INTERNATIONAL PROJECTS PARTNERSHIP CONSULTANTS, FRANCE INDIA: Agribusiness and Commercial Agriculture Assessment (TA4192-IND)

INTERNATIONAL PROJECTS PARTNERSHIP CONSULTANTS, FRANCE www.ippconsultants.com INDIA: Agribusiness and Commercial Agriculture Assessment (TA4192-IND) Final Report Volume-I Asian Development Bank May 2004

(i) CURRENCY EQUIVALENTS (as of 28 th May 2004) Currency Unit - Rs Rs. 1.00 = 0.0221 $1.00 = IR 45.25 ABBREVIATIONS ADB - Asian Development Bank ADTA - Advisory Technical Assistance AEZ - Agri Export Zones AP - Andhra Pradesh APEDA - Agricultural and Processed Food Export Development Authority APM - Agricultural Produce Marketing Act APMC - Agricultural Produce Market Committees ATMA - Agricultural Technology Management Agency AWAKE - Association of Women Entrepreneur of Karnataka BIS - Bureau of Indian Standards CAC - Codex Alimentarius Commission CFTRI - Central Food Technology Research Institute CII - Confederation of Indian Industry CMU - Carnegie Mellon University CPRS - Check Post Registration System CWI - Consignment wise Inspection DAC - Department of Agriculture & Cooperation DASP - Diversified Agriculture Support Program DFPI - Department of Food Processing Industries DGHS - Directorate General of Health Services ECA - Essential Commodities Act EIC - Export Inspection Council e-marketing - Electronic Marketing EPZs - Export Processing Zones ERC - Electricity Regulatory Commission EXIMBANK - Export-Import Bank of India FCA - Forward Contract (Regulation) Act FCI - Food Corporation of India FICCI - Federation of Indian Chambers of Commerce & Industry FIIS - Farm Income Insurance Scheme FMC - Forwards Markets Commission FPO - Fruit Products Order FSMSC - Food Safety Management Systems GATT - Generalized Agreement on Trade and Tariff GCF - Gross Capital Formation GDP - Gross Domestic Product GMP - Good Manufacturing Practices GOI - Government of India GWH - Giga Watt Hour HACCP - Hazard Analysis and Critical Control Points

HOPCOMS - Horticulture Producers Cooperatives Marketing and Processing Society HRD - Human Resource Development IAAD - Indian Association for Agribusiness Development IBD - International Business Division ICAR - Indian Council of Agriculture Research ICICI - Industrial Credit Investment Corporation of India ICRISAT - International Crop Research Institute of Semi-Arid Tropics ICT - Information Communication Technology ITC - Indian Tobacco Company IFPRI - International Food Policy Research & Industry INR - Indian Rupee IPPC - International Plant Protection Convention IPQC - In process Quality Control ISRO - Indian Space Research Organization IT - Information Technology J&K - Jammu & Kashmir KVK s - Krishi Vigyan Kendra s MANAGE - National Institute of Agriculture Extension Management MAP - Market Access Promotion MFPI - Ministry of Food Processing Industries MIDC - Maharashtra Industrial Development Corporation MIS - Market Intervention Scheme MOA - Ministry of Agriculture MOU - Memorandum of Understanding MP - Madhya Pradesh MPEDA - Marine Products Export Development Authority MRL - Maximum Residue Level MSAMB - Maharashtra Agricultural Marketing Board MSP - Minimum Support Price MSSRF - M.S. Swaminathan Research Foundation NABARD - National Bank for Agriculture and Rural Development NAFED - National Agriculture Cooperative Marketing Federation NAFTA - North American Fee Trade Agreement NAIS - National Agricultural Insurance Scheme NATP - National Agricultural Technology Project NCDC - National Cooperative Development corporation NDDB - National Dairy Development Board NGOs - Non Governmental Organizations NWR - Negotiable Warehouse Receipt O&M - Operation & Maintenance PAN - Permanent Account Number PC - Personal Computer PDC - Planning Development and Control PFA - Prevention & Food Adulteration PPP - Public Private Partnerships PSF - Price Stabilization Fund RRBs - Regional Rural Banks RSGA - Reddiarchatram Seed Growers Association SFAC - Small Farmers Agribusiness Consortium SFVAM - Safal Fruit and Vegetable Auction Market

SHGs - Self Help Groups SPS - Sanitary & Phyto Sanitary TA - Technical Assistance TN - Tamil Nadu TV - Television UK - United Kingdom US - United States USA - United States of America USDA - United States Department of Agriculture UTs - Union Territories VCF - Venture Capital Fund VHT - Vapour Heat Treatment WHO - World Health Organization WTO - World Trade Organisation WEIGHTS & MEASURES Crore - Ten Million (10,000,000) Lakh - One Hundred Thousand (1,00,000)

