Eminent panel here, Mr MK Mishra, the Joint Secretary from the Department of Banking, Ministry of Finance; Ms Diane Bogart, Ms Mio Oka, Mr Prasad Gopalan from the IFC; Mr Saket Mishra who has just returned back after 17 years engaging with the finance world, as was mentioned earlier with the Deutsche Bank, with the World Bank and has come back to serve his nation, to give back to our people, to give back to his motherland the knowledge that he has acquired over so many years, a warm welcome to you Saket.
We have distinguished delegates from across the world who have come in here. I hope you enjoyed the Khichdi that was served. I don’t know, did you all manage to partake in that? But, delighted that my colleague and elder sister Harsimrat has brought the flavour to the Indian food processing industry. It has been a subject of much debate in India for many-many years that possibly we need to do much more to add value to our farmers’ produce, to help them get better incomes, more sustainable and good quality of life for family of farmers, good quality food for our people processed, for that matter, even unprocessed. And a holistic vision about how we are going to make this sector truly an engine of growth in this country.
I think this World Food India 2017 Conference has actually helped bring the focus on this industry, much needed focus for that matter. And I am sure, being co-terminus with the Kickstart fund that Rabo has started, with almost similar objectives for increasing agricultural production, for giving more sustainable production. It’s very-very heartening that as Rabo works towards it on a 3-year timeframe, we will try to be concomitant with that and work towards doing the same 50% in agricultural production, income, we can work around that.
But, again, in a sustainable manner, so that we also take care of its impact on the environment, see that it doesn’t damage the environment when we are looking at expanding the food processing industry in India. We don’t bring in products that would add to environmental degradation, possibly the HFCs for refrigeration. So, in some sense, though this subject is not really something I am very familiar with, financing is something that I do believe we can really bring in a good amount of thought to how it can be made more attractive, more encouraging for participants, both in India and internationally, to come in and invest, make good money.
After all, nobody is going to invest for charity. One must start with the recognition that an investment has to get a fair return. Fair return sometimes is also sought to be misused. I remember just when I started the renewable energy scale-up in India, late 2014, I would engage with a number of international funds, and since there was the legacy of the pre-2014 period, most funds would start with a 22%-25% kind of equity return. And I remember trying to explain to them that that’s ridiculous, we all know, all the investment bankers and the investment funds all know that that 22 or 25 is only (inaudible). We make that on a spreadsheet, probably, to satisfy our investment committees. And we all know that we are really targeting for about 14-15% real return.
It’s something like at one point of time, I don’t know how many of you have ever applied for a bank loan, I don’t know what the situation is now. Hopefully better, Mr Mishra. But I remember in the good old days when I used to write a credit application and I am going back in memory to nearly 35 years ago. I was not even an adult at that point of time when I made my first loan application.
And I remember the advice that one would get is that you need, let’s say a million dollars, you start by applying for 2 million dollars. And then it will get cut at every level of the system so you would finally get your one million that you want. In the same way, I think we must bring to the table a realistic picture of what industry can truly give in terms of returns. It has to be benchmarked with international levels of return, while, of course, one will factor in rupee-dollar exchange rates or exchange stability, on which, of course, India, if you ask me has an excellent track record despite being a developing country. We may have had in the past certain ebbs and spikes, but if one was to take a 25-30 year period, post liberalization, 1991 – in the long run, any period, you take a 10-year period during 1991 to 2017, you take a 15-year period, you take a 20-year horizon, you will find that the rupee has never depreciated anymore than between 3 and a half, possibly three and a quarter and three and a half percent.
I did a lot of math and calculations on that, I think there was one period where possibly it came to 4% or little under 4%. But otherwise any long haul, the rupee has never depreciated more than three and a quarter, three and a half percent. Thus this expectation on returns that very often we hear from venture capitalists, for bankers or investors, internationally, somehow tends to be a little unreasonable, a little on the higher side. And, in fact, that becomes a factor which holds back the industry and holds back investment.
