Indian Agriculture and Policy in Transition

Maurice LandesMarket and Trade Economics Division

Economic Research ServiceU.S. Department of Agriculture

Introduction

The environment for Indian agriculture and policy has changed:

• Changes in food demand due to rising incomes, urbanization, and diet diversification pressure production and marketing systems

• Flow of benefits from adoption of Green Revolution technology has slowed

• More open trade—both multilateral and unilateral—challenges old, closed economy structures

• Advent of competitive multi-party and regional politics has changed political environment for agricultural policy

Introduction

Indian agriculture is faring poorly in this new environment:

• Low yields relative to world averages• Slowed growth of output and yields• Subsidies rising while rates of new public & private

investment remain low• Supply-demand imbalance an emerging threat to food price

stability• Agricultural marketing and processing system is

fragmented & mostly unready to compete in global markets

Indian and world average yields for major crops

Variable

Source: USDA Production, Supply, and Distribution database.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Whe

atRice Corn

Peanuts

Rapese

ed

Soybe

ans

Sunflo

werseed

Cotton

Tons

/ha

WorldIndia

Public investment and subsidies in Indian agriculture

Sources: GOI, Ministry of Agriculture; GOI, Ministry of Finance; Mullen, Orden,and Gulati, 2006.

0

50

100

150

200

250

300

350

1990

1992

1994

1996

1998

2000

2002

2004

Bil.

199

3/94

Rup

ees

Food subsidy

Input subsidies

Public investment (in/for agriculture)

Public investment (in agriculture)

Introduction

Long-standing policies and attitudes have proven difficult to transform:

• Past success in achieving food grain self-reliance• Protecting employment—including agricultural

employment—remains a top priority• Reducing Government role in markets is risky due to

importance of food in consumer price stability• Legacy of economic planning & closed economy• Agricultural reform requires State Government action

Pressures for change are increasing• Skepticism of open economy, private-sector driven

solutions adopted in other countries

Trade Developments

India’s agricultural imports have been showing strong growth:

• Demand is outstripping supply• Demand is diversifying• Rupee is appreciating vs. dollar

India’s major agricultural imports

Sources: Food and Agriculture Organization, FAOSTAT database;GOI, Ministry of Agriculture.

0.0

1.0

2.0

3.0

4.0

5.0

1990

1992

1994

1996

1998

2000

2002

2004

$ B

illio

n

Cereals & prepRaw cottonFruit & vegetablesPulsesEdible oilsOther

Consumption growth by food group in India (1991-2004)

Source: Food and Agriculture Organization, FAOSTAT database.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Oilcrop

sEgg

sFrui

ts

Vegeta

bles

Milk Fish Meat

Cereals

Sugarc

rops

Pulses

Gro

wth

rate

Consumption growthPopulation growth

Trade Developments

Growing pressure to reduce applied agricultural tariffs unilaterally:

• Examples: edible oils, pulses, wheat, corn• Aimed at reducing pressure on domestic prices• But, both bound and applied tariffs often overstate

actual levels of protection• ‘Redundant’ tariffs afford policy flexibility & assured

protection in all regions & seasons

India's bound and applied tariffs forselected agricultural products

Commodity Bound Appliedrate rate 1/

PercentMajor imports:

Pulses 100 10Wheat 100 0Onions 100 5Crude soybean oil 45 40Crude palm oil 300 45Refined soybean oil 45 45RBD palm olein 300 52.5

Others:Corn 70 0Rice 70 70Oilseeds 100 30

1/ As of August 2007.Sources: GOI, Ministry of Agriculture; USDA/FAS.

Trade Developments

SPS policies emerging as key issue:

• Examples: GM traits, edible oils, wheat, corn• Weak capacity to set/implement SPS policies

• Little investment in human/institutional capacity for harmonized SPS system prior to removal of QRs in 2001

• USDA efforts—including through AKI—to strengthen capacity

• Private sector involvement may be key

Trade Developments

ERS research indicates that growth in some sectors may benefit from more open trade policies:

• Poultry: Importance of competitively-priced corn• Soybeans: Imports that permit increased processing capacity

use could generate efficiency gains that benefit producers and consumers

• Apples: Relatively high quality & high-priced imports demonstrate opportunity for domestic growers

Private sector likely to play key role in breaking down anti-import bias

Poultry Sector Analysis

Results of integration and corn free trade scenariosProjections for 2010

Variable 75 percent Integration +integration only free trade

Change from baselinePercent

Poultry meat prodiction 19 34Poultry meat price -15 -26

Egg production -6 17Egg price 5 -14

Corn imports 0 318Soymeal exports -3 -14Source: Landes & Persaud

Oilseed Sector Analysis

Scenario: Oilseed import liberalizationVariable Major oilseeds and products

% change from baselineOilseeds

Production 1.4Price 1.6Crush 44.5Imports (mil. tons) 8.7

OilConsumption 0.0Imports -25.9

MealExports 237.5

ProcessingCrush cost -28.2Utilization 72.9Quasi-profits 21.5

Source: Persaud and Landes, 2006.

Apple Sector Analysis

Source: ERS estimates.

Indian marketing costs and margins for domestic and imported apples

0102030405060708090

100

Domestic (Rs45/kg) Imported (Rs100/kg)

Rup

ees/

kg, r

etai

l Marketing marginsMarketing costsTariffGrower/importer price

Investment Developments

Public and private investment in agriculture and agribusiness has been weak

• Despite large, growing, diversifying market• Despite rapid investment growth elsewhere in economy

Large number of Central and State policies have reduced incentives for private investment

• Many regulations are gradually being changed

Gross fixed capital formation in India

Source: Reserve Bank of India, Handbook of Statistics on Indian Economy.

