Self-Sustaining Mechanism to Enhance Trade Capabilities at Farm Level: A Study of the FICCI

Amit Mookerjee

Associate Professor Indian Institute of Management, Lucknow-Noida Campus

PMI, 5-14, Sec 16 A Noida 201301

India Tel (Off) +91-120-2501741

Ph: +91-9811373970 E-mail: amookerjee@iimlnc.ac.in

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Table of Contents

Executive Summary ......................................................................................................................................2

Introduction: A perspective on the emerging farm produce export business environment in India .....4 The need for change: Farming process and output quality, environmental concerns, and commercial

risk/return issues .........................................................................................................................................6

Brief Case History: The GAP project objectives, methodology, and key success factors .......................7 Case History ...............................................................................................................................................8 The Grape Farming Business Environment................................................................................................8 The project focus: major planks of the GAP implementation program ....................................................13

The pilot project review: Observations .....................................................................................................15 Key success factors...................................................................................................................................20

Sustainability of reform efforts ..................................................................................................................21

Role in facilitating trade: impact on trade, policy and promotion..........................................................23

Drivers of Change in the export farming business environment.............................................................24

Coordination processes and structures......................................................................................................26

Analytical Framework based on the project review.................................................................................26 The approach to market based incentives for sustainable reforms ...........................................................29

References ………………………………………………………………………...……..32 Appendix …………………………………………………………………………..…….33

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Executive Summary Self-sustaining mechanism to enhance trade capabilities at farm level: Case Study of the Promotion of European Retail Parties Standards for Good Agricultural Practices (EurepGAP) in India. Agricultural produce quality and safety certification programs such as EurepGAP certainly help agriculture, agri-trade development and business environment in two critical ways. Programs that help farmers modernise, earn incentives for environmental and food safety practises, and integrate an important sector such as agricultural commodity trade with the global supply chains, would be of immense value to economies that depend heavily on agriculture, as is the case for most developing economies. First it allows the indigenous trade to modernise, and gain more assured access to global markets, through certified produce that can be traded at a premium in developed markets. It also helps develop the indigenous markets by providing a supply of high quality certified produce, and this generates a stronger and higher volume value chain right till the end consumer, with obvious gains at the macro level. Further, it enhances the earnings at the farm gate itself, strengthening reforms and trade development at the grassroots level, and provides the businesses with significantly higher earnings from the global markets, to invest in further developmental activities. It also provides for better safer produce to be available in plenty in both local and global markets. Second, it allows the right developmental direction for the farmers and agri-markets. Farmers gain through better environmental management practises, which protect them from soil degradation, leaching, loss of fertility and over fertigated, high residue produce that is harmful. It sets benchmarks for produce and farm practises that enable better environmental and food safety standards, so that the market mechanism may ensure that such standards are propagated. In the case of horticultural produce, the tropical fruits and vegetables have a growing market in developed economies, and strong supply chain developments led by retail sourcing networks have made it more commercially viable as a sector. In such a scenario, the grape and mango exports of the country have seen a very high growth, once the access to the markets opened up after certified produce was available as preferred by sourcing agents for the major retail chains. Creating resources for globally acceptable produce would greatly strengthen the local economy and allow it to integrate better with the global markets, face competition in domestic markets from overseas players as well as enjoy the higher returns from exports. A recent donor funded project for implementing Good Agricultural Practices in the high export potential agricultural sector in India, using EurepGAP certification, targeted horticulture sector (such as grape farmers, mango growers, etc.). The pilot review found that farmers with certified produce gained market access in Europe that was limited earlier by doubts on food safety and quality. Further, the change was self sustaining, since the certified produce of the farmer attracted higher returns from the market, via access to export markets’ higher prices, larger percentage produce sold in the export market, and risk reduction through first preference given to certified produce by buying agents in the market. The donor program and the market forces were aligned to provide farmers a competitive advantage with the certification as well as the adoption of quality, safety and environment management processes. The project covered major parties in the

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fruit exports value chain, with an agenda that was well communicated and accepted by all parties in the chain, especially exporters/buyers operating at farm-gate/ market yard level, who directly impacted the price realisation of farmers. The case study found that produce buyers’ involvement and conviction of greater market returns if they sourced certified produce from farmers, was the key to market linked returns for the farmer, and their adoption of EurepGAP certification. There would be a stable, competitive source of certified produce if buyers created conditions favouring certified produce and thus they would be interested in the long term to support such a venture. Even farmers seemed convinced that in the long term, they would have to meet the overseas players’ challenges locally, with such quality and safety procedures. Hence the short and long term aspects of the change were well debated, and there was a clear incentive in the market to favour the certification. Creating such an intervention would require that the donor initiative studies the market dynamics, and identifies the target parties’ role in the value chain for that sector. Further the initiative should facilitate the development of a competitive business advantage for the target parties. The benefits are manifold: it ensures greater market returns for the parties; it ensures faster and wider diffusion of change and adoption of the intervention by the target parties; and it allows the donor funded incentives to be replaced ultimately by the target parties own gains from the market mechanism thanks to the competitive advantage that the donor project delivers. This also leads to a self-sustaining and modifying cycle, so that once entrepreneurs have developed adequate resources through business gains, they become capable of fending for themselves in a better way. Ensuring this scenario also requires communication of both broader agenda and specific change methodology and objectives. The involvement of members up and down the business value chain from the target party is also a must. Further each sector of trade has its own support processes and parties, and all of these can become bottlenecks in any expansion of trade activity. Hence these must also be coordinated for adequate development, such as trained personnel availability, research, testing and grading facilities, certifying agencies etc, in an agricultural trade sector such as fruits and vegetables. Donor agencies would thus benefit if such initiatives are at the outset given a defined objective of market incentive linked reforms, with measurable goals and long term impact incorporated into the project. Sustainability would depend on an identified competitive business advantage for the target party to derive gains from the market, and the project guidelines may include such a requirement. There must be projections and measurement of the impact in short and long term, in terms of these market forces. The involvement of key value chain members in the trade, their role, and the delivery of the market incentives must be defined in the projects, so that market rewards actually accrue to intended parties. A plan for diffusion of the change must also be considered by the project, to ensure that sustainability and spread of change are ingrained in the project.

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Introduction: A perspective on the emerging farm produce export business environment in India The farm sector in India is modernizing slowly, over the last few decades. After having witnessed gross inadequacy in production of even food grains in the earlier part of the 20th century, the green revolution ensured that grain stocks and production of other crops were quite adequate in the last three decades, barring some years. Later, the white revolution was supposed to turn the dairy and poultry sectors into vibrant growth pockets in the economy, and to trigger wealth creation, modern practices and infrastructure. This wave of change has had mixed results, and is still being debated. Many factors are said to be responsible for holding Indian farming back from the modern farming methods witnessed in the developed world. As seen from extant literature, the ground conditions of development in India, and other similar economies, would possibly entail a different model of development, of farm production infrastructure and practices, for modernization. Changes enabling development in today’s world, would involve the farmer’s commercial or business success as a cause as well as a sign of that development. The development of farm practices and modernization on these lines, are seen India, in pockets where farm holdings, direct market access, irrigation and other critical factors are in favour of the farm sector. The State initiatives aside, a large part of this modernization is being carried out by the noveau riche farmer, who is able to mechanize farming, and has adequately expanded land holdings to benefit from modern methods. In many regions which have exhibited more modern farm practices, the driver of the development has been to a large extent the individual initiative of leading farmers, who have shown the way to others, as well as the advent of some corporate bodies in this field through farm level involvement, contracting, and building of the last mile in the supply chain for agri-commodities. A crucial role has also been performed by the extension services, funding and credit, infrastructure development etc., provided by various state agencies and educational institutions, as well as some agri-input marketing cooperative federations. Some private firms have been involved in not only marketing new agri-input and crop protection products, but also in helping farmers apply those products more effectively. It may be seen that wherever the various change agents have coordinated their activities, there has been a far greater impact on development and sustainability. Further, the agenda in such successful cases has usually been the direct commercial growth of targets. Commercial agents have been successful in changing existing farm practices related to use of their products and tools (involving fertilizers, pesticides and repellents, and a host of other mechanical and chemical aids to pre-and post harvest production, storage etc.). Right from sowing stage to the market sale, the commercial agents have been more successful in changing existing farming practices, due to their focus on commercial benefits that farmers would derive through these changes involving new products. This has led to changes in the natural, indigenous fertigation and protection products and practices that farmers have traditionally used. At present, there seems no single bigger guiding principle for the farmers other than the commercial success, in adopting products and practices, than commercial gains through “larger” produce and crop volume, in this very high risk business of agriculture in India. Regarding the high risks, various factors such as the soil, weather, water/rains, plant disease/health factors and market conditions, create a condition where the farmer has to keep an