Also, bank credit by and large is available for this sector at quite attractive rates, but it may be a good idea for the government and Mr Mishra we should look at it internally to see how the categorization of food processing can be more appropriate, because truly, this can become an engine to promote and encourage agricultural output and therefore in some sense can be a very important factor in doubling the farmers’ income, a stated goal of this government by 2022.
And, with the current day uncertainties with banks having to make up for some of their misdemeanours of the past, I think the small and medium industries are the worst hit. They land up paying the highest rates of interest in the process. So, it may be a good idea to address that issue also while we are all the time focused on at what rate the farmer gets credit, I think this is no less important than the farmer who is getting credit. Not to suggest that I am proposing any subsidies. I am one person who has in the last three and a half years made the instrument of removal of subsidies the basis of growth and aggressive growth at lower prices.
In every one of the programmes, be it the fast-tracking of solar energy in India, be it our engagement with the wind energy sector, be it our effort on promoting energy efficiency, the huge rollout of LED bulbs in the country – all of these were primarily subsidy-based, prior to 2014, and in the subsidy-based the prices were phenomenally high. So, even considering that there were huge subsidies in the system, you couldn’t get an LED bulb for probably less than Rs 500-600 in the marketplace. The government used to procure LED bulbs at Rs 310 plus taxes. And then with all the costs associated with that it became so unviable that they had to give a Rs 100 subsidy for every bulb.
Same was the case with wind energy; we promoted wind energy with a generation-based incentive for every unit that somebody would generate. We promoted solar energy by forcing it down the throat of state DISCOMS, and therefore, we could never go beyond 2,500 MW of solar energy in nearly 32 years or 30 years. I think the Renewable Energy Ministry, first as a department and then as a Ministry who had run for 32 years before I came on board. 2,500 MW of solar power, LEDs was almost non-existent in the country.
A government company was selling some 600,000 bulbs in a whole year, because subsidies in each of these cases was becoming a limiting factor. It’s like somebody asking me what is my budget for R&D, when I was a Minister in my first few days, I said I have no budget for R&D. The audience was shell-shocked. They said this guy must be an idiot, even if he doesn’t have a budget for R&D he shouldn’t say it. Because that’s the flavour of the world –R&D, innovation. But I truly meant that I have no budget, because budget is a constraint. I don’t want to constrain my R&D efforts. I don’t want to restrict my efforts to promote new technology, to help the scientific community innovate.
Similarly, subsidy becomes a constraint. I remember when we were working on the electric vehicle programme. And I am just giving these examples, ladies and gentlemen, to try and take your mind away from the current thinking of financing. Innovative financing doesn’t mean you add a subsidy to a programme and that’s the only way we will be able to work through or progress in that. The electric vehicles were getting a subsidy, but then the subsidy means how much the Ministry of Finance gives every year in the budget, then over the course of the year how much do you actually get cashed out. You may not necessarily have the whole budget by the end of the year, and therefore, that will become the restricting factor for growth in any sector.
But you remove subsidies from LED bulbs, and you can scale it up massively after that, because then there’s nobody stopping you from larger rollouts. You scale it up nearly 300 times in less than 18 months. You find prices fall by 87% and in two and a half years you met a target which was to be done in four years. You saved 80 million tonnes of carbon emissions annually. You saved the consumers of India about 6.5 billion dollars of annual energy bills.
All of this is possible because you didn’t put a subsidy on the programme. You didn’t get government to interfere with some concessions, tinkering. It’s a lesson actually that very renowned management Guru gave me during the turn of the millennium. A little story around that, I never knew, I have never become a Railway Minister, but I got this management lesson on a train. As the millennium turned from 1999 to 2000, we took that 7-day train journey in the Orient Express or Palace on Wheels or something, which goes to Rajasthan and all the tourist places. There was a train packed with professors from all the universities around the world. I was the only odd man out.
