VISION AND PLANNING BEHIND THE E-CHOUPALS

Implementing and managing e-Choupals is a significant departure from commodities trading.

Through its tobacco business, ITC has worked in Indian agriculture for decades, from research to
procurement to distribution. ITC’s translation of the tactical and strategic challenges it faced and
its social commitment into a business model demonstrates a deep understanding of both agrarian
systems and modern
management. Some of the guiding management principles are:
Re-engineer, Not Reconstruct
The conventional view of transforming established business systems begins with the failures of
the current system and develops means to change it. ITC took a different approach by looking at
the successes of the current system and identifying what they could build on. ITC not only
retained the efficient providers within the mandi system but also created roles for some inefficient
providers. This philosophy has two benefits. First, it avoids “reinventing the wheel” in areas
where ITC would not be able to add value through its presence. Second, it recruits and engages
members of the rural landscape there by making their expertise available to ITC while preventing
their expertise from being shared with ITC’s competition. A good example of this in action is the
role created for the commission agents as discussed later.
Address the Whole, Not Just One Part
The farmers’ various activities range from procuring inputs to selling produce. Currently, the
village
trader services the spectrum of farmers’ needs. He is a centralized provider of cash, seed,
fertilizer,
pesticides, and also the only marketing channel. As a result, the trader enjoys two competitive
benefits.
First, his intimate knowledge of the farmer and village dynamics allow him to accurately assess
and
manage risk. Second, he reduces overall transaction costs by aggregating services. The linked
transactions
reduce the farmers’ overall cost in the short term, but create a cycle of exploitative dependency in
the
long-term. Rural development efforts thus far have focused only on individual pieces rather than
what the
entire community needs. Cooperatives have tried to provide agricultural inputs, rural banks have
tried to
provide credit, and mandis have tried to create a better marketing channel. These efforts cannot
compete
against the trader’s bundled offer. Functioning as a viable procurement alternative, therefore,
must
eventually address a range of needs, not just the marketing channel.
An IT-Driven Solution
From the conception of the model, an IT-based solution was recognized as fundamental to
optimizing
effectiveness, scalability, and cost. Information technology is 20% of all the effort of ITC’s e-
Choupal
business model, but is considered the most crucial 20%. The two goals envisioned for IT are:
• Delivery of real-time information independent of the transaction. In the mandi system, delivery,
pricing, and sales happen simultaneously, thus binding the farmer to an agent. E-Choupal was
seen as
a medium of delivering critical market information independent of the mandi, thus allowing the
farmer an empowered choice of where and when to sell his crop.
• Facilitate collaboration between the many parties required to fulfill the spectrum of farmer
needs. As
a communication mechanism, this goal is related to the commitment to address the whole system,
not
just a part of the system.
It should be noted that ITC did not hesitate to install expensive IT infrastructure in places where
most
people would be wary of visiting overnight. It is a manifestation of the integrity of rural value
systems
that not a single case of theft, misappropriation, or misuse has been reported among the almost
2,000 e-
Choupals.
Modularity of Investments, in Size and Scope
ITC managed its investments modularly along the scope and scale axes in what it terms “rollout-
fixitscale
up” and “pilot-critical mass-saturation.” This incremental control of investment levels along with
the clarity of revenue streams and the social import were critical in getting board approval for the
initiative.
Risk Assessment and Mitigation
ITC identified the following risks as it designed the business model:
• Radical shifts in computing access will break community-based business models.
• The sanchalaks are ITC’s partners in the community, and as their power and numbers increase,
there
is a threat of unionization and rent extraction.
• The scope of the operation: the diversity of activities required of every operative and the speed
of
expansion create real threats to efficient management.
Managing Bureaucracy
When the e-Choupals were conceived, they faced a fundamental regulatory obstacle. The
Agricultural
Produce Marketing Act, under whose aegis mandis were established, prohibits procurements
outside the
mandi. ITC convinced the government that e-Choupals would operate according to the spirit of
the Act
and thus e-Choupal procurement was in line with its goals. Since ITC would not be using the
mandi
infrastructure for its procurement, and would have to incur its own costs with the e-Choupal
infrastructure, the government offered to waive the mandi tax on the produce procured through
the e-
Choupal. However, ITC recognized that the tax was a major source of revenue for the
government and
local mandis and, as ITC’s competition was also subject to the tax, the tax itself was not making
ITC
uncompetitive. ITC therefore chose to continue paying the tax rather than risking the
relationships with
the government and the mandis.

