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The
Elephant Is Jogging: New Pressures for Agricultural
Reform in India
Maurice R. Landes
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Although often characterized as a lumbering elephant compared
with the tigers (such as Malaysia and Thailand) and the dragon
(China) of Southeast and East Asia, India’s economy and agricultural
sector have made remarkable progress in the 57 years since independence
in 1947. Endowed with rich land, water, and labor resources, India
increased production of its staple cereals from 42 million tons
just after independence in 1950/51 to over 188 million by 2000/01—more
than a fourfold increase. Much of this gain was driven by the introduction
of high-yielding wheat and rice varieties during the Green Revolution
period of the late 1960s and early 1970s, combined with supportive
price policies and investments in irrigation.
Now, however, the agricultural sector has outgrown the policies
that contributed to past success and is facing new pressures as
consumer incomes rise. The middle
class of the world’s second most populous nation is growing ever wealthier
and seeks greater diversity in food products. And, because the average Indian
household spends about 55 percent of its income on food—a much higher
share than in developed countries—changes in food prices resulting from
new domestic and trade policies are also driving changes in food demand patterns.
Indian producers are responding to rising demand with only partial success.
Recent trade liberalization measures have introduced new products at lower
prices, thus creating competitive pressures for domestic producers. Constraints
such as poor infrastructure, inefficient markets, and low investment also hobble
Indian producers’ ability to satisfy consumer demand.
Economywide trade and regulatory reforms are improving the investment
climate for both domestic and foreign companies in India. But policy
reform in agriculture
has proven politically difficult, and the pace of reform in that sector will
likely be slower than in some other fast-growing Asian economies, such as Malaysia,
Thailand, or China. Even so, the past few years have seen an expansion in India’s
farm trade. This is not likely to bring short-term benefits to U.S. exporters,
since many U.S. products are not price-competitive in India’s market.
But there is significant potential for investment in production and marketing.
Economic Growth Begins To Transform Food Demand
After more than three decades of sluggish economic gains stretching
from independence to the early 1980s, Asia’s elephant has now broken into a jog. The economy
has grown at an annual rate of 5.7 percent since 1980, ranking India among
the fastest growing economies. Rapid per capita income growth is now the major
force behind the emerging transition of Indian agriculture and policy. Although
India is still home to a large share of the world’s poor, the share
of the population in poverty is declining, and a significant, relatively
affluent,
middle class has emerged.
India’s per capita income of about $460 remains low by developed
country standards, but actual buying power is more than five times
that amount because
Indian prices for many goods and services are well below world averages.
Middle-class households with buying power well above that average include
roughly 150-200
million consumers and constitute the fastest growing segment of the population.
Urbanization is also on the rise. Urban dwellers account for about 28 percent
of the population, and their share of the population is growing about 3 percent
annually.
Higher incomes, particularly in lower- and middle-income households, are having
an important impact on food demand in India because these groups tend to spend
a relatively large share of their income on food consumption. Middle-income
and urban consumers are also likely to spend more of their income on upgrading
and diversifying their diets, eating out more often and eating more processed
and convenience foods.
Indian food consumption patterns have diversified significantly since the 1980s.
Consumption of fruits, vegetables, edible oils, and animal products is rising
much faster than that of wheat and rice, staple grains in the Indian diet.
Milk—of which India is now the world’s largest producer—along
with eggs and poultry meat are the most important animal products, and all
are registering strong growth in production and consumption. Poultry meat is
finding broad consumer acceptance, in part due to its low relative price, and
the sector is growing 10-15 percent per year—ranking it among the fastest
growing poultry sectors in the world.
Despite traditional vegetarian dietary preferences, the growth of the poultry
and egg industries is evidence that the expansion of meat and feed demand will
play a role in the transformation of Indian agriculture, as it has in other
developing countries. In fact, consumer studies suggest that while 20-30 percent
of consumers have strict vegetarian preferences, meat consumption by the remaining
70-80 percent is limited more by income than religious preference.
Price Changes Also Drive Food Demand and Trade
Changes in food prices, whether arising from lower import barriers or from
improved efficiency of domestic production and marketing, are also playing
an important role in India’s food demand and trade. Because such a
large proportion of income is spent on food, consumers are more likely to
adjust
the amounts and types of food they buy when prices change. Recent developments
illustrate the increased influence of world prices, and of improved marketing
efficiency, on consumption and trade:
- Poultry meat consumption is sharply higher in southern India,
primarily because large, integrated producers have significantly
reduced marketing costs and consumer prices in the region.
- A sharp increase in edible oil consumption since the mid-1990s
stems from larger imports and lower domestic prices following
the reduction of import barriers. Low relative prices for imported
palm oil, which was not traditionally consumed in India, have
made it the single largest oil used in India.
