PART II
Indian agriculture and scenario for 2020

Bibek Debroy
PHD Chamber of Commerce and Industry

Laveesh Bhandari
Indicus Analytics

Abbreviations and acronyms

Executive summary

The objectives of the study are mainly to understand the dynamics of the agriculture sector within India, how it is likely to emerge in coming years and how other countries in the region or otherwise can gain from greater interaction with India.

This study draws from the literature, government reports as well as policy documents to bring out specific issues related to agriculture apropos increasing its potential for contributing to development. The impact of India's agriculture sector on the rest of the world is an important aspect in this context. Forecasts for domestic production and consumption as well as the potential exports and imports of various agricultural commodities obtained using the Global Trade Analysis Project (GTAP) model are considered. The implications for other countries, both as potential trade partners and in general are also discussed.

The paper first discusses the evolution of the Indian economy with a special focus on the agriculture sector. Since independence there have been three major phases — before the Green Revolution, the Green Revolution years and deceleration after the Green Revolution. The success of the Green Revolution provides us with some important insights: The government, even for a country as diverse and heterogeneous as India, can play an important role in setting the agriculture sector on a course towards high growth. It has done so in the past, inter alia by promoting suitable technology nationwide, supplying ample credit and manifold extension services, declaring a minimum support price and a scheme for government purchasing, subsidizing fertilizer and pesticides, and increasing investment in small irrigation projects. Despite their relatively low capital base, Indian farmers, including small and marginal farmers, responded positively to the opportunities offered by technology and the incentives put in place by the government. Impressive strides were made in other subsectors such as fisheries and livestock, meeting the diverse food needs of the growing population. A critical success factor was the coordinated approach by the government in establishing numerous agricultural research institutions and a well-knit extension system.

However, all of these efforts could not disseminate the benefits of the new technologies to all parts of the country, given the diversity in crops and resource constraints, particularly water, in less well-endowed areas. In the 1990s, in the wake of the policy reforms in response to the macroeconomic crisis, there was a slackening of public investment in research and infrastructure. Risk mitigation measures — so necessary for continued and stronger diversification — were also not in place. The coordinated approach worked best during crises (for example lack of food or foreign exchange) that resulted in heavy dependence on external largesse. But once the crisis was over, the necessary follow-up measures were not forthcoming.

One of India's significant successes in the past few decades has been massive reduction in poverty levels at a time when the population was expanding rapidly at about 2 percent per annum. Was the Green Revolution responsible for this? Although this is not debated here, the Green Revolution as well as improvements in the dairy industry, fisheries and animal husbandry, were quite instrumental. The greatest increases in productivity occurred in the 1970s and 1980s. The greatest reduction in poverty occurred in the 1980s and 1990s, which were also a period of high economic growth and economic liberalization. The Green Revolution facilitated the availability of agricultural commodities; it also increased incomes for many cultivators who could access the available technologies. When the high-income growth phase occurred, poverty levels fell significantly, as high-yielding varieties benefited both producers directly and consumers indirectly. In other words, enhanced production by itself may not have generated the required impact on poverty, although it was a necessary factor, but when greater income growth came later, the impact on poverty was significant.

Section 3 discusses current population, economic growth and demand patterns and future prospects. It also discusses productivity issues to provide a backdrop to the assumptions used for the GTAP model that is used to forecast food production and consumption scenarios in India.

Between 10 and 13 percent of the Indian export basket of goods (excluding services) comes from agriculture and is worth around US$7 billion a year. Tea, coffee, rice, wheat, sugar and molasses, tobacco, spices, cashew nuts, oilmeal, fresh fruit and vegetables, meat and marine products are the major export items. India's export shares in global exports are high for items like tea, coffee, tobacco, spices, sugar, rice and fish. Contingent on domestic reforms, there is enormous potential for meat products, fruit and vegetables and processed foods. Imports of agricultural products account for between 4.5 and 5.5 percent of India's imports of goods (excluding services), worth US$2 to 3 billion, with pulses, cashew nuts, other fruit and nuts and edible oils being the major items. Rice is the largest agricultural commodity export and India is currently among the top three nations in quantity terms. India is a minor exporter of wheat and by-products and this share is expected to fall further.

Oil and oilseed imports are likely to increase in quantity and value. India is going to become an even more important exporter of cotton garments, and therefore importer of cotton, accounting for 18 percent of global plant-based fibre imports by 2020. Meat is not a significant export, and India will remain a net exporter, although marginal, of fish products.

Sections 4 and 5 discuss the agenda for reform related to land, water, credit, markets, diversification and taxation separately. For poor farmers, land and its ownership is the most significant asset and form of collateral. Since the 1990s, conversion of agricultural land to other uses has increased because of urbanization and population pressure. Land redistribution in many states has not really changed the status of small and marginal farmers. Apart from improper land utilization, there are salinization and waterlogging constraints. A considerable area of land is also subject to litigation and land ceiling laws have not been repealed. Land consolidation on the basis of efficiency has been hampered by poor documentation and confusion over land rights.

Barely one-third of agricultural land is irrigated, so Indian agriculture remains dependent on monsoons. Irrigation fuelled the success of the Green Revolution, but since the 1990s projects remain incomplete or on paper only owing to lack of funds. Credit has similarly remained out of reach for many farmers despite initiatives taken by the government, as well as non-government entities, especially for small farmers with poor access, knowledge and collateral. A concomitant issue is the continued absence of a comprehensive crop insurance scheme.

Intermediation is a serious problem that plagues Indian agriculture. The abundance of intermediaries not only wastes produce but also keeps farmers at the bottom of the food chain. The plethora of laws aggravates the situation. Nine different ministries are concerned with food processing and there are 22 related Acts and Orders. Encouraging diversification through producers' organizations and greater private sector participation would be of major assistance.

The National Common Minimum Programme, a politico-economic agenda that guides new government policy decisions, lists several important reforms. Some are underway. Now an integrated food-processing law is being prepared and the Essential Commodities Act (ECA) has been drastically amended. All Orders issued by state governments under the ECA have almost been repealed. Contract farming, because it is equated with corporate farming, is controversial, but many states have amended their Agricultural Produce Marketing Committee (APMC) laws, to allow direct marketing, contract farming and the establishment of private markets in the private or cooperative sectors.

But if reforms have not matched actual expectations, there is a reason. Constitutionally, most agriculture-related areas are state government subjects and it is difficult for the central government to provide incentives for such reforms. The major exceptions to this principle are foreign trade policy, agricultural credit and insurance, major irrigation projects, fertilizer policy and research and development.

Reform needs can be therefore be summarized as follows:

• Create infrastructure: For irrigation, for marketing and distribution, and for transportation and storage;

• Adequate public investment in research;

• Change laws that will enable the free flow of goods and services;

• Allow for greater flexibility in production and trade;

• Appropriate regulatory measures and enforcement of environmentally sustainable development of agriculture;

• Enforcement of food quality standards and food safety;

• Ensure availability of credit by not only targeting public sector banks, but moving from cost to accessibility;

• Stop unsustainable exploitation of water and use of land.

A greater decentralized and market-oriented approach is emerging, albeit slowly. In the past, whether for technology development, provision of extension services or seed generation, initiatives in the private corporate sector were scarce. Although it is too soon to tell, this appears to be changing. Owing to the open economy, liberalization, greater ease in setting up and operating domestic firms, rapidly growing demand, improvement in infrastructure and government subsidies, many different privately backed activities are occurring across India. Most are currently small in size and are widely scattered. However, they have the potential to generate dynamic changes, as many are bottom-up responses to requirements and appear to be scaleable. Moreover, the government still continues to and will continue to play an important role. In part as a beneficiary, where it continues to subsidize many if not most agricultural inputs, and regulates and controls many activities. Moreover, new technologies are being developed by government scientific research agencies. Although private research and development (R&D) in the agriculture sector is at a nascent stage, it appears to be growing. The diversity of India's agroclimatic zones and highly educated human resource pool provide many opportunities for developing an array of technologies specific to different conditions and soil types.

