The CGPRT Centre
The Regional Co-ordination Centre for Research and Development of Coarse Grains, Pulses,
Roots and Tuber Crops in the Humid Tropics of Asia and the Pacific (CGPRT Centre) was
established in 1981 as a subsidiary body of UN/ESCAP.
Objectives
In co-operation with ESCAP member countries, the Centre will initiate and promote research,
training and dissemination of information on socio-economic and related aspects of CGPRT
crops in Asia and the Pacific. In its activities, the Centre aims to serve the needs of
institutions concerned with planning, research, extension and development in relation to
CGPRT crop production, marketing and use.
Programmes
In pursuit of its objectives, the Centre has two interlinked programmes to be carried out in the
spirit of technical cooperation among developing countries:
1.
2.
Research and development which entails the preparation and implementation of
projects and studies covering production, utilization and trade of CGPRT crops in the
countries of Asia and the South Pacific.
Human resource development and collection, processing and dissemination of relevant
information for use by researchers, policy makers and extension workers.
CGPRT Centre Working Papers currently available:
Working Paper No. 31 Economic Assessment of Selected Resource Management Techniques in Marginal
Upland Agriculture: Case Studies of China
by Ni Hongxing and Gu Shuzhong
Working Paper No. 32 Economic Assessment of Selected Resource Management Techniques in Marginal
Upland Agriculture: Case Studies of India
by Mahander Singh and G.C. Munda
Working Paper No. 33 Effects of Trade Liberalization on Agriculture in Pakistan: Institutional and
Structural Aspects
by Muhammad Ramzan Akhtar
Working Paper No. 34 Effects of Trade Liberalization on Agriculture in Malaysia: Institutional
and Structural Aspects
by Tengku Mohd Ariff Tengku Ahmad
Working Paper No. 35 Effects of Trade Liberalization on Agriculture in the Republic of Korea:
Institutional and Structural Aspects
by Myung-Hwan Sung
Working Paper No. 36 Effects of Trade Liberalization on Agriculture in Japan: Institutional
and Structural Aspects
by Hiroaki Kobayashi
Working Paper No. 37 Effects of Trade Liberalization on Agriculture in the Philippines:
Institutional and Structural Aspects
by Minda C. Mangabat
(Continued on inside back cover)
Effects of Trade Liberalization on
Agriculture in India:
Commodity Aspects
The designations employed and the presentation of material in this publication do not
imply the expression of any opinion whatsoever on the part of the Secretariat of the United
Nations concerning the legal status of any country, territory, city or area of its authorities, or
concerning the delimitation of its frontiers or boundaries.
The opinions expressed in signed articles are those of the authors and do not necessarily
represent the opinion of the United Nations.
WORKING PAPER 45
Effects of Trade Liberalization on
Agriculture in India:
Commodity Aspects
Ramesh Chand
CGPRT Centre
Regional Co-ordination Centre for
Research and Development of Coarse Grains,
Pulses, Roots and Tuber Crops in the
Humid Tropics of Asia and the Pacific
CGPRT Centre
Jalan Merdeka 145, Bogor 16111
Indonesia
© 1999 by the CGPRT Centre
All rights reserved. Published 1999
Printed in Indonesia
National Library: Cataloguing in Publication
Chand, Ramesh
Effects of Trade Liberalization on Agriculture in India: Commodity
Aspects/Ramesh Chand -- Bogor: CGPRT Centre, 1999.
xx, 62 pp.; 25.5 cm. -- (Working paper series; No. 45)
Bibliography: 4 pp
ISBN 979-9317-01-0
1. India – Trade, free and protected
I. Title
II. Series
2. Agriculture – economic aspects
382.710.954
Table of Contents
Page
List of Tables ........................................................................................................................... vii
Abbreviations .......................................................................................................................... ix
Foreword .................................................................................................................................. xi
Acknowledgements ................................................................................................................. xiii
Executive Summary ................................................................................................................ xv
1.
