Investing in India’s Agricultural Markets: A Source of Growth and

Equity?

Maurice LandesEconomic Research Service, U.S. Department of Agriculture

Mary BurfisherUnited State Naval Academy

Background

Despite improved overall economic performance, Indian agriculture has been faring poorly:

• Low yields relative to world averages

• Slowed growth of output and yields

• Subsidies rising while rates of new public & private investment remain low

• Supply-demand imbalance an emerging threat to food price stability

• Lack of consensus on reform

Public investment and subsidies in Indian agriculture

Sources: Government of India, Ministry of Agriculture, Directorate ofEconomics and Statistics, 2003; Government of India, Ministry of Finance,Economic Survey; Mullen, Orden, and Gulati, 2006.

0

50

100

150

200

250

300

1990

1992

1994

1996

1998

2000

2002

2004

Bil

. 199

3/94

Rup

ees

Food subsidy

Input subsidies

Public investment in/for agriculture

Public investment in agriculture

Gross fixed capital formation in India

Source: Reserve Bank of India, Handbook of Statistics on Indian Economy.

Gross fixed capital formation in India as share of gross domestic product (GDP)

0%

5%

10%

15%

20%

25%

30%

35%

Sh

are

of G

DP

Total

In agriculture

Background

Growing evidence that lack of investment in agricultural markets is a problem:

• Agricultural marketing and processing system is fragmented, inefficient & mostly unready to compete in global markets

• World Bank studies• ERS studies

The economy-wide implications of increasing investment & efficiency in agricultural markets could be large in a developing economy like India

Objectives

Analyze the effects of improvements in agricultural marketing efficiency that might result from an improved climate for agribusiness investment.

Compare the impacts of marketing efficiency gains with more “traditional” reforms to agricultural subsidies and tariffs.

Include household distribution of impacts

Outline

Overview of Indian policies affecting investment in agricultural markets

Overview of Indian subsidy & tariff policies Overview of model

• Marketing costs

Scenarios• Increased marketing efficiency

• Subsidy removal

• Tariff removal

Policies Affecting Marketing Investment & Efficiency

Essential Commodities Act• State restrictions on private movement & storage

Agricultural Produce Marketing Acts• State restrictions on private marketing

Small Scale Industry Reservations• Most food processing reserved for small firms ($247,000 of

capital assets) until 1997 Tax Policy

• Excise, sales, octroi taxes impede processing & movement Border/Commercial Policy

• High tariffs & quantitative restrictions impede price transmission; development of efficient processing & export supply chains

Policies Affecting Market Investment & Efficiency

Food Laws• 8 Ministries and more than 12 legislative acts

Land Tenure Policy• Small holdings complicate vertical coordination/

integration

Labor Policy• Proliferation of labor laws affect ”organized sector” firms

Policies have begun to change, but private investors still face a difficult environment in agricultural markets

Agricultural Subsidies

Input subsidies totaled about Rs500 billion ($10 billion) in 2002/03 (Mullen, Orden & Gulati):

• Includes electricity (about 70%), fertilizer (about 16%) & irrigation water (about 13%)

Subsidies account for about 11 percent of agricultural GDP; public investment about 5 percent

“Foodgrain subsidy” not covered• Producer/consumer incidence varies by year• Logistical margins a large part of price wedge calculation

Agricultural Subsidies

Sources: GTAP v.6 and author calculations.

Major Indian crop input subsidies, 2001

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Rice

Whe

atCor

n

Other

grain

Pulses

Fruit

& veg.

Oilsee

ds

Sugar

Fibers

Other

crops

$US

bil

lion

s

Irrigation

Power

Fertilizer

Agricultural Tariffs

Bound agricultural tariffs remain high, but most applied rates are substantially lower• Current applied rates are zero for major commodities,

including wheat, corn, pulses, edible oils & cotton

Reluctant to lower bound rates in order to retain flexibility to meet producer/consumer price goals

Agricultural Tariffs

Sources: GTAP v.6.

