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India Agricultural Policy Review Vol. 4, No. 3 One in a series of policy notes on countries of interest to Canada This note draws on analysis from a number of institutions, listed on page 5. Introduction This note first reviews India’s macro reforms, followed by discussion of the competitiveness of Indian agriculture. The evolution of India’s major agricultural policies is then described, and new policy directions and emerging challenges are discussed. The note closes with some of the prospects for India’s agri-food sector and the implications for Canada India’s Macroeconomic Reforms With a population of about 1.1 billion, India is expected to overtake China as the world’s most populous country by 2030. India’s economy ranks as Asia’s third largest, after Japan and China, and is now one of the world’s fastest growing. While growth has led to significant reductions in poverty, India still ranks among the world’s low income countries in terms of income per capita. Nevertheless, economic growth has resulted in a burgeoning middle-class. India’s agriculture sector accounts for 18% of GDP, and employs around 60% of the workforce. Rice, wheat, cotton, oilseeds, jute, tea, sugarcane, milk and potatoes are India’s major agricultural commodities. With its growing urban middle-class and increasing influence in global affairs, India’s policies have important implications not only for its own economic development but also for global agricultural markets and trade. Following its independence in 1947, India pursued a centrally directed, inward-oriented development strategy. This strategy emphasized self-sufficiency and import replacement through large-scale public intervention in industrial production, price setting and foreign trade. Sub-par economic performance from the 1950s to the 1970s led to a strategy of higher public spending in the 1980s in an effort to attain higher economic growth. However, higher public spending in the 1980s resulted in rising fiscal deficits and, eventually, to a balance of payment crisis in the early 1990s. Following the balance of payment crisis, India implemented extensive economic and structural reforms. Key reform elements included adopting a floating exchange rate regime, relaxing foreign direct investment rules, and relaxing export and import controls. Since these reforms were undertaken, India’s GDP growth has exceeded 6 percent per annum. India’s Agri-Food Competitiveness India has the world’s second largest arable land base (after the U.S.) and the second largest irrigated area (after China). India’s per capita arable land is roughly comparable to that of Italy or Germany (Figure 1). Further, much of the land in India can be double cropped. Given these resource endowments, the World Bank indicates that India could be as competitive as Thailand India May 2008 ture sector relatively untouched, except for the removal of export controls. While agriculture reforms have been modest, the macroeconomic reforms of the 1990s had two important impacts. First, reforms increased per capita incomes and strengthened domestic demand. Second, they reduced industrial protection and improved agriculture’s terms of trade. and Indonesia in agri-food production if reform is undertaken. Fruit, vegetables and nuts are considered areas where India’s comparative advantage is strong. Figure Figure 1. 1. Per Per Capita Capita Arable Arable Land Land in in Selected Selected Countries, Countries, 2005 2005 0.7 0.7 0.6 0.6 Hectares Hectares 0.5 0.5 In spite of macro-economic reforms that worked in agriculture’s favor, growth of the sector has actually slowed since the mid1990s (Figure 2). A potential explanation for these apparently contradictory trends lies with India’s agricultural policies and their performance. 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 00 Japan Japan China China Chile Chile Italy Italy India India Germany Germany France France USA USA Source: Calculated from FAO database. Figure Figure2. 2.Average AverageAnnual AnnualGrowth GrowthRate Rateof ofGDP GDPand and Agriculture Agriculturein inIndia India(at (atConstant ConstantPrices) Prices) Despite having a comparative advantage in production of many agri-food products, India’s share of international trade in agrifood products remains relatively small at 1.5 percent. India’s trade regime, transportation and logistics challenges, and policy and regulatory approaches are the main reasons for its sub-par trade performance. Percent Percent 88 Overall OverallGDP GDP Agriculture Agriculture 66 44 22 00 The Evolution of Agricultural Policy After independence, India pursued a policy of food self-sufficiency in staple foods – rice and wheat. Policies initially focused on expanding cultivated area, land reform, community development, and restructuring rural credit institutions. Trade was strictly regulated through both quota restrictions and high tariff rates. 1950/51 1950/51 to to 1984/85 1984/85 1985-90 1985-90 1992-97 1992-97 1997-02 1997-02 2002-07 2002-07 Source: Ministry of Finance, Government of India. India’s main policy goals remain as follows: to attain food self-sufficiency, to ensure remunerative prices to farmers, and to maintain stable prices for consumers. To meet these goals, India relies on a number of policy instruments: During the 1960s and 1970s, widespread adoption of high yielding rice and wheat varieties occurred. At the same time, India expanded irrigated areas, promoted increased use of chemical fertilizers and pesticides, and improved access to institutional credit. Together, these initiatives led to dramatic leaps in agricultural production and made India self-sufficient in food grain production at the national level. • • • • • minimum support prices (MSP), food subsidies for consumers, regulated markets, input subsidies for producers, and trade policy. Each policy instrument is discussed below. Minimum Support Prices. India supports producer prices for key commodities. Based on the recommendations of the Commission for Agricultural Costs and Prices (CACP), the Government of India (GOI) announces