Although there is great potential for private R&D, it cannot completely replace public R&D. Moreover, issues such as conservation of local varieties and import of newer varieties need to be addressed. Although the legal structure exists through the Protection of Plant Varieties and Farmers' Rights Act, its enforcement needs to be strengthened.

Section 5 delves into issues related to multi- and bilateral trade. It discusses India's trade with the rest of the world commodity-wise and points to specific opportunities for other countries. India has many regional trade agreements (RTAs) and Comprehensive Economic Partnership Agreements (CEPAs). FTAs (free trade agreements) are covered by Article XXIV of the General Agreement on Tariffs and Trade (GATT), although India's RTAs are notified under a 1979 enabling clause that requires less trade to be liberalized than through Article XXIV. Multilateral liberalization is preferable to discretionary regional liberalization, even if negotiating the latter is easier although it will soon become irrelevant. The focus ought to shift to cross-border movements of labour and capital, non-trade barriers, double tax avoidance agreements, investment agreements and cross-border liberalization of services.

As things stand currently, India is unlikely to be in a position to tap global potential. However there is no particular reason for India to fear a deluge of agro-imports. Barring isolated sectors, India is cost competitive in agricultural products.

What can other countries learn from India's experience? The critical differentiating factor between India and many other countries, in the view of the authors, is not that India has greater population or land mass. But that agroclimatically, culturally and economically, India is a highly diverse and heterogeneous country. Moreover it has a decentralized system of governance. Hence coordinated efforts by the central government are difficult to manage and sustain in an environment where flexibility is important. The alternative option is a system where the government leaves the role of coordination to the market mechanism and limits itself to ensuring price stability, rural development, environmental and standards' regulations and property rights. India appears to be moving in this direction.

Doubtless there will be high levels of increase in demand for agricultural products on account of both increases in population and high economic growth. These will generate rapid increases in the demand for food products, although of course to varying degrees for different items. At the same time, India is a major producer of most of the commodities that it consumes. Agricultural productivity appears to be stagnating but there is much that could happen to put productivity back on a high growth path.

1. Background

Agriculture is important to the Indian economy. At a speech delivered on 27 October 2005 at a National KVK (Krishi Vigyan Kendra) Conference, the present Prime Minister quoted a former Prime Minister.¹ “Long ago, Jawaharlal Nehru once said “Everything else can wait but agriculture cannot wait…. And I should begin by stating that our Government attaches the highest importance to achieve a 4 percent average growth rate in agricultural production.” The share of agriculture in national income (gross domestic product) is a shade lower than 20 percent now and will only fall further.² The percentage of the working population that reports itself as earning a living primarily from agriculture is now around 57 percent. It should also be noted that agricultural performance during the first three years of the Tenth Five Year Plan (2002–2007) has been nowhere near that target trend of 4 percent, actual growth having been more like 1.6 percent.

Following the reforms of the 1990s, initially introduced in 1991, there have been outstanding successes in the Indian economy and these cannot be disputed. (1) The external sector is doing very well. (2) The rate of GDP growth has risen. (3) Despite some quibbling about data, the percentage of the population below the poverty line has declined and so has the occurrence of hunger. (4) There is no evidence that income distributions have deteriorated.³ (5) Educational indicators have improved, not only literacy rates, but also gross enrolment ratios. (6) The rate of population growth has begun to slow down and is currently around 1.8 percent⁴ , implying a faster increase in per capita income. (7) The savings rate has increased to around 28 percent.⁵ (8) With dependency ratios dropping, there is a demographic dividend to be reaped. Overall, the Indian economy appears to be in an enviable position.

But concerns remain. The benefits of economic growth have not been evenly distributed. Traditionally, India's less-advanced states have been known as the BIMARU (Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh). After the bifurcation of some states, the states in this category are now Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Uttar Pradesh, Orissa and Rajasthan, with some evidence of deprivation also in the northeast. Despite the benefits of the liberalization of the 1990s, employment growth has tended to stagnate and this is fundamentally a rural sector problem. Commercialization and diversification of agriculture is tending to increase but at a slow pace. Agriculture's profitability has been squeezed, with increases in input prices eroding any increases in output prices. There has been exposure to risk and uncertainty, without the development of risk mitigation instruments. The rural sector's failure to create jobs has resulted in economic refugees' migration to urban areas. Public investments in agriculture have slowed down and this is also applicable to research and extension services. While required reforms are on the agenda, they continue to be on paper only, with minimal implementation. This is partly due to India being a constitutionally federal country, with most agricultural issues being state-government subjects. These endogenous and systemic problems explain much of the opposition in opening up agriculture, within or outside the World Trade Organization (WTO) negotiating system.

However, it is not that the Indian state does not have the capacity to push the agriculture sector along a higher growth path. The great successes of the past have shown that indeed when there is motivation and a concerted effort, resources can be found and programmes for overall agricultural and rural development have been instituted. But concentrated, synchronized and coordinated efforts are difficult to sustain over time.

Overview of Indian agriculture

On the eve of Independence, Indian agriculture had experienced many years of relatively low growth and by many accounts even deceleration in both productivity and output growth. From annual agricultural output growth of greater than 1 percent in the late 1800s, the first half of the 1900s saw annual growth plummet to about 0.3 percent per annum. Growth in grain yields has been estimated at between -0.4 to -0.6 percent annually from 1916 to 1946 (Blyn 1966).

It is generally agreed that a combination of (1) structure of land rights and (2) resource endowments generated a set of incentives that worked against increases in productivity. The argument is that those who had ownership rights and access to capital did not have the right set of incentives to invest in productivity enhancing measures. Why this occurred has been the topic of much debate and will not be revisited here (see Roy 2000). The more important question is why this continued in the period following Independence. The answer is that class structure and resource endowments take time to change.

Subsequently Indian agriculture has witnessed significant positive changes. Growth of net domestic products from agriculture averaged 1.87 percent from 1950 to 1967, increased to about 2.25 percent in 1966 to 1981 and further increased to about 3.3 percent in 1980 to 1999. However it now appears to be stagnating, as is discussed in later sections. The growth in production can be broadly ascribed to (1) growth in factor inputs and (2) growth in productivity. The first phase was more a result of an increase in factor inputs and the latter was driven by increases in productivity (see NCAER 2001). It is debatable whether the early twenty-first century will witness stagnation or a continued increase (Figure 1).

Source: NCAER (2001).

Figure 1. Trends in sectoral output — net domestic product
(1993 constant, Rs10 million)

At the same time the Indian economy overall is also growing faster. Moreover the dependence of the overall economy on agricultural growth is now much lower. According to estimates from Indian Council for Research on International Economic Relations (ICRIER) about 45 percent of the historical variation in growth can be accounted for by variations in agricultural output (Virmani undated). But growth evidence from the early 2000s suggests that high levels of dependence belong to the past.

However, high growth is essential, with increases in population, incomes and nutritional requirements being various aspects. The ability to advance progress and the lifestyles of a large mass of the population is an important component. The experience of China is relevant here. A recent International Food Policy Research Institute (IFPRI) report summarizes the issue well (Gulati et al. 2005): “The comparative study shows that agriculture-led reform and development not only provide the necessary conditions for the manufacturing and service sectors to grow and reform, but also lead to larger reductions in poverty given the same rate of growth. The Chinese reform starting with agriculture ensured that the majority of the population benefited from the initial reforms, as the population was overwhelmingly dependent on the primary sector. The breathtaking reduction of poverty, from 33 percent of the population in 1978 to 3 percent in 2001, is primarily attributed to the acceleration of agricultural growth during the same time period.”

India's experience however has been rather tame in comparison. The reasons are apparent. For one, the governance structure is quite different. There have been few effective policy measures in agriculture despite policy documents stating otherwise. This does not mean that policy-makers do not appreciate the importance of agriculture. But a combination of factors ranging from the fiscal situation, India's infamous infrastructure bottlenecks, manifold laws and coordination failures have contributed to the situation. The politico-economic argument of entrenched lobbies is one of the more frequently cited reasons. But not the only one. India had fewer price distortions, and fewer controls on deliveries at the very outset, and therefore agricultural reforms were not as critical as they may have been in China.

