Report No. 27889-IN India Re-energizing the Agricultural Sector To Sustain Growth and Reduce Poverty July 30, 2004 Rural Development Unit South Asia Region Document of the World Bank India Re-energizing the Agricultural Sector to Sustain Growth and ReducePoverty Table of Contents Acknowledgements v India at a Glance ........................................................................................................................ .................................................................................................................... vi ExecutiveSummary ................................................................................................................... vii IIntroduction . .......................................................................................................................... 1 11 Overview ofthe AgriculturalEconomy . ............................................................................. 5 Agricultural Sector Performance ....................................................................................... 5 Crop Sector Performance................................................................................................ 6 Agricultural InputUse .................................................................................................... 7 Diversification as a Potential Source o f Agricultural Growth........................................ 7 Public Expenditures inAgriculture.................................................................................... 10 11 RuralNon-Farm Sector ...................................................................................................... Declining Public Investments inAgriculture.................................................................. 12 13 RuralInformal Sector ...................................................................................................... Agro-Industry ................................................................................................................. 14 I11 ChangingAgriculturalPolicyEnvironmentinthe 1990s . ................................................ 15 Liberalizing Domestic Markets.......................................................................................... 15 Reforms inAgricultural Trade Policy................................................................................ 18 Import Policy ................................................................................................................. -18 Export Policy .................................................................................................................. 18 Rationalizing Commodity Price Policy ......................................................................... -19 Foodgrain (Rice and Wheat) Policy................................................................................... 20 I V AgriculturalInputPolicies: Impact and Costs . ............................................................... 33 33 Water Resources and Irrigation Development andManagement....................................... Fertilizer Policy.................................................................................................................. 35 Water Resources Management....................................................................................... 36 Irrigation Development and Management ...................................................................... 36 Power Supply to Agriculture.............................................................................................. Problems inthe Irrigation Sector .................................................................................... 37 41 45 Agricultural Research and Extension................................................................................. LandPolicy and Administration ........................................................................................ 48 V Re-energizingthe AgriculturalSector: Policy Options . .................................................... 55 Priorities for Reform.......................................................................................................... 56 FoodgrainPolicies ............................................................................................................. 56 MinimumSupport Price................................................................................................ 57 Buffer Stock Management .................................................... 65 Targeted Public Distribution System ............................................................................ :....................................... 65 11 66 Power Supply to Agriculture ................................................... Water and Irrigation Resource Management..................................................................... ......................................... Agricultural Research and Extension Systems .................................................................. : 67 68 Fostering Competitive Agricultural Marketing and Agro-Industry................................... 72 Other Issues ...................................................................................................................... 76 Conclusion......................................................................................................................... 77 IV References . ............................................................................................................................ 79 List of Tables Table 1.1. GDPby sector. average annual (trend) percentage growth rate inreal terms (1993/94 rupees)................................................................................................ 3 Table 1.2. State Classificationby Agricultural and Allied Services and Non-Agri- cultural Sectors Growth Rates, 1991-92 to 2000/01, constant 1993/94 Rs.....4 Table 2.1. Agriculture and Allied Services GDP, Average Annual Growth Rates in Real Terms and Percentage o f Gross CroppedArea Irrigatedby State ..........5 Table 2.2. Sources o f Production Growth of Selected Major Crops 1981/82 to 2000/01............................................................................................................ 6 Table 2.3. Comparisono f Average Yields o f Major Crops in Cropping Pattem and Value o f Outputby Region ............................................................................. 7 Table 2.4. InputUse inMajor States inIndia, 1998........................................................... 7 Table 2.5. Share o f Foodgrain andNon-Foodgrain Crops inCropping Pattem and Value o f Outputby Region ............................................................................. 8 Table 2.6. Per Capita Consumption and expenditures on Major Food Items, 1987/88 And 1999/00.................................................................................................... 10 Table 2.7. Public Expenditures in Agriculture inMajor States, India, TE 2000/02...........11 Table 2.8. Impact o f Different Government Expenditures on Total Factor Productivity and Rural Poverty inIndia 1970-93 ................................................................ 12 Table 2.9. Major Subsidies inthe Agricultural Sector, 1981/82 to 2002/03 ...................... 12 Table 2.10. Percentage Distribution o fUnits,Employment and Value Added 13 GO1Major Policy Documents 1998-2002 ........................................................ Among the Manufacturing Sub-sector, 1994/95 and 2000/01 ........................ Table 3.1. 15 Table 3.2. Policy Actions Covered inPolicy Documents .................................................. Table 3.3 Go1Major Domestic Policy and Trade Regulations, 1996 and 2003................16 17 Table 3.4 Import Tariffs o f SelectedAgricultural Commodities, 2003 ............................ 18 Table 3.5 Nominal ProtectionRate for Selected Major Commodities inIndia................20 Table 3.6. TPDS Foodgrain Central Issue Prices and FCIEconomic Cost........................ 22 Table 3.7. Distribution o fWheat and Rice Growing Households inPunjab, Haryana, Uttar Pradesh, Andhra Pradesh and Tamil Nadu, 1998...................24 Table 3.8. EstimatedTransfers to Producers through MSP 1998 ...................................... Table 3.9. Trends inTPDS FoodgrainAllocation and Off-take, 1993/94 to 2001/02 .......25 Table 3.10. Percentage o fHouseholds with Access to PDS/TPDS by Poverty Status ........27 27 Table 3.1 1 Share o f TPDS Purchases inTotal Grain Consumption by Households 1993194 and 1999/00....................................................................................... 28 Table 3.12 Household Reasons for not Purchasing Foodgrains from TPDS. 1999/00 .......29 Table 3.13. FoodgrainOff-take o f Various GO1Schemes. 1996/97 to 2002/03. 000 mt ....29 Table 4.1. Average Fertilizer Consumption inMajor States. TE 1992/93 and TE 2000/01...................................................................................................... 34 Table 4.2. Recent Fertilizer Policy Reforms ...................................................................... 35 ... 111 Table 4.3. Public Expenditures in Surface IrrigationDevelopment. 1951.2002. Table 4.4. Major and MediumSupported under Five Year Plans ...................................... Rsbillion.......................................................................................................... 37 Table 4.5, Water Charges for Selected Crops and States inIndia. 2002 (Rs/Ha) ...............37 38 Table 4.6. EstimatedCanal Irrigation Subsidies in Selected States. 1997/98 .................... Table 4.7. Agricultural HouseholdAccess to Canal Irrigation inIndia. 1998. percent......39 39 Table 4.8. EstimatedSubsidies Receivedby Agricultural Households inRajasthan. and -40 Table 4.9. Number o f WUAs Established up to 2001 ........................................................ Maharashtra. 1998 .......................................................................................... 40 Table 4.10. EstimatedAverage Tariff. FY2001-02. (inRs. Per kwh)................................. Table 4.11. Comparisono f India and International Electricity Tariffs................................. 42 42 Table 4.12. Distribution o f Households Using Electric Pumps and Area Irrigated. 1998 ................................................................................................................ 43 Table 4.13. Average Subsidy receivedby Farmers inKarnataka. Andhra Pradesh and Tamil Nadu. by Landholdings Status....................................................... 45 Table 5.1. EstimatedProducer Support and Fiscal Cost under Different Income Table 5.2. Selected Country Experiences with Agricultural Subsidy Reform................... Support Scenarios ........................................................................................... 57 -62 Table 5.3. Characteristics o f Agricultural Technologies and Private Sector Incentives to Provide them .............................................................................. 70 Table 5.4: SelectedInvestmentClimate Indicators for India. China. and Thailand. 2000 -75 Listof Figures Figure 1.1, TE 82/83 and TE 00/01 .................................................................................. Contribution o f the Agricultural and Allied Services Sector to GDP. 2 Figure 1.2. Labor Productivity. Rural Poverty and Labor inAgriculture inMajor States .............................................................................................................. 2 Figure 2.1. Average Labor Use for Selected Crops. days/ha/season ................................ 8 Figure 2.2. Milk.Eggs. Meat andMeatOutput 1980181to 2001/02................................ 9 Figure 2.3. Gross Capital Formation inAgriculture and Allied Sectors. 1960/61 to 2001/02 (Rs. billion. 1993/94 rupees) .......................................................... 11 Figure 2.4. Problems facedby Informal Sector Enterprises inRural Areas. All India. 1999-2000 .................................................................................... 14 Figure 3.1. IndiaFoodgrainStocks. Actual andMinimumNorms. Millionmt Wheat and Rice Procurement by FCI. 1990/91to 2002/02. millionmt.........21 1992-2003..................................................................................................... Figure 3.2. Figure 3.3. Ratio o f the MSP to the C2 Cost o f Production. 1990/91 to 2000/01 ............23 23 Figure 3.4. EstimatedRice and Wheat Price Subsidy inMajor States. Rs.Million. 2001/02 ........................................................................................................ 25 Figure 3.5. Nominal Protection Coefficients for Wheat and Rice and Net Export FoodgrainConsumer Price and Buffer Stock Subsidy. Rs.Billion. Volumes. 1980 to 2002 ................................................................................ 26 Figure3.6. Fertilizer Subsidies inIndia. 1980/81 to 2002/03. Rs. billion. 1993/94 Rupees............................................................................................ 30 Figure4.1. 1993/94 rupees ............................................................................................. 33 Figure 4.2. 35 36 Number o f Electric Pumpsets. 1980/81 and 1998/99 ..................................... Distribution o f IrrigatedArea by Source. TE 1998/99................................... Gross and Net Irrigated Area by Source. 1980/81 to 1998/99 ....................... Figure 4.3. Figure 4.4. 41 Figure4.5. Electric Pumps only: Irrigation Cost as a Percent o f Gross Farm Income inHaryana ....................................................................................... 43 1v Figure 4.6. Status o f Groundwater Exploitationin Selected States. 1998........................ 44 Figure 4.7. Percentage Distribution ofNumber of Owned Holdings and Area Owned by Farm Size.................................................................................... 46 Figure 4.8. Government o f India and State Agricultural Research and Education Expenditures, 1985/86 to 2002/03. Rs.Billion 1993/94 rupees.................49 Figure 4.9. Average Annual State Expenditures on Agricultural Research and 49 Challenges inthe Water Sector inIndia......................................................... Education. Rs. Billion. constant 1993/94 rupees ......................................... Figure5.1, 67 Figure 5.2. Alternatives for Public-Private Financing and Provisiono f Extension Services ........................................................................................................ 73 Listof Text Boxes Box 2.1. Declining Per Capita Cereal Availability: I s a Crisis Looming? .................. 9 Box 3.1. Report o f the HighLevel Committee on Long-Term Grain Policy Summary of Key Recommendations ............................................................. 30 Box 3.2 FarmIncome Insurance Scheme .................................................................... 31 Box 4.1. New Government o f India Extension Initiatives............................................ 52 Box 4.2. Private Extension inIndia: Recent Initiatives................................................ Box 5.1. Maharashtra Horticulture Linked to the Employment Guarantee Scheme ....53 59 Box 5.2. Rural Enterprise Development: Recent Lessons from International Experience............................................................................. 60 Box 5.3. H o w does a Warehouse Receipt Operate? ..................................................... 64 Box 5.4. Key Elements inthe Design of Employment Programs................................. 64 Box 5.5. Designing Subsidies to Promote Access o f the Poor ..................................... Piloting Foodgrainand Kerosene Coupons inAndhra Pradesh..................... 66 Box 5.6. 68 Box 5.7 Reforming Public Agricultural Research Systems: The China Experience...69 Pilot Initiatives inReforming Power Supply to Farmers ............................... Box 5.8 71 Box 5.9 Competitive Research Grant Programs.......................................................... 72 Box 5.10 Role o f Government inAgro-Food System and Agro-Enterprise Development ............................................................................................... 74 V Acknowledgements This report was prepared by a team led by Dina Umali-Deininger, under the overall guidance o f Gajanand Pathmanathan and Adolfo Brizzi. Major contributors to the report were Mona Sur (food and irrigation subsidy analysis), Lucio Monari, Douglas Barnes, Rohit Mittal, Robin Bates and Shruti Kapoor (power supply to agriculture), Paul Sidhu, Burt Swanson, P.N. Mathur (agricultural research and extension), Srinivasan Rajagopal, Harshadeep Rao and R. S. Pathak (water resource management and irrigation); Ashok Gulati, Garry Purse11 and Kathleen Mullen (agricultural policies), Shikha Jha (Targeted Public Distribution System), and Bruce Gardner and Isabel Tsakok (income support schemes). Administrative support was provided by Lilac Thomas and Michelle Chen. The report was edited by Alicia Hertzner. The team especially wishes to thank the peer reviewers, James Hanson and John Nash for their valuable guidance and advice during the preparation of the report. We also thank Michael Carter, Shanta Devarajan, Constance Bernard, Deepak Ahluwalia, Priya Basu, Derek Byerlee, Manuel Contijoch, Angus Deaton, Klaus Deininger, Paul Dorosh, Robert Epworth, Stephen Howes, Deepak Mishra, andPannesh Shah for their helpfulcomments. We gratefully acknowledge the cooperation and valuable assistance provided by officials from the Ministry of Agriculture, Water Resources, Food, Public Distribution and Consumer Affairs, Rural Development, and Finance, Planning Commission, and the academic and private agri-business community, during the preparation o f the report. The report was discussed with the Government o f India inMay-June 2004. v1 Indiaat a glance 2/9/04 POVERTY and SOCIAL South Low- India Asia income Developmentdiamond" 2002 Population,mid-year(millions) 1,048.3 1,401 2,495 Life expectancy GNI per capita (Atlas method, US$) 470 460 430 GNI (Atlas method, US$ billions) 494.6 640 1,072 Average annual growth, 1996-02 Population(%) 1.7 1.8 1.9 Laborforce (%) 2.2 2.3 2.3 GNI Gross per I-- +pnmary Most recent estimate (latest year available, 199642) capita enrollment Poverty(% ofpopulation belownationalpoverty line) 29 Urban population(% of totalpopulation) 28 28 30 Life expectancyat birth (years) 63 63 59 1 Infant mortality(per 1,000live births) 67 71 81 Child malnutrition(% of childrenunder 5) Access to improvedwater source Access to an improvedwater source I%ofpopulation) 84 84 76 Illiteracy(% ofpopulation age 15+) 41 44 37 Gross primaryenrollment (% of school-agepopulation) 102 97 95 India Low-incomegroup Male 111 108 103 w m.l Female 92 89 87 KEY ECONOMICRATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios. GDP (US$ billions) 194.8 244.2 478.5 510.2 Gross domestic investmenffGDP 21.7 23.8 22.3 22.8 Exportsof goods and services/GDP 6.1 9.0 13.5 15.2 Gross domestic savings/GDP 18.3 21.8 23.5 24.2 Gross nationalsavings/GDP 19.2 21.8 25.5 26.3 Currentaccount balance/GDP -2.0 -1.6 0.1 0.6 Interestpayments/GDP 0.4 1.4 0.8 0.7 Total debtlGDP 14.1 37.0 20.4 20.6 Total debt service/exports 13.6 28.0 11.7 13.9 Presentvalue of debffGDP 14.2 I Presentvalue of debffexports 84.7 Indebtedness 1982-92 1992-02 2001 2002 2002-08 (average annualgrowth) GDP 5.6 6.0 5.2 4.6 6.2 GDP per capita 3.4 4.2 3.5 3.0 4.7 IVSm*a- lndia Low-incomegroup Exportsof goods and services 6.9 13.5 7.1 21.6 7.9 STRUCTUREof the ECONOMY 1982 1992 2001 2002 I Growth of investment and GDP ( O h ) (% of GDPJ Agriculture 359 309 250 227 1'' Industry 258 267 257 266 Manufacturing 162 162 153 156 Services 383 423 494 507 Privateconsumption 699 658 659 650 97 48 9, DO 0, Generalgovernmentconsumption 107 112 125 125 "'WGDI - O - G D P Importsof goods and services 8 4 9 6 141 156 e> 1962-92 1992-02 2001 (averageannualgrowth) Agnculture 3 1 2 5 Industry 6 7 6 2 Manufacturing 6 5 6 6 Services 6 8 8 2 Private consumption 5 3 5 0 6 2 -08 General aovernmentconsumption 6 1 7 1 Gross domesticinvestment 5.7 7.2 1.6 9.5 Importsof goods and services 5.7 12.0 4.0 8.1 Note: 2002 data are preliminaryestimates. *The diamondsshow four key indicators inthe country (in bold) compared with its incomegroup average. Ifdata are missing, the diamond will be incomplete. India Re-energizing the Agricultural Sector to SustainGrowth and ReducePoverty Executive Summary Fostering rapid and sustained agricultural and rural growth and development remain the key priorities o f the Government o f India. Although agriculture contributes only about one-quarter o f India's total gross domestic product (GDP), its importance in the economic, social, and political fabric o f India goes well beyond what i s indicated by its contribution to the economy. The large number o f poor agricultural households and their income vulnerability are major concerns among policymakers. These concerns in turn have driven both agricultural policies (trade protection and private trade marketing controls) and public expenditures (investments and subsidies) inagriculture. India made significant advances towards achieving its goals o f rapid agricultural growth, improving food security, and reducing rural poverty during the last four decades. Sustained foodgrain production growth enabled India to achieve foodgrain self-sufficiency, eliminating the threat o f famines and acute starvation inthe country. The increased demand for rural labor generated by agricultural intensification inthe 1970sto 1980s raisedrural wages and, combinedwith declining food prices, reduced poverty in rural areas. Aided by sustained, although much slower, agricultural growth inthe 1990s, the rural poverty rate (head-count) declined to 26.3 percent in 1999/00.Indeed, India recently had to contend with problems o fplentywith respect to foodgrains. However, the slow- down in agricultural growth o f the 1990s i s a major concern. Hence, the GOI's National Agricultural Policy and the lo*Five Year Plan place highpriority on raising agricultural productivity to achieve an annual agricultural growth rate o f 4 percent. Bold action from policymakers will be required to move away from the existing subsidy- basedregime and instead invest inbuildinga solid foundation for a highly productive, internationally competitive, diversified agricultural sector. More rapid agricultural productivity growth, as past experience in India shows, can have major impacts on poverty reduction through direct effects on producer incomes, indirect effects on consumer welfare through changes in food prices, employment and wage effects, and growth-induced effects throughout the economy. However, the existing policy regime, which i s founded on achieving foodgrain self-sufficiency achieved through high price support and large input subsidies (fertilizer, irrigation, and power), i s no longer compatible with the changed environment of the twenty-first century, nor i s it sustainable. There i s a need to develop a new strategy for the agricultural sector. Clearly, the current policy regime will not be sufficient to achieve the sectoral growth target o f 4 percent per year over the longer term nor to achieve the GOI's poverty reduction goals. Heavy dependence on the foodgrain sector to do so will require even higher and fiscally unaffordable increases in the government minimum support price (MSP) and input subsidies, that will lead to the accumulation o f even larger buffer stocks and exacerbate land degradation problems in many areas. At the same time, these policies will discourage fanners from diversifying to other, higher value crops, which could be a potentially important means for raising farm incomes and source of growth. It i s recognized that political economy considerations will not make taking a new path easy. Inthe future, improving India's agricultural performancewill require progress intwo key policy areas. The first i s to reorient government expenditures away from subsidies toward more productivity-enhancing public investments, including rural infrastructure (irrigation, rural markets, roads, electrification, drinking water) and services (agricultural research and extension, environmental conservation, land administration, education, and health in rural areas). The second policy change required i s to permanently eliminate restrictions on domestic trade (storage, transport, ... Vlll credit controls), subject to their imposition only intrue emergencies, and to remove the levies on rice and sugar, the small-scale reservation o f agro-enterprises, and state controls on wholesale marketing. These changes will improve the investment climate for farmers and the private sector to effectively meet market opportunities. Overview of the Agricultural Economy Agricultural Sector Performance.Rice and wheat output, crucial to India's reaching food self-sufficiency in the 199Os, continued to increase over the last decade. Boosted by favorable price policies, the increased output also resulted in burgeoning buffer stocks, which reached over 60 million mt in 2001, and massive storage problems. Maize output grew rapidly, spurred by rapid growth indemand for feeds by the livestock sector. Among oilseeds, soybeans displayed spectacular growth, albeit starting from a low base. Production o f traditional oilseeds, such as groundnuts and rapeseed, fluctuated significantly, declining sharply in the late 1990s due to increased edible oil import liberalization. Sugarcane output increased significantly in the 199Os, driven more by area expansion than yield increases. Indian agriculture i s becoming more diversified, driven mainly by the shift to high-value crops, livestock, and fisheries. Using the Simpson index for diversification, India's crop agriculture ranks as the third most diversified in South Asia. Notably, the states in the Southern and Westem regions that posted the highest degree o f crop diversification also displayed higher than the India average agricultural growth rates. The livestock sector also i s emerging as an important growth sector in the country. Increasing agricultural diversification also contributed to increased export revenues and employment. Several factors are driving these agricultural diversification trends. These factors include rising incomes; changing relative prices between cereals and high-value agriculture, livestock, and fisheries products; increasing urbanization and access to infrastructure; and more open trade policies. Agro-Industry.The agro-industrial subsector is an important segment o f India's industrial sector. Agro-industry i s dominated by the unorganized segment, which i s composed largely o f micro- and small agro-enterprises. The number o f agro-industrial units increased by 4.5 million between 1994/95 and 2000/01, expanding the subsector's share inthe manufacturing sector fkom 65 percent to 82 percent. Thus, removing the obstacles to the more rapid growth o f agro-industry could serve as an important lever to expand markets for primary agricultural products, foster greater value addition and generate employment inrural areas. Decliningand UnbalancedPublicExpendituresinAgriculture.Public investments inthe agricultural sector declined steadily in absolute terms and as a share o f total investments since the mid-1980s. This decline has serious implications for the sector's longer term growth prospects. One estimate shows that a 10 percent decrease in public investments (including irrigation and power) leads to a 2.4 percent reduction in agricultural GDP growth. Public investments in the agriculture sector over the last decade declined inlarge part due to the sector's growing subsidy requirements. In 1999/00, public investments amounted to only about 14 percent o f agricultural subsidies (including foodgrains, fertilizer, canal irrigation and power subsidies). This decline will have a negative impact on private investments over the longer term also, due to the inducement effect o f public investments on private investments. This unbalanced composition o f expenditures has significant direct and indirect costs to the economy and society. Foodgrainprice and agricultural inputs subsidies are major contributors to the rising fiscal deficit in the central govemment and the fiscal crises in many state governments. The bias toward subsidies intum reduces the resources for muchneeded rural and social investments and appropriate operations and maintenance o f critical infrastructure, leading to their rapid deterioration. Inmanyareas, output andinputsubsidies distortedfarmer croppingandinvestment decisionstoward specific crops, particularly rice, wheat, and sugarcane in water scarce areas, which not only are 1x inefficient from an economic perspective but also are damaging the environment. Subsidies for fertilizer, water, and power encourage their overuse, leading to soil nutrient imbalances, water logging, salinity, and declining ground water tables inmany areas. Changing Agricultural Policy Environment in the 1990s Since the mid-l990s, the Government o f India has produced several major policy documents that elaborate proposals for addressing problems plaguing the agricultural sector. These policy documents reflected an increasing convergence on the need for reform in key areas. These areas include: (a) liberalizing and improving the functioning o f commodity markets, (b) reforming commodity price policy, (c) rationalizing input subsidies, (d) increasing productivity-enhancing investments (research and development, extension, rural infrastructure and services), and (e) reforming public sector institutions and adopting participatory approaches. Liberalizing Markets. The GO1has adopted several o f these proposed policy reforms that relate to domestic trade deregulation. In 2001, to cope with problems o f mounting foodgrain stock, the GO1 removed restrictions on investments in bulk handling and storage by private investors, including permitting up to 100 percent ownership by foreign investors. In2002 GO1liftedlicensing requirements, stocking limits, and movement restrictions on wheat, paddyhice, coarse grains, edible oilseeds, and edible oils. During the same year, GO1 removed the restrictions on access to credit under the Selective Credit Control Policy and amended the Milk and Milk Products Order 1992 to eliminate the restrictions on private investments in new processing capacity, while refocusing the order toward ensuring food safety. The GO1 reduced the levy on sugar factories from 15 to 10 percent to allow more sugar to be sold inthe open market. Inaddition, the government approved the National Plant Variety Protection Act, which clarified intellectual property rights with respect to crop research and development. In 2003 the GO1 eliminated the ban on futures trading on 54 commodities including wheat, rice, oilseeds, and pulses, which were prohibited under the Forward Contract (Regulation) Act 1952. Inthe same year, a GO1taskforce completed the model act for state reform o f its Agricultural Produce RegulatedMarkets Act. These reforms include permitting farmers to sell their produce wholesale outside o f the state-operated wholesale markets and for the private sector to develop and operate wholesale markets. Some states (Punjab, Kamataka, Haryana, Madhya Pradesh, Tamil Nadu) have partially amended their State Acts to permit farmers to sell outside o f the regulated markets to foster contract farming. A challenge for the future i s encouraging all state governments to adopt the model act. A large market reform agenda, however, still remains to be completed. Higher growth will continue to be hampered by the large number of regulations remaining. While GO1temporarily lifted several key regulations such as storage, transport, and credit controls, the threat o f their re-imposition discourages both local and foreign investments. For example, despite the recent severe shortage o f grain storage capacity and offers o f various investment incentives by the GOI, the private sector i s hesitant to invest inbulk foodgrain handling and storage. Duringthe 1990s, GO1implemented a number o f extemal trade policy reforms: the removal of quantitative import restrictions, reductions inproducts subject to state trading, relaxation o f export quotas, the abolition o f minimumexport prices (MEPs), and increased credit availability for exports. Nevertheless, in response to declining world prices, the average agricultural tariff (excluding the special additional duty, or SAD), rose from 33.8 percent in 1997/98 to 41.7 percent in 2001/02. In 2000 GO1resorted to export subsidies for rice and wheat to reduce domestic buffer stocks. Foodgrain Policy. The GOI's foodgrain policy rests on two major pillars: (a) to ensure farmers a reasonable income through procurement and price support operations, and (b) to ensure adequate availability of, and improved access to, foodgrains by consumers at reasonable prices through the distribution o f subsidized foodgrains and price stabilizatiodbuffer stockmg operations. To achieve these goals, the GO1 created a government marketing system that parallels that o f the X private sector. The Food Corporation o f India (FCI), a parastatal, i s the main implementing arm o f the GOI's foodgrain policy. FCI or its designated state govemment agency procures paddy and wheat from farmers at the minimum support price (MSP). In addition, FCI obtains additional rice supplies through a "rice levy" on rice mills. Levy rice accounts for about 60 percent o f total F C Irice procurement. Paddy/rice and wheat stocks accumulated through procurement are used to meet the requirements o f the public distribution system, buffer stocks, and other welfare schemes. To ensure adequate foodgrain supplies for the government's procurement operations and protect farmers and consumers from unfair practices by grain traders, the GO1 and state governments imposed a large number o f restrictions on private trader operations. These restrictions include controls on transport, storage, exports and imports, and access to trade credit. Controls are enforced or lifted depending on the severity of supply shortfalls and price rises, reducing private sector incentives for spatial and temporal arbitrage. The Targeted Public Distribution System (TPDS) i s the largest safety net program in the country and provides a price subsidy to consumers for essential commodities. The most important o f these are rice and wheat. It has a 2-tiered pricing structure for below-the-poverty line (BPL) and above-the-poverty line (APL) households. In addition, in 2000 the GO1introduced the Antyodaya Anna Yojana (AAY), a subscheme o f the TPDS that targets greater support to the poorest o f the poor. It provides a larger price subsidy and grain allocation than those received by B P L households. Minimum Support Price. Steady increases inthe rice and wheat MSP, especially over the last six years, encouraged increased production, necessitating greater government procurement. Prior to 1996/97, the GO1 generally adopted the MSP recommendations for rice and wheat from the Commission on Agricultural Costs and Prices (CACP), which are based on the "C2 cost o f production." C2 costs approximate total production costs: all cash and in-kind expenses plus rent paid for leased land, imputed value o f family labor, and the interest on the value o f owned capital. Starting in 1997/98, the GO1set the rice and wheat MSPs substantially higher than C2 costs. Recent GO1efforts to freeze the MSPs were stalled by pressures from the MSP beneficiary states. The high MSPs encouraged increased production. Coinciding with the drop infoodgrain off-take with the shift to TPDS and the downward trend indomestic open and world market prices, the government was left with no option but to procure more, resulting in the massive accumulation o f buffer stocks and the needto subsidize exports. Impact ofthe MSP. The MSPs benefited farmers in only a few states, and larger farmers within these states. Nearly all states in India grow rice, and approximately 20 states grow wheat. However, FCIprocures approximately 95 percent o f wheat from three states: Punjab, Haryana, and (western) Uttar Pradesh. Approximately 85 to 90 percent o f rice i s procured from 5 states: Punjab, Andhra Pradesh, Haryana, Uttar Pradesh, and Tamil Nadu. Because o f the sizable margin between the MSP and C2 costs, farmers inthese five states received a considerable windfall. Punjab farmers received support totaling Rs 19.8 billion, or 43 percent o f India's total price subsidies in 2001/02. In the MSP beneficiary states, the income transfers to large rice or wheat farmers are approximately 10 times those received by marginal farmers. However, the intensive rice-wheat and two-season rice production systems followed in many foodgrain procurement states are resulting in the ecologically harmful over-extraction o f groundwater and waterlogging and salinity in canal irrigated areas. Ironically, as the MSP increased inreal terms duringthe 1990s, farm harvest prices in other rice- and wheat-producing states inthe country declined. Targeted Public Distribution System. The shift to TPDS contributed to an increase in allocation and offtake in states with higher rates o f poverty. Using the NSS SOth round (1993/94) and 55th round (1999/00), analysis o f the change in access between PDS and TPDS finds that the targeting o f the benefits improved. Household participation rates on average increased from 22.6 percent to 31.6 percent between 1993/94 and 1999/00. Although access still remains low, there was nevertheless a significant increase in access in the poorest states o f Bihar, Madhya Pradesh, Orissa, x1 and Uttar Pradesh. In most states, the share o f TPDS foodgrains in total household foodgrain consumption also increased among BPL households. Despite the improvement, a large proportion o f the poorest are unserved. Rising Costs of Foodgrain Policy. The rapid accumulation o f stocks and the need to offload them quickly led to the sharp jump inthe fiscal cost o f the government's foodgrain policy. The GO1 food subsidy reached Rs 212 billion ($4.3 billion) in2002/03, or 0.8 percent o f the national GDP. As buffer stock levels rose, so did their cost such that their share o f the foodgrain subsidy rose from about 14 percent in 1997/98 to about 41 percent in 2001/02. Recognizing the crisis created by mounting buffer stocks and food subsidies, the GO1 established a high-level committee to re- examine its foodgrain policy. The GO1i s reviewing the recommendations o f the committee, and only a few proposals have been acted upon (such as the agricultural income insurance scheme). AgriculturalInput Policies:Impact and Costs Fertilizer. Fertilizer subsidies were introduced in the 1970s in response to the sharp rise in prices o f oil and feedstock o f the fertilizer industry. The rationale for providing the subsidy was to ensure fertilizer availability at affordable prices and an adequate return on investment for farmers. The total subsidy rose from Rs 15.6 billion in 1981/82 (constant 1993/94 rupees) to Rs 83.3 billion in 1999/2000. It i s estimated that, fi-om 1981/82 to 1999/2000, the subsidy share o f farmers was about 67 percent, while that o f industry was about 33 percent. Fertilizer subsidies, which are largely concentrated on urea, distorted input use, leading to nutrient imbalances in the soil and groundwater contamination in many areas. The ideal nitrogen-phosphorous-potassium (NPK) application ratio aggregated for the whole country i s 4:2:1. In 2001/02 the application ratio was 6.9:2.7:1.The government announced in 2001/02 its intention to rationalize fertilizer pricing and implement the recommendations o f the Expenditure Reforms Commission (ERC) for a phased program o f price increases (7 percent per year) and complete decontrol o f urea by April 2006. These reforms contributed to the decline in the fertilizer subsidy to approximately Rs 65 billion in 2002/03. Continued commitment to the proposed timetable i s critical. Water Resources Development and Management. The tightening competition among multiple users o f water, between agriculture and other sectors, recently exacerbated by consecutive years o f drought, brought to light some weaknesses o f current state water policies, and their associated regulatory and institutional arrangements. Increasing conflicts among users and the unsustainable use o f water in many areas result from limited coordination among various water resource (surface and groundwater) development initiatives, and the absence o f policies defining water entitlements, pricing, and intersectoral allocation rules; and if these policies exist, the inconsistencies among some o f them. The state