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How ITC's Business STRATEGY revolutionised Indian Agriculture? : Business case study - YouTube
Channel: Think School
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Hi everybody, every now and then we keep hearing
about the pathetic state of farmers in our
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country.
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And in spite of employing more than 50% of
the workforce, the condition of the Indian
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agricultural sector has been so bad that every
day 28 people dependent on agriculture commit
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suicide.
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And every time we hear this news 99% of us
curse the government, we feel sorry for the
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farmers and we just move on until another
news comes in.
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And in this process of shallow activism, we
never ever try to understand what exactly
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is the problem of the farmers at the ground.
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But you know what, guys, while every single
media house and politicians have been using
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the state of farmers for their own advantage,
the Indian tobacco company has been working
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on a revolutionary business strategy, and
has improved the lives of 4 million farmers
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across 35,000 villages in India.
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And the best part is that they have achieved
this not by doing charity, but by deploying
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a world class business strategy that has even
doubled the income of farmers.
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And if you understand the strategy properly,
you will not just be able to tap into a million
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dollar business opportunity in the Indian
agricultural space.
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But you'll also be able to understand how
can companies like zomato and grofers become
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profitable in the next five to 10 years?
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So the golden question is, what exactly is
this strategy?
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How will it help zomato and grofers become
profitable, and more importantly, what are
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the business lessons that we need to learn
from this wonderful case study.
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This video is brought to you by goDutch, but
more on this at the end of the video.
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This is a story that dates back to 1999 when
the agricultural export division of ITC was
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not performing well at all.
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During that time, soyabean was a primary export
commodity of ITC, and in 1999 4 million tonnes
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of soyabean or 80% of the produced soybean
produce of India came from rural Madhya Pradesh.
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80% of this produce was turned into soya meal
that was used in poultry and cattle feed.
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And eventually ITC exported soya milk to countries
such as China, Pakistan, Bangladesh and even
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United Arab Emirates.
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And the remaining 20% became edible oil, which
again was a highly nutritional high demand
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product.
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So the soyabean industry overall was supposed
to be very, very profitable.
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And the farmers who produced soybean was supposed
to be extremely rich.
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But guess what?
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The soyabean farmers in Madhya Pradesh were
leading a miserable life, most of them struggling
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in debt when they didn't even have enough
capital for the next season.
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And at the same time, even companies like
ITC that were procuring these crops were not
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able to make healthy profits.
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So the question was, when soybean was in such
high demand in the international market, how
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is it possible that neither the farmers nor
the export companies were able to make healthy
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profits?
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Well, as it turns out, it was because of a
major inefficiency in the supply chain of
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soybean.
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And this is how it worked out.
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On paper, there were three elements in the
supply chain, the farmers, the apmc or the
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agricultural produce market committee, and
then we had export companies like ITC and
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the wholesalers.
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So ideally, the farmers were supposed to produce
their crops and they were supposed to take
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it to the apmc.
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APMC was nothing but a body of licenced traders
set up by the government to ensure that farmers
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are not exploited by open trade.
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It's also called as the mandi.
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So at of mandi, only government licenced traders
could buy the produce from the farmers and
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no other trader was allowed.
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So theoretically, these traders were supposed
to auction for the crops, and the highest
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bidder procured the crops from the farmers.
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This way, the farmers are supposed to get
the best prices and they were supposed to
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be rich.
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But in reality, this was far far away from
the truth for three major reasons.
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Firstly, the mandis are about 30 to 50 kilometres
far away from the farmers and more than 80%
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of the farmers in our country are still small
farmers.
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So most of them either had storage facilities,
nor could they afford transportation facilities.
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Therefore, they either had to rent a truck
or they had to sell it to a junior contractor
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who then sold it to the senior contractor,
who then took it to them mandi.
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So to put that straight, they either had to
bear the cost of transportation or they had
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to sell their produce to the middlemen at
an extremely low cost.
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Secondly, the farmers had no way to find out
what exactly was a price being offered at
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a particular mandi on a particular day.