The objectives of this study are to:

• Outline the main changes in agriculture, food security and rural development, and document the main policies and strategies that led to them;

• Extrapolate these trends in the future and assess the implications for food security;

• Assess the implications of the overall rapid economic growth of India for neighbouring countries and generally.

This study draws from the literature, government reports, as well as policy documents to highlight the specific issues related to agriculture with a view towards increasing its potential to contribute to development. The impact of India's agriculture sector on the rest of the world is an important aspect in this context. Forecasts for domestic production and consumption as well as potential exports and imports of various agricultural commodities obtained using the Global Trade Analysis Project (GTAP) model are considered.⁶ The implications for other countries, both as potential trade partners and generally are discussed.

Section 2 discusses the evolution of the Indian economy with a special focus on the agriculture sector. Following independence there have been three major phases — before the Green Revolution, the Green Revolution years and subsequent deceleration. How these phases occurred, and what implications they may have for developing countries in general and India in particular are discussed.

Section 3 discusses how population, economic growth and demand patterns exist in India and how they are expected to behave in the near future. It also discusses productivity issues; the objective being to provide a backdrop to the assumptions used for the GTAP model that is used to forecast the food production and consumption scenario in India.

Section 4 discusses the agenda for reform; for this purpose it discusses issues related to land, water, credit, markets, diversification and taxation separately. Section 5 discusses the current agenda, constraints and the emerging private sector. Section 6 delves into issues related to multi- and bilateral trade. It then provides a commodity-wise discussion of India's trade with the rest of the world and points to specific opportunities for other countries. Conclusions are drawn in Section 7.

2. Economy and agricultural economy: growth and deceleration

India has a land area of about 328 million ha and a coastline of about 7 000 km. Of the total land area about 165 million ha are arable and 54 million ha belong to the net irrigated area (GOI 2005a). Ranging from the Himalayas in the north to the Thar desert in the west and the tropical climate in the south, there is a wide range of climatic conditions within the country.

2.1 Growth

There are various ways to disaggregate the temporal trend of India's growth experience, for instance, the decadal system. Alternatively, one can use the five-year plan framework, as India has a system of five-year plans.⁷ Real annual average GNP growth was 3.7 percent during the First Plan (1951–1956), 4.2 percent during the Second Plan (1956–1961), 2.8 percent during the Third Plan (1961–1966) and 3.4 percent during the Fourth Plan (1969–1974) (GOI 2004–2005). The period up till the mid-1970s is often described by the term “Hindu rate of growth”, a term coined for an annual average real growth of 3.5 percent, a rate that India never seemed to cross till the mid-1970s. From the second half of the 1970s, growth rates inched up, especially in the 1980s, to an annual average real growth approaching 5.5 percent. For instance, the Fifth Plan (1974–1979) produced average growth of 5.0 percent, the Sixth Plan (1980–1985) 5.5 percent and the Seventh Plan (1985–1990) 5.8 percent. As a trend, the new Hindu rate of growth became 5.5 percent. Some reforms were introduced in the late 1970s and 1980s, particularly in the second half of the 1980s. Faced with a balance of payments crisis in 1990 to 1991, more substantive economic reforms were introduced in the 1990s, beginning with 1991. Following these reforms, the Eighth Plan (1992–1997) produced average growth of 6.8 percent and the Ninth Plan (1997–2002) 5.6 percent. The Tenth Plan (2002–2007) has a target growth rate of 8 percent and the NCMP (National Common Minimum Programme) of the United Progressive Alliance (UPA) Government mentions growth of between 7 and 8 percent. The 8 percent target during the Tenth Plan is now impossible to achieve. The first three years have produced 4.2 percent in 2002 to 2003, 8.5 percent in 2003 to 2004 and 6.8 percent in 2004 to 2005, with around 7.5 percent expected in 2005 to 2006. Growth in 2006 to 2007 will have to cross 10 percent for the 8 percent goal of the Tenth Plan to be reached — an unlikely situation.⁸

2.2 Poverty

How does growth affect poverty and unemployment in a relatively poor country like India beyond direct antipoverty programmes? Income poverty is certainly not the only indicator of poverty, but it is an important one. Table 1 shows the incidence of poverty in India (GOI 2003–2004a). The poverty ratio or head count ratio is based on the percentage of population below the national poverty line.⁹ This national poverty line is not the same as the international PPP (purchasing power parity) standard of US$1.00/day, but is close to it. Data for computing poverty ratios are obtained through surveys and the National Sample Survey (NSS) organization conducts sizeable and reliable surveys approximately once every five years. The NSS collects data on consumer expenditure, not income. Similar to surveys elsewhere in the world, the aggregate of consumption expenditure obtained in household surveys falls short of the aggregate of consumption expenditure obtained through national accounts. Ideally, one ought to make adjustments for this gap, but ultimately all such adjustments tend to be subjective. Nationwide, there are significant inter-regional variations.

Income poverty has dropped significantly, especially since the early 1980s (Table 1). This is understandable, and has largely been a function of growth. Income and expenditure distributions have not deteriorated. Depending on the year, the Gini coefficient of rural consumption expenditure distributions has varied between 0.25 and 0.30, while the Gini coefficient for urban consumption expenditure distributions has varied between 0.32 and 0.34. Therefore, because distributions have not declined, growth has induced trickle-down poverty reduction effects. In addition, because income distributions are typically log normal, sharp drops are possible when the thick part of the distribution passes above the poverty line. Arguably, that is precisely what has been happening in the 1990s and this trend should continue for the next decade also.

Table 1. Incidence of poverty

Source: GOI (2003–2004a).

The decline in the combined poverty ratio from 36.0 percent in 1993 to 1994 to 26.1 percent in 1999 to 2000 was one of the sharpest drops ever witnessed.¹⁰ But despite the reduction, the absolute numbers of the poor were quite large, particularly in rural India, where, in 1999 to 2000, almost 200 million individuals were BPL (below the poverty line). In addition, the rural poverty ratio was higher than the urban poverty ratio.¹¹ There are significant regional variations within India, such as between states or between districts. Also there are states where the rural poverty ratio is lower than the urban ratio. This was evidenced in Andhra Pradesh, Gujarat, Haryana, Karnataka, Madhya Pradesh, Rajasthan and Tamil Nadu in 1999 to 2000. However there were other states where the rural poverty ratio in 1999 to 2000 exceeded 30 percent, for example Assam, Bihar, Madhya Pradesh, Orissa, Uttar Pradesh and West Bengal as well as some northeastern states.

All of this evidence indicates that high growth is a significant force behind high poverty reduction. Neither government poverty alleviation programmes nor other direct policy instruments appear to have made a significant dent in poverty levels on a large enough scale. At the same time, there are too many state-level and within state variations in both poverty levels and their trends, indicating that if poverty has to be impacted through other means, then location-specific models need to be built around the socio-economic and other peculiarities of specific villages and urban communities.

2.3 Unemployment

The last NSS survey was held in 1999 to 2000 and is somewhat dated now.¹² It revealed a labour force of 363.33 million and a workforce of 336.75 million, with an unemployment rate of 7.2 percent. With a significant share of the workforce employed in the rural sector, unemployment figures may not reveal a great deal. The problem is more of underemployment. Again, there are significant variations in unemployment rates across states. Unemployment rates exceeded 10 percent in states such as Kerala, Tamil Nadu and West Bengal. What is worrying is that the annual average growth in employment has slowed down. While the average annual growth rate in employment was 2.89 percent between 1983–1987–1988 and 2.50 percent between 1987–1988 and 1993–1994, it was 1.07 percent between 1993–1994 and 1999–2000.