THE E-CHOUPAL SYSTEM

The re-engineered supply chain looks very different from the existing system and has the
following
stages:
Figure 3. E-Choupal Supply Chain
Pricing
The previous day’s mandi closing price is used to determine the benchmark Fair Average Quality
(FAQ) price at the e-Choupal. The benchmark price is static for a given day. This information and
the previous day mandi prices are communicated to the sanchalak through the e-Choupal portal.
The commission agents at the mandi are responsible for entering daily mandi prices into the e-
Choupal. If and when the Internet connection fails, the sanchalak calls an ITC field
representative.
Inspection and Grading
To initiate a sale, the farmer brings a sample of his produce to the e-Choupal. The sanchalak
inspects the produce and based on his assessment of the quality makes appropriate deductions (if
any) to the benchmark price and gives the farmer a conditional quote. The sanchalak performs the
quality tests in the farmer’s presence and must justify any deductions to the farmer. The
benchmark price represents the upper limit on the price a sanchalak can quote. These simple
checks and balances ensure transparency in a process where quality testing and pricing happen at
multiple levels.
If the farmer chooses to sell his soy to ITC, the sanchalak gives him a note capturing his name,
his village, particulars about the quality tests (foreign matter and moisture content), approximate
quantity and conditional price.
Weighing and Payment
The farmer takes the note from the sanchalak and proceeds with his crop to the nearest ITC
procurement hub, ITC’s point for collection of produce and distribution of inputs sold into rural
areas. Some procurement hubs are simply ITC’s factories that also act as collection points. Others
are purely warehousing operations. ITC’s goal is to have a processing center within a 30 - 40
kilometer radius of each farmer. There are currently 16 hubs, but there will eventually be 35 in
the state of Madhya Pradesh. At the ITC procurement hub, a sample of the farmer’s produce is
taken and set aside for laboratory tests. A chemist visually inspects the soybean and verifies the
assessment of the sanchalak. It is important to note that this is the only test assessment before the
sale. Laboratory testing of the sample for oil content is performed after the sale and does not alter
the price. The reason for this is that farmers, having historically been exploited, are not
immediately willing to trust a laboratory test. Therefore pricing is based solely upon tests that can
by understood by the farmer. The farmer accepts foreign matter deductions for the presence of
stones or hay, based upon the visual comparison of his produce with his neighbors. He will
accept moisture content deductions based upon the comparative softness of his produce when he
bites it. ITC is working to change farmer attitudes towards laboratory testing. It is developing an
appreciation of better quality by using the subsequent lab tests to reward farmers with bonus
points if their quality exceeds the norm. At the end of the year, farmers can redeem their
accumulated bonus points through the e-Choupal for farm inputs, or contributions toward
insurance premiums. After the inspection, the farmer’s cart is weighed on an electronic
weighbridge, first with the produce and then without. The difference is used to determine the
weight of his produce.
Hub Logistics
After the inspection and weighing are complete, the farmer then collects his payment in full at the
payment counter. The farmer is also reimbursed for transporting his crop to the procurement hub.
Every stage of the process is accompanied by appropriate documentation. The farmer is given a
copy of lab reports, agreed rates, and receipts for his records. Samyojaks, who are adept at
handling large amounts of cash, are entrusted with the responsibility of payment, except at
procurement centers near large ITC operations where ITC is handles cash disbursement.
Samyojaks also handle much of the procurement hub logistics, including labor management at the
hub, bagging (if necessary), storage management, transportation from the hub to processing
factories, and handling mandi paperwork for the crops procured at the hub. For his services in the
procurement process, the samyojak is paid a 0.5% commission.
Farmer Gains
Prior to the introduction of e-Choupal, farmers’ access to agricultural information was incomplete
or inconsistent. The only sources of information were word of mouth within the village and the
commission agent. E-Choupal allows farmers daily access to prices at several nearby mandis.
Some e-Choupal sanchalaks have taken this a level further by accessing external pricing sources
such as prices on the Chicago Board of Trade, in order to track global trends and determine the
optimum timing of sales. Moreover, through e-Choupal, farmers have access to prices and make
the critical decision of when and where to sell his crop. Both factors work together to provide the
farmers a better price for their crops. Under ITC’s system, farmers no longer bear the cost of
transporting their crops to the mandi and are instead reimbursed for transport to the procurement
hub. The transaction at the ITC hub is also much faster than at the mandi, usually taking no more
than two or three hours. Moreover, ITC’s electronic weighing scales are accurate and not
susceptible to sleight of hand like the manual weighing system at the mandi. The system also
does not require produce to be bagged, which avoids the associated loss of produce by intentional
spillage. Thus the e-Choupal system has logistical and transaction efficiencies. Finally, the ITC
procurement center is a professionally run operation where the farmer is treated with respect and
served as a customer. The dignity accorded farmers by the professional process of the e-Choupal
cannot be understated. ITC’s recognition that farmers are not simply agricultural producers, but
integral partners in the supply process has elevated the level of respect paid to them. Simple
provisions such as a shaded seating area where farmers can sit while waiting for their paperwork
serve as indicators of ITC’s respect for farmers and their produce. Though intangible, the self-
confidence created by this professional treatment is affecting the way farmers conduct
themselves. Sanchalaks and even commission agents have noted a change in farmer attitudes. The
incremental income from a more efficient marketing process is about US$6 per ton, or an increase
of about 2.5% over the mandi system. Farmers also can make use of the information available to
them through e-Choupal to improve yields. Moreover, the seed, fertilizer, and consumer products
offered them through e-Choupal cost substantially less than through other local sources such as
village traders. Thus there are meaningful net economic benefits to farmers, and it is having a
measurable impact on what farmers choose to do: in areas covered by e-Choupals, the percentage
of farmers planting soy has increased dramatically, from 50 to 90% in some regions, while the
volume of soy marketed through mandis has dropped by as much as 50%.