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eye on many sources of information on a varied set of factors, products, and practices on each stage of the farm production. But there are very few information sources focused on the integrated farming process, no single source that can provide for comprehensive consultation for taking care of all aspects preparation and sowing to post harvest and market stages – that is, the entire farming process. Each information source and risk factor is interrelated and quality control and enhancement processes are a possible source of integrating the management of the entire farming process. So far quality has been either end product quality, or a matter of consultants and experts who may advise the farmer on specific input or condition factors such as fertigation, weather and irrigation, etc. Indeed, the expertise harnessed here has helped the Indian farmer go through a green revolution, and later has helped some farmers’ individual initiatives in enhancing and managing quality of product (and for exports, quality of processes). But this comes with a lot of individual initiative and exposure to modern farming and international markets. The risk is further enhanced for the typical Indian farmer due to the small farm size and subsistence levels of farming. All earning hinges on the single crop of that season, usually. Anything that enhances crop volume and produce characteristics, are adopted, provided the risk is not too high. The focus of gains are entirely on that year’s crop earnings, and not on quality of processes, of environment degradation and subsequent loss of earnings and damage to quality of life, health risks, etc. In this regard, the role of exports in creating a lucrative market for farmers has been significant. Farming specifically for the export markets has led farmers to adopt a host of farming input and process enhancements, not least being mechanization, better storage and packaging as well as better management and control of inputs and practices to obtain maximum yield of export quality produce. This professionalism is most seen amongst those engaged in farming for export markets. Rice and a few other products like spices are cases in point. The increased earnings from exports, have also led to enhanced investments in inputs, infrastructure and equipment as well as advanced techniques and practices, with a broader outlook regarding food safety and environment. The awareness levels and quality practices have evolved to a significant extent in such ventures. The practices at the farm level are attuned to global markets. Relevant farm technology is also of global level with modifications evolved to suit Indian conditions. It is indeed accepted as a sea change in farming methods, equipment, infrastructure, and quality and earnings associated with such a venture are indeed much higher than the typical farming operation in India. The export trade has changed the way the agricultural value chain is working. The ventures that are involved have changed in scale of operations and infrastructure, asset quality and processes. The agricultural supply chain is more modernized in all respects, right to the farm level, as far as these businesses go. It has affected not just ex-farm gate practices such as individual cold chains etc., but also farming production itself, which is now much more standardized, mechanized and on the whole, modernized. Workers and farmers, traders and millers, and logistics/storage providers - the whole value chain is geared to meet the quality, packaging, price and other requirements of buyers in the foreign markets. The whole value chain for those few export oriented farms and larger ventures, is attuned to globally competitive farm production and marketing operations – the export market demands no less. A similar story has emerged regarding the limited but successful contract farming engaged in by large firms in the agri-processing and packaged food products industry. But all this remains a small part of the farming community in India, and most major success stories in terms of holistic improvement in the farm and farming methods, are mainly driven by the individual level initiatives of farmers and large business ventures.

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The success of commercial ventures in adopting transformation is an obvious take-away, and market forces incentivising change suggest that inherent sustainability will be a plus point of change that is in sync with the market forces and market system. The coming retail industry developments in India, with investments in the scale of over Rs. one lakh crores over the next few years, in retail business value chains including grocery and food products, will change the market scenario and requirements in the not so distant future. The requirements of organized retail would be primarily a reliable systematized supply chain. It inevitably will end up with large-scale contract farming, as well as a well-developed modern exchange for spot and medium term trade in agri-commodities. The exchange development has already started, and it can be said with private sector investments by large groups like Reliance, it will be a mater of time before both changes force a move towards modern farming. So far it has only been the farms that have the wherewithal to enter into upstream operations for agri-processing, exports or contract farming, that have been able to upgrade. Later, the survival of farming businesses will become more linked to modern farming methods and produce quality demanded by retail chains and global competitors in the supply chain The WTO negotiations revolving around this issue have highlighted the need for competitive farming set-up in India. But even without the global competition, the consolidation brought about by “big” retail in India through contract farming and supply chain management practices, will ensure that only the modern will survive.

The need for change: Farming process and output quality, environmental concerns, and commercial risk/return issues The scenario of regulated input use, environmental and produce safety and quality, safe farm practices, etc. have been put at risk due to the so far unorganized nature of the farm business in India, due the limitation of majority of cultivated land being under small holdings. With limited resources for mechanization, and wide availability of crop enhancers and protection agents, commercial risk reduction has taken the shape of enhanced crop volumes and size of produce, through the indiscriminate use of chemicals. This has crept into the entire production system. An incident in this regard was the concern raised some years back, by some European buyers of Indian table grapes, about the chemical residue levels in the fruit, which had otherwise met other physical product quality specifications. After this, the State’s farm produce export promotions agency (APEDA) had requested all producers and exporters to certify the residue related parameters in India itself so that no problems came up later. The problems received attention due to quasi-regulatory edicts and market feedback which forced all farmers and exporters to take adequate steps, but the production technology to ensure safety and productivity was not available. Around this time, this particular project to initiate change at the farm level was taken up, and over the years, with changes in residue levels observed, and adoption of new farming methods, the grape exports increased significantly by many times the volume in five years. For food safety, residue standards may be specified by buyers or regulatory authorities or both; but steps to help farmers meet these standards are most crucial in such a situation, especially if the majority of farmers are lacking the sophistication and means to take adequate rectificatory steps themselves.

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In a situation that is possibly common to developing nations the world over, sophisticated tests and practices that help control residue levels of various chemicals in agri-produce, would be a matter that the ordinary farmer may not be able to manage without external assistance, and a well developed market for certified safe produce may not be commercially significant locally, to incentivised the same. The causes and consequences of such a situation, go much deeper than issues related to standards of residue, testing, and input practices per se. For the farmer, it relates to issues like degrading of soil quality, water, and general environmental decline that may make farming unsustainable, and even cause deterioration in living quality, since the farm is the only means of both livelihood and living area for the farmer. It is in this area that the need arises for a system of agriculture production that can be practiced for safe, high quality, sustainable, productive farming. The Good Agricultural Practices (GAP) system followed in Europe, and leading to certification for various quality parameters by several agencies, is of significance here. The largest buyer forum specifying such GAP, the European Retail Parties, have specified a Standard for Good Agricultural Practices – EurepGAP. This makes produce certified under this standard, completely acceptable to buyers/sourcing agents aligned with them. This ultimately allows greater market access and buyer preference for a farmer who has this certification. Most buying agents would want the reassurance and valid proof of such certification, since it assures them that large buyers would find the produce acceptable. Retail parties are assured by this certification, about residue as well as many other aspects of production and post production treatment and storage practices that affect the quality, safety, lot survival rate and shelf life of the fruit. Traceability of the producer is also an issue along with the certification of production process and produce standards, since that reduces the risks of the parties involved in buying and supplying to retailers and end users. This is also a part of the EurepGAP standards. It was in this scenario that a project was undertaken with regard to standards and practices related to agricultural production in India, under donor funding. In the Pilot project, specific crops were taken up in specific regions, for implementation of Eurepgap standards modified to Indian conditions, which would also make them amenable for export to markets such as Europe. This would introduce the quality practices in select horticultural sectors, and help to study the feasibility and know-how required for the spread of such quality standards and certification. A review of the same project emerged with some significant facts and learning in donor-funded interventions in this area. These are shared in the subsequent sections of the paper. As a background to the same, the context of the intervention, the GAP project, is given in the next section.

Brief Case History: The GAP project objectives, methodology, and key success factors Donor funding was made available for carrying out a pilot program for creating a knowledge base and developing actual systems and processes that allowed certification programs to take root in the country for high potential export crops. The details of the program are given below, to put in context the issues related to the trade, exports, value chain members, farming/production technology, quality and market based incentive systems for adoption of certification. The concerns regarding large scale adoption of quality standards and certification via a sustainable

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economy-wide market driven change in farm production, emerged from a study of the initiative that was built around this set of issues.

Case History The NORAD funded initiative on GAP was undertaken by FICCI Quality Forum– the Pilot Project on Implementation of Good Agricultural Practices (GAP) in India. It’s specific goals and objectives were to create farmers’ awareness about food safety, EUREPGAP standards, good agricultural practices (GAP) to achieve standards of safety and quality, and to implement on a pilot basis the EUREPGAP certification. This involved creating a process for certification, facilitating various constituencies, and validating the process for implementing GAP in India. The expected outcomes were as follows: 1. Increased awareness of Good Agricultural Practices among Indian Farming Community,

especially the plantation based farmers. 2. Consultants and auditors trained for implementation and monitoring of GAP in India. 3. Establish and validate the EUREPGAP certification process for growers The pilot project undertook development of GAP standards for specific target crops, for achieving EurepGAP certification. To facilitate the certification, it identified and tied up with appropriate agencies in the commercial domain. After initial expert discussions, the process started with awareness seminars about GAP and certification programs were held. The program plan was then adjusted to the given ground conditions, and a comprehensive program was chalked out at the ground level (See Appendix 1). The project audit revealed that the business environment for the horticultural produce chosen as a starting point had some unique characteristics. It was further felt that each produce would have a unique business environment while still being part of, and having commonalities with, the overarching agricultural produce economy. This would therefore require the spread of GAP across the horticulture and then the entire agricultural produce economy, would require some initial starting point where the success of the basic premise of GAP certification in bettering the economy and environment, would have to be tested, along with the development of the GAP implementation methodology. As a starting point for this diffusion, grape as an export-oriented produce would be the thrust area.

The Grape Farming Business Environment The whole value chain in this business is similar to other fruit and horticulture export businesses and is typical of how the environmental factors affecting the farming business operates in India. The brief description below delineates the various stakeholders operative in this business value chain. Key constituencies in the Value Chain The following are the key members who play a role, and are impacted by, the raw/fresh produce export value chain.