Indian applied agricultural import tariffs, 2001

0%

20%

40%

60%

80%

100%

120%

140%

Ric

eW

heat

Cor

nO

th. g

rain

Puls

esFr

uit &

veg

.O

ilsee

dsO

ilmea

lsFa

ts/o

ilsSu

gar

Fibe

rsC

rops

nec

.C

attle

& s

heep

Poul

try &

hog

sB

eef &

mut

ton

Poul

try &

por

kD

airy

pro

ds.

Food

s ne

c.B

ev/to

bacc

o

Per

cent

ad

valo

rem

Model

IFPRI “standard” single-country CGE (Lofgren, 2002; Robinson, et al., 1990)

• 30 sectors:• 12 crop/livestock sectors• 7 processed food sectors

• 3 trade service sectors • Agricultural & food retail• Agricultural production inputs• All other

• 5 rural & 5 urban households (Saluja & Yadav, 2006)

Marketing Costs & Margins

Focus on retailing costs & margins (farm gate-to-consumer)• Direct & indirect impacts on:

• Producer & consumer prices

• Factor returns

• Household consumption & investment

Calculation: • Based on total of transport & trade services inputs allocated

for domestically produced goods.

Food Retail Marketing Costs & Margins

Source: GTAP v.6; and author calculations.

Estimated food retail marketing costs & margins in India, 2001

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Ric

eW

heat

Cor

nO

th. g

rain

sPu

lses

Frui

t & v

eg.

Oils

eeds

Oils

eed

mea

lsO

ils &

fats

Suga

rFi

bers

Cro

ps, n

ecC

attle

& sh

eep

Poul

try &

hog

sB

eef &

mut

ton

Poul

try &

por

kD

airy

& p

rod.

Oth

. foo

ds

Rat

io o

f re

tail

mar

gin

to s

ales

qua

ntity

Marketing Cost & Margin Estimates

Generally small compared with evidence from commodity market studies

Examples:• Wheat: 52% producer-to-consumer (Gandhi & Koshy, 2007)

• Poultry: Rs32/kg producer-to-consumer nonintegrated vs. Rs11/kg with vertical integration (Landes & Persaud, 2003)

• Horticulture: 85-88% producer-to consumer (World Bank, 2007)

We maintain consistency with GTAP database

Food Retail Marketing Costs & Margins

Source: Saluja and Yadav, 2006; GTAP v6; author calculations.

Household expenditure on food marketing costs & margins in India as share of total consumption

expenditure, 2001

0%

1%

2%

3%

4%

5%

6%

7%

RH1 RH2 RH3 RH4 RH5 UH1 UH2 UH3 UH4 UH5

Perc

ent

Scenarios

Scenarios:• 50% increase in food retail marketing efficiency

• Removal of agricultural subsidies

• Removal of agricultural tariffs

Why a 50% increase in marketing efficiency?• Margins implied in database are smaller than those

found in market studies

• View as medium/longer term potential gain

Impacts of Increased Marketing Efficiency

Aggregate impacts of retail food marketing efficiency Price effects of agricultural marketing efficiencygains in India gains in India

50% increase in food Variable retail marketing

efficiencyPercent change from base

Real GDP 1.0Real household consumption 1.4Real investment demand 0.4Government revenue 1.0Producer price index 0.4Land rents 5.6Wages 1.6Capital rents 0.1Agricultural exports 3.9Agricultural imports -37.2

Impacts of Increased Marketing Efficiency

Price effects of food retail marketing Aggregate impacts of marketing, subsidy, and tariff reform efficiency gains in India scenarios in India

50 % increase in foodSelected retail marketing efficiencysectors Producer Consumer

price pricePercent change from base

Rice 1.2 -0.8Wheat 1.8 -0.5Corn 2.2 -0.2Fruit,veg. 2.3 -1.0Oils, fats 0.4 -2.1Sugar 1.0 -1.8Fibers 2.4 -0.1Poultry & pork 2.7 0.6Dairy products 1.9 -0.7Food products nec -0.1 -4.0

