Focus on India

by World Grain Staff
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by Mario Sequeira

India is one of the world’s top food grain producers. Not counting the European Union, it is second to China in wheat and rice production and fourth, behind the United States, China and Brazil in coarse grains production. Yet, its impressive position in world production notwith standing, India’s potential to increase agricultural output is huge. Obstacles that are hindering growth include a low mechanization rate, low crop yields compared to other top producers and not enough investment.

Indeed, the agricultural indus try as a whole, taking into account post-farm operations, has the vast potential to become more efficient, competitive and profitable. Certain issues, such as the poor rural infrastructure, including roads, storage and handling, inefficient marketing and the under-developed processing sector must be addressed before India’s agriculture can move forward.

Indian agriculture is made up of predominantly small farms handed down by tradition. The most recent count in the 1995-96 census indicated there were 115.5 million holdings. Of these, 60% were less than a hectare and 1% were 10ha or larger.

The agricultural sector employs 60% of the country’s labor force and contributes 25% to gross domestic product.

Agricultural performance has been driven by government policy that advocates strong financial support, control and protection from international competition. India’s agricultural policy since independence from Britain in 1947 has been underpinned by economic and social values. The country aimed to become self-sufficient in food grains, which it achieved in the 1980s, and also to make basic food items available at affordable prices to consumers.

This policy gave birth to the Green Revolution in the 1960s, which tripled rice yields and quadrupled wheat yields during the past 45 years. Farmers received improved research, high-yielding wheat and rice varieties, more water through new irrigation projects and more and better fertilizers and pesticides.

The social imperative of agricultural policy entails the government every year buying food grains from producers at or above minimum support prices (MSP) to distribute to the poorest people at subsidized prices and also build up minimum buffer stocks.

The MSPs are fixed every year by the Commission for Agricultural Costs and Prices, taking into account many factors, including the costs of production, trends in market prices, inter-crop price parity, supply and demand, the effect on cost of living and international prices, and farmers terms of trade.

The food is procured by the Food Corporation of India and allocated to states based on the number of people in two categories — below poverty level and above poverty level. The food grains are made available to people through a public distribution system that consists of storage houses and ration shops.

India’s agricultural policy has resulted in problems — a huge subsidy bill, mountains of food stocks and price distortions resulting in consequences for food exports. The United States Department of Agriculture estimates the annual bill for India’s agricultural subsidies at U.S.$12 billion.

There is raging debate within the country for change of policy and the MSP mechanism. It is argued that the huge food subsidy diverts public funds away from much-needed investment in agriculture for infrastructure, research, processing and other projects.

It is also argued that government control in agriculture, which has spawned complicated regulatory measures that involve endless red tape, is discouraging private investment in agriculture.

Here too, independent and government bodies point out in annual studies that agricultural growth can be increased if government further relaxes its grip on agriculture.

The government has been easing controls since the 1980s, cautiously at first and then drastically in 1991, when sweeping reforms were enacted for the economy as a whole. However, these reforms did not touch agricultural policy, with restrictions on exports and imports continuing in the form of high tariffs, quotas and other regulatory hurdles.

However, economic globalization has caught up with India and agricultural controls have been eased with every round of World Trade Organization talks.

The role of state trading enterprises has shrunk; several regulatory measures, including licensing, have been removed; market access to agricultural products has been extended; and the imports of many food items have been freed to the private sector.

India continues to set the bar higher. Each year, the government sets crop production targets, which are subsequently adjusted based on actual performance. For 2003-04 and 2004-05, the food grain production target is 220 million tonnes.

In 2003-04, food grain production, including wheat, rice, coarse grains and pulses, was 210.8 million tonnes. In 2004-05, rainfall has been about 13% below average and production has been scaled down to about 208 million tonnes from earlier higher estimates.

In 2003-04, agriculture contributed growth of 9.1% to the overall real GDP growth of 8.1%. However, agriculture has been growing at about 2% annually in the past decade. Agriculture ministers who meet in January this year pushed for 8% growth in overall GDP in 2004-05, although other institutions project growth of 6 to 7.4%. The ministers said to realize GDP growth of 8%, agriculture growth must be doubled to 4% from 2% annually. WHEAT AND FLOUR MILLING India has been a net exporter of wheat since 2000-01. In the past five years, exports have ranged from a high of 5.6 million tonnes in 2003-04 to a projected 1.5 million tonnes in 2004-05.

