The rise of FPOs: Mistakes of the past should be avoided

| Updated on July 20, 2020

There is huge scope for reaching capital and skills to the bottom of the FPO pyramid. Funds should not be usurped by those in positions of advantage

Following up on the 2019-20 Budget announcement to set up 10,000 new FPOs (farmer-producer organisations) over five years — there are over 7,000 of them already in existence — the Centre has come up with sensible guidelines to hand-hold these entities. The push for FPOs, as the latest policy paper observes, is meant to enhance the bargaining ability of small and marginal farmers (who account for 86 per cent of all farmers) in both input and output markets, while the Centre and States move towards contract farming and creation of alternative markets to APMCs. The political economy implications of a shift to FPO-driven farming, at least in regions where small farmers are a significant presence (it is not so, for instance, in Punjab), are immense in a sector where intermediaries control prices and credit. It can lead to better realisation of output prices and control over input costs, provided the institution shapes up as envisaged. The FPOs are being visualised as an improvement over cooperatives, which are riddled by misuse of funds and concentration of power in the hands of a few members. In fact, the FPO push began with an amendment to the law nearly two decades back, that allowed for cooperatives to turn into producer companies. Not surprisingly, Maharashtra, as a leader in cooperatives, is an FPO leader as well.

The guidelines are notable for their emphasis on creating ‘cluster-based business organisations’, or a pool of managerial expertise for FPOs. The Centre has earmarked a credit requirement of ₹18 lakh and an equity grant of ₹15 lakh for each genuine FPO (with a membership of at least 300 farmers, with at least half comprising small and marginal farmers). By allowing for a manager and accountant with a reasonable salary, FPOs can draw up proposals that banks and formal entities require — a facility that will boost their negotiating power, save them from red-tapism and allow them access to bank credit. Now, FPOs are entirely dependent on NBFCs, with their higher cost of capital. Banks should offer short-term loans with roll-over provisions, particularly in a time of economic downturn. Going forward, it is also important to create a trained pool of local talent to manage these FPOs on professional lines.

The growth of FPOs so far has been uneven in terms of size and regional concentration. Fifty per cent of the FPOs are located in just four States, including Maharashtra, a study by Azim Premji University points out. Besides, only 14 per cent of the FPOs have a paid-up capital of ₹10 lakh or more, while 49 per cent of them have a paid-up capital of ₹1 lakh or less, the study says. There is huge scope for reaching capital and skills to the bottom of the FPO pyramid. Funds should not be usurped by those in positions of advantage.

Published on July 20, 2020

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