This deceleration is largely because in the 1990s agriculture failed to create jobs. While this is recognized and increasing rural employment is important in the present UPA government's agenda, notwithstanding the emphasis on agricultural reforms, it is fair to say that the emphasis is not on creating employment through crop output. Instead, the emphasis is on creating employment through off-farm activities and within farm activities, through non-crop diversification.

2.4 Broad sectoral trends

Sectoral compositions of the GDP are not constant. They change overtime. In 2003 to 2004, agriculture and allied activities (the primary sector), accounted for 21.71 percent of the GDP, compared to 59.20 percent in 1950 to 1951, 54.75 percent in 1960 to 1961, 48.12 percent in 1970 to 1971, 41.82 percent in 1980 to 1981 and 34.93 percent in 1990 to 1991.¹³ This relative decline, particularly marked in the 1990s, has been due to the increased importance of the services sector, rather than increasing importance of the secondary sector. This classification of the primary sector also includes mining and quarrying. In 2003 to 2004, mining and quarrying accounted for 2.3 percent of the GDP¹⁴. That is, with mining and quarrying excluded, agriculture, forestry and logging and fishing accounted for 19.8 percent of the GDP. The forestry and logging share was 0.01 percent of the GDP and the fishery share was also 0.01 percent. Thus, agriculture contributed 19.6 percent of the GDP.¹⁵

2.5 Trends in the agriculture sector

There were three distinct periods in the evolution of Indian agriculture and agricultural policy after Independence. The first period was before the Green Revolution up to the mid-1960s (Phase 1). The second period was the Green Revolution from the mid-1960s till the late 1980s (Phase 2). The third phase continues from then to the present day (Phase 3).

2.5.1 Phase 1

The first period saw the government focusing policy on the following:

• irrigation,

• land reforms,

• community development, and

• restructuring of rural credit institutions.

Land reforms involved abolition of intermediaries, tenancy reforms, acquisition of surplus land through ceilings on holdings and redistribution and consolidation of holdings; success varied across states (Deshpande et al. 2004). Land reforms quite successfully altered agrarian structures in states like Kerala, West Bengal and Karnataka, but failed to do so in states such as Bihar, Orissa and Rajasthan. Changes in agrarian structures occurred in Punjab, Haryana, Western Uttar Pradesh, Tamil Nadu and Andhra Pradesh.¹⁶

A Community Development Programme was started in 1952, for integrated village development by coordinating the development of agriculture, animal husbandry, infrastructure and extension at the block level. Also in 1952 the National Extension Programme was spliced into the Community Development Programme, incorporating provision of technical inputs. The Intensive Agricultural District Programme (IADP), started in selected potential districts in 1960 and 1961, aimed to provide a package of high-yielding inputs (seed, fertilizers, plant protection measures, etc.) to farmers. The Intensive Agricultural Area Programme (IAAP), started in selected potential blocks in 1964 and 1965 aimed to provide technological inputs for identified crops.

Whether these changes were successful or not depends upon how one benchmarks success. Compared to the low or negative growth in the period immediately preceding Independence, they were successful. Both productivity and output increased during most of the period. However, progress in productivity improvements was not commensurate with the requirements even during good monsoon years. There were institutional constraints in providing inputs like high-yielding varieties, fertilizers and irrigation, coupled with a switch during the Second Plan (1956–1961), with reduced investments in agriculture as fallout. In other words, the government was unable to inject the required financial resources, or develop adequate institutional back-up to enable widespread and sustained implementation. Moreover, the government was also unable to effect improvements in technology and the usage of improved seeds, inputs and methods did not occur until much later.

On the positive side the first phase did succeed in other aspects that facilitated later changes. Land reforms (although limited to some states and discussed elsewhere), assigning ownership rights to tenants, consolidation of holdings, among others, were important measures that started during this period and have continued to a varying extent to the present day. The establishment of many agricultural technology institutions and the birth of a widespread extension services system also transpired during this time (although it is now ineffective in many states). Most importantly, administrative systems were developed during this period with the capacity to take on the challenge of the Green Revolution when the technologies finally became available.

The mid-1960s witnessed a succession of exogenous negative shocks that had a major impact on agricultural output: a war with China in 1962, a war with Pakistan in 1965 and successive monsoon failures in 1965 to 1966 and 1966 to 1967. India had to resort to large-scale imports of food.

2.5.2 Phase 2

The Green Revolution package was based on increased availability/access to:

• high-yielding varieties (HYV) of seeds,

• fertilizers,

• irrigation,

• biochemicals,

• extension services,

• availability of credit,

• establishment of marketing and price-support mechanisms for farmers.

This was spliced with a price-support policy. The government's role in ensuring the availability of complementary inputs for HYV seeds was quite significant. Ahluwalia summarizes it well, “[it] required a comprehensive strategy for agricultural change requiring active Government intervention in many dimensions…” (Ahluwalia undated).

A sustained effort was needed to expand irrigation with a shift from major to medium and minor irrigation projects. It was necessary to move the banking system into rural areas to provide credit for the purchase of biochemical inputs needed for HYVs. Nationalized banks were given the task of upgrading their rural operations and they succeeded to a large extent. Primary agriculture markets were regulated and some of the usurious practices of traders stopped. Extension services were set up and backed by numerous agricultural research establishments. Development of appropriate varieties was critical given the heterogeneity in agroclimatic conditions. The ability of the government to effect adequate coordinating mechanisms was also quite important. Provision of credit was facilitated through the nationalization of banks. Fertilizer availability and accessibility was expanded through subsidies and was juxtaposed by public and private sector expansion in manufacturing. Moreover price support was instituted at remunerative prices. This coordination role cannot be understated. While subsidized inputs were becoming available and productivity increases were rapid and concentrated, the price-support mechanism ensured that incomes for farmers increased. The three key characteristics of the mandate were: simultaneous handling of constraints in supply and marketing, a coordinated approach and recognition of heterogeneity in agroclimatic conditions. This approach can be assigned most of the credit for the success of the Green Revolution.

Table 2 shows growth rates in area, production and productivity of major crop groups. The asterisks in the table indicate the major contributing factors behind increase in production during that period. As Table 2 indirectly suggests, from 1949–1950 to 1964–1965, non-foodgrain was the major component of crop production and for both foodgrain and non-foodgrain, production growth primarily transpired through area expansion. This was reversed from 1967–1968 to 1980–1981. During this period, expansion of production for both foodgrain and non-foodgrain occurred through productivity increases, area expansion having slowed down. This trend continued from 1979–1980 to 1989–1990, with productivity increases becoming sharper and the area under foodgrain actually declining. However, in the last few years, productivity growth has slackened, and so has growth in production, particularly of foodgrain.

Table 2. Growth rates in area, production and productivity of crop groups (annual percentage change)

^† Major contributing factors behind increases in production.

Source: GOI figures, but reproduced from Despande et al. (2004).

However the Green Revolution had several positive aspects: (1) As foodgrain production increased faster than the population growth rate, per capita availability of food increased. Per capita net availability of cereals and pulses was 394.9 grams in 1951, 468.7 grams in 1961, 468.8 grams in 1971, 454.8 grams in 1981, 510.1 grams in 1991 and 416.2 grams in 2001 (GOI 2004–2005). (2) Per capita income generation in agriculture increased. (3) Agriculture was better protected from the ravages of drought. (4) There was greater commercialization and diversification, with cropping patterns changing in favour of commercial crops and moving away from coarse cereals, even for small and marginal farmers. (5) Capital accumulation rose, including investments from the private sector. (6) While there may have been some reservations about the initial distributional impact of the Green Revolution package, the benefits became more broad-based in subsequent years.

Table 3 shows that many holdings are marginal (less than 1 ha) or small (between 1 and 2 ha). Barring pulses and coarse cereals, all other crops seem to have benefited from the new technologies. In addition, there was a paradigm shift from foodgrain towards commercial crops and even fruits and vegetables, this diversification being at the expense of pulses and coarse cereals. Although a large percentage of small and marginal farmers is still dependent on foodgrain, there was some diversification among small and marginal farmers. For instance, the share of cereals in area cultivated by small and marginal farmers declined from 71.44 percent in 1970 to 1971 to 70.57 percent in 1980 to 1981 and 66.22 percent in 1990 to 1991; the share of fruit and vegetables increased in area from 2.43 percent in 1970 to 1971 to 3.25 percent in 1980 to 1981 and 3.71 percent in 1990 to 1991 (Despande et al. 2004).¹⁷ Thus it can be argued that there has been a degree of commercialization and diversification among small and marginal farmers but this could have been greater.

