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India Agricultural Policy Review

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 India Agricultural Policy Review
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.
Introduction
With a population of about 1.1 billion, India
is expected to overtake China as the world’s
most populous country by 2030. India’s
economy ranks as Asia’s third largest, after
Japan and China, and is now one of the
world’s fastest growing. While growth has
led to significant reductions in poverty, India
still ranks among the world’s low income
countries in terms of income per capita.
Nevertheless, economic growth has resulted
in a burgeoning middle-class.
India’s agriculture sector accounts for 18%
of GDP, and employs around 60% of the
workforce. Rice, wheat, cotton, oilseeds,
jute, tea, sugarcane, milk and potatoes are
India’s major agricultural commodities. With
its growing urban middle-class and increas-
ing influence in global affairs, India’s policies
have important implications not only for its
own economic development but also for
global agricultural markets and trade.
Vol. 4, No. 3
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 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
the 1980s resulted in rising fiscal deficits
and, eventually, to a balance of payment
crisis in the early 1990s.
Following the balance of payment crisis,
India implemented extensive economic and
structural reforms. Key reform elements
included adopting a floating exchange rate
regime, relaxing foreign direct investment
rules, and relaxing export and import
controls. Since these reforms were
undertaken, India’s GDP growth has
exceeded 6 percent per annum.
India’s Agri-Food Competitiveness
India has the world’s second largest arable
land base (after the U.S.) and the second
largest irrigated area (after China). India’s
per capita arable land is roughly comparable
to that of Italy or Germany (Figure 1).
Further, much of the land in India can be
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
Figure
Figure 1.
1. Per
Per Capita
Capita Arable
Arable Land
Land in
in Selected
Selected
capita incomes and strengthened domestic
Countries,
Countries, 2005
2005 demand. Second, they reduced industrial
0.7
0.7
protection and improved agriculture’s terms
0.6
0.6 of trade.
0.5
0.5
Hectares
Hectares

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
0.2 sector has actually slowed since the mid-
0.1
0.1 1990s (Figure 2). A potential explanation for
00 these apparently contradictory trends lies
Japan
Japan China
China Chile
Chile Italy
Italy India
India Germany
Germany France
France USA
USA
with India’s agricultural policies and their
performance.
Source: Calculated from FAO database.

Despite having a comparative advantage in Figure

Figure2.
2.Average
AverageAnnual
AnnualGrowth
GrowthRate
RateofofGDP
GDPand
and
Agriculture
Agriculturein
inIndia
India(at
(atConstant
ConstantPrices)
Prices)
production of many agri-food products,
India’s share of international trade in agri- 88
Overall
OverallGDP
GDP Agriculture
Agriculture
food products remains relatively small at 1.5 66
percent. India’s trade regime, transportation Percent
Percent
44
and logistics challenges, and policy and
22
regulatory approaches are the main reasons
for its sub-par trade performance. 00
1950/51
1950/51 1985-90
1985-90 1992-97
1992-97 1997-02
1997-02 2002-07
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
expanding cultivated area, land reform, India’s main policy goals remain as follows:
community development, and restructuring to attain food self-sufficiency, to ensure
rural credit institutions. Trade was strictly remunerative prices to farmers, and to
regulated through both quota restrictions maintain stable prices for consumers. To
and high tariff rates. meet these goals, India relies on a number
of policy instruments:
During the 1960s and 1970s, widespread
adoption of high yielding rice and wheat • minimum support prices (MSP),
varieties occurred. At the same time, India • food subsidies for consumers,
expanded irrigated areas, promoted • regulated markets,
increased use of chemical fertilizers and • input subsidies for producers, and
pesticides, and improved access to • trade policy.
institutional credit. Together, these initiatives
led to dramatic leaps in agricultural Each policy instrument is discussed below.
production and made India self-sufficient in
food grain production at the national level.
Minimum Support Prices. India supports
Production gains from Green Revolution producer prices for key commodities. Based
technologies continued through the mid- on the recommendations of the Commission
1980s and then slowed. During the 1980s, for Agricultural Costs and Prices (CACP),
the input subsidies that had been put in the Government of India (GOI) announces
place also began to strain government MSP for key commodities based on cost of
budgets. production. MSP benefits have been capital-
ized into the value of land and fixed assets,
Unlike reforms in other emerging economies contributing to higher production costs and
(e.g., Brazil, China), the series of reforms pressures to raise MSPs every few years.
instituted since 1991 in India left its agricul-
2
India
As a result, India’s food grain MSPs are less
reflective of actual market conditions.
Food Subsidies. In an effort to protect low-
income consumers from food price
increases, the Food Corporation of India
(FCI) purchases food grains from farmers at
the MSPs and sells at subsidized prices
through the public distribution system (PDS).
Food subsidy expenditures have almost
trebled in the past decade (Figure 3).