1. Growers Growers comprise the main constituent of the value chain - making the ultimate product available, their practices determining the commercial characteristics of the produce such as freshness, shelf life, etc., and also its environmental and consumption safety and quality aspects. However prices, under the current market system, are governed by market supply-demand situation, both in the local, export and import markets. Grape

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growers are geographically concentrated in the two states of Maharashtra and Andhra Pradesh. The maximum production is from the Nasik district of Maharashtra and thereabouts. The current study found various types of growers engaged in the business of grape production for exports. There were the large growers with farm holding averaging around 25 acres who are also sometimes independent exporters. There were farmers having from 5-25 acres in holdings, with part of land under grape vines, and mainly exporting through the Primary Marketing Organisation (PMO) - a commercial venture formed for the purpose, with agreements for sharing of costs and resources, as well as shares of benefits. These farmers may also sell directly to exporters through the market mechanism commencing at the time just prior to grape harvesting season. Further, there are the smaller grape farmers with land holdings in the region of 2 to 5 acres, and also those who grow grapes on less than 2 acres of farmland. Finally there are the growers who are part of cooperatives, who are also actively engaged in growing and exporting grapes through direct contact with importers or through export agencies. Some cooperative societies like Abhinav Farms are registered as PMOs, and members are registered as PMO farmers attached to the Society, and they are quite advanced in their production technology, employing their own scientific officers, with facilities such as weather stations and in-house testing as well as packing, storage etc.

2. Consultants Consultants are mainly independent experts who are professionally qualified and familiar with the local conditions, engaged in two kinds of consulting: related to farm productivity and integrated farm management; and consulting for certification such as EUREPGAP, or specific issues such as spraying and residue management, equipment and calibration management, etc. The number of consultants is fairly large numbering hundreds as per the State agriculture department officials, and most such experts consult for a variety of products with clients across many districts in the state. Nasik and Pune abound with very aware farmers who engage such consultants for both types of consulting. This also has an impact on the variety of regimens and fertigation/crop protection methodologies available to farmers, and sometimes the advisory can be quite complex and varied across advisors. Word of mouth plays an important role in the general farming scenario, and the multiplicity of such spraying and formulation application regimens and other practices is a major issue as far as standardization and strictly controlled practices are concerned. This becomes one area that EUREPGAP with its so far unique farm and process management systems is addressing. As mentioned later, this is helping meet a major requirement of farmers for systematic farming methodology and practices.

3. Exporters The exporters are usually trading parties who tie up with the importer - usually a buying agency catering to the supply chain requirements of large organized supermarket chains and retailer organizations/associations, as well as the wholesale markets. The exporters can be of various other backgrounds as well: many are large farmers with facilities such as modern packhouses and cold storage facilities. Some cooperative societies are also acting as exporters. Even the apex cooperative body NAFED has earlier engaged in contract and market based onion exports from this region. Finally there are the export houses which have been set up by large industrial houses such as the Mahindra

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Shubhlabh, Mico backed Seven Star, ITC’s IBD initiative, e-choupal, and so on. The two largest grape exporters are the professional trading-cum-export houses, reportedly exporting over a thousand containers of grapes in the past year. The Nasik district agriculture authorities reveal that there are around one hundred registered exporters who have actively participated in exports in the year 2004-05.

4. Importers It is stated by most farmers, PMOs and exporters that buyers or importers are mainly agencies that do sourcing work on behalf of clients, mostly retail chains and a few manufacturers in Europe. The agencies first provide for the higher paying chains, and sell the remaining stock, either at the dock or in the wholesale markets in Europe. Exports are mostly via UK or Rotterdam, to markets in Holland, Germany, Belgium, Norway, Russia, and the UK. Other nations represented by importers are UAE (Dubai, Bahrain, etc.), other Asian markets such as Singapore, Hong Kong, Malaysia, Sri Lanka, and also African nations of Ivory Coast, Kenya, Sudan. Nasik district itself has exports bound to all these nations. Many farmers and PMOs also depend on the market of Vashi, Mumbai, for exports. Many importers from USA and Europe, the Asean countries, looking at multiple produce imports, visit Vashi for sourcing. These importers are mostly agents, working for the larger retail chains and food processing units abroad.

5. Testing labs The major requirements for exports as per regulations is the registration for the farmer, and being part of the Residue Monitoring Plan launched by APEDA, in conjunction with the State Departments of Maharashtra, Andhra Pradesh, and Karnataka. It calls for registration of all farms growing grapes for exports, recording and availability of spray records, and a random sampling of all farms to test for harmful residues from all these farms registered for grape export. The National Research Centre (NRC) Grapes, Pune is the Central Referral laboratory which conducts sample tests drawn from both the seven nominated residue testing laboratories as well as from the field. There are seven nominated laboratories including both state as well as private entities. The tests are done with reference to around 81 formulations in the recommended list issued under the auspices of the program by the National Research Centre (NRC) for grapes in Pune. There are reported to be around 194 such formulations registered in India, but the IRDL routinely tests for 81 formulations it certifies, and also samples randomly for further around 140 odd formulations. The buyers in the European Union, it is reported, routinely test for over 350 formulations and would like the exporters to move to the same number here in India.

6. Experts Horticultural scientists in various areas, and experts in the agriculture departments of the State Administration and the various Boards for promotion of agriculture produce, marketing and exports, the Institutional /Research staff at testing facilities and other agencies form this group. They have a significant effect on practice evolution and diffusion and also regulatory policy inputs. The development of regimens and alternative farming and input formulation related practices as well as eth inputs themselves are

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driven by this group. Their association with international bodies also helps the diffusion of knowledge about international events, practices and technologies and the upcoming trends in the global markets.

7. AdministrativeState/Regulatory entities These agencies such as the district Agricultural Officers, State Horticulture and the State Agricultural Marketing Boards, APEDA, etc., have not only an administrative and facilitating agenda but the mandate is slowly evolving to include more supportive and advisory and certification/recording functions. The techno-commercial aspects of supporting farming and other agro-commercial activities are now taking centre-stage amongst the emerging concerns and initiatives. There is also growing consideration of the environmental and quality aspects. The APEDA driven Residue Monitoring Programme (RMP) is an example of that concern and initiatives being taken up, and so is the computerized registration of all one hectare sized plots under export-oriented grapes production, which then have to undergo testing under the RMP for export eligibility.

8. Certification agencies Currently there are five certification groups active in the region as far as grapes are concerned, with SGS, Eurocert and Foodcert as the main agencies. They have a system of representatives in each region, to help with inspections, auditing, and to help farms/PMOs develop on the right lines, with the help of consultants, to achieve certification norms. The tests, inspections and surveillance aspects are managed by these representatives of the certifying agencies. Certification requires a farm to apply for certification with an agency of their choice. The consultant then helps them to meet the inspection requirements by outlining the infrastructure, process, recording and agricultural practices especially related to fertigation, crop protection, labour health, disposal and other requirements. Thereafter the application is processed, the audits and inspections take place, and the surveillance and testing procedure starts. It ends with the residue tests and certification is granted if along with the MRL limits the soil, water, organic manure tests and other requirements have been successfully met. This certification is valid for that year (season, since for grapes in India there is one season). It is in the name of that particular grower, for that particular farm, for produce that is traceable to specific plots (now that plot level registration is being done). Within that season it can also be transferred to other produce as long as it conforms to the specific requirements. The only additional costs are for testing and recording, with the main investment in infrastructure and other things being already done. However with respect to grapes this is a difficult proposition since the farms have generally started covering their entire holding with vines for export varietals, and since the vines are perennial and vacant in-row spacing is shaded, other crops may not be feasible. Most farmers who are in the export business have covered maximum possible cultivable acreage with grapes. For producers of other fruits and vegetables, this is indeed a viable proposition to have multiple crops certified for export under EUREPGAP. The export market conditions and pricing – how revenue accrues to the farmer The prevailing demand-supply situation for the table grapes is very competitive as far as suppliers go. The current scenario for Indian table grapes seems to be very positive, with

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demand rising as exporters become more active and importers discover their own customer’s preferences for the varietal qualities and seasonality/timing of the Indian grapes. The window for Indian grapes is at a time when European market supplies from main competitors like Chile, Brazil and South Africa are lower in scale. Thus this advantage during the March – April period provide for an attractive opportunity. It is estimated that the over 25 thousand hectares under table grape cultivation in Nasik district produced over 5.6 lakh metric tones of grapes, at an average yield per hectare of around 22 metric tones per hectare. Exports have been steadily growing from the district, with a growth of around 1.5 times in the last year on a year on year comparison. The cultivated area has also increased from around 13000 hectares in 2001-02 to around 25000 hectares in 2004-05, with production rising from 3.5 lakh metric tonnes to around 5.5 lakh metric tonnes in 2004-05. Average yield also rose from around 18 tonnes per hectare to around 22 tonnes per hectare in the same period. This compares favorably in terms of total export percentage of around 1 percent in 2001-02 to around 2.5 percent of total production in 2004-05. This increase in export is both due to the increased awareness of and demand for Indian table grapes. In turn, the demand is due both to varietal qualities, and to the increased quality and safety of certified supply from India, as reckoned by experts and officials as well as exporters in Nasik and Pune. The project focus on providing support to the enhancement of quality and certification involved several key players, and the ramifications of the same may be better understood if the changes are delineated first. The analysis of the business environment and the consequent a) changes in environment, and b) impact of these changes, and c) implications for future intervention programs, may be then drawn out with more clarity. The first area of impact was on the pricing and preference mechanism in grape sales from farms. The price for export quality grapes range from Rs. 35/- per kg. to around Rs 65/- per kg generally for farmers/PMOs. However, those entities selling abroad directly may be able to share with their farmers, (such as Abhinav Farms Cooperative) around Rs. 67/- to Rs.70/- per kg of fruit. The exporters’ sale price band is stated to be UK £ 6-13 per 4.5 kg box. The usual system for pricing comprises a base price for the farmer/PMO, who sells to the exporter. The exporter then incurs logistics and other charges and gets a price of around € 9-15 at the European ports such as Rotterdam, or UK £ 6-13 per 4.5 kg box. This is after the importer deducts a flat 8 percent commission on the buyers’ prices, and after all other charges incurred by the exporter have been deducted. These charges include the dock charges, testing at destination, certification and documentation charges, incidentals etc. The logistics charges were found to be fairly standardized, with a range of £ 28000 per container bound for Rotterdam and around £ 18000 to £19000 for ports in UK in 2005. Insurance per container was around Rs. 11500/- typically. Given this scenario, it was reported that there may be difference of over 60 percent in the prices obtained due to late season versus peak season trade; supply at the destination port at that time; the sourcing agent/importers order size and assurance of supply, and the quality of and intrinsic

