Indira Gandhi National Open University MAM-052

School of Agriculture Agribusiness Management and

Policies

Block

1
INTRODUCTION TO AGRIBUSINESS

UNIT 1
Agribusiness: An Overview
UNIT 2
Emerging Trends in Agriculture
UNIT 3
Entrepreneurship Development
UNIT 4
Farmer Producer Organizations
UNIT 5
Business Ethics
PROGRAMME DESIGN COMMITTEE
Prof. R. P. Das, PVC, IGNOU Dr. Anjali Ramtake, Associate
Professor, SOMS, IGNOU
Prof. S.K. Yadav, Director, SoA,
IGNOU Dr. Leena Singh, Assistant Professor,
SOMS, IGNOU
Dr. B.K. Sikka, Former Dean, College of
Agribusiness Management, GBPUAT Prof. Sunil Gupta, SOMS, IGNOU
Dr. V.C. Mathur, Former Professor and Dr. P. Vijayakumar, Associate Professor,
Head, Div. of Agri. Econ. IARI SoA
Dr. Pramod Kumar, Principal Scientist Dr. Mita Sinhamahapatra, Associate
(Agri. Econ.) IARI Professor, SoA
Prof. M. K. Salooja, School of Dr. Mukesh Kumar, Assistant Professor,
Agriculture, IGNOU SoA
Dr. P. K. Jain, Associate Professor and
Programme Coordinator, SoA
Programme Coordinator: Dr. Praveen Kumar Jain
Block Preparation Team
Unit Writers Editors
Unit 1: Dr. T.S. Bhogal, GBPUAT, Dr. V. C. Mathur, IARI, New Delhi
Pantnagar
Dr. Sapna A. Narula, Professor and Dean,
Units 2 & 3: Dr. Praveen Kumar Jain, SoA, School of Management Studies, Nalanda
IGNOU University, Rajgir, Bihar
Unit 4: Dr. Pramod Kumar, IARI, New
Delhi Dr. Praveen Kumar Jain, SoA, IGNOU
Unit 5: Prof. Atul Dhingra, HAU, Hisar
Course Coordinator: Dr. Praveen Kumar Jain
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October, 2022
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BLOCK 1 INTRODUCTION TO AGRIBUSINESS

This block provides an overview of agribusiness and its management. In this block you will learn
the nature and scope of agribusiness, the agribusiness system and its linkage with sub-system,
changing dimensions of agribusiness, emerging trends in agribusiness, and support measures
implemented for agribusiness. The block also explains the entrepreneurial opportunity and
entrepreneurship development in agriculture. The Farmers Producers Organizations is venturing
in big ways to start agribusiness startups and this block explains the concept and process of
formation of farmers producers organizations.

The content of this block is divided into five units. Unit 1 (Agribusiness: An Overview) defines
agribusiness and explains the nature and scope of agribusiness. Under this unit, you will identify
the components of the agribusiness system and changing dimensions of agribusiness
management in the country. A good discussion is provided on the linkages between sub-systems
of the agribusiness system, and also on the requirement of infrastructure for agribusiness
development in the country.

Unit 2: Emerging trends in agriculture cover the development and growth of the agriculture
sector. This unit explains the scope and benefits of diversification in agriculture. The changes in
the agricultural support measures such as credit, investment, prices, subsidies, and marketing
reforms are important contents covered in this unit. This unit also highlights the emerging trends
and issues related to trade, gender, sustainability; information communication technology in
agriculture and agribusiness.

In Unit 3: Entrepreneurship Development, the focus is on agri-partnership development. In this

unit, we will identify the essential qualities of an entrepreneur and the different types of
entrepreneurs. The Unit thoroughly discussed the entrepreneurial opportunities in agriculture and
the development of the business plan. The units also describe the steps involved in setting up an
enterprise.

Unit 4: Farmer Producer Organizations explain the meaning and process of forming the Farmer
producer organizations (FPO). This unit discussed the structure of FPOs and their role of FPOs.
The schemes implemented for the promotion of FPOs and achievements made by the FPOs are
also elaborated.

The concept and importance of business ethics are discussed in Unit 5: Business Ethics. You will
identify ethics in various business functional areas and measures to solve ethical problems. You
will also understand the concept of corporate social responsibility and principles of corporate
governance.

The material provided in this block is supplemented with various examples and activities to
make the learning process simple and interesting. We have also provided Check Your Progress
questions for the self-test at a few places of these units which invariably lead to possible answers
to the questions set in those exercises. What perhaps you ought to do, is to go through units and
jot down important points as you read, in the space provided in the margin. This will help you in
assimilating the content. A list of reference books has been provided at the end of each unit for
further detailed reading.
UNIT 1 AGRIBUSINESS: AN OVERVIEW
Structure

1.0 Objectives
1.1 Introduction
1.2 Definition and Nature of Agribusiness
1.2.1 Agribusiness: Concept and Definition
1.2.2 Scope of Agribusiness
1.2.3 Nature of Agribusiness
1.3 Agribusiness System and Its Components
1.3.1 The Agribusiness System
1.3.2 The Components of Agribusiness
1.3.3 Linkages Among Sub-Systems of Agribusiness System
1.4 Changing Dimensions of Agribusiness
1.4.1 The Concern
1.4.2 Organised Food Retailing and Value Chain Management
1.4.3 Contract Farming
1.4.4 Functioning of Markets
1.4.5 Agro-processing
1.5 Agribusiness Infrastructure in the Country
1.6 Let Us Sum Up
1.7 Keywords
1.8 Further Suggested Readings /References
1.9 Possible Answers to Check Your Progress Exercises

1.0 OBJECTIVES

After going through this unit, you will be able to

 define agribusiness;
 grasp the nature and scope of agribusiness;
 identify the components of the agribusiness system;
 explain changing dimensions of agribusiness management in the country
 describe linkages between sub-systems of the agribusiness system; and
 discuss the agribusiness infrastructure in the country.

1.1 INTRODUCTION

In this unit, we will learn about the definition and scope of agribusiness. We will also
understand the agribusiness system and its various components and the linkages between

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them. We will also look at the changing dimensions and infrastructure of agribusiness in the
country

1.2 DEFINITION AND NATURE OF AGRIBUSINESS

1.2.1 Agribusiness: Concept and Definition

For their sustenance, humans require a variety of raw and processed food products. In order to
make our daily requirements of food and fiber products available at the desired place, in the
required form, and at the right time, the efficient functioning of many individuals and
business organizations in farm and input production, food processing, and marketing and
distribution systems is required. This entire system is referred to as Agribusiness.
The concept of agribusiness has evolved significantly over time from being regarded only as a
food and fiber production system to a more holistic market-oriented system delivering a wide
range of farm produce and processed agricultural products to meet the changing consumer
demands and preferences. A look at how the definitions of agribusiness have changed over
time will make this clear.
The term “agribusiness” was first used by John H. Davis in a speech he gave at a conference
on ‘Business Responsibility and the Market for Farm Products’ in Boston, USA in 1955
(Fleet, 2016). His focus was on agricultural production and he referred to agribusiness as “the
sum total of all operations involved in the production and distribution of farm
commodities”.Subsequently, in 1957 John H. Davis along with Ray A. Goldberg published a
book entitled “A Concept of Agribusiness”, in which they expanded the definition of
agribusiness.
“In this book, they defined Agribusiness as “the sum total of all operations involved in the
manufacture and distribution of farm supplies; production operations on the farm; and
the storage, processing, and distribution of farm commodities and items made from
them”.
Later as agriculture became commercialized and moved away from small family farms to
larger commercial farms, agribusiness came to be defined as “all those business and
management activities performed by firms that provide inputs to the farm sector, produce
farm products, and/or process, transport, finance, handle or market farm products” (Downey
and Ericson, 1987). This definition underlines the application of management principles and
techniques in agriculture. With time, the definition of agribusiness was expanded to move
beyond the farm to include related businesses like warehousing, wholesaling, processing,
retailing, and so on. Thus, Edwards and Schultz in 2005 came out with a definition that
included a broader set of market-oriented activities: “Agribusiness is a dynamic and systemic
endeavor that serves consumers globally and locally through innovation and management of
multiple value chains that deliver valued goods and services from sustainable orchestration of
food, fiber, and natural resources”.

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In brief, agribusiness may be defined as the sum total of all operations involved in the
manufacture and distribution of farm supplies; production operations on the farm; and the
storage, processing and distribution of farm commodities and items made from them.

Agri-business basically involves three sectors:

1. Input sector: It deals with the supply of inputs, both consumables, and durable products,
required by the farmers for producing crops, raising livestock, and other allied enterprises.
These include seeds, fertilizers, plant protection chemicals, machinery, and fuel.
2. Farm sector: This sector undertakes the production of crops, livestock, fish, and forest
products.
3. Product marketing and services sector: This includes firms or industries that are
involved in processing (product transformation), storage and warehousing, transportation,
wholesaling and retailing of products, and marketing of the finished products to meet the
dynamic needs of consumers.

1.2.2 Scope of Agribusiness

1) All the business activities which ensure the availability of food and fiber products at the
desired place, in the required form and quantity, at the right time come within the
purview of agribusiness. In other words, all business activities in the input supply sector,
farm production sector, and food processing sector make up the subject matter of
agribusiness. In addition to these, logistics and marketing of food and fiber products also
constitute activities within the spectrum of agribusiness activities.
2) In India, varied agro-climatic conditions ranging from sub-tropical to tropical and
temperate, and farming environments in terms of soil types, allow the cultivation of
varied types of agricultural commodities and the rearing of different types of animals for
food and fiber.
3) Consumer needs and preferences for food commodities, especially processed products,
are changing rapidly in India. The dynamic agribusiness sector is continuously striving to
meet current consumer preferences and satisfy demand in both domestic and global
markets.
4) This has created a growing demand for different types of agricultural inputs such as
improved seeds, feed and fodder, inorganic fertilizers, bio-fertilizers, and plant protection
chemicals
5) Diverse types of commercial enterprises including manufacturing and production,
financial and technical services, processing, and marketing, function in the agribusiness
sector. These diverse agribusiness enterprises offer the scope for employment and
utilization of a heterogeneous combination of labour, materials, capital, and technology.
6) Agribusiness establishments help to strengthen infrastructural facilities, expand credit
supply, enhance opportunities for raw materials suppliers, promote the adoption of
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 modern technology in agricultural production and processing and promote the organized
marketing of agricultural commodities and food products.
5) Impetus is provided by agribusiness enterprises for overall economic development
through the creation of forward (storage, processing, transportation, and marketing) and
backward linkages (inputs supply, credit, and finance, production technologies, farm
services, etc.).
6) Agribusiness generates employment opportunities.
7) Agribusiness adds value to products and thereby increases the net profits of producers
and sellers.

1.2.3 Nature of Agribusiness

1. Management varies from business to business and farmer to farmer depending on the kind
and type of business. It varies from basic producers to brokers, wholesalers, processors,
packagers, manufacturers, warehouses and cold storages, proprietors, transporters,
retailers, etc.,
2. Agribusiness is very large and complex and has evolved to handle varied products through
various marketing channels from producers to consumers.
3. There is a very large variation in the size of agribusiness; some are very large, while many
others are one person or one family organization.
4. Most agribusiness units involved in farm production activities are conservative and
subsistence in nature and family oriented and conduct business that is run by family
members.
5. Farm production is seasonal in nature and many production and processing enterprises in
the agribusiness sector are affected because of this seasonality. Additionally, agriculture
and, therefore, agribusiness is also affected by the vagaries of nature.
7. Agri-business is always market-oriented.
8. Agribusiness enterprises are often vertically integrated. As with other types of businesses,
some degree of horizontal integration and conglomeration can also be seen in the
agribusiness sector.
9. There is a direct impact of government programmes on the production and performance of
agribusiness enterprises.

(Horizontal integration: When one firm assumes the functions of another firm at the same
level in the supply chain it is called horizontal integration. For example, one retailer takes
control of another retailer. Cooperative marketing societies and cooperative farming societies
are examples of cooperative integration. Vertical integration: When one firm assumes other
functions in the production-to-consumption supply chain it is called vertical integration. For

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example, if a retailer assumes charge of a wholesaler, or a processing firm assumes charge of
production it is vertical integration. Vertical integration can be (a) forward vertical integration
or (b) backward vertical integration. Forward vertical integration occurs when a firm takes
over the charge of another firm at the next higher level in the production-to-consumption
chain, which is a function closer to the end consumer. Thus, a producer taking charge of a
processing firm that is at a higher level in the chain is forward vertical integration. Backward
vertical integration occurs when a firm assumes charge of another firm lower down in the
production-to-consumption supply chain, which is closer to the raw materials supply or
production function. Thus, if a wholesaler assumes charge of a processing firm it is backward
vertical integration. Conglomerates are formed when a firm takes over other firms involved in
entirely different or similar activities to f rm corporations. This is essentially an expansion
strategy in business. Examples of conglomerates are Hindustan Unilever, Ltd., and ITC.)

Check Your Progress 1

Note:
 Answer the following questions in the space provided.
 Match your answers with those given at the end of this learning object.

1. Define agribusiness.
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2. What is the nature of agribusiness?

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1.3 AGRIBUSINESS SYSTEM AND ITS COMPONENTS

1.3.1 The Agribusiness System

Agriculture is an excellent example of how consumers can benefit from a partnership between
science and free enterprise. Agriculture goes about its task of feeding hungry people each day
quietly and with little fanfare. Moreover, advances in agriculture are the basis of the economic

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prosperity of a country. Growth in agriculture triggers economic growth in a country. It is
estimated that a one percent increase in agriculture growth results in a three to four times
increase in overall growth in the gross domestic product in India. A large number of industries
draw raw materials from agriculture. Further increased per capita income in the farm sector is
translated into a huge growth in demand for various categories of goods and services
produced or imported into the country.
Modern agriculture is the outcome of various economic and technological developments.
Since the mid-1960s, the pace of agricultural development has quickened. Along with
developments in technologies and growth in agriculture, new industries have emerged.
Traditional farming operations have grown larger and more specialized in most countries -
developed and developing. Agriculture has been (in developed) and is (in most developing
countries) a major industry across the globe. Even in the United States of America, nearly
every family farmed or lived on a farm because people typically did not produce much food
above what their families could consume. As late as 1850 the average American farmer
produced only enough food to feed himself and just four other people. This meant that most
farmers had small quantities of crops to sell. As a result, they had to be nearly self-sufficient.
People have always recognized that ownership of land confers power and prosperity for the
owners. Land, therefore, was an actively sought-out resource and successful farming on such
land played a key role in economic development in countries. Initially, the land was in
abundance and agriculture prospered. However, as the population increased, labour became
scarce, new production technologies emerged, and the size of land holdings began to
decrease, several changes began to occur in the method of cultivation and managing
operations on the farm. Yield-increasing purchased inputs and the adoption of labor-saving
technologies began to be used. Some family members started moving out of agriculture into
alternative employment off farms. Increasing marketed and marketable surplus changed
agriculture from subsistence to commercial. Businesses started building up in and around
agriculture. This resulted in the real birth and growth of the agribusiness sector.
Thus, the agribusiness system includes in addition to the farm producers, all the firms
involved in the manufacture and supply of inputs and services for agricultural production and
those which handle or process farm outputs, and marketing firms for inputs and outputs.
Government policies and programmes including research and extension programmes that are
focused on agriculture and agribusiness firms are also part of the overall agribusiness system

1.3.2 The Components of Agribusiness

The Agribusiness System thus can be said to comprise the following six sub-systems:
(i) Government policies and programmes.
(ii) Research and extension programmes of the Government
(iii) Farm inputs suppliers or input sector

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 (iv) Agricultural production sector
(v) Processing – manufacturing or agro-processing sector, and
(vi) The marketing of agricultural products –distribution sector.

Figure 1.1 depicts the various components of the agribusiness system.

Government Policies
& Programmes
Government Research &
Extension Programmes

Agro-
Agricultural Processing-
Farm Input Sector Production Manufacturing
Sector Sector

Marketing–Distribution Sector

Figure 1.1: The Components of the Agribusiness System

(i) Government Policies and Programmes

Government policies and programmes relating to the raising of crops and other enterprises
such as livestock, poultry, fisheries, etc., form one component of the agribusiness system in
the country.

(ii) Research and Extension Programmes of Government

Government agricultural research network comprises the central and state agricultural
universities and research centers and institutes under the Indian Council of Agricultural
Research (ICAR) This vast network of research institutions in India is devoted to developing
new knowledge/technology on crop production and post-harvest management of agricultural
produce. In addition to these, there are also industrial research and development institutions
including technical colleges and institutes which are engaged in developing new production
and processing technology, machines, equipment, etc. In order to disseminate the information
and technologies developed by the research and development organizations, the Government
has established an extension system.

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(iii) Farm Inputs Suppliers or Input Sector
This sector produces and supplies farm inputs such as fertilizers, plant protection chemicals,
seeds, feed, and farm machines used by the production sector of agribusiness. The input firms
are a major part of the agribusiness sector and produce proximately 75 percent of all the
inputs currently used in production. The growth in the agriculture input sector exceeds the
growth in other sectors of the agribusiness system in most developing countries. The reason
for this is obvious – increasing demand and dependence on purchased inputs of all types.

(iv) The Agricultural Production Sector

The production sector is at the center of much of the developments in agribusiness. The
production efficiency on farms is growing as farmers are increasingly buying yield-increasing
farm inputs from the market. Agriculture is fast becoming commercialized and farm
production is getting increasingly transferred to the manufacturing-processing sector and sold
in domestic as well as global markets. A new trend of diversification from high volume - low
value to low volume-high value crops is being experienced in countries like India.

(v) The Agro Processing and Manufacturing Sector

The processing or manufacturing sector includes all the individuals and firms that process raw
agricultural commodities to produce value-added products like converting wheat into flour or
raw milk into pasteurized milk or flour into bread. There are thousands of processed food
products that are demanded by consumers and this sector manufactures them for the final
consumers. The size and attractiveness of this sector are evident from the fact that big
multinational companies like Pepsi, Coca-Cola, Hindustan Unilever, Kellogs, and Nestle, are
involved in food manufacture.

(vi) The Distribution - Marketing Sector

The distribution-marketing sector plays a major role at each level in the agribusiness supply
chain from input supply to production to processing and consumption. Millions of people and
firms are engaged in this sector. On one hand, the sector makes available farm inputs to the
production sector, on the other hand, this sector makes available processed products to the
final consumers. The packaging industry, transport companies, warehouses, advertising
companies, insurance companies, wholesale firms, retail outlets, etc. are all part of this sector.

1.3.3 Linkages Among Sub-Systems of Agribusiness System

Consumers need and demand a variety of agricultural and food products and fiber daily. Also,
consumers demand and buy these commodities and products at convenient places. One can
imagine the work and effort involved in ensuring the availability of these commodities and
products to geographically dispersed heterogeneous consumers. Besides availability, it is also
important to ensure efficiency in this whole processing and distribution function.

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This system begins with many varied activities from the farm supply sector, which provides a
myriad of production inputs and services to the farm, and then continues through the
marketing, processing, and distribution chain necessary to satisfy consumer wants. As the
agricultural production process becomes increasingly complex and specialized, the farm
supply sector takes on important new dimensions. Also, as consumers’ incomes rise, more
services are demanded with respect to food products purchased. As these trends continue, the
agribusiness sector becomes increasingly important because it is faced with the responsibility
of providing not only the right type and amount of purchased inputs to the farm sector but the
correct mix of services to products as they move through the food system to the final
consumer. The system becomes more complex involving more sub-systems.
Today more than ever before, every sector of the economy is affected by agriculture. The
agribusiness sector in today's economic environment combines diverse commercial
enterprises, using a heterogeneous combination of labor, materials, capital, and technology.
The food and fiber system is an extremely large and complicated system that is constantly
changing to meet current consumer demands and provide food and fiber for both domestic
and world markets.
Agribusiness thus includes the agricultural input businesses, farm production businesses,
processing, and distribution and marketing sectors. All these sub-sectors have logical linkages
amongst them which ensure the efficient functioning of the overall agribusiness system.
Figure 1.2 depicts the linkages among subsystems of the agribusiness system.

Figure 1.2: Linkages among Subsystems of Agribusiness System

Farm Supplies
Seed Fertilizer Machinery Petroleum Transportation Feed Others
& &
Chemicals Equipment

Farming

Processing

Industri Food Retail Other

al

Supermarkets,
Restaurants Institutions
mall etc.

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Farm supplies, including feed, seed, fertilizers, agrochemicals, machinery and equipment,
fuel, transportation, etc., are produced and supplied to the farmers by the firms in the
respective sub-sectors constituting the input supply sector. The input supply sector must
ensure input supply at right time, at the right place, and in the right quantity to be effective.
Farmers or farming sub-sector utilize the input supplies in the course of agricultural
production. Best production technology should be used at the farm level to attain maximum
production from the given bundle of inputs. Farm output then is processed to make it
consumable by the ultimate consumers. Then come the linkages with distribution or
marketing sub-sectors which facilitate the acquisition of agro-products by the final consumer.
Supermarkets, restaurants, wholesalers, and retailers of agricultural products constitute this
sub-sector. A variety of skills and knowledge is utilized by the different sub-sectors of the
agribusiness system, thus, the knowledge and skills required by those employed in
Agribusiness may be broken down as:

 Agricultural production and propagation of animals, animal products, plants, plant

products, forests, and forest products.
 The provision of services associated with agricultural production and the manufacture and
distribution of supplies used in agricultural production.
 The design, installation, repair, operation, servicing of machinery equipment, and power
sources, and construction of structures used in agricultural production.
 Any activity related to the inspecting, processing, and marketing of agricultural products
and primary by-products.
 Any aspect of greenhouse, nursery, landscaping, and other ornamental horticultural
operation.
 The conservation, propagation, improvement, and utilization of renewable natural
resources.
 The multiple uses of forestlands and resources.

Check Your Progress 2

Note:
 Answer the following questions in the space provided.
 Match your answers with those given at the end of this Unit.
1. What are the components of agribusiness system?
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2. What are the crucial linkages between different subsystems of the agribusiness system?
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1.4 CHANGING DIMENSIONS OF AGRIBUSINESS

1.4.1 The Concern

Commercialization of agriculture, socio-economic change and liberalization of trade policies
in the country have necessitated the change in the functioning of the agribusiness system. The
issues that are required to be addressed for efficient working of the agribusiness system,
therefore, relate to the current and potential changes in the functioning of agricultural systems.
What is needed is improvement in the existing marketing system that reduces cost by saving
the losses in the marketing chain, increasing the competition thereby reducing undue profits
of some intermediaries and creating additional employment opportunities in the agricultural
marketing system. This would help farmers, consumers as well as unemployed youth.
Dimensions of change are, therefore, those that are related to enhancing the efficiency of
functioning of regulated markets, agro-processing, contract farming management,
management of food retailing, and value chain management.

1.4.2 Organized Food Retailing and Value Chain Management

One of the big changes in the agribusiness system is seen in the retailing of food products.
There is a considerable potential of creating more lucrative and attractive jobs for the youth in
agribusiness retail activities. Emerging supermarkets and retail chains will need many more
young business graduates. It needs to be noted that already between 2000 and 2005, India
created 1.1 million jobs per year, which is the highest among BRIC (Brazil, Russia, India, and
China) countries. The changes in the agribusiness systems have significant implications for
growth, poverty, and food security. On the positive side, agribusiness is responding to the
strong consumer demand for high-value commodities, processed food products, and pre-
prepared foods. There is an expansion of demand for farm products. This provides new
opportunities to farmers for value addition, processing firms provide them with crucial inputs
and services and cover a part of their risk. If properly managed, this should turn out to be a
boom for the farmers. Investment is rapidly increasing in agribusiness. Many companies have

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already invested billions either directly or through local partnerships. There is a likelihood of
agribusiness firms with all their managerial abilities, finding new ways to use the demand
opportunities. On the negative side, fears are being expressed that, by virtue of their capital
and scale of operations, these firms may space out small traders, processors, and retailers. In
this context, two important dimensions that need to be given attention are (a) expansion of the
organized retail segment, and (b) entry of global players in the food retail sector.

a. Expansion of the organized retail segment

The entry of the organized sector in retail business brings with it more investment in
marketing and creates millions of jobs but may also displace the existing self-employed
people. The basic question is whether we need more relatively high-profile jobs or continue
with a scenario where many families make a living through microscopically small one-person
or one-family enterprises. There is a demand for organized retailing services. It is not only the
high-end consumers but also the middle-class and lower-middle-class consumers who are
going to the organized retail stores for lower prices, variety, better service, and shopping
comfort, particularly when these are available in the neighborhood. Apart from the fears of
partial displacement of the existing informal retail outlets, the main concern relates to the
nature of the market structure that may emerge when the market share of modern retail outlets
goes up. The tendency of increased consolidation (both horizontal and vertical) of
agribusiness firms may lead to a situation of monopsony/monopoly or at the most
monopsonistic/monopolistic competition, that may not be more perfect than the existing
imperfections in the market.
In parts of India, there have been protests from traders’ and vendors’ groups against the
emerging modern retail sector. Protestors argued that corporates and large organized retail
chains buy directly from the farmers, save on transaction costs, and sell at lower prices to the
consumers. The existing traders are unable to compete on prices and thus lose business. The
fact is that the existing players are now facing stiff competition from organized retail sellers.
While it is true that competition for traditional groceries retailers has increased because of
organized retailers, many of the traditional retailers have begun to successfully modify their
stores and their terms of sale to take on the competition. of food and vegetables
The opposition to modern retail outlets has been mostly in those states where farmers are
relatively more marginalized. A noteworthy aspect is that farmers, in general, are favourably
placed with modern retail outlets and the central government is asking states to ensure
trouble-free operations for the retail chains. There is no other comparable large and diverse
economy anywhere in the world that has such an antediluvian distribution system for the basic
commodities of daily needs as we have in India. There is a need to resolve the growing tide
against the modern retail sector as the impact of their exclusion can be harmful to the
agricultural sector as a whole, rather than to the corporates who have entered or plan to enter
this sector. All big players are mostly diversified businesses that can very easily modify their
business plans and divert resources to other exciting opportunities in India and abroad. The

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losers in the process could be the millions of middle and lower income Indians who would
have potentially benefited from the competition and efficiency-induced lower prices, better
quality, superior service, and shopping comfort. The losers could also be millions of farmers
who would be constrained to continue to sell to middlemen who have no hesitation in creating
scarcity when it suits them, only to raise the final price for the consumers, even as the farmers
continue to receive low prices. The losers could also be millions of average men and women
who could have found better jobs (in sales and supply chain). The losers could also be state
governments who would have otherwise gained from better tax compliance at the retail end.

b. Entry of Global Agribusiness Firms

The other equally important issue relates to the entry of global agribusiness firms in the Indian
market for trade, particularly the retail sector. No doubt, global firms bring with them
technology, capital, and managerial skills, but several other aspects need to be kept in view
while allowing foreign direct investment (FDI) in the retail sector. First, global firms, by their
very strategy, maximize their profits by procuring or purchasing from globally cheapest
markets/areas/countries and indulge in dumping, leading to pricing out of domestic producers
and local small retailers. Second, global agricultural trade is highly asymmetric in the sense
that there are many producers, very few traders, and a large number of consumers. It has been
reported that the top 10 companies that control around on global trade are 84 percent in
agrochemicals, 51 percent in seeds, 24 percent in food retail, and more than 90 percent in
foodgrains trade. Third, owing to the concentration of trading power among a few companies,
international decline in basic commodity prices does not result in cheaper food in importing
countries. And fourth, global firms indulge in lobbying to influence national and international
policies in their favour. It is in this context that the option of allowing entry of global firms
and FDI in the retail sector needs to be carefully analyzed. China has restricted foreign
holding up to only 49 percent in the retail sector. The Philippines has imposed sourcing and
reciprocity requirements on foreign retailers. India will also need to put in place adequate
safeguards in this regard.

c. Initiatives and Measures Against possible Negative Impact of Modern Retailing and
Organised Supply Chain
Considering the wider importance of modern retail stores and emerging organized supply
chains, and keeping in view the arguments against these, there is a need for initiatives and
measures that would help in taking care of the possible negative impact on some sections.
First, as in Bangladesh, nongovernmental organizations (NGOs) in rural areas should become
active in organizing farmers for increasing their bargaining power. Second, the existing
traders and retailers should be provided with liberal loan facilities so that, if they so desire,
they can set up their own retail outlets and supply chains. Third, major retailers and supply
chains should be persuaded or facilitated to use the existing traders or commission agents as
their sourcing agents and vendors as their sale outlets, as is being successfully done by some

13
companies. Fourth, agribusiness models (whether modern retail chains or otherwise) can be
set up in the public-private partnership format. A very successful case is of Uttarakhand State
Seeds and Tarai Development Corporation. The stakeholders or partners are the state
government (30 percent), the Government of India (21 percent), the State Agricultural
University (15 percent), and farmers (34 percent). The Corporation is using private companies
for the sale of seeds and is also involved in the export of seeds. Further, quite a few modern
retail outlets launched by farmers’ groups/ cooperatives/companies or consumer organizations
are working successfully in many places in the country. Fifth, possible unfair trade practices
of agribusiness firms can be regulated by (a) enforcing transparency in contracts and
procurement; (b) strengthening farmers’ cooperatives or self-help groups; (c) providing for
public scrutiny of acquisitions and mergers; and (d) strict social or public auditing of food and
trade flows. And sixth, prudent regulation of corporate retailers as has been done by several
countries may be put in place. For example, there is enforced zoning for mega-retailers in
Japan and Thailand. In the USA, some states have put city limits for organized retailers. In
France, there is regulation for retailers with larger than specified carpet areas. India should
devise its own regulatory system.

