In the past few decades, Indian agriculture has been webbed in crisis and is facing the complex challenge of reversing the deceleration in agricultural growth. The shared value of agriculture in the national GDP has been declining over the years. The primary reasons behind the increasing crisis are rapid urbanization, followed by rising industrial demand, and increasing population with further land fragmentation. This has added subsequent pressure on the availability of cultivable land.

Credit: Ramkumar Radhakrishnan | Wikimedia (CC0 1.0)

Further, the agricultural sector in India has been hampered by rising transaction costs, low access to credit and inputs, and poor realization of output prices. This coupled with the information gap has resulted in poor income outcomes for the farmers especially the small and marginal holding farmers (SMHF).

This is also highlighted in the report of the Committee on Doubling Farmers Income (2018) set up by the central government. The report findings indicate that the average income of farmers from cultivation increased only by 3.8% (over the decade 2001-2011), but this income increase has been large for the high-income farmers (nearly 7.5 times that of marginal farmers). The NABARD All India Rural Financial Inclusion Survey 2016-17 also points towards the rising income inequality in the agriculture sector.

In order to attain better income outcomes, the smallholder farmers need to process and scale their produce which will help them in attaining better prices in the market. But with lower production, low investments, weak market linkages and low value addition, it becomes difficult for the smallholder farmers to sustain. This has resulted in many farmers taking up unproductive non-farm activities for additional or alternative income source.

Another dynamic shift has been of vegetable production which has well suited into their ecosystem. But due to a poor understanding of market imperfections, the farmers are unable to get better incomes.

The issue of income insecurity has been affecting the overall development of the primary food producers. And also raises the concern on attaining food security of the nation. This trend is projected to further continue unless there is a set of effective policy options targeting the complexity of the agrarian crisis with the development of small and marginal farmers at its centre stage.

The logic of collective action

Collective action is defined as a line of action identified by different actors motivated to achieve certain common interest through collectivization.

There are benefits of improved bargaining power, fewer transaction costs, and better economic outcomes in such group behavior. These are beneficial in cases where individual capacities fail to overcome the endogenous or exogenous constraints. The collectives formed can be formal or informal; connected through self-motivation or influenced or coerced; self-interests induced through collective interests or social interests; short-lived or has a long-term presence. Depending on the purpose and conditions the collective agency forms its characteristics.

One of the key determinants of the nature (or say success) of collective action is the member’s allegiance. The allegiance can be reflected from the member’s inclination towards significance of collective interests.

As discussed by Olson (1971), in a collective group, there might be cases when self-interested individuals (in the continuous process of making rational choices) will try to seek their personal benefits over the collective interests. Olson defines this as the ‘free-rider’ problem under which only a few individuals work and benefits are shared by everyone. Certain individuals do not find any incentive in working towards collective interests and under such conditions, there is a strong possibility that the objective of collective action might fail.

Therefore the collectives have to be formed and designed in such a manner that such individual characteristics can be curbed (it cannot be removed completely). In view of this are various approaches discussed by Olson and many others. Some of them are as follows:

Small size of the group: smaller groups have been considered to resilient to free-rider problem than larger groups (Olson, 1971). In a smaller group, collective decision making is more transparent, less conflicted and accountability is kept on a check. It ensures better per-capita benefit as production costs is also less.

For (large) groups facing the issue of free-rider, there are two specific ways which can stimulate a rational individual to be group-oriented,

  • Privileged groups: Benefits or incentives should be given based on the active participation of members in the collective decision-making. Individuals enjoying the free ride would see this as a disincentive and might act upon it. The incentive is dominantly ‘expressive’.
  • Selective groups: Benefits or incentives (largely private goods) are given to members on certain contributions. These are organized groups.

The idea of small size group is significant as in larger sizes, the group characteristics gets diversified which has implications during the decision making. But this does not mean a larger group cannot be formed or developed. For larger group to be group-oriented there is need of incentives and disincentives as stated above. This will mobilize the individuals in the group.

But all of these approaches will be effective depending on the benefits of the collective actions. If the overall functioning of the collective action is poor (for example it has not established any market linkages for selling its collective goods) and there are no substantial benefits in it, then the incentive/disincentive might also not work. This is one of the prime assumptions which need to be kept in mind before forming any collective or interest groups. It is the members who need to be aware of the benefits and challenges of collective action even before forming a collective.

One of the key assumptions of Olson that the benefits of member mobilization lead to positive benefits on policy mobilization has been argued in many works. It means that the mobilization of interest groups will lead to collective functioning. It is accepted that mobilizing producers with common interests might be relatively easier, but this will not lead to the mobilization of the same producers (now members) in taking collective decisions and bearing the risk of it. There might be information asymmetry and self-interest leading to internal conflicts. It is necessary to separate these two linkages and work towards controlling and tackling collective action problems right at the member mobilization stage.

