India Agricultural Policy Review

An Expert's View about Food , Beverages and Tobacco in India

Posted on: 25 Mar 2010

One is a series of policy notes on countries of interest to Canada. This note first reviews India's macro reforms, followed by discussion of the competitiveness of Indian agriculture. The evolution of India's major agricultural policies is then described, and new policy directions and emerging challenges are discussed. The note closes with some of the prospects for India's agri-food.

India Agricultural Policy Review Vol. 4, No. 3 One in a series of policy notes on countries of interest to Canada This note draws on analysis from a number of institutions, listed on page 5. This note first reviews India?s macro Introduction reforms, followed by discussion of the competitiveness of Indian agriculture. The evolution of India?s major agricultural policies is then described, and new policy directions and emerging challenges are discussed. The note closes with some of the prospects for India?s agri-food sector and the implications for Canada India?s Macroeconomic Reforms Following its independence in 1947, India pursued a centrally directed, inward-oriented development strategy. This strategy empha- sized self-sufficiency and import replace- ment through large-scale public intervention in industrial production, price setting and foreign trade. Sub-par economic perform- ance from the 1950s to the 1970s led to a strategy of higher public spending in the 1980s in an effort to attain higher economic growth. However, higher public spending in With a population of about 1.1 billion, India the 1980s resulted in rising fiscal deficits is expected to overtake China as the world?s and, eventually, to a balance of payment most populous country by 2030. India?s crisis in the early 1990s. economy ranks as Asia?s third largest, after Japan and China, and is now one of the Following the balance of payment crisis, world?s fastest growing. While growth has India implemented extensive economic and led to significant reductions in poverty, India structural reforms. Key reform elements still ranks among the world?s low income included adopting a floating exchange rate countries in terms of income per capita. regime, relaxing foreign direct investment Nevertheless, economic growth has resulted rules, and relaxing export and import in a burgeoning middle-class. controls. Since these reforms were undertaken, India?s GDP growth has India?s agriculture sector accounts for 18% exceeded 6 percent per annum. of GDP, and employs around 60% of the workforce. Rice, wheat, cotton, oilseeds, India?s Agri-Food Competitiveness jute, tea, sugarcane, milk and potatoes are India has the world?s second largest arable India?s major agricultural commodities. With land base (after the U.S.) and the second its growing urban middle-class and increas- largest irrigated area (after China). India?s ing influence in global affairs, India?s policies per capita arable land is roughly comparable have important implications not only for its to that of Italy or Germany (Figure 1). own economic development but also for Further, much of the land in India can be global agricultural markets and trade. double cropped. Given these resource endowments, the World Bank indicates that India could be as competitive as Thailand India May 2008 and Indonesia in agri-food production if ture sector relatively untouched, except for reform is undertaken. Fruit, vegetables and the removal of export controls. While agricul- nuts are considered areas where India?s ture reforms have been modest, the macro- comparative advantage is strong. economic reforms of the 1990s had two im- portant impacts. First, reforms increased per capita incomes and strengthened domestic i r . r it r l i l t Figure 1. Per Capita Arable Land in Selected tri s, demand. Second, they reduced industrial Countries, 2005 0.7 0.7 protection and improved agriculture?s terms 0.6 0.6 of trade. 0.5 0.5 0.4 0.4 In spite of macro-economic reforms that 0.3 0.3 worked in agriculture?s favor, growth of the 0.2 sector has actually slowed since the mid- 0.2 0.1 1990s (Figure 2). A potential explanation for 0.1 these apparently contradictory trends lies 0 0 Japan China Chile Italy India er any France SA Japan China Chile Italy India Germany France USA with India?s agricultural policies and their performance. Source: Calculated from FAO database. Figure 2. Average Annual Growth Rate of GDP and Despite having a comparative advantage in Figure 2. Average Annual Growth Rate of GDP and Agriculture in India (at Constant Prices) Agriculture in India (at Constant Prices) production of many agri-food products, 8 8 India?s share of international trade in agri- Overall GDP Agriculture Overall GDP Agriculture food products remains relatively small at 1.5 6 6 percent. India?s trade regime, transportation 4 4 and logistics challenges, and policy and 2 2 regulatory approaches are the main reasons 0 for its sub-par trade performance. 