However there are some qualifiers. The first is that the coordinated approach did not lead to the spread of the benefits of the new technologies across India. Only a few areas benefited. It is difficult for a central government to introduce measures and mechanisms that are fine-tuned to the requirements of each state and district.¹⁸ , Success was based on the term “provision” — inter alia provision of credit, HYVs, subsidized fertilizers and extension services. These had a negative long-term impact on the development of market-backed services and commodities. Lastly, the new technologies were biased towards high usage of water for irrigation. As many parts of the country were not irrigated, power-operated motorized tubewells sprung up across the country. Crops such as rice in Punjab and sugar cane in Maharashtra have become quite important even though surface water is limited in some of these areas. The result has been a rapid fall in water levels.

Table 3. Distribution of landholdings (% of total holdings and total area)

Source: Despande et al. (2004).

2.5.3 Phase 3 and the agricultural anomaly

In the 1980s, when the balance between demand and supply of cereals (foodgrain) was in sight, the overall goal of agricultural strategy/policy shifted from “maximization of production of foodgrain” to “evolution of a production pattern in line with the demand pattern”. The implication of this shift is that the emphasis of the policy shifted from foodgrain to other agricultural commodities like oilseed, fruit and vegetables. The shift helped to increase the output of non-cereal food items.¹⁹

Diversification has been occurring in India since Phase 1, however, it became more prominent in the 1980s (but waned in the 1990s). There is little agreement on how much of this was due to the government efforts and how much transpired because of changing economic conditions. It would be fair to argue for oilseed that the shift from coarse cereals to oilseed in rain-fed areas was aided by (i) a protective trade environment; (ii) favourable price policy; and (iii) the connecting of the Technology Mission on Oilseeds (see Hazra 2001). At the same time diversification was not merely attributable to greater area under high-value commodities; the improvements in yield also would have been generated by government-aided supply and technology-related factors.

Table 4 shows the improvements in both production and yield for the crop sector. There were significant improvements for livestock in the 1980s — the value of the livestock sector in total agricultural output value increased from about 18 percent in the triennium ending (TE) 1980 to 1981 to 23 percent in TE 1990 to 1991 (although it remained stagnant at that level by TE 1997 to 1998 (see Joshi et al. 2003). Almost 70 percent of the livestock sector's production (in value terms) is accounted for by the milk and products subsector; the role of “Operation Flood” cannot be understated (Box 1).

Table 4. Compounded annual rates of growth of production and yield

Source: Deshpande et al. (2004).

The value of the fisheries subsector swelled by about 50 percent during the 1990s, although as a share of the total it declined from 1.3 to 1.0 percent of the total agriculture sector value during the period. There were significant and coordinated government efforts to increase fish production. The central government's outlays towards the fishery sector as a share of the total agriculture sector outlays were more than doubled from 2 to 3 percent in the 1970s to about 5.5 percent in the 1980s and 1990s. Production and development programmes were instituted in both marine and inland areas. Farmers' development agencies were established both for fresh and brackish water areas. These programmes included technology upgrading components, encouragement and involvement of the private sector in activities such as seed, feed and other inputs and also creation of suitable infrastructure for storage, transport, marketing and credit. By 1998/1999 more than 50 seed hatcheries at the national level had been established, fishery industrial estates had been created and 30 minor fishing harbours and 130 fish-landing centres had evolved.

Diversification in favour of high-value commodities is considered by some to have only partly benefited through government efforts. Both econometric and GIS-based studies also suggest that the presence of infrastructure aided diversification. Rao et al. (2004) found that in their sample, the areas close to large urban centres (and as a result with better connectivity to urban centres) could diversify more to high-value commodities. They concluded that urbanization is a strong demand driver for high-value commodities. In an earlier econometric study, Joshi et al. (2003) came to a similar conclusion — that diversification into high-value commodities was demand driven, unlike the supply driven Green Revolution.

Between 1990–1991 and 1998–1999, the annual average increase in yields was only 1.79 percent and 1.31 percent for wheat and rice, respectively. Despite the successes of the Green Revolution, there continue to be concerns with agricultural performance during Phase 3, the present phase of globalization and diversification, initiated in the 1990s, and some macro issues emerge.²⁰

The first macro point is the one already alluded to indirectly. Compared to the 1980s, there was deceleration of agricultural growth in the 1990s. This is evident from Table 4 and cuts across all crops and both production and yields. The quality of the system for collecting agricultural statistics²¹ and the extent of deceleration can be debated, but the conclusion that growth in the crop sector decelerated in the 1990s is fairly obvious. In any case, deficiencies in the quality of statistics are constant factors and cannot explain the deceleration. Indeed, growth in non-food and non-crop output was also faster in the 1980s than in the 1990s and growth in animal husbandry, poultry, dairy, horticulture and fisheries also slowed down. This deceleration happened despite the reversal of historical discrimination against agriculture. In the 1990s, the terms of trade moved in favour of agriculture and this was independent of the terms of trade measures used (Misra 2004).²² There were several reasons for this reversal of trend. There were higher prices for rice and wheat through support/procurement policies and prices of other crops also increased. There is a positive correlation between procurement prices, open market prices and higher prices in the PDS (public distribution system). Simultaneously, because protection granted to manufacturing declined, the relative prices of manufactured products also declined. A priori, one should therefore have expected a positive supply response and increased capital accumulation.

However farm profitability declined in the 1990s (Sen and Bhatia 2004; Alagh 2004). Not all farmers had access to higher support prices for rice, wheat or sugar cane, there was a deceleration in yields and real input prices also increased, thanks to prices for fertilizers, power and diesel that were closer to market-determined prices. Higher cereal prices also contributed to increases in wage costs.

Consequent to per capita income growth, NSS data show changes in consumption patterns, with a decline in consumption of cereals in both rural and urban India, despite cereals still being important in the food basket. There has been a shift from consumption of coarse cereals to rice and wheat and also a shift towards consumption of fruit and vegetables and even fish and eggs. Table 5 shows some of these changes. Consumption patterns are changing, even for the bottom 30 percent of the population and the shares of non-cereal food (fruit and vegetables) and non-food items have been increasing in consumption baskets (Mahendra et al. 2004). Increased cereal prices and lower rural incomes may have depressed demand for both cereal and non-cereal food, but there is no denying that preferences are also changing.

Table 5. Per capita consumption

^† Vegetable oil.

Source: Alagh (2004).

2.6 The reason for deceleration

Why did deceleration occur? More importantly, why did deceleration occur when better technologies were more readily available? In answering this question, it is important to distinguish between generic problems that continue to constrain agriculture and issues that became constraints in the reform decade of the 1990s. The former constitutes part of the agricultural cum rural reform agenda, the latter is more specific. First, one confronts a diminishing returns argument, with total factor productivity declining, as opposed to an argument based on increases in input costs or a slower increase in output prices. This argument is usually applied to Punjab, Haryana and the western parts of Uttar Pradesh where agriculture has become overcapitalized. In these traditional Green Revolution areas, there are also questions about unsustainable practices like excessive use of water²⁴ and imbalanced use of fertilizers.²⁵ Land has become degraded. These are traditional arguments associated with the Green Revolution and concern reduction in soil fertility, excessive use of fertilizers and imbalance of nutrient content in the soil, problems related to biomass availability, genetic erosion, waterlogging and salinization, depletion of groundwater tables, imbalances in nutrient availability because of changes in cropping patterns and contamination of waterbodies and soil by pesticides and fertilizers (Shiva 1991). Then there is the issue related to lowering of farm profitability in the 1990s. While these are important topics, they are not very convincing in explaining the 1990s deceleration, unless one plugs in a regional dimension. In the 1980s, availability of power, irrigation and infrastructure helped the spread of the Green Revolution to the Eastern Region, particularly for paddy rice. Owing to power shortages, among other factors, this osmosis was less evident in the 1990s.

