Curb food prices without harming the farmers

Various measures have been deployed to combat food inflation. Subsidies on food and fertilisers, imports of food as well as regulations to prevent hoarding of farm produce did succeed in stabilising prices from time to time. But such crisis management has been able to provide only short-lived relief, and prices have gone up from 2007.

Bringing down food inflation will benefit the consumer, but make prices unattractive to farmers. This will accentuate poverty. Unremunerative prices discourage investments in agriculture, causing supply-side shortages, fuelling inflation further. So, the most effective way of tackling this issue is to focus on bringing down consumer prices, ploughing a larger share of the consumer spend back to the farmer.

First we need to lower transaction costs. The Agricultural Produce Market Committee (APMC) Acts mandate all farm produce should be brought to mandisfor auctioning, making these platforms virtual monopolies. The farmer pays to transport his produce over long distances, before knowing the price at which his produce would be sold, or whether any other market would have paid a better price.

The journey from farm to consumer involves multiple levels of transportation, handling expenses, commissions of agents and a mandi cess, adding nearly 20% cost to food prices. This absurdity was acknowledged years ago, and anew Model APMC Act recommended by the Centre in 2003.

This Model Act must be implemented in all states. Unless farmers have the freedom to sell at farm-gate or other transparent platforms directly to buyers, transaction costs will remain high and drive consumer prices higher. Next, we need to cut wastage. Anywhere from 5% to 40% of food is wasted along the chain, depending on the perishability of the crop and the season. First, market instruments must empower farmers to produce as per tomorrow's demand, rather than be guided by yesterday's prices.

If the Forward Contracts Regulation Act (FCRA) is amended to permit trading in options, farmers are assured of a minimum price when sowing, based on future projections simulated by a market consensus. This will align production volumes to future demand conditions and minimise wastage. We need large investments to set up climate-controlled infrastructure to enhance the shelf life of farm produce. The private sector has the capacity to invest and add value to such infrastructure.

But regulations like the Essential Commodities Act (ECA), which impose stock limits and curb movements, create uncertainty, acting as a deterrent to such long-term investments. We need to add value to farm produce by facilitating food processing on a much larger scale. Food processors do not find it worth their while to engage with farmers directly due to APMC restrictions. And the ECA does not distinguish between hoarders and genuine market players. The risk management capacity of food processors is squeezed, because options are not permitted under FCRA. So, reforms in APMC, ECA and FCRA are critical to mobilise investments in the food processing sector.

India's agricultural yields are far below the best-in-class. Depending on the crop, productivity improvements can range from 20% to 100%. Though Indian farming has seen progress, induction of technology and mechanisation is still below par. Agriculture is still exposed to high climate variation risks. Given that around 65% of India's total sowed area meets its requirements from rainwater alone, it is imperative to invest in technology to make agriculture climate- and weatherproof.

These include introduction of specially-developed seeds that withstand extreme weather, diverse soil conditions and various biotic stresses. Solutions like crop and weather insurance are also essential to whet the risk-taking capability of the farmer, who can then invest to step up productivity, participate more effectively in agricultural value chains and garner alarger share of consumer spends.

Market-distorting subsidies have to be rationalised to make agri-business more viable and bring investments into the sector. Private enterprises engaged in agribusiness must focus on research and innovation to make agriculture remunerative to farmers and ensure the products are relevant to consumers.

First published in Economic Times on 27th June 2014 at http://economictimes.indiatimes.com/opinion/curb-food-prices-without-harming-the-farmers/articleshow/37280685.cms
 

Why are food prices rising unabated? What can we do about it?

This is the transcript of an interview given for the forthcoming issue of CII's Economy Matters:

Why are the food prices rising unabated despite several measures taken by the government?

Firstly, let's set the context correctly. The government has an unenviable task of walking a tightrope between the diametrically opposite expectations of the farmers for higher prices and the consumers for lower prices. Given that the majority of our farmers are small and resource-poor, and the consumers are largely low or middle-income, the government cannot short-change either constituency for the sake of the other.

In this backdrop, let’s recount the key actions taken by the governments from time to time, and the limitations of such actions, because of which the prices continue to rise.

