PART II
Indian agriculture and scenario for 2020(continue)

4. The agenda for reform

One way to categorize the reform agenda could be in terms of objectives: (a) protection of natural resources, (b) rise in productivity, (c) encouragement for value-added agriculture and (d) disseminating the benefits of agricultural growth for overall rural development. However as many of the necessary actions span these objectives, the requirements can be grouped under: (i) land, (ii) water, (iii) credit, (iv) markets, (v) diversification and (vi) technology.

Numerous reports and studies within various organs of the government have identified the critical issues that need to be addressed. However, it will take some years for the political establishment to tackle many of them even if there is a consensus on the issue.

4.1 Land

The arguments in the Approach Paper to the Tenth Five Year Plan (APTFYP) are almost generic. Both in agriculture and in forestry, uncultivated land must be brought into productive use. This requires a proper land-use policy, including tenurial reforms. Leasing and sharecropping of uncultivated agricultural land needs to be regularized. (Chadha et al. 2004).

• There is unequal access to land and this adversely affects farmers at the bottom of the farm size hierarchy. Despite land redistribution attempts, the land base of marginal and near-landless farmers has not improved much over time; land redistribution gains having been restricted mostly to middle levels of the peasantry. Currently, however, land redistribution does not appear to be on the agenda of any political entity.

• Fragmentation of holdings has led to reduced economies of scale, low allocative efficiency and low investments and mechanization. In many cases, this leads to subsistence farming. One should review the policy on land availability and ideally, repeal land ceiling acts.³⁴ Consolidation of landholdings is important to exploit economies of scale, as has happened in Punjab. Though land rights become complicated because of rights and subrights, it is possible to perform the consolidation on the basis of primary rights and legalize leasing of land. Some states are in the process of improving their land records systems and this is expected to gather momentum in coming years. While it might not address fragmentation directly, it would at the very least enable functioning of land markets and enable mutually beneficial land transactions.

• There is underutilization of available agricultural land. If land is limited, there must be land-augmenting or land-saving technologies. Agricultural holdings of socially disadvantaged groups like “scheduled castes” and “scheduled tribes” also exhibit greater underutilization of land, particularly in states such as Bihar, Uttar Pradesh, Gujarat, Assam and Kerala and this may be due to the poor quality of land. The solution lies in the development of appropriate technologies and provision of support services to enable the small and disadvantaged farmer to utilize this resource.

• There is increasing land degradation because of natural and human-induced factors.³⁵ Much land has become unusable owing to land degradation, salinization or waterlogging. There is no transparent policy to make this land available to agro-industry. Panchayats (village local bodies) can be used to identify unusable, saline or waterlogged land, which can be reclaimed through joint cooperatives of landless farmers and agro-industry for cultivation, afforestation and plantation crops. With greater powers and funds being devolved to the Panchayats, it is expected that the local communities will be better motivated to take up these tasks collectively. Moreover there are some measures for growing biofuel-yielding plants that are gathering momentum.

• Notwithstanding official bans on leasing in and leasing out of land, tenancy continues de facto, although the form has changed from sharecropping to fixed rent tenancy. Given economies of scale in production, this suggests a conversion of the de facto practice to de jure legal changes, so that there are incentives to invest in land and land can also act as collateral. However, these changes are likely to be highly sensitive politically and unlikely to be changed in the near future.

Somewhat in the same vein, provisions are needed for contract farming, with explicit clauses on contract enforcement and dispute resolution.

4.2 Water

Of the total agricultural land, only 35 to 40 percent is irrigated and agriculture is therefore still dependent on monsoons. Moreover, during the 1990s³⁶ , the area under canal irrigation declined, despite an increase in expenditure on major and medium irrigation projects (Raju et al. 2004). Simultaneously, there was also a decline in the use of tank irrigation; an increasing source of irrigation has been groundwater irrigation, mostly owned and managed by farmers.

There are several issues connected with irrigation and water usage: (a) water conservation and appropriate pricing of water; (b) diversion of water from surplus basins to deficit basins³⁷ ; (c) decline of traditional water management structures and institutions; (d) disparity in the spread of irrigation across regions; (e) absence of sufficient attention to the software of irrigation systems, rules and procedures, allocation and distribution of water and relationships between users and the bureaucracy; (f) inequity in groundwater usage and the absence of legal frameworks and enforcement mechanisms to check overexploitation; (g) insufficient usage of drip and sprinkler irrigation; and (h) declining user management and participation in irrigation systems (Raju et al. 2004). Nor should one forget that parts of India are still characterized by rain-fed agriculture, such as parts of Andhra Pradesh, Karnataka, Maharashtra, Madhya Pradesh and Rajasthan, producing coarse cereals and oilseed (Rao 2004). These drought-prone areas often witness farmer trauma and institutional and policy support for dryland agriculture is weak or non-existent.

The solutions are well-known: community-based water conservation measures, revamping of traditional water-harvesting mechanisms, greater investments in maintenance of irrigation systems and appropriate pricing of electricity for agricultural purposes.

Water will emerge as a serious consideration over the next few years, and it is likely that many, if not most, of the above solutions will have to be put in place.

4.3 Credit

The objective of the Agricultural Credit Policy in India since Independence has been gradual replacement of moneylenders by cooperatives and lowering of interest rates. Until banks were nationalized, cooperative institutions were the only source of institutional credit in rural areas. Since nationalization, scheduled commercial banks and regional rural banks (RRBs) have also been part of the formal credit system. As percentage of agricultural GDP, institutional credit to agriculture increased from 2.56 percent in 1970–1971 to 7.11 percent in 1980–1981 to 12.14 percent in 2000–2001, although studies do suggest asymmetries in distribution of credit across farm size and across regions. But small farmers continue to resort to informal lenders (despite the success of Kisan credit cards, see Box 2), as the current system of institutional credit to farmers suffers from non-farmer friendly practices, delays in credit delivery and collateral problems. This forces farmers to resort to non-institutional sources of credit at high rates of interest. There should be a shift in attention from the cost of credit to availability of credit.

There are a number of strands in the reform package:

• First, improvements in the supply of credit by simplifying loan application and documentation procedures, easing collateral requirements and recapitalizing regional rural banks (RRBs) and cooperative banks.³⁸

• Second, there are issues in reforming cooperatives and freeing them from government intervention (Datta 2004).

• Third, there are questions of stimulating demand for credit by pushing the formation of self-help groups (SHGs) and NGO involvement (Deshpande et al. 2004), especially in the context of microcredit. There is a government policy to link SHGs with banks and up to December 2004, 1.28 million SHGs have been linked with banks (GOI 2004–2005).³⁹

• Fourth, the agricultural credit issue cannot be delinked from insurance. There is poor protection for farmers because the current Comprehensive Crop Insurance Scheme is too complicated; it does not cover all crops and has a complex system for loss assessment.

• A simplified crop insurance scheme should have farmer friendly administration, cover all crops, cover farmers who do not take loans, charge actuarial rates and provide subsidies for small and marginal farmers. In all fairness, one should point out that this is easier said than done.

4.4 Markets

In much of the agricultural reform agenda, there is questioning of what has historically believed to have been the government's role in pushing agricultural development. At a generic level, these government policies include agrarian reforms; the broad objective of what was called self-sufficiency in foodgrain production; a price-support policy; government interventions in production and distribution of agricultural products, inputs and services; technology generation and dissemination; and promotion of cooperatives (Thimmaiah and Rajan 2004). For instance, the self-sufficiency in foodgrain production objective led to a system of price-support purchases through the FCI (Food Corporation of India) and subsidized distribution through the PDS.⁴⁰ This price-support system for rice and wheat created incentives in favour of rice and wheat, and favoured states that had such surpluses — Punjab, Haryana, the western parts of Uttar Pradesh and Andhra Pradesh. Quite often, the MSPs were increased far more than what the CACP (Commission on Agricultural Costs and Prices) had recommended. The FCI procured both for buffer stocks and the PDS and, in both cases, inefficiencies in FCI procurement have been documented. It is being suggested that while the FCI might continue to procure for buffer stock purposes, for the PDS, procurement should be thrown open to state governments, the private and the cooperative sector.