Another explanation for the 1990s deceleration is reduced public investments, especially in irrigation; this is directly reflected in the reduced share of capital formation in agriculture in the overall GDP (Table 6).²⁶ Moreover, in the 1990s, the quality of public sector agricultural research, technology development and extension services deteriorated.²⁷

Table 6. Gross capital formation in agriculture at 1993–1994 prices

Source: Economic Survey, GOI (2004–2005).

While public investments in agriculture have declined, especially investments in research, private investments have not been able to compensate for the decline in public sector investments. Thus the burden of fiscal reform has been borne by agricultural investments, especially at the state level, including expenditure on R&D.²⁸ More specifically, expenditure on research stagnated, while that on extension declined. The state withdrew from spending on agriculture, without establishing alternative institutional mechanisms. State governments lack resources, a problem that was aggravated in the 1990s, and adversely affected the development of agricultural infrastructure.

This can be juxtaposed with the failure of risk mitigation instruments to develop and general regulatory failure. There were no coordinated policies or crop adjustment programmes to enable the move from rice and wheat towards pulses, oilseed or other crops. Diversification led to risk and uncertainty and in the absence of institutions, this was difficult to handle. Within public sector institutions, there was deterioration in management and monitoring norms. Hence, there were instances of adulterated fertilizers and seeds that were substandard. Whether extension departments of state governments are the best agencies for quality checks and inspections of inputs like fertilizers, insecticides, pesticides, feed and seeds is debatable. However, the quality of these extension services deteriorated in the 1990s.

While only tangentially related to the slowdown of the 1990s, there is the question of the form public investments in agriculture should take. The Steering Group on Agriculture and Allied Sectors (SGAAS) does not question this, but the Approach Paper to the Tenth Five Year Plan (APTFYP) does, “The policy approach to agriculture, particularly in the 1990s, has been to secure increased production through subsidies in inputs such as power, water and fertilizer, and by increasing the minimum support price rather than through building new capital assets in irrigation, power and rural infrastructure. This strategy has run into serious difficulties.” The statement further identifies that the deterioration in state finances and the financial non-viability of the State Electricity Boards have meant that crowding out has occurred in public agricultural investment/expenditures for:

• roads,

• irrigation,

• expenditure on technological upgrading,

• maintenance of canals and roads,

• expansion of power supply to rural areas not covered,

• improvement in quality of rural power.

Moreover the combination of dependence on subsurface water and free/subsidized power is not only environmentally harmful but has also led to:

• excessive use of water that produced waterlogging in many areas,

• falling water tables.

At the same time, there is no evidence of any improvement in income distribution. Last, it is also increasingly being noticed that despite the best intensions of the policy there is a significant imbalance between usage of N, P and K fertilizers. Moreover, financial constraints are increasing both for the state governments and their State Electricity Boards (SEBs).

These problems are particularly severe in the poorer states. The equity, efficiency and sustainability of this approach are questionable. The subsidies have grown in size and are now financially unsustainable. Power continues to be supplied free for farmers in many states and is otherwise highly subsidized given the high cost of production of SEBs. According to one estimate (Srivastava et al. 2003) energy subsidies (of which power is one component) accounted for about 10 percent of all the subsidies in the late 1990s. This figure is likely to increase subsequently.

Moreover, the small and marginal farmers have been less able to access credit despite the existence of a large rural credit system. Poor land records are endemic across rural India. Also much of the agriculture sector is in the unorganized segment. But the financial system is largely in the organized sector and requires credible land ownership records, systematic record keeping and formal contracts. This has contributed to a situation where the bulk of the small and marginal farmers cannot access formal credit institutions. In the 1990s, availability of credit for large farmers may have risen, but declined for small farmers. Moreover, although 18 percent of priority sector lending is supposed to be for agriculture, agriculture's share in net bank credit has been more like 12 percent.²⁹

In summary, there is unarguable stagnation in Indian agriculture and more so in the foodgrain sector. This is due to a combination of factors ranging from overdependence on the government in some areas/sectors, falling ability of the various government entities to subsidize and/or directly provide various inputs and services and overuse of resources. The “mission mode” that was so successful in tackling the problems of low production cannot be a vehicle to take on this set of problems. This requires efficient functioning of the price mechanism, smooth transactions between the various stakeholders, the alignment of incentives at the microlevel and fine-tuning of technology to the needs of the farmer. There are arguments for and against the current system of minimum support price (MSP) and subsidized inputs.

3. Future expectations

3.1 Overview

Because of deceleration in the 1990s, expanding population and rapid economic growth, food security concerns have been raised. Food security at the national level need not be equated with 100 percent self-sufficiency in foodgrain production. Adequate foreign exchange reserves should instead be the issue. The mindset is largely a reflection of the food import scare India confronted before the Green Revolution. Future demand projections are contingent on assumptions made about population, per capita income growth, the time frame and hunger removal. The time frame tends to be 2020. Population projections for 2020 vary with 1.315 billion being closer to the mark now (Dyson 2000).

Consider the basic trends first. With economic growth, population increases and changing age distributions, food requirements will be higher. How they match up with expected production given current trends, and what implications this has for international markets are discussed later.

3.2 Population

India's population in 2001 was 1.02 billion according to the Census of India, making it the second most populous country in the world after China (with a population of 1.28 billion). It has been estimated that in the next 15 years, the population will increase by about 23 percent to 1.24 billion persons. But estimates vary, some being as high as 1.4 billion. High growth rates can be ascribed to death rates being lower than birth rates. Between 2001 and 2010, almost 150 million more people need to be provided with adequate nutrition and between 2010 and 2015, another 83 million people need to be covered (Figure 2). Most GOI estimates do not go beyond 2015, but trends till 2020 are not likely to be any different.

Source: GOI (1996).

Figure 2. Population 2001–2015 (figures in '000s)

3.3 Incomes and expenditures

According to India's national accounts, total GDP in 2003 to 2004 was about US$600 billion (per capita GDP of US$540). Of this, personal disposable income was in the range of US$512 billion and 24.6 percent of this income was directed into savings by the household sector. During the postliberalization decade, from 1993–1994 to 2003–2004 the average annualized growth rate of India's GDP has been around 6.2 percent and this has been accelerating in the early 2000s. Table 7 records the growth rates of some of the key indicators of national accounts of India.

Table 7. Growth of macroeconomic variables

Source: GOI (2003–2004b).

As discussed earlier, poverty has declined significantly, and is expected to continue to fall. The poverty line is defined by the GOI as the cost of a package of commodities (about 80 percent food items and 20 percent other essentials such as clothing) that can provide about 2 400 calories and 2 100 calories to an average Indian citizen living in rural and urban areas, respectively. The HCR (head count ratio) in India had fallen to about 26 percent in 1999 to 2000 from 39 percent in 1987 to 1988. Our own estimates are that if the GDP growth is sustained, it will fall to about 14 percent by 2010 and then to 8 percent by 2015 (Figure 3). These are not very different from other estimates discussed earlier. Two further points need to be mentioned in this connection. First, income distributions are typically log normal and as the thick part of the distribution passes through the poverty line, it is possible for sharp reductions in HCRs to occur. Second, when the Indian poverty line evolved in India in the early 1960s, the presumption was that health and education would be merit goods, if not public goods. In either event, they would be provided by the government and need not be ingredients in private consumption expenditure. Hence, these are not included in defining or computing the poverty line. The 1990s, however, witnessed a switch from public expenditure to private expenditure in both health and education. It is thus possible that the Indian poverty line might be redefined at some time in the future. Notwithstanding this possibility, the proposition about decline in HCRs, assuming an unchanged poverty line, remains valid.

