon understanding the challenges and the

compulsions that have shaped the fertilizer policy decisions in India and its influence on

agriculture pricing, the author makes some recommendations that can battle some of the

challenges that Indian agriculture policy makers face today.

Keywords: Fertilizer policy, fertilizer pricing, fertilizer subsidy, cash transfer, food security,

agriculture, small and marginal farmers.

Fertilizers – Key to Food Security and Sustainable Agriculture

Food security is of paramount importance to meet the growing food needs of an ever

increasing population. Not having sufficient domestic production of food to meet requirement

of 1.25 billion plus and still expanding will not only put a huge burden on scarce foreign

exchange resources but can also expose us to exploitation in global market. Hence a strong

case can be made for strategic interventions to facilitate the achievement of this goal.

Agriculture has a share of around 15% in gross domestic product (GDP) and nearly 60% of

population derives its livelihood from it. Industry and services sectors too depend heavily

on it for their rapid and sustained growth. Therefore, agriculture needs to grow rapidly not

only for ensuring food security but also for giving a boost to economic growth and increase

income of millions of farmers and India’s entire population.

Land – a key asset for growing food - has been ever diminishing thanks to increasing

population and increasing diversion for urbanization, infrastructure and industry. There

was an over whelming consensus that these issues must be tackled on a priority basis. The

overriding objective of the policy narrative was ‘How to get more from every unit of land?’

The contemporary ministries and implementing agencies latched on to new technology

that combined use of HYV seeds, fertilizers and irrigation to give higher crop yield.

Fertilizers provide the much needed plant nutrients viz., N, P & K and a host of secondary

& micro-nutrients that make HYV work. Irrigation gives the much needed ‘moisture’ for

process of flowering and grain making.

1 Dr Uttam Gupta (31st Aug 1953) is an Indian author, columnist and expert on a wide range of subjects like

Fertilizers; Oil & Gas; Power; Intellectual Property Rights or IPRs; Agriculture, World Trade Organiza-

tion WTO agreements, Crop protection etc. which are critical to sustainable economic development. His

website is www.uttamgupta.com. He can be reached at [email protected]

Fertilizer Industry in India – Challenges and Way Forward

Dr Uttam Gupta1

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Given the background of agriculture and farming, it was a daunting challenge to:

(i) make farmers accept new technology

(ii) make required quantity of fertilizers available

(iii) ensure that farmers can afford to pay.

While, objective (i) was job of extension machinery, (ii) & (iii) were essentially a function

of policy.

UNFOLDING POLICY ENVIRONMENT

Fertilizer Price Control and Subsidy

Since production of fertilizer is highly energy and capital intensive, in an inflationary

environment, its cost is unavoidably high. On the other hand, 83% of the farmers are small

& marginal who cannot afford to pay high price. If, fertilizer is priced high, farmers won’t

buy. And, if price is kept low, that would make supplies unviable. Government resolved the

dilemma by controlling maximum retail price (MRP) at a low level and assuring to producers

a price that helped them remain viable. The difference was reimbursed as subsidy.

The producer prices and subsidy were administered through a scheme unique to fertilizers

viz., Retention Price Scheme (RPS). Based on the recommendations of high power Marathe

committee, RPS was implemented for urea in 1977; for DAP & other complex fertilizers in

1979 and for SSP in 1982.

RPS had phenomenal success. Fertilizer consumption increased dramatically supported by

increase in production in 80’s. The trend was sustained in 90’s.

However, the Scheme came under attack on account of increase in subsidy per se; without

analyzing its causes. The main causes were increase in cost of feedstock and other inputs

on one hand and virtually no increase in MRP on the other besides increase in production

and consumption.2

Policy back flips for Phosphorus (P) & Potassium (K) Fertilizers

In 1991, faced with an economic crisis, India had to approach International Monetary Fund/

World Bank who insisted on elimination of fertilizer subsidy within 3 years as a precondition

for extending financial support. Accordingly, in August 1992, DAP3/complex fertilizers &

SSP4 were decontrolled and subsidy abolished. However, a month there after, subsidy was

resurrected under a new incarnation viz., ad-hoc concession. Controls on MRP too were

revived albeit indirectly.

2 For insights in to nuances of RPS, amendments from time to time, associated problems and its contribution,

refer to my articles on my website link as under:http://www.uttamgupta.com/category/fertilizers/retention-

price-scheme-rps/3 Diammonium Phosphate4 Single Super Phosphate

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From April 1, 2010, all decontrolled fertilizers are covered by Nutrient Based Scheme

(NBS). Under NBS, government fixes ‘uniform’ subsidy per nutrient N,P,K and Sulfur and

producers have freedom to fix MRP as well. However, on June 26, 2013, government

decided to fix ‘reasonable’ MRPs and manufacturers charging higher will be deemed to be

‘profiteering’ from the scheme.

The violations are penalized by way of denying subsidy to the extent of deviation of MRP

actually charged from the ‘reasonable’ MRP or even exclusion of concerned product from

purview of NBS. This is tantamount to taking away flexibility to fix MRP albeit indirectly.5

Continued Price Control on Urea

MRP of urea has been under control all thru. Producers are assured of ‘Retention Price’

(RP) and excess of this over net realization from sale at controlled MRP reimbursed as

subsidy. However, manner of determination of RP has undergone several changes; from

erstwhile unit-based RPS to New Pricing Scheme (NPS) viz.,

Stage I (2003-04)

Stage II (2004-05) & (2005-06)

Stage III (October 1, 2006 to March 31, 2010); which stands extended till date.

Meanwhile, early this year, government revised fixed charges after a gap of 12 years (these

were last revised in 2002-03).

In 2012, an Empowered Group of Ministers (eGoM) decided that Urea should also be

brought under NBS and producers given freedom to fix retail prices on the same lines as

the extant scheme for decontrolled P & K fertilizers. However, government is yet to act on

this recommendation.

Mechanism for Subsidy Payment

Subsidy payments are made to manufacturers to enable them sell fertilizers at price lower

than cost of production and distribution. 85-90% of the subsidy amount is paid to

manufacturer on ‘receipt of material in district’. From November 2012, these payments are

on confirmation of receipt of fertiliser by the retailer. Balance 10-15% amount is released

on receipt of confirmation from the state regarding sale to farmers.

In Budget for 2012-13, the Government had announced tracking movement of fertilisers

from retailer to farmers and linking part of subsidy payment to manufacturers to the sale of

fertilisers to farmers by retailers. In the mid-year economic analysis of 2012-13, finance

ministry came out with a blueprint on modalities for implementing the Budget announcement.

Pilot projects in 10 districts spread over nine states were to be launched.

5 For a comprehensive account of policy changes in the P&K segment, amendments from time to time and

their implications, pl refer to my articles on my website link as under:

http://www.uttamgupta.com/category/fertilizers/concession-scheme-for-p-k/

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After successful implementation in these 10 districts, cash subsidy will be transferred to

farmers in the next phase from April 1, 2013. Concurrently, tracking movement of fertilisers

was be rolled out in the whole country. The Department of Finance (DoF) has developed a

mobile and web application, a mobile Fertiliser Monitoring System (m-FMS) that provides

information about stock position, sale and receipt of fertiliser till the last retail point.

While, tracking system has been put in place, government is yet to implement direct subsidy

transfer to farmers.6

Policy for New Investment in Urea

With effect from September 4, 2008, Government had put in place a policy for new

investment in urea sector. The policy prescribed methods for determining retention price

(RP) for various categories viz., additional urea from revamp of existing units; expansion

of existing units; green field projects etc. Revival of Food Corporation of India (FCI) I &

Hindustan Fertilizer Corporation Limited (HFC) group of plants was also covered under

this policy.

Meanwhile, considering mute response to the above policy (only 2 million tons urea capacity

was added through revamp of existing units), in 2012 government came up with a new

version of Urea Investment Policy (UIP). This went through a process of amendment in the

following year and in early 2014, the Cabinet approved an amended UIP.

The amended UIP assures investors in new green field projects and revival projects of sick

public sector units of FCI & HFC a price linked to import parity price (IPP) with a floor (F)

US$ 305 per ton and ceiling (C) US$ 335 per ton.

The prices correspond to gas price of up to US$ 6.5 per mbtu. Beyond this level, for each

$ increase in gas price up to US$14 per mbtu, ‘F’ and ‘C’ would increase by US $ 20 per

ton each. For increases beyond US$14 per mBtu, only ‘F’ price would apply albeit with

full protection for the gas cost.7

Feedstock and other Raw Materials in Fertilizer Production

The urea industry in India is heterogeneous with plants based on a variety of feedstock viz.,

naphtha, fuel oil/LSHS, gas. However, in view of its superior characteristics such as higher

efficiency and being a much cleaner/environment friendly fuel, gas is the predominant

feedstock. Currently, it accounts for around 80% of urea capacity. Supply of gas is regulated

in accordance with priority for allocation laid down by government from time to time.

6 For insights in to the dynamics of how a scheme of direct cash transfer would work, its positives and

government’s stance, pl refer to my articles on my website link as under:

http://www.uttamgupta.com/category/fertilizers/targeting-subsidies/7 For details on new urea investment policy (UIP), its implications with especial reference to impact on

investment & growth of industry, pl refer to my articles on my website link as under:

http://www.uttamgupta.com/fertilizers/the-urea-investment-policy-quagmire/

http://www.uttamgupta.com/fertilizers/urea-investment-policy-flop-show-yet/

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In P&K fertilizers, plants are based on a variety of raw materials viz., imported phosphoric

acid and imported ammonia; domestic phosphoric acid and imported ammonia etc. SSP

plants are based on imported rock phosphate (supplemented by domestic rock where

available) and imported sulfur.

Controls on Movement & Distribution

From 1973, government controlled movement and distribution of all fertilizers under the

Essential Commodities Act (ECA). In 1992, concomitant with removal of price control and

abolition of subsidy on P & K fertilizers, movement and distribution controls were also

withdrawn. However, controls on urea continued alongside price control.

From 2003, there has been some liberalization in the urea segment as well. Up to 50% of

urea production is subject to movement and distribution control. However, states allocate

entire quantity of urea arrivals – both regulated and unregulated & track up to district level.

Urea import is allowed only through designated State Trading Enterprises (STEs) like

Mineral and Metal Trading Corporation Limited (MMTC), State Trading Corporation of

India Limited (STC), Indian Potash Limited (IPL) etc.

Even though, P&K fertilizers are free from movement and distribution control, however,

20% of this material is under movement control to service underserved areas. Import of

these fertilizers is under Open General Lisence (OGL) and companies are free to import.

The same holds for raw material such as rock sulfur, phosphoric acid used in the manufacture

of these fertilizers.8

Major challenges facing fertilizer industry

At 15% of GDP of US$ 2 trillion, the value of agriculture produce is around US$ 300

billion. During the last decade, agriculture grew at 2.5-3% per annum. However, for 12th

five year plan (2012-13 to 2016-17), Government has a set a growth target of 4% which

needs to be sustained in future as well.

Urgent Need to Bridge Increasing Demand-supply Gap

In view of ever decreasing land area under cultivation and reduction in average size of

holding, such high growth can be achieved only by substantially increasing productivity of

land. That can come about only through increase in fertilizer use and its efficient

management. But, the Indian fertilizer industry is far from having the requisite capability

to meet this challenge.

During the last one-and-a-half decade or so, hardly any investment has been made for

adding to indigenous urea production capacity. As a result, out of a total demand of 30

8 For a detailed account of how controls on distribution and movement evolved and their nexus with changing

pricing policy and subsidy environment, pl refer to my articles on my website link as under:

http://www.uttamgupta.com/category/fertilizers/distribution-controls/

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million tons, around 8 million tons is met from imports. Of domestic production of 22

million tons, around 80% or 17 million tons is based on gas. Over 30% of the gas requirement

is met from imported LNG.

In phosphate and potash, acute lack of natural resources leads to high dependence on imports

which makes Indian industry highly vulnerable. Thus, we depend on imports to the extent

of 85-90% in phosphates, 95% in sulphur and 100% in potash. The value of imports –

finished fertilizer and raw materials/intermediates – is a staggering US$ 16 billion

(2012-13).