Nor has the PDS worked well. The APTFYP comments on the targeted PDS, in an attempt to reform the PDS: “There is 36 percent diversion of wheat, 31 percent diversion of rice and 23 percent diversion of sugar from the system at the national level. ….Due to poor off-take by the states and even poorer actual lifting by the BPL families, the scheme has not made any impact on the nutrition levels in [some] states.”⁴¹ The Expenditure Reform Commission's (ERC) Report on Food Subsidy (July 2000) is a devastating critique of the PDS, highlighting FCI inefficiencies as well as the pro-urban bias of the PDS. The reform agenda therefore encompasses a revamp of the PDS system as well and some states have now begun to experiment with a system of food stamps.

In addition to procurement and PDS, the APMC Acts and the Essential Commodities Act (ECA) are perceived to be unnecessary impediments towards developing a national and common market for agricultural products. Government policies on agricultural marketing have covered regulation of marketing practices, creation of infrastructure, price support, promotion of cooperative organizations, technology transfer, input supply and credit delivery (Acharya 2004). The following trends are evident:

1. Marketed surplus per farm rose.⁴²

2. Marketing charges payable by farmers were dropped, standardized, or liability shifted to buyers.

3. More and more reliable information was made available to farmers.

4. Better storage facilities and quicker means of transportation became available.

5. The trend of village sales declined and market sales increased.

6. Price-support programmes helped farmers reduce price risks.

7. In some areas, there was an increase in cooperative or group marketing by farmers.⁴³

There are 7 161 regulated markets, mostly primary wholesale markets and the number has increased overtime (Acharya 2004). Through APMC Acts, marketing boards have often accumulated substantial resources, based on fees that range between 0.5 and 2 percent of the value of produce transacted. These market development funds were supposed to be ploughed back into the development of infrastructure and other services. Whether this has indeed happened, is doubtful.⁴⁴ In many states, state governments alone are allowed to set up markets for agricultural commodities. Such monopolistic practices prevent the development of efficient and transparent agricultural marketing and the use of preharvest and postharvest technologies, or the setting up and enforcement of quality standards (Table 15).

Table 15. Number of regulated markets

Source: Acharya (2004).

The food chain in India has several intermediaries from the farmer to the consumer. It is estimated that 20 percent of the food produced in India is wasted⁴⁵ Less than 2 percent of fruit and vegetables is processed and wastage is estimated at 25 percent of total production. While private traders are allowed to trade in foodgrain, the APMC regulations create much complication in trade in agricultural commodities.

However, it is now generally agreed that both the APMC and ECA will not remain in force for long in most states. Contract farming will be allowed, and there will be greater flexibility for the farmers and traders to transact freely. However, for these reformed systems to work, the dispute resolution mechanism will need to be strengthened.

The APTFYP also makes the point that such reforms are resource neutral, that is, they do not require significant additional public resources. Success in reducing the layers of intermediation with or without the use of information technology, can allow producers to obtain better prices, without the final consumer having to pay higher prices. It also spills over into better extension services and even credit and insurance.⁴⁶

There are too many statutes and orders and these have not been rationalized or harmonized. Nine different ministries are concerned with food processing and there are 22 related Acts and Orders. Laws to enforce food standards should be unified and rationalized. Simultaneously, enforcement must be strengthened.⁴⁷ Indian standards must be aligned with international standards such as CODEX.⁴⁸

In India, experience has proven that a reform is first undertaken in one aspect, which then introduces a need to reform other constraining laws and regulations and institute other policy changes. These are subsequently taken up by policy-makers. In the context of agriculture, once the APMC and ECA are repealed, and intermediation is explicitly recognized as an important component, other facilitative reforms would also be addressed. However, because agriculture is a state concern it is likely that these changes will be slower than in other sectors.

At the same time newer technologies are facilitating the flow of other aspects related to marketing and information to farmers; moreover they are cost effective. 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. Private corporations for instance are providing easy access to relevant information for the farmers through the Internet. The ITC e-Choupal (Box 3) and the Digital Mandi (Box 4) are two examples. Another important feature is related to transparent auctioning systems — the NDDB's horticulture initiative in Karnataka (Box 5) is an example.

4.5 Diversification

A broader point that is being made through this reform agenda is encouraging diversification. Although not always articulated clearly, diversification will obviously be encouraged through greater private sector participation, removal of policy distortions (such as unnecessarily high procurement prices for foodgrain),⁴⁹ scrapping of legal hurdles, development of risk management institutions and a refocusing of public sector driven research. As diversification automatically implies exposure to additional risk, there must be risk and disaster management, or reduction instruments. This spills over into issues connected with insurance, transaction costs associated with futures' markets and management of exogenous shocks connected to natural disasters.⁵⁰ Such diversification can include (but is not limited to) dairy, poultry, fisheries and agroforestry. The latter two are discussed hereunder.

4.5.1 Fisheries

With remarkable growth of 800 percent since the 1950s, the fisheries sector has contributed handsomely to overall agricultural growth numbers. Fish production has thus grown at a faster pace than foodgrain, but the manner of its growth leaves much to be desired. This is because most of the growth has come from the expansion of fish culture in inland waters, but little from oceans and rivers. The result is that the readily available potential for developing the marine catch is not being utilized. The annual output of marine fisheries has therefore been stagnant at less than 3 million tonnes for over five years. In 1960, the production of inland fisheries was just over one-fourth (280 000 tonnes) of the marine output (880 000 tonnes). By 1999/2000, inland output caught up with marine output, with both reporting an almost identical catch of about 2.8 million tonnes each. The inland catch has risen since then. States where fish consumption is low, such as Punjab, Haryana and Uttar Pradesh, and even a water-scarce state like Rajasthan, have also taken to aquaculture in a big way. Rajasthan, which is mostly desert, had over 14 000 tonnes of locally raised fish for consumption.

As pointed out by the parliamentary standing committee on agriculture, the overall business has suffered from neglect. Fish harvesting is still largely done by non-motorized traditional boats. There is a shortage of mechanized boats, modern communication systems and fishing gear as well. The infrastructure for landing and berthing of fishing vessels as well as postharvest preservation, packing, processing and refrigerated storage and transportation is in a derelict state. Ice plants and facilities for drying and dehydration of fish are not available in most places. Much of India's vast exclusive economic zone remains virtually untapped. But coastal areas are being overexploited, causing a steady depletion of fishing and a decline in the fish catch. Year after year, the funds earmarked for fisheries development are not spent. In the current Five Year Plan period, of the total allocation of Rs7.5 billion, only Rs2.6 billion has been spent in the first three years. Clearly, a new policy is needed to encourage private investment in deep-sea fishing vessels and the postharvest infrastructure.

The east coast only accounts for about 30 percent of the total marine catch, although it has a much longer coastline. This situation has been ongoing since the late 1970s. Consequently, fishing families on the east coast are more impoverished relatively. The NSS data also indicate that most fisherfolk are undernourished, being highly deficient in both calorie and protein intake. The west coast, too, seems to be headed in a similar direction, as reflected in the progressive reduction in the average size of fish caught in the past few years. At the same time the zone beyond 50-metre depth remains underexploited owing to policy constraints.

In inland aquaculture problems are also emerging. The mushrooming of shrimp aquaculture farms in the vicinity of the coasts, for instance, caused much sea and groundwater pollution. The Supreme Court had to order their closure in 1996.