GLOSSARY Arthiyas - Trade Intemediate Atta - Wheat Flour Bajra - Coarse Millet Choupal - Gathering place in Indian Villages. Jaie - Oats Jay - Barley Jowar - Sorghum Kala-Zeera - Black Cumin Khadi - Hand-spun Yam Khunmoh - Kisan - Farmer Koden - Kotwal - Watchman krishi - Farmer Kutcha arthiya - Broker or Commission Agent Kutki - Makkai - Maize Mandi - Market place Naan - Baked Bread Panchayat Raj - Village Governance Pucca arthiya - Stockist or Dealer Rotis - Baked Bread Sanchalak - Coordinator (ii)

i TABLE OF CONTENTS SECTION TITLE PAGE Executive Summary 1 1.0 Introduction 6 2.0 Overview: Agribusiness and Commercial Agriculture 9 3.0 Key Policy, Legal and Regulatory Issues 14 Wholesale Markets 14 Futures Markets 14 Essential Commodities Act 15 Storage & Warehousing 16 Cooperatives 16 Food Processing Laws 17 Credit Availability 21 Processing 21 Taxation and Fees 26 Marketing and Distribution 28 National Programs 30 4.0 The Value Chain 31 The Producer 31 The Wholesale Sector 32 The Retail Sector 33 Losses in the Value Chain 34 Effect of Subsidies on the Efficiency of the Value Chain 35 Evaluation of the Efficiency of the Value Chain 36 5.0 Stakeholders and their Issues 41 Producers 41 Wholesalers 45 Processors 46 Consumers 56 Importers 56 Exporters 57

ii TABLE OF CONTENTS (cont d) SECTION TITLE PAGE 6.0 Key Lessons Learned from Case Studies and the National Seminar Farm Extension Training and Technology Transfer, Andhra Pradesh National Institute of Agriculture Extension Management MANAGE ICT Connectivity: e-choupal, The use of ICT in Direct Farm Procurement, Madhya Pradesh Agricultural Technology Management Agency (ATMA). 75 International Crops Research Institute for the Semi-Arid Tropics - ICRISAT Private Sector Produce Wholesale Market, Karnataka 77 Madhya Pradesh Case Study e-choupals for Direct Farm Procurement Agri Export Zones for Horticultural Produce, Maharashtra The role of NGO s in the Development of Agribusiness, Tamil Nadu Diversified Agriculture Support Programs, Uttaranchal 85 Contract Farming 88 Social Aspects and Poverty Reduction 90 Delhi Workshop 100 National Seminar 102 74 74 74 75 76 79 81 83 7.0 Strategies, Roadmaps and Investment Opportunities. 107 Strategy and Roadmaps for the five States selected for Investment 111 Chhattisgarh 112 Jammu & Kashmir 113 Punjab 115 Sikkim 116 Himachal Pradesh 118 Strategy and Roadmaps for all States 120 Marketing Reforms 121 Futures Trading 121 Institutions 122 Standards 122

iii Food Processing Laws 122 Potential Investments in ICT 132 Post Harvest Handling (Applicable to all States) 140 Problem Tree Analysis 141 Tables 1 GDP from the Agribusiness Processing Sector 2 Composition of the Value of Agricultural Output 3 Changes in Food Consumption Patterns in India 4 Changes in Food Consumption among Different Expenditure Groups 5 Supply Chain of Select Agricultural Commodities 6 India s Export of Principal Agricultural Products 7 Agriculture Imports 8 Central foodgrain stocks: actual and the norm 9 Production and procurement of rice and wheat by agencies 10 Export of Basmati rice for the last decade 11 Export of Non basmati rice 12 Export of Wheat 13 Export of Mango Pulp 14 Export of pickles and chutneys 15 Export of Preserved mushrooms 16 Packaging and Marketing of different commodities in Regulated Markets 17 Ranking of Various Sources of Information 18 Control Orders Issued by Focused State Governments 19 Trade Ratios in percent 20 Output and Export of Processed Food Products from India 21 Processed Food Exports from India 22 Multiplicity of Ministries

iv SECTION TITLE TABLE OF CONTENTS (cont d) Appendices Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6 Appendix 7 Appendix 8 Appendix 9 Appendix 10 Terms of Reference Case Study: Farm Extension Training and Technology Transfer, Andhra Pradesh Case Study: Private Sector Produce Wholesale Market, Karnataka Case Study: e-choupal, The use of ICT in direct Farm Procurement, Madhya Pradesh Case Study: Agri Export Zones, Maharashtra Case Study: The role of NGO s in development of Agribusiness, Tamil Nadu Case Study: Diversified Agriculture Support Programs, Uttaranchal Case Study: Contract Farming Persons Met Reference Documents