Irrigation Departments are placed in the difficult position o f resolving these conflicts because o f their role as both "regulator" and the largest "user." Irrigation Development and Management. Irrigated area increased steadily over the last half-century both directly, as a result o f public investments in surface irrigation infrastructure, and indirectly through public investments in power. By 1998/99, total gross irrigated area in India reached 75.6 million ha, 39 percent o f gross cropped area. In tri-ennium ending (TE) 1998/99, groundwater irrigation accounted for 57 percent o f net irrigated area, while canals accounted for 32 percent, and tanks 6 percent. The irrigation sector i s faced with many challenges. The rising costs and the initiation o f too many irrigation projects by state governments are leading to scarce financial resources being spread too thinly. Moreover, the burgeoning fiscal cost o f surface irrigation (and power) subsidies and the debt burden arising for large-scale market borrowings for canal irrigation development by some state Irrigation Development Corporations contributedto the fiscal crisis at the state level. Many states also are caught in the following vicious circle, resulting in the rapid deterioration o f surface irrigation systems. Inadequate priority to and funding o f operations and xii maintenance (O&M) led to the rapid deterioration o f canal systems in many states, causing poor quality o f services. Deteriorating systems necessitated their repetitive and costly rehabilitation to make up for inadequate maintenance. Institutional wealmesses in the water agencies combined with minimal participation o f farmers and other users impeded greater improvement in quality o f service delivery. The poor quality o f water service delivery reduced farmers' incentives to pay water charges. Overstaffing in the departments took additional resources from needed physical works, because salaries took priority. With limited ability to raise funds directly, in the context o f the tightening fiscal situation among state governments, Irrigation Departments were unable to fund adequately operation and maintenance, thus closing the vicious circle. Under-pricing o f canal irrigation also reduces the incentive for farmers to save and use water efficiently. Who benefits from surface irrigation and its subsidies? Ina large number o f states, medium and large farmers generally capture a large share o f the benefits. On average, small and marginal farmers inIndia comprise about 82 percent o f the farmers who use canal irrigation, but they cultivate only about half o f the area that i s irrigated by canals. Household-level analysis o f the incidence o f canal irrigation subsidies in Rajasthan and Maharashtra find that it mainly benefits large farmers. A marginal farmer inthese states receives on average approximately one-tenth o f the subsidies received by a large farmer. Power Supply to Agriculture. To encourage the use o f groundwater drawn by electric pumps, state governments provided a one-time investment subsidy for digging wells and priced electricity for electric pump use at very low rates or for fiee. As a result, electric pump usage jumped inmost states. Electricity tariffs for agriculture generally is set at a flat rate on a pump horsepower basis, although a number o f states are slowly introducing metered tariffs. Compared to other developing countries, India stands out as having the lowest average agricultural tariff rate. The ratio o f agriculture to domestic tariff rates i s approximately 0.22 in India, compared to 0.85 in Bangladesh, 1.77 inPakistan, and 1.32 inVietnam. The financial crisis in the State Electricity Boards (SEBs) i s part o f a vicious circle, with negative repercussions on the agricultural sector. The crisis reduced the ability o f SEBs to undertake required investments, respond to rising local demand, as well as maintain smooth, reliable day-to- day operations. The result was the rapid deterioration in quality o f service provided to electricity consumers in general, and to the farm sector in particular. These included power rationing, frequent power interruptions, and voltage fluctuations that led to pump bumouts, and increased unreliability in irrigation water supplies, ultimately also undermining farm productivity and farm profits. Consequently, farmer dissatisfaction resulted in nonpayment o f electricity bills and increasing resistance to tariff increases, which aggravated the financial problems o f the SEBs. Recent farm level studies in Haryana and Andhra Pradesh found that poor quality o f supply impose considerable additional costs on farmers. Motor burnouts that cost approximately Rs 1,000 to Rs 4,000 to repair each time impose undue burden especially among the small and marginal farmers. The underpricing o f electricity and in turn o f groundwater also i s leading to natural resource degradation in many states. In Punjab, where until 2002 power to agriculture was provided for free, approximately 60 percent o f the administrative blocks in which groundwater i s used for irrigation i s already overexploited. In Maharashtra, excessive groundwater withdrawals in several districts caused the groundwater table to drop by as much as 300 feet in some areas. This led to widespread drying o f drinkingwater wells. At the All-India level, medium and large farmers capture the larger share o f the benefits from cheap power. Although medium and large farmers account for 34 percent o f all farmers using electric pumps, they cultivate 71 percent o f the total electric pump irrigated area. Recent studies o f Kamataka, Andhra Pradesh, and Tamil Nadu found that large farmers received 10 or more times the level o f subsidies receivedby marginal farmers. ... Xlll Land Policy and Administration. The distribution o f land ownership in India has become less skewed since the 1970s, with an increasing share owned by marginal to semi-medium fanners. The trend toward landlessness has been arrested also. In addition to land ceilings, tenancy restrictions range from a total ban to almost complete freedom o f rental. These regulations were aimed at increasing tenants' tenure security. However, they have had unintended adverse effects, leading to large-scale self-cultivationby landlords or the adoption o f wage labor contracts. They also limited the ability o f the landless and an increasing number o f marginal and small farmers to make productive use o f their labor, whether in farming by accessing more land, or renting out their land to take advantage o f higher-paying, nonfarm opportunities. There i s a growing consensus, as reflected in a number of government policy statements, about the need to reformulate current tenancy legislations. Inconsidering tenancy reform, it i s critical to draw lessons from states that do not have tenancy restrictions. In the mid-l990s, the Department of Land Resources introduced a scheme to pilot computerization o f land records in selected districts nationwide. Some states not only scaled up the program statewide but also implemented the program in partnership with the private sector. These initiatives reportedly contributedto more efficient and rapid service as well as reduced opportunities for corruption through increased transparency. Over the longer term, the focus will have to shift toward a more holistic approach to improve land administration systems at the state level. T o be successful, the land administration system will have to meet several other key standards o f performance, including security, costs, fairness, and sustainability. Agricultural Research. India's public agncultural research and extension service is one of the largest inthe world. Agricultural research i s primarily under the purview o f the GOI; agricultural extension i s primarily the responsibility o f state governments. The public agricultural research system in India i s led and managed by the Indian Council of Agricultural Research (ICAR), a GO1 apex body. GO1expenditures on agricultural research and education amounted to Rs 16 billion per year in the early 2000s, equal to 0.5 percent o f agricultural GDP. Notably, research and education expenditures amount to only about 15 percent o f total GO1foodgrain subsidies. While there i s need to further increase budgetary allocations, there also i s an urgent need to improve the effectiveness o f existing expenditures. Critical weaknesses identified include proliferation o f programs resulting in resources being spread thinly and lack o f focus on areas o f relevance and opportunity; crop bias with the major focus on rice and wheat; and inadequate priority to emerging challenges, particularly post- harvest, marketing and environmental conservation, and policy issues. There i s inadequate emphasis to the needs o f rainfed areas, which account for over 60 percent o f cultivated area, and women in agriculture. There i s a multiplicity o f agencies leading to duplication. There i s weak accountability for performance; inadequate collaborative multi-disciplinary research; weak interaction among researchers, extension workers, farmers, and the private sector; and excessive centralization o f planning and monitoring Agricultural Extension. The extension system is primarily under the purview o f the state govemments. Currently, each state government line department-such as Agriculture, Horticulture, Animal Husbandry, Fisheries, and Sericulture- maintains and manages its own field staff to carry out its respective extension activities and government schemes. The multiplicity o f departments and limited coordination among them reduce the effectiveness o f the existing extension system. The public agricultural extension systems at the state level, which were based on the training and visit (T&V) system with its top-down, narrow crop-focused approach, also have become outmoded and ineffective inmeeting the changed needs o f farmers. Inview o f the GOI's preoccupation with food self-sufficiency since independence, the Department o f Agriculture (DOA) extension system primarily concentrated on the main cereals, particularly rice and wheat. Due to lack o f operating funds, the extension workers' primary attention in most departments was diverted to carrying out GOI-funded development schemes (for example, input distribution). The private sector in India xiv ,however, i s playing an increasing role in the agricultural extension system. These include NGOs, cooperatives, input suppliers, traders, and private extension providers. They deliver extension services in a number o f ways, as direct fee-for-service or indirectly as a service integrated with other activities, such as input supply, output marketing, and contract buyingarrangements. Re-energizing the Agricultural Sector: Policy Options Improving agricultural performance and sustaining it over the longer term require a careful reorientation o f government expenditure priorities. This entails shifting public expenditures from more politically attractive subsidies that generate limited lasting benefits toward more productivity- enhancing investments that could enable the large number o f agriculture-dependent families to enhance their apcultural productivity, competitiveness, and ultimately their farm incomes. Also required i s refocusing the role o f the government to provide the appropriate regulatory framework to ensure competition and withdrawal from commercial activities and devolving these functions to the private sector. FoodgrainPolicy There i s broad recognition that the current foodgrain policy framework i s not sustainable from a fiscal, economic, and agricultural productivity perspective. But in what direction should the foodgrain sector be heading? A long-term vision o f the foodgrain sector would be the increased shift o f the foodgrain breadbasket to the northern and eastern states, which possess highly favorable agro- ecological conditions and a comparative advantage in foodgrain production. Existing major foodgrain producers, such as Punjab, Haryana and Tamil Nadu, which are increasingly constrained by water scarcity, would have a more highly diversified agriculture and allied services sector, growing less water-intensive, higher-value crops. There will be a liberalized market environment, in which farmers face well-functioning, efficient, and competitive markets that perform the primary role o f marketing, distributing, exporting, and importing grain and other commodities. There will be a regulatory framework that fosters farmer and private participation and competition, while a well- designed competition policy guards against unfair practices. The poor are protected from price and income shocks by effectively targeted safety nets (including food), while drastic supply shocks are mitigated by cost-effective and well-managed price stabilization mechanisms (for example, foreign currency reserves and modest strategic reserves). MinimumSupport Price. Moving forward on the reformof foodgrain policies, however, is complicated by complex economic, social, and political concerns. There i s no magic formula or consensus on the way forward. Reaching agreement on the appropriate course o f action i s complicated by the close interdependence among government procurement, buffer stocking, public distribution activities, and the need to balance strong political and social concerns against economic efficiency goals. One aspect subject to widespread debate i s what to do with the MSP. Some reform options and their implications are elaboratedbelow. 0 Set rice/wheat MSP at average C2 costs. Usingthe 2001/02 MSP foodgrain support levels as a benchmark, lowering the MSPs to the average C2 costs will generate fiscal savings o f approximately Rs 41.3 billion ($910 million) per year. However, this option will lessen only slightly the grice-distorting effect o f the MSPs on cropping decisions. It will continue to limit incentives to diversify and only mitigate slightly the associated environmentally damaging consequences o f the policy. Of more serious concern, it implies that the government will continue to determine farm prices rather than the market. This role i s not compatible with market economy principles the GO1i s aiming for. e Set rice and wheat MSP to C2 costs andfreeze it at current levels over the longer term, so that it will eventually cover only the cash costs and imputed cost of family labor (AZ+FL costs). Similarly, usingthe 2001/02 MSP foodgrain support levels as a benchmark, the reduction o f the xv MSPs to "A2+FL costs" would almost double fiscal savings to approximately Rs 78.8 billion ($1.7 billion) per year. Following a phased reduction through inflation will provide farmers time to adjust their production systems. Itwill minimize output price distortions, encourage farmers to diversify, and function as a true safety net and price floor for farmers. Revising the foodgrain MSPs i s undoubtedly a highly contentious issue due to its economic, political and social ramifications. There i s widespread concern that lowering the MSPs will have detrimental consequences on farmer incomes, especially hurting many o f the poor during the transition period. The fiscal savings from the price subsidy reduction potentially could fund complementary investments to improve farmer access to technical advice, credit, rural infrastructure, and other related services, which could facilitate and strengthen farmer capacity to shift to other more profitable enterprises, including diversifying to higher value crops and agribusiness activities. However, some policymakers suggest that an additional compensatory instrument to assist farmers cope with the transition i s needed to foster acceptance o f MSP reform. Some o f the options proposed include investment grants, contract farming, income support, negotiable warehouse receipts, and the use o f other safety nets. These are examined below. In examining the feasibility and applicability o f these options to the Indian situation, some critical considerations are: (a) the fiscal cost o f the scheme, (b) its contribution to GO1 goals o f promoting productivity growth and diversification to higher value crops, and (c) its administrative and implementationrequirements. 0 Investment grunts: Providing investment grants to farmers, communities, and agnbusiness could help compensate farmers and at the same time facilitate diversification from foodgrain production to other higher value crops or agricultural undertakings. This one-time grant can cover a portion o f investment costs and be used to support such activities as (a) feasibility studies and farm investment costs o f diversifying to other crops; (b) marketing studies, business development services, and market information development for agri-business; (c) market infrastructure development by groups o f farmers and agribusiness; and (d) cost o f converting current market infrastructure, farm machinery, and irrigation systems to alternative enterprises. As a one-time grant, there would be less expectation o f it becoming a permanent subsidy, thus helping to contain fiscal costs. To enhance the implementation and targeting effectiveness, the investment grant program should be administered in a decentralized and participatory manner, at the community or local government level. Coordinating this program with other public and private sector initiatives to promote the development o f the complete commodity supply chain will increase the program's chances for success. Special care is needed to ensure that the grants do not undermine rural financial markets. One example i s the Maharashtra horticulture-linked employment guarantee scheme, which provided an investment grant averaging about Rs 7,700 per farmer ($161) primarily covering the labor costs during the start-up years (up to 3 years). It had the dual benefit o f encouraging the shift to and expansion o f high-value horticulture in the state as well as generating additional permanent employment in rural areas. Overall total fiscal cost will depend on the size o f individual grants and the number o f farmers to be covered. The grant program will necessarily require significant short-term fiscal outlays. For example, an investment grant amounting to an average o f $1000 per farm household covering all o f the estimated 81.4 million farm households in India would require a budgetary outlay o f $81.4 billion over the program period. Targeting support to poor farmers will be critical to reduce overall fiscal cost. 0 Contract Farming. Contract farming can serve as a mechanismto reduce the market and income risks faced by farmers when diversifying away from rice and wheat to new commodities. Successful examples o f contract farming experiences include: dairy, basmati rice, vegetables, groundnuts and seeds in Punjab; wheat in Madhya Pradesh; rice and cotton in Tamil Nadu; vegetables in Haryana; and poultry in Andhra Pradesh. The government can foster the development of contractual arrangements by facilitating the creation o f producer organizations, xvi legislating an appropriate contract law and enforcing it effectively, strengthening and improving the quality o f (public and private) agricultural extension services, providing complementary infrastructure, and developing effective land administration systems. Contract farming will require amendment o f the state Agricultural Produce Market Act to legally permit farmers to sell directly to agribusiness. 0Imome Support Program: One o f the proposals o f the High Level Committee on Long Term Foodgrain Policy i s to adopt an income support scheme applicable exclusively to rice and wheat farmers inthe states where FCIprocures foodgrains. An income support scheme generally comes in the form of a lump sum annual or seasonal payment made to farmers based on crop area cultivated. Income support i s economically less distortive than price support because it delinks payments from production decisions. Income support payments allow the market, rather than government, to determine prices, thus allowing resources to be allocated more efficiently. To ensure clarity o f program goals and contain the fiscal costs, eligibility rules and registration procedures need to be clearly defined from the outset and the number o f years for which producers will be eligible for payments be time bound. Internationalexperience shows, however, that governments often find it difficult to resist pressures to revise the rules and level o f support or adhere to phase-out timetables. Implementing an income support scheme, given India's large farm population-numbering 81.4 million households, will likely raise the fiscal cost o f foodgrain policies substantially above the current level. Taking producer support levels per rice or wheat household in Punjab (the biggest and most influential player) in 2001/02 as a reference and applying these levels to all rice and wheat farmers inthe procurement states will increase the fiscal cost o f the program from Rs 41.3 billion ($918 million) to Rs 767 billion ($17 billion) per year. Expanding the program at the same rate to all rice and wheat farmers in the country will increase the fiscal cost to Rs 949 billion ($21.1 billion) per year. The fiscal cost jumps to Rs 1.9 trillion ($42.2 billion) if the same income support rates were given to all farmers inthe country. Reducing costs will require drastically cutting procurement volumes and subsidy rates per household. H o w acceptable a lower rate will be will needto be negotiated with all states. Implementing an income support scheme introduces new intensive administrative requirements and costs. To work effectively, it will require a historical database and monitoring o f crops and area planted by, and land tenure status o f each farmer, which will need to be updated yearly. The program also will require an effective delivery mechanism to distribute the transfer to farmers (for example, a banking system to deliver checks). In view o f the large number o f farm households in India and the generally weak local government capacity existing in many areas, meeting the administrative and logistical needs o f effectively implementing this program will be difficult and pose a major challenge. An additional concern i s that income support programs do not necessarily encourage diversification to other crops, because the program merely changes the delivery mechanism for the subsidy. International experience shows that countries had to introduce separate investment grant programs to encourage productivity-enhancing and agricultural diversification investments. Negotiable warehouse receipt systems: A negotiable warehouse receipt i s a receipt issued by warehouse operators that farmedtraders can either retain or assigdtransfer to a lender inreturn for a percentage o f the value o f the commodity-a loan to be repaid by a certain due date. Due to credit constraints, farmers are often compelled to sell their produce immediately after harvest, when prices are at their lowest point, thus adversely affecting the profitability o f farming. Negotiable warehouse receipts enable farmers to hold their grain back from the market and borrow briefly against its value and expected higher price, while usingthe grain as collateral for the short-term credit. With stored foodgrain functioning as collateral, credit histories and asset bases become less important, and lenders seeking to expand their client base can take on even small farmers as borrowers. xvii 0 Other safety nets: Improving the effectiveness o f existing government schemes, such as the TPDS and employment schemes that provide wage employment during lean months or during times ofcrisis (for example, droughts and floods), can serve as important safety nets for farmers. Buffer stock management. It will be critical to adhere to the lower officially prescribed buffer stock norms. Effective buffer stock management will, however, be heavily dependent on the reform of the MSP and procurement policies. At the same time, public financing o f buffer stocks need not necessarily meanholding all grain requirements inphysical stocks. Inview o f its comfortable foreign currency reserve situation, the government could explore holding foreign currency reserves to meet part o f the buffer stock needs. The relative proportion between physical stock and currency reserves will need to be examined carefully to appropriately balance the relative costs o f holding stocks vs. the global price effect o f imports by a large country such as India and the time it takes for supplies to be transported to the country. Improving the efficiency o f FCI operations to reduce costs also will be essential. FCI management could be improved through improved inventory management, systematic benchmarking o f performance across units relative to the private sector, adopting transparent and merit-based personnel management, strengthening cost accounting and monitoring systems to increase accountability and reduce leakages, and operating under hardbudget constraints. Targeted Public Distribution Program. To improve transparency, accountability, and reduce leakages, state actions that could be taken include: (a) posting publicly at the Fair Price Shop (FPS) and Gram Panchayat offices the official TPDS entitlements, the list o f BPL beneficiaries, and sales and stock positions; and (b) enabling Panchayat Raj (local government) Institutions and community groups to take a greater role inmonitoring and overseeing the operations o f the TPDS at the community level. Instead of physically distributing foodgrains, alternative mechanisms, such as food stamps or coupons, could be piloted. The successful experience o f Andhra Pradesh in using coupons for accessing TPDS grains and kerosene from fair price shops offers valuable lessons in implementingthese programs. Piloting food coupons/stamps through private retail shops could begin ina few larger municipalities or cities inwhich a well-functioning private foodgrainretailing system operates. Water ResourcesandIrrigation Water ResourcesDevelopmentand Management. There is an urgent need to formulate a new policy and regulatory framework at the state level to support integrated and sustainable water resources development and management, including the establishment o f clearly defined transferable water rights and entitlements for both surface and groundwater, for either individuals or user groups. It would be essential to establish a separate apex institution at the state-level with overall responsibility for planning, development, management and allocation o f water resources inthe state. This apex agency could be carved out from the existing institutions and initially strengthened by provision o f additional required shlls. The planning, allocation, and sustainable management of water resources will require appropriate pricing and tariff regulatory mechanisms also. These mechanisms could involve establishing an autonomous Water Tariff Regulatory Commission. To strengthen the decisionmaking process, complementary efforts to improve the knowledge and database inthe water sector will be needed. Delivery of Irrigation Services. Expenditure and organizational reforms in irrigation and drainage institutions are vital to improving the delivery o f surface irrigation services and help ensure the longer-term performance of irrigation infrastructure. Priorities include: (a) developing, modernizing, and operating irrigation and drainage infrastructure with close involvement o f basin and system stakeholders; (b) promoting participatory irrigation management though the establishment o f water users associations (WUAs) and empowering them through necessary legislation to operate and manage irrigation and drainage infrastructure at levels appropriate to the xviii socioeconomic conditions o f the state; (c) revising water tariffs to cover at least operations and maintenance costs to improve the financial sustainability and longer term viability o f irrigation infrastructure, while linkingtariff reform to improvements in irrigation service delivery quality; and (d)piloting public-private partnerships inirrigationanddrainage investments and operations (such as management contracts). Power Supplyto Agriculture. There i s an urgent need to adopt a more transparent and targeted subsidy delivery mechanism for supplying power to agriculture. For such an alternative model to work, it i s indispensable that there be: (a) cost recovery o f at least operating costs; (b) universal metering o f consumption; (c) payment discipline; and (d) improved delivery efficiency o f electricity providers. In 2003 the GO1approved the Electricity Act 2003. One o f its provisions i s the mandatory meteringo f electricity supplied within two years. Concerted efforts to encourage states to comply with universal metering will be needed. A number o f technical solutions could also be adopted to improve the reliability and quality o f power supply. These range from providing dedicated electricity feeders for farmers to bringing high voltage lines directly to farmers' premises to undertakmg decentralized generation projects. States have found it difficult to reform tariffs, because power subsidies generally benefit richer, and more politically powerful, farmers. Against this political reality, a comprehensive approach needs to be adopted, so as to ease the transition and mitigate the adjustment costs. Several states are piloting different initiatives to address the problem from a number o f fi-onts (a) an income support scheme for small and marginal electric pump-owning farmers and a pilot integrated assistance package for farmers (that is, technical advice, investment grant for efficient pump sets) in Tamil Nadu; (b) the "Tatkal Scheme," which involves a special higher rate to expedite connections inAndhra Pradesh; and (c) pilots o fwater user associations inanumber o f states. Carefulmonitoring and evaluation o f these initiatives would offer useful lessons that could guide future reform programs. Agricultural Researchand Extension Agricultural Research.The varying ago-ecological potential across states inIndia requires a more regionally differentiated research strategy. There i s a need to integrate bothpublic and private research institutions in the system, each filling the role for which it has the comparative advantage. Public sector research would need to increasingly address the problems o f poorer farmers in less- endowed regions, such as rainfed areas. The roles and responsibilities o f ICAR institutes and State Agricultural Universities (SAUs) need to be redefinedto minimize overlaps and duplication. There i s a need for consolidation o f research programs, amalgamation o f some institutes/departments, need- based redeployment o f human resources, and development o f a long-term human resources development plan. A rigorous priority-setting exercise i s necessary to ensure that resources are allocated to drive the future agricultural growth and diversification agenda. Priority areas for improvement include: (a) strengthening demand orientation, (b) improving quality o f agricultural research, (c) increasing decentralization o f responsibility from central to state agencies and organizationally to the lowest research level, (d) promoting pluralistic systems, and (e) strengthening international alliances to access new technologies and knowledge. Agricultural Extension.As proposed inthe National ExtensionPolicy, the central and state governments and private sector could explore a mix o f options in both financing and service provision to strengthen the quality o f agricultural extension services in the country. While public financing o f the extension needs o f farmers i s justified in many situations, private service delivery can offer an efficient avenue for meeting these needs. Contracting extension services i s one option for delinking funding from service delivery. Improving the effectiveness o f the public extension system at the state level would require greater state efforts to: (a) decentralize the extension system xix to district and block levels to foster greater farmer-focused extension, with increased allocation and integration o f GO1and state govemment fundingto these decentralized systems, drawing on lessons learned from the Agricultural Technology Management Agency (ATMA) pilot initiative; (b) promote farmers' organizations/federations and link them with multiple sources o f information and market opportunities; and (c) encourage a shift from a narrow commodity focus to a holistic farming systedagribusiness approach. Improving the effectiveness o f the public extension system will require some degree o f integration o f extension programs o f the state line departments responsible for agriculture, horticulture, animal husbandry, dairy, fisheries, sericulture and marketing, as appropriate, With increasing private sector participation in the agricultural extension system, an important role for the government will be to provide the policy framework for ensuring service quality standards and fair competition. LandPolicyandAdministration There i s growing consensus, as reflected by a number government policy statements (for example, National Agricultural Policy 2002, 10" Five-Year Plan 2002-2007, Kamataka Agricultural Policy 1995) about the need to revisit and reformulate current tenancy legislations. In considering tenancy reform, it i s critical to draw lessons from experience in states that do not have any tenancy restrictions. More importantly, there are some states in which the benefits from relaxing tenancy laws are likely to be higher than in others, due to more advanced commercialization o f agriculture (and significant amounts o f informal leasing) and greater political capacity to do so. These states that show more benefit could serve as starting points for pilots. Ifthe impact o f relaxation or elimination o f tenancy restrictions in the pilot states i s closely monitored, they could yield important insights for the policy debate and subsequently serve a basis for broader implementation o f tenancy reform initiatives inother states. Over the long term, there i s a needto shift towards a more holistic approach to improve land administration systems at the state level. To be successful, the land administration system will need to meet several other key standards o f performance, including security (certainty o f ownership and parcel identification); costs (fair and not unduly burdening users); fairness (separation from political process and allowing equitable access), clarity and simplicity (to also help reduce costs) and sustainability (not only financially but also completing the cadastre intime and keeping information up to date). States could draw on considerable internationalexperience inthis area. FosteringCompetitiveAgriculturalMarketingandAgro-Industry The GO1 and state governments should continue the momentum initiated over the last decade to progressively liberalize and improve the functioning o f internal markets. Such actions include removing permanently: (a) storage, movement, and credit restrictions on all commodities and the rice and sugar levy and to limit their enforcement during emergencies only; and (b) the small- scale reservation o f a number o f agro-industrial activities. The GO1 should encourage states to amend their Agricultural Produce Market Acts to allow other (non-government) agencies to develop and operate agricultural wholesale markets, and farmers to market their produce wholesale outside o f the state-regulated markets. While the market intervention scheme in horticulture aims to provide price support and thus protect farmers from sharp seasonal price declines, the experience with rice and wheat illustrates how interventions can easily distort incentives and relative prices to exacerbate the over-supply situation. In the long term, measures to improve the functioning o f markets (for example, investments in rural infrastructure) and value-addition (such as agro-processing, cold chains) could offer more efficient and cost-effective methods o f relieving seasonal gluts. Promoting agribusiness, agro-industry and overall rural non-farm sector growth requires improving the overall investment climate. Doing so will require greater industrial deregulation, implementing the value-added tax (VAT), labor market reform, facilitating small and medium xx enterprise (SME) access to credit, and investinginkey infrastructure (roads, ports, and more efficient railways), inaddition to agricultural deregulation and power sector reform. It is frequently contended that India should not phase out its agricultural subsidies and trade protection until the high-income countries phase out theirs. Nevertheless, it i s critical that India not wait for other countries to act and resolve their subsidy concern before tackling its subsidy and trade policies at home. As noted above, to the extent that they distort farmer incentives, the foodgrain, fertilizer, power, and irrigation subsidies are increasingly erodingthe very foundation for agricultural production in many states, threatening future agricultural growth and sustainability. Rationalizing these subsidies i s thus in India's best interest. Experience worldwide also shows that highprotection will sooner or later create high production costs, as land, labor, and capital move to products protected by highbarriers to imports. What i s needed, therefore, i s an integrated package o f critical public investments that enhances the productivity and international competitiveness o f India's farmers, removing domestic trade restrictions to improve farmer and private sector incentives to invest in the sector, while gradually lowering trade protection to foster efficient production. As one o f the world's largest agricultural economies, India directly influences the world markets for many agricultural products. If its follows open, predictable, noninterventionist trade policies, it can broaden these markets and reduce their instability. However, if India intervenes excessively to protect itself against instability, its economy i s large enough to increase international instability, which reinforces protection and intervention in other countries. The experience o f China testifies to the role o f trade in stimulating growth and reducing poverty, notwithstanding the barriers erected by rich countries. Conclusion The reform agenda outlined above highlightsthe difficult challenge o f balancing short- vs. longer term policies and expenditure priorities to achieve the Indian government's growth targets. Nevertheless, action to regain a better balance between short- and long-term policy and expenditure priorities to ensure sustainable poverty reducing agricultural growth can no longer be postponed. It i s well recognized that the reform agenda in the agricultural sector requires major expenditure, regulatory, and institutional reform decisions that are highly political and controversial. These decisions will require bold, but socially sensitive, efforts by policymakers and their strong commitment to build acceptance among affected stakeholders. Only taking these difficult steps will create the context for Indian farmers to reap the maximum benefits from the country's significant agricultural potential. India Re-energizing the Agricultural Sector to Sustain Growth and ReducePoverty I,Introduction Fostering rapid and sustained agricultural and rural growth and developmentremain key priorities of the Government of India. Although agriculture and the allied services sectors only contribute approximately one-quarter o f total Indian gross domestic product (GDP) today, its importance in the economic, social, and political fabric o f India goes well beyond that which i s indicated by its contribution to the economy. Approximately 75 percent o f India's poor live inrural areas, and a large proportion o f the rural poor depend on agriculture for employment and as a major source o f livelihood. Analysis o f the National Sample Survey (NSS) 55th round survey (1999/2000) shows agricultural households' comprise approximately 54 percent o f poo? households in rural areas. Insome states, such as Rajasthan and Uttar Pradesh, agricultural households comprise over 70 percent o f poor rural households. The majority o f cultivators also are small landholders. The large number o f poor agricultural households and their income vulnerability are major concems to policymakers. These two concems inturnhave driven both agricultural policies (trade protection and private trade marketing controls) and government expenditures (investments and subsidies) in agriculture. India made significant advances towards achieving its goals of rapid agricultural growth, improving food security, and reducing rural poverty during the last four decades. Sustained foodgrain (rice and wheat) production growth that exceeded the population growth rate eliminated the threat o f famines and acute starvation inthe country. Government of India (GOI) investments in agricultural research and extension, irrigation, and other rural infrastructure4omplemented by subsidies for key inputs such as fertilizer, water, and improved seeds-launched the country into the "Green Revolution," from which it continues to benefit today. India achieved national self- sufficiency in the 1990s. Improved foodgrain availability contributed to increased national food security. Indeed, India recently faced problems o f plenty with respect to foodgrains. The increased demand for rural labor generated by agricultural intensification, especially during the 1970s and 1980s, raised rural wages and, combined with declining food prices, was a critical contributor to reducing poverty in rural areas (Ravallion and Datt 1995, Bhalla and Singh 1997).3 Aided by sustained, although much slower, agricultural growth inthe 1990s, poverty rates (headcount) inrural areas declined from 39 percent in 1987/88 to 33 percent in 1993/94 to 26.3 percent in 1999/00 (Deaton and Dreze 2002). Consistent with the process of economic development, the agriculture sector's role in the national and state economies is changing rapidly. At the national level, the share o f the agriculture and allied services sector (including forestry and fishing) in total GDP i s down to approximately 26 percent in triennium ending (TE) 2000/01 as growth o f the industrial and the services sectors far outpaced those o f the agricultural sector over the last two decades (figure 1.1).4 In some states, such as Gujarat, Maharashtra, and Tamil Nadu, the sector today contributes less than 20 percent to gross state domestic product (GSDP). These includehouseholdsinvolved in cultivation and agriculturalwage labor. Basedon the PlanningCommissionrural povertyline. RavallionandDatt (1995) estimatedthe long-runelasticityo fthe headcount povertyindex to farmyield to be over 2, o f which 40% came throughthe increaseinrealrural wages. The service sector's share increasedfrom 36% to 49%, and industry's share remained at 26% duringthe sameperiod. 