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physical characteristics of the grapes. It was stated that the premier retail chains themselves mark up the grapes for around 30 percent profits at the retail point, and the others would gain anywhere from 10 to 25 percent from the importer’s prices. Hence the actual gains may be calculated for most members in the value chain. The season for Indian harvests ranges from February to March. Large farms typically are putting most of the farm land under cultivation for table grapes for exports, and with more confidence in their farming methods, they are going in for maximizing their export quality investments on the field, rather than the earlier practice of hedging bets with a part of the crop being prepared for the purpose of the domestic market. It was stated that on an average such a large farm would be able to export anywhere from 30 % of the produce to around 80 % of the produce. Further the district officials stated in their records that yields upper limits were around 22 metric tones per hectare, but the variation depended on region, farm size and individual attention of the farmer, availability of skilled labour at the critical pruning, thinning and application stages.

The project focus: major planks of the GAP implementation program The program started with targeted seminars presenting the various aspects of GAP certification – the methodology overview, technical aspects, business implications of certification, and so on. The seminars were held in various cities in the main export oriented horticultural production regions. They were coordinated with district level agricultural board/agencies as far as possible. These seminars were held for attracting participants from the immediate target members of the value chain: farmers for certification, exporters who would buy that produce, and experts who would influence the farming practices and produce acceptability for the exporter. The impact of the initial seminars was such that it was felt that a more relevant targeting should be done. For that purpose, the list of farmers and PMAs, registered with APEDA (the apex agri-exports promotion body) were used for inviting prominent farmers/traders to the seminars. This was more successful in both attracting farmers/traders/exporters, as well as resulted in more registration for the certification program, and higher interest levels generally. Thereafter GAP awareness seminars were organized in regions with a high export potential for horticultural produce, and the project staff invited key participants from the APEDA list; liasoned with the local state agencies for horticulture, to invite other leading farmers, traders/exporters in each. These seminars subsequently had an average fifty member participation level, and seminars were held in twenty cities over six Indian states, covering over ten specific fruits and many other vegetables. This group was probably the innovator/early adopter group as far as exports went, and became more involved with the initiative. This awareness campaign further focused on the grape business, which was more affected by the residue issues and was concentrated in a certain geographical area. Thereafter, efforts were made to support the initiative of the farmers who registered for certification program. This effort brought in touch all parties involved in the trade especially export trade, as a starting point for the initiative. The donor terms specifying export oriented farm produce, as well as the choice of crop by the executor of the project– grapes, was critical in that the most plausible group of GAP adopters were targeted. This greatly helped the diffusion of GAP, as the entire grape farming community was quickly enveloped in the awareness campaign, and the entire value chain was easy to involve later. This comprehensive coverage of the sector

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was due to proximity in terms of geographical spread, and of business interests and operations. The farmers had to invest in consulting and testing for monitoring their crop parameters at regular interval, and also had to incur the fees for certification. Finally the infrastructure development at the farm, and the change in worker safety and other practices were also major investments for the farmer. Depending on farm holding and size of operations, the infrastructure investment and other GAP related expenses were stated by farmers to be around US $ 300 at a minimum, but most farmers spent more, averaging at around US $ 1000. This was around half the per acre cost of growing export quality grapes. Of course larger farmers over US $ 10,000 as befitted their status and operational size. They also had to spend around USD 100-150 on consultation fees. The project bore most the initial consultation fees and found that registration outside the purview of the project was also substantial in the later stages of the project duration, as farmers paid for this on their own. Most farmers also realized a savings of around 20 percent in their usual crop protection expenses due to savings in kind (better storage facilities required by GAP) as well as lesser application levels of chemicals. The smaller farmer actually saved more since in the bid to maximize returns and minimize crop failure risks; the application levels were far higher per acre, and the decrease in application post GAP was substantial. There were four main planks of the effort to support certifications: a) communication; b) facilitating comprehensive infrastructure, facility, and technology support availability; c) enabling market incentives to flow to farmers who sold certified produce, to sustain the adoption of EurepGAP by innovators/ early adopter farmers; finally, d) coordinating all agencies and value chain members playing any role in the various parallel business process, related to the selected horticultural produce with high export potential. This latter was with respect mainly to the stage in the farming stage of the agri-value chain, and scope was initially the grape export business, as one of the highest potential horticultural produce. The first step was communicating with all stakeholders, across the value chain and the business environment, to create a common cause and methodology for tackling quality issues through certification; and creating perceptual and business grounds for incentivising certified produce. This was a marketing effort in business parlance, where concept of business advantages and profits through certified quality and safety of produce would be mooted in the groups. The second plank was to create the necessary infrastructure, support processes, resources and knowledge required to bring the about the certification, such as to provide consulting and monitoring services to farmers to obtain certification, and provide for testing labs’ infrastructure, expertise and ability to handle the peak season loads of produce for testing. For this purpose training programs were organized for expert trainers in Europe through state agencies, and lab personnel were trained in India through expert workshops. Further, a pool of professional who could act as consultants was identified, where the consultants would guide farmers through the certification process, and help in change of practices and infrastructure. Workshops were also held for this group, and they were helped with allotment to registered farmers who required these services. Thus a supporting economy of consultants who would help obtain required farm up gradation, by purely commercial means via farmer payments, was sought to be initiated. Their training needs would need to be looked after to create a larger pool adequate for covering all the farms, and this was deemed possible only through educational institutions, same as for laboratory personnel. Existing labs however would have sufficient ongoing practice to fund their training and development, whereas individual consultants may be unable to fund their initial training and practice development. The parallel businesses of consultants, laboratories, fertigation and crop protection agents, certifying agents, all were taken into the ambit of the project. The holistic GAP implementation program developed for the farmer, included all these activities where these related businesses were involved.

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The third plank was to enable the EurepGAP certified farmers to obtain a higher selling price for their produce. This was to be done through communicating with all traders and exporters about eh advantages of access and preference given to certified produce by European buyers, especially retail chains buying directly, rather than from wholesale markets where lots may be sold on further negotiated rates. The idea was that buying/sourcing agencies and wholesale buyers at the dock or wholesale market would typically take a commission, incur testing and certification expenditure, and also get a lower arte for the produce, based on market fluctuations. The realisation was felt to be lower in this case than a deal with a contracted price directly with the retail parties, due to already having the certification necessary for a sourcing agent/retailer. The services of the agent may not then be necessary. Further, the quality control, reassurance, safety and improvement in specifications of crop were expected to fetch a higher price. The EurepGap certification was given based on a year round monitoring and control of practices, which allowed for a much better, safer crop growth. This was supposed to filter back to the farmer in terms of a higher price per ton or per kilogram, as the unit used in local trade was in kilograms. Advantages from nil to over forty percent were reported during the review of the project. This varied over size of farm holding and land under grape cultivation, to whether the sales were effected directly to a sourcing agent or to the local trader. On an average the price for certified grapes over the same quality uncertified grapes was reported to be around twelve percent average across all sales from a farm. Farms were able to export around 30 % to 60% on large farms, and nearly 100 % for very small farms of around an acre or so, grape being the sole crop. The price comparison is not just regarding export prices, but also benchmarked to higher prices for quality gripes in the local markets. Grapes specifically grown for the local market were of different quality and sold for far lesser locally, and within India. Finally for the purpose of facilitating the availability of commercial resources involved such as labs, consultants etc., coordination with experts, state agencies, regulatory and administrative bodies at the state and district levels was done. This was made a part of the process of attracting farmers and exporters to the GAP implementation and certification program. For instance, coordination resulted in drawing attention of state agencies top the methodology and resource requirements of GAP certification, and from helping premier national research institute to obtain grants for research, to facilitating labs who were given one time grants for equipment purchases to train their personnel in using this sophisticated equipment for the effective bulk scale testing of chemical residue in the produce, all parties involved in the entire business value chain were engaged in alignment and information sharing and joint action programs. The pilot project tried to get the exporters and farmers on a common platform so that all modalities could be worked out. Further, there was an effort at widening the crop base covered, as well as the geographical spread. The review of the project revealed many factors that affected the success of the project, and also the frameworks and issues that must be considered for the success of a market-incentive based standards and practices oriented initiative that involves trade. The following observations made in the formal project review are collated below as pertinent for the current study.