Gross fixed capital formation in India as share of Gross Domestic Product (GDP)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

1970 1975 1980 1985 1990 1995 2000 2005

Shar

e of

GD

P (%

)

Total In/for agriculture In agriculture

Investment Developments

Policies under reform (1):

• Essential Commodities Act• State restrictions on private movement & storage• Now seldom imposed

• Agricultural Produce Marketing Acts• State restrictions on private marketing• Many States revising laws to permit private markets, contract

farming, etc.

• Small Scale Industry Reservations• Most food processing reserved for small firms ($247,000 of

capital assets)• Most reservations removed in 1997

Investment Developments

Policies under reform (2):

• Food Laws• Regulation involves 8 Ministries and more than 12 legislative

acts—many are contradictory, overlapping, or outdated• New unified Food Safety and Standards Bill establishing new

“Food Authority” under Ministry of Health is forthcoming

• Tax Policies• High tariffs, excise taxes, and sales taxes traditionally key

sources of Government revenue• Transition to Value-Added Tax (VAT) system will improve

environment for larger firms• Higher excise taxes on most processed food items now reduced

Recent changes in India's excise taxes on food products

Year and product From To2001/02:

Fruit & vegetable preps 16% 02002/03:

Tea Rs2/kg Rs1/kg2003/04:

Branded, packed refined edible oils 0 8%2004/05:

Processed meat, fish & poultry prod. 16% 8%Cakes & pastries 8% 16%

2005/06:Surcharge on refined edible oils Rs1/kg 0

2006/07:Condensed milk 16% 0Ice cream 16% 0Processed meat, fish & poultry prod. 8% 0Pasta 16% 0Ready-to-eat processed foods 16% 8%

2007/08Packed biscuits 16% 0

Source: GOI, Ministry of Finance.

Investment Developments

Policies under reform (3):

• Credit Policy• Credit availability improved significantly since late 1990s• 2004 “Farm Credit Package” gave further boost

• FDI Policy• Now gives automatic approval of up to 100% foreign ownership

in most agribusiness sectors• Key exceptions are multi-brand retailing and primary crop

production

Credit Policy

Sources: Reserve Bank of India; GOI, Ministry of Agriculture.

Direct institutional credit for agriculture and allied activities in India

0

200

400

600

800

1,000

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

Bill

ion

1993

/94

rupe

es Commercial BanksRegional Rural BanksCooperative Banks

FDI Policy

Source: Reserve Bank of India.

Foreign direct investment (FDI) in India and share of gross fixed capital formation (GFCF)

0

5,000

10,000

15,000

20,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

FDI,

93/9

4 R

s cro

re

0.00

0.20

0.40

0.60

0.80

1.00

FDI s

hare

of G

FCF

(%)

FDI FDI share of GFCF

Investment Developments

But reform is lagging in key areas:

• Land Tenure Policy• Small, fragmented operational holdings complicate vertical

coordination/integration• Little progress on legal frameworks to support competitive &

equitable land sale & rental markets

• Labor Policy• Proliferation of Central & State laws regulate hiring, firing, pay,

and other practices of ”organized sector” firms• SEZs may be permitted to have less restrictive practices

Investment Developments

Infrastructure & institutional weaknesses also affect investment climate:

• Transport: Low costs, low quality• Power: Chronic shortages attributable to low cost recovery• Water: Growing competition between agricultural &

nonagricultural uses• Agricultural research: Neglected, but on the rise since late

1990s• Institutional services: Weak systems of grades & standards,

market information, insurance, futures trading, etc.

Power Cost Recovery

Source: Kapoor and Barnes, 2003

Agricultural and domestic power tariffs in selected countries

0.01.02.03.04.05.06.07.08.0

India,

2002

Mexico

, 199

9

Bangla

desh,

1999

Jorda

n, 20

02

Vietna

m, 199

8

Pakist

an, 1

998

Brazil,

1998

US

cent

s/ki

low

att

Agriculture Domestic

Agricultural Research Expenditures

Source: Pal and Byerlee, 2003

Public agricultural research funding in India

0

5

10

15

20

25

30

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Bil.

199

9 ru

pees

0.0%

0.1%

0.1%

0.2%

0.2%

0.3%

0.3%

0.4%

0.4%

0.5%

Perc

ent

Public agricultural research fundingShare of agricultural GDP

Investment Developments

Changes in the economic & policy environment are having an impact on investment:

• Recent domestic and foreign investment in chain retailing & agricultural supply chains:

• Bharti-Walmart (2007): $2.5 billion by 2014• Max Hypermarket/Spar (2007): 7 stores by 2009• Spinach (2006): 1,500 stores by 2010• Reliance Retail (2006): 3,000 stores by 2010• Star India Bazaar (2004): 25 hypermarkets by 2009• Metro AG (2003): 18 “Cash & Carry” by 2009• Food Bazaar (2002): 250 stores by 2010

Summary

India is a growing market for agricultural trade & investment Change in agricultural & trade policy is likely to remain

gradual• Elections by 2009• WTO a tough sell domestically; even tougher as elections near

Demand growth & regulatory reform appears to be strengthening the climate for investment in agriculture & agribusiness• Growth in agribusiness investment & employment an enabler of trade

reform

Building & strengthening market institutions may be a productive area for US-India cooperation

References

ERS “Briefing Room:” http://ers.usda.gov/Briefing/India/

Recent studies:• Indian Wheat and Rice Sector Policies and the Implications of Reform• The Role of Policy and Industry Structure in India’s Oilseed Markets• Prospects for India's Emerging Apple Market• Growth Prospects for India's Cotton and Textile Industries• India's Poultry Sector: Development and Prospects• The Environment for Agricultural and Agribusiness Investment in

India (forthcoming)