The high import dependence often leads to our exploitation in international market which

is cartelized by a few suppliers. For instance, during 2012-13, we were paying $ 400 per

ton for MOP. Due to break-up of Russian-Belarus cartel in July, 2013 (it controls 40% of

global potash market), the price dropped to a low of around US$ 320 per ton. But, one is

not sure how long these lower levels will last as efforts are already on to resurrect the

cartel.

Ballooning Subsidy and Under/delayed Payments

From a very modest level of Rs 266 crores in 1977-78, fertilizer subsidy increased to Rs

4389 crores in 1990-91 and by 1998-99 it had crossed Rs 10,000 crore. In another decade

down the line, by 2008-09 it had zoomed to Rs 100,000 crores mark. After some reduction

in following 3 years, during 2012-13, it again crossed Rs 100,000 crores. During 2014-15

too, it is expected to hover around this tantalizing figure.

During the last two-and-a-half decade from 1990-91 to 2014-15, fertilizer subsidy has

increased 25 times. Ironically, this is also the period coinciding with economic reforms

when the government has consistently harped on fiscal consolidation with special emphasis

on reining in subsidies including subsidy on fertilizers. This demonstrates the existence of

a total disconnect between what was preached and what was actually done.

The founding fathers of unit-specific Retention Pricing Scheme (RPS) did not contemplate

such a scenario. They intended the scheme to be a ‘pooling’ mechanism whereby fertilizer

plants whose retention prices (RP) was lower than realization from sale at controlled price

would contribute to pool. Units whose RP was higher would receive money. This was not

just theoretical. During initial years, RP of some plants viz., Gujarat State Fertilizer and

Chemicals (GSFC), Baroda; IFFCO, Kalol; HFC, Namrup were lower than MRP and they

were contributing to pool. This poses an important question which is what factors caused

such problems.

The genesis of the problem lies in steep increase in the price of feedstock/fuel and other

inputs even as the government kept a tight leash on retail price of fertilizers. Between 1981

and 2012, urea price increased from Rs. 2,350 to Rs. 5360 per tonne, or 2.2 times. In

contrast, price of gas went up from Rs0.32 per cubic metre to Rs 8.4 per cubic metre, or 26

times. The price of naphtha went up from around Rs 600 per tonne to Rs 50,000 per tonne,

or 83 times.

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This led to a widening gulf between cost of production and realisation from sales at controlled

price. Juxtaposed with increasing quantum of production per se, this led to skyrocketing

subsidy. The above mentioned fundamental causes behind increasing subsidy were never

addressed in a credible and consistent manner. Despite this scenario, fiscal compulsions

led the Government to prioritise subsidy reduction.

During last 2 decades or so, mandarins in Finance Ministry have taken recourse to financial

engineering that involved inter alia under-provision in Budget & postponing payments.

Whereas, in 90s, under-provision used to be in Rs. 500–2000 crores range, in first decade

of 21st century and now in to second which runs in to several thousand crores.

In 2008-09, budget allocation was close to Rs. 50,000 crores short of requirement. In

2011-12, under-provision was around Rs 17,000 crores. In 2012-13, this doubled to Rs

32,000 crores and in 2013-14, this was around Rs. 38,000 crores. For 2014-15, interim

budget has allocated Rs. 68,000 crores. After meeting roll-over from previous year, only

Rs 30,000 crores will be left barely adequate to cover payment for three months till June

2014.

Under-provision leads to suspension of payments, liquidity crunch and pushes plants to

brink of closure. In 90s, manufacturers faced suspension in last quarter of a fiscal. Now,

this happens much earlier e.g., from start of second quarter. Given government’s continuing

obsession with fiscal deficit red lines, under-provisioning for subsidy will continue to

dominate the policy narrative.9

Increasing Imbalance in Fertilizer Use

In order to get maximum crop yield from fertilizer use and yet, maintaining soil health it is

imperative that farmer applies all the 3 major nutrients Nitrogen (N), Phosphorus (P) and

Potassium (K) in the right mix. As a rule of thumb, agronomists recommend their use in a

ratio of 4:2:1; ideally it has to be customized to soil and crop specific situations.

Unfortunately, by making fertilizers carrying P & K very expensive and urea - main source

of N - artificially cheap, government policies have led farmers to apply excess of N and

less of P & K. That led to increasing imbalance and the ratio at one point had gone up to

8.5:3.1:1 (1998-99). The current ratio at 8.2:3.2:1 (2012-13) remains heavily imbalanced.

All along, urea has been treated as a holy cow. In 1992, when, P and K fertilisers were de-

controlled, urea was not. The latter remained under RPS, which has since been rechristened

as NPS. For two decades, we have lived with different policy dispensations for urea on one

hand, and P & K fertilisers on the other. These work at cross purposes. While NPS/RPS for

urea encourages excessive use, NBS for P and K discourages their use.

9 For insights in to how obsession with fiscal consolidation per se has led to shortfall in allocation for

fertilizer subsidy and financial squeeze on industry, pl refer to my articles on my website link as under:

http://www.uttamgupta.com/category/economic-outlook/fiscal-deficitsubsidies/

http://www.uttamgupta.com/fertilizers/fertilizer-bonds-a-manifestation-of-deeper-malaise/

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This has skewed NPK fertiliser-use ratio towards urea, therefore progressively worsening

the overall soil nutrient imbalances and also effecting crop yields. However there seems to

be a lack of remedial action in this respect.

An Empowered Group of Ministers (eGoM) had earlier recommended deregulating urea

prices and bringing it under the nutrient-based subsidy (NBS) regime. A Committee of

Secretaries (CoS) was, then, asked to work out the modalities of the plan, which is now

practically shelved.

Due to continued dithering over coverage of urea under NBS and its MRP virtually frozen,

NBS for P&K fertilizers which was hailed as a revolutionary reform has boomeranged.

This is due to government’s stance of either drastically reducing subsidy on P&K fertilizers

or at best keeping it unchanged. This has spiked their prices 3-4 times since 2010 even as

urea MRP increased by meagre 10 per cent. This has aggravated farmer’s preference towards

urea due to resultant imbalance in price ratio.10

Shortage of Gas and its High Price

Gas is the predominant feedstock in production of fertilizers in India. Gas based plants

account for about 80% of total urea production capacity of 22 million tons. Fertilisers get

top priority in gas allocation. LPG is at number two and power gets the third slot. These

priorities were reiterated by empowered group of ministers (eGoM) in its meeting held in

July, 2013.

Yet, requirements of fertiliser plants are far from fully covered. Against requirement of 42

million standard cubic meter per day (mmscmd), they get 31 mmscmd including 15 mmscmd

from KG-D6 fields operated by Reliance Industries (RIL) and 16 mmscmd from ONGC/

OIL. The balance 11 mmscmd is met from imported LNG (liquefied natural gas).

Under a policy directive from the government, in 2012-13, five fuel-oil and naphtha-based

plants were restructured and switched over to gas. They need 5 mmscmd, thus increasing

the uncovered gap to 16 mmscmd. This much gas which represents about 30% of requirement

is met from imported LNG. The situation is likely to deteriorate in years ahead.

As regards price, prior to 2007 fertilizer manufacturers were getting gas from ONGC/OIL

under administered price mechanism (APM) at basic price of US$ 2.5 per million Btu

(British thermal unit) plus marketing margin, transport charges, taxes and duties. In 2007,

eGoM while approving a price of US$ 4.2 per mBtu chargeable on supplies from KG-D6,

recommended that this be made applicable on supplies from ONGC/OIL as well.

Meanwhile, based on recommendations of Dr. Rangarajan Committee in June 2013, the

government approved a new structure of gas pricing that would result in doubling of price

to US$ 8.4 per mBtu from April 1, 2014. This was despite strong opposition from fertilizer

department (besides power) who brought out serious implications of hike. This will increase

10 For an analysis of fertilizer policies moving in opposite directions and implications for imbalance in

fertilizer use, pl refer to my article on my website link as under:

http://www.uttamgupta.com/fertilizers/fertilisers-policies-pull-in-opposite-directions

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urea subsidy by about Rs. 10,400 crores annually.

A Parliament’s Standing Committee (PSC) in its August, 2013 report had also strongly

objected to cabinet decision. The committee wanted government to re-consider Rangarajan

formula taking in to account cost of production approach. Yet, new pricing guidelines were

notified on Jan 10, 2014. However, their implementation has been kept on hold in view of

general elections and model code of conduct till May 16, 2014. The matter is now active

consideration of present NDA government.

Meanwhile, in the Gas Sales Purchase Agreement (GSPA) for supplies from KG-D6,

Reliance Industries Limited (RIL) has proposed that government fixed rate will be charged

on Gross Calorific Value (GCV) basis instead of current practice of charging on Net Calorific

Value (NCV). It also moots marketing margin of US$ 0.135 per mBtu on GCV basis. Thus,

fertilizer units will have to pay US$ 0.935 per mBtu extra on account of switch from NCV

to GCV. This will increase subsidy by another around Rs 2600 crores annually.11

ADDRESSING THE CHALLENGES & WAY FORWARD

Need for a long-term and stable policy for urea

Growth of fertilizer industry in India at the desired pace is hamstrung due to lack of a

conducive, long-term and stable policy. Way back in 2000, the Expenditure Reforms

Commission (ERC) had given a road map for wholesome reforms of fertilizers sector.

Beginning 2001-02, implementation of ERC recommendations would have led to full

decontrol by 2005-06 with proviso for subsidy to be given directly to the poor small and

marginal farmers.

The road map envisaged a complete overhauling of the structure of fertilizer industry in a

calibrated manner to include inter alia gradual increase in MRP of urea to eventually attain

a level at which domestic manufacturers could compete with imported urea; pricing of

feedstock on Import Parity Basis (IPP); switch-over of all Naphtha and fuel oil based plants

to gas and removal movement and distribution controls.

Unfortunately, none of the proposed changes have seen fruition. In the last 12 years, Urea

MRP was increased only once in April 2010 that too by mere 10%. Currently, at an abysmal

low of Rs. 5360 per ton, the price is less than half the production cost of most efficient gas

based unit and less than one-fourth cost of imported urea. The cost of some naphtha based

plants is nearly 8 times the MRP.

While, introduction of New Pricing Scheme (NPS) in 2003 was intended to be a precursor

to uniform pricing, the reality is even today each of 30 operating units gets a specific price.

NPS is a new incarnation of erstwhile unit-wise RPS. Urea Investment Policy (UIP)

reinforces this trend by prescribing different price bands for various categories of investment

viz., new Greenfield; revamp of existing plants; revival of FCI/HFC sick plants; brown-

11 For a comprehensive account of changes in structure and methodology of gas pricing and implications

for fertilizer subsidy, pl refer to my articles on my website link as under:-

http://www.uttamgupta.com/category/oil-gas/

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field projects.

The current highly segmented and differentiated approach to pricing of urea must give way

to uniform pricing. The government should implement without further delay the eGoM

recommendation for NBS for urea on same lines as for P&K fertilizers. Thus, all units will

be entitled to a uniform subsidy on per kg N benchmarked to import parity price (IPP) of

urea. As for P&K, urea manufacturers will be free to fix the MRP.

Once NBS is in place, much of the incentives to target different segments will eventually

disappear. We will have ‘certainty’ of policy environment thus enabling big-ticket investment

in capacity creation and reduced dependence on imports. Additional benefits will flow by

way of reduction in cost, huge saving in subsidy and enhanced efficiency of fertilizer use

by farmers.

There is no need for a separate new Urea Investment Policy (UIP). All manufacturing units

should be governed by the same policy dispensation. Even so, an earlier version of UIP that

came in 2008 with more or less similar contours as present policy failed to enthuse investors.

The latter too has not generated much interest despite being on the table for over 2 years

now.

The real reason for lack of investor interest is continuing uncertainty of the policy

environment, acute shortage of domestic gas and its high price and substantial under-

provisioning for subsidy resulting in delayed payments and even under-payments. If these

are addressed then, there won’t be any need for special packages to attract fresh investment.12

Need to Streamline Policy for P&K Fertilizers

The biggest stumbling block in the way of promoting balanced fertilizer use thus far, has

been different policy dispensations for decontrolled P&K fertilizers and urea working at

cross-purposes with each other. The adoption of NBS for urea on the same lines as for

P&K will remove this glaring anomaly.

