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India Agricultural Policy Review

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 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
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 May 2008

As a result, India’s food grain MSPs are less Box 1: Water Scarcity in India
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
(FCI) purchases food grains from farmers at and a growing population, demand for non-
the MSPs and sells at subsidized prices agriculture water use has been increasing rapidly.
through the public distribution system (PDS). Water shortages in general and particularly in
Food subsidy expenditures have almost agriculture have been growing in India. The
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
Figure
Figure3.
3.India's
India'sFood
FoodSubsidy
SubsidyExpenditures
Expenditures
water scarcity.
88 The World Bank and the International Water
Management Institute (IWMI) have suggested that
66 under-pricing of water and subsidies have
rendered India’s canal irrigation system inefficient
U.S.$$
BillionU.S.

44 and dilapidated. Heavy electricity subsidies, along

Billion

with an inefficient canal irrigation system, have led

22 to explosive growth in private water pumps to
exploit groundwater. Consequently, major
00 agricultural production areas of north-western
1997/98
1997/98 1999/00
1999/00 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
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
agricultural markets remain subject to a rights apply only to surface water and do not cover
complex regulatory framework. The groundwater.
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 movement of commodities sources under India’s constitution made reform
deemed essential by governments. difficult and contentious. In addition, India’s input
Similarly, the Agricultural Produce Market subsidies and commodity price policies favor water
Committee (APMC) Act requires that farm intensive crops like rice and encourage the use of
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
Input subsidies. India subsidizes fertilizer, systems for water resources. Therefore, how India
electricity, fuel and irrigation. India’s input manages its water resources will be critical to both
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
subsidized. In most states, electricity is less than 20 percent of operation and
provided to agriculture at very low prices or maintenance costs (Box 1).
free. Despite reform attempts, water
subsidies mean that irrigation charges cover

3
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
Pulses other than peas 10 100
Recent Policy Developments
Sugar 60 150 India announced its first comprehensive
Palm oil (crude) 80 300 agricultural policy statement in 2000 – the
Sunflower 75 300
National Agricultural Policy (NAP). The
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
Source: Government of India, 2006. concrete action has been taken at the
central and state level to implement the
Policy Outcomes and Challenges proposed policy measures.
India’s support of its agri-food sector has
effectively de-linked the sector from market The 2007 draft of the 11th five-year plan
signals. The combination of administratively (2008-13) acknowledges the agri-food
determined output prices and consumer sector’s growing subsidy bill and declining
subsidies has undermined the role of market investment but doesn’t outline substantive
forces in India’s agri-food sector. In addition, approaches to reverse these trends. India
heavy presence of government agencies in has, however, taken some steps to make
the marketing of agri-food commodities and agricultural markets more responsive:
market regulations has discouraged the
• revising the APMC Act to allow contract
private sector’s participation in the efficient
operation of agri-food markets. farming;
• removing the reservations for small
Combined with the output price support, scale firms on food processing
India’s border measures have led to higher industries;
• removing restrictions on futures trading
domestic food prices. Food subsidies were
instituted to minimize the impact of higher on many commodities;
• allowing up to 100% foreign ownership
food prices on consumers. Input subsidies
have contributed to the excessive use of in many agribusiness sectors, except in
inputs and resulted in a number of agro- some forms of retailing and primary pro-
environmental problems, such as soil salinity duction.

4
 India May 2008

Prospects looking domestic policies are adopted. For

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.
However, slow growth in the agricultural Sources:
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
rivalries, and special interests within the Government of India Economic Survey of India,
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).
The following areas will be critical to the Indian Wheat and Rice Sector Policies and the
prospects for India’s agri-food sector: water Implications of Reform. USDA-ERS Research
Report No. 41. 2007.
scarcity and valuation; reforms in commodity
price policy; public and private investment in Landes, R and A Gulati.(2004). Farm Sector
rural infrastructure and logistical services for Performance and Reform Agenda. Economic and
agri-food value chain; and the level of Political Weekly (August 7). Mumbai India.
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 trade of agri-food products. case of India’s Horticulture. Oxford University
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 ([email protected], 613-694-2451)
Brad Gilmour ([email protected], 613-759-7404)
For further information regarding this series, contact:
Cameron Short, Director, Policy Analysis Division ([email protected], 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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