bangalore presentation landes burfisher paper f n1
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mba(2007-2009)TRANSCRIPT
Investing in India’s Agricultural Markets: A Source of Growth and
Equity?
Maurice LandesEconomic Research Service, U.S. Department of Agriculture
Mary BurfisherUnited State Naval Academy
Background
Despite improved overall economic performance, Indian agriculture has been faring poorly:
• Low yields relative to world averages
• Slowed growth of output and yields
• Subsidies rising while rates of new public & private investment remain low
• Supply-demand imbalance an emerging threat to food price stability
• Lack of consensus on reform
Public investment and subsidies in Indian agriculture
Sources: Government of India, Ministry of Agriculture, Directorate ofEconomics and Statistics, 2003; Government of India, Ministry of Finance,Economic Survey; Mullen, Orden, and Gulati, 2006.
0
50
100
150
200
250
300
1990
1992
1994
1996
1998
2000
2002
2004
Bil
. 199
3/94
Rup
ees
Food subsidy
Input subsidies
Public investment in/for agriculture
Public investment in agriculture
Gross fixed capital formation in India
Source: Reserve Bank of India, Handbook of Statistics on Indian Economy.
Gross fixed capital formation in India as share of gross domestic product (GDP)
0%
5%
10%
15%
20%
25%
30%
35%
Sh
are
of G
DP
Total
In agriculture
Background
Growing evidence that lack of investment in agricultural markets is a problem:
• Agricultural marketing and processing system is fragmented, inefficient & mostly unready to compete in global markets
• World Bank studies• ERS studies
The economy-wide implications of increasing investment & efficiency in agricultural markets could be large in a developing economy like India
Objectives
Analyze the effects of improvements in agricultural marketing efficiency that might result from an improved climate for agribusiness investment.
Compare the impacts of marketing efficiency gains with more “traditional” reforms to agricultural subsidies and tariffs.
Include household distribution of impacts
Outline
Overview of Indian policies affecting investment in agricultural markets
Overview of Indian subsidy & tariff policies Overview of model
• Marketing costs
Scenarios• Increased marketing efficiency
• Subsidy removal
• Tariff removal
Policies Affecting Marketing Investment & Efficiency
Essential Commodities Act• State restrictions on private movement & storage
Agricultural Produce Marketing Acts• State restrictions on private marketing
Small Scale Industry Reservations• Most food processing reserved for small firms ($247,000 of
capital assets) until 1997 Tax Policy
• Excise, sales, octroi taxes impede processing & movement Border/Commercial Policy
• High tariffs & quantitative restrictions impede price transmission; development of efficient processing & export supply chains
Policies Affecting Market Investment & Efficiency
Food Laws• 8 Ministries and more than 12 legislative acts
Land Tenure Policy• Small holdings complicate vertical coordination/
integration
Labor Policy• Proliferation of labor laws affect ”organized sector” firms
Policies have begun to change, but private investors still face a difficult environment in agricultural markets
Agricultural Subsidies
Input subsidies totaled about Rs500 billion ($10 billion) in 2002/03 (Mullen, Orden & Gulati):
• Includes electricity (about 70%), fertilizer (about 16%) & irrigation water (about 13%)
Subsidies account for about 11 percent of agricultural GDP; public investment about 5 percent
“Foodgrain subsidy” not covered• Producer/consumer incidence varies by year• Logistical margins a large part of price wedge calculation
Agricultural Subsidies
Sources: GTAP v.6 and author calculations.
Major Indian crop input subsidies, 2001
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Rice
Whe
atCor
n
Other
grain
Pulses
Fruit
& veg.
Oilsee
ds
Sugar
Fibers
Other
crops
$US
bil
lion
s
Irrigation
Power
Fertilizer
Agricultural Tariffs
Bound agricultural tariffs remain high, but most applied rates are substantially lower• Current applied rates are zero for major commodities,
including wheat, corn, pulses, edible oils & cotton
Reluctant to lower bound rates in order to retain flexibility to meet producer/consumer price goals
Agricultural Tariffs
Sources: GTAP v.6.
