What we want to tell?

1. Transaction Costs in Emerging Markets:A Study of India’s Apple TradeSatish Y. Deodhar (IIM-A)Barry Krissoff (ERS, USDA)Maurice Landes (ERS, USDA)

2. What we want to tell? • Of course, imports grow due to rise in incomes and fall in tariff rates • However, reduction in transaction costs matter a lot And, to show this .. • We take a preview of India’s apple imports, domestic supply, marketing cost and margins, and price integration • And, hint at FDI in retail and wholesale markets

3. India: An Emerging Market • Sustained high GDP growth rates • 9 percent in recent past (2006-2007) • Rising middle-class segment • 250-400 million apple consumers • 50 to 100 million imported-apple consumers • Rapid growth in food demand expected • Particularly in high value horticultural products such as apple

4. Change in Import Regime • In 1999 significant liberalization in agricultural trade regime • Policy now guided by WTO precepts • QRs converted to tariffs • Generally high WTO bound rates • Applied rates are lower • However, high rates on apples • Bound rate = applied rate = 50%

5. Tariff Rates on Select Fresh Fruit, India India: Applied Tariffs 55 50 45 40 35 30 Percent 25 20 15 10 5 0 Kiwi Pear Plum Guava Papaya Apples Mango Banana Mandarin Grapefruit Strawberry Watermelon

6. Imports Scenario • Imports account for less than 1.5% of domestic supply (about 25,000 tons) • Imports mainly from USA, Australia, China, and New Zealand in that order 3,000 2,500 2,000 Tons 1,500 1,000 500 0 Sept- Oct Nov Dec Jan-03 Feb Mar Apr May Jun Jul Aug- 02 03 Months Australia China New Zealand USA

7. Domestic Supply Production is about 1.5 million tons • US = 4 million; China = 20 million • Low yield at about 6 tons/ha • US = 26 tons/ha; China = 10 tons/ha • Low production growth: about 1% • US = -3%; China = 5% • Impediments • Old root stock (red delicious), erratic monsoon rainfall, mountainous terrain • Producers bear all price risk • No cold chain, lack of grading, poor road transport

8. Anti-Hail Nets

9. Mountainous Terrain

10. Ready to Upset the Apple Cart!

11. Domestic Fruit Prices Apples are generally the most expensive fruit in the market…

12. Domestic Market Not Well Integrated • Regional markets are not well integrated • Confirmed by error correction model • Full transmission of price changes occurs in about 2 weeks in some cities • Other markets are poorly integrated • Lack of efficient transport & direct procurement from growers limits price arbitrage between Delhi & other markets • Cascading trader margins

13. Domestic Marketing Cost and Margins November 2003, Rs per box of 20 kgs Net price received by grower 295 Expenses incurred by growers on: 118 Picking, grading, packing, & handling 20 Packing materials 45 Freight up to market 20 Commission of commission agent 33 Realisation at wholesale market, Delhi 413 Expenses of wholesale trader 6 Wholesale trader’s margin84 Sub-wholesaler margin 101 Retailer’s expenses 65 Retailer’s margin 231 Consumer price, Delhi 900 Trader Margins account for 46% of the final consumer price

14. Import Marketing Cost and Margins May 2003, Rs per box of 20 kgs Import unit price, CIF 510 Expenses incurred by importer on: 434 Tariff 255 Clearing 20 Freight 70 Commission of agent 89 Importer’s margin 165 Realisation at wholesale market, Delhi1,109 Expenses of wholesale trader 23 Wholesale trader’s margin198 Sub-wholesaler margin199 Retailer’s expenses 5 Retailer’s margin466 Consumer price, Delhi 2,000 Trader Margins account for 51% of the final consumer price

15. Import Prospects • Drivers of import demand • GDP growth • Tariff (customs duty) reduction • Transaction cost (trader margins) reduction • Assumptions • Price elasticity of demand = -1.0 • Income elasticity of demand = 1.5 • GDP growth rate = 6% p.a.

16. Likely Outcomes * Base year 2003. Base year imports 22,000 ton

17. To Conclude .. • Of course, income growth and tariff reduction will increase imports However • Reduction in transaction cost may be very critical in increasing imports. • FDI in retail and wholesale market may be the key to reducing transaction cost • Already happening to some extent with Walmart tying-up with Bharti group • Shop Rite (SA), selling imported apples only at Rs. 70

18. Model Equations and estimations ∆Yt = β1 + δYt-1 + αi Σ ∆Yt-1 + et

19. = + + + e Y a X a X a Y . - - 01 11 1 12 1 t t t t t é ù + ( a a ) D = D + - - + e 01 11 Y a X ( 1 a ) X Y . ê ú - - 01 12 1 1 t t t t t - ( 1 a ) ë û 12

20. - - k 1 k 1 [ ] å å D = + D + D + - + e Y a a X a Y m m X Y , - - - - t 00 i 1 t i i 2 t i 0 1 t k t k t = = i 0 i 1 k å = - m ( 1 a ) 0 2 i where = 1 i k å a i 1 = = i 0 m . and 1 m 0

21. Stationarity Test for Wholesale Apple Prices * All I(0) statistics were insignificant and all I(1) price series were significant at 1%. We also used Augmented Dickey Fuller test. Results were similar if not identical

22. . Pairwise Cointegration Test of Apple Prices * Significant at 1 percent, ** barely significant at 5 percent.

23. Error Correction Model for Bangalore-Mumbai Wholesale Prices

24. Error Correction Model for Kolkata-Mumbai Wholesale Prices