1 EXECUTIVE SUMMARY 1 The agriculture sector in India contributed 24.2% to GDP in 2002-2003 and provides a living for approximately two thirds of the population. Although significant progress has been achieved over the past 5 years, the potential for development of agribusiness, diversification, marketing and exports has not been realized and remains under developed, value addition to food production is only 7%. India has diverse agro climatic conditions and is a major producer of agricultural produce serving one of the largest domestic markets in the world, yet its share in world agricultural trade remains very low. 2 The Tenth Five Year Plan (Tenth Plan) has identified the need to improve productivity and efficiency and proposes increased investments in diversification, infrastructure, post harvest technology and information dissemination. While the Tenth Plan proposes a significant increase in public sector investment, it is acknowledged that it encourages private sector participation wherever possible. The proposed public sector investments will only have a marginal effect on growth and more private sector investment is needed to accelerate growth in commercial agriculture and agribusiness. This can be more readily achieved if present policy and institutional impediments are substantially reduced. 3 The growth of the agribusiness sector is positively affected by agricultural productivity, changes in consumption patterns away from food staples, improvements in transportation and communication infrastructure, international trade and supportive government policy. In India, components of commercial agriculture such as fruits and vegetables, oilseeds and sugars are growing faster than foodgrains. Such behaviours in consumption pattern changes have seen more rapid growth in the consumption of items such as fruits and vegetables, oils and milk products than in foodgrains. In the future these trends may be reinforced by international trade. 4 India s supply and demand of agricultural products face uncertainties owing to conflicting domestic policies relating to production, distribution, food security and pricing. Near self sufficiency of inputs and relatively low labor costs have enabled exports of several agricultural commodities over the years such as marine products, cereals, cashew, tea, coffee, spices, oil meals, fruits, vegetables and castor. For certain commodities like Basmati Rice, India has a niche market. 5 Given a favorable enabling environment, the Indian farmer can perform just as well as farmers in other countries where the private sector is given more freedom to operate without the burden of interventions. The problem at present is that farmers and businessmen are forced to operate in a restrictive environment reducing their ability to be efficient. More emphasis should be placed on promotion of direct marketing and the reduction of taxes on raw agricultural produce. However the overall economy suffers from inefficiencies at all levels in the agribusiness chain, input supply, production, marketing, processing, exporting, and retailing. These inefficiencies result from policy, legal, and institutional impediments to private sector initiatives over which the private sector has little control. 6 For several commodities, India s national productivity is less than the world average and there are wide variations in productivity levels in different parts of the country. Thus the issue of competitiveness is also region specific. A regionally differentiated strategy taking into account agronomic, climatic and environmental

2 conditions is not pursued to full potential of yield in every region. A major difficulty faced by India in the international market is the high level of domestic support and export subsidies given by developed countries for agri exports. Indian agriculture can become competitive and enhance its efficiency by seeking substantial reductions in the support given to agriculture by developed countries and by providing domestic support to maintain and improve competitiveness within the WTO framework. 7 The Green Revolution enabled India to make great progress in productivity, however declining investments have retarded progress, Further incentives are required to maintain and increase productivity and growth and enhance value addition. These investments must be targeted at supporting infrastructure as well the core agribusiness sector. The production component of the agribusiness sector in India is characterized by the significant presence of small household production units and employs a significant portion of the country s workforce. 8 Many reforms were introduced following the near insolvency crisis in 1991 including the reduction of import duties, greater private sector participation, and the easing of restrictions on business allowing greater freedom on what can be produced. However further reforms and incentives are necessary across a wide range of agribusiness activities with a corresponding reduction in market interventions aimed at improving efficiency, value addition, and the promotion of greater private sector participation. 9 Government recognizes that existing legislation is outdated and hampers efficiency in marketing and agricultural production. Recently a Model Act was formulated but has not yet been implemented. The Central Government held a high level meeting on 7 January 2004 to discuss the Model Act with the states and has given them one year to incorporate amendments to the legal framework to change the Governments role as facilitator rather than controller of agricultural markets. 10 The State Government s mandate is to amend the APMA in a manner enabling the private sector to own, operate and manage markets including forward and backward linkages necessary to promote agribusiness without Government interventions. Although the Model Act is a progressive step, it is incumbent on the State Governments to act upon it and make it happen to better meet the needs of all stakeholders. Subsequent investment projects can then support and accommodate the reforms more directly utilizing the expertise on modern agricultural marketing practices which is clearly abundant in India. 11 Numerous ministries are directly involved in agriculture and agribusiness making the formulation and implementation of an effective agribusiness development strategy difficult and cumbersome. Private sector investment in agribusiness requires in the first place, a removal of the many legal and institutional impediments causing an adverse business investment climate. Incentives may be needed and entrepreneurs are of the opinion that once the impediments are drastically removed, the private sector will accelerate investments at a much faster pace. A rationalization of the ministries involved in agriculture and agribusiness will expedite this process. 12 The Government has promoted the establishment of Agri Export Zones (AEZ) and other entities for agribusiness through grants and other subsidies. The concept of AEZs is sound and appears to be gaining ground. Feasibility reports prepared for State agencies involved in the establishment of the AEZs do not contain comprehensive business plans, margins and profit analyses on which to justify investment and