Figure
Figure3.
3.India's
India'sFood
88
66
U.S.$$
BillionU.S.
44
Billion
22
00
1997/98
1997/98 1999/00
1999/00
Source: Ministry of Finance, Government of India.
Regulated Markets. India’s domestic
agricultural markets remain subject to a
complex regulatory framework. The
Essential Commodities Act (ECA), for
example, allows central and state
governments to place restrictions on the
storage and movement of commodities
deemed essential by governments.
Similarly, the Agricultural Produce Market
Committee (APMC) Act requires that farm
produce be sold only at regulated markets
through registered intermediaries.
Until recently, food-processing industries
were limited by regulation to small-scale
capacities. In spite of moves to deregulate,
small-scale, low technology firms
established under the old laws still dominate
the industry. State linked firms have been
favored in transportation, marketing and
distribution of agri-food commodities.
Input subsidies. India subsidizes fertilizer,
electricity, fuel and irrigation. India’s input
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
subsidized. In most states, electricity is
provided to agriculture at very low prices or
free. Despite reform attempts, water
subsidies mean that irrigation charges cover
May 2008
Box 1: Water Scarcity in India
India possesses almost 3.5 percent of the world’s
fresh water resources, but its per capita
endowment is below that of Sub-Saharan Africa.
Agriculture accounts for more than 80 percent of
consumptive water use. With a growing economy
and a growing population, demand for non-
agriculture water use has been increasing rapidly.
Water shortages in general and particularly in
agriculture have been growing in India. The
undervaluation of resources, questions related to
property rights, institutional obstacles and
agricultural policies have all contributed to growing
FoodSubsidy
SubsidyExpenditures
Expenditures
water scarcity.
The World Bank and the International Water
Management Institute (IWMI) have suggested that
under-pricing of water and subsidies have
rendered India’s canal irrigation system inefficient
and dilapidated. Heavy electricity subsidies, along
with an inefficient canal irrigation system, have led
to explosive growth in private water pumps to
exploit groundwater. Consequently, major
agricultural production areas of north-western
2001/02
2001/02 2003/04
2003/04 2005/06
2005/06
states have seen water tables decline rapidly due
to over-extraction of ground water. India lacks an
explicit legal framework specifying water rights,
although several acts play a role in defining some
form of rights through land rights. However, these
rights apply only to surface water and do not cover
groundwater.
The World Bank notes that about 90 percent of the
land area in India is drained by interstate rivers.
Consequently, state responsibility for water re-
sources under India’s constitution made reform
difficult and contentious. In addition, India’s input
subsidies and commodity price policies favor water
intensive crops like rice and encourage the use of
extensive (rather than targeted) irrigation tech-
niques. Policies inadvertently encourage extrac-
tion over conservation and constrain the efficient
allocation of water resources across crops and
sectors.
Water shortages may worsen in the coming years
if current trend continues. The intergovernmental
panel on climate change (IPCC) indicated that
climate change may exacerbate the water short-
age in India. International agencies like the World
Bank, IWMI and FAO view India as being in critical
condition unless remedial measures are taken
soon to correct inappropriate pricing and incentive
systems for water resources. Therefore, how India
manages its water resources will be critical to both
its agri-food sector and general welfare.
less than 20 percent of operation and
maintenance costs (Box 1).
3
India
Agricultural Trade Policy. India is a
marginal player in global agri-food trade.
Until the 1990s, agricultural trade was
strictly regulated with high tariffs and
quantitative restrictions and was channeled
through public trading agencies. India’s
agricultural export policies have been
liberalized in part since 1994. Reforms have
included a reduction in products subject to
state trading, relaxation of export quotas,
and removal of minimum export prices.
However, import liberalization for agri-food
trade remains slow. In 2001, to comply with
WTO rules, India replaced quantitative
restrictions on imports of all agricultural
products with import tariffs. A wide gap
between applied and bound tariff rates
exists for most products (Table 1). These
gaps provide India with the discretionary
ability to adjust tariffs to balance competing
producer and consumer interests.
TABLE 1: Sample Applied & Bound Tariffs (%)
Applied rate Bound rate
Wheat 50
Pulses other than peas 10
Sugar 60
Palm oil (crude) 80
Sunflower 75
Coconut oil 85
Meat of Poultry 30
Raw hams 30
Source: Government of India, 2006.
Policy Outcomes and Challenges
India’s support of its agri-food sector has
effectively de-linked the sector from market
signals. The combination of administratively
determined output prices and consumer
subsidies has undermined the role of market
forces in India’s agri-food sector. In addition,
heavy presence of government agencies in
the marketing of agri-food commodities and
market regulations has discouraged the
private sector’s participation in the efficient
operation of agri-food markets.