However, this fundamental change in policy by itself will not generate required impulses

for reducing imbalance. The government needs to follow it up by adjusting subsidy on urea

in a manner such that the ratio of DAP/complex price to urea and MOP to urea is brought

down to reasonable levels from the current high of 3.5 times and 3 times respectively.

Ever since NBS for decontrolled P & K fertilizers was introduced 4 years ago, a number of

anomalies have crept in its implementation. The biggest irritant is fixation of so called

‘reasonable’ MRP, requiring manufacturers to submit cost data, identifying potential

deviations from these benchmarks and penalizing them by denial of subsidy etc. This

tantamount to resurrection of control on these fertilizers through the backdoor.

The real merit of NBS was that it allowed flexibility to manufacturers to set prices which

was taken away vide the DoF office memorandum of June, 2013. While, this may have

12 For details on how NBS for urea will help attract investment, reduce imbalance in fertilizer use and rein

in subsidy, pl refer to my article on my website link as under:

http://www.uttamgupta.com/fertilizers/urea-pricing-government-must-walk-the-talk/

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been prompted by some fall guys charging more than an amount justified by reasonable

cost, they can to be punished through market forces. Government can also do necessary

surveillance, call for details from those found over-charging and penalize them instead of

subjecting the entire industry to avoidable harassment.

The government should shed its current mind-set of cutting corners merely to save some

subsidy here and there. Whenever, there is drop in international price, the subsidy amount

is cut. Considering that already the retail prices of P& K fertilizers are at an elevated level,

the government should as a matter of utmost caution not reduce subsidy and allow the

benefit of reduction in international price or rupee appreciation etc to be passed on to

farmers through reduction in MRP.13

Right Pricing of Domestic Gas and Ensuring Adequate Supply

For arriving at price applicable to all domestic gas, Rangarajan formula takes average of

hub prices in USA and Europe and further averages these with net-back price of imported

Liquefied Natural Gas (LNG) in to India. The new price – to be revised quarterly – is

expected to be US$ 8.2-8.4 per mBtu. The formula is disingenuous.

Due to tight global demand-supply balance and India’s heavy dependence on import, current

LNG prices are exploitative. Net-back from its supplies to India and Japan is way above

US$ 10 per mBtu. Since, two sets are clubbed; formula leads to steep increase in price to

US$ 8.4 per mBtu. True, domestic production needs to be incentivized. But, to argue this

will come only by giving operators today’s extortion price is not tenable.

Much of global trade in gas takes place at hub prices. These prices are reasonable and

adequately protect supplier’s interest? On the other hand, price of imported LNG is an

aberration and must not be included for determining producer’s price in India.

The oil minister, Mr Veerappa Moily recently opined ‘if US$ 8.4 per mBtu is not granted,

domestic production will not increase and we would continue to import LNG at US$ 16

plus’. This seems to be an alarmist remark. It poses a deep conundrum and puts the decision

maker in a catch – 22 situation.

In June, 2013 meeting of the Cabinet, fertilizer and power ministers had strongly opposed

the steep hike. Later, Finance Minister had promised to give concession to both sectors.

There seems to been no credible explanation for increasing price, especially when these

two use nearly 75% of domestic gas consumption.

Rangarajan formula based price is also out of sync with prevailing prices in other countries

viz., US$ 2.6 per mBtu in Russia; US$ 3.5-4 per mBtu in USA and US$ 1.5 per mBtu in

UAE.

Other principle is production cost plus reasonable return. For domestic gas supplies from

13 For insights in to how DoF memorandum of June, 2013 has meant virtual return of license raj for

decontrolled P&K fertilizers, pl refer to my article on my website link as under:-

http://www.uttamgupta.com/fertilizers/fertilisers-back-to-the-licence-raj/

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ONGC/OIL, this was used for determining producer price as per Kelkar formula till 2007

but abandoned thereafter. Even PSC had asked government to re-consider its decision and

examine cost of production. In this regard, a close look at some facts is in order.

Initially, oil ministry/DGH had approved capital expenditure of US$ 2.4 billion for 40

mmscmd in 2004. In 2007, this was hiked to US$ 8.8 billion for enhanced output 80 mmscmd.

In 2011, this was reduced to US$ 5.6 billion. 1 mmscmd equals 10,000 million kcl. @ US$

1 per mBtu or US$ 4 per mKcl (4 mBtu=1 mkcl), value of 1 mmscmd is US$ 40,000 or 0.04

million. This will yield US$ 14.6 million annually (.04×365). If, fields produce 80 mmscmd

– as committed under PSC – total revenue would be US$ 1168 million (14.6×80).

Even at US$ 1 per mBtu, entire US$ 5.6 billion could be recovered in less than 5 years

(5600/1168) (production commenced in 2009). Though, actual production was less than 80

mmscmd, outcome would be even better as price allowed was more than 4 times at US$ 4.2

per mBtu. In this backdrop, and entire investment already fully amortized, even if price is

retained at US$ 4.2 per mBtu, operator would make handsome profits.

Clearly, structure of gas pricing that UPA government wanted to put in place is flawed. It

neither adopts market based principle nor follows global benchmark. And, it does not

consider cost of production approach. A viable pricing system must reconcile concerns of

both producers and users.

Whether, one considers global benchmarking or production cost, there is no justification

for increasing gas price beyond the current level of US$ 4.2 per mBtu. Further, in line with

the practice followed all along, the price must continue to be on NCV basis (instead of

GCV propounded by RIL).

The new government should take all necessary steps including removal of all regulatory

hurdles to ensure availability of sufficient quantity of domestic gas to fully meet the

requirements of the fertilizer industry.14

Reining in Subsidy and Reforming Payments System

Subsidy depends primarily on cost of feedstock/fuel and other raw materials on one hand

and selling price of fertilizers on the other. Since, gas is the predominant feedstock in urea

production, if only its price can be fixed at reasonable level and availability of domestic

gas assured in full at this price, that will make a huge dent on subsidy. Besides, bringing up

urea MRP under NBS can also yield substantial saving.

At present, imported urea comes at a much higher price than cost of domestic production

from gas based plants at prevailing price of US$ 4.2 per mBtu. This is testified by the fact

that on import of around 8 million ton annually which is nearly one-third of domestic

14 For insights in to the flaws in methodology adopted for pricing of gas and logic for retaining price

at existing level, pl refer to my articles on my website link as under:

http://www.uttamgupta.com/oil-gas/gas-pricing-plunder-camouflaged-incentive/

http://www.uttamgupta.com/fertilizers/rilbpniko-exploit-fault-line-rangarajan-formula-bonanza/

http://www.uttamgupta.com/oil-gas/debate-should-gas-prices-be-raised-as-per-rangarajan-plan/

http://www.uttamgupta.com/oil-gas/kg-d6-gas-fiasco-defending-indefensible

13


production of 22 million tons, the subsidy outgo is more or less the same. Consequently,

giving a boost to domestic production based on reasonable gas cost will further reduce

subsidy.

Government should make adequate provision in the budget to ensure timely payment of

subsidy dues in full to the manufacturers. The practice of deferring substantial amounts

year-after-year, issue of bonds in lieu of subsidy or manufacturers being asked to take

loans from banks under so called ‘special banking arrangement’ must be shunned. These

subject them to avoidable huge losses through discounted sale of bonds or interest cost.

The election manifesto of Bharatiya Janata Party (BJP) promises to bring about a

fundamental change in the way subsidies henceforth will be administered. This is abundantly

clear from its focus on ‘DELIVERY’ instead of ‘Doles’, a hallmark of erstwhile UPA

regime.

Instead of the current approach of giving subsidy through fertilizer manufacturers to lower

retail prices to farmers – which distorts markets, throttles competition, prone to leakages/

misuse and breeds inefficiencies – the government may consider the possibility of giving

money directly to farmers.

This will be a revolutionary reform that will change the fertilizer landscape - all its segments

N, P & K – in a way to yield rich dividends for all stakeholders viz., farmers, industry, tax

payer etc.

In 2012- 2013, government had promised to cover fertilizers under its direct benefit transfer

(DBT) scheme and also done a trial run in 10 districts. Even the IT-enabled infrastructure

for tracking movement of fertilizers up to the farmers level is in place. This project must be

scaled up soon.15

Joint Ventures in Countries well endowed with resources for Fertilizer Production

with Buy-back Agreement

Efforts to increase domestic production capacity using indigenous feedstock need to be

supplemented by supply of urea from joint ventures (JV) set up in countries with abundant

reserves of gas and where gas is priced much cheap.

We need to build on the success of the JV in Oman where IFFCO and KRIBHCO are equal

equity partners with Oman Oil Company (OOC).

Since, such JVs will be accompanied by buy-back agreement to bring production to India,

implications with regard to compliance with our obligations under WTO need to be carefully

analysed. The government should come up with a concept paper to guide appropriate course

of action by stakeholders in both public and private sector to explore such opportunities.

15 For insights in to the dynamics of how a scheme of direct benefit transfer would work, its positives and

government’s stance, pl refer to my articles on my website link as under:

http://www.uttamgupta.com/agriculture-foodgrain/cash-transfers-food-for-thought/

http://www.uttamgupta.com/fertilizers/lets-not-delay-direct-cash-transfer-of-subsidy/

14


Considering the vulnerabilities in P&K segment where India depends on import to the

extent of 85-90% in phosphate and 100% in potash, government should also encourage

setting up of JVs in countries where raw materials are available in abundance.16

16 For insights in to the issues that need to be addressed for bringing fertilizers from JV under buy-back

agreement in the context of India’s commitment under WTO, pl refer to my article on my website link as

under:

http://www.uttamgupta.com/wp-content/uploads/2013/05/Joint-venture-urea-project-in-Oman-Buyback-

agreement-needs-a-fresh-look.pdf

15

Daman Prakash Special Article

“Investments in agriculture are important to increase food security. The channels

are complex and multiple. Rising productivity increases rural incomes and lowers

food prices, making food more accessible to the poor. Other investments, such as,

improved irrigation and drought-tolerant crops, reduce prices and income variability

by mitigating the impact of a drought. Productivity gains are key to food security in

countries with foreign exchange shortages or limited infrastructure to import food.”

– World Bank Development Report 2008.

Abstract

Cooperatives have played an important role in agriculture in developing countries the

Asia- Pacific Region. Voluntary associations like cooperatives and farmer organizations

have helped small and marginal farmers to gain access to technology, market. This paper

attempts to explore the role of cooperatives and farmer organizations in boosting the food

and nutrition security of the rural poor in Asia-Pacific Region.

Background

The Asia-Pacific Region accounts for nearly half the world’s population. India and China

together are home to over 75% of the Region’s population. A majority of people in Asia

depends upon land and agriculture for their livelihood.

Agriculture continues to be the engine of economic growth in most developing countries of

the Region. The success of the Green Revolution was experienced in several Asian countries

where the rapid adoption of modern agricultural technology resulted in dramatic gains in

productivity. However, despite significant achievements in food production, problems of

food and nutrition security, poverty alleviation and regional imbalances still persist.

1 Dr Daman Prakash is the Director of Rural Development and Management Centre. Previously worked as

Senior Consultant with the IFFCO Foundation. Served the International Cooperative Alliance-Regional

Office for Asia and the Pacific [ICA ROAP] since 1962 in various capacities and retired in 2002 as its

Director. Served in Indonesia as Chief Technical Advisor of the ILO/UNDP and ILO/SWISS Projects on

Rural Cooperatives [KUD] Management Development, Training and Education [1981-88]; Served in Sri

Lanka as Senior Consultant to the ICA/Swedish Cooperative Teachers’ Training Project [1978-81]; He

has been awarded “Life-Time Achievement Award in Cooperatives-2012” by the World Peace Research

and Development Foundation, and “National Award on Cooperation” by Bhutti Weavers’ Cooperative

Society, and National Award by Government and Cooperative Movement of Nepal-March 2014. He can

be contacted at [email protected], and, [email protected]

The Role of Farmers’ Organisations and Cooperatives in Food

and Nutrition Security of Rural Poor in Asia-Pacific*

Dr Daman Prakash1

Senior Consultant, NEDAC

16


Experience shows [especially from the Japanese and Korean agricultural sector] that the

strength of small farmers lies in group mobilisation for meeting diverse agricultural needs

including land leasing, accessing inputs, pooling resources, sharing information, agro-

processing/marketing of produce and above all credit and thrift groups for consumption

and production loans.