When the objective is to balance conflicting interests, any government’s first strategy is to subsidise. Subsidies on inputs like water, power, credit, and fertiliser to keep the cost of production low; and then subsidies on food itself by buying at high support prices from the farmers and selling at lower prices to the poor consumers through the public distribution system. No doubt, subsidies have delivered the expectations to a large extent. But, given the fiscal position of the government, this strategy is neither scalable nor sustainable beyond a point. Once that point is reached, as we have now, the subsidies strategy leaves both the farmers and the consumers dissatisfied despite consuming massive amounts of money. Additionally, the resultant market distortion discourages the private investment in the sector, and the value chains remain under-developed.

Another strategy that's adopted is to import food products, or ban the exports in times of shortage. Given the fleeting speed at which the international commodity markets move, our responses are often too late. The problem is further compounded by the weak market intelligence system the governments typically have, and the complex logistics of the global trade. In times of shortages, expectedly, the domestic prices are sky-high while the crops are standing in the fields, raising the price expectations of the farmers; then the import consignments usually arrive just about the time the farmers are ready to harvest their crops, and the prices start falling like there is no bottom!

Imposing stock limits to prevent hoarding of farm produce is yet another measure that's commonly used to control prices. This action does soften the prices, but only temporarily. However, because this measure cannot actually increase the availability of food in the season as a whole, the prices do go up eventually. Besides, since the government doesn't distinguish between hoarders and the genuine Agri Businesses / Food Processors, such restraints render investments along the supply chain and processing unviable, and the value chain participants remain fragmented.

One can possibly refine these strategies a bit more, viz. sharper targeting of subsidies, proactive imports through real-time market intelligence etc., and keep the prices under check a few weeks longer. The longer-term food inflation cannot be truly tamed unless the key drivers are appreciated and managed. 

What according to you are the key drivers of food inflation?

While quite a few reasons have been cited for triggering food inflation, demand outpacing supply is definitely the key cause, to my mind. Increasing incomes and changing lifestyles & aspirations have spurred the demand for food items, especially high value products such as fruits, vegetables, milk and milk products, eggs, fish, and meat. Per capita consumption of many of these products in India is still significantly below that of comparable countries, suggesting the likelihood of this trend continuing in the years to come. Given this scenario, it is crucial that the supply rises substantially to meet the rapidly expanding demand for food.

That brings us to supply side drivers. Though farm yields in India have grown significantly over years, they are still largely dependent on the annual monsoon rains and other vagaries of weather. In certain crops like vegetables that are more vulnerable, adverse weather conditions result in serious damages, leading to exorbitant prices for a few months almost every year in some corner of the country. Rising Minimum Support Prices for certain key commodities, especially wheat and rice, have pushed the prices of those crops up. With the introduction of the Mahatma Gandhi National Rural Employment Guarantee Act, agricultural wages have risen as a result of labour shortage, contributing to rising costs of production. Then there are chronic supply chain deficiencies (high transaction costs due to long chains, huge wastages due to broken chains, increasing cost of transportation due to rising fuel costs) that don’t let a fair share of the consumer price flow back to the producer. The supply chain deficiencies also prevent the demand signals from flowing seamlessly to the farmer. In the absence of such a mechanism, most farmers produce crops based on the prices obtained for the previous crop rather than the prices expected for the crops being planted. This results in huge price swings due to supply-demand imbalances around the harvest time.

As a combined effect of all these complex factors, the food prices in India kept moving up since 2007 when supplies fell short of demand globally; all that the various price control measures achieved was temporary respite from time to time. In these seven years, prices of cereals rose unabated, at an average of 10% per annum; the vegetables also started at a similar rate of 10% per annum, but accelerated to an average annual rise of 30% in the more recent years.

More broad-based reforms in the agricultural policy framework, together with the creation of certain market based institutions and instruments only can deal with these complex factors and solve the problem of food inflation in the long run. Otherwise, one would have to fire-fight every few months to deal with the crisis.

What are those reforms, which can really contain food inflation in India?