The pilot project review: Observations The major observation was about the rate and nature of diffusion of GAP amongst farmers, varying across different levels of land holding, acreage under grape production and scale of operations. The adoption of EurepGap certification seemed to have been triggered in a group where it spread very rapidly within the geographical region as well

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as across the trade (See Appendix 2). It felt that this rate of diffusion should provide some lessons for the spread of GAP or similar quality and certification programs, within the horticulture sector as well as the larger agricultural produce sector. The diffusion had typical characteristics for renewal rate and new applications both. The spread to other crops and regions was seen to follow a classical diffusion path. It was felt that an analysis of the standard diffusion factors would yield factors pertinent to enhancing the spread of something like farm production process, that is, a practice based intervention. It was however learnt increase in final revenue realisation at the farm-gate stage, was felt to be lower than was deemed possible by the farmers, who felt that the certified produce fetched much more at the end of the value chain in Europe. The trade channel’s reluctance in sharing or passing on increased profits, that particular year’s market conditions, and doubts over actual price realisation mechanism, were the factors raised by various parties involved, to explain this. But many smaller farmers, and cooperative farms, were found to have benefited financially to a significant extent, due to this certification, depending on their use of local trader, large exporter, or direct sales abroad. It was hence concluded that the market mechanism did exhibit some price advantages to certified produce. Given this initial dichotomy of price related business gains, a deeper study of the project was made to establish the various facets of the impact of the project. The overall impact as well as impact on various key aspects of the business, were classified into different areas, and the key issues are given below.

i. Exports First, farmers realized the price differential between the export and domestic markets, and this was a factor that reduced their perceived risk while investing on certification. The requirements for grape production for exports were manifold, such as higher investment (around 1.3 times to 1.5 times per acre cost incurred for production for domestic market); but more important, one required documentation to prove quality and food safety levels; finally there was a need to improve practices to achieve the required safety and other requirements to be able to export. The reported price differential for certified produce was anywhere from nil to forty percent (around Rs. 5 per kg of grapes on an average price of Rs.45), with an average gain of around 12 % in the Nasik market. It was calculated that even farms which spent far more on infrastructure than the minimum required for certification, they would still recover the costs in a single year. The condition was that the quantity of produce exported would be high enough percentage of the total yield that year, and would exceed a certain tonnage. This meant getting a higher share of produce sold in the market. The export buyer’s first preference was certified produce, and would always pick up as much of available stocks of certified produce which met the physical quality parameters, as available. This saved the buyer the risk of not meeting the retailer’s approval, saved delays for testing and certification of various sorts in European ports, and also reassured the subsequent buyers of produce quality safety and traceability. This was a major factor for the trader and intermediate buyer, since safety and traceability was a necessary requirement for European buyer nations as well as retail parties.

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It was further found that certified farmer’s gains in net realization may occur even without a direct price advantage from traders. Firstly, with the certification being eligibility as well as a means for the farmer to enter the grape export market, the differential with cost-benefit calculations should look at the domestic versus export market realization for a given farm output. It is a fact that the export part of the market is growing at a far faster rate, showing that the conversion from domestic to export market for grape growers is far higher, and that the turn towards exports vis-à-vis domestic markets is significant. That it is impacted in part by the certification led export market access, was also fairly established in the market. The movement towards greater acreage under grape cultivation is also partly driven by higher price realization from produce, and not just water and soil issues related to other crops in the region, such as sugarcane etc. Thus a comparison is valid at this stage, the returns from the domestic market versus the export markets. The farmer’s preference for exports was clear – he earned at least 1.8 times more from exports (using an average returns scenario for exports, and the best scenario for domestic grapes). If the optimistic scenarios for both cases are used, this ratio of difference in earnings per acre rises to over 2.9 times for export market. The cost of certification and related expenses mapped for a single year including total cost of infrastructure, could be recovered in a single year, given a realistic scenario of sales, price realization in domestic as well as export market. It is easy to see how the certification (that allows access to such a lucrative market) became so sought after. Access to export market allowed much higher returns, and the preference shown for such produce by buyers also ensured a reduction in risk of sales of standing crops. It truly provided a competitive advantage to the farmers who achieved certification and this advantage were rewarded handsomely by the market forces. It made business sense to any farmer who could afford the additional investment in cultivating for exports, and getting certified. The following indirect benefits that the farmer obtained on getting certified emerged in the final analysis: 1. Risk reduction in the export production scenario: it gives a farmer an assured means

of producing grapes meeting export requirements of MRL, and traceability. 2. Savings of around 15 to 20% on input costs, labour etc. This is in relation to the

degree to which the farmer was over-fertigating or using inputs on his farm earlier, and is a result of both the better planning due to record keeping, as well as better practices under GAP.

3. Increased percentage of produce per acre exported, since more process controls and quality consciousness, and less wastage, as well as better crop turnout is achieved under GAP. If this even enhances export percentage per acre by ten percent, the difference in returns would be around Rs 39000/- per acre, by average price, export percentage of produce, and production level calculations. For someone with a ten acre farm under grape cultivation, this translates to an amount of around Rs. 3.9 lakhs (US $ 9,000) for example.

4. Later, the environment protection measures will also pay off financially as with lesser degradation, the fertility and other costs would be lesser.

5. It will also create an assured supply chain for the exporter and eventual buyer, leading to branding effects that have their own financial rewards in the future. In fact one of

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the largest exporters in Nasik, mentioned specifically that this is now a part of their branding which is strategically poised to yield returns which are higher by an expected margin of ten percent in the near future. The same is said to be true for the largest exporter as per reports, since he has obtained a reputation amongst the buyers in Europe that all his produce is under EUREPGAP. This has reportedly enhanced the access to the higher paying retail chain buyers directly, and a much larger percentage of their company’s exports are at this higher price, rather than for other food processing/wholesale buyer marts.

6. It creates an infrastructure that attracts better buyers, makes it possible to entertain importers directly, and also attracts better labour due to the facilities available.

7. There is a greater preference amongst exporters for EUREPGAP certified farm’s produce, hence the practice is that the export buyers in the open market would first pick their produce and then look at the others in the market. This is worth some value - risk reduction as well as negotiating terms. It also reduces time to market, and makes it easier to find buyer: the transaction costs are lower.

8. If one looks at the potential to use the certification for other crops, only the crop specific registration and practice charges, with consulting, would be additional. The infrastructure would be the same and the costs shared over multiple crops. This however would not be applicable to grape farmers, since the plant is perennial and vines are planted such that land utilization is limited.

This set of conclusions from the review study allow the conclusion that the project facilitated business related, clearly commercial advantages, to the target farmer who obtained certification. Thus it was definitely a case of competitive advantage being delivered by the program and this thereafter ensured that the market forces would on their own support and sustain the certification process. Change in mindset in the farming business was another major feature of the farmers who achieved certification. They all vouch for one major change: the whole system of farming changed due to the GAP, and they felt it was a rather better way of doing things. They would like to continue it as long as possible, whether their produce is certified or not later. They felt much better in their production arena, in using the new systems. It was not just not the farming technology, but also the holistic system of running a farm and the farming business that caught the fancy of most certified farmers. So whether one renewed the certification or not, the change in mindset ensured that some changes in practice would be retained, in the long term. It may be concluded that creating these commercial success situations even once, can allow positive associations with behaviour, perceptions and practices to linger and take root. One such practice was the recording of all events in the farming process. It was reported that it forces better management practices since the records force the farmer to plan and spend time on resources stocktaking, which apparently was a lesser priority area earlier. A focus on changing mindsets may not receive adequate attention in a typical certification or testing program, or action oriented donor program, but it may deliver far more permanent change if coupled with a mindset change program.

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The linkage with market success was seen as most critical for spread and sustainability of the certification program. As can be seen from the observation earlier, the visibility of success was indeed high, since in a given region, the returns of various farmers growing the same crop are usually a hot topic of discussion, and are well known. As such, having geographical proximity or concentration of a percentage of farmers growing grapes in India, also helped since they were all part of a community that could gather and discuss easily in social settings. They were part of a community that could interact easily, and this community covered a majority of the growers. Indeed the diffusion effect may be seen from the number of farmers whose plots have been registered: from six thousand in 2004-05, it has risen to over twenty thousand in Maharashtra in 2005-06, and is around fourteen thousand in Nasik itself, where the concentration is highest, and the success stories also abound in the community. Some additional concerns that were raised related to the issues of local/national bodies engaged in monitoring for accreditation instead of a foreign board with limited field forces in India; quality grading systems that are acceptable in the market to complement the safety and health related certification like EurepGAP; a system which gives market support abroad and in domestic marketing through an agency/office that handles promotional of exotic horticulture produce, as well as handling quality and residue related clarifications, especially abroad. For creating adequate professional infrastructure, existing academic and research institutions must be supported with curriculum development and research on GAP. A national level accreditation Board seems necessary especially to ensure that conflict of interests and unethical practices in certification may be handled by on-field surveillance and testing not feasible to that extent by overseas certification bodies. Third, a system for gradation of produce quality that is accepted widely by trade within India and abroad, must be set up. Further, handling residue test queries made on exporters must be handled by an office abroad that can also provide a platform for promotions and liasoning, best set up with industry-State involvement to ensure markets are engaged on all business dimensions. This highlights the fact that the success of such a project may be affected by the following: a) The presence of a comprehensive system of support that looks at an entire industry with all its parallel business sectors and value networks rather than just value chains; b) Whether the entire environment of business including all players and forces which may potentially change the rules of the business game or its resources, are understood and considered for project strategy, irrespective of whether all issues are dealt with under the project or not. And c) that when business advantages are obtained through a donor funded initiative, the spread and sustainability of the initiative is far higher. The socio-economic process of diffusion is such that when trade related changes are contemplated, such market based incentives ensure that changes in trade live past the donor project. This is common knowledge, and the real learning may lie in details and to a larger extent in the identification of a framework that allows the planning and delivery of such a project. For this purpose the key factors affecting the success of the project, under the three major areas mentioned above, would be considered in detail.

