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Crop diversification and risk management in Indian agriculture

April 2016
DECISION 43(2)

DOI:10.1007/s40622-016-0129-1

Authors:

Ashwini Chhatre

Indian School of Business

Sripad Devalkar

Indian School of Business

Sridhar Seshadri

University of Illinois, Urbana-Champaign

The narrow dependence on paddy and wheat cultivation along with incentives such as free electricity and water has resulted in overuse of pumps and significant depletion of ground water resources in Punjab. Stagnating yields and soil degradation due to intensive cropping pose a significant threat to long-term agricultural productivity in the state. In this paper, we focus on the farmers’ decision-making process and identify policy changes that are required to incentivize farmers to cultivate a diverse portfolio of crops and reduce dependence on paddy and wheat. Using data from four representative districts of Punjab, we quantify the impact of introducing alternate crops on the farmers’ profitability. Our analysis shows that incorporating horticultural crops in the mix increases net expected returns from cultivation for all land size classes. We also find that including alternate crops reduces water usage by up to 30 % for most farmers, while increasing the labor and working capital requirements. We also examine risk factors—price, labor, credit and yield risk—that might be contributing to the status quo and suggest risk mitigation strategies to promote crop diversification.

ncome effects of alternative crops. a Comparison of total net income between paddy/wheat rotation and alternative specifications. b Comparison of net income per hectare between paddy/wheat rotation and alternative specifications

…

Effect of shift to alternate crops on working capital (including input costs and hired labor). a Comparison of total working capital between paddy/wheat rotation and alternative specifications. b Comparison of per hectare working capital

…

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1 23

DECISION

Official Journal of Indian Institute of

Management Calcutta

ISSN 0304-0941

Volume 43

Number 2

Decision (2016) 43:167-179

DOI 10.1007/s40622-016-0129-1

Crop diversification and risk management

in Indian agriculture

Ashwini Chhatre, Sripad Devalkar &

Sridhar Seshadri

1 23

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RESEARCH PAPER

Crop diversiﬁcation and risk management in Indian

agriculture

Ashwini Chhatre .Sripad Devalkar .

Sridhar Seshadri

Published online: 15 April 2016

Indian Institute of Management Calcutta 2016

Abstract The narrow dependence on paddy and

wheat cultivation along with incentives such as free

electricity and water has resulted in overuse of pumps

and signiﬁcant depletion of ground water resources in

Punjab. Stagnating yields and soil degradation due to

intensive cropping pose a signiﬁcant threat to long-

term agricultural productivity in the state. In this

paper, we focus on the farmers’ decision-making

process and identify policy changes that are required

to incentivize farmers to cultivate a diverse portfolio

of crops and reduce dependence on paddy and wheat.

Using data from four representative districts of

Punjab, we quantify the impact of introducing alter-

nate crops on the farmers’ proﬁtability. Our analysis

shows that incorporating horticultural crops in the mix

increases net expected returns from cultivation for all

land size classes. We also ﬁnd that including alternate

crops reduces water usage by up to 30 % for most

farmers, while increasing the labor and working

capital requirements. We also examine risk factors—

price, labor, credit and yield risk—that might be

contributing to the status quo and suggest risk

mitigation strategies to promote crop diversiﬁcation.

Keywords Indian agriculture Agricultural supply

chains Crop diversiﬁcation Risk management

Introduction

Post the green revolution, farmers in Punjab and other

parts of India moved to cultivating high-yield varieties

of paddy and wheat. Their efforts have been successful

to such an extent that India went from marginal

surpluses or deﬁcits in food grains to a substantial

surplus in a matter of a decade. The change in cropping

pattern was supported by various government pro-

grams, such as the provision of subsidized inputs

(fertilizers, pesticides, electricity, water) and procure-

ment support for output (minimum support price

programs for paddy and wheat). The trend continues

long after the green revolution. For example, the gross

cropped area under rice and wheat in Punjab was 77 %

in 2001. According to the Agricultural Census of

India, 81.5 % of the gross cropped area in Punjab was

under the cultivation of rice and wheat (37.4 % under

rice during the Kharif season, 44.1 % under wheat

during the Rabi season) in 2011.

The success has come at a cost. The excessive and

narrow dependence on paddy and wheat has led to

rotation patterns that can result in several associated

A. Chhatre S. Devalkar S. Seshadri (&)

Indian School of Business, Hyderabad 500 032, India

e-mail: sridhar_seshadri@isb.edu

A. Chhatre

e-mail: ashwini_chhatre@isb.edu

S. Devalkar

e-mail: sripad_devalkar@isb.edu

http://agcensus.dacnet.nic.in/StateCharacteristic.aspx, last

accessed on Nov 30, 2015.

123

Decision (June 2016) 43(2):167–179

DOI 10.1007/s40622-016-0129-1

Author's personal copy

socioeconomic and environmental problems. One,

paddy and wheat are water-intensive crops. In addi-

tion, the provision of free electricity and water

combined with uncertain power supply has resulted

in over-use of pumps for irrigation. Some observers

even suggest that farmers tend to over-irrigate their

farms (Oweis and Hachum 2006). This practice has

resulted in signiﬁcant depletion of groundwater

resources—110 out of the 137 blocks in Punjab were

classiﬁed in 2013 as ‘‘over-exploited’’ (Committee for

Formulation of Agriculture Policy for Punjab State

2013). Two, yields for both rice and wheat have been

stagnating over the last two decades, while the cost of

inputs has been steadily increasing. The inputs include

seeds, fertilizer, pesticides, agricultural labor and

credit. Migrant labor is used in most parts of Punjab

to meet the growing demand for seasonal workers

(Singh 1997). Three, intensive cultivation practices

without crop rotation to preserve the soil have led to

soil degradation such as increase in salinity, and

extensive waterlogging across Punjab. This has

resulted in loss of valuable agricultural land and poses

a signiﬁcant threat to long-term agricultural produc-

tivity for the state (Scherr 1999).