And Sumantra Ghoshal, I don’t know if any of you recall him, somebody who has worked 13 years in an oil PSU in India. And I am only saying this because I genuinely believe the government companies have some of the finest talent who doesn’t get an opportunity to really express himself or come out with the best in him, goes to London, does his PhD in strategy, and then becomes a management Guru who I had at one point of time hoped would get a Nobel Prize for India, but unfortunately passed away at a young age. And his one lesson to me amongst two, and I won’t get into the second, the one lesson that has held me in good stead is ‘if you want to be successful in any programme,’ and I was with the private sector at that time, ‘keep the government out, don’t depend on the government, that’s the sure way you can be successful in any programme that you do.’
And to my mind, all my experience of 30 odd years in the private sector, and now three and a half years in government, he’s right. He was absolutely spot on. The moment we look at government only as a facilitator, and which role we certainly need to do, which is our responsibility, which is what this entire World Food India programme is all about. As long as government also doesn’t become an impediment to your work, facilitator chalo comes later, the first part is we don’t become an impediment in your work. So, we don’t regulate you beyond a point, we don’t bottle you up, tie you up in knots. Many people say even if you do that much it’s good enough, we don’t even need your facilitation.
But, truly to my mind, if we can work as partners, engage as partners to understand what is it that you need from the government which can help this industry prosper, stand on its own feet, scale up. And with economies of scale, with introduction of modern technology, with innovative ideas help to make this truly the harbinger of growth for India and help a large part of the country, nearly 50-55% of the population largely dependent on agriculture or related activities come up in life. As they say, many of us, or at least almost all of us in this room have possibly boarded the train and we have passed the signal. We still have a lot of people back there who have not yet boarded that train. We need to help them come up in life. We need to help them get a better future for their children.
And in that sense, I will just venture to suggest 4 or 5 possible thoughts about financing food processing, which may be of interest to you; I am no great expert on the industry. But I am just going by the basic first principles of any business, and in that I think what we would really need to do is to think intelligently of what are the products that India is more suitable to work on. We need not do any or everything on earth. There may be some products where we are not economically viable and we may be able to actually help our farmers come out of some products and look at more value added products and then facilitate through our intervention that product’s success story.
After all, at some point of time when the green revolution was proposed, while there was a need to make India self-sufficient, it was also recognized that with the Canal system, the irrigation coming into Punjab, Haryana, with the fertile soil over there we can actually expand our production hugely and we were successful in that. Second, we should not be satisfied with numbers. Every time we see a presentation on any discussion, I find we take a lot of satisfaction that we have grown 2x, we have got returns 4.4x – one of your investors, I don’t know, I would love to meet him. I would probably put my money with him. Not Rabo, is it?
But, I think we shouldn’t rest on the laurels of numbers. This 10% growth in agro-processing, or 20% or 8% in finance, credit, frankly doesn’t impress me at all. We have to look at a quantum jump. And that quantum jump is what will help this industry really make good returns, good profits. For example, look at what Amul did. Amul changed the dynamics of milk processing in India. But I just can’t for the life of me understand why we can’t do more than what Denmark does, for example, or the overall the Scandinavian countries.
For any of you who are interested, politically it may not be the wisest thing to say and I would request the media to keep it off the record – but what has been done in Baramati for example, Mr Sharad Pawar’s constituency, former Agriculture Minister, is truly remarkable in terms of how he has engaged with the farming community and taken value addition to the highest level, literally to make it an export hub internationally, goods going from India all over the world.
We need to really scale that kind of thinking up with the country. I remember the other day I was talking to my railway officials and I have been trying to push them to expand refrigerated vans and increase the ability of farmers to take his produce countrywide with a twin objective that farmers get more income, and there’s price stability across the country through the year. So, unfortunately, when there’s onions, there is so much of it that Lasalgaon, Nasik will be throwing onions literally onto the streets and would have to sell their onions at Rs 1-2 a kilo. I think it happened with potatoes recently. And then you suddenly 6 months later have a huge shortage and the price could skyrocket, some of it also for illegitimate gains maybe.
