What ails cotton industry in Maharashtra

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Cotton farmers commit suicide in Maharashtra but prosper in Gujarat, PM visits Vidharbha, announces sops yet suicides continue. Cotton farmers commit suicide in Maharashtra but prosper in Gujarat. The prime minister visits Vidharbha and announces sops, yet the suicides continue. Both states accounted for roughly the same proportion of the country’s production in 1991-92 (Gujarat was 12.7 per cent and Maharashtra was 10.5 per cent). While Maharashra’s share has increased only marginally in the period since, to 14.8 per cent in 2005-06, Gujarat’s share is up three times, to 36.5 per cent; Maharashtra’s area under cotton has grown just marginally, Gujarat’s has nearly doubled; and Gujarat’s yield is more than three times that of Maharashtra.

The article covers working of Cotton Monopoly Scheme (CMS), its impact, reasons for cotton production stagnating in Maharashtra and Gujarat’s success, yields in these two states, Crop Insurance scheme, Vaidyanathan Committee Report on working of cooperative banks and Cotton Corporation of India’s role.

1. Working of CMS: In 1971, when Garibi Hatao and nationalization were the flavor Maharashtra launched the CMS. Its aim was to capture the whole economic value for the farmer ie from growing cotton to selling finished cloth. It proposed to do this by helping farmers get a fair price for their produce, make available unadulterated cotton to consumers at reasonable prices, produce textiles and distribute bonus (profit on operations) to farmers. Therefore, the CMS allowed politicians to control the state’s cotton industry.

It was in 1984 that the state government set up The Maharashtra State Coop Cotton Growers Mktg Fed Ltd (MSC), an Apex cooperative society. It administered the CMS for the state government and was responsible for procurement, processing, storage and sale of cotton. Under the CMS cotton produced in the state had to be pressed within the state only.

MSC purchased cotton from farmers at a minimum support price (MSP). Payment was in installments and often delayed due to non-availability of funds. At the time of payment the Kharidi Vikri Sangh (sub agent of MSC) deducted loans taken by farmers from co-operative banks (up to a maximum of 50% of payment) and paid the balance. MSC entered into conversion contracts with G&P units and then sold cotton in the open market. Since only MSC units could buy cotton in the State entrepreneurs were compelled to set up G&P units in border towns of adjoining states e.g. Burhanpur in Madhya Pradesh. Thus cotton was illegally sent out to other states. As a result Value Addition took place outside the State with adverse impact on employment/economic activity. 

Since each cotton procurement center was managed by a Grader (responsible for procurement, weighment, grading etc) he became powerful and extracted bribes from farmers.  According to an ex senior official of MSC, graders commanded the highest dowry in their village for obvious reasons. At 100% levels for the period 1985 to date losses from shortages were Rs 738 crs.

Under CMS cotton traders gave way to ‘Kheda Kharidi wale’ (KKW). Some KKW supplied inputs to farmer, at times induced demand for inputs and became moneylenders too. To avoid dealing with Graders and deduction of loan referred to above numerous small farmers (holding of app 8-10 acres of dry land) preferred to sell their produce to KKW at a discount to MSP. Interlocking of inputs, credit and output reduced transaction cost for the farmer but adversely affected his bargaining power.

Also, the Managing Director of MSC was mostly an IAS officer, with short stints at that. None of which was designed to make learning the trade either possible or necessary for them.

By virtue of being a cooperative MSC could only borrow from a cooperative bank in this case Maharashtra State Coop Bank. The bank lent at 15-17% and earned interest of nearly Rs 1,800 crs during a 30-year period. It was only after 2004 that MSCC got loans from nationalized banks at interest rates of less than 9%.

2. Impact of CMS on state finances & production: The scheme worked well till 1993-94 when Politics took over.  See table.

Year

Loss Rs crs

2004-05

1620

1999-00

913

2001-02

861

1998-99

623

1995-96

515

1996-97

383

Cumulative Loss till 31/8/06

5728

Loss was funded by loans from the State government Rs 4,678 crs, Mumbai Metropolitan Region Development Authority (MMRDA) Rs 596 crs and balance through internal accruals. As the State’s fiscal condition worsened it stopped funding MSC.

The Scheme had a negative impact on state’s cotton production. See table. 
 
                                                           India                                                     Maharashtra

2005-06

2000-01

1996-97

1991-92

2005-06

2000-01

1996-97

1991-92

Cotton production lakhbales of 170kgs

244

140

178

119

36

18

33

12.5

Yield kgs/ hectare

468

278

331

266

212

101

182

79

% India production

14.8

13.0

18.5

10.5

Source: Confederation of Indian Textile Industry.