3 government grants. The record with government involvement and interventions in these types of business has been mixed. Based on experience in other countries such as Thailand, programs that directly involve the private sector are likely to be more effective and do not require public funds or direct involvement from public sector agencies other than to ensure compliance with food safety laws. 13 The impact of increased economic growth in agribusiness can be highly effective in reducing rural poverty and increasing rural income. Contract farming may eliminate constraints associated with rural extension together with the introduction and application of modern technology, finance and marketing. In many countries, it has increased marginal farm incomes significantly and has benefited high quality agricultural production. Given the infancy of contract farming in India and its potential for agricultural development and rural poverty reduction, it is recommended that in collaboration with the private sector, a program is formulated which may accelerate contract farming in India. 14 Information and communication technology (ICT) is rapidly becoming an important aspect of agriculture. There are already various initiatives dealing with the agriculture sector including private and cooperative electronic marketing (e marketing) services providers. An important aspect of these systems is that they are completely financed by the private sector. The role of the government is limited to providing incentives that extend fast internet services to rural areas, teaching on the use of the internet, providing training to teachers and any individual interested in the use of internet. Although the Agricultural Produce Marketing Act (APMA) does not allow e marketing, some states have amended this limitation or have made specific exemptions. This demonstrates that where benefits are clearly identified, state governments will facilitate changes. 15 Despite increasing availability of agricultural credit granted by cooperative banks and regional rural banks, there has been an overall decline in the total share of agricultural credit compared to total credits for all sectors (agricultural and non agricultural). Banks still have the perception that lending to agriculture is risky and prefer to lend to non agricultural enterprises. Small farmers find it particularly difficult to obtain credit and finance because banks prefer to lend to larger groups where transaction costs and risks are lower. Private institutions such as ICICI Bank Agribusiness Division should be encouraged and incentives provided to promote the extending of credit to farmers and to agribusiness. 16 The Technology Mission for Integrated Development of Horticulture carried out in 2003 identified good potential for the development of horticulture in the states of Sikkim, Jammu Kashmir, and Himachal Pradesh. These areas experience diverse climatic conditions, suitable soils and adequate rainfall for horticultural development. A state level investment strategy to foster rapid growth in these areas is worthy of further consideration including investments in water resources management for drip irrigation, and infrastructure. DAC has prepared a report on this mission identifying the high potential for horticultural development. 17 The value chain links agricultural producers to consumers through a series of steps adding value to the produce at each stage. At the producers end, farmers optimize their strategy in an economic environment distorted by subsidies, absence of taxation, support prices, market legislation, government direct procurement, and other interventions. Similarly other private entrepreneurs in the agribusiness chain optimize their investment and management strategy in an equally distorted environment.

4 18 The marketing chain does not offer grading facilities in most locations. As the Expert Committee notes, the quantity graded at the producers level is negligible. Even in regulated markets less than 20% of them offer any sort of grading facilities. As a result, farmers lose out on the value addition that they could get from grading. Furthermore, the grading that occurs at the market yard leads to congestion in market yards during the peak arrivals period. 19 Most of India s larger agribusinesses are in branded processing with weak procurement systems. Many other kinds of large scale agribusinesses that are important in other kinds of countries do not have a significant presence here. Important instances of this are commodity processors and traders and retailers. These are typically the firms that invest in marketing infrastructure (grading, sorting, temperature controlled storage, bulk handling) and procurement systems. 20 In India, the development of the wholesale marketing system for agricultural and allied products has been focused around protecting the farmers. Regulation and development of wholesale markets was deemed an institutional necessity and construction of well laid out markets was an essential part of wholesale markets. 21 A large number of agro processing Industries, particularly in the primary processing sector, is in the hands of individual ownership. While there are few jointly managed (Partnership concerns or Private Limited companies) or collectively managed (Cooperative organizations), most of them being small scale do not have access to modern management tools or the capabilities. 22 The growth of consumer incomes is a key factor that drives the growth of commercial agriculture and agribusiness. Higher incomes lead to (a) greater demand for perishables and non food staples and to (b) higher demand for processed foods. These impacts increase the demand for agribusiness products and services (e.g. processed foods, storage and refrigeration services). They also increase the variety of products and services offered by the agribusiness sector. 23 The key crops with high export potential and competitiveness are basmati rice, non basmati rice, wheat, cut flowers, mangoes, grapes, walnuts, potatoes, onion, mango pulp, pickles and pastes, preserved mushrooms and tomatoes (fresh and processed). A well planned promotional strategy coupled with ensuring quality through standards and specifications, research and development with modern laboratory and up to date market information are essential to maintain and increase exports. 24 Increased international food trade must require the participating countries to share the responsibilities of food safety through the entire food chain. Food safety standards are frequently and very often erroneously viewed as technical barriers to trade. Improvements to food safety and expanded international trade are mutually compatible and are an effective shared responsibility. 25 Overall emphasis must be on creation of synergy and convergence of various programs to achieve horizontal and vertical integration. For any strategy to succeed requires a strong commitment and positive attitude from all of the stake holders. Creative and innovative thinking is required. A strong agribusiness sector can only be achieved by a comprehensive reappraisal of development strategies and the institutional structures that support them. The expansion of commercial agriculture and agribusiness

