1. Briefing Paper Number 6 | 2012
GDN Agriculture Policy Series
Managing agricultural Vijay Paul Sharma
Dinesh Jain
commercialization Sourovi De
for inclusive growth
in South Asia
Rapid income growth, urbanization, organized retailing and Women and children sort a huge
liberalized trade are dictating the way food is produced, and crop of red chilis in Jodhpur,
India. Small and marginal farmers
South Asian agriculture is responding by becoming increasingly have been economic pillars in
commercialized. New markets could present an opportunity rural areas but risk being excluded
for smallholder farmers to increase their income, but many from commercialized markets.
jean - leo dugast | panos pictures
barriers still prevent their inclusion.
This briefing paper is one of the
Key messages 10-part Global Development
Network (GDN) Agriculture Policy
Strong economic growth, rapid
p Smallholder producers struggle to
p Series for its project, ‘Supporting
urbanization, changing demographics, participate in the commercialization Policy Research to Inform
Agricultural Policy in Sub-Saharan
modern technology and the emergence process. Bottlenecks include Africa and South Asia’. It is based
of modern agri-food markets are leading inappropriate policies, lack of access on a longer synthesis paper,
to the commercialization of South Asian to technology, institutional barriers, Managing agricultural
commercialization for inclusive
agriculture. poor infrastructure and, crucially, poor growth in South Asia, which
Commercialization has seen a significant
p links to markets. draws on extensive published
and unpublished research. The
shift in patterns of consumption, away To strengthen market linkages and
p full paper can be downloaded at:
from staple cereals towards high-value encourage smallholder participation, www.agripolicyoutreach.org
agricultural products such as fresh fruits farmers need vertical integration It will be of value to policymakers,
and vegetables, milk and dairy products, into agri-food value chains, coordination experts and civil society working to
improve agriculture in South Asia.
meat and poultry products, processed and collective action, stronger market
This project is supported by the
food and beverages. information systems, and better access Bill & Melinda Gates Foundation.
Small and marginal farmers have been
p to institutional credit.
economic pillars in rural areas but face Investment in research and development,
p
the risk of exclusion due to profound extension services, rural infrastructure
changes in the structure and governance and post-harvest management is
of regional and global food chains. needed to ensure smallholder producers’
participation in emerging markets.
Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia 1

2. Overview
A farmer in Jalandhar in India
watches as his vegetables are
weighed at a Reliance Fresh
collection center. Called ‘formal
retail’ the stores are a break
from small corner stores and
open markets. One of the
chain’s greatest challenges has
been sourcing produce from
local farmers, preparing it and
transporting it to stores.
jacob silberberg | panos pictures
In the past two decades, developing Agriculture in South Asia is dominated by
countries have witnessed a rapid increase smallholder farms, ranging from less than
in the commercialization of agriculture. one hectare in Bangladesh (0.6 hectare),
Rising incomes, changing tastes and Sri Lanka (0.69 hectare) and Nepal
lifestyles, demographic patterns and the (0.79 hectare), to just above one hectare
spread of modern supply chains have led in India (1.23 hectares), while farms
to this situation. In many countries in Asia, in Pakistan are comparatively large at
new markets have emerged for high-value 3.1 hectares. Evidence shows these farm
commodities such as fruits, vegetables, sizes are shrinking and fragmenting. The
flowers, livestock products and fisheries. majority of the population live in rural
The retail revolution is not only areas and depend on agricultural activities
transforming the way South Asian as the major source of income. Agriculture
consumers buy their food, it is also is also the main source of employment
dictating how food is produced, graded, for the large workforce in the region. But
stored and displayed. It offers a potentially because there are only a few corporations,
exciting window into the future of there is no effective competition in
emerging agri-food markets. The world agri-input industries, food processing,
market for high-value food products is manufacturing, trading and retailing. This
expanding fast, especially in developing leads to skewed bargaining power between
countries. This is an opportunity for South smallholders and agri-business chains.
Asian countries to enhance their global While it may seem like there is potential
share of exports of high-value agriculture. for smallholder farmers to increase their
income and businesses, many barriers exist.
2 Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia

3. Background to the research
This paper is based on a systematic review of the literature on commercialization
of agriculture, analysis of secondary data from published government sources
in the selected South Asian countries, and from individual case studies in India.