Additional Services: Credit and Insurance

Farmers’ low income and difficulty in accessing credit severely limits their capacity to pursue
opportunities within and outside the agriculture sector. Access to credit has long been considered
a major poverty alleviation strategy in India. Demand for rural credit is estimated at US$31.6
billion (Rs 1.43 trillion). The Indian government has implemented a number of subsidized credit-
related programs. Among such programs, the Integrated Rural Development Program (IRDP),
started in 1978, was a major national rural poverty alleviation program with a large credit
component. Under the IRDP, nearly 53 million families were assisted with bank credit of US$684
million (Rs. 31 billion) and subsidy of US$231million (Rs. 10.5 billion). But its impact had not
matched the resources expended. The loans were not tailored to meet individual needs and it
lacked the support systems necessary to help farmers.
Many financial institutions are hesitant to serve rural India due to lack of credit history, high
delivery, transaction, and administration costs, and a perception of high risk that leads to high
borrowing costs imposed on farmers. ITC proposes to address these problems through e-Choupals
and partnerships with financial institutions to capture needed information and offer new products:
• Capturing Credit History. Farmers in rural India borrow money from local moneylenders,
through government incentives, friends, relatives, or traders. Local moneylenders and
intermediates are aware of farmers’ creditworthiness and are therefore willing to loan money,
albeit at a high interest rate. Through e-Choupal, ITC now has the capability to manage credit risk
through its sanchalak network which can be used not only to verify creditworthiness of individual
farmers but also to continuously monitor credit risk. ITC will be able to create a consolidated
farmers’ database with information pertaining to their holdings and transactions that can be used
as a source of credit report profiles.
• Transaction and Administration Costs. For major financial institutions, transaction costs
involved in servicing the rural market have been high because of the difficulty in reaching the
market. EChoupal can help overcome this problem by leveraging the IT infrastructure and the
sanchalak network, thereby lowering administrative costs.
ITC plans to partner with larger banks such as ICICI to design products for rural India. Some of
the products being designed include:
• Non-cash loans for farm inputs. Instead of giving cash to the farmer directly, the financial
institutions will purchase farm inputs on behalf of the farmer. Farmers are expected to pay back
loans for the purchase price to the financial institution.
• Loans to sanchalaks. Instead of giving loans directly to farmers, loans will be given to
sanchalaks
who, in turn, will loan money to farmers. Sanchalask can manage credit risk better than financial
institution because they have better access to the farmer, and therefore more accurate information.
• Direct loans to farmers based on sanchalak recommendations. In this case, sanchalaks’
commissions are based on the loan recovery and therefore the have incentive to monitor the risk
on a continuous basis.
• Insurance and Risk Management Services. Insurance products have been designed to deal with
rural cash-cycles. There is recognition that in bad years, farmers may not be able to pay the
insurance premium. Rather than penalize the farmer when his policy, ITC allows for catch-up
payments in later years or, as an alternative, the reduction of the final payout. ITC uses the e-
Choupal Web infrastructure to set up and issue electronic reminders for premium payments. This