- India’s pulse imports have surged recently because of
a low tariff and increased global supplies of low-priced white
peas. Although not traditionally consumed in India, white peas
have gained acceptance due to their low price.
Trade Liberalization Has Brought Increased Imports of
Some Products . . .
Faster income growth, together with lower import barriers, helped
to more than double India’s farm imports during the 1990s
to $1.9 billion in 2000/01. Complying with World Trade Organization
(WTO) rules, India removed all quantitative barriers to agricultural
imports by 2001 and voluntarily reduced tariffs below required
levels for a number of commodities, including edible oils, pulses,
and cotton.
As a result of trade liberalization, India is now the world’s largest
market for edible oils and pulses. In general, India has chosen to liberalize
imports of those products where domestic production is least competitive. Edible
oil imports—about two-thirds of which are low-priced palm oil—now
account for about half of domestic oil consumption. Imports of pulses, widely
used in traditional Indian meals, averaged more than 2 million tons during
2001/02 and 2002/03, up from just 0.4 million in 2000/01. These imports are
mostly low-cost varieties of chickpeas (garbanzos) and peas (mainly white peas,
but also including some green peas). Imports of raw cotton—a primary
input for India’s large textile sector—have also been on the rise,
primarily to meet the quality needs of textile exporters.
For other products, however, including most high-value consumer items such
as fresh fruits and processed foods, India has chosen to protect domestic production
by imposing high tariffs. Apples, for example, face a 50-percent tariff. Most
processed and packaged foods—including canned goods, cereal preparations,
and packaged meats—face import duties of 50 to 150 percent. This high
border protection has dampened overall imports of consumer food products, but
their recent upswing testifies to the rising purchasing power of India’s
higher-income consumers.
These trends have brought only limited benefits to U.S. agriculture. U.S. agricultural
exports to India, consisting primarily of raw cotton and almonds, accounted
for just 15 percent of India’s total agricultural imports between 2000
and 2002. A key constraint on U.S. sales is that many U.S. products, particularly
soybean oil and pulses, have not been price-competitive in the Indian market.
. . . But Agriculture, Despite Subsidies, Suffers From Low Productivity and
Under-Investment
Consumer demand for greater variety, coupled with more liberal
import policies, is pressuring India’s producers and marketing
system to provide a broader range of products at competitive prices.
But Indian agriculture is characterized
by low productivity, with average crop yields well below world levels. Large
investments, public and private, are needed to improve seed varieties and
improve irrigation and plant protection practices. Government agencies
are promoting
diversification in production, research, and farm extension. But successful
diversification is likely to require shifting public resources away from
subsidies and improving incentives for private investment.
Historically, India’s agricultural policies sought to ensure
self-sufficiency in two staple grains, wheat and rice. That focus
continues today, even though
current grain production is more than enough to satisfy consumer demand.
Through the “food subsidy,” the Indian Government covers
the cost of price support, distribution, and storage of wheat and
rice—totaling about
$4.4 billion in 2002, equivalent to 5 percent of all government expenditures
(see
“Food Grain Surplus Signals Need for Policy
Change”). The government
also subsidizes other farm inputs, including fertilizer, power, and irrigation
water. The total subsidy bill has now grown to more than $12 billion annually—far
exceeding both public ($1 billion in 2001/02) and private ($2.8 billion)
investment in agriculture.
Food Grain Surplus Signals Need for Policy Change
In the last several years, the Indian Government has accumulated
stocks of wheat and rice far in excess of those needed
as a food security buffer. Although stocks declined to
about 35 million tons as of July 2003, due to poor weather,
the pattern of food grain stock accumulation remains a
major symptom of the need for policy change, particularly
when contrasted with India's still-large population living
in poverty.
Two policies drove the emergence of surpluses. First, since the late
1990s, wheat and rice producers were given support prices based on full
costs of production—and sometimes higher— rather than on
market price. Even as surpluses began to emerge, support prices did not
adjust downward, and production and government procurement continued
to rise. The support price program does not work for other crops and
could not provide incentives to shift to other crops.
Second, in the mid-1990s, the government tried to reform the Public Distribution
System (PDS), which provided general consumer subsidies on large volumes
of grain, into a system better targeted on the lowest income consumers.
Although large amounts of grain were allocated to the new schemes, the
amount of grain actually distributed declined sharply due to administrative
and cost problems, particularly with identifying and certifying poor
consumers. More recently, distribution has been increased again by distributing
grain through untargeted channels to higher income consumers.
The result of these policies has become what some observers call a "de
facto nationalization" of wheat and rice trade. Little average-quality
grain is now held by private traders, domestic prices are well above
the price that would clear the domestic market, and consumption is actually
down. Despite this situation, and soaring government costs, it has proved
difficult to withdraw support from politically influential growers in
the few surplus states that benefit from the policy.