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Key success factors The advantages that the stakeholders obtained were found to be the key to success of a project aiming at adoption of new practices and/or standards in the trade. The advantages were in the business domain, and followed from changes in the following areas, and were not related to subsidies or other State controlled or provisioned areas, especially when a de-regulated and globalizing market scenario is contemplated:

• Market access created for much more lucrative markets, with a far greater return on investments than the market that the target farmers were serving so far.

• The visibility of the commercial success that followed this market access, especially amongst the same-trade population, initially.

• The geographical and social proximity of the target group and the percentage coverage of the target group through indirect social and group processes

• Certification which provides reassurance of product quality safety traceability and accountability leading to higher preference or acceptability by business parties in the value chain, (in this case buyers/sourcing agents and retail parties in the fresh produce market). This works just like a branding.

• Quality practices that enhanced the safety and quality of produce, of workers and farmers, and also helped in long term protection of the environment, with all its consequent advantages.

• Changes in mindset when looking at process rather than product certification; better management of resources and better planning with a longer timeframe, more resource driven and with greater cost consciousness.

• Creation of infrastructure at two levels: at the farm level for the ongoing and long term use of the target beneficiary, and in terms of systems for creating and sustaining pools of support talent and facilities such as testing labs and consultants, who will drive the practices forward, market the concept of certification, under a market incentive, with the initial knowledge and training inputs from the project

• Market incentives to adoption of quality standards and certification – in whatever form they accrue. The attribution of these business gains to the project intervention and change are of course critical. Thus a clear competitive advantage that is well understood and accepted as such by the target community is essential. This competitive advantage must be directly attributed to the change enacted by the donor project, and this must lead to some visible business gains - to the bottom line in particular.

The coverage of parties right across the value chain, with parallel business activities such as consulting etc., was also a key factor in delivering a business advantage to the farmer. Without these out-reach processes in place, the advantage may not have accrued to enough farmers to create a visible trend amongst the farmers which could spread. Even in a purely business environment, an outreach program that creates a platform even if for just understanding issues, becomes a key to both identifying critical hurdles, as well as getting the message across. Diffusion of the GAP amongst more farmers would have been blocked due to a shortfall in availability of such resources as test labs, equipment availability for fast tests required for peak season testing loads, and so on. The traders’

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involvement was obviously a key in creating a mindset of preference for, and sharing of, gains with the farmer for certified produce. The common platform also helped in understanding and taking action to clear all bottlenecks in the realization of trade benefits and price realization, as well as ramping up the volume of exports without bottlenecks in testing and consulting etc. This helped the project team to start coordination activity with all related agencies for a common goal quasi- program, which is so essential for larger environment management. No single project can try, or lay claim to, managing the entire trade environment. But it can surely coordinate with all related agencies. The efficiency and effectiveness of this coordination will depend on whether all issues in the value chain are being addressed, and whether the steps taken by various agencies are coordinated, uni-directional, and gel together, for maximum impact. This requires a deeper understanding of the trade environment and engagement with multiple parties and not just the target parties in a program.

Sustainability of reform efforts The self sustaining nature of the adoption of GAP by farmers, and of certification and modern farming practices in general, that the donor agency sought through this program, depended on whether the competitive advantage gained by the farmers from certified produce, were sustained over a period, and over several business cycles. For the pioneering group of grape farming businesses, who adopted the new practices and standards, the gains from this investment in certification, should result in visible business gains. Further the quantum of these gains should be such that it is a matter of concern and is discussed amongst the peer group at least; that is, the people in a given socio-economic setting engaged in the same trade. Further the change in beliefs and mindset towards doing business in the new way should also emerge in a visible manner and as a conscious factor in their business operations, otherwise complete linkage to immediate economic gains may obtain amongst the group, and may limit the adoption of the program. In other words, if the impact remains rooted in a belief amongst target groups that there is a fast buck to be made, then the efficacy may be limited in spread and acceptance. Limitations of a single factor to affect a complex business would ensure that the gains may not be that visible in a given period or year, and that may lead to disengagement and discrediting of the whole program. If the mindset changes, the belief in the program benefits occurs, and a proper understanding of the role of the change in gaining business advantage is not there, then there is very little tolerance to deviations from a high expected return, and consequent loss of faith thereafter may kill a good program. In such a case, the sustainability is dependent not only on the continuity but on the quantum of the gain, which may vary in a free market. This is not to suggest delinking of economic incentives, but to reinforce and make visible the longer term gains from a change as opposed to subsidies and immediate gains. Secondly, there has to be a focus on indirect gains and competitive advantages in business which may result in consequent economic gains, which are valued by the adopters. Thirdly, there should be other advantages to the change than just economic gains, such as ease of management, greater security and psychological gains, or even, if perceptible, a decrease in financial risk. In many cases, even social advantages were seen to emerge on adoption of new practices, since GAP required worker facilities and a farm layout and maintenance level, which raised the self esteem of

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the farmer. In a socially rigid set up like India and many other developing nations, this change in infrastructure itself would signify some concern for others and an ability and willingness to spend on larger interests than just farming for profit. Finally, the sustainability of the adoption through market incentives would be in the long run, possible only with an integration of the changes created within the system in the overall system or micro-environment and exhibit a clear potential for diffusion in the larger macro-environment as well. This is aided by awareness of the inevitability of change and modern quality practices as well as global competition, its imminent arrival and consequent quality and practice issues. This awareness requires specific thrust, since in such rural communities change is reviewed deeply and word of mouth plays a big part. Two things helped here: getting together all groups in the value chain, and having a system that gave incentives through the market forces. This ensured that spread of word was faster and more consistent in the message. The market mechanism of incentives, sustained in the short run, ensured diffusion to the larger market, and larger microcosm of business, as adoption by farmers independently, increased due to word of mouth about the advantages reaped by adopters. It may be concluded that market based incentives help sustain the momentum of change, and make it self sustaining. This incentive may be reflected in profits, or in risk reduction, market access, branding image and quality parameters, etc, that is, they may be long or short term gains that a business obtains. To ensure this incentive, a competitive advantage must be obtained by the target group of the program, through the intervention. Further, this must translate into some business gains, direct or otherwise. Support processes such as awareness of the way in which a competitive advantage is obtained by adopting the targeted change, must be a necessary part of the program so that the gains of adoption of change are reinforced sufficiently for retention of practices and wider diffusion. Support processes in the entire business cycle or process is a must for any bottlenecks that occur at any point in the value chain may derail or slow down the benefits of the change from accruing to the target group. Hence, all parallel business processes that affect the main trade process that is being targeted, must be studied for any potential bottlenecks. In this case, the provision for consultants, lab equipment and training, certification agencies, exporter laisoning etc., was a key factor in getting the farmers the advantage of certification. These support processes, must also be facilitated such that the business environment or market forces devise the incentives for the support players. This will make it sustainable for the support processes also, and the incentives will provide a mechanism for expansion in support capacity without constant donor support. In the absence of such initial support and later market incentive mechanism for support processes and players will create bottlenecks that will endanger the sustenance of the main reform agenda. This highlights the state role in creating the larger infrastructure which provides resources such as trained manpower and other inputs in this kind of a market.

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If this sharing of gains in the market is not substantial enough to be a sufficient incentive for all parties involved, then there may be a risk of failure. That is, if the addition in value through the certification of grapes for exports, did not create enough rise in price realisation and market access in this case, then the share of incentives that traders would pass on to farmers would be less than required; and obviously if that share was not sufficient, it would not trigger a growth in consulting and lab testing businesses to provide enough resources for the diffusion of certification amongst farmers – they would create a bottleneck.

Role in facilitating trade: impact on trade, policy and promotion Trade can be said to be impacted significantly, there is a visible and enduring change in the nature, quantum, scale, modus operandi or quality parameters exhibited in the trade as a whole, as a sector of the economy. This is only possible if a significant number of parties engaged in the specific trade exhibit these changes, and thus the effect can be felt over the whole sector and/or economy. It is seldom possible to directly engage and impact a significant number of parties in any sector of a sizeable economy. It becomes even more difficult if the various sectors sought to be targeted are unorganized to a large extent, which is true of most sectors of emerging and underdeveloped economies. Diffusion rate and extent, amongst target group or trade sector, is the real test of the change initiative. An obvious fallout of quality and safety certification is that the global market acceptability and access increases directly. Further quality assurance is an essential part of the total value or brand equity on offer from the business. Such certification or quality driven programs will be able to create a competitive advantage that leads to substantial market returns. It may prove a level playing field once the diffusion is wide spread, but as a factor in the economy of that region, the global competitiveness rises and a global quality supply chain is created, which has its own benefits in attracting investments in stabilizing and enhancing scale of the sector to global levels. So even if after a while the participating farmers lose their comparative edge over each other in the local market, they will provide a large base of supplies of a consistent globally acceptable standard, which may attract the global market to invest significantly. That is a long term advantage of most quality programs in a economy. Amongst the many factors that helped in this case, it was observed that creating and publicizing a credible, see-it-for-yourself kind of success story in a given environment was very necessary for the diffusion amongst the wider target community, beyond the participants of the program itself. So identification of an innovator or early adopter group is crucial. One such group, if comprehensively guided to market success becomes a success story that propels other groups on word of mouth, and achieves a far more credible communication movement, as well as spreads the adoption through society through a natural process that is far more economic and fast. The comprehensiveness of the approach determines whether the initial success would come or not. In this case, the key to the initial success was found to be the effort to tap and involve all members of a

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value chain, upstream and downstream as well as across in a given stage in the value chain. The involvement of all stakeholders directly may be essential to provide a market incentive based gains mechanism, at least in the short run, even if it means supporting it partially initially. Since change is involved, all parts of the system need to be evaluated for changes, even one part may be a bottleneck for the whole. In this case it was seen that with testing being a major component, the availability of testing facilities and trained personnel were a potential bottleneck in the region. Paucity existing infrastructure to cope with testing needs for a region meant that during peak harvest periods most farmers would have to wait for their test results, with a crop on hand either getting ripe on the vines, or stored in the cold rooms. The only other alternative to this was to have early or late harvests. Here the creation of a pool of trained technicians, coordination with State agencies to fund testing infrastructure even if it be one time funding, and creating a market incentive for such testing, was seen to be crucial to the adoption of standards. Achieving those standards required creating a pool of consultants who would provide the technology and practical on field handling for farmers till they were adequately equipped to handle GAP. The market incentive would again ensure that this pool was sustained and grow, as it would provide opportunities for agri- experts to lend their expertise to farmers for a price. The farmer’s gains in the market should therefore be adequate for investing part of it on GAP. Enabling through constant monitoring and help, may be initially aided if it helps the adopters reduce the investment risk. He fees for consulting being paid by agency, the farmers had no hesitation to call the expert at every instance, and it helped achieve standards with a higher hit rate.