2 Despite the shrinking share o f the sector in Figure 1.1Contribution of the Agricultural the economy, the majority o f the labor force andAllied Services Sector to GDP, Triennium continue ,to depend on the agricultural sector for Ending(TE) 82/83 and TE 00/01. employment. According to the 2000 census, 58 l percent o f the total labor force, numbering approximately 235 million people, i s employed in the agricultural sector in India (Census o f India 2OO2).' In rural areas, dependence on the agricultural sector i s even greater. Nearly three- quarters o f the rural population, approximately 228 million workers, are employed in the sector. The large disparity between the labor productivity of agricultural workers relative to those in other sectors i s a serious concern (figure 1.2).6 The low agricultural productivity results from the large number o f workers tied to agriculture in almost all states, the slowing o f agricultural growth, and limited opportunities for rural non-farm employment. This low productivity in turn TE 82/83 TE 00/01 contributes to the highrate o f poverty inrural areas Source: World Bank States Database at the state level. The GOI's National Agricultural Policy and the lo* Five-Year Plan place high priority on raising agricultural productivity as a means to achieve more rapid agricultural growth and reduce rural poverty. (Ministry o f Agriculture 2000, Planning Commission 2003). The government's goal i s to achieve an annual agncultural growth rate o f 4 percent duringthe 10" Plan (2001/02 to 2006/07). At the same time, government is directing more attention towards promoting more rapid growth of the rural nonfarm sector, i.e. industry and services in rural areas (Planning Commission 2003, Ministry of Agriculture 2000, Reserve Bank o f India 2000). Figure1.2 Labor Productivity, Rural Poverty and Labor Concern over the slowing pace inAgriculture inMajor States o f agricultural growth, however, i s 1 increasing. Contrary to government 160 , f 90% ? goals, the rate o f growth o f the agricultural sector slowed slightly between the 1980s and 1990s. The sector grew at an average annual (trend) rate o f 3.3 percent from 1981/82 and 1990/91, - declining slightly to 3.0 percent from 1991/92 and 2000/01 (table 1.1). Notably, agricultural growth performance in the 1990s weakened despite rising government output and 0Ag.LaborProductivity Non-Ag LaborProductivity input subsidies. This decline is in -A- %Rural PovertyRate 99/00 -0- %LaborinAgnculture contrast to the industry and services Note: Ruralpovertyrates for Bihar, Madhya Pradesh, and Uttar Pradeshare sectors, which grew at 6 and 8 percent those prior to the state split-up. per year respectively during the 1990s. Source: Census of India2002, Deatonand Dreze 2002, World Bank National Accounts database. These include 127.6million cultivators and 107.4 million agricultural laborers (Department of Census and Statistics, "Provisional Population Totals: India, Census of India 2001"). Average labor productivityi s measured by the sector GSDP divided by the number of workers employed inthe sector. 3 Various studies attribute the Table 1.1GDP by sector, average annual (trend) percentage duringthe first half o f the 1990s 81/82- 91/92- 91/92- 96'97-00/01 to a number o f factors. These Sector 90/91(%) OO/Ol(%) 95/96(%) (%) ~ ~ p ~ t f ~ ~ 5.5t ~ ~6.1~ ~ ~5.6 t 5.9 include favorable monsoons; economic reforms' in the early 199Os, which reduced the taxation o f agriculture and thus contributed to improving the agricultural terms o f trade8; the impact o f increased investments, Source: Central Statistical Organization, National Accounts Statistics. particularly from the private sector; increasing agricultural diversification into higher value products such as horticulture, livestock, and fisheries spurred by rising incomes, changing consumer preferences, and increasedexport opportunities; and finally, rapidly rising government support prices and input subsidies (Ministry o f Finance 2003-Economic Survey, Planning Commission 2002, Hanumantha Rao 2003, Gulati and Purse11 2003, Gulati and Sudha 2002). While weather shocks, particularly extensive droughts inmany states due to poor monsoons9and flooding in some northern states, contributed to the recent slow-down in agricultural GDP growth rates, there i s growing concem regarding whether past agricultural growth performance or attaining an even higher growth trajectory i s achievable without addressing fundamental structural problems inthe various states. Current land and water use practices are unsustainable and less productive in many states. The rice and wheat production system was identified as a major cause o f increasing land and water resource degradation, threatening the longer-term sustainability o f agricultural production in Punjab (Punjab Agricultural University 1998, Sidhu and Johl 2002,World Bank 2003). While having the highest net groundwater irrigated area (76 percent in 2000/01), Punjab now also has the highest percentage (60 percent in 1998) o f over-exploited and dark blocks." Cultivation o f rice and sugar, which are very water-intensive crops, inmany water-scarce states, such as Andhra Pradesh, Gujarat, Haryana, Kamataka, Maharashtra, Rajasthan, and Tamil Nadu are rapidly depleting groundwater. Depletion not only affects agricultural productivity, but it i s threatening also drinking water availability (World Bank 2001b, World Bank 2003c, World Bank 2003g). Despite their potential impact on longer term agricultural growth and sustainability, GO1and state government price policies are discouraging changes at the farm level. GO1 price support policies for rice and wheat and price subsidies on fertilizer, and state government price subsidies for sugar, electric power (for groundwater irrigation using electric pumps) and canal irrigation bias farmer crop and input use decisions, and encourage the perpetuation o f unsustainable and environmentally harmful cropping practices. H o w this came about will be discussed in greater depth inchapter 3. 'Particularly important were the exchange rate and trade liberalization that reduced the protection o f the industrial sector (Pursell2003, Hanumantha Rao 2003). * Estimates o f growth rates are highly sensitive to the choice o f data periods and methodology. Estimates o f agriculture and allied services growth rates by averaging annual growth rates show a sharper decline from 3.2 to 2.3 percent between the 1980s and 199Os.This method tends to overestimate the jumps and underestimate the falls. Due to the sharp fluctuations arising from severe weather shocks, the preferred approach i s to use medium-to long-run trend growth rates. Relative to the long-term average taken as 100 percent, 1999 had 96 percent o f average rainfall, 2000 and 2001 had 92 percent and 2002 had 81 percent (Ministry o f Finance Economic Survey 2002-2003). io Groundwater exploitation i s measured by groundwater extracted as percentage o f annual recharge. Over-exploited blocks are those in which groundwater extraction i s more than 100%ofrecharge. Dark blocks are those inwhich extraction is between 85 to 100 percent o f recharge. 4 Weak agricultural performance, Table 1.2 State Classification by Agricultural especially among the poorest states, makes it and Allied Services and Non-Agricultural more difficult to narrow widening income Sectors Growth Rates, 1991/92 to 2000/01 disparities. Table 1.2 illustrates the wide disparity (constant 1993/94rupees) inperformance o f boththe agriculturaland allied services and non-agricultural (industry and Average non-agricultural sector 9.% 8i growth rate per year services) sectors across states in the 1990s. It Below 7.0% Above7.0% amplifies the magnitude o f the challenge o f z p *2I Above II IIKamataka meeting the government's goals o f achieving an agricultural sector growth rate o f 4 percent per s s3 4% Andhra Pradesh Maharashtra year. Except for Kamataka and West Bengal, the .: .e I Puniab I Kerala agricultural sector in most states grew less than 4 2: I 2.0% to I MaihyaPradesh* I Raiasthan 1 percent per year in the 1990s. Of great concem i s & .8 3.0% Uttar Pradesh* Tamil Nadu Below Bihar* Gujarat that the states with the highest concentration o f $ $ p 2.0% Orissa Haryana the poor-Bihar and Orissa-also are the poorest Note: *Unsplit states, 1991/92to 1999100period. performers. Source: Author's calculations. There i s growing consensus that the lack o f significant improvements in sectoral growth i s due in large part the result o f the continuing decline in productivity-enhancing investments by the government and agricultural policies that unintentionally are threatening the country's land and water resources. They contribute to the slow-down in overall total factor productivity growth in the agricultural sector and will have dire consequences for rural areas and the rural poor over the longer term if appropriate actions are not taken to reverse them. In the future, therefore, improving agricultural performance will require progress in two key policy areas: (1) rebalancing govemment expenditures from subsidies toward more productivity-enhancing public investments, including irrigation, agricultural research and extension, and infrastructure and social services in rural areas; and (2) permanently removing restrictions on domestic trade, imposing them only in emergencies. These actions will improve the investment climate for farmers and the private sector to effectively meet market opportunities. This study aims to: 1. Examine the performance o f the agriculturalsector duringthe last decade; 2. Review the evolving policy and regulatory framework for the agricultural sector, with special focus on: (a) the foodgrain, irrigation, agricultural technology, and power supply to agriculture policies, and (b) how the framework i s affecting the performance o f the sector and its incentive; 3. Identify remaining major policy constraints to achieving more rapid agricultural growth and rural development; and, 4. Explore options for reform, drawing on internationalexperience inagricultural sector reform. 11.Overview of the Agricultural Economy A. Agricultural Sector Performance Weakening agricultural performance in a large number o f states i s a national concern. The marked slow-down in growth rates in the traditional green revolution states and bread basket o f the country, namely, Punjab, Haryana and Uttar Pradesh i s a major concern (table 2.1)." Although widespread severe droughts led to the sharp agricultural slow-down in many states in the early 2000s, this was not the case in the northern states, in which over two-thirds o f cultivated land i s irrigated. Indeed, they recorded lower growth rates than the all-India average agricultural sector growth rates. As these northern states are the primary granaries for foodgrains in the country, accounting for 74 percent and 26 percent o f production o f wheat and rice respectively, these lower growth rates are raising food security concerns also. At the same time, the states of Bihar and Orissa, in which rural poverty rates and dependence on agriculture are highest, agriculture shows limited improvement. To promote sustainable agricultural growth, a regionally differentiated strategy based on ago-climatic conditions and land and water resource availability i s needed. There i s growing consensus over the need to foster the shift o f the bread basket to the eastern region o f the country, including eastern Uttar Pradesh, Bihar, West Bengal, and the North Eastem States, in which highly fertile soils and plentiful water can support rice-wheat systems more sustainably over the long term. However, achieving such a shift will require a radical shift in price policies o f the GO1 as well as significant investments to strengthen agricultural support services and infrastructure, and improved govemance. The Table 2.1. Agriculture and Allied Services GDP,Average Annual GrowthRatesin challenge o f sustaining growth over the longer term i s reaffirmed by several recent studies that find total factor productivity (TFP) in agriculture declined between the 1980s and 1990s (Kalirajan and Shand 1997, Kumar 2002, Sharma 2002). Kumar finds that while TFP12grew by 2 percent per Notes: year between a. Trend growth rate. b. GCA i s gross cropped area. 1981 and 1990, it c. Unsplitstates, 1990sgrowthrates for 1991192to 1999100. 1999100to 2001102 for divided state only Source: GDP-World Bank States database: irrigatedArea - CMIE 2002a: Author's calculations. The inter-state comparisons are largely based on the old National Accounts (1980-81 base), which show a much slower overall growth o f agricultural GDP than the new National Accounts (1993194 base). See World Bank (2000) footnote 9 for detailed discussion. '' TFP measures the amount o f increase in total output that i s not accounted for by increases intotal inputs. 6 become negative during 1990-96 in Table 2.2 Sources of Production Growth of Selected the Indo-Gangetic Plains, which i s spread over the states o f Punjab, Haryana, Delhi, Uttar Pradesh, Bihar, and West Bengal.13 These states also are traditionally the seat o f the green revolution. These and other studies attribute the deceleration in TFP growth to the slow-down in productivity gains from the earlier adoption o f high-yielding varieties, the decline in public investments in the agricultural sector, and increasing natural resource degradation (for example, water logging, salinity, declining water tables, soil nutrient imbalances) due to the existing incentive framework (Reserve Bank o f India 2000, Kalijaran and Shand 1997, Kumar and Rosegrant 1997). C r o p Sector Performance Analysis o f crop-wise performance over the last two decade presents a mixed picture. Rice and wheat output continued to increase over the last decade. This output growth was instrumental to India reaching food self-sufficiency in the 1990s. Boosted by favorable price policies, it also resulted inburgeoning buffer stocks and massive storage problems, which reached over 60 million metric tons (mt) in 2001. The Source: CMIE, Agriculture various issues; author's calculations. process by which these came about i s detailed in chapter 3. Notably, the contribution o f increasing yield to output growth inrice almost halvedbetween the 1980s and 1990s, while wheat yield growth has remained strong through both decades. Maize output grew rapidly inthe 1990s, spurred by rising demand for feed from the livestock sector. Rapid increases in yields generated by the adoption o f new high-yielding varieties facilitated the rapid output growth. Among oilseeds, soybeans displayed spectacular growth, albeit starting from a low base. Production o f traditional oilseeds such as groundnuts and rapeseedmustard fluctuated significantly, declining sharply in the late 1990s due to increased edible oil import liberalization. Sugarcane output increased significantly in the 1990s, driven more by area expansion than yield increases. Average yields o f several major crops in India have room to improve to other major producing-country levels. For example, taking the average yield for TE 1999/2000 to preclude the impact o f successive droughts in the early 2000s, Indian rice yields are approximately half o f Vietnam's and Indonesia's, and one- third o f China's (table 2.3). With the exception o f sugarcane, potatoes, and tea, the same i s observed with respect to the other commodities. There i s considerable l3 The Indo-Gangetic Plain i s one o f the most fertile regions in India. room to raise productivity further, but doing so will require policies and programs to enhance farmers' access to and adoption o f improved technologies and knowledge. Agriculture InputUse The intensity o f agricultural input use shows limited connection to recent growth performance. Punjab, Haryana, and Uttar Pradesh show some o f the highest rates in household use o f fertilizers and other agrochemicals, improved seed varieties, and irrigation (proxied by electric and diesel pump use), notably primarily for rice and wheat use (table 2.4). By contrast, the southern and western states display a slightly lower intensity of use of purchased inputs, in addition to more limited access to irrigation (table 2.1). Nevertheless, these states achieved better growth performance in the 1990s. The difference i s driven inmajor part by the pace o f agricultural diversification, especially the move out o f foodgrain crops. Diversificationas a Potential Source of Agricultural Growth The agricultural sector in India now ranks as the third most diversified in the South Asia Region. This ranking i s driven mainly by the shift to high-value crops, livestock, and fisheries (table 2.4). This shift, in turn, i s influencing agricultural growth patterns across states. Using the Simpson Index for measuring the degree o f diversification, Joshi and others (2003) estimated that in Average Households Using Households Owning No. of Princ@al Tractors/ Improved Electric Diesel Agricultural CroppedArea Power Tillers Fertilizers Pesticides Seeds Weedicides Pumps Pumps Households RegiodState (ha) (%) (%) (96) (%) (%) (%) (%) (million) Punjab 2.6 92.4 1 72.1 I 86.9 I 80.1 I 78.6 I 51.0 1 38.1 1.o Haryana 2.2 93.8 I 86.2 I 68.2 1 79.5 I 63.8 1 29.8 I 28.3 II 1.2 Note: a. Unsplit states. Source: NSS 54th (1998) round and authors' calculations. 8 Table 2.5 Share of Foodgrainand Non-FoodgrainCropsin CroppingPattern [AllIndia I 0.63 I 0.66 I 70.34 I 65.44 I 29.66 I 34.56 I 48.05 I 39.85 I 51.95 I60.15 I Notes: a. Northem region: Havana, Punjab, Uttar Pradesh(including Uttaranchal). b. Northeast region: All the northeast states. c. Eastem Region: Bihar, Onssaand West Bengal. d. Westem Region: Gujarat, Maharashtra, Madhya Pradesh, Rajasthan. e. Southem Region: Andhra Pradesh, Kamataka, Kerala, Tamil Nadu; Source: Joshi and others 2003. 199912000 India had a crop diversity index o f 0.66, closely following Maldives (0.77) and Sri Lanka (0.75). l4Duringthe 1990s, the increaseddiversification inthe crop sector came primarily as a result o f crop substitution (63 percent) rather than increased cropping intensity (36 percent). The primary incentive for diversification has been to increase incomes rather than as a coping strategy to manage farm-level risk and uncertainty. Within India, the Southern and Western Regions posted the highest degree o f crop diversification as measured by the Simpson Index. Notably, during the 1990s, the Southern Region also recorded faster agricultural growth rates than the national average. On the ground, this growth rate translated to the rapid shift away from foodgrain crops toward oilseeds, pulses, maize, sugarcane, fruits, vegetables, and other crops. In contrast, the Northern Region continues to specialize in foodgrains, particularly rice and wheat, encouraged by favorable government price support policies (see chapter 3). Increasing agricultural diversification i s opening new export avenues and labor opportunities. Agricultural diversification contributed to changing significantly the composition o f Indian agricultural exports, expanding from traditional exports o f tea, spices, and coffee to horticulture, fisheries, and livestock products. Between triennium ending (TE) 1991192 and TE 1999100, the value o f meat exports rose from $79 millionto $198 million, fresh and processed fi-uits Figure 2.1. Average Labor Use for Selected and vegetables from $239 million to $408 Crops (daydhaheason) million, and fish from $461millionto $1.1 billion 250 (Joshi and others 2002). Agricultural diversification i s helping to generate additional 0c 200 employment opportunities in rural areas, E0 especially since the labor requirement o f non- 2s 150 cereal crops i s substantially higher than cereal crops (figure 2.1). 'O 100 6 u) 3 Increasing agricultural diversification i s 50 mitigating the impact o f weather-related shocks. 38 In Andhra Pradesh, for example, the agricultural 0 and allied services sector's reasonable performance during the period 1998/99 to 2001/02 was bolstered by the rapid growth in the livestock and fisheries sectors, which grew by 15.1 percent and 11.4 percent per year Note: Sugarcane-annuallabor use. Source: Joshi and others 2003. l4Ifspecialization exists, the Simpson Indexmoves to zero. 9 Box 2.1 Declining per Capita Cereal Availability: I s a Crisis Looming? Between the early and late 1990s in India, per capita net availability of cerealsper person per day declined from approximately 450 grams to approximately 420 grams. Many highlighted this decline as an early sign of an impending crisis. These figures are consistent with the National Sample Survey (NSS) data that showed a decline inper capita cereal consumption in the 1990s. Between 1993194 and 1999/2000, average per capita cereal consumption declined from 13.5 kgto 12.7kgper month in rural areas, and from 10.6 kgto 10.4 kgper month in urban areas. Many interpreted this overall decrease in consumption as a sign of the increased impoverishment of the 1990s. Others questioned why cereal consumption i s declining, while the povertyrate i s declining at the same time. Several studies, however, showed that the decline in cereal consumption i s not new in India. Hanchate and Dyson (2000) found that rural food consumption pattems declined quite sharply on average (from 15.8 to 13.6 kg per person per month) between 1973174and 1993194 but rose among the poorest households. The reduction in consumptionof the higher expenditure groups influenced significantlythe decline in the overall average consumption. Hanumantha Rao (2000) observed similar trends in analyzing consumption between 1972173 and 1993194. As there was limited change in food prices relative to other prices during this time, the average decline likely was not due to changes in relative prices. This trend appeared to indicate substitution away from cereals to other foods as incomes rose. Notably, Deaton and Dreze found that the consumption o f "superior foods," such as vegetables, milk, fruit, fish and meat, rose quite sharply across all expenditure groups during this same period. Thus, the decline in average cereal consumption per se may not be a matter of concern. Average cereal consumption i s inversely related to per capita income across countries (for example, it i s lower in China than India) and across states in India. Cereal consumption i s higher inBihar and Orissathan in Punjab and Havana. Source: Drawn from Deaton and Dreze 2002. respectively during the same period (Umali-Deininger 2003). This bolstering effect manifested despite drought-related setbacks inthe traditional crop sector, which grew at 0.1 percent per year. By 2001/02, these two sectors contributed over one-third to the total agriculture and allied services share in state GDP and helped to compensate for the sharp slow-down in crop-based agriculture's growth rate.'' The rapid growth o f the livestock sector was bolstered primarily by the poultry sector. The value o f poultry meat and egg output increased in real terms by an average o f 14 percent and 30 percent per year respectively duringthe 4-year period. The livestock sector i s emerging as an important sunrise sector in the country. In 2001/02 livestock accounted for 25 percent of agricultural GDP, or 5.6 percent o f national GDP (Ministry o f Finance and Company Affairs 2003). Duringthe 199Os, milk output grew 4.3 percent per year, egg output by 4.2 percent per year, fisheries output by 4.4 percent per year, and meat output by 2.3 percent per year (figure 2.2). Rising incomes and increased export opportunities were important Figure 2.2 Milk,Eggs,Meat and Meat Output - drivers o f demand and output. The sector employs igsoiii to 2001/02 approximately 11 million workers (Department of Animal Husbandry and Dairying 2003). Because 6 , 70 ~ I most livestock in India is owned by small and 5 60 marginal farmers and landless households in rural g 4 50 areas, the sector's rapid growth benefits the U poorest households. 9 3 t4030 2e c) Several factors are driving agricultural g 2 20 5E diversification trends in the country. These factors 1 10 include rising incomes, changing relative prices 0 0 between cereals and high-value agriculture, increasing urbanization and access to infrastructure, and more open trade policies (Kumar and Mathur 1996, Kumar and Mmthyunjaya 2002, Joshi and others 2002, Joshi and Gulati 2003). Over the last decade, the composition o f per capita consumption and Note: * = provisional Source: Department o f Animal Husbandry and Dairying, expenditures increasingly shifted from cereals h.tte!!~~h~-~!?~~~..,in!~.~~:.h~m. toward a variety o f other food products (table 2.6). l5 In2001102, the livestock sector accounted for 26 percent oftotal agriculture and allied services GSDP, while the fisheries sector accounted for 9 percent in Andhra Pradesh. 10 Demand-side factors such as rising incomes and increased urbanization and export Item Rural Urban opportunities helped boost demand for non-cereal higher value crop and livestock products. Supply side factors such as the slow-down in rice and wheat productivity growth, accompanied by increased access to improved planting materials and livestock breeds resulting from increased liberalization o f these markets facilitated farmer's Edible oil & sugar 7.9 6.1 6.1 7.1 4.8 4.4 ability to respond to changing Fruits &vegetables 6.8 7.9 8.3 7.8 7.6 6.9 demand. Increased access to Total Food 64 59.4 55.0 56.4 48.1 42.5 . . infrastructure (roads, electricity, surveys and NSS 58" (2002) round survey. telecommunications) and market Source: Joshi and others 2003. NSSO 2000 and 2003. support services (markets, storage, cold chains) also reduced transaction costs, facilitated marketing, and improved the competitiveness o f these products both locally and internationally. However, in some states, the success o f agricultural diversification programs i s leading to seasonal "problems o f plenty," compelling government to intervene. In recent years, seasonal gluts and price crashes for maize and various h i t s and vegetables have occurred in Maharashtra and Karnataka. The GO1 and state governments' response to this crisis was to introduce market intervention schemes (MIS) for horticultural crops and other agricultural commodities not covered by GO1 minimum support prices. Under the MIS, if the market price falls below a specific "economic level,'' .the GO1 intervenes, at the request o f the state govemment, by purchasing the commodity at a market interventionprice that does not exceed production costs. Any loss incurred in implementing the M I S i s shared equally by the GO1and state government. Since 1998, the M I S has been used to support a number o f horticultural products, including oranges, coriander seeds, apples, oil palm, potatoes, red chilies, areca nut, ginger, and onions. While the government's market intervention efforts are intended to assist farmers to weather sharp seasonal price declines and ensure reasonable incomes, the experience with rice and wheat illustrates how they can easily distort incentives and exacerbate the supply situation. Inthe longer term, measures to encourage the improved functioning o f markets (for example, investments inrural infrastructure) and value-addition (agro-processing, cold chains) could offer a more efficient, cost-effective, and sustainable method o f dealing with seasonal gluts. B.PublicExpendituresinAgriculture Government expenditures in the agriculture sector amounted to approximately 8 percent of GDP in India in the early 2000s. This percentage varied considerably by state (table 2.6). As a percentage o f GDP, Tamil Nadu and Karnatakapostedthe highest share at approximately 11percent. In most states, however, recurrent expenditures accounted for the major share of total public expenditures in agriculture. The dominance o f recurrent expenditures in overall expenditures has serious longer-term growth implications to the extent that they crowd out productivity-enhancing capital investments. 11 DecliningPublic InvestmentsinAgriculture Total investments in the agricultural and allied sectors as measured by the gross capital formation (GCF) increased over time, but since the mid-l980s, GCF was driven largely by the private sector. By the late 1990s, private Figure2.3 Gross CapitalFormationin investments accounted for approximately three- Agriculture andAllied Sectors, quarters o f total investments in the sector (figure 1960/61 to 2001/02 2.3). These investments primarily were in the form (Rsbillion, 1993194rupees) o f farm equipment, minor irrigation, and land 250, , 100 improvements (Acharya 2003, Gulati and Bathla 95 2002). Notably, the increase in private investments fE200 90 5 in minor irrigation, specifically electric pumps, 2 150 -3 85 Z' whose numbers increased from 1.5 million in - 80 9\ 75 $2 1970/71 to 11.9 million in 1998/99 (CMIE 2002b), 70 0, was made possible by public investments in power. .--$100 65 2 Duringthe 1990s, incentives for increased private E 50 60 sector investments also could be traced to 55 0 50 improving agricultural terms o f trade. This improvement was the result of a number of developments including increased trade liberalization in agriculture; reduction in industrial +Public GCF +Private GCF protection; exchange rate devaluation which +Total GCF -Ag. TOT reduced the anti-agriculture bias; and domestic Source: GCF-Ministry of Agriculture, Agricultural Statistics price support and subsidy policies, especially for at a Glance 2002. Agriculture Terms of Trade (TOT)- rice and wheat (World Bank 1999b, Gulati and Directorate of Economics and Statistics. others 2003). The decline inpublic sector investments is a major cause for concern, because o f its likely adverse impact on agricultural growth over the longer term. Public investments in the agricultural and allied services sector have declined systematically since the mid-1980s-its share declined from 44 percent in 1985486 to 23 percent in 2000/01.'6 Indeed, public investments in research and development, irrigation, roads, and education have been shown to significantly contribute to TFP growth and the reduction o f rural poverty in India (Fan and others 2002) (table 2.8). Gulati and Bathla (2002) estimate that a 10 percent decrease in AgricultureExpenditure Capitalexpenditure Recurrent expenditure public State Value % of Agriculture to agriculture SDP to agriculture SDP investments Rs. Billion GSDP/GDP 6) (%) (including irrigation and power) leads to a 2.4 percent reduction in agricultural GDP growth. In view o f the l6 According to the Indian System o f National Accounts, the public capital formation statistics comprise primarily investments in major and medium irrigation schemes. Gulati and Bathla (2002) re-estimate public gross capital formation to includeinvestments inpower (concept 11) andpower plus investmentsmade in agricultureand allied activitiesas defined underbudgetaryheads of the government accounts(concept 111).Under bothconcepts, public capitalinvestmentsdeclined. 12 complementarity or inducement effect between public and private investments, the decline inpublic investments also i s expected to have a negative impact on private investments. They estimate the elasticity o f private GCF in agriculture with respect to the cumulative financial public investment in irrigation and power to be 0.16 and 0.15 respectively." The agricultural sector's growing subsidy requirements are crowding out public investments inthe sector. These subsidies include those to food, fertilizer, power and irrigation (table 2.9). The GO1food subsidy continues to increase and amounted to Rs 212 billion ($4.3 billion) in 2002/03, which i s equivalent to 0.8 percent o f the national GDP. GO1 fertilizer subsidies, while declining, amounted to Rs 112 billion ($2.3 billion) or 0.5 percent o f national GDP in the same year. In 1999/00, public investments only amounted to approximately 13.6% o f the subsidies to food, fertilizer, power and canal irrigation This unbalanced composition o f expenditures comes with considerable direct and indirect costs to the economy and society. These subsidies are major contributors to the rising fiscal deficit in the central government and the fiscal crises inmany state governments. The bias toward subsidies in turn reduces the resources for much needed social and rural investments and appropriate operations and maintenance of critical infrastructure, leading to their rapid deterioration. Subsidies have distorted farmer cropping and investment decisions toward specific crops, for example, rice, wheat, and sugarcane inmany areas, which not only are inefficient from an economic perspective but, more importantly, are seriously degrading resources Table 2.8 Impactof DifferentGovernment (causing soil nutrient imbalances, water logging, Expenditureson TotalFactor Productivity salinity, declining ground water tables). There i s broad recognition o f the need to reverse the declining trend in public sector investments in agriculture, which as the loth Plan 2001/02- 2006/07 proposes will require better targeting o f subsidies and increasing investments in productive assets such as irrigation, power, credit, and rural infrastructure (Ministry of Agriculture 2002, Planning Commission 2002). Note: 10% level of significance. Source: Fan. and others 2000. C. RuralNon-Farm Sector While for most rural households, agriculture remains the main source o f income, the rural non-farm sector i s increasing in importance as a source o f supplementary income. According to the most recent estimates, based on a 1993/94 survey o f 16 states in India, the non-farm sector on average accounted for one-third of rural household incomes (34 percent) and o f those inthe poorest quintile (32 percent) (Lanjouw and Shariff 2000). Given these high rates o f poverty, more rapid growth o f the rural non-farm sector can offer an important vehicle for generating greater opportunities for higher paying employment inrural areas. Inparticular, the more rapid growth o f the agro-industrial sector will be important not only in expanding markets for primary agricultural products and adding greater value, but also ingenerating additional employment inrural areas. They also findthat availability of institutional credit and terms o f trade between agriculture and non-agriculture has a positive and significant influence on private GCF. 13 Sector I 81/82 I 91/92 1 95/96 1 96/97 I 97/98 I 98/99 1 99/00 I 00/01 1 01/02 I02/03RE Subsidies, RsBillion, 1993/94 Rupees Food 19.6 34.0 45.1 47.3 57.8 61.7 61.5 75.4 105.7 84.4 Fertilizer 10.7 61.8 56.4 59.1 72.5 78.6 86.3 86.3 77.4 38.4 Power a 11.2 70.2 114.0 120.8 139.4 147.5 159.3 Irrigationb 17.8 37.5 45.3 49.0 52.1 55.8 57.1 Subtotal 59.2 203.4 260.8 276.2 321.8 343.4 364.2 Public Investments in Agriculture, RsBillion, 1993/94 Rupees Investments 71.3 43.8 53.2 51.5 45.0 44.4 47.6 44.2 52.6 51.5 Subsidiesas YOof GDP Food 0.4% 0.4% 0.5% 0.4% 0.5% 0.5% 0.5% 0.6% 0.8% 0.6% Fertilizer 0.2% 0.8% 0.6% 0.6% 0.7% 0.7% 0.7% 0.7% 0.6% 0.3% Power 0.2% 0.9% 1.1% 1.1% 1.3% 1.3% 1.3% IIrrigation 0.4% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% a. Power subsidv as estimatedbv Power and EnergvDivisionof PlannineCommission. b. Canal irrigation subsidy = O&M costs plus depreciation (differencebetween GDP and NDP of irrigation sector) less imputed irrigation I. I charges from farmers. Source: Food and fertilizer-Central Statistical Organization, National Account Statistics, MOFC 2002a; Power and irrigation - Acharya and Jogi 2004. Public investments inagriculture -Agriculture Statisticsat a Glance2003, Ministry of Agriculture. Agro-Industry Ago-industry remains an important segment o f the industrial sector in India. Ago-industry refers to the subset o f the manufacturing sector involved in processing raw materials from the crop, livestock, forestry, and fisheries sub-sectors and intermediate products fi-om other industries, such as hides and skins for manufacturing, leather products, and edible oils for manufacturinghydrogenated oils. In 1994/95, ago-industrial enterprises accounted for 65 percent o f total units and 63 percent o f employment in the manufacturing sector in India (table 2.10). Inrural areas, they accounted for 71 percent o f the units and employment. However, they account for only approximately 35 percent o f the value-added o f the total manufacturing sector. Notably, the ago-industry sector i s dominated by the unorganized segment, which i s composed largely o f micro- and small enterprises.18They account for 99 percent o f the units and 87 percent o f employment (Chadha and Gulati 2003). Forward linkages between the agricultural and manufacturing sector increased considerably between 1994195 and 2000/01. Ago-industrial units increased by 4.5 million units, thus expanding ago-industry's share in the manufacturing sector fkom 65 percent in 1994/95 to 82 percent in 2000/01. Among these, the ago-based, non-food-processing category posted the largest increase in number o f units and employment during this period, It was ledby Table 2.10 Percentagedistribution of units, employment andvalue added the textile manufacturers, which increased by 2 million units. The food processing category increased by 1.3 million units. By contrast, the number of n0n-W-i- based manufacturing 19.7 18.6 13.9 13.9 Paper and Its Products units approximately 2 million by units duringthis period. IAll Industries 100.0 100.0 100.0 100.0 100.0 100.0 I Source: Chadhaand Gulati 2003. Establishments that use power and have 10 or more workers and those that do not use power and have 20 or more workers are classified part of the organized sector. Those outside of these two groups are considered to be inthe unorganized sector. 14 Ruralinformalsector The rural informal sector i s an important source o f employment in rural areas. The NSS conducted a survey o f the rural informal sector in the year 1999-2000, Figure 2.4 ProblemsFacedby Informal Sector Enterprises inRuralAreas, All India, 1999-2000 covering both "own account enterprises" and "establishments." An "own account enterprise" i s an undertaking run by household labor, Lack of lightingfacility usually without any hired worker Non-Recovery o f service employed on a "fairly regular ba~is."'~ "Establishments" are enterprises that Competition from larger have at least one hired worker on a "fairly regular basis." There were 25.1 million enterprises in the informal Shortage o f capital sector in 1999/2000. Own account enterprises comprised 94 percent of 0 10 20 30 40 50 total enterprises and employed 86 percent o f the 39.8 million workers in Source: NSS 55" Round, Informal Sector in India: 1999-2000.Reportno. 