0 1950/51 1985-90 1992-97 1997-02 2002-07 1950/51 1985-90 1992-97 1997-02 2002-07 to to The Evolution of Agricultural Policy 1984/85 1984/85 After independence, India pursued a policy Source: Ministry of Finance, Government of India. of food self-sufficiency in staple foods ? rice and wheat. Policies initially focused on India?s main policy goals remain as follows: expanding cultivated area, land reform, to attain food self-sufficiency, to ensure community development, and restructuring remunerative prices to farmers, and to rural credit institutions. Trade was strictly maintain stable prices for consumers. To regulated through both quota restrictions meet these goals, India relies on a number and high tariff rates. of policy instruments: During the 1960s and 1970s, widespread ? minimum support prices (MSP), adoption of high yielding rice and wheat ? food subsidies for consumers, varieties occurred. At the same time, India ? regulated markets, expanded irrigated areas, promoted ? input subsidies for producers, and increased use of chemical fertilizers and ? trade policy. pesticides, and improved access to institutional credit. Together, these initiatives Each policy instrument is discussed below. led to dramatic leaps in agricultural production and made India self-sufficient in food grain production at the national level. Minimum Support Prices. India supports producer prices for key commodities. Based Production gains from Green Revolution on the recommendations of the Commission technologies continued through the mid- for Agricultural Costs and Prices (CACP), 1980s and then slowed. During the 1980s, the Government of India (GOI) announces the input subsidies that had been put in MSP for key commodities based on cost of place also began to strain government production. MSP benefits have been capital- budgets. ized into the value of land and fixed assets, contributing to higher production costs and Unlike reforms in other emerging economies pressures to raise MSPs every few years. (e.g., Brazil, China), the series of reforms instituted since 1991 in India left its agricul- 2 Hectares Hectares Percent Percent India May 2008 As a result, India?s food g Box 1: Water Scarcity in India rain MSPs are less reflective of actual market conditions. India possesses almost 3.5 percent of the world?s fresh water resources, but its per capita Food Subsidies. In an effort to protect low- endowment is below that of Sub-Saharan Africa. income consumers from food price Agriculture accounts for more than 80 percent of increases, the Food Corporation of India consumptive water use. With a growing economy and a growing population, demand for non- (FCI) purchases food grains from farmers at agriculture water use has been increasing rapidly. the MSPs and sells at subsidized prices Water shortages in general and particularly in through the public distribution system (PDS). agriculture have been growing in India. The Food subsidy expenditures have almost undervaluation of resources, questions related to trebled in the past decade (Figure 3). property rights, institutional obstacles and agricultural policies have all contributed to growing water scarcity. Figure 3. India's Food Subsidy Expenditures Figure 3. India's Food Subsidy Expenditures 8 The World Bank and the International Water 8 Management Institute (IWMI) have suggested that 6 under-pricing of water and subsidies have 6 rendered India?s canal irrigation system inefficient 4 and dilapidated. Heavy electricity subsidies, along 4 with an inefficient canal irrigation system, have led 2 to explosive growth in private water pumps to 2 exploit groundwater. Consequently, major 0 agricultural production areas of north-western 0 1997/98 1999/00 2001/02 2003/04 2005/06 1997/98 1999/00 2001/02 2003/04 2005/06 states have seen water tables decline rapidly due to over-extraction of ground water. India lacks an Source: Ministry of Finance, Government of India. explicit legal framework specifying water rights, although several acts play a role in defining some Regulated Markets. India?s domestic form of rights through land rights. However, these rights apply only to surface water and do not cover agricultural markets remain subject to a groundwater. complex regulatory framework. The Essential Commodities Act (ECA), for The World Bank notes that about 90 percent of the example, allows central and state land area in India is drained by interstate rivers. governments to place