Year 2020 An Year Of Reforms; Expect FPOs Bring Green Shoots Of Change
Cabinet approved the Farming Produce Trade and Commerce (Promotion and Facilitation) Ordinance 2020 seeking to create an ecosystem where farmers and traders will have the freedom of sale and purchase of the Agri Produce. This is in progression to the measures announced in the third tranche of the economic package of 20 lakh crore.
Progressing towards an 'Atmanirbhar Bharat', Finance Minister considered the promotion of farmer PO and Post Farm Gate Value Chain Infrastructure, a catalyst to revive the agricultural economy.
Shri Anurag Thakur, Hon’ble Minister of State for Finance also further accentuated that the “Year 2020 is going to be the year of reforms”.
The recent reforms included Rs 30,000 crore Additional Emergency Working Capital for Farmers, Rs 1 lakh crore for Farm Gate Infrastructure, Rs 10,000 Crore Scheme for Formalization of Micro Food Enterprises, amendments in Essential Commodities Act and APMC Act.
These reforms are not just coming amidst the pandemic. In February, 2020 Cabinet Committee on Economic Affairs (CCEA) approved the Central Scheme “Formation and Promotion of Farmer Producer Organizations (FPO) which is aimed at forming and promoting 10000 new FPOs with a budgetary provision of Rs 4496 crore for five years.
Through these Investments and Structural reforms, expect the Farmer Producer Organizations (FPOs) to be a vehicle of change.
What is Farmer Producer Organization?
A Producer Organization (PO) is a legal entity formed by primary producers, viz. farmers, milk producers, fishermen, weavers, rural artisans, craftsmen. A PO can be a producer company, a cooperative society or any other legal form which provides for sharing of profits/benefits among the members. In some forms like producer companies, institutions of primary producers can also become member of PO. A PO is a generic name for an organization of producers of any produce e.g. Agricultural, Non-Farm Products, Artisan Products etc. Farmer PO consists of Farmers as its Members.
Rationale of Promoting Farmer PO
Grass Root Level Institutional building in the form of collective farmer PO has been a focus in India in the past few years.
Small and Marginal Farmers suffers from problems like access to information and their inability to participate in price discovery mechanism, poor vertical and horizontal linkages, limited access to market and limited access to finance.
The farmers not only benefit by increased agricultural productivity and increase in their income by reduction in transaction costs and improved market access but also get better bargaining power, access to technological advancements, collective use of machineries, effective governance structure thereby entising better risk management etc
Farmer PO also provides better input supply, facilitate production activities, support in market linkage, and help in grading, processing, branding and technology and educational services to its members i.e. the primary producers.
Investments in Value Chain Infrastructure to benefit FPOs
Government announced ₹1 lakh crore for funding agriculture infrastructure projects at farm-gate and aggregation point as a part of the economic package of 20 lakh crore.
There has been also focus on Facilitative legal framework will be created to enable farmers for engaging with processors, aggregators, large retailers, exporters etc.
The weak rural infrastructure has been exposed amidst the pandemic. With the farmers facing issues in finding the buyer for their products, often dumping their produce and had limited access to agricultural inputs. There have been issues in finding the labor and seeds for sowing for Kharif season.
With the development of Infrastructure, it would not only entail supply but also expect the farmer PO to leverage these facilities and reduce transaction costs leading to increased income and opportunity for the farmers to store their produce for better price realization.
Amendment in Essential Commodities Act – Much Awaited Reform
The Essential Commodities Act (ECA) was enacted in the year 1955 in order to enable the Government to regulate the production, supply and distribution of essential commodities such as coal, iron, steel, pulses, oil etc to ensure the availability of such products, however the law does not hold good as on date as the same was enacted at the time when there was shortage of such essential items. This move will attract the private players to invest in Cols Chain, Storage Facilities etc.
Irrespective of the surplus production, farmers were not able to get better prices as there was a lack of investment in storage facilities and export majorly attributed because of the ECA.
