Indian Agriculture –Easing the transition to more open

global markets

IPC NIA Seminar

12th Nov 2003

Role of the Private Sector Hardeep Singh

What will the Arena look like• More open competition• Reduced barriers to entry in most segments• Licensing will no longer promote inefficiency• Global alliances.. World class capabilities will compete

locally… borders will be breached• Composition of world trade changing much more rapidly that

composition of production• Opening up of Agriculture/ WTO implications

– Leveraging Competitive advantage– Losing and gaining supply positions

Future canvas will be vastly different…. Will require a clearly thought through…and integrated approach to succeed!!

Agriculture – Issue Dimensions

• Gross Wheat and Rice production 160myn ts– Govt/ FCI procures 20pct. Limited to 4 states

marketable surplus…. Cost/ Inequity???– Farmer own consumption/ barter/ hold back - 55pct– Trade and barter account for 25pct

• PDS offtake now down to 14-17myn ts [10pct]– FCI open market sales plus export 16myn ts

1980 ….. Investments twice the value of subsidies2001 …. Subsidies triple the value of investments

Leverage Country Competitiveness

• Focus on commodities where India has competitive advantage & import with value of surpluses generated

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

RiceWheatCorn

Yield/HA India US World China

Rice 2.9 6.3 3.7 6.0

Wheat 2.5 2.4 2.5 3.5

Corn 1.6 7.1 3.8 4.9

Competitiveness of Indian Crops

Source : NCAER

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

Gnut Oil

SoybeanOilSun Oil

MustardOil

Indian Vegoil Competitiveness

Even Worse Off Relative to Palm Oil EquivalenceSource : NCAER

Marketing … Issues

• Inequity in MSP regime.. Distorted markets• Logistics constraint at gutslot

– Rly rolling stock – Covered Storage

Tariff and Tax Barriers / Sops add to distortion– and loopholes.. E.g. Delhi

• Knee Jerk Export Regime

Dangerously continuing Supply side thought process…

Shifting Demand away from cereals….

1.8

2

2.9

3

3.2

3.3

3.8

0 1 2 3 4

Rice

Wheat

Fruits

Pulses

Vegetables

Milk

Meat

Projected Growth Rates of All India Demand between 2000-2

Indian Farm Sector –

• Small Size– local barter/ low marketable surpluses

• Regional overcapitalization of on farm private investment– Major scope for optimization/ incl non ag

• Land Lease /Hiring and Dehiring- Issues

Farming is largely a way of life…

Overcapacity in basic processing

• Wheat Milling• Rice Milling• Oilseed Crushing• Sugarcane Crushing• Cotton ginning… and textiles Large Scale capacity redundancy impacts

sector attractiveness and Trade Practices… knock on effect on value added processing.

Essentials• Align major commodity markets with

worldwide values.. Transition mechanisms

• Disintermediate and rationalize non value adding components

• ‘Trade’ surpluses nationally and internationally before losing value– create supportive structures and capability

• Create long term consistent environment to attract unfettered investment

Managing ‘and’ Encashing Commodity Surpluses

• Leverage long term competitive advantage ...prodn cost and destination mkts proximity

• Need to build source credibility– Consistent supply origin– Reputation of quality… – Build capability to Identity preserve– Manage intake and logistics end to end

Market surpluses before losing value

Intervention..

• In remote areas where infrastructure/ trade capability is limited

• Delink intervention operations from purchases for PDS – why just grain for PDS.. Cash/ Food stamps!!

• Avoid handling costs and distr. inefficiency

• Review outdated buffer stock norms - watch international supply and demand scenario

Risk Management and Mitigation

• Warehouse Reciepts

• Creating a more transparent market with commodity futures

– States need to allow direct purchases and delivery at warehouse

– Negotiable instrument– Licensing..Money lenders * Price Discovery* Price risk management

- Hedge future exposures- Lock in assured local price- Improve export capability

and competitiveness

Grain Handling investments-need for an integrated approach

Capability/ Objectives Identity Preservation Obviate Bagging/ Cost Ease in fumigation Optimize specs/ value ‘Aggregate’ quality Economy in transport

and shipping

Components Hopper bottom trptn

primary movementrailcars

Silo ‘systems’at ‘both’ endsCustomer interface

Farmer Financing

Transparent Grain MarketingSpin off benefits..

• Will attract serious private investment in grain handling infrastructure

• Will Spur investments in food processing• Will reduce leakage of indirect subsidies• Will reduce cropping distortions• Will improve flow of technology/ genetics Will improve farm economics and make

farming long term sustainable

Policymakers Considerations…

• Is it possible to create policy middle ground straddling social purpose and economic drivers

• Is there political consensus and will to challenge the status quo

Freebies… The Vicious Cycle

Free Power

More powerneeded

Lowering ofWater table

Other exploitation of ground water

Encourages water intensive crops

Adverse Impact on state finances

More capitalinvestment

SEB’s gobankrupt

Other examples of overcapacity ……..in food processing

• Roller Flour Mills – Capacity 21myn tons… Prodn 9myn ts

• VegOil Extraction and Refining– >50pct overcapacity. Half the industry is sick… And

yet new refining capacity being built on back of tax incentives on multiples of recorded investment

Artificial and indirect subsidies create distortions and misplaced investments..

Agriculture and Food-Policy Environment to Compete

• Consistent policy environ will spur Infrastructure development… add transparency and rule clarity – Release domestic capital funding for agriculture

• Allow unfettered investment – Don’t meddle - incentivising of distortions slows down real

investment and creates idle assets

• Duty is an adequate barrier- watch and see– Non tariff barriers add to distortions / inhibit flow of technology

• Align thought process from Supply side to Demand driven

Way Forward

• Immediate serious new study on competitive advantage

• Get the best brains together… domestic and international…debate and decide.. Create support.. Heighten awareness of consequences- Get politicos, banks, farmer leaders, corporates, to buy in.. and then execute relentlessly.. Integrate investments to align upstream and downstream within selected areas..Trash special interests

• Plan should be Politically sustainable/ Socially equitable

• Clean up unnecessary constraining legislation.. Immediate!

• Trash indirect subsidies… all subsidies to be direct and line of sight.. With sharp understanding of WTO obligations

• Plan for transition mechanisms… graded timeline

• Get legislation cleaned up of useless controls

Deploy the very best talent to monitor and execute plan