MSP for key commodities based on cost of production. MSP benefits have been capitalized into the value of land and fixed assets, contributing to higher production costs and pressures to raise MSPs every few years. Production gains from Green Revolution technologies continued through the mid1980s and then slowed. During the 1980s, the input subsidies that had been put in place also began to strain government budgets. Unlike reforms in other emerging economies (e.g., Brazil, China), the series of reforms instituted since 1991 in India left its agricul2 India May 2008 Box 1: Water Scarcity in India As a result, India’s food grain MSPs are less reflective of actual market conditions. India possesses almost 3.5 percent of the world’s fresh water resources, but its per capita endowment is below that of Sub-Saharan Africa. Agriculture accounts for more than 80 percent of consumptive water use. With a growing economy and a growing population, demand for nonagriculture water use has been increasing rapidly. Water shortages in general and particularly in agriculture have been growing in India. The undervaluation of resources, questions related to property rights, institutional obstacles and agricultural policies have all contributed to growing water scarcity. Food Subsidies. In an effort to protect lowincome consumers from food price increases, the Food Corporation of India (FCI) purchases food grains from farmers at the MSPs and sells at subsidized prices through the public distribution system (PDS). Food subsidy expenditures have almost trebled in the past decade (Figure 3). Figure Figure3. 3.India's India'sFood FoodSubsidy SubsidyExpenditures Expenditures The World Bank and the International Water Management Institute (IWMI) have suggested that under-pricing of water and subsidies have rendered India’s canal irrigation system inefficient and dilapidated. Heavy electricity subsidies, along with an inefficient canal irrigation system, have led to explosive growth in private water pumps to exploit groundwater. Consequently, major agricultural production areas of north-western states have seen water tables decline rapidly due to over-extraction of ground water. India lacks an explicit legal framework specifying water rights, although several acts play a role in defining some form of rights through land rights. However, these rights apply only to surface water and do not cover groundwater. 88 BillionU.S. U.S.$$ Billion 66 44 22 00 1997/98 1997/98 1999/00 1999/00 2001/02 2001/02 2003/04 2003/04 2005/06 2005/06 Source: Ministry of Finance, Government of India. Regulated Markets. India’s domestic agricultural markets remain subject to a complex regulatory framework. The Essential Commodities Act (ECA), for example, allows central and state governments to place restrictions on the storage and movement of commodities deemed essential by governments. Similarly, the Agricultural Produce Market Committee (APMC) Act requires that farm produce be sold only at regulated markets through registered intermediaries. The World Bank notes that about 90 percent of the land area in India is drained by interstate rivers. Consequently, state responsibility for water resources under India’s constitution made reform difficult and contentious. In addition, India’s input subsidies and commodity price policies favor water intensive crops like rice and encourage the use of extensive (rather than targeted) irrigation techniques. Policies inadvertently encourage extraction over conservation and constrain the efficient allocation of water resources across crops and sectors. Until recently, food-processing industries were limited by regulation to small-scale capacities. In spite of moves to deregulate, small-scale, low technology firms established under the old laws still dominate the industry. State linked firms have been favored in transportation, marketing and distribution of agri-food commodities. Water shortages may worsen in the coming years if current trend continues. The intergovernmental panel on climate change (IPCC) indicated that climate change may exacerbate the water shortage in India. International agencies like the World Bank, IWMI and FAO view India as being in critical condition unless remedial measures are taken soon to correct inappropriate pricing and incentive systems for water resources. Therefore, how India manages its water resources will be critical to both its agri-food sector and general welfare. Input subsidies. India subsidizes fertilizer, electricity, fuel and irrigation. India’s input subsidies have almost doubled over the past decade and are now estimated to be roughly equivalent to US$8 billion. Prices of both domestic and imported fertilizers are subsidized. In most states, electricity is provided to agriculture at very low prices or free. Despite reform attempts, water subsidies mean that irrigation charges cover less than 20 percent of operation and maintenance costs (Box 1). 3 India May 2008 and ground water depletion. The growing cost of input and food subsidies has also contributed to fiscal deficits in many states. Agricultural Trade Policy. India is a marginal player in global agri-food trade. Until the 1990s, agricultural trade was strictly regulated with high tariffs and quantitative restrictions and was channeled through public trading agencies. India’s agricultural export policies have been liberalized in part since 1994. Reforms have included a reduction in products subject to state trading, relaxation of export quotas, and removal of minimum export prices. Expenditures on subsidies also could have been invested in research, education and infrastructure to improve productivity and competitiveness of the sector. India’s institutional, policy and regulatory systems have favored the production of food staples and hindered vertical coordination in the value chain as well as the development of its horticultural industry. However, import liberalization for agri-food trade remains slow. In 2001, to comply with WTO rules, India replaced quantitative restrictions on imports of all agricultural products with import tariffs. A wide gap