Underpinnings of India’s agricultural trade policies

Ensuring food security for a rapidly increasing population has been the principal goal of India's food and agriculture policies, and all agri-trade policies have been subservient to this. In the quest for self-reliance in basic food (especially key staples like rice and wheat) trade policy has oscillated between export controls and high import duties. Nevertheless, over the years, India has been integrating its agriculture with global markets, and its agri-trade (imports plus exports) as a percentage of agri-GDP has risen from about 5% in 1990-91 to about 18% in FY12.

India still has the largest number of poor and malnourished people in the world. So, one of the major concerns has been to keep food prices under control. It is this overriding concern that has often led to export controls, high stock holdings to feed the PDS, and large food subsidies for the poor. To incentivise production, cultivators have been provided input subsidies and minimum support prices for some crops. This approach of keeping food prices low for the consumer and incentivising production through domestic support has been the hallmark of India’s agricultural policies.

Due to the rising population, the per capita availability of cultivated land and water has declined and raising food production in a sustainable manner has become quite a challenge. Concerns over sustainability of agriculture have risen with falling water tables and forecasts of an increase in frequency of droughts and floods owing to climate change.

Policies and programmes to support farm operations

In FY11, input subsidies generally available to cultivators (non-product-specific subsidies) totalled $27.6 billion, comprising subsidies for irrigation ($4.7 billion), power ($6.5 billion), fertilisers ($13.7 billion), credit ($2.47 billion), and a small amount coming from subsidies for seeds, insurance, etc. In that year, these subsidies were 8.88% of the total value of agricultural output but earlier, in FY09, the level had topped 15%. But, how these figures measure up against the WTO Agreement on Agriculture's (AoA) de minimis level of 10% depends on the interpretation of 'low-income' or 'resource-poor' farmers for whom AoA exempts signatories from reduction commitments.

Without doubt, the agricultural holding area cannot be the sole measure of the income status of farmers as farm income depends critically on the availability of assured irrigation. However, this imperfect basis is still used to undertake analysis of the status of farmers because there is no detailed holding-wise data on water availability. Our analysis shows that no matter what holding size is considered—10, 4, or 2 ha— as the defining level for low-income or resource-poor status, in FY11, the total non-product-specific subsidy as a percentage of the total value of agriculture produce was well below the benchmark 10%-level. In FY09, despite the most rigorous definition of low-income or resource-poor and the unprecedented spike in government support for agriculture in F, this figure was 7.75%! Input subsidies benefit to farmers is substantially neutralised by inefficient delivery by the government agencies.

Sustainable development

State governments have tended to spread thin the available financial resources by sanctioning too many irrigation projects. This has led to time and cost overruns in the completion of projects and delays in benefits flowing to the farmers. Lack of command area development, after the head works and main canal systems have been completed, leads to the same situation.

Ground water now accounts for about 62% of the net area under irrigation. However, power subsidies have led to falling water tables in many parts of the country with eater being drawn in excess of utilisable recharge. Overuse and skewed use of chemical fertilisers, thanks to fertiliser subsidies, have led to the neglect of organic matter and depletion of micro-nutrients affecting soil fertility.

Minimum price support

MSP is mainly backed by extensive and regular purchase by government for rice and wheat. Our calculations show that adjusted for inflation under Article 18.4, the MSPs are well below the fixed external reference prices. The negative gaps between the fixed external reference prices and the MSPs are large enough to allow full adjustment of product-specific investment and input subsidies.

Food security legislation

The central government promulgated the National Food Security Ordinance (NFSO)—which has since become the Food Security Act—on July 5. The legislation grants the ‘right to food’ to 67% of the country's population and is the biggest-ever experiment in world for distributing highly subsidised food grains (~61.2 MMT), raising the annual food subisdy bill from the current R900 billion ($15 billion) to R1,250 billion ($20.8 billion). The main weakness here is the highly inefficient (with nearly 40% leakage) and expensive (given the high cost of FCI operations) PDS on which it depends.