There are four areas of intervention that will make a difference:

Reforming the APMC Act along the lines of new Model Act recommended by the central government in 2003 is the first step. The alternative marketing models envisaged in the Model Act, viz. Direct Marketing, Contract Farming, and Private Mandis will provide a healthy competition to the conventional Mandis and offer a choice to the farmer. These models will be customised to different contexts, eliminating the non value adding transaction costs that came into being only because the conventional Mandi was mandated as the only mechanism for a farmer to market his produce. APMC reform will also help in changing the purely transaction oriented relation between an Agri business / Food Processor and the farmer in a Mandi set up, to a reciprocally dependent partnership. This will motivate Businesses to engage with farmers to raise farm productivity and align crop quality to consumer demand in mutual interest. This will also lead to complementary investments in storage and handling infrastructure along the supply chain that reduces wastage.

Secondly, the Forward Contracts Regulation Act (FCRA) must be amended to permit trading in ‘Options’. Farmers will then be assured of a minimum price at the time of sowing itself, based on the future projections of demand simulated by a market consensus. This will help adjust the production volumes to the future demand conditions, thus minimising the potential shortages as well as avoidable wastages, and the consequent price volatility.

Solutions like crop and weather insurance are also essential to enhance the risk-taking capability of the farmer, who can then invest in the required technology and inputs to step up productivity.

Lastly, the protocols for approving new technology must be scientific, made transparent and predictable to attract investments into R&D. We have some distance to cover in discovering seeds that will optimize drought tolerance, disease resistance, yield enhancement, pest resistance, enable nutritional enhancement etc.

You mentioned Food Processing briefly. Can it play an important role in dealing with food inflation?

Anywhere from 5% to 40% of food is wasted along the chain, depending on the inherent perishability of the crop and the season. This obviously reduces the actual availability of food even after the farmers have produced. Food Processing offers a solution to reduce this colossal wastage and contain inflation.

India processes just about 2% of its agri-based products compared to other developing countries such as Malaysia and Thailand who process as much as 40 %. A key constraint for the growth of the sector is the high prices of processed food, primarily because of the cascading effect of taxation along the value chain. Consequently, consumption of processed food remains low despite rising disposable incomes, adversely impacting the investments in this very important sector.

Full potential of this sector can be exploited if processed food products are made affordable at lower prices through a zero-tax regime. Such a tax regime must be extended for a minimum period of 5 years to “communicate” stability and attract investment.

With the prediction of a deficit monsoon this year due to El Nino, do you see food inflation going out of bounds soon?

Just as El Nino was showing signs of weakening, a monsoon blocker developed in Indian Ocean! It is certainly a situation that requires close monitoring. More important than the overall deficit in rainfall, is its spacial and temporal distribution. There is insufficient visibility on that count at this time. We therefore need to be prepared with contingent plans for different micro-regions, to be able to rapidly deploy them as the situation evolves. A big comfort, of course, is the large stock of wheat and rice available with the government. So, if at all something goes out of bounds, it would only be a vegetable here or a fruit there…

Sowing the seeds of a farm revival

Very few sectors are as important, yet as beleaguered as agriculture in India. Engaging more than 50 per cent of the country’s workforce, it offers livelihoods to 75 per cent of the population living below the poverty line. It consumes 80 per cent of the nation’s fresh water resources, a quarter of the total electricity and more than 70 per cent of central government subsidies. However, it accounts for just about 14 per cent of GDP. Woefully therefore, the farmer’s per capita income is less than one-fifth of the rest of the country’s average.

A four-pronged policy agenda in agriculture has the potential to achieve the much desired ‘inclusive and sustainable’ growth of Indian economy.

Weather-proofing production, and conserving life-giving natural resources

 

Arguably, there has been significant progress in making Indian agriculture resilient to recurrent droughts. Nonetheless, it remains a stark reality that the vagaries of nature can potentially cripple the sector at any time. In addition, dwindling natural resources like groundwater can have disastrous consequences. Therefore, any solution will have to weather-proof production, and replenish and conserve life-giving natural resources, using the right technologies.

The entire technology spectrum — from better seeds to precision-farming practices, from micro-irrigation to watershed development, from renewable energy to power-saving farm equipment — will have to be fully harnessed. Over the years, among other policy initiatives, liberalisation of imports of improved varieties and breeding lines has revitalised the availability of high quality seeds. The Indian seed market, estimated at over $1 billion, has grown at double the pace of the global seed market. However, there is a long way to go in developing and deploying seeds that will address extreme weather variations and poor soil conditions, besides serious biotic stresses.