1.4.3 Contract Farming

Another important dimension of change in the agribusiness system in India is the emergence
of contract farming. The organized sector is using the contract farming model for sourcing its
requirements for retailing, processing, or export purposes. However, despite several
advantages of contract farming, the coverage continues to be limited in India. As per the
statement of the Union Minister of State for Rural Development in the Parliament on
September 3, 2007, the total area under contract farming was 4.26 lakh hectares, most of
which was in three states of Tamil Nadu (2.37 lakh ha), Punjab (1.21 lakh ha) and Orissa
(0.60 lakh ha). In recent years, some other states like Haryana and Karnataka have also
witnessed contract farming agreements. some of the major companies and organizations that
are involved in contract farming are Hindustan Unilever, WIMCO, Pepsi, Food Pro, National
Dairy Development Board, Maxworth Orchards, Cadbury India, BILT, ITC, JK Paper, AV
Thomas, Reliance Agrotech, Godrej Agro, United Breweries, DCM Sriram, Markfed, Larson
and Tubro, and Escorts. Contract farming has been traditionally a common practice for the
paper industry, match sticks manufacturers. Now, contract farming has come up in seed
production paddy, and vegetables and fruits like potatoes and tomatoes. The advantages of
contract farming range from lower transaction costs for the contracting company to reduced
market risks for the producer farmers. It is certainly a viable alternative to corporate farming.
Some sort of contract farming is also prevalent in sugarcane and dairying, but it is not in the
conventional format of contract farming. Studies show that the experience with contract
farming has been a mixed one. Contract purchaser becomes a sort of monopsonist with all the
associated disadvantages. Also, there is evidence of the tendency to exclude small and
marginal farmers on the part of contracting companies. Nevertheless, it has been found to be

14
successful in several cases like basmati rice for exporting firms. With adequate hassle-free
safeguards, advance contracts between the farmer and buyer can be an important pathway for
minimizing farmers’ marketing risks and increasing their incomes, but it requires vigilance
and government regulations of the operation of the companies to safeguard the interest of
farmers, especially the small and marginal.

1.4.4 Functioning of Markets

Regulated markets are expected to facilitate the efficient functioning of the agribusiness
system in the country. Despite several forms of government intervention and market
development programmes, the marketing system for farm products has continued to suffer
from several weaknesses. The farmers have suffered a lot because of these weaknesses.
Investments in agricultural marketing activities were generally not forthcoming from the
private sector. It is only during the past few years, in the second phase of liberalization, that
the agricultural marketing reforms were initiated to create a favorable environment for the
growth of agribusiness in the country. One of the outcomes of these initiatives has been the
entry of the private sector into agribusiness activities on a substantial scale. One dimension of
this change is the need to assess whether agribusiness and retail food chains help to improve
agricultural marketing efficiency. While the new firms will carve out market space for
themselves, they would also need to realize returns on their investments. In this context, how
many benefits of the reduced marketing cost would they transfer to the farmers and
consumers? Food chain owners consider working with small and marginal farmers a
cumbersome and costlier proposition. Will they encourage farmers’ organizations to assist in
sourcing the farm products? To what extent will these firms be able to use the expertise and
experience of the existing traders and vendors? What is going to be the overall employment
scenario? Can the entry of organized retail chains help India become more competitive
internationally? Further, given the advantages of hawkers and street corner shops and the
purchasing habits of Indian consumers, what is the upper limit of the market share that
modern food retailers can capture? The most important issue, of course, relates to the legal
and regulatory framework that needs to be put in place to ensure that adequate private
investment flows in these activities and the market structure that ultimately emerges is more
perfect than what we have today.
Amendments in State Agricultural Produce Markets Regulation Acts have been made to
facilitate the setting up of private markets, direct purchases of farmers’ produce, and contract
farming arrangements. Several marketing-related restrictions have been withdrawn or
replaced. Several monetary concessions have also been announced by the central and state
governments. These include 100 percent excise exemption for 10 years, 100 percent income
tax exemption for five years (later withdrawal in phases), and capital investment subsidy of 15
percent (up to Rs 30 lakh). Keeping in view the growing importance of agri-exports in
improving farmers’ incomes, the government has set up several agri-export zones (AEZs).
Further, to help exporters in meeting phytosanitary requirements, several initiatives have been

15
put in place. Regulatory authorities at the state level have been notified. The quality standards
have been harmonized and publicized and the requirements of necessary documents have
been specified. Every exporter is required to obtain an IEC (Import-Export Code) from the
Director General of Foreign Trade and then get registered with APEDA. Those who plan to
export some products, can either register themselves or contact registered export houses,
whose names and details are available on the websites of APEDA and the Indian Trade
Promotion Organization. While Indian companies are increasingly entering the retail business,
foreign direct investment (FDI) in retail is not allowed. It is allowed in franchising and
commission agent services. It is also allowed in wholesale farmers’ business on a case-by-
case approval from the Reserve Bank of India. However, foreign retailers can operate in India
through joint ventures (where the Indian partner is an export house), franchising/local
manufacturing/sourcing from a small-scale sector (like McDonald'), and through cash and
carry operations (like Metro Cash and Carry). Considering that the traditional supply chain is
fragmented, there is the presence of a large number of intermediaries, and the existing market
yards are dominated by the association of a few traders, the growth of organized retail
(through India’s corporate sector or FDI) is favored as it has several advantages. It brings in
new technical know-how in marketing and reduces inefficiency in the supply chain. It
improves the quality of services to the consumers and creates employment for the youth. It
also helps in achieving international quality standards and thus boosts exports, leading to an
increase in incomes.

1.4.5 Agro-Processing
Agro-processing in India is undergoing rapid transformation. Strong macro-economic
fundamentals and the changing socio-economic scene are driving what was once a traditional,
small-scale processed food production system into a modern industry. Agro-processing
industry in India is being recognized as a 'sunrise industry with a vision to make India the
food basket of the world. Opportunities for agro-processing are being created as agriculture is
evolving from traditional subsistence-level farming to commercial agriculture producing high-
value commodities. Agriclinics and Agribusiness Centers (ACABC) of the Government of
India, implemented with the assistance of NABARD, have helped to enhance the reach
of modern farming technologies to farmers across the country and to promote commercial
agriculture.
Changing the socio-economic environment in the country has created high prospects for
modernizing the processing of agricultural products. Increased urbanization, higher incomes
of people with the increasing population of working women, an increasing number of nuclear
families, and greater consumer awareness about processed foods are leading to increased
demand for processed food products.
As noted earlier, APMC Model Act has enabled procurement of agricultural produce from the
farm gate, made contract farming possible, and provided for the direct sale of farm produce. It

16
has also encouraged private sector investment in agriculture. This has helped to modernize the
agro-processing industry in the country. The Union Budget for the financial year 2006-07 was
the first Union Budget that focused attention on food processing and food technology. Key
measures undertaken included a decision to treat the food processing sector as a priority
sector for bank credit, and the creation of a separate window with a corpus of Rs. 1000 crore
to NABARD for refinancing loans in agro-processing.
Public-Private Partnership (PPP) in agro-processing is one of the important dimensions of
change in agribusiness management. Major infrastructure development projects are part of the
PPP initiative in the agro-processing sector. Modern terminal markets, the development of
abattoirs, and food parks are examples of this.
In 1986, the Agriculture and Processed Food Products Export Development Authority
(APEDA) was formed to facilitate and promote the exports of agricultural commodities and
processed food products. The National Institute of Food Technology Entrepreneurship
(NIFTEM) has been established by the Ministry of Food Processing Industries to develop
world-class food technologists and create entrepreneurs and managers in the food industry. In
1994, the Small Farmers Agribusiness Consortiums (SFAC) was created as an autonomous
body for the promotion and development of small agribusinesses and farmers' producer
organizations.
Regulatory provisions provide for 100% Foreign Direct Investment in agro-processing. No
industrial license is required for all food and agro-processing industries. Liberal exports and
imports, except for items on the negative list, are allowed in the agro-processing sector.
The objectives of agro-processing programmes in India should be to minimize product losses,
add maximum value, achieve high-quality standards, keep processing costs low and ensure
that a fair share of added value goes to the producer.

Check Your Progress 3

Note:
I. Answer the following questions in the space provided.
II. Match your answers with those given at the end of this learning object.
1. Mention the important dimensions of agribusiness changes in India.
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2. Discuss important issues related to emerging organized food retailing in the country.
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3. What is the importance of public-private-partnership mode in agribusiness system

development in the country?
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1.5 AGRIBUSINESS INFRASTRUCTURE IN THE COUNTRY

The number of primary production units, that is operational holdings, in India is 146.5
million, of which 68.5 percent (100.3 million) are marginal with less than one hectare of
operational holding size, the average being 0.38 hectare according to the 2015-16 Agricultural
Census, Phase-1. Even if all farm size categories are considered, the average size of holding is
just 1.08 hectares. Assembling farm products from such a large number of small production
units is a huge task. There are around 5 million wholesale traders and 11.2 million retailers of
agricultural and other commodities. Out of 11.2 million retail outlets, 3.7 million are
estimated to be food retail outlets. Agro-industries include both organized and unorganized
sector units. There are 17.0 million units in the unorganized sector, of which 13.91 million are
agro-based. Out of 13.91 million agro-industrial units in the unorganized sector, 12.32 million
are own account manufacturing establishments (OAME), 1.2 million are non-directory
manufacturing establishments (NDME) and 0.39 million are directory manufacturing
establishments (DME). There are 5.11 million food processing units in the unorganized sector
of which 4.62 million are OAMEs, 0.36 million are NDMEs and 0.13 million are DMEs. The
units in the organized sector are few in number but account for the bulk of the total gross
value added. There are 35,000 modern rice mills, 20,000 pulse mills, 5198 fruit and vegetable
processing units, and 400 fish processing units. There are 426 sugar mills, and 3619 ginning
and pressing units (Singh, 2007). Most of the food processing units are in the unorganized
sector and the Indian food market continues to be dominated by the fresh food segment.
According to one estimate, the Indian food market comprises 10 percent processed segment,
15 percent semi-processed segment, and 75 percent fresh food segment. Processing is

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reported to be around 2 percent in fruits and vegetables, 37 percent in milk, 21 percent in
meat, 6 percent in poultry, and 11 percent in marine fish. Fruit and vegetable processing was
projected to go up to 10 percent by 2010, taking the food processing segment to 32 percent of
the total food market. The overall value addition in food products, which is currently nearly 8
percent, is likely to increase to 35 percent by 2025.

1.6 LET US SUM UP

Studying this unit we are clear about the definition of agribusiness and able to understand the
scope and nature of agribusiness. We now know the agribusiness system and its various
components. We must also have developed insight into the changing dimensions of
agribusiness in the country and the infrastructure of agribusiness. This unit thus has provided
us the knowledge specifically of the agribusiness environment in the country.

1.7 KEYWORDS
 Contact farming: An aggerement between farenrs and the organized sector to source
their equirements for production, retailing, processing, or export purposes.
 Horizontal integration: When one firm assumes the functions of another firm at the
same level in the supply chain it is called horizontal integration.
 Inputs: Products required by the farmers for producing crops, raising livestock, and
other allied enterprises.
 Processing sector: Processing of raw agricultural commodities to produce value-
added products.

1.8 FURTHER SUGGESTED READINGS /REFERENCES

1. Arora, V.P.S., Agribusiness Management - Conceptual Overview, College of
Agribusiness Management, G.B.Pant University. of Agriculture and Technology,
Pantnagar, Uttarakhand
2. Bhatia, Gangadhar. 2007. Agribusiness Management, Mittal Publications, New Delhi.
3. Fleet, David Van. 2016. What is Agribusiness? A Visual Description. Amity Journal of
Agribusiness 1(1): 1-6.
4. Singh, Surendra P., Tegegne, F. and Ekenem, E. 2007. “Food Processing Industry in
India: Challenges and Opportunities”, Journal of Food Distribution Research, 43 (1).

1.9 POSSIBLE ANSWERS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1

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 1. All those business and management activities performed by firms that provide inputs
to the farm sector, produce farm products, and/or process, transport, finance, handle or
market farm products.
2. Management varies from business to business and farmer to farmer; large and
complex, large variation, seasonal in nature, market-oriented, vertically integrated,
direct impact of government programmes, etc.

Check Your Progress 2

1. Government policies and programmes; Research and extension programmes of the
Government; Farm inputs suppliers or input sector; Agricultural production sector ;
Processing – manufacturing or agro-processing sector; and he marketing of
agricultural products –distribution sector.
2. Agribusiness thus includes the agricultural input businesses, farm production
businesses, processing, and distribution and marketing sectors. All these sub-sectors
have logical linkages amongst them which ensure the efficient functioning of the
overall agribusiness system.

Check Your Progress 3

1. Dimensions of change are, therefore, those that are related to enhancing the efficiency
of functioning of regulated markets, agro-processing, contract farming management,
management of food retailing, and value chain management.
2. Important dimensions that need to be given attention are (a) expansion of the
organized retail segment, and (b) entry of global players in the food retail sector.
3. Public-Private Partnership (PPP) are important in agro-processing, development of
infrastructure and modern terminal markets, the development of abattoirs, and food
parks.

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UNIT 2 EMERGING TRENDS IN AGRICULTURE

Structure
2.0 Objectives
2.1 Introduction
2.2 Growing Agriculture Sector
2.2.1 Growing Livestock Sector
2.2.2 Growing Horticulture Sector
2.2.3 Increasing Foodgrains Production
2.3 Modern Indian Agriculture
2.4 Diversification in Agriculture
2.4.1 Scope for Diversification in Indian Agriculture
2.4.2 Avenues for Diversification
2.5 Agriculture Industry Interface
2.5.1 Linkage between Agriculture and Industry
2.5.2 Rural Non-farm Sector (RNFS) and Rural Industrialization
2.5.3 Types of Rural Industries
2.6 Emerging Trends in the Food Processing Sector
2.7 Support Measures for the Agriculture Sector
2.7.1 Institutional Finance in Agriculture
2.7.2 Capital Formation in Agriculture
2.7.3 Agricultural Marketing Reforms
2.7.4 Agricultural Subsidy
2.7.5 Agricultural Price Support
2.8 Issues related to Trade
2.8.1 Issues related to Trade Promotion
2.8.2 Trade Distortions
2.8.3 Quality Considerations and Sanitary and Phyto-Sanitary Measures
2.8.4 Issues in the Implementation of SPS Measures
2.9 Gender Inequality and Trade
2.10 Sustainability and Trade

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2.11 Information Flow and Information Needs
2.11.1 Information and Communication Technology
2.12 Let Us Sum Up
2.13 Keywords
2.14 Suggested Readings/ References
2.15 Possible Answers to Check Your Progress

2.0 OBJECTIVES
After going through this unit, you will be able to:
 discuss the development and growth of the agriculture sector;
 describe the scope and benefits of diversification in agriculture;
 state the changes in the agricultural support measures such as credit, investment, prices,
subsidies, and marketing reforms; and
 highlight the emerging trends and issues related to trade, gender, sustainability; information
communication technology in agriculture and agribusiness.

2.1 INTRODUCTION
Indian Agriculture contributes substantially to the gross value added and exports of the nation. It
is a major source of livelihood in rural India covering more than 50 percent of the population. A
large population of landless labour is also employed in agriculture. Indian agriculture is
characterized by the smallholdings of millions of farmers. About 65 percent of the total
cultivated area is rainfed.
Indian Agriculture has made spectacular progress since Independence. More than a billion
people are being provided food by agriculture and allied sectors besides raw materials to
thousands of agro-based industries. Agriculture and allied sectors contribute nearly 18 percent of
the country’s gross value added and 12 percent of exports. Foodgrains production has reached
303 million tonnes in 2020-21 from merely 50.82 million tonnes in 1950-51.
A traditional farmer grows sufficient food to meet his family’s requirements and sells extra
produce in the market to earn income to support his family. The farmers are now resorting to
commercial agriculture in which they are using modern inputs to have higher production and
profitability. Farmers are diversifying crops and enterprises to generate more income by
optimizing resource use and realizing better market prices. There are strong linkages between the
agricultural and industrial sectors and they support each other in production and marketing. The
scope to set up agro-based industries is increasing. This unit identifies some areas/programmes
for setting up the agro and rural industries. This unit explains the scenario of agriculture and the

2
developments in the agricultural sector. The various support measures adopted for the agriculture
sector are also discussed. In conclusion, the unit explains the emerging issues arising on account
of globalization such as trade promotion, trade distortions, product quality, and sanitary and
phytosanitary requirements.

2.2 GROWING AGRICULTURE SECTOR

Indian agriculture has made tremendous progress in all its constituents such as field crops,
livestock, and horticulture. India is not only able to produce food for domestic consumption and
raw materials for industrial production but also contributes significantly to national exports. The
progress and contribution of livestock, horticulture, and foodgrain crops are presented in the
following sub-sections.

2.2.1 Growing Livestock Sector

The livestock sector occupies a dominant place in the Indian agricultural economy. The sector
provides food, income, employment, and foreign exchange. The sector serves as a store of wealth
for farmers and provides draught power, organic fertilizer for crop production, and a means of
transport. The contribution of the livestock sector to the agricultural GVA is about 25 percent
and the contribution is expected to increase further due to market-oriented policies and trade
liberalisation. India is the largest producer of milk in the world and milk production reached
198.4 million tonnes in the year 2019-20.
Spectacular growth in the consumption of livestock products in India has been observed and
major reasons for this are urbanization, population growth, the convergence of food habits, and
an increase in per capita income in India. There is a possibility to improve India's
competitiveness in the world market of meat and dairy products, if developed countries
substantially reduce domestic support and export subsidies, and enhanced market access.
There is a promising prospect for the livestock sector in India due to the existence of immense
potential to enhance production, consumption, and export, especially meat and dairy products.
There is a need to enhance competitiveness in the world market which largely depends on price
competitiveness and product quality with international standards.
Fisheries are emerging as an important allied sector of agriculture. It gives the highest return per
rupee of investment as well as it is emerging as an important foreign exchange earning source. It
is bread earning enterprise for the people living in the coastal areas.

2.2.2 Growing Horticulture Sector

The horticulture sector is contributing to improving the income of the farmers through increased
productivity, generating employment, and enhancing exports. The horticulture sector has moved
from rural confines to commercial ventures. The scenario of the horticulture sector is very
encouraging. The contribution of horticultural output has reached 33 % of total agricultural

3
output. Significant importance is given by the government to the horticulture sector as the plan
outlay for Horticulture was 3.9% during the IX Plan, which increased to 4.6% during the XII
Plan of total agriculture. The horticulture production in India is 319.57 million tonnes during
2019-20, out of which the contribution of vegetable production is 189.46 million tonnes and the
contribution of fruit production is 100.45 million tonnes. An increase in horticulture production
is attributed to area expansion as well as yield increase. The area under horticulture crops is
about 25.43 million hectares.

2.2.3 Increasing Foodgrains Production

Foodgrains production in India has increased from 50.82 million tonnes in 1950-51 to 303.34
million tonnes in 2019-20. The worst drought of 2002-03 pulled down the country’s foodgrains
production to 174.19 million tonnes. However Indian agriculture has made a smart recovery
with a production of 264.77 million tonnes in 2013-14. The production of other agricultural
crops such as oilseeds, sugarcane, and cotton is also increasing over the period. As per
3rd Advance Estimates, the estimated production of major crops during 2020-21 is as under:
 Foodgrains: 305.44 million tonnes
 Rice: 121.46 million tonnes
 Wheat: 108.75 million tonnes
 Nutri / Coarse Cereals: 49.66 million tonnes
 Pulses: 25.58 million tonnes
 Oilseeds: 36.57 million tonnes
 Sugarcane: 392.80 million tonnes
 Cotton: 36.49 million bales (of 170 kg each)
 Jute & Mesta: 9.62 million bales (of 180 kg each)
Source: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1721692 Posted On: 25 MAY
2021 retrieved on 10th Sept. 2021

2.3 MODERN INDIAN AGRICULTURE

Modern agriculture developed with the advancement of science and technology and its practical
application in the field of agriculture. Now farmers are using new techniques of agricultural
production by replacing the traditional practices to harness a high level of productivity.
Consequently, agricultural production has increased substantially. Such achievements in
maintaining the pace of agricultural production with the growing population of humans and
cattle are mainly contributed due to the following facts:

4
Development of ideal plant types/varieties: Vast improvement in crop varieties has been made
in India. High-yielding varieties responding to better management have made a tremendous
positive change in agricultural production. Varieties resistant to many diseases and insect pests
are available. Now crop varieties superior in grain quality, high oil contents, high quality of
fiber, as well as tolerance to abiotic stresses like drought, floods, frost, high temperature, etc. are
also available. The crop varieties of varying duration (early, medium, and late) have encouraged
the cultivation of these crops in varied agro-climatic conditions and cropping/farming systems.
Development of improved crop production technologies: Improved production techniques for
crop cultivation based on the availability of various resources viz., land, water, capital, and farm
machinery have been developed. Improved production technology includes the selection of
suitable crops/varieties, proper land preparation, efficient sowing management (sowing time,
seed rate, sowing method, plant geometry, etc.), balanced nutrition, effective weed control,
adequate water management, and proper plant protection measures. Thus, now agriculture itself
is an industry.
Intensive cropping: In the past, mono-cropping and double cropping under rainfed farming
were not considered ideal for crop production. Now due to the availability of early maturing
high-yielding varieties and efficient soil moisture conservation techniques, several double-
cropping systems have evolved. Cultivation of three or more crops in a succession even without
giving the rest to land became quite feasible to raise the returns per unit area and time.
Dryland agriculture: In the areas where evapotranspiration is greater than precipitation,
growing crops was risky but now improved cultivation technology for growing suitable crops
have been developed.
Use of problematic and wastelands in agriculture: The problematic soils like saline, alkaline,
acidic, flood-prone, desert, and other soils unsuitable for agricultural use are being reclaimed
with suitable scientific technologies for their efficient use in agriculture.
Maintenance of soil health: Soil is a medium for plant growth to give ultimate yields. Hence,
any operation on the soil for agriculture viz., tillage, manuring, fertilizer application, irrigation,
drainage, weeding, intercultural practices, and use of agrochemicals may be done taking due
consideration about their influence on soil properties.
The old philosophy of Indian farming is getting changed and modern improved agro techniques
for growing crops are being adopted.
Check Your Progress 1
Note: a) Use the space given below for your answers.
b) Compare your answer with those given at the end of the unit.

1) What are the reasons for the growth in the consumption of livestock products?

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2) Which factors contribute to maintaining the pace of agricultural production?
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2.4 DIVERSIFICATION IN AGRICULTURE

Rapid growth in agriculture in India was achieved through the adoption of high-yielding good
quality seeds, balanced fertilizer use, and the use of insecticides/pesticides to protect the crop.
While the positive result of the new agricultural technology promoted in the mid-sixties was a
rapid increase in foodgrains production in the country, there were also some negative aspects
associated with it such as the reduced profit margins of farmers resulting from the high input
costs, excessive exploitation of water resources and high use of chemical fertilizers and different
kinds of insecticides and pesticides resulting in the degradation of land and water resources and
loss of biodiversity ultimately slowing down the growth rate of productivity.
Diversification has been conventionally advocated as a useful strategy to reduce the effects of
unpredictable variations in farming and tackle the concerns for food security and the degradation
of natural resources. Thus, the short-term objectives of diversification essentially include:
(i) increasing the income of farmers, especially small farmers,
(ii) generate full employment of farm resources, and
(iii) stabilization of farmers’ income across seasons.
The long-term objectives of diversification include:
(i) the conservation of natural resources,
(ii) the restoration of the natural capital of the farm (soil health, natural pest controls, etc.),
(iii) reduction of dependence on costly inputs,
(iv) increased resource use efficiency,
(v) increased resilience of agricultural production systems and reduced environmental
impact, and

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(vi) the evolution of more benign systems of food production that can provide needed food
and fiber, without compromising the long-term sustainability of the agroecosystem.
This means that diversification in agriculture helps to reduce risk and uncertainty, particularly in
terms of income and employment, thereby allowing farmers to withstand unfavorable conditions.
Diversification is an integral part of the process of structural transformation of an economy. It
requires the adoption of a farming system that involves a shift in cropping patterns from
traditionally grown less remunerative crops to more remunerative crops like oilseeds, pulses,
fodder crops, horticulture, medicinal and aromatic plants, floriculture, etc. including land-based
activities like livestock and fishery rearing enterprises. The interventions for crop production and
post-harvest management are also technology-driven thus offering employment opportunities in
rural as well as urban areas.
Thus, diversification in agriculture may imply:
(i) a shift from a less profitable crop (or enterprise) to a more profitable crop (or
enterprise);
(ii) the use of resources in diverse but complimentary activities.

2.4.1 Scope for Diversification in Indian Agriculture

In India, agricultural producers predominantly follow a system of mixed farming in which crop
production combined with animal rearing is the practice. This is particularly true for marginal
farmers and landless labourers who depend more on livestock, poultry, and piggery production
for their income. Agriculture in the country is today facing the problem of fragmentation and
decreasing size of land holdings on account of growing population pressures, overexploitation of
land and depletion of groundwater. Liberalization of the economy and globalization has
expanded the market for India’s agricultural products, provided prices and quality are
competitive. To gain an advantage of this situation and increase their incomes, farmers need to
diversify their farm enterprises. The following conditions prevailing in Indian agriculture are
conducive to the diversification of agriculture:
(1) Suitability of agro-climatic conditions
Diverse agro-climatic conditions, ranging from temperate to tropical, offer attractive scope for
diversified agriculture in India.
(2) Availability of appropriate technology
Appropriate technologies suiting local agro-climatic conditions as well as the local needs of the
people are available. The vast network of ICAR and SAU research institutes has developed
appropriate area and climate-specific technologies. In addition to this, the large network of
research institutions provides the advantage of continuous refining and improvement of
technologies suitable for specific socio-economic and agroecological needs of the different agro-
climatic regions.

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2.4.2 Avenues for Diversification
Within agriculture, diversification is possible in various ways. Some of the possibilities for
diversification are:
a) Diversification with pulses and oilseeds
Although India has been able to achieve self-sufficiency in foodgrains, it still relies on huge
quantities of imports of edible oils and pulses to meet the domestic demand for these
commodities. In 2019-20, imports of edible oils were 14722 thousand tonnes valued at 9673
million US $. For the corresponding period, imports of pulses stood at 2917 thousand tonnes
with a value of 1440 million US $. Diversification of the cropping system to include pulses and
oilseeds would help to enhance the availability of these commodities, save foreign exchange, and
ensure better nutritional security for the people of the country.
b) Diversification with fodder crops
The growing population and changing food habits coupled with increasing incomes have led to
an increase in demand for milk in India. The country has achieved a total milk production of 198
million tonnes in 2019-20. This was made possible only through improved cattle breeds,
cooperative movement in milk marketing, and better feed and fodder quality. Green fodder plays
a vital role in augmenting milk production. Future demand for fodder will increase
proportionately to the cattle population. Hence there is an immense need to increase fodder
production by bringing additional area under fodder cultivation through diversification.
c) Diversification with horticultural crops
Horticulture, which includes fruits, vegetables, spices, plantation crops, floriculture, and
medicinal and aromatic plants, helps in increasing the income of cultivators as returns per
hectare are higher for these crops, improves the productivity of land, generates employment,
enhances exports, improves nutritional security, and generally leads to better economic
conditions of the farmers and entrepreneurs. The thrust on the development of horticulture in
India began in the 1980s. The production of horticultural crops, which was only 96 million
tonnes during 1991-92, has increased to 320 million tonnes during 2019-20 while the area under
horticultural crops has increased from 12.77 million ha to 26.48 million ha during the same
period. Thus, there has been a gradual diversification of horticultural crops in India. The
contribution of horticulture output to agricultural output has increased from 29.2 percent in 2011-
12 to 33.3 percent in 2015-16. Focused attention on horticultural production will generate higher
dividends.
d) Diversification with medicinal and aromatic plants
Increased awareness about the harmful effects of synthetically produced medicines has resulted
in an increasing preference for plant-based medical formulations. Its unique geographical
location and conducive soil and agro-climatic conditions provide India with a high potential for
cultivating a variety of medicinal and aromatic plants. Diversification towards the cultivation of
medicinal and aromatic plants will not only enhance their production and availability but also
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generate employment and income in rural areas as the cultivation of these crops is highly labor-
intensive. Simultaneously the increased availability of medicinal and aromatic plants can induce
the development of medicinal and aromatic plants based small-scale industries.

2.5 AGRICULTURE INDUSTRY INTERFACE

During the process of economic growth, strong linkages develop between the agriculture and the
industrial sectors. Both sectors complement growth and development in each other. Prosperous
agriculture provides the basis for a sound industrial sector and vice-versa. As growth proceeds,
these linkages tend to weaken as the growth impulses in the economy spread out. The
dependence of the economy on the agriculture sector relatively declines. New job opportunities
have to be found in the non-farm sector. The non-farm sector is a collection of various activities
like industry, service, and business. Among these, it is primarily the agro-processing and rural
industry that holds the key to further growth in the economy.

2.5.1 Linkage between Agriculture and Industry

During the process of economic development after independence, interdependence between
agriculture and industry has become stronger. Over the period, three important linkages have
developed between the agricultural sector and the industrial sector:
i) Production linkages: These arise from the interdependence of agriculture and industry for
productive inputs, i.e., supply of agricultural products such as cotton, jute, sugarcane, etc. to
agro-based industries and supply of fertilizers, plant protection chemicals, machinery, and
electricity by industry to agriculture. These linkages have been strengthened with the high
dependence of agriculture on the industry as the agricultural sector rapidly modernized.
ii) Demand linkages: Strong demand linkages between the two sectors have arisen. The impact
of increasing urban incomes and industrialization on the demand for food and agricultural
raw materials is generally recognized. Equally significant is the impact of the increasing rural
incomes on industrial consumption goods, such as clothing, footwear, sugar, edible oils, etc.
iii) Savings and investment linkages: Increased incomes in the agricultural sector lead to
higher savings which, through the banking system, generate additional investments in the
industrial sector. The relative terms of trade between the two sectors not only influence the
level of private savings and investment but also manifest themselves in government savings
and investment. Higher agricultural production results in higher government savings through
a higher collection of indirect taxes and reduced expenditure on programmes such as drought
relief; the higher government savings lead to higher public investment which generates
demand for industrial goods.