Dependence on Agriculture

Agriculture plays a significant role in national economies and a considerably large number

of people depend on agriculture. In 2008, for instance, 66.8% of the total land was under

agriculture in Bangladesh, 56.9% in the case of India while only 12.7% was the case in

Japan. In China also just 13.1% of the total land was under agriculture. On an average

15.9% of the total land was under agriculture in Asia-Pacific region. 58% of agricultural

land was irrigation in the case of Bangladesh, 54.4% in Japan and the lowest, 14.8% was in

the case of the Philippines. On an average 37.9% of agricultural land was under irrigation

in the Region, which has improved from 32.6% in 1998. 93% of the national population in

Nepal was involved in agriculture, 62% in China and just 2.4% in the case of Japan. The

regional average was 49.8% in 2008 as against 55.1% in the year 1998 which indicates that

more people were moving out of agriculture. As to the status of agricultural production

indices in Asia during 1998-2008, 3.9% was the highest in Bangladesh [moving from 84%

to 135 in 2008 index], 3.7% in the Philippines [moving from 89 in 1998 to 132 index in the

year 2008] while the regional index was 3.0% growth.

As to key commodity food grains [wheat and paddy rice] there has been a steady growth in

the region. Wheat production has gone up considerably. However, the regional production

has been just 0.8% growth in wheat. In the case of paddy rice, there has been a considerably

growth in the case of the Philippines [5.2% during the period 1998-2008]. While Bangladesh

achieved 3.3% growth, the regional average has been 1.3%. The increase in the production

of paddy rice in 3.1% in Thailand, 2.7% in Sri Lanka and just -0.6% in Japan.

Source: World Development Report-2008. World Bank. “Agriculture for Development”

Table-1 : Percentage of Population below the Poverty Line

Country Year Rural Urban National

Bangladesh 2000 53.0 36.6 49.8

China 1998 4.6 <2 4.6

India 1999-00 30.2 24.7 28.6

Japan - - - -

Nepal 2003-04 34.6 9.6 30.9

Philippines 1997 50.7 21.5 36.8

Sri Lanka 1995-96 27.0 15.0 25.0

Thailand 1998 - - 13.6

17



Table-III: Population, Annual Growth and Density of People per Sq Km


Country Population

Million 2006

Av Annual % Growth

2000-06

Density per Sq. Km.

2006

Bangladesh 144 1.9 1,109

China 1,312 0.6 141

India 1,110 1.5 373

Japan 128 0.1 350

Nepal 28 2.1 193

Philippines 85 1.8 284

Sri Lanka 20 0.4 306

Thailand 65 0.9 127

Country Total. Million

2003-2005

Av. Annual % Growth

1990-2005

% of total Population

2003-2005

Bangladesh 104.8 1.6 75.3

China 784.5 -0.4 60.5

India 771.9 1.4 71.5

Japan 43.8 -0.3 34.3

Nepal 22.5 1.8 84.7

Philippines 31.1 -0.1 38.1

Sri Lanka 16.5 1.1 84.8

Thailand 43.3 0.8 67.9

Table-IV: Exports-Imports

Country Exports

US$ M.2006 Imports

US$ M.2006 FDI

US$ M.2005 External Debt

US$ M.2005

Bangladesh 12,050 16,100 802 18,935

China 969,073 791,614 79,127 281,612

India 120,168 174,376 6,598 123,123

Japan 647,137 577,472 3,214 -

Nepal 760 2,100 2 3,285

Philippines 47,028 51,980 1,132 61,527

Sri Lanka 6,860 10,226 272 11,444

Thailand 130,575 128,600 4,527 52,266


18


Table-V : Arable Land and Permanent Cropland and Hectare per

Capita Agricultural Population

Country

Arable Land &

Permanent Cropland

1000 ha.

Ha. per capita [agri.

population]

2003-04

Year

Bangladesh 8,417 0.1 1996

China 115,632 0.1 2004

India 169,583 0.3 1991

Japan 4,714 1.2 1995

Nepal 2,484 0.1 2002

Philippines 10,700 0.4 2002

Sri Lanka 1,916 0.2 NA

Thailand 17,687 0.6 1993


A look at the analysis made by the World Bank on some of the countries in the Region

shows that 49.8% of the national population of Bangladesh lives below the poverty-line,

followed by the Philippines [30.9%], Nepal [30.9%], India [28.6%], Sri Lanka [25.0%]

Thailand [13.6%] and China [4.6%], [see Table-I].

Table-II indicates the percentage of rural population of the national population [2003-

2005]. The highest %age of rural population is in Sri Lanka [84.8%], followed by Nepal

[84.7%], Bangladesh [75.3%], India [71.5%], Thailand [67.9%], China [60.5%], the

Philippines [38.1%] and Japan [34.3%].

During 2006, the density of population per sq km was the highest in Bangladesh [1109

with an annual growth rate of 1.9%], followed by India [373 with annual growth rate of

1.5%], Japan [350 with growth rate3 of 0.1%], Sri Lanka [306 with the growth rate of

0.4%], the Philippines [284 with growth rate of 1.8%], Nepal [193 with the growth rate of

2.1%], China [141 with a growth rate of 0.6%], Thailand [127 with growth rate of 0.9%].

See Table-III.

The figures go to affirm and confirm that a large number of rural populace needs to be

taken care of in issues relating to food security. The population is on the rise while the

production and productivity remain static or showing downward trends on account of high

level of urbanization. It has also been observed that a fewer number of younger people get

into the farming business.

Need for Enhancing Agricultural Production

In the developing countries, food production has to increase by 100 per cent. The challenge

is tremendous in terms of doubling food production under existing constraints such as

changing climate conditions, degradation of land, scarcity of natural resources, as well as

lack of infrastructure and financing, urban migration, ageing farming population, and

changing dietary habits and food consumption.

19


Nearly 70 per cent of the world’s total poor were living in the South and South Asian

countries. In all the countries population grew rapidly during the second half of the century.

These countries faced acute shortages of food during the early ‘sixties and early `seventies

and were the focus of world attention due to frequent occurrence of food shortages. These

shortages were met by the large food imports through food aid or otherwise.

With only a few exceptions by the mid ‘eighties most of these countries succeeded in

recording significant increases in their food production through the widespread adoption

of new seed-fertilizer technology and none of these faced serious food shortages by the

type experienced by them during the earlier period. Despite these successes, these countries

face some formidable problems in the matter of providing adequate and stable food security

to their people.

Possible Roadblocks in overcoming Food Insecurity

Some of the steps which need to be taken care of are the following:

- First, despite satisfactory trend rates of growth, the per capita food and calorie

availability remains highly inadequate in most of the countries;

- Second, these countries have not been able to find an appropriate solution to the

problem of wide year to year fluctuations in their food output. Carrying of large reserves

practiced by China and India is quite costly;

- Third, despite higher growth rates achieved in food production, these countries have

not been able to devise fool proof mechanisms for providing access to food to a large

number of poor who live in these countries. Most of these countries have initiated

special employment and income-generating programmes for improving the purchasing

power of the rural and urban poor. Nevertheless, the problem of malnutrition remains

serious;

- The fourth serious problem is that in spite of higher production; many of these countries

had to import large quantities of food grains over the years. China, Malaysia and

Indonesia have been importing food. The surpluses originating in the region are not

sufficient to meet the import demand of some of the rapidly growing Asian countries;

- Fifth, rising import and domestic prices of food grains are bound to adversely affect

the poor and vulnerable sections in these countries;

- Sixth, currently many of these countries including China and India are undergoing a

process of economic liberslisation. Liberalisation is aimed at integrating the domestic

economies with the world economies; and

- Finally, there is much greater scope for collaboration among the Asian countries in

the matter of food security.

Massive Investment in Agriculture Needed

Developing countries need to double the food production by 2050 in order to feed the

growing population. According to the Director-General of FAO, “A production increase of

this magnitude will require the developing world alone to invest over 200 billion US dollars

20


per year in agriculture till 2050, of which almost 120 billion US dollars would have to be

invested in the Asia-Pacific Region alone”. Raising agricultural productivity can be done

by improving crop management, expanding the use of modern varieties, strengthening rural

infrastructure and improving post-harvest technologies.

According to the Asian Development Bank [ADB], the Asia-Pacific region is home to the

largest number of poor, and is one of the most vulnerable regions against the impacts of

climate change and economic shocks. The region is also the largest supplier and consumer

of food. It is home to a dynamic food and agriculture industry that is providing an increasing

range of affordable food products. Thus, what the region does for its food security will

resonate around the world.

Given the complex nature of these challenges, the key factors that enable or disable food

security can be addressed through an increased level of collaboration, harmonization and

action by governments, the private sector including the academic and the civil society

organisations, particularly the small farmers. Moreover in Asia, millions of small farmers

and their families remain poor and malnourished and they continually have to contend with

low yield, difficult access to credit, high costs of inputs, low prices for their products, and

comparatively little support from their governments, not to mention typhoons, floods and

other natural calamities.

A broad and well-considered framework has already been laid down under the United

Nations Millennium Development Goals. [see Annexe-I].

Improving agricultural productivity to benefit the rural poor: There are strong, direct

relationships between agricultural productivity, hunger, poverty, and sustainability. Growing

sufficient food will require people to make changes such as increasing productivity in

areas dependent on rainfed agriculture; improving soil fertility management; expanding

cropped areas; investing in irrigation; conducting agricultural trade between countries; and

reducing gross food demand by influencing diets and reducing post-harvest losses.

The UN Millennium Development Goals are one of the initiatives aimed at achieving food

security in the world. In its list of goals, the first Millennium Development Goal states that

the UN “is to eradicate extreme hunger and poverty”, and that “agricultural productivity is

likely to play a key role in this if it is to be reached on time”. “Of the eight Millennium

Development Goals, eradicating extreme hunger and poverty depends on agriculture the

most.

It is recognized that cooperatives and producer organisations are key partners in ending

hunger and poverty. More and more farmers are getting organized to enable them to have

economies of scale in the market and get better access to agricultural support services such

as information, communication, input and output markets, natural resources, from local to

international levels.

Strong cooperatives and other producer organisations are able to overcome many of the

obvious difficulties faced by them. Cooperatives have the advantage of the total support

from their members. Cooperative organisations are autonomous and democratically

managed. Cooperatives, especially the agricultural cooperatives offer a variety of services.

21


Members participate in the process of decision-making. They are the owners and managers

of their own institutions.

Role of Cooperatives and Farmers’ Organisations

in Food Security and Livelihood

Cooperatives are present in all countries and all sectors, including agriculture, food, finance,

health care, marketing, insurance and credit. It is estimated that one billion individuals are

members of cooperatives worldwide, generating more than 100 billion jobs around the

world. Agricultural and food cooperatives are already a major tool against poverty and

hunger.

Cooperatives in the Asia-Pacific Region are the main players in the chain of food security

and livelihood [Figure-I]:

Figure-I: Cooperatives as main players in the chain of

Food Security and Livelihood

FARMER-PRODUCERS

Food Processors

National Agricultural Marketing Federation

National Food Stocks Food Procurement Centres

Primary Agricultural Cooperative Society

State Agricultural Marketing Federations

District Marketing Federations

Consumers

The farmer-producer, as a member of the agricultural cooperative, sells his products e.g.,

wheat, rice, fruits and vegetables, to his cooperative society. The agricultural cooperative

sells the products to two channels – one to the marketing federations, and the other to the

national food stock agencies. The national food agencies supply the products to the market

and food processors which distribute the final products to the consumers. Cooperatives are

the main players in food chain and a sure factor in maintaining food prices.

Cooperatives being member-owned, member-managed democratic and autonomous socio-

economic organisations are better placed to provide all kinds of services to their members.

A number of examples from the Asia-Pacific Region can safely be cited which go to prove

that agricultural cooperatives, on their own and in concert with their respective governments,

have been playing a significant role in providing food security and livelihood of farming

community in the Region. Even in economically-developed countries like Japan, agricultural

cooperatives contribute to the wellbeing of member-farmers. Agricultural cooperatives or

farmers’ organisations are the sure rallying institutions for the members at the village level.