A policy framework that encourages investment in research, and streamlines regulatory processes for accelerated introduction of new technologies will enable sustainable intensification of Indian agriculture.

Making farming remunerative, and enthusing NextGen in agriculture

India’s young demographic profile is a great source of strength. Unfortunately, a future in the agricultural sector does not seem to evoke enthusiasm among the youth. Income from farming is not only unattractive but also not commensurate with the risks and drudgery associated with the farm sector. This has led to farmers moving away from farms to non-farm livelihoods in villages, besides migration to urban areas.

The next horizon in agricultural progress cannot be conquered without harnessing the vitality of the youth. This will require a policy impetus that encourages two vital components: one that enables greater mechanisation of farm operations to mitigate drudgery and enhance efficiency; and the other that enables larger value creation through farming that blends traditional knowledge with new technologies.

Aligning production to changing consumption trends, and linking farmers to markets

Rising disposable incomes and growing urbanisation has brought about a dimensional change in the pattern of consumer demand. The share of cereals is reducing in the diet, in favour of vegetables, fruits, milk, and meat. Besides more variety, today’s consumer demands superior quality, enhanced safety, and added convenience while shopping or using products. This dictates a fundamental transformation.

Producing what the consumer demands is an entirely different ball-game from consuming whatever is produced by the farmer. It is a re-orientation from production-driven supply chains to demand-driven value chains, and will entail huge investments in creating appropriate infrastructure in post-harvest, logistics, processing, packaging, retailing, and information systems.

Corporate involvement through vibrant agri-businesses and food-processing can considerably enhance value for farmers by linking them to the value-seeking markets. However, a variety of policy constraints deter any sizeable investment by the corporates today. Foremost is the non-implementation of the ‘Model APMC Act’ by many states. In addition, the ‘Essential Commodities Act’ imposes stock limits, and curbs movements from time to time, further affecting the viability of agri-businesses. ‘Forward Contracts (Regulation) Act’ also requires reform.

Currently, critical risk management tools, such as Options, are not available. Farmers can realise better prices without undue risk, by buying Options, either directly or through aggregators. This gives them a right to transact at a future price and not just an obligation, as is the case when only the Futures are available. Trade and marketing policies in agriculture will need a significant overhaul, if the farmers have to benefit from the huge consumption dividend offered by the country.

Sharper targeting of social subsidies, and vital investments in soft infrastructure

Over the years, subsidies in the farm sector have certainly played an important role in aiding resource-poor small farmers. However, subsidies can be significantly market-distorting. There is also a concern that systemic leakages significantly dilute the quantum of subsidies that finally reach the intended beneficiaries. Direct transfers of subsidies are perceived to be a more effective alternative. Policies need to sharply target the subsidies to ensure social security but in a way that does not distort markets. In the current global and national economic context, market forces are key to unleashing the true potential of the agricultural sector.

While past investments in rural areas have enhanced the quality of hard infrastructure, such as roads, telecom and irrigation, we need to invest in the complementary ‘soft infrastructure’ now. It is important to create the equivalents of ITIs in the farm sector to train rural youth and enable better implementation of best practices. Investments are also needed in soil health and other natural resource management systems, as also in the emerging agri-services.

Orchestrated action for sustained resurgence

The policy priorities outlined here need to be carried out in a concerted manner to create a springboard that can propel Indian agriculture into a higher orbit.

The ITC e-Choupal experience in empowering millions of farmers lends confidence that a synergistic and integrated rural programme can significantly raise incomes and secure a better quality of life in rural India.

Given the right policy impetus and effective public-private-people partnerships, there is enough reason to believe that the giant agriculture sector can be re-energised to offer a new promise for tomorrow’s India.

 

This article was published in the Business Line print edition dated May 14, 2014 with modified sub-heads http://www.thehindubusinessline.com/todays-paper/tp-opinion/sowing-the-seeds-of-a-farm-revival/article6006734.ece

 

Livelihoods Promotion: Quest for Scale

In spite of the creditable growth of the Indian economy over the last two decades, the proportion of rural population living in poverty is still unacceptably high. While many models have successfully supported the livelihoods of the poor, very few have achieved the desired scale.

In this backdrop, 'Quest for Scale' was chosen as the theme of one of the Panels in the 2013 edition of the Livelihoods India Conference.