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As a result, they only had to rely on word
of mouth and take the risk of travelling 50
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kilometres with the hope that the word of
mouth was true.
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And lastly, since no other trader was allowed
to procure crops from the mandi, the licenced
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traders formed a cartel and instead of auctioning
for the highest price, they all quoted the
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same price which was way below the standard
price of the produce.
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For example, if one quintal of soyabean was
supposed to be sold at a base price of 8000
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rupees giving the farmer a profit of 2500
rupees per quintal, what the traders would
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do is all of them would quote a price of 6000
rupees only.
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Why?
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Because 1700 farmers have already travelled
50 kilometres and they cannot go back and
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they couldn't sell their produce anywhere
else.
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So the farmer had no other option but to sell
his crops at a bare minimum profit of 500
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rupees to the licenced traders.
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And worst case, if the farmer sold it to the
junior contractor, then the profits would
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go down further from 500 rupees to less than
100 rupees to sometimes even at a loss.
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And to make matters worse, even after dragging
the price down to a mere 500 rupees.
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The mandi traders did not pay the farmers
right away, and they took the hard on produce
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at an unofficial credit and paid the farmers
only when they made a profit.
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And this time of credit would range between
one week to even one month.
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And this pathetic system put the farmers in
a very very dangerous vicious cycle.
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Since the farmers did not have enough cash
flow.
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It led to low investment into farming equipments,
and other essential inputs like pesticides
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and fertilisers.
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This led to low production leading to low
margins, which again led to a cash crunch.
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In fact, even today, this is a state of most
of the farmers in our country.
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And at the end of the day, in 1999, the farmers
were losing 60 to 70% of the potential value
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of their crop with the agricultural gains
of only 25 to 30% of the global standards.
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But you know what, guys, this is when ITC
came out with a revolutionary initiative called
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the E-chaupal initiative, and they installed
a super amazing tool called the computer in
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the remotest villages of India in 1999 itself.
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And under this initiative, ITC supplied a
Windows PC and internet connection and a dot
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matrix printer to all the village centres
in its canopy.
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To take this forward, they launched a website
called soyachaupal.com, which consisted of
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three of the most important information tabs
needed for the farmers, data and weather reports
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to help the farmers decide what is the best
time to sow his seeds and to prevent him from
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sowing seeds at the wrong time.
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Number two was the best practices section.
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For example, 18 inch spacing was considered
to be best practice.
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However, many farmers were spacing the seed
rows nine inches apart, which eventually resulted
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into less yeilds.
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And thirdly, they had the Market Information
section that gave the important market metrics,
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including the daily price and volume traded
at the mandis and the ITC centres.
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And this was supported by other important
pages like the q&a section, the new section
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and even the crop Information section.
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Secondly, they appointed a lead farmer called
the sanchalak who was responsible for helping
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the farmers out with a computer operation.
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And he was given a commission of 0.5% on the
basis of the farmers productivity.
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So because of the incentive, he automatically
worked hard to help the farmers out with the
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computer operation and to enable them to improve
their productivity.
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And thirdly, ITC convinced the government
to allow the company to procure the produce
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directly from the farmers with the promise
that they will provide reasonable cost and
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will build an efficient and profitable supply
chain.
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And that is all Ladies and gentlemen, the
implementation of the E-chaupal began in 1999.
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Back then ITC had five processing units in
Madhya Pradesh and 39 warehouses making a
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total of 44 touch points, covering 80% of
the farmers in Madhya Pradesh, to which the
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farmers could bring the soyabean produce.
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The best part was that these points were only
20 to 30 kilometres away from the farmers
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as compared to the 30 to 50 kilometre range
of the mandis.
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And this amazing setup ladies and gentlemen,
changed the way the farmers of Madhya Pradesh
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traded soyabeans.
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And this is how the system worked out.
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First of all, the farmers were given all the
important information through the E-chaupal
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computers, which included everything from
weather forecasts all the way up to the seed
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sowing techniques.
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Therefore, the farmers were confidently able
to invest in their crop.