The review Managing agricultural commercialization for inclusive growth in
South Asia focused on four countries in South Asia: Bangladesh, India, Pakistan
and Sri Lanka.
The term ‘inclusive growth’ can incorporate a range of concerns including poverty
reduction, environmental sustainability, food security, nutrition and governance.
Researchers conducting the review took the term to imply a form of agricultural
commercialization that involves smallholder participation in commercial markets as
well as any benefits to smallholder farmers. It puts the farmers’ income and welfare
at the center of any evaluation of agriculture.
The review chose to put the smallholder farmer centre stage. Researchers used
case studies to look at smallholder farmers’ participation in agri-business, the
researchers and how they may have benefited. It is therefore impossible to identify
general characteristics and trends from these examples.
Small and marginal From the perspective of a smallholder Increasing evidence from both research
farmers who have farmer, commercial agriculture involves and practice shows that one way for
high costs of modern inputs such as smallholders to overcome the problem
been economic pillars better seeds, fertilizers, irrigation and of market failure is through organizing into
in rural areas face agrochemicals. In the absence of input farmer groups or producers’ organizations.
the risk of exclusion due and credit markets, farmers find it difficult Acting collectively, smallholders are better
to profound changes to purchase what they need. Access positioned to: reduce transaction costs for
to institutional credit for farmers and their market exchanges; obtain necessary
in the structure and smallholders is weak in South Asian market information; have better bargaining
governance of regional countries and they mostly rely on high- power to secure access to new technologies
and global food chains. cost informal sources of credit. and tap into high-value markets.
The challenges they In addition, growing high-value crops Agricultural policies in the region are
face are many and not for the markets requires getting timely therefore faced with several competing
just because the world information on market prices and areas resulting in a policy quagmire.
well-developed markets. However, How do we enable smallholder farmers
of commercial agriculture smallholder farmers often do not have to emerge out of traditional production
is unfamiliar to them. access to that information. Added problems systems and embrace a more responsive
are that high-value commodities are approach to emerging food markets?
often perishable. Output markets are How do the goals of commercial agriculture
under-developed and fragmented and align with ‘inclusive growth’ for poor
have acute shortages of post-harvest farmers? The review examined the
infrastructure, leading to high volatility challenges and barriers that smallholder
in their prices and large losses. farmers confront if they are to participate
in commercialized agricultural systems.
Moreover, new procurement systems
What specific conditions are required
often demand larger supply volumes and
to support smallholder participation
a uniform product, favoring larger farmers.
and increase farmer income and welfare?
It is difficult for small farmers to participate
What policy options would support
in commercial agriculture unless they find
these conditions? What is the agenda
ways to improve their bargaining power
for future research?
and reduce transaction costs.
Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia 3

4. The challenges in more detail
The growing demand for high-value In developing countries a significant
agriculture and the rising importance number of the working population reside
of commercialized supply chains poses in rural areas and depend on agriculture for
many questions and challenges for their livelihood. While smallholder farmers,
developing country smallholder agriculture. who might own less than two hectares
Traditionally, agriculture was expected of land, have been and continue to be
to feed the teeming industrial workforce, responsible for a large share of agricultural
while providing markets for industrial production, their impact on market supplies
outputs. Today, agricultural development has been limited.
is seen not just as a vehicle for supporting
But increasingly, agricultural
industrialization, but also as a mode
commercialization is discussed as
of inclusive growth, pro-poor economic
a potential pathway out of poverty for
development, food security and
these smallholder cultivators.
environmental sustainability.
This includes: the trend towards non-staple
western dietary habits among growing
McCain India: making direct links with farmers urban populations; rising household
incomes; foreign investment in food
When McDonald’s restaurants entered the Indian fast-food
markets, the emergence of supermarkets;
market, they discovered that potatoes traditionally grown by
and vertical integration of production
Indian farmers are shorter in length than the standard size
and retail in agriculture.
required for the typical french fries served at the chain’s
restaurants. Importing potatoes for every pack of fries sold The drivers of agricultural commercialization
was not an option and using shorter potatoes for producing in South Asia include rising incomes,
fries was also rejected. McCain Foods India (a 100 per cent changing dietary consumption patterns,
subsidiary of McCain Foods Canada), suppliers to McDonald’s, urbanization, female labor force
decided that a home-grown alternative was the way forward. participation, changing demographics
and the growth in export opportunities.
