India s Agricultural Trade Policy and Sustainable Development Goals Prof. Anwarul Hoda New Delhi Wednesday, April 17, 2013
SCOPE OF STUDY Agricultural Policy 1. Research, Extension and Diffusion of Technology; 2. Infrastructure and infrastructure services- Water, Power, Transport; 3. Agricultural Credit; 4. Market Intelligence; 5. Wages, Tenancy laws and Land Reforms; 6. Agro-meteorology; 7. Animal Health; Agricultural Trade Policy 1. Market Price Support; 2. Input Subsidies; 3. Buffer Stocks and Public Distribution System; 4. Consumption Subsidies; 5. Market Access; 6. Export Controls. PUBLIC POLICY OBJECTIVES 8. Agricultural Trade Policy. 1. Food Security; 2. Poverty Alleviation; 3. Small and Marginal Farmers; 4. Sustainable Development; 5. WTO Obligations and Commitments.
India s Progress in Increasing Agricultural Production It has moved from the position of food deficit country to a net food exporting country Production of food grains increased from 50 to 250 million MT (1951-2012) Second largest producer in both wheat and rice; largest exporter of rice World s largest producer of milk World s largest exporter of beef (buffalo meat)
Distribution of Input Subsidies 14% 2% 0% 2% 23% Electricity Subsidy for Agricultural use Fertilizer subsidy Irrigation Subsidy Interest Subvention for providing short term credit to farmers Subsidy in Other Schemes Waiver/relief for farmers excluding Marginal and Small farmers 59%
Irrigation- Main Features Expansion of surface irrigation a major factor in increasing production Irrigation potential has risen from 9.72 to 46 MHA 337 past projects have spilled into 2012-13, including 36 from 1980 Utilization of potential only 35 MHA due to lack of command area development Despite large investments the total potential utilized has leveled off Benefits not flowing from projects due to lack of completion or lack of command area development
Irrigation Subsidies- Low Water Rates and Its Consequences, Sustainability Irrigation service fee very low, collection even lower One calculation is that in 2001 ISF was 0.2 % of investment, 1.2 % of value of crop and 7.9 % of O&M Broken down irrigation system and growth of weeds due neglect of repair and maintenance Overuse of water by farmers at the head reaches inequity in water distribution between farmers at the head and tail end Low average water use efficiency of irrigation projects (38%) Water logging, salinity and environmental degradation due to disrepair in drainage
Lift Irrigation and Power Subsidies Lift irrigation now responsible for 62 % of all irrigation 66 % rely on diesel pumps (NSSO, 2005) Main reason - in using this source the farmer is full control Use of lift irrigation will increase for value added and precision agriculture Rural electrification and power subsidies only partly responsible for the change Average rate of power for agriculture is <one third of unit cost of supply
Consequences of Power Subsidies, Including Sustainability Issues Subsidy to agriculture responsible for 90% of uncovered subsidies of SPUs Inefficiencies in supply of electricity to agriculture outweigh these benefits Electric pumps are idle for long periods for lack of supply Voltage fluctuations cause motor burn-outs Farmers draw out water in excess of utilizable recharge Over-exploitation of groundwater alarming in 5 states, particularly Punjab, Rajasthan and Haryana (81,86,65 Per cent)
Fertliser Subsidy - Main Features Fertiliser subsidy is the most expensive input subsidy In urea the MRP is fixed and the Central Government bears the difference In potassic and phosphatic fertilisers the nutrient based subsidy (NBS) is fixed Shift to NBS not extended to urea In 2010-11, the farmer paid just over one-third of the import parity price of urea, two-fifth of DAP and one-fourth of MOP When domestically produced urea was costlier, farmer s share of subsidy was 60-65 %; now almost 100 % goes to the farmer
Consequences of Fertiliser Subsidy Fertiliser use has increased from 6 to 26.5 million MT from 1981-82 to 2010-11 and has undoubtedly contributed to increase in agricultural production In recent years (2002-03 to 2010-11), there is evidence of overuse as the increase in food grain production (38 per cent) has not been commensurate with increase in fertiliser consumption (65 per cent) between 2002-03 and 2010-11. Skewed use of fertilisers as a result of differential subsidy resulting in soil degradation (18.4:5.9:1 in Punjab against norm of 4:2:1) Fertilisers have leached into aquifers and made groundwater unusable High subsidies have led to neglect of organic matter and micro-nutrient deficiency, which have lowered the efficiency of chemical fertlisers and increased cost of of production Major contributory factor into fiscal deficit of central government- as high as 31.51 % in 2007-08 Leakage of benefits due to smuggling into neighbouring countries
Agricultural Credit Subsidy and Its Effects Agricultural credit subsidy discontinued after economic reforms but reintroduced in 2006-07, with interest subvention rising from 2% to 5 % in 2011-12 In 2008, all loans to small and marginal farmers that were overdue were completely waived; other farmers were given a one-time settlement of 25% rebate if they repaid 75% Hassle free and timely access (Kisan Credit Cards scheme) has led to growth of institutional credit (7.3 %in 1951 to 61.1 % in 2002) Growth of institutional credit to farms was stronger before 2006-07 than later, after the introduction of credit subsidy Large difference from market rates of interest may have created the temptation to the farmer to re-lend instead of using it for obtaining farm inputs
Total Non-Product-Specific Subsidies and WTO Obligations Notes: 1. Article 6.2 of the AOA exempts generally available input subsidies from reduction commitments. 2. Since according to the latest survey small and marginal farmers own 41 per cent of arable land, we have reduced the total subsidies by a factor of 0.59