restrictions on the Consequently, state responsibility for water re- storage and sources under India?s constitution made reform movement of commodities difficult and contentious. In addition, India?s input deemed essential by governments. subsidies and commodity price policies favor water Similarly, the Agricultural Produce Market intensive crops like rice and encourage the use of Committee (APMC) Act requires that farm extensive (rather than targeted) irrigation tech- produce be sold only at regulated markets niques. Policies inadvertently encourage extrac- through registered intermediaries. tion over conservation and constrain the efficient allocation of water resources across crops and Until recently, food-processing industries sectors. were limited by regulation to small-scale Water shortages may worsen in the coming years capacities. In spite of moves to deregulate, if current trend continues. The intergovernmental small-scale, low technology firms panel on climate change (IPCC) indicated that established under the old laws still dominate climate change may exacerbate the water short- the industry. State linked firms have been age in India. International agencies like the World favored in transportation, marketing and Bank, IWMI and FAO view India as being in critical distribution of agri-food commodities. condition unless remedial measures are taken soon to correct inappropriate pricing and incentive systems for water resources. Therefore, how India Input subsidies. India subsidizes fertilizer, manages its water resources will be critical to both electricity, fuel and irrigation. India?s input its agri-food sector and general welfare. subsidies have almost doubled over the past decade and are now estimated to be roughly equivalent to US$8 billion. Prices of both domestic and imported fertilizers are less than 20 percent of operation and subsidized. In most states, electricity is maintenance costs (Box 1). provided to agriculture at very low prices or free. Despite reform attempts, water subsidies mean that irrigation charges cover 3 Billion U.S. $ Billion U.S. $ India May 2008 Agricultural Trade Policy. India is a and ground water depletion. The growing marginal player in global agri-food trade. cost of input and food subsidies has also Until the 1990s, agricultural trade was contributed to fiscal deficits in many states. strictly regulated with high tariffs and quantitative restrictions and was channeled Expenditures on subsidies also could have through public trading agencies. India?s been invested in research, education and agricultural export policies have been infrastructure to improve productivity and liberalized in part since 1994. Reforms have competitiveness of the sector. India?s included a reduction in products subject to institutional, policy and regulatory systems state trading, relaxation of export quotas, have favored the production of food staples and removal of minimum export prices. and hindered vertical coordination in the value chain as well as the development of its However, import liberalization for agri-food horticultural industry. trade remains slow. In 2001, to comply with WTO rules, India replaced quantitative Under India?s Constitution, most agriculture restrictions on imports of all agricultural related responsibilities, including water and products with import tariffs. A wide gap electricity, are state jurisdiction. In addition, between applied and bound tariff rates India has a highly decentralized system of exists for most products (Table 1). These governance. Until recently, this decentral- gaps provide India with the discretionary ized system of governance has proven an ability to adjust tariffs to balance competing obstacle to undertake fundamental reform in producer and consumer interests. the sector. Existing policies have benefited special interests which oppose significant TABLE 1: Sample Applied & Bound Tariffs (%) reforms. Applied rate Bound rate Wheat 50 100 Recent Policy Developments Pulses other than peas 10 100 Sugar 60 150 India announced its first comprehensive agricultural policy statement in 2000 ? the Palm oil (crude) 80 300 National Agricultural Policy (NAP). The Sunflower 75 300 NAP?s aimed to attain an annual growth rate Coconut oil 85 100 of 4 per cent in the agricultural sector over Meat of Poultry 30 100 two decades (2000-2020). Since the Raw hams 30 100 announcement of the NAP, however, little concrete action has been taken at the Source: Government of India, 2006. central and state level to implement the Policy Outcomes and Challenges proposed policy measures. India?s support of its agri-food sector has The 2007 draft of the 11th five-year plan effectively de-linked the sector from market (2008-13) acknowledges the agri-food signals. The combination of administratively sector?s growing subsidy bill and declining determined output prices and consumer investment but doesn?t outline substantive subsidies has undermined the role of market approaches to reverse these trends. India forces in India?s agri-food sector. In addition, has, however, taken some steps to make heavy presence of government agencies in agricultural markets more responsive: the marketing of agri-food commodities and market regulations has discouraged the ? revising the APMC Act to allow contract private sector?s participation in the efficient farming; operation of agri-food markets. ? removing the reservations for small scale firms on food processing Combined with the output price support, industries; India?s border measures have led to higher ? removing restrictions on futures trading domestic food prices. Food subsidies were on many commodities; instituted to minimize the impact of higher ? allowing up to 100% foreign ownership food prices on consumers. Input subsidies in many agribusiness sectors, except in have contributed to the excessive use of some forms of retailing and primary pro- inputs and resulted in a number of agro- duction. environmental problems, such as soil salinity 4 India May 2008 looking domestic policies are adopted. For Prospects obvious reasons, it behooves Canada to be Since economic reforms began, India has well-informed as to India?s economic and transformed itself on the global stage. In agri-food policy choices and prospects. general, its economy has been opening and growing steadily, leading to higher incomes and greater and more diversified demand. Sources: However, slow growth in the agricultural sector remains a cause for concern. India?s World Bank (2005) India?s Water Economy: Brac- agricultural policies still carry the legacy of ing for a Turbulent Future. Report No. 34750-IN. its past centrally-guided, closed economy. Government of India, Agricultural Statistics at Fundamental reforms are needed to realize Glance 2006-07. Ministry of Agriculture, New the potential of India?s agriculture sector. Delhi, India. However, constitutional conflicts, inter-state Government of India Economic Survey of India, rivalries, and special interests within the Fiscal Year 2007-08. Ministry of Finance, New agri-food value chain have complicated Delhi, India. reform efforts. Jha, S.; Shrinivasan, P.V.; and M Landes, (2007). Indian Wheat and Rice Sector Policies and the The following areas will be critical to the Implications of Reform. USDA-ERS Research prospects for India?s agri-food sector: water Report No. 41. 2007. scarcity and valuation; reforms in commodity price po Landes, R and A Gulati.(2004). Farm Sector licy; public and private investment in Performance and Reform Agenda. Economic and rural infrastructure and logistical services for Political Weekly (August 7). Mumbai India. agri-food value chain; and the level of government involvement and potential Mattoo, A.; Mishra, D.; and Narain, A. 2007. crowding out of private initiatives in the From competing at home to competing abroad: A marketing and case of India?s Horticulture. Oxford University trade of agri-food products. Press and World Bank. Regardless of the path it takes, India will be Persaud S and S Rosen (2003). India?s an important player in world markets and in Consumer and Producer Price Policies: multilateral trade negotiations due to the Implications for Food Security. Economic sheer size of its population and its Research Services, USDA agricultural resource base. India could Shahidur Rashid, Ralph Cummings Jr., and emerge as both an enormous market for Ashok Gulati (2005) Grain Marketing Parastatals agri-food products as well as a formidable in Asia: Why Do They Have to Change Now?, competitor. Opportunities for trade and IFPRI Discussion Paper 80. investment could change dramatically if Tushaar, S et al., (2000) The Global Groundwa- India?s economy continues to grow and ter Situation: Overview of Opportunities and more open trade policies and forward- Challenges, IWMI. Bates, B.C., Z.W. Kundzewicz, S. Wu and J.P. Palutikof, Eds., 2008: Climate Change and Wa- ter: Technical Paper of Intergovernmental panel on climate change, IPCC Secretariat, Geneva. For further information regarding this paper, contact: Rajendra Gurung (, 613-694-2451) Brad Gilmour (, 613-759-7404) For further information regarding this series, contact: Cameron Short, Director, Policy Analysis Division (, 613-759-7426) September 2008 Project 08-040-b Publication 10661E ISSN 1918-0144 ISBN 978-1-100-10090-6 Catalogue A38-3/5-1-1E-PDF 5
Posted: 25 March 2010

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