With 75% of the population in India living in rural areas and 64% of the workforce dependent on agriculture for their livelihoods, the agriculture sector is a vital element of India's economic and cultural fabric.

Although large, modern farms exist, agricultural production in India remains grounded in traditional village farming. According to the official 1990-91 agricultural census, nearly 60% of agricultural operations were smaller than 1 hectare, while less than 2% of operations exceeded 10 ha. The average size of these "large" operations was about 17 ha.

Given the predominance of small-scale farming, India's success in conquering famine is impressive. Decades of commitment and investments in agronomy and agricultural practices continually boosted yields to the point where India by the 1970s and 1980s was largely self-sufficient in wheat and rice, the primary food grains. And in the 1990s, India enjoyed net exporter status most years in those grains.

In the past decade alone, India's wheat production increased by some 40%, reaching a record 70.8 million tonnes in 1999-00. Rice production in the same period also expanded, albeit at a more modest 13%, with output in 1998-99 reaching a record 86 million tonnes.

In addition to agronomic advances, government policies also have stimulated output. The understandable intent is to maintain buffer stocks adequate to avoid famine in lean harvest years and to assure a reliable food supply at all times for India's poorest citizens.

But India has been so successful in expanding its wheat and rice supplies that the country is now faced with increasingly burdensome and costly surpluses of these critical food grains.

As of January, India's surplus wheat and rice supplies stood at a total of 31.5 million tonnes, nearly double the desired buffer stocks level of 16.8 million, according to a report in India's Economic Times. Nearly 18 million tonnes of the January total comprised wheat, for which the desired level of buffer stocks is 8.4 million tonnes, the report said.

The burgeoning surpluses are having a predictably negative effect on India's budget. According to the Economic Times, the government's costs for its wheat and rice program subsidies in the 1999-00 fiscal year, not including fertilizer subsidies, are estimated at between U.S.$2 billion to $2.4 billion, calculated at recent exchange rates.

The situation stems primarily from policy decisions in the past few years that increased farm support prices while increasing the price of government-subsidized wheat sold to consumers. The policies simultaneously encouraged wheat and rice production — and the amounts procured by the government — while slowing offtake from government stocks (see chart on page 49).

Indian grain markets basically operate under a free market system, although market prices are heavily influenced by the government-run Public Distribution System. Under this system, which is administered through the Food Corporation of India (F.C.I.), the government procures grain from farmers at subsidized prices and sells to consumers at subsidized prices.

Because farmers may choose to sell wheat on the open market or to the Food Corporation, depending on relative prices, the farmer's minimum support price tends to serve as an overall market floor. From 1990-91 through 1999-00, minimum wheat support prices have increased each year, rising by nearly 156% over the period, and since the 1996-97 year alone, prices have been raised by 45%.

Government costs for the procured wheat are inflated further by handling, storage and distribution expenses. In June 1999, for example, the F.C.I.'s total "economic cost" of a tonne of procured wheat was estimated at U.S.$190, while the prevailing world f.o.b. export price was about U.S.$120.

Meanwhile, the government, through a network of about 400,000 "fair price shops" throughout the country, sells grain to consumers at a subsidized Central Issue Price (C.I.P.), which actually consists of two price tiers: below-poverty-level (B.P.L.) for low income consumers and a higher above-poverty-level (A.P.L.). In June 1999, the government's "loss" on a tonne of wheat — the difference between the government's cost and sales prices to consumers — averaged U.S.$80.

Since 1997, the B.P.L. wheat price has been fixed at 2.5 rupees per kg (U.S.$58 per tonne), with the A.P.L. increasing by 44% to 6.5 rupees (U.S.$151) between 1997 and 1999. The A.P.L. increases were designed to contain the government's food subsidy costs.

Unfortunately, the increases instead reduced demand for government grain, as A.P.L. consumers switched to comparably priced open-market grain, which is perceived to be higher quality. The net result has been smaller-than-anticipated annual offtakes and increasing surpluses.

Exacerbating the F.C.I.'s difficulties over the past three to four years is the fact that while domestic wheat prices have been rising, world wheat prices have been under pressure. Officials in late 1999 authorized exports of 1 million tonnes, but the price disparity has precluded significant sales, and exports for the current year are estimated at only 200,000 tonnes.

And even though the F.C.I. can sell wheat to flour mills at prices below its "economic cost," its offers until very recently were not competitive with the landed cost of imported wheat. Consequently, private millers, who were given the right in late 1998 to import wheat themselves, stepped up their overseas wheat purchases, with wheat imports in 1998-99 reaching nearly 2 million tonnes.

During the past year, government concerns about high wheat stocks have prompted a re-examination of agricultural policy and programs. Among the first changes were the imposition in December 1999 of a 50% tariff on imported wheat and a reduction in the F.C.I.'s wheat offering price to millers.

Those measures have increased the amount of offtake from government stocks, as imports became more expensive than domestic wheat for millers. But surpluses remain higher than desired, and whether the government can reduce them remains problematic.