22


Cooperatives – Pillars of Agricultural Development and Food Security

Agriculture, including farming, forestry, fisheries and livestock, is the main source of

employment and income in rural areas, where the majority of the world’s poor and hungry

people live. Agricultural cooperatives play an important role in supporting men and women

small agricultural producers and marginalized groups by creating sustainable rural

employment.

Producer cooperatives offer men and women smallholders market opportunities, and provide

them with services such as better training in natural resource management, and better access

to information, technologies, innovations and extension services. In several countries, FAO

provides quality seeds and fertilizers to farmers and agricultural cooperatives and works

with them in applying more suitable and productive farming practices.

Initiatives in ensuring Nutritional Security

Three significant examples can be citied in this connection.

[I] Cooperative Vocational Groups as a means to ensure Food and Social Security –

Experiences of Thailand

A number of methods are employed in various countries to empower people, especially

women belonging to cooperatives, to enhance their food and social security. Agricultural

cooperatives in Thailand have undertaken a bold step in promoting an integrated initiative

under the banner ‘One Village One Product’ [OTOP]. The agricultural cooperatives provide

guidance and technical support to their women members to undertake economic activities

to enhance to improve their social and economic security and status.

What is ‘One-Village One-Product’?: “One-Village-One-Product” [in Thailand it is called

‘One-Tambun One-Product-OTOP] [Tambun means a village in Thai language] concept of

Japan is worth a mention. The concept, after its successful implementation in Japan, has

been adopted by various countries in the Region with appropriate modifications e.g., China,

Indonesia, Malaysia, Philippines, Thailand and the United States. The guiding principles

of the Movement are: [i] Going local yet global; [ii] Independence and Creativity; and [iii]

‘One Village-One Product’ movement as a human resources development activity.

Logic of the Concept: The logic is straightforward. The main aim is rural development

and job creation through financial, technical and marketing assistance; Encourage

specialisation and brand development by partnering community skills with modern business

practices; Use new technology and the Internet to link small producers with consumers;

Economic development from the community level upward.

Business Development: Under the concept, community groups are encouraged to devise

their own product ideas for development into business plans with due consideration to the

following factors:

- Financial support can come from state development banks, private venture capital, or

government’s own rural development projects, or from cooperatives and their

federations and banks;

23


- Duplication in products is inevitable – there can be as many products as there are

villages;

- In marketing facilitation government support is crucial;

- Products sampling: Varieties of fruits and vegetables; handicrafts, clothing, farm

products, pickles, fish, ornamental plants;

- Focus on all local consumers. Markets abroad, Linkages with tourist industry and

bulk users/consumers;

- Reacting buyers will depend on heavy state support to promote goods, given the limited

resources available for community groups and start-up enterprises to spend on

marketing and advertising;

- Caution: Encourage countries to shift their resources away from low-selling products

to those offering more promising opportunities; and

- An area known for producing high quality lime, for instance, might first look to develop

food stuffs taking advantage of the local produce. But if good failed to sell, the

community might consider shifting to leatherwear or woven baskets to tap consumer

demand.

What is important under the programme [concept] is having communities learning about

joining and cooperating together about fostering an entrepreneurial spirit among people

who wish to better their income potential. While some might fail, others could develop into

full-blown small and medium-size enterprises. The logic is: create wealth from locally-

available products to be inducted in generating additional income for food and social security.

[II] World’s Largest Food Security Programme of India

Around 30% of India’s population lives under the poverty line. This means that 4 out of 10

people have to struggle for even two secure meals a day. The Government of India has

taken a huge initiative towards reducing this discrimination and at the same time addressing

the unfortunate issue of malnutrition amongst children.

The Food Security Legislation, enacted by the Parliament in September 2013, proposes to

cover 75% people in rural areas and 50% in urban areas. It guarantees at least 25 kgs of

subsidised grains to every family of five members, covering in all 67% of India’s population.

This is seen as a major poverty eradication programme aimed at the same time towards

reducing massive malnutrition in Below Poverty Line [BPL] families.

The Food Security Act is the biggest such programme in the world with the government

spending an estimated Rs 125,000 crore annually. This will provide a supply of about 62

million tonnes of rice, wheat and other coarse cereals to the target population. The Act is

seen as a timely step towards insulating a large segment of the population from rising

inflation particularly sky-rocketing prices of food grains and vegetables.

Crisil a reputed rating agency in India known for its reliable financial analysis, research

and forecasts indicates that the food security legislation would generate additional savings

of around Rs. 4,400 crore a year for BPL household, on purchasing subsidised food.

24


On another positive note the step will push huge investments in storage and transportation

sectors for putting in place a commensurate infrastructure through the length and breadth

of the country. It is also seen as a step towards infusing greater participation of agricultural

cooperatives in erecting appropriate channels for warehousing, distribution and

transportation.

[III] United Nations International Year of Family Farming-2014

-A means to ensure food security at the local level

The 2014 International Year of Family Farming [IYFF] aims to raise the profile of family

farming and smallholder farming by focusing world attention on its significant role in

eradicating hunger and poverty, providing food security and nutrition, improving livelihood,

managing natural resources, protecting the environment, and achieving sustainable

development, in particular, in rural areas.

The goal of the 2014 IYFF is to reposition family farming at the centre of agriculture,

environmental and social policies in the national agendas by identifying gaps and

opportunities to promote a shift towards a more equal and balanced development. The

2014 IYFF will promote broad discussion and cooperation at the national, regional and

global levels to increase awareness and understanding of the challenges faced by

smallholders and help identify efficient ways to support family farmers.

What is Family Farming? Family farming includes all family-based agricultural activities

and it is linked to several areas of the rural development. Family farming is a means of

organising agricultural, forestry, fisheries, pastoral and aquaculture production which is

managed and operated by a family and predominantly reliant on family labour, including

both woman’s and men’s.

Both in developing and developed countries, family farming is the pediment form of

agriculture in the food production sector.

At national level, there are a number of factors that are key for a successful development of

family farming, such as agro-ecological conditions and territorial characteristics, policy

environment; access to markets; access to land and natural resources; access to technology

and extension services; access to finance; demographic , economic and socio-cultural

conditions; availability of specialised education among others.

Family farming has an important socio-economic environmental and cultural role.

Why is Family Farming important? Family and small-scale farming are inextricably

linked to world food security;

Family farming preserves traditional food products, while contributing to a balanced diet

and safeguarding the world’s agro-biodiversity and sustainable use of natural resources;

Family Farming represents an opportunity to boost local economies, especially when

combined with specific policies aimed at social protection and well-being of communities.

25


Role of Regional Organisations

In the Asia-Pacific Region, a number of national cooperative organisations and several

government departments offer a variety of capacity building programmes to strengthen the

management of cooperatives. Specialised institutions like the Network for the Development

of Agricultural Cooperatives in Asia-Pacific [NEDAC] offer various avenues of training

and exchange of expertise to the leaders and managers of agricultural cooperatives to

facilitate exchange of information, technology and knowledge.

A brief note of NEDAC is placed as Annexure-II which gives information on the

organisation and services of the institution. The NEDAC by virtue of its organisational

structure and objectives is well-poised to collaborate on issues relating to farmers-

organisations and cooperatives with international organisations like the FAO, IFAD, ICA

and the UN/ESCAP. The NEDAC’s member composition is unique in the sense that it

accepts governmental and non-governmental organisations as its members. Several national

level training institutions are in its membership and participate in exchange programmes.

Other institutions like the International Cooperative Alliance Regional Office for Asia-

Pacific [ICA AP] offer specialized training programmes to the leaders and managers of

cooperatives in association with its member-organisations.

Suggestions and Recommendations

In the light of the discussions held hereinabove, it is clearly highlighted that agricultural

cooperatives and farmers’ organisations play a significant role in providing food security,

financial stability, improving livelihood situations and income and employment generation.

Agricultural cooperatives are member-owned, member-managed, autonomous and

democratically-controlled organisations. Members take their own decisions based on their

own financial and social standings and in concert with local conditions and without any

interference from the government authorities. They are major contributors in the management

of national food reserves and distribution of agricultural inputs including credit for

production and consumption.

- In order to further enable agricultural cooperatives and farmers organisations to

continue to perform their tasks the following conditions need to be met:

- Agricultural cooperatives should have adequate capital and should be able to operate

all the four key services to the members e.g., credit, marketing, input supplies and

farm guidance. For this purpose, members need to be encouraged to participate in all

the activities of the cooperative;

- Government should be encouraged to provide adequate legal protection and

encouragement to cooperatives, especially agricultural cooperatives and farmers’

organisations and to ensure that they are free from political and official interference;

- Organisations like the FAO and IFAD should be more positive to support the activities

of NEDAC especially in sectors like field projects, technology exchange, initiatives

like food security, issues relating to climate change by holding joint technical assistance

26


programme and also enabling the NEDAC to undertake field research and development

programmes through an adequate funding support;

- Institutions like the FAO, IFAD, ILO, ICA and NEDAC should develop a coordinated

approach to strengthen agricultural cooperatives and farmers’ organisations for better

access to inputs, credit and markets which will ultimately result into better livelihood

for the poor;

Conclusion

Agriculture continues to be the engine of economic growth in most developing countries of

the Region. Small farmers in the Region have common features being e.g., seasonal

producers, fragmented buyers and suppliers unable to exploit economies of scale, and

dominated by household economies where functions such as consumption, investment,

work and social activities are undifferentiated and unspecialized.

Strong cooperatives and other producer organisations are able to overcome many of the

obvious difficulties faced by them. Cooperatives have the advantage of the total support

from their members.

Cooperatives are present in all countries and all sectors, including agriculture, food, finance,

health care, marketing, insurance and credit. It is estimated that one billion individuals are

members of cooperatives worldwide, generating more than 100 billion jobs around the

world. Agricultural and food cooperatives are already a major tool against poverty and

hunger.

Some of the principal services offered by cooperatives to their members are: Farm Guidance

and better living services; Cooperatives, through their member education and information

programmes, offer general and technical information on the management of cooperatives,

methods and practices of business management which enhance member participation in

organisational and business matters.

In association with government and non-governmental organisations cooperatives also offer

training and orientation programmes in soil testing, crop protection, use of insecticides and

pesticides, composting and drainage including irrigation management.

A number of examples from the Region go to prove that agricultural cooperatives have

been playing a significant role in providing food security and livelihood of farming

community in the Region. Even in economically developed countries like Japan, agricultural

cooperatives contribute to the wellbeing of member-farmers. Agricultural cooperatives or

farmers’ organisations are the sure rallying institutions for the members at the village level.

This theme paper was presented at the General Assembly Meeting of the Network for the Development

of Agricultural Cooperatives in Asia-Pacific [NEDAC] held at Rural Development Academy, Bogra,

Bangladesh. April 4-10 2014

27


Annexure-I

The UN Millennium Development Goals

And the Role of Cooperatives in Ensuring Food Security

In the year 2000 world leaders met at the historic Millennium Summit where they adopted

the UN Millennium Declaration with additional input from the Millennium Forum held in

May that year and comprising representatives of NGOs and civil society organizations.

Equally important to the establishment of the MDGs were also inputs from other international

development bodies – including the Organization for Economic Cooperation and

Development [OECD], the World Bank [WB] and the International Monetary Fund [IMF].

They aim at improving social and economic development in the poorest countries of the

world, with a fifteen-year time frame running from 2001–2015.

The MDGs do not merely constitute a list of wanton aspirations of development donors but

are a product of intense and careful thinking, analysis, evaluation of past approaches and

experiences against the realities of the current social, economic, political and cultural order.