459. the sector, with value-added o f Rs 24,442 per worker, compared to Rs 13,443 for establishments. Approximately 71percent of these informal enterprises reported facing problems, the most common o f which were a shortage o f capital, local problems, and lack o f infrastructure (figure 2.4). To what extent government policies have influenced the agriculture sector's growth i s examinedinthe next chapter. ''"Fairlyregular basis" meant the major part o f the period of operation(s) of the enterprise duringthe last 365 days. 111.ChangingAgricultural PolicyEnvironmentinthe 1990s Since the mid-l990s, the Government o f India released several major policy documents elaborating proposals to address pressing problems plaguing the agricultural sector. O f paramount importance to policymakers was, in the context o f increasing land and water resource constraints, how to achieve a higher agricultural growth trajectory to meet the food needs o f a growing population, and raise incomes and reduce poverty inrural areas. Externally, the rapidly globalizing trade environment elevated concerns about staying competitive in the world market and protecting farmers, many o f whom comprise the poorest o f the poor, from cheap imports. H o w to resolve the paradoxical and fiscally costly situation o f burgeoning foodgrain stocks in the midst o f widespread poverty and malnutrition in the country was an urgent concern. Some of the policy documents addressed a broad range of constraints facing the sector, while others dealt with subsector-specific issues (table 3.1). Table 3.1 GO1Major Policy Documents 1998-2002 Sector-wide Recommendationsof the Prime Minister's Economic Advisory Council 2001 (PM-Council) National Agricultural Policy 2002 (NAP) a DraftApproach Paper to the lothPlan2001 (DAP-10" Plan) Export Import Policy 2001-2002 (EXIM) a 1OfhPlan 2002-2007* (10" Plan) Subsector-focused Mahajan Committee on Sugar Industry 1998 (MC Sugar) High-powered Fertilizer Review Committee 1998 (HP-Fertilizer) Expenditure Reforms Commission Report onRationalizing Fertilizer Subsidies2000 (ERC-Fertilizer) Policy Frameworkfor Agricultural Extension 2000 (PF-Extension)a National Policy on Handling, Storage, Transportation of Foodgrains 2001 (HST-Foodgrain)a Nationals Seed Policy 2002 (NP Seeds) a Plant Variety Protection and Farmers' Rights Act 2002* (PVP) National WaterPolicy 2002 (NP Water) a Report of the Inter-Ministerial Task ForceonAgricultural MarketingReforms 2002 (ITF-Marketing) High-level Committee Report on Long -term GrainPolicy 2002 (LT-Grain) ModelAct for State Agricultural ProduceMarketing (Development and Regulation) 2003 (MAPM Act) I Note; a. policies officially adoptedby GOI. 3.2 Notably, these policy documents reflect an increasing convergence on the need for reform in key areas. These areas include: (a) liberalizingand improving the functioning o f commodity markets, (b) reforming commodity price policy, (c) rationalizing input subsidies, (d) increasing productivity- enhancing investments (research and development, extension, rural infrastructure and services), and (e) reforming public sector institutions and adopting participatory approaches. Table 3.2 lists the policy issues addressed by each o f these policy pronouncements. A. Liberalizing Domestic Markets Pervasive regulations of domestic marketing unnecessarily increased marketing costs, risks and uncertainty, hurting the agricultural sector. The resulting marketing margins place downward pressure on farm prices, increase the costs for consumers, and reduce the competitiveness o f exports and potential demand by local consumers. These regulations include small-scale reservation and controls on private storage, transport, processing, access to credit, exports, and imports under the Essential Commodities Act (ECA) 1955. The continuing uncertainty created by the lack of stability in the regulatory environment discourages private sector investments in supporting marketing infrastructure, ago-processing, and ago-industry that could have expanded demand for primary agricultural products as well as generate additional employment inrural areas. 16 Policy Deregulate Reform commodity Rationalize input Increaseproductiviw Reform marketing price policy subsidies enhancing investment institutions Abolishing controls on licensing, stocking, and movement under the Essential Commodities Act 1955 Removing levies on rice and sugar, and decontrolling sugar distribution Rationalizingtaxes on agricultural commodities Removing oilseed processing and farm equipment manufacture from the small-scale industry reservation list Introducing a warehouse receipt system, promoting pledge financing, and establishing futures markets for all bulk commodities. Abolishing the Milkand MilkProducts Order 1992 Amending the state Agricultural Produce Marketing Regulations (APMC) Act to allow contract farming, private sector investments in wholesale markets, and direct marketing between buyers and sellers. Basing imports and exports on a system o f variable tariffs. GO1 has adopted several of the policy recommendations relating to domestic trade deregulation. In 2001, to cope with problems o f mounting foodgrain stock, the GO1removed the restrictions on investments inbulkhandling and storage by domestic and foreign investors (upto 100 percent). In 2002 GO1undertook a number o f important reforms. It lifted licensing requirements, stocking limits, and movement restrictions for wheat, paddyhice, coarse grains, edible oilseeds, and edible oils, and removed restrictions on access to credit under the Selective Credit Control Policy. GO1amended the Milk and Milk Products Order 1992 to remove restrictions on investments by the 17 private sector in dairy processing, including up to 100 percent ownership by foreign investors (MinistryofFinance and Company Affairs, or MOFC, 2003b). Itreducedthe levy on sugar factories from 15 to 10 percent to enable more sugar to be sold in the open market. It clarified intellectual property rights with respect to crop research and development by enacting Plant Variety Protection legislation. In 2003 the GO1 eliminated the ban on futures trading o f 54 commodities including wheat, rice, oilseeds, and pulses that had been prohibited from futures trading under the Forward Contract (Regulation) Act 1952. A GO1 taskforce completed the model act for state agricultural produce (wholesale) market development and regulation, which eliminates the exclusive control o f state-regulated markets over wholesale marketing and permits the private sector to undertake wholesale market development. In early 2004, Maharashtra announced that it plans to adopt the model act. A challenge for the future i s encouraging other state govemments to adopt the model act. Several states have taken various steps to relax some o f their Agricultural Produce Market Act restrictions. In2003 Kamataka permittedthe National Dairy Development Boardto set up a fruit and vegetable wholesale market. Other state govemments, such as Punjab, Haryana, Madhya Pradesh and Tamil Nadu allowed farmers under contract farming arrangements to bypass regulated wholesale markets and sell directly to private buyers or contractors. However, a large domestic market reform agenda remains to be completed. Higher growth will continue to be hampered by the large number o f remaining regulations, most o f which come under the umbrella of the Essential Commodities Act 1955 (table 3.3). While GO1has temporarily lifted several key regulations such as storage, transport and credit controls, the threat o f their re- imposition discourages both local and foreign investments. For example, despite the shortage o f Notes Shaded cells = commodity regulation exists. Lifted = commodity regulation temporarily not enforced. # =wholesale marketing controls relaxed in some states for contract growing arrangements. These co&odities account for approximately two-thirds o f agricultural GDP. Sources; World Bank 1997 and author's assessment. 18 grain storage capacity and offers o f various investment incentives by the GOI, the private sector remains hesitant to invest inbulk foodgrain storage infrastructure. B. ReformsinAgriculturalTrade Policy During the 1990s' GO1 implemented a number of external trade policy reforms that had significant implications for the agricultural sector, These included: the removal o f quantitative import restrictions and state import monopolies o f most agriculturalproducts, partial liberalization o f agricultural exports, and transitory subsidization of cereal exports. ImportPolicy Economic reforms introduced in 1991 led to a substantial liberalization o f India's external trade regime. In the early 1990s, progress in phasing out quantitative restrictions on consumer products including agricultural products was very slow. Except for the 1994 liberalization o f import licensing on sugar and cotton, most agricultural products remained subject to import controls. In 1997, with the considerable improvement in its balance o f payments, India agreed to phase out its quantitative restrictions over a nine-year period, which was completed before the deadline on April 2001. The 2001 Budget, however, required that biosecurity and phyto-sanitary permits and other packaging and labeling conditions already provided for by different legislations be enforced for imports o f certain agricultural commodities. These requirements represented a shift to non-tariff protection measures, apparently designed to counter the perceived threat o f a flood o f imports. India also progressively trimmedthe list o f products whose imports were canalized through State Trading Enterprises. The Export-Import Policy (EXIM) for 2002-07 retained import monopolies only for copra and coconut oil by the State Trading Corporation and cereals by the Food Corporation o f India. Table 3.4 Import Tariffs of Selected Import tariffs rates for agricultural commodities increased in the late 1990s. The average agricultural tariff (excluding the special additional duty, or S A D ) rose from 33.8 percent in 1997/98 to 41.7 percent in 2001/02. The Maize 19.6 or 56 majority o f agricultural product-related tariffs are in the 35 Sorghum 81.2 percent to 50 percent range. Hence, as international prices Powdered milk 15 or 60 crashed in the late 1990s, imports did not increase Bab foods significantly as import tariffs were adjusted upwards. Inthe Fresh a es 45.6 second half o f the 1990s, the major agricultural imports Fresh lums 45.6 were wheat, maize, pulses, edible oils, and milk. Table 3.4 Coffee 108 lists the import tariffs o fmajor commodities. Tea 108 ExportPolicy. India's agricultural export policies were progressively liberalized beginning in 1994, subject to occasional reversals. Export policies pertaining to agricultural products changed frequently, often several times a year, and therefore did not follow a general trend. The policyreforms include reductions inproducts subject to state trading, relaxation o f export quotas, abolition o f minimumexport prices, and increased credit availability for exports. To encourage exports o f agricultural products, GO1 Note: SAD = Special additional duty Source: World Bank 2003. announced inits Export-Import Policy o f 2001 a program to support the establishment o f agricultural export zones. Inthe EXIM Policy 2002-2007, quantitative export controls applied to only a limited 19 number o f products.20 Besides these, export restrictions were applied to other products for environmental and moral reasons.21Although, the policy keeps changing from year to year, and sometimes even within a year, export licenses are generally required for items such as cattle, milk, cereals, edible oils, and pulses. India introduced export subsidies for cereals in early 2000. GO1 had to resort to export subsidies for rice and wheat as world cereal prices crashed to very low levels in the late 1990s. The decline in world prices coincided with increases in the domestic support prices for wheat and rice, which encouraged increased production, necessitating increased government procurement. As a result, government foodgrain stocks rose to over 60 million mt. InNovember 2000 the GO1decided to offer private traders wheat for export at a price "equal to the Food Corporation o f India economic cost minus two years carrying cost, but not lower than the central issue price for below poverty line households" (Department o f Food and Public Distribution 2001). In2003 the scheme was expanded to cover rice. This sharply increased India's foodgrain exports (figure 3.5). The GO1justified its export support policy under the exemption for developing countries from reduction commitments contained in Article 9.4 o f the Agreement on Agriculture. This exemption permits export subsidies for reducing the costs o f marketing and providing favorable internal transport charges on export shipments.22 Impact of agricultural trade policy. The level o f trade protection increased for several major commodities in the late 1990s. Nominal protection coefficients (NPCs) represent the ratio o f the domestic price to world price (the price o f an exportable or importable commodity at the border). Estimates o f NPCs for rice and wheat indicate that trade protection for them increased rapidly in the late 1990s (table 3.5).23 As elaborated in the next chapter, such trade protection i s driven by the rapidly rising minimum support prices in the context o f declining world market prices. NETSfor most oilseeds with the exception o f rapeseed, declined below 1, The sugar and dairy sectors are also highlyprotected. Rationalizing Commodity Price Policy The GO1price support policy aims to provide farmers insurance against any sharp price fall and help ensure a reasonable farm income. Currently, the government sets minimumsupport prices (MSP) for 24 major crops, including paddy, wheat, jowar, bajra, maize, ragi, pulses, oilseeds, copra, corn, jute, sugarcane, and The Commission o f Agricultural Costs and Prices (CACP) in the Department o f Agriculture and Cooperation is charged with recommending the MSPs for these commodities every year.25Farmers have the option o f selling their produce in the open market or to the GO1or its designated agency at the MSP. ' O Including onions (exports allowed through STEs and subject to quota); paddy, de-oiled groundnut cakes, fodder, rice bran, and certain seeds and plantingmaterial (exports permitted under license). 2' For example, exports o f beef and tallow fat and/or oil o f animal origin, excluding fish oil, are prohibited. 22 India's most recent notification to WTO for export subsidies was made in March 2002 and covers the marketing years 1996197, 1997198, 1999100, and 2000101 (WTO document GIAGMIIND13, 1 March 2002). 23 The NPC i s the ratio o f the domestic price to the border price o f a commodity. An NPC greater than 1 implies that producers receive higher price (or positive protection) than without the intervention. The NPCs computed for wheat and rice use the Minimum Support Price as the proxy domestic price for 1990191 to 2000/01. These calculations exclude domestic taxes and fees such as the purchase tax and wholesale regulated market fee. See Gulati and others 2003 for details. 24 Untilapproximately 1973-74, the govemment announced two prices, the MSP and procurement prices. The MSP was intended to serve as a floor price. The procurement price was the price at which cereals were procured by FCI for release through the public food distribution system. Since there was significant pressure from farmers to raise the MSP, in 1975- ''76,In the two prices were merged (Ministryof Finance and Company Affairs 2003a) recommending these prices, the CACP takes into account all important factors including cost of production, changes in input prices, inputioutput price parity, trends in domestic market and intemational prices, intercrop price parity, and demand and supply status (Ministry o f Finance and Company Affairs 2003a). 20 Notes: a. Exportable b.Importable c. SMP- skimmilk powder Source: Gulatiand other and others 2003; SharmaandGulati2003. Over the last decade, GO1 MSP operations were significant for only paddy, wheat, and sugarcane. For other commodities, actual government procurement was negligible as their market prices were generally higher than their MSPs. Of significant concern, however, i s the rapidly rising trend in GO1price support activities for paddy and wheat, which has had adverse fiscal, economic, and environmental consequences nationally. At the same time, because they are closely interwoven with the government's national foodgrain policy, the reform o f foodgrain MSP policy cannot be disassociated from its other elements. This complex web o f interdependent policies i s elaborated below. C.Foodgrain (Rice and Wheat) Policy The GOI`s foodgrain policy rests on two major pillars: a) to ensure farmers a reasonable income through procurement and price support operations and (b) to ensure adequate availability of, and improved access to, foodgrains by consumers at reasonable prices through the distribution o f subsidized foodgrains and price stabilizatiordbuffer stocking operations. To achieve these goals, GO1 created a government marketing system that parallels that o f the private sector. The Food Corporation o f India (FCI), a government parastatal, i s the main implementing arm o f the GOI's foodgrain policy. FCI or its designated state government agency procures paddy and wheat from farmers at the MSP. 26 Inaddition, F C I obtains additional rice supplies through a "rice levy" on rice mills. Depending on the state, rice mills are required to deliver to the FCI from 10 percent to 75 percent o f their milled rice output at a government-prescribed levy price.27On average, levy rice accounts for approximately 60 percent o f total rice procurement by the FCI. Paddyhice and wheat 26 Paddyis the primaryproduct; which whenmilled, producesrice, bran andother by-products. 27 The rice levy price is based on the MSP for paddy plus "average rice milling costs and a margin o f profit for the rice millers.'' 21 stocks accumulated through procurement then are used to meet the requirements o f the public distribution system, buffer stocks, and other food-based welfare schemes. To ensure adequate foodgrain supplies for the government's procurement operations and to protect farmers and consumers from unfair practices by grain traders, a large number o f restrictions were imposed on private traders by GO1and state governments. These restrictions include controls on movement, storage, exports, imports, and access to trade credit, and-until 2003-risk management instruments (futurescontracts) (table 3.3). Controls are enforced or lifted depending on the severity o f supply shortfalls and price rises, thus reducing private sector incentives for spatial and temporal arbitrage. The Targeted Public Distribution System (TPDS) i s the largest safety net program in the country and operates by providing a price subsidy to consumers for essential commodities. The most important o f these are rice and wheat." Introduced in June 1997, TPDS supplies these commodities at prices below the FCI's economic costs, which equals the sum o f FCI's procurement, storage, and distribution costs. TPDS has a 2-tiered pricing structure for below the poverty line (BPL) and above the poverty line (APL)households. The shift to the TPDS was a significant milestone in the GOI's food security strategy. At inception, TPDS targeted the price subsidy exclusively to the poor (table 3.6). As discussed below, this targeting was later adjusted to also provide a small subsidy to APL households. By contrast, its predecessor, the Public Distribution System (PDS), was a general entitlement scheme. PDS was widely criticized for its failure to effectively reach the poor, its urban bias, substantial leakages, poor quality o f grain supplied due to deficient inventory management and relaxed specification for procurement, lack o f transparent and accountable delivery systems, and negligible coverage and low off-take in states with high concentration o f poor due to nonavailability o f stock (Radhakrishna and others 1997, Comptroller and Auditor General o f India 2000, Drkze 2001, Dutta and Ramaswami 2001, Jha and Srinivasan 2001, Umali-Deininger and Deininger 2001, and Shariff and others 2002). It i s estimated that leakages at the national level during 1997/98 amounted to 31percent for rice and 36 percent for wheat (Ministry o f Consumer Affairs and Public Distribution 2000). GO1introducedthe Antyodaya Anna Yojana (AAY) in December 2000, as a sub-scheme to benefit the poorest o f the poor. AAY provides a larger price subsidy and quantity than that Figure 3.1 India FoodgrainStocks, Actual and received by B P L households. Each M Y Minimum Norms, millionmt 1992-2003 household i s eligible for 25 kg o f food grain per I 70 I 1 month at a CIP o f Rs 2 per kg for wheat and Rs 3 per kg for rice. The estimated annual I E 6 0 E allocation o f food grains for this scheme was 3 million mt. In April 2002, the AAY household t foodgrain allocation was increased to 35 kg per 6 30 month. Y8 20 F C I uses buffer stocking and open 5 10 market sales to stabilize domestic rice and wheat consumer prices and meet India's food security needs. Buffer stock norms are adjusted by quarter and range from 16 million mt to 24 million mt (figure 3.1). Actual buffer stock I &Min.Norm+Actual volumes stayed close to the norms until 1999. Source: Minishy of Finance and Company Affairs, Economic After 1999, however, stock levels jumped as a Survey, various issues. ** The program also supplies sugar nationally, and other commodities such as edible oils and coarse grains in some states. 22 result o f large increases in the F Table 3.6 TPDS Foodgrain CentralIssue Pricesand FCI MSP, declining off-take from the TPDS and declining domestic and Rice, Rs/kg Wheat,Rskg internationalprices. H o w this came BPLprice APL price FCI cost BPLprice] APL price II II I II FCI7.98 cost about i s elaborated in the next 1997/98 3.50 7.00 9.37 2.50 4.50 1998199 3.50 9.05 9.95 2.50 6.50 8.00 section. 1999100 3.50 9.05 10.75 2.50 6.82 8.88 5.65 11.30 11.80 4.15 8.30 8.58 Impact of GOI's MSP, 12°00'01 2000102 5.65 8.30 12.04 4.15 6.10 8.71 Steady incieases in the minimum 12002103-APr 5.65 7.30 12.06 4.15 5.10 8.79 encouraged increased production, ~~ necessitating greater government procurement. Prior to 1996/97, the GO1 generally adhered to the CACP recommended MSP for rice and wheat. CACP primarily used as its benchmark the "C2 cost o f production." C2 approximates full production costs, including all expenses in cash and in kind, plus rent paid for leased land, imputed value of family labor, and the interest on the value of owned capital. Starting in 1997/98, the GO1 began setting the MSP significantly higher than the C2 cost benchmark. In2001/02, for example, the weighted average C2 costs o f 8 wheat producing states was Rs4.83 per kgwhile the MSP was set at Rs 6.20 per kg (MOFC 2003a). In2002/03 GOI's efforts to freeze the MSP were overwhelmed by pressures from the MSP beneficiary states (for example, Punjab, Andhra Pradesh, Haryana) to raise it. Thus, although the MSP was frozen at 2001/02 levels, GO1offered a "drought relief bonus" o f Rs 200 per mt to the paddy MSP and Rs 100 per mt to the wheat MSP, despite the fact that these crops were generally grown in irrigated areas and thus had assured water supply. The highMSPs encouraged increasedproduction o f wheat and rice. Combined with the reduction in foodgrain off-take with the shift-to TPDS and the downward trend in world market prices, which limited export possibilities, the government was left with no option but to procure more, resulting in the massive accumulation o f buffer stocks. The continuing overhang of burgeoningbuffer stocks inturn exerted downward pressure on open market prices. With the private sector unable to compete with the high MSPs, this necessitated even greater government procurement. InJanuary 2003, actual buffer stocks stood at 48 millionmt compared to the 17 million mtnorm (figure 3.1). Who are benefiting from the Government's highMSPs for rice and wheat? Nearly all states in India grow rice, and approximately 20 states grow wheat. However, FCI wheat and rice procurement are concentrated in a few states. Wheat procurement i s concentrated in three states: Punjab accounts for approximately 55 percent o f total procurement, Haryana approximately 30 percent, and (Western) Uttar Pradesh approximately 10 percent (figure 3.2).29Indeed, in Punjab and Haryana, F C I procures nearly 100 percent o f total market arrivals. Varying by year, FCI procures rice from approximately 22 states in India. However, Punjab, Andhra Pradesh, Haryana, Uttar Pradesh, and Tamil Nadu account for approximately 85 to 90 percent o f total rice procurement. Andhra Pradesh and Punjab contribute 35 percent each. Inboth Andhra Pradesh and Punjab, F C I procures approximately 90 percent o f total market arrivals, approximately 50 percent in Haryana, and 40 percent inTamil Nadu. 29FCIwheat procurement in other states i s minimal: Madhya Pradesh and Rajasthan accounts for about 2 percent to total wheat procurement, while and Bihar, Delhi,Chandigarh accounts for about 0.2 percent. 23 Figure3.2 Wheat andRice Procurementby FCI, 1990/91to 2002/02, million mt 25 I I 25 Wheat Procurement Rice Procurement E 20 E 0Haryana Punjab Punjab AP Haryana 0UttarPradesh* HOther States 0 UP* NTN Other States Note: Uttar Pradeshfigures includeUttaranchalprocurement after 2000101 Source: Ministry of Food and Consumer Affairs, httu:/ifcainin.nic.innlic tabl4.htm The rapid increases in the MSP for wheat and rice benefited these selected states considerably. The MSP exceeded the estimated state-specific C2 cost o f wheat in Punjab, Haryana and Uttar Pradesh by a wide margin during the 1990s, with the premium rising rapidly after the mid 1990s (figure 3.3). By 2000, the wheat MSP was 40 to 50 percent higher than the "cost of production" in these states. Because o f the very attractive prices, between 1998/99 and 2000101 wheat area increased by 130,000 ha in Punjab, by 161,000 ha in Haryana and 239,000 ha in Uttar Pradesh. In the case of rice, the diversity in level o f production efficiency resulted in Punjab and Uttar Pradesh capturing most o f the benefits, with the MSP exceeding their state-specific C2 costs by approximately 10 percent during most o f the 1990s and rising to approximately 25 percent by 2000. By contrast, as farm harvest prices were above the MSP in Haryana and Andhra Pradesh, the MSP functioned like a floor price. Not surprisingly,between 1998/99 and 2000/0 1, rice area increasedby 93,000 ha in Punjab and by 263,000 ha in Uttar Pradesh, while rice area declined by 34,000 ha in Haryana and by 73,000 ha inAndhra Prade~h.~' The inequities associated with the implementation o f the wheat and rice price support program are highlighted by the windfall received by these select group o f states. Taking the Figure3.3. Ratioof the MSP to the C2 Cost of Production, 1990/91 to 2000/01 1.60 1.50 1.50 Rice 1.40 1.25 1.30 1.20 1.oo 1.10 1.00 ! - , , , , I I , Punjab --ePunjab - I , , I I 0.75 Haryana +UP I +AP +Haryana+UP Source: Departmentof Food and Public Distribution 2002. 24 difference between the MSP and all-India average C2 costs to measure rice and wheat price support benefits, the fiscal transfers to Punjab in 2001/02 amounted to Rs19.8 billion, or 43 percent o f total prices subsidies (figure 3.4). Other states that benefited significantly, but to a much lesser degree were Haryana (Rs 9.4 billion), Andhra Pradesh (Rs 4.9 billion) and Uttar Pradesh (Rs 4.6 billion). The benefits transferred to other states were insignificant. For rice farmers in 2001, this amounted to an average o f approximately Rs 4,645 per farmer in Punjab, Rs 1,049 per farmer inHaryana, and Rs 996 per farmer in Andhra Pradesh. The estimated transfer per wheat farmer duringthe same year i s approximately Rs 7,281 inPunjab, Rs 3,132 inHaryana, and Rs 152 inUttar Pradesh (unsplitstate). The benefits o f rice and wheat procurement at the MSP accrue mainly to larger farmers in these states. Analysis o f the 54thRound (1998) o f the National Sample Survey (NSS) shows that medium and large farmers, who account for approximately 40 to 45 percent o f all farmers, cultivate over two-thirds o f total wheat area in Punjab and Haryana. In Uttar Pradesh, they account for 12 percent o f all farmers, but cultivate 40 percent o f the wheat area. Consequently, they also capture a larger share o f the MSP benefits (table 3.7). Similarly, medium, and large farmers account for the major share o f area plantedto rice inPunjab, Haryana, and Andhra Pradesh, disproportionate to their numbers. InTamil Nadu and Uttar Pradesh, the distribution o f rice area i s slightly more equitable. Assumingrice andwheat yields are constant across farm sizes, total marketedsurplus is estimatedby total production less home consumption by the household (derived from the NSS 54" round) and a 10 percent set-aside for seeds, other uses, and farm losses. Assuming marketed surplus i s sold at the MSP, the average "income transfer" per household through the MSP in 1998 i s estimated taking two reference points: (a) C2 costs and (b) total cash costs plus imputedcosts o f family labor or "A2 +FL costs". The estimated average income transfer per household more than doubles from the C2 to the A2 +FL benchmarks (table 3.8). It i s higher for wheat than rice. Whether for wheat or rice, in each state the average income transfer to large farmers i s approximately 10 or more times greater than those receivedby marginal farmers. Punjab, Haryana, and Uttar Pradesh receive twofold benefits from the GOI's price support program, because o f the rice-wheat production system followed inthese state. Usingthe C2 benchmark, the total transfer per household in Punjab amounts to an average o f approximately Rs 13,000 per year, and ranges from ,approximately Rs 3,000 per marginal farmer to Rs 34,000 for large farmers. Many other major rice and wheat growing states do not share in these benefits. While the wheat MSP increased in real terms by 1.9 percent per year during the 1990s, farm harvest prices Table 3.7 Distributionof Wheat and Rice GrowingHouseholdsinPunjab,Haryana, Uttar Pradesh,Andhra Pradeshand Tamil Nadu, 1998 Note: HH= households. a. Marginal farmers own less than 1ha of land and small farmers own 1to less than 2 ha of land. b. Mediumfarmers own 2 to less than 4 ha of land and large farmers own 4 or more hectares of land. Source: Sur and Umali-Deininger2003. 30 The severedrought during 2000/01 in AndhraPradeshi s likely to have contributedto the decline inarea as well. 25 declined in Bihar (-1.8 percent), Figure3.4 EstimatedRice andWheat Price Subsidy inMajor Madhya Pradesh (-0.3 1 percent), States, Rsmillion, 2001/02 Rajasthan (-0.52 percent), and 25,000 Uttar Pradesh (-0.11 percent). Similarly, while the rice MSP 20,000 increased by 0.8 percent per year in real terms during the 1990s, 2C farm harvest prices declined in 115,000 Bihar (-1.1 percent), Orissa (-2.1 2 io,ooo percent), Karnataka (-0.1 percent), 5,000 and Tamil Nadu (-0.2 percent) (World Bank 2003a). 0 The intensive rice and wheat production system in Punjab, Haryana, and Western Uttar Pradesh and rice production in Andhra Pradesh and Tamil Nadu are causing widespread Rice Subsidy 0 Wheat Subsidy mining o f groundwater and Source Estimated by authors using data from Department o f Food and Public waterlogging and salinity in some Distributionand Food Corporation of India canal irrigated areas. Indeed, over-extraction o f groundwater resulted in cave-ins causing injuries and death in some areas in Punjab. InCentral Punjab, extensive rice cultivation, accounting for 75 percent o f kharif cropped area, and its early transplanting are cited as the main causes for the decline in water tables, which dropped by approximately 23 cm per year during the last 2 decades. On the other hand, in southwest Punjab, where canal irrigation i s common, waterlogging and salinity problems are widespread. In Tamil Nadu, the depth o f borewells for irrigation in hard rock areas increased to as much as 600-1000 fi (World Bank 2003g). These problems are discussed in more depth inthe next chapter. Clearly, water-related problems threaten the longer-term sustainability and productivity o f agriculture inthese states. External Rice and Wheat Trade. The rapid increase in the wheat and rice MSP inthe late 1990s coincided with the steep downturn in international prices 8 Producer transfer per household, Rshousehold for these commodities. Domestic :Commodity/State AN Marginat Smallb Medium` Larged prices rose as world market 1. Rice producers prices hit historic lows making C2 Base: Indian exports uncompetitive Punjab 3,041 799 1,674 3,094 7,556 (although still efficient as import Andhra Pradesh 164 54 186 339 621 A2 + FLBase: substitutes). In 1999 the GO1 Punjab 17,508 4,598 9,637 17,813 43,502 raised the import duty for wheat Andhra Pradesh 3,826 1,260 4,315 7,876 14,454 from zero to 50 percent to stem 2. Wheat Producers the inflow o f imports. Under the C2 Base: Punjab 9,980 2,210 5,094 9,761 26,752 exportable hypothesis, the Haryana 5,794 2,236 3,597 6,547 14,705 nominal protection coefficient Uttar Pradesh 217 29 351 793 1,807 (NPC) for wheat rose sharply A2 + F LBase: above 1 beginning in 1998 and Punjab 21,667 4,797 11,059 21,190 58,077 Haryana 10,957 4,229 6,803 12,382 27,809 reaching 1.75 in 2000 (figure Uttar Pradesh 402 53 651 1,470 3,351 3.5). The NPC for rice reached Note: HH= households. 1.39 in 2000 (Gulati and others 2003). With mounting buffer stocks and their associated costs 26 Figure 3.5 Nominal Protection Coefficients for Wheat and Rice and Net Export Volumes, 1980 to 2002 0 ' """ "" ' " " ' "" ' 5 mNetExports 0NetImports E3NetExports --cImportableHypothesis +Importable Hypothesis --6-Emortable Hypothesis +Exportable Hypothesis Source: Gulati and others 2003. and storage problems reaching crisis proportions, the inability to use exports as an escape valve heightened the crisis. Consequently, the GO1 resorted to subsidizing the marketing and internal freight costs o f private sector exports to offload some the stock^.^' From a net importer o f wheat in 1999, India's net exports rose to 2.6 million mt in 2001. Rice exports remained high at approximately 2.2 million mt. Unfortunately, there are no readily available estimates o f the fiscal cost o f subsidizing exports. TargetedPublicDistributionSystem. Many states encountered difficulties intransitioning to the TPDS in 1997. Some state governments took awhile to identify and issue the new ration cards to the BPL families. By 1999, 18 statedunion territories (UTs) still had not completed the process o f identifying the poor. This failure resulted in 18 percent o f the population nationally not possessing ration cards. The number o f BPL households covered increased marginally from 63.2 million in 1998 to only 65.2 million in2001. The shift inentitlements to a family norm amounting to a uniform 10kg o f grain per BPLhousehold in 1997, irrespective o f family size and need, translated to 2 kgper person per month for a 5-member family. Inresponse to criticisms regarding the inadequacy o f the allocation and faced with the problem o f mounting stocks, the GO1inApril 2000 increased the BPL family allocation from 10 to 20 kg per month to be priced at 50 percent o f FCI's economic cost. No changes were made to the APL allocation at this time. The GO1adopted further modifications to the TPDS by increasing the foodgrain allocation to the poor and help reduce excess stocks. The quota for BPL families was modified to depend on the number o f family members, with each family allowed to purchase up to 5 kgper person per month at the announced BPLprice; or an allocation o f 20 kgper family-whichever is higher (Department o f Food and Public Distribution 2002). Any additional requirement will be provided at the APL price. InJuly 2001, the BPLallocation of food grains was increased further from 20 kgto 25 kgper family per month, priced at 48 percent o f economic cost (table 3.6). GO1 also allowed APL families to purchase TPDS foodgrains at 70 percent o f the economic cost. From April 2002, the allocation of foodgrains for AAY, BPL, and APL families was increased again to 35 kg per family per month for 1year (Planning Commission 2002). At the same time, the government also reduced the issue price for APL rice and wheat by Rs 1-00per kg for 3 months. The off-take under TPDS during April to 31InApril 2002, wheat sale prices per mt from FCI stocks inPunjab were: open market sales $134.5-$149.9; APL $104.7; BPL $85.2; and export sales $88.5. The Delhi wholesale price was $128.3 and the MSP $127.3. The estimated export subsidy i s between about $40 and $61 per mt, depending on whether the alternative for an exporter is considered to be the Delhi wholesale price or the FCI open market sale price equivalent to approximately 40 percent to 58 percent of an fob price of $105 per mt (Purse112003). 