Policy intervention is needed, for example, to reduce boat density in the overexploited sea zones and encourage fishing activity beyond 50-metre depth. A new prioritization of technologies for every type of market participant must be the first step, backed by appropriate incentives. But emphasis must continue on efforts to increase scale. This requires a new foreign direct investment (FDI) policy, a new financing policy and a suitable tax regime to encourage processing companies that face formidable hurdles such as complicated exporting procedures, high shipping costs, severe competition among exporters, frequent revisions of quality standards by importers, irregular supply of power and raw materials, hygiene issues and lack of arrangements for speedier transportation of highly perishable produce.

As a further refinement, the states could be grouped into three categories — traditional fishing states that have a relatively higher fisheries productivity (Orissa and West Bengal), non-traditional fisheries states that have performed well (Andhra Pradesh and Punjab) and states with untapped fisheries potential (Bihar, Karnataka, Tamil Nadu and Madhya Pradesh). Different strategies are needed for each of these groups to facilitate sustainable high growth in fisheries.

Above all, it is necessary to clarify whether the issue will be viewed from a livelihood or a major business perspective. The two are almost mutually exclusive and until this friction is reduced, the current multipronged strategy, like all multipronged strategies (because they have multiple objectives) will only result in suboptimal solutions.

4.5.2 Agroforestry

Increasing amounts of land are being degraded while demands for timber, fuelwood and grass for fodder are increasing. The central issue in agroforestry, therefore, is to restore degraded lands. Agrisilviculture, agrihorticulture and silvipasture are some of the terms used for describing the processes and methods through which this can be done. These are essentially ecofriendly practices that permit gainful exploitation of land to meet the fuel, fodder and timber needs of the population without impairing land productivity. Agrisilviculture refers to the system of growing multipurpose trees along with agricultural crops. When trees are grown with grass, shrubs and other vegetation that can serve as animal feed, this becomes a silvipastoral system. When some fruit trees are grown with crops, this is called agrihorticulture. The need for these practices has arisen because of rapidly declining local fodder and fuel resources in rural areas, besides, of course, the growing ecological imbalances due to acceleration in denudation of natural vegetative cover and consequential deterioration in soil health.

The newly launched Greening India project to extend forest cover to 33 percent in all the states by 2012 is the first step in this direction. It is novel in several respects. Unlike previous programmes that sought to achieve afforestation, reforestation or wasteland development, this project has land and people as its theme, and poverty alleviation through the generation of income from land as its goal. The situation-specific land and environment upgrading activities will be carried out with the participation of local communities. The trees to be planted in a particular area are to be selected with their market and value-added potential in view. The target area is 107 million ha of degraded land, including 64 million ha categorized as wasteland.

But there is no guarantee of success. Earlier efforts have failed. The National Wasteland Development Board (NWDB), established in 1985 to carry out the equally imposing task of reclaiming over 2 million ha of wasteland every year through reforestation and afforestation, is a case in point. The most significant issue is access to land. Much of the degraded land belongs to forest departments, panchayats or private individuals. They do not willingly allow any outside agency to work on their land for fear of losing control. There may be a case here for invoking what in the United States is called the “power of eminent domain” which permits the state to take over land for the greater public good. Funding must also be arranged beforehand, rather than on a pay-as-you-go manner. The existing national wasteland development programme, conceived for developing 88.5 million ha by the end of the 13^th Five Year Plan, has estimated that Rs730 billion will be needed.

Biofuels also need to be pursued. This can be done by identifying the most suitable vegetation. These include jatropha and pongamia. Jatropha has emerged as the preferred species. It has a high oil content of over 30 percent and the plant, being a bush, is easy to manage. It begins bearing seed in only four years. Several states are proceeding with large-scale planting on land not suitable for commercial crops (Box 6).

4.6 Technology development and access

4.6.1 Development

India spends 0.26 percent of the agricultural GDP on research and 90 percent of expenditure on R&D comes from the public sector (Alam 2004). However, R&D has paid little attention to crops grown under dryland conditions. Agricultural research and extension services need rehabilitation, with a focus on subsistence crops and dryland agriculture. Krishi Vigyan Kendras (KVKs) need to be further integrated with state and district level extension mechanisms and selected agricultural universities and research laboratories need to focus research on high-yielding hybrid coarse grains, pulses and items for mass consumption.⁵¹

The Protection of Plant Varieties and Farmers' Rights Act (2001) seeks to protect the rights of farmers, breeders and researchers. Issues such as the compulsory licensing of rights and preventing the import of varieties by incorporating the Genetic Use Restriction Technology (GURT), which makes it obligatory for farmers to depend on companies for seeds, are some of its more discussed features. It provides rights to farmers to use the seeds from their own crops for planting the next crop. Further, there are provisions for benefit sharing with farmers and a penalty for marketing spurious propagation material. The act came about after almost a decade of debate on the relative rights of farmers, breeders and developers. However, the success of illegal varieties of BT cotton illustrates the poor capacity of the government to enforce intellectual property rights. The structure now exists, and an efficient enforcement mechanism needs to be created.

This supplements the issue of upgrading facilities and expertise in ICAR (Indian Council of Agricultural Research) and state agricultural universities with full attention to the needs of the industry, with adequate funding linked to outcomes. However, there is a difference between developing technology and disseminating it. In emphasizing the former, one should not lose sight of the latter. During the last decade, the agricultural extension mechanisms of state governments have been considerably weakened.

4.6.2 Access

The discussions in the previous sections also reveal an important lesson. Improvements in yield necessarily require better technologies. However proper mechanisms for making technology accessible to a wide spectrum of potential users are essential for benefits to be realized. In the case of India, the success of the Green Revolution was based on precisely this aspect. However, as further spread was limited due to the inability of the government to develop and disseminate newer technologies and complementary inputs over a larger geographical area, sets of commodities and classes of farmers, significant yield improvements have not continued.

Moreover, once a particular technology delivery regime is initiated, it takes steady and sustained efforts (especially in democratic and multi-tiered governments) to switch to a new delivery regime. Production scenarios are therefore difficult to predict and are to a large extent dependent upon the government's ability to facilitate appropriate technology, input and service delivery mechanisms.

The decentralized system, with many small and large private entities that are cropping up across India, is a good way of ensuring that appropriate technology is developed and disseminated. In this regard it is essential that minimal regulation is applied to the activities of these merging private entities, while at the same time ensuring fair and quick dispute resolution.

4.7 Taxation

Should agriculture be exempted from direct (income) and indirect (excise) taxes?⁵² Regarding the latter, there has been a partial move towards a VAT (value-added tax) since 1 April 2005. The move being partial because only unification of state-level sales tax is being contemplated at the moment and other domestic indirect taxes remain. However, the principles of standardization and harmonization and removal of discretion are violated if there are special VAT rates for agricultural products. This is not to say that agriculture is not taxed. Apart from the mandi tax which is a tax imposed on the farmer at the point of sale in the regulated market, other taxes such as development cess (as in Punjab) and taxes on property transactions (stamp duties) are imposed across the country.

5. Current efforts for agricultural and rural development

India's UPA government, at the union or central level, came to power in 2004 and the UPA's National Common Minimum Programme (NCMP) forms the foundation of economic policy. The NCMP is as much a political document, as it is an economic one. Many of the statements are echoed across the political spectrum and are not likely to be opposed. There has been a growing consensus on many of the economic aspects of India — decentralization within the government, the growing role of the private sector and the importance of a social security net are some examples. The importance of water conservation and rainfall harvesting and other environmental issues is also echoed across the political spectrum. The importance of rural infrastructure is also universally agreed. Rural credit is becoming easier to provide via increased private sector involvement, the roles of NGOs and microcredit institutions.