The Agriculture Policy for Punjab 2013, formulated

by the state government of Punjab, aims to address

several of these issues by incentivizing farmers to

increase the area under cultivation of alternate crops

that are less water intensive (Committee for Formu-

lation of Agriculture Policy for Punjab State 2013).

For the policy to be successful and for farmers to

diversify their cropping practices, policymakers need

to directly address factors that affect the farmers’

decisions. For the changes proposed to be accept-

able and to be implemented successfully, the policy

changes should ensure that the farmers are not left

worse off and ideally are better off after adopting these

new practices. The policymakers should also address

the incentives that currently encourage farmers to

focus exclusively on paddy and wheat cultivation.

Ideally, the four stakeholders, farmers, workers,

consuming public and taxpaying citizens should be

better off.

The focus of this research is to primarily understand

the farmers’ decision-making process, identify policy

changes that are required to incentivize farmers to

diversify their crops, and quantify the impact of such

changes on the income of farmers. We present some

arguments below that our suggestions are beneﬁcial to

all the stakeholders.

In this paper, we model the farmer’s cropping

decisions when subject to land, labor and credit

constraints. We use the model to understand the

implication of introducing alternate crops on the

farmer’s proﬁtability. Using data from four represen-

tative districts of Punjab, we ﬁnd that incorporating

horticultural crops such as cauliﬂower, onion, tomato

and capsicum in the cropping mix increases the net

expected returns from cultivation for all land size

classes. We also ﬁnd that including alternate crops

increases the labor and working capital requirements.

Furthermore, the water usage drops up to 30 % for

most farmers under the alternate cropping pattern.

Given the overall potential gains for all constituents,

the obvious next step is to look for factors that are not

included in the expected-value-maximization

model—factors that might be preventing the adoption

of crop diversiﬁcation. We, therefore, examine several

risk factors that might contribute to the status quo and

suggest risk mitigation strategies to promote crop

diversiﬁcation.

In the next section, we describe our model of the

farmer’s cropping decisions along with the data

sources used to estimate the parameters of the model.

In section ‘‘Sources of risk and uncertainty and supply

chain challenges for alternative crops,’’ we discuss the

results of our modeling exercise. In section ‘‘Risk

mitigation,’’ we discuss some factors that possibly

prevent a farmer from cultivating alternate crops in

spite of the fact that they provide higher returns

compared to paddy and wheat. We conclude in section

‘‘ Conclusion.’’

Model of farmer’s cropping decisions

We model a farmer as a rational decision-making

agent who makes crop-allocation decisions at the

beginning of each agricultural season. That is, the

farmer decides the amount of land to allocate to crop i,

with i=1, 2,…,n, where nis the total number of

crops available to be grown. The crops differ in their

price per unit, requirements of inputs and cost of

inputs. As the actual proﬁt from each crop is realized at

the end of the season, the farmer makes his crop-

allocation decisions in the face of uncertainty. We

168 Decision (June 2016) 43(2):167–179

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model the farmer as an expected-proﬁt maximizer and

use the mathematical program described in ‘‘Ap-

pendix 1’’ to capture the land, labor and working

capital constraints that the farmer faces while making

the decision.

Evaluation of alternatives using empirical data

from four districts of Punjab

We simulate the decisions of farmers that belong to four

land size classes: marginal, small, medium and large.

There is variation in terms of prices and suitability of

growing alternate crops in different parts of Punjab. To

account for this variation, we consulted experts in

cropping practice and decided to model decision-

making by farmers in four districts of Punjab, Amritsar,

Ferozpur, Ludhiana and Sangrur. These districts

account for roughly 33 % of the total irrigated area in

Punjab with wheat and rice as the predominant crops.

We use data from the following sources in our model.

Land size

District-speciﬁc average land holding for different

size classes is obtained based on data from the

Agricultural Census 2011.

The same land size is

taken for both rabi and kharif seasons for the

optimization procedure.

Labor and working capital

The labor and capital required for cultivation of

speciﬁc crops were taken from the database on costs of

cultivation of principal crops, maintained by the

directorate of economics and statistics under the

ministry of agriculture.

Working capital requirements

include the cost of inputs such as seeds, fertilizer,

manure, insecticide, hired labor and energy cost for

running pumps (typically, cost of diesel).

Yield and revenue information

Multiple other data sources provided information on

yields and prices, as well as public policies with

respect to price support and procurement. For exam-

ple, prices for various crops were obtained from the

database of wholesale prices maintained by the

ministry of agriculture,

yields from cost of cultivation

data and statistical abstracts maintained by the central

and state

departments of economics and statistics.

In particular, the selling price of alternate crops is

extracted from the local mandi prices for each of the

four districts. The price used in the optimization is the

average price over the selling season. For paddy and

wheat, we have used the market average price because

we found it to be above the minimum support price

(MSP) in all cases that we studied.