So, when I asked them why can’t we expand, why can’t we plan that when it’s the onion season, Nasik is going to take out refrigerated vans which go through the length and breadth of the country, all directions. Either store in Nasik if it’s possible or ideally store across the country in different places. It’s something somehow nobody has ever thought about. And it’s so elementary, so logical. Or when I talked to the honourable Chief Minister of Jammu & Kashmir last week about apples coming out of Kashmir, delicious apples, I remember all our youth we have enjoyed the taste of those really-really good ones coming in from Kashmir. It pains me when I have to take off the sticker from an apple when I eat one in my home in Mumbai today and then when you read the country of origin, sometimes it really puts off your ..(Inaudible).
Can we not have apples going in from there, maybe we don’t have a train connect all across Jammu & Kashmir, but maybe drive in to the nearest point, take it across the length and breadth of the country. He gets a better income. There will be a little storage cost or transport cost, but we will make sure that right up to Kerala and with the railway network going all over the country, we can have price stability 12 months in the year.
But it will need scaling up. These things won’t work with the small scale, and it will need some risk taking, which is where possibly you all could devise first loss guarantees or better insurance assistance, better education of the farmers in terms of his ability to get a price, financing as you just mentioned on railway receipts, transporter receipts, warehouse receipts. We could look at the futures market once again to see where it could be misused and where it was a sobering influence on the market. It’s a debate that I think has not yet found a final resolution.
Does the futures market actually damage the farmer’s interest, causes turbulence in pricing, and at the time when the farmer thinks he is going to get a better price, they can just kill the price through derivative trading. Or whether that can help to stabilize the prices, I think the jury is out on that still. But we can study whether we can create a model where by anticipating or by data mining or using past data, one can come across a certain price point, work backward and try and bring stability across the country in finished product pricing. Not the kind of stability you have on potato chips though, where a Rs 2 kilo potato becomes Rs 200 kilo potato chips. And I was told Walmart’s cost of raw material is less than 5% to the finished product that they sell.
I think probably a country like India will not be able to digest that. And in some sense, it may be useful for those of you who are interested and I am not standing here to promote one company or the other, but since I saw that photograph of the khichdi in the papers. Baba Ramdev’s Patanjali model actually finds resonance with the Indian capability to spend and possibly even their needs or demands. And it’s giving all the multinational companies a run for their money, just because he’s been able to bring down price points and the differential between the base material and the final product by, again, economies of scale, a better supply chain across the whole country and maybe lesser royalties to pay out to companies in Netherland or London or UK, and possibly also lesser profit margins, I don’t know. But I believe that wherever he procures from, he ensures that the farmers get good quality seed, they get all the inputs that helps them increase their productivity, gives them market intelligence, assures output being lifted by his company.
So, if we are able to actually create the entire value chain, you will be able to get far more confidence back into the system, a good food processing company can possibly borrow at today’s price, maybe 9-10% very comfortably, a good company with good financials. Whereas a small processor would land up paying 14-15%, but if the larger company becomes the facilitator to give quality seeds, help analyze the soil health card which we have almost by and large taken across the nation and all the farmers are being given a card which shows the quality of his soil, what kind of nutrients it needs. They don’t pump in too much urea into it necessarily. Irrigation, the drip irrigation or Maharashtra’s model of Jalyukt Shivar where the Chief Minister came up with a model to create small ponds, and a pond at Rs 50,000 gives him an ability to survive even if there is only 3 days of monsoon in the whole year.
These interventions actually if done by the parent company can not only help farmer increase his produce, but bring stability to the cost of inputs for the food processor also. So, I think the time has come where food processing goes to the farmers, engages with the farmers, actively engages with the farmers, becomes a teacher to the farmer, brings in technology at the farm level.