5.1 The current agenda

Several antipoverty and employment generation schemes already exist in rural areas, often through centrally sponsored schemes (CSSs). Through the Planning Commission, an attempt is underway to rationalize these CSSs. For example, under the Department of Agriculture and Cooperation, assorted schemes on agricultural statistics may be merged. So will technology missions on oilseed, pulses and maize with technology missions on cotton and horticulture in the northeast being retained as separate programmes. There will be independent CSSs on on-farm water management, agriculture census and macromanagement. In addition, there are CSSs through the Department of Animal Husbandry and Dairying, Ministry of Environment and Forests, Ministry of Land Resources and Ministry of Rural Development.⁵³

The NCMP of the UPA Government states, “All centrally sponsored schemes except in national priority areas like family planning will be transferred to States.” Otherwise, there is the concept of devolving CSSs downwards to panchayati raj institutions (PRIs) and linking CSS releases to states only when states transfer funds, functionaries and financial resources to PRIs.

A National Food for Work Programme (NFWP) was launched in 2004 in 150 less-advanced districts. Subsequently, 167 were identified under the Rashtriya Sama Vikas Yojana (RSVY), with terrorism-affected districts being added to districts identified on the basis of economic criteria. Both the NFWP and RSVY identifications have now been superceded by identification of 200 less-advanced districts, undertaken by the Planning Commission, although the list is not available in the public domain yet.

This identification became necessary because of a Backward Regions Grant Fund (BRGF) and the National Rural Employment Guarantee Act (NREGA). The NREGA, in place since 1 February 2006 in 200 districts, provides that state governments will offer 100 days of unskilled manual work every year to every poor household in rural areas whose adult members volunteer for such work, at minimum wage rates. The 100-day ceiling applies to households and not to individuals. Existing CSSs, including the NFWP, will be subsumed under the NREGA. If states fail to provide jobs, there is an unemployment insurance component. There are also legislative plans for introducing social security for unorganized sector workers, including agricultural workers, and minimum protective legislation for agricultural workers.

Agricultural issues cannot be delinked from broader rural development issues. As was mentioned earlier, centrally sponsored schemes exist for rural roads (Pradhan Mantri Gram Sadak Yojana), rural housing (Indira Awas Yojana) and rural electrification and drinking water (Pradhan Mantri Gramodaya Yojana).⁵⁴ Yet data show a lack of physical and social infrastructure in rural areas.⁵⁵

The first two phases of the National Highway Development Programme (NHDP) have been reasonably successful and have improved road connectivity. Phase I involves the Golden Quadrangle and links the four metropolises of Delhi, Mumbai, Chennai and Kolkata. Phase II involves a North-South and East-West corridor. Since January 2005, Phases III and IV have been added to the NHDP, to improve connectivity in places not located on the upgraded networks of Phases I and II. More importantly, the PMGSY (Pradhan Mantri Gram Sadak Yojana) is being revamped; it has not performed very well in states like West Bengal, Uttar Pradesh, Bihar, Madhya Pradesh, Jharkhand, Assam and Chhattisgarh.

There is now an attempt to push rural infrastructure through clusters, although most clusters have an autonomous origin and are rarely induced, emerging around local skill or natural resource bases. At a conceptual level, there are three kinds of clusters that one can visualize: relatively modern, small firm-dominated industrial clusters that often tend to be located in relatively urban areas; artisan and rural industry-based clusters; and clusters that are based on the agricultural economy. The latter two, particularly the last, tend to be natural resource based. Most policy interventions have focused on the first of the three, rather than the last two. Earlier attempts at cluster formation have not always been successful, as they often tended to be ad hoc and piecemeal. The present PURA (Provision of Urban Amenities in Rural Areas) scheme is more integrated, at least in intention, and builds on different kinds of connectivity: physical connectivity through roads and power, electronic connectivity through village Internet kiosks, knowledge connectivity through education and flowing on from them, economic or market connectivity through access to markets. PURA manifests itself through the Bharat Nirman idea, focusing on rural infrastructure. It has six components of irrigation, roads, water supply, housing, rural electrification and rural telecommunications connectivity, with target dates for completion in 2009. The government is also establishing a food processing SEZ (special economic zone) in Kakkancherry in Kerala.

The government has forwarded an Integrated Food Processing Act to parliament to pass and the ECA has been amended repeatedly. Around 200 orders issued by the state governments under the ECA are likely to expire in 2006, unless the states make cases for their continuation and the GOI approves/agrees to the proposals. This is a very positive development. Contract farming, as it is equated with corporate farming, is extremely controversial.

The Food Safety and Standards Bill (2005) has been also placed before parliament; it consolidates eight laws governing the food sector and establishes the Food Safety and Standards Authority (FSSA) to regulate the sector. The FSSA will be aided by several scientific panels and a central advisory committee to lay down standards for food safety. These standards will include specifications for ingredients, contaminants, pesticide residue, biological hazards and labels.

As Table 16 illustrates, several states have amended their APMC Acts, to allow direct marketing, contract farming and establishment of private markets in the private or cooperative sectors.

There seems to be a conscious shift from an agricultural to a rural development policy, with a focus on rural infrastructure like roads, electricity and water (drinking and irrigation). For agriculture proper, the mid-term appraisal of the Tenth Plan flags certain issues (GOI 2005b):

1. Rejuvenation of support systems in extension, credit and delivery systems for inputs like seeds, fertilizers and veterinary services.

2. Investments in irrigation/water management.

3. Appropriate pricing of water.

4. Mega-irrigation projects.

5. Watershed development.

6. Agricultural research.

7. PDS (public distribution system) pricing.

Table 16. Progress in amending APMC Acts (as of January 2006)

Source: GOI (2006).

8. Fertilizer pricing.

9. National Horticulture Mission.

10. Agricultural marketing and contract farming.

11. Amendment of the ECA.

12. An integrated food-processing law.

13. Promotion of participatory natural resource management

14. Promotion of biodiesel.

The broad directions are quite clear — a host of measures related to water conservation, management, availability and accessibility are being addressed. Some support is related to pricing of output, charges for inputs, some legal reform as well as people's participation in environment and resource management. This, combined with the devolution of greater powers to rural local bodies and the powers accorded to the common man through the Right to Information Act, can help ensure that adequate accountability is imposed on the bureaucracy.

5.2 Constraints

The critical constraining aspects are three-fold and will require deft political maneuvering to push through. First, many of these policy measures will require large sums to be generated through other (non-agricultural) revenue means. It is not clear how this will be possible. Second, poor control and monitoring abilities of many state governments limit their ability to implement such large-scale programmes effectively. These abilities will take some time to build up. An example is the collapse of the extension programmes and delivery systems. Without significant administrative reforms within the government, neither is their privatization feasible in the next few years, nor is their rejuvenation likely across many if not most states of the country. Third, if reforms have not matched up to actual expectations, there is a reason. Constitutionally, most agriculture-related areas are state government subjects and it is difficult for the centre to provide incentives for such reforms. The central government will need to put in a significant amount of effort if it wants a nationally coordinated approach.

5.3 The private sector

Despite constraints, the policy regime is increasingly moving towards the greater role of private entities; economic policies in general have been moving towards the larger role of the private sector, private-public partnerships, the increasing role of communities, self-help groups and non-profit organizations for delivering critical inputs and services. Following constitutional amendments in the early 1990s, Panchayats have been given greater powers. State-level finance commissions have been established to oversee the devolution of funds to these bodies. It is now generally agreed that the Agricultural Produce Marketing Act that limited transactions between buyers and sellers except through mandis will be changed to allow for contract farming. Over the next few years, it is also expected that the laws and rules limiting internal trade in agricultural commodities will be changed to enable greater choice for the farmer.

The government is finally tackling the building of rural roads, the objective being to connect all of the roughly 600 000 villages to each other and with cities via all-weather surface roads.

At the same time developments on the IT front have enabled the setting up of Internet kiosks on a mass scale throughout rural India. Basic primary education for everyone has become a thrust area and it is only a matter of a few years when literacy will be universal, at least among young adults. India already boasts some of the cheapest cellular phone tariffs, and services for Internet and cellular communication are emerging. Private entities are marrying the advantages of Internet infrastructure and distributional networks to provide purchase, retail, information and knowledge delivery under one umbrella.

