Domestic Agricultural Market Regulation and Investment
Agricultural Trade Policy
Since it gained independence in 1947, 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.
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 Targeted Public Distribution System (TPDS) 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
Outlays for input subsidies for fertilizers, electrical power used for agriculture, and irrigation water distributed through surface irrigation systems increased about 11 percent annually in real terms (adjusted for inflation) between fiscal years 1993/94 (April-March) and 2008/09, when high world fertilizer prices pushed the total input subsidy bill to 1,609 billion rupees (US$35.04 billion). On average, fertilizer subsidies, which include both subsidies to farmers and to the fertilizer industry, account for about 40 percent of all input subsidies. The cost of providing subsidized electricity for agriculture accounts, on average, for about 26 percent of total agricultural input subsidies, while subsidies to cover the operational costs of providing surface water irrigation typically account for about 21 percent of the total.
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 rising again due to hikes in MSPs, unchanged subsidized issue prices through the TPDS, and rising government stocks. 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 513 billion rupees ($11.2 billion) in 2010/11. New food security legislation currently under consideration in India's parliament would significantly expand consumer eligibility for the subsidies under the TPDS in an effort to address the needs of India's large food insecure population.
While India's policies have largely achieved the goal of self-sufficiency in staple cereals, the performance in other agricultural sectors has been mixed. Pulses (chickpeas, pigeon peas, lentils, dry peas, etc.) are an important protein source in Indian diets, but productivity is low and, despite having a liberal import policy since the early 1980s, per capita supplies have generally declined. Recently, however, sharply higher MSPs have begun to boost output through diversion of land to pulse cultivation. In the oilseed sector, where India is among the world's largest importer of edible oils and an exporter of oil meals, India has traditionally provided high levels of protection for edible oils with the aim of boosting domestic oilseed production. This approach imposed high costs on consumers in exchange for small gains in output. In 2007, vegetable oil tariffs were largely eliminated, leading to larger imports, lower consumer prices, and continued slow growth in domestic oilseed production. 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. India is a major global producer and trader of cane sugar, but both production and trade are highly cyclical, in part because domestic price policy has been ineffective in stabilizing incentives to growers and processors.
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 is the world's largest milk producer and output growth is being driven by strong consumer preferences for dairy products and, more recently, policies aimed at boosting private investment in dairy processing. Broiler meat and eggs are among fastest growing sectors of Indian agriculture, aided by consumer preferences for these sources of animal protein and the emergence of efficient private integrated poultry and egg operations that are both expanding supplies and reducing real prices.
Consumption growth by food group in India: 1991-2006
Stronger economic growth since the major industrial and trade policy reforms of 1991-93 and slowed farm sector investment and growth continue to create 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 budget resources, agriculture is a "state subject" in the Indian constitution. As a result, all agricultural policies-including price supports, input subsidies, marketing regulations, and consumer subsidies-must ultimately be approved 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 reform, 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. However, the poor performance of the rural sector was a key issue in the last rounds of national elections in 2004 and 2009, and remains an important and often contentious topic of public debate.
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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.
Agriculture's terms of trade and share of gross fixed capital formation (GFCF) in India
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 gradually 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 potentially important 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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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 a number of 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. Table 3. India's bound and applied agriculture tariffs. Excel icon (16x16)
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 exports 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.
Additional information on India's agricultural and agricultural trade policies are available from:
- Government of India, Union Budget and Economic Survey. Latest economic data, including statistics on agriculture.
- Government of India, Ministry of Agriculture, Department of Agriculture and Cooperation, Agricultural Statistics at a Glance. Current statistics on various aspects of agricultural supply, demand, trade and policies.
- Government of India, Ministry of Agriculture, Commission on Agricultural Costs and Prices. Reports and recommendations on Minimum Support Prices for agricultural commodities.
- USDA, Foreign Agricultural Service, Agricultural Attaché Reports.
- ERS, Growth and Equity Effects of Agricultural Marketing Efficiency Gains in India (December 2009).
- ERS, The Environment for Agricultural and Agribusiness Investment in India
- ERS, Indian Wheat and Rice Sector Policies and the Implications of Reform
- ERS, The Role of Policy and Industry Structure in India's Oilseed Markets
- ERS, India's Poultry Sector: Development and Prospects