Dr Rajesh Tandon of the Society for Participatory Researchin Asia, Mr Brij Mohan of ACCESS Development Services, and Dr Subhashish Gangopadhyay of India Development Foundation and I were the Panelists in this session, moderated by Dr Sankar Datta of Azim PremjiUniversity. 

I argued that the default model chosen by most organisations for 'Scaling Up' is 'Spreading Wide'. This involves codifying the solution that worked, and then executing that code in new geographies. This would work so long as the new context is similar to the one where the solution worked in the first instance. And the organisation must have capacity to manage scale, be it the management bandwidth or the quality of execution. 

For example, if a Microfinance Organisation perfected the process of social mobilisation, risk assessment of the borrowers, efficiency of cash disbursements as well as collections etc, the same process can be successfully replicated in a different geography, unless the socio-cultural or livelihoods context is quite different.

In many cases, the scale reduces the 'Unit Costs', but in several cases, the scale can raise the management costs disproportionately. One must be cognizant of these issues also before 'Spreading Wide'. 

If the new context is very different, the original solution won't work; and if the organisation lacks capacity to manage scale, the consequences can be disastrous.

There are more ways to scale than Spreading Wide. Depending on the 'transferability of the solution' and the 'capacity of the organisation', one can choose from any of the four other Scaling Models.

2.       Scaling (or Mining) Deep: This involves bringing more products and services to serve the other current needs of the existing customers. If the infrastructure and the relationships built to deliver the original solution can be converted into a platform, it can facilitate access to other relevant offerings from third parties, who otherwise find it difficult to reach out to these customers. Continuing with the same example of Microfinance Organisation, Mining Deep model could go beyond lending and bring complementary solutions such as Capacity Building, Risk Management, Access to Quality Inputs, or Linking to Output Markets.

3.       Scaling (or Evolving) Along: This involves adapting products and services to serve the evolving needs of the existing customers, as time goes by. For example, as the incomes of the current borrowers improve, or as they reach different age bracket, their borrowing needs would change. A successful push-cart vendor, selling vegetables, may like to borrow ten times as much amount and set up a Grocery Store. This might mean a completely redesigned process compared to the process used for the earlier loan size. This is an often ignored, but smart, scaling opportunity.

4.       Scaling (or Stepping) Out: This involves adapting the solution to a completely new value chain. For example, the business model that worked for building an inclusive agricultural supply chain, could very well be adapted for skilling human resources for the employment market. While the Mining Deep model works wherever morphing into platform is feasible, this model can be explored where value chains are somewhat similar.

5.       Scaling (or Multiplying) Through: This is like the conventional franchising model. The code is handed over to a franchisee or a licensee for execution. One can spread wide, scale along or out, using this model. If  the organisation would like to retain control on the franchisee, there is a need to find a 'stickiness' factor, eg. shared services at low cost riding on the scale of multiple franchisees (accounts management, quality audit, training, legal services etc).

Thus, in my view, the foremost question in the quest for scale is "which model of scaling is right for me?"

Will the new CSR mandate be a game changer?

As you may know, the new Companies Act of India mandates that companies of a certain size and profitability must spend at least 2% of their net profits on Social Responsibility activities (See Section 135 on Page 80 of the Act)

I was a panelist at the 'CII National Summit on CSR' in Delhi held on 30th September 2013. These were my opening remarks in response to the question posed to my panel, "Will the new CSR mandate be a game changer?"

The 2% CSR spend is estimated at about Rs 20,000 Crores. This money is less than what Government spends in five days, considering the annual expenditure budget of Government is some Rs 17 Lakh Crores. Subsidies alone, out of this total amount, exceed Rs 250,000 Crores! Therefore the 2% CSR spend is not going to bring in the game-changing resources...

However, if Corporate India harnesses its 'innovation capacity' and leverages the 'power of partnerships' to solve India's social and environmental problems, I am sure it can change the game!

Instead of looking at the 2% amount as 'a philanthropy budget', if companies can innovatively embed CSR into their business strategies, larger problems can be solved.

This could be in the form of 'socially inclusive business models' where the capacities of low income suppliers and distributors can be strengthened to improve their productivity, market access, and bargaining power, while enhancing the competitiveness of the whole value chain in which the company is a part. Eg. ITC eChoupal.