The budgetary cost of the price support and food distribution program
is known as the "food subsidy," although, at present, most
of the benefit is accruing to producers rather than consumers. The annual
cost of the policy has grown to about $4.4 billion, equivalent to about
5 percent of all government expenditures. In addition, about $11 billion
of bank credit, or roughly 10 percent of all bank credit in the country,
is now tied up by government borrowing to hold wheat and rice stocks.
To help reduce costs, the government initiated exports of wheat and rice.
Exports require subsidies to be competitive in world markets, but these
costs are lower than holding the grain in stocks. Subsidized exports
averaged about 3.1 million tons of wheat and 3.9 million tons of rice
during 2000-2003.
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Rising subsidies and a large overall public sector deficit have dampened public
investment in agriculture. Although private investment has grown, it remains
small, amounting to only about 1.4 percent of agricultural output, compared
with 24 percent for the economy as a whole. Private investors have, historically,
been discouraged by an array of market regulations and licensing requirements
that, among other things, have restricted private storage and movement of
major farm goods and limited the scale of food processing plants.
Weak incentives have led to significant underinvestment in agricultural marketing
and processing, as well as production. Marketing chains are highly fragmented,
often including six to eight intermediaries, and are dominated by small-scale
enterprises. Rural road and transport infrastructure remains poor and relatively
costly. Because markets are inefficient, farmers tend to receive a small share
of the consumer price—only about 25 percent in the case of unprocessed
vegetables. Physical losses in the food chain are high as well—roughly
40 percent for horticultural products. Inefficient marketing also raises the
cost of imported foods, as high margins taken by wholesalers, retailers, and
intermediaries exacerbate the effect of high tariffs.
Vertical integration—the consolidation or coordination of production
and processing stages by one firm—is a common feature of efficient food
marketing systems in other large agricultural economies, but is nascent in
India. Only about 4 percent of output is processed, and only a handful of food
processors have annual turnover as large as $150 million—a scale considered
small in many other developed and developing countries. Even with more than
1 billion consumers and a retail food market estimated at $133 billion, small “Pop & Son” shops
still dominate retail food sales. Organized chain stores are emerging and expanding
rapidly, but at present account for only about 1 percent of food sales.
India’s Inefficient Markets are Targets
for Change . . .
India’s traditional and inefficient agricultural
marketing system is yielding to change. Sources of inefficiency
include poor transport and handling infrastructure, domestic
taxes, and fragmented, non-integrated marketing chains
dominated by small-scale enterprises. Policies are now
beginning to promote domestic and foreign private investment
in a more efficient agricultural processing and marketing
system. The pace and extent of change will likely have
a significant impact on the growth and competitiveness
of India’s agricultural sector. Some examples:
Poultry marketing: In southern and western India,
vertically integrated broiler operations are reducing production
costs among contract growers, as well as producer-consumer margins.
Consumers are responding to the lower retail prices by boosting
consumption. However, most broilers are still sold as live birds
that are manually dressed by retailers, a practice that limits
the market radius and scale of the integrators. A shift to machine-processed,
chilled, and frozen products may be key to the continued expansion
of poultry integrators.
Wheat marketing: Most of India’s
70 million tons of annual wheat consumption is sold by
independent retailers as whole grain, then custom-ground
into “atta” (whole meal flour) by small-scale “chakis” (motor-driven
stone grinders). Only about 15 percent of wheat is marketed
as flour processed in modern flour mills. Producer-to-retail
marketing costs in the system are high, particularly if
the high costs of government storage, handling, and transport
are accounted for. Since the late 1990s, however, domestic
and multinational firms have been marketing nationally
branded pre-packaged atta. To compete on price, these firms
are vertically integrating to secure raw materials and
market products, and finding growing markets in urban areas.
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Major Agricultural Policy Reform Remains Politically Difficult . . .
India’s improved economic growth has stemmed largely from major domestic
and trade policy reforms in the industry and service sectors in the early 1990s.
Complementary reforms in agriculture have proven more difficult. Political
consensus on major agricultural reform remains elusive, in part because of
reform’s potential impacts on food prices and employment—agriculture
accounts for 60 percent of India’s employment. In addition, price support
and input subsidy policies, which primarily benefit producers of wheat and
rice in surplus regions, have proven difficult to withdraw despite the stockpiling
of grain.
The most significant policy changes in the sector have been in market access,
including the WTO-required liberalization of import policies completed in 2001.
Longstanding restrictions on farm exports that taxed local producers and precluded
competitive export industries began to lessen in the mid-1990s. These reforms
helped stimulate trade, including the rise in edible oil imports and increased
exports of rice and wheat. But they have also exposed the inefficiencies of
the domestic marketing system, including high transport and handling costs,
small-scale and inefficient milling and processing, and lack of food grading
and inspection services.