addresses a major weakness of the current insurance system. The agents currently selling
insurance have little incentive to encourage renewals and the lapse rate among policy is high. A
system of interlocking instruments has been set up so that insurance premiums can be credited
with quality bonus points from the farmer’s soy sale. The sanchalak is assisted in making the
sales pitch by informational Web-casts and video presentations.

TECHNOLOGY
Characteristics of the Operating Environment
Understanding the constraints imposed by the physical and social environment in e-Choupals
operate is necessary to provide the context for understanding the system design.
Overcoming Power Constraints
Power availability in rural India is unreliable and the quality of power is sub-standard. As power
is usually available for only a few hours a day and at on a sporadic schedule, the e-Choupal
computer cannot always be accessed when information is needed. Access to information in a
timely manner is critical to the success of the business model. ITC has overcome the problem of
local power supply by providing a battery-based UPS (uninterrupted power supply) backup. With
the reliability of a battery back up, the sanchalak can use the system at least twice a day—in the
morning to check the prevailing mandi prices, and again in the evening to check the rate ITC is
offering the next day. While the battery backup addresses the power supply issue, insufficient line
power during the day poses the challenge of not having enough power to charge the backup
battery. This has caused ITC to explore other power sources and ultimately ITC decided to use
solar battery chargers. One full day of sunlight is enough to charge the battery for 70 to 80
minutes of computer usage.
The second problem with power is quality. Voltage fluctuations are endemic. The UPS unit is the
most affected component. As a result of the erratic power supply, fuses are susceptible to being
blown. To overcome this problem, ITC plans to install specially designed UPS units that remain
effective between90V and 300V. In order to control voltage spikes, they have introduced spike
suppressors and filters. Phase imbalances, which lead to damage of equipment, have been
addressed through the use of isolation transformers to correct neutral voltages.
Transportation
Most e-Choupal villages lack proper roads, limiting vehicle access. As such, public transportation
access to many of the villages is infrequent. Some villages are served only once or twice a day by
rural taxis. The population relies on two-wheeled bicycles and motorbikes and bullock carts as
the main means of transportation. Moving equipment into and out of the villages is not an easy
task. Providing system support and maintenance requires the technician to travel from outside
areas to visit the e-Choupal. For these, and other reasons ITC initially placed e-Choupals in
villages that are within a ten to fifteen kilometer radius of a city.
Telecom Infrastructure
Telecommunication infrastructure in villages is poor. Telephone exchanges are subject to sporadic
power supply and have limited battery backup. When power is lost, phones cease to function. In
addition, there is no local support staff to maintain or troubleshoot telephone exchanges. The
support team at the main exchange typically is responsible for eight to ten villages and is short-
staffed. The turn-around time for fixing problems is often measured in days, not hours. Overhead
telephone lines are exposed to the elements and run alongside high voltage power lines which can
cause transmission quality problems. Currently, village telecommunication infrastructure is
designed to carry voice traffic only and transmission speed is so slow that it renders Internet
access impractical.