Therefore instead of simply going ahead with the set policies and functions (and further incentives) in the collective agency, it is necessary to understand the drivers behind it. The primary concern is to keep these drivers maintain the equilibrium and not lead to institutional changes and conflict of self-interest. Therefore at the mobilization stage of any collective agency, membership incentive should be strongly ‘expressive’ and not an attractive package of material selective benefits.

It is necessary to examine the promoters and barriers to collective action leading to high or low participation of members. And this participation depends on both individual and group behavioral characteristics, which will be further explored in this study.

Role of collective action in agriculture

Collective action has been termed out as one of the effective pathways for integrating smallholder producers to high-value and competitive markets.

With the increasing transaction costs in agriculture and with no say in the value chain, collective action has been instrumental in empowering the smallholder producers in many ways.

The smallholder producers who have been the underserved communities, with the help of collective action have been able to access and participate in the input and output markets of the agriculture value chain.

However, though the farmer’s groups are formed on concentrated interests there are factors of composition and characteristics of individuals and member mobilisation method (which links to group behaviour) which determine the nature of the outcome. The varying level of commitment of individuals as explained by Olson (1971) and Fischer (2011) will lead to the collection problem of free-riding. This will have implications on the participation in collective activities and raise the concern on the sustainability of the group formed.

The nature of collective action in agriculture has moved from cooperative structure to an enterprise structure. More emphasis has been laid down on the economic empowerment of the members in a collective. This has been well depicted in the work of Bijman (2016).

The author has highlighted the “changing nature of farmer collective action” in the agrarian livelihood context of developing countries by drawing out three large trends,

  • The transition from a focus on resources (access to inputs, credit, and technology) and capabilities of producers towards improved access to the market. This is interesting, as for market access or proper business functioning of the PO there is a need for resources and capabilities, in the form of investment in developing leadership, management, and marketing skills of the producers;
  • Transition in the policy process from community-oriented towards member-oriented policies. The traditional collective action was more focused on the social and economic prosperity of the entire community. In the PO model, the focus is primarily on the economic prosperity of only the members of the organisation.
  • The transition from policy orientation towards market orientation. Rather than working towards efficient policymaking, the farmer collective action has shifted its orientation towards placing itself in the market (as a buyer or supplier or both). They have made their way into the agricultural market value chain.

The first transition is important as it draws variables needed to work towards the changing nature of farmer collective action. The variables need to be developed in order to achieve economic benefits for the PO members through market orientation.

In the second transition, the author raises the concern of the inclusiveness of PO. In a market-orientation structure, the emphasis has to be given to producers who are interested and willing to be the owner of the PO. The PO might have to expand beyond its region for business opportunities and lose out on its regional identity. Thus community inclusiveness at the local level might not be there.

But it is important to understand here that, even a collective of members under a PO is also another form of community. Thus in a way, the benefits of PO are served to a particular set of ‘community’. And over a period it is possible for the PO to incorporate the community at the local level. But the specific question to address is the social inclusiveness primarily of caste, class, gender, and age. This lays an impact on the participatory decision-making and sharing of benefits among the members.

In context of the third transition, the author further observes that, with market orientation (preference to selling farm produce rather than agri-input supply) benefits adding to the producers income, the traditional PO are willing to carry out market activities. But there are two major constraints which pose as challenges to sustain in this transition. Firstly the producers need to develop capability to understand and manage the new intervention and secondly, the state policies are largely favoured towards input stage of agriculture (subsidies, credit support, and technology assistance) and not towards strengthening income security of the producers.

The transition towards market-oriented policies does ensure economic empowerment of the producers but it also has implications on the governance, leadership requirements, and relations among actors.

The internal governance in the market-oriented transition is hampered by the heterogeneity of membership (Bijman, 2016). This reduces the overall efficiency and effectiveness of collective decision making. In order to sustain this transition requires a separate set of leadership qualities and skills. This requires external assistance and hand-holding in the initial stages. With market-oriented activities there comes the requirement of capital which has its own constraints. This also has an impact on the member commitment. And as explained earlier, member commitment and interest act as a key determinant in preventing the collection action problems. With more integration into the markets, there will be a demand for vertical coordination in the PO structure. And the increase in the hierarchy in the member-PO relationship will tend to reduce the member commitment.

Apart from access to market, a PO faces issues of scarcity of capital, lack of knowledge and information and non-availability of quality inputs. To fully function as a business enterprise, the PO needs to overcome all of these challenges.