5 will play a vital role in the Indian economy and will contribute to the increase of incomes and reduction in poverty. 26 Efficiency and sustainability of the subsidies policy has been seriously eroded and is financially unsustainable. High subsidies on power, irrigation and fertilizers do not improve income distribution and cause environmental damage. Excess use of subsidized fertilizers has caused imbalances in the soil and excessive use of water has caused water logging in many areas. 27 Food products in India are subject to complex and multiple laws. Their replacement by a simpler single law that is harmonized with international quality standards is on the agenda of the Ministry of Food Processing. The food processing sector pays taxes on its inputs and outputs. Its tax burden is higher than that in other Asian countries such as Indonesia, 28 Value added products have more export potential and hence development of new value added products in horticulture sector will enhance export promotion. Similarly processed fruits, vegetables, ready to serve food items need to be developed and marketed. In the field of processing and marketing, focus should be on quality improvement, reduction in cost of processing and value addition. 29 The average productivity of most agricultural and horticultural crops in India is low. A wide gap thus exists between yields obtained and potential yields with improved varieties and technologies. Programs therefore need to be implemented to reduce the yield gap by improving productivity. 30 The concept of the Agri Infrastructure Development Fund is a proposed initiative to provide incentives to the private sector to invest in agribusiness projects. The advantage of this concept is that it would also provide incentives to financing institutions and commercial banks by reducing the risk of lending to the private sector. The entity administering the fund would in effect be a stakeholder in the equity of potential projects. At some point in the future of each project, the Fund would have the option to sell its stake to other investors or to the stock market and recover its investment. The administration of the fund would be made up from representatives of Central and State Governments and the financing agency in a tripartite arrangement, thereby providing the State with the incentive to leverage its funds.

6 1.0 INTRODUCTION 1.1 The Government of India (GOI) has requested the Asian Development Bank (ADB) for Advisory Technical Assistance (ADTA) to assess agribusiness and commercial agriculture. Following consultations, ADB formulated the objectives, cost estimates, financing plan and implementation program for the ADTA. This was approved by ADB in October 2003 and IPP Consultants from France were retained to carry out the assessment study. The team of consultants mobilized in December 2003. An Inception Report was submitted in December 2003 followed by an addendum in January 2004. The Mid Term Report was submitted in April 2004. 1.2 Following discussions with GOI and ADB, a decision was made at the inception phase that the TA was to select five states for identification of investment opportunities. The five states selected together with the rational for selection are as follows: (i) Chhattisgarh: Already a focal state for ADB assistance including development of irrigation and rural roads to support and have synergy with growth in agriculture. (ii) Jammu and Kashmir: Has been given high priority by GOI and possess comparative advantage for certain horticulture crops. (iii) Punjab: At the forefront of the Green Revolution and now evolving from agriculture to agribusiness. Soil degradation and depleting water resources resulting from the rapid rotation of rice and wheat cultivation have driven the need for crop diversification. Initiatives carried out in the state can be replicated and expanded in other states. (iv) Sikkim: A new focal state for ADB assistance as part of Government s priorities to support development of the north eastern states. Sikkim is already a producer of cardamom and ginger and has ideal conditions for expansion of floriculture and medicinal plants. (v) Himachal Pradesh: A hilly state and ideal for the development of horticulture and medicinal plants. The state also produces several out of season vegetables including cabbage, cauliflower, peas and tomatoes. 1.3 The Executing Agency for this TA is the Department of Agriculture and Cooperation (DAC) who are responsible for the formulation and implementation of national policies and programs designed to advance rapid growth in the agriculture sector. DAC nominated a counterpart team to work closely with the consultants. The counterpart team comprise the following members: P.K. Agarwal Agricultural Marketing Advisor Department of Agriculture and Cooperation S.N. Pandey Joint Industrial Advisor Ministry of Food Processing Industries A.S. Rawat General Manager Agricultural Products Export Development Authority D.G. Prasad Chief General Manager Export Import Bank of India A. Jain Managing Director National Horticulture Board G.S. Dutt Managing Director Small Farmers Agricultural Business Consortium.

7 S. Sunanda Team Leader Federation of Indian Chambers of Commerce and Industry. H. Shrivastava Director Confederation of Indian Industry R. Wig President PHD Chamber of Commerce 1.4 The consultant s team was accommodated at the offices of the Small Farmers Agribusiness Consortium (SFAC) and provided with offices and supporting facilities. The SFAC was established in 1992 as a non profit organization providing advice to farmers and farmer groups to assist them in enhancing their skills to improve agricultural productivity, post harvest technology, processing and marketing. SFAC s mission is to link small farmers to technology and markets in association with private, corporate and cooperative sectors. SFAC is also a financial institution and implements programs on behalf of the Ministry of Agriculture for which it receives service fees. 1.5 The methodology envisaged by the TA called for assembling a 10 member Team of experts comprising 2 international and 8 national experts, one of the International experts was designated as team leader. A Counterpart Team comprising Government officials at Central and State levels was established by DAC. A TA Manager and coordinator was to facilitate interaction between the team of experts for accessing data and information and assist with field visits. 1.6 The team leader was appointed on 2 December 2003 and served in this position on until 26 February 2004. Subsequently a new team leader was appointed on 4 March 2004. Seven out of the eight national experts were appointed in line with functional responsibilities for their involvement in the TA. One national expert was appointed after a brief delay since the original candidate could not join due to medical reasons. One international expert was appointed on 15 December 2003 until 20 March 2004 and another international expert was appointed to the TA on 5 March 2004 for a period of 3 weeks and was responsible for the preparation of the Mid Term Report. 1.7 Senior representatives were appointed by DAC and SFAC to function as TA Manager and TA Coordinator respectively. Working representatives were also appointed from NHB, MFPI, APEDA and EXIMBANK. Nodal officers were appointed from each of the 6 Case Study States and the 5 Investment Focus States. In almost all cases, the Nodal Officers were Assistant Director rank in the State Agriculture or Horticulture Departments. Due to preoccupations with ongoing responsibilities, the Counterpart Team could not meet on a weekly basis as planned. The TA Team of Experts has however benefited from frequent interactions with the TA Manager and the TA Coordinator. 1.8 The TA Team was successful in being able to directly access the key authorities for participation in State Workshops. Each Investment Focus State was provided with records of discussion at the Workshop as well as a transcript of the Mid Tern Review presentation chaired by Secretary, Department of Agriculture and Cooperation, in New Delhi on April 5, 2004. Several State Officials were required for conducting the National Elections resulting in the postponement of the National Seminar. 1.9 Two of the three national chambers of commerce and industry did provide valuable support to reach out to their industry members. A regional chamber of commerce having a North India focus was enrolled to the Counterpart Team.