From the table you can see that yields are less than 50% of national average, production has hovered around 33 lakh bales during the decade starting 1996-97. Since growing cotton was not financially rewarding area under cultivation has stagnated at app 30 lakh hectares between 1995-96 and 2005-06.  If things were always that bad why did the British develop an extensive rail network in Vidharbha’s Amravati district so they could ship cotton to Manchester.

Today CMS is virtually redundant. Market play has resumed. Farmers sell their produce to the best bidder. Any entrepreneur can set up a G & P unit.

3. Why did cotton production in Maharashtra stagnate?

• Since MSP guaranteed under CMS was higher than market price and only G & P units in the state could buy cotton from MSC there was little incentive to improve quality for farmer & units alike. At peak there were app 736 units of which 300 were cooperative societies.
• G & P units in the unorganized sector had trash wastage of 4-5% while the figure for modern units was 2-2.5%. This resulted in lower realization for MSC.
• 3% of the cultivable land is fully irrigated as compared to 40% in Gujarat. 
• Non-implementation of large irrigation projects in Vidharbha area. Instead of the Rs 6,000 crs odd loss on CMS the state government could instead, have constructed 100 Kolhapur type Bandhara dam (medium type dam) at a cost of app Rs 60 crs each. It would have irrigated 25 lakh acres or 33% of area under cotton cultivation.
• Also money sanctioned for irrigation projects lie unutilized. In 1999-2000 both NABARD & Ministry of Agriculture contributed Rs 100 crs each to create a Watershed Development Fund. Corpus stands at Rs 579 crs today of which only Rs 30 crs is disbursed. Since the scheme was part grant part loan State govts were not keen to avail this facility. It is only after over 1000 suicides and the PM’s recent visit was NABARD asked to develop 15,000 hectares in six districts of Vidharbha through a grant of app Rs 9 crs per district. 
• Maharashtra govt was too busy with the CMS to create a brand for its produce unlike Gujarat where Shanker6 is known worldwide and commands a premium for its consistency/quality/luster.
• Inadequate extension service that could have advised farmers on modern cultivation practices e.g. excessive use of urea damages crop.
• Lack of entrepreneurial spirit amongst farmers and supply of spurious inputs.
• Use of a larger % of desi cotton that has lowers yields compared to BT cotton although usage levels are up today.
• Declining role of formal institutions in providing credit resulted in reliance on informal sources at higher interest rates.

Once the cotton policy in Maharashtra stabilizes the ill effects of the CMS would gradually get undone.

4. Comparing yields in Maharashtra and Gujarat?

The table below shows that production & productivity in Gujarat have leapfrogged!                                           Source: Confederation of Indian Textile Industry.

Both states produced about 34 lakh bales of cotton in 1996-97. In 2005-06 yield and production in Gujarat was 2.5 times that of Maharashtra.

5. What did Gujarat do right?  

• Cotton is bought, processed & sold at market prices.
• By nature the Gujarati farmer is an entrepreneur.
• Industry sources indicate that average landholding in Gujarat 6-10 hectares, % fully irrigated land is app 40%. Corresponding numbers for Maharashtra is less than 1 hectare and 5%. Note, “Also water levels across the state have gone up due to large scale rain water harvesting by the construction of thousands of check dams. It is a people initiative supported by the Government”*.
• “Bt technology and the rapid adoption of Bt technology since 2002 on an informal basis with better adapted varieties as compared to other states, fairly good cotton prices and shift in area from groundnut to cotton”. *
• According to industry sources app 80% of the area cultivated in Gujarat is with Bt cotton ie 8.3 lakh hectares. Benefits are many. One they are resistant to pests particularly Bollworm. Comparing the two states an IIMA study@ states that in irrigated land yields go up by 35% to 3,176 kgs/hectare, profit increases by 75% to Rs 32065/ per hectare for Bt cotton as compared to non Bt cotton. The same study took a sample across Maharashtra, Gujarat and Andhra and found a 24% reduction in pesticide cost, Rs 1772/ per hectare.  It found that the Gujarati farmer spends Rs 4,649/ on fertilizer vs. Rs 7,116/ per hectare in Maharashtra. (w.r.t Bt cotton).  This made cotton cultivation in Gujarat profitable.
• A larger number of Ginning & Processing (G&P) units modernized due to subsidy received under the Cotton Technology Mission. Total disbursements up to 31/10/2006 were Rs 182.30 crs of which Gujarat received Rs 45.84 crs and Maharashtra Rs 25.30 crs.
• With a larger number of G & P unit’s cotton produced gets processed in Gujarat meaning Value Addition is in the state. 