The high tonnages exported in 2003-04 were the result of a strong export push since 2000-01 because of a huge wheat and rice stockpile of about 40 million tonnes. With stocks as of October 1 last year down to 20.3 million tonnes (14.2 million tonnes of wheat and 6 million tonnes of rice), exports are not expected to be as large.

Exports are helped with subsidies and this year the government is providing a WTO-compatible subsidy of Rs.900 (U.S.$21) per tonne of wheat. However, the cost of domestic wheat, based on the MSP of Rs.6,400 (U.S.$146) a tonne, plus other export costs makes Indian wheat more expensive than competitors’ wheat.

India wheat production has averaged 60 million tonnes and higher in the past decade. In 2003-04, production was an estimated 72 million tonnes, the same as in 2004-05 following below average rainfall.

Most of India’s wheat is consumed by its population of more than one billion. India produces mostly soft and medium hard wheat, which is used for making the staple "chapattis" or flat breads.

The processing sector is underdeveloped. Just 15% of India wheat is processed at 820 industrial mills in the country, represented by the Roller Flour Mills Federation. The remaining 85%, which is retailed as whole wheat, is ground into "atta" or wholemeal flour at small local stone-grinding mills.

Since 1997, licensing requirements to open wheat and rice milling business have been removed. But there appear to be no takers, with the number of mills flat at just over 800 in the past 10 years.

The industry’s annual milling capacity is about 19.5 million tonnes, but utilization is at about 55 to 65%, with throughput estimated at about 12.5 million tonnes of wheat products.

This is because of uncertain wheat supply, poor transportation of wheat from the surplus northern states, and plant obsolescence, leading to high energy costs.

Until 1998, wheat imports were unrestricted. Millers imported hard wheat for high-value end use. But the im-ports, cheaper than domestic wheat, began to hurt prices and the government imposed a 50% import tariff. Since then, imports have plunged. Millers have been unsuccessfully pleading for zero tariffs.

With consumption patterns changing in favor of processed foods, the milling and baking industries have a big opportunity to meet that demand. India’s growing middle class population, estimated at 150-200 million, is getting wealthier and can afford more diversified diets. Demand for more processed and convenience foods, such as pizza and hamburgers is growing.

The Ministry of Food Processing, created in 1988, released a draft policy in January. Among the proposals advocated to promote food processing growth include making processed food cheaper by reducing costs, especially that of packaging; creating direct relationships between processors and producers; contract farming; and consolidating the long and fragmented supply chain. RICE Rice is a staple of India, particularly in central and southern India. Northern Indians prefer wheat-based chappatis.

India has been self-sufficient in rice since the 1980s. In the 1990s, it started building exports for basmati rice and in the past five years, exports have exceeded one million tonnes, with a high of 6.3 million tonnes in 2001-02, when buffer stocks were high. Since that year, the government has allowed exports of non-basmati rice as well.

Stocks in the past two years have dropped and this year’s exports are not expected to be as high in previous years. Late last year, traders estimated 2004-05 exports at about 1.6 million tonnes, down on 2003-04’s 2.7 million tones.

Another reason for lower exports in 2004-05 was the absence of export subsidies. With stocks down, the government has given no signals of providing subsidies for 2004-05 rice.

Indian rice production in the past decade has exceeded 80 million tonnes, with two exceptions in 1995-96 and 2002-03. In 2003-04, India produced 87 million tonnes. In 2004-05, the forecast production has been reduced following below average rainfall and the figure now is expected to be the same or slightly higher than last year.

India buys about 25% of rice production for the public distribution system. It buys paddy directly from farmers and cleaned rice from millers at a price that includes a levy, which varies among the states.

There are approximately 35,000 modern rice mills in the country. Since 1997, a licence is not required to open a milling business and the government provides financial assistance to existing and new mills to install the latest technology. WG