McCain invested in research and development to identify
the best varieties of potatoes suitable for French fries and other The majority of agriculture in South Asia
high-end products. The company developed strong vertical is by smallholder farmers, who struggle to
links with smallholder potato farmers in north Gujarat. participate in large-scale commercial
activities. This includes producing outputs
They worked through contract farming arrangements to
that adhere to the quality and safety
provide the farmers with seed supply, extension services, quality
specifications of the quality-conscious
control, storage and processing facilities. The company trained
consumer.
farmers in better planting methods, irrigation systems, fertilizer
application programs and seed treatments. This led to increased Poor market linkages with smallholder
crop productivity (from about 18 tonnes per hectare to over farmers are a major stumbling block for
40 tonnes per hectare) and higher profits for farmers. McCain’s the commercialization of agriculture in
contract farming initiative has brought a new way of farming South Asia. Ways to improve these linkages
to India and its potato growers. include improving rural infrastructure,
vertical coordination of agri-food chains,
Hitesh Patel, a contract farmer, used to grow cotton on
strengthening market information systems
his six-hectare farm. Four years ago, he planted one hectare
and collective action by smallholders.
of potatoes under the guidance of McCain agronomists.
Improving farmer access to finance and
Now he plants potatoes on all of the 6 hectares he owns and
credit service is also important.
another 1.6 hectares he has leased. McCain Foods offers him
an assured price, and improved productivity and farm income. It is crucial to note that growth in
agricultural productivity does not
Farmers told researchers that as a result they had bought
necessarily lead to poverty reduction.
new vehicles, land and cattle as well as investing in larger
It results from the deliberate and planned
homes. It took McDonald’s roughly six years and US$100 million
use of modern technology, investment in
to set up a reliable supply chain, with companies like McCain
research and development, infrastructure,
facilitating the process. But this case study shows that
especially rural roads, better access to
the private sector can play an important role in providing
inputs and services and market linkages.
technology, extension services and the required market
linkages to smallholder farmers.
4 Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia

5. Poor market linkages For example, farmers mainly depend on
rain-fed agriculture, yet we see very little
Poor market linkages are a critical factor
is being done towards expanding the
in the success or otherwise of smallholder
area under irrigated cultivation. This raises
farmers participating in commercial
crop yields, which in turn increases labor
agriculture. The following factors influence
and land productivity. It encourages
how smallholder famers link to markets:
diversification from traditional low-value
Rural infrastructure staples to high-value crops such as fruit,
Rural roads, power, water and storage vegetables, flowers and spices for the
facilities, processing and post-harvest domestic and export market. Strategies
infrastructure are critical factors in should also focus on developing allied
commercial agriculture. This is particularly sectors such as dairy, meat, poultry,
the case for high-value perishable fruit, fish, non-farm sector, agro-industry
vegetables or livestock products. If and agri-business.
infrastructure is poor, as it often is, farmers
Vertical coordination in
experience higher losses and increased
agri-food chains
marketing costs. However, neither national
Vertical integration of business between
governments nor international aid agencies
the farmer and the retailer is increasingly
seem to prioritize investment in the
common in agri-business. Contract farming
construction of new rural infrastructure
is a form of vertical integration where
or maintenance of existing infrastructure.
the buyer and farmer agree conditions for
producing and marketing farm products.
Typically the farmer agrees to produce
a certain quantity of output, meet quality
standards and a delivery schedule. The
contract also sets a price or price range
to be met. Sometimes the buyer insists
on particular inputs and production
techniques. Critics of contract farming
argue that smaller farmers are often unable
to negotiate fair terms of trade themselves
and that it is not a transformative approach.
Others argue that the relationship is
not exploitative if managed properly.