Indian applied agricultural import tariffs, 2001
0%
20%
40%
60%
80%
100%
120%
140%
Ric
eW
heat
Cor
nO
th. g
rain
Puls
esFr
uit &
veg
.O
ilsee
dsO
ilmea
lsFa
ts/o
ilsSu
gar
Fibe
rsC
rops
nec
.C
attle
& s
heep
Poul
try &
hog
sB
eef &
mut
ton
Poul
try &
por
kD
airy
pro
ds.
Food
s ne
c.B
ev/to
bacc
o
Per
cent
ad
valo
rem
Model
IFPRI “standard” single-country CGE (Lofgren, 2002; Robinson, et al., 1990)
• 30 sectors:• 12 crop/livestock sectors• 7 processed food sectors
• 3 trade service sectors • Agricultural & food retail• Agricultural production inputs• All other
• 5 rural & 5 urban households (Saluja & Yadav, 2006)
Marketing Costs & Margins
Focus on retailing costs & margins (farm gate-to-consumer)• Direct & indirect impacts on:
• Producer & consumer prices
• Factor returns
• Household consumption & investment
Calculation: • Based on total of transport & trade services inputs allocated
for domestically produced goods.
Food Retail Marketing Costs & Margins
Source: GTAP v.6; and author calculations.
Estimated food retail marketing costs & margins in India, 2001
0.00
0.05
0.10
0.15
0.20
0.25
0.30
Ric
eW
heat
Cor
nO
th. g
rain
sPu
lses
Frui
t & v
eg.
Oils
eeds
Oils
eed
mea
lsO
ils &
fats
Suga
rFi
bers
Cro
ps, n
ecC
attle
& sh
eep
Poul
try &
hog
sB
eef &
mut
ton
Poul
try &
por
kD
airy
& p
rod.
Oth
. foo
ds
Rat
io o
f re
tail
mar
gin
to s
ales
qua
ntity
Marketing Cost & Margin Estimates
Generally small compared with evidence from commodity market studies
Examples:• Wheat: 52% producer-to-consumer (Gandhi & Koshy, 2007)
• Poultry: Rs32/kg producer-to-consumer nonintegrated vs. Rs11/kg with vertical integration (Landes & Persaud, 2003)
• Horticulture: 85-88% producer-to consumer (World Bank, 2007)
We maintain consistency with GTAP database
Food Retail Marketing Costs & Margins
Source: Saluja and Yadav, 2006; GTAP v6; author calculations.
Household expenditure on food marketing costs & margins in India as share of total consumption
expenditure, 2001
0%
1%
2%
3%
4%
5%
6%
7%
RH1 RH2 RH3 RH4 RH5 UH1 UH2 UH3 UH4 UH5
Perc
ent
Scenarios
Scenarios:• 50% increase in food retail marketing efficiency
• Removal of agricultural subsidies
• Removal of agricultural tariffs
Why a 50% increase in marketing efficiency?• Margins implied in database are smaller than those
found in market studies
• View as medium/longer term potential gain
Impacts of Increased Marketing Efficiency
Aggregate impacts of retail food marketing efficiency Price effects of agricultural marketing efficiencygains in India gains in India
50% increase in food Variable retail marketing
efficiencyPercent change from base
Real GDP 1.0Real household consumption 1.4Real investment demand 0.4Government revenue 1.0Producer price index 0.4Land rents 5.6Wages 1.6Capital rents 0.1Agricultural exports 3.9Agricultural imports -37.2
Impacts of Increased Marketing Efficiency
Price effects of food retail marketing Aggregate impacts of marketing, subsidy, and tariff reform efficiency gains in India scenarios in India
50 % increase in foodSelected retail marketing efficiencysectors Producer Consumer
price pricePercent change from base
Rice 1.2 -0.8Wheat 1.8 -0.5Corn 2.2 -0.2Fruit,veg. 2.3 -1.0Oils, fats 0.4 -2.1Sugar 1.0 -1.8Fibers 2.4 -0.1Poultry & pork 2.7 0.6Dairy products 1.9 -0.7Food products nec -0.1 -4.0
Impacts of Increased Marketing Efficiency
Production impacts of 50% increase in food retail marketing efficiency in India