They are a product of a broader view of human development that transcends “traditional”

view of economic growth as a solution to all human problems. They are based on a set of

fundamental values: freedom, equality and solidarity. There are eight of them which can be

grouped in three categories of human development:

• Bolstering human capital

• Improving infrastructure

• Increasing social, economic and political rights

The eight goals are listed below:

GOAL-01: Eradicating extreme poverty and hunger: Target 1[a]: Halve the proportion of

people living on less than 1 dollar a day; Target 1[b] Achieve decent employment for

women, men and young people; Target 1[c] Halve the population of people who suffer

from hunger;

GOAL-02: Achieve universal primary education: Target 2[a]: By 2015 all children - boys

and girls can complete a full course of primary education

GOAL-03: Promote gender equality and empower women: Target 3[a]: Eliminate gender

disparity in primary and secondary education, preferably by 2005, and at all levels by

2015;

Goal-04: Reduce child mortality rates: Target 4[a]: Reduce by two-thirds, between 1990

and 2015, the under-five mortality rate;

Goal-05: Improve maternal health: Target 5[a]: Reduce by three-quarters, between 1990

and 2015, the maternal mortality ratio; Target 5[b] Achieve by 2015 universal access to

reproductive health;

28


Goal-06: Combat HIV/AIDS, malaria and other diseases: Target 6[a]: Have halted by

2015 and begun to reverse the spread of HIV/AIDS; Target 6[b] Achieve by 2010 universal

access to treatment of HIV/AIDS for all those who need it; Target 6[c] Have halted by

2010 and begun to reverse the incidence of malaria and other major diseases

Goal-07: Ensure environmental sustainability: Target 7[a] Integrate the principle of

sustainable development in country policies and programmes; reverse loss of environmental

resources; Target 7[b] Reduce biodiversity loss, achieving by 2010, a significant reduction

in the rate of loss; Target 7[c] Halve, by 2015, the proportion of the population without

access to sustainable safe drinking water and basic sanitation; Target 7[d] By 2020, to

have achieved a significant improvement in the lives of at least 100 million slum-dwellers

Goal-08: Develop a global partnership for development: Target 8[a] Develop further, an

open, rule-based, predictable, non-discriminatory, trade and financial system; Target 8[b]

Address the special needs of the Least Developed Countries [LDC]; Target 8[c] Address

the special needs of land-locked developing countries and small islands developing states;

Target 8[d] Deal comprehensively with the debt problems of developing countries through

national and international measures in order to make debt sustainable in the long term;

Target 8[e] In cooperation with pharmaceutical companies, provide access to affordable

essential drugs in developing countries; Target 8[f] In cooperation with the private sector,

make available the benefits of new technologies, especially information and communication.

The MDGs are specific and measurable as well as being relevant and time-bound

GOAL-01: Eradicating extreme poverty and hunger: Target 1[a]: Halve the proportion of

people living on less than 1 dollar a day; Target 1[b] Achieve decent employment for

women, men and young people; Target 1[c] Halve the population of people who suffer

from hunger.

Cooperatives and the MDGs

Many features of the MDGs are based on values that have much in common with the

Cooperatives Principles and Values. For example:-

MDG Values Cooperative Principles & Values

• Freedom • Voluntary and open membership

• Autonomy and independence

• Equality • Equality

• Solidarity • Solidarity

• Tolerance • Caring for others

• Respect for nature • Concern for the community

• Shared responsibility • Social responsibility

29


Let us now see how cooperatives are [and have the potential for] contributing to the various

Millennium Development Goals.

GOAL ONE: Eradicating Extreme Poverty and Hunger

Cooperatives have demonstrated the potential to contribute, in no small measure, to poverty

reduction. It has been proven that:

- Cooperatives are people-oriented i.e., they are based on active participation of

individuals and groups working together [cooperating] to achieve their goal, guided

by the concept that what an individual or a few people cannot accomplish, quite often

many people working together can. Cooperatives are thus founded upon solidarity.

Solidarity forged out of a common need, mutual trust and pursuing a common goal

under good leadership and governance creates power. This power when harnessed in

production or an enterprise can positively change people’s economic conditions. Their

principal objective is to improve the social and economic welfare of their members.

In pursuing this objective the reduction of poverty among their members in particular

and the community generally is implicit;

- As enterprises cooperatives conduct business from which they generate income. The

profit or surplus made over a period of time reverts to members. The distribution is

not according to the number of shares held by a member [as is the case with traditional

private companies] but on the basis of the extent to which the member has used the

services of the cooperative i.e., patronage. This contributes to poverty reduction among

cooperative members. A recent study has established that “the standards of living of

cooperative members in villages [peasants] are low, but better than peasants who are

non-members.

- Cooperatives are based on the values of equality and equity. There is a relationship

between equality and poverty reduction if we consider that “poverty reduction is faster

where growth is combined with equity. It is more easily achieved in less unequal

countries because the lower the level of inequality the larger the share of benefits that

accrue to the poor;

- Because the cooperative enterprise in many cases eliminates or reduces the number of

middlemen, this also helps cooperatives make more money for their members.

Increased income helps reduce poverty;

- Not only are cooperatives “schools of democracy”, they provide education and training

that help improve and increase production with greater possibilities for increased

household incomes;

- Cooperatives operate everywhere – including remote rural areas where no other

enterprise want to operate from – ostensibly for lack of infrastructure such as paved

roads, potable water, electricity, and other amenities, but also because of low incomes

and poverty in those areas. Yet this is where the majority of the population, - and the

poor for that matter – live They provide services that are easily accessible to members

– including supply of farm inputs and marketing their products. The former is often

provided on credit with repayment deducted from the proceeds realized from sale of

30


their products. Most of the services provided by cooperatives help improve the

livelihoods not only of their members but the community at large;

- Education, training and information programmes for members are among the services

radiating from cooperative. These help broaden the knowledge and skills of members

so that they are able to produce more and raise their incomes;

- Cooperatives contribute to food security through such services and grain storage and

warehouse receipt systems. Advice given to members through information programmes

and methods used in storing produce delivered by members ensures minimum post

harvest loss;

- Financial cooperatives – prominently savings and credit cooperatives - enable poor

people both in rural and urban areas access credit to improve production or run small

enterprises that generate income and contribute to poverty reduction;

- With regard to employment creation cooperatives have a potential for creating decent

employment for both women and men. As has been noted, cooperatives employ over

100 million people worldwide. In several Asian countries the numbers employed by

cooperatives may not be so impressive but there is much indirect employment that

goes unnoticed;

- Agricultural cooperatives provide services that enable their members raise their

production time [full employment] and also hire additional labour - for example during

tilling, weeding and harvesting. The cooperatives as such engage full-time workers as

managers, book-keepers, clerks, store-keepers, watchmen, and drivers and hire casual

labour during the crop delivery season. Some of them have processing facilities not

only create employment but also adds value to the members produce, thus raising

incomes and reduce poverty;

- Of all types of cooperatives, workers cooperatives have the greatest potential for

creating employment – even more so with labour contracting cooperatives;

- Youth employment: Unfortunately the design and orientation inherent in the education

system of many developing countries has not changed significantly from the colonial

days. Typically, it has not succeeded appreciably in preparing school leavers for self-

employment. Still, cooperatives have a potential for employment creation for young

women and mean - especially those with technical or professional training and who

find it hard to ever-shrinking employment opportunities;

- School cooperatives where children form their own cooperatives – e.g. small retail

shops and vegetable gardens are common in various countries. Children do not only

run the cooperatives but also get classroom lessons on cooperative theory and practice.

The combined theoretical knowledge and hands-on experience help them develop

leadership and managerial skills as well as democratic practices. The cooperatives

are a good grooming facility for future cooperative members, leaders and managers;

- Retirees/Senior citizens, too, can form a workers’ cooperative - including professionals

such as accountants, auditors, doctors and teachers can also form cooperatives that

provide professional services to public;

31


- Workers’ cooperatives: Of all types of cooperatives, workers cooperatives have the

greatest potential for creating employment – even more so with labour contracting

cooperatives;

- The informal workers: The informal economy is an important provider of employment.

In some countries it employs over 70% of the labour force. But it is not always decent

employment and indeed they are mostly unprotected. Through cooperatives such as

savings and credit cooperatives they can access loans to improve their businesses,

increase their incomes and improve their living conditions. Such cooperatives do also

offer some kind of social protection as one can access a loan in times of emergency –

for example illness or death in the family.

Source: Based on various documents of the United Nations, Secretariat of the UN International Year of

Cooperatives-2012, and International Cooperative Alliance.

32


Annexure-II

Network for the Development of Agricultural Cooperatives

in Asia and the Pacific [NEDAC]*

-Institutional Information-

Background

The Network for the Development of Agricultural Cooperatives in Asia and the Pacific

[NEDAC] was established in December, 1991 by the FAO Regional office for Asia and the

Pacific, Bangkok [FAORAP] in close collaboration with International Cooperative Alliance

and International Labour Organisation. It was the ICA conference of Cooperative Ministers

held in Sydney in 1990 that provided the platform for establishment of NEDAC by the

FAO Regional office, Bangkok. The FAO provides work place to NEDAC in its office in

Bangkok.

Being encouraged by the endorsement of the Cooperative Ministers in that ICA Conference,

FAO Regional office with the support/assistance of ICA ROAP and ILO organized the first

meeting/foundation meeting of NEDAC in December, 1991 which was attended by senior

cooperative officials from 9 [nine] countries [Bangladesh, China, Fiji, India, Indonesia,

Malaysia, Philippines, Sri Lanka and Thailand]. Since then NEDAC General Assembly

meetings have been held in 1992 [in Bangkok], 1993 [in Beijing], 1995 [in Bangkok], 1997

[in New Delhi], 2001], [in Beijing], 2003 [in Kathmandu], 2006 [in New Delhi] 2009 [in

Bangkok], and, 2011 [in the Philippines]. ICAROAP and FAORAP are permanent members

of NEDAC General Assembly and its Executive Committee.

Growth

The present membership of NEDAC has grown to 20 cooperative organizations from 8

countries [Bangladesh, China, India, Japan, Nepal, Philippines, Sri Lanka and Thailand] as

against 10 organizations in 1991.

Membership*

NEDAC membership is open to: government departments dealing with cooperatives,

Cooperative Movements and any other organization/institution involved in education/

training, agro-processing, research/development of agricultural cooperatives. The

membership is subscription-based. Associate membership is granted at the discretion of

General Assembly.

* Secretariat :

Network for the Development of Agricultural Cooperatives in Asia and the Pacific

[NEDAC]

36 Maliwan Mansion, Phra Atit Road, Bangkok 10200. Thailand

33


Mandate

Major objectives/functions of NEDAC are as follows:

- To provide a forum for exchange/sharing of information and experiences on cooperative

development and promote cooperation amongst member-countries through joint efforts/

field visits/workshops/seminar etc;

- To promote cooperative policy frame works of member-countries with focus on legal/

legislative reforms, enterprise development, institutional capacity building/

strengthening of agricultural cooperatives [agriculture includes fishery, livestock and

forestry];

- To sensitize governments on the need for promoting the potential of agricultural

cooperatives’ role in development;

- To strengthen the institutional capacity and professionalism of member-organizations;

- Arrange for and organize consultations, workshops, seminar, research projects, courses

and other training programmes for senior level policy makers, cooperative leaders

and middle level managerial and technical staff on policies, programme management

and technical aspects of agricultural cooperative development;

- Organize observation tours/study programmes for policy-makers, cooperative leaders

and senior executives to study policies, programmes and field activities related to

agricultural cooperative development and related issues.

Development Activities

NEDAC activities/development Workplan for every two years’ span are discussed and

approved in principle in advance by the NEDAC General Assembly. The NEDAC Executive

Committee selects the activities for each year.

*Current Members of NEDAC: Bangladesh: Rural Development and Cooperatives

Division, Ministry of Local Development, Rural Development and Cooperatives; China:

Department of Rural Economic System and Management Administration, Ministry of

Agriculture; India: National Cooperative Development Corporation; National Cooperative

Union of India; Ministry of Agriculture, Government of India; Indian Farmers Fertiliser

Cooperative Limited; National Federation of State Cooperative Banks Limited; National

Agricultural Cooperative Marketing Federation Limited; Haryana State Cooperative Supply

and Marketing Federation Limited; National Federation of Fishermen’s Cooperative

Limited; National Consumer Cooperative Federation Limited; Krishak Bharti Cooperative

Limited; Japan: Central Union of Agricultural Cooperatives of Japan [JA-Zenchu];

Malaysia: Farmers Organisation Authority; Nepal: National Cooperative Federation of

Nepal Limited; National Cooperative Development Board; National Agricultural

Cooperative Central Federation Limited; Philippines: Cooperative Development Authority,

Government of the Republic of the Philippines; National Cooperative Development Council;

Sri Lanka: Department of Cooperative Development, Government of Sri Lanka; Thailand:

Cooperative Promotion Department; The Cooperative League of Thailand; Asia-Pacific

Regional Office of the International Cooperative Alliance; and, FAO-RAP.