2.5.2 Rural Non-Farm Sector (RNFS) and Rural Industrialization

The diversification of agriculture brings to the forefront the importance of the rural non-farm
sector in the economy. For example, rural artisans have demonstrated the capability to produce

9
quality products by making use of traditional skills. If these can be provided much-needed
support, this can result in a sizeable improvement in the economic conditions of the rural
population.
RNFS is a varied heterogeneous sector. The National Bank for Agriculture and Rural
Development (NABARD) defines RNFS as including those enterprises and enterprise activities
that could be classified as a household, decentralized, tiny, and small-scale enterprises, involved
in the production, processing, preserving, storing, and marketing of goods and/or engaged in
agro-processing and providing employment and income to persons residing in rural areas. In
addition, the following features of the RNFS may be noted:

 marketing or linkage activities related to the above enterprises irrespective of their location;
 all villages and towns with a population up to 1 lakh may be included for coverage under
rural industries; and
 agriculture and allied activities are excluded.
In short, we can define RNFS to cover all activities outside agriculture, in secondary and tertiary
sectors of the rural economy, carried out in, or primarily benefiting, rural areas. Three
dimensions are considered in defining the scope of RNFS:
 Sub-sectoral dimensions: only activities with certain specific characteristics are included
here.
 Spatial dimension: only activities which are located in rural areas or those which have a
location impact on the rural sector are included.
 Scale dimension: there has been a certain ceiling on the size and turnover of the activities;
only those enterprises which fall below those ceilings are included in the RNFS.
Three indicators are generally employed to measure the contribution of the RNFS to India's
economic sector: (i) production, (ii) employment, and (iii) exports. Measured by any of these
criteria, the contribution of the RNFS has not been insignificant.

2.5.3 Types of Rural Industries

Rural industries embrace all industries which are run by rural people in or near their homes as a
part-time or full-time occupations either as a caste industry or a traditional profession. These are
based primarily on the utilization of locally available raw materials and skills and small amounts
of capital.
The various industries can be broadly classified into three groups:
(a) Cottage industries: These are generally small and family-run, and managed ventures which
may or may not be associated with agriculture.
(b) Agro-based industries: These industries are based on the processing of agricultural produce
or to meet the input needs of agriculturists. Rural agro-based industries are generally
organized either on a cottage or on a small-scale basis.

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(c) Small-scale industries. These industries are owned by persons with means enough for their
own subsistence though not always sufficient to run the industrial units at a profitable level.
Small industries are distinguished from large industries based on the capital employed (up to
Rs 10 crore) and an annual turnover (less than Rs. 50 crores).
Suggested Areas for Rural Industries
A programme of rural industrialization should consider the feasibility of setting up the following
types of industries:
1. Processing of agricultural produce: Several industrial units can be created to provide full-
time employment to a large number of people. They can also serve to provide supplementary
part-time employment to farmers and their families. Some examples of such industries are
the processing of cotton, preparation of milk and milk products, oil extraction, jute
manufacturing, and extraction of sugar.
2. Industries that utilize agricultural by-products: There is considerable scope for exploring
the technological possibilities of utilizing several agricultural products as raw materials for
manufacturing industries. Some important examples of such by-products are alcohol from
molasses; the use of rice husk as fuel; broken rice for winemaking and oil from rice bran.
Such industries offer good scope for employment generation.
3. Development of village handicrafts and cottage industries: There is a vast scope for the
development of handicrafts producing units as cottage industries
4. Professional services sector: There is a great need for rationalizing the professions of
gardeners, cobblers, blacksmiths, carpenters, etc. in rural areas. There is a certain class of
people who are entering these professions based on their castes and with the skills handed
down from one generation to the next. There is hardly any improvement in the skills and
these services are rendered generally on a barter basis. The industrial training institutes that
provide training in the various crafts should also include training for barbers, cooks, cobblers,
etc. With appropriately developed skills, these professions can become a great source of
strength to the rural economy.
To accelerate rural industrialization, it is necessary to produce a wide variety of consumer goods
for local consumption such as vegetable oils, soaps, agricultural implements, cloth, certain
hardware, etc. The rural community should be helped to reap the multiple benefits of higher
income and employment of the financial outlays on rural industries projects.
Check Your Progress 2
Note: a) Use the space given below for your answers.
b) Compare your answer with those given at the end of the unit.
1) How to define diversification in agriculture?
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2) List the linkage between agriculture and industry.

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2.6 EMERGING TRENDS IN THE FOOD PROCESSING SECTOR

New trends in the different areas of food processing, namely food manufacture, preservation,
packaging, and quality control are being observed in the food industry due to various reasons like
changing food habits and demand of the consumers, the introduction of innovative technologies,
and new national and international rules and regulations related to food safety and marketing.
Consumer demand is directed toward convenient, easy-to-handle, nutritious, and healthy foods.
So, the industries are focusing on the processing of foods that are ready-to-cook, ready-to-
eat/drink, shelf-stable, nutritionally enriched/fortified, prebiotics, probiotic-rich foods, and
longer shelf-life products.
There is an increasing trend in the use of non-synthetic chemical preservatives for fresh or
minimally processed food. The industries are also exploring the possibilities for the adoption
of non-thermal innovative processing technologies like high High-Pressure Processing
(HPP), Pulsed Electric Fields (PEF), Ultrasonic, Ultraviolet, Membrane Technology, and Super
Critical Fluid Technology. All these non-thermal technologies help in avoiding the use of high
temperatures during processing and inactivating the microbes without changing the nutritional
and sensory qualities of food. Many food industries are investing in automated systems like
robotic technology at every point of the food processing chain starting from sorting to packaging
to minimize the risk of contamination and overcome labour shortages. With the advent of
biotechnology, industries are also exploring the use of recombinant proteins and enzymes in food
processing.
Innovative packaging and storing are being evolved to tackle the problems of conventional
packaging systems. Industries are shifting towards the use of eco-friendly and recyclable
packaging materials; alternative packaging techniques for quality conservation and extended
shelf life of products; smart and intelligent packaging for better history tracking, quality
monitoring of food through the use of bar codes, and biosensors during storage, transportation
and retailing.

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All these efforts are being adopted by the food processing industries to maintain food quality,
comply with new rules and regulations, improve the process efficiency, safety, competitiveness,
and stability of food products in a healthier way.

2.7 SUPPORT MEASURES FOR THE AGRICULTURE SECTOR

The Government is making concentrated efforts to make the agriculture sector prosper and
increase its share in the national economy. The efforts in terms of agricultural credit, investment,
agricultural marketing, subsidies, and price support are prominent and are briefly discussed
below:

2.7.1 Institutional Finance in Agriculture

The Indian farmers in general are poor and require outside financial help to meet their cash
requirements for performing farming operations. The various sources of agricultural finance in
India can be grouped into institutional and non-institutional sources.
(1) Non-institutional sources: Moneylenders, relatives, traders, commission agents, and
landlords are the common non-institutional sources of finance for farmers.
(2) Institutional sources: Co-operatives, scheduled commercial banks, and regional rural banks
(RRBs) are all institutional sources of finance.
The share of non-institutional sources of finance is continuously declining (Table 2.1) due to the
conscious and concerted efforts of the government and policymakers directed towards increased
access to institutional sources of finance.
Table 2.1: Flow of Institutional Credit to the Agriculture Sector
(Rs in Crore)
Particulars/ Commercial Coops. Regional Rural Other Grand
Agency banks Banks Agencies Total
2001-02 33587 23524 4854 80 62045
2005-06 125477 39404 15223 382 180486
2006-07 166485 42480 20435 229400
2010-11 345877 78121 44293 468291
2015-16 642954 153295 119260 915509
2016-17 799781 142758 123216 1065755
2017-18 877155 150389 140959 1162617
2018-19 954823 152340 149667 1256830
2019-20 1070036 157367 165326 1392729

Source: Government of India, Directorate of Economics and Statistics, Agriculture Statistics at a

Glance, various issues

Co-operative Credit Societies

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The cooperative movement was initiated in 1904 through the establishment of cooperative credit
societies. The societies were organized to relieve the indebtedness of rural people and promote
thrift. Co-operatives in India have two types of structures: (a) Three-tier and (b) two-tier
structures. Both co-operative credit societies and non-credit cooperative societies have three-tier
structures and two-tier structures in all the states except Bihar, Jammu and Kashmir,
Maharashtra, and Uttar Pradesh, where the structure is unitary.

Commercial Banks
Although agriculture was the main occupation of Indians in the sixties, contributing significantly
to the country’s national income, advances to agriculture from commercial banks were barely
one percent of their total advances. The bulk of the deposits, contributed by the public, were
being advanced to the organized sector comprising industry and trade. Agricultural credit was
dominated by private money lenders due to the absence of financial institutional protection and
the money lenders were charging exorbitant rates of interest. In 1968, the Government imposed
social control over banks to ensure wider availability of bank credit to the agriculture sector as
one of the objectives.
The commercial banks were nationalized on 19th July 1969 through an ordinance titled the
“Banking Companies (Acquisition and Transfer of Undertakings) Act” and 14 commercial banks
were nationalized. The main objectives were the removal of control of the banking business by a
few industrialists and the expansion of credit to priority areas. On 15th April 1980, six more
banks were nationalized. At present, as a result of banking sector reforms undertaken to stimulate
economic growth in India, mergers of 10 banks into 4 were undertaken and currently, there are
12 public sectors in the country.
Regional Rural Banks: The Regional Rural Banks (RRBs) were set up in 1975 to supplement
the efforts of the commercial banks and the co-operatives in extending credit to weaker sections
of the rural community - small and marginal farmers, landless labourers, artisans, and other rural
residents of the small means. The intention in having these new banks was that there should be
an institutional mechanism that combined the local feel and familiarity with the rural problems
which the cooperatives possessed and the degree of business organization and modernized
outlook that the commercial banks had, to reach the rural poor more extensively.
Microfinance
Microfinance initiatives are now recognized as a cost-effective and sustainable way of expanding
the outreach of the banking system to the rural poor.
There are two major models under micro-finance, i.e., Self-help Group (SHG) - Bank Linkage
and Microfinance Institutions (MFI) - Bank Linkage being operated in the country.
The target groups of microfinance are small and marginal farmers, landless agricultural and non-
agricultural laborers, artisans, and craftsmen. The major advantages are on-time repayment and

14
door-step savings and credit facilities for the poor and exploitation of the untapped business
potential in rural India

2.7.2 Capital Formation in Agriculture

Capital formation is an accumulation of capital stock during a particular period. Investment in
infrastructural facilities is a must for economic development. Capital formation in agriculture
refers to the addition of capital stock in the agriculture sector such as roads linking rural areas to
markets; irrigation, soil, and water conservation; power, machinery, equipment; rural markets
and agricultural research, education, and extension services, etc.
Capital formation is an addition of real physical assets and not financial assets such as shares and
bonds. The increase in the real capital of a country adds to the productive potential of the
country. It is the mobilization of a community’s savings into channels of productive investment.
Capital formation in agriculture is important for bringing innovation and adoption of technology
in various agricultural practices such as:
 Improvement in land resources – land levelling, land reclamation, flood control, drainage,
development of irrigation facilities, etc
 Innovation and use of farm power and machinery
 Improvement and development of biological resources

The capital formation also improves the efficiency of the market mechanism by developing road
networks and transportation, storage, and other market infrastructures.

Table 2.2: Gross capital formation in agriculture and allied sector: Some Facts
Percentage to gross Absolute terms Public (% Private (%
value added (GVA) (2011-12 prices) Contribution) Contribution)
2013-14 17.7 2,84,424 2.1 15.6
2015-16 14.7
2016-17 15.6 2,67,836 2.7 12.8
2017-18 15.2 2,73,755
2018-19 16.4
Source: Economic Survey, 2018-19, 2019-20, & 2020-21 Volume 2

2.7.3 Agricultural Marketing Reforms

The Government of India has initiated various initiatives to facilitate efficient agricultural
marketing in the country. The important reforms include amendments to the State APMC Act;
promotion of direct marketing and contract farming; development of agricultural markets in
private and cooperative sectors; stepping up of pledge financing; expansion of future trading to
cover all agricultural markets; introduction of negotiable warehouse receipt system and use of
information technology to provide market-led extension services to the farmers.

15
The purpose of bringing about reforms in agricultural marketing is to ensure more remunerative
prices to farmer producers and give them more choices to sell their produce. Some reforms also
facilitate e-trading in agricultural produce. Reforms are also being initiated to promote barrier-
free inter-state trade in agricultural commodities. To enable farmers to engage with processors,
aggregators, large, organized retailers, and exporters, fairly and transparently a legal framework
for contract farming is being developed. This will help mitigate the risk for farmers and through
the production of good quality and standardized produce ensure better returns to farmers.
Small Farmers Agribusiness Consortium (SFAC)
The SFAC was established in 1994 to facilitate agri-business ventures by catalyzing private
investment through Venture Capital Assistance (VCA) Scheme. The objectives of SFAC include:
• Promotion of development of small agribusiness through VCA schemes;
• Assist in the formation and growth of Farmer Producer Organizations (FPOs) / Farmer
Producer Companies (FPCs);
• Improve availability of working capital and development of business activities of FPOs/FPCs
through Equity Grants and Credit Guarantee Fund Scheme;
• Implement National Agriculture Market (e-NAM) electronic trading platform.

SFAC is involved in the promotion and development of value addition through agro-processing
facilities by farmers. It promotes agribusiness ventures for this purpose. SFAC is also designated
as the central procurement agency for onions and pulses by the Government of India under the
Price Stabilisation Fund.
National Agriculture Market (eNAM)
The National Agriculture Market (eNAM) is a pan-India electronic trading portal that networks
the existing APMC Mandis to create a unified national market for agricultural commodities.
Starting in 2016, eNAM allows farmers to sell their produce at any suitable market/place
throughout the country. There are about 1.6 crore registered farmers and 1.28 lakhs registered
traders with eNAM. One thousand agricultural markets (Mandies) have been connected on this
platform as of May 15, 2020.
Farmer Producer Organisations (FPO)
Small and marginal farmers constitute a large section of the farming community in India. They
face a lot of problems in organizing production and marketing activities. The rising cost of
cultivation low access to quality inputs, credit, and modern technologies, crop failures, limited
access to markets, and low marketable surplus, force small and marginal farmers to depend on
exploitative intermediaries. Collectivization of agricultural produce and value addition has been
suggested as the mechanisms for tackling such problems and ensuring better income for the
farmers by achieving economies of scale. To achieve this, the Government of India is promoting
the formation of Farmer Producers Organizations (FPOs). This is a central sector scheme started
with the target to form 10000 FPOs by the year 2023-24 (NABARD, “Farmer Producers’

16
Organizations (FPOs): Status, Issues and Suggested Policy”, National Paper – PLP 2020-21,
www.nabard.org).

2.7.4 Agricultural Subsidy

An agricultural subsidy is a governmental payment to farmers and agribusinesses to manage the
prices of food commodities, manage their production and supply through appropriate input use,
encourage diversification of agriculture, and supplement farmers’ incomes. A variety of
incentives and special assistance programmes are currently available for the agricultural sector.
The basic objectives of these producers’ incentives are to stimulate agricultural growth and the
adoption of new technology.
The more easily identifiable forms of incentive are (i) price supports; (ii) input subsidies; (iii)
subsidized institutional credit; and (iv) subsidies on target group-oriented anti-poverty
programmes including food subsidies.
Table 2.3: Amount of fertilizers and food subsidies in India
Year Fertilizer subsidy (Rs. in Crore) Food Subsidy (Rs. In crore)

2016-17 70100 109135

2017-18 69197 116281
2018-19 73435 131787
Data Source http://pib.gov.in/Pressreleaseshare. FCI,
aspx?PRID=1579455 http://fci.gov.in/finances.php?vie
w=22

2.7.5 Agricultural Price Support

The Commission for Agricultural Costs and Prices (CACP), earlier called the Agricultural Prices
Commission, was set up by the Government in January 1965 to advise on the price policy for
agricultural commodities in India.
The CACP has evolved a balanced and integrated price structure from the perspective of the
overall needs of the economy. The CACP gives due regard to the interests of the producers and
the consumers while recommending the minimum support price (MSP) for 23 agricultural
commodities. MSP is announced before the start of sowing seasons every year and ensures an
adequate return to the producers' overall paid-up costs of production.
For Horticulture crops, a price stabilization fund has been set up to tackle the volatile price,
particularly of onion, potato, and other perishable crops. The “Operation Greens” programme
run by the Ministry of Food Processing Industries (MOFPI) has been extended from tomatoes,
onions, and potatoes (TOP) to all fruits and vegetables (TOTAL). Under this programme 50%
subsidy on transportation from surplus to deficient markets, a 50% subsidy on storage, including
cold storage are provided.

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Check Your Progress 3
Note: a) Use the space given below for your answers.
b) Compare your answer with those given at the end of the unit.
1) Name the institutional sources of agricultural finance.
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2) What do you understand about the National Agriculture Market (eNAM)?

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2.8 ISSUES RELATED TO TRADE

The agriculture sector contributes significantly to national exports. Total agricultural exports
were Rs 308830 crore in the year 2020-21 which was 14.30 percent of total national exports. The
country also imports significant amounts of agricultural products. Total agricultural imports
during 2020-21 were 4.5 percent of national imports. After globalization, considerable
opportunities and challenges for enhancing agricultural exports are emerging. Some important
issues relating to agricultural trade are discussed below:

2.8.1 Issues related to Trade Promotion

Agribusinesses should focus on increased productivity and cost-effective production of
commodities having good export prospects. To achieve this, it is essential to identify and adopt
technologies and protocols suitable to local situations. Appropriate technological interventions
would also help in maintaining the product quality to the desired level and improving post-
harvest management including processing, packaging, storage, transport, and delivery. We must
follow certain regulatory procedures and abide by relevant regulatory laws of both exporting and
importing countries. For example, we must label the packets and consignments in a prescribed
manner. Certificates on the consignment mention the sanitary and phytosanitary (SPS) conditions
of the goods contained in a particular consignment. Exporters must furnish detailed SPS reports
for both countries of import and export or label particular consignments by using a particular
colour, and so on, as part of any additional regulatory requirements. It will be important to

18
remind about the increasing importance of the protection and ownership of intellectual property
rights (IPR) over the products or services in trade. For countries to achieve a competitive edge in
their exports, their legislative, regulatory, and administrative systems as well as policy guidelines
must be appropriate and effective.
The Indian farmers are known for their hard work and perseverance. The majority of them are
marginal and small farmers. However, given the right technologies, market guidance, and
support through cooperative and self-help groups, even small and marginal farmers may be able
to take advantage of the globally emerging trade opportunities.

2.8.2 Trade Distortions

Trade may be distorted due to several reasons or factors. For example, total trade will be affected
if prices are either higher or lower than normal. Similarly, total trade will vary if production is
higher or lower or normal, or quantities bought and sold are different than the levels that would
exist in a competitive market in normal cases. The prices in a country’s internal market, the total
production, or the total quantities bought or sold, in turn, may be dependent on factors such as
import barriers and domestic subsidies.
Higher prices can encourage farmers to produce more. Similarly, export subsidies can encourage
them to sell their surplus in world markets. When some countries give export subsidies and
others do not, the trade will not be normal but distorted. Domestic support to farmers in several
forms of subsidy or agriculture-related infrastructure development has been favoured by
countries even if it also results in agricultural trade distortions in some cases. Developed and
developing countries broadly have differential capacities and priorities in giving domestic
support and export subsidy to their farmers. This causes trade distortions of considerable
magnitude.
Another important area identified for attention by countries in this context has been to improve
access to their markets and provide a level playing field to traders from other countries. Trade
distortions can also occur due to quantitative restrictions (QRs) or the curbs imposed by
countries to regulate imports by quotas, licensing, or canalizing. All imports are subject to
payment of customs duty/additional customs duty or tariffs. Applied duties can be raised to the
bound tariff levels, wherever necessary, to protect the interests of domestic agriculture.
Therefore, one of the purposes of the international trade negotiations has been to reach some
agreement on trade rules that are capable of eliminating or minimizing such trade distortions.

2.8.3 Quality Considerations and Sanitary and Phyto-Sanitary Measures

Liberalized agricultural trade under the WTO system may result in increased movement of
agricultural produce and products between countries. However, imported commodities are also
likely to bring along with them some unexpected diseases and pests. Consequently, countries
may block imports of certain commodities from certain other countries. Such blocking of imports
by countries should not be irrational and this should not unduly reduce the prospects of exports

19
by the affected countries. The WTO system has provided certain legal standards based on
appropriate international standards and transparent procedures. These are known as Sanitary and
Phyto-sanitary (SPS) measures.
Countries are required to take SPS measures for food safety, human, animal, and plant life, and
health. The SPS agreement recognizes that governments have the right to take SPS measures but
such measures should not arbitrarily or unjustifiably discriminate between Members where
identical or similar conditions prevail.
The SPS agreement spells out procedures and criteria for the assessment of risk and the
determination of appropriate levels of SPS protection. The SPS measures have to be broadly
harmonized with international standards, guidelines, and recommendations. But, WTO members
may introduce, based on appropriate scientific justification, some measures which require higher
standards.
An importing country may accept the SPS measures of the exporting country as equivalent
measures if these are demonstrated to achieve the appropriate level of health protection. There
are provisions in the SPS agreement on control, inspection, and approval procedures.

2.8.4 Issues in the Implementation of SPS Measures

Developed countries often adopt very high standards for the safety and health of their citizens,
animals, and plants. This requires an exporting country to conform to these high standards for
their exports. Sometimes, conformity to such high international standards as a part of the SPS
measures becomes impracticable for developing countries. This is so because the exporting
country requires strong institutional capabilities and capacity in respect of (i) processing and
transportation infrastructure, and (ii) implementation of SPS measures in each case of import or
export i.e. (a) the required SPS analysis, (b) pest risk analysis, and (c) chemical analysis with
high precision given specified limits. Many developing countries, however, do not have adequate
capacity for this effect.
The absence or paucity of referral analytical facilities and inference tools/software in developed
countries will also result in a lack of transparency in the levels of SPS measures specified by
them. As a result, the whole situation will render SPS measures a technical trade barrier or a non-
tariff trade barrier. Application of SPS measures in areas such as chemical residues, foreign
matter content, microbial load, etc. need skills that are a constraint for the developing countries
and, hence, they may not be able to enhance their exports or access potential new markets and
promote external trade. The provision in SPS Agreement for accepting equivalence in SPS
measures is rarely accepted by importing countries. In practice, this amounts to a denial of
immediate market access although the differences can be resolved through bilateral or
multilateral consultations.
To cope with the SPS Agreement in the export of agricultural commodities, the exporting
countries have to focus on some essential follow-ups, such as (i) development of pest risk

20
analysis (PRA) for particular commodities in the country vis-à-vis the prospective country of
import, (ii) identification/notification of pest-free areas on a continuous basis, and (iii) fixing of
maximum residue limits.
In the Doha Ministerial Conference of the WTO, it was decided that member countries will not
exceed 6 months period for compliance under the SPS Agreement in the context of a longer time
frame provided to developing countries under the special and differential treatment (Article 10
para 2 of SPS Agreement). This round also recognized the following issues of continued
concern, (i) implementation of the provisions of equivalence, (ii) response to the negative effects
on trade of least developed countries through the introduction of any new SPS or TBT measures,
and (iii) SPS-related technical assistance needs and setting or adopting international standards. It
was also agreed to continue the review of the operation and implementation of SPS measures at
least once every four years.

2.9 GENDER INEQUALITY AND TRADE

Despite constituting 70-90 percent of the workforce in agriculture, women in many developing
and least developed countries, have very little control over land, credit, inputs, extension
services, and infrastructure. These inequalities greatly reduce productivity and further decrease
the share of these countries in trade in agricultural goods in the global market. Gender is
important not only as a human rights issue but also because it may have a dynamic relationship
with growth, inequality, and poverty. Many United Nations platforms, resolutions, and mandates
require gender mainstreaming in inter alia trade policies and institutions focusing on these
policies. For example, the Beijing Platform of Action (United Nations, 1996) has pointed out the
need for (i) more analysis of the impact of globalization on women’s economic status, and (ii)
assurance that national policies related to international and regional trade agreements do not
adversely impact women’s new and traditional economic activities.
From the point of view of trade, there is a multifaceted relationship between gender inequality
and trade pattern. For example, gender employment and employment conditions may have an
association with export orientation. Labour is not considered a part of economic activity in a
developing economy as long as unpaid household labourers, mostly women, are available. The
cost of production also remains partly invisible. From a market-focused analysis, one may
consider a particular enterprise as efficient. But the role and work of women may not have been
properly reflected in trade. The inclusion of such roles and work of women in full labour
accounting and time-use will change the economic equations.
Access to global markets is critical to the economic security of many of the world’s poor,
working in the informal sector, which accounts for up to 70 percent of GDP and more than 40
percent of exports. This sector includes home-based workers, vendors, manual labourers, and
service providers. About 93 percent of the workforce is likely to be operating within the informal
sector. Further, 60 percent of the workforce in the informal sector is expected to be women.
While most other dimensions of gender inequality indirectly hinder trade performance, wage

21
inequality in women's labor may have a positive impact on trade in the context of competition.
This is considered a challenge in the level playing field on ethical grounds.
Gender-sensitive trade policies and action plans should essentially focus on (i) promotion of
gender awareness in trade issues, (ii) integration of gender perspectives in trade matters at all
levels, (iii) inclusion of gender in the trade review mechanism, and (iv) visibility of gender-trade
links in trade analysis.

2.10 SUSTAINABILITY AND TRADE

You know that environment is common to all. Also, there is growing interdependence in global
economic issues. Therefore, some people advocate for the integration of trade and environmental
issues and action plans. However, others criticize the idea of globalization in a variety of
arguments, ranging from ‘social issues’ to ‘labour standards’ and ‘environment’. The main
criticism is that globalization does not promote sustainable development. The criticism is typical,
and it revolves around the functioning of the multilateral trade system in general and of WTO in
particular.
The concept of ‘sustainability’ is defined differently depending on the context of the discussion.
‘Sustainable development can refer to either poverty or environment or income distribution or
other aspects of economic development such as gender issues, health, education, etc. Sometimes,
the problems of ‘sustainability’ are also linked to the deficiencies of the multilateral system of
trade and finance.
The United Nations Conference on Environment and Development (UNCED), 1992 had
considered that the objectives of environment and economic and social development policy are at
par. The Rio Declaration suggested that environmentally compatible economic development will
occur only if countries respect the integrity of the natural environment. Agenda 21 on sustainable
development pointed out that this may be achieved by addressing the environmental and
development concerns at the same time. It was agreed to take action under Agenda 21 on issues
such as (i) sustainable agriculture and rural development, (ii) sustainable management of fresh
and ocean waters, (iii) conserving biological diversity, (iv) protecting the atmosphere, (v) better
management and treatment of hazardous and radioactive wastes and toxic chemicals, and (vi)
combating deforestation and desertification. Various means of implementing Agenda 21 were
identified, which included extensive domestic reforms and international assistance programs for
developing countries in areas such as economic development, improved market access, and
commodity prices, technology transfer, financing (debt relief, foreign investment, official
development assistance), and institutional capacity building.
You may also like to observe the principles of trade and sustainable development as developed
by the International Institute for Sustainable Development (IISD) in line with the spirit of the Rio
Declaration and Agenda 21. These principles are:

22
 (i) Progressive internalization of unpaid environmental costs in the prices of goods and
services, and trade liberalization, to improve efficiency.
(ii) Trade liberalization and other critical proactive measures, to promote equity.
(iii) Special efforts to maintain the regenerative capacity of ecosystems and avoid irreversible
harm to plant and animal populations and species.
(iv) Implementation of environmental measures as per national law within the countries.
Where a significant trans-border impact is envisaged, international cooperation is
essential.
(v) Open, effective, and impartial dispute settlement procedures.
(vi) Access to information, public participation, and accountability in the decision-making
process.
The WTO will have to play its role on trade and sustainable development issues in broad terms
by (i) monitoring and analyzing trends in environmental regulation which are likely to have a
significant trade impact; this includes monitoring domestic trends in product standards
regulations, including technical regulations, packaging, labelling, and recycling, (ii) clarification
on current trade rules which may be considered relevant to sustainable development, and (iii)
facilitating negotiations on changes in tariff structures and rules of conduct which foster
sustainable development.
In terms of capacity to fully exploit market opportunities, there is a need to promote exports of
environment-friendly products, identify market trends, and the products and processes, improve
the collection and dissemination of information on relevant environment-based regulations in
major markets, and ensure the right to participate in such markets, absorb and use such
information to adjust production methods and training to sustain core competence.

2.11 INFORMATION FLOW AND INFORMATION NEEDS

With the knowledge-driven economy gaining significance, information, as an input in agriculture
is becoming critical. In this context, we need to understand the different dimensions and patterns
of information flow and the dynamic nature of the information needs of farmers. In India, the
public extension system is the major agricultural information provider. Over the years, it is
experiencing the following generic constraints leading to information flow inadequacy in terms
of regions and target groups, especially the resource-poor farmers and farm women.
1. Inadequate extension coverage: The use of traditional modes of extension makes effective
communication with farmers difficult. This results in large communication gaps as all target
groups, especially the resource-poor farmers and those in remote locations, are not
effectively reached. The group approach is being tried as an alternative approach to save time
and enhance the reach of extensionists, but it has limitations due to heterogeneous socio-
cultural barriers.