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This reduced the risk of the spoiled crops
and at the same time it increased the yield.
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Then after the harvesting was done, they could
directly have a look at the website to see
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how much price was being offered at the apmc
and the ITC centre on a daily basis.
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Eventually, they could compare the prices
and then decide where to go to have higher
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profits.
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In this case, ITC even reimburse the transportation
cost to the farmers because of which, they
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do not have to depend on the contractors to
sell their yield at a bare minimum profit.
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After that, when they arrived at the ITC centre,
the processing facility also included a soil
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testing lab.
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And here's where top great scientists offered
the best recommendation for fertilisers or
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additives based on the chemical composition
of the farmers soil sample.
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And lastly, the farmer was given cash on delivery
for the sale of his products immediately and
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this was a very big deal because it enables
him to buy fertiliser and other essential
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products that were needed for the next season.
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And this wonderful system, ladies and gentlemen,
turn the disastrous, vicious cycle into a
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virtuous cycle by which the farmers had good
cash flow, which led to high investment into
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farming equipments that led to high productivity,
eventually giving them thicker margins and
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better cash flow.
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On top of that, in spite of all these reimbursements,
this setup was so amazing that even ITC ended
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up saving $3 per tonne on transportation,
and at the same time, the farmers are able
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to earn $8 extra per tonne.
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Furthermore, this move turned out to be extremely
profitable for ITC, because they got raw material
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from the farmers at a low cost.
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And were able to use that for their fmcg division.
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And today, each E-chaupal initiative already
has become the largest initiative among the
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internet based interventions in rural India,
reaching out to more than 4 million farmers
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across 35,000 villages in 10 different states.
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And today, these crops include soya bean,
coffee, wheat, rice, pulses, and even shrimp.
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This is the incredible story of the E-chaupal
initiative.
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And this brings me to the most important part
of the episode and that are the lessons from
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the case study and the business opportunities
arising in the Indian agricultural space.
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Before we move on, I want to thank our wonderful
partners for today's episode and that is goDutch.
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People just like the farmers were stuck in
a dangerous vicious cycle because of not having
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enough cash flow.
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Have you realised that knowingly or unknowingly
even we are stuck in a vicious cycle because
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of not tracking our expenses, because if you
don't know how much you will be spending,
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you don't know how much you will save.
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And if you cannot project your savings, you
cannot make strategic investment decisions.
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And eventually, this little complacency ends
up costing us a lot of money in the future.
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Moving on to the lessons from the case study.
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There are three important lessons to learn
from ITC's E-cahupal initiative.
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Number one, technological accessibility, government
regulation and cash rich stakeholders are
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the three pillars that can catalyse the growth
of rural sectors of India.
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In this case, the farm bill now legally allows
companies to procure the produce directly
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from the farmers without seeking special permission.
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And thanks to Jio kisaan, farmers can now
witness the next level of the E-cahupal initiative.
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Secondly, we are seeing the rise of extremely
cash rich and not so profitable companies
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like zomato and swiggy, who are building a
b2b supply chain in order to supply raw materials
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directly to the restaurants.
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And this is where projects like zomato hyper
pure come in.
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And just like ITC cannot own the supply chain,
but only make it super efficient and profitable
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both for themselves and for the farmers.
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If this is done by rest of the companies,
the inefficiency caused the apmc traders will
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get eliminated resulting into huge profits
to grofers, zomato, swiggy, and other companies.
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And lastly, most importantly, if you're someone
who wants to invest into organic farming or
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hydroponics please read about something called
contract farming because it's opening up new
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supply chains that will eventually present
you with game changing business and investment
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opportunities.
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And if you find something worth sharing, please
feel free to drop a comment or write an email
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to us.
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That's all from my side for today guys, if
you learned something valuable, please make
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sure to hit the like button in order to make
YouTube baba happy.
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And for more such insightful business and
political case studies please subscribe to
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our channel.
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Thank you so much for watching.
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I will see you in the next one.
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Bye bye
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