Appendices 1,2and 3summarize the results from

solving the mathematical program and show the

impact on net income and labor used for farming by

season, compared to the situation where the farmer

exclusively grows paddy and wheat. The tables also

summarize the alternate crops that the farmer would

grow (either instead of, or in addition to the staple

crops) in either season if he were interested in

maximizing the total expected income from farming.

Results of the optimization exercise

The results indicate that a portfolio of alternative crops

has higher net expected returns (116–384 %) com-

pared to the prevailing paddy/wheat rotation system in

every case—for each land size class in every district as

seen from Table 1and Fig. 1below. Table 1also

indicates that the total water consumed by the portfolio

of alternate crops is signiﬁcantly lower (29–50 %)

compared to the prevailing paddy/wheat rotation

system (except in the case of large farmers in Ferozpur

district).

In addition to paddy and wheat, several other crops

show up in the list of alternate crops that maximize the

net returns—onion, cauliﬂower, capsicum and tomato.

This suggests that the alternate cropping pattern is

sufﬁciently diverse to prevent a huge glut in the market

of the same product.

http://agcensus.dacnet.nic.in/statesummarytype.aspx, last

accessed on Nov 30, 2015.

http://eands.dacnet.nic.in/Cost_of_Cultivation.htm, last

accessed on Nov 30, 2015.

http://agmarkweb.dacnet.nic.in/SA_Month_PriM.aspx, last

accessed on Nov 30, 2015.

http://eands.dacnet.nic.in/Cost_of_Cultivation.htm, last

accessed on Nov 30, 2015.

http://pbplanning.gov.in/pdf/Statistical%20abstract%

202012.pdf, last accessed on Nov 30, 2015.

Decision (June 2016) 43(2):167–179 169

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The magnitude of increase in the expected income

and the variety of crops that a farmer could grow

suggest that there are signiﬁcant opportunities for

farmers to diversify into different crops. Therefore, it

is important to understand the factors that might be

preventing farmers from adopting these alternative

crops in sufﬁciently large numbers in the current

environment. In the next section, we consider some

potential sources of risk and uncertainty and supply

chain challenges related to cultivating alternate crops

and how they might affect a farmer’s crop-allocation

decision.

Table 1 Net income from growing only staples and alternate mix of crops (Annual Basis)

District Land size class Net income (in Rs.) Increase in net

income (%)

Decrease in

water use (%)

With only paddy

and wheat

With alternate

mix of crops

Amritsar Marginal 57,026 276,167 384.3 50.7

Small 122,825 594,821 384.3 50.7

Medium 489,546 2,315,316 373.0 50.7

Large 1,142,275 4,025,611 252.4 58.9

Ferozpur Marginal 100,816 436,625 333.1 29.7

Small 203,160 879,866 333.1 29.7

Medium 910,402 3,711,163 307.6 29.7

Large 2,381,405 5,957,969 150.2 5.0

Ludhiana Marginal 56,393 221,069 292.0 50.7

Small 121,462 476,148 292.0 50.7

Medium 511,875 1,919,068 274.9 50.7

Large 1,279,689 2,958,635 131.2 58.1

Sangrur Marginal 77,352 260,807 237.2 50.7

Small 174,934 589,825 237.2 50.7

Medium 684,264 2,234,624 226.6 50.7

Large 1,618,433 3,506,266 116.6 34.6

Net income, change in net income, and change in water use are obtained by solving the mathematical program used to model the

farmer’s crop-allocation decision

02,000 4,000 6,00002,000 4,000 6,000

Marginal S mall Medium Large Marginal Sma ll Medium Large

Amritsar Ferozepur

Ludhiana Sangrur

Paddy/Wheat Rotation Alternate Crops

Total Net Income ('000 Rupees)

Graphs by District

0200 400 600 8000200 400 600 800

Marginal Small Medium Large Marginal Sma ll Medium L arge

Amritsar Ferozepur

Ludhiana Sangrur

Paddy/Wheat Rotation Alternate Crops

Net Income per Hectare ('000 Rupees)

Graphs by Distri ct

Fig. 1 Income effects of alternative crops. aComparison of total net income between paddy/wheat rotation and alternative

speciﬁcations. bComparison of net income per hectare between paddy/wheat rotation and alternative speciﬁcations

170 Decision (June 2016) 43(2):167–179

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Sources of risk and uncertainty and supply chain

challenges for alternative crops

Consider the basic supply chain for agricultural

commodities as shown in Fig. 2.

Compared to paddy/wheat, the alternate crops are

subjected to considerable uncertainty and signiﬁcant

challenges at each stage in the above supply chain.

These could be attributed to

•Uncertainty in quality and availability of inputs for

alternate crops

•Availability of skilled labor and mechanization for

alternate crops

•Uncertainty due to perishable products and chal-

lenges due to traceability requirements

•Availability of cold storage and transportation

infrastructure

•Access to markets, processing facilities and

demand uncertainty

•Fragmented nature of supply chain with multiple

intermediaries.