Drivers of Change in the export farming business environment Possibly the most potent driver of change in a free market is the enhancement of returns for the entrepreneur and consumer, by adopting some means like technology, business processes, branding etc. Access to such a market where the existing products/produce may generate greater returns, is another such driver, again linked with the ultimate financial incentive. That being the direct logic for market forces to effect a change in the business environment, the alignment of any change agent with such a return based mechanism would ensure a great degree of success. Something which provides competitive advantage in business typically becomes a business tool adopted by most active players in an industry. Programs such as quality certification are supposed to enhance not only quality, but also the returns from such enhanced quality. They would usually affect the entire value chain, and add to the pie for more than one member of the chain. What is necessary here is to identify the various forces in the market that determine either enhancement of returns through some product level, business process or technology level, or market access level issues. The use of the value chain perspective offered by Michael Porter1 in the five forces framework for analyzing markets has been an essential strategic analysis tool for most major organisations in business. They have helped identify the strategic opportunities, and provided the means of developing a competitive advantage. Such an analysis, using typical target parties of a donor program, would greatly enhance

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the efficacy of the project. Using a value chain perspective, the analysis may provide the program’s intervention agenda a means to be aligned with the market forces’ determination of incentives in that given sector of the economy. It would also help understand whether the value being added would be supported later by the market forces itself. If so, it would also help project if that return is substantial enough for sharing across the value chain members, so that there is something for everyone on the plate, to adjust and support the reform. It helps identify the critical value chain members who would need to be involved for the accrual of business gains by the target parties of the donor program. This also implies that the donor programs efforts at engagement of the right parties, and dissemination of the agenda for competitive gains in business, are highlighted in the program: an area that may benefit greatly from a detailed analysis of the market forces mentioned earlier. For instance, in this case, the involvement of exporters in the seminars and workshops, meant enhanced awareness and acceptance of certification benefits amongst the buyers of certified produce. These were the parties who would actually give higher returns to farmers, who adopted the certification program. The farmers were the main target parties, but their widespread adoption and It was found that the diffusion of the GAP, its spread across crops and regions, was rapid and showed a high initial penetration percentage, because of the single product line focus in the project after the initial stage. It meant that all resources revolved around success in the grape exports to the EU, which was a major market for Indian farmers/exporters. Further most grape production was concentrated in a specific single socio-economic region and market. Diffusion through market incentives were seen to work mainly because entrepreneurial ventures unlike state ventures will spread through a process that is as much socially affected as economic. Farmers were in the business of grape farming; they did as they saw their peers do; the successful amongst the peers are discussed, give faith in methods and markets, reduce risk and initiate further trail. But this happens within a peer group, and outside the professional bodies, peer groups amongst the various trades and occupations in India and many other nations with a similar culture, will be the local community and its own hierarchy and social circles. The complex overlapping social layers in Indian rural communities aside, the adoption of change is both a social as well as financial risk, and the two risks are tied to each other, in as much as financial success has affected social standing and relationships in every society. The word also spreads through social groups such as the farming community, the agricultural community, the caste groups (who may differ in occupational groups), and so on. This complexity is something that needs to be understood whenever the diffusion is to be attempted. In this case, it was managed at a local level through the system of personal contacts, as well as by involving the related occupational groups, and having agents ( the consultants who were trained in GAP certification) who were a part of the given socio economic milieu. The importance of local talent has long been understood for community involvement and understanding of critical local issues. But the use of such agents to tap a larger community was seen to help mainly in creating a few change agents within the target community. It was these farmers who adopted GAP, which set the ball rolling for diffusion. Two aspects here – this project benefited from the involvement of the community at a social group, so socio-economic target groups make sense. But many initiatives based on the same target group logic have shown less than acceptable levels of

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diffusion outcomes. The success of the current may be due to the second advantage that this project had the benefit of: economic gains to the members of the given community, and a agent system to create word of mouth. The regional spread is important here – too wide a spread may not allow the same target group to benefit from word of mouth, visible success stories, and reduction of adoption risk via interaction with experiencers of change.

Coordination processes and structures The focus on a narrow regional ecosystem may lead to more visible exemplar, talked about success; and adoption in that region and trade. However, how would it spread outside the region and product line? This project benefited from two more things: the region dealt with more than one major produce, so farmers tried it on more products that could be exported. Second, their competitors in a given produce such as grapes and mangoes, in other regions, now needed to play catch, to sustain their own place in the export markets. They would also adopt GAP to even out the competitive advantage. Grape farmers adopted GAP and certification, then pomegranate followed with limited success, as exports are limited and shelf life is low. Grape growers in other parts of India such as Andhra Pradesh, followed with certification efforts. Farmers in the region tried the certification advantage with mango, which is a major crop in the Maharashtra regions close to Nasik, where the concentration of GAP certified grape growers was highest. Mango is a major crop domestically as well as in the export sector. Export markets exhibit a huge potential for this produce, but so far the exports have not reached significant utilization of this potential. Most mango growers who tried for certification, found that the enhanced knowledge of the business of certified produce exports, as well as the agricultural practices, are in themselves, factors that provide competitive advantage. Access to markets is far greater and easier, through certification. Mango growers who export are spread across other regions such as Uttar Pradesh, and the southern states, and the certification also spread there. So multi-product and multi- region spread of the parties involved and the market itself, helps the spread of the practice. This also brings up the question of support business processes for the certification such as consultants, labs, certifying agencies, etc. Slowly there must be a mechanism to create infrastructure for the whole nation, otherwise the success story may not be entirely emulated. The advantage of market based incentives is that the direct support is slowly minimized, as the change spreads on its own via a market driven system of setting up facilities and attracting talent, where there is a market for the same.

Analytical Framework based on the project review. It has been seen here that a sustainable change program that is based on market incentives, has the advantage that that if change actually delivers some competitive advantage, then market forces deliver the reward. This becomes self sustaining as the project target would continue to engage in economically (and socio-economically – such

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as word of mouth activity on changes and trends in their occupation) rewarding behaviour. Once gains accrue, in this case it showed an enhanced belief in the new system of farming, additional and indirect benefits were identified by the participants of the program, fleshing out of the detailed requirements for success were further taken up by the target community, and there is a virtuous cycle of compliance – access- quality- yield – input – process –repeat cycles. That is, perpetuity is more possible under such a project program. The more the yield the more the investment put back in areas of business that give competitive advantage, and that a fact of business life. This kind of project that builds competitive advantage will always have a better chance of sustainability due to its market rewards. Sustainability beyond donor funding is then not an issue: it is one of survival in the marketplace. The competitive advantage must accrue for any entrepreneurial venture to survive and sustain. If the adoption of GAP and certification provides a competitive advantage, then it will sustain the farmer, and will have the effect of not only continuity of practices in that case, but also of influencing others to follow suit. For competitive advantage, the gains accrue due to a certain practice or strength inherent in that business2. In a state controlled economic set-up, the State can sponsor such incentives or gains, and specify the conditions under which the venture/farmer may obtain the same. In a market economy, if the market forces are to be used to drive this kind of adoption and change, then the gains must accrue through some business related competitive advantage that the farmer obtains through the adoption of the targeted change. In a larger perspective, the free market economy with its own set of forces determines the conditions which enable a particular venture with a specific set of business practices and strengths, to achieve profits3. The quantum of profits is determined by the strength of the venture vis-à-vis the existing conditions. The forces which determine these conditions have been discussed under various frameworks, and Porter’s five forces framework has been widely adopted for the purpose. These five forces are the competing firms, new entrants, potential players, the supply side forces, the distribution or forward side forces including customers and channel members, etc. Further the environmental forces which affect conditions determining the business’ success has also been widely held to be the political/regulatory, social, economic and technological environment. Together these forces shape the major conditions which determine whether a venture with given characteristics, can succeed. To ensure that in this environment the gains accrue to a venture adopting GAP and certification, it requires that the market forces favour this adoption. It is therefore required that a market incentive based adoption model, must ensure that these forces are understood, and the specific change being initiated, provides a competitive advantage to the adopter due to some strength that it provides its business practices or assets. In the case of GAP, it created market access for those farmers who were earlier unable to cerate significant market presence since there was no differentiation from other sources in the existing Indian exporters, all other things being equal. Further, it allowed entry into a