21 June 2002 rose to 2.35 million tons for rice and 1.61 million Table 3.9 Trendsin TPDS FoodgrainAllocation and Off-take, tons for wheat against 1.85 million tons and 0.99 million PDS/TPDS allocation, million mt Ratio of off-take to allocation State 1993I94 I 1999/00 I 2001/02 1993I94I 1999/00 I2001/02 tons respectively for the Andhra Pradesh 2.46 2.44 3.25 0.93 0.99 0.53 corresponding period in 2001. Assam 0.77 0.88 0.98 0.84 0.85 0.59 Increased off-take, open Bihar a 1.02 1.37 2.87 0.50 0.65 0.27 Delhi 1.10 0.88 0.69 0.64 0.15 0.16 market sales, and exports Gujarat 1.06 1.03 1.50 0.52 0.45 0.34 reduced stocks and buffer Haryana 0.18 0.16 0.22 0.51 0.54 0.43 stocking costs (Jha and Umali- Kamataka 1.12 1.32 1.45 0.76 0.79 0.92 Kerala 2.18 2.20 2.27 0.87 0.65 0.58 Deininger 2003). MadhyaPradesha 0.98 0.92 1.93 0.45 0.69 0.53 The shift to TPDS Maharashtra 1.82 1.97 3.13 0.61 0.89 0.45 Orissa 0.73 1.59 1.04 0.55 0.10 0.56 contributed to an increase in Punjab 0.26 0.06 0.16 0.07 0.04 0.35 allocation and off-take in states Rajasthan 1.22 0.65 1.43 0.49 0.38 0.47 Tamil Nadu 1.12 2.17 1.85 0.97 0.91 0.58 with higher rates of poverty. At Uttar Pradesha 1.51 2.27 3.12 0.42 0.59 0.45 the aggregate level, foodgrain West Bengal 1.96 1.58 2.27 0.69 0.73 0.34 allocation and off-take All India II 21.59 23.90 30.01 II 0.67 0.70 0.45 Nore: % * increased substantially at the a. For comparability, 2001102 figures for Bihar, MadhyaPradesh and Uttar Pradesh are for national level between 1993/94 unsplit states. (pre-TPDS) and 999/00 Source: Ministry o f Food and Consumer Affairs, Food Corporation of India. (TPDS). More importantly, allocation and offtake increased inthe poorest states, such as Uttar Pradesh, Orissa, Maharashtra, and Madhya Pradesh (table 3.9). Allocations increased further in 2001/02 as household foodgrain allocations were raised from 20 to 35 kgs per household per month and additional provisions for flood and drought reliefwere channeled through TPDS. Despite this increase inallocation, foodgrain off-take during 2001/02 declined inmany states. This was due largely to the sharp decline inoff-take o f APL households. At the national level, BPL off-take increased from 7 million mt to 11.7 million mtbetween 1999/00 and 2001/02, while APL off-take dropped from 9.8 millionmtto 1.8 million mt. As mounting buffer stocks placeddownward pressure on market prices, the wedge between APL and market prices narrowed, limiting the incentive by APL households to source their foodgrains from the TPDS. The same trend i s mirrored at the state level. Thus the TPDS appears to have been relatively more successful inchannellinga larger share o f the subsidized foodgrains to the poor. Analysis o f the change in access through PDS and State Above Poverty Line HH Below Poverty Line HH All HH TPDS using the NSS 1993/94 1 1999/00 1993194 11999/00 1993/94 I 1999100 50th round (1993/94) Andhra Pradesh 43.0 54.4 57.8 66.2 45.7 55.9 Assam 12.8 25.5 19.3 49.4 15.2 32.9 and 55" round Bihar 3.3 6.9 2.6 10.8 3.0 8.4 (1999/00) finds that the Gujarat 26.5 34.9 41.1 57.2 29.4 37.2 targeting o f the Haryana 3.5 2.7 2.6 5.5 3.3 2.9 Kamataka 43.4 61.8 48.7 75.0 44.8 63.8 benefits improved with Kerala 63.9 71.2 69.8 87.0 65.2 72.6 the shift to the TPDS. Madhya Pradesh 7.7 14.2 9.7 21.9 8.5 16.7 Maharashtra 26.2 33.6 26.0 47.5 26.1 36.3 Household Orissa 5.6 39.7 3.7 58.0 4.7 47.7 participation rates Punjab 1.o 1.8 1.1 2.6 1.1 1.8 increased from 22.6 to Rajasthan 11.3 5.4 16.6 6.8 12.6 5.6 Tamil Nadu 53.6 69.0 57.9 82.7 55.0 71.4 31.6 percent between Uttar Pradesh 3.4 7.1 2.o 11.8 2.9 8.3 1993194 and 2001/02. West Bengal 16.3 17.6 10.2 31.5 14.3 20.8 Other States 35.0 35.8 43.0 58.1 36.1 36.9 The largest improvements in access by B P L persons 28 occurred in Orissa, Table 3.11Share of TPDS Purchasesin Total GrainConsumptionby Assam, and Kamataka, Households, l!13/94 and 1999/00(( in which access Above Poverty Linea Below PovertyLinea All Households increased by 54, 30, State 1993/94 I 1999/00 1993/94 I 1999/00 1993/94 1999/00 and 26 percentage 19.0 17.2 28.9 24.5 20.8 18.1 Assam 3.8 4.4 4.6 9.4 4.0 6.0 points respectively. Bihar 1.o 1.5 0.7 2.1 0.9 1.7 Participation o f the Gujarat 12.6 11.7 24.8 25.6 14.9 12.9 Haryana BPL persons was 1.o 0.6 1.2 2.9 1.o 0.7 Kamataka 16.8 20.7 26.5 32.4 18.9 22.2 highest in Kerala and Kerala 42.9 44.5 58.9 70.8 46.1 47.0 Tamil Nadu, in which MadhyaPradesh 2.8 2.4 3.8 4.4 3.1 3.O Maharashtra 12.0 12.2 16.2 16.5 13.1 13.1 more than 80 percent Orissa 1.4 9.3 0.9 13.9 1.2 11.3 o f BPL persons used Punjab 0.5 0.8 0.5 1.1 0.5 0.8 TPDS in 1999/2000 Rajasthan 10.4 1.9 19.2 2.6 12.3 1.9 Tamil Nadu 18.2 28.6 23.2 42.3 19.6 31.0 (table 3.10). Although Uttar Pradesh 2.7 2.2 1.5 2.4 2.3 2.2 access still remains West Bengal 5.8 2.9 3.1 5.4 4.9 3.6 low, there was 22.8 21.7 25.5 33.0 23.2 22.3 9.6 9.4 8.3 9.4 9.2 9.4 nevertheless a Note: HH-househc . Datafrom NSSSO" (1993194) for PDS and 55* Rounds (1999100) for TPDS. significant increase in a. BPL includes AAY also. APL and BPL classificationbased on official poveAy line eitimates access in the poorest Source: Deininger, and Umali-Deininger, forthcoming. states o f Bihar, Madhya Pradesh, Orissa, and Uttar Pradesh. Rajasthan was the only state in which access declined between the two periods, but this decline also could be due to the sharp cut in foodgrain allocation between 1993/94 and 1999/00 (table 3.9). The challenge for the future will be how to further raise participationrates by BPL households. The share o f TPDS foodgrains in total household foodgrain consumption increased among B P L households in most states. At the All India level, the contribution o f TPDS to household foodgrain consumption on average remains limited and changed negligibly between 1993/94 and 1999/00 (table 3.11). This unchanged share could be attributed partly to the fact that, at inception, household allocations were fixed at 10 kg per month household. The increase in allocation to 35 kg per household for BPL and AAY households likely will lead to a further increase in consumption shares among these vulnerable households. Although TPDS's share was small, its contribution did increase significantly for BPL households in many states between 1993/94 and 1999/00, including highpoverty states such as Bihar, MadhyaPradesh, Orissa, and Uttar Pradesh. Despite the improvement, a large proportion o f the poorest remain unserved. Inthe NSS 55* round, households were asked why they had not purchased any rice or wheat from the TPDS during the previous 30 days. That the item was not available in the ration shop was the most frequently cited reason for those not buying rice-30 percent for all households and 41 percent for the poorest households, that is, the bottom 20 percent o f the expenditure quintile (table 3.12). Not having access (28 percent) was the second most common reason. For wheat buyers, nonavailability was cited as the most common problem (30 percent o f all households and 36 percent among the poorest households), followed by item not required (29 percent) and having no access (20 percent). For both grains, the proportion expressing dissatisfaction with the quality o f foodgrains sold in the TPDS increased with increasing wealth. Poor quality was less important among households in the poorest quintile. The degree of severity o f the problem o f not having foodgrains available in the ration shop varied significantly by state and wealth categories. A 1999 ORG-MARGhousehold survey o f all states and union territories also found that non-availability o f stocks at the fair price shop and unacceptable quality were the two most frequently cited reasons for not usingthe TPDS (cited inTaimini 2001). 29 Other Welfare Table 3.12 Household Reasonsfor Not Purchasing Foodgrains from Schemes. To quickly reduce stock levels further, GO1 also increased the foodgrain allocation to other welfare schemes and open market sales. GO1 provided foodgrains (5 millionmt per state) free o f charge under the Sampoorna Gramin Rozgar Yoyana, a new employment scheme introduced in 2001 (table a. Not entitled or no ration card. 3.13). GO1 also provided b.Not available or not available in sufficient quantities. Source: Deininger and Umali-Deininger, forthcoming. foodgrains as part o f disaster (drought and floods) assistance to states under an emergency food-for-work program, releasing over 2 million mt in 2001/02. Open market sales increased to 5.6 million mt in 2002/03. These massive releases o f grain contributed to depressing domestic prices considerably, which contributedto the reduced off-take from the TPDS in2002/03 also as noted above. 3.34 Rising Costs of Foodgrain Policv. The rapid accumulation of stocks and the need to offload them quickly led to the sharpjump in thefiscal cost of the government's foodgrain policy. The TPDS consumer price subsidy level in real terms (estimated by total off-take times average consumer price subsidy per kg) declined slightly inthe late 1990s, but returned to 1998/99 levels by 2001/02 (figure 3.6). As buffer stock levels rose, so didtheir cost, such that its share o f the foodgrain subsidy grew from approximately 14 to 41.1 percent between in 1997/98 and 2001/02. However, as noted above, efforts by the GO1to rein in increases in the MSP to contain buffer stock levels were thwarted by political pressure from the main MSP beneficiary states to keep raising the MSP. Very highstate taxes appliedto FCIwheat andrice procurement further increase the cost to the GO1o f its foodgrain policy. Applicable tax rates for rice and wheat procurement i s 9 percent o f the MSP in Punjab and Haryana and 10 percent o f the rice MSP (rural development tax) in Andhra Pradesh (World Bank 2003b and 20030. In 2001/2002 these foodgrain taxes, which served as an additional "fiscal transfer" to the states, amounted to approximately Rs 11.3 billion for Punjab, Rs 4.7 billion for Haryana, and Rs 4.3 billion for Andhra Pradesh. Consequently, the foodgrain subsidy more than doubled inreal terms from approximately Rs 31billion in 1995/96 to approximately Rs 84 billion in 2001/02. Recognizing the crisis created by mounting buffer stocks and food subsidies, the GOI established a Table 3.13 Foodgrain Off-take of Various GO1Schemes committee to re- Schemes 1 96/97 I 97/98 198/99 1 99/00 I 00/01 I01/02(P) I02/03 (P) examine the TPDS 19,664 16,981 18,692 17,076 12,041 13,836 20,130 GOI's foodgrain SGRYIJRY & Other -policv. - Employment Schemes 107 4 11 156 1,883 8,518 The Food for Work 544 2,836 118 committee was Mid-Day Meal & charged with Nutrition Programs 1,147 1,850 1,365 1,426 1,502 2,212 2,404 developing Open market Sales 4,020 55 650 4,551 1,488 5,598 5,661 Export 43 1 1,487 4,685 12,464 proposals for a Other Welfare Schemes 327 229 13 0 932 254 335 Total 25,696 19,119 20,730 23,053 18,150 31,304 49,629 30 The committee completed its report in 2002 and the main recommendations are summarized Figure 3.6 FoodgrainConsumer Price, andBuffer in Box 3.1. The proposals include removal of . . Stock Subsidy, Rsbillion,1993/94 rupees the rice levy and all restrictions on foodgrain E 9n , 1 trade. Current restrictions are proposed to be v & 80 _ - activated only in emergency conditions; this 70 will improve incentives for the private sector. *E 60 50 However, the other key proposals raise 2 40 serious concerns. The sharp reversal from - e 30 adopting a strategy for food security that also 3 20 takes advantage o f international trade to a 2 10 s o strategy o f food self-sufficiency, will come at ' high economic costs. Reverting back to a food self-sufficiency strategy will tie farmers to low- U value rice and wheat production, at the cost o f 0 ConsumerPricesubsidy IBufferStock Subsidq efficiency and more rapid agricultural growth. The continued large sector roleI public Source: Ministry of Food and Consumer Affairs, Ministry of envisioned in foodgrain markets will crowd out Finance and Company Affairs, Economic Survey, various issues, Authors calculations. private sector participation. The committee recommends continued setting o f MSP to cover the cash costs plus the returns to family labor, land, and capital (C, cost). It proposes to compensate the affected states through a number o f possible ways, such as direct per-hectare payments, subsidized insurance premiums, specific crop diversification schemes, and credit-input linked schemes. While the reduction o f the MSP to C2 costs will help reduce the fiscal costs, it implies that the government, rather than the market, will continue to determine farm prices. Government prescription o f prices i s not compatible with market economy principles. The recent decision by the GO1to freeze the MSP at current levels is a positive step. Over the longer term, the government Box 3.1 Reportof the High Level Committeeon Long-TermGrain Policy: Summary of Key Recommendations Minimum supportprice andprocurement. (a) Lower the MSP to the C2cost of production (cash costs plus allowance for retums to labor, land, and capital) as estimatedby the Commission of Agricultural Costs and Prices (CACP); (b) remove the rice levy; (c) adhere to quality specifications; (d) give compensationpackageto states to compensatecultivatorsfor the difference betweenthe MSP and the C1multiplied by average procurement during the last three years. The formula should continue until the actual procurement price crosses the highest MSP; (e) states could compensate rice and wheat farmers through some combinationof direct per-hectare transfers to farmers, subsidizing premiums on insurance schemes on crop incomesiprices, specific crop diversification schemes, or other credithnput-linked schemes to offset cost, including electricity; (f) CACP should be made a statutory body recommending the MSP. Once announced, the govemment should underwriteopen-endedpurchase. Public distribution. (a) Shift immediatelyto a unifiedPublic Distribution SystmDS at a uniform central issue price (CIP) accompaniedby a 35 paiseper kg incentive to state govemments to lift the grain; (b) gradually raise the CIP toward acquisitioncosts; (c) provide Rs 500 per monthto fair price shop operatorsto restoreviability; (d) provide additionalsubsidy in cash for poor consumers inbackwardregions to be given to states for state schemes. The subsidy could be transferred to the poor through food coupons, differential pricing, and food quotas; (e) transfer state cash conditional on actual grain lifting, subject to a ceiling; (f) the cash subsidy will amount to the excess of FCI acquisitioncost over half of FCI's economic costs; (h) relax restrictionson eligibility for operating fair price shops and commodities to be sold; (i) increaseinvolvementof panchayatraj institutions in implementingfood security schemes. Employment and weyare schemes. (a) Expand the Sampooma Grameen Rozgar Yojana (SGRY). The SGRY, launched in September 2001, aims at providing food security and wage employment in rural areas. SGRY is the result of the merging of other employment program$, namely, Jawahar Gram Samriddhi Yojana, Employment Assurance Scheme, and the food-for-work program. The scheme is being implementedon a 75:25 cost-sharingbasisby the Center and the states. (b) grain issuedfor SGRY will be at PDS costs; (c) provide 50% central support to states for acookedmid-daymealscheme. Exports and imports. (a) to stabilize prices, should be govemed by variable tariffs linked to deviation of spot intemationalprices from their long-termtrends; (b) exports mustbe entirelyonprivate accounts. Encouraging private trade. (a) EssentialCommodities Act will activate only during natural disasters or other contingencies and shouldbe reviewed to facilitate private trade; (b) adopt negotiable warehouse receipt systems; (c) investinruralroads and market infrastructure Food Corporationof India: Shouldcontinue its operations. Source; Departmentof Foodand Public Distribution, Report of the High LevelCommittee on Long-TermGrain Policy 2002. 31 should aim to cover only the cash costs incurred, which could serve as a true safety net for farmers. The reversionto an untargeted public distribution scheme i s likely to bringback the earlier problems o f the PDS o f subsidies being captured by non-poor households and likely escalate food subsidies. The GO1i s reviewing these recommendations, but no action has been taken to date on many o f the proposals. FarmIncomeInsurance Scheme, The GO1is piloting a crop insurance scheme, called the Farm Income Insurance Scheme (FIIS) in 100 districts in 16 states. 32 The govemment i s using FIIS as an option to manage price and yield risks (due to natural calamities, pests, and diseases) o f rice and wheat farmers. This scheme will be compulsory for farmers who availed o f short-term crop loans from bankhancia1 institutions and optional for non-loan farmers. FIIS will replace the National Agricultural Insurance Scheme (NAIS), which guards only against yield fluctuations. The NAIS will continue to remain operational for crop and districts not covered by this new program.33 FIIS i s the first attempt to implement an income insurance program ina developing country. Box 3.2 provides a quick overview and initial assessment of the program. There i s broad agreement in India that the existing foodgrain policy i s not sustainable, but there i s limited agreement on the way forward. Significant political economy constraints necessitate Box 3.2 FarmIncomeInsuranceScheme The pilot Farm Income Insurance Scheme (FIIS) was initiated during the rabi season 2003104. FIIS will be implementedby the Agriculture Insurance Company of India, a parastatal. Under the program, the insurance indemnity under FIIS for both borrower and non-borrower farmers is based on the positive difference between the GuaranteedIncome and the Actual Income. FIE i s based on the area approach implemented under the NAIS. The actual income per hectare (ha) for a notified crop in a notifiedarea is the actual area multiplied by the yield multipliedby the market price of the current season. Because of the potential high volatility, the market price will be restrictedby a "capping" and a"cupping" rangeof 20 percent, that is, the market price used inthe insuranceindemnitywill lie between 80% and 120%of the market price of the previous year. The guaranteed income (the sum insured) per ha for a notified crop in a notified area will be the moving average of actual yield of last 7 years, multiplied by the indemnity level (80% for high-risk crops and 90% for low risk crops), multipliedby the Minimum SupportPrice (MSP). Actuarial rateswill apply for all crops coveredunder the FIIS. The gross premiumwill be subsidizedby the govemment. Premiumsubsidies will be 75% for small and marginal farmers (farmers cultivating less than 2 ha) and 50% for other farmers. Product design. In the presence of joint yield and price risks, instead of separate crop yield insurance and price insurancehedging, an "umbrella" contract based on the gross revenue conceivably could provide crop revenue insurance. However, of major concem are the goals of this product. As experience with the National Agricultural Insurance Scheme (NAIS) shows, the multiplicity of objectives, particularly seeking to achieve risk management and social objectives, undermines the effectiveness of the instrument. As a risk managementproduct, revenueinsurancecan deal only with yield variability andprice volatility. The guaranteedincome should depend on the projected area yield (for example, seven-year moving average of area yields) and on the projected commodity price (for example, commodity futures prices).Thus, the guaranteed income would capture trends in yield and price. Using the MSP insteadof the forecasted price inthe guaranteed income will introduce a social dimension inthis insuranceprogram. Under the FIIS, the revenueinsurancecontract will display both a risk management component and a safety-net component (based on the difference between the MSP and the projected price). While the former couldbe transferred to the private (reinsurance or financial) markets, the safety-netcomponent shouldbe retained by the govemment. Premium rates and subsidies. The pricing of the product i s a critical issue. AIC intends to price this insurance product on an actuarial basis. This means that the insurance premium rates will reflect the level of crop yield risk exposure. The absence of such a price discrimination under the NAIS led to problems of adverse selection amongnon-loanee farmers, that is, more high-risk farmers purchase insurancethan do low-risk farmers. The indemnity level will depend on the farmer's exposureto crop yield risk (more specifically, on the coefficient of variation), but this discriminationis insufficient to solve the adverseselection problem. Ifthe premiumrates are underpriced, as is the case under the NAIS, this underpricingimplies that indemnities always exceed premiums and will require subsidies, which will usuallybenefit largefarmers more than small farmers. Finally, explicit subsidieswill take the form of premium subsidies, in which the level depends on the farmer's category. Such a subsidy discrimination,also implemented in the NAIS, aims at giving additional incentives to small and marginalfarmers to purchaseinsurance.If the govemment's objective i s to provide a social safety-net instead of crop insurance, the former could be achieved through the developmentof a free disasterrelief program. Inconclusion, the role of the govemment as aproviderof ariskmanagement instrumentor a safety net instrument, and the underlyingcosts of such political decisions,needs to be clarified. Source: Olivier Mahul, Financial Sector Operation and Policy Department,World Bank, 2004,personal communication. 32At inception, the pilot covered 18 districts duringthe Rabiseason 2003104. 32 careful negotiations between the GO1 and major MSP beneficiary states. These constraints and the complex interdependencies among the various interventions (procurement, buffer stocking, TPDS, and other welfare schemes) compound the difficulty o f managing the reform process. Progress requires difficult decisions, which require strong government commitment. RationalizingInput Subsidies. The major input subsidies relate to fertilizer, irrigation and power. While investments in these sectors are critical for improving and sustaining agricultural growth over the coming decade, these could not be disassociated from the need to rationalize their pricing structures and the institutions involved intheir delivery. These are discussed inmore depth in the next chapter. 33For a detailed discussion and evaluation o f the National Agricultural Insurance Scheme, see World Bank 2003k. IV. Agricultural InputPolicies:Impactand Costs Over the last three decades, agricultural policy in India involved heavily subsidizing key inputs. These include subsidies to fertilizer, water, power, and credit to promote more rapid agricultural production growth and ensure food security. These programs were largely successful. They are recognized as important cornerstones o f the green revolution inthe 1970s and 1980s, which inturn enabled India to overcome frequent famine threats and achieve foodgrain self-sufficiency in the 1990s. As India steps into the twenty-first century, there i s a need to adjust its input policy regime to the radically changed agricultural circumstances. There i s broad recognition in India that the rapidly rising subsidy levels are fiscally unsustainable. Power and irrigation subsidies are major causes of the fiscal crises in many states, and deteriorating state finances are crowding out productivity-enhancing public investments on social services, rural infrastructure, irrigation, and technology upgrading (Planning Commission 2002, Hanumantha Rao 2003, Acharya 2003). Power and water subsidies are threatening the longer term sustainability o f agricultural production in many areas. These subsidies encourage inefficient use o f water and are leading to salinity and water logging problems in canal irrigated areas, and over-extraction of groundwater resources, resulting in the rapid decline of groundwater tables. Fertilizer subsidies, which are concentrated largely on urea, distort input use, leading to nutrient imbalances in the soil. These issues are elaborated in the following sections. A. Fertilizer Policy Fertilizer subsidies were introduced inthe 1970s inresponse to the sharp rise inprices o f oil and feedstock for the fertilizer industry. These subsidies have remained since then (Vyas 2003). Their objective was to ensure oil and feedstock availability at affordable prices and an adequate return on investment to farmers (MOFC 2003a). Domestic producers o f urea are given a designated, plant-specific retention price, which i s derived essentially through a cost-plus formula. The Figure 4.1 Fertilizer Subsidies inIndia, 1980/81to fertilizer subsidy given to the firm i s the 2002103, Rs billion, 1993/94rupees difference between the retention price and the farm-gate price o f f e r t i ~ i z e rPrice controls on . ~ ~ d 100 R 1.0% di-ammonium phosphate (DAP) and muriate o f 9 0 1 0.9% 80 0.8% potash (MOP), which are imported, were Isz- 70 0.7% "decontrolled," or removed, in 1992. Instead, .sE In 60 0.6% 2E the GO1adopted an ad hoc concession scheme, E 50 0.5% 0 wherein the manufacturers received a flat rate 2 s 40 0.4% g 5 subsidy per mt (Gulati and Narayan 2002, 2 30 0.3% 20 0.2% Economic Survey 2001102, Venkateshwarlu `5 10 0.1% - and Sen 2002).35The fertilizer subsidy i s borne n 0 0.0% v) 3 fully by the GO1 (figure 4.1). For example, in 2002103 the farm-gate price for urea was Rs 4,839 per mt; the average subsidy was approximately Rs 4,100 per mt (MOFC 2003a). I Fertilizer Subsidv +Subsidv as %of GDP The total subsidy rose from Rs 15.6 billion in Source: Central Statistical Organization, National Account. Statistics, MOFC 2002a. 34The retention price scheme aimed at ensuring a reasonableretum on investment to local manufacturers and attracting additional investments. The difference between the retentionprice (based on a normative cost of production o f urea plus a 12%post-tax retum on net worth) and the notified sale prices minus the distribution margin is paid as subsidyto individual manufacturingunits.A freight subsidy also is paid to individual unitsto cover the cost o f transportation o f fertilizers from the plant to the consumers. 35The concession scheme was introduced to promote more balanced use o f fertilizer. 34 1981/82 (constant 1993/94 rupees) Table 4.1 Average Fertilizer ConsumptioninMajor States, to Rs 83.3 billion in 1999/2000. It TE 1992/93 andTE 20001001 declined to approximately Rs 65 TrienniumAveraEe billion in 2002/03, in part as a State consumption, million mt Application per ha, kgha State 90/91-92/93 1 98/99-00-01 90/91-92/93 I 98/99-00-01 result o f recent fertilizer policy Puniab 1.2 1.4 166.0 171.7 reforms. 1.6 2.1 124.0 154.2 0.8 1.o 116.2 148.5 Beneficiaries of the Fertilizer 0.6 0.8 115.6 145.3 Subsidy. Who benefits from the 2.2 3.2 87.4 118.8 est Bengal 0.7 1.1 87.7 118.8 fertilizer subsidies- farmers or 0.8 1.3 68.2 110.8 domestic fertilizer manufacturers? 0.6 1.o 60.0 95.3 0.7 0.7 66.6 85.8 Gulati and Naryanan (2002) 0.2 0.2 75.1 83.1 estimate the distribution o f the aharashtra 1.3 1.7 63.2 80.2 subsidy based on the difference adhya Pradesh 0.8 1.1 36.3 55.8 0.2 0.3 20.8 40.3 between farm-gate prices o f 0.4 0.8 25.9 35.2 domestically produced fertilizer ssam 0.0 0.1 8.8 25.8 relative to imports. While the actual farmer share varies yearly due to the fluctuations in world prices, these authors find that, between 1981/82 and 1999/2000, the subsidy share o f farmers was approximately 66.5 percent while that o f industry was approximately 33.4 percent. At the state level, the major beneficiaries o fthe fertilizer subsidy have also beenmany of the foodgrain MSP beneficiary states, in which irrigation i s also more extensive. Fertilizer application rates per ha increased over the last decade, with the highest rates posted inPunjab, Andhra Pradesh, Tamil Nadu, Haryana, and Uttar Pradesh (table 4.1). The different pricing and subsidy structure between urea and DAP and MOP led to the decline inDAP and MOP consumption and the overuse o f urea. The ideal Nitrogen-Phosphorous-Potassium ("K) ratio aggregated for the whole country i s a 4:2:1 application, but the application ratio reached 10:2.9:1 in 1996/97. With the continued adjustment in the subsidy, this rate came down to 6.9:2.7:1 in 2001/02 (Ministry o f Finance 1998, Venkateshwarlu and Sen 2002, MOFC 2003a). This distorted application proportion i s contributing to nutrient imbalances in the soils. Fertilizer Reform Program. Concemed with the rising fiscal costs, the GO1established a High Powered Fertilizer Pricing Policy Review Committee in 1997. Its report, completed in 1998, recommended (a) deregulation o f the fertilizer industry; (b) discontinuation o f the unit-wise retention price; (c) a new pricing methodology based on the long-run marginal cost; (d) abolition of allocations under the Essential Commodities Act; (e) new units to get a guaranteed price for 15 years; and (f) setting up a Fertilizer Policy Planning Board (Ministry o f Chemicals and Fertilizer 1998, Ministry o f Finance 2002~).In 2001/02 the government announced its policy to rationalize fertilizer pricing and implement the recommendations o f the ExpenditureReforms Commission for a phasedprogram o f price increases (7 percent per year) and complete decontrol o f urea by April 2006 (Expenditure Reform Commission 2000, Ministry o f Finance-Budget Speech 2001/02, 2002/03). Since then, the GO1has implemented a number o f reform actions (table 4.2). To some extent, these reforms contributed to a reduction in the fertilizer subsidy after 2000/0 1. Continued commitment to the proposedtimetable is be critical. 35 Budget period I Reform announcement Reform actions taken Unit specific RPS will be replaced by a Group Proposal for replacement of the Retention Concession Scheme. Current maximum retail price (MRP) Price Scheme by a Group Concession Scheme arrangement will be continued and the concession for each beingprepared by the Ministry of Fertilizers group calibrated to enable units to sell urea at stipulated MRP. Concession rate for urea units based on naphthdfumace Implemented in 2001 oil/low sulfur heavy stock be linked to international prices o f feedstock. 2002103 Urea, DAP and MOP prices increasedby 5 percent and reduce Maximum retail prices of urea, DAP, MOP and the subsidy on SSP bv 50/mt. Prices of comulex fertilizers will complex fertilizers increased and rate o f subsidy be suitabl; modified. on SSP reduced by Rs 501mt. 2003/04 IIIssue price of urea will be raised by Rs12 and DAP and MOP [Urea price increased reversed in March 20031 by R s l O per bag (reversed inMarch 2003) Implementation o f Group Concession Scheme beginningApril 1,2003 mrce; Ministry of Finance 2001a, 2001b, 2002a, 2002b, 2003a, 2003b; Economic and Political Weekly 2003. B. Water ResourcesandIrrigationDevelopmentandManagement Irrigation development i s a major pillar o f the government's agricultural strategy to promote agricultural growth and rural development and to ensure food security. Increased access to irrigation benefited farmers by enabling them to achieve higher productivity through the adoption o f higher yielding varieties of crops, increased cropping intensity, and reduced vulnerability to weather risks; and in opening opportunities to cultivate higher value crops. These in tum contributed to increased employment and incomes and the reduction o f poverty in rural areas, and improved food security nationally. Surface irrigation development also contributed to meeting the water needs o f industry and residential consumers and generating power for them. Over the last half-century, public investments in surface irrigation infrastructure and power were instrumental in expanding irrigated area. By 1998/99,total gross irrigated area (GIA) in India reached 75.6 million hectares (ha), equivalent to 39 percent o f gross cropped area (figure 4.2). Duringthe last two decades groundwater irrigated area (through wells) expanded more rapidly than other sources of irrigation. By TE 1998199, it accounted for 56.7 percent o f net irrigated area, while canals accounted for 31.2 percent and tanks 5.6 percent. hi^ rapid expansionFigure was funded 4.2 Gross and Net Irrigated Area by Source, primarily by private investments in wells and , 1980/81 to 1998/99 electric and diesel pumps. The importance o f 80 groundwater nationally i s mirrored at the state 70 level. Approximately 40 percent or more o f net 2 60 irrigated area depends on groundwater for '? 50 irrigation in most states (figure 4.3). However, the sustainability o f irrigated agriculture in $ 40 many areas i s threatened increasingly by 3o problems o f waterlogging and salinity, 5 -L 2o especially in canal irrigated areas, and by over- 10 extraction o f groundwater in groundwater 0 irrigated areas. Government policies, &+\&'& 9 4 &% 9 9&+9'9d9 particularly under-pricing o f canal irrigation and b9&9 \ 9 c ,$ power, which encourage inefficient use o f water, are major factors contributing to these Canals Wells Tanks resource degradation problems. -Others -GIA 36 water amplifies the urgency o f Figure4.3 Distributionof IrrigatedArea by Source, adopting a more strategic framework TE 1998199 for water resource development and 100% management. Water resources management i s primarily a state 80% responsibility; the exceptions are interstate and international water 60% issues, which are under the purview o f GOI. A critical challenge facing 40% many states i s the tightening competition for water (both surface 20% and groundwater) between agriculture, the largest consumer, 0Yo and other users, such as industry, drinking water, power generation, and environmental services. Currently, irrigation accounts for 84 0Canals 0Tanks &Others Wells 1 percent o f water use in India (Planning Commission 2002). But Note: * =Undivided state. in some areas, drinking water Source: CMIE, Agriculture 2002. supplies have reached critical levels due to over-extraction o f groundwater. The recent consecutive years o f drought and the water crisis faced by many states brought to the forefront the need for a more coherent framework for water resources allocation and management. Resolving these challenges, however, requires revisiting existing policy, regulatory and institutional arrangements in the water sector ingeneral, and the irrigation sector inparticular. Water ResourcesManagement Water resources allocation, development, and management and irrigation delivery are handled generally by state Irrigation Departments (IDS), because o f the historical importance bestowed by government on expanding irrigated agriculture. The tightening competition among the multiple users o f water, especially between agriculture and other sectors, i s bringing to light some weaknesses o f the current policy, and regulatory and institutional arrangements. Limited coordination among various water resource (surface and groundwater) development initiatives and the absence o f policies defining water entitlements, pricing and inter-sectoral allocation rules-and, if they exist, the inconsistencies among some o f them-lead to increasing conflicts among users and the unsustainable use of water in many areas. The Irrigation Departments are in a difficult position to resolve these conflicts, because o f their roles as both "regulator" and largest "user." At the same time, the long period o f supply-driven development and investment in irrigation has left little space or motivation to adapt institutional arrangements to deal with changing conditions inthe agricultural and the water sectors as a whole to adjust to growing multi-sector water demand. The multiplicity o f government and other agencies involved, at both the central and state government levels, and weak coordination among them increase the difficulty o f managing water resources in an integrated manner.36 IrrigationDevelopmentandManagement Capital expenditures on major and medium surface irrigation schemes and flood control continue to account for the largest share o f public expenditures inthe agricultural sector. Total public 36 At the central govemment,severalministriesare involved,includingWater Resources, Agriculture,RuralDevelopment, Urban Development, Power, Shipping, Environment and Forests. In Maharashtra, there are 10 govemment agencies directlyinvolvedinwater development andmanagement. 37 expenditures on major, Table4.3: PublicExpendituresinSurfaceIrrigationDevelopment, medium, and minor schemes 1951-2002, Rsbillion. and flood control increased Irrigation steadily from the First Year Total Plan (1951-56) to the Ninth b Major & Five-Year Plan Medium Minor 3.76 4.55 Five-Year Plan (1997-2002). 3.80 5.90 11.01 During this period, public 5.76 4.30 3.26 2.35 0.42 10.33 expenditures totaled Rs 1.5 12.42 5.12 1.62 25.78 trillion (table 4.3).37 These 25.16 7.79 2.99 42.24 nnual(l978-80) 20.79 5.02 4.80 3.30 33.90 investments expanded net Sixth(1980-85) 73.69 19.79 14.38 7.87 115.73 surface (or canal) irrigated area 30.61 9.42 182.28 from 15.3 million hectares (ha) " ~ ~ ~ ~ $ ~ $ ~ 31.18) 54.5911.07 16.80 ~ 13.50 4.61 89.50 (1992-97) 210.72 64.08 53.31 16.92 345.03 in 1985/86 to 17.7 millionha in Ninth(1997-2002) 482.59 86.15 26.59 26.29 621.62 1008.65 243.08 161.28 74.86 1487.87 from approximately Rs 4.9 billion in 1985186to Rs 13.7 billion (1993/94 rupees) in2002/03. Future expansion o f surface irrigation infrastructure will come at increasing cost. Due to higher capital costs and project extension to more difficult areas, the cost o f bringingnew land under canal irrigation increased substantially from Rs 24,207 per ha in the First Plan period to Rs 156,378 per ha in the Ninth Plan period (constant 1999/2000 rupees). Inadequate resources devoted to appropriate operations and maintenance o f canals are causing the early and rapid deterioration o f completed infrastructures, further requiring continued expenditures for major rehabilitation. Problems in the Irrigation Sector The irrigation sector faces with many challenges. The rising costs o f irrigation projects and the initiation o f too many new projects by state governments led to scarce financial resources being spread too thin and are affecting the pace o f creation o f irrigation potential. Moreover, the burgeoning fiscal burden o f surface irrigation (and power) subsidies and market borrowings o f Irrigation Development Corporations in some states for surface irrigation development contribute to the fiscal crises at the state level. The increasing subsidies and debt burden not only limit resources available for future investments but also threaten the medium to long-term growth prospects o f the states. Budgetary problems and weak systems management restrict proper operations and maintenance, lead to the deterioration o f the Table 4.4 Major andMediumSupportedunder irrigation systems, and threaten their longer- Five-YearPlans term sustainability. Proliferation of Projects. The GO1 and state government supported new projects through various five-year and annual plans, but many are uncompleted. At the end o f the NinthFive-Year Plan, the Working Group o f the Tenth Five-Year Plan (2002-07) estimated that a total o f 159 major and 242 medium schemes are uncompleted in 2002 (table 4.4). These uncompleted schemes slow the pace o f irrigated area expansion and create problems regarding the reallocation of Source: Planning Commiss,on 2o03, 37A major irrigation scheme has a cultivable command are above 10,000 ha; amediumirrigation scheme between2,000 and 10,000 ha, and a minor irrigation scheme has less than 2,000 ha. 38 water within the various parts o f the command area once they are completed. While these projects are pending completion, farmers in the head reaches o f major and medium canals often assume a greater water entitlement than was designed; and oppose the necessary reallocation o f water to the tail reaches when the system i s completed. In some states, such as Maharashtra and Kamataka, water tribunal decisions encouraged state governments to focus on the creation o f water storage infrastructures to ensure their claim on the basin water allocations. High-cost borrowings ffom the market by irrigation development corporations financed primarily the construction o f these structures. The massive debt burden accumulated by these corporations, the limited distribution systems created, and thus the limited investment retums generated so far, are important contributors to the fiscal crises o f the state governments. Vicious CircleinIrrigation.Many states are also caught ina vicious circle resulting inthe rapid deterioration o f surface irrigation infrastructure. Inadequate priority to and funding for operations and maintenance (O&M) led to the rapid deterioration of canal systems in many states, resulting in poor quality o f services. Water use efficiency in most irrigation systems i s low-in the range o f 10 to 40 percent-against the planned 60 percent (Planning Commission 2002a). System deterioration reduced productivity and supply o f water to tail-enders. It necessitated the repetitive and costly rehabilitation o f systems to make up for the inadequate maintenance. Institutional weaknesses in the water agencies combined with minimal involvement o f farmers and other users impeded greater improvement inquality and "user-orientation" o f service delivery. The poor quality o f water service delivery intum adversely affected farmers inseveral ways. Poor reliability o f water delivery and the lack o f access to water by tail-enders hampered agricultural productivity growth and thus reduced the income-generating potential o f farmers. The poor quality o f services reduced farmers' incentive to pay water charges. With limited ability to raise funds directly, exacerbated by the tightening fiscal situation, Irrigation Departments were unable to provide adequate funding for operation and maintenance. Overstaffing o f these departments further drew resources away from needed physical works, because funding for salaries took priority.38The Fifth Pay Commission's generous wage hike in 1997/98 aggravated the situation. Inadequate maintenance led to the deterioration o f systems, thus closing the vicious circle. Under-pricing o f water also reduced farmers' incentive to save and use water efficiently. In some states, continued over- application o f water i s resulting in waterlogging and salinity. In other more water-scarce states, under-pricing o f water encouraged the cultivation o f water-intensive crops, such as paddy and sugar. The expanded cultivation of these water-intensive crops is especially critical inview of projections o f increasing competition for water among users inmany areas. Under-Pricing of Canal Water. Under-pricing o f canal irrigation, even below O&M, requirements, i s practicedextensively in India. Water rates are set by state governments, usually on a per unit area and crop basis (table 4.5). The use o f volumetric pricing i s expanding, but currently limited to a few states such as Maharashtra, Rajasthan, and Uttar Pradesh. Various Finance Note: a. first cr0p.b. second crop. c. flow, d-drip and sprink1er.e.on contract. f . on demand.g. rabi. h.hot weather. i. kharif. Source: World Bank ZOOlc, World Bank 2003c. 39 Note: a. Tamil Nadu figures are for 1998199. b. Subsidyl: Planned subsidy =O&M expenditures assessedwater charges. - c. Subsidy 2: Actual subsidy.= O&M expenditures -actual water charges collected Source: Sur and Umali- Deininger2003, World Bank 2003g. Commissions have recommended that water charges cover at least O&M costs plus a percentage (fiom 1percent to 2.5 percent) o f the capital costs. The India National Water Policy 2002 advocated setting water charges initially to cover O&M costs and gradually charging for capital costs. The policy also stated that water charges should be linked to the quality of service provided. So far, no state, with the possible exception o f Maharashtra in the early 2000s, has set water charges to cover full O&M costs. As a result, the gap betweenwater charge revenues and O&M expenditures widened over time inmany states, becoming a major budgetary burden (table 4.6). Who benefits from surface irrigation and its associated subsidies? Medium and large farmers capture a large share o f the benefits inmany states. On average, small and marginal farmers inIndia comprise about 82 percent o f the farmers who use canal irrigation, but they cultivate only about half Kerala 12.3 11.9 0.4 96.5 3.5 66.0 34.0 All-India II12.7 1I 10.5 II 2.2 82.9 17.1 47.4 52.6 Notes: a. Marginal farmers own less than 1 ha of land and small farmers own 1 to less than 2 ha of land. b.Mediumfarmers own 2 to less than 4 ha of landand large farmers own 4 or more hectaresof land. Source: World Bank 2003a 38 In 1999/2000the percentage share of establishment costs intotal O&M expenditures was 69 percent inMaharashtra and 72 percent inRajasthan (World Bank 2003c, Government of Rajasthan Irrigation Department). 