We focus on the uncertainties. The paddy/wheat

rotation has low risk for multiple reasons. The

availability of assured irrigation, largely accessed

through the use of free electricity for groundwater

exploitation, stabilizes yields to a great extent. Credit

and insurance instruments for rice and wheat are

clearly worked out, well established and used by a

large pool of clients. Labor demand is low, largely

predictable, and labor supply is assured (Senthilkumar

et al. 2008). Paddy has high labor demand during

transplantation early in the season, but supply of

skilled labor is assured, especially through migration

from Bihar and Jharkhand. Minimum support prices

have been gradually but continuously rising over the

last two decades, assuring predictable returns to

farmers. Large-scale state-sponsored procurement

amounts to a de facto forward contract that covers

NOTES

Deciding fac tors on farmer sale to mandis - (1) Coverage of state under Model APMC Act (2013) (2) Power of middlemen

(3) Dependence of farmers on middlemen for credit (4) Availability of storage space with farmers for produce

Direct sale by farmers to wholesalers/retailers/consumers is possi ble in states that have embraced Model APMC Act

Farmers can also have contractual agreements with instuonal buyers

F A R M E R

Own

consum-

pon

Wholes aler

store

Wholes aler

store

Retailer

store

Retailer

store

Retailer

store

Retailer

store

Mandi

Agricultural

Labour

Seeds

Ferlizers

Water

Power

Credit

Insurance

services

Informaon on

weather, local

condions,

price, etc

refers to end consumer

Agent

(Middlemen)

Fig. 2 Agricultural supply chain in India

Decision (June 2016) 43(2):167–179 171

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costs under almost all circumstances for both paddy

and wheat. As Table 2indicates, 35 % of the total

paddy and wheat procured by the government comes

from Punjab.

The green revolution, along with providing techni-

cal support to grow high yielding varieties of paddy

and wheat, also developed mechanisms for providing

seeds, crop advice, storage and transportation support

for these crops (Mohan 2006; Reardon and Minten

2011). The well-developed ecosystem for paddy and

wheat cultivation is supplemented by the network

effects of large numbers of farmers doing the same

tasks in a given neighborhood (Maertens and Barrett

2013).

While the expected value of an alternative portfolio

is higher compared to paddy/wheat rotation, uncer-

tainty in returns can be equally high or even greater for

the alternative crops compared to the paddy/wheat

rotation. We focus on four key factors that contribute

to the uncertainty and discuss how the lack of well-

developed supply chains for the alternate portfolio of

crops contributes to the uncertainty.

Table 2 Paddy and wheat procurement in India (cumulative 2003–2004 to 2012–2013)

Million

Tonnes

‘000

Crores

Punjab 199.781 189.008

Haryana 80.661 81.744

Andhra Pradesh 74.382 66.681

Uttar Pradesh 52.366 49.484

Madhya Pradesh 32.837 40.582

Chhattisgarh 37.271 33.626

Odisha 26.183 23.861

India 560.158 540.007

35.01

15.14

12.34

8.9

7.5

6.22

4.41

10.46 Punjab

Haryana

Andhra Pr adesh

Uttar Pradesh

Madhya Prad esh

Chhattisgarh

Odisha

Others

Rice and Wheat Procurement: Cumulative Proportion

Data source: Food Corporation of India; Combined Revenue and Finance Accounts, Ofﬁce of the Controller General of Accounts,

Ministry of Finance

020 40 60 80

Coefficient of Variation

Wheat

Paddy

Tomato

Cabbage

Onion

Potato

Cauliflower

Capsicum

Price volatility during peak harvest season

01,000 2,000 3,000 4,000 5,000

Price per Quintal

Potato

Cabbage

Wheat

Onion

Cauliflower

Tomato

Capsicum

Paddy

Comparative prices across commodities

Fig. 3 Price volatility and comparative prices. aMedian,

minimum, maximum coefﬁcient of variation in prices during

peak harvest season for 8 commodities and 197 markets across

Amritsar, Ferozepur, Ludhiana and Sangrur districts.

bVariability in prices per quintal of 8 commodities during

peak harvest season across 197 markets across Amritsar,

Ferozepur, Ludhiana and Sangrur districts

172 Decision (June 2016) 43(2):167–179

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Price risk

Paddy and wheat have stable price support, with strong

and established public procurement systems, leading

to low price volatility across markets and years. On the

other hand, volatility in prices of vegetable crops is

much higher, both across time (weeks in the harvest

season) and space (markets across districts) as seen

from Fig. 3below.

The lack of a well-developed cold chain infrastruc-

ture for the perishable vegetable crops means that

farmers cannot store their produce for long periods of

time and often sell immediately upon harvest, as the

price offered reduces dramatically with each passing

day. As a result, the prices of these commodities are

subject to wide ﬂuctuations and farmers are often

unable to get remunerative prices for their crops

(Maheshwar and Chanakwa 2006). In contrast, storage

of paddy and wheat, being cereals, are relatively easier

to store and retain their value for much longer,

reducing price volatility.

Labor risk

Figure 4indicates that the change in cultivation

pattern to a portfolio of alternative crops requires

more farm labor. High-value vegetable crops are not

only labor intensive but also need specialized skills

throughout the cropping period. In contrast, labor

requirements for paddy and wheat are signiﬁcantly

lower. Further, the seasonality of labor demand for

paddy and wheat is fairly well established, and farmers

can count on prior experience to predict labor supply

and costs reasonably accurately. For example, paddy

requires high volume and highly specialized labor

during transplantation. But, the systems for meeting

this concentrated seasonal labor demand are in place

and function exceedingly well, with large-scale labor

migration from distant Bihar and Jharkhand to Punjab.

Therefore, while income might increase by over

100 % for alternative crops, the demand for labor

increases even more in absolute terms (see Fig. 4).

