Equity driven trade and marketing policy strategies for improved performance of Indian agriculture- a scoping exercise

ADP/1998/091: Equity driven trade and marketing policy strategies for improved performance of Indian agriculture- a scoping exercise

India

University of Wollongong, Australia

Professor D.P. Chaudhri
Phone: 02 42 214018
Fax: 02 42 213725
Email: dp_chaudhri@uow.edu.au

• Institute of Development Studies, India
• National Centre for Agricultural Economics and Policy Research, India
• Asian Agribusiness Research Centre, Australia

$218,318

01/01/1999 - 31/12/2000

Dr Ray Trewin

India is facing the challenge of moving towards a free trade regime for agricultural commodities. Concerns about household food security, levels of poverty and regional disparities in development mean that the country has taken a cautious approach to trade liberalisation. This project undertook a scoping exercise designed to address equity and efficiency considerations in devising trade and marketing policy strategies for improved performance of Indian agriculture.

The overall goal of the project was to identify equity-driven policies/strategies in respect of trade, domestic market integration, output and input pricing and other related policy support, in order to improve agricultural efficiency. Key project objectives were (a) to document and analyse the impacts of the past and current government policies - trade, pricing policies, market interventions and anti-poverty and employment generation programs; (b) to identify alternative policy options that fulfilled the requisites of greater efficiency and high social acceptance.

The project comprised five subprojects, each with a key person responsible for completing the research task in collaboration with colleagues from other institutions. These subprojects were: 1) Trade liberalisation and equity; 2) Domestic marketing integration and policies; 3) State level terms of trade for agriculture; 4) Agricultural performance and productivity; 5) Rural poverty, equity and rural employment under liberalisation. All of the subprojects were interlinked and the results of each served as building blocks to achieve the broad objectives of the project. The results of the five subprojects were subjected to a synthesis to identify an optimum mix of policies for improving both efficiency and equity.

An analysis revealed that, starting in 1991, India had undertaken several policy changes towards liberalisation of agricultural trade as part of broad economic reforms needed to meet its commitments as a WTO member country. They involved removal of quantitative restrictions on imports and exports and gradual reduction in peak tariff rates, and led to a sharp rise in the volume of agricultural exports and imports (from about 6 per cent of GDP before liberalisation to about 9 per cent).
Estimates of impact of free trade in selected commodities on producer and consumer prices, producer welfare, consumer welfare and net social welfare showed that the Punjab would benefit most from free exports of rice whereas Kerala would be the biggest loser. The states of Haryana, Madhya Pradesh, West Bengal and Uttar Pradesh would gain while all other states would lose. Again, exports of wheat at international prices would improve net social welfare for Punjab, Haryana and Uttar Pradesh but cause net social loss to all other states. The overall relationship between per capita income of a state during the recent triennium and net social gain was positive and significant-the higher the per capita income of a state, the greater the gain from liberalisation of trade in wheat and rice. Impact of free import of edible oils and pulses also showed large inter state variations.
The price situation at international level is changing rapidly and it has defied predictions relating to price rise in the post-WTO period. International prices of grains in recent years have either declined or remained steady. By contrast, India's domestic prices for most of its grains have risen, reducing the country's export competitiveness of rice and completely eroding export advantage for wheat, maize and sorghum. Conversely, international prices of some grains have favoured imports to India.
Thus, promoting exports of grains and raw materials would not be very beneficial. Given the nature of demand for grains and similar agricultural products, their real prices are not expected to increase in the near future. Demand for processed agricultural products seems to have better growth prospects and India would, therefore, benefit from harnessing the export potential for these. This has implications for domestic production pattern, because to implement such a strategy requires diversification of agriculture, particularly in rice-growing areas showing signs of degradation in the natural resource base.
The analysis showed that agricultural price policy including the provision of subsidised inputs, which was considered integral to the strategy for agricultural development, subserved the objectives of achieving self-sufficiency in food grains, fair sharing of gains of technology and public investment between the farmers and the consumers and improvement in the economic access to food. It also encouraged diversification of cropping, consistent with the emerging pattern of demand and development of backward and dry land regions. Further, owing to the increased economic access to food, the industry and the governments could keep their wage bills low, because wages in the organised sector are linked to the prices of consumer goods and food grains are a considerable component of the price index. The input subsidies also helped the government to keep the food subsidy bill low. Consequently all sections of society have shared the benefits of price policy and input and food subsidies.
A review of past studies on terms of trade revealed four distinct phases in the behaviour of terms of trade for Indian agriculture: (a) almost no change from 1951-52 to 1963-64; (b) improvement or increasing phase from 1963-64 to 1973-74; (c) deterioration or decreasing phase from 1973-74 to 1980-81; (d) trend towards recovery from 1980-81 to 1991-92 and beyond. The crop-wise estimates of terms of trade up to the early 1980s revealed that since the early 1970s the terms of trade remained unfavourable for cereals, more favourable for pulses, oilseeds, sugarcane and cotton, and distinctly unfavourable for jute.
The crop-wise results further revealed that (a) the compound rates of increase in farm harvest prices have been higher than price increases for farm inputs and consumption goods separately for almost all crops in all the states; (b) the rates of increase in prices of purchased inputs have been generally lower than those of consumption goods; (c) the rates of increase in terms of trade for almost all crops and states have been positive.
The results further indicated that with the liberalisation of trade in agricultural commodities, the terms of trade for farmers and regions growing pulses and oilseed will deteriorate and of those growing rice and wheat will improve. This would increase the disparities in farm incomes between irrigated/high rainfall regions and dry land areas, also between resource-rich and resource-poor farmers. Further, the net purchasers of staple cereals would lose through higher prices for these basic food items.
The results also revealed that terms of trade play a favourable role in agricultural growth, if other factors for growth are conducive, particularly the availability of better technology and institutional and infrastructural factors-their absence can negate the impact of favourable barter terms of trade.
Simulation of the estimated model showed that during the liberalisation of the economic environment, the farm situation was characterised by reduction in farm labour, higher use of fertilizer and mechanisation. This is improving efficiency and productivity in Indian agriculture. Rural literacy was identified as an important spur to growth in adoption of technology, use of modern inputs and yield. In the liberalised economic environment, efficiency and growth orientation will attract maximum attention and literacy will play a far more important role than it did in the past.