A value chain is characterised by a market-focussed collaboration of a set of enterprises working together to produce, process and market products and services in an effective and efficient manner. The actors (private and public, including service providers) and the sequence of value-adding activities involved in bringing a product from production to the end-consumer. In agriculture they can be thought of as a “farm-to-fork” set of inputs, processes and flows (Miller and da Silva, 2007). In India, the traditional agri value chains in existence are small scale, unorganised, fragmented and disjointed where the produce traversed through several channels and players, often redundant, requiring several touch points at the farm gate end(Barrett et al., 2022). Catalysed by changes to global markets, urbanization, and other trends, Agri food value chains have been growing and changing rapidly in India over the past few decades.
Agriculture has always been a mainstream sector in India with close to 50% of the country’s population involved in agricultural and allied activities for their livelihoods and the sector contributing significantly to the country’s gross domestic product (GDP). Nearly 700 million people in India live in rural areas and are directly dependent on sectors like agriculture, forestry and fisheries, and biodiversity. At present, the Government is focusing on improving the country’s agricultural value chains (AVCs).
The term Agriculture Value Chains (AVC) refers to the set of interrelated activities involved in delivering an agricultural product from its production to the final consumer in a manner that support investments, growth, and competitiveness of the value chain actors (Chen K.Z., et.al 2015).The concept of Agricultural Value Chain includes the full range of activities and participants involved in moving agricultural products from input suppliers to farmers’ fields, and ultimately, to consumers’ tables.
The AVC Finance approach enables lenders to capitalize on the strength and relationships within the agricultural value chains responsible for bringing an agricultural product to its end users. It is considered to be the most suitable method for catalysing credit flow to the agricultural sector in developing countries and offer an opportunity to expand lending scope for financial service providers, and reduce costs and risk associated with agriculture finance.
Role of Agriculture Value Chain
The primary role of an AVC is to bring products to the final consumers, with value added to the product at each stage along the chain. Delivering agri commodities quickly and directly to final consumer gives smallholder farmers important higher income earning opportunities. A vital cog in increasing farmers’ income will be the extent of credit penetration to the ultimate farmer. With changing consumer preferences towards branded, well-packed, safe and healthy food there has been increasing focus on organized agriculture value chains and their financing. Farmer producer organisations (FPOs) and supermarket chains will play a very important role in this revolution.
Agriculture Value Chain Approach
The value chain concept allows integration of the various players in agriculture production, processing and marketing. It defines the various roles of players while at the same time, scope and purpose of partnerships that can be established.
Internal value chain finance is that which takes place within the value chain such as when an input supplier provides credit to a farmer, or when a lead firm advances funds to a market intermediary. Finance will flow in value chains regardless of the presence of formal financial institutions. Participants further down the value chain provide loans to smallholders with or without the involvement of financial institutions. Forms of internal value chain financing include aggregator credit, input supplier credit, marketing company credit, and lead firm financing. This lead firm may borrow from a financial institution but there is no connection between the financial institutions and upstream value chain participants (i.e. farmers, aggregators)
External value chain finance is that which is made possible by value chain relationships and mechanisms: for example, a bank issues a loan to farmers based on a contract with a trusted buyer or a warehouse receipt from a recognized storage facility. When actors outside the value chain, such as financial institutions, provide finance to the value chain based on relationships within the chain, this finance may be referred to as external financing. A typical example is when a bank provides a loan to a producer based on a contract with a buyer. The entry of financial institutions and external financing can benefit all value chain participants and buyers do not need to use working capital to provide finance to producers; producers can access finance without meeting typical collateral requirements; and banks can enter profitable new markets without the risk and transaction costs associated with lending to smallholders directly.
The type of AVC model to be selected depends on:
- The chain
- The capacity of the different stakeholders in the chain
- The interests of the stakeholders
- The socio-economic and political context
Agriculture Value Chain in India
In India, agriculture system along with value chain framework has not been conceived as a main strategy to bring more efficiency, productivity and earnings. There has not been enough emphasis on the growth and development of efficient agricultural value chains in India. Through the development of modern agriculture value chains at national and regional-levels, farmers in India can gain from increased knowledge, data, and information and communication technologies
The agriculture sector is at the cusp of a transformation with the launch of the One District One Product (ODOP) scheme, the Central Sector Scheme of Formation and Promotion of 10,000 Farmer Produce Organisations (FPOs) and the PM Formalisation of Micro Food Processing Enterprises Scheme.
However, while such efforts shall drive linkages and fair remuneration, their impact can be further strengthened by addressing the overall sustainability of value chains. Sustainability in agriculture is going to be a key focus area for future generations as it will ensure the availability of sufficient resources. Hence, stakeholders in the agriculture sector should prioritise balancing the present needs with appropriate and sustainable measures for future generations.
In the Indian context, there are lacunae in extending equal benefits to all the agricultural stakeholders as women, children and adolescents are largely at a disadvantage due to limited resources and knowledge. Despite access to limited opportunities, the vulnerable groups can play the role of important stakeholders in strengthening agriculture and promoting sustainability across the value chain.Hence, it is imperative to develop policies and initiatives that can act as empowering tools for them.
Future of Agriculture Value Chain Finance
A value chain is about linkages generating value for the consumer. The productivity, efficiency and depth of agricultural value chains are important elements driving commercial agriculture and agribusiness. A value chain approach in agricultural development helps identify weak points in the chain and actions to add more value. Agri start-ups and Fin-techs can revolutionise the AVCF. They can help to provide agile, efficient, low cost and differentiated experiences to the VC players. They can democratise the existing services like invoice-based trading, Trade Receivables Discounting System (TReDs), digital connectivity within the agrivalue chains, blockchains, etc. (RBI 2019).
A national level policy on agri value-chain coupled with suitable financial architecture and infrastructure is needed to make Indian agriculture, especially the small holder farmers more vibrant and prosperous.Agricultural markets need to be more competitive, and farmers should be free to market their produce to any entity on mutually agreed terms. Competition isa key to building value chains, and anything which restricts competitive practices, protects monopolies and reduces transparency should be identified and removed.To make the value chains global,it will be important to shortlist products where India has a competitive advantage and identify specific need for investments and policy action. Such a policy will need to consider the complementary competence of farmers, co-operatives and FPOs as well as public and private sector players. Value chain finance has an important place in agricultural finance that augments, but does not replace, conventional finance; most important is its comprehensive, structured and market-competitiveness approach, which complements conventional finance, increasing access to capital and reducing risk for both clients and financiers.Innovation and disruption are the buzz words for Agriculture Value Chain Finance revolution.
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- Barrett, C.B., Reardon, T., Swinnen, J., and Zilberman, D. 2022. Agri-food Value Chain Revolutions in Low- and Middle-Income Countries, Journal of Economic Literature, forthcoming.
- Calvin Miller.2012. Agricultural value chain finance strategy and design, Technical note.
- Carlos Cuevas and Maria Pagura.2016. Agricultural Value Chain Finance. A guide for bankers. Pp 3-5
- Chen, K.Z., Joshi, P.K., Cheng, E. and Birthal, P.S. (2015) Innovations in Financing of Agri-Food Value Chains in China and India: Lessons and Policies for Inclusive Financing. China Agricultural Economic Review, 7, 616-640. https://doi.org/10.1108/CAER-02-2015-0016.
- India Agri Food Startup Investment Report, Ag Funder. 2021
- Keynote Address delivered at Fintech Conclave, on ‘Opportunities & Challenges of Fintech’ by Governor, RBI. 2019.
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