These are challenges that might arise from time to time, thus there are no permanent solutions to them. At best, the PO ecosystem can be developed in such a manner that it can be resilient enough to the shocks/crisis arising out of the constraints. With capital, the availability of quality inputs can be dealt with (provided there are regional suppliers to it). With capital and proper knowledge of business entities, the problem of access to the market can be resolved to an extent.

Information asymmetry is one of the major reasons that the individual producers have failed to understand the consequences of agrarian crisis. For example, the extensive usage of chemical fertilizers and pesticides has resulted in soil degradation and groundwater deterioration. Since these are common resources, there can be no resistance drawn by individuals to save themselves from the practice of larger communities. There is an over-exploitation of groundwater used for irrigation. At an individual level, the farmers have not been able to picture the mammoth water crisis which will badly hit the agrarian sector. The government provides extension services to fill these gaps but many are left out of all these. Lastly, the market entry is restricted, very competitive, and exploitative in nature.

Thus for a PO, which procures the produce from its members and moves to market for fetching better incomes, will be hampered by the above-mentioned constraints. The formation and functioning of the PO need to have integrated solutions to tackle all of these.

Farmers collective in the Indian context

The farmer collective or enterprises in the Indian context were first organized under the Co-operative act of 1904 made during British Rule. The concept of collective action in the form of ‘agricultural credit cooperatives’, was implemented in rural India under the patronage of the Government. Post-independence the movement gained momentum and cooperatives were set up nationwide.

A major emphasis was given to agricultural commodities like poultry, fisheries, and dairies with strong support from Government’s cooperative departments and various other institutions.

One of the prime examples would be the ‘Operation Flood’ under which the world’s largest dairy development program was conducted. Dairy cooperatives were set up to directly procure milk products from the (dairy) farmers. This approach of collective action has helped the producers in a multidimensional way.

Another example would be the Indian Farmers Fertilizer Cooperative (IFFCO) which today has a 35% share in the fertilizer and seeds market. Similar cooperatives are present in the cotton, sugar, hand-weaving sector with a market share of nearly 60%, 58%, and 55% respectively..

The cooperatives have successfully played multi-functional roles in the Indian market with their presence in various sectors. The primary role of cooperatives has been to build linkages between producers and markets and to develop economic democracy at the regional level. But even with a history of over 100 years into existence, the traditional cooperative form of organization has not been able to effectively deliver its objectives.

The performance and operations of the cooperatives have been largely hampered due to huge government intervention (and not a people’s movement), mismanagement, lack of awareness, restricted coverage, and functional weakness. These constraints are well etched in the very nature and principles of cooperatives form of organization.

The story of cooperatives has been reflected in various other collectives like Self-help groups (SHGs), Farmer Interest Groups (FIGs), Village Level Institutions (VLIs), Producer Groups (PGs), etc. The pitfalls resulted in the demand for an alternative legal framework in order to give more autonomy to the cooperatives to function as business enterprises. This led to the formation of Farmer Producer Companies (FPC), which is a legal entity formed after the amendment of section 181 (part IXA) of the Indian Companies Act 1956 in 2003. This now has found a separate chapter (XXI) in the new Companies (Amendment) Act 2020.

The FPCs have been seen as an amalgamation of a cooperative and private limited company.

It carries the cooperative values of mutual benefit and professional style of functioning of a corporate. Its members and shareholders can only be farm producers who have voting rights.

The members appoint the board of members who undertake resolutions for the functioning of the FPCs. The FPC issues equity shares to its members, which cannot be publicly tradable but only transferable. Like the traditional cooperatives, it gives a (limited) return on capital to its members but also functions under a regulatory framework like private companies.

One of the unique features of FPC formation is that it can have individual producers and also producer collectives as its members. It has been viewed that the role of cooperative or producer collectives is required more in the post-production stages like processing and marketing.

Thus FPCs can have efficient participation of the FIGs, VLIs, PGs, SHGs, etc to function as a business entity. It has no restriction on its area of operation thus allowing the FPCs to benefit from the economies of scale. The FPCs have reduced the intermediaries present in the traditional marketing channels. It has bridged the gap between producers and buyers.

Over the period of time with more market opportunities and operational control, the FPCs are more likely to coordinate vertically in a hierarchical fashion or expand horizontally along the agribusiness value chain or achieve both.

Farmer buying bio-pesticide from the FPO Input shop

Note: This article is the first in the series of small and marginal producers and the (Farmer) Producer Organisations (FPOs) in the Indian context. The subsequent articles would focus on the success models, challenges, enabling ecosystem, and the future journey of the agrarian crisis.

PPIN Staff

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