Sometimes contract farming can be tapped
as a vehicle for smallholder-led agricultural
commercialization as it enables large
buyers of farm produce to pool the
outputs of several small farmers and
harness economies of small-scale. Benefits
to the farmer depend on the number
of intermediaries between producer and
final buyer and the buyer’s contribution to
Vegetables are laid out for the cost of inputs.
sale at an open air market in
Dhaka, Bangladesh
g m b akash | panos pictures
Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia 5

6. Collective action for smallholder Market information systems
market access The importance of market information
systems in developing countries increases
If smallholder producers organize
with the move from subsistence farming to
themselves and act collectively, they
commercial agriculture. As farmers engage
are more likely to overcome some
more with commercialization, they interact
of the significant challenges they face.
with traders and others in both input
This includes lack of access to market
and output markets. Information becomes
information, technology and credit, high
vital to facilitate these interactions. Access
transaction costs and uneven bargaining
to information increases the efficiency
power. Collective action can help to
of agricultural markets.
aggregate production volumes to
establish links with large buyers, reduce Access to finance
transaction costs on both sides of the Smallholder famers need access to
supply chain, and improve bargaining institutional finance. High-value agriculture
power. Ultimately it allows farmers to is capital intensive and restricts participation
compete more effectively. of smallholders in the process as they lack
access to capital.
Amul cooperative: a success story
of collective action
The features of this successful model are:
In the mid-1940s in Anand, a small town in the state Great leadership and freedom from external
p
of Gujarat, Western India, milk became a symbol political and bureaucratic controls.
of protest against a local trade cartel. Angered by
Farmers participating at all levels from production
p
unfair and manipulative trading practices, farmers
to marketing.
approached the eminent statesman, Sardar
Vallabhbhai Patel, who advised them to get rid of Autonomous, committed professional managers.
p
the middlemen and form their own cooperative. The Sustainable growth through assured prices, cash
p
farmers then refused to sell their milk to the trade payments for milk supply, provision of quality
cartel and formed the Kaira District Cooperative Milk feed, breeding and animal health care services,
Producers Union Limited. They started pasteurizing and support for infrastructure (bulk milk coolers,
milk in June 1948 for the Bombay Milk Scheme with testing facilities) at village level.
just a handful of farmers in two village cooperative Development of a consumer base by making dairy
p
societies, producing 250 liters a day. It was an products affordable.
assured market and by the end of 1948, 432 farmers
Focus on core activities of production, processing
p
had joined and milk quantities increased to 5000
and marketing and managing other services
liters per day. Today in Gujurat, about three million
such as logistics for milk collection, distribution,
rural producers in 15,712 dairy cooperatives farm
etc. through third party/outsourcing.
milk under the Amul brand. In 2010–2011 they
produced 9.2 million liters. Market-driven production system marked by
p
transparency and accountability.
The Amul model is a three-tier structure with dairy
cooperative societies at the village level federated See diagram on the next page for an overview
under a milk union at the district level and a of the Amul model.
federation of member unions at the state level.
The model works by establishing direct linkages
between milk producers and consumers. Milk
farmers control the procurement, processing
and marketing, and the cooperative also hires
professional managers. Amul assures guaranteed
purchase of all milk at pre-determined prices and
assures high-quality products sold at competitive
prices to consumers. This happens through
vertical coordination from production to market
through a vast cooperative network. This is
a unique model for rural development, especially
for women and small and marginal farmers.
6 Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia

7. Recommendations
Support infrastructure
p Invest in research and extension
p
Governments should pay attention to Reorient public expenditure away from
maintaining and building rural infrastructure large non-targeted subsidies in agriculture
that will support smallholder farmers towards research and extension services
and increase their ability to participate to enable smallholder farmers to cope
in commercial agriculture. with the challenges of cultivating high-
value crops.
Enable private investment but protect
p
smallholders Target subsidies toward smallholders
p
Agricultural policy in South Asia should Ensure subsidy programs for credit,
encourage contract farming by offering fertilizers and irrigation are aimed
an enabling environment for organized at smallholder farmers. Subsidy programs
private investment as well as protecting the should be carefully targeted to free
interests of smallholder producers. up budgetary resources for productive
agricultural investments.
Three-tier ‘Anand Pattern’
of dairy development in India Promote ICT
p
Strengthen access to market information
systems and Information and
Market
Communication Technology (ICT).
Encourage farmer organization
p
Provide support to farmers’ efforts
Milk and Sales revenue to take collective action through groups,
dairy products
organizations and networks.
Improve smallholders’ access to finance
p
State cooperative milk marketing federation Efforts are needed to improve smallholders’
1 in Gujarat and 22 in India access to institutional finance. The active
participation of different organizations such
as public and private banks, cooperatives,
Milk and Sales revenue non-governmental organizations, micro-
dairy products finance institutions, self-help groups etc.
can all help improve access to finance.