2.
3.
Introduction
1.1 Background ...............................................................................................................
1.2 Objectives .................................................................................................................
1.3 Outline of the study ..................................................................................................
1.4 Summary of the institutional and policy review study .............................................
1
2
2
3
Effects of Trade Liberalization on Production, Marketing and Demand of
Selected Commodities
2.1 Selection of commodities and analytical tools ..........................................................
2.1.1 Analytical tools ................................................................................................
2.2 Crucial production, marketing and trade-related policy on selected
commodities ..............................................................................................................
2.2.1 Policy related to production .............................................................................
2.2.2 Policy related to prices .....................................................................................
2.2.3 Policy on marketing .........................................................................................
2.2.4 Policy related to trade ......................................................................................
2.3 Effects of trade liberalization on selected commodities at the national level ...........
2.3.1 Impact on domestic prices ................................................................................
2.3.2 Impact on producer and consumer surplus ......................................................
2.4 East Asian crisis and the Indian economy ................................................................
11
12
16
17
19
21
22
24
35
Effects of Trade Liberalization at the Farm Level
3.1 Farm level production, marketing and trade policy ..................................................
3.1.1 Input subsidies .................................................................................................
3.1.2 Production or acreage control ..........................................................................
3.1.3 Price intervention and parastatals ....................................................................
3.1.4 Marketing policy and regulations ....................................................................
3.2 Effect of trade liberalization at the farm level ..........................................................
37
38
41
42
42
43
9
10
4.
Prospects and Strategies ....................................................................................................... 47
5.
References ............................................................................................................................... 53
Appendix Tables .............................................................................................................................. 57
v
vi
List of Tables
Page
Chapter 1
Table 1.1 Growth rates of food crops, non-food crops, all commodities, GDP and population
in different periods ................................................................................................ 1
Chapter 2
Table 2.1 Area and production of selected crops ................................................................ 11
Table 2.2 Per capita net availability of important items of consumption (gram/day) and share
of selected crops .................................................................................................. 12
Table 2.3 Area under rice and competing crops in north-west states of India during the post
green revolution period ........................................................................................ 12
Table 2.4 Irrigation and fertilizer application to selected crops .......................................... 13
Table 2.5 Government policy related to production of rice in various five-year plans,
1974-1997 ............................................................................................................ 14
Table 2.6 Government policy related to production of maize in various five-year plans,
1974-97 ................................................................................................................ 14
Table 2.7 Government policy related to production of rapeseed-mustard in
various five-year plans, 1974-97 ......................................................................... 14
Table 2.8 Government policy related to production of chickpea in various
five-year plans, 1974-97 ...................................................................................... 15
Table 2.9 All India compound growth rates (%) of area, production and yield of selected
crops .................................................................................................................... 15
Table 2.10 Minimum support prices and farm harvest prices of selected crops in major
producing rates (Rs.) ........................................................................................... 16
Table 2.11 Status and progress of market infrastructure in India .......................................... 17
Table 2.12 Marketed surplus of rice and its procurement by official agencies, 1992/93 ...... 18
Table 2.13 Current status of trade policy for selected crops as of March 31,1999 ............... 21
Table 2.14 Effect of trade liberalization on rice .................................................................... 22
Table 2.15 Domestic and international prices of selected commodities, US $/ton ................ 22
Table 2.16 Domestic wholesale price and import/export price of selected commodities,
Rs./ton .................................................................................................................. 23
Table 2.17 Nominal protection coefficients of selected commodities during the last decade
under different hypotheses ................................................................................... 23
Table 2.18 Price elasticity of demand for selected commodities in India ............................. 25
Table 2.19 Supply elasticity with respect to own price and elasticity of price transmission . 27
Table 2.20 Ex post impact of trade liberalization on domestic consumer and farm level
prices of rice, Rs./ton ........................................................................................... 28
Table 2.21 Ex post impact of trade liberalization on domestic consumer and farm level
prices of maize, Rs./ton ....................................................................................... 29
Table 2.22 Actual ICF import price and imputed CIF import price of rapeseed-mustard
oil in India, Rs./ton ............................................................................................. 30
Table 2.23 Ex post impact of trade liberalization on domestic consumer and farm level
prices of rapeseed-mustard Rs./ton....................................................................... 30
Table 2.24 Ex post impact of trade liberalization on domestic and farm level prices
of chickpea, Rs./ton .............................................................................................. 31
vii
Table 2.25 Regional and temporal variation in chickpea prices in selected markets,
Rs./100 kg ............................................................................................................