Much of this extra labor needs speciﬁc training and

specialized skills in handling delicate and perishable

products. This class of labor skills simply does not

exist in the required quantities in Punjab or in the

labor-surplus states.

Credit risk

The change in cropping pattern also requires more

working capital, as seen from Fig. 5. Working capital

requirement for paddy and wheat is low and is

available at low cost through subsidized credit.

Alternate crops require signiﬁcantly higher working

capital, and credit instruments are not standardized for

these crops. Any widespread solution to these prob-

lems is further hampered by the low number of

010,000 20,000 30,000010,000 20,000 30,000

Marginal Smal l Med ium Large Marginal Smal l Medium Lar ge

Amrits ar Ferozepu r

Ludhiana Sangrur

Paddy/Wheat Rotation Alternate Crops

Total Labor Hours

Graphs by District

01,000 2,000 3,000

Marginal Smal l Medium Lar ge Marginal Sma ll Medium L arge

Amritsar Ferozepur

Ludhiana Sangrur

Paddy/Wheat Rotation Alternate Crops

Labor Hours per Hectare

Graphs by District

Fig. 4 Effect of shift to alternate crops on labor demand.

aComparison of total labor demand between paddy/wheat

rotation and alternative speciﬁcations. bComparison of per

hectare labor demand between paddy/wheat rotation and

alternative speciﬁcations (labor requirements are obtained by

solving the mathematical program used to model the farmer’s

crop-allocation decision)

Decision (June 2016) 43(2):167–179 173

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growers. The cost of capital is also high because of the

higher price, volatility and labor risks and associated

uncertainty. Figure 5shows the widely different credit

requirements for different districts and land-classes.

Yield risk

Emanating from weather shocks (ﬂoods, unseasonal

rains) and ecology (pest and disease incidence), yield

risk is an inherent part of agriculture. They work

through lowering yields or increasing costs where the

risk can be mitigated. Paddy and wheat have been the

focus of long-term and large-scale agricultural

research, with a high degree of disease surveillance

and investments in new varieties for increasing yields

and resistance to known pests. Similar investments in

the alternative crops are absent, leading to signiﬁ-

cantly higher yield risks associated with these crops.

In addition to yield risk, high-value vegetable crops

also face high amount of post-harvest losses due to

insufﬁcient cold storage and transportation capacities.

According to some estimates, close to 30 % of the

fruits and vegetables grown in India are wasted due to

lack of well-developed farm-to-fork supply chains for

these products (Maheshwar and Chanakwa 2006).

In summary, the supply chain support for product

development, ﬁnancing, managing inputs, production,

transportation, storage, and sales for these alternate

crops is not commensurate to the scale necessary to

shift the cropping mix to alternate crops. In the next

section, we describe some strategies that can mitigate

these risks and help overcome the supply chain

challenges.

Risk mitigation

The risks preventing farmers from cultivating a

portfolio of high-value crops, rather than paddy/wheat,

in large numbers can be mitigated through a combi-

nation of public policy interventions and supply chain

innovations such as the following:

1. Insurance products designed for speciﬁc risks.

Currently, crop insurance is a nascent economic

sector, dominated by subsidized policies. There

are several design and implementation ﬂaws in the

existing instruments, outside the scope of this

paper, that prevent targeting the most salient risks

and/or the composition of appropriate risk pools

(Clarke et al. 2012). Public policy could be

designed to encourage private sector initiatives

targeted at speciﬁc risks and crops.

2. Pooling practices, such as land pooling, labor

pooling, pooling of output (produce), collective

bargaining agreements, cooperative arrangements

for storage, transport and inputs, can lead to

economies of scale and reduce uncertainty in

availability of inputs. While there are isolated

examples of how such pooling practices have

beneﬁtted farmers in other parts of India (see Aji

2015 for an example of how creating producer

0200 400 600 8001,0000200 400 600 8001,000

Marginal Small Medium Large Marginal Small Medium Large

Amritsar Ferozepur

Ludhiana Sangrur

Paddy/Wheat Rotation Alternate Crops

Total Capital Cost ('000 Rupees)

Graphs by District

020,000

40,00060,00080,000100000

020,00040,000

60,00080,000

100000

Marginal Small Medium Large Marginal Small Medium Large

Amritsar Ferozepur

Ludhiana Sangrur

Paddy/Wheat Rotation Alternate Cro ps

Capital Cost per Hectare ( '000 Rupees )

Graphs by District

Fig. 5 Effect of shift to alternate crops on working capital

(including input costs and hired labor). aComparison of total

working capital between paddy/wheat rotation and alternative

speciﬁcations. bComparison of per hectare working capital

between paddy/wheat rotation and alternative speciﬁcations

(working capital requirements are obtained by solving the

mathematical program used to model the farmer’s crop-

allocation decision)

174 Decision (June 2016) 43(2):167–179

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organizations in Karnataka has helped farmers

growing horticultural crops), the lack of infras-

tructure and transaction costs present major

hurdles to undertaking pooling efforts at scale.

Public policies designed to support self-organized

pooling efforts can go a long way in persuading

farmers to invest in alternate crops.

3. Investments in skill development are urgently

required, because lack of labor who is skilled in

growing vegetable crops becomes a major

obstacle to crop diversiﬁcation. This aligns

perfectly with the current national focus on

skill development, suitably oriented toward the

agricultural sector. This has to correspond to

similar investments in research on farm mech-

anization for high-value vegetable crops, so that

skills and technology are adequately matched.