40 Table 4.8 EstimatedSubsidiesReceivedby AgriculturalHouseholds in Large 7.86 2.65 25.49 64.56 1756.77 ] 1,942.12 All 2.00 4.67 100.00 100.00 I 11371.55 I 11,972.17 Marginal ai 0.50 2.07 44.43 21.62 5534.03 5,826.32 Small b' 1.36 1.47 31.40 33.39 12092.85 12,731.57 Medium '' 2.55 0.76 16.32 23.51 16379.30 17,244.43 a. Marginal farm = land owned less than 1 ha' b. Small farm = land owned from 1 to less than 2 ha. c. Medium farm = land owned from 2 to less than 4 ha. d. Large farm = land owned greater than 4 ha. e. Planned subsidy (Sl) = O&M expenditures - assessedwater charges. f.Actual subsidy (S2) = O&M expenditures-actualwater chargescollected. Source: Sur and Umali-Deininger 2003 usingNSS 54" Round Survey in 1998. o f the area that i s irrigatedby canals (table 4.7). Household-level analysis o f the incidence o f canal irrigation subsidies in Rajasthan and Maharashtra find that the distribution o f canal subsidies i s regressive. In Rajasthan, small and marginal farmers comprise 55 percent o f farmers using canal irrigation, but they cultivate only 19 percent of the area. In Maharashtra, small and marginal farmers comprise 76 percent o f farmers using canal irrigation, but they farm only 55 percent o f the canal-irrigated area. The significant inequality in access to canal irrigated area contributes to medium and large farmers capturing a large share o f the benefits from canal irrigation subsidies. On average, a marginal farmer receives approximately one-tenth of the subsidies receivedby a large farmer (table 4.8). National Water Policy and Ongoing State Reforms. The GOI's National Water Policy (2002) aims to ensure sustainable intersectoral allocation and efficient use o f the country's increasingly scarce water resources by promoting the adoption o f a comprehensive and integrated approach to planning and management o f water resources within a river basin framework. The national policy puts priority on rebalancing expenditures focusing not only on the creation Table 4.9 Nun ber of WUAs Establishedup to 200I o f new assets but also demand-driven Number of WUAsformed Major & Area coverer investments in rehabilitation and maintenance State medium Minor Total (million ha: o f infrastructure through greater participation o f Andhra Pradesh 2046 7754 9800 4.31 users in managing systems. To ensure longer Assam 47 239 286 0.03 term financial and fiscal sustainability o f Bihara 37 37 0.11 Gujarat operations, the policy promotes cost recovery 378 0.08 Goa 43 0.01 o f at least O&M costs. It encourages greater Haryana 2575 2575 0.30 participation by users in systems management Kamataka 864 864 0.30 and seeks to reorient water agencies toward Kerala 3930 0.15 improving the quality o f service delivery. Madhya Pradesha 2416 2.63 Maharashtra 236 11 247 0.09 Several states adopted the proposed Orissa . 163 163 0.07 Punjab 957 reform measures in varying degrees. To 957 0.11 Rajasthan 401 401 0.19 improve delivery o f irrigation services, several Tamil Nadu 1398 1529 '0.76 Note: a. unsplit sta 'states (for example, Karnataka, Maharashtra, Source: Planning C 41 Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh) recently increased their water charges to cover a greater percentage o f O&M (table 4.5). Many states are piloting or scaling up participatory irrigation management (PIM), through greater involvement o f water users associations (WAS)in irrigation systems management (table 4.9). Andhra Pradesh, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, and Tamil Nadupassed or are about to pass legislationto institutionalizePIM (Planning Commission 2001b). Rajasthan, and Uttar Pradeshrecently established state water resource management agencies responsible for the integrated state planning, development, and management o f water resources on a river basin basis. Maharashtra, Rajasthan, and Uttar Pradesh are taking steps to right-size their Irrigation Departments to meet the changing needs o f the sector. As water i s under the purview o f state governments, the challenge for the future i s to encourage more states to adopt the whole package o f proposed reforms. The GO1also recently introduced the Accelerated Irrigation Benefits Program, an incentive scheme to encourage cost recovery o f O&M and scheme completion. The program provides central assistance (80 percent central, 20 percent state) for the completion o f "last mile" major and medium projects. Duringthe 10" plan period, Rs 95 billion were allocated for this purpose. So far, Rajasthan, Madhya Pradesh, Orissa, Maharashtra, and Uttar Pradesh have availed o f these resources. C.Power Supply to Agriculture Inthe 1960s, as India witnessed major famines, the government gave emphasis in its rural electrification program to providing electricity for agriculture, particularly for groundwater irrigation. The use o f electric pumps for groundwater irrigation was critical for expanding irrigated area, which in turn contributed to growth in agricultural productivity and aggregate output. By TE 1998/99, approximately 57 percent o f net irrigated area in India was irrigated using groundwater (figure 4.2). Groundwater irrigation's positive impact on agricultural productivity has been shown in various studies. Studies at the village level found that the use o f electric pumps for irrigation increased aggregate agricultural output by 2 percent (World Bank 2002b). A study on the cost o f unserved energy found estimated losses in crop production o f 3.1 percent o f agricultural GSDP in Haryana and 13.3 percent in Karnataka (Tata Figure4.4 Number of ElectricPumpsets, EnergyResearchInstitute2001). 1980/81 and 1998/99 To encourage the use o f groundwater using electric pumps, state governments provided a one- time investment subsidy for digging wells and 0 priced electricity to agriculture at very low rates or 0 0 for free. As a result, electric pump usage jumped in g 1500 w most states. Between 1980/81 and 1998/99, some o f the largest increases were in Andhra Pradesh %g 1000 (446,000 to 1.9 million), Madhya Pradesh (3 17,000 p1 to 1.3 million), Maharashtra (668,000 to 2.2 500 million), Karnataka (309,000 to 1.1 million) and Tamil Nadu (92,000 to 1.6 million) (figure 4.4). 0 Electricity tariffs for agriculture generally are set at a flat rate on a pump horsepower basis, although several states are slowly introducing metered tariffs. Electricity pricing decisions rest Note: AP = Andhra Pradesh, Bih= Bihar (prior to split), Guj = with the states and thus vary considerably across Gujarat, Har = Haryana, Kar = Kamataka, MP = Madhya Pradesh (prior to split), Oris = Orissa, Pun = Punjab, Raj = India. Agricultural power tariffs amount to Rajasthan, TN = Tamil Nadu, UP = Uttar Pradesh (prior to approximately one-fifth or less o f the average split), WE3 = West Bengal. Source: CMIE, 2002b. 42 Category India Ave Andhra Pradesh Uttar Pradesh Rajasthan TamilNadu Haryana Agriculture 0.42 0.14 1.19 0.46 0.01 0.48 Domestic 1.95 1.74 1.81 1.90 1.81 2.80 Industries 3.79 4.41 4.82 3.95 3.95 4.51 OverallAvg. 2.40 2.22 2.59 2.21 2.37 2.25 cost of Supply 3.50 3.61 3.83 3.68 3.09 4.12 Tar@ (US centsntwh) Ratio Country Year Domestic Agriculture (ARricuIture/domestic) India 2001/02 0.04 0.001 0.22 Neoal a 2001 8.64 4.80 0.56 Bangladesh 1999 4.18 3.57 0.85 Pakistan 1998 3.28 5.82 1.77 Brazil 1998 7.33 6.54 0.89 Mexico 1999 3.82 2.09 0.55 \li'=*!lmC . 1998 3.59 4.73 1.32 I"LIIc.II. I I Jordan 2002 5.05 3.67 0.73 Zimbabwed 1998 1.54 3.20 2.08 43 collection efficiency, even o f the Figure 4.5 Electric Pumps Only: IrrigationCost as aPercentof l o w agricultural power tariff Gross FarmIncomeinHaryana charges. In 2001/01 the collection 1 35 7 rate was only 28 percent in Orissa, 52 percent in Kamataka, and 76 percent inUttar Pradesh. v) The financial crisis in the ecn v) 20 SEBs led to a vicious circle, with 3 15 negative repercussions on the .-C 9 10 agricultural sector. The crisis reduced the ability of SEBs to 6$ 5 undertake required investments, to 0 1Marginal 1 Small 1Medium I Large 1Overall 1 respond to rising local demand, and to maintain smooth, reliable day-to-day operations. The result was the rapid deterioration in service to electricity consumers in general, and to the farm sector in particular.included power rationing, This compromised I Note: Pump maintenance includes travel costs for repair and other costs.Motor bumout frequent power intemption% and investments. Marginal -land owned less than lha. Small -land owned 1to less than 2 out consists of motor rewinding cost. Fixed costs per year cover pump and well voltage fluctuations that led to ha.Medium-2 to less than 5 ha. Large-landowned greater than 5 ha. pump bumouts, resulting in the Source: World Bank 2001b. unreliability o f irrigation water supplies, and ultimately undermining farm productivity and farm profits. Consequently, farmers' dissatisfaction grew, increasing their unwillingness to pay even the highly subsidized charges. This dissatisfaction contributedto delayed payment of electricity bills and increasing resistance to tariff increases, in Table 4.12 Distributionof HouseholdsUsingElectricPumps and Area aggravating the - Irrig Led, 1998 financial crises in the HH using e, :tricpumps Yhare of irrigi d with pumps Total irrigated SEBs. Small & Medium & Small & Medium & area irrigated marginat largeb marginat largeb electricpumps Recent farm- (%) (%) (%) (%) (million ha) level studies in 66.14 33.86 32.49 61.52 3.13 Haryana and Andhra Assam 90.05 9.95 91.11 8.83 0.02 Bihar 19.62 20.38 32.62 67.38 0.6 Pradesh found that Gujarat 63.83 36.17 29.1 70.9 2.64 poor quality o f supply Haryana 55.33 44.68 24.73 15.21 2.1 Kamataka 44.4 55.6 18.6 imposes considerable 81.4 2.06 Kerala 93.31 6.69 61.14 38.86 0.21 additional costs on Madhya Pradesh 46.4 53.6 16.09 83.91 1.25 farmers. Pump motor Maharashtra 49.19 50.21 20.6 79.4 4.09 Orissa 80.14 19.86 56.03 43.97 0.09 bumouts that cost Punjab 54.78 45.22 21.38 78.62 3.3 approximately Rs Rajasthan 51.24 48.76 20.2 19.8 4.12 1,000 to Rs 4,000 to Tamil Nadu 81.59 18.41 51.73 48.28 1.71 Uttar Pradesh 83.58 16.42 51.79 48.21 6.19 repair each time 92.93 7.01 68.75 31.25 0.51 imposed 66.11 undue 33.9 29.03 70.91 38.71 burdens, especially O n Note: HH= house1 Ids. a. Marginal farmers own less than 1 ha of land and small farmers own 1 to less than 2 ha of land. small and marginal b. Mediumfarmers own 2 to less than 4 ha of land and large farmers own 4 or more hectares of land. Source: World Bank 2003a using data from NSS 54' Round 1998. ~~ 39Metered power supply was universal practice inIndia untilthe mid-1970s and 1980s. As SEBs faced increasing problems o f pilferage, poor collection efficiency, and large numbers o f corrupt meter readers, the shift was made to flat tariffs (Kishore, Sharma, and Scott 2003) 44 farmers (World Bank 2001b). These Figure 4.6 Status of Groundwater Exploitation in SelectedStatesJ998 repair costs accounted for approximately 10 percent o f gross farm income for Onssa marginal farmers in Haryana and MadhyaPradesh Andhra Pradesh approximately 8 percent o f gross farm West Bengal income for marginal farmers in Andhra Kamataka Pradesh. (figure 4.5). Notably, electricity Bihar tariffs account for a small but regressive Maharashtra share o f gross farm incomes. Uttar Pradesh Gujarat The study also found that Tam1Nadu improvements in quality o f supply could Rajasthan more than compensate farmers for the Haryana increase in tariffs. Based on the findings Punjab o f the household-level study o f farmers 0 20 40 60 80 100 using electric pumps in Haryana, different reform scenarios were simulated W % Overexploited and Dark Blocks to examine the impact o f tariff increases El% Ground-water Development on farmer incomes. One scenario Note: Over-exploitedblocks are those in which groundwater extraction i s included only a tariff increase. Another more than 100% of recharge. Dark blocks are those in which extraction is examined an accelerated reform scenario between85% to 100%of recharge. Source: Central Groundwater Board, as cited in World Bank 2003-Punjab involving more aggressive institutional, Report. regulatory, and technical reforms, such as reduction in theft, improvement in bill collection, shortening the wait for service, and improvement in the utilities' capacity to manage loads. These reforms translate into reductions in the duration o f power cuts (70 percent) and in days lost because o f transformer burnout (70 percent). The study carried out the simulations for a six-year period to allow for the introduction o f tariff refornis and for investments to rehabilitate the transmission and distribution network. The results show that tariff increases for agriculture, matched by improvements inquality, would benefit farmers, particularly small and marginal fanners. With accelerated reform, the incomes o f small farmers would rise by 100 percent and those o f large farmers by 40 percent. Under the business-as-usual scenario, the incomes o f small farmers would drop by 100 percent and those o f large farmers by 50 percent (World Bank 2001b). The under-pricing o f electricity and, in turn o f groundwater, i s leading to adverse environmental consequences in many states. Sustainable use o f groundwater i s threatened by over- exploitation in many areas (figure 4.6). In Punjab, in which until 2002 power was provided to agriculture for free, approximately 60 percent o f the administrative blocks in which groundwater i s used i s already over-exploited. In Punjab's Central region, in which average groundwater exploitation has reached 141 percent, 83 percent o f the 69 blocks i s over-exploited. Indeed, agricultural scientists inPunjab estimate that reducing the area under the rice-wheat system from 4 to 3 million ha inthe Central region, will balance water use and its replenishment (World Bank 2003b). InHaryanaand Tamil Nadu, 40 percent of groundwater areas are over-exploited. InTamil Nadu, of the 1.8 million wells in the state, approximately 10 percent are non-operational. The depth o f borewells in hard rock areas has increased to as much as 600-1000 feet (World Bank 2003g). In Maharashtra, where groundwater accounted for nearly three-quarters o f the increase in net irrigated area in the 199Os, excessive groundwater withdrawals in some districts (including Nasik, Ahmednagar, Jalgaon, Sangli, and Satara) caused the groundwater to drop by as much as 300 feet. This drop led to widespread drying up of drinking water wells, most o f which are only 30-50 feet deep, forcing the state Ground Water Survey and Development Agency to dig borewells for drinking water inthese areas (World Bank 2003~). 45 Who benefits from the power subsidy to Table 4.13 Average Subsidy Receivedby agriculture? At the All India level, medium and FarmersinKarnataka,Andhra Pradesh, large farmers capture the larger share o f the benefits from cheap power. Although medium and large farmers account for 34 percent o f all farmers using electric pumps, they cultivate 71 percent o f the total electric-pump-irrigated area (table 4.13). 3.296 Similarly, with few exceptions (such as Tamil Nadu 9,303 15,853 and Uttar Pradesh), in states with significant area 9200 29,710 irrigated by using electric pumps, the majority o f Total 18,000 the benefits are captured by medium and large Andhra Pradesh2001/02 farmers. In Madhya Pradesh, Punjab, and Haryana, medium and large farmers accounted for over three- quarters o f electric-pump-irrigated area. State-level studies o f the incidence o f the subsidies have found them to be regressive, that is, that they benefit larger farmers more. Recent studies o f Kamataka, Andhra Pradesh, and Tamil Nadu found that large farmers received 10 or more times the level o f subsidies receivedby marginal farmers (table 4.13). Source: Howes and Murgai, 2003, Sur 2003, World Bank 2003g. GO1 efforts to promote the adoption of state legislationto ensure sustainable groundwater use have had limited success. The Central Ground Water Board circulated a model bill to regulate and control the development o f ground water in 1970, 1992, and 1996. To date, only a few states have adopted the proposed reforms. Gujarat enacted the legislation. Tamil Nadu passed the Metropolitan Area Ground Water Regulation Act. Madhya Pradesh, Maharashtra, and Andhra Pradesh passed a regulation for drinking water, while West Bengal and Kamataka passed a bill for water resources conservation, protection, and development. Due to the acute water scarcity, the Government o f Tamil Nadu announced plans to ban the drilling of bore wells in hardrock areas. In June 2003, the GO1 also passed the Electricity Act, which provides the framework for power sector reform in India. It provides directions for facilitating private investment in generation, fostering greater competition, tariff setting, and improvement in governance and sector administration. However, it does not directly address the issue o f power subsidies to agriculture. To date, all the state governments have taken very limited actions inraising power tariff to agriculture as a means to promote more efficient resource use. D.LandPolicyandAdministration The agrarian structure in India has undergone significant structural transformation since the 1970s. The distribution of land ownership has become less skewed.40Recent data show that the share o f land area owned by marginal to semi-medium farmers (farmers owning fkom 0.1 to less than 4 ha) increased from approximately 47 percent in 1971/72 to approximately 62 percent in 1999/00 (figure 4.7). The trend toward landlessness also appears to have been arrested, with the percentage o f landless between 1982/83 and 1999/00 remaining at approximately 11 percent. The distribution o f operational holdings (actual area cultivated) in 1991/92 closely mirrors the distribution o f land owned.41 The two critical factors driving this process were the government's land policies and 40These figures do not account for land quality, as land ceiling laws allow for larger landholdings for lower quality land (that is, rainfed land). 4'The two major sources o f land data in India are the National Sample Surveys, which collect land ownership information and Agricultural Census, which collects data on operational holdings. However, they are not strictly comparable (Vyas 2002). 46 demographic pressures (that is, farm- Figure 4.7 PercentageDistribution of Number of Owned break-up through inheritance), I Holdingsand Area Owned by FarmSize although the contribution o f each i s open to some debate. 70 Land Reform. Under the 6o constitution, state governments have the responsibility for land reform. In a process that began in the 1950s, all states passed land reform legislation in 1972. This legislation focused on (a) the abolition o f intermediaries between the state and the cultivator; (b) the imposition of ceilings on land Number of Number of Area Area ownership and distribution o f surplus Holdings Holdings Owned Owned lands to the landless;42 (c) tenancy (71/72) (99/00) (71/72) (99/00) reforms to provide security o f tenure Marginal Small Semi-Medium Medium 0 Large and regulate fair rent;43 and (d) consolidation o f holdings to prevent Note: Marginal = 0.1 to less than 1ha.Small = 1to 2 ha.Semi-Medium= 2 to 4 ha.Medium=4 to 10haand Large= 10or moreha. their further fragmentation Source: 1971172 and 1992/93 NSS surveys, as cited in Vyas 2002; 1999100 NSS. (Venkatasubramanian 2000, survey- Deininger2003, mimeo Deshpande 2003). The imposition of a ceiling on land owned and the redistribution of surplus land to the landless contributed to the changing land ownership structure in India. However, it appears to have worked more by encouraging the subdivision o f land rather than the sale of surplus land by large land owners to the poor. In fact, government purchases o f ceiling surplus land for redistribution to the landless were not significant in all states (Thorat 1997, Vyas 2002, Deshpande 2003).44 The purchase o f land by tenants also contributed to the restructuring o f the land ownership. Today, the continuing decline in average farm sizes in all states have also brought forth increased debate on land ceiling and land rental legislations. Another area o f increasing concern i s ensuring legal recognition o f property rights o f women, which were neglected in earlier land legislation. Women's land rights as well as access to land accrue primarily through three avenues: (a) inheritance, (b) government allotment o f ceiling surplus land, and (c) gaining contractual access to land through tenancy or license. The need to examine and redress gender inequalities in existing succession legislation for Hinduwomen as well as customary laws to provide inheritance o f property fiom other religious communities i s also gaining recognition (Saxena 2000b).~~ ~ 42The land ceiling varies depending on the quality o f the land (for example, dryland, irrigated land with one or two crops) and across states. 43The national guidelines for tenancy reforms to be incorporated under the state laws included security o f tenancy to the actual cultivator, fair rent to be fixed between one-fourth to one-fifth o f gross produce, permission for land owners to cultivate land if for personal use, surrender o f tenancy rights by mutual consent, the tenant cultivator to be brought directly under contact with the state, exemptions for disabled persons and defense personnel, personal cultivation defined if land were to be resumed for cultivation; and correct record o f tenancy and abolishing oral tenancy completely (Deshpande 2002). Actual provisions varied by state. 44As o f September 2000, the total land declared surplus in India was 2.97 million ha, o f which 2.62 million ha had been taken by the government. O f these, 2.1 million ha, equal to approximately 1.5% o f All-India net cultivated area, have been distributedto 5.5 million beneficiaries (Ministry o f Rural Development 2001). 45For example, in Haryana, Himachal Pradesh, Jammu and Kashmir, Punjab, Delhi and Uttar Pradesh, a woman can only hold limited tenancy rights on the land; and on her death, the holding goes to the heirs o f the last male landowner and not to her heirs. 47 Tenancy Policy. The extent and nature o f tenancy restrictions vary from state to state. The restrictions range from a total ban (Bihar, Gujarat, Karnataka, Kerala, Manipur, Orissa, Rajasthan, Jammu and Kashmir, Uttar Pradesh) to almost complete freedom o f rental (Assam, Punjab, Haryana). Landlord rights o f resumption, rental ceilings, and leasing periods also varied by states. These regulations were all aimed at increasing tenure security by tenants (Saxena 2000a, Deshpande 2003). These laws, however, had serious unintended adverse outcomes. These laws led to large- scale self cultivation by landlords or the adoption o f wage labor contracts, both modes o f production that are inferior to share tenancy in terms o f production outcomes and incentives (Ray 1999). Where implementation was incomplete, they may also reduce land access and equity. Appu (1997) estimated that the introduction o f tenancy legislation was associated with the eviction o f more than 100 million tenants, which caused the rural poor to lose access to approximately 30 percent o f total operated area. Furthermore, because o f fears by landowners o f losing their land that i s leased out, the legislation drove tenancy arrangements underground in most states. These hidden arrangements reduce both the scope for greater land access through rental markets, the tenants' bargainingposition and their ability to enforce contract terms. Of all Indian states, only West Bengal achieved an effective campaign o f tenant registration that led to increased agricultural productivity (Banerjee, Gertler and Ghatak 2002) and improved tenants' ability to acquire limited amounts o f land through the regular sales markets (Rawal2001). However, Besley and Burgess (2000) found that, for India as a whole, the tenancy reforms helped reduce poverty but didnot boost productivity, suggesting that a productivity impact requires more thanjust passage o f a law. The existing literature highlights that, even in cases in which tenancy restrictions may increase welfare o f sitting tenants, the restrictions are likely to limit supply o f land to the market and tend to drive those who engage in rentals in contravention o f the law into informality. Inthe many states in which long-term leases would confer property rights to tenants, landlords resort to short- term leases that strongly discourage investment. Incases in which tenants received some property rights, the fact that both tenants and land owners have rights to the same plot i s likely to discourage land-related investment. In addition, there are often restrictions on "subleasing" that become a binding constraint if former tenants' offspring want to take on off-farm employment. The low land ceiling and fear among landowners o f losing their land if they rent it limit the ability of the landless and an increasing number o f marginal and small farmers to make productive use o f their labor, whether in farming by accessingmore land, or inrenting out their land to others to take advantage o f higher-paying non-farm opportunities. The need to work in secret and often very short-term leasing arrangements discourage tenants from making long-term investments in land and, by limiting the ability to enforce contracts (which are illegal on paper), can be particularly harmful to the poor, who have few outside options and are unable to resist imposition o f such terms by landlords. There i s growing consensus, as reflected by a number government policy statements (for example, National Agricultural Policy 2002, 1Oth Five-Year Plan 2002-2007, Karnataka Agricultural Policy 1995) about the need to reformulate current tenancy legislations. In considering tenancy reform, it i s critical to draw lessons from experience in states that do not have any tenancy restrictions. More importantly, there are some states in which the benefits from relaxing tenancy laws are likely to be higher than in others, due to more advanced commercialization o f agriculture (and significant amounts o f informal leasing) and greater political capacity to do so. These states that show more benefit could serve as starting points for pilots. Ifthe impact o f relaxation or elimination o f tenancy restrictions in the pilot states i s closely monitored, they could yield important insights for the policy debate and subsequently serve a basis for broader implementation o f tenancy reform initiatives in other states. Land Administration. Under the Indian Constitution, land administration falls under the purview o f state governments. Nevertheless, the Department o f Land Resources o f the GO1Ministry 48 o f Rural Areas and Employment also has responsibility for some issues relating to land administration, such as issuing guidelines for strengthening o f revenue administration and updating o f land records (Deshpande 2003). In 1997/98 the GO1Department o f Land Resources sponsored a scheme to pilot computerization o f land records in selected districts nationwide, with 100 percent GO1financial assistance. The objective was to promote greater efficiency through faster information retrieval, transparency, and cost reduction. Some states, such as Karnatakaand Maharashtra, not only scaled up the program statewide but also implemented the program in partnership with the private sector. These initiatives reportedly contributed to more efficient and rapid service as well as reduced corruption through increased transparency. Over the long term, the focus will need to shift towards a more holistic approach to improve land administration systems at the state level. To be successful, the land administration system will need to meet several other key standards o f performance, including security (certainty of ownership and parcel identification); costs (fair and not unduly burdening users); fairness (separation from political process and allowing equitable access), clarity and simplicity (to also help reduce costs) and sustainability (not only financially but also completing the cadastre in time and keeping information up to date). States could draw on considerable international experience inthis area. E.AgriculturalResearchandExtension The public and private agricultural research and extension systems were important contributors to productivity growth in India. Between 1956 and 1987, public agricultural research explained nearly 30 percent of TPF growth, while private sector research and development contributed 11percent (Evenson and others 1999) India's public agricultural research and extension service i s one o f the largest in the world. While agricultural research i s primarily under the purview o f the GOI, agricultural extension i s primarily the responsibility o f state governments. The public agricultural research and extension systems were designed to respond to the food crisis o f the 1960s and have played a pivotal role in promoting agricultural productivity and output growth, especially for rice and wheat in irrigated areas from mid-1960s to 1980s. However, these system were, and still are, very slow to respond to the changing needs of the agricultural sector. Food security is now only one o f the several priorities o f the GOI. Globalization and rapid developments in science, privatization and liberalization o f the economy, sustainable management of natural resources, and agricultural diversification are placing new demands on the agricultural production system and the range o f services demanded by today's farmers. Over time, the efficiency and cost effectiveness o f the public agricultural research and extension systems are increasinglybeing called to question. AgriculturalResearch.The public agriculturalresearch system inIndia is led and managed by the Indian Council o f Agricultural Research (ICAR), a GO1 apex body. ICAR comprises 184 institutes, centers, directorates, and special projects and programs, and 29 state agricultural universities (SAUs) with a research staff o f approximately 30,000. It i s one o f the largest research systems in the The ICAR institutes generally focus on upstream and strategic research; the SAUs on applied and adaptive research in the respective states; and zonal agricultural research stations on location-specific research (Pal and Singh 1997, ICAR 2002b, ICAR 2001). However, this division i s not clearly defined, resulting in overlaps and duplication. As an apex body, ICAR coordinates research and promotes inter-institutional linkages. Since ICAR supports the SAUs through regular grants, it has a direct role inthe management o f the SAU's researchprograms. 46 These include 5 multi-disciplinary national institutes, 45 central research institutes, 30 national research centers, 54 bureaus, 10 project directorates, 80 All-India coordinated research projects, networks, and 16 other projects and programs. The 34 agricultural universities and one Central Agricultural University operate 3 13 research stations. 49 GO1 and state expenditures on Figure 4.8 Governmentof India and State agricultural research and education (ARE) Agricultural Research and Education plateaued in the 1990s and again in the early Expenditures,1985/86to 2002/03, 2000s. Funding for the ICAR system comes Rsbillion, 1993/94 rupees from the GOI. Most o f the funding o f SAUs comes from the state govemments, but the SAUs also received some funds from ICAR. GO1expenditures on ARE reached a plateau at about Rs 8 billion to 9 billion per year (constant 1993194) in the early 1990s, equivalent to 0.4 percent o f agncultural GDP (figure 4.8). Beginning in 1998, GO1expenditures on ARE increased sharply, in part with the additional support coming from the World Bank- supported National Agricultural Technology Project. Expenditures stabilized after 2000 at & i + & h ? & & i + & h Q Q a 9 9 9 9 9 Q Q i o Q Q 9 V . i o Q Q 9 approximately Rs 16 billion per year, or Q J Q a Q h 9 9 9 0 0 approximately 0.5 percent of Agricultural GDP GO1& StateRes & EducExpenditures (ICAR 2001, ICAR 2002b). At the state level, average annual ARE expenditures increased in real terms in many states. Spending hovered around Rs 300 million to 500 million per year Source. World Bankdatabase, inmost statesduring 1998199to 2002103 (figure 4.9). Maharashtra, however, consistently spent more on ARE the last decade than other states. While there i s need to further increase budgetary allocations, there i s also an urgent need to improve the effectiveness o f existing expenditures that arise due to several weaknesses. Strategically, the public research system has not been able to keep pace with the changing needs o f the sector. Critical weaknesses identified in the research system include proliferation o f programs, resulting in resources being spread thinly and lack o f focus in areas o f relevance and opportunity; crop bias with major focus on rice and wheat; and inadequate priority to emerging challenges, particularly post- harvest, marketing and environmental conservation, and policy issues. There i s inadequate emphasis on the needs o f rainfed areas, which account for over 60 percent o f cultivated area, and women in agriculture. There i s a multiplicity o f agencies Figure 4.9 Average Annual State Expenditureson with purview in the sector, leading to Agricultural Research and Education,Rsbillion, duplication. There i s weak accountability for constant 1993/94 rupees performance; inadequate collaborative multidisciplinary research; weak interaction B 1.4 among researchers, extension workers, farmers, and the private sector; and excessive centralization o f planning and monitoring (Acharya 2002, Vaidyanathan 2002, ICAR 2002b, Hanumantha Rao 2003, Pal and Byerlee 2003). To address the above weaknesses, in 1998 ICAR began taking steps to improve research efficiency and accountability and to shift the research emphasis from commodities toward farming systems-based agro- ecosystems research. ICAR established a 093194-97198 098199-02103 research priority-setting and monitoring and Source: World Bank States database. 50 evaluation system for its research programs and i s decentralizing functions, including transferring programmatic and financial responsibilities to researchers. ICAR also introduced a competitive grant system for enhancing the pluralism and diversity o f research providers (NGOs, private sector, and science universities). However, the participation o f institutes outside ICAR and the SAU system, including NGOs, agribusiness, and civil society, needs to be improved. Private sector participation in agricultural research i s increasing in India. GO1 and state government promotion o f biotechnology and the adoption o f recent key policies, including the Plant Variety Protection and Farmer's Rights Act (2002), the National Seed Policy (2002), and National Seed Act (in draft) aimed at the protection o f intellectual property rights are encouraging increased private sector involvement in research (Planning Commission 2002). However, the private sector tends to focus more on higher value crops and hybrid seeds in better-endowed areas. Public sector research increasingly will need to address the problems o f poorer farmers in less-endowed regions (Hanumantha Rao 2003). Agricultural Extension. The extension system i s primarily under the purview o f the state government, although ICAR also operates 261 KrishiVigyan Kendras (farmer science centers) and 8 trainer's training centers (ICAR 2002a, ICAR 2001). In the current public extension system, each individual line department, such as Agriculture, Horticulture, Animal Husbandry, Fisheries, and Sericulture, maintains and manages its own field staff to carry out its respective extension activities and implement government schemes in its respective technical area. The multiplicity o f departments and limited coordination among them reduce the effectiveness o f the existing extension system. The existing extension system suffers from other weaknesses. The public agricultural extension systems at the state level, which are based on the training and visit (T&V) system with its top-down, narrow crop-focused approach, have become outmoded and ineffective in meeting the changed needs o f farmers (Ministry o f Agriculture 2002b, Planning Commission 2002). The top- down approach and limited participation o f farmers in shaping the extension services delivered have limited their accountability. In view o f the GOI's preoccupation with food self-sufficiency since independence, the state-level Department o f Agriculture (DOA) extension systems generally concentrated on cereals, particularly rice and wheat, with an emphasis on the transfer o f improved varieties and management practices. The weak coordination between the state DOAs and the other line departments and the limited staff capacity beyond the Department o f Agriculture also often translated to limited extension activities beyond cereals. The weak coordination with research at the centfal level further increased the difficulty o f ensuring effective research-extension-fanner linkages at the state level. The main focus o f extension continues to be technology dissemination for production agriculture, although marketing, post-harvest handling, and enhancing livelihoods are emerging as key concerns o f the rural communities. In many states, tight fiscal constraints contributedto the breakdown o f the state extension machinery (Hanumantha Rao 2003). Due to lack o f operating funds, the extension agent's primary attention was diverted frequently to carrying out GOI-funded development schemes (for example, input distribution). These top-down schemes had two important impacts on extension workers and extension programs. First, government schemes had specific deadlines, quotas, and other responsibilities for which the field staff were held directly accountable. Therefore, these tasks took precedence, and most field staff had little time or incentive to carry out additional "nonfunded" extension and training activities. Second, because o f this plethora o f government programs, extension workers were generally viewed by farmers as providers o f fi-ee or subsidized inputs, services, and/or other incentives. Except for submitting completion reports, there was no systematic attempt to assess the effectiveness and impact o f these top-down schemes. Consequently, there was no opportunity on the part o f farmers or government to assess the effectiveness o f these programs, their possible impacts (both positive and negative), and whether these programs should be improved or eliminated. Under these programs, government extension agencies continue to provide some inputs and services. While the prices o f 51 these services were raised, they are still below the full cost o f service. Not only do low prices undermine fiscal sustainability; they also crowd out private sector participation inthese activities. The GOI's new Policy Framework for Agricultural Extension (2002) envisages the replacement o f the current extension approach that has primarily focused on increasing the productivity o f staple food crops, to a new farming system approach that concentrates on increasing farm household income through agricultural diversification. The goal i s to make extension more market- or opportunity-driven so that farmers can be more competitive in both domestic and international markets. This new policy also favors the withdrawal o f public extension from those agro-service areas that can be provided more efficiently by the private sector (agribusiness firms, farmer organizations and cooperatives, and NGOs) and for which farmers can pay the cost. The policy aims to promote greater public-private partnership whereby extension institutions work closely with private sector organizations in a multi-agency extension system. It aims to decentralize public extension by ensuring greater user involvement in planning and implementation. Under this new institutional arrangement, rural people will be expected to participate directly in assessing local needs, setting extension priorities, evaluating system performance, and in improving the accountability and transparency o f public extension. The future challenge lies in promoting the adoption and implementation o fthis policy at the state level. Inline with the newpolicy, the GO1is promoting a number ofnew initiatives. The Ministry o f Agriculture (MOA) i s piloting a new decentralized farmer-driven approach using the Agricultural Technology Management Agency (ATMA) framework in 28 districts in 7 ~tates.