THE SOCIAL IMPACT OF E-CHOUPAL

A major impact of the e-Choupal system comes from bridging the information and service gap of
rural India. Agricultural research centers (such as the Indian Council for Agricultural Research),
universities, and other agencies in India have developed several practices and technologies to
improve productivity and crop quality. The impediment to implementation has been affordable,
large-scale dissemination of this knowledge. The e-Choupal system leverages technology that can
reach a wide audience literally at the click of a mouse. The constant presence of sanchalaks, who
themselves are farmers who apply these techniques, ensures that the practices actually make their
way from the Web site to the field. Some areas about which information and services are provided
by the e-Choupal Web site and e-commerce system.
include:
• Weather. This is a very popular section on the Web site because it provides localized weather
information at the district level. Other public sources generally provide only aggregated state
level weather information. E-Choupal’s weather information is intelligently coupled with advice
on the activities in the agricultural lifecycle. One farmer observed that prior to e-Choupal,
unreliable weather information would result in prematurely planted seeds that would be washed
out by early rains. The availability of accurate rain information has cut losses due to weather by
more than half.

• Agricultural Best Practices. Scientific practices organized by crop type are available on the
Website. Additional questions are answered through FAQs and access to experts who respond to
emails from the villages.
• Customized Quality Solutions. After sale of a crop is completed, ITC performs laboratory
testing of the sample collected. Based on these results, farmers are given customized feedback on
how they can improve crop quality and yield.
• Intelligent Product Deployment. Inputs such as fertilizers and pesticides are not generic in their
application. The optimal application is relative to the soil and crop. Determining these parameters
requires services such as soil testing. Past providers brought inputs but not the information and
services required to make them effective. ITC’s “full-service” approach corrects this by coupling
the input sale to the information on the Web site and services such as soil testing.
The collective impact of better information and new services can be gauged by the fact that prior
to e-Choupal, soy cultivation was on the decline. Productivity was stagnant and farmers saw no
future in it. In Khasrod, soy production declined from a high of 100% to 50% of farmers planting
soy and was expected to decline further. Since ITC’s involvement, soy is seen as profitable again
and nearly 90% of farmers are planting the crop. A second major area of impact stems from the
ability of the e-Choupal system to open a window on the world and thus impact the future of the
villages in which they operate. Computers are bringing the same resources to villages as they
brought to urban India, and their impact is no less dramatic. This, coupled with higher incomes
and changes in farmers’ attitudes, is causing several shifts in the social fabric of village life.