Table 2.26 Likely impact of free trade on domestic consumer and farm level prices of
rice and maize ......................................................................................................
Table 2.27 Likely impact of free trade on domestic consumer and farm level prices of
rapeseed-mustard oil and seed ..............................................................................
Table 2.28 Impact of trade liberalization on producers, consumers and net social grain
under different scenarios. ....................................................................................
Table 2.29 Symbols in estimation of producer and consumer surplus ..................................
Table 2.30 India’s export of agricultural and allied products to East Asian economies
and other countries, million Rs. ...........................................................................
Table 2.31 India’s export and import to East Asian countries during last three years,
$ million ..............................................................................................................
Chapter 3
Table 3.1
Table 3.2
Table 3.3
Table 3.4
Table 3.5
Sites for studying farm level effects of trade liberalization .................................
Input subsidies in Indian agriculture since 1980-81, Rs. million ........................
Estimates of cost of cultivation/production and related data per hectare, 1995/96
Impact of trade liberalization on gross and net returns ........................................
Percent change in farm level prices and crop income under different trade
liberalization scenarios ........................................................................................
viii
32
33
33
34
35
36
36
37
39
44
45
46
Abbreviations
BOP
CACP
CIF
FAO
FOB
GATT
GCA
GDP
ha
HYV
ICAR
kg
km
MIO
MNCs
MSP
NAFED
NCAP
NDDB
NOTP
NPC
OGL
PDS
QRs
R&M
RPS
TE
WTO
Balance of payments
Commission on Agricultural Costs and Prices
Cost insurance and freight
Food and Agriculture Organization
Free on board
General Agreement on Tariffs and Trade
Gross cropped area
Gross domestic product
Hectare
High yielding varieties
Indian Council of Agricultural Research
Kilogram
Kilometre
Market intervention operations
Multi national companies
Minimum support price
National Agricultural Cooperative Marketing Federation of India, Ltd.
National Centre for Agricultural Economics and Policy Research
National Dairy Development Board
National Oilseed Technology Project
Nominal protection coefficient
Open general license
Public distribution scheme
Quantitative restrictions
Rapeseed and mustard
Retention price scheme
Triennium ending
World Trade Organisation
ix
x
Foreword
Responding to the growing concern for the effects of trade liberalization on regional
agriculture, the CGPRT Centre has implemented a three-year research project “Effects of Trade
Liberalization on Agriculture in Selected Asian Countries with Special Focus on CGPRT Crops
(TradeLib)” since March 1997, in collaboration with partners from ten countries: China, India,
Indonesia, Japan, Malaysia, Pakistan, the Philippines, the Republic of Korea, Thailand and Viet
Nam. In all these countries, important issues regarding trade liberalization were investigated
with an identical research framework by national experts.
The investigation covers major crops which might receive either favorable or
unfavorable effects of trade liberalization both in export and import. I believe that the project
will provide broad and practical knowledge on various aspects of the effects of trade
liberalization; moreover, the information will be useful for researchers and policy planners not
only in participating countries but also in other countries in the region. I would like to note that,
however, since this project was conceived and started before the current currency and economic
crisis began in the middle of 1997, the analysis handles basically the period before the crisis
with available current information.