between applied and bound tariff rates exists for most products (Table 1). These gaps provide India with the discretionary ability to adjust tariffs to balance competing producer and consumer interests. Under India’s Constitution, most agriculture related responsibilities, including water and electricity, are state jurisdiction. In addition, India has a highly decentralized system of governance. Until recently, this decentralized system of governance has proven an obstacle to undertake fundamental reform in the sector. Existing policies have benefited special interests which oppose significant reforms. TABLE 1: Sample Applied & Bound Tariffs (%) Applied rate Bound rate Wheat 50 100 Pulses other than peas 10 100 Sugar 60 150 Palm oil (crude) 80 300 Sunflower 75 300 Coconut oil 85 100 Meat of Poultry 30 100 Raw hams 30 100 Recent Policy Developments India announced its first comprehensive agricultural policy statement in 2000 – the National Agricultural Policy (NAP). The NAP’s aimed to attain an annual growth rate of 4 per cent in the agricultural sector over two decades (2000-2020). Since the announcement of the NAP, however, little concrete action has been taken at the central and state level to implement the proposed policy measures. Source: Government of India, 2006. Policy Outcomes and Challenges India’s support of its agri-food sector has effectively de-linked the sector from market signals. The combination of administratively determined output prices and consumer subsidies has undermined the role of market forces in India’s agri-food sector. In addition, heavy presence of government agencies in the marketing of agri-food commodities and market regulations has discouraged the private sector’s participation in the efficient operation of agri-food markets. The 2007 draft of the 11th five-year plan (2008-13) acknowledges the agri-food sector’s growing subsidy bill and declining investment but doesn’t outline substantive approaches to reverse these trends. India has, however, taken some steps to make agricultural markets more responsive: • • Combined with the output price support, India’s border measures have led to higher domestic food prices. Food subsidies were instituted to minimize the impact of higher food prices on consumers. Input subsidies have contributed to the excessive use of inputs and resulted in a number of agroenvironmental problems, such as soil salinity • • 4 revising the APMC Act to allow contract farming; removing the reservations for small scale firms on food processing industries; removing restrictions on futures trading on many commodities; allowing up to 100% foreign ownership in many agribusiness sectors, except in some forms of retailing and primary production. India May 2008 looking domestic policies are adopted. For obvious reasons, it behooves Canada to be well-informed as to India’s economic and agri-food policy choices and prospects. Prospects Since economic reforms began, India has transformed itself on the global stage. In general, its economy has been opening and growing steadily, leading to higher incomes and greater and more diversified demand. However, slow growth in the agricultural sector remains a cause for concern. India’s agricultural policies still carry the legacy of its past centrally-guided, closed economy. Fundamental reforms are needed to realize the potential of India’s agriculture sector. However, constitutional conflicts, inter-state rivalries, and special interests within the agri-food value chain have complicated reform efforts. Sources: World Bank (2005) India’s Water Economy: Bracing for a Turbulent Future. Report No. 34750-IN. Government of India, Agricultural Statistics at Glance 2006-07. Ministry of Agriculture, New Delhi, India. Government of India Economic Survey of India, Fiscal Year 2007-08. Ministry of Finance, New Delhi, India. Jha, S.; Shrinivasan, P.V.; and M Landes, (2007). Indian Wheat and Rice Sector Policies and the Implications of Reform. USDA-ERS Research Report No. 41. 2007. The following areas will be critical to the prospects for India’s agri-food sector: water scarcity and valuation; reforms in commodity price policy; public and private investment in rural infrastructure and logistical services for agri-food value chain; and the level of government involvement and potential crowding out of private initiatives in the marketing and trade of agri-food products. Landes, R and A Gulati.(2004). Farm Sector Performance and Reform Agenda. Economic and Political Weekly (August 7). Mumbai India. Mattoo, A.; Mishra, D.; and Narain, A. 2007. From competing at home to competing abroad: A case of India’s Horticulture. Oxford University Press and World Bank. Regardless of the path it takes, India will be an important player in world markets and in multilateral trade negotiations due to the sheer size of its population and its agricultural resource base. India could emerge as both an enormous market for agri-food products as well as a formidable competitor. Opportunities for trade and investment could change dramatically if India’s economy continues to grow and more open trade policies and forward- Persaud S and S Rosen (2003). India’s Consumer and Producer Price Policies: Implications for Food Security. Economic Research Services, USDA Shahidur Rashid, Ralph Cummings Jr., and Ashok Gulati (2005) Grain Marketing Parastatals in Asia: Why Do They Have to Change Now?, IFPRI Discussion Paper 80. Tushaar, S et al., (2000) The Global Groundwater Situation: Overview of Opportunities and Challenges, IWMI. Bates, B.C., Z.W. Kundzewicz, S. Wu and J.P. Palutikof, Eds., 2008: Climate Change and Water: Technical Paper of Intergovernmental panel on climate change, IPCC Secretariat, Geneva. For further information regarding this paper, contact: Rajendra Gurung ([email protected], 613-694-2451) Brad Gilmour ([email protected], 613-759-7404) For further information regarding this series, contact: Cameron Short, Director, Policy Analysis Division ([email protected], 613-759-7426) September 2008 Project 08-040-b Publication 10661E ISSN 1918-0144 ISBN 978-1-100-10090-6 Catalogue A38-3/5-1-1E-PDF 5