23
2. Less interactive, time-consuming multi-step communication channel: In a conventional
method of training, master trainers are trained; they in turn train the trainers who go to the
field level for conducting training of extension workers. Finally, extension workers carry
information to the final recipients. This ‘step down model’ has the obvious disadvantages of
loss of information, deterioration in the quality of training, long lead times, and high costs
3. Use of traditional extension methods becoming expensive: Some of the frequently used
printed materials like brochures and leaflets are becoming relatively low in cost-
effectiveness in terms of printing cost, amenability for updating, and distribution.
Owing to new challenges and increased competition in agriculture, farmers look for information
on farm diversification, value addition, recycling, and integrated farming approaches with the
potential for risk minimization. At the same time, farmers prefer information that is easily
accessible so that the cost of procuring the information and the time spent accessing it are
minimized.

2.11.1 Information and Communication Technology

The world is witnessing an information revolution. In India, to bridge the agricultural knowledge
gap between clients’ needs and various stakeholders, information and communication
technologies (ICTs) are emerging as appropriate tools. ICTs have proved to be effective and
efficient tools to support agricultural extension as outlined below:
 More subject matter coverage: Using ICTs, we can disseminate ‘knowledge-intensive’
information related to market intelligence, weather forecast, post-harvest processing, etc.
 Decision support: It can provide alternative solutions for problematic situations/scenarios and
thereby improve the quality of decision-making.
 Direct access to information: It helps overcome the problems of multi-step distortions.
 Minimization of time and distance barriers: It can virtually link the national and global
knowledge systems and can break organizational working-hour barriers.
 Empower rural intermediary organizations: ICTs can enhance the capacity of stakeholders
and agricultural producers like local governments, local extension services centers, farmers’
associations, NGOs, community radio stations, agro-processors, agricultural input providers,
and rural credit organizations.
Thus, ICTs have the potential to facilitate cost-effective production, vertical integration, value
addition in marketing, minimization of transaction costs, improved communication efficiency,
and enhanced competitiveness thereby accelerating growth.

2.12 LET US SUM UP

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The agriculture sector has made remarkable growth after independence. The concerted efforts of
the farmers, governments, research organizations, extension systems, and various policymakers
have contributed to agricultural development. The farmers are growing the crops based on the
market demand which fetch good prices. The objective of farmers is to earn more income not
just to get more production. Further scope for improving the farm economy exists by promoting
the concept of agribusiness/commercialization in the agricultural sector. Diversification towards
high-value commodities provides good scope for enhancing farm income. Crop diversification,
adoption of allied enterprises such as livestock, beekeeping, poultry farming, and value addition
through food processing can help to generate higher incomes for agricultural producers, while
simultaneously satisfying consumer needs and demand. Changing consumer needs and
preferences for food products offers considerable scope for promoting and setting up agro-based
industries in the country. Globalization and liberalization have led to an increase in agricultural
trade though issues of product safety and quality continue to be important.
There is scope to enhance agricultural trade by resolving the issues of quality, gender, and
sustainability in agriculture and enhancing production efficiency. Gender issues, especially
drudgery reduction and work opportunities for farm women are becoming important and are
concerns at the global level. Information and communications technology is helping the
agriculture sector with a faster and greater flow of information. ICT is also facilitating the
marketing and financial services in agriculture.

2.13 KEYWORDS
Diversification: Diversification means raising more than one crop or pursuing more than one
enterprise on a farm.
Sanitary and Phyto-sanitary (SPS) measures: These are the legal standards adopted by
countries in international trade for food safety and the protection of human, animal, and plant life
and health developed on appropriate scientific and transparent procedures. Appropriate levels of
SPS protection are determined by procedures and criteria for assessment of risk spelled out in the
SPS Agreement.
Trade distortions: These are deviations in total trade in terms of prices, total production, or total
quantities bought and sold relative to what would have been the case in a perfectly competitive
market. These distortions are a result of factors such as domestic support, export subsidies, and
import barriers (customs duty or tariffs, quantitative restrictions, import quotas, licensing, or
canalizing) that affect market access.

2.14 SUGGESTED READINGS/ REFERENCES

 IGNOU Study Material MNR001: Indian Agricultural Development
 Agricultural Statistics at a Glance 2020, Directorate of Economics and Statistics, Department
of Agriculture, Cooperation and Farmers Welfare, Ministry of Agriculture and Farmers
Welfare, GOI

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2.15 POSSIBLE ANSWERS TO CHECK YOUR PROGRESS
Check Your Progress 1
1) Urbanization, population growth, a convergence of food habits, and an increase in per
capita income in India.
2) The technological development for dryland agriculture, Intensive cropping, improved
crop production technologies, plant types/varieties, use of problematic and wastelands in
agriculture, and maintenance of soil health.

Check Your Progress 2

1) Diversification in agriculture can mean any of the following situations:
 A shift from a less profitable crop (or enterprise) to a more profitable crop (or
enterprise)
 Using resources in diverse but complimentary activities
2) Production linkages, Demand linkages, and Savings and investment linkages

Check Your Progress 3

1) Co-operatives, Scheduled Commercial Banks, and Regional Rural Banks (RRBs)
2) The National Agriculture Market (eNAM) is a pan-India electronic trading portal that
networks the existing APMC mandis to create a unified national market for agricultural
commodities. The eNAM allows farmers to sell their produce at any suitable
market/place throughout the country.

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UNIT 3 ENTREPRENEURSHIP DEVELOPMENT

Structure
3.0 Objectives
3.1 Introduction
3.2 Entrepreneur and Entrepreneurship
3.3 Classification of Entrepreneurs
3.4 Entrepreneurial Skills
3.5 Entrepreneurial Opportunities in Agriculture
3.6 Right Mindset for Entrepreneurship Development
3.6.1 Strategy to Bring Desirable Changes in the “Mind Set” through Training
3.7 Entrepreneurial Development
3.8 Types of Entrepreneurship
3.9 Corporate Entrepreneurship
3.10 Preparation of Business Plan
3.10.1 Components of Business Plan
3.10.2 Appraisal of Business Plan
3.11 Steps in Setting up an Enterprise
3.12 Let Us Sum Up
3.13 Key Words
3.14 Further Readings / References
3.15 Possible Answers to Check Your Progress Exercises

3.0 OBJECTIVES
After going through this unit, you will be able to:
 explain the concept of entrepreneur and entrepreneurship;
 identify the essential qualities of an entrepreneur;
 differentiate between different types of entrepreneurs
 state the various entrepreneurial opportunities in agriculture;
 discuss the meaning, importance, and components of the business plan; and
 describe the steps involved in setting up an enterprise.

3.1 INTRODUCTION

1
More than 60 percent of the population in India, directly or indirectly, depends on agriculture for
their livelihood. An important characteristic of farming in India is that the majority of farmers
still use traditional farming practices. The element of entrepreneurship in agriculture can play a
vital role in improving livelihood security and alleviating poverty. This unit will help you to
understand the meaning and importance of entrepreneurship in agriculture and the important
characteristics of an entrepreneur. The unit will also explore entrepreneurial opportunities and
the process of entrepreneurship development in agriculture.
Entrepreneurs should have a clear idea about the business opportunities, potential customers and
markets, consumers and their needs and want, availability of raw materials, finance, and human
resources. It is equally important for entrepreneurs to know about their own strengths and
weaknesses. The present document attempts to define all these components and lay down the
required steps and procedures to be followed to establish and operate an enterprise. This unit
explains a business plan, its significance for a successful venture, the various components of a
good business plan and requisite measures to be considered for appraisal of a proposed plan.
Setting up an enterprise is a complex process. Various institutions and organizations provide
training to young people to understand the process of setting up a business enterprise. The
entrepreneur should have complete knowledge of men, materials, machines, markets, and
products. Several formalities like approval and clearance from concerned government
departments must be completed before setting up an enterprise. The establishment of an
enterprise involves the study of business opportunities, development of a feasible business plan,
and identification, determination, and arrangement of men, materials, machinery, and market for
products. This unit explains in detail the procedure to set up a business enterprise

3.2 ENTREPRENEUR AND ENTREPRENEURSHIP

For every individual, there are two options for earning a livelihood: (i) wage employment and (ii)
self-employment. In wage employment, individuals take up a job and serve the business owner
or organization for a fixed salary. In self-employment, individuals start their own economic
activities. The economic activities may be a small business, processing or manufacturing unit or
dairy plant, vermicomposting., etc. Once the activity grows it can provide the wage-employment
to others, then it is called entrepreneurship. The person who practices entrepreneurship is called
an entrepreneur.
An entrepreneur is defined as a “person in effective control of a commercial undertaking; or one
who undertakes a business or an enterprise”. An entrepreneur is an innovative person who
maximizes his profits by following new strategies or venturing into new products or services. A
good entrepreneur is one who inspires confidence in people and motivates them. An entrepreneur
is one who identifies and exploits opportunities to his advantage, innovates, raises money,
assembles inputs, and sets up and manages an enterprise. Innovation occurs through the
introduction of a new product or service and quality in a product; identification of fresh demand
for a product and a fresh source of supply; finding new processes or resources for manufacturing

2
a product; finding new use for existing products and finding new markets for existing products
and services. As an innovative person, an entrepreneur maximizes his profits by following new
strategies or venturing into new products or services.
Entrepreneurs perform one or more of the following activities:
 Perceive and identify opportunities for profitable investments;
 Explore the prospects of starting a manufacturing enterprise;
 Obtain necessary industrial licenses;
 Arrange initial capital;
 Provide personal guarantees to the financial institutions;
 Promise to meet the shortfalls in the capital; and
 Supply technical know-how.
Entrepreneurship refers to the quality and skills required to become an entrepreneur. It refers to
identifying and innovating ideas and services; mobilizing resources; organizing production and
services, and finally marketing them. An entrepreneur tries to cover risks by constantly trying to
achieve growth and development. Thus, entrepreneurship is the “process of the entrepreneur”. It
is an attempt to create value through the recognition of business opportunities. It is basically a
communicative and management function that aims to mobilize financial and material resources.
Entrepreneurial activity is governed by a combination of personal, environmental, cultural,
social, and economic factors,

3.3 CLASSIFICATION OF ENTREPRENEURS

Entrepreneurs are generally classified based on expertise, business type, and motivation levels.
a) Entrepreneurs based on expertise

Technical Entrepreneurs: They develop the improved quality of goods because of

craftsmanship. The greatest strength of a technical entrepreneur is a skill in production
techniques. They improve goods or services by using innovative technologies and concentrate
more on production than on marketing.
Non–technical Entrepreneurs: They are not concerned with the technical aspects of the product
that is produced. Their focus is more on marketing and distribution strategies and less on
production.
Professional Entrepreneurs: Their primary interest and focus are on establishing a business
rather than on managing or operating it. Once the business is established, they sell it out and start
another venture. They conceive and explore new ideas to develop alternative projects.
b) Entrepreneurs based on motivation levels:

3
Pure Entrepreneurs: These entrepreneurs are motivated by psychological and economic
rewards. They undertake an entrepreneurial activity for their personal satisfaction in work,
recognition, status in society, and a desire to earn wealth.
Induced Entrepreneurs: Induced entrepreneurs are attracted to undertake entrepreneurial
activity by incentives provided by the government. Policy measures such as government
assistance, concessions, and subsidies induce them to start a business venture.
Motivated Entrepreneurs: These entrepreneurs are motivated by personal factors, especially
by a desire to realize self-fulfillment. They are motivated by the possibility of making and
marketing a new product for the consumer. Economic factors also motivate them.
Spontaneous Entrepreneurs: Entrepreneurs who undertake entrepreneurial activity because of
the natural talent they possess for doing business. Confidence, resourceful nature, and the
willingness to take up challenges, induce them to undertake an entrepreneurial activity.
c) Entrepreneurs based on the type of business:
Business Entrepreneurs: They conceive an idea for a new product or a new service. They
undertake both production and marketing activities to convert their ideas into business ventures.
Trading Entrepreneurs: These entrepreneurs undertake the activities of distribution and
marketing of goods, that is trading related activities but not production or manufacturing work.
They identify potential markets for products and stimulate demand for the products they trade in
by creating a desire and interest among buyers for the product thereby inducing purchase.
Industrial Entrepreneurs: These entrepreneurs are essentially manufacturers who identify the
potential needs of the customers and tailor a product or service to meet the needs of the
customers.
Corporate Entrepreneurs: Corporate entrepreneurs are those who possess the skills of
organizing and managing corporate undertakings. They follow the rules and regulations of the
corporate and help the corporate to meet its objectives.
Agricultural Entrepreneurs: These entrepreneurs undertake agricultural activities of crop
production or raising livestock. Agricultural entrepreneurs are also involved in the marketing of
crops and agricultural inputs. (IGNOU, 2008).

3.4 ENTREPRENEURIAL SKILLS

In order to successfully establish and manage a business enterprise, entrepreneurs require certain
skills. These skills range from personal and social skills to business management skills. Some of
the important qualities required by successful entrepreneurs are:
Positivism/Optimism: Entrepreneurs should direct their energies towards the accomplishment
of worthwhile goals and set standards of excellence in what he or she is doing.

4
Creativity and innovation: Creativity and innovation are most important in entrepreneurship. It
does not necessarily mean applying only new ideas. What is needed is that the entrepreneur
should select the right ideas and adopt them faster than others. In other words, the entrepreneur
should possess the vision to see plan the future for his enterprise.
Strong Desire: Entrepreneurs should have a strong desire to achieve higher goals and make their
dreams come true. This requires a strong focus and passion for what they are doing.
Consistency: Entrepreneurs should be consistent in their decisions and follow-up actions.
Persistent efforts are required for being successful and difficulties and problems that come along
should not be deterrents.
Risk taking: Risk-taking is an important quality among successful entrepreneurs. Undertaking a
new activity always involves a certain amount of financial risk. It is important that entrepreneurs
should take moderate and well-calculated risks and not make wild speculative gambles.
Opportunities seeking: Entrepreneurs should be quick to spot and grab opportunities. This
means that an entrepreneur’s innovative turn of mind should be able to convert challenges into
possible opportunities.
Information seeking: Relevant information enables risk-taking and improves the quality of
decisions. Information is the basis for the efficient management of a business.
Using feedback: Entrepreneurs should take immediate feedback on their performance. They
should seek prompt and accurate data and information even though it may not be favorable and
act on it.
Managerial skills: Entrepreneurs must have good managerial skills and knowledge. The ability
to set achievable goals and make systematic plans, and develop appropriate strategies to achieve
the set goal and targets within the given time frame and the available resources is essential for an
entrepreneur. In addition to this, they must also possess financial management, marketing, and
human resources management skills.
Concern for maintaining standards and quality of work, a problem-solving attitude, long-term
commitment, and the ability to cope with stress are other important qualities that determine
success for an entrepreneur.
Check whether you have the essential qualities listed here and try to adopt them to become a
successful entrepreneur.

3.5 ENTREPRENEURIAL OPPORTUNITIES IN AGRICULTURE

Some important entrepreneurial opportunities in agriculture are discussed below:
Diversification: Diversification means raising more than one crop/enterprise on a farm.
Diversification in agriculture involves a shift in cropping patterns from traditionally grown less
remunerative crops to more remunerative crops like oilseeds, pulses, fodder crops, horticulture,
medicinal and aromatic plants, floriculture, etc. It also includes undertaking livestock and fishery

5
enterprises and establishing small-scale agro-based industries. Diversification increases
employment opportunities, optimum use of resources, and profitability.
Organic farming: The importance of organic farming is growing very fast particularly as the
demand for organic food products is growing in international markets. The increased demand for
organic products provides great business opportunities for agro-based entrepreneurs. In India, the
area under organic farming is increasing but is still not adequate to meet the demand for organic
produce.
Venture technologies: Traditionally, greater importance has been given to the production of the
main economic products. For example, in the case of rice, paddy is the main economic product.
However, additional income can be generated from enterprises such as the production of paddy
seeds and processed foods made from rice. The same applies to other agricultural and livestock
products.
Food preservation, processing, and packaging: A large proportion of agricultural produce is
wasted due to improper storage and warehousing, lack of transportation, and lack of food
processing facilities. With changing lifestyles and greater awareness, there is a significant shift in
consumer food preference toward processed food products. Entrepreneurs can add value with
proper management and marketing initiatives. The market for processed food, be it ready-to-eat
or semi-cooked products, organic products, and value-added products provide a significant
opportunity and potential for entrepreneurs.
Production of agro-inputs: Farmers can undertake entrepreneurial activities in the production
of seeds, organic fertilizers, and pesticides.
Floriculture: Floriculture is a very lucrative sector in India. The tropical and sub-tropical
climatic conditions prevalent in India permit the cultivation of a variety of floriculture products.
India’s current share in the world trade of floriculture is very low. There is a huge market to be
tapped considering the rising demand for fresh flowers.

3.6 RIGHT MINDSET FOR ENTREPRENEURSHIP DEVELOPMENT

There are immense opportunities for entrepreneurship development and for entrepreneurial
activities in agriculture in rural India to improve the livelihoods of farmers. However, to become
an entrepreneur, a person should have the right mindset, appropriate knowledge, and above-
discussed skills. The entrepreneurial skills in any individual do not come by birth; these skills
can be learnt through vocational education and training intervention. Various organizations
provide specialized training for this purpose. However, the major responsibility for success lies
with the learner.

3.6.1 Strategy to Bring Desirable Changes in the “Mind Set” through

Training
It is possible to bring desirable changes through purposeful training interventions. Specialized
training attempts to provide an opportunity to explore “behaviour” and experiment with new

6
behaviour that is conducive to entrepreneurial performance. This leads to “self-learning” and
“self-acceptance”. Now let us understand this process of change during training.

1. To know “What You Are?”

The question could be answered in a variety of ways. One of the ways commonly followed is
the attempt to reflect oneself keeping in view the image of an achievement-oriented person. In
such a situation it is possible to visualize an “ideal self”; against the “real self”, that is, what is
the reality or the real image. The gap between the ideal self and the real self sets the process of
change in motion. It is possible to realize the gap and enhance willingness to fill up the gap
through action. For example, Raju’s real self is that he hates mathematics, but his ideal self is
that he wants to become a chartered accountant. Now it is for Raju to fill this gap by taking
appropriate steps.

Let us examine the steps:

 Reviewing one’s failures and successes, fears, and aspirations.
 Looking at the relationship between one’s own desires and what society (family and culture)
expects.
 Examining one’s characteristic modes of behavior resulting from understanding, attitude,
opinions, and beliefs.
 Looking at the self through the eyes of others.
 Studying fantasies/dreams and the actual behaviour.
 Identifying the internal potentialities.

2. To know your destination

Once you know or discover the discrepancy between the ideal and real self it may create enough
anxiety or discontentment and you may soon desire to change towards the ideal. This is
important, as, through discontentment, you may like to find alternative solutions. For this, the
following aspects may be kept in mind.
 Explore alternate ways of thinking and action and collect factual information in relation to
the consequences of these choices.
 Ensure quick feedback concerning the new behavioral patterns and understand their
significance.
 Evaluate progress in the desired direction.
 Try out the new behavioural patterns in the real world outside the training experience.

3. To believe that you are the master of your own destiny

Fundamental to all the other conditions for change is a growing conviction in you that you can
change, take control, and direct your own life. There are different ways through which any

7
person can realize how powerful he or she is, rather than a pawn being pushed around by others.
Try this simple strategy to bring this about:

 Have belief in your capacity to help others and to learn from others.
 Have a constant desire to strive for change.
 Take a decision regarding pursuing any change on your own rather than the following
prescription of others.

These will facilitate your thinking and help you towards building an entrepreneurial profile. Any
desirable change in thinking will lead to actions conducive to entrepreneurial performance.

4. To develop a positive self-image

In order to develop an image of self, let us look at this diagram. The central focus is ‘ME’. This
‘ME’ is formed on what I think about myself, what I wish to become, how others perceive me,
and most importantly how I project myself. Based on this, I develop my own identity of “Who I
am”. However, this ME goes through a continuous self-evaluation, which contributes to self-
confidence and self-respect. Based on this evaluation the “ideal self” is formed which helps the
person to move forward toward his goal.
Remember this can make a person more focused. This leads to self-effectiveness and increased
internal power or control.

ME SELF EVALUATION

SELF CONFIDENCE

SELF RESPECT

I WISH I WERE
I TRY TO PROJECT SELF IDENTITY:
I USED TO BE
WHO AM I
I THINK I AM
OTHERS PERCEIVE WHAT AM I
ME

SELF IDEAL:

WHAT SHOULD I BE!

WHAT COULD I BECOME!!

8
 Research has shown that a person desiring to be an entrepreneur has a goal where s/he
is continuously engaged in some activity rather than just aiming at a goal where there is
a lack of clarity. Further it has been found that such persons have tendency to solve
rather than avoiding problems. They possess internal resources in the form of
confidence, ability, capacity etc. rather than depending upon external resources or have
a feeling of lack of resources. Similarly they are found to take initiative rather than wait
for a direction from others to do the task. A content analysis of the essay on “Who I
am?” can help in understanding and developing this concept.
Source: BPVI008, IGNOU Study Materials

Check Your Progress 1

I. Answer the following questions in the space provided.
II. Match your answers with those given at the end of this unit.

1. Fill in the blank:

An entrepreneur is one who identifies the ------------------------, innovate the ideas, raises
money, assembles inputs, and sets and manages the organization.

2. Which of the following is not a characteristic of an entrepreneur?

(a) Positive
(b) Planner
(c) High-risk taker
(d) Innovator

3. Entrepreneurship is the:
(a) quality and skills required to become an entrepreneur
(b) process of the entrepreneur
(c) creation of value through recognition of business opportunity
(d) All of the above

4. The entrepreneurial qualities in an individual come by birth only (True/false)

3.7 ENTREPRENEURIAL DEVELOPMENT

The process of starting a new business venture is embodied in the entrepreneurial development
process. The process can be classified into four phases.

9
1. Identification and evaluation of the opportunity: The process of enterprise building starts
with an effort to think out an attractive set of opportunities for an enterprise. Each relevant
business idea/opportunity must be carefully screened and evaluated for market potential,
financial viability, and technical feasibility. The entrepreneur should understand the cause of
opportunity. It may be technological change, market shift, government regulation, or
competition.

2. Develop a business plan: A good business plan must be developed to exploit the defined
opportunity. The business plan helps the entrepreneur to develop a framework of activities,
arrange finance and other inputs, select the appropriate production technology, and security
clearance from the government and successfully manage the resulting venture.

3. Determine the resources required: The resources needed for realizing the opportunity must
also be determined. This process starts with an appraisal of the entrepreneur’s available
resources. Any resources that are critical must then be distinguished from those that are just
helpful.

4. Implementation and management of the enterprises: After resources are identified, the
entrepreneur sets up the business venture, employs the resources through the implementation
of the business plan, manages the enterprise, and creates and looks for growth.

3.8 TYPES OF ENTREPRENEURSHIP

One of the first decisions an entrepreneur's faces while starting a new business is selecting the
form of ownership for the new business venture. Understanding ownership is very important for
a better entrepreneurial process. Entrepreneurs have a wide choice of forms of ownership. The
most common forms of ownership are sole proprietorship, partnership, family ventures, and
corporations.
a) Sole proprietorship: This is a business that is owned and managed by an individual. This
form of ownership is the most popular. The advantages of this form of ownership are that it is
simple to create, the least costly form of ownership to begin a business, total decision-making
authority lies with the individual, there are no special legal restrictions, and it is easy to
discontinue. However, there are certain disadvantages also like unlimited personal liability
(this is so because there is no distinction between the owner’s personal and business assets
and liabilities), limited skills and capabilities of the individual, feelings of isolation, limited
access to capital, and lack of continuity for the business.

b) Partnership: A partnership is an association of a minimum of two and a maximum of seven

people who co-own a business for the purpose of making a profit. Advantages of this include
ease of establishing, the complementarity of skills, division of profits, a larger pool of capital,
the ability to attract limited partners, and fewer governmental regulations. Disadvantages are

10
 that it has an unlimited liability of at least one partner, capital accumulation, difficulty in
disposing of partnership, lack of continuity, and lack of potential for personality.

General Partnership: Partners of a firm share in the management and profits of the business;
have ready access to accounting records and business affairs of the partnership; enjoy more
privacy.

Limited Partnership: It is an association formed by one or more general partners and one or
more limited partners. The general partner or partners manage the operation. The limited partner
or partners are investors only. The general partner manages the partnership without interference
from the limited partner or partners.

Family Ventures: These are generally locally owned and operated, often by one person called a
sole proprietor. Proprietors may have started their businesses in an effort to supplement or
replace family income.

3.9 CORPORATE ENTREPRENEURSHIP

Corporate entrepreneurship is the process of encouraging ‘’innovation” within existing
companies through motivated employees who are supported with company resources. It is the
process used to develop new businesses, products, services, or processes in an existing
organization to generate revenue growth. Corporate entrepreneurship may be classified as:
 Administrative Entrepreneurship: The firm simply moves a step beyond formal R&D
projects to encourage greater innovation and commercial development of new products,
techniques, and services or improve existing ones.
 Opportunistic Entrepreneurship: Talented personnel is given the freedom to pursue
opportunities, both for the organization and through external markets.
 Acquisitive Entrepreneurship: Corporations actively count on other firms and
entrepreneurial start-ups rather than developing ideas through R&D.
 Imitative Entrepreneurship: This type of entrepreneurship takes advantage of other firms’
ideas.
 Incubative Entrepreneurship: Whenever new ideas materialize or develop internally in the
organization they are nurtured and constructively executed to ensure success, profitability,
and revenue generation for the company.

Check Your Progress 2

I. Answer the following questions in the space provided.
II. Match your answers with those given at the end of this learning object.

11
1. Explain Entrepreneurship ownership? Discuss the advantages and disadvantages of sole
proprietorship and partnership.
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
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3.10 PREPARATION OF BUSINESS PLAN

Assessment of a business idea to determine its viability is essential after the identification of a
business opportunity. Critical examination of the feasibility and viability of a business project on
technical, financial, economic, managerial, and other aspects is vital for a business venture to
succeed. A business plan in simple words is a plan of business. A business plan is the systematic
development of a project idea to guide the entrepreneur on how his company will achieve its
goals. The eventual purpose of the plan is to arrive at an investment decision. The entrepreneur
can prepare a business plan, or he may consider involving a consultant to prepare a professional
business plan.
Importance of business plan
In today’s highly competitive and dynamic business environment, a business plan is essential for
the success of the venture. A business plan details the requirements for resources – human,
materials, equipment, and finances – required for the success of the business venture. A business
plan helps the business to be proactive, rather than reactive. The business plan is a written
document that outlines the guidelines and milestones for the business. It facilitates the timely
arrangement of adequate operational and financial resources. The business plan also serves as a
communication tool for the organization.

3.10.1 Component of Business Plan

A business plan is not only a simple document that you sit down and write over a weekend.
Invariably, it is the result of many weeks and months of research and evaluation. A business
plan, also known as a feasibility plan, comprises several components. The components of a
business plan are given below:
1. Executive summary: This is an introductory part of the project plan. The executive
summary presents the essence of the plan in an encapsulated form and should capture the
reader’s attention and imagination, and convey the flavor of the rest of the plan. It should
explain the scope and vision of the business enterprise, products and services, market
profile, production process, and information about finance, ownership, and management.
The executive summary should be ideally two pages.

12
 2. Vision: This section provides the information on scope and vision of the proposed business
enterprise, the milestones set, and methods to achieve these milestones.
3. Products and services: Description of products and services offered by the business
enterprises are given in this section.
4. Market and competitive analysis: This section covers the information on a description of
the market and the nature of competition. Market analysis is undertaken to assess market
demand or market potential, identify the target market, and assess future market growth on
account of changes in market segments, consumer preferences, and possible new entrants
in the market. Competitive analysis helps to identify major competitors and assess their
strengths and weaknesses so that appropriate marketing strategies can be developed.
5. Marketing strategy: This section should explain key competitive capabilities and
weaknesses, proposed marketing strategies, sales promotion, distribution channels, etc.
6. Production and operation: This section of a business plan, the operating plan, is very
important for those enterprises involved in manufacturing activities. The section explains
the location, size, and capacity of the plant and production activities, infrastructure
facilities, collaborations, machinery and equipment, arrangement of raw materials, human
resource arrangement, etc.
7. Finance: This section, which is the financial plan, comprises information about financial
requirements for the business and the sources of finance.
8. Organization and management: This section, which is the management plan, provides
information on the ownership type and organizational structure of the firm. It also details
the staffing requirements for the business and the requirements of specific technical and
managerial expertise.

3.10.2 Appraisal of Business Plan

Business plans need to be critically examined by the entrepreneur. Banks and other financial
institutions do examine the feasibility of a business plan against the probable success or failures
and risks and uncertainties associated with the project before arriving at lending decisions.
Following are the important aspects that should be examined in the appraisal of a business plan:
(1) Economic viability: Impact on production, employment, revenue, living standards,
national income, etc, is evaluated.
(2) Ecological viability: Effect on the environment - groundwater and air pollution – is
examined.
(3) Technical viability: Factors related to infrastructure, technology, availability of machines
and equipment, and raw materials, skilled manpower needs are evaluated.
(4) Marketing viability: Market potential, demand forecast, the position of competitors,
distribution channels, etc. must be examined. Two important elements that are indicative

13
 of market opportunity are the size of the potential market and the rate of growth of the
market.
(5) Managerial viability: The background of the business project developer, qualifications,
experience, and potential of key management personnel are examined. Particularly
important are the strengths and expertise of the leadership team and their passion for the
success of the venture.
(6) Financial viability: Financial position of the business enterprise is examined for sound
implementation of the project. The surplus generation capacity of the project is assessed
for timely repayment of loans, meeting the project cost in the pre-defined timeline, and
sources of various types of finance. Projected income statements, balance sheets, and
various financial ratios are also critically examined based on available historical data. It is
important to assess whether the financial projections are realistic or not.

Check Your Progress 3

I. Answer the following questions in the space provided.
II. Match your answers with those given at the end of this learning object.