~'The ATMA i s a registered society o f key stakeholders involved in agncultural activities in a district which serves as the focal point for integrating research and extension activities and decentralizing day-to-day management o f the public extension systems (box 4.1). The society has more flexibility than government line departments: the society can receive funds fkom both government and nongovernmental sources; enter into contracts; maintain revolving accounts; charge for services; and recover costs from farmers or other service recipients (Sulaiman and Van den Ban 2002, Swanson and Mathur 2003). In 2002 the National Bank for Agriculture and Rural Development (NABARD) also introduced the Agriclinic Schemes4*Its primary objective i s to provide recent agricultural graduates with new sources o f employment. This scheme i s designed to supplement and extend the efforts o f the government extension system by making available new, commercial sources o f inputs, services, and technical advisory services to farmers. The GO1provides a 25 percent investment grant and the remainder i s financed through bank loans. The goal i s to establish approximately 5,000 agriclinics to provide testing facilities, diagnostic, and control services and other consultancies on a fee-for-service basis (Sulaiman 2003a, Swanson and Mathur 2003). For the success o f these agriclinics, it i s essential that similar services provided by public sector agencies are priced at he same rate to foster a level playing field. The private sector inIndia is playing an increasing role inthe agricultural extension system. These include NGOs, cooperatives, input suppliers, traders, and private extension providers. They deliver extension services in a number o f ways, as direct fee-for-service or indirectly as an element integrated with other activities, such as input supply, output marketing, and contract buying arrangements. Box 4. 2 illustraterecent private initiatives infee-for-service extension. A recent study found that farmers are willing to pay for some types o f agricultural extension services. Ina survey o f 720 farmers inMaharashtra, Rajasthan, Bihar, and Kerala, Sulaiman and Sadamate (2000) found that About 48 percent o f farmers surveyed were willing to pay for agricultural information, though the percentage varied from state to state and across farmer types. The demand for paid services was higher innonfoodgrain crops, especially, horticultural crops (fruits, vegetables, flowers, and spices) 47 Punjab,Bihar,Jharkand, HimachalPradesh, Orissa, Andhra Pradesh, andMaharashtra. 48 See Agriclinic andAgribusiness Centreweb site for details: httu://www.anricliiiics.nct. 52 Box 4.1 New Government of India ExtensionInitiatives 4gricultural Technology Management Agency (ATMAs) Scheme The ATMA approach is one mechanism being piloted by India's Ministry o f Agriculture (MOA) to promote decentralized, farmer-driven :xtension. The ATMA approach involves the creation o f new management mechanisms, including an ATMA society and ATMA goveming board at the district level, farmer advisory committees and block technology teams at the block level, and produceriself help youps at the village level. ATMAs are quasi-govemmental registered societies. They have more flexibility than govemment line jepartments, because they can receive funds from both govemment and nongovemmental sources; enter into contracts; maintain revolving xcounts; charge for services; and recover costs from farmers or other service recipients. The ATMAs are controlled by goveming boards 3 fstakeholders and receive guidance from Farmer Advisory Committees established at the block level. The block technology teams are responsible for implementing and integrating the extension activities across each block, thus, ensuring coordination among the different line departments. They work closely with the farmer interestkelf-help groups. Bottom-up planning and prioritization o f extension needs are institutionalized under this new approach through the preparation o f strategic research and extension plans (SREPs) approved by the goveming board. Block action plans are prepared by block technology teams within the framework o f the SREP and approved by Farmer Advisory Committees. The block plans are aggregated to produce the district's annual work plan. The program also promotes increased partnerships between the ATMAs and the private sector and NGOs. ATMAs support private extension initiatives by contracting NGOs to take on extension responsibilities in selected blocks/areas, using farmer-to-farmer Zxtension services through individuals or through farmer organizations; and developing partnerships with input providers for iemonstrations and farmer training. The preliminary experience with some ATMAs i s encouraging. Farmers and other stakeholders involved in the ATMAs, especially in Andhra Pradesh, Himachal Pradesh, Maharashtra, and Orissa, have developed ownership o f the program. Operational flexibility has allowed extension services to respond to local needs and improved program relevance and effectiveness In Orissa, over 400 farmer innovation groups (FIGs) were organized in each A T M A district. Supported by the ATMA, these FIGS focused on specific economic activities, such as producing vegetables, spices, flowers, goats, chickens, dairy and fish, mushrooms, eggs, cheese, or ground spices. As these village-level FIGs became economically viable, they united with other FIGs within the block to form different types o f farmer organizations, including commodity associations and/or farmer federations. It also was observed that village-level FIGs soon diversified into several different commodities or enterprises, depending on the interests and resources o f their members. Most ATMAs already require farmers to pay for part o f the cost o f exposure visits, study tours, and training courses. Some initial lessons from the ATMA experience are (1) integrated implementation o f field activities is workable but depends considerably on the state govemment's commitment to intemalize and implement the new concepts: (2) the block technology teams and farmer advisory committees need to play a more active role in the preparation o f block plans, (3) the integrated package o f exposure visits and training and demonstration has resulted in better technolog) adoption; and (4) the flexibility to respond quickly to training and information needs o f farmers, the availability o f a reasonably untiec operational budget, and the participation o f the farming community by way o f the farmer advisory committee at the block level were majoi factors in the successful ATMAs. Areas for improvement include strengthening monitoring and evaluation and linkages with statf universities and the ICAR farmer science centers. Agriclincs Scheme The mainpurpose o f the agriclinic scheme i s to provide accountable extension services to farmers through technically skilled graduates a the village level. These clinics are expected to provide different types o f inputs (for example, seed, fertilizer, agrochemicals, feed medications), technical services (for example, artificial insemination, vaccinations, soil testing), and advisory services. Generally, the cos o f technical and/or management advice will be bundled with the sale o f farm inputs and/or other technical services, and made available tc farmers on a commercial basis. It is expected that agriclinics will specialize in crop production/protection, .animal husbandry/veterinar] services, and/or agricultural marketing and farm management services. When farmers purchase inputs from an agriclinic, they expect thr ownedmanager to provide the most up-to-date technical advice on topics such as varietal selection, best management practices, and possibly, value-added options. Once established, agriclinics or agribusiness centers might expand their operations to include such service; as (I) access through intemet connection to specialized technical or marketing information, (2) crop insurance, or (3) information 01 sanitary and/or phytosanitary regulations that farmers may need to know in successfully marketing their products in niche or intemationa markets. In addition, agriclinics are being set up to promote high-value commodities, such as banana, pineapple and papaya, via tissul culture procedures; seed or feed processing units; and plants to produce bio-fertilizers (for example, vermiculture or composting) or bio pesticides. This scheme is open to agricultural graduates and graduates in fields allied to agriculture. Project costs will be limited to Rs 1million fo, individuals and Rs 5 million for groups. Assistance will be provided from National Bank for Agriculture and Rural Development's (NABARD) Soft Loan Assistance Fund to cover up to 50% o f the margin prescribed by banks in meeting any shortfalls in borrower's contributions. The mode o f refinancing will be under the Automatic Refinance Facility (ARF) under the previously sanctioned procedures o f NABARD. By 2002 approximately 15, 600 graduates had applied for training under the scheme, 2,853 graduates had completed the training, and 235 had started agriclinics or agribusiness centers. Source: Sulaiman and van de Ban 2002, Seth and Sidhu 2003, Sulaiman 2003a, Swanson and Mathur 2003. and oilseeds. Farmers with larger land area and area planted to nonfoodgrains were more willing to pay for agricultural information. Farmers were found to be willing to pay for plant protection and training programs. One important condition for paid services i s the farmers' insistence on field-visit- based advice. Farmers were willing to share the costs with other farmers for bringing expert advice to their sites. With increasing private sector participation in the agricultural extension system, an 53 important role for the government will be to provide the policy framework for ensuring service quality standards and fair competition. Box 4.2 PrivateExtensioninIndia: RecentInitiatives Private extension initiatives are increasing in India. Notable amongthemare recent initiatives by several Indian agribusinessfirms. All of these models are new experiments, and the firms are still developing their strategies. This box describes the progress of three of these major innovations. Mahindra and Mahindra Lfd., India's leading tractor and utility vehicles manufacturer, entered the private extension scene through a subsidiary that opened its first center (Mahindra Krishi Vihar, or MKV) in Madurai District of Tamil Nadu in October 2000, primarily to cater to paddy growers. Encouragedby the success of this new approach, Mahindra is establishingnew centers in other districts of Tamil Nadu and in other states. The centers provide the following services: (I)selling quality farm inputs (seeds, fertilizers, and pesticides); (2) renting farm equipment (tractors, harvesters, dryers); (3) arranging credit (in partnership with ICICI bank); (4) offering farm advice by trained field supervisorswho visit fields and supervise the critical farm operations; and (5) buying the resultingproduce (through contracts with processing units). Although this operation started as ajoint venture with its existing tractor dealers, the company i s expanding its operation though franchisees. The company also expanded its services from paddy to other crops such as sugarcane, maize, and wheat. In Madurai within one year, the paddy area registeredwith the company increasedfrom 797 acres to 2000 acres. Inpaddy, the services are providedat the rate of Rs 500 (approximately USrSlO) per acre per season. Rallis i s one of India's leading agri-input companies, supplying pesticides, fertilizers, and seeds. The company initiated the concept of Ralis Kisan Kendra (RKK) to provide integrated services to farmers. The company established 10 RKKs in wheat, soybean, vegetables, and fruits in 5 states. RKKs provide the following services to farmers: (1) send agronomists to visit the fields of farmers at regular intervals (on an agreed schedule); (2) facilitate credit to farmers (through ICICI and other banks); (3) provide all farm inputs (seeds, fertilizer, and plant protection chemicals); (iv) test the soil; and (5) procure the entire produce of the grower (on behalf of other market partners). The first RKK was establishedat Panipat district of Haryana in July 2001. Starting with 584 farmers in the first year (with aregisteredarea of 3600 acres ofbasmati), the scheme expandedto 725 farmers inyear 2 (with a registeredarea of 5000 acres of basmati). The enrollment fee chargedis Rs 100 (approximately US$2)irrespectiveof the size of holdings. The charges vary by crop and the natureof services provided. Indian Tobacco Company (ITC) i s a market leader in tobacco products, hotels, and packaging, and its IntemationalBusinessDivision is one of India's largest exporters of agricultural commodities. ITC's new extension effort revolves around e-choupals, which are village intemet kiosks that enable access to information on weather, market prices, and scientific farm practices. Launched in June 2000, the company so far has established 120 e-choupals across 4 states (Madhya Pradesh, Kamataka, Andhra Pradesh, and Uttar Pradesh). The services reach more than 750,000 farmers growing soybean, coffee, wheat, rice, pulses, and shrimp. Eachkiosk i s run by a local farmer (sanchalak),selected from the village and providedwith a short training. The services offeredto farmers through the choupal include: (1) information in the local languageon all aspects of cultivation through the ITC website; (2) daily information from different markets of the state and ITC's price for the produce for the next day; (3) a forum to post and receive farming queries via email; (4) detailed district. specific weather information (sourced from the state Department of Meteorology); (5) an assured price at ITC's procurement centers proper weighing, and immediate payment; and (6) quality inputs and services (offered by various partners), The company provides thc infrastructurefor the choupal, including a computer, a printer, UPS system, solar panel, and intemet connectivity through VSAT. The sanchalak providesthe space and has to meet other operational expenditures such as electricity charges. The sanchalak has a transaction. based income. Farmersare free to use this facility, and there is no fee or registrationcharge. 1Source: Sulaiman2003b. 54 V. Re-energizingthe Agricultural Sector:PolicyOptions The Government o f India's rural development strategy for the twenty-first century must rise to the challenge o f meeting the rapidly changing needs in rural areas, the country, and the global environment. As illustrated by the experiences in other rapidly growing developing countries - China, Thailand, Brazil-economic development and increasing industrialization eventually bring about a changed and smaller role for the agricultural sector. This shift i s happening inIndia. Indeed, the pace o f structural change i s rapid in some states. InMaharashtra, Tamil Nadu, and Gujarat, the agriculture and allied services sector contributes less than 20 percent to the state's GDP. The movement o f agricultural labor to higher paying jobs in the industrial and services sectors and the increasing diversification o f rural household incomes are consistent with this economic transformation. Integral to the development process i s the importance o f a concurrent rapid pace o f growth in the agricultural and rural nonfarm sectors, because they jointly, directly, and indirectly contribute to generating opportunities for greater rural employment and income growth. Removing the policy and regulatory barriers to ensure that those who choose to remain in agriculture can enhance their productivity and competitiveness, and achieve the highest returns from their endeavors i s critical to maximize the sector's contribution to overall economic growth. This i s important particularly as the majority o f the workforce in India remain dependent on the agricultural sector for their livelihood. At the same time, rural non-farm sector (industry and services) growth not only offers greater alternative employment opportunities, but it can create a strong foundation for consumer demand in rural areas alos. An increase in rural-based demand in turn can stimulate growth in the agricultural and other sectors o f the economy. Successfully achieving such broad- based growth, however, will require vigilantly adjusting to the rapidly changing market opportunities and challenges internally and globally. Indian agriculture faces both tremendous opportunities and complex challenges. Three o f five people employed in India depend on agriculture for their livelihoods (as cultivators or agricultural laborers). Many o f these people, a large share o f whom comprise the poorest, continue to be bound to low-value, low-productivity agricultural activities. Increased liberalization o f domestic and global markets brings tremendous opportunities and challenges. It opens opportunities for states to tap demand in one another's markets as well as access new intemational markets. However, increased liberalization also heightens competition both among Indian states and with other exporting countries for the same markets. Bold action from policymakers i s needed to move away from the existing subsidy-based regime to focus on building a solid foundation for a highly productive, internationally competitive, diversified agricultural sector. More rapid agricultural productivity growth, as past experience in India shows, can have major impacts on poverty reduction through direct effects on producer incomes, indirect effects on consumer welfare through changes infood prices, employment and wage effects, and growth-induced effects throughout the economy. Unarguably, the current policy regime was successful in improving the productivity o f Indian farmers and enabling the country to achieve foodgrain self-sufficiency by the 1990s. Having met this goal, India now needs to change course and develop a new strategy for the agricultural sector ingeneral, and the foodgrain sector inparticular. The current agricultural policy regime, which i s founded on attaining foodgrain self- sufficiency achieved through high price support and large input subsidies, i s no longer compatible with the changed environment o f the twenty-first century nor is it sustainable. Clearly, current policies will not be sufficient to achieve the GOI's sectoral growth target o f 4 percent per year over the longer term nor achieve its poverty reduction goals. To depend on the foodgrain sector to reach these goals will require even higher and fiscally unaffordable increases in minimum support prices and input subsidies. These inturn will lead to the accumulation o f even larger buffer stocks and the 56 problems o f disposing o f them. Moreover, increased foodgrain production could exacerbate land degradation problems in many areas, while discouraging farmers from diversifying to other higher value crops. But it also i s recognized that political economy considerations will not make taking this new path easy. A. Priorities for Reform Improving agricultural performance and sustaining it over the longer term require a careful reorientation of government expenditure priorities. This entails shifting public expenditures from more politically attractive subsidies that generate limited lasting benefits toward more productivity- enhancing investments that could enable the large number o f agriculture-dependent families to enhance their agricultural productivity, competitiveness, and ultimately their farm incomes. Priority areas for investments include rural infrastructure, such as irrigation, rural markets, roads, electrification, and drinking water; and services such as agricultural research and extension, environmental conservation, land administration, education, and health in rural areas. Tightening competition for limited fiscal resources heightens the urgency o f appropriate public expenditure reallocation. Institutional reforms within government departments to ensure improved quality o f delivery o f rural-relatedpublic goods and services will be integral to the revival o f the government's investment program. These actions are critical to foster more rapid growth and ease anticipated rural employment pressures inthe whole economy. Anything less would have serious poverty and welfare implications. Another key priority i s to refocus the role o f the government to provide the appropriate regulatory framework to ensure competition while withdrawing from commercial activities and devolving these functions to the private sector. The new regulatory framework necessitates permanently removing restrictions on domestic trade such as movement, storage and credit controls, and imposing them only in emergencies. The framework will include the removal o f levies on rice and sugar, small-scale reservation o f agro-enterprises, and state controls on wholesale marketing. This liberalization will improve the investment climate for farmers and the private sector to effectively meet emerging market needs and opportunities. B. Foodgrain Policies There i s broad recognition in India that the current foodgrain policy framework i s not sustainable from the fiscal, economic, and agriculturalproductivity perspectives. The cost o f existing policies i s very high, especially when implementation o f the price support program i s found to benefit only farmers in a few states, and within these states, mainly large farmers. Moreover, the price bias in favor o f rice and wheat, which encourage their cultivation in less ideal ago-ecological areas, i s causing environmental damage that will progressively undermine the longer-term productive capacity o f agricultural lands inthese areas. In what direction should the foodgrain sector be heading? At this juncture, a long-term vision o f the foodgrain sector i s the increased shift o f the foodgrain breadbasket to the northem and eastem states, which possess highly favorable ago-ecological conditions and a comparative advantage in foodgrain production. Existing major producers, such as Punjab, Haryana, and Tamil Nadu, which are increasingly constrained by the growing water scarcity, will shift to a more highly diversified agriculture and allied services sector, growing less water-intensive, higher value crops. There will be a liberalized market environment, inwhich well-functioning, efficient, and competitive foodgrain markets perform the primary roles o f marketing, distributing, exporting, and importing grain. There will be a regulatory framework that fosters private sector participation and competition, while a well-designed competition policy guards against unfair practices. Farmers, traders, 57 consumers, and policymakers will have ready access to accurate and timely market information to enable them to make appropriate decisions on resource allocation, for production and marketing for example, and to take appropriate actions to minimize risks associated with temporary food shortfalls and surpluses. The poor will be protected from price and income shocks by effectively targeted safety nets (including food), while drastic supply shocks are mitigated by cost-effective and well- managed price stabilization mechanisms, for example, foreign currency reserves and a modest strategic reserve. Moving forward on the reform o f foodgrain policies, however, i s complicated by complex economic, social and political concerns. There i s no magic formula or consensus on the way forward. Reaching agreement on the appropriate course o f action i s complicated by the close inter-dependence between government procurement, buffer stocking, public distribution activities, and the need to balance strong political and social concerns against economic efficiency goals. The debate revolves around what measures could be adopted to re-orient the foodgrain policy regime, including what to do with the rice and wheat MSP. MinimumSupport Price There i s broad recognition that the recent rapid increase in the minimum support prices (MSPs) for rice and wheat was a major contributor to recent problems o f mounting buffer stocks. But there are divergent views on what level to set the revised MSPs. Some reform options and their implications are presentedbelow: e Set Rice and Wheat MSPs at C2 costs. This i s the proposal o f the GO1 High Level Committee on Long-Term Grain Policy (HCLTGP). Using the 2001/02 MSP foodgrain support levels as a benchmark, lowering the rice and wheat MSPs to average C2 costs will generate fiscal savings o f approximately Rs 41.3 billion (US$910 million) per year (table 5.1, scenario I). However, this option will lessen only slightly the price-distorting effect o f the MSPs on cropping Procurementstates only, RsiHH All states, rice or wheat, RdHH Procurement states rice or wheat, Rs million All states, rice or wheat, Rs million Notes: a. Total subsidy =procurement x (2001102 MSP- average2001/02 C2 Costs). Procurementis averagefor 2000101 to 2002103. The analysis uses the estimates of agriculturalhouseholdsfromNSS 54" round. b. .Punjabsubsidy rate of Rs 9,208 per rice cultivator and Rs 14,443 per wheat cultivator c. Punjab subsidyrate of Rs 2,481 per ha of rice and Rs 3,941 per ha of wheat. Source: Author's calculations. 58 decisions. Setting them at C2 costs will continue to limit incentives to diversify and only mitigate slightly the associated environmentally damaging consequences o f the policy. Of more serious concern, this policy implies that the government rather than the market will continue to determine farm prices. This role i s not compatible with the market economy principles at which the GO1i s aiming. 0 Set Rice and Wheat MSPs to C2 costs andfreeze at current levels over the longer term, so that they eventually will cover only the cash costs and imputed costs of family labor (AZ+FL costs). Similarly, usingthe 2001/02 MSP foodgrain support levels as a benchmark, the reduction o f the MSPs to "A2+FL costs" would almost double fiscal savings to approximately Rs 78.8 billion ($1.7 billion) per year. Following a phased reduction through inflation will provide farmers time to adjust their production systems. Phased reduction will minimize output price distortions, encourage farmers to diversify, and function as a true safety net and price floor for farmers. Phase out price support completely. In 1984 New Zealand embarked on a bold program to phase out all agricultural subsidies (table 5-2). This program led to a massive restructuringo f the agricultural sector, which resulted in the longer term in a more efficient, fast growing and competitive agricultural sector. During the adjustment period, the government provided assistance to some farmers in restructuring their debts. In the process, many farms became unviable, and during the period immediately after the introduction o f the reform, a significant number o f farmers left farming. Providing a secure safety net for farm households was critical duringthis period. Revising the foodgrain MSPs i s undoubtedly a highly contentious issue due to its economic, political and social ramifications. There i s widespread concern that lowering the MSPs will have detrimental consequences on farmer incomes, especially hurting many o f the poor during the transition. The fiscal savings from price subsidy reduction could fund complementary investments to improve farmer access to technical advice, credit, rural infrastructure, and related services. These services could facilitate and strengthen farmer capacity to shift to more profitable enterprises, including diversifying to higher value crops and agribusiness activities. However, some policymakers suggest that an additional compensatory instrument to assist farmers cope with the transition i s needed to foster their acceptance o f MSP reform. Some o f the options that have been proposed include investment grants, contract farming, income support, negotiable warehouse receipts, and the use o f other safety nets. These options are examined below. In examining their feasibility and applicability to the Indian circumstances, critical considerations are (a) the fiscal cost o f the scheme; (b) its contribution to GO1goals o fpromotingproductivity growth and diversifying to higher value crops; and (c) administrative and implementation requirements. Investment Grants. One option proposed to assist farmers to cope with reduced price support (and other subsidies) i s to provide them with investment grants. These grants to farmers, communities, or agribusiness could be designed to simultaneously encourage diversification from foodgrains to other crops or other agricultural undertakings. This one-time grant could cover a portion o f investment costs for a variety o f activities including (a) feasibility studies and on-farm investment costs of diversifying to other crops; (b) marketing studies, business development services, and market information development for agribusiness; (c) market infrastructure development by groups o f farmers and agribusiness; and (d) cost o f converting current market infrastructure, farm machinery, and irrigation systems to alternative enterprises. The size o f the grant could vary according to designated poverty or wealth indicators (for example, land owned). An example o f a successful innovative investment grant scheme inIndia is the "horticulture- linked employment guarantee scheme" in Maharashtra. To encourage the establishment o f horticulture enterprises, this scheme provided an investment grant to farmers inthe form o f financing 59 Box 5.1 MaharashtraHorticultureLinkedto the Employment Guarantee Scheme The Horticulture Development Programlinked with the Employment Guarantee Scheme (EGS) aimed to accelerate the expansion o f horticultural production and generate additional employment in rural areas. While food crops can provide employment of approximately 100 to 115 person days per ha per year, horticulture production required up to 275 person days per ha per year (Godbole 1990). The programapplied to 25 fruit crops, spices intercroppedin coconutplantations, and medicinaland aromatic plants. The scheme was open to all farmers, with a minimum required area per project of 0.2 ha to a maximum of 4 ha (0.1 to 10 ha in the Konkan region). The scheme provideda 100%subsidy on wages and material inputs (plantingmaterials, fertilizer, agrochemicals)to small and marginal farmers and scheduled caste (SC), scheduled tribes (ST), and other ethnic minorities, on a declining scale and phased out by the third year. All other farmers received a subsidy of 100%of wages and 75% on material inputs on a declining scale over 3 years. Wages were given in cash, while the material inputs were supplied in kind. The "grant" or subsidy receivedaveraged Rs 7,709 ($161)per farmer beneficiary. To support the scheme, the Govemment of Maharashtra(GOM) implementedcomplementary initiatives to ensure the supply of key inputs and services. The public extension service provided intensive technical support to farmers. During the first 7 years, 140 govemment nurseries and 24 nurseries in the 4 agricultural universities were established to supply high-quality planting materials. Planting material supply was further expanded by the entry of approximately 1,670 private nurseries. By 2002, the state was self- sufficient in planting materials. Pesticide residue testing laboratories with intemational standards were established in Pune and Nagpur.A website "agri.mah.nic.in" on agriculture-horticulturewas launchedby the GOM Departmentof Agriculture to disseminate information about the program. A GO1 centrally sponsored scheme for sprinkler and drip imgation facilitated the expansion of horticulture and floriculture production.Inview of water scarcity conditions inmany areas, the scheme aimed to increase efficiency in water use. The drip/sprinkler scheme, provideda subsidy equivalent to 75% of costs for all farmers and 90% of costs for SC/ST, up to alimit of Rs 32,000, the cost of which was sharedbetweenthe central and state govemments at aratio of 7525. Complementarypublic andprivateinvestmentsfurther supportedthe growthof the sector. GOM investmentsininfrastructure, suchas building the Pune-Mumbai expressway and other roads and upgrading airport and port fac es, reduced transportation costs and helped to increasethe competitiveness of Maharashtra products domestically and in the export market. Private sector initiatives and investments also contributed to the growth of the sector. Large farmers and corporate investors in horticulture and floriculture, who have invested in supporting marketing infrastructure, such as precooling facilities, cold storage, refrigeratedtransport, and agroprocessing,promoted productionand organized supply from other (smaller) farmers to meet the bulk requirementsfor export and local demand and providedtechnical advice to meet export quality requirements.Someprivatecompanies also have been instrumental in introducing new technologies in the state and in providing combined technology and advisory packages. Increasedprivate participation in input supply (fertilizers, agrochemical, improved seeds) increased the accessibilityby farmers to key farm inputs. Commodity marketing organizations including Mahagrapes, Mahamangoes, and the Westem India Floriculture Association were instrumentalinpromotingexports of local products. The programhas been a success from both the horticultureand employment perspectives. Of the 1-million-ha increase in area planted to fruits in the state between 1989190 and 2000/01, 96% was supported through the horticulture-linked EGS scheme. Since the program's inception in 1990, approximately 1.28 million farmers covering 35,525 villages have availed of the program. Approximately 7% and 11% of the beneficiaries were SC and ST respectively. It appears that the scheme has also generated considerableeconomic benefits. Assuming conservativelythat only 10% of the fruits and vegetableGSDP was due to the horticulture- linked EGS program, and taking costs as equivalent to the total subsidies for the program during the same period (Rs 6.44 billion, constant 2000/01 rupees), the benefit-costratio came to approximately 7:l. In addition, over the last decade, it directly created an estimated 213 million person days of work or approximately 807,000 person years (assuming 220 days work per year). Because the fruit orchards, once initiated, would normally requirecontinuous employment to meet day-to-daylabor needs, the scheme also opened opportunities for permanent full-time employment for agricultural laborers. In addition, the increased fruit production generated positive multiplier effects in term of increased labor demand arising from increased demand for inputs and marketing services (transport, storage, packaging, processing, trading). Inthe future, inview of the rapid uptake of the technologies,the challengewill be to more exclusivelytarget assistanceto poor and small and marginalfarmers, who are more capitalconstrained. Source: World Bank 2003c. the labor costs during the start-up years (up to 3 years). The grant had a dual benefit o f not only encouraging the shift to and expansion o f high-value horticulture in the state but also generating permanent employment inrural areas (box 5.1). InTurkey, it was used to support adjustment in the context o f liberalization. To enhance the implementation and targeting effectiveness, the investment'grants program should be administered in a decentralized and participatory manner, at the community or local govemment level. Coordinating this program with other public and private sector initiatives to promote the development o f the complete commodity supply chain-from input supply, production, marketing, processing, to exports-will increase the chances for success o f the program (box 5.2). Investment grants have the advantage o f being tied to specific diversification initiatives decided on by farmers and agribusiness. As one-time grants, there would be less expectation o f their becoming permanent subsidies. However, the grants will require clear eligibility rules, transparent 60 administration, and an independent monitoring system. In addition, special care should be taken to ensure that grants to individual farmers or businesses do not undermine rural financial markets (World Bank 2003b). The fiscal cost will depend on the size o f individual grants and the number o f farmers to be covered. The program necessarily will require significant short-term fiscal outlays. For example, an investment grant averaging $1000 per farm household and covering all o f the estimated 81.4 million farm households in India would require a budgetary outlay o f $81.4 billion over the program period. Targeting the investment grant to poor farmers will be critical to reduce overall fiscal cost. Agricultural Diversification Support. Diversification to higher value activities such as horticulture, livestock, and fisheries provides an avenue to preserve income levels after price subsidy reduction. As illustrated by the horticulture development experience in Maharashtra, key public investments that improve the investment climate are also key to enable farmers to shift and improve Box 5.2 RuralEnterpriseDevelopment:RecentLessonsfromInternationalExperience "Best practice" in nonfarm, rural enterprise development means not only the use o f business logic in preparing and analyzing financial projections, but also the creative use o f different models, mechanisms, and incentives for stimulating, supporting, and managing new businesses. At the macro-level within a given country, the most successful approach has probably been the "enterprise zone," which combines improvements in basic infrastructure such as ports, airports, and highways with tax incentives (both for the initial investment and for annual operations over a certain number o f years). Yet, tax incentives have relatively little effect in many developing countries, in which compliance with tax regimes i s often low. At the municipal level, the most successful approaches have included "free zones," "industrial parks," "food parks," or "technology parks." These generally involve (1) well-equipped but low-cost factory, laboratory, or office facilities; (2) good access roads and telecommunications capacity; (3) labor and training programs to facilitate the generation o f higher paidjobs; (4) tax incentives for investment and annual operations; and sometimes (5) access to extemal technical or business support. At the local level, the "business incubator" model has proven especially effective because it recognizes that (1) as they move through the stages o f evolution o f the business, entrepreneurs usually need mentoring from more experienced businesspersons as well as specific technical expertise; (2) they can benefit from both peer support and constructive criticism all along the way; (3) at the start, they do not need major office facilities nor support services and can conserve scarce resources by renting or paying on a fee-for-service basis; and (4) entrepreneurs do not usually need and probably should not invest in major facilities until their business plans are strong, their financing secure, and their decisions to go ahead very firm. Business incubators usually make all o f these services available to fledgling enterprises in a "just-in-time'' manner. Inthe case o f micro-entrepreneurs, which is a boomingfield all over the world, the primary felt need usually is capital (from US$lOO to US$25,000, depending on the context). Capital may be provided through normal commercial banks, niche banks, savings and loan associations, NGOs,or any other private financial intermediary. The debate continues as to whether it is cost-effective tc even provide any classroom training, shared physical facilities, technical support, or business advice to micro-entrepreneurs. One example o f a successful rural enterprise project is the Sri Lanka Ago-Enterprise Development Project. Sri Lanka Agro-Enterprise Development Project. The Sri Lanka Agro-Enterprise Development Project (AgEnt), funded by USAID was an enterprise development program whose objective was to stimulate development and expansion of private, ago-based enterprises tc generate increased employment and incomes from more diversified and commercial agricultural systems. Project implementation movec through three phases. The first phase was based on a competitive grants program to share risks with Sri Lankan companies undertaking ar array o f innovations in technical, managerial, marketing, and financial planning operations. The project services were well publicized an( interested entrepreneurs were encouraged to apply for assistance. Qualified enterprises were identified during meetings and interviews anc invited to submit Client Profile Forms. During this stage, the appropriate grant interventions were determined and presented to a Gran Committee. At anytime, more than one enterprise mightbe applying (competing) for one o f the three available grants per technology, tha is, no more than 3 grants for packaged spice were awarded. From 1993 through 1998, the AgEnt program made a total o f 752 grants to 404 firms, o f which 26% were classified as microenterprises 30% as small, 19% as medium, 7% as large, and 18% as institutions (farmer associations, trade associations, research institutes). Grant averaged approximately US$6,000 and leveraged approximately US$5 for every US$4 o f grant funding. Grants were used for the trial o new equipment or processes, travel to assess markets or technologies, trial production, participation in trade fairs, feasibility studies, o environmental improvements to productionprocesses. The project outcomes include the (1) creation o f 21,000 new jobs; (2) adoption o f 327 new processing or production technologies, (3, introduction o f 162 new products to 190 different markets, and (4) sales increases o f US$ 33.4 million for export and US$48.3 million for domestic. The project had 34 staff members composed o f economists, businesspersons, and academics. They included advisors in agribusiness, production, marketing, ago-processing, and creditifinance. There was one manager each for grants, administration, and the business information center. The balance comprised support staff. Source: Lamb (no date), Alex (no date). 