On the environmental front, investing in renewable energy is a low hanging fruit, given our unreliable grid power, and the high cost of diesel-generated power. Innovation of higher order is required to build 'green supply chains' that regenerate the natural resources consumed in a business. Eg. ITC FarmForestry. 

Embedding CSR into business strategies would also ensure that the CSR spends do not get impacted in times of slowdown. Of course, this whole argument is not to rule out the need for philanthropic spends in cases of extreme distress.

Now I come to my second idea. I believe four types of partnerships could contribute to game-changing outcomes:

Partnerships with other Corporates operating in the same geography or working in the same domain can create joint projects and / or knowledge platforms for experience sharing.

Partnerships with CSOs / NfPs for social mobilisation and impact audits.

Partnerships with Communities themselves for gaining deeper insights while designing and executing projects. Also, Users Groups for democratising common property management.

Partnerships with Governments to create markets for trading "social credits" ala "carbon credits", and for aligning social subsidies to develop inclusive markets rather than distorting markets. This is besides the PPPs for building infrastructure that are already gaining traction.

While no one stopped Corporates from innovating and partnering to solve societal problems - indeed several companies have done so, successfully - the new CSR mandate hopefully inspires many companies to look at this as a game changing opportunity.

Never believe that a few caring people can't change the world. Indeed it is the only thing that ever has ~ Margaret Mead 

Inclusive Agriculture

Food and Agriculture Organisation (FAO), as a part of the process to prepare their Country Programming Framework 2012-17, organised a Workshop on Indian Agriculture, today, at the Central Research Institute for Dryland Agriculture (CRIDA) in Hyderabad.  

I was a panelist in the session on "greater inclusion of women and disadvantaged social groups, and marginalised areas", along with Dr Suman Sahai of Gene Campaign and Dr Geetha Kutty of Kerala Agricultural University.

This is a summary of my remarks:

Before we can figure out "what we can do to include these people", we need to understand "why they are excluded" and "how they are coping"...

There are multiple causes for exclusion and several ways in which people cope with the situation. So, the solutions also need to be varied, to be effective.

Based on the experiences from around the world, FAO may like to prepare a 'Tool Kit' to enable the practitioners easily analyse the context, and mix & match the solution themes, rather than starting with a zero base each time.

Here are the answers that came top of my mind, for each of these questions. 

  

Q1: Why are women, disadvantaged social groups, and marginalised areas excluded?

I think they are locked-up in a vicious circle by some centripetal forces. Such forces include

• historical and cultural reasons (especially true for women, and socially disadvantaged groups)

• vested interests that benefit by locking these people in a cycle of dependency, after helping them out of a tricky situation (eg. informal money lenders in the villages)

• natural resource constraints and other risks inherent to agriculture (eg. water scarcity in rainfed areas, challenges of hilly areas, commodity price risk).

While the efforts of the Government succeeded only partially to date, the markets have not been interested in these people either as producers (because of no marketable surplus) or as consumers (because of low income). As a result, most of these people stay locked in a vicious circle.

Q2: How are they coping?

• Some are resigned to their fate, while some are satisfied with a low-level equilibrium

• some resort to violence and extremism to change the situation, while

• some aspire for a better future and rely on their entrepreneurial energies

Yet, a large majority are still stuck in a vicious circle!

Q4: What are the solution themes?

Logically, the only way this vicious circle can be broken is by applying sufficient centrifugal force. Sources of such force include

• disproportionate deployment of resources at strategic points (currently the Government spends are spread across several initiatives, as a result they are not able to break the vicious circle anywhere)

• orchestrating synchronised interventions at multiple points through a collaborative effort (markets get interested as they now see profits in raising incomes of the poor, instead of competing for a share of small wallets. eg ITC eChoupal ecosystem)

• collective action by the affected people themselves (eg Amul, SHGs supported by SERP in Andhra Pradesh)

Several activities form part of these solution themes, such as:

• capacity building of the groups before investing in physical assets

• expand income streams that put cash in the hands of the women (dairy, agarbatti making)

• evolve institutions for risk management (insurance for weather risk, futures & options for price risk)

• leverage technology (ICT, micro irrigation, drudgery reducing - not labour displacing - farm equipment suitable for women and other labour)

Promoting Exports of Agricultural Products from India

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.