1. A business plan is the --------------- of a project idea for the eventual purpose of arriving at an
investment decision.
2. Who should prepare the business plan
a) Banker
b) Entrepreneur
c) Manager
d) None of the above
3. Business plan is important to :
a) Achieve set goals
b) Serve as a communication tools
c) Arrange financial and other inputs
d) All the above
4. List any four components of a business plan.
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………

3.11 STEPS IN SETTING UP AN ENTERPRISE

14
The Ministry of Micro, Small, and Medium Enterprises (MSME) has defined 8 distinct steps for
setting up micro, small and medium-level enterprises. These steps have been given in detail at
http://dcmsme.gov.in/howtosetup/getstart.htm. Briefly, these steps are discussed below:
1. Project selection: The first step in setting up a business enterprise is the identification and
evaluation of business opportunities. After the emergence of viable business opportunity, the
project has to be conceptualized in all dimensions of the 4 Ps of Project Conception, namely,
(i) Product (nature, physical characteristics, and features), (ii) Process (technology to be used
to produce the product), (iii) Place (location of the plant), and (iv) Partner (technological or
financial collaborator). The factors like marketing strategy, availability of raw materials,
process technology, accessibility to the market, and incentive and support from the
Government are considered in making the choice of a product.
2. Technology and machinery: After the selection of the product, process technology is
selected for the production/manufacturing of the product. In selecting the process technology,
the following points should be kept in mind:
 Requirement of the level of skills and complexity of machines
 Requirement of large quantities of water and/or power
 Issue related to product patent if any
 Any special pollution or environmental regulations
 Appropriateness to the local environment and conditions
Due to the lack of awareness and information and the paucity of resources, small
businesses do not invest in modern equipment and machinery which leads to inefficiencies
in the production and manufacturing process. To overcome this problem, the National
Small Industries Corporation (NSIC), a public sector undertaking, facilitates the
procurement of equipment, plant, and machinery on a hire-purchase basis for
entrepreneurs. The NSIC also provides special incentives to new entrepreneurs.
3. Arranging finance: Monetary support is necessary for starting small enterprises. The
monetary support is required as seed capital, short, medium, and long-term loans, and for
meeting financial requirements. Some of the major institutions which provide credit to
business enterprises are commercial, regional rural, and cooperative banks, Small Industries
Development Bank of India (SIDBI) and State Financial Corporations (SFC), etc.
Long- and medium-term loans are provided by SFCs, SIDBI, and SIDC. Banks also finance
long-term loans. This type of financing is needed to fund the purchase of land, construction
of factory building/shed, and purchase of machinery and equipment. The short-term loans are
required for working capital requirements, to finance the purchase of raw materials and
consumables, payment of wages, and other immediate manufacturing and administrative
expenses. Such loans are generally available from commercial banks. The commercial banks

15
 also sanction composite loans comprising working capital and term loan up to a loan limit of
Rs.1 crore.
For loans from financial institutions and commercial banks, a formal application needs to be
made. The details of documentation that need to be provided with the loan application are
indicated below:
 - Documentation for Loan Application
- Balance Sheet and Profit Loss Statement for last three consecutive years of firms
owned by promoters
- Income Tax Assessment Certificates of Partners/Directors
- Proof of Possession of Land/Building
- Architect’s estimate for construction cost
- Partnership deed/Memorandum and Articles of Associations of Company
- Project Report
- Budgetary Quotations of Plant and Machinery
A sanction or rejection letter is issued by the bank after its assessment of the application.
After receiving a sanction letter, applicants need to indicate in writing their acceptance of
the terms and conditions laid down by financial institutions and banks.
Subsequently, the loan is disbursed according to the phased implementation of the
project. In today’s environment, there are other choices apart from commercial banks and
Government owned financial institutions. These options include venture capital funds and
non-government finance companies.
Source: https://msmedihimachal.nic.in/pages/view/87/167-arranging-finance
4. Unit Development: Selection of the site for setting up the enterprise is the next important
step. For tiny units and service-based units, the home may be the best starting point. Setting
up an establishment requires negotiating a favourable plot or shed purchase, organizing for
proper construction of the building, design of interiors, and finding good deals for equipment
and machinery. Getting the utility connections for power and water is an important activity as
delays in getting such connection leads to delays in setting up the plant. Projections for
manpower and staffing, machinery, and materials are made in the business plan. The
selection of proper manpower and procurement of the right machinery and materials are very
important and critical in the establishment of a plant to succeed.
5. Filing of Entrepreneurs’ Memorandum:
The Entrepreneurs’ Memorandum is a type of registration of micro, small and medium
enterprises. Filing of the memorandum by a micro, small or medium Enterprise under
Section 8 of the Micro, Small, and Medium Enterprises Development (MSMED) Act,
2006 is required as this helps the Government to keep track of the developments and growth
taking place in this sector. The memorandum may be filed by all three categories of

16
 enterprises with the District Industries Centre in the jurisdiction of which the enterprise is
(or, is proposed to be) located. The File Format for Entrepreneurs Memorandum and the
detailed procedure for filing it are available at http://dcmsme.gov.in/howtosetup/getstart.htm
6. Approvals: Every SSI unit must comply with various regulations in force. These include
regulatory, taxation, environmental and certain product-specific clearances. Virtually, no
small-scale industry requires a license from the Government of India. An entrepreneur can
set up an SSI unit anywhere in the country without any restriction. The units are, of course,
subject to the location/land use and zoning restrictions in force under the local laws.
7. Clearances: An entrepreneur must obtain several clearances or permissions depending upon
the nature of his unit and products manufactured. Regulatory or taxation-related, product
specific and environment and pollution-related clearances are mainly required. SSI units will
merely have to file an application and obtain an acknowledgment which will serve the
purpose of consent in case of environmental-related clearance except for 17 critically
polluting sectors.
8. Quality Certification: Quality certification is very important in competitive markets and
especially in international markets. To avail the quality certification like ISO-9000, a
significant cost has to be borne. The small-scale industries found it difficult to obtain such
certification due to resource crunch. A scheme has been launched to give financial incentives
to those SSI units that acquire ISO-9000 certification, by reimbursing 75 percent of their
costs of obtaining certification, subject to a maximum of Rs. 0.75 lacs per unit.
Source: http://www.dcmsme.gov.in/

Check Your Progress 3

I. Answer the following questions in the space provided.
II. Match your answers with those given at the end of this learning object.

1. Which one of the following is the first step in setting up an enterprise:

a) Technology and machinery
b) Project selection
c) Clearance
d) Quality certification
2. A business enterprise needs financial support for the purpose of:
a) Short-term working capital requirement
b) Long-term investment
c) Mitigating risk
d) All of the above
3. No small-scale industries require a license from the Govt. of India.

17
 True / False
4. Fill in the blank.
The Entrepreneur’s memorandum may be filled at ----------------------------in the jurisdiction
of which the enterprise is (or, is proposed to be) located.

3.12 LET US SUM UP

An entrepreneur is a person who identifies and senses business opportunities, innovates ideas,
raises money, assembles inputs, and sets up and manages a business organization.
Entrepreneurship in agriculture can play an important role in enhancing the livelihood security of
rural masses. The introduction of entrepreneurship in agriculture requires the development of
certain qualities and skills in an entrepreneur like positive self-concept, moderate risk-taking,
planning, generating innovative ideas, seeking out opportunities, etc. Important entrepreneurship
development opportunities in agriculture are diversification in agriculture, income from venture
technologies, food preservation, processing and value addition, and production of agro-inputs.
Entrepreneurial qualities and skills can be developed through vocational education programmes
and training.
For the successful establishment of a business enterprise, the primary requirement is a business
plan. It directs the entrepreneur in achieving set goals and helps in the timely mobilization of
various resources required for the operations of a business enterprise. A business plan is a written
document by the entrepreneur about targeted goals, methods of achieving goals, customers’
expectations, market potential, strengths and opportunities, and the nature of competition. A
business plan is also required by lending institutions to assess the worthiness of the business
plan. A business plan should have an executive summary, the vision of the organization,
information on products and services, target market and market potential, marketing strategy,
production and operations, finance, and organizational structure and management. It is also
impotent to properly evaluate the feasibility and viability of a business plan.
Setting up a business enterprise is a complex process. This can be divided into four distinct
phases (i) identification and evaluation of the opportunities, (ii) development of a business plan,
(iii) determination of resources requirements, and (iv) implementation and management of the
enterprises. The Ministry of Micro, Small and Medium Enterprises has suggested 8 distinct steps
to be followed in the process of setting up an enterprise which also explains clearly the
regulatory and other requirements for the purpose. Small-scale industries do not need many
clearances and approvals from the Government of India, except in the case of highly polluting
industries.

3.13 KEY WORDS

Entrepreneurship : The quality and skill required to become an entrepreneur.

18
Innovate : Make changes to something already existing
Risk : Risk implies future uncertainty about deviation from expected
earnings or expected outcomes. Risk measures the uncertainty
that an investor is willing to take to realize a gain from an
investment. (The Economic Times, April 10, 2022)
Motivation : The driving force towards the attainment of the goal.
Certification : Formal procedure by which an accredited or authorized
person or agency assesses and verifies
(and attests in writing by issuing a certificate)
the attributes, characteristics, quality, qualification,
or status of individuals or organizations, goods or services,
procedures or processes, or events or situations, in accordance
with established requirements or standards
(http://www.businessdictionary.com)
Technology : Technology is the making, usage, and knowledge of tools,
machines, techniques, crafts, systems, or methods of
organization in order to solve a problem or perform a specific
function (Wikipedia)
Product : Product is a "thing produced by labor or effort or the "result of
an act or a process. (Wikipedia)
Memorandum : It is a note, document, or other communication that helps the
memory by recording events or observations on a topic, such as
may be used in a business office. (Wikipedia)
Business : Business is any trade, commerce, or manufacture or any
venture in the nature of trade, commerce, or manufacture.
Business environment : All external factors affecting the organization and operation of
business.
Project : It is an investment activity meant for providing the returns for a
specific clientele group for a specific activity, specific
objective specific area development.
Plan : A plan is typically any diagram or list of steps with timing and
resources, used to achieve an objective (Agropedia).

3.14 FURTHER READINGS/ REFERENCES

 IGNOU Study Material (2006) Entrepreneurship and Marketing: Entrepreneur and
Entrepreneurship (BPVI-008), Block 1, School of Agriculture, IGNOU, New Delhi.
 Nandan H. (2011), Fundamentals of Entrepreneurship, PHI Learning Private Limited, New
Delhi

19
 IGNOU Study Material (2008) Dairy Management and Entrepreneurship (BPVI-018), Block
4, School of Agriculture, IGNOU, New Delhi.
 http://dcmsme.gov.in/howtosetup/getstart.htm.
 Bhanushai, Kishor. Agripreneurship Education and Development: Need of the Day retrieved
from http://www.ediindia.org/Creed/data/Suryakant%20Patel.htm on 09.04.2012
 IGNOU Study Material (2008) Introduction to Plantation Management (MAM-001), Block 1,
School of Agriculture, IGNOU, New Delhi.

3.15 POSSIBLE ANSWERS TO CHECK YOUR PROGRESS EXERCISES

Check Your Progress 1

1. Opportunities
2. C
3. D
4. False

Check Your Progress 2

1. Different Entrepreneurial ownership is a sole proprietorship, partnership, family venture, and

corporation.
a) Sole Proprietorship: Business owned and managed by one individual.
Advantages:
Simple to create
Total decision-making authority.
Disadvantages:
Limited skills and capabilities.
Limited access to capital.
b) Partnership: is an association of two or more people.
Advantages:
Easy to establish
Complementary skills
Disadvantages:
Capital Accumulation

20
 Potential for Personality

Check Your Progress 3

1. Systematic development
2. B
3. D
4. Summary, vision, products and services, market, marketing strategy, production and
operation, finance, organization, and management.

Check Your Progress 4

1. B
2. D
3. True
4. District Industries Centre

21
UNIT 4 FARMER PRODUCER ORGANIZATIONS

Structure
4.0 Objectives
4.1 Introduction
4.2 Meaning of Farmer Producer Organizations
4.2.1 Difference between Farmer Producer Organizations and Cooperatives
4.2.2 Characteristics of Producer Company
4.2.3 Programme Implementing Agencies
4.3 Various Concepts related to FPOs and Process of Formation of FPOs
4.3.1 Concepts related to FPOs
4.3.2 Members of Producer Company
4.3.3 Advantages of a Producer Company
4.3.4 Process of Promotion and Development of FPO
4.3.5 FPO Service Model
4.4 Structure of FPOs and need for FPOs
4.4.1 Structure of FPOs
4.4.2 Need for FPOs
4.4.3 Broad Services and Activities undertaken by FPOs
4.4.4 Role of FPOs in strengthening Backward and Forward Linkages
4.5 Schemes for Promotion of FPOs and progress of FPOs
4.5.1 Schemes for Promotion of FPOs
4.5.2 Progress of FPOs
4.5.3 Constraints faced by FPOs
4.5.4 Role of State Government Institutions in supporting FPOs
4.6 Let Us Sum Up
4.7 Key Words
4.8 Suggested Further Readings/References
4.9 Answers to Check Your Progress Exercises
4.10 Unit End Questions

4.0 OBJECTIVES

After completion of this unit, you are expected to:

 explain the meaning of Farmer producer organizations;
 describe various concepts related to FPOs and the process of formation of FPOs;
 discuss the structure of FPOs and the need for FPOs; and
 explain the schemes for the promotion of FPOs and the progress of FPOs
4.1 INTRODUCTION
Agriculture plays a pivotal role in developing economies. Small and marginal farmers account
for 85 percent of the total operational land holdings in India (Agriculture census, 2011). The
smallholders are facing many problems viz., poor education levels, high rate of indebtedness,
inadequate irrigation facilities, increased risks due to climate change, etc., (Dev, 2012). Small
farmers with weak bargaining powers suffer from greater dependency on cultivation and
monopsonistic exploitation under formal contracts (Bachke, 2009). Therefore, in the post-
independence era, India encourages the collectivization of small farmers into cooperative
societies which are registered with the Registrar of Cooperative Societies. India has a large
number of cooperative institutions and long experience in the conduct and functioning of these
show large variation in performance across regions (Datta, 2004). The major limiting factors for
the success of cooperatives have been that they are state promoted and are welfare oriented
rather than doing business on commercial lines. Several institutional models are being tried in
India to integrate farmers into the value chain. The most common model is the Farmers
Producers Organizations which is being given a lot of emphasis by the government. In this unit,
we will learn about the concept of Farmers Producers’ Organizations, their benefits, working,
and management at the village level

4.2 MEANING OF FARMER PRODUCER ORGANIZATIONS

In 2002, through an amendment to the Indian Companies Act. 1956, the Government of India
(GoI) enacted the Producer Companies Act by incorporating a new section IXA in the Indian
Companies Act 1956 based on the recommendations of the Y.K. Alagh Committee set up for this
purpose. The producer companies are incorporated with the Registrar of Companies (RoC). The
objective of the Government of India for such an initiative was to formulate legislation that
would enable the incorporation of cooperatives as companies and the conversion of existing
cooperatives into companies while ensuring that the unique elements of the cooperative business
remain intact in the new legislation.

Since farmers or the producers are the equity holders of the company, a PC as an organization
provides an appropriate framework for owning the company by the producers themselves. The
need to organize farmers, especially the smallholders, is a well-established fact. The basic
purpose of the PC is to collectivize small farmers or producers for (a) backward linkage for
inputs like seeds, fertilizers, credit, insurance, knowledge, and extension services and (b) forward
linkages such as collective marketing, processing, market-led agriculture production, etc. At the
heart of this effort is to gain collective bargaining power for small farmers/ producers.

The collectives of farmers in the form of producer companies are gaining popularity among the
farmers/ producers and among the promoting agencies primarily due to several advantages it
carries in comparison to the conventional model of producer cooperatives. The Producer

2
Companies Act enshrines the ethos and basic tenets of cooperatives and infuses a professional
attitude into management.

FPO or a Farmer Producer Organization is the phenomenon of collectivization of farmers to

improve their bargaining power to access financial and non-financial inputs and services, and
technologies, reduce transaction costs, tap high-value markets and enter into partnerships with
private and public entities on more equitable terms.

A PC (Producer Company, distinct from a producer cooperative) is formed with the equity
contribution by the members. The day-to-day operation is expected to be managed by the
professionals, hired from outside, under the direction of the Board of Directors BoD elected/
selected by the General body of the PC for a specific tenure.

4.2.1 Difference between Farmer Producer Organizations and Cooperatives

Table 4.1 provides a comparative analysis of producer companies and producer cooperatives to
understand the differences in the basic premises of these two Acts which enable the
incorporation of producers collectives. The producer companies have inherent advantages over
the cooperatives in many areas. In PC there is less government control whereas the cooperative
institutions are state-controlled. The overriding powers of the Registrar of Cooperative Societies
to direct and regulate cooperatives, whenever the government deems necessary, has throttled the
growth of the cooperative institutions. The majority of the cooperative institutions are currently
facing a severe financial crisis and at times are heavily dependent on the state subsidy for
existence. The Mutually Aided Cooperative Societies Act (MACS) was introduced to overcome
some of these limitations of the cooperatives, however, not many States have adopted the
MACS, and also not many commodity cooperatives have migrated to the MACS format.
Table 4.1: Differences between producer companies and cooperatives
Parameters Cooperative Producer Company
Registration Cooperative Societies Act Indian Company Act
Objectives Single object Multi-object
Area of operation Restricted, discretionary Entire Union of India
Membership Individuals and cooperatives Any individual, group,
association, producer of the
goods or services
Share Non-tradable Not tradable but transferable
limited to members on par
value
Profit sharing Limited dividends on shares Commensurate with the
volume of business
Voting rights One member, one vote but the One member, one vote.

3
 Government and Registrar of Members not having
Cooperatives hold veto power transactions with the
company can not vote
Government control Highly patronized to the extent of Minimal, limited to statutory
interference requirements
Extent of Autonomy Limited in “real world scenario” Fully autonomous, self-ruled
within the provisions of Act
Reserves Created if there are profits Mandatory to create every
year
Borrowing power Restricted More freedom and
alternatives
Relationship with other Transaction based Producers and corporate
corporate/business entities can together float a
houses/NGOs producer company

4.2.2 Characteristics of Producer Company

It is a corporate body registered under the Indian Companies (Amendment) Act 2002. Ownership
and membership of such companies are held only by ‘primary producers’ or ‘Producer
Institutions’, and members’ equity cannot be traded. However, it may be transferred, only with
the approval of the Board of Directors of the producers' companies. The clauses of a Private
Limited Company shall be applicable to the producer companies except the clauses specified in
the Producer Company Act from 581-A to 581-ZT which make it different from a normal private
or limited company. The liability of the PC is limited to the value of the share capital it has
issued. Similarly, the member’s liability is limited to the value of share capital held by them. The
minimum authorized capital at the time of incorporation of PC should be Rs.5 lakh. The
authorized capital is such that a company has been authorized to raise by way of equity shares
through the Articles of Association/Memorandum of Association of the PC. This is typically the
capital at the time it has been incorporated. The minimum number of producers required to form
a PC is 10, while there is no limit for the maximum number of members and it can be increased
as per feasibility and need. However, based on the experience (not to be treated as prescribed) it
is found that for agriculture-based PC, 800- 1000 farmers with about 1000-1500 acres of
agricultural land is a good size for initial years to make it economically viable and increase up to
2000 as the company grows. There cannot be any government or private equity stake in the
producer companies, which implies that PC cannot become public or deemed a public limited
company. The area of operation for a PC is the entire country. Thus, it has a number of
advantages over the cooperatives where the farmer members do not have much incentive to earn
profit by increasing the volume of business (Table 4.1).

4
4.2.3 Programme Implementing Agencies
Small Farmers’ Agribusiness Consortium (SFAC) is recognized as the nodal agency for the
promotion of FPOs in the country. Different state departments and central agencies are involved
in mobilizing the primary producers into producer organizations under various schemes like
Paramaparagat Krishi Vikas Yojana (PKVY), Rashtriya Krishi Vikas Yojana (RKVY) and
Vegetable initiative for Urban Cluster (VIUC), etc. Among the central level institutions, SFAC
and NABARD are the major institutions taking up the task of promoting FPOs in the country.
Check Your Progress 1
Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) Give full form of the following:

(i) VIVC: ………………………………………..

(ii) SFAC: ………………………………………..
(iii)PKVY: ………………………………………..
(iv) RKVY: ………………………………………..

2) Fill in the blank

(a) The government of India enacted Producers Companies Act by incorporating

section……….. in the Indian Companies Act ……….
(b) A producer company is formed by an equity contribution by the …………..
(c) The examples of backward linkage of producer companies are………………,
………………, ……………, …………………, ………………….
(d) The examples of forward linkage of producer companies are ……………….,
……………, …………………..
(e) The objective of cooperatives is………. While that of producer companies is …………..

3) State true or false

(a) The share of cooperatives is tradable

(b) The area of operation of the producer company is restricted
(c) The area of operation of cooperatives is restricted
(d) The cooperatives can be registered under the Indian Company Act
(e) The producer company has the option to create or not create reserves every year

5
 (f) There is too much government control in a producer company

4.3 VARIOUS CONCEPTS RELATED TO FPOS AND THE PROCESS

OF FORMATION OF FPOS

In this section, you will learn about the concepts related to FPOs, the advantages of the Producer
Company, the role of Central Government and State Government Institutions in supporting
FPOs, the process of formation and development of FPOs, and the FPOs service model.

4.3.1 Concepts related to FPOs

A Producer Organisation (PO) is an organization/legal entity formed by primary producers
(agricultural or otherwise), viz. farmers, milk producers, fishermen, weavers, rural artisans, and
craftsmen. A PO can be a producer company, a cooperative society, or any other legal form
which provides for sharing of profits/benefits among the members. In some forms like - producer
companies, institutions of primary producers can also become a member of producer
organizations.

A Farmer Producer Organization is one type of Producer Organization where the members are
farmers. Small Farmers’ Agribusiness Consortium (SFAC) is providing support for the
promotion of FPOs.

Producer Company means a body corporate having the following objects and registered as a
Producer Company under the Companies Act, 1956 or the Companies Act, 2013:
a. Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export
of primary produce of the Members or import of goods or services for their benefit;
b. Processing including preserving, drying, distilling, brewing, venting, canning, and
packaging of the produce of its Members
c. Manufacture, sale, or supply of machinery, equipment, or consumables mainly to its
Members
d. Providing education on the mutual assistance principles to its Members and others
e. Rendering technical services, consultancy services, training, research and development,
and all other activities for the promotion of the interests of its Members
f. Generation, transmission, and distribution of power, revitalization of land and water
resources, their use, conservation, and communications relatable to primary produce
g. Insurance of producers or their primary produce
h. Promoting techniques of mutuality and mutual assistance
i. Welfare measures or facilities for the benefit of Members

6
 j. Any other activity, ancillary or incidental to any of the activities referred to in (a) to (i) or
other activities which may promote the principles of mutuality and mutual assistance
amongst the Members in any other manner
k. Financing of procurement, processing, marketing or other activities specified in (a) to (j)
which include extending of credit facilities or any other financial services to its Members.’

Producer Institution means a Producer Company or any other institution (whether incorporated
or not) having only producer(s) or Producer Company (ies) as its members, having any of the
objects of a Producer Company and which agrees to make use of the services of the Producer
Company (ies) as provided in its Articles of Association

4.3.2 Members of Producer Company

A primary producer or a Producer Institution (whether incorporated or not) may be admitted as a
Member of a Producer Company. However, if a person has any business interest which conflicts
with the business of the Producer Company, they cannot become a Member of such Producer
Company. Membership of the Producer Company shall be voluntary and available to all eligible
persons who can avail of the services of the Producer Company, and are willing to accept the
duties of Membership. The Articles of Association of the Producer Company shall prescribe the
qualifications for Membership, the conditions for continuance or cancellation of Membership,
and the terms, conditions, and procedure for transfer of shares. Members are shareholders of the
equity share capital of the Producer Company, in proportion to their patronage. Active Members
are Members who fulfill the quantum and period of patronage of the Producer Company as
required by its Articles of Association. Every Producer Company shall deal primarily with the
produce of its active members for carrying out any of its objects. If a Member ceases to be a
producer or fails to retain his qualifications as a Member, the Board of Directors shall direct such
Members to surrender their shares in the Producer Company.

4.3.3 Advantages of a Producer Company

 The Producer Company is a body corporate having perpetual succession and the power to
acquire, hold and dispose of property (both movable and immovable, tangible and
intangible), to contract, and to sue and be sued in its own name.
 Only 10 Members are required to form a Producer Company, while there is no limit on
the maximum number of Members. Therefore, a Producer Company may be incorporated
with ease by 10 Members initially and the membership can be increased as desired.
 Once incorporated, the Producer Company would be a body corporate in the nature of a
Private Limited Company. However, the manner of distribution of mutual benefits
amongst Members is based on the principles of a cooperative organization.

7
  The Producer Company shall not, under any circumstance become or be deemed to
become a public limited company. Therefore, the cost and complexity of compliance with
corporate regulatory norms are limited.
 Membership of a Producer Company is held only by primary producers and/or Producer
Institutions and the shares of a Producer Company can be transferred by the Members
only to Active Members and only with the approval of the Board of Directors. Hence, the
Producer Company shall be protected from the acquisition of ownership and/or control by
any entity which is not a primary producer or Producer Institution.
 The liability of the Members in a Producer Company is limited to the unpaid amount of
the shares held by them. Hence, the private assets of the Members are safe in the event of
liquidation of the Producer Company.
 The Producer Company may operate all over the country, including export business,
giving the flexibility to expand a business.
 Producer Companies may also create subsidiaries or enter into joint ventures, enabling
the Producer Company to improve its supply chain, and storage facilities and provide
access to technology, thereby enhancing profitability.

Role of Central Government Institutions in Supporting FPOs

Department of Agriculture and Cooperation (DAC), Ministry of Agriculture, Government of
India will act as the nodal agency for the development and growth of FPOs
Small Farmers’ Agribusiness Consortium (SFAC), a Society under DAC, will be the designated
agency of DAC to act as a single window for technical support, training needs, research, and
knowledge management and to create linkages to investments, technology, and markets.
The mandate of the National Cooperative Development Corporation (NCDC) will be expanded
to include FPOs in the list of eligible institutions which receive support under the various
programmes of the Corporation.
NAFED will take steps to include FPOs in the list of eligible institutions which act on its behalf
to undertake price support purchase operations.
DAC will work with the Food Corporation of India (FCI) and State Governments to encourage
them to include FPOs as procurement agencies under the Minimum Support Price (MSP)
procurement operations for various crops.
DAC and its designated agencies will work with NABARD and other financial institutions to
direct short and medium-term credit for the working capital and infrastructure investment needs
of FPOs. DAC will also work with all relevant stakeholders to achieve 100% financial inclusion
for members of FPOs and link them to Kisan Credit Cards.

8
DAC will work with the Ministry of Corporate Affairs and other stakeholders to further clarify
and strengthen provisions of the law relating to the registration, management, and regulations of
FPOs to foster the fast-paced growth of FPOs.

Role of State Government Institutions in supporting FPOs

Besides encouraging State Governments to take up the formation of FPOs on a large scale
through Centrally-sponsored and State- financed programmes and schemes. DAC suggests the
following steps to be taken by the state governments to support and strengthen FPOs by:
 Declaring FPOs at par with cooperatives registered under the relevant State legislation
and self-help groups/ federations for all benefits and facilities that are extended to
member-owned institutions from time to time.
 Making provisions for easy issue of licenses to FPOs to trade in inputs (seed, fertilizer,
farm machinery, pesticides, etc.) for use of their members as well as routing the supply of
agricultural inputs through FPOs at par with cooperatives.
 Using FPOs as producers of certified seed, saplings, and other planting material and
extending production and marketing subsidies on par with cooperatives.
 Making suitable amendments in the APMC Act to allow the direct sale of farm produce
by FPOs at the farm gate, through FPO-owned procurement and marketing centers, and
for facilitating contract farming arrangements between FPOs and bulk buyers.
 Appointing FPOs as procurement agents for MSP operations for various crops
 Using FPOs as implementing agencies for various agricultural development programmes,
especially RKVY, NFSM, ATMA, etc., and extending the benefits of central and state-
funded programmes in agriculture to the members of FPOs on a preferential basis.
 Linking FPOs to financial institutions like cooperative banks, state financial corporations,
etc., for working capital, storage, processing infrastructure, and other investments.
 Promulgating state-level policies to support and strengthen FPOs to make them vibrant,
sustainable, and self-governing bodies.

9
4.3.4 Process of Promotion and Development of FPO
The process of FPO formation and development follows various well-defined path consisting of
11 stages, which is shown in Fig below.

Cluster
identification

Assessment &
audit
Diagnostic
study

Feasibility
Business
study
operations

Baseline
Systems assessment
development

Business
Resource
planning
mobilization

Organizing & Mobilization

Formalizing of farmers

Fig 4.1: FPO promotion and development process

Cluster identification – Cluster areas are to be selected by the RI in consultation with the
respective State Government departments. However, it should be ensured that a cluster of 8,000-

10
10,000 farmers should be formulated, within one or two blocks, identifying 80 to 120 contiguous
villages of a particular district.

Diagnostic study – A diagnostic study is to be conducted by the RI in the selected cluster area.
The Diagnostic Study is conducted to assess the preliminary situation of the farmers and the
level of agriculture in the area. The study will also help in identifying the potential interventions
required and understanding the specific project implementation context.

Feasibility analysis – Feasibility Analysis for the formation of FPCs should be carried out by
RIs and then appraised by hired external experts in various technical areas. A normal feasibility
study should cover aspects such as financial, technical, legal, political, socio-cultural,
environmental, economic, and resource feasibility. The feasibility analysis will establish a case
for the promotion of FPCs in the prevailing specific regional environmental context of the FPOs.

