Transcript India’s Oilseed Sector: Implications of Policy and

Indian Agriculture and Policy
in Transition
Maurice Landes
Market and Trade Economics Division
Economic Research Service
U.S. Department of Agriculture
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
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
Indian and world average yields for major crops
5.0
4.5
World
India
4.0
Tons/ha
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Su
Source: USDA Production, Supply, and Distribution database.
tto
n
Co
nf
lo
w
er
se
e
d
an
s
So
yb
e
d
ee
Ra
pe
s
an
ut
s
Pe
rn
Co
ce
Ri
W
he
at
0.0
Public investment and subsidies in Indian
agriculture
350
Bil. 1993/94 Rupees
300
Input subsidies
250
200
Food subsidy
150
100
Public investment (in/for agriculture)
50
04
20
02
20
00
20
19
96
19
94
19
92
19
90
19
98
Public investment (in agriculture)
0
Sources: GOI, Ministry of Agriculture; GOI, Ministry of Finance; Mullen, Orden,
and Gulati, 2006.
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
Trade Developments
 India’s agricultural imports have been showing strong
growth:
•
•
•
Demand is outstripping supply
Demand is diversifying
Rupee is appreciating vs. dollar
India’s major agricultural imports
5.0
$ Billion
4.0
Cereals & prep
Raw cotton
3.0
Fruit & vegetables
Pulses
2.0
Edible oils
Other
1.0
04
20
02
20
00
20
98
19
96
19
94
19
92
19
19
90
0.0
Sources: Food and Agriculture Organization, FAOSTAT database;
GOI, Ministry of Agriculture.
Consumption growth by food group in India
2004)
6.0%
Consumption growth
5.0%
Growth rate
Population growth
4.0%
3.0%
2.0%
1.0%
Source: Food and Agriculture Organization, FAOSTAT database.
lse
s
Pu
ps
rc
ro
ga
ea
ls
Su
Ce
r
ea
t
M
sh
Fi
ui
V
eg ts
et
ab
le
s
M
ilk
Fr
gs
Eg
O
ilc
ro
ps
0.0%
(1991-
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
India's bound and applied tariffs for
selected agricultural products
Commodity
Bound Applied
rate
rate 1/
Percent
Major imports:
Pulses
100
10
Wheat
100
0
Onions
100
5
Crude soybean oil
45
40
Crude palm oil
300
45
Refined soybean oil
45
45
RBD palm olein
300
52.5
Others:
Corn
70
0
Rice
70
70
Oilseeds
100
30
1/ As of August 2007.
Sources: GOI, Ministry of Agriculture; USDA/FAS.
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
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
Poultry Sector Analysis
Results of integration and corn free trade scenarios
Variable
Poultry meat prodiction
Poultry meat price
Projections for 2010
75 percent
Integration +
integration only
free trade
Change from baseline
Percent
19
34
-15
-26
Egg production
Egg price
-6
5
17
-14
Corn imports
Soymeal exports
Source: Landes & Persaud
0
-3
318
-14
Oilseed Sector Analysis
Scenario: Oilseed import liberalization
Variable
Major oilseeds and products
% change from baseline
Oilseeds
Production
Price
Crush
Imports (mil. tons)
Oil
Consumption
Imports
Meal
Exports
Processing
Crush cost
Utilization
Quasi-profits
Source: Persaud and Landes, 2006.
1.4
1.6
44.5
8.7
0.0
-25.9
237.5
-28.2
72.9
21.5
Apple Sector Analysis
Rupees/kg, retail
Indian marketing costs and margins for domestic and
imported apples
100
90
80
70
60
50
40
30
20
10
0
Marketing margins
Marketing costs
Tariff
Grower/importer price
Domestic (Rs45/kg)
Source: ERS estimates.
Imported (Rs100/kg)
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
Gross fixed capital formation in India
Gross fixed capital formation in India as share of Gross
Domestic Product (GDP)
Total
In/for agriculture
In agriculture
0.30
Share of GDP (%)
0.25
0.20
0.15
0.10
0.05
0.00
1970
1975
1980
1985
1990
1995
2000
Source: Reserve Bank of India, Handbook of Statistics on Indian Economy.
2005
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
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
Recent changes in India's excise taxes on food
products
Year and product
2001/02:
Fruit & vegetable preps
2002/03:
Tea
2003/04:
Branded, packed refined edible oils
2004/05:
Processed meat, fish & poultry prod.
Cakes & pastries
2005/06:
Surcharge on refined edible oils
2006/07:
Condensed milk
Ice cream
Processed meat, fish & poultry prod.
Pasta
Ready-to-eat processed foods
2007/08
Packed biscuits
Source: GOI, Ministry of Finance.
From
To
16%
0
Rs2/kg
Rs1/kg
0
8%
16%
8%
8%
16%
Rs1/kg
0
16%
16%
8%
16%
16%
0
0
0
0
8%
16%
0
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
Credit Policy
Direct institutional credit for agriculture and allied
activities in India
Billion 1993/94 rupees
1,000
800
600
Commercial Banks
Regional Rural Banks
Cooperative Banks
400
200
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
20
04
-0
5
20
06
-0
7
0
Sources: Reserve Bank of India; GOI, Ministry of Agriculture.
FDI Policy
Foreign direct investment (FDI) in India and share of
gross fixed capital formation (GFCF)
FDI
FDI share of GFCF
15,000
1.00
0.80
0.60
10,000
0.40
5,000
19
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
05
0
Source: Reserve Bank of India.
0.20
0.00
FDI share of GFCF (%)
FDI, 93/94 Rs crore
20,000
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
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.
Source: Kapoor and Barnes, 2003
19
98
Br
az
il,
Jo
r
V
ie
tn
am
,1
99
8
Pa
ki
sta
n,
19
98
Domestic
da
n,
20
02
Agriculture
M
ex
ic
o,
19
99
Ba
ng
la
de
sh
,1
99
9
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Agricultural and domestic power tariffs in selected
countries
In
di
a,
20
02
US cents/kilowatt
Power Cost Recovery
Agricultural Research Expenditures
Public agricultural research funding in India
30
Public agricultural research funding
Share of agricultural GDP
0.4%
0.4%
20
0.3%
0.3%
15
0.2%
10
0.2%
0.1%
5
0.1%
0
0.0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Source: Pal and Byerlee, 2003
Percent
Bil. 1999 rupees
25
0.5%
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
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
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)