I am pleased to publish Effects of Trade Liberalization on Agriculture in India:
Commodity Aspects as a report of the second phase of the country study of India. A report of
the first phase of the country study, which includes institutional and structural aspects on the
same subject, has been published before. I certainly hope these reports will be fully utilized for
the improvement of agricultural trade and the encouragement of regional agriculture.
I thank Dr. Ramesh Chand of India for his intensive research and the National Centre for
Agricultural Economic and Policy Research for allowing him to work with us and for providing
continuous support. Dr. Boonjit Titapiwatanakun ably coordinated the various complex steps in
the study. I would also like to express appreciation to the Government of Japan for funding the
project.
Haruo Inagaki
Director
CGPRT Centre
xi
xii
Acknowledgements
The recent General Agreement on Tariffs and Trade (GATT), which culminated in the
formation of the World Trade Organisation, requires all the member countries to adjust their
trade and other policies as envisaged under GATT. An important obligation of WTO members
is to liberalize trade by removal of quantitative restrictions on trade and reduction in tariff rates.
This is expected to have far reaching implications on the agriculture sector, which has so far
been guided mainly by policies based on domestic concerns. It was in this context that the
UN/ESCAP CGPRT Centre, Bogor, Indonesia, sponsored the present study in selected Asian
countries. We are grateful to the CGPRT Centre for including India as one of the countries in
this study.
The study was conducted under the guidance of Dr. Dayanatha Jha, Director, National
Centre for Agricultural Economics and Policy Research (NCAP), New Delhi. I wish to express
my deep gratitude to Dr. Jha for providing support and for proposing my candidature to
undertake this study.
I am indebted to Dr. R. S. Paroda, Director General, Indian Council of Agricultural
Research (ICAR) and to Dr. Mruthyunjaya, Assistant Director General (ESM), ICAR for
nominating me as the National Expert for this study.
Dr. Haruo Inagaki, Director, CGPRT Centre, Bogor, deserves my special thanks for
taking a keen interest in the progress of the study. I am highly obliged to Professor Boonjit
Titapiwatanakum, Regional Advisor for this project and to Dr. Michio Kanai, Project Leader
for making valuable suggestions for revising the study.
Ms. Sonia Chauhan ably helped in data collection and analysis and Ms. Umeeta Ahuja
provided secretarial assistance for preparation of this report. Mr. Douglas Stoltz of the CGPRT
Centre, Bogor, has taken the editing part. I am thankful to all of them.
New Delhi
July, 1999
Ramesh Chand
Principal Scientist
National Centre for Agricultural
Economics and Policy Research
Indian Council of Agricultural Research
xiii
xiv
Executive Summary
India is a founder member of the World Trade Organization (WTO) and is thus
committed in moving in the direction of liberalization of trade in agricultural commodities.
Quantitative restrictions on imports are being phased out and exports are also being liberalized.
Both agricultural exports as well as imports are now permitted through private trade, except for
a few commodities. There is lot of anxiety, interest and apprehension about the impact that trade
liberalization may have on producers, consumers and the economy. The present study is an
attempt to analyze the impact of trade liberalization on selected commodities and locations and
it reviews production, marketing and trade-related policy concerning these commodities. It also
discusses the strategy and prospects of trade liberalization to meet WTO obligations.
The study focuses on four crops, namely paddy (rice), maize, chickpea and rapeseedmustard. Of these, rice is the most important for food security of the country as it constitutes
44% of total foodgrain consumption. Rice is also the most important crop for farmers. It
occupies 23% of the gross sown area of India, which is the highest among all the crops grown
in the country. Traditionally, India used to export only Basmati rice but since 1991/92 nonBasmati rice has emerged as a significant export crop.
Maize is one of the important coarse cereals grown in India and it occupies an important
share in the food basket of poor people. Rapeseed-mustard is the second most important oilseed
crop grown in India. It is grown on about 6.66 million hectares, which constitutes one-fourth of
the total area under all oilseeds grown in India. Rapeseed-mustard is mainly used for edible oil.