Baseline assessment – Baseline Assessment, to be carried out by RI, will help in generating
data related to the current prevailing situation of farming and small, marginal, and tenant
farmers. Baseline assessment will cover a variety of factors to identify the potential
interventions, to plan development and business plans, and to establish the base figures based on
future outcome indicators that can be measured to understand the change contribution. The
assessment shall be conducted using stratified random sampling through structured household-
level interviews and open-ended focus group discussions with a variety of stakeholders.

Business planning: Business planning will be carried out by RIs with the help of selected
farmers’ representatives. Business planning is a process through which the strategic and
operational orientation of an emerging FPO is shaped. While baseline assessment figures will be
important inputs to understand the level from which products and services for farmers’ members
should be developed, more important will be the collective visualization of the future of the FPO.
The key is to develop business plans in detail with at least 10% of the FPO farmer members to
provide a clear vision.

Mobilization of farmers: Once a strong case has been established by SHT with the help of a
select group of farmers through the business planning process, it is time to mobilize farmers into
FIGs and eventually as farmer members of FPOs. Mobilization of farmers should be done with a
variety of communication aids like – pamphlets, documentary movies, posters, regular village-
level meetings, and proper vision development of promoter farmer-members. Promoter farmer-
members are those who are eager to form an FPO on a voluntary basis, having understood the
importance and potential benefits of forming FPOs, obtained through training programmes and
exposure provided by SHT of RIs.

Organising and finalising: FIGs in an aggregated cluster together form FPOs. Typically, around
50-70 FIGs can come together to form an FPO. FPOs can be registered under the Producer
Company provision under the Companies Act. The final form of FPO assumes (i.e producer
company, cooperative, multistate cooperative, etc) must be a decision taken by FIG members at

11
an appropriate time. It is important to stress that the process must not be hurried in any manner
and there is no “right time” by which the FPO must be registered. Any period between 18
months to 24 months may be necessary for the FIGs to settle down and understand the
implications of aggregation. Only then should the FPO registration be attempted.

Resource mobilization: Before initiating the operations of an FPO all required resources should
be mobilized by the RI with the help of FPO representatives and the board of directors.
Financial, human (staff), technical and physical resources should be developed during this
particular step. Based on the business plan the RI should liaise with various financing agencies
and mobilize resources for hiring/ purchasing and developing various resources.

Management systems development: RIs should facilitate the development of management

systems in the FPOs. Guidelines for management systems should be able to address all
requirements related to financial services, and input and output management services. Systems
related to the management of finance, human resources, stock and inventory, procurement and
quality management, marketing, internal audit, internal conflict resolution, and other important
functional areas should be developed. Standard operating procedures for the same should be
established.

Business operations: Business operations are the commencement of procurement, production,

processing, marketing, and financial services activities of an FPO. RIs should carefully train both
the governing and operational structures of the FPO in order to ensure the smooth functioning of
business operations. The entire value chain related to various agriculture and allied products and
commodities needs to be managed.

Assessment and Audit

RIs should facilitate the constant assessment of the performance of various stakeholders like
farmer members, governing boards of directors, and service providers. They should also help
FPOs to reflect using Institutional Maturity Index to understand areas of improvement. Internal
process and accounting audits will help maintain both transparency and accountability.

4.3.5 FPO Service Model

The FPO can offer a variety of services to its members as illustrated in the table. It can be noted
that it is providing almost end-to-end services to its members, covering almost all aspects of
cultivation (from inputs, and technical services to processing and marketing). The FPO will
facilitate linkages between farmers, processors, traders, and retailers to coordinate supply and
demand and to access key business development services such as market information, input
supplies, and transport services. Based on the emerging needs, the FPO will keep on adding new
services from time to time. The set of services includes Financial, Business, and Welfare
services. An indicative list of services includes:

12
Financial Services: The FPO will provide loans for crops, purchase of tractors, pump sets,
construction of wells, and laying of pipelines.
Input Supply Services: The FPO will provide low-cost and quality inputs to member farmers. It
will supply fertilizers, pesticides, seeds, sprayers, pump sets, accessories, and pipelines.
Procurement and Packaging Services: The FPO will procure agricultural produce from its
member farmers; will do the storage, value addition, and packaging.
Marketing Services: The FPO will do the direct marketing after procurement of agricultural
produce. This will enable members to save in terms of time, transaction costs, weighment losses,
distress sales, price fluctuations, transportation, quality maintenance, etc.
Insurance Services: The FPO will provide various insurance like Crop Insurance, Electric
Motors Insurance, and Life Insurance.
Technical Services: FPO will promote best practices of farming, maintain a marketing
information system, and diversify and raise levels of knowledge and skills in agricultural
production and post-harvest processing that adds value to products. Networking Services:
Making channels of information (e.g. about product specifications, market prices) and other
business services accessible to rural producers; facilitating linkages with financial institutions,
building linkages of producers, processors, traders, and consumers, facilitating linkages with
government programmes.
Check Your Progress 2
Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) State true or false

(a) The non-producers can control the producer organization

(b) The producer company cannot create subsidiaries or enter into joint ventures.
(c) There is no limit on the maximum number of members of a producer company
(d) State government institutions can support FPOs by appointing FPOs as procurement
agents for MSP operations for various crops.
(e) The private assets of the members are not safe in the event of liquidation of the producer
company

2) Give full form of the following

(a) DAC: ……………………………………………

(b) NFSM: ……………………….…………………
(c) ATMA: ………………………..………………..

13
 (d) MSP:……………………………………………..
(e) APMC: …………………………..………………

3) Fill in the blanks:

(a) Custer identification is followed by ………………….
(b) Business planning is followed by …………………
(c) Organizing and formalizing is followed by …………………….
(d) Systems development is followed by ……………………
(e) The FPO will provide various insurance services like………………………., …………..,
……………….

4.4 STRUCTURE OF FPOS AND NEED FOR FPOS

In this section you will learn about the structure of FPOs, the need for FPOs, broad services and
activities to be undertaken by FPOs, and the role of PFOs in strengthening backward and forward
linkages.

4.4.1 Structure of FPOs

The FPOs have a general body, executive body, and board of directors, general manager, FPO
staff & local resource persons. The Board of Directors, General Manager, and FPOs staff
together deal with the planning, implementation, and monitoring of FPO activities.

Initially, the farmers are mobilized into farmers’ interest groups. It is important that small and
marginal farmers who are like-minded and are growing uniform crops, living in the same area,
and come forward voluntarily to form FIGs. Each FIG has 15 to 20 members and they select two
leaders. A general body comprises 1000 members of such 50 FIGs who are the shareholders. The
General Body of an FPO is an important body that primarily consists of the shareholders of the
company who are the owners. It is essential that they meet once a year.

One hundred farmers who are the leaders (two from each FIG) of the 50 FIGs form the
Executive Committee members. The Executive Board comprising 100 leaders shall conduct a
meeting once in three months and hold discussions about the suggestions and problems of their
respective FIGs and come up with suitable strategies with respect to marketing and production
and submit a collective opinion to the Board of Directors and help the FPO in preparing an
integrated pro-farmer program.

The Board of Directors governs the affairs of a Producer Company. The initial Board of
Directors of a Producer Company is the persons who are designated as Directors by the Members
who sign the Memorandum and the Articles of the Producer Company. Thereafter, the Board of
Directors is elected by the Members in the annual general meeting, as required. A Producer

14
Company shall have a minimum of 5 Directors, but not more than 15 Directors. A Director shall
hold office for a minimum period of one year, but not more than5 years, as specified in the
Articles of Association. Further, every Director who retires shall be eligible for re-appointment
as a director.

The Board of Directors of a Producer Company is authorized to exercise powers on behalf of the
Producer Company relating to any or all of the following matters, by means of resolution passed
at its meeting:
a. determination of the dividend payable
b. determination of the quantum of withheld price and recommend patronage to be approved
at a general meeting
c. admission of new members
d. pursue and formulate the organizational policy, and objectives, establish specific long-term
and annual objectives, and approve corporate strategies and financial plans
e. appointment of a Chief Executive and such other officers of the producer company, as may
be specified in the Articles of Association
f. exercise superintendence, direction, and control over Chief Executive and other officers
appointed by it
g. proper books of account to be maintained; prepare annual accounts to be placed before the
annual general meeting with the report of the auditor and the replies on qualifications, if
any, made by the auditors
h. acquisition or disposal of property of the Producer Company in its ordinary course of
business
i. investment of the funds of the Producer Company in the ordinary course of its business
j. sanction any loan or advance, in connection with the business activities of the Producer
Company to any Member, not being a director or his relative
k. take such other measures or do such other acts as may be required in the discharge of its
functions or exercise of its powers

The Chief Executive is an individual appointed by the Board of Directors of a Producer

Company from amongst persons other than Members. The Chief Executive is a full-time officer
who shall be an ex officio Director on the Board of the Producer Company and such Director
shall not retire by rotation. The Chief Executive shall manage the affairs of the Producer
Company under the general superintendence, direction, and control of the Board of Directors and
shall be accountable for the performance of the Producer Company. The qualifications,
experience, manner, and terms and conditions of appointment of the Chief Executive are laid
down in the Article of Association of the Producer Company.

15
The Chief Executive is entrusted with substantial powers of management by the Board of
Directors of a Producer Company. Accordingly, the Chief Executive may exercise any of the
following powers and functions:
 do administrative acts of a routine nature including managing the day-to-day affairs of the
Producer Company
 operate bank accounts or authorize any person, subject to the general or special approval of
the Board, to operate the bank account
 make arrangements for the safe custody of cash and other assets of the Producer Company
 sign such documents as may be authorized by the Board, for and on behalf of the Producer
Company
 maintain proper books of account, prepare annual accounts and audit thereof, place the
audited accounts before the Board and in the annual general meeting of the Members
 furnish Members with periodic information to apprise them of the operation and functions
of the Producer Company
 make appointments to posts in accordance with the powers delegated by the Board
 assist the Board in the formulation of goals, objectives, strategies, plans, and policies
 advise the Board with respect to legal and regulatory matters concerning the proposed and
ongoing activities and take necessary action in respect thereof
 exercise the powers as may be necessary for the ordinary course of business
 discharge such other functions, and exercise such other powers, as may be delegated by the
Board from time to time.

The officers that are formally appointed by the company to look after the day-to-day affairs of
the company shall include Chief Executive Officer, Accountant, Store Keeper, etc. These
officers are paid a salary for their services to the company. Chief Executive Officer or Managing
Director is appointed on a full-time basis by the Board of Directors from amongst persons other
than members. The CEO shall be the Ex-officio Director of the Board and shall not retire by
rotation. He/she will be accountable for the performance of the company, both, to the Board of
Directors and the members.
Local resource persons usually five in number are appointed to serve as a link between FIGs,
FPO, and Departments concerned and help the farmers.

16
 FIG4.2: STRUCTURE OF FPOs

1. Planning
2. Implementation
3. Monitoring

4.4.2 Need for FPOs

The FPOs are needed for a variety of advantages and benefits they offer to member farmers and
society at large. A few positive features of the FPOs are as follows:
 The FPOs utilize economies of scale. The economies of scale refer to making the size of
a business above a certain critical volume after which it becomes profitable. The small
and marginal farmers or farmers when operating individually then the business volume is
very low. They procure a small amount of seeds, fertilizers, pesticides, etc for which he
has to go and buy it from the market and bring it paying huge transportation costs. If the
volume of purchase of these inputs is large, the transportation cost gets spread, and per
unit cost is low. Hence, increasing the volume through FPO increases the bargaining
power of farmers.
 The FPO can organize training programmes for the members and non-member farmers.
This leads to the building up of the knowledge of the farmers. They can also invite the
extension persons of the state department of agriculture to guide the member farmers
with respect to correct usage of inputs, marketing, and branding, use of new technologies,
and better cultivation practices

17
  The FPOs can collectively procure the member farmers' produce and take it to a distant
market where the price realization could be more. Since the volume of farm produce
available for sale is more the wholesalers in the mandi, it provides them better value
 The FPOs can also set up their own grading, packaging, and processing facility which
leads to substantial value addition to the farm produce and therefore helps in the
realization of higher prices.
 The FPOs can also access credit from larger banks and distribute it among their members
on a loan basis. They can also use the credit to procure the inputs in advance and make
them available to the members on a credit basis and collect the price for the inputs after
the season after the sale of the farm produce.
 They can also help the farmers to mitigate risk, encourage the farmers to buy insurance
products, and improve the bargaining power of farmers through collective action. Thus a
huge social capital is created by the FPOs who are ready to act in unison and also help
each other in the event of the need of an individual.
 The FPOs also can organize awareness campaigns on various government schemes which
help in improving food and nutritional security. The farmers' yield is increased; their
income improves leading to greater access to food.

Source: Strategy Paper for FPOs (SFAC)

18
4.4.3 Broad Services and Activities undertaken by FPOs
The FPOs may provide and undertake the following relevant major services and activities for
their development as may be necessary:-
(i) Supply quality production inputs like seed, fertilizer, pesticides, and other inputs at
reasonably lower wholesale rates.
(ii) Make available need-based production and post-production machinery and equipment like
cultivator, tiller, sprinkler set, combine harvester, and such other machinery and equipment
on a custom hiring basis for members to reduce the per unit production cost.
(iii) Make available value addition like cleaning, assaying, sorting, grading, packing, and also
farm-level processing facilities at a user-charge basis on a reasonably cheaper rate. Storage
and transportation facilities may also be made available.
(iv) Undertake higher income-generating activities like seed production, beekeeping,
mushroom cultivation, etc.
(v) Undertake aggregation of smaller lots of farmer-members produce; add value to make them
more marketable.
(vi) Facilitate market information about the produce for judicious decisions in production and
marketing.
(vii) Facilitate logistics services such as storage, transportation, loading/unloading, etc. on a
shared cost basis.
(viii) Market the aggregated produce with better negotiation strength to the buyers and in the
marketing channels offering better and remunerative prices.
A Business Plan Linked development in both the medium and long-term will be the
hallmark of strong business growth for FPO

19
 Retailers/ Processors
CSC MSP
Banks NSPOT/ MCDEX
NBFCs
Link to
consultants
Banks

PHI/VIUC
CSC GBY
Banks VCA
NBFCs NMFP
RKVY/PPIAD

Inputs
BDS/ERP FPOs as source point for
WHR rural products
FPOs as rural retail points for
Mechanisation consumer products/ services
Krishidoot

Backward and Forward linkages of FPOs

4.4.4 Role of FPOs in strengthening Backward and Forward Linkages

The FPOs source fertilizers from fertilizer companies/cooperatives like IFFCO, etc. They can
procure in bulk and stock it just before the crop season and make it available to the farmers.
They can even source farm inputs like seeds, manure, etc in bulk from wholesalers and make it
available to their members and members located in villages at a reasonable price. The FPOs can
liaison with line departments for implementation of government schemes through them. The
technical inputs like a package of practices of crops, control of insects and pests, and diseases
could be known from the line departments by organizing the training programs by inviting
officials of line departments. The organic inputs could be procured from the farmers and made
available among the members and non-member farmers.

Similarly, the FPOs also have forward linkages with processors, farmers, and consumers. The
FPOs collect the farm produce from member and non-member farmers and aggregate it and sell
it to consumers located at a distant places. The FPOs provide the farmers with inputs, like seeds,
biofertilizers, insect traps, technical know-how, etc. The FPOs take the farm produce to the
processors for processing.
Backward Linkage Forward Linkage
M

O
A
R

D
U
C

R
E

E
F

20
 Fig 5. Backward and forward linkage of FPOs

Check Your Progress 3

Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) State true or false

(a) The Board of Directors has a role to play in the determination of dividends payable.
(b) The Chief executive is an individual appointed from among the members.
(c) A producer company can have less than 5 Directors.
(d) Linkage of FPO with line departments forms the forward linkage.
(e) FPOs can sell seeds, biofertilizers, and insect traps to farmers which is called forward
linkage.

2) Give full form of the following

(a) FIGs…………………………………………..
(b) IFFCO:……………………………………….
(c) FPO: ………………………………………….

21
 (d) BoD
(e) CEO
(f) PGS Certification

3) Fill in the blanks:

(a) A …………………. is an organization/ legal entity formed by primary producers viz.,
farmers, milk producers, fishermen, weavers, rural artisans, and craftsmen.
(b) ……………………… is a body corporate having the objects and registered as a producer
company under the Companies Act, 1956 o the Companies Act, 2013
(c) ………………………… a Society under DAC is a designated agency of DAC to act as a
single window for technical support, training needs, research, and knowledge
management and to create linkage to investments, technology, and market.
(d) DAC will work with ………………….and ……………….to encourage them to include
FPOs as procurement agencies under the Minimum Support Price (MSP) procurement
operations for various crops.

4.5 SCHEMES FOR PROMOTION OF FPOS AND PROGRESS OF FPOS

In this section we will learn about the schemes for the promotion of FPOs in India, the
classification of FPOs, the progress of FPOs, challenges and issues in building robust FPOs, the
role of central government and state government institutions in supporting FPOs.

4.5.1 Schemes for Promotion of FPOs

Several programmes and schemes of the Government of India are there which help the FPOs.
The Agricultural marketing infrastructure (AMI), Mission of integrated development of
Horticulture (MIDH), Deendayal Antyodaya Yojana-National Rural Livelihood Mission (DAY-
NRLM) of the Ministry of Rural Development, and Operation greens for the creation of
backward and forward linkage are a few schemes that can be used by FPOs.

22
 Fig: Various schemes for the promotion of FPOs
Source: NABCONS (2019) DARPAN- Theme-Farmer Producer Organizations (FPOs),
Quarterly e-newsletter of NABCONS, VIII issue, July to Sept 2019, NABARD Consultancy
Services (NABCONS), New Delhi.

The Reserve Bank of India has included financing of FPOs up to Rs two Crore under direct
agriculture finance under the Priority Sector Lending scheme. This will encourage the banks to
lend to the FPOs. The earnings of FPOs up to Rs 100 crores are exempt from income tax to the
extent of 100% up to five years. This facility needs to be used by the FPOs to enhance their
volume of business and growth. There is a provision of cash credit and term loans for FPOs by
financial institutions.

The NABARD is also playing a great role in facilitating the growth of FPOs. The Producer
Organization Development Fund (PODF) was established in 2011, with an initial corpus of Rs
50 crore. Support under PODF was provided as a grant for the promotion and capacity building
of FPOs, and loans for market linkage. The NABARD PRODUCE fund was set up in 2014, with
an initial corpus of Rs 200 Crores to create a network of more than 2000 FPOs in the country.
The NABARD has created a dedicated web portal and has developed training modules that are
helpful for the capacity building of the various stakeholders of FPOs. The NABKISAN finance
limited meets the credit requirements of the FPOs. NABARD provides FPOs with both capacity-

23
building support through Resource Support Agencies (RSAs) and implementation support
through producer organization promoting institutions (POPIs). The POPIs are implementation
organizations, typically NGOs in the FPO formation and capacity-building stages. These POPIs
are identified and trained by NABARD, thereby enabling them to support FPOs through their
formation, capacity building, evolution, and growth. The RSAs are technical expert
organizations that train POPIs and help the POPIs in the implementation of the programme.

The Small Farmers Agribusiness Consortium (SFAC) also has created an Equity grant fund,
credit guarantee fund scheme, and venture capital assistance to provide much-needed capital
funds to strengthen the FPOs. The support the FPOs can receive is; (1). FPO Management Cost:
Under the scheme, financial support to FPOs up to a maximum of INR 18 Lakhs per FPO or
actual, whichever is lesser is to be provided for 3 years from the year of formation; (2). Equity
Grant in the form of matching grant up to INR 2,000/- per farmer member of FPO subject to a
maximum limit of INR 15 Lakhs fixed per FPO. SFAC has impaneled a network of Resource
Institutions (RIs) that provide resource support (including business development) to FPOs
through a network of selected local agencies, typically NGOs. Tasks related to implementation
are delegated to local institutions. Typically, there are 5 NGOs and 10 FPOs under each RI.

NABKISAN Finance Limited (NKFL) a subsidiary of NABARD. The NKFL Company provides
loans to Producer Organisations. It provides loans to three types of producer organizations (i)
Start-up POs (iii) Mature FPOs and (iii) High potential POs. It provides two types of loans (a)
Working capital, term loan for the creation of infrastructure for storage, processing, marketing,
etc; (b) Bulk loan for on-lending for asset creation at the member level. The loan offered is to
the tune of 5 times, 10 times, and 20 times the net worth of FPOs for Start-up POs, Mature FPOs
and High potential POs, respectively. NABKISAN has emerged as the biggest lender of the FPO
ecosystem.

The Indian Council of Agriculture Research (ICAR) helps the FPOs by providing technical
support by conducting training programmes and offering advisory services to the farmers
through its network of Research Institutes and KVKs spread across the country.

Operation Green: A Centrally sponsored Scheme (CSS) started by the Government of India. Its
total budgetary allocation is Rs 500 Crores and is implemented by the Ministry of Food
Processing Industries (MoFPI). The scheme is aimed at capacity building of FPOs through their
professional development, reduction of post-harvest losses, creation of preservation and
processing infrastructure, provision of agri-logistics for supply chain, price stabilization for
consumers and producers, and prevention of distress sale.

eNAM: FPOs/FPCs can register on eNAM Portal via the website (www.enam.gov.in) or mobile
app or by providing the following details at the nearest eNAM mandi: (i) Name of FPOs/ FPCs;
(ii) Name, address, email id and contact no of authorized person (MD/CEO/ Manager); (iii) Bank
account details (Name of Bank, branch, Account No., IFSC code). FPOs/ FPCs can act as an
aggregator for its member and sell through e-trading as one/multiple lots depending upon the

24
requirement. Payment will be done directly to the FPO/FPCs bank account. In turn, FPO/FPCs
can distribute among members. Union budget 2017-18 made provisions to install collection/
sorting/ packing facilities at their premises. Provision for the personalized dashboard and real-
time information on arrival, quality, and price of commodities. The entire payment will be
credited to the bank account of FPO/FPC. After the payment is credited the payment disbursal of
the amount to individual member farmers has to be done by FPO/FPC. FPOs/ FPCs will be
provided access to the “eNAM” Dashboard to see MIS and reports related to the Trade executed
by FPOs/FPCs.

Tax exemption: As of Financial Year 2017-18, Farmer Producer Companies, registered under the
Companies act, having annual turnover up to Rs 100 Crore are exempt from tax on profits
derived from farm-related activities for a period of 5 years.

A few of the state-level policies include:

 Odisha Farmer Producer Organization (FPOs) Policy, 2018
 Center of excellence for FPOs, 2017, by the Government of Karnataka
 Rythu Kosam, Andhra Pradesh Farmer Producer Organizations Promotion Policy, 2016
 The Punjab FPO Policy
 Agriculture-Promotion of Collective Farming by organizing small/ marginal farmers into
Farmers Interest Group (FIG)/ Farmer Producer Group (FPG) of Tamil Nadu

Classification of FPOs
As per NABKISAN
(a) Start-up POs: FPOs existing for 1-2 years with at least one audited balance sheet for a
financial year. The FPO should fall under “A+”, “A”, “B” categories of POs based on the
NABKISAN rating tool
(b) Mature POs: FPOs whose age is more than 2 years from the date of Incorporation and
turnover in excess of Rs 25 lakh in the preceding year or an average of the preceding
three years. The FPO should fall under “A+”, “A”, “B” categories of POs based on the
NABKISAN rating tool
(c) High potential POs: FPOs whose age is more b than 2 years from the date of
incorporation, turnover in excess of Rs 100 lakh in the preceding year or average of
preceding three years, no accumulated losses, and good credit history.

4.5.2 Progress of FPOs

The SFAC and NABARD are the nodal agencies for the promotion of FPOs. The SFAC has
promoted a total of 740 FPOs linking 733658 numbers of farmers while NABARD has promoted
2076 FPOs linking 588127 numbers of farmers. SFAC promoted the largest number of FPOs in
Madhya Pradesh i.e., 135, and is followed in Karnataka i.e., 117. The maximum number of

25
 FPOs promoted by NABARD is in Karnataka followed by Tamil Nadu. It is significant to note
that the largest number of FPOs is promoted by NABARD but a large number of farmers is
linked to FPOs by SFAC. On the whole, the number of farmers linked to FPOs is highest in
Karnataka and is followed by Madhya Pradesh, Maharashtra, Tamil Nadu, West Bengal, etc. On
average the SFAC-promoted FPOs have a larger number of farmers being linked with 991
farmers per FPO than the NABARD-promoted FPO with 283 farmers per FPO. The state-wise
analysis reveals that Manipur with 795 farmers per FPO is leading and is followed by Haryana
(707), Arunachal Pradesh (618), MP (585), Maharashtra (551), etc.

Table 4.2: State-wise progress of FPOs promoted by SFAC and NABARD (As of
30.04.2018)

States SFAC NABARD Total

Farmer FPO Farmers/ Farmers FPO Farmer Farmers FPO Farmers
s FPO s/ /FPO
FPO
Andhra Pradesh 6792 7 970 30264 106 286 37056 113 328
Arunachal
1750 2 875 103 1 103 1853 3 618
Pradesh
Assam 5647 12 471 11956 40 299 17603 52 339
Bihar 25685 24 1070 12427 102 122 38112 126 302
Chhattisgarh 27825 23 1210 22459 57 394 50284 80 629
Gujarat 19166 20 958 34237 115 298 53403 135 396
Haryana 13240 23 576 17143 50 857 30383 73 707
Himachal
4887 5 977 5739 54 51 10626 59 129
Pradesh
Jammu &
6814 2 3407 1329 12 111 8143 14 582
Kashmir
Jharkhand 10009 8 1251 21286 65 333 31295 73 435
Karnataka 118218 117 1010 57915 186 311 176133 303 581
Kerala 0 0 0 50077 105 477 50077 105 477
Madhya
123791 135 917 48681 160 304 172472 295 585
Pradesh
Maharashtra 88948 85 1046 22922 118 194 111870 203 551
Manipur 5671 4 1418 1481 5 296 7152 9 795
Meghalaya 2990 3 997 1409 9 157 4399 12 367
Mizoram 1700 1 1700 3016 15 201 4716 16 295
Odisha 39463 41 963 25857 100 259 65320 141 463
Punjab 6288 7 898 4601 67 69 10889 74 147
Rajasthan 49617 40 1240 29840 143 209 79457 183 434
Sikkim 16279 29 561 645 4 161 16924 33 513
Tamil Nadu 10945 11 995 90543 170 533 101488 181 561
Tripura 2874 4 719 80 1 80 2954 5 591

26
Uttarakhand 6004 7 858 26144 52 503 32148 59 545
Uttar Pradesh 35746 34 1051 13131 113 116 48877 147 332
West Bengal 72266 68 1063 28156 148 190 100422 216 465
Others 29233 28 1044 26582 76 350 55815 104 537
All India 207 281
733658 740 991 588127 283 1321785 469
6 6
Source: GoI, 2018a and GoI, 2018b

On the whole, the number of farmers linked to FPOs is highest in Karnataka (1.76 lakh) and is
followed by Madhya Pradesh (1.72 lakh), Maharashtra (1.2 lakh), Tamil Nadu (1.01 lakh), West
Bengal (1.00 lakh), etc. The number of FPOs formed in different states ranges from 2 in Goa to
303 in Karnataka. The states like Karnataka, Madhya Pradesh, Maharashtra, and West Bengal
account for about 50 percent of the total number of FPOs formed in the country. The number of
farmers linked to each FPO ranges from 129 in Himachal Pradesh to 957 in Goa.

4.5.3 Constraints faced by FPOs

 Lack of technical knowledge/ awareness
 Lack of / inadequate professional management
 Weak financials
 Inadequate access to credit
 Lack of risk mitigation mechanism
 Inadequate access to market
 Inadequate access to infrastructure
 Ownership issues
 Convergence of resources
 Cumbersome registrations and statutory processes compliances
 Lack of skilled human resources
 Social and economic challenges in form of entrepreneurial culture, literacy, etc
 Competition with rich middlemen and intermediaries in the agricultural supply chain.
 Difficulty and delay in the mobilisation of farmers
 Limited organizational and management capacity of FPOs
 Need for incubation and handholding support of FPOs

Role of Central Government Institutions in promoting FPOs

 Department of Agriculture and Cooperation (DAC), Ministry of Agriculture, Govt. of India
will act as the nodal agency for the development and growth of FPOs.

27
  Small Farmers’ Agribusiness Consortium (SFAC), a Society under DAC, will be the
designated agency of DAC to act as a single window for technical support, training needs,
research, and knowledge management and to create linkages to investments, technology,
and markets. SFAC will provide all-around support to State Governments, FPOs, and other
entities engaged in the promotion and development of FPOs. In particular, SFAC will
create sustainable linkages between FPOs and inputs suppliers, technology providers,
extension and research agencies, and marketing and processing players, both in the public
and private sectors.
 The mandate of the National Cooperative Development Corporation (NCDC) will be
expanded to include FPOs in the list of eligible institutions which receive support under the
various programmes of the Corporation.
 NAFED will take steps to include FPOs in the list of eligible institutions which act on its
behalf to undertake price support purchase operations.
 DAC will work with the Food Corporation of India (FCI) and State Governments to
encourage them to include FPOs as procurement agencies under the Minimum Support
Price (MSP) procurement
 DAC and its designated agencies will work with NABARD and other financial institutions
to direct short and medium-term credit for the working capital and infrastructure
investment needs of FPOs. DAC will also work with all relevant stakeholders to achieve
100% financial inclusion for members of FPOs and link them to Kisan Credit Cards.
 DAC will work with the Ministry of Corporate Affairs and other stakeholders to further
clarify and strengthen provisions of the law relating to the registration, management, and
regulation of FPOs with a view to fostering the fast-paced growth of FPOs.