Meanwhile private sector banks are increasingly becoming aggressive lenders in the rural domain as well. Insurance firms are targeting agricultural markets more and more. Private seed companies have sprung up across the country and with some changes in the IPR regime are expected to become significant players. Moreover, after many years, the private sector has emerged as an investor in building and running quality agricultural warehousing facilities across India.

But all of the above components are recent changes; they hold great promise but currently are at a nascent stage of development. More importantly carry-overs from the past continue, and currently it is difficult to see reforms in the following areas:

• Electricity for farmers is quite cheap or free, a result of competition between various political parties;

• Investments in irrigation facilities, tanks and ponds are not rising to the levels required. State government funding is constrained;

• Water tables are falling rapidly throughout western and northwestern India, primarily due to extraction of water for agriculture;

• Central and state governments are increasingly unable to find the resources to maintain the existing infrastructure (canals for example) or to provide traditional services (such as extension services);

• User charges continue to be absent or insignificant so even basic running costs need to be subsidized for most services through the public exchequer;

• Large sections of the electorate believe that whatever the government provides should be subsidized.

In other words, the private sector will be constrained as well owing to externalities, expectations due to past policies and lack of public funds for critical public infrastructure.

6. International trade: multilateral, bilateral trade and potential impact

6.1 Multilateral issues

Although agricultural reform issues are primarily an internal or domestic matter, it is impossible to escape from the WTO (World Trade Organization). In this section, we therefore turn to the international angle.

There was no attempt to liberalize agriculture and integrate it into the General Agreement on Tariffs and Trade (GATT) framework before the Uruguay Round (1986–1994).⁵⁶ Hence, agricultural liberalization proposed in the Uruguay Round and set out in the Agreement on Agriculture (AOA) is at best a beginning and is no more than imperfect and incomplete liberalization. There are three pillars to the liberalization proposed in the AOA.⁵⁷ There are disciplines placed on domestic support, through computation of an aggregate measurement of support (AMS). Once this has been done, there are reduction commitments on the base period for AMS, if the computed AMS is above the threshold.⁵⁸ This only leads to a reduction in the base period for AMS, without setting a cap on it. Some policies (Green Box, Blue Box) are also exempted from AMS calculations. Quantitative restrictions (QRs) on imports have to be converted into tariffs and after this tariffication, tariffs have to be reduced.⁵⁹ Yet again, there is no cap on tariffs (although there are bindings) and reductions apply to the base period tariff. Nor are tariff rate quotas (TRQs) precluded.⁶⁰ For export subsidies on agricultural products, there is a reduction commitment on base period export subsidies, with no cap.⁶¹

There is sufficient evidence to demonstrate that the promised agricultural liberalization, which accounted for the bulk of the market access liberalization promised in the Uruguay Round, has not happened.⁶² Rather perversely, using exemptions, export subsidies on agricultural products in developed countries are higher after the Uruguay Round began to be implemented. The QRs have been converted into artificially high tariff equivalents, referred to as “dirty tariffication”. As with industrial products, there are specific duties, high peak tariffs and tariff escalation. The TRQs lead to low tariffs below the threshold, but extremely high tariffs above the threshold. Exemptions have been freely used to violate the spirit of AMS liberalization. The special safeguards clause⁶³ has been used to hinder market access, not to speak of the SPS agreement.

This is known and agriculture is part of the built-in or mandated agenda of the Uruguay Round. That is, even if there were to be no DDA (Doha Development Agenda), agriculture would have been negotiated. Agricultural liberalization in all its three pillars forms part of the DDA, now formalized in the framework agreement of 31 July 2004. The argument for disciplining distortions in developed countries is fairly simple,⁶⁴ although perceptions differ on whether a country is a net exporter or importer of agricultural products. What complicates matters further is the required quid pro quo on the part of developing countries and interpretation of the special and differential (S&D) treatment clause.

Shorn of public posturing, the Indian approach to agricultural negotiations exhibits some schizophrenia, with the fear of self-reliance in foodgrain production being destroyed; this is not very easy to dismiss.⁶⁵ If one takes the issues item by item, for domestic support, Indian AMS levels are around 7 percent⁶⁶ , well below the permitted threshold of 10 percent. There is enough slack for increasing domestic support. It is a separate matter that central and state governments are in no fiscal position to increase such support.⁶⁷ India has no specific export subsidies on agriculture⁶⁸, so the disciplines on export subsidies do not bite either. That leaves tariffs on agriculture, QRs on imports having been phased out.⁶⁹ Unlike domestic support and export subsidies, negotiating positions here are probably more than public posturing, compounded by the fact that domestic agricultural reform has not happened⁷⁰ and agriculture was in trouble in the second half of the 1990s. In addition, in the absence of reforms that facilitate diversification, agriculture has been equated with foodgrain production and foodgrain policy. There are also differences in perceptions among the Commerce Ministry, Agriculture Ministry and Food and Civil Supplies Ministry.⁷¹

The argument for liberalizing agriculture in developed countries is a reasonably simple one, regardless of whether it materializes or not. The point about restricting an import surge in certain segments is also reasonably easy to understand, pending long-run adjustments. Edible oils, milk and milk products, fruits and vegetables, rubber, cotton and silk, tea and coffee and alcoholic beverages figure in the list of sensitive products identified and tracked by the Commerce Ministry. Of these, edible oils and milk and milk products are the most important. Having said this, does India need the present high levels of bindings in agriculture? Almost certainly not. For the most part, tariffs of the order of 20 to 25 percent should be suitable, not to speak of exemptions through special products and temporary deviations through special safeguard mechanisms.⁷²

6.2 South Asian Free Trade Area (SAFTA) and agriculture

India has its own plethora of regional trade agreements (RTAs). FTAs (free trade agreements) are covered by Article XXIV of GATT, although India's RTAs are notified under a 1979 enabling clause that requires less trade to be liberalized than through Article XXIV. For a long time, India's RTAs were limited to the Bangkok Agreement and SAARC. But India has several more now. This plethora of FTAs and CEPAs (Comprehensive Economic Partnership Agreements) originated with the NDA government. But it continues under the UPA Government, with a perceptible switch from FTAs to CEPAs.

There are signed FTAs or PTAs (Preferential Trade Agreements) with Sri Lanka, Thailand, Bhutan, MERCOSUR (Mercado Común del Sur or Southern Common Market), Afghanistan, SAFTA and the Bay of Bengal Initiative (formerly BIMSTEC), apart from the Bangkok Agreement, and those with Bangladesh, ASEAN and Southern African Customs Union are under negotiation. China and Australia have not been settled yet. There is a CEPA with Singapore, Sri Lanka and Mauritius are in advanced stages, and Japan, Pakistan, Malaysia, Indonesia, Israel, Chile, Republic of Korea and Australia are possible. To the extent that these initiatives represent liberalization, they are welcome. However, multilateral liberalization is preferable to discretionary regional liberalization, even if negotiating the latter is easier.

There are three layers to India's RTAs. First, there is the multilateral, so to speak, SAPTA or SAFTA. Second, there is the subregional BIMSTEC and BBIN (Bangladesh, Bhutan, India, Nepal) quadrilateral growth initiative. Third, we have the purely bilateral agreements with Bhutan, Nepal, Sri Lanka and Bangladesh.

