Indian Agriculture and Policy in Transition

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)