Agricultural Policy
Agricultural Trade Policy
Domestic Agricultural Market Regulation and Investment
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Agricultural Policy
Since it gained independence, India has pursued a policy of
food self-sufficiency, primarily by boosting domestic production
of its major food staples: rice and wheat. This basic goal
has been achieved by developing and adopting high-yielding varieties,
expanding irrigation, and increasing fertilizer use—all
aided by supportive output price and input subsidy policies. Cropped
area has also increased steadily as expansion in irrigation has
boosted multiple cropping and cropping intensity.
Policies and performance for other crops have been mixed. For
pulses (chickpeas, pigeon peas, lentils, dry peas, etc.), an
important protein source in Indian diets, there has been little
success in boosting output, and India has pursued a liberal import
policy since the early 1980s. In the oilseed sector, generally
high levels of protection for oilseeds and edible oils have not
yielded major gains in output. As a result, India is now among
the world's largest importers of edible oils, while Indian
consumers pay among the highest prices in the world. For
cotton, the widespread adoption of hybrid Bt cotton—so
far, the only genetically modified crop approved for cultivation
in India—has led to rapid growth in output since the early
2000s, supporting expansion of both raw cotton and textile product
exports. With rising incomes diversifying food demand,
nonstaple foods—including fruits, vegetables, dairy products,
eggs, and meats—are now experiencing the fastest growth
in production and consumption, but with relatively little policy
intervention in either input or output markets.
India's major policy instruments for domestic agriculture
include minimum support prices (MSPs)for major crops; input subsidies
for fertilizer, power, and irrigation water; and a public distribution
system that provides subsidized food staples—primarily
wheat and rice—to food-insecure segments of the population. MSPs
are set annually and, if necessary, defended through market procurement
by central and state government agencies. Historically,
MSP policy for food staples has balanced producer incentives
with the need to maintain consumer price stability, but recent
adjustments to MSPs suggest a significant shift toward stronger
grower incentives.
![Real minimum support prices for major Indian crops 1/](Gallery/majorindiancrops.gif)
Outlays for input subsidies for fertilizers, electrical power
used for agriculture, and irrigation water distributed through
surface irrigation systems increased about 6 percent annually in
real terms (adjusted for inflation) between fiscal years 1993/94
(April-March) and 2005/06, when input subsidies totaled about 530
billion rupees (US$11.9 billion). The cost of providing subsidized
electricity for agriculture accounted for about 30 percent of total
agricultural input subsidies in 2005/06. Fertilizer subsidies
are provided both to farmers in the form of price subsidies for
domestic and imported fertilizers, and to the fertilizer industry
in the form of preferential prices to offset the losses of higher
cost plants. Irrigation subsidies cover the operational costs
of providing surface water irrigation that are not recovered from
users.
Since 2005/06, the cost of input subsidies has increased sharply,
primarily because of the rising prices for domestic and imported
fertilizer feedstocks that have not been passed on to farmers. Since
2005/06, the cost of the fertilizer subsidy has increased more
than fivefold, reaching an estimated Rs1.0 trillion ($22 billion)
in 2008/09.
The budgetary costs of operating India's system of MSPs,
public distribution, and storage for wheat and rice are accounted
for in the "food grain subsidy." The real cost
of the food grain subsidy increased sharply in the late 1990s,
when India accumulated large surpluses of wheat and rice in government
stocks. The subsidy declined as stocks were reduced in the
early 2000s but is now poised to rise again as a result of rent
increases in minimum support prices, unchanged subsidized issue
prices for low-income consumers through the Public Distribution
System, and the likelihood of higher government stockholding costs. Overall,
the real cost of the food grain subsidy has increased about 9 percent
annually since the early 1990s, and is expected to reach a record
of Rs360 billion ($8 billion) in 2008/09.
![India's food grain subsidy 1/](Gallery/foodgrainsubsidy.gif)
Stronger economic growth since the major industrial and trade
policy reforms of 1991-93 and slowed farm sector investment and
growth (see the Basic
Information chapter for more detail) are creating pressure
for change in India's agricultural policies. Food demand
is expanding, diversifying, and placing new demands on underdeveloped
agricultural markets and institutions. Longstanding production,
procurement, and distribution programs that focus on cereals are
increasingly expensive and out of step with market demand. At
the same time, rising subsidy outlays appear to be constraining
public investment in transforming institutions and market infrastructure,
while private investment in agriculture and agribusiness has been
limited, in part due to national and state level regulatory interventions
in agricultural markets. Although the central government
plays an important role in recommending national agricultural policies
and is the primary source of funds, agriculture is a "state
subject" in the Indian constitution. As a result,
all agricultural policies—including price supports, input
subsidies, produce marketing, and consumer subsidies—must
ultimately be formally adopted and implemented by state governments. The
support of India's various states, which reflect a broad
range of interests and resource endowments, is a key issue in reaching
consensus on agricultural policy and in implementing policy change.
There have been some important changes in agricultural policy
since the early 1990s, including the removal of quantitative trade
restrictions completed in 2001, steps to reform state regulations
that impeded private investment in agricultural markets, implementation
of a unified value-added tax structure across Indian states, adoption
of a new unified "Food Law" that will simplify food
processing and trade, and large increases in the availability of
credit for agricultural producers and agribusinesses. The
poor performance of the rural sector was a key issue in the last
round of national elections in 2004 and will likely remain an issue
in the upcoming 2009 elections and beyond.
