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Indian Agriculture and Policy in Transition

Indian Agriculture and Policy in Transition. Maurice Landes Market and Trade Economics Division Economic Research Service U.S. Department of Agriculture. Introduction. The environment for Indian agriculture and policy has changed:

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Indian Agriculture and Policy in Transition

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  1. Indian Agriculture and Policy in Transition Maurice Landes Market and Trade Economics Division Economic Research Service U.S. Department of Agriculture

  2. 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

  3. 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

  4. Indian and world average yields for major crops

  5. Public investment and subsidies in Indian agriculture

  6. 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

  7. Trade Developments • India’s agricultural imports have been showing strong growth: • Demand is outstripping supply • Demand is diversifying • Rupee is appreciating vs. dollar

  8. India’s major agricultural imports

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

  10. 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

  11. India's bound and applied tariffs forselected agricultural products

  12. 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

  13. 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

  14. Poultry Sector Analysis

  15. Oilseed Sector Analysis

  16. Apple Sector Analysis

  17. 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

  18. Gross fixed capital formation in India

  19. 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

  20. 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

  21. Recent changes in India's excise taxes on food products

  22. 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

  23. Credit Policy

  24. FDI Policy

  25. 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

  26. 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.

  27. Power Cost Recovery

  28. Agricultural Research Expenditures

  29. 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

  30. 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

  31. 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)

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