8 1.10 The State Workshops were reasonably well attended and the TA Team is especially grateful to the several farmer groups representing the key stakeholders in agribusiness development. A workshop was held in Delhi on 30 April 2004 and was well attended and included a good representation from Government as well as other interest groups including the private sector. A summary of the discussions is presented in Section 6 under Delhi Workshop. The National Seminar held on 20 May 2004 was poorly attended in view of the continuing process of Government formation in the aftermath of the national elections. Effective consultations with the Private Sector could not however, take place on this occasion.

9 2.0 OVERVIEW: AGRIBUSINESS AND COMMERCIAL AGRICULTURE 2.1 The agribusiness sector comprises businesses that either supply farm inputs or are involved in the marketing of farm products through warehousing, processing, wholesaling and retailing. The sector can therefore be considered as consisting of economic activities relating to the supply chain of agricultural inputs and the supply chain of agricultural products. Over the years, the share of this sector has been declining while that of the other sectors, notably services have been increasing. 2.2 For large countries such as India, there is a close inverse association between the size of the agricultural sector and its productivity. In such economies, the sectoral composition of output largely reflects the structure of domestic demand. As incomes grow, the structure of demand shifts away from food and agricultural products. Such demand shifts away from agriculture are paradoxically initiated by the process of agricultural transformation. One of the most important determinants of income growth is agricultural productivity (Eswaran and Kotwal, 1993). 1 Conversely, low productivity in agriculture is associated with low incomes, high shares of food in household expenditures, and a high share of the agricultural sector s total employment. 2 2.3 In value terms, 50% of agricultural output is due to commercial agriculture comprising oilseeds, sugars, fibres, fruits and vegetables, tea, coffee, tobacco and various condiments and spices. Foodgrains account for 40% of value of agricultural output. As some part of foodgrains can also be regarded as commercial, the value of agricultural output that is transacted in markets is anywhere between 65-75% of the total value depending on what we estimate to be the marketed surplus of foodgrains. 2.4 Besides foodgrains, the major component of commercial agriculture is the fruits and vegetables sector. For the twenty years from 1980-81, the fruits and vegetables output has grown at a trend rate of 4% per annum. As against this, foodgrains in this period have grown at around 2% per annum. Among the major cash crops, sugarcane and oilseeds output have grown at around 3% per annum while cotton output has grown more slowly at around 2%. If these growth rates continue, we can expect agribusiness opportunities to expand in fruits and vegetables and to a lesser extent in oilseeds, sugars and foodgrains. 3 2.5 India must therefore continue to emphasize policies that will facilitate higher productivity on farms. The importance of the agricultural sector to the national economy cannot be seen fully from its contribution to GDP alone. For instance, agriculture accounts for only 1% of GDP and about 2% of the workforce in the United States. However, the food system that consists of farming, food processing, input manufacturing, transportation, trade, retailing and food establishments is estimated to account for 15% of GDP and 18% of all employment (USDA, 2000). Thus, the agribusiness sector (which can be considered to be the food system minus the farming sector) in the United States accounts for 14% of GDP and 16% of all employment. 1 The exception to this would be countries that export significant proportions of their agricultural output. In such cases, an increase in agricultural productivity would increase the sector s share. 2 The only way for the agricultural sector to decline even without an increase in productivity would be if the growth pattern was characterized by high rates of growth of manufacturing exports together with large volumes of food imports to support the shift of employment from agriculture to manufacturing. 3 Changes in trade policy mean that agribusiness opportunities in the future may not necessarily be tied to domestic production.

