(Fortune Magazine) -- Here's a business-school case study waiting to be written: a national distribution system that guarantees that a third of its goods never make it to market. That has been the problem with agriculture in India - a place that likes to tell the world these days that it is as efficient and growth-oriented as China.

But consider the obstacles that have long been faced by farmers there. Until recently they were forced by law to sell their produce at mandis, a network of local markets originally introduced to protect poor farmers from exploitation but now controlled by cartels of traders, petty bureaucrats, and moneylenders. There they were paid the official minimum price or less for their produce, but no one told them what vegetable varieties sold well or showed any interest in improving quality. The produce was then sent via other middlemen on a slow and often hot journey to retail customers, where, according to estimates by agriculture expert Abhijit Sen, a member of India's planning commission, between 30% and 40% of it would rot before it got to market. With few refrigerated packing centers, no regional distribution network, and an inefficient fleet of trucks, India can't sustain large-scale vegetable production, let alone an export business.

Now market pressure - the potential for export and a rapidly growing domestic demand for reliable produce from new supermarket chains-is driving change and opening up opportunities for investment by multinationals such as PepsiCo, which has been involved in Indian agriculture since the 1980s, and Britain's Tesco. "Organized supermarkets have to have an organized back end," says Lynn Forester de Rothschild, founder and CEO of E.L. Rothschild, a British investment firm owned by a branch of the Rothschild banking family. E.L. Rothschild is a fifty-fifty investor in FieldFresh with Bharti Enterprises, one of India's two biggest telecom operators, which is planning to set up a nationwide retail chain, probably with Tesco, as well as India's first large-scale fruit and vegetable export business. "There is a compelling case for India to feed the world, using inherent strengths that haven't been exploited at all," says Bharti chairman Sunil Mittal, some of whose produce already goes to Tesco.

No wonder Emann Singh Mann is a happy farmer-a rare commodity in India's northern state of Punjab, where overfarming and a falling water table have affected productivity on the broad plains that gave rise to India's first green revolution in the 1960s, a U.S.-led effort that helped feed India's starving millions by introducing high-yield varieties of wheat and rice. FieldFresh has leased 90 acres of Mann's land to grow vegetables that need less water than the wheat, rice, and sugarcane he used to grow. It will pay him slightly more than the $30,000 a year he was getting, and it hires his tractors as well as pays his workers. "I might have got out of agriculture," says Mann, 35, the son of a prominent local politician, who opened a computer-design school in nearby Chandigarh 18 months ago as a hedge. Now okra and chilies grown on Mann's land go to a warehouse for cooling, then travel 125 miles by road in a refrigerated truck to Amritsar, where they're put on a flight to Britain.

FieldFresh has 78 farms with 4,200 acres on lease in Punjab producing beans, snow peas, carrots, okra, baby corn, and other vegetables for export to Europe and the Middle East. In other parts of India it is buying produce on contract from farmers, guaranteeing to pay market prices, though farmers are free to sell elsewhere. This contract system will probably become FieldFresh's main business model once farmers have learned to produce consistently high-quality crops using new seeds, fertilizers, and techniques the company provides. The benefits are already visible: "It has had an astounding impact on my village," says Mann, "with more employment and higher family earnings, alleviating a lot of social problems-and I'm learning new ways of doing things."

With low wages of $1 to $3 a day in a labor-intensive business, India has a clear cost advantage over many producing countries. But FieldFresh's initial export attempts last year proved disastrous: 15 out of 20 containers of grapes, as well as shipments of mushrooms and okra, were wasted because of bruised skins, pest attacks, and airport delays. "It was a learning phase," says Mittal, who has persuaded the government to set up India's first perishable-produce centers at airports in Delhi and Amritsar, and to relax lengthy and often corrupt customs procedures. But even though Tesco is among FieldFresh's overseas buyers, the produce company is still finding it difficult to break into foreign markets and to achieve the required levels of quality and rapid delivery. FieldFresh hopes its exports will grow this year to $15 million, after an initial investment of $50 million.

Reliance Industries, one of India's two largest industrial groups, has even bigger plans. In June its chairman, Mukesh Ambani, announced a $5.6 billion multiyear investment in agriculture and retail. He aims to make a new company, Reliance Retail, the sector's dominant player. Links are being established with farms on several thousand acres in Punjab, West Bengal, Maharashtra, and elsewhere, with rural centers providing goods for farmers and handling their produce. A supply chain is planned from these hubs to Reliance Retail's outlets as well as to foreign buyers. Ambani says he aims to deliver "better returns for the Indian farmer and producer by connecting them directly to Indian and global consumers, and lower prices and better product quality for consumers." He is already growing mangoes on land adjacent to Reliance's oil refinery at Jamnagar and plans to become India's biggest exporter, selling 3,600 tons annually within five years.

With 77% of India's population relying on agriculture for a living, improvements in efficiency and new markets have the potential to benefit large numbers of people. The initiatives by Bharti, Reliance, and other companies will undoubtedly bring advantages of scale that have largely been missing in a nation where the average land holding is only 2½ acres and 60% of agricultural output is consumed by farmers' families. But anything that might lead to consolidation or to farmers' being displaced from their land is politically sensitive-especially at a time when crop failures and bankruptcy have led to an average of 15,000 farmer suicides annually over the past five years, according to official records. Even Mann's father, Simranjit Singh Mann, who heads a Sikh political party in Punjab, has found it politically expedient to attack the state government for providing low-priced agricultural land to Reliance for a rural farming center.

India Agriculture Secretary Radha Singh is backing the big companies' entry into vegetables and fruits because of the obvious growth potential and the impact they can have on other farmers' performance. She is also encouraging states to change laws to relax the mandis' monopoly and improve infrastructure, and slowly they are beginning to do so. "Until recently," Singh says, "the government has never looked at linkages beyond basic food production because the focus has been on self-sufficiency."

PepsiCo (Charts) began working with Punjab farmers on pulping tomatoes in return for obtaining government permission to produce and sell its drinks in India. It introduced new varieties that have helped boost the state's tomato crop from 18,000 tons in 1988 to 300,000 tons this year. Although no longer involved with tomatoes, Pepsi has a five-year program with the Punjab government to provide several hundred farmers with four million sweet-orange trees by 2008 for its Tropicana juices. It is also developing a seaweed crop for a food-gelling agent on 4,000 rafts off the southern coast of India. And it has introduced Punjab farmers to high-yielding varieties of other crops, such as basmati rice, mangoes, potatoes, chilies, peanuts, and barley, that it uses for its Frito-Lay snacks and sells to domestic and foreign buyers. Last year its agriculture exports totaled $40 million. Pepsi (along with Coca-Cola) has recently been accused in India of having unsafe levels of pesticides in its cola beverage, which it denies. But that has not affected the agriculture initiatives. "This started off as a government obligation," says Abhiram Seth, Pepsi's exports director, "then became corporate social responsibility, and is now a business."