Market access and export controls

India’s average tariff binding on agri-commodities is 113.1% while its applied rates of tariffs were at 31.8% in FY09. The wide gap between bound and applied levels of tariffs is principally the result of the unilateral and autonomous liberalisation undertaken by India since the Uruguay Round, which deserves appreciation rather than criticism. But, the applied tariffs on India’s biggest agri-import items have been brought down significantly—2.5% on crude edible oils and 7.5% on refined edible oils in June 2013. India imported edible oils worth more than $1 billion in FY13. The applied tariff on pulses, the next biggest agri-import of around $2.3 billion, is zero.

In the past, particularly during 2007-11, government used quantitative restrictions on exports of some agricultural products (like common rice and wheat) which benefited consumers but hurt farmers. Moreover, the restrictions led to large accumulation of grain stocks at home, (~80 MMTs on July 1, 2012). But, things are changing with exports opened since October 2011. India has emerged as a significant exporter of both rice and wheat (16.6 MMT in FY13).

The way forward

Completion of pending major and medium irrigation projects should be the aim of all further investment in this regard. Command area development should be intensified to bridge the gap between the potential created and utilised. ISF should be progressively raised to meet the O&M cost, and the management of irrigation projects should be handed over to WUAs.

Drip irrigation and fertigation (the application of fertilisers through micro-irrigation) in crops like sugarcane and banana will save 40-50% of the water used, and almost 30-40% of fertilisers and energy consumption, compared to the traditional method of flood irrigation. Investment subsidies for micro-irrigation already being granted by the central and state governments need to be scaled up, factoring in fertigation. Good quality power, even for a limited period of time, should be assured to the farmer, on the Gujarat template of separating supply feeders for farm operations from the rest. The next step would be gradually increasing tariffs to the level of average cost of supply if the quality of supply is maintained and improved leading to better farm efficiency. Further, solar-panelled motor pumps need to be incentivised to promote environment friendly and sustainable irrigation. The Nutrient Based Subsidy (NBS) scheme must be extended to urea. NBS should be fixed in nominal terms, allowing inflation to erode it in real terms over time. An alternative could be to shift to the system of conditional cash transfers, whereby direct payments are made on the condition that farmers get soil analysis done and know the proportions of nutrients suitable for their holdings.

Creating institutional sources for agri-credit must be accorded priority given that 40% of such credit is from informal sources obtained at exorbitant rates. Interest subsidy can be contained and phased out gradually. Repeating loan waivers is not advisable as it damages the credit culture.

The PDS reforms would include improving delivery of benefits by checking leakages and cost reduction through conditional cash transfer system. Ideally, this should have happened before implementation of the new food security law, but since it is already in force, these reforms should be given top priority.

The government should stock only strategic reserves of food grain, which should be acquired from the private sector by inviting open tenders. The open-ended physical procurement of grains needs to be reviewed, and farmers need to be incentivised by getting the markets right’, i.e., by removing the myriad controls on markets including exports and rationalising taxes and other levies.

To stabilise applied tariffs on agricultural products, the statutory rates should be reduced to the exempted levels where exempted levels have remained unchanged over a long period. Whenever it becomes imperative to limit exports, the objective should be accomplished by levying an export duty rather than imposing quantitative restriction.

For sustainable agriculture it is necessary to bridge the gap between creation and utilisation of irrigation potential, regenerate groundwater through check dams and water harvesting, encourage drip irrigation with fertigation. Agricultural activities in Eastern India which has plentiful groundwater resources needs to be promoted.

Anwarul Hoda/ Ashok Gulati

Excerpted from the report “India’s Agricultural Trade Policies and Sustainable Development Goals”.

Gulati is the chairman, Commission for Agricultural Costs and Prices and Hoda is chair professor, ICRIER's Trade Policy and WTO Research Programme