10 2.6 Higher productivity in the agricultural sector derives from better inputs such as improved seeds and farm tools and from shifts in cropping patterns away from subsistence farming towards more lucrative commercial crops. As a result, many activities that would traditionally be accomplished on the farm start to move away from the farm (seeds, storage, processing etc). 2.7 India is one of the largest producers of farm commodities, including fruit and vegetables, in the world. The country has one of the largest domestic markets for food in the world and potential export markets in the nearby Middle East, South East Asia and Europe. Despite being a major producer of agricultural crops, India s share in world agricultural trade is less than 1.3%. Criticism that anticipated benefits of the WTO agreement have not resulted in the anticipated expansion of world agricultural trade appears justified. In addition India has raised tariffs on imports for many products such as tea, coffee, pulses and edible oils to support the domestic industry by preventing competition in the domestic market. 2.8 However, even for products and foreign markets where tariffs or other restrictions do not apply, Indian exports remain severely limited. Based on yield (land productivity), India is not a competitive producer for rice, wheat, coarse cereals, pulses, oilseeds, seed cotton, onions, tomatoes, potatoes. Only less than 2% of agriculture produce is commercially processed in contrast to, for example, 30% in Thailand. Value Added to food production is only 7%, compared to as much as 23% in China and 45% in the Philippines 1. 2.9 India has experienced a period of healthy GDP growth that has been particularly strong in the service sector. The Indian economy has been growing at an average rate of 5.7% since 1980 ranking India among one of the world s faster growing economies. Per capita income of about $475 per annum remains low but actual buying power exceeds this figure by a factor of 5 because prices for many goods and services fall well below world averages. In PPP terms the annual per capita income is nearer $2,600. Agricultural growth has been the slowest in the economy with an average annual growth rate of 2.6% over the period 1993 to 2001. Agricultural production declined in 2000 to 2003 due in part to adverse weather conditions but has made a strong recovery since then. India s agricultural growth rate should rise by 4% per annum in the next 5 years if an overall 8% growth rate in overall GDP is to be achieved. 2.10 Where subsistence agriculture dominates, the agribusiness sector is small dealing primarily with the limited volumes of marketed food surpluses. In an economy with a highly productive agricultural sector, the agribusiness sector is large consisting of complex layers of activities in marketing, storage and processing. Productivity in the agricultural sector is therefore a key determinant of agribusiness growth especially in its initial stages. 2.11 Despite significant achievements and advances, the sector remains relatively under developed in terms of agribusiness, diversification and value addition. India has also demonstrated a stark contrast between a large food grain surplus on the one hand, and widespread rural poverty on the other. There is a widening gap between the increasing prosperity of the urban population and a stagnating poverty of the rural population. 2.12 Unregistered processing accounts for about 42-47% of processing agribusiness GDP. This proportion is significantly higher than the ratio of unregistered processing GDP in all of processing GDP. Thus processing agribusiness GDP in India is

11 significantly biased towards small scale units. Processing agribusiness GDP is between 14 to 33% of processing GDP depending on how agribusiness is defined. Given that processing accounts for 16% of GDP, this means that the agribusiness component contributes to somewhere between 2 to 5% of GDP. 2.13 The impacts of agricultural productivity on agribusiness are of two kinds: (a) on commercial agriculture and on (b) the marketing sector. Regarding the first kind of impact, agricultural productivity affects both the supply and demand for the products of commercial agriculture. On the supply side, higher productivity in food staples releases land and other resources for commercial agriculture. On the demand side, higher productivity raises rural incomes leading to greater demand for non staple foods. Regarding the second kind of impact, higher agricultural productivity creates marketable surpluses without which the marketing system remains under developed. As the supply of marketing and processing services is subject to fixed costs, higher marketable surpluses lowers the cost of these services and expands this sector. Seen in this context, the Green Revolution that substantially increased foodgrains marketed surpluses has laid a firm foundation for the growth of commercial agriculture and agribusiness in India. 2.14 The growth of consumer incomes is another key factor that drives the growth of commercial agriculture and agribusiness. 4 Higher incomes lead to (a) greater demand for perishables and non-food staples and to (b) higher demand for processed foods. These impacts increase the demand for agribusiness products and services (e.g., processed foods, storage and refrigeration services). They also increase the variety of products and services offered by the agribusiness sector. 2.15 Until the early 1980s, the economy was restrained by socialist politics and the elaborate license system to regulate it. From the early 1980s until 1992, the economy was slowly being liberalized, and the near insolvency crisis in 1991 prompted far reaching reforms. These reforms remain incomplete and have not eliminated all vestiges of socialism and government involvement. As a businessman put it recently, we benefit not from what regulations the government creates, but from the regulations it removes. 2.16 In order to maintain high growth rates, the GOI recognizes that restructuring of the economy is urgently needed. The GOI is determined to bring greater benefits to the rural India with the firm conviction that only by increasing farmer incomes will it be possible to accelerate growth rates still further while ensuring equitable participation in increasing incomes for all its citizens. To accelerate the above objective, India s Tenth Plan recognizes the need for a fundamental review of policies, initiatives and interventions to remove impediments on agriculture and agribusiness. This is required to create an improved environment for market driven forces to develop farming systems and facilitate further private sector investment. 2.17 The Tenth Plan indicates that the equity, efficiency and sustainability of present agricultural policies needs to be restructured, in particular the strategy to secure production through subsidies. The demand for subsidies on limited fiscal resources has caused subsidies to take precedence over other much needed public investments which in turn contribute to the inefficiencies in the economy. The high level of debt servicing for the states affects the availability of funding for public investment. Further development 4 As mentioned earlier, agricultural productivity it itself one of the determinants of consumer incomes in a country like India. However, other factors also matter.