4.5.4 Role of State Government Institutions in supporting FPOs

Besides encouraging State Governments to take up the formation of FPOs on a large scale
through centrally sponsored and state-financed programmes and schemes, DAC suggests the
following steps to be taken by State Governments to support and strengthen FPOs:
 By declaring FPOs at par with cooperatives registered under the relevant State legislation
and self-help groups/federations for all benefits and facilities that are extended to member-
owned institutions from time to time.
 By making provisions for easy issue of licenses to FPOs to trade in inputs (seed, fertilizer,
farm machinery, pesticides, etc.) for use of their members as well as routing the supply of
agricultural inputs through FPOs at par with cooperatives.
 By using FPOs as producers of certified seed, saplings, and other planting materials and
extending production and marketing subsidies on par with cooperatives.

28
  By suitable amendments in the APMC Act to allow the direct sale of farm produce by
FPOs at the farmgate, through FPO-owned procurement and marketing centers, and for
facilitating contract farming arrangements between FPOs and bulk buyers.
 By appointing FPOs as procurement agents for MSP operations for various crops.
 By using FPOs as implementing agencies for various agricultural development
programmes, especially RKVY, NFSM, ATMA, etc., and extending the benefits of Central
and State funded programmes in agriculture to members of FPOs on a preferential basis.
 By linking FPOs to financial institutions like cooperative banks, State Financial
Corporations, etc. for working capital, storage, and processing infrastructure and other
investments.
 By promulgating state-level policies to support and strengthen FPOs to make them vibrant,
sustainable, and self-governing bodies.
Check Your Progress 4
Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) Give full form of the following

(a) NCDC:……………………….………………..
(b) NABARD:…………………………………….
(c) NKFL:………………………..………………..
(d) FCI:……………………………...…………….
(e) KVK:……………………………...…………..

2) Fill in the blanks:

(a) The Research Bank of India has included financing of FPOs up to Rs ………. Under
direct agriculture finance under the Priority Sector Lending Scheme
(b) ……………………….is a centrally sponsored scheme (CSS) started by the Government
of India and is implemented by the Ministry of Food and Processing Industries (MoFPI)
(c) NABKISAN provides loans to three types of producer organizations namely
(i)…………; (ii)………………(iii)…………………
(d) The Small Farmers’Agribusiness Consortium (SFAC) has created …………., …………
and ……………. To provide much-needed capital funds to strengthen FPOs.
3) State true or false

(a) The FPOs are faced with inadequate access to FPOs

(b) The mobilization of farmers is easy for the formation of FPOs

29
 (c) The formation of FPOs involves cumbersome registration and statutory processes
compliance
(d) The FPOs whose age is more than 2 years from the date of incorporation and with
turnover in excess of Rs 100 lakh in the preceding year are classified as Mature POs by
NABKISAN
(e) The Farmer Producer Company registered under the companies act having turnover of up
to Rs 100 crore is exempt from tax on profits derived from farm-related activities for a
period of 5 years.

4.6 LET US SUM UP

A Producer Company is formed with equity contribution by the members. Formation of FPOs
improves the bargaining power of farmers to access financial and non-financial inputs and
services, and technologies, reduce transaction costs, tap high-value markets and enter into
partnerships with private and public entities on more equitable terms. The minimum number of
producers required to form a PC is 10 and there is no upper limit for the maximum number of
members. The liability of members in FPOs is limited to the unpaid amount of the shares held by
them. Hence, the private assets of the members are safe in the event of liquidation of the
producer company. Small Farmers Agribusiness Consortium (SFAC), a Society under the
Department of Agriculture and Cooperation, Ministry of Agriculture is designated as an agency
of DAC to act as a single window for technical support, training needs, research, and knowledge
management to create linkages to investments, technology, and markets. The state government
supports FPOs to act as procurement agents for MSP operations for various crops, and issue
licenses to trade in inputs (seed, fertilizer, farm machinery, pesticides, etc) for use of their
members. The FPOs will be given preference to act as implanting agencies of various
agricultural development programmes, especially RKVY, NFSM, ATMA, etc, and extend the
benefits of central and state-funded programmes in agriculture to members of FPOs on a
preferential basis.

The formation and development of FPOs follow a well-defined path namely (1) cluster
identification, (2) Diagnostic study, (3) Feasibility study, (4) baseline assessment, (5) Business
planning, (6) mobilization of farmers, (7) organizing and formalizing, (8) resource mobilization,
(9) systems development, (10) business operations, and (11) Assessment and audit. The general
structure of FPOs involves the general body, executive body and Board of Directors, General
Manager, FPO staff & local resources. The Board of Directors, General Manager, and FPOs staff
together deal with the planning, implementation, and monitoring of FPO activities. A number of
programmes and schemes of the Government of India are there which help the FPOs. An
example includes AMI, MIDH, DAY-NRLM, Operation greens, etc.

The RBI has included financing of FPOs up to Rs 2 crore under direct agriculture finance under
Priority Sector Lending Scheme. NABARD has set up a PODF fund with a corpus of Rs 50 core
to provide a grant for the promotion and capacity building of FPOs. NABARD PRODUCE fund

30
was set up in 2014 with a corpus of Rs 200 crores to create a network of more than 2000 FPOs in
the country. SFAC has created an equity grant fund, credit guarantee fund, and venture capital
assistance to provide much-needed capital funds to strengthen the FPOs. NABKISAN Finance
Limited provides loans to producer organizations towards meeting working capital and term
loans for the creation of infrastructure for storage, processing, marketing, etc.

The ICAR helps FPOs by providing technical support by conducting training programmes and
offering advisory services to the farmers through its network of Research Institutes and KVKs
spread across the country.

The FPOs having turnover of up to Rs 100 crore are exempt from tax on profits derived from
farm-related activities for a period of 5 years.

The FPOs are faced with a number of challenges like lack of technical knowledge, inadequate
professional management, weak financials, inadequate access to credit, inadequate access to the
market, lack of skilled human resources, difficulty and delay in the mobilization of farmers, etc.

4.7 KEYWORDS

FPO : A Farmer Producer Organization is the phenomenon of

PKVY
Producer Institution
Diagnostic Study
NABARD
Resource Mobilization
collectivization of farmers to improve their bargaining power
to access financial and non-financial inputs and services, and
technologies, reduce transaction costs, tap high-value markets
and enter into partnerships with private and public entities on
more equitable terms.
: Paramaparagat Krishi Vikas Yojana
: Producer Institution means a Producer Company or any other
institution (whether incorporated or not) having only
producer(s) or Producer Company (ies) as its members, having
any of the objects of a Producer Company and which agrees to
make use of the services of the Producer Company (ies) as
provided in its Articles of Association
: A diagnostic study is to be conducted by the RI in the selected
cluster area. The Diagnostic Study is conducted to assess the
preliminary situation of the farmers and the level of agriculture
in the area. The study will also help in identifying the potential
interventions required and understanding the specific project
implementation context.
: The National Bank for Agriculture and Rural Development
(NABARD) is playing a great role in facilitating the growth of
FPOs.
: Before initiating the operations of an FPO all required
resources should be mobilized by the RI with the help of FPO

31
 representatives and the board of directors. Financial, human
(staff), technical and physical resources should be developed
during this particular step. Based on the business plan the RI
should liaise with various financing agencies and mobilize
resources for hiring/ purchasing and developing various
resources.

4.8 SUGGESTED FURTHER READINGS /REFERENCES

 GoI (2020) Formation and promotion of 10000 farmer producer organizations (FPOs)
Operational, Department of Agriculture, Co-operative & Farmers’ Welfare, Ministry of
Agriculture and Farmers Welfare, Government of India.
 Manaswi B.H., Pramod Kumar, P. Prakash, Amit Kar, V. Lenin, DUM Rao, R. Roy
Burman, P. Anbukkani (2021) Status and Performance of Farmer Producer Organizations in
India: An Economic Perspective, published by Walnut Publication, ISBN: 9789390785728
 B.H. Manaswi, Pramod Kumar, P. Prakash, Amit Kar, P. Anbukkani, G.K. Jha and DUM
Rao (2019) Impact of Farmer Producer Organisations on Organic Chilli (Capsicum
Frutescens) Production in Telangana, Indian Journal of Agricultural Sciences, 89(11):1850-
1854.
 B.H. Manaswi, Prramod Kumar, P. Prakash, Amit Kar, P. Anbukkani, G.K. Jha, DUM Rao
and Lenin V. (2020) Impact of Farmer Producer Organisations on Organic Chilli Production
in Telangana, India, Indian Journal of Traditional Knowledge, 19(1):33-43
 BH Manaswi, Pramod Kumar, Prakash P., P Anbukkani, GKJ Amit Kar, DUM Rao (2018)
Progress and performance of states in promotion of Farmer Producer Organizations in India,
Indian Journal of Extension Education, 54(2):108-113.
 NABARD (2015) Farmer Producer Organisations-Frequently Asked Questions, Published by
Farm Sector Policy Department & Farm Sector Development Department, National Bank for
Agriculture and Rural Development (NABARD) Head Office, Mumbai
 GoI (2015) Policy & Process Guidelines for Farmers Producer Organisations, Department of
Agriculture and Cooperation, Agriculture Ministry, Government of India
 NABCONS (2019) DARPAN: The Quarterly e-Newsletter of NABCONS, VIII issue (July –
Sept 2019)
 Anonymous (2020) Formation and promotion of 10,000 Farmer Producer Organizations
(FPOs), Operational Guidelines, Government of India, Ministry of Agriculture, Co-operation
and Farmer’s Welfare, Ministry of Agriculture & Farmers Welfare, Government of India.
 SFAC (2020) Strategy Paper for promotion of 10,000 Farmer Producer Organisations
(FPOs), Small Farmers Agribusiness Consortium, New Delhi

32
  http://sfacindia.com/UploadFile/Statistics/Farmer%20Producer%20Organizations%20Sc
heme.pdf
 http://sfacindia.com/UploadFile/Statistics/Operational-Guidelines-for-Formation-and-
Promotion-of-10000-Farmer-Producer-Organizations-Hindi.pdf
 http://sfacindia.com/UploadFile/Statistics/Operational-Guidelines-for-Formation-and-
Promotion-of-10000-Farmer-Producer-Organizations-Hindi.pdf
 http://sfacindia.com/UploadFile/Statistics/Addendum-to-Operational-Guidelines-OG-of-
Formation-Promotion-10,000-FPOs.pdf

4.9 ANSWERS TO CHECK YOUR PROGRESS EXERCISES

Check Your Progress 1

Q.1.

i. VIUC: Vegetable Initiative for Urban Cluster

ii. SFAC: Small Farmer Agribusiness Consortium
iii. PKVY: Paramparagat Krishi Vikas Yojana
iv. RKVY: Rashtriya Krishi Vikas Yojana

Q.2.

(a) IXA, 1956

(b) Members
(c) Seeds, fertilizers, credit, insurance, knowledge
(d) Marketing, processing, market-led agricultural production
(e) Single object, multi-object

Q.3.

(a) False
(b) False
(c) True
(d) False
(e) False
(f) False

Check Your Progress 2

33
Q.1.

(a) False
(b) False
(c) True
(d) True
(e) False
Q.2.
(a) Department of Agriculture and Cooperation
(b) National Food Security Mission
(c) Agriculture Technology Management Agency
(d) Minimum Support Price
(e) Agricultural Produce Market Committee

Q.3.

(a) Diagnostic study

(b) Mobilization of farmers
(c) Resource mobilization
(d) Business operations
(e) Crop insurance, Electric motors insurance, life insurance

Check Your Progress 3

Q.1.
(a) True
(b) False
(c) False
(d) False
(e) True

Q.2.
(a) Farmers Interest Group
(b) Indian Farmers Fertilizer Cooperative Limited
(c) Farmer Producer Organization

34
 (d) Board of Directors
(e) Chief Executive Officer
(f) Participatory Guarantee Scheme of Certification

Q.3.
(a) Producer Organization
(b) Producer Organization
(c) Small Farmers Agribusiness Consortium (SFAC)
(d) Food Corporation of India (FCI), State Governments

Check Your Progress 4

Q.1.
(a) National Cooperative Development Council
(b) National Bank for Agriculture and Rural Development
(c) NABKISAN Finance Limited
(d) Food Corporation of India
(e) Krishi Vigyan Kendra

Q.2.
(a) 2 crore
(b) Operation Green
(c) (i) Start-up POs (ii) Mature FPOs (iii) High potential Pos
(d) Equity grant fund, credit guarantee fund scheme and venture capital assistance

Q.3.
(a) True
(b) False
(c) True
(d) False
(e) True

4.10 UNIT END QUESTIONS

Short Answer Questions

Q.1: Define the flowing:

(a) Mobilization of farmers: …………………………………………………………………

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 …………………………………………………………………………………………..

(b) Cluster identification: ……………………………………………………………………

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(c) Baseline assessment:………………………………………………………………………

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(d) Farmer Producer Organization …………………………...............................................
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Q.2: Classify the FPOs into various categories
Q.3: Give schematic illustration of schemes for supporting FPOs
Q.4: What is the significance of FPOs in Indian Agriculture?
Q.6: Give schematic diagram of structure and formation of FPOs?
Q.7: Define the following with respect to FPOs
(a) Marketing services
(b) Technical services
(c) Input supply services

Essay Types Questions:

Q.1: Enlist the function of the Board of Directors.
Q.2: Enlist the problems faced in building strong FPOs.
Q.3: Draw a schematic diagram to show the backward and forward linkage offered by FPOs.
Q.4: Enlist a few state government policies to promote FPOs.
Q.5: Enlist the advantages of FPOs.
Q.6: Describe the role of state government in supporting FPOs.
Q.7: Differentiate between producer companies and cooperatives.

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UNIT 5 BUSINESS ETHICS

Structure
5.0 Objectives
5.1 Introduction
5.2 Business Ethics
5.2.1 Nature of Business Ethics
5.2.2 Scope of Business Ethics
5.2.3 Need for Business Ethics
5.3 Ethics in Business Functional Areas
5.3.1 Ethics in Marketing
5.3.2 Ethics in Finance
5.3.3 Ethics in Production and IT
5.3.4 Ethics in Human Resource Management
5.4 Measures to Solve Ethical Problems
5.5 Corporate Social Responsibility
5.5.1 Why is Corporate Social Responsibility Important?
5.5.2 Social Responsibilities of Business towards different Stakeholders
5.5.3 Corporate Social Responsibility in India
5.5.4 Corporate Social Responsibility Voluntary Guidelines (2009)
5.6 Corporate Governance
5.6.1 Corporate Governance - Developments World Over
5.6.2 Corporate Governance – Developments in India
5.6.3 Principles of Corporate Governance
5.6.4 Whistle Blower Policy
5.7 Let Us Sum Up
5.8 Keywords
5.9 Suggested Further Readings /References
5.10 Answers to Check Your Progress

5.0 OBJECTIVES
After studying this unit, you should be able to:
 discuss the concept, nature, scope, importance, and need of business ethics;
 identify ethics in various business functional areas;
 explain the measures to solve ethical problems;
 describe the corporate social responsibility; and
 explain the meaning and principles of corporate governance.

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5.1 INTRODUCTION

Business ethics, corporate social responsibility, and corporate governance have become
topics of interest in present times, worldwide. In recent years, shocking stories of
corporate misconduct and wrongdoings have brought these topics to the forefront and in
limelight. These topics have attracted the attention of authors, researchers, officials,
practitioners, and other stakeholders. The corporate sector has often been plagued with
the onslaught of accusations of unethical practices. The accusations sometimes have a
basis and are well grounded with facts. Although ethical-unethical issues have come to
the limelight, once in a blue moon, throughout the history of business but of late,
especially after the 1970s and 80s, their frequency of occurrence has increased manifold.
Many large firms have been convicted of lawlessness, including bribery, criminal fraud,
illegal campaign contributions, tax evasion, or price-fixing since then. Many new
committees, new codes, and laws have been framed since then but a lot of work remains
to be done. Indian companies too are also facing the heat of ethical issues such as
transparency at the board level, board compensation, unethical marketing, and HR
practices. E.g. Satyam IT, Jaypee builders, and many others from time to time,

5.2 BUSINESS ETHICS

The term 'business ethics' came into common use in the United States in the early 1970s.
The Society for Business Ethics was started in 1980. Firms started highlighting their
ethical stature in the late 1980s and early 1990s, possibly trying to distance themselves
from the business scandals of the day.
Before understanding business ethics, let us first try to understand, what ‘ethics’ are. The
word ‘ethics’ has its origin in the Greek word ‘ethikos’ meaning a set of moral
principles. In simple words, ethics refers to norms, morals, principles, and ideals
prevailing in a group or society. These are some standardized forms of conduct or
behavior. They give an idea of what is wrong or right, true or false, fair or unfair, just or
unjust, and proper or improper. Ethics are, actually, fundamental personal traits that one
adopts and follows as guiding principles in one’s life.
Business ethics focuses on the morals, rules, and principles followed by a business
enterprise. These issues are mainly related to the behavior and obligations of business
professionals. An ethically responsible company is said to have developed a culture of
caring for people and for the environment and where all business decisions are made in
an ethical manner. Business ethics are part of the formal rules and procedures in an
ethical company

5.2.1 Nature of Business Ethics

The nature of business ethics can be understood by the following:

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  Business ethics, also called corporate ethics, are nothing but a form of applied
ethics or professional ethics. They cover the entire range of ethical principles,
morals, conducts, and also ethical situations and problems that are encountered in
running a business on a day-to-day basis.
 Ethical norms reflect the norms of each historical period. As time passes, new
norms evolve, causing accepted behaviors to become objectionable. Business
ethics, actually, are influenced by society and its norms at a particular period of
time.
 The range and quantity of business ethical issues reflect the interaction of profit-
maximizing behaviour with non-economic concerns.
 Governments use laws and regulations to point business behavior in what they
perceive to be beneficial directions. Ethics implicitly regulates areas and details
of behavior that lie beyond governmental control.
 It is believed that unethical behaviour in business more often than not is a
systematic matter. To a large degree, it is the behaviour of generally decent
people who normally would not think of doing anything illegal or immoral but
they get backed into doing something unethical by the systems and practices of
their own firms and industries. Unethical behaviour in business generally arises
when business firms fail to pay explicit attention to the ethical risks that are
created by their own systems and practices.

5.2.2 Scope of Business Ethics

Business ethics come into play at all levels of business and in all functional areas. They
guide corporate strategies, decisions, policies, programmes, and culture. Employees,
vendors, dealers, customers, retailers, wholesalers, shareholders, and other stakeholders
affect and get affected by business ethics. Ethical issues not only confront decision
makers and top managers but also are faced by supervisors and workers in the
origination. Similarly, each department, marketing, finance, production, purchase, and
human resource management, face ethical dilemmas and situations.

5.2.3 Need for Business Ethics

There are several reasons why is ethical behavior needed. Some of them are as under:
 First, ethical behavior is usually associated with positive consequences. Honesty
in professional dealings promotes mutual trust and helps in building a positive
long-term relationship between the two parties. Unethical dealing, on the other
hand, may damage the credibility, reputation, and image of the companies.
 Ethical behavior empowers all the parties involved in business transactions.
Managers who behave ethically establish an organizational climate of
supportiveness, honesty, and trust. This climate in turn empowers employees to
try out new ideas, takes risks, and assume more responsibility.

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  It has been seen that managers who treat other people fairly earn employees’ trust
and this makes them more willing to support the organization. Ethics cultivate
strong teamwork, productivity, and efficiency.
 The government and its laws may not be able to resolve emerging problems, but
ethics can. Regulations always lag behind technology and emerging situations,
ethics, therefore, come to the rescue in new situations.
 Ethical behavior is intrinsically valuable also. Those who behave humanely in
their dealings with others and who are concerned with the welfare of the
organization and society are rewarded with peace of mind that carries no price
tag.
Check Your Progress 1
Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) Discuss the nature of Business Ethics.

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2) Highlight any two advantages of Business Ethics.

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Activity 5.1:
Visit any company or a business organization of your choice and discuss business ethics
and ethical situations with senior managers or executives. Based upon the discussion,
give your opinion about business ethics and ethical situations in business.
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5.3 ETHICS IN BUSINESS FUNCTIONAL AREAS

Many ethical issues may arise in the course of operating a business enterprise. These
ethical issues may relate to different functional areas like marketing, finance, production,
and human resources management. A clear understanding of ethical issues related to
these functional areas provides us with a broader picture of business ethics. There may
be hundreds of situations that may arise during the day-to-day functioning of a business
enterprise and require ethical decision-making. A few of these situations and ethical
issues, related to business functional areas, have been discussed below:

5.3.1 Ethics in Marketing

The marketing department is one of the most important departments of a company as it
generates revenues by disposing of products and services for a profit. Marketing actually
is taking the right kinds of products and services to the targeted customers at the right
prices with the right promotion and distribution. Fair pricing, fair advertising, etc. are
essential while marketing; but in actual practice, is it so?
There are many issues related to the way companies sell and market their products. Many
companies sell products, e.g., cigarettes, which are harmful but not illegal. Many food
products, especially junk food and soft drinks also are bad for the health. Production,
marketing, and distribution of junk food is a big ethical dilemma because the products
are not illegal, yet they create negative impacts on society in terms of health concerns for
consumers especially the younger generation
Securing business through gifts isn’t a bribe? Somehow, this is a way of marketing in
some organizations. What about the customer’s personal details? Should they be
disclosed to others or exploited? Similarly, what about piracy and copyrights? Don’t you
think this is being done in our country? Is it copyright or right to copy? What about
deceptive and misleading advertising? What about hoarding and black marketing? Don’t
you think these exist although morally wrong and illegal?
Marketing practices are deceptive if customers believe they will get more value from a
product or service than they actually receive. Deception, which can take the form of
misrepresentation, omission, or misleading practice, can occur when working with any
element of the marketing mix. Deceptive pricing practices cause customers to believe
that the price they pay for some unit of value in a product or service is lower than it
really is. The deception might take the form of making false price comparisons,
providing misleading suggested selling prices, omitting important conditions of the sale,
or making very low price offers available only when other items are purchased as well.
Promotion practices are deceptive when the seller intentionally misstates how a product
is constructed or performs or employs bait-and-switch selling techniques, a technique in
which a business offers to sell a product or service, often at a lower price, in order to

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attract customers who are then encouraged to purchase a more expensive item. When
packages are intentionally mislabelled as to contents, size, weight, or use information,
that constitutes deceptive packaging. Selling hazardous or defective products without
disclosing the dangers, failing to perform promised services, and not honoring warranty
obligations are also considered deception.

During the past 20 years or so, much greater attention has been paid to how and where
our clothes are made, particularly in light of tragedies such as the blaze that tore through
a garment manufacturing facility in Bangladesh in 2012, killing 117 people – a factory
that supplied clothing to American retailers including Walmart and Sears. Following this,
the demand for ethically made clothing has soared in recent years, a trend that has given
rise to dozens of companies that want to change how we make and view clothing,
including Everlane.
At Everlane, a garment manufacturing firm, the garments are made in factories that meet
the most stringent quality standards – not only in terms of the clothes themselves but also
in how workers are treated. Everlane only partners with manufacturers that demonstrate a
strong commitment to their workers’ welfare, a fact the company prides itself upon in its
marketing material.
Everlane isn’t content to merely tell you that its clothes are manufactured and sold
ethically; the company also provides customers with a detailed cost breakdown for each
and every one of its stylish, minimalist garments. This includes details on the cost of
materials, labor, transportation and logistics, excise taxes and duties, and even hardware
such as zippers and buttons.
The company’s Elements jacket, for example, costs $60 to produce, and you can see
exactly how much each of the manufacturing and logistical elements affects the retail
price:
Source: https://www.wordstream.com/blog/ws/2017/09/20/ethical-marketing

5.3.2 Ethics in Finance

A business enterprise must follow strict ethical standards in accounting and also in
disclosures to various stakeholders. All the information must be accurate, timely, and
comprehensive. Transparency and disclosure become very important issues. What about
window dressing, financial fraud, and money laundering? Laws are there for them but
ethics are more important.
Fraudulent financial dealings, influence peddling and corruption in governments, brokers
not maintaining proper records of customer trading, cheating customers of their trading
profits, unauthorized transactions, insider trading, misuse of customer funds for personal
gain, mispricing customer trades, and corruption and larceny in banking have become
common occurrences.
Ethical issues related to securities include insider trading, manipulation of financial
markets, etc. Bribery, kickbacks, overbilling, under-invoicing, tax payments, internal

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audits, and external audits are the other areas in which ethical financial practices need to
be followed.

Applying Virtue Ethics: The Rajat Gupta Case

Virtue ethics is an ethical approach based on agents. This approach focuses on the
fundamental character and motivations of the individual moral agent. Moral behavior is
not constrained by rules or guidelines, but rather involves an individual rationally
pursuing moral excellence as an end in itself. Virtue, according to Aristotle's virtue
ethics, is a desirable character trait that falls between two extremes, rashness, and
cowardice. The virtuous agent is always seeking balance in ethical decision-making.
Such an agent does not follow any specific "rules" when making ethical decisions but
rather attempts to make decisions that are consistent with the pursuit of a specific kind of
excellence, which entails exercising sound moral judgment guided by virtues like
courage, wisdom, temperance, fairness, integrity, and consistency.

Rajat Gupta and Insider Trading

The Players
Rajat Gupta is an Indian-American businessman who was previously the managing
director of the management consulting firm McKinsey & Company and a business leader
in both India and the United States. Rajat Gupta has also served as corporate chairman,
board director, or strategic advisor to Goldman Sachs, Procter & Gamble, and American
Airlines, as well as non-profit organizations like The Gates Foundation, The Global
Fund, and the International Chamber of Commerce.

In June 2012, Rajat Gupta was convicted of insider trading. He was sentenced to two
years in prison, one year on supervised release and a $5 million fine in October 2012.
His trial began on May 22, 2012. On June 15, 2012, Gupta was found guilty of three
counts of securities fraud and one count of conspiracy.

The primary beneficiaries are Rajat Gupta, McKinsley & Company, Goldman Sachs, Raj
Rajaratnam, Galleon Group, Warren Buffet, and the US equity markets. Rajat Gupta's
family and friends, employees at McKinsley & Company and Galleon Group, Goldman
Sachs investors and creditors, and government and officials involved in the case are all
indirectly affected.

The Transactions
In September 2008, Warren Buffet agrees to pay Goldman Sachs $5 billion in exchange
for preferred stock in the company. This is likely to boost the stock price of Goldman
Sachs. The announcement or dissemination of the news should be delayed until the end
of the day. Less than a minute after the board approves the Buffet purchase, Rajat Gupta
calls his longtime friend Raj Rajaratnam, a hedge fund manager and billionaire founder

7
of Galleon Group. When Rajaratnam learns of this information, he buys Goldman Sachs
stock right away. When the stock market opens the next day, Raj Rajaratnam makes
nearly $1.2 million as Goldman Sachs shares rise. The SEC estimates the tip leaked by
Rajat Gupta generates profits and avoids losses of more than $23 million.

Ethical Analysis
Would a good person have given Raj Rajaratnam the information? Rajat Gupta
demonstrated a lack of character

Integrity:

Integrity refers to a person's honesty, truthfulness, or accuracy in their actions. Rajat

Gupta is untrustworthy to his former employer, Goldman Sachs, where he served on the
Board of Directors. Instead, he shares insider information for personal gain.

Trust:

Rajat Gupta betrayed the trust of other Goldman Sachs directors and others with whom
he has done business. His actions have an impact on the relationship with McKinsley &
Company.

Fairness:

Rajat Gupta's actions are reprehensible for two reasons. First, other investors who are
unaware of Buffett's transaction are at a disadvantage. Second, he makes good use of the
information entrusted to him by Rajaratnam.

Honesty:

He lied to Goldman Sachs and his fellow board members, to whom he impliedly
promised not to share inside information

Self-Control:

Rajat Gupta would not have leaked inside information to Rajaratnam for personal gain if
he had exercised self-control.

People who knew Gupta praised him for being a kind person. He was deeply involved in
the provision of medical and humanitarian aid to developing countries. He rose from
humble beginnings to become a consulting community pillar and trusted advisor to the
world's leading businesses and organizations. In the media coverage of Rajat Gupta's
trial, the word "respected" was frequently used. People in positions of power used to be
assumed to be moral, but that is no longer the case. Incidents such as the Rajat Gupta
insider trading case and other financial scandals, however, show that this assumption is
incorrect.

A good manager strives for moral excellence as a true professional, which includes
honesty, fairness, prudence, and courage. Several mechanisms are proposed to help

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practitioners develop moral character and avoid ethical lapses like the Rajat Gupta case.
Tighter government regulations, improved financial institution systems and processes,
better corporate governance, and increased customer awareness are all suggestions.
However, the underlying cause of the problem is not addressed: financial ethics are not
taught in business schools, where moral decision-making should be emphasized.
Situations like "Rajat Gupta and Insider Trading" may become less common if business
schools provide proper ethical education to future financial managers.

5.3.3 Ethics in Production and IT

Production is nothing but the conversion of raw material into finished goods. Quality is
expected in all manufactured goods. What if the product is harmful, especially eatables?
Ethical issues in production also relate to; Defective, addictive, and dangerous products;
Emission norms and pollution; genetically modified food; New technologies; and
Product testing especially the use of animals and disadvantaged groups, etc. Selling
expired products are also considered unethical.
The internet, private exchanges, global satellite linkages, RFID, and other forms of new
technology hold great promise in terms of allowing global supply chains to operate more
efficiently and provide faster responses to demand. However, these new technologies
also present some cultural and ethical challenges to firms operating in the global
environment. There may be varying views among countries on goals, decision-making
approaches, information sharing, trust, and many other cultural differences. Another
central issue is that of intellectual property, in particular, digital assets such as software
programs.

