Aug. 21 (Bloomberg) -- The demise of India's fragmented, wasteful and corruption-ridden agricultural market, and its replacement by a modern supply chain, may well be the most significant change in the Indian economy over the next decade.

Since the new arrangement will inevitably see local and multinational companies dealing with farmers directly in private markets, the change is also controversial.

``Without market regulation, agribusiness corporations will make profits selling costly seeds, buying cheap farm produce, and locking farmers in debt,'' says Indian environmentalist Vandana Shiva in New Delhi.

I would bet on exactly the opposite outcome: Farmers will earn higher profits, consumers will get food at cheaper prices, and the economy at large will gain from an increase in agricultural productivity, the biggest constraint on the purchasing power of three out of five Indians.

Needless to say, the companies that are currently at the forefront of building farm-to-store networks will probably make handsome returns. Investors should pay attention.

Indian agribusiness company ITC Ltd., which is almost one- third owned by British American Tobacco Plc, last month said it would spend $1 billion over the next seven to 10 years to link up one-sixth of rural India with its digital network.

The Internet-based system, called ``e-Choupal,'' already covers 3.5 million farmers and allows ITC to buy directly from them, bypassing the inefficient village marketplace.

Other companies, too, are realizing that investing in exclusive arrangements to obtain farm produce will pay in the long run. Reliance Industries Ltd., India's biggest non-state company, announced earlier this month that it has entered into an agreement with the government of the northern state of Punjab for setting up 50 of its ``rural business hubs.''

Reliance Retail

The petrochemicals company, controlled by billionaire Mukesh Ambani, plans to buy 900,000 tons of food grains and 200,000 tons of horticultural produce a year, apart from 700,000 liters of milk a day.

Reliance's motivation is plain to see. It is spending $5.4 billion to create a brand-new supermarket chain across the country. The first Reliance Retail store will open next month.

Owning the supply chain right down to the farmer will allow Reliance to establish a clear lead over international retailers such as Wal-Mart Stores Inc. and Carrefour SA, which are still awaiting government permission to set up shop in India.

The New Delhi-based Bharti Group, which runs India's biggest mobile-phone operator, has similar plans.

Bharti Chairman Sunil Mittal proposes to enter into contracts with farmers so that he has access to as much as 100,000 acres over the next five years for his foray into horticulture.

FieldFresh

In 2004, former investment banker Evelyn de Rothschild and his wife Lynn Forester teamed up with Mittal to set up FieldFresh Foods Pvt. The company, which aims to supply Indian fresh fruit and vegetables to Europe, Southeast Asia and the Middle East, is in talks with ``several global companies'' to set up a retail venture in India, Mittal said in March this year.

There are some 7,000 markets for agricultural produce in India. Although they collect 1 percent to 2 percent of the value of the crop as a fee, most of these markets don't even provide the most basic infrastructure, such as protection from rains.

After cursory visual inspection, buyers' agents bid for the crop, which is usually brought to the market by the farmer the previous night to beat long queues. Once the price is ascertained, the crop is put in bags -- the farmer pays for the packing -- and weighed manually. The agent pays only some of the money upfront and the grower has to come back for the rest.

Using Technology

There is immense scope to improve this inefficient, high- cost system. Technology has a big role to play.

In ITC's ``e-Choupal'' program, the Internet allows all farmers to access prevailing soybean prices in several nearby markets at a computer maintained by one of them -- a coordinator. The coordinator also quotes an indicative one-day price for the farmer's crop based on a sample. The farmer can then decide whether he wants to sell to ITC, in the open market, or wait.

Farmers, who distrust manual weighing in the open market, have more faith in the accuracy of ITC's electronic scale. Since the produce doesn't have to be packed in bags to be weighed, the spillage associated with it can also be avoided.

Even after reimbursing the transportation cost to the farmer, ITC saves 2.5 percent of what it would have paid to procure the crop in the open market. The farmer gains a similar amount, according to a University of Michigan case study.

An efficient supply chain can also have a salutary effect on agricultural productivity, which has been stagnant in India for the past several years, especially in wheat and rice.

A Model for Change

A template for transformation already exists. By building a network that connects more than 12 million farmers with consumers in 750 cities and towns, India's milk cooperatives have, over the past four decades, turned an importing nation into the world's biggest dairy producer.

Ultimately, the Indian government will have to reduce its controls on agricultural trade -- some 400 laws govern trading in commodities, according to research by economist Raghbendra Jha of the Australian National University in Canberra, Australia -- in order for a common, nationwide market to emerge.

Two years ago, the federal Indian government asked states to amend their laws to allow ITC-type private markets. Some states have already heeded the advice and relaxed their laws.

``This is a recipe for destroying local markets, and through market destruction, destroying local production,'' environmentalist Shiva writes on the ZNet Web site.

It's up to agribusiness to prove her wrong.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

Last Updated: August 20, 2006 13:13 EDT