There is a chronic shortage of edible oils in the country, which is met through large imports.
According to some studies India does not have comparative advantage in producing edible
oilseeds including rapeseed. Therefore, liberalization of trade is expected to encourage imports
and decrease domestic prices of rapeseed-mustard. This crop represents the case where trade
liberalization is going to have a negative effect on domestic production. Chickpea is the most
popular among all pulses in India. It comprises about 30% of the area under all pulses in the
country. There is a chronic shortage of pulses in the country, which is met through large
imports.
The effects of trade liberalization on the four commodities were studied at the national
level as well as at the farm level. The effect at the national level was studied by estimating the
impact on wholesale and farm level prices and by estimating consumer surplus, producer
surplus and net social welfare. To study the farm level effects of trade liberalization, partial
budgets for each of the selected commodities were prepared using survey data for the chosen
locations. The effect has been measured on crop income by substituting existing domestic prices
with international reference prices for comparable quality produce.
Until 1991 export as well as import of the selected commodities has been subjected to
various kinds of regulations and restrictions. There has been no restriction on export of Basmati
rice, but common rice was subject to canalization, minimum export price and export quota until
1991. Restrictions on export of common rice were somewhat relaxed during 1992 following
initiation of economic reform programmes in June 1991. A major boost to rice export occurred
during 1995/96 when under a major policy change the government of India decided to release 2
million tons of rice for export. Due to a comfortable situation on the food front, quantitative
ceilings on exports have now been abolished. There is no duty on import of rice.
There has been no special policy for import-export of maize, nor is this crop considered
very important from the trade point of view. Like other cereals, maize export and import have
xv
been subject to several restrictions, except for feed grade maize for poultry or animals. There is
no duty on import of maize.
Due to a growing imbalance between demand and supply of edible oilseeds in the post
green revolution period, India had to import a massive amount of edible oil, which constituted
30% of the total supply by the mid 1980s. Prior to 1994 the oilseed sector was protected
through QRs on imports and exports and imports were canalised through state agencies.
Domestic prices of oilseeds were maintained at more than double the world prices. In 1995
rapeseed-mustard oil was put under OGL at an import tariff of 30%. The tariff has been further
reduced in stages to the present level of 15%. Trade policy on rapeseed/mustard and edible oils
has been caught between two opposing viewpoints. According to one viewpoint India would
benefit by liberalizing import of rapeseed-mustard oil and other edible oils as their domestic
prices have been higher than world reference prices for several years. According to the second
viewpoint the policy of import liberalization would have an adverse impact on the oilseed sector
and Indian producers. It is asserted that world prices of rapeseed/mustard are low because U.S.
and Europe provide large direct and indirect subsidies to the producers, so world prices are not
an appropriate yardstick for comparison with Indian prices.
Despite a highly favourable resource cost ratio and high domestic profitability, chickpea
area and production did not show any perceptible growth during the last 20 years. While
chickpea export is restricted, its import is free and is regulated mainly through tariffs which are
also quite low at present.
As such, there is no discernible impact of liberalization of the rice trade and rise in its
export during the last six years on acreage allocated to rice and its output. One reason for this
could be that the benefit of rice export has not percolated down to producers in terms of higher
prices and income.
The impact of trade liberalization on the selected commodities has been analysed for two
situations: first, if trade were liberalized in the past, how would it have affected domestic prices
during the last six years; and second, by comparing a base scenario represented by the triennium
ending 1996/97 with a free trade scenario as it existed in this period and projected multi-lateral
free trade scenario with full compliance with the Uruguay Round agreement.
A comparison between domestic and international prices of selected commodities during
the recent four years shows that international prices of rice of comparable grade have been more
than one-third higher than the domestic price. There is no clear difference between international
and domestic prices of maize. In some years the domestic price is lower and in other years it is
higher than the international price. The position of rapeseed-mustard oil is the opposite of rice.