CHALLENGES
The e-Choupal system faces multiple continuing challenges. The first is the possibility that
radical shifts in computing access could fundamentally alter community-based business models.
That is one of the reasons ITC seeks to build and control its own ICT infrastructure. Second, as
the number and power of the sanchalaks increase, there is a threat that they will unionize and
extract “rents” – unwarranted additional payments based on their increasing influence on the
system. Third, ITC’s relationship with the samyojaks seems to be uneasy, and competitors with
the financial muscle to invest for scale could conceivably use discontented samyojaks as the base
to obtain market share. Fourth, the scope of the e-Choupal operation, the diversity of activities
required of every operative, and the speed of expansion create real threats to execution
management. ITC has awakened the aspirations of farmers. If ITC fails to fulfill these aspirations,
the farmers will look elsewhere for satisfaction. As an example, in our conversation with a
sanchalak about the potential for Indian onions to succeed in the global market, he also
understood what the key to success was – better seeds. He half-complained that he had told ITC
several times to begin selling better onion seeds, but he had not heard back from them. In a
competitive environment, ITC would have to provide faster and more responsive customer
service to maintain its distribution system. The computer in the village is no doubt revolutionary,
but there is also no doubt that the villages we saw were stratified to the point where not
everybody can walk up to the sanchalak and ask to be shown the computer. There are clearly
some segments of village society, including the entire adult female population, that does not have
access to the computer—although this may not be true in all regions. The presence of the
computer by itself will not transcend this barrier unaided. This is not a reflection on ITC, but
rather the nature of society in rural Madhya Pradesh. The solution might lie in observing where
the system has driven social change. Village farmers belong to many social and economic strata.
Yet the sanchalaks are servicing all of them equally. In this case, the potential for commerce has
broken a barrier that society has built. Similarly, engagement with poorer segments of society and
women may be possible through the active distribution of products tailored specifically to them.

STRATEGY FOR THE FUTURE

ITC recognizes the limitations of today’s e-Choupals as a vehicle of procurement efficiency. Not
every crop lends itself to such an intervention. In crops such as soy where value can be
maximized, follower swill soon imitate ITC and eliminate the company’s competitive advantage.
ITC’s vision for e-Choupal extends many generations as e-Choupal evolves into a full-fledged
orchestrate of a two-way exchange of goods and services between rural India and the world. The
soy e-Choupal is “Wave 1,” with several more to follow.
• Wave 2. The source of value in this generation will be identity preservation through the chain.
This is a significant source of value in crops such as wheat, where the grade of the grain
determines its end use. The ability to separate different grades from field to consumer will
command a price premium. E-Choupals in Uttar Pradesh have already started wheat procurement.
• Wave 3. This wave takes identity a step further by building the concept of traceability into the
supply chain. This is vital for perishables where traceability will allow ITC to address food safety
concerns and once again provide a value that the customer is willing to pay for. Shrimp is a good
example of a crop for which Wave 3 will be important. ITC’s intervention in such products will
occur level of production. ITC will define standards that producers must adhere to and work with
farmers to ensure product quality. Farmers in turn will get the best price from ITC because ITC
commands the traceability premium.
• Wave 4. The first three waves fill institutional voids while Wave 4 creates institutions. The first
three waves apply to environments in which ITC is the sole buyer in the e-Choupal channel. In
commodities where the underlying markets have reached a high degree of efficiency, such basic
sources of value will not exist. In crops such as these, e-Choupal will serve as the market-place
where multiple buyers and sellers execute a range of transactions. A good example of this is
coffee. ITC’s source of value will be the sunk cost of the IT infrastructure and the transaction
fees.
• Wave 5. While the first four waves related to sourcing from rural India, the fifth wave
elaborates
the rural marketing and distribution strategy. This is not the same as the rudimentary distribution
of agri-inputs that is being done today. ITC plans to bring together knowledge of the customer,
knowledge of the business, deployed infrastructure, its reputation, and experience gained over the
first four waves, with an organization of people, processes, and partners. This base will allow ITC
to bring value-added products and services to rural India.
• Wave 6. After the sourcing of goods from rural India, ITC’s last wave has the ambitious vision
of eventually sourcing IT-enabled services from rural India. Telemedicine, eco-tourism,
traditional medicine, and traditional crafts are some of the services that can be sourced from rural
India. While still a ways off, it is an agenda that inspires scale of the vision and potential impact
on development in rural India.