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
% c
han
ge f
rom
bas
e
Impacts of Increased Marketing Efficiency
Household real consumption impacts of increased food retail marketing efficiency in India
0.0
0.5
1.0
1.5
2.0
RH
1
RH
2
RH
3
RH
4
RH
5
UH
1
UH
2
UH
3
UH
4
UH
5
Household type
% c
hang
e fr
om b
ase
Scenario Comparisons
With subsidy removal expenditure shifts from consumption to investment• Lower farm output, factor returns & consumption (at least in the
medium term)
• Higher food prices
• Adverse impacts on low income rural & urban households
With tariff removal expenditure shifts from investment to consumption• Output & factor returns rise as resources are reallocated
• Small price impacts except in heavily traded/protected sectors
• Higher factor returns benefit low income households
Scenario Comparisons
Aggregate impacts of agricultural marketing efficiency, subsidy & tariff changescenarios in India Household real consumption (welfare) impacts of agricultural
50% increase Elimination of Elimination of Variable in food retail agricultural agricultural
marketing subsidies tariffsefficiency
Percent change from baseReal GDP 1.0 0.1 0.3Real household consumption 1.4 -1.3 1.2Real investment demand 0.4 4.2 -2.2Government revenue 1.0 7.4 -2.3Producer price index 0.4 -0.4 1.0Land rents 5.6 -5.0 -0.1Wages 1.6 -1.4 1.3Capital rents 0.1 -0.5 1.2
Scenario Comparisons
Consumer price impacts of agricultural marketing efficiencysubsidy & tariff change scenarios in India
50% increase Elimination of Elimination of Household type in food retail agricultural agricultural
marketing subsidies tariffsefficiency
Percent change from baseRice -0.1 5.4 0.9Wheat 0.0 8.7 0.8Corn 0.2 1.1 0.6Fruit & veg. 0.2 0.9 -1.3Oils & fats -0.3 -0.6 -21.0Sugar -0.4 -2.2 0.8Fibers 0.2 1.5 0.3Poultry & pork 0.1 -0.7 -34.7Dairy -0.2 -2.2 0.3Food, nec -0.8 -0.9 -1.1
Scenario Comparisons
Household real consumption (welfare) impacts of agricultural Consumer price impacts of agricultural marketing efficiencymarketing efficiency, subsidy & tariff change scenarios in India subsidy & tariff change scenarios in India
50% increase Elimination of Elimination of in food retail agricultural agricultural
Household type marketing subsidies tariffsefficiency
Percent change from baseR1 2.0 -2.6 1.7R2 1.9 -2.3 1.7R3 1.8 -1.9 1.5R4 1.7 -1.6 1.3R5 1.4 -1.2 0.9U1 1.4 -1.8 1.7U2 1.3 -1.4 1.6U3 1.2 -0.9 1.4U4 0.9 -0.5 1.0U5 0.8 -0.8 1.0
Summary
Despite progress on the policy front, agribusiness continues to face a difficult policy environment in India• Particularly for larger-scale, horizontally & vertically integrated
businesses common elsewhere
Increased food retail marketing efficiency appears to have significant economy-wide income, employment, and welfare implications• A potentially important complement to subsidy and border policy
reform
Need better data on marketing costs & margins & on potential for efficiency gains to strengthen this exploratory analysis
References
ERS “Briefing Room:” http://ers.usda.gov/Briefing/India/
Recent studies:• The Environment for Agricultural and Agribusiness Investment in
India Indian Wheat and Rice Sector Policies and the Implications of Reform
• The Role of Policy and Industry Structure in India’s Oilseed Markets
• Prospects for India's Emerging Apple Market
• Growth Prospects for India's Cotton and Textile Industries
• India's Poultry Sector: Development and Prospects