Per ton prices of rapeseed-mustard in the country ranged between $839.3 and $962.3 during
1994 to 1997 while international prices varied between $557 and $617. In the case of chickpea
there is tremendous inter and intra year instability in domestic prices, so it is difficult to say
whether international prices are consistently lower/higher than the domestic prices.
A comparison of international and domestic prices sometimes does not indicate trade
possibilities since freight, insurance and related charges can make a significant difference to
price. Accordingly, prices were compared using the CIF price for importable commodities and
the FOB price for exportable commodities.
Comparison of domestic wholesale prices with CIF world prices for importables and
FOB world prices for exportables relevant to India reveals that liberalization of agricultural
trade would lead to an increase in export of rice and maize. On the other hand, trade
liberalization would lead to large-scale import of rapeseed-mustard oil. Thus, one can expect
that domestic prices of rice and maize would go up and that of rapeseed mustard oil would go
down because of trade liberalization. This may have further adverse effects on rapeseedmustard area, output and its producers, whereas rice and maize area, output and producers may
be affected favourably. In the case of chickpea, it appears that trade liberalization would not
xvi
have significant impact on domestic prices and production. Import would continue to fill the
gap between domestic demand and supply without seriously affecting domestic production.
Year-wise comparison indicates considerable volatility in the international price of rice,
whereas the domestic price has maintained a steady trend. Unlike rice, the domestic price of
maize shows oscillations in price. The volatility in FOB export price was found to be much
larger than in the domestic price. The CIF price of rapeseed-mustard oil imported by India
showed violent fluctuations. In fact this fluctuation is not in the international price. The actual
CIF price of rapeseed-mustard oil imported by India was found to be quite high compared to the
imputed CIF price derived by adding freight charges to the international price. The reason for
this seems to be that India is not a stable importer of rapeseed-mustard oil and the quantity
imported varies considerably depending upon the domestic supply situation. The country does
not have a stable trading source or partner for the import and there is not sufficient planning of
imports. As a result when a shortfall in domestic market is felt the country resorts to panic
buying for fear of a violent rise in domestic prices. With proper and advance planning, the
country can have access to cheaper imports compared to what it has been paying.
India is big importer of pulses including chickpea. However, domestic prices of chickpea
in the wholesale market of the biggest producing state were lower than the CIF price at port in
three out of the six years. When internal cost is added to the landed cost, then the import price
turns out to be higher than the domestic price only in one out of six years. It may appear
ironical that import of chickpea took place when domestic prices were lower than the CIF
import price. One explanation for this seems to be that there is considerable intra year and inter
market variation in chickpea prices in the country and imports are undertaken to keep a check
or to take advantage of peak prices in the lean months in some of the markets.
In the ex ante analysis we have estimated the impact of trade liberalization on prices in
the baseline scenario which is taken as an average of the triennium ending 1996/97. The impact
is studied in two ways:
• assuming unilateral free trade by the country in which there is no restriction on imports
and exports: this would imply that domestic prices would be equated to corresponding
CIF or FOB prices during TE 1996/97, adjusted for internal marketing and transport
cost. This has been termed the baseline scenario with liberalization.
• the other scenario refers to year 2000 and assumes multilateral trade liberalization with
full Uruguay agreement impact, in which subsidies, etc. are removed as envisaged in
the Uruguay round. This would entail an increase in international prices by 7% in the
case of rice and 4% in the case of maize and rapeseed-mustard oil.
For rice, the reference price in the base scenario arrived at by adding internal costs to
domestic price works out to be Rs. 8,548 per ton while the FOB price was Rs. 8,653.