. . . But the Seeds of Policy Reform Are Being Planted
Many policies that have, historically, weakened
private investment incentives and contributed to India’s
fragmented, small-scale, and inefficient marketing system are now
being changed. The central government and several state governments
have lifted longstanding measures that restricted private storage and interstate
movement of grain and other essential foods. Licenses are no longer needed
to establish food-processing firms, and regulations restricting their size
have been mostly eliminated. In addition, foreign direct investments (FDI)
in food processing and marketing—with the exception of retail marketing—are
now automatically approved for investments up to 51-percent equity.
Other key changes are underway that should improve the climate for investment.
One is establishing legal frameworks to protect both farmers and processors
in contract farming agreements, and to enforce those agreements. With Indian
agriculture dominated by small-scale holdings of only about 2-½ hectares,
food processors struggle to procure adequate supplies of high-quality produce.
Contract farming is already expanding in some regions and products, including
broilers in Tamil Nadu and Maharashtra and vegetables in Punjab, and has proved
successful at reducing marketing risks faced by both buyers and sellers. But
contract farming is not recognized or protected by current laws, and the practice
could expand more rapidly with stronger legal protections in place.
A related reform now under discussion would involve changes in current laws
governing the leasing of agricultural land. At present, inadequate protections
for both lessors and lessees limit the use of land rental to assemble larger,
and potentially more efficient and competitive, holdings.
Another anticipated reform is the streamlining of food safety laws
and their alignment with international standards. Indian food
law now falls under five
outdated statutes, with jurisdiction spread across four ministries, thus greatly
increasing the cost and complexity of compliance. A major revamp of the food
law aimed at consolidation of responsibilities and jurisdiction, as well as
closer links to international standards, is now underway, although there is
no clear time frame for its completion.
A relaxation of the current ban on FDI in retailing, should it occur,
could also have a big impact on the transformation of India’s food
markets by providing an infusion of capital and expertise, as well as
promoting linkages
and standards backward through the marketing chain. Several large Indian firms
have announced ventures in food retailing. FDI has already begun to flow into
wholesale food distribution in Bangalore.
Emerging Trade and Investment Trends
The pace of change in agricultural policy, trade, and investment in India is
likely to remain closer to that of an elephant than a dragon or tiger. Achieving
political consensus for significant change in agriculture remains a slow process,
even as economic imperatives become clear. Gradually, regulatory and policy
change is helping transform agricultural markets, creating opportunity for
trade and investment.
India’s agricultural imports will probably continue to be dominated by
basic commodities—such as edible oils and pulses—where price competitiveness
will remain the key to boosting trade. The extent to which India emerges as
a major global market for other commodities—such as feed grains—will
hinge on how successfully it exploits its rich resources and boosts farm productivity.
Similarly, future trends in high-value product trade will be driven not only
by demand, but also by success in diversifying production, and building a modern,
market-oriented agricultural marketing system.
Indian import demand is likely to remain extremely price-sensitive, and
this will continue to hinder U.S. exports to that market. While trade
prospects
may be limited, there could be opportunities for investment. India appears
poised for an expansion of investment to modernize agribusiness, including
input supply, distribution and marketing, and food processing. Significant
investment opportunities are likely in the markets for both basic and high-value
foods, where demand can be driven by rising incomes and price reductions achieved
through increased integration and efficiency in the supply chain. Huge annual
investments, estimated by some at more than $30 billion, will be needed for
this transformation and, if the policy climate continues to improve, foreign
direct investment could play a key role.
ERS Emerging Markets Activities in
India…
An ERS project funded by USDA’s Emerging Markets Program
(EMP) since 2001 is promoting collaborative research between
ERS and Indian economists
on issues affecting the long-term outlook for Indian agriculture. Research
projects are focusing on topics related to commodity markets of interest
to U.S. agriculture, including wheat, corn, pulses, poultry, oilseeds,
oilseed products, cotton, and apples.
Recent ERS products based on activities under the EMP, include:
“India’s Consumer and Producer
Price
Policies: Implications for
Food Security,” by Suresh Persaud and Stacey Rosen, in Food Security
Assessment, GFA-14, USDA/ERS, February 2003.
India’s
Pulse Sector: Results of Field Research, by
Greg Price, Rip Landes, and A. Govindan, WRS-03-01, USDA/ERS, May
2003.
India’s
Edible Oil Sector: Imports Fill Rising Demand, by
Erik Dohlman, Suresh Persaud, and Rip Landes, OCS-0903-01,
USDA/ERS, November 2003.
India’s Poultry
Sector: Development and Prospects,
by Maurice Landes, Suresh Persaud, and John Dyck, WRS-04-03, USDA/ERS,
January 2004. |
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