Agricultural
Policy
Domestic Agricultural Market Regulation
and Investment
Agricultural Trade Policy
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Agricultural 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.
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.
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.
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.
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.
More Information
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