Source: Dubey and Crook (2001) and authors' estimates for 2010 and 2015.

Figure 3. Poverty levels

Both rural and urban areas have a very similar poverty scenario. However, India has a long way to go before the whole population has the means to consume the minimum required calories per day. During 1999 to 2000, more than one-fourth of India's population was below the poverty line and this amounted to about 260 million people at that time. If the rapid rate decline in poverty after 1991 were to continue, not only the percentage, but also the actual number of people below the poverty line is expected to be lower. The net impact on the demand for greater nutrition is obvious.

3.4 The changing food basket

As incomes, and as a consequence expenditures, increase, not only are expenditures on food and agricultural commodities as a whole likely to increase, but the consumption basket characteristics are also likely to change. In both rural and urban areas, dairy products, meat, fruit and vegetables are likely to have a greater share of the additional demand being generated.

This is the standard picture across different countries, and is also reflected in the differing elasticities observed by various studies both for India as well as other countries. The income elasticities for five different income groups (quintiles 1–5) in urban and rural areas of India are shown in Table 8.

Table 8. Income elasticities across quintiles

Source: Mohanty et al. (1998).

The food requirement is dependent on the consumption behaviour, which in turn is a direct outcome of income. With development, incomes are expected to rise and would thus impact consumption behaviour. The income elasticities are a measure of the future demand of various food items.

Quintile one (Q1) denotes the poorest 20 percent of the population and Q5 denotes the richest 20 percent. Income elasticities across all commodities, as well as quintiles, are higher for the rural areas as compared to urban areas. The elasticities also fall as income rises, both within urban and rural quintiles.

Wheat shows an elasticity of 0.50 and 0.32 for rural and urban areas respectively, in Q1. However, the elasticity decreases to 0.47 and 0.04 for the same areas in the case of Q5. Similarly, the income elasticity of rice in rural areas drops from 0.72 to a negative 0.21 as we move up from Q1 to Q5. A similar pattern is observed in the urban areas as well.

The elasticities of milk and milk products, along with eggs, show very high values of greater than 1 for the lower quintiles, implying that the proportionate change in consumption demand is greater than the proportionate change in income. However, these elasticities also follow the general decreasing trend as we ascend to higher income groups. Elasticities for chicken and other meat are lower than those of milk and eggs. For rural areas, income elasticities for meat are greater than 1 across all income groups (1.25 for Q5), while they are less than 1 for all income groups falling in urban areas. Meat eating is common across India, however a significant share of the population is vegetarian. Even among those who consume meat, at certain times of the year a largely vegetarian diet is followed. Consequently, the income elasticities of meat products may not be as high as in other countries (Table 9).

Table 9. Sensitivity to prices — own price elasticities

Source: Dev et al. (2004).

In both rural and urban areas, the own price elasticity declines in absolute terms as we move from the very poor to the non-poor section of the population. For cereals in rural areas, elasticity declines from 0.7 to 0.1, while it changes from 0.5 to 0.1 for the urban areas. Milk, edible oils and meat show similar trends in both urban and rural areas, although demand for milk shows a higher sensitivity to price changes. Price elasticity of demand for sugar in rural areas increases marginally from 0.7 to 0.8, before declining to 0.6 for the non-poor. In urban areas, however, the elasticity shows a gradual decline as we move to higher income groups.

As shown in Table 9, the demand for pulses is extremely sensitive to price changes in rural areas, with the elasticity being as high as 2.4 for the very poor in rural areas, but falls to 1.2 for the non-poor. For the non-poor section in urban areas too, the price elasticity is 0.9.

3.5 Consumption of agricultural products

Others have estimated the growth in food consumption and most have similar insights. Milk and milk products will see the largest increase up to 2020. Fruit and vegetables, sugar and meat and fish consumption will also increase significantly. The reasons are obvious in light of the previous discussion. Income increases matched by the high income responsiveness of these commodities will be the driving force. Among cereals, the highest percentage growth will be in wheat, followed by rice. Coarse grains are not likely to grow as much.

The demand for rice is projected to grow from 78.3 million tonnes/year in 2000 to 118.9 million tonnes/year in 2020, showing a compounded annual growth rate of 2.1 percent. The main factor driving this demand will be the increase in population. Wheat demand rises from 54.2 million tonnes in 2000 to 72.1 and 92.4 million tonnes in 2010 and 2020 respectively, with a growth rate of 2.7 percent. The responsible factors will be the rising population and positive income elasticity for wheat. The demand for other cereals will grow by 0.9 percent, primarily on account of change in preferences as incomes grow. On the whole, consumption demand for all cereals will show a growth of 76 million tonnes from 2000 to 2020 at the rate of 2.1 percent, which is marginally higher than the projected growth rate of the population (Tables 10 and 11).

Table 10. Consumption estimates (million tonnes/year)

^† Jaggery (unrefined sugar).

Source: Radhakrishna and Reddy (2002).

Table 11. Growth in consumption

Source: Radhakrishna and Reddy (2002).

Demand for food items such as milk products, meat and fruit is expected to grow at much higher levels of 3 to 5 percent in the next few years. This is a natural result of growth in incomes following economic development. The estimated demand for foodgrain in 2020 is 240.6 million tonnes/year, growing from 155.6 tonnes/year in 2000 at the rate of 2.2 percent per annum. The income effect will manifest itself to raise the demand for milk and milk products to 166 tonnes, edible oils to 11 tonnes, meat and fish to 11 tonnes and sugar and gur (jaggery) to 25 tonnes/year (Tables 10 and 11).

3.6 Production of agricultural commodities

India has one of the largest land masses of any country of the world, and a high proportion of its land mass is arable. Although most of the land depends upon the monsoons for irrigation, irrigated areas have been increasing and comprise about 40 percent of the gross cropped area. However, yields in India are among the lowest in the world, and therefore there is significant scope for increases in the coming future.

A yield comparison across countries (see Appendix 1: Figure A1.1, Figure A1.2 and Figure A1.3) shows how India's crop production fares vis àvis international benchmarks. India's figures are contrasted with crop yields in the United States, China and an average for the world. While these can be compared for a number of different crops, the results are remarkably similar, with a few exceptions. For cereals, coarse grains and pulses, both the United States and China are well above the world average. India has extremely low yields, even by developing country standards. For oil crops and primary fibre crops as well, India has yield levels below the United States, China and aggregate world levels. Across different product segments, a similar picture emerges.

While the static picture of India's crop production is not encouraging, the indicators for the future provide grounds for optimism. The potential improvements made possible by improvements in technology, organizational expertise and policy redirection have lifted the yield levels of many of India's crops. From 1961 to 2004, commodities with the largest increases in yield were wheat, maize and jute, and rice to a lesser extent. Pulses, oil crops and primary fibre crops have had muted increases in yield.

On an even more cautionary note, in the last ten years, improvements in yield have plateaued for Green Revolution heavyweights like wheat and cereals (Figure 4). From 2001 to 2004, several crops even experienced an absolute decline in their yields.

Source: FAO Statistics.

Figure 4. Trend in yield of major crops (kg/ha)

Given these indications, prospects for the future of Indian agriculture production are mixed. While yield levels seem to have plateaued, they are still significantly below competitive levels for most crops. While countries at the peak of the agricultural technology curve must pour funds into R&D to invent new ways to increase production, countries on the other side of the curve stand to benefit from implementing those methods that have already been pioneered. Catching up is always easier and for this reason alone, India should be able to realize fast and significant gains in the near future. The directions to be followed are quite clear and are discussed in other sections.

3.7 Price competitiveness

Currently, there are some estimates of price competitiveness, the results often being functions of whether an importable or an exportable hypothesis assumption is used and whether one uses the nominal protection coefficient (NPC), the effective protection coefficient (EPC), the effective subsidy coefficient (ESC)³⁰ or the domestic resource cost (DRC). A widely referred to study by Bhalla (2004) revealed that:

• Most crops except oilseed, some coarse cereals and sugar are internationally competitive;

• More crops would be competitive if developed countries withdrew domestic support to agriculture;

• However, import competitiveness becomes reduced overtime because:

  -   Successive price hikes have led to very high prices for many agricultural commodities. For example major crops such as rice and wheat became non-competitive during recent years because of a fall in their international price combined with a major increase in their domestic price owing to increase in MSP.