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Agricultural Trade Policy
From the time it gained independence in 1947 until the early
1990s, India maintained firm control over imports and exports
of both agricultural and nonagricultural goods, making it one
of the most closed economies in the world. During
this period, India's domestic markets were insulated from world
markets by various restrictive practices, including trade bans,
licensing regimes, state trading, and other quantitative restrictions,
as well as high tariffs. Fundamental reform of domestic and trade
policies affecting the industrial and service sectors began during
1991-93, when many restrictive licensing arrangements and quantitative
restrictions were lifted and basic tariffs were substantially
reduced.
While quantitative restrictions on imports of some agricultural
commodities, most notably pulses and edible oils, were freed
up in the 1980s and 1990s, the general removal of quantitative
restrictions on agricultural trade occurred following the Uruguay
Round Agreement on Agriculture (AoA). The AoA required
India to bind agricultural tariffs at ceiling rates ranging from
0 to 100 percent for primary products, 150 percent for processed
products, and 300 percent for edible oils. In 1997, when
India lost the balance-of-payments waiver that allowed it to
maintain restrictive trade policies, India accelerated the process
of lifting quantitative import restrictions (QRs). India
completed the removal of QRs in April 2001, and nearly all agricultural
products can now be imported subject to a tariff and to sanitary
and phytosanitary standards.
While India's bound
agricultural tariffs are among the highest in the world, applied
tariffs for many products are set well below bound rates. India's
policy has been to adjust applied tariffs periodically to help
meet domestic price stability goals; either raising tariffs
to help strengthen producer prices or reducing tariffs to help
moderate rising consumer prices. In 2007 and 2008, India
reduced tariffs for a number of major commodities—in
many cases to zero—to help curb inflationary pressures
and moderate the impact of high world prices on the domestic
market. In general, however, tariffs have significant
impacts on domestic prices of only the few agricultural commodities
that India trades regularly in large volumes, such as edible
oils and pulses. For most agricultural commodities, Indian
domestic prices are below transport-adjusted world prices.
India's
bound and applied tariffs for selected
agricultural products |
Commodity |
Bound tariff
rate |
Applied tariff rate
|
August 2007 |
November 2008 |
|
|
Percent |
|
Imported products: |
Pulses
|
100 |
10 |
0 |
Wheat |
100 |
0 |
0 |
Onions |
100 |
5 |
5 |
Crude soybean oil |
45 |
40 |
20 |
Refined soybean oil |
45 |
45 |
7.5 |
RBD palm olein 1/ |
300 |
52.5 |
7.5 |
Other products:
|
Atta |
150 |
0 |
0 |
Corn |
70 |
0 |
0 |
Rice |
70 |
70 |
0 |
Oilseeds |
100 |
30 |
30 |
1/ RBD = Refined, bleached, and deodorized.
Source: Government of India, Ministry of Agriculture, Directorate of Economics
and Statistics, Statistics at a Glance. |
India has also removed most quantitative controls on agricultural
exports since the late 1990s, but export controls are not restricted
by the terms of the AoA, and India continues to impose bans and
quotas on exports of agricultural commodities to meet domestic
price policy goals. Recent examples include bans on export of
rice, wheat, and corn in order to ensure stable domestic prices
when global process rose sharply in 2007 and 2008.
India also provides an array of policy incentives aimed at promoting
exports of agricultural commodities, including the following:
- Import duty reductions or drawbacks for goods needed to produce
processed products for export.
- Government support for domestic marketing and transport costs
for exported products, consistent with World Trade Organization
rules.
- Government support for agroprocessing zones to produce goods
for export.
Domestic Agricultural Market Regulation and Investment
Despite accelerating growth in the overall economy, rising consumer
demand, and supportive price and subsidy policies, growth and
investment in Indian agriculture and agribusiness have remained
weak since the early 1990s. There is evidence that numerous domestic
policy interventions, along with weak infrastructure and limited
institutional support for agricultural markets, have been a deterrent
to new investment by agribusinesses and farmers. An array
of central and state government policy interventions in domestic
agricultural markets and industries have created disincentives
and risks for investors in agribusiness, particularly larger
scale and vertically integrated agribusiness enterprises.
Interventions have included movement, storage, and private marketing
restrictions for agricultural commodities, scale restrictions
on agribusiness firms, high taxes on processed products, relatively
high cost credit, and complex food laws. The climate for
private investment is also shaped by weak transport and
power infrastructure and lack of key market services, such as
market information, risk management tools, and grading and inspection
systems, which affect the private costs and returns of new investments. For
farmers, disincentives have included trade and price policies
that, despite MSPs, maintained relatively low domestic prices
for many farm commodities, inefficient markets that dampen returns
to growers, and the limited availability of public and private
marketing services. Onfarm investment may also be constrained
by India's large number of small and marginal farmers—accounting
for about 39 percent of farm land—who often have limited
access to input and output markets and more limited investment
options.
Since 2000, there is evidence that the policy environment is
improving, and that investment in agriculture and agribusiness
is beginning to show stronger growth. Aside from rising
MSPs and input subsidies, a number of central and state policy
changes appear to be stimulating more private investment. Recent
changes include:
- Restrictions on private movement and storage on farm commodities
are becoming less common.
- Restrictions that limited many types of agricultural processing
to small-scale firms have been largely removed.
- State marketing laws are being changed to permit development
of private marketing channels.
- Taxes on processed agricultural products have been reduced
and simplified.
- A new unified food law will simplify development of food
processing industries.
Although power, transport, and other infrastructure problems
will likely be solved only in the longer term, there is evidence
that private investment is on the rise. Recent private
investment activity in food marketing ventures oriented toward
development of supply chains and “front end” retail
outlets represents a major surge in private investment, as well
as a turnaround in investor confidence in the future policy environment
in agriculture and agribusiness.
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More Information
Additional information on India's agricultural and agricultural
trade policies are available from:
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