Corresponding to this FOB price the domestic price works out to be Rs. 7,684. This shows that
if trade were liberalized the domestic rice price would go up by 1.39% and the farm level price
of paddy would rise by 1.45% in the base scenario. The impact is quite strong in the free trade
scenario with full Uruguay impact, which envisages a 7% rise in international prices and thus
makes exports more attractive. Under free trade this would result in a 9.38% increase in the rice
price and a 9.81% rise in the farm level price of paddy in India.
The impact of freeing export on maize prices is very strong. In the base scenario trade
liberalization involves about a 21% increase in domestic wholesale and farm level prices.
Multilateral free trade with full Uruguay impact would raise the base level wholesale price by
more than 25%.
Free import of rapeseed-mustard oil in the base scenario would have rendered this edible
oil cheaper by 18%. Similarly, prices received by farmers for rapeseed-mustard seed would go
down by about 16%. In the second scenario, in which the international price increases by 4%,
xvii
the domestic price of edible oil falls by 14.75% and the farm level price of seed declines by
13%.
Changes in consumer surplus and producer surplus were estimated from changes in
prices due to liberalization and resulting changes in demand and supply. Liberalization of rice
export in the baseline scenario would have a very small impact on the producer price and hence
on supply. This would result in an increase in producer’s surplus by Rs. 7,237 million. The
impact on consumer surplus is Rs. 7,545 million, which shows there would be a decline in net
social gain due to liberalization in the base scenario. Under multilateral free trade the difference
in producer’s gain and loss in consumer surplus would increase further. These calculations
demonstrate that free trade in rice would lead to a small net social loss to the country. In the
case of maize, liberalization of trade is found to be highly beneficial to the country. The gain to
producers is almost double the loss to consumers due to the price rise.
In the case of rapeseed-mustard, when the domestic price of its oil is equated to the
relevant import price and the required change is incorporated in the seed price, the net social
welfare improves by Rs. 563 million. In the second scenario international prices increase by 4%
and the difference between CIF and domestic prices is narrowed down. The net social gain still
remains positive, but is less than in the base scenario.
It was observed that results based on a single year price can lead to misleading
conclusions because of considerable year to year variation in domestic as well as international
prices. Also, the impact of trade liberalization would not be uniform across commodities.
The study shows that implementation of WTO would have a mixed impact on net social
welfare of India. The country would be a net winner in some commodities and it would be a net
loser in some other commodities.
The impact of different levels of trade liberalization and removal of subsidies on farm
level income was studied by preparing partial budgets based on primary data taken from
representative locations. Gross returns from paddy production increased from Rs. 19,006 per
hectare in the base scenario to Rs. 19,282 under free trade prices of the base scenario and
further to Rs. 20,870 in the free trade scenario with full Uruguay impact. However, when
subsidies are removed along with free trade then the gross return without liberalization is higher
than the gross return under free trade. A similar pattern holds for the net income. Reduction in
income due to removal of input subsidies in rice production would not be compensated for by
the access to international prices under free trade.
Trade liberalization in the base scenario increased net returns from maize cultivation by
Rs. 1,007, while the increase due to free trade with full WTO impact is Rs. 1,279. The domestic
subsidy for maize is Rs. 729, which is lower than the gain from trade liberalization.
In the case of rapeseed-mustard, liberalization of oil imports would reduce the net return
to farmers by 25% of the existing net returns. Along with this, if subsidies are removed, the net
return declines by about 35%. As multi lateral trade liberalization takes place leading to a rise in
international prices, the adverse impact on net returns would be reduced.
For selected crops, free trade is estimated to have sharp positive impact on net returns
from production of exportables such as maize and rice, whereas it is going to have a small
negative impact on net returns from the importables such as rapeseed-mustard. In rice where the
input subsidy is high, free trade would not be sufficient to counter the adverse impact on
income due to withdrawal of subsidies. It can be concluded from the above analysis that trade
liberalization is a mixed bag and its impact would vary from commodity to commodity.