Such a concerted effort will raise supply of

skilled labor, increase labor productivity and

reduce associated risks.

4. Entrepreneurial models for service provision. It is

possible to develop an ecosystem of services

necessary for agricultural productivity through

entrepreneurial models. For example, application

of inputs such as irrigation, fertilizer and pesti-

cides is a specialized task and can deliver

signiﬁcant cost savings as well as yield improve-

ment at the farm level. However, the necessary

skill is highly heterogeneous at the farmer level,

leading to unnecessary losses through a system

where each farmer is responsible for the acquisi-

tion and application of inputs to their farms.

Alternatively, if there was a service enabled and

supported through public policies, which could

contract for application of inputs for a ﬁxed cost,

farmers would be liberated from performing these

activities. The payments themselves could easily

be structured into loan agreements, whereby

banks would pay the vendors directly instead of

the farmer.

5. In addition to eliminating hurdles on the input

side, it is also important to develop linkages

between the farmers and buyers, and increasing

the demand for the alternate portfolio of crops. As

Narrod et al. (2009) discuss, these markets can

include buyers in developed countries, in addition

to domestic consumers. While markets in devel-

oped countries can possibly help improve returns

to smallholders, serving these markets also

necessitates investment in supply chain practices

required to meet stringent quality and traceability

requirements. As examples discussed in Narrod

et al. (2009) show, public–private partnerships

can be instrumental in developing farm-to-fork

linkages between smallholder farmers in devel-

oping countries such as India and buyers in

developed countries. Apart from public–private

partnerships, direct investment by multi-national

companies (MNC) in improving farm-to-fork

linkages can create economic value for the

MNC, as the experience of companies such as

Nestle demonstrates (Porter and Kramer 2011).

MNCs working directly with smallholder farmers

to help them access better quality inputs and adopt

better farming practices can lead to mutual

beneﬁt—farmers can realize higher yields and

incomes by cultivating alternate crops that the

MNC uses as inputs for its downstream processes,

while the MNC beneﬁts from having a reliable

supply source of high-quality agricultural

products.

6. It is necessary to study the supply chain risk

associated with inputs, production, distribution,

storage and sales for each crop separately. Each

alternate crop has a unique farm-to-table supply

chain with associated risks that are fairly well

understood in other countries (Swinnen 2007).

These lessons could be transferred where appli-

cable to India.

Conclusion

Agriculture has long been associated with the imagery

of a lone farmer battling the elements, exploited by

traders and middlemen, and largely unsupportive

policies. Our study indicates that farmers can improve

their returns from cultivation signiﬁcantly, provided

that the mix of crops is appropriately chosen.

Furthermore, the right mix of crops, compared to

exclusive paddy/wheat cultivation, can also improve

socioeconomic and environmental outcomes by

increasing farm-labor use and reducing the water

intensity of cropping. However, the lack of a well-

developed farm-to-table supply chain for the alternate

crops exposes farmers to considerable risk, making it

difﬁcult to move away from the paddy/wheat crop

Decision (June 2016) 43(2):167–179 175

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rotation cycle. Public policy interventions such as

provision of well-designed crop insurance, skill

development to handle vegetable crops, combined

with supply chain innovations to leverage the beneﬁts

of aggregation by pooling land, labor, storage and

transportation resources, can address these risks.

Public policy can also play an important role by

changing the incentives and costs for farmers through

reforming the pattern of public investments and

subsidies in India. As Table 2illustrates, more than

half the country’s food grain procurement takes place

in Punjab and Haryana. If these price subsidies were

instead to be provided to other geographical regions

and targeted at different crops—for example, large

parts of central and south India are producers and

consumers of millets (Jowar, Bajra, and Ragi), where

the price subsidy may target farmers with a lower cost

of production—it will ensure that India’s food security

is not threatened while redistributing the price subsidy

across more than just two cereals and a few states.

Although beyond the scope of the present study, we

would also like to suggest that partial or full

withdrawal of subsidies will also increase the costs

of growing paddy and wheat, further changing the

calculation in favor of alternate crops. For instance,

withdrawal of subsidies for water and/or power will

have a relatively large negative impact on the

economics of cultivating paddy and wheat which are

water-intensive crops, making it even more desirable

for farmers to cultivate alternate crops.

Acknowledgments The authors thank Sukhmeet Singh

(Associate Director), Arvinder Walia (Analyst), Jasmine

Sharma (Researcher) at the Munjal Institute, ISB, Mohali,

Gaurav Sadhwani (MBA student 2014) at ISB, Mohali, and

Prashanth Hariharan Research Associate at ISB, Hyderabad, for

their valuable support for data collection, analysis and other

help.

Appendix 1: Mathematical program to model

the farmer’s crop-allocation decisions

maxA1;...;AnP

i¼1

liAixL

subject to

i¼1

AiA0Land availability constraint

i¼1

liAiL0þLlabor availability constraint

i¼1

ciAiþxLC0capital availability constraint

Ai0 for i¼1;...;n;L0

where A

is the land allocated (in hectares) to crop iby

the farmer; l

is the expected net income per hectare

from crop i; l

is the labor required (in man hours) per

hectare of crop i; c

is the input cost (excluding human

labor cost) per hectare of crop i; A

is the total land

available for cultivation; L

is the total household

labor available (in man hours); Lis the total external

labor (in man hours) hired by the farmer; xis the wage

rate (per man hour); C

is the total working capital

available with the farmer.