Intra South Asian Association for Regional Cooperation (SAARC) trade as a percentage of total SAARC trade is estimated at around 4 percent. There is an obvious problem in citing such figures, as a significant part of intra SAARC trade is informal trade or is routed through third countries.⁷³ It is sometimes argued that such trade, including third country trade, is almost as large as formal trade. Therefore, formal trade figures represent half of what trade figures actually are. Over time, all SAARC members have liberalized their economies and become more open and the trade/GDP ratios have consequently increased. However, for present purposes, one needs to note that intra SAARC trade as a percentage of total trade turnover is much higher for countries like Bangladesh, Bhutan, Maldives and Nepal, than for a country like India.⁷⁴

SAARC's share in India's trade is low. In 2004 and 2005, exports to the SAARC region were US$4.300 billion, representing 5.4 percent of total exports. Imports from the SAARC region were US$0.905 billion, representing 0.85 percent of total imports.⁷⁵ If one goes back to 1990 and 1991, exports to the SAARC region as a percentage of total exports were 2.9 percent and imports from the SAARC region as a percentage of total imports were 0.55 percent. The SAARC shares have increased, but not spectacularly.

There are innumerable studies on the potential for greater inter SAARC trade. Most studies focus on gains from SAFTA, as opposed to bilateral trade potentials, and there are issues connected with modeling, estimating trade diversion vis àvis trade creation, computing static gains apropos dynamic gains and so forth. What do the studies show? (Strategic Foresight Group, 2005):

• First, complete elimination of tariffs will increase intraregional trade by 1.6 times the existing levels. The volume of intra SAARC trade will increase from the present figure of US$5 billion to around 14 billion in 2015. As overall trade also increases, this does not necessarily represent an increase in the ratio of inter SAARC trade to total trade by SAARC members.

• Second, dynamic gains are 25 percent more than static gains.

• Third, smaller member countries tend to gain relatively more than larger ones. The latter is stated as an empirical argument, but it is a theoretical one as well, and is borne out by the experiences of other FTAs elsewhere in the world.

How much of a constraint are tariffs to increasing trade? In the GATT/WTO system, there are tariff bindings and tariff reduction commitments on bound rates. India has bound 73.8 percent for tariff lines, 100 percent for agricultural products and 69.8 percent for non-agricultural products (WTO 2005). The simple average of tariff bindings is 49.8 percent, 114.5 percent for agricultural products and 34.3 percent for non-agricultural products.

The Indian tariff structure can indeed be faulted. First, notwithstanding the tendency towards a monotonic decline, there are differences across sectors, the difference between agricultural and manufactured products being an obvious case. In principle, any such differentiation distorts resource allocation and there is no reason why agricultural tariff rates should be higher than non-agricultural ones. While this is a valid point to make, every country in the world is equally culpable. And the plethora of FTAs within the South Asia region and outside it, invariably exclude agriculture from liberalization commitments. Second, other than the agriculture/manufactured dichotomy, there is arbitrary variation across sectors, compounded by occasional use of specific duties. Such discretion distorts effective rates of protection across sectors, other than encouraging lobbying. Conceptually, every economist ought to argue that there should be a single uniform tariff, invariant across sectors. But, in practice, every country implements tariff escalation, with low tariffs for raw materials, higher tariffs for intermediates and highest tariffs for finished products. Because it is not immediately apparent what a finished product is, discretion sets in. Tariff escalation in India may deter value-added exports from other countries in the South Asia region, just as tariff escalation in the United States deters value-added exports from India.

There is a unilateral Indian reform attempt at tariff reduction that is independent of multilateral negotiations and commitments. Indeed, GATT's role in reducing global tariffs may have been important in the first few rounds of multilateral trade negotiations (MTNs). But in the post-Uruguay Round (1986–1994) scenario, it will be difficult to establish GATT's role in reducing tariffs, except in the case of countries that acceded to WTO as new members. Most tariff reductions have been unilateral, or driven by structural adjustment packages and this partly explains the bridge between bound rates and applied ones. Accordingly, there is a unilateral Indian tariff reform agenda. This is articulated in different places, but the most commonly cited one is the Vijay Kelkar Task Force on Indirect Taxes (GOI 2002c). For manufactured products, this has the following timeline for 2006 to 2007: 5 percent for basic raw materials like coal, ores, concentrates and xylenes, 8 percent for intermediate goods used for future manufacture, 10 percent for finished goods that are not consumer durables and 20 percent for consumer durables. But agriculture in such unilateral reform blueprints continues to be treated differently.

Next consider informal trade. Other than the existence of porous borders that are impossible to police, why does informal trade take place? Other than trade and domestic policy distortions, the reason is higher transaction costs (procedural costs) in formal trade, as opposed to informal trade. A desire to avoid not just import duties, but also domestic indirect taxes, may also be a contributory factor. The avoidance of a domestic indirect taxes objective will remain. But despite what has been hitherto said for the medium term, if there is a trade liberalization agenda, spliced with a trade facilitation agenda, one can probably expect informal trade to switch to formal channels. Although tariff elimination may not be sufficient, there seems to be a case for reducing agricultural tariffs unilaterally and regionally, regardless of what happens to multilateral negotiations.

6.3 India's trade in agricultural commodities and potential impact

Between 10 and 13 percent of the Indian export basket of goods (excluding services) comes from the agriculture sector. In absolute terms, such exports are around US$7 billion a year. Tea, coffee, rice, wheat, sugar and molasses, tobacco, spices, cashew nuts, oilmeal, fresh fruit and vegetables, meat and meat preparations and marine products⁷⁶ figure prominently in this export basket.⁷⁷ Table 17 gives details of India's exports of agricultural and allied products in 2003 and 2004. India's interests in agricultural exports are often described as peripheral. To some extent this is true, especially if contrasted with manufacturing or services. However, India's export shares in global exports are large for items like tea, coffee, tobacco, spices, sugar, rice and fish and preparations. And, contingent on domestic reforms, there is enormous potential in meat and preparations, 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) and pulses, cashew nuts, other fruits and nuts and edible oils account for the bulk of such imports. The absolute import figure is between US$2 and 3 billion a year.

Table 17. India's exports of agricultural products, 2003–2004
(US$ million)

Source: GOI (2004–2005).

The GTAP model predicts an interesting scenario for 2020. This is shown in Table 18.

Table 18. Net export share of world export (%)

Source: GTAP estimations.

Appendix 3 details on a commodity-by-commodity basis the export and import trends in the five-year period from 1997 to 2001 for the commodities for which comparable data exists. The appendix also contains a country-by-country discussion on commodity-wise exports and imports of the major items. Key points are summarized here:

• As India's share in the world market is not likely to change much, India does not appear, prima facie, to pose much of a threat as a competitor to future exporters such as China, Thailand and Viet Nam;

• Overall, India's share of the world wheat pie is insignificant and expected to remain so in net terms;

• India is likely to become an important importer of edible oil and oilseed and countries such as Philippines, Malaysia and Indonesia are likely to benefit;

• India is not likely to be among the major sugar exporters by 2020, an easier export market for Thailand is therefore likely;

• The net result is that by 2020, India is expected to account for an estimated 18 percent of world imports of plant-based fibre. The only large cotton exporter in the geographical vicinity is Australia and Pakistan. Most other countries in the vicinity are themselves significant importers;

• India is unlikely to become a significant world supplier or buyer of meats;

• Although it will be a major consumer and producer of dairy products, India is expected to be an insignificant supplier or buyer of milk products;

• India is likely to remain a marginal exporter of fish products;

• Major opportunities exist for those countries that export forestry products such as wood. Currently only Australia is a significant exporter of these products in the vicinity.

7. Summary and conclusion

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 vicinity or otherwise can gain from greater interaction with India.

Doubtless there will be high levels of increase in demand for agricultural products. These will be on account of both increases in population and high economic growth. Together they 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 large producer of most of the commodities that it consumes. Agricultural productivity appears to be stagnating, but this is observable from only a few data points and there is much that could happen to put productivity back on a high growth path.

The success of the Green Revolution provides us with one important insight that the government — even for a country as diverse and heterogeneous as India — can play an important role in putting the agriculture sector on a high growth path. It has done so in the past, with the promotion of technology, massive supply of credit and extension services, timely announcement of a minimum support price and government purchasing, subsidized fertilizer and pesticides as well as increased investments in small irrigation projects. The critical success factor was not just the availability of HYV seeds or subsidized inputs, but the fact that this was done in a coordinated manner.