12 will require increased mobilization of private sector investment to develop agribusiness. To increase private sector investment will require effective incentives, a rationalization of policies and legislation, and investments in infrastructure. 2.18 The Ministry of Food Processing estimates the size of the processed food Industry at Rs1440 billion. Unorganized small enterprises (processing less than 0.5 tons per day) process more than 75% of the industry output in volume terms and 50% in value terms these numbers correspond to the share of unregistered agribusiness processing discussed above. Processed foods account for 13% of the country s exports and 6% of total industrial investment in the country. The processed food industry employs 1.6m workers, which constitute 18% of the country's industrial labor force. The industry is estimated to consist of 9,000 organized units in the country of which more than 5,000 are in the fruit and vegetable processing segment alone. 2.19 The processing sector is, however, only one component of the agribusiness sector. The other and possibly larger component consists of trade (wholesale and retail), storage and transport services. 5 These activities account for 20% of GDP. According to one estimate, food sales account for 63% of total retail trade. If this is indicative of the trade sector (which accounts for 14% of GDP), it would not be surprising if the agribusiness sector (including processing and services) accounted for at least 10% of GDP. Its contribution to employment would be even greater given the importance of unregistered agroprocessing and also because trade tends to employ many people. 2.20 Per capita consumption of wheat, rice and pulses has essentially stagnated while that of coarse cereals has declined. On the other hand, there is considerable increase in the per capita consumption of edible oils, fruits and vegetables, milk and milk products, and meat, fish and eggs. Remarkably, these shifts in consumption are also seen among the poor. The increase in consumption by the poor of fruits and vegetables and of other products such as milk is probably due to lower prices (from higher supply of these products) and also possibly because of change in preferences. Demand projections estimate that demand from nonstaples such as fruits and vegetables, meat and milk will grow faster than demand from foodgrain staples. 2.21 Transport and communication costs play a critical role in determining the size of agricultural markets and agribusiness. These have historically been determined by state investments in highways, railways and communication infrastructure. Even though there is greater private investment in these activities, government financed infrastructure will remain paramount for the foreseeable future. There is little doubt that India s recent efforts in improving its road highways including rural connectivity and the increase in telephone density would have stimulated agribusiness. 2.22 International trade has the potential be a powerful engine of agribusiness growth in the future. The exports of agricultural products grew at an annual rate of 8% in the 1990s as against 3% in the 1980s. Exports of fruits and vegetables have more than doubled from US $110 million in 1981/2 to $262 million in 1999/00 (Joshi, et. al, 2003). Although India s exports are small relative to world trade in fruits and vegetables, India has a presence in specific food products such as grapes and mango pulp. India could be a sourcing hub for products such as rice, organic produce and food products such as ready to eat meals and convenience foods (CII, 2003). 5 This leaves out financial and insurance services which are important in the agribusiness sectors of developed countries.

13 2.23 India has a reasonably well spread financial system and has followed a multi agency approach to the provision of financial services starting with cooperative credit institutions that have a long history. Other players in the financial system include the commercial banks that are predominantly in the public sector domain, then finally the regionally based and rurally focused financial institutions called Regional Rural Banks (RRBs). There are over 100 commercial banks with about 66,500 branches of which 32,000 are in rural areas. There are 196 RRBs with about 14,500 branches and credit cooperatives accounting for about 92,000 primary units at the grassroots level. Collectively these agencies provide a countrywide network of formal financial institutions. 2.24 This was achieved with a conscious effort at branch expansion followed for many years which ensured that the average population served per commercial bank branch was approximately 15,000 in 2002. The branch expansion program required a large recruitment drive for manning such branches supported by policies of direct lending to agriculture. All these efforts were intended to enable better access to financial services which were outside the fold of the formal banking institutions. While the underlying objectives were plausible and substantial progress has been made, credit flow to the poor remains low. The debt and investment surveys carried out by the Central Bank in 1991-1992 showed an alarming picture of over 36% of the farmers that continued to be dependent on the informal credit markets for their financial and credit needs. 2.25 This led to initiatives that were institution driven that attempted to converge on the existing strengths of rural banking to better serve the poor. These pioneering efforts were made by the National Bank for Agriculture and Rural Development (NABARD), a development financial institution set up by the GOI with equity contributions from the Central Bank. NABARD conducted a series of research studies that showed that despite having a wide network of rural bank branches that implemented specific poverty alleviation programs and self employment opportunities through bank credit, a very large number of the poor continued to remain outside the fold of the formal banking system. 2.26 The studies also showed that the existing banking policies, systems and procedures were perhaps not well suited to meet the needs of the poor. It also proved the fact that what the poor really needed was better access to these services and products. The launching of a pilot phase of the SHG Bank Linkage program in 1992 could be considered a landmark development in banking for the poor. Based on successful feedback of the pilot program, NABARD in 1998 crystallized its vision for providing access to one third of the poor.