Product- Specific Support for Rice Year MSP for Paddy MSP for Rice WPI (Base = 1986-87) Fixed External Reference Price (ERP) Inflation Adjusted ERP Rs. / Tonne Rs. / Tonne Rs. / Tonne Rs. / Tonne 1 2 3 4 5 6=5*(4/100) 2007-08 7450 11175 407.82 3520 14355.2 2007-08* 8500 12750 407.82 3520 14355.2 2008-09 9000 13500 440.7 3520 15512.48 2009-10 10000 15000 457.48 3520 16103.44 2010-11 10000 15000 501.2 3520 17642.37 Notes: According to Article 1 of the AoA the Current AMS has to be calculated with the constituent data and methodology in the supporting material to Schedule notified to the WTO. India had notified in Indian Rupees and therefore our calculations are made in terms of this currency Article 18.4 provides that due consideration should be given to the influence of excessive rates of inflation. We have therefore recalculated the ERP after taking into consideration movements in the Wholesale Price Index
Product- Specific Support for Wheat Year MSP for Wheat WPI (Base=1986-87) Fixed External Reference Price (ERP) Inflation Adjusted ERP Rs. / Tonne Rs. / Tonne Rs. / Tonne 1 2 3 4 5=4*(3/100) 2007-08 10000 407.82 3540 14436.77 2008-09 10800 440.7 3540 15600.62 2009-10 11000 457.48 3540 16194.93 2010-11 11700 501.2 3540 17742.61 Notes: According to Article 1 of the AoA the Current AMS has to be calculated with the constituent data and methodology in the supporting material to Schedule notified to the WTO. India had notified in Indian Rupees and therefore our calculations are made in terms of this currency Article 18.4 provides that due consideration should be given to the influence of excessive rates of inflation. We have therefore recalculated the ERP after taking into consideration movements in the Wholesale Price Index
600 MSP, Domestic and International Prices RICE 350 WHEAT in US$ 500 300 400 250 200 300 150 200 100 100 50 0 0 International Domestic MSP International Domestic MSP
Procurement Operations Food Corporation of India (FCI) designated for purchasing paddy and wheat in support of MSP Government of India has laid down the norms for minimum quantities of food grains to be held in stock at different points in time of the year Purchases in support of MSP and for buffer stocks are carried out in a seamless manner In recent past the stocks held by the FCI have been far in excess of buffer stock norms, sometimes more than double Food grains procured by the FCI provide the stocks to run the public distribution system (PDS)
Actual Stocks vis-à-vis Minimum Buffer Norms for combined Procurement of Rice and Wheat
Public Distribution System Procurement, storage, transportation and bulk allocation to states done by Central Government Distribution among Fair Price Shops carried out by the State governments In 1997 Central government introduced Targeted Public Distribution System (TPDS) Separate issue prices were fixed for consumers above poverty line (APL), below poverty line (BPL) and indigent sections Antyoday Anna Yojana (AAY) After 2000, the issue prices have been maintained almost unchanged for BPL and AAY categories and even reduced for APBL categories, while the economic cost of procuring food grains has more than doubled Result is mounting burden on Central government and food subsidy had risen to 16 per cent of central governments fiscal deficit in 2010-11 Biggest concern in TPDS is leakage of subsidized food grains (36.38%) and diversion of benefits (21.45%)
National Food Security Bill (NFSB) Envisages supply of cereals at highly subsidized prices to 75 %of rural and 50 % of urban population Indigent households will get food grains at the rate of 7 kg per person and others 5 kg per person per month The issue price will be fixed in law at Rs 3 (US cents 5.5) per kg for rice, Rs 2 (US cents 3.7) per kg for wheat and Re1 (US cents 1.8) per kg for coarse grains Criticized for cereal centric and centralized approach Suffers from two fundamental flaws: places reliance on the decrepit machinery of TPDS; it ignores the current fiscal predicament of the Central Government
Market Access Quantitative restrictions on imports of agricultural products no longer a problem Applied level of tariff has shown a downward trend Wide gap between bound and applied level is the result of autonomous liberalisation Deserves applause rather than criticism Closing the gap can be done only at the conclusion of the Doha Round Special agricultural safeguards mechanism needed for India to bring down bound tariffs Feature of applied level is that reduction is done through exemption notifications rather than change in statutory rates This makes the applied levels inherently unstable and the practice needs to change
Export Control One practice in India is to impose quantitative controls on exports of key agricultural products Quota or prohibition imposed whenever there is an estimated shortfall in production Objective is to pre-empt upward pressure on prices This favours domestic consumers but is against the interest of farmers There is criticism also that the practice has a role in exacerbating price spikes in global markets of foodstuffs There are indications that the Government of India s practice will change and reliance will be placed on duties and charges to restrain exports when this becomes absolutely necessary
Overall Assessment of India s Agricultural Trade Policy On the whole India s agricultural trade policy has been successful in achieving the principal objective of increasing production of food grains for food security Economic access and household food security has been accomplished partially There is over-reliance on input support, rather than on public investment, extension and research Market support mechanism has not led to jacking up the price above international levels If the government is saddled with large stocks it is because of curbs on private sector trade Input subsidies and food subsidies are causing fiscal stress in the central government Agricultural trade policy has also given rise to a number of serious sustainability issues Reform is needed on the market access and export controls front WTO obligations and commitments are by and large not a problem
Thank You Contact Details:- Prof. Anwarul Hoda ICRIER, Core 6A, 4 th Floor, India Habitat Centre, Lodi Road, New Delhi -110 003 ahoda@icrier.res.in