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market where buyers (intermediary or retail level), were increasingly at that point in time, conscious and desirous of EurepGAP certification, due to some quality concerns. So along with requisite product quality. This certification provided traceability and risk reduction to buyers, and met a near mandatory requirement. It also ensured that the quality parameters at various stages in product and post production process were being adhered to, and therefore the product was of assured standards and of superior quality. It ensured that in the market, buyers would first exhaust all possible certified produce meeting the requisite product specifications for size and colour, and only then give a chance to other produce which was not certified. The test results had a critical role as it determined not only the certification but also market acceptance later, on quality grounds. The advantage of Gap certification over produce quality certification was that it provided for data on the complete production process, and so had greater sanctity for a buyer. Being a process change guided by constant consulting and monitoring, as well as infrastructure creation, it also ensures that major benefits of quality produce, quality of soil and environment, are also obtained by the practitioner. It is at this juncture necessary to highlight the role that all round support has to ensure that the market forces actually create the conditions that provide the necessary incentive3 for the farmer to adopt and continue certification programs. The market must reward the certification in some way. That will happen only if farmers realize a higher price from buyers, or gain some other financial advantage – that is the bottomline. Quality standards often produce a risk reduction for buyers, and this ensures sales to a greater degree to the farmer; further as mentioned above, a larger part may be sold in more lucrative markets due to priority of purchase as compared to uncertified produce. Further quality management would usually ensure greater product quality also, as well as reassurance, and provide a degree of branding to the farmer. But for this to happen, the awareness of availability, of marketing this produce amongst buyers, has to facilitated. The individual adopting GAP cannot be expected to be effective in this regard unless it is a very large enterprise. This creates a specific target for any such project; get a significant share of the produce suppliers to join in; or else identify the market leaders and shapers, early adopters, and spend on eth marketing themselves to aid these farmers. A certification program requires testing, and adequate infrastructure also involves equipment, commercial groups which will profitably run the testing, and adequately trained people to handle the equipment and tests involved; finally adequate number of such testing ventures with adequate testing capacity in volumes, since produce will always come in peaks as the harvest season progresses. This is a separate business which will take its won time to develop as a market, and will have its own development cycle time. This has to be matched to the GAP adoption cycle times, and the project has to facilitate all this. It cannot by itself fund everything, the involvement if members of the existing market must be maximized since interventionist strategies cannot be sustained beyond a time period without becoming a part of the market. In a free market such interventionism creates only imbalances, and may not be that desirable. It also touches upon the larger professional/educational environment that will provide trained staff for labs, for providing consulting to farmers, and so on. The consulting business has a good potential, but requires that talent is available (trained and interested in the profession);

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that farmers profit enough to share the proceeds significantly with these professionals to make it attractive for talent to remain. Such a condition will prevail when colleges prepare research and teaching agenda that attracts talent, and places them in the right arena. In effect the understanding of the five forces and the PEST analysis, to find out the changes and support necessary to create a sustainable competitive advantage for the adopters is a must. On the other hand one should not be averse to creating specific interventions that will provide infrastructure aid and initial financial gains to adopters, and support societal communication processes that will shape the diffusion. Anything that will hasten the various related business cycles are also a part of such a project if this is to diffuse and sustain itself, both. To ensure that the diffusion of change takes place, the existing frameworks advise socio-economic relevance: that is a given, obviously. More recently, word of mouth communication triggers and community involvement, as opposed to mere mass communication earlier, have been adopted by large corporates4 to extend their market share, mainly by leveraging customer relationships. Community involvement, commitment and advocacy requires certain triggers, and the idea of enhancement of economic status which also acts upon social status, may be argued to be a greater attraction to adoption rather than the social or economic approach alone. This is so especially if the adoption is closely related to occupational practices and farming business. Export oriented farming is clearly a business as viewed and reported by most farmers big and small. Triggers such as highly visible financial gains are critical here to create interest and opinion seeking as well as credible opinion leaders who may spread the right message. It is a critical decision on the farmer’s part since most quality paradigms are a major investment not just financially but also process change wise. Established farming practices are difficult for a farmer to change since it is a very complex business, and set practices which have delivered a modicum of success are all the more difficult to change if the complexity and consequent perceived risk of change, is very high. Visibility of the success of change, and social processes that enable communication between members of the target group to flow freely and credibly, enough to reduce risk, are critical and must be managed as far as possible by the program.

The approach to market based incentives for sustainable reforms

In a nutshell, case review concluded that the following may be included in the approach of a program aimed at business environment reforms:

Program interventions can be sustained beyond donor funded interventions, if they are linked to the incentives gained by target parties, via the determination of existing market forces.

The roles played by the state, private and NGO bodies as well as the target group, associated value chain members of the target group – all must be included in the project

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brief and analysis must be done of the business environment in terms of the value chain, to determine this role, and impact of changes in roles and functioning. A differentiation of the roles may thus be targeted by the program itself, to enhance the impact of each parties’ value addition in the entire business process in that particular trade.

Elements of the program such as awareness campaigns to incentives delivery and substitution of donor funded incentives to market returns, need to be chalked out at the beginning itself.

Programs should include all the members of the value chain, and players impacting the related business environment, should be included in the program implementation plan, and engagement should be on specific agenda aimed at enhancing market returns or competitive advantage of the target party. Whether this requires short term regulatory measures or donor funding of incentives for other-than-target parties, it should carry a clear agenda from the beginning itself.

Programs which include elements of awareness and information sharing, skill development and knowledge base creation, infrastructure and capacity building, business process mapping and competitive advantage development via five market forces, PEST analysis, and a strengths/weakness/opportunities/threat analysis, would provide a much more comprehensive solution or intervention than one missing any single element.

Focus on secondary business processes that support and enable, can help reduce bottlenecks and facilitate business gains for target parties. Parallel business processes are often just as important as the main target reforms. Identification of key success factors and the competitive advantage that will be delivered to the target party via the program, enhances efficacy greatly.

On conclusion, a single project may be limited in coverage of parties, but may have a cascading effect on trade capacity building, if a competitive advantage is delivered to the business, which enhances returns and or provides market access. This revolves around diffusion of a success story, and that may occur when a comprehensive multi party engagement program is created based on a value chain analysis.

Donor agencies would thus benefit if such initiatives are at the outset given a defined objective of market incentive linked reforms, with measurable goals and long term impact incorporated into the project. Sustainability would depend on an identified competitive business advantage for the target party to derive market incentives, and the project guidelines may include such a requirement. There must be projections and measurement of the impact in short and long term, in terms of these market forces. The involvement of key value chain members in the trade, their role, and the delivery of the market incentives must be defined in the projects, so that the competitive advantage delivered by the intervention to the target parties, may be assured of an incentive in the market place. A plan for diffusion of the change must also be considered by the project, to ensure that sustainability and spread of change are ingrained in the project.

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References

1. Porter, M. E., Competitive Advanatge: Creating And Sustaining Superior Performance (New York: Free Press), 1985

2. Narver, JC and SF Slater, “The Effect Of A Market Orientation On Business Profitability,” Journal of Marketing, Oct 1990, pp.10-19.

3. Webb, J and C Gile, “Reversing the Value Chain”, Journal of Business Strategy, Mar-Apr 2001, pp13-17.

4. Kotler P and G Armstrong, Principles of Marketing (New Delhi: PHI) 2003, pp 4 (quoting Jeff Bezos of Amazon.com, on customer word of mouth)

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Appendix 1

Case Study: Activity Plan for the Project

SNo. Description of Activities 1. Planning meeting with experts, to develop methodology for project enactment 2. Appointment of specific staff and team for enactment of the project as

planned, with requisite skill areas and organizational structure. 3. Visits and alliances with organizations (Foodplus, FoodCert, APEDA, State

Boards, and experts for developing an systems and procedures to enact the implementation plan and GAP standards for Indian conditions

4. Planning meeting /awareness seminars with select groups of farmers/PMO, exporters, consultants, experts etc.

5. Organizing of structured awareness seminars for farmers, PMOs and exporters, consultants drawn via other agencies such as APEDA.

6. Involvement of influential government officials & institutions in the project activities, such as awareness programs, generating interest and credibility and involvement of farmer/PMO community, for training, for coordination with agencies such as APEDA for activities training lab technicians so that APEDA aided labs could utilize the funds for purchase of advanced spectrometric testing equipment to the best possible extent. It was also necessary to establish standards acceptance with international agencies such as Foodplus etc.

7. Organized programmes for imparting training to laboratory technicians and horticulturists, advanced training programs for consultants, farmers and others associated with certification process.

8. Consultancy to grape growing farmers in Maharashtra; EUREGAP certification program for farmers.

9 Incentivising farmer certification directly through registration fee subsidy and consulting activities.

Source: 2004-05 Project Audit report, and additional information provided by Project Staff.

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Appendix 2

Diffusion of Certification amongst farmers: EUREPGAP Certificates issued in India by FoodCert from the year 2003 till present.

Source: Collated from FoodCert India Ltd., 2005 and FICCI, 2006

A. Grape 2003 2004 2005 2006

No. of farms certified (Option – I) 12 49 130 Grape

No. of farms certified (Option – II) - 08 (farms covered 161)

08(farms covered 267)

Additional fruits: Mango Other:

B. Vegetables Vegetables No. of farms certified (Option –II) - 2(farms covered

110) 2(farms covered 110)

Total farms covered under EUREPGAP

12 320 507