A top of mind question anyone
will have, when we talk of agricultural exports is, "what happens to the
availability and prices of food in the domestic market?"
After all, India has 17% of
world's population, but only 12% of arable land and 4% of fresh water
resources... Should we be exporting at all?
But, exports not only have the
potential to improve farmer incomes - an important necessity, given the low per
capita GDP of the farm sector in India - but also, quite counter intuitively,
can keep the domestic prices low and stable!
Such a possibility is real today
because the world is transiting from a policy of self sufficiency at national
level to a philosophy of resource efficiency at global level. Instead of all
the countries trying to produce every food product they need - an approach
started after the first world war and intensified after the second world war -
each country is now moving towards maximising production of what they are good
at, given their natural endowments, and importing what they have to. That's the
only way to feed a larger, richer and more urban global population by 2050. In
any case, the goal of self sufficiency is unsustainable - per an estimate, when
the per capita food consumption of developing nations reaches today's global
average (mind you, not the average of world's rich nations), we need two more
earths to satisfy the demand even after factoring the productivity gains from
all known technologies!
India has a great opportunity in
this backdrop, because (1) we have rich & diverse agro-climatic conditions,
and (2) there is significant headroom for improvement in farm productivity.
But the game has to be played
differently, to grab this opportunity. Today, we are less than 2% of global
agri exports; of our own total exports, agri constitutes just about 10%; and,
within agri, share of value added products is not even 10%
The new way of playing this game
is to adopt a two pronged strategy, with three distinct action areas under each
strategy...
Strategy 1: Focus on specific crops & products where India has
comparative advantage.
This is key, because, to date,
India has been an adhoc exporter of whichever commodities left over as
surpluses after domestic consumption.
Action Area 1: Ministry of
Commerce already has schemes such as Focus Product Scheme and Market Linked
Focus Product Scheme. What is required is an institutionalised mechanism within
the Ministry of Agriculture to select the products from the agri & allied sector.
Such a mechanism could actively involve the exporters too, besides the
representatives from the State Governments.
My first cut recommendation would
include spices, marine products, processed cereal products, fresh vegetables
and processed fruits, and meat products.
Action Area 2: As
important as the task of selecting the products to be focused upon, and more
important than offering some standard financial incentives to such products as
is being done conventionally, it is critical to tailor-make country level
strategies suitable to specific competitive contexts of those products.
For example, the Duty Draw Back
on chilly exports from India is 1%, which does not even neutralise the
incidence of direct and indirect taxes, while China offers an export subsidy of
5% on whole chilly exports and 15% on processed chilly products. The Tariff
Rate Quotas imposed by the USA on leaf tobacco blunts the competitiveness of
Indian leaf tobacco; and India is denied duty free access given by the EU to similar
imports from the LDCs. India must take up such cases of discrimination strongly
in the international fora.
Action Area 3: Value added
exports must be encouraged, to retain more value within India, rather than
relying on basic commodities. A key first step in this regard would be to
announce a stable export policy, instead of banning exports every now &
then. Only then exporters will invest in product development and branding. To
keep the domestic supplies in tact in years of shortage, the exporters could be
asked to balance the stock by importing.
Additionally, differential
incentives, as described in the Chinese chilly example mentioned earlier, for
raw and processed products will help push value added exports and build Indian
brands.
Strategy 2: Enhance the inherent competitiveness of Indian agriculture.
In the focus products, to start with.
Action Area 1: Transform
the current supply-driven value chains into demand-driven value chains. This
requires transmission of real-time demand signals from the consumers to the
producers, so that they are able to align production and quality to serve the
market. New technologies need to be inducted to raise farm productivity. Active
engagement of private sector in agricultural extension and marketing is
essential to accomplish these two objectives. Reforming of APMC Acts allowing 'Direct
Marketing' and 'Contract Farming' is a prerequisite to enable such an
engagement.
Action Area 2: Reduce
costs along the agricultural chain. This could be done by minimising tax
incidence and improving infrastructure efficiencies.
Ironically, even the taxes exempted
in spirit are incurred by exporters of agri products, given the agri-specific market
dynamics, because of the way the exemption provisions are written. For example,
sales tax is exempted on purchases made for export purpose; but, it is
mandatory that the purchases must take place after procuring the export order
to qualify for such exemption. In case of agricultural products, given their natural
seasonality of production, purchases have to be made in season without necessarily
having export orders on hand; otherwise one has to sell in distress. Or pay the
sales tax!
Larger investments into agri
infrastructure could be attracted by removing the caps on subsidies applicable
to warehouses built under Grameen Bhandaran Yojana and the Scheme to strengthen
Agricultural Marketing Infrastructure. Also, the Zero Duty EPCG Scheme may be
extended to cover investments in the entire agricultural value chain.
Action Area 3: Reduce
risks in farm production and output prices, by building institutional mechanisms
such as Weather Insurance and Commodity Derivative Markets.
As per the RBI guidelines, corporates
are allowed to hedge their price risks in the international commodity exchanges
only if the position is backed by export / import contracts. In concept, this
is very similar to the sales tax exemption procedure. Exporters of Agri commodities
need to purchase raw material stocks during the season, not only for export
orders on hand, but many times also in anticipation of future export orders. Thus
the exporter who wishes to manage the price risk inherent in such domestic raw
material purchases in advance, against fluctuating prices in international
market, does not have an option to hedge on international commodity exchanges.
As a result, the exporter is subjected to price risk till the time he obtains
an export order for his product.
To reduce the price risk in exporting
agri products, Indian exporters with an open stock position, even without prior
export contracts should be allowed to hedge on the international commodity exchanges.
This is a summary of the presentation
made to the Committee of State Agricultural Ministers
on Marketing Reforms in Tirupati on Oct 30, 2012.