6. Crop Insurance: is provided by Agriculture Insurance Company of India Limited (AICI) under the National Agriculture Insurance Scheme. For farmers in Maharashtra who take bank loans loan amount is the sum insured, for others it up to 150% of assured yield. Local banks sell policy. Insurance premium for cotton is calculated based on the Area Approach ie the entire state of Maharashtra is one area. Conversely payment of claims is made based on Revenue Circles. There are 738 revenue circles in the state. At end of season average production for last five years multiply by level of indemnity gives you Guaranteed Yield. Thus the difference between guaranteed less actual production is paid to the farmer irrespective of his actual output. Shortcomings are-  
1. Premium is same throughout the state, not adjusted for difference in soil conditions etc.
2. At 80% level of indemnity premium is 13.05% on a threshold value of Rs 7,176/. In February 2006 the state government agreed to provide a subsidy (Vidarbha’s six districts) of 75% for small & marginal farmers, 50% for others.
3. Farmer awareness about the scheme is low.  
4. In times of drought taking five years average production for calculating guaranteed yield affects the farmer adversely if crop has failed for say 3 out of 5 years.
5. The scheme’s performance can be judged from this table. 

                   All Nos in Lakhs

Kharif

Nos of Farmers

Area Insured in Hectares

Sum Insured

Premium as a % of sum insured

2000

7.1 (2.2)

10.7 (5.7)

53111

3.8 (5.0)

2003

2.7 (1.7)

4.3 (3.4)

22885

6.1 (7.8)

2006

1.9 (0.3)

2.0 (0.60)

13877

12.2 (14.1)

Figures in brackets are for Gujarat.

• Area insured as a % of land under cotton cultivation is only 6.5% in 2006.
• Cost of premium in both states is over 13%. When combine with interest rate of say 13% total cost make it unaffordable for the farmer.
• Till 2002 it was mandatory for every farmer who took a loan to get crop insured. That could be one reason why nos of farmer covered dropped from 7.1 to 2.7 lakhs in 2003.
• Figures for Gujarat (in brackets) show that the insurance coverage is very low there as well. Only 30,000 farmers took insurance cover.

In order to make the scheme effective AICI must determine premium revenue circle wise.  This could increase premiums in a revenue circle and decrease it elsewhere. Government could then subsidize circles where premium is high so the subsidy is well targeted. Instead of five years average referred to above average production of past ten years to be considered or take highest production of 5 out last ten years. Lastly the Government must increase awareness about the program. Local banks could piggyback rural promotional activities of FMCG cos or use freelancers to sell these policies.

7. Rural Credit: Lack of adequate credit forces the farmer to borrow money from informal sources at high rates of interest. The Vaidyanathan Report on Rural Coop Banking and Credit Institutions found amongst others-
• Accumulated losses of all co-operative banks till 2002-03 was Rs 9,277 crs. 
• That ineffectiveness of rural credit system was on account of state governments influencing management/norms of credit and governance of cooperatives.
• Erosion in their financial health was due to the 1989 scheme where the Central Government wrote off coop-bank loans.
• Degree of professionalism needs to be brought into the working of primary co-op banks.

Based on the above report NABARD is the implementing agency for revival & reform of co-op banks. States who agree to implement legal & institutional reforms in a phased manner (over three years) to sign an MOU with the Central Government and get financial assistance. So far nine State governments including Maharahstra have signed MOU. The Banking Regulation and Coo-operative Societies Act have to be suitably amended to empower RBI. It is hoped that the revival package would serve the credit needs of rural India esp. small & marginal farmers. The key is Implementation.

8. Cotton Corporation of India (CCI): The state would do well to take lessons from the Cotton Corporation of India (CCI), which is the equivalent of Maharashtra’s MSC. CCI:

• Administers the Cotton Technology Mission. As part of the mission it provides G & P units subsidy of 25% of modernization cost up to a maximum of Rs 12.5 lakhs, if units use automatic press then Rs 7 lakhs, if new grading laboratory then Rs 4 lakhs.
• Conducts Front Line Demonstrations on production technology whereby it demonstrates to farmers how cotton should be cultivated on a one acre plot and holds kissan melas, farmer’s field schools etc. 3,700 demonstrations are held so far.
• Plays a supportive role in Contract Farming. It recently started Contract Farming in Vidharbha. The way it works is that an informal association of farmers represented by select farmers signs a tripartite MOU with CCI and the textile mill. While various structures exist broadly the mill provides farmer with inputs conducts demonstrations and agrees to buy produce normally at a premium of 5-10% of prevailing market price. This way the farmer focuses on production & quality and mill is assured of pure unmixed cotton.

Invest in creation of assets rather than doling out subsidies should be the mantra. End of Matter

@ The Adoption & Economics of Bt Cotton in India,

September 2006: Vasant Gandhi & N.V. Namboodiri.

*Prof Vasant Gandhi, Professor, IIM A The author is CEO Surya Consulting.

An abridged version of this article appeared in the Business Standard on 2/2/2007.