GGI Business Review is a new business series, capturing snapshots of the GGI Harvard Case Style Masterclass by CEOs and Industry Leaders.
This particular piece is a snapshot from Saurabh Bakliwal's GGI Masterclass.
Practice makes perfect is the wisdom that has been imparted by the elders since the olden days, and it is genuinely true to its very essence. Practice helps hone our skills and ensures that we become better at the things we consistently practice.
The skill of problem-solving is developed over time through rigorous practice and is mastered through consistent involvement in solving problems.
In the world of management consulting, there are a lot of problems that consultants solve on a daily basis and train their problem-solving muscles. Typically, these problems revolve around increasing the overall profitability of the companies they work with. Solving these problems includes the usage of standardized frameworks which have been in place for many years to identify ways to enhance the overall profitability of the companies.
But then comes problems that can not be solved using standard management frameworks, and these problems are called Non-Linear problems. Such problems are usually seen in the public sector where most problems are counter-intuitive and standard solutions don't work there. It is because the objective of people working in this sector is not to increase profitability but rather to increase community welfare.
BCG Managing Director Saurabh Bakliwal takes us on the journey of solving Non-Linear problems while helping us understand the importance of improving the efficiency of public governance through real-life examples from the Indian agriculture and dairy industry.
DOUBLING FARMER INCOME IN INDIA
In India, 50-60% of the total population is employed in the agriculture sector. These people have been involved in this industry for many generations, despite the fact that the returns in this sector are very low and it's almost unprofitable to stay in this business now. Even after the government’s massive investments in this sector every year, there has only been a slight increase in the farmer’s income. So what is the reason behind this low growth?
Well, there are more than 100 million families involved in agriculture in India, and 75% of them own less than a hectare of land, these small farmers are the ones who are on the losing side due to their small land ownership. But they still continue to be in this business because a lot of them eat what they grow in order to sustain themselves.
Following observations can be made after examining the income statements of these small farmers:
Low Revenue The revenue generated for most farmers from farming was only around One Lakh Rupees per annum.
Cattle Ownership More than 70% of farmers in India also own cattle, and many of them use those cattle for running a dairy business alongside farming. Interestingly, the income from the dairy business has around 50-55% gross margin for the farmers due to the less cost involved.
High Financial Costs The financial cost of farming is very high and about 50-60% gross income of farmers was going into interest expenses. This led to most farmers getting entangled in dept-trap.
Limited Crop-Mix Most of the farmers in India are involved in the cultivation of wheat and paddy.
DOMINANCE OF WHEAT AND PADDY
Another engaging observation in the Indian agriculture sector is that the majority of small farmers are involved in the cultivation of Wheat and Paddy and only a limited number of farmers are growing perishable crops like fruits and vegetables. In fact, more than 50% of the total farming area in India is under paddy and wheat. Though very interestingly the return from these 2 crops is the lowest when compared to other crops. But why is the return on wheat and paddy so low?
By monitoring the demand and supply of wheat and paddy, we see that these 2 are surplus crops and are consumed quite less compared to other crops. Moreover, they are over-supplied throughout the world. So why do farmers continue growing these crops even after such low returns?
Following are the reasons for the high growth of wheat and paddy among the farmers in India:
Fixed Prices Farmers prefer growing wheat and rice as they find it reassuring to have a Minimum Support Price (MSP).
Lesser Assurance of offtake The perishable nature of products requires assurance of potential buyers and if you don't find a buyer at right time then it leads to the risk of spoilage.
Inadequate storage facilities There are inadequate storage facilities for perishable products, whereas grains like wheat and rice can be stored easily for a longer time.
Higher irrigation and labor requirement The higher cost involved due to higher irrigation makes farmers reluctant to grow fruits and vegetables
Higher risk of crop failure Fruits and vegetables are more vulnerable to adverse weather, leading to a higher risk of failure.
WHAT CAN BE DONE
To improve the overall situation of farmers in India, the following steps can be taken:
Improving the market access of farmers
Providing them better access to financial instruments
Encouraging the creation of sources of alternate income, for example, dairy.
Identify and promote the best crop mix for different areas
DAIRY IN INDIA
Dairy is a key sector of the Indian economy and a significant contributor to farmer income as more than 70 million farmers are directly involved in dairying. Moreover, more than 10 million people are directly and indirectly employed in the dairy sector making it a significant contributor to the economy with a high growth rate.
When compared to farming there are very fewer costs involved in the dairy sector and there is a 40-50% gross margin in this business. Furthermore, the majority of farmers in India own 1 cow, so if we can double their cattle holding just by a cow then their income can get doubled as well. So what is preventing farmers from leveling up their dairy business?
Milk being a very highly perishable product requires extensive infrastructure for preservation and transportation, which many farmers can not afford. Out of the total milk produced, farmers themselves consume 46% and the rest of the milk distribution is divided between organized channels and unorganized channels. Of this, 23% of production is procured through organized channels and the rest through unorganized channels.
NEED FOR INVESTMENT
Most major dairy-producing states in India have a processing capacity of less than 30% of production. Whereas states like Gujarat have a very robust processing and distribution infrastructure. The role of co-operatives like Amul is a big factor in Gujarat's robust infrastructure, while on the other hand the rest of the states lack the presence of such organizations which might boost their overall processing capacity
Here the big question which arises is why is the private sector not stepping in and bridging the gap between milk production and its efficient distribution through the creation of good infrastructure.
The following reasons contribute to the lack of private investment in the dairy sector:
Distorted policies in many states favor co-operatives over private organizations. Additionally, the co-operatives in most states don't have good infrastructure.
Lack of control over the quality of milk due to infrastructure restrictions makes many people reluctant to enter this sector.
Variability in the supply of milk affects the overall margins and this prevents any private players from entering as well.
High investment uncertainty and long gestation period also deter the entry of many new players.
To solve the issue of low private participation in the dairy sector following things are required:
Need to build awareness and interest among investors to invest capital in developing this sector
Fixing the issue of market linkages on the ground by establishing a market discovery platform for private players to source milk.
Improving access to credit for dairy farmers
Establishing quality testing infrastructure for ensuring the supply of good quality milk
Dairy and Farming are big contributors to India’s economy, and the upliftment of these sectors through planned investments can help the growth of the overall economic landscape of India.
After going in-depth to solve the above problems we realized that such non-linear problems can not be solved through standardized management frameworks, rather they require rigorous problem-solving skills that can be developed over a period of time through exposure to such problems.
Saurabh Bakliwal heads the Infrastructure topic for Boston Consulting Group in Asia, and the Transportation & Logistics topic in India. He is also a core member of the Industrial Goods, Public Sector, and Operations practice areas. Saurabh works with both public and private sector clients on strategy, operations excellence, asset monetization, and large-scale transformation programs.
Saurabh holds an MBA Degree from IIM Bangalore and BTech from Vishveshwarya Technological University.
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