All this coordination however could not help to disseminate the benefits of the new technologies across all parts of the country, and the Green Revolution has yet to spread to many areas. The reason is that the coordinated approach in a large agroclimatically diverse agricultural economy, governed by a multi-tiered democracy, and having a predominantly free economy, is difficult to sustain. In India it worked best when there was a critical lack of food and foreign exchange, which resulted in heavy dependence on external largesse. Once the crisis was over, coordinated efforts for expanding the reach of services and benefits to newer areas could not be continued.

One of India's significant successes in the past few decades has been the 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? The facts are: The greatest increases in productivity occurred in the 1970s and 1980s. The greatest reduction in poverty occurred in the 1980s and 1990s. The 1980s and 1990s 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 technologies. When the high income growth phase occurred (whether as a result of the Green Revolution, or due to liberalization, or both) poverty levels fell significantly, as even those who did not benefit from the HYV technologies as producers, benefited as consumers. In other words, purely greater production may not have generated the required impact on poverty; it had to be supplemented with greater income growth.

At the same time, the coordinated and government-subsidized “mission-mode” approach may also have affected the emergence of private sector initiatives — whether in the for-profit or non-profit/ community cooperation domains. Consequently private sector initiative was scarce. Therefore government efforts could not expand the scope and scale of the Green Revolution beyond a certain set of areas; the private sector also did not take up the initiative.

Although it is too soon to tell, this appears to be changing. With greater openness of the economy, and greater liberalization many different privately backed activities are occurring across India. Most of these have a small spread currently and are widely scattered. However, they have the potential to rapidly 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. Partly as a beneficiary, where its scientific agencies are continuing and accelerating their efforts in the development of newer technologies. It continues to subsidize many, if not most, agricultural inputs, and regulates and controls many activities.

Perhaps inadvertently, the government has also introduced distorted incentives owing to its thrust on rapidly expanding output. Excess extraction of groundwater partly due to subsidized or free electricity or unsuitable cultivation patterns such as sugar cane cultivation in water-scarce areas are some examples. Inaction, slow response or disagreement in the political ranks have also affected the lack of or slowness of reforms in the agriculture sector. Many laws that need to be changed such as the APMC Acts and the Essential Commodities Act continue to remain in force. Contract farming has not been legalized in several states. Lastly, some of the services provided by the government in the past are no longer as effective owing to a multiplicity of factors; poor scale, scope and quality of extension services is one example.

India is unlikely to be in a position to tap global potential should it be opened up. On the flip side, there is no particular reason for India to fear a deluge of agricultural imports. Barring isolated sectors, India is cost competitive in agricultural products. The bindings are also sufficiently high. Therefore, other than edible oils (especially soybean), and odd items like milk powder, chicken legs or sugar, there is no reason to fear large-scale imports. Of course, non-viability of edible oil production has a strong geographical dimension, with significant transition pains.

Reform needs can be summarized as:

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

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

• Allow for greater flexibility in production and trade;

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

• Stop overuse of water and the unsustainable use of land.

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 government coordinated efforts are difficult to manage and sustain. They can lead to great successes for a while but their sustainability is debatable. The alternative option is a system where the government leaves the role of coordination to the price system and limits itself to ensuring price stability and rural development efforts. This is the system that India appears to be moving towards. Whether it works or not, only time will tell.

The GTAP model is a general equilibrium model that has in-built parameter estimates from the world, assumptions drawn from experiences in other countries as well as key growth and elasticity estimates from India. Using past experience and these estimates it predicts that if business as usual occurs, if India sustains the acceleration in economic growth rate (that is widely expected) and population growth follows the trends of the past, the expected productivity increases will largely be consumed domestically, leaving little for exports in most commodity segments. However, this does not mean that India will not be a significant agricultural trader in the future. On the contrary. For many commodities it would continue to be a significant exporter, and will emerge as a significant importer in others. The Indian market would require significant imports of oilseed, plant-based fibre, other agricultural products, forestry products and to a lesser extent milk and its products. Perhaps as importantly, and this the GTAP model cannot predict, India is likely to be engaged in switch trade with many countries in other segments such as fresh fruit and vegetables.

Economic growth and development in India will generate many opportunities within India and for other countries. Export opportunities and the possibility of technology imports are two examples. Although private R&D in the agriculture sector is at a nascent stage, it appears to be a growing sector. The diversity of India's agroclimatic zones and its large highly educated pool of human resources provide many opportunities for developing an array of technologies specific to different conditions and soil types.

Appendices

Appendix 1

Tables

Table A1.1. Growth rates, 1868–1946 (annual trend growth rates in percent)

Table A1.2. Trend growth rates of crop output, acreage and yield for British India 18917–1946 (% per annum)

Source: Roy (2000).

Table A1.3. Indicators of rural unemployment (% of labour force)

Source: Employment and Unemployment Situation in India (2001); National Sample Survey Organization, Report No. 458, Ministry of Statistics and Programme Implementation, Government of India, New Delhi.

Table A1.4. Green Revolution trends in yields (kg/ha)

Source: FAO Statistics, various years.

Table A1.5. Crops and major states that grow them

^† Bajra - millet; ragi - finger millet; - jowar - Sorghum vulgare; tur - pigeon peas or red gram.
Source: www.agricoop.nic.in

Table A1.6. Production of major crops (million units)

^† Vegetable-based fibre plants more commonly known as roselle.
NA: Not available.
* Provisional
** Include groundnut, rapeseed & mustard, sesame, linseed, castorseed, nigerseed, safflower, sunflower and soybean. @ Bale of 170 kg + bale of 180 kg. Neg. Negligible.
Sources: 1) Directorate of Economics & Statistics, Department of Agriculture & Cooperation. 2) Ministry of Commerce & Industry.

Figures

Source: FAO Statistics.
Note: Data are 3-yr average (2001–2003).

Figure A1.1. Comparison of yield for different crops across countries (kg/ha)

Source: FAO Statistics.
Note: Data are 3-yr average (2001–2003).

Figure A1.2. Comparison of yield for different crops across countries (kg/ha)

Source: FAO Statistics.
Note: Data are 3-yr average (2001–2003).

Figure A1.3. Comparison of yield for different crops across countries (kg/ha)

Appendix 2
Methodology, data and assumptions

This note borrows from the information prepared by Jikun Huang and Jun Yang of the Center for Chinese Agricultural Policy, Chinese Academy of Sciences for the GTAP forecasts. The GTAP forecasts for India were also conducted by the same authors and we would like to acknowledge their efforts.

The main analytical tool used in this study is a model of global trade, which is based on the Global Trade Analysis Project (GTAP). In this appendix, after a brief introduction of the model, the assumptions on macroeconomic development such as GDP and population growths are summarized.

The Global Trade Analysis Project

The well-known GTAP has been used to assess the implications of India and China's rapid economic growth for agriculture and food security in both these countries and the rest of world. The GTAP is a multiregion, multisector computable general equilibrium model, with perfect competition and constant returns to scale. The model is fully described in Hertel (1997). It has been used to generate projections of policy impacts in the future (Arndt et al. 1996; Hertel et al. 1999; van Tongeren and Huang 2004).

In the GTAP model, each country or region is depicted within the same structural model. The consumer side is represented by the country or regional household to which the income of factors, tariff revenues and taxes is assigned. The country or regional household allocates its income to three expenditure categories: private household expenditures, government expenditures and savings. For the consumption of the private household, the non-homothetic Constant Difference of Elasticities (CDE) function is applied. Firms combine intermediate inputs and primary factors, i.e. land, labour (skilled and unskilled) and capital. Intermediate inputs are composites of domestic and foreign components, and the foreign component is differentiated by region of origin (Armington assumption). On factor markets, the model assumes full employment, with labour and capital being fully mobile within regions, but immobile internationally. Labour and capital remuneration rates are endogenously determined at equilibrium. For crop production, farmers make decisions on land allocation. Land is assumed to be imperfectly mobile between alternative crops, and hence endogenous land rent differentials should be taken into account. Each country or region is equipped with one country regional household that distributes income across savings and consumption expenditures to maximize its utility.