As Power Minister, we had brought in a proposal that we will replace all the agricultural pumps of the farmers free of charge and the savings in electricity – and you know electricity to the farmers is usually highly subsidized and rightly so – savings in that subsidy on electricity or the waste of electricity because of a modern efficient pump compared to these age-old 30-40-year old many farmers are forced to use for lack of capital to change, the savings in 5-7 years would pay for the new pump. He would get a pump which he wouldn’t have to tinker with for 4-5 years. He would conserve water, so water table would not go down.
Look at the multifarious dimension of a project like this. Similarly, if we were to guide the farmer not to feed in too much urea but balance the nutrients that go into his farm, not just attracted by the cheaper urea that’s available, but focused on output productivity, we would actually not only be doing a service to the nation, but helping the farmer increase his income, bring in better quality produce. Organic farming – that’s something India should be at the forefront in the world. Sadly, even on that score we are not yet, I would say, in mission mode.
It may be great if some of the companies would think of promoting organic farming and kind of making it like a contract process. I just met day before yesterday a gentleman, and we have just had Gurpurab yesterday, so he was a Sardar who met me 2 days back. He started in Uttar Pradesh with a small model of 300 acres last year where he brought together the farmers and in Uttar Pradesh the farm’s size with land fragmentation has come down to in many cases as low as .2 acres/.5acres. Obviously, they cannot introduce technology and good practices. Instead of getting into the contract farming model, officially taking over the farm or creating a cooperative, which sometimes can be misunderstood, all he did was assured the farmers that I will pick up your entire produce and he funded all the inputs that went into the farming.
So, the farmer didn’t have to bother about bank loans or any all of that. Maybe his cost of funds may have been 9-10%, farmer would have got it at 4% or in many cases even less than that. But that differential of Rs 50,000 or Rs 1 lakh, which is just about a 1000 or 15oo dollars, did not impact the costing of the produce so much as the fact that he got better quality seeds, he was able to multi-crop, instead of just doing sugarcane, I think he did sugarcane and potato or some combination of crops. I don’t recall what he told me. He ensured there was an insurance backup which helped in any event of.. and we have the Pradhan Mantri Krishi Bima Yojana under which 100% of a potential loss can be covered, the first time ever in India. And he said farmers’ income has increased on a per acre basis to about 1 lakh or Rs 1.25 lakhs to an acre, which is something not imagined very easily in this system. But that’s because he clubbed his financing with insurance, with an off-take of the produce that comes in, on the backend of it he’s helped young entrepreneurs set up processing.
So if you are going to have a large bovine population and we have milk collection centres distributed across different clusters or villages transporting it through a small refrigerated van to a processing centre, may be at the panchayat level, or maybe at the district level, you can actually have 500/600 Amuls working in India, bringing down the cost of milk which is very important ingredient for our children, particularly, considering that we want to eliminate malnutrition in the country.
And we need not necessarily always look for very fancy, high-end solutions. We need to tailor-make these solutions, which is where innovation in our young scientists and young boys and girls can help us devise new mechanisms. But in that same potato chip, instead of a add-on from Rs 2 a kilo to 100 or 120 or Rs 200 a kilo, could change from Rs 2 a kilo to, maybe Rs 6 or Rs 5 a kilo, or even Rs 4, anything beyond that and the end product could come down, imagine the way we could scale this industry up in a big way. The potential could be humongous.
I mean at Rs 100 for that small packet, I won’t take a name somebody will allege that I am anti a company or the other. But you know paying for a 100/200 grams whatever we must be paying, I don’t recall now, maybe 30/40 bucks or whatever. And against that the good old wafers that we used to take to school in my young days, I don’t know if any of you is from Mumbai, but there’s was an Okay Wafer in Mumbai at Tardeo or somewhere. I think it’s still there because it used to be, it’s owned by Boman Irani’s family, the famous film star, the 3 Idiots guy. I mean he’s not an idiot. But we were sharing a stage and he was introducing himself to me and he said I am a Mumbai-born from Tardeo, I ran a wafer shop.
