Growth and Equity Effects of Agricultural Marketing Efficiency Gains in India
by
Maurice Landes and Mary E. Burfisher
Economic Research Report No. (ERR-89) 43 pp, December 2009
Growth in India's economy and consumer buying power has
accelerated sharply since the early 1990s, when a
balance-of-payments crisis instigated major liberalizing reforms to
exchange rate, trade, and domestic regulatory policies. As a
result, India's food demand is expanding and diversifying, but
India's farm sector has not shared in the benefits of policy
reform, and growth in the sector has remained sluggish. Because the
farm sector accounts for a large share of total output and
employment in the Indian economy, this poor performance raises
concerns about India's ability to sustain accelerated income
growth, reduce pervasive rural poverty, and maintain food
security.
What Is the Issue?
Despite the recent robust expansion of India's economy, lagging
investment and growth in its agricultural sector are raising
concerns about the need for a second round of reforms to stimulate
the farm economy. Reforms of agricultural trade protection and
producer subsidies are frequent topics of discussion and analysis,
but strong evidence supports the idea that fragmented and
inefficient domestic agricultural marketing chains seriously hinder
agricultural competitiveness and growth. Measures to boost
marketing efficiency by reducing regulatory barriers that have
impeded investment in agricultural wholesale and retail trade
services may also improve conditions for low-income producers and
consumers, a priority for India's policymakers. This study examines
the performance of India's agricultural marketing system and
analyzes the economywide implications of improved marketing
efficiency that might stem from future reforms to domestic market
regulations and increased investment in agricultural markets.
What Are the Major Findings?
Measures to improve agricultural marketing efficiency in India
can substantially and broadly benefit India's economy. Improved
marketing efficiency has the potential to generate economywide
gains in output and wages, raise agricultural producer prices,
reduce consumer food prices, and increase private consumption,
particularly by rural and low-income households. The broad gains
from improving agricultural marketing efficiency contrast
significantly with the impacts of reducing agricultural subsidies
and tariffs. Indian policymakers face domestic and international
pressures to reduce input subsidies and tariffs in the farm sector.
But reducing subsidies and tariffs, while conferring economywide
benefits, may also, at least in the medium term, create adjustment
costs for labor, land, and capital markets, some commodity sectors,
and households. In contrast, improved agricultural marketing
efficiency can benefit the overall economy (see chart), as well as
low-income households. The results of this study suggest that
policy measures to improve the efficiency of domestic agricultural
markets may be a valuable complement to subsidy and tariff reforms
by helping to mitigate the medium-term losses that may stem from
such reforms.
Greater investment and efficiency in India's agricultural supply
chains also have the potential to enhance agricultural growth over
the longer term. Whether new policies lead to rapid investment by
modern retailers and others in transforming India's markets or the
process occurs gradually, more efficient agricultural marketing is
likely to strengthen consumer demand for food and other goods. More
efficient domestic marketing may also boost net agricultural
exports, although this result does not account for the changes in
demand likely to occur as higher income growth is sustained over
the longer term or for constraints on crop and livestock production
that may emerge.
This analysis also does not fully assess the adjustment costs,
including potential employment and income losses in some areas of
the traditional marketing system, that might result from
transforming India's traditional wholesale and retail markets into
a more efficient sector. This transformation could lead to fewer,
but larger, vertically integrated, and more technologically
advanced processing and marketing enterprises. Concerns with
managing these adjustment costs are central to the current debate
over regulating direct foreign investment in food retailing in
India. This study suggests, however, that although some
participants in the traditional marketing system would undoubtedly
face adjustment costs, the impacts on economywide wages and
welfare, as well as the welfare impacts on low-income households,
are positive. For the United States, these results suggest that
increasing investment and efficiency in India's agricultural
markets is an important potential driver of broad-based income and
demand growth in India, likely bringing long-term benefits to its
trade partners. The analysis of the potential impacts of reforms to
agricultural input subsidies and tariffs suggests why these issues
are sensitive for India in bilateral and multilateral negotiations.
At least in the medium term, reducing input subsidies lowers output
of food staples, leading to reduced welfare for low-income
households, while reducing tariffs imposes adjustment costs on
protected commodity sectors. But, the results also suggest that
measures to improve agricultural marketing efficiency, perhaps
including cooperation to strengthen India's market institutions and
investment climate, can help mitigate the adjustment costs faced by
some households and commodity sectors from such reforms. Further,
the substantial increases in agricultural output and food
consumption that arise from improved marketing efficiency in this
analysis suggest the potential for positive returns to private
investment-including U.S. private foreign investment-in Indian
agribusiness.
How Was the Study Conducted?
The authors constructed a computable general equilibrium (CGE)
model of the Indian economy. The basic model structure was
developed by the International Food Policy Research Institute
(IFPRI), with expanded commodity coverage, disaggregation of
marketing and trade costs, disaggregation of rural and urban
households by expenditure class, and other extensions added by the
authors for this study. Model data were supplied by the Global
Trade Analysis Project (GTAP) and official Indian sources. Model
structure, extensions, and data sources are described in detail in
an appendix. The study also draws on data and results from studies
of India's agricultural markets conducted recently by ERS, the
World Bank, and other institutions.