176 Decision (June 2016) 43(2):167–179

123

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District Land

size

class

Change (compared to growing only paddy)

In net income (%) In labor use (%) Crops grown

Using only

household

labor

Using household

plus hired labor

Using only

household

labor

Using household

plus hired labor

Using only

household

labor

Using household

plus hired labor

Amritsar Marginal 314 314 289 289 Cauliﬂower Cauliﬂower

Small 314 314 289 289 Cauliﬂower Cauliﬂower

Medium 251 294 230 289 Cauliﬂower Cauliﬂower

Large 51 183 41 225 Cauliﬂower Cauliﬂower

Ferozpur Marginal 319 319 476 476 Tomato Tomato

Small 319 319 476 476 Tomato Tomato

Medium 134 283 200 476 Paddy, tomato Tomato

Large 10 83 15 151 Paddy, tomato Paddy, tomato

Ludhiana Marginal 348 348 289 289 Cauliﬂower Cauliﬂower

Small 348 348 289 289 Cauliﬂower Cauliﬂower

Medium 260 318 212 289 Cauliﬂower Cauliﬂower

Large 44 166 25 187 Cauliﬂower Cauliﬂower

Sangrur Marginal 186 186 289 289 Cauliﬂower Cauliﬂower

Small 186 186 289 289 Cauliﬂower Cauliﬂower

Medium 142 171 220 289 Paddy,

cauliﬂower

Cauliﬂower

Large 23 90 35 196 Paddy,

cauliﬂower

Paddy, cauliﬂower

District Land size

class

Change (compared to growing only wheat)

In net income (%) In labor use (%) Crops grown

Using only

household

labor

Using household

plus hired labor

Using only

household

labor

Using household

plus hired labor

Using only

household

labor

Using household

plus hired labor

Amritsar Marginal 443 443 736 736 Onion Onion

Small 443 443 736 736 Onion Onion

Medium 423 439 702 736 Onion, wheat Onion

Large 147 310 244 595 Onion, wheat Onion

Ferozpur Marginal 367 367 205 205 Capsicum Capsicum

Small 367 367 205 205 Capsicum Capsicum

Medium 367 367 205 205 Capsicum Capsicum

Large 283 311 150 170 Capsicum Capsicum

Appendix 3: Impact of alternate cropping decisions on expected income and labor use in Rabi season

(See below)

Appendix 2: Impact of alternate cropping decisions on expected income and labor use in Kharif season

(See below)

Decision (June 2016) 43(2):167–179 177

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continued

District Land size

class

Change (compared to growing only wheat)

In net income (%) In labor use (%) Crops grown

Using only

household

labor

Using household

plus hired labor

Using only

household

labor

Using household

plus hired labor

Using only

household

labor

Using household

plus hired labor

Ludhiana Marginal 255 255 736 736 Onion Onion

Small 255 255 736 736 Onion Onion

Medium 229 247 659 736 Onion, wheat Onion

Large 71 109 204 362 Onion, wheat Onion, wheat

Sangrur Marginal 291 291 736 736 Onion Onion

Small 291 291 736 736 Onion Onion

Medium 268 285 679 736 Onion, wheat Onion

Large 90 144 229 410 Onion, wheat Onion, wheat

District Land

size

class

Change (compared to growing only paddy or wheat)

In net income (%) In labor use (%) Crops grown

Using only

household

labor

Using household

plus hired labor

Using only

household

labor

Using household

plus hired labor

Using only

household

labor

Using household

plus hired labor

Amritsar Marginal 384 384 419 419 Cauliﬂower,

onion

Cauliﬂower, onion

Small 384 384 419 419 Cauliﬂower,

onion

Cauliﬂower, onion

Medium 345 373 368 419 Cauliﬂower,

onion, wheat

Cauliﬂower, onion

Large 103 252 100 333 Cauliﬂower,

onion, wheat

Cauliﬂower, onion

Ferozpur Marginal 333 333 391 391 Tomato,

capsicum

Tomato, capsicum

Small 333 333 391 391 Tomato,

capsicum

Tomato, capsicum

Medium 202 308 202 391 Paddy, tomato,

capsicum

Tomato, capsicum

Large 90 150 57 157 Paddy, tomato,

capsicum

Paddy, tomato,

capsicum

Ludhiana Marginal 292 292 419 419 Cauliﬂower,

onion

Cauliﬂower, onion

Small 292 292 419 419 Cauliﬂower,

onion

Cauliﬂower, onion

Medium 241 275 342 419 Cauliﬂower,

onion, wheat

Cauliﬂower, onion

Large 60 131 77 238 Cauliﬂower,

onion, wheat

Cauliﬂower,

onion, wheat

Appendix 4: Impact of alternate cropping decisions on expected income and labor use on Annual Basis

(See below)

178 Decision (June 2016) 43(2):167–179

123

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continued

District Land

size

class

Change (compared to growing only paddy or wheat)

In net income (%) In labor use (%) Crops grown

Using only

household

labor

Using household

plus hired labor

Using only

household

labor

Using household

plus hired labor

Using only

household labor

Using household

plus hired labor

Sangrur Marginal 237 237 419 419 Cauliﬂower,

onion

Cauliﬂower, onion

Small 237 237 419 419 Cauliﬂower,

onion

Cauliﬂower, onion

Medium 203 227 354 419 Paddy,

cauliﬂower,

onion, wheat

Cauliﬂower, onion

Large 56 117 92 258 Paddy,

cauliﬂower,

onion, wheat

Paddy,

cauliﬂower,

onion, wheat

Decision (June 2016) 43(2):167–179 179

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Feb 2007

Johan Swinnen

Using original research from Asia, Africa, Europe and Latin America this book reviews the recent restructuring of the global agri-food industry and the dramatic rise of global retail chains in developing and transition countries. It focuses on the private standards and requirements imposed by multinational companies investing in these countries and the resulting changes to existing supply chains. It also examines the impact of these changes on local producers, particularly poor farmers, and considers the long-term policy implications in terms of growth and poverty.