Despite recommendations from some government agencies to hold the line on farmer subsidies, the F.C.I. earlier this year raised the 2000-01 minimum support price for wheat by another 5.4% to 5,800 rupees per tonne, or about U.S.$135 at current exchange rates. Then in early March, the agency announced changes to the Public Distribution System in hopes of mitigating the farm subsidy's effect on the budget.

Those changes included wheat price hikes for both B.P.L. and A.P.L. consumers to reduce the budget costs of the food subsidy. To help increase domestic offtake, the F.C.I. also doubled to 20 kg per month from 10 kg the amount of wheat a B.L.P. family may purchase at subsidized prices.

In a March budget presentation, India's finance minister announced a need to slash subsidies further, by raising central issue prices to levels equivalent to 50% of "economic cost" for below poverty level consumers and 100% for above poverty level consumers. On March 30, the Food Corporation announced another round of C.I.P. price hikes that reflected those percentages, raising B.P.L. and A.P.L. prices to the equivalent of U.S.$104 and U.S.$208 per tonne, respectively.

According to news reports, the food price hikes have sparked a political uproar and threats of public protests. And some observers and analysts in India have pointed out that the changes are unlikely to reduce surpluses and government costs.

Instead, rising production subsidies and higher consumer prices merely perpetuate the flaws in the existing system, they say. Farmers will increase output to capture the higher minimum support price, while any gains in consumption by B.P.L. consumers will be offset by reduced offtake from A.P.L. consumers, whose new "subsidized" price in most circumstances will be higher than prevailing local open market prices.

FLOUR MILLING. As with wheat farming, India's flour milling activities center on small, localized operations called "chakkis." According to estimates from India's Department of Food Processing Industries, India has 2.6 million chakkis throughout the country, accounting for about 85% of annual wheat grind.

Consumers buy wheat at fair price shops or on the open market, and the local chakki produces their flour, called "atta" or wholemeal flour. Most wheat consumed is soft or medium hard, suitable for baking "chapatis," or unleavened flat bread, which is India's most popular wheat product.

India's "organized" milling sector consists of about 800 large modern flour mills, which grind about 10.5 million tonnes of wheat a year, or 10% to 15% of total wheat consumed as food. Total estimated wheat milling capacity is about 15 million tonnes. According to the International Grains Council, India produced slightly more than 5 million tonnes of flour in 1997, the latest available estimate.

The organized sector produces mostly all-purpose flour and semolina. In recent years, demand for branded, wholemeal "atta" flour milled and marketed by large mills has gained in popularity, especially in the cities, because of its convenience, a trend that is expected to continue. Demand for speciality wheat flour is also likely to increase, based on expanding demand for fast foods, noodles and pasta products.

In 1997, the government liberalized the country's flour and rice milling sectors by repealing licensing requirements for establishing or expanding new milling operations. The government also has relaxed restrictions on foreign investment for modernization.

RICE INDUSTRY. Rice is a staple food and the primary food grain in India's southern and eastern states. More than 4,000 varieties are grown, with farmers planting the types most favored by local consumers.

For procurement purposes, the government divides rice into only two categories: Common, which is distinguished by a length-to-breadth ratio of less than 2.5, and Grade A, with a ratio of more than 2.5. Unlike wheat procurement from farmers, the government procures rice mostly from millers, who are required to sell a percentage of their milled rice at established rates called the "levy price," which varies from state to state.

India has about 91,000 rice "hullers" and 43,000 modern rice mills. Branded rice is becoming more popular, encouraging a growing corporate presence in the sector. Through grants and other programs, the government is actively promoting modernization of rice mills. The government also has approved nearly 50 foreign investment proposals valued at U.S.$139 million for the rice milling industry.

India already has met with some success in building export markets for its aromatic basmati rice. With improvements in quality and efficiencies in the rice milling sector, the country hopes to expand its markets for other rice types.

COARSE GRAINS & FEED. Production of all coarse grains typically averages about 30 million tonnes annually, with sorghum, millet, barley and maize the key grains harvested. Food use comprises about 80% of total consumption, but unlike wheat and rice, coarse grains are not a food staple, and the government does not maintain buffer stocks.

Analysts indicate that future consumption increases may occur amid expansion of the feed and industrial starch industries. The poultry industry in recent years has grown at rates of 10% to 15% annually, much faster than population growth rates, and the industry, particularly in the southern parts of the country is becoming increasingly more commercial and integrated.

This trend is expected to continue, and industry sources estimate that the poultry compound feed sector will need about 11 million tonnes of maize a year by 2005, of which only 4.5 million to 5 million can be supplied locally. Domestic feed use of maize in the past three years has averaged about 3.7 million tonnes.

Until 1997, maize imports were highly restricted. Now, the government permits feed producers in the private sector to import maize without a license, subject to the condition that the imported grain is used for feed. A similar easing of maize import restrictions were implemented for the starch sector in 1998.

Melissa Cordonier Alexander, formerly an editor of World Grain, is now a consultant providing information research services for agriculture.

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