The study shows that implementation of WTO would have a mixed impact on net social
welfare of India. The country would be a net winner in some commodities and it would be a net
loser in some other commodities. For selected crops, free trade is estimated to have a sharp
positive impact on net return from production of exportables such as maize and rice, whereas it
is going to have a small negative impact on net returns from the importables such as rapeseedmustard. In rice where the level of input subsidy is high, free trade would not be sufficient to
xviii
counter the adverse impact on income due to withdrawal of subsidies. Trade liberalization is a
mixed bag and its impact would vary from commodity to commodity. There is considerable
scope for increasing benefits due to trade liberalisation by reducing domestic marketing costs
and by tapping proper markets for imports.
In our opinion, signals from the ratio of domestic to global prices should not be stretched
too far. There should not be major policy shifts for important crops like foodgrains and oilseeds
based on global price signals. Agriculture should be subjected to world competition, but
domestic policy support must continue. The policy of attaining self-sufficiency in oilseeds
should also emphasize improvement in resource use efficiency through technological
improvements.
The challenges due to import liberalization cannot be met through trade policy changes
alone, nor can trade policy in itself help in taking advantage of export in a liberalized world.
Both of these would depend on the growth rate in domestic output and production efficiency
built in to cost of production. If domestic output does not grow to keep pace with domestic
demand then domestic prices would go up, which would be attractive for imports and
unfavourable for exports. Similarly, if the cost of production in the domestic market were
sufficiently higher than in competing countries, this would attract imports and discourage
exports. The best strategy to face the challenge of import liberalization and to take advantage of
export potential would be to ensure that (i) growth in aggregate domestic supply is higher than
2.75%, which is estimated to be the growth rate in domestic demand, and (ii) there is
continuous improvement in efficiency of production to keep the cost of production low.
Along with trade policy reforms, attention needs to be given to domestic market reforms
to improve competitiveness of the country’s agriculture and to improve long term growth
prospects.
There are formal as well as informal restrictions on inter state movement of agricultural
produce, stocking and trading. The consequences of this are slow movement of produce from
surplus to deficit markets, low market integration, depressed prices in producing areas and high
prices for consuming areas. There are several government regulations such as the Essential
Commodities Act (1956), stock limit, credit control, etc. which were meant to deal with scarcity
situations and to curb the activity of hoarders. These regulations need to be modified to
encourage increased participation of the private sector in agricultural trade and commerce. The
idea is not to allow a free ride to the private sector, but to allow more room for market
manoeuvring. Under the provision of levy, millers are required to sell part of the rice and sugar
they mill to the government at a price derived from the procurement price. The levy on rice is as
high as 75% in agriculturally progressive northern states. Millers often complain that after
contributing as much as 75% of their rice at a price which is often below open market price,
they are left with little produce to run their business and thus are at a disadvantage compared to
their counterparts in other countries. Removal of the levy on the export quantity would provide
a level playing field to India’s rice exporters.
The agricultural trade of India has been significantly affected by the financial crisis that
hit Southeast Asian economies in 1997. India’s agricultural exports to the four crisis ridden
countries had been growing rapidly until 1997. During 1997/98 after the crisis hit these
economies, India’s agricultural exports plummeted by 22% compared to the previous year. This
decline is a result of both very high devaluation of the currencies of the crisis-hit countries and
worsening of their economic conditions.
Like agricultural exports, there has been a marked decline in total exports from India to
all the four Southeast Asian countries, whereas imports from these countries increased
significantly due to exchange rate developments. Exports to the four countries during the period
April-December 1998 declined by almost half over the corresponding period in 1997. There has
been a slowdown in exports to other countries also, which can be partly attributed to an indirect
effect on India’s export due to the effect of the crisis on the rest of the world. Depreciation of
xix
Southeast Asian currencies has adversely affected India’s exports and balance of payments. Due
to this depreciation, competition for export from India has increased, which has implications for
exports and the economy.
xx
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