But the taste of that wafer, frankly, if you ask me I still believe that was better than what we take from this packaged food processed industry today. What we need is more indigenous solutions, but maintaining quality standards, ensuring that safety is not compromised, ensuring sustainability so the packaging can be more better designed to be bio-degradable or to be at least reprocess able.
If we take a holistic approach, then I think that financing which we do whether as credit, as venture capital, private equity funding, whether as equity promoter funding, in this holistic context, packaged with input support, output guarantees, first loss guarantees, insurance, sustainability – when all of these come together and we formalize the agricultural business, which for centuries in India somehow has remained outside the formal sector. We have made an effort to bring in formalization in this sector also post demonetization. We have had some success. We will continue to make effort to bring that into the national mainstream – digitization, formalization of the sale produce of the farm.
You know, actually, many times farmers also don’t understand the impact of formalization. A – usually bankers have a limit that per acre we will give you Rs 60,000, but if the farmer would formalize his sales, digitalize his sale and if his sale was actually Rs 2 lakh on that acre if he made a value added product and it was recognized in the bank as such, it would still remain tax free. There is no tax on that, but then the banker who is any case wanting to lend to agriculture, it’s priority sector, it helps him fulfil his targets, if he sees a Rs 2 lakh sale coming in year on year, he will happily lend more to that farmer, and all of that will help the farmer then further grow, increase, expand.
Similarly, with formalization, the value of his land holding goes up. Because if a farmer earns Rs 2 lakh in an acre, Saket Mishra will be happy to value that land and give him a good valuation story. So, I think along with working on innovative financing, formalization of the economy is equally important. Of course, there is a downside to formalization. With the model code of conduct, I can’t be very explicit, but the downside is that a person cannot then also fudge his records that you have an income of Rs 2 lakh every year from farming and then you suddenly decide to say that, no since it’s tax-free, and I can convert cash into official money, let me declare my Rs 2 lakh income into Rs 200 lakh income every year.
Formalization has the downside, for maybe if you misguided individuals but it has the upside of really transforming the sector, bringing it into the national mainstream. And to my mind, if we all work together, we can actually transform this sector, not at the rates that we are discussing today, not at the 8-10-12-15% growth rates and drawing satisfaction from being better than the rest. But as we plan the New India of 2022, as we look at doubling farmers’ incomes by 2022, as we look at ensuring quality life for every citizen of India by 2022 – shelter, 24/7 electricity, clean drinking water, good healthcare, good education, mobility – to my mind, there can be no more important and more transformational initiative than the effort that is kick-started by my colleague, Harsimrat Kaur Badal. She has brought Indian food processing industry at the centre stage and it has received attention across the world today.
I believe this entire transforming of the food economy exercise that is sought to be done will bring fire in the belly for many of us. And I would urge each one of you, particularly, those from the finance world to look at a scale which is no less – and why I am going to say this is because in your figures you added beverages, actually if you remove the beverages then our food processing is very-very nascent. I am told the bank credit other than beverages would possibly be only $10 or $12 billion, some figures suggest only $9 billon – Rs 60,000 crores.
But I don’t know the statistics, that’s for the bankers to know and tell. But to my mind, and many of you may laugh but that’s how I have done my work all through so far, to my mind, we should look at an industry where we can create different models of finance, different models of business and income generating, profit-making models, to scale-up food processing 10x in the next 5 years. And if we keep that kind of a ambitious goal ahead of us, a 10x growth in the food processing sector in India, truly, we will become the drivers of the growth engine of the economy and we will become the New India of 2022 – a dream that my Prime Minister and your Prime Minister Mr Modi is very passionate about and a dream that I think 1.2 billion Indians are living, day in and day out.
My best wishes to all of you.