34

Akshara Baru Special Article

Abstract

The Panchayat Raj system in India is a concept that aims at a decentralized and participatory

system of local self governance through a three tier system at the State Level. This structure

includes a locally elected governing body at the Village, Mandal and the District level.

This theory of having a locally elected governing body at the village level has been in

conception since the Vedic period in the form of ‘sabhas’ and with time has found a place

for itself in the Constitution of India (Bhattacharya, 2009).

This paper primarily aims to understand the contributions of the former Viceroys of India

Lord Mayo (1869-1872) and Lord Ripon (1880-1884) in sanctioning local self governing

institutions and empowering them thereof. The paper first tries to explore Lord Mayo’s

decentralization scheme in the 1870’s which granted for the establishment of a system of

local self government by sanctioning financial decentralization awarding greater power to

the provinces thereby enabling them to meet their local needs .

Following Lord Mayo’s contribution through fiscal decentralization the paper furthers

discusses Lord Ripon’s historic resolution which emphasized administrative efficiency by

removing the defects that existed in the system. He further advocated the creation of

instruments of political education through these self government units which would help

build effective administration through local self government.

The paper finally concludes by analyzing the policy of decentralization so established by

the aforementioned Viceroys and its relevance to a system of good governance.

Keywords: Panchayati Raj System, local self governance, decentralization, Indian

Constitution, good governance, British Raj, Indian administration, public policy.

1 Akshara Baru is a fifth year law student from Symbiosis Law School, Pune. The last few years of her

academic life have been involved in understanding the broad framework that guides public policy and

their implications on development of a society. In the course of the last few years she has worked with

esteemed institutions such as Administrative Staff College of India, National Commission for Women and

Foundation for Democratic Reforms. She is currently working on the critique of the State Action Plan on

Climate Change-Tamil Nadu as a part of her present internship. Her previous research paper titled

“International and Domestic influences on Green Energy Policy in India” under the guidance of Dr. Usha

Ramachandran, Administrative Staff College of India, has been published in the “IOSR Journal of

Humanities And Social Science”.

Evolution of the Policy of Local Self-Governance in India

during the British Raj

Akshara Baru1

35


Introduction

The most distinct feature of Indian democracy is its well established, vigorous structure of

governance at its grass root level. There are significant institutions stretching to every

corner of India which reflects its democratic resolve thus strengthening democracy and

enabling the governance to be more responsive and compelling (Arora, Hooja, 2009). Local

budgeting by providing an opportunity to citizens of a particular area to participate in

resource pooling increases a sense of belongingness as well as reinforces consistency in

the collection of funds thereby ensuring a process of effective and equitable distribution of

funds (Oommen, 2008).

The changes in economic policies during Lord Mayo’s regime such as financial

decentralization, increase in the rate of Income Tax from one percent to two and a half

percent, increase in salt duties etc had proved effective as the years following 1868-1869

showcased not just a substantial surplus over the ordinary expenditure but also relieved the

local governments to a considerable degree from depending on the Supreme Government

for their finances (Cunningham, 1881; Frazer, 1896).

Martinez-Vazquez and McNab (1997) state in their paper on fiscal decentralization and

good governance that even today most countries with established or transitional economies

are in the process of adopting financial decentralization policies with the understanding

that though the concept cradles certain risks there would be heighted efficacy in expenditure

of public funds. Lord Mayo had understood the undoubted necessity for having a better

economic structure for the better working of the government. As Fiscal Decentralization

ensures the establishment of increased social capital it also helps structure an efficient

system of democratic governance.

Though Lord Mayo’s contribution to strengthening local self governments through the

process of fiscal decentralization stands significant in understanding the deepening of this

concept during the British rule yet, Pathy (1980) argues that decentralization of political

power was largely limited only to homogenous societies where differences in social

constructions were relatively feeble. It was only towards the end of the nineteenth century

that under the Viceroyalty of Lord Ripon that there was deepening and revival of local self

governments. Therefore it is imperative to analyze and understand the contributions of

Lord Ripon in inception of decentralization of political power in India.

Lord Ripon

As mentioned earlier the credit for establishing a yardstick for institutionalizing a system

of decentralization in the government policy is attributed to Lord Ripon. There was a

considerable amount of impact of the western civilization on the Indians and this added to

an increase in the confrontation between the British and the Indians. One such impact of

the westernization was the growth of a new class of Indian intelligentsia. Though this class

was still growing and comprised of only a few their aspirations and voices needed a platform

to be publicized. It was then that Viceroy of India realized that there was an urgent need to

unleash such voices by institutionalizing platforms for such political ambitions. This caused

36


the gradual increase of inclusion of Indians to have an influence on the administration.

Therefore an age old idea that existed was replenished by extending freedom which in turn

encouraged local participation (Gopal, 1953).

Mapping Lord Ripon’s personal life to understand the factors that drove him to establish a

people centric policy digressing from the ways of his predecessors one realizes that Ripon’s

political ambitions and opinions from the beginning, vastly varied with others. He was an

active member in the Socialist movements and this gave him a reputation of a radical.

Despite being British he was one of the main spokespersons for the producer cooperative

movement that was started by Parsis in 1848. It is noted that Lord Ripon was also a proactive

member in promoting causes such as secular education, promotion of trade unions and

voter reforms. Lord Ripon is also considered as one of the main contributors of drafting the

Education Act in the year 1870 (Denholm, 1983).

Gopal (1953) in his book on the Viceroyalty of Lord Ripon argues that the greatest

achievement of Lord Ripon was not the establishment but the strengthening of an old

concept in a fresh light. He vehemently advocated substitution of outside interference with

an alternative system of greater local participation which had become a necessity. Pamphlets

of the year 1883 collected by the London School of Economics describe the reaction to

drastic change in the manner of governance brought in by Lord Ripon. The Viceroy by

creating a system which augmented independent authority of the natives offended the British

interest in India. He gave the sprouting intelligentsia and the local press a sense of revolution

through his decisions which were therefore appreciated. Apart from looking at the policy

of strengthening local self governance as a pro-Indian measure, one needs to analyze and

appreciate Lord Ripon’s decision as a step towards good governance.

Hence, further evaluating one can observe that Lord Ripon’s policy of administrative

decentralization considered the two aspects of administrative efficiency which could be

achieved through the process of political awareness and education. The first consideration

addressed in the resolution passed by him which came during the year 1880 emphasized on

educating as well as training both the elected representatives and the general public.

Though the resolution of 1880 had a great impact on local self governing institutions it was

the second resolution that came in the year 1882 that made Lord Ripon popular. Drafted in

the end of 1881 this bill can be considered a brain child of Lord Ripon and Finance member

named Baring. This resolution became immediately popular amongst the public as it

encouraged the local governing bodies to inspect the local and municipal accounts of the

provinces. In a system that ensured restrictive participation of local bodies only to the

areas that they understood. The resolution further called for from the local bodies any kind

of suggestive measures that could be taken up to strengthen local governance (Gopal, 1953).

This system so established can be connected to what is today popularly known as

Participatory Budgeting. The process involves identification of local targets and addressing

of these priorities through channelized spending. The local demands are concretized into

projects and a majority opinion on implementation of these projects is followed by the

authorities (Wampler, 2000).

37


The resolution ensured only participation but did not take any substantial measures to

build greater awareness of the governments decisions; it was still welcomed by most Indians.

Even the press appreciated the government’s attempt at strengthening decentralized

institutions till the clause of instituting an official chairman (Bradley, 1982). The initiatives

of Lord Ripon, despite their flaws, are considered as a new beginning in history of

decentralized institutions in India. In spite of previous efforts there was a need to replenish

the withering concept which came in the form of the Viceroy’s resolutions.

Lord Ripon was greatly anxious to stretch the concept of elections and make it more inclusive.

He advocated that without the sanctioning of greater powers the system of local self

governments would not last thus, it was necessary that these institutions enjoyed both

public will which could be achieved through the awareness as well as through honing the

processes of democratic control (LSE Selected Pamphlets, 1883). Though many historian

state that never before had any Viceroy attempted at including the concepts of elections,

independence of authority and measures for political education it is still assumed that Lord

Ripon’s ways were similar to Lord Mayo’s as both followed a conservative system.

Establishment of local self governments form a system which ensures involvement of locals

in development activities, helps targeting issues and prioritizing the restoration mechanisms,

escalate transparency, politically educate the community and further achieve generation of

leadership at a local level. Hence, decentralization process which strengthens local self

governments is considered a step towards efficient administration and good governance

which was attempted by both Lord Mayo and Lord Ripon during the British Raj in India

(Bardhan, 2002; Pathy, 1980).

Conclusion

Good governance as Stoker (1998) in his paper defines, necessarily involves creating

conditions for both an ordered rule as well as creative action. The system of local governance

has evolved and deepened in India today. Over the year’s this structure has gained certain

popularity and increasing legitimacy. Mallik (1929) states local self-governments have

always attracted both the intelligentsia as well as the natives of a community thus inspiring

the inception of a better class of citizens with greater participation in the process of

governance.

Even today good governance is associated with practices of greater transparency,

accountability and increased voter participation which can be achieved in its totality only

with a consistent vigilant participation of the civil society. Decentralization ensures increased

participation as there exists immediacy between the voters and their representative (IMF

Working Committee Paper, 2001) and evaluating the policies of local self governance by

the Viceroys it can be deduced that the above stated principles of good governance where

reflected in their decisions.

For instance the Lord Ripon’s policy which emphasized on both; having a better system of

decentralization as well as ensuring political awareness of the locals by stressing on greater

participation remains relevant even today. India is a country of vast diversity and a largely

38


heterogeneous population thus there is a necessity for participation and representation of

most classes on the political as well as administrative front to help prevent marginalization

of communities. As Wampler (2000) states Participatory Democracies has helped strengthen

the system democracy in countries and International Organizations including the World

Bank and the United Nations have endorsed Participatory Institutions such as local self-

governments as a step towards improving policy formulation, reducing corruption and

empowering citizens and these processes of good governance were reflected in Lord Ripon’s

policy of local self government.

Further analyzing the policy of financial decentralization enforced by Lord Mayo one can

appreciate the applicability of such a policy even today. For instance World Bank in their

report (2008) establish that India has progressed to a greater extent, though with varying

consistency, after establishing a system of financial decentralization and thereby sanctioning

autonomy to local institutions (Rao, 2000). It can hence be no exaggeration to say that the

Viceroy’s and their political and administrative foresight began the process of lessening

the gap between citizens and policy making-an idea whose furthering is still argued as a

solution to great participation.

References

ASOK BHATTACHARYA; 2009; Local Self Government and Parliamentary Democracy in India;

Panchayati Raj Update [online]; (viewed 12 February 2014); Available-http://

www.indiaenvironmentportal.org.in/files/Local%20self%20government.pdf

PRANAB BARDHAN; 2002; Decentralization of Governance and Development; The Journal of

Economic Perspectives; Vol. 16, No. 4, pp. 185-205.

S. GOPAL; 1953; The Viceroyalty of Lord Ripon, 1880-1884; Oxford University Press, 21s, London.

S. N. MALLIK; 1929; Local Self-Government in India; Annals of the American Academy of Political

and Social Science; Vol. 145, Part 2: India, pp. 36-44.

BAHADOUR SINGH; 1965; Economic History of India: 1857-1956; page-532-537.

K.K. SRIVASTAVA; 2011; Decentralized Governance And Panchayati Raj; Page-15.

INDIANET ZONE; 2011; Lord Mayo, Viceroy of India [online]; (viewed 23 December 2013);

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40

Priyambda Tripathi Notes from the Field

Abstract

This article aims to explore the ground realities of implementation of the Vocational Training

Loan Scheme through interviews with the various stake holders involved including training

service providers, bankers, students etc. The article is a preliminary exploration of issues

that the implementing bodies face in promoting this scheme. It finds that one of the major

challenges of the scheme is that banking systems are still not accessible to prospective

applicants as they view banking and loan as intimidating processes. The article concludes

that though the Vocational Training Loan Scheme shows great potential, it can deliver its

services only if the service delivery agencies become more accessible to its beneficiaries.