POSTHARVEST LOSSES DUE TO GAPS IN COLD CHAIN IN INDIA-A SOLUTION

Article

Jun 2006

The Big Idea: Creating Shared Value. How to Reinvent Capitalism—and Unleash a Wave of Innovation and Growth

Article

Jan 2011
HARVARD BUS REV

The concept of shared value—which focuses on the connections between societal and economic progress—has the power to unleash the next wave of global growth. An increasing number of companies known for their hard-nosed approach to business—such as Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever, and Wal-Mart—have begun to embark on important shared value initiatives. But our understanding of the potential of shared value is just beginning. There are three key ways that companies can create shared value opportunities: By reconceiving products and markets • By redefining productivity in the value chain • By enabling local cluster development • Every firm should look at decisions and opportunities through the lens of shared value. This will lead to new approaches that generate greater innovation and growth for companies—and also greater benefits for society. The capitalist system is under siege. In recent years business increasingly has been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community. Even worse, the more business has begun to embrace corporate responsibility, the more it has been blamed for society's failures. The legitimacy of business has fallen to levels not seen in recent history. This diminished trust in business leads political leaders to set policies that undermine competitiveness and sap economic growth. Business is caught in a vicious circle. A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable "solution" to competitive challenges? Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The presumed trade-offs between economic efficiency and social progress have been institutionalized in decades of policy choices.

Agricultural Credit in India: Status, Issues and Future Agenda

Article

Jan 2006
Econ Polit Wkly

Rakesh Mohan

Agricultural credit has played a vital role in supporting farm production in India. Though the outreach and amount of agricultural credit have increased over the years, several weaknesses have crept in which have affected the viability and sustainability of these institutions. Following the shifts in consumption and dietary patterns from cereals to non-cereal products, a silent transformation is taking place in rural areas calling for diversification in agricultural production and value addition processes in order to protect employment and incomes of the rural population. In the changed scenario, strong and viable agricultural financial institutions are needed to cater to the requirements of finance for building the necessary institutional and marketing infrastructure. What is needed in agriculture now is a new mission mode akin to what was done in the 1970s with the green revolution. The difference now is that initiatives are needed in a disaggregated manner in many different segments of agriculture and agro-industry: horticulture, aquaculture, pisciculture, dairying, sericulture, poultry, vegetables, meat, food processing, other agro-processing and the like.

Measuring Social Networks’ Effects on Agricultural Technology Adoption

Article

Nov 2011

Technological improvements, especially in agriculture, drive sustainable advances in labor productivity, incomes, food security and general economic growth. But improved technologies are not adopted immediately, randomly or completely throughout a population. Any firm economic understanding of the diffusion of a new technology therefore depends on understanding the dynamic and cross-sectional patterns of technology adoption. Second, even if social networks are well measured, inferring causal social interaction effects from correlations in individuals' behavior is difficult. Within an identified reference group, there almost surely exist correlated attributes among individuals. Agents' behaviors and characteristics affect not only the formation and structure of social networks, they may likewise influence the behaviors of other network members, giving rise not just to changed economic outcomes but also to feedback that causes network structure to evolve endogenously. The farmer uses available information to update his beliefs. Most models assume Bayesian updating because it is analytically simple and consistent with the expected utility framework, although more general ad-hoc learning models are available.

Modified rice cultivation in Tamil Nadu, India: Yield gains and farmers’ (lack of) acceptance

Article

Sep 2008

The looming water crisis and water-intensive nature of rice cultivation are driving the search for alternative management methods to increase water productivity in rice cultivation. Experiments were conducted under on-station and on-farm conditions to compare rice production using modified methods of irrigation, planting, weeding and nutrient management with conventional methods of cultivation. Farm surveys were used to evaluate adoption of modified rice cultivation method. On-station experiments showed that, a combination of water-saving irrigation, young seedling or direct seeding, mechanical weeding and green manure application increased the rice water productivity though the largest yields were obtained for a combination of conventional irrigation, young seedling or direct seeding, mechanical weeding and green manure application. On-farm experiments demonstrated a yield advantage of 1.5 t ha−1 for the modified method over conventional method. We found, however, that yield advantages were not the sole factor driving adoption. Associated changes required in management, including the increased labour demand for modified planting, unwillingness of agricultural labourers to change practices, difficulties with modified nursery preparation and the need to replace cheaper women’s labour for hand weeding with more costly men’s labour for mechanical weeding, all reduced the chance of adopting the modified rice cultivation method. Risks associated with water-saving irrigation, such as uncertainty about the timing and amount of water release for irrigation affect adoption adversely as well. There was no incentive for farmers to adopt water-saving irrigation as water from reservoirs and electricity for pumping well-water are both free of charge. To date farmers continue to experiment with the modified cultivation method on a small part of their farms, but are unlikely to adopt the modified method on a large-scale unless policies governing water management are changed.