The agricultural sector is vital for the Indian economy to sustain the livelihoods of some 58 per cent of families and ensure food security for 1.3 billion people. The sector has reached a critical juncture. While it is under stress to feed a growing population with limited natural resources and ecological challenges, the agricultural sector is also expected to sustain income for 100 million smallholders while facing the continued threat of climate change.
To effectively respond to this situation, the farm sector needs to address the critical issues of inclusive access to factors of production, efficient supply chains and sustainable resource use.
Digital technologies such as blockchain, artificial intelligence (AI), drones and the Internet of Things (IoT) have immense potential to stimulate the transition process. These technologies can create a long-term impact on all three indicators if they are adopted and actively used at scale. In the 2022-23 Budget, the government recognised the potential of digital agriculture technology and innovation and announced that a public-private partnership (PPP) scheme will be launched to scale these technologies.
In 2021, the World Economic Forum’s Centre for the Fourth Industrial Revolution (C4IR) in partnership with the Telangana government initiated a first-of-its-kind PPP to scale digital technologies in the State’s agriculture sector. The lessons from this project highlight that in such a PPP framework, the government should play the role of an enabler that creates a sustainable market for technologies by addressing systemic challenges that impede scaling up.
This approach will also encourage the private sector to participate in regions where they do not have any business presence.
Considering the innovative nature of both the PPP structure and the technologies, governments can adopt a two-stage process of implementation: an initial validation process followed by a full scaling up. At both stages, access to commercial capital is critical to de-risk the private sector’s investments and ensure their sustained interest and financial viability.
While India is one of the biggest agricultural technology (agritech) markets for equity investments with nearly $500 million invested in agritech start-ups between 2014 to 2020, there is still an unmet demand for commercial capital. A Bain and Company 2021 report estimates that the Indian agritech sector will attract $30-35 billion in investment by 2025. Blended finance structures, by pooling different risk-taking capital (capital that’s invested in high-risk high impact initiatives to demonstrate the feasibility of the initiative) can play a crucial role in kick-starting investments in the sector
Currently, organisations that offer these instruments operate in silos. Grant funds offered by philanthropic organisations are largely channelled to not-for-profits for implementing digital agriculture projects in a limited geographic area within specific timelines. These not-for-profits may then partner with the private sector to implement digital tech solutions. However, the scaling of such initiatives remains a challenge as focus remains local.
On the other hand, mainstream commercial institutions such as banks or non-banking financial companies (NBFCs) directly fund start-ups in the form of working capital loans and asset financing. However, such lending is limited owing to a limited understanding, lack of suitable products and lack of credit appetite.
Risk participation structures by development finance institutions can bring commercial capital investment in this booming agritech sector to the mainstream — for example, Rabo Foundation’s multiple financing programmes with leading Indian financing institutions for agritech and sustainable agriculture. Such structures can be further scaled through domestic and global funds in partnership with Indian financial institutions.
PPP for digital agriculture provides a perfect platform to initiate blended finance programmes that take advantage of different types of capital. While grant funds can be efficiently used to validate early, untested ideas, they can also prompt the flow of commercial capital for both debt and investment requirements by collaborating with domestic financing institutions. Risk participation funds can be created by the development sector and the government under the appropriate PPP governance
The envisioned blended finance framework can be coordinated by a government agency or multilateral institution acting on behalf of a government. The platform could pool a coalition of institutions that share a common vision of scaling digital agriculture. A collaborative structure will provide flexibility and agility while ensuring easy entry and exit for the institutions based on their strategic interests.
The potential for such a partnership is immense and the first step is the need to further investigate the resource requirements, specific value propositions and set-up of a governance structure for such partnerships. The immediate next step would be a constructive dialogue, setting the vision and collaboration between the aforementioned stakeholders. The government is best placed to drive this dialogue at the national level and facilitate a coalition.
Datta is Executive Director & Head, Rural and Development Banking/Advisory, Rabobank, and Pareek is, Lead, Fourth Industrial Revolution for Agriculture, World Economic Forum, India
July 26, 2022