In the light some of the current flagship skill development schemes offering free training,

administering a loan product for the same target audience would be a challenge.

Key words: Model Vocational Training loan, Indian Banking Association, Skill Development,

Private Training Providers, Priority Sector Lending

Introduction

Amidst the current rhetoric on converting India from a “scam India to skilled India” one

has to look at the financial feasibility of creating a talent pool of 500 million skilled youth

by 2022. As per Twelfth Five Year Plan document only 10% of workforce has acquired

formal vocational skills in India while the existing annual training capacity in the country

is just 4.5 million. The accelerated economic growth has increased the demand for skilled

manpower that has highlighted the shortage of skilled manpower in the country. As per

Knowledge Paper on Skill Development in India, Learner First published by FICCI in

2012 “Employees worldwide state a variety of reasons for their inability to fill jobs, ranging

from undesirable geographic locations to candidates looking for more pay than what the

employers have been offering. India is among the top countries in which employers are

facing difficulty in filling up the jobs. For India, the difficulty to fill up the jobs is 48%,

which is above the global standard of 34% in 2012”. Some of the reasons cited for unfilled

vacancies are lack of available applicants, shortage of hard skills and shortage of suitable

employability, including soft skills.

1 Priyambda Tripathi is a Masters in Social Work with specialization in Social Welfare Administration from

Tata Institute of Social Sciences (TISS). She is also currently a Ph.D. candidate at Tata Institute of Social

Sciences (TISS). She has more than 7 years of experience in livelihood issues with leading organizations

like SEWA Bharat, IFMR Trust, National Skills Foundation of India. She is currently a Consultant at The

IFFCO Foundation, IFFCO Colony, Sector 17-B, Gurgaon. She can be reached at

[email protected]

Financing Skill Development

Status of Model Vocational Training Loan Scheme

Priyambda Tripathi1

41


Skill development is a national priority and accordingly a new Ministry has been formed

for Skill Development and Entrepreneurship. The Ministry may look at the current initiatives

to mobilize financial support for creating skill infrastructure. From a policy perspective the

earlier government spelled out a clear strategy through National Skill Development Policy

in the following words “all stakeholders, the Government both at Centre and States, the

enterprise – public and private, and the direct beneficiary – the individual, would share the

burden of mobilizing financial or in-kind resources for skill development”. National Skill

Development Corporation (NSDC) was established as a public private partnership initiative

set up by the Ministry of Finance, under section 25 of the Companies Act. It has an equity

base of Rs 10 crore, of which the Government of India share accounts for 49%, while the

private sector has the balance 51%. NSDC works towards catalyzing private sector

intervention in capacity building of youth through providing financial support in terms of

loan, equity and grant. Currently, 100 corporate houses/private players/private education

institutes are associated with NSDC for imparting vocational education and training in

India. With the help of private players, NSDC aims to reach its desired target (150 million

skilled persons) by year 2022.

The government has attracted private players, not for profit organizations, cooperative and

educational institutions through various schemes under Ministry of Rural Development,

Urban Development, Labour and Employment, Agriculture, Food processing Finance,

Human Resource Development, Minority affairs, Social Justice and Empowerment, Women

and Child Development, Micro, Small and Medium Enterprises with a set target for skilling

youth.

The other initiatives include workshop of public sector enterprises organized by National

Skill Development Agency to mobilize funds for skill development. The new provisions

under Companies Act 2013 envisage 2% of net profit to be routed for corporate social

responsibility activity. As per the section of Companies Act 2013 2% of net profit for

Maharatna companies would amount to about Rs.2000 crores.

The most significant step in this direction is financing skill development through vocational

loans by scheduled commercial banks for trainees. Keeping in mind the need to make

training sustainable and demand driven a model vocational education loan scheme has

been floated by Indian Banking Association (IBA) in 2012. A committee approved by Prime

Minister’s Council was set up to come up with a draft policy that would make skill training

eligible for credit support. The committee chaired by Advisor to Prime Minister on Skill

Development included Dept. of Financial Services and Chairman of Indian Banks

Association(IBA) amongst others. After three rounds of meeting a loan scheme was finalized

and subsequently a circular was sent on 31st May 2012 by IBA to all member banks on

‘Indian Bank Association Model Loan scheme for Vocational Education and Training’ as

an extension to the current Education Loan scheme.

The new scheme enables loans for courses of duration of 2 months to 3 years, with no

minimum age limit and no collateral; the parent would be a joint borrower. The moratorium

period is a minimum 6 months after completion of course.

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As per Twelfth Five Year Plan the scheme would not only help students but also training

providers who site financial reasons for low enrolment. Some of the private organizations

have also come up with innovative loan products to cater to vocational trainees. The current

study explores status of such loans, response among bankers, beneficiaries and training

providers, issues and challenges in administering the program.

Salient Features of Model Vocational Training Loan scheme are as follows:

• Vocational Training Loan Scheme would be applicable to all member banks of IBA

and other banks and institutions advised by Reserve Bank of India

• Applicable to courses of duration 2 months to 3 years run by by a Ministry / Dept./

Organization of the Govt. or a company / society / organization supported by National

Skill Development Corporation or State Skill Missions / State Skill Corporations,

preferably leading to a certificate / diploma / degree, etc. issued by a Govt. organization

or an organization recognized / authorized by the Govt. to do so

• The quantum of finance has been worked out subject to the following ceilings:

- For courses of duration upto 3 months- 20,000

- For courses of duration 3 to 6 months-50,000

- For courses of duration 6 months to 1 year- 75,000

- For courses of duration above 1 year- 1,50,000

• The loan covers expenses with respect to tuition fees, examination/laboratory/library

fees, caution deposit, purchase of books, equipments and lodging as well as boarding

in case necessary

• The rate of interest is linked to the base rate of the bank or at a reduced rate decided

by banks

• There are no processing charges and no collateral or third party guarantee is taken

• For course of duration upto 1 year the moratorium period would be 6 months from the

completion of course and for courses of duration above one year the moratorium

period would be 12 months from completion of course

• Repayment for courses of duration upto 1 year in monthly installments can be made

in 2 to 5 years and for courses above 1year the period specified is 3 to 5 years

The IBA Model vocational loan Scheme has been launched by most of the scheduled

commercial banks like State Bank of India, Central Bank of India, Dena Bank, Bank of

India, Punjab National Bank and Bank of Baroda to name a few banks.

Issues and Challenges

In order to understand issues and challenges in implementation of model vocational training

loan scheme we conducted interviews with private training providers, bank officers and

trainees of skill development centre.

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The following issues were highlighted:

Lukewarm Response of Private Training Providers:

The loan scheme was launched with much enthusiasm through joint efforts by National

Skill Development Agency and Indian Banking Association in order to financially support

trainees and training providers so that training becomes sustainable. However, the response

among training providers towards the scheme seems lukewarm. Out of the three leading

private training providers only one training provider had administered a loan product for

training in partnership with financial service provider associated with National Skill

Development Corporation2. The other two were not implementing an IBA Model vocational

training loan scheme or any other loan scheme to fund training of students

We interviewed one of the leading training providers which has opened skill development

centres in North East, Rajasthan, Bihar, Jharkhand,Orissa and MP. The training is mostly

student funded. The training provider is working on a skill financing model which entails

a loan for students. The amount of loan offered is Rs. 6000 with 18% reducing balance

borne by training provider. The moratorium period of loan is 6 months payable in monthly

installments. Matriculation certificate of student is considered collateral in this context.

Follow up on loan repayment is conducted through post placement tracking. However, this

experiment has not been very successful as students are not keen on taking vocational

loans. The training provider highlighted the need to generate grass root awareness about

the benefits of model vocational training loan scheme administered by scheduled commercial

banks3.

Lack of awareness among students: We also interacted with trainees of one of the skill

development centre operated by a leading training provider to understand the level of

awareness about skill financing through vocational training loans offered by scheduled

commercial banks. The following issues were highlighted4:

• Reluctance to avail such a loan scheme due to the amount of paperwork and time

taken in loan sanction. They also stated that the bank officials may not be receptive

towards trainees who are school drop outs and belong to underprivileged households

• Quality of Training: The trainees also linked the quality of training to finance mobilized

for taking up such training. They said that in case they see value in terms of lucrative

career opportunities they would be interested in vocational training loan products to

fund training even if the fees is high

Apathy towards the scheme by implementing banks:

We also interviewed bank officials to understand implementation of vocational training

loan. As per the interview the IBA model vocational loan scheme has been implemented in

2012, however, the response among students is low. The bank officials undertake an

awareness drive through distributing pamphlets and handout at skill development centres

and Industrial Training Institutes. The training provider is not involved in the process of

loan sanction and follow up for repayment of loan.

44


The off take is quite low. The bank officials could not disclose the number of loans sanctioned

and the repayment rate. Even though vocational training loan is categorized under priority

sector lending as per the guidelines of Reserve Bank of India (RBI) promotion of vocational

training loan is not a high priority for banks due to an insignificant amount of loan involved

as compared to other higher loan products. The bank officials have higher targets to chase

and hence, not much attention is paid to smaller loan products like vocational training

loan55 Interview with Chief Manager, Training of State Bank of Patiala

Subsidized Training versus Training through Vocational Training Loan

Apart from the issues cited above it has been observed that most of the government schemes

initiated for skill development through wage or self employment for the target audience

which include unemployed youth, school drop outs and youth from marginalized

communities and underprivileged households like National Rural Livelihood Mission

(NRLM) by Ministry of Rural Development, Support to Training and Employment

Programme (STEP) for women by Ministry of Women and Child Development, Skill

Development Initiative Scheme by Ministry of Labour and Employment, Learn and Earn

Program by Ministry of Minority Affairs offer subsidized training and sometimes a stipend

as an opportunity cost for the time spent in training. Hence, in such a scenario when the

training is free of cost for the same category of target group for whom the IBA Model

Vocational Training Loan Scheme is designed; administering the loan product would be a

challenge. It may be one of the reasons for lack of demand for vocational training loan on

the part of trainees and lack of participation by training providers who are implementing

the above mentioned schemes.

Recommendations

A successful financing model for vocational courses depends on demand driven skill system.

Resource mobilization requires that all the stakeholders, namely government, students and

employers share burden. The IBA Model Vocational Training loan scheme has been

formulated with the right intention of helping student pay for training which would increase

employability. However, it has not been able to reach the target audience due to some of the

reasons cited above. There is a need to revisit the modus operandi in terms of implementation

through the following ways:

• Probe performance in terms of number of vocational training loan sanctioned,

repayment rate for members of Indian Banking Association which are implementing

the scheme as there is lack of data on the number of loans sanctioned and loan repayment

to understand the demand for such a loan product

• Involve rural and urban credit cooperatives due to massive outreach and a community

connect with their clients

• Awareness generation among trainees through financial literacy campaigns which

increases their confidence in financial transactions with banks and other financial

institutions

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• Encourage Training Providers to improve the quality of training and operate on a fee

based model so as to make training sustainable and demand driven which makes

trainees credit worthy through increasing employability

• Involve employers as guarantors for up skilling programs of un skilled workers so as

to widen the scope of the scheme and involve industry as one of the key stakeholders

• Revisit the loan product to identify the target audience willing to pay for training

References

Website of National Skill Development Agency [www.skilldevelopment.gov.in]

Website of National Skill Development Corporation [www.nsdcindia.org]

Interview with Sr.Representatives of NIIT Yuva Jyoti

Interview with Sr. Representative of IL&FS Skills Development Corporation

Interview with 8 trainees of IL&FS Skills Development Corporation, D-114,Okhla Phase I, New

Delhi

Interview with Sr. Team Member of B-Able

Interview with Chief Manager, Training of State Bank of Patiala

People matters [www.peoplematters.in] India’s skilling industry: In need of synchrony

Annual Report of Dena Bank 2012-13

Annual Report of State Bank of India 2012-13

End Notes:

1 Interview with Private Training Providers(IL&FS Skill Development Corporation, B-Able and

NIIT Yuva Jyoti)2 Interview with senior representative of B-Able3 Interview with 8 trainees of IL&FS Skill Development Centre, New Delhi4 Interview with Chief Manager, Training of State Bank of Patiala

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