Combined with the output price support,
India’s border measures have led to higher
domestic food prices. Food subsidies were
instituted to minimize the impact of higher
food prices on consumers. Input subsidies
have contributed to the excessive use of
inputs and resulted in a number of agro-
environmental problems, such as soil salinity
May 2008
and ground water depletion. The growing
cost of input and food subsidies has also
contributed to fiscal deficits in many states.
Expenditures on subsidies also could have
been invested in research, education and
infrastructure to improve productivity and
competitiveness of the sector. India’s
institutional, policy and regulatory systems
have favored the production of food staples
and hindered vertical coordination in the
value chain as well as the development of its
horticultural industry.
Under India’s Constitution, most agriculture
related responsibilities, including water and
electricity, are state jurisdiction. In addition,
India has a highly decentralized system of
governance. Until recently, this decentral-
ized system of governance has proven an
obstacle to undertake fundamental reform in
the sector. Existing policies have benefited
special interests which oppose significant
reforms.
100
100
Recent Policy Developments
150 India announced its first comprehensive
300 agricultural policy statement in 2000 – the
300
National Agricultural Policy (NAP). The
NAP’s aimed to attain an annual growth rate
100
of 4 per cent in the agricultural sector over
100
two decades (2000-2020). Since the
100 announcement of the NAP, however, little
concrete action has been taken at the
central and state level to implement the
proposed policy measures.
The 2007 draft of the 11th five-year plan
(2008-13) acknowledges the agri-food
sector’s growing subsidy bill and declining
investment but doesn’t outline substantive
approaches to reverse these trends. India
has, however, taken some steps to make
agricultural markets more responsive:
• revising the APMC Act to allow contract
farming;
• removing the reservations for small
scale firms on food processing
industries;
• removing restrictions on futures trading
on many commodities;
• allowing up to 100% foreign ownership
in many agribusiness sectors, except in
some forms of retailing and primary pro-
duction.
4
 India
Prospects
Since economic reforms began, India has
transformed itself on the global stage. In
general, its economy has been opening and
growing steadily, leading to higher incomes
and greater and more diversified demand.
However, slow growth in the agricultural
sector remains a cause for concern. India’s
agricultural policies still carry the legacy of
its past centrally-guided, closed economy.
Fundamental reforms are needed to realize
the potential of India’s agriculture sector.
However, constitutional conflicts, inter-state
rivalries, and special interests within the
agri-food value chain have complicated
reform efforts.
The following areas will be critical to the
prospects for India’s agri-food sector: water
scarcity and valuation; reforms in commodity
price policy; public and private investment in
rural infrastructure and logistical services for
agri-food value chain; and the level of
government involvement and potential
crowding out of private initiatives in the
marketing and trade of agri-food products.
Regardless of the path it takes, India will be
an important player in world markets and in
multilateral trade negotiations due to the
sheer size of its population and its
agricultural resource base. India could
emerge as both an enormous market for
agri-food products as well as a formidable
competitor. Opportunities for trade and
investment could change dramatically if
India’s economy continues to grow and
more open trade policies and forward-
For further information regarding this paper, contact:
Rajendra Gurung (gurungr@agr.gc.ca, 613-694-2451)
Brad Gilmour (gilmourb@agr.gc.ca, 613-759-7404)
For further information regarding this series, contact:
Cameron Short, Director, Policy Analysis Division (shortc@agr.gc.ca, 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
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May 2008
looking domestic policies are adopted. For
obvious reasons, it behooves Canada to be
well-informed as to India’s economic and
agri-food policy choices and prospects.
Sources:
World Bank (2005) India’s Water Economy: Brac-
ing for a Turbulent Future. Report No. 34750-IN.
Government of India, Agricultural Statistics at
Glance 2006-07. Ministry of Agriculture, New
Delhi, India.
Government of India Economic Survey of India,
Fiscal Year 2007-08. Ministry of Finance, New
Delhi, India.
Jha, S.; Shrinivasan, P.V.; and M Landes, (2007).
Indian Wheat and Rice Sector Policies and the
Implications of Reform. USDA-ERS Research
Report No. 41. 2007.
Landes, R and A Gulati.(2004). Farm Sector
Performance and Reform Agenda. Economic and
Political Weekly (August 7). Mumbai India.
Mattoo, A.; Mishra, D.; and Narain, A. 2007.
From competing at home to competing abroad: A
case of India’s Horticulture. Oxford University
Press and World Bank.
Persaud S and S Rosen (2003). India’s
Consumer and Producer Price Policies:
Implications for Food Security. Economic
Research Services, USDA
Shahidur Rashid, Ralph Cummings Jr., and
Ashok Gulati (2005) Grain Marketing Parastatals
in Asia: Why Do They Have to Change Now?,
IFPRI Discussion Paper 80.
Tushaar, S et al., (2000) The Global Groundwa-
ter Situation: Overview of Opportunities and
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.