The GTAP model includes two global institutions. All transport between regions is carried out by the international transport sector. The trading costs reflect the transaction costs involved in international trade, as well as the physical activity of transportation itself. Using transport inputs from all regions the international transport sector minimizes its costs under the Cobb-Douglas technology. The second global institution is the global bank, which takes the savings from all regions and purchases investment goods in all regions depending on the expected rates of return. The global bank guarantees that global savings are equal to global investments.

The GTAP model does not have an exchange rate variable. However, by choosing as a numeraire index of global factor prices, each region's change of factor prices relative to the numeraire directly reflects a change in the purchasing power of the region's factor incomes on the world market. This can be directly interpreted as a change in the real exchange rate. The welfare changes are measured by the equivalent variation, which can be computed from each region's household expenditure function.

Taxes and other policy measures are represented as ad valorem tax equivalents. These create wedges between the undistorted prices and the policy-inclusive prices. Production taxes are placed on intermediate or primary inputs, or on output. Trade policy instruments include applied most-favoured nation tariffs, antidumping duties, countervailing duties, export quotas and other trade restrictions. Additional internal taxes can be placed on domestic or imported intermediate inputs, and may be applied at differential rates that discriminate against imports. Taxes could be also placed on exports and on primary factor income. Finally, where relevant taxes are placed on final consumption, they can be applied differentially to consumption of domestic and imported goods.

The GDP can be treated either endogenously or exogenously in simulations. Normally, the GDP is treated as an endogenous variable when analysing the impacts of trade liberalization or other policy shocks (e.g. technology changes, resource endowment changes and fiscal or financial policy changes). However, the GDP also can be treated as an exogenous variable when one uses the GTAP to analyse the impacts of overall economic growth on the performance of individual sectors, trade and others. In this case, technology variables become endogenous if capital investment is exogenous, or capital investment becomes endogenous if technological change is exogenous.

The GTAP database contains detailed bilateral trade, transport and protection data characterizing economic linkages among regions, linked with individual country input-output databases which account for intersectoral linkages among the 57 sectors in each of the 87 regions. The database provides quite detailed classification on agriculture, with 14 primary agriculture sectors and seven agricultural processing sectors. All monetary values of the data are in US$ million and the base year for the version (Version 6) used in this study is 2001. For the purposes of this study, the GTAP database has been aggregated into 14 regions and 18 sectors.

Assumptions: the baseline scenario

Initial GDP growth. For initial assumptions on GDP growth over the next 20 years (2001–2020) for all countries except China and India, we adopted the World Bank's projections. The World Bank's projection on global and regional GDP growths has been widely used in many similar studies (e.g. Walmsley et al. 2000; van Tongeren and Huang 2004). Meantime, we also incorporate the economic growth prospects of Asia with information from Economic outlook (ADB 2002). The assumptions on annual growth of GDP for 2001 to 2020 are based on the prospects of China's economic growth. Initial GDP growths for all countries are used to calibrate the implicit assumptions of technology changes (e.g. total factor productivity [TFP]) embodied in these initial GDP growths given the input-output tables in individual countries or regions. After the embodied TFP growths are estimated and used as exogenous assumptions in the model, the GDP is treated as endogenous in the final analysis. For India, the assumptions are found in the main text and are also provided hereunder.

Population and labour. Population data for 2001 to 2020 for all countries except for India and China are from the United Nations' population projection. China's population projection is from a recent study by IIASA (Toth et al. 2003).

Natural resource endowments. No effort has been made to develop a comprehensive database on natural resource endowments. In this study, we directly adopted those assumptions that were in a recent LEI-CCAP study (van Tongeren and Huang 2004). They assume that the annual growth rate of natural resource endowment will be 0.3 percent for all countries.

Physical capital. Assumptions of physical capital growth are from Walmsley et al. (2000) and van Tongeren and Huang (2004) although there are several methods to keep the capital endogenously based on the static model (Francois et al. 1996; Walmsley, 1998). However, it usually assumes the initial and final results are stable states and the return rates of capital in the beginning and the final stage equally. Therefore it is not suitable to simulate a short time span (five years) in our simulations. Moreover such a method also assumes the capital is freely mobile among countries and does not trace the ownership.

Recursive dynamic simulation. The baseline is constructed through the recursive dynamic approach. We implement the simulation through four steps (2001–2005, 2006–2010, 2011–2015 and 2016–2020) to reflect the change of endowment in different countries and periods. This procedure has been used in several other studies (Hertel et al. 1999; van Tongeren and Huang 2004). Comparing these methods, we keep the long-term trade balance of different countries fixed. The basis for this assumption is that investment must be financed solely from domestic savings and thus capital is not mobile across regions (Walmsley 1998). If we do not trace the ownership and pay the foreign capital inflow back, h will cause large foreign capital inflow via trade deficits. Although it is not perfect as the recent GTAP model, which lets the capital freely mobile among countries and traces the foreign ownership, there is no public version available; it requires the creation of a new accounting database to reflect the foreign capital inflow, which is beyond the scope of this study. On the other hand, under our approach, the equivalent variable (EV) can be directly interpreted as change in welfare.

Trade and other policies. The baseline projection also includes a continuation of existing policies and the effectuation of important policy events related to international trade as they are known to date. The important policy changes are: implementation of the remaining commitments from the GATT-Uruguay Round agreements; China's WTO accession between 2001 and 2005; global phase out of the Multifibre Agreement under the WTO Agreement on Textiles and Clothing (ATC) by January 2005; European Union enlargement with Central and Eastern European Countries (CEECs); and possible trade agreement in Doha negotiations during 2005 to 2010. For the baseline projection, this results in a number of assumptions with regard to import tariffs, tariff rate quotas, production and export subsidies. Because there are still high uncertainties on the results of the current Doha Round negotiation, we assume the possible outcome by simply averaging the offers provided by the United States, European Union and CAIRNS proposals in 2004. Details of these assumptions are adopted from van Tongeren and Huang (2004).

Assumptions for India

Table A2.1. The growth rate of exogenous variables for India in four stages (per year %)

Table A2.2. The change in trends of income elasticity in India

Table A2.3. The change in trends of uncompensated own price elasticity in India

References (Appendix 2)

Arndt, C., Hertel, T., Dimaranam, B., Huff, K. & McDougall, R. 1997. China in 2005: implications for the rest of world. Journal of Economic Integration, 505–547.

Francois, J.F., MacDonald, B.J. & Nordström, H. 1996. Trade liberalisation and capital accumulation in the GTAP model. GTAP Technical Paper No. 7.

Hertel, T.W. & Martin, W. 1999. Would developing countries gain from inclusion of manufactures in the WTO negotiations? GTAP working paper, Purdue University.

Hertel, T.W. (ed). 1997. Global trade analysis: modelling and applications. Cambridge University Press.

Huang, J., Rozelle, S. & Chang, M. 2004. Tracking distortions in agriculture: China and its accession to the World Trade Organization. World Bank Economic Review, 18(1): 59–84.

Van Tongeren, F. & Huang, J. 2004. China's food economy in the early 21^st century. Report #6.04.04. The Hague, Agricultural Economics Research Institute (LEI).

Walmsley, T.L., Betina, V.D. & Robert, A.M. 2000. A base case scenario for the dynamic GTAP model. West Lafayette, Center for Global Trade Analysis, Purdue University.

Walmsley, T.L. 1998. Long-run simulations with GTAP: Illustrative results from APEC trade liberalization. GTAP technical paper No. 9.