Impacts of Increased Marketing Efficiency

Production impacts of 50% increase in food retail marketing efficiency in India

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

% c

han

ge f

rom

bas

e

Impacts of Increased Marketing Efficiency

Household real consumption impacts of increased food retail marketing efficiency in India

0.0

0.5

1.0

1.5

2.0

RH

1

RH

2

RH

3

RH

4

RH

5

UH

1

UH

2

UH

3

UH

4

UH

5

Household type

% c

hang

e fr

om b

ase

Scenario Comparisons

With subsidy removal expenditure shifts from consumption to investment• Lower farm output, factor returns & consumption (at least in the

medium term)

• Higher food prices

• Adverse impacts on low income rural & urban households

With tariff removal expenditure shifts from investment to consumption• Output & factor returns rise as resources are reallocated

• Small price impacts except in heavily traded/protected sectors

• Higher factor returns benefit low income households

Scenario Comparisons

Aggregate impacts of agricultural marketing efficiency, subsidy & tariff changescenarios in India Household real consumption (welfare) impacts of agricultural

50% increase Elimination of Elimination of Variable in food retail agricultural agricultural

marketing subsidies tariffsefficiency

Percent change from baseReal GDP 1.0 0.1 0.3Real household consumption 1.4 -1.3 1.2Real investment demand 0.4 4.2 -2.2Government revenue 1.0 7.4 -2.3Producer price index 0.4 -0.4 1.0Land rents 5.6 -5.0 -0.1Wages 1.6 -1.4 1.3Capital rents 0.1 -0.5 1.2

Scenario Comparisons

Consumer price impacts of agricultural marketing efficiencysubsidy & tariff change scenarios in India

50% increase Elimination of Elimination of Household type in food retail agricultural agricultural

marketing subsidies tariffsefficiency

Percent change from baseRice -0.1 5.4 0.9Wheat 0.0 8.7 0.8Corn 0.2 1.1 0.6Fruit & veg. 0.2 0.9 -1.3Oils & fats -0.3 -0.6 -21.0Sugar -0.4 -2.2 0.8Fibers 0.2 1.5 0.3Poultry & pork 0.1 -0.7 -34.7Dairy -0.2 -2.2 0.3Food, nec -0.8 -0.9 -1.1

Scenario Comparisons

Household real consumption (welfare) impacts of agricultural Consumer price impacts of agricultural marketing efficiencymarketing efficiency, subsidy & tariff change scenarios in India subsidy & tariff change scenarios in India

50% increase Elimination of Elimination of in food retail agricultural agricultural

Household type marketing subsidies tariffsefficiency

Percent change from baseR1 2.0 -2.6 1.7R2 1.9 -2.3 1.7R3 1.8 -1.9 1.5R4 1.7 -1.6 1.3R5 1.4 -1.2 0.9U1 1.4 -1.8 1.7U2 1.3 -1.4 1.6U3 1.2 -0.9 1.4U4 0.9 -0.5 1.0U5 0.8 -0.8 1.0

Summary

Despite progress on the policy front, agribusiness continues to face a difficult policy environment in India• Particularly for larger-scale, horizontally & vertically integrated

businesses common elsewhere

Increased food retail marketing efficiency appears to have significant economy-wide income, employment, and welfare implications• A potentially important complement to subsidy and border policy

reform

Need better data on marketing costs & margins & on potential for efficiency gains to strengthen this exploratory analysis

References

ERS “Briefing Room:” http://ers.usda.gov/Briefing/India/

Recent studies:• The Environment for Agricultural and Agribusiness Investment in

India Indian Wheat and Rice Sector Policies and the Implications of Reform

• The Role of Policy and Industry Structure in India’s Oilseed Markets

• Prospects for India's Emerging Apple Market

• Growth Prospects for India's Cotton and Textile Industries

• India's Poultry Sector: Development and Prospects