  -   Productivity growth has decelerated, moreover production efficiency is being affected by lack of implementation of technological innovations.

  -   A major thrust is needed in infrastructure investment in general and investment in science and technology in particular for India to maintain and enhance its competitiveness.

3.8 Production, consumption and surpluses

The GTAP model has been used to predict India's trade with the rest of the world including India's own production and consumption. The quantitative assumptions behind the model are given in Table 12.

Table 12. Assumptions: the growth rate of exogenous variables of India in four stages (per year %)

Source: Author estimates.

For greater details on the GTAP model and related assumptions see Appendix 2.³¹

India's GDP is expected to grow at more than 7 percent for much of the period under consideration. Moreover, the growth rate is expected to increase for the coming decade. As population growth has been falling owing to falling birth rates for the past two decades, the growth in labour supply would decline over the next decade and a half. Irrigated area is expected to grow, although not too significantly, as further increases will require significant public investments that show no signs of accelerating. Private efforts are likely to be the main driving force behind the 1 percent annual increase in irrigated area. Skilled and highly educated labour is expected to rise much faster than unskilled labour; this reflects the latest improvements in the educational achievements of a large segment of the population. The capital stock would have to grow rapidly as well, and is expected to increase as labour supply growth tapers off to sustain the high growth rates of 8 percent.

These GDP forecasts need to be qualified. The GDP forecasts given in Table 12, with acceleration from 6.73 to 8 percent are actually a worst-case scenario, although one must mention that the BRIC (Brazil, Russia, India, China) report, generated by Goldman Sachs, involves real GDP growth of slightly less than 6 percent (Wilson and Purushothaman 2003).³² A more likely scenario is GDP growth of 7.5 percent, accelerating to 8.5 percent and a third scenario would involve 7.5 percent accelerating to 9 percent.³³ Long-term GDP forecasts are rare. In the short term, the Tenth Five Year Plan (2002 2007) talks about 8 percent real GDP growth during the Plan, while the National Common Minimum Programme (NCMP) of the UPA government considers 7 to 8 percent.

Although long-term projections are rare, when they are made, most experts expect real GDP growth of 7 to 8 percent for India in the period leading up to 2020. Notwithstanding reservations about the speed of economic reforms, consequent to debates about liberalization in a democratic policy, these estimates of 6, 7 or 8 percent are probably underestimates, even if one ignores the exchange rate aspect. There are different ways to argue this out and all of these trends reinforce one another. Looking forward to 2015, an average savings rate of 30 percent is certainly plausible given the current rate of 28.1 percent rising. Foreign capital inflows are also increasing. There is no reason why the average investment rate should not therefore be 32 percent. The present incremental capital/output ratio (ICOR) is around 4 (though estimates vary between 3.5 and 4.6). Whatever the figure, there is no reason why this should increase significantly in the near future. Indeed, with reforms, competition and resultant efficiency improvements, the ICOR should decline. But even with an ICOR of 4, there is growth of 8 percent.

It is obvious that these quantitative forecasts have not considered the possibilities of future environmental degradation, unforeseen changes in economic and trade policy and of course technological changes. The discussions in the previous sections underscore the importance of enabling reforms. However, given these assumptions and those outlined in Appendix 2, the GTAP model predicts consumption and production characteristics as shown in Table 13.

The growth in rice is going to be in the order of 1 percent per annum till 2010, for both production and consumption. For wheat however, the rise in incomes is going to create a marginally higher growth in consumption than expected production increases. For both oilseed and processed foods, consumption increases will outstrip production increases. Given current conditions and trends, similarly, for forestry products, as well as other foods, consumption increases are going to be far higher than likely production increases.

Overall, the patterns are quite unambiguous. Although production levels are likely to increase significantly, they are not going to be able to match the increases in consumption, at current and expected overall economic growth.

This does not imply a fall in export earnings, as overall expected price increases due to the opening of international markets, as well as reduction of subsidies will tend to have a positive impact on prices. This is regardless of the temporary impasse at WTO on agricultural liberalization, which hopefully, will be temporary. The net export earnings for rice, wheat, sugar and other grains are given in Figure 5a, while Figure 5b illustrates export earnings for cattle, animal products, etc.

Table 13. Likely production and consumption in 2020

* CARG: compounded annual rate of growth.

Source: Estimates using the GTAP model.

India is likely to maintain the status of an exporting country for rice and wheat. However for oilseed, India is likely to be a significant importing country in another decade and a half. It will also remain as a marginal exporter of sugar and coarse grains.

Despite being an exporter of jute and cotton, India will be a net importer of plant-based fibre. Moreover, it will also start to become a net importer of other horticultural crops. Although overall milk production is expected to increase rapidly, consumption increases will prevent India from becoming a large dairy product exporter. Cattle and red meat exports are likely to increase, although other animal products, such as leather, are likely to see a net increase in imports.

Source: GTAP estimations.

Figure 5a. Export/import earnings for selected agricultural commodities

Pfb: plant-based fibre; Othcrop: other crops; Ctl: bovine cattle, sheep and goats, horses; Oap: animal products (not else classified, nec); Ofood: other food.

Source: GTAP estimations.

Figure 5b. Export/import earnings for selected agricultural commodities

3.9 Expectations for India

Overall, India will remain a marginal exporter of wheat, coarse grains, sugar, cattle and red meat, fish and other foods. However, it will become a significant importer of oilseed, forestry products, other animal products and plant fibre. For products such as plant fibre and animal products, its position as a net exporter of manufactured items will be facilitated by larger imports of raw materials. For the other segments, rising domestic consumption not matched by domestic supply increases, will be the driving principle.

Table 14. Net export share of world export in value terms (%)

Source: Estimations from GTAP.

Forestry products are likely to be a significant import item, the bulk being related to wood. Industrial and furniture requirements are the important components that will drive forestry product shortfalls. Although India has large forest cover, commercial forestry is insignificant and is unlikely to expand in a big way given its current environmental protection laws. The statistics for forestry products have large gaps (much more than is usual for India). According to some FAO estimates, production in India for industrial roundwood has been falling (it was about 1.6 billion m³ in 2000), while fuelwood has stagnated at about 2.9 million m³ (FAO 2002). Pulp and matchwood have also been showing a negative trend. On the whole, it is expected that India will be substituting imports for domestic production more and more in the near future.

The overall position is quite unambiguous. For Indian policy-makers, the most worrying aspects are stagnating yields. This in itself is not surprising, given the low investments in agriculture, as well as the constraints on agricultural trade. If India is to become a significant exporter of other agricultural products apart from rice, emphasis will have to be placed on improving yields. Investments in rural areas are therefore essential.

How would these estimates change if growth assumptions were different? India would continue to be a large importer of forestry products whether economic growth is 6 or 8 percent. Although the quantum may differ. Similarly, its position as a significant textile and garment producer may require it to import plant-based fibre, in spite of plus or minus 1 percent variation in growth. (What the numbers in this case are more sensitive too is the productivity assumption. Yields are currently quite low in large parts of India and the introduction of new varieties, BT cotton being one example, may lead to a rapid increase in cotton production in coming years.) India's low production of oilseed and high requirements will also drive its oilseed imports. But this needs to be qualified. Given its land area, it is conceivable that productivity enhancements could lead to a lower shortfall in oilseed and pulses. However, current trends indicate this to be a remote possibility. Now rice remains. Compared to the past, rice is not a preferred cereal; income elasticity measures also indicate that at the middle and upper income levels, the parameters are lower. In other words, estimates of rice surpluses are not as sensitive to economic growth assumptions.

How would these surpluses affect India's trade partners? This requires an examination of which countries could potentially be India's major trade partners in agricultural commodities.