The amendment would attract investments in modernization of cold chain, storage facilities and help the farmers secure better prices by giving them the freedom to store, sell any quantity of commodity.
How Amendments in APMC Act benefit FPOs
The reforms included the amendments in APMC Act which would give liberty to the farmers to sell their produce at competitive price and if this situation is managed properly, this would give the farmers producer organizations to establish market linkage all over India and also increase their export share.
Way Forward
FPO’s would play a key role in Prime Minister’s vision of Local to Global, building an ecosystem to thrive such organizations is necessary. Reforms will definitely benefit these FPOs to thrive, however continuous monitoring at implementation would make huge difference.
FPOs face issues in respect of working capital. The Govt has sanctioned economic package to infuse liquidity, however long term sustainability and scaling up of these organizations post the support in the form of Grant is over, as the share capital of the Producer Companies are inadequate. Poor Inventory Management, Overhead Cost, Lack of Business Acumen, Access to Market also accompanies. Federation sort of structure only focused on marketing of the produce of FPO would take away risk and lead to revenue generation and efficient management of cash flow. Partnerships with the Agri Fin Tech Startups could solve these issues. Based on demand, the FPO may also plan production staggering and move towards balanced commodities consisting of commodities acting as cash cows. The Government should also develop a separate section for FPOs on MCA wherein the registration process in easier and continuously monitor the progress of these Producer Companies to ensure that they are sustainable and also maintains the financial viability to attract credit from Banks and Investors. The standard sustainability reporting/ FPO rating Tool/MIS certified by the auditors could be a possible solution.
Producer Company (form of legal entity of FPO) is governed by the Companies Act, 2013 which provides for mandatory positioning of Board which consist of the Producer Farmers. It also mandates CEO in place. FPOs often face Governance Issues as most farmers are not clear about their role as business owners and view their share capital contribution as membership fee for selling their produce to the Producer Companies and sense the companies run by Government or NGOs promoting these companies. Mostly Producer Companies are based out in interiors and face issues in finding skilled staff of these organizations. There is a need for strong technical support to be given to these FPOs to impart skills among the Board of Directors, CEO and staff for building business acumen. It is good to link agriculture universities, management institutions, agriculture department in government, and other knowledge institutions with the government.
Producer Companies have to comply with the same compliances as applicable for private companies with liabilities of the directors for non-compliance remaining the same. Since the Directors of the FPOs are the producer farmers penalties on directors should be waived off for certain non-compliances like DIR-3 KYC. Many FPOs are not even able to conduct their AGMs. Simplified structure along with ease in compliances would be beneficial. There are challenges faced in documentation of the women farmers as they may not have landholding in their name to qualify as Producer. Documents certified at the Panchayat level should be accepted by the ROC.
A specified conduct of Entrepreneurship Programs should be done to help the farmer board and staff to be able to think of sustainability. A specific fair like Saras Mela/Trade Fair which gives these FPOs a platform to meet the Institutional Buyers or Digital Technology Interruption for aggregation of the farmers produce or a model wherein a central federation which ensures marketing of the products of the Farmer PO ensuring demand of the products of FPOs by providing provisioning of minimum purchase could be thought of.
After years, the deduction from Income was also allowed to Producer Companies like the Cooperative Societies by inserting Sec 80PA in Income Tax Act, 1961. However the Memorandum of Finance Bill 2018 specified that these are extendable to Farmer Producer Organizations thus this excludes Producer Organizations in the Non-Farm sector such Handloom and Handicrafts. Extension of the deduction to all Producer Organizations will encourage Non- Farm base producer organizations which are less in number but expected to grow.
The success of the Farmer Producer Organizations will be critical for ensuring success of small and marginal farmers and also to ensure the reforms makes the maximum impact. With continuous monitoring of these reforms, expect Farmer Producer Organizations to bring Green Shoots of Change for the Farmers and economy.
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