Research smallholder participation
p
District cooperative milk union /
dairy processing plants Further documentation and research is
15 in Gujarat and 177 in India needed to examine the level of smallholder
participation in the supermarket revolution
Milk Base milk price Cattle feed in South Asia, in order to formulate
Additional Veterinary, evidence-based policies.
price difference animal health and
Dividend breeding services
Rural health services
Village dairy cooperative society
15,712 in Gujarat and 144,240 in India
Milk Base milk price Cattle feed
Additional Veterinary,
price difference animal health and
Dividend breeding services
Rural health services
Member milk producers
3 million in Gujarat and 15 million in India
Source: Amul (2012)
Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia 7

8. Key references
The full paper Managing agricultural
J Fei and G Ranis (1961) commercialization for inclusive growth
‘ theory of economic development’,
A in South Asia is available for download at
American Economic Review, vol 514, www.agripolicyoutreach.org
pp533–65 It was written by:
Ashok Gulati, Nicolas Minot, Prof. Vijay Paul Sharma
Chris Delgado and Saswati Bora (2005) Indian Institute of Management, India
‘ rowth in high-value agriculture in
G Dinesh Jain
Asia and the emergence of vertical Indian Institute of Management, India
links with farmers’, paper presented
Sourovi De
at the Workshop on Linking Small-
University of Oxford, UK
Scale Producers to Markets: Old and
New Challenges, The World Bank, and reviewed by
Washington DC, 15 December 2005 Prof. Per Pinstrup-Andersen
Cornell University, USA
P K Joshi, Ashok Gulati and
Ralph Cummings Jr (2007) P
roject Steering Committee
‘ gricultural diversification in South Asia:
A
Senior Advisors
Beyond food security’, in PK Joshi, Ashok
Gulati and Ralph Cummings Jr (eds) Prof. Per Pinstrup-Andersen
Agricultural diversification and smallholder Cornell University, USA
in South Asia, New Delhi: Academic Prof. Thomas S. Jayne
Foundation, pp47–81 Michigan State University, USA
Praduman and Mruthyunjaya Kumar (2002) Prof. William A. Masters
‘ ong-term changes in food basket
L Tufts University, USA
in India’, paper presented at the Prof. Alexandros Sarris
International Workshop on Agricultural University of Athens, Greece
Diversification and Vertical Integration Prof. David Zilberman
in South Asia organized by FICCI-ICRISAT- University of California, Berkeley, USA
IFPRI, 5–6 November, New Delhi, India
Project Management Team
W A Lewis (1954)
‘ conomic development with unlimited
E Principal Advisor
supplies of labour’, Manchester School Prof. Douglas Gollin
of Economics, vol 20, pp139–91 Williams College, USA
Project Director
Anwar Naseem, Steven Were Omamo
Dr. George Mavrotas
and David J Spielman (2006)
Chief Economist, GDN
The private sector in agricultural
R&D: Policies and institutions to foster Deputy Project Director
its growth in developing countries, Tuhin Sen
ISNAR Discussion Paper 6, Lead Strategist, GDN
Washington DC: International tsen@gdn.int
Food Policy Research Institute Project Consultant
Nupur Suri
P Pingali (2006)
‘ gricultural growth and economic
A Policy Outreach Analyst
development: A view through the Vinaina Suri
globalization lens’, paper presented you wish to reproduce or build upon this work,
If
at 26th International Conference of please contact Global Development Network (GDN).
Agricultural Economists, 12–18 August,
Gold Coast, Australia © Global Development Network
Vijay Paul Sharma (2012) Designed and produced for GDN by Panos London,
‘ ndia’s agricultural development
I panos.org.uk
under the new economic regime: All photographs © Panos Pictures, panos.co.uk
Policy perspective and strategy All rights reserved.
for the 12th five year plan’, Indian
Journal of Agricultural Economics, Further information
vol 67, no 1, January–March, pp46–78. more information on the ‘Supporting Policy
For
Research to Inform Agricultural Policy in Sub-Saharan
Africa and South Asia’ project and for free
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8 Briefing Paper Number 6 Managing agricultural commercialization for inclusive growth in South Asia