5.3.4 Ethics in Human Resource Management

In the human resource management area, there are clear-cut ethical issues related to
recruitment and selection, transfer, dismissal, compensation, appraisal, etc. Managers
have to be fair while selecting and hiring employees. There should not be any
discrimination based on gender, nationality, religion, caste, colour, and creed. The best
candidate should be selected and hired. The whole process should be transparent. In pre-
placement talks with the prospective candidates during campus placements, the true
picture of the nature of the job, duties and responsibilities, remuneration and facilities,
etc. should clearly be revealed.
Conflicts of interest, however, can become a serious issue in some situations. A conflict
of interest arises when an individual or organization is involved in multiple interests,
where one could potentially corrupt the actions regarding the other. For example, a
manager interviewing job applicants would face a conflict of interest if a family member
applied for the job. Their obligations towards helping out a relative could compromise
their responsibility as a manager to hire the best candidate for the position. This type of
situation is also known as an ethical dilemma, which is a complex situation where your
moral or ethical obligations to different parties contradict each other, making it difficult
to come to a resolution.

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Many ethical issues are related to the health and safety of employees. Although
occupational health and safety conditions are mandated by law in many countries
including India, a business enterprise should also be bound by its ethical values to ensure
that workers are provided with safe conditions at the workplace.
While tackling the difficult issue of employee dismissal, managers need to be aware of
some important ethical considerations. Employees should not be dismissed unless a valid
reason related to their employment can be provided. Managers also need to think about
whether dismissing an employee is actually the best option in the circumstances or if can
they consider other options such as further training, job sharing, or temporary leave.
What about discrimination based on caste, gender, religion, nationality, etc.? And what
about sexual harassment and exploitation?

Check Your Progress 2

Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) Discuss any two ethical issues related to the functional area of marketing.

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2) “Transparency and disclosure promote ethical practices in finance area”. Comment.

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3) Are ethical issues also related to human resource management?

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Activity 5.2:
Visit any company or a business organization of your choice and discuss business ethics
and ethical situations with senior managers or executives of different functional areas.
Based upon the discussion, highlight a few ethics as related to different functional areas.
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5.4 MEASURES TO SOLVE ETHICAL PROBLEMS

Managers of business enterprises need to make their own decisions with regard to the
ethical standards and moral values that they wish to maintain in their business. By
following a carefully and thoroughly thought out set of business principles, they give
themselves the best opportunity for achieving sustainable business success.

There are, however, business situations or dilemmas when there is no simple choice
between right and wrong. These situations have no clear-cut guidelines for managers
either in law or in religion. Managers, therefore, find themselves in a fix. The dilemmas
arise because managers have to choose between situations that are equally important like
truth versus loyalty, organization versus community, short term versus long term,
concern for customers versus profits, etc.

Normally, business organizations must set up procedures for dealing with ethical
dilemmas. A typical procedure may contain various steps like identification of the
problem; determination of factors and actors affecting the problem situation; gathering
information related to the problem; generating of alternative courses of action to tackle
the problem; evaluation of each alternative; selection of the best ethical alternative;
implementation the best alternative; and follow up, modification and updating, if any
Some other measures are as follows:
 An ethics committee of senior managers must be constituted to tackle these
dilemmas. Managers and employees may seek advice from this committee if the
situation so warrants.
 An ethical checklist or code of conduct may be developed and circulated to
various departments of the organization. This checklist or code of conduct must
also be updated from time to time.
 Training and development programme may contain topics related to ethical issues
and codes of ethics. This will help managers and employees to keep updated
themselves and also how to resolve ethical situations.

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Check Your Progress 3
Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) What are various ethical dilemmas in a business enterprise?

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2) Suggest two measures to resolve ethical dilemmas in an organizational setting.

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5.5 CORPORATE SOCIAL RESPONSIBILITY

All thoughtful people believe that corporate enterprise should be organized and operated
to serve the interests of society as a whole and that the interests of shareholders deserve
no greater weight in this social calculus than do the interests of any other members of
society. This type of thinking has given birth to the concept of Corporate Social
Responsibility (CSR)

Social Responsibility of business means the obligation of business enterprise to make

decisions and to take steps for the well-being of all stakeholders and society while
focusing on its own objective. Every decision of the manager may have social
implications. Be it the opening of a new branch; closure of an existing branch;
replacement of men with machines; laying off employees, subcontracting, etc. All affect
society in general and concerned stakeholders in particular. It is, therefore, striking a
balance between measures for well being of society and own interest.

Traditionally, in the United States, CSR has been defined much more in terms of a
philanthropic model. Companies make profits, unhindered except by fulfilling their duty
to pay taxes. Then they donate a certain share of the profits to charitable causes. Over the
years, things, however, have changed fast. This is reflected in CSR documents of US
companies. The European model is much more focused on operating the core business in
a socially responsible way, complemented by investment in communities for solid
business case reasons. If we take a look at Europe, European Commission has come out

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with a new policy on corporate social responsibility in October 2011. It states that in
order to fully meet their social responsibility, enterprises “should have in place a process
to integrate social, environmental, ethical and human rights concerns into their business
operations and core strategy in close collaboration with their stakeholders”. The aim is
both to enhance positive impacts – for example through the innovation of new products
and services that are beneficial to society and enterprises themselves – and to minimize
and prevent negative impacts. Corporate social responsibility is a critical issue across
Asia also. From local companies to multi-national conglomerates, how successfully
business interacts with their environs and community is of supreme importance.

5.5.1 Why is Corporate Social Responsibility Important?

This question has raised enormous amounts of controversy in the past, but it is by now
widely accepted that businesses do indeed have responsibilities beyond simply making a
profit. This is based on a number of arguments as under:
 Corporations exist because they satisfy the needs of society. If corporations at
any time fail to live up to society’s expectations, they may extinct.
 Corporations perceived as being socially responsible might be rewarded with
extra and/or more satisfied customers. On the other hand, perceived
irresponsibility may result in boycotts or other undesirable consumer actions.
 Employees might be attracted to work for, and even be more committed to,
corporations perceived as being socially responsible.
 Voluntarily committing to social actions and programmes may forestall
legislation and ensure greater corporate independence from the government.
 A firm that is more responsive to the improvement of community quality of life
will get a better community in which to conduct business.
 Responsible corporations enjoy better brand image and reputation
These are primarily good business reasons why it might be advantageous for the
corporation to act in a socially responsible manner. In addition to these business
arguments, it is also important to consider moral arguments for corporate social
responsibility:
 Corporations depend on society for the needed inputs like money, men, etc., and
also for a market where products may be sold. Being so much dependent,
corporations have definite responsibility toward society.
 Corporations cause social problems, such as pollution, and hence have a
responsibility to solve those they have caused and to prevent further social
problems from arising.
 As powerful social actors, with recourse to substantial resources, corporations
should use their power and resources responsibly in society.

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  All corporate activities have social impacts of one sort or another, whether
through the provision of products and services or some other corporate activity.
Hence, they can’t escape responsibility for these impacts.
 Corporations rely on the contributions of a much wider set of actors or
stakeholders, such as consumers, suppliers, intermediaries, etc., rather than just
shareholders, and hence have a duty to take into account the interests and goals of
those stakeholders also.

5.5.2 Social Responsibilities of Business towards different Stakeholders

Let us now discuss the social responsibilities of businesses towards different

stakeholders. All stakeholders may be divided into two broad categories namely internal
and external interest groups.
(i) Internal Interest Group: This includes the owners, employees, etc.
(a) Responsibilities towards owners: It is expected that owners, shareholders,
partners, etc. get a fair dividend or a fair return on the capital invested. Shareholders
also expect security of investment and share in profits, capital appreciation, and
bonus shares.
(b) Responsibilities towards employees: Employees should be viewed as partners in
running a business. They are expected to be given fair wages based on productivity.
There should not be any discrimination on the basis of caste, gender, religion, etc.
Favoritism and harassment should not be there and grievances, if any, may be
solved amicably. Responsibility of business is also in the form of fair selection,
training, promotion, participation, etc., and includes the welfare of employees –
health, safety, working conditions, etc.
(ii) External Interest Group: This includes the consumers, community, government, etc.
(a) Responsibilities towards consumers: Products and services must satisfy
consumers’ needs. They must be of good quality and reasonably priced. After-sale
services are expected.
(b) Responsibilities towards Government: Companies must follow all rules,
regulations, and laws framed by the government. They must pay their dues and taxes
honestly. They should not use bribes and corrupt government officials. The
government also expects fair trade practices from companies.

5.5.3 Corporate Social Responsibility in India

Many large groups and companies are discharging corporate social responsibility in India
since independence and even before. Tatas, Birlas, etc. have done it over the years and
also doing it now. Relatively newer firms like Infosys, Wipro, Reliance, etc. are doing it
now. Public sector undertakings like SAIL, BHEL, ONGC, etc. have contributed
tremendously since their inception. Most of the programmes were in the areas of rural
development, environment protection, upliftment of the poor, employment generation,

14
management of natural calamities, women empowerment, etc. Opening up of schools,
colleges, technical institutions, and hospitals; Plantation of trees; Upgradation of schools,
and parks; helping disabled by providing artificial limbs, and means of transport;
Scholarship and uniforms to needy; supply of clean water, food, and other amenities, etc.
are some of the ways in which society is being helped by these corporate.

5.5.4 Corporate Social Responsibility Voluntary Guidelines (2009)

Ministry of Corporate Affairs, Government of India has issued voluntary guidelines for
corporate in India. According to it, each business entity should formulate a CSR policy
to guide its strategic planning and provide a roadmap for its CSR initiatives, which
should be an integral part of overall business policy and aligned with its business goals.
The policy should be framed with the participation of various level executives and
should be approved by the Board. The CSR Policy should normally cover the following
core elements:
(i) Care for all Stakeholders: The companies should respect the interests of, and be
responsive towards all stakeholders, including shareholders, employees, customers,
suppliers, project-affected people, society at large, etc. and create value for all of
them. They should develop a mechanism to actively engage with all stakeholders,
inform them of inherent risks and mitigate them where they occur.
(ii) Ethical functioning: Their governance systems should be underpinned by Ethics,
Transparency, and Accountability. They should not engage in business practices that
are abusive, unfair, corrupt, or anti-competitive.
(iii) Respect for Workers' Rights and Welfare: Companies should provide a
workplace environment that is safe, hygienic, and humane and which upholds the
dignity of employees. They should provide all employees with access to training and
development of necessary skills for career advancement, on an equal and non-
discriminatory basis. They should uphold the freedom of association and the
effective recognition of the right to collective bargaining of labour, have an effective
grievance redressal system, should not employ child or forced labour, and provide
and maintain equality of opportunities without any discrimination on any grounds in
recruitment and during employment.
(iv) Respect for Human Rights: Companies should respect human rights for all and
avoid complicity with human rights abuses by them or by third party.
(v) Respect for Environment: Companies should take measures to check and prevent
pollution; recycle, manage and reduce waste, should sustainably manage natural
resources and ensure optimal use of resources like land and water, should
proactively respond to the challenges of climate change by adopting cleaner
production methods, promoting the efficient use of energy and environment-friendly
technologies.
(vi) Activities for Social and Inclusive Development: Depending upon their core
competency and business interest, companies should undertake activities for the

15
 economic and social development of communities and geographical areas,
particularly in the vicinity of their operations. These could include education, skill
building for the livelihood of people, health, cultural and social welfare, etc.,
particularly targeting disadvantaged sections of society.
Implementation Guidance of Ministry of Corporate Affairs, Government of India, in this
regard is as under:
(i) The CSR policy of the business entity should provide for an implementation strategy
which should include the identification of projects/activities, setting measurable
physical targets with timeframe, organizational mechanism and responsibilities, time
schedules, and monitoring. Companies may partner with local authorities, business
associations, and civil society/non-government organizations. They may influence
the supply chain for CSR initiatives and motivate employees to voluntary efforts for
social development. They may evolve a system of need assessment and impact
assessment while undertaking CSR activities in a particular area. Independent
evaluation may also be undertaken for selected projects/activities from time to time.
(ii) Companies should allocate a specific amount in their budgets for CSR activities. This
amount may be related to profits after tax, the cost of planned CSR activities, or any
other suitable parameter.
(iii) To share experiences and network with other organizations the company should
engage with well-established and recognized programmes/platforms which
encourage responsible business practices and CSR activities. This would help
companies to improve their CSR strategies and effectively project the image of
being socially responsible.
(iv) The companies should disseminate information on CSR policy, activities, and
progress in a structured manner to all their stakeholders and the public at large
through their website, annual reports, and other communication media.
CSR was made mandatory under section 135 of the Companies Act 2013
In a revolutionary move, CSR in India was made mandatory in India. All the companies
registered under the Indian Companies Act 2013 must comply with CSR obligations
as part of section 135 of the act. The law states that all companies:
 Private or public or a subsidiary of a foreign company
 Has a net worth of 5 bn Indian rs or more
 A turnover of 10 bn or more or a net profit of 50 mn rs or more
Any company coming under the preview of mandatory CSR must :
 Create a CSR committee of its board members consisting of three or more
directors, at least one of whom is independent. The CSR committee of a private
company may be made up of two directors, neither of whom needs to be
independent.

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  After taking into account the recommendations of the CSR committee, the
company must approve a CSR policy, including the contents of the policy in its
annual performance and financial reports, publish the policy on its website, and
ensure that activities specified in the policy are actually undertaken.
 The company must ensure that in every fiscal year it spends at least 2 percent of
its average net profits from the three preceding fiscal years in pursuit of its CSR
policy.
 The Companies (CSR Policy) Amendment Rules 2021 have overhauled India’s
CSR regime.
 Besides giving effect to changes introduced in Section 135 of the Companies Act,
as a result of the Companies Amendment Act of 2019 (regarding the transfer of
unspent CSR amount) and Companies Amendment Act 2020 (regarding setting
off of excess CSR expenditure), the New Rules have introduced new
requirements like
 impact assessment of CSR contributions,
 engagement of International Organisations for CSR Projects in limited capacity
etc.
 Even with respect to the concepts earlier present in the 2014 Rules, such as the
meaning of CSR, CSR Policy, and CSR Implementation, the provisions of the
New Rules appear to be more detailed and structured

Role of CSR Committee

 Approve CSR policy ( After considering the recommendation made by

the CSR committee
 Disclose the content of CSR policy in Boards report and
 Ensure the company undertakes the activities included in the CSR policy

List of activities to be undertaken under CSR

1. Eradicating extreme hunger and poverty;
2. Promotion of education;
3. Promotion of gender equality and empowering women;
4. Reducing child mortality and improving maternal health;
5. Employment enhancing vocational skills;
6. Ensuring environmental sustainability, ecological balance, the protection of flora
and fauna, animal welfare, agroforestry, the conservation of natural resources;
and maintaining the quality of soil, air, and water, including contribution to the
Clean Ganga Fund set up by the central government to rejuvenate the Ganga
River.

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 7. Protecting India’s national heritage, art, and culture, including the restoration of
buildings and sites of historical importance and works of art; setting up public
libraries; and contributing to the promotion and development of traditional arts
and handicrafts.
8. Setting forth measures for the benefit of veterans, war widows, and their
dependents.
9. Training to promote rural sports, nationally recognized sports, Paralympic sports,
and Olympic sports.
10. Contributing to the prime minister’s National Relief Fund or any other fund set
up by the central government for the socio-economic development, relief, and
welfare of marginalized classes, minorities, and women.
11. Contribution to publicly-funded business incubators and public bodies (such as
publicly-funded universities and national laboratories) conducting research in
science, technology, engineering, and medicine to promote the Sustainable
Development Goals (SDGs).
12. Working on rural development projects.
13. Developing slum areas.
14. Disaster management, including relief, rehabilitation, and reconstruction
activities
Such other matters as may be prescribed. (Corporate Social Responsibility) Companies
act, 2013

Check Your Progress 4

Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) What is the significance of CSR for a firm?

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2) Suggest novel measures to discharge Corporate Social Responsibility.

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Activity 5.3:
Visit the website of a big business organization and search what measures are being
taken by the organization to discharge corporate social responsibility. Give your opinion
on their efforts.
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5.6 CORPORATE GOVERNANCE

Corporate governance is a system by which companies are directed and controlled. It is a
conscious, deliberate, and sustained effort on the part of a corporate entity to strike a
judicious balance between its own interest and the interest of various constituents of the
environment in which it is operating. Corporate Governance extends beyond corporate
law. Its fundamental objective is not mere fulfillment of the requirements of the law but
in ensuring the commitment of the Board of Directors to transparently managing the
company for maximizing stakeholder value. Basic ingredients for good governance
include:
 Accountability of the Board of Directors and their responsibilities to various
stakeholders.
 Transparency and disclosure.
 System of checks and balances.
 Adherence to rules and conformity.

5.6.1 Corporate Governance – Developments World over

In view of many scandals and frauds in companies, the world over, many developed
countries like the U.K. and the U.S.A. have set up many committees and laws for good
and effective corporate governance. These committees have focussed on various aspects
of corporate governance. Some of these committees and their recommendations, in brief,
are presented below:
(i) Sir Adrian Cadbury Committee (1992) recommended the separation of the
role of CEO and Chairman of the Board. The committee also recommended the
formation of an audit committee, balanced composition of the Board of
Directors with executive and non-executive directors, and selection process of
non-executive directors.
(ii) Mervyn E. King’s Committee (1994) also recommended the establishment of
an audit committee and ensuring effective internal audits. Committee pressed

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 on the observance of the highest level of business and professional ethics.
According to it accounting standards should be in line with international
standards.
(iii) Richard Greenbury Committee (1995) focussed on director remuneration,
particularly compensation packages, large pay increases, and share options. The
important recommendation was the establishment of a Remuneration committee
composed of non-executive directors which would be responsible for deciding
the remuneration for executive directors.
(iv) Ronnie Hampel Committee (1998) focussed on the role of the board of
directors and auditors.
(v) Blue Ribbon Committee (1999) recommended independent members of the
audit committee. The audit committee should have a minimum of three
directors, and all of them should be financially literate. The audit committee
must have a formal written charter, approved by the full board, specifying the
responsibilities, structure, process, and membership.
(vi) OECD principles of corporate governance (1999) also highlighted principles
of corporate governance.
(vii) CACG guidelines (1999) provided principles for corporate governance in the
Commonwealth.
(viii) Sarbens –Oxley Act (2002), a recent enactment in the USA, has emphasized
audit function, auditor independence, and financial disclosures. It has
recommended severe penalties, both fines, and imprisonment for wilful default
by managers and auditors.
(ix) The Combined Code of Corporate Governance (2003, 2006, and 2008) sets
out standards of good practice in relation to shareholders. All companies in the
U.K. and listed on London Stock Exchange are required to report in their
annual reports and accounts about the implementation of the combined code of
corporate governance.

5.6.2 Corporate Governance – Developments in India

India also has formulated codes of corporate governance through various committees, the
more important ones being:
(i) CII (Rahul Bajaj) Committee (1996) recommended a simple structure of
board which should meet 6 times a year. According to it, listed companies in
excess of Rs. 200 crores and above should have at least 30%, non-executive
directors. Directors should not be on the board of 10 or more companies. The
director who does not attend 50% or more meetings is not to be considered for
re-appointment.
(ii) Kumar Mangalam Birla Committee (2000) recommended the board set up a
qualified and independent audit committee to enhance the credibility of

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 financial disclosures and to promote transparency. According to it, shareholders
have to show a greater degree of interest and involvement in the appointment of
directors and auditors.
(iii) Naresh Chandra Committee (2002) recommended that every five years, audit
partners should rotate. Companies are to have at least 50%, independent
directors. An audit committee is to be set up of all independent directors and
certain professional assignments should not be undertaken by auditors.
(iv) Narayana Murthy Committee was constituted by SEBI under the
chairmanship of N.R. Narayana Murthy. The committee included
representatives from the stock exchanges, chambers, commerce and industry,
investor associations, and professionals and made some mandatory
recommendations related to audit committees of listed companies, disclosure of
accounting treatment, risk management, nominee directors, non-executive
director’s compensation, and whistleblower policy, etc.
(v) Corporate Governance Voluntary Guidelines (2009) have been released by
the Ministry of Corporate Affairs, Government of India. These guidelines relate
to the Board of Directors, audit committee, auditors, and whistle-blowing
policy.
Satyam case led to a re-look at corporate governance practices and frameworks prevalent
in the country. The role of independent directors and also auditors came under the
scanner. Actually, the Satyam episode opened a window of opportunity for corporate
governance reforms in the country.
In India, the office of the Comptroller and Auditor General (CAG) functions as an
oversight audit body for the audit of public sector companies. There are certain statutory
provisions related to audit committees in India. These are contained in section 292A of
the companies act, 1956, and clause 49 of the uniform listing agreement prescribed by
SEBI.
The Ministry of Heavy Industries and Public Enterprises, Department of Public
Enterprises has issued guidelines on corporate governance for Central Public Sector
Enterprises (CPSEs). To evolve guidelines, CPSEs have been categorized into two
groups namely – (i) those listed in the Stock exchanges; (ii) those not listed in the stock
exchanges. In so far as the listed CPSEs are concerned, they have to follow the SEBI
guidelines on corporate governance. In the case of non-listed CPSEs, each enterprise
should strive to institutionalize good corporate governance practices broadly in
conformity with the SEBI guidelines. The guidelines for listed and unlisted CPSEs deal
with the subject of corporate governance, under the headings: Board of Directors; Audit
Committee; Subsidiary Companies; Disclosures; Report, Compliance, and Schedule of
Implementation.

5.6.3 Principles of Corporate Governance

The principles of corporate governance as evolved by The Institute of Company
Secretaries of India (ICSI) are as under:

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  Sustainable development of all stakeholders – to ensure the growth of all
individuals associated with or affected by the enterprise on a sustainable basis.
 Effective management and distribution of wealth – to ensure that the enterprise
creates maximum wealth and judiciously uses the wealth so created for providing
maximum benefits to all stakeholders and enhancing its wealth creation
capabilities to maintain sustainability.
 Discharge of social responsibility – to ensure that enterprise is acceptable to the
society in which it is functioning.
 Application of best management practices – to ensure excellence in s functioning
of the enterprise and optimum creation of wealth on a sustainable basis.
 Compliance of law in letter and spirit – to ensure value enhancement for all
stakeholders guaranteed by law for maintaining socio-economic balance.
 Adherence to ethical standards – to ensure integrity, transparency, independence,
and accountability in dealings with all stakeholders.

5.6.4 Whistle Blower Policy

The concept of the whistleblower is generating much-needed heat nowadays. This
concept is very important from the point of view of corporate governance. A whistle-
blower is a person who publically complains about concealed misconduct on the part of
an organization or body of people, usually from within that same organization. This
misconduct may be a violation of a law, rule, or regulation, and/or a direct threat to
public interest such as fraud, health/safety violations, and corruption. Whistleblowers
frequently are likely to face retaliation, sometimes at the hands of the organization or
group of which they have accused unless a system is in place that would ensure
confidentiality. It is in this context, that whistleblowers are needed to be protected under
the law from employer retaliation. In India, clause 49 of the listing agreement provides
non-mandatory guidelines with regard to the whistle-blower policy.
The company may establish a mechanism for employees to report to the management,
concerns about unethical behavior, actual or suspected fraud, or violation of the
company’s code of conduct or ethics policy. This mechanism could also provide for
adequate safeguards against the victimization of employees who avail of the mechanism
and also provide for direct access to the chairman of the audit committee in exceptional
cases. Once established, the existence of the mechanism may be appropriately
communicated within the organization.
Check Your Progress 5
Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) What do you understand by “Corporate Governance”?

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 ………………………………………………………………………………………
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2) Throw light on the recommendation of a few committees on corporate governance in

India.

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3) Who is a Whistle Blower in the context of corporate governance?

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Activity 5.4:
Go through the annual reports of any two big companies and write down what they have
disclosed about corporate governance in their annual reports.
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5.7 LET US SUM UP

Business is an integral part of society. It can not survive for long if the focus is only on
making profits and maximizing wealth. The concern for moral values and well being of
society is also very important. Not only the Profits but concern for the People and Planet
is of paramount importance. Business ethics, corporate social responsibility, and
corporate governance, therefore, have gained the focus of attention the world over.
Ethics refers to norms, morals, principles, and ideals prevailing in a group or society.
They are some standardized form of conduct or behavior. Business Ethics are the morals,

23
rules, and principles followed by a business enterprise. Corporate Social Responsibility
of business means the obligation of business enterprise to make decisions and to take
steps for the well-being of all stakeholders and society while focusing on its own
objective. Corporate Governance is a system or set of processes to ensure that company
is managed to suit the best interest of all stakeholders. These are interlinked and are vital
to the success of an enterprise.

5.8 KEYWORDS
Business Ethics: They are the morals, rules, and principles followed by a business
enterprise.
Corporate Governance: It is a system or set of processes to ensure that company is
managed to suit the best interest of all stakeholders.
Corporate Social Responsibility: Social Responsibility of business means the
obligation of business enterprise to make decisions and to take steps for the well-being of
all stakeholders and society while focusing on its own objective.
Ethical Dilemma: They are conflicting decision situations that have no clear-cut
guidelines either in law or in religion and which require morals and ethics to come into
play.
Ethics: They refer to norms, morals, principles, and ideals prevailing in a group or
society. They are some standardized form of conduct or behavior.
Whistle Blower: A whistle-blower is a person who publically complains about
concealed misconduct on the part of an organization or body of people, usually from
within that same organization.

5.9 SUGGESTED FURTHER READINGS/ REFERENCES

 Boatright, J.R., 2003, Ethics and conduct of Business, 4th edition, Pearson
Education Publication, New Delhi, India
 Crane, A. and Matten, D., 2007, Business Ethics – Managing Corporate
Citizenship and Sustainability in the Age of Globalisation, 2 nd edition, Oxford
University Press, New Delhi, India.
 DeGeorge, R.T., 2011, Business Ethics, 7th edition, Pearson Education, Inc./
Dorling Kindersley India, Pvt. Ltd., New Delhi, India
 Hartman, L.P. and Chatterjee, A., 2007, Perspectives in Business Ethics, 3rd
edition, Tata McGraw Hill Publishing Co. Ltd., New Delhi, India.
 Velasquez, M.G., 2002, Business Ethics – Concepts and Cases, 5th edition,
Prentice Hall, NJ, USA
 Weiss, J.W., 2003, Business Ethics – A Stakeholder and Issues Management
Approach, 3rd edition, Thomson Press Asia Pte. Ltd., Singapore.

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  www.nfcgindia.org (National Foundation for Corporate Governance)
 www.mca.go.in (Ministry of Corporate Affairs, Government of India)
 www.timesfoundation.indiatimes.com (Times Foundation, The Times Group)

5.10 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress 1

1) Business ethics, also called corporate ethics, are nothing but a form of applied ethics
or professional ethics. They cover the entire range of ethical principles, morals,
conducts, and also ethical situations and problems that are encountered in running a
business.
2) The two advantages of business ethics are:
 It has been seen that managers who treat other people fairly earn employees’ trust
and this makes them more willing to support the organization. Ethics cultivate
strong teamwork, productivity, and efficiency.
 The government and its laws may not be able to resolve emerging problems, but
ethics can. Regulations always lag behind technology and emerging situations,
ethics, therefore, come to the rescue in a new situations.

Check Your Progress 2

1) Many food products, especially junk food and soft drinks are not good for the health.
To produce and market them creates a big ethical dilemma because the products are
not illegal, yet the negative impacts on society are considered significant. Similarly
securing business through gifts isn’t a bribe? Somehow, this is a way of marketing in
some organizations.
2) Transparency and disclosure become very important issues in the area of finance. Not
only these are desired by committees and governments all over the world but also fall
in the domain of business ethics. All stakeholders desire transparency in accounts and
also disclosure of finance and account-related facts. There are laws and statutory
provisions for these also.
3) In the human resource management area there are clear-cut ethical issues related to
recruitment and selection, transfer, dismissal, compensation, appraisal, etc.

Check Your Progress 3

1) Ethical dilemmas are conflicting decision situations that have no clear-cut guidelines
for managers either in law or in religion and which require morals and ethics to come
into play.
2) The measures are as follows:

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  A committee of senior managers must be constituted to tackle these dilemmas.
Managers and employees may seek advice from this committee if the situation so
warrants.
 An ethical checklist or code of conduct may be developed and circulated to
various departments of the organization. This checklist or code of conduct must
also be updated from time to time.

Check Your Progress 4

1) There are primarily good business reasons why it might be advantageous for the
corporation to act in a socially responsible manner. In addition to these business
arguments, it is also important to consider moral arguments for corporate social
responsibility. Corporations exist because they satisfy the needs of society. If
corporations at any time fail to live up to society’s expectations, they may extinct.
Corporations perceived as being socially responsible might be rewarded with extra
and/or more satisfied customers. On the other hand, perceived irresponsibility may
result in boycotts or other undesirable consumer actions. Employees might be
attracted to work for, and even be more committed to, corporations perceived as
being socially responsible. Voluntarily committing to social actions and programmes
may also forestall legislation and ensure greater corporate independence from the
government.
2) Plantation of trees, the opening of and upgradation of schools, helping the disabled,
scholarships and uniforms to the needy, supply of clean water and food, etc. are some
of the ways of discharging corporate social responsibility.

Check Your Progress 5

1) Corporate governance is a conscious, deliberate, and sustained effort on the part of a
corporate entity to strike a judicious balance between its own interest and the interest
of various constituents of the environment in which it is operating.
2) Naresh Chandra Committee (2002) recommended that every five years, audit
partners should rotate. Companies are to have at least 50%, independent directors. An
audit committee is to be set up of all independent directors and certain professional
assignments should not be undertaken by auditors.
CII (Rahul Bajaj) Committee (1996) recommended a simple structure of board which
should meet 6 times a year. According to it, listed companies in excess of Rs. 200
crores and above should have at least 30%, non-executive directors. Directors should
not be on the board of 10 or more companies. The director who does not attend 50%
or more meetings is not to be considered for re-appointment.
3) A whistle-blower is a person who publically complains about concealed misconduct
on the part of an organization or body of people, usually from within that same
organization. This misconduct may be a violation of a law, rule, or regulation, and/or
a direct threat to public interest such as fraud, health/safety violations, and
corruption.

26