61 the incentive environment for diversification. These key investments include strengthening research and extension systems, rural infrastructure and services (roads, markets, electricity, airport and port facilities, and information services). Maharashtra's experience emphasizes the needto reorientpublic expenditures to productivity-enhancinginvestments. When diversifying to new commodities, promoting contract farming or outgrower schemes are additional mechanisms to reduce market and income risks. The GO1and a number o f states are pursuing these approaches to facilitate marketing by farmers. Contract farming is a forward agreement between farmers and processing and/or marketing firms to supply agricultural products, frequently at predetermined prices. Other possible arrangements include assistance for sourcing inputs, credit, and technical advice. The pricing arrangements can reduce the risk and uncertainty faced by farmers. Contract farming also assists agribusiness enterprises in establishing a reliable supply o finputs o fthe desired quality and volume inan agreed timeframe. Contract farming requires the long-term commitment o f farmers and buyers, both recognizing that honoring contractual arrangements i s to their mutual benefit. Successful examples o f contract growing experiences have been documented in several states: dairy, basmati rice, vegetables, groundnuts, and seeds in Punjab; wheat in Madhya Pradesh; rice and cotton in Tamil Nadu; vegetables in Havana; and poultry in Andhra Pradesh (AP)(Manage 2003, World Bank 2003b). These experiences provide useful lessons for other states. The government can foster the development o f contractual arrangements in a number o f ways. These methods include facilitating the creation o f producer organizations, legislating an appropriate contract law and effectively enforcing it, strengthening and improving the quality o f (public and private) agricultural extension services, providing complementary infrastructure, and developing effective land administration systems (World Bank 2003b). In most states in India, contract farming will require amending the state Agricultural Produce Market Act to legally permit farmers to sell directly to agribusiness. Income Support Scheme. To compensate farmers for the reduction in the MSP, the HCLTGP proposed as an option an income support scheme applicable exclusively to rice and wheat farmers in the states where F C Iprocures foodgrains. Income support programs generally come inthe form o f a lump sum annual or seasonal payment to farmers based on crop area cultivated. Income support schemes are economically less distortive than price support because they delink payments from production decisions. They allow the market, rather than government, to determine prices, thus allowing resources to be allocated more efficiently. Several lessons can be drawn from recent country experiences with income support programs. Table 5.2 summarizes the main features o f income support programs in the European Union, Mexico, Turkey, and the United States. To ensure clarity o f program goals and contain the fiscal costs, eligibility rules and registration procedures need to be clearly defined from the outset and the number o f years for which producers will be eligible for payments be time-bound. Experience shows, however, that governments often find it difficult to resist pressures to revise rules and level o f support or adhere to phase-out timetables. For example, in response to the weakening international competitiveness o f Mexican agricultural products covered by the income support program, the Government o f Mexico reintroduced price supports in 2002. Similarly, the United States in 2002 revised the design and level o f income support and timeframe for its program. Income support payments, which are not based on current production, price or input use, are considered Green Box under the Uruguay Round Agreement in Agriculture and are not subject to limitations or reduction commitments. This feature could also limit government incentive to remove them. Payments per ha will favor larger farmers and be more administratively complex, because they will require monitoring crop-related information for each farmer. Payments per household will 62 Table 5.2 Selected Country Experienceswith Agricultural Subsidy Reform I I I I Farmer Income Support Programs Salient EU: Common Mexico: US:Agricultural Market Turkey Direct New Zealand: Farming without Features Agricultural PROCAMPO TransitionAct and Income Support Subsidies India j Policy Farm Security and Program Rural Investment Act Objective Compensate Compensate Compensatefarmers for Compensate Removetrade Achieve self producers from a farmers for reducedremoval of deficiency farmers for protectionand govt sufficiency, reductionin incomewith payments,counter- reducedincome interventions in ensure support prices elimination of cyclical supportof farm due to removalof agriculture and reasonable supportprices on income,maintainbudget support prices andago-indushy, incomeof selected crops due discipline subsidies public sector and farmers, and to NAFTA institutional reform, ensure and privatization, affordable exceptfor public pricesof goods aspectof essential food for consumers reforms 5 years Implemented 1993 1994 1996,2002 2001 1984 1950s PaymentbasisAverage acreage $86per ha for Fixed payment rate per $110 per ha ofTotal withdrawal of MSP, TPDS, insupportcrops autumniwinter unit output and variableland area sown asconcessionaryloans open market during 1989-91 crops, $91for payment rate that shown by and support sales, fertilizer, springisummer increases as marketcadastral records; payments, subsidy water, and crops up to 100ha prices decrease, paid onoriginally cappedschemes, and power subsidies (2002) for each each farm's historicalat 20 ha, now 50preferentialtax growing season. acreage and yields for ha treatment Basedon average supportedcommodities acreage during 11991193 I Applicable IWheat,maize, IWheat,maize, IWheat,maize sorghum, lAll crops eligible INone . - /Mainlyrice anc commodities barley, rye, oats, sorghum,barley, barley, rice, cotton, oats for supportunder wheat; sugar rapeseed, rice, cotton, beans, the previous sunflower, soybeans,. programs soybeans, dried safflower pulses, beans, tobacco, beef, lamb Payment None $6,700 per farm $40,000 +possible $5,000 per farm One-time assistance None limits $20,000on eachof 2 for debt subsidiaryfarms. restructuringfor some farmers Restrictionon Allocatedto Allocated to Must remain in farming, Landhas to be None None the use of support crops; support crops, but no increase in fruit or cultivatedbut land largeproducers since 1996, land vegetablearea; mustbe includes fallow mustput into can be used for incompliancewith land fallow a other agricultural existingconservation predetermined uses plans level of support- crop land Estimated $48.1billion $1.3billion (2002), $15 billion per year $1.3 billion per Fiscal savings Est.$6.04 billic SubsidyiGDP 0.73% 0.20% 0.06% 0.68% 1.28% RuraliTotal 1 25% 20% 35% 3Yo 72% Popn Total FarmersI I 5 million I 2.1 million I 4.1 million I 109,000 I 81.7 million 63 be more equitable and require less administration due to fewer data requirements. To help target poorer farmers, the rate could decrease as farm size increases, with a ceiling on the number o f hectares eligible for payment. Inthese situations, the delicate balancing o f strong political pressures from large farmer interests groups to raise area ceilings vs. targeting assistance to poor farmers will arise. In exploring the feasibility of an income support scheme in India, the extent of farmer coverage will be an important consideration. One estimate o f the number o f farm households in India, based on the NSS 54" round (1998) i s 81.4 million, approximately 20 to 40 times the number o f farm households in other countries currently implementing income support schemes.49Taking the average rice and wheat procurement volumes for the three-year period 2000/01 to 2002/03 o f approximately 19.9 million mt o f rice and 18.7 million mt o f wheat, and the average price subsidy per farmers in 2001/02 (MSP-average C2 costs), the price support received inthe procurement states totaled Rs 17.6 billion for rice farmers and Rs 23.7 billion for wheat farmers (table 5.1). On average, these totals translated to Rs 402 and Rs 847 per season per rice- and wheat-cultivating household respectively. The question arises, however, whether it will be politically feasible to ignore rice and wheat farmers outside o f the "procurement states" or all other farmers inthe country who grow other crops. Implementing an income support scheme, given India's large farm population, will likely raise the fiscal cost o f foodgrain policies substantially above the current level. If a fixed transfer per household i s adopted, the rate at which it i s set will have to take account o f political economy considerations. Given the highproducer support rates in Punjab o f Rs 9,208 ($203) and Rs 14,443 ($318) per rice and wheat farming household respectively, Punjab farmers may demand the same income support rates. Ifthe Punjab income support rates are applied to rice and wheat farmers in all procurement states, the annual fiscal cost o f the program increases from Rs 41.3 billion ($918 million) to Rs 767 billion ($17 billion). If these rates are applied to all rice and wheat farmers inthe country, the annual fiscal cost increases to Rs 949 billion ($21.1 billion). The annual fiscal cost jumps to Rs 1.9 trillion ($42.2 billion) if the same level o f income support is given to all farmers in the country. Similar analysis using per ha rates indicates an increase in fiscal costs. One option to reduce cost would be to reduce drastically the MSP and procurement volumes. Note that these calculations do not include the administrative costs o f the program, which will increase the cost further. Implementing an income support program will introduce new intensive administrative requirements and costs. To work effectively, the program necessarily will require a historical database o f crops and area planted by each farmer and land tenure status. The database will need to be updated yearly. The program will require an effective delivery mechanism to distribute the transfer to farmers (for example, a banking system to deliver checks). Inview o f the large number o f farm households (8 1.4 million) inIndia and the generally weak local government capacity existing in many areas, meeting the administrative and logistical requirements to effectively implement an income support programwill be a major challenge. Income support will not necessarily encourage diversification to other crops, as the program merely changes the delivery mechanism for the subsidy. InMexico, the income support program had very limited impact in promoting agricultural diversification or fostering the desired productivity increases (Rosenzweig 2003). To encourage productivity-enhancing and agricultural diversification investments, the Government o f Mexico had to introduce a separate agricultural investment program. It revised the Procampo program in 2001 to enable farmers to receive in advance a lump sum 49 According the 2000 Census, India has 127.6 million cultivators; however, they do not necessarily equate to the number o f agricultural households. 64 Box 5.3: How Does a Warehouse Receipt Operate? As an altemative mechanism for raising working capital, a warehouse receipt system offers farmers or traders to convert foodgrain into collateral held in a licensed warehouse. Warehouse operators issue negotiable receipts that farmersitraders can either retain or assignhansfer to a lender in retum for a percentage of the value o f the commodity-a loan to be repaid by a certain due date. Lenders record their security interest with warehouse operator so that, if a borrower defaults, a lender can claim the commodity directly from the warehouse operator and sell the foodgrain to liquidate the loan. A negotiable receipt also gives the lender the opportunity to trade the receipt on a secondary market and refinance its loans. The United States Warehouse Code requires that every agricultural commodity receipt contain the location o f the warehouse; date o f issuance; consecutive number o f the receipt; statement guaranteeing delivery o f the product to the bearer, to a specified person or to order; storage rate; and the quantity, weight, grade, or class o f the product. In addition to a statement that the receipt is subject to the warehouse law and the signature o f the licensed warehouse operator, the receipt also must identify the ownership o f the warehouse and specify the amount o f advance and liabilities incurred for which the warehouse operator claims a lien. Source: World Bank 1999a I 65 agricultural produce and improve local competitiveness. Improving the targeting o f employment schemes will be critical, if they are to serve as an effective safety net for farmers and the poor. Reorienting wage-setting rules for the program will be critical to strengthen self-targeting toward the poor (box 5-4). Reorientation could include testing other wage setting mechanisms such as piece rates or setting special poverty program rates that would not exceed market wages. There also i s a need to build strong local community mechanisms that would serve as a "check" on implementation effectiveness o f these programs. As implementation by design i s devolved topanchayat raj (local government) institutions, the challenge for these programs will lie more inbuilding capacity not only to develop community development plans that create durable community, social and economic assets for sustained employment and incomes for the poor and backward classes, but also to foster strong local community mechanisms that would ensure transparency and accountability inthe implementation o f these programs. Buffer Stock Management Careful management o f buffer stock levels i s urgently needed to minimize costs. While a minimumlevel isjustifiedto promptly respondto local or nationaldrastic foodgrain shortfalls due to natural calamities and other unpredictable catastrophes, it would be critical to adhere to the lower officially prescribed buffer stock norms. Effective buffer stock management, however, i s heavily dependent on the MSP and procurement policies. Thus, adjustments in the foodgrain MSP will necessarily have to come hand in hand to control buffer stock levels and costs. In addition, improving the efficiency o f FCI operations to reduce costs will also be essential. F C I management could be improved through improved inventory management, systematic benchmarking o f performance across units relative to the private sector, adopting transparent and merit based personnel management, strengthening o f cost accounting and monitoring systems to increase accountability and reduce leakages, and operating under hardbudget constraint^.^^ Public financing o f buffer stocks neednot necessarily mean holding all grain requirements in physical stocks. In view o f the Government's comfortable foreign currency reserve situation, the government could explore the use o f foreign currency reserves rather than grain to meet part o f the buffer stocking needs. The relative proportion between physical stock and currency reserves will need to be examined carefully to appropriately balance the relative costs o f holding stocks vs. the global price effect o f imports by a large country such as India and the time it takes for supplies to be transported to the country. TargetedPublic DistributionSystem While the TPDS contributed to an improvement in access by the poor, improving its effectiveness requires active measures to reduce leakages. The GO1has outlined immediate steps to ensure transparency and accountability. State commitment to their implementation i s needed. These steps include (1) posting publicly at the Fair Price Shop (FPS) and Gram Panchayat offices the official TPDS entitlements, the list o f BPL beneficiaries, and sales and stock positions; and (2) enabling Panchayat Raj Institutions and community groups to take a greater role in monitoring and overseeing the operations o f the TPDS at the community level. Instead o f physically distributing foodgrains, alternative mechanisms, such as food stamps or coupons, could be piloted. Piloting could begin in a few larger municipalities or cities in which a well-functioning private foodgrain retailing system operates. Food stamps or coupons offer a possible cost savings by eliminating the need for physical handling o f grains by the government. Food coupons are "secured paper or notes," which, like money, permit the purchase o f a list o f food items in limited quantities at a discounted price. Food stamps are "secured paper or notes" that could 50Formore detaileddiscussionson options for reforms of FCIoperations,refer to World Bank 1999a. 66 Box 5.5 PilotingFoodgrainand Kerosene Coupons in Andhra Pradesh To improve the delivery system of Targeted Public Distribution System a food coupon system for distribution of rice and kerosene was introducedin Andhra Pradesh in 1998-99. Obtaining the coupons requires both physicalpresenceof the cardholder and a photo identity card. Couponsin denominationsof 4 kg, 8 kg, and continuingare issued once a year and entitle coupon holders to draw rice and kerosene on a monthly basis. The coupons guarantee the stakeholder the right to draw the specified quantity every month. Unless a coupon is produced, rice, or keroseneis not released.According to the state government, this requirement largely eliminated the scope of cheating the beneficiaryby dealers who delivered quantities lower than entitlement. Since the actual quantity distributed in a month is based on coupons produced by the beneficiaries, the requirement also facilitates accounting through matching quantity distributed with coupons produced. The matchcan be verified every monthby the officials of the Civil SuppliesiRevenueDepartment.This requirementhas greatly reducedthe scope of diversionof rice and kerosene while reducingthe number of bogus/ ineligible cards by approximately 0.8 million. In quantity terms, the savings amounts to 20,000 mt of rice and 7,100 kiloliters of kerosene every month. The monthly savings in subsidies are equivalent to Rs 90 million for rice and Rs 56.7 million for kerosene. Source: Jha and Umali-Deininger2003. be used to buy designated foods at market prices. A food stamp or coupon scheme would offer additional cash support to the poor to meet food needs. Such a monetized income transfer from the government, rather than a price subsidy, would permit unhindered private-sector participation in foodgrain markets and pare down the fiscal costs o f supporting government handling costs. Experiences in implementing food stamp programs in Colombia, Honduras, Jamaica, Mexico, Sri Lanka, United States, and Venezuela provide lessons on the key elements o f successful programs. These lessons are (1) establishing transparent procedures for beneficiary selection and exit, (2) building an appropriate regulatory framework and institutional capacity to implement the program, (3) developing "secure" food stamps to prevent fraud, (4) instituting clear administrative procedures for stamp distribution and redemption, and (5) integrating monitoring and evaluation systems to facilitate program adjustment as needed. Andhra Pradesh piloted coupons for accessing TPDS grains and kerosene from fair price shops. Inadopting a coupon system, AP reduced the scope o f diversion by approximately 20,000 mt o f rice and 7,100 kiloliters o f kerosene every month, generating savings of about Rs 90 million per month on rice and Rs 56.7 million per month on kerosene. (box 5.5). C.Water and Irrigation Resource Management Increasing the productivity o f water and ensuring its sustainable use over the longer term would necessitate reforms at two levels. These include (1) unbundling resource management functions from irrigation and drainage institutions and (2) policy and institutional reforms within the irrigation sector. Water Resource Management. There i s an urgent need to formulate a new policy and regulatory framework at the state level to support integrated and sustainable water resources development and management, including the establishment o f clearly defined transferable water rights and water entitlements for both surface and groundwater either for individuals or for user groups (figure 5.1). It would be essential to establish a separate apex institution at the state-level with overall responsibility for planning, development, management and allocation o f water resources in the state. This apex agency could be carved out from the existing institutions and initially strengthened by provision o f additional required skills. The planning, allocation, and sustainable management o f water resources also would require appropriate pricing and tariff regulatory mechanisms. This could involve establishing an autonomous Water Tariff Regulatory Commission. To strengthen the decision-making process, complementary efforts to improve the knowledge and database inthe water sector would be needed. Improving the management and delivery of irrigation services. Expenditure and organization reforms in irrigation and drainage institutions would be vital to improving the delivery o f surface irrigation services and help ensure the longer-term performance o f irrigation 67 Source: World Bank 2003. infrastructure. Organizational reforms to streamline business processes to enhance efficiency and transparency and professionalize the work culture will be essential to integrate participatory irrigation management, improve service delivery overall, reduce the cost o f service provision (especially by modemizing and rightsizing), ensure financial sustainability o f operations and maintenance o f systems, and reduce the fiscal burden to state governments. These reforms would give priority to: 0 Planning, developing, modernizing, and operating well-designed irrigation and drainage infrastructure taking into account economic, environmental, and social objectives with close involvement o f basin and system stakeholders, approaching surface and ground water holistically indesigningirrigation and drainage infrastructure. 0 Promoting participatory irrigation management though the establishment o f water users associations and empowering them through necessary legislation to operate and manage irrigation and drainage infrastructure at levels appropriate to the socioeconomic conditions o f the state. 0 Revising water tariffs to cover at least operations and maintenance costs to improve the financial sustainability and longer-termviability o f irrigation infrastructure. Linkingtariff reform to improvements inirrigation service delivery quality would be essential. 0 Piloting public-private partnerships in irrigation and drainage investments and operations (such as management contracts). D.PowerSupplyto Agriculture There i s an urgent need to adopt a more transparent and targeted subsidy delivery mechanism for agriculture. For such an alternative model to work, it i s indispensable that there are (1) cost recovery o f at least operating costs, (2) universal metering o f consumption, (3) payment discipline, and (4) improved delivery efficiency o f electricity providers (box 5.6). In 2003 the GO1 approved the Electricity Act 2003 (Act). One o f its provisions i s the mandatory metering o f supply o f electricity within two years. Concerted efforts to encourage states to comply with universal metering will be needed. 68 Box 5.6 DesigningSubsidiesto PromoteAccess of the Poor Whom to subsidize?Ifsubsidiesare meantto improve the welfare of the poor, they mustbe directedto the peoplewho cannot afford access to high-quality energy services.These peopletypically are the very poor living inrural areas. What to subsidize?Evidencefrom other countries shows that providingapartial subsidyof the cost of connectionis moreeffectivethan a subsidy for ongoingenergy charges.Capitalsubsidies for access costs not only reduce the cost of service to the poor but also encourage businessesto increaseconnectionsinrural areas. How to subsidize?Subsidyimplementation mechanisms are categorizedbroadlyas demand side and supply side. Although further study i s needed to establishthe right mechanismfor India, demand-sidesubsidies that involve partial funding of connections generally work better. Demand-sidesubsidies havebettertargetingproperties andprovide greater incentives for expandingcoverage and sustaining services. With the possibleexceptionof lifeline rates, supply-sidesubsidies, although easier to implement, have the disadvantages ofbeing difficult to target, underminingefficient service deliveryandraising costs above what they would otherwisebe. While the proper designof the subsidy scheme would improve its effectivenessinreachingthe poor, its ultimate success also depends on effectiveinstitutional structures,regulationsthat allow businessesto charge remunerativeprices for electricity services, mechanismsto offset the tendencyof politicians to divert subsidies to political interestgroups, and the active involvementof community groups in the scheme's design. ISource: Bamesand Halpem 2000. I A number o f technical solutions can be adopted to improve the reliability and quality o f power supply.These range from providing dedicated electricity feeders for farmers, to bringing high voltage lines directly to farmers' premises rather than low voltage lines, to undertaking decentralized generation projects. However, revamping the entire power network would require very large financial investments and time. Perhaps the pilot approach, whereby the comprehensive package o f policy measures and intervention initially are implemented inrelatively small areas, would appear to be more attractive for testing its robustness andresults, before embarking on a large-scale program. Several states recently unilaterally increased electricity tariffs on agriculture, although the tariffs still do not cover the cost of supply, and often collection remains problematic. In 2002 Karnataka increased its tariffs from Rs 300/HP/year to Rs 540/HP/year, although additional increases were stalled by political considerations. Collection, however, was extremely poor. From a regime o f free power in 2002, Punjab now charges Rs 702/HP/year. Inthe same year, Rajasthan implemented two tariff increases, and collection efficiency i s reportedly good (Howes and Murgai 2004). In2003 Madhya Pradeshraised tariffs to Rs 2,50O/HP/year and legislated a maximumlevel o f subsidy. Generally, states have found it difficult to reform tariffs because power subsidies generally benefit richer, and more politically powerful, farmers. This obstacle to reform makes a rapid phase- out o f tariffs extremely difficult. Against this political reality, a comprehensive approach needs to be adopted, to ease the transition period and mitigate the adjustment costs. Several states are piloting different initiatives to address the problem from a number o f fronts (box 5.7). Careful monitoring and evaluation o f these initiatives would offer useful lessons that could guide future reform programs. E.AgriculturalResearchandExtensionSystems Revampingagricultural research and extension inIndia will be critical to enabling farmers to meet the challenge o f achieving the country's goal o f a higher agricultural growth trajectory. The success o f the green revolution and the contribution o f the agricultural research and extension systems in achieving it attest to their critical role. The challenge for the future rests not only in raising the productivity o f traditional crops but also in meeting demands for increasing agricultural commercialization and diversification. Replicating past achievements in today's changed and more complex environment will require increasing the effectiveness o f public expenditures inthe research and extension system. Reforms o f these systems can also contribute to environmental and fiscal sustainability. These reforms involve (1) redefining the public and private sector roles in the agricultural research and extension systems, (2) improving research priority setting and allocating 69 Box 5.7 Pilot InitiativesinReformingPower Supply to Farmers TamilNadu. In March 2003 TamilNaduElectricity RegulatoryCommission(TNERC)re-introducedagriculturaltariff in the state after 12 years of free power to farmers. The new agriculturaltariff for unmetered connectionswas set at a flat rate of Rs 250per HPper annumand Rs 0.20kWh for meteredconnections. As a complementaryprogram, the govemment announcedan income support scheme for small and marginal farmers. This initiative aims at greater transparency in delivering and targeting of subsidies and to foster the commercial operation of the utility. The scheme provides a cash transfer to small and marginal farmers of up to Rs 1250 per year. For small and marginal farmers owning pump sets of 3 HP capacity, the limit is Rs 1000. These farmers number approximately 940,000 (12% of farmers) and account for approximately57% of the agriculturalconnections. The fiscal cost of the scheme amountsto approximatelyRs 1 billion per year. In its recent tariff order, TNERC indicated its intention to move toward a pricing regime in which no category of consumer shall either bear or receive a subsidy of more than 50% of the average cost per unit of electricity. In July 2002, Tamil Nadu startedmeteringnew agricultural connections. The govemment i s considering a pilot for an integrated scheme to improve irrigation efficiency, thereby addressing issues of efficient water and power usage together. The pilot will involve advisory services to encourage a shift in cropping pattem toward less water- intensive crops, associated risk mitigation measures, replacement of inefficient pump-sets, and introduction of improved irrigation measures, such as drip irrigation and arrangements for maintenance of the same. It will include a capital grant to farmers for the replacementof existingpumps with more efficient pump sets provided.The schemeis estimatedto cost approximately Rs 100million and i s proposedto cover 8,000 farmers. The pilot seems very promisingdue to its comprehensivenature. Currently,however, the proposaldoes not include meteringfarmers. To target subsidies, pump-owningfarmers have been classified interms of landholdingsize and capacity of pumpsets to determinewhether a subsidy shouldbeprovided. Andhra Pradesh. In 2003 Andhra Pradesh initiated a tatkul scheme, under which farmers seeking immediate connection are requiredto pay Rs IkWh to expedite the connection of the utilities. The current rate for farmers is Rs 0.25/kWh (full cost is Rs 4/kWh). Under this scheme, 30,000 new connections were provided during the year by the ut es. The govemment and the utilities are also separating the supply of power to farmers from that to other consumers by splitting the 1lkV rural feeders. This initiativehas severalmerits, including the potentialto monitor the reliability and quality ofpower supply to farmers and an increasein cost recovery. However, investmentcost is highat Rs 10million for each 1IkV feeder. User associations.The Electricity Act, 2003, provides for the UnionGovemmentto issue anationalpolicy permitting stand-alone systems (including those based on renewable sources of energy and unconventional sources of energy) for rural areas, and a nationalpolicy for rural electrification and for bulk purchase of power and management of local distribution in rural areas through Panchayat Institutions, users' associations,cooperatives societies,nongovemmental organizations, or franchisees. These institutional models havebeenpiloted in India. In terms of intemal efficiency, some cooperatives are working well while others are not. In cases in which it did notwork well, one major cause was the lack of penalties for defaulting in payments to the public electric utility. The institutional model is potentially promising,providedthere is the willingness to proceedwith disconnectionsincaseofnonpayments. Source; Monari2003; World Bank 2003g. public funds to meet farmer needs, (3) increasing decentralization, (4) positioning the system to tap new knowledge and technologies from domestic and international sources, and (5) strengthening monitoring and evaluation and impact assessment. Agricultural Research. Varying agro-ecological potential across states necessitates more regionally differentiated research strategies. Public sector research increasingly will need to address the problems o f poorer farmers in less-endowed regions, for example, rain-fed areas. These are areas inwhich there is less incentive and priority for private sector research. The roles andresponsibilities o f the Indian Council o f Agricultural Research (ICAR) institutes and State Agricultural Universities (SAUs) needto be redefined to minimize overlaps and duplication and to focus on key constraints o f farmers. For strengthening strategic focus and building the critical mass o f scientific human capital in priority areas, there is need for consolidation of research programs, amalgamation of some instituteddepartments, need-based redeployment o f human resources, and drawing a long-term human resources development plan. The ratio o f support to scientific staff needs to be reduced and operational budgets augmented, especially in the SAUs. Ultimately, these reforms imply a smaller, higher quality, more agile public sector research system. A rigorous priority-setting exercise i s necessary to ensure that resources are allocated to drive the future agricultural growth and diversification agenda. This priority-setting very likely would result in reallocation from crop production research (especially in high-potential irrigated areas) to marketing policy, post-harvest technologies and practices, livestock and high-value commodities with strong market demand, and cost-saving technologies 70 Table 5.3 Characteristics of Agricultural Technologies and Private Sector Incentives to Provide Them TypeofGood I Public Good CommonPool Toll Private nonrival Examples Weather forecast Self-pollinatedseeds Soil Analysis Hybrid seeds Mass communication of Commonpasture Farmmanagement Biotechnology productionand market management computerprograms products information Sharedfishery Privateconsultation on Agricultural machinery Naturalmanagement farming and marketing and chemicals techniques Livestock dipping Veterinary supplies Livestockvector control Likelihood of privateprovision Very low Low Higher High 71 Box 5.8: Reforming PublicAgriculturalResearchSystems: The China Experience China's national agricultural research system (NARS) comprises the Chinese Academy o f Agricultural Sciences, 29 provincial Academies and agricultural universities. Notwithstanding impressive success in the 60's and ~ O ' S ,during the early 80's there were indications that China's research system had lost some o f its effectiveness due to outdated research practices, too much duplication, overstaffed institutes and underpaid researchers. A consensus arose that the system was in crisis and needed radical reforms. A first round o f reforms included introduction o f a competitive grant program, greater focus on applied research and encouraging research institutes to increase financial resources through commercialization. The aggregate effects o f this first round were disappointing. By the late 1990's, new research requirements were created by China's move toward a market-oriented economy and in high-technology fields, such as biotechnology and information. Thus, a second round o f reforms aimed at changing the NARS into an intemationally competitive, state-of-the-art, merit- based, "quality-first" organization, with the core goals o f (i)increasing the adoption o f the outputs o f the research system; (ii) upgrading research staff quality and provision o f increased resources; and (iii) focus on breakthroughs inbiotechnology. Two main measures, implemented in general science on a national basis, were applied to implement the goals o f the program in agriculture: (i)separate agricultural research activities into those that are "commercializable" and those that are not; and (ii) the latter in sector, for the best research staff arrange for competitive salaries, improved budgets and new facilities and equipment. The reforms involve commercialization and privatization o f about a third o f the Academy Institutes with saved funds being applied to the remaining publicly-financed institutes (also about one third). Another third o f the institutes was scheduled for a more limited set o f reforms; funding will remain with the public system, but revenue sharing plans will provide incentives for enhancing institute effectiveness. The final third o f institutes, which will be involved in more basic research closer to true public goods, will be maintained as the "innovation base." All research staff in this innovation base will need to produce a resume and research plan, and contractual appointments will be approved by an independent evaluation panel. Ultimately, competitive grant funding (funding both operational and infrastructure costs), would be significantly increased with a larger share o f funds allocated to high technology research. Several important constraints to implementing these reforms have emerged; some o f these are: insufficient funding (govemment financing needs to be doubled); and, commercialization issues (needs more time and effort than expected). The Chinese experience also provides several lessons for agricultural research system reform. The introduction o f competitive grants can promote NARS reformb y introducing competition, pluralism, and partnerships; they show a new and better way o f doing business. Even if reforms are clearly needed, their design and implementation i s almost always much more complex and difficult than envisaged by the reformers. Reform results in both winners and losers and a stake-holder endorsed vision o f the goals and desired results, and a continuous effort to keep all parties on board are essential to succeed. Large budget increases are needed up-front for agricultural research system reform, to attract the best scientists and achieve research impact on sustained productivity. Successful commercialization often depends on much broader reforms such as reforming the seed industry before establishing seeds subsidiaries and transferring agricultural research system welfare burdens (retirement) to a general social security system. Adequate time and authority are essential for commercialization to succeed and to begin to contribute to budgetary savings. A dynamic visionary set o f leaders i s required to champion reforms both to internal stakeholders (institute staff and clients) and to policy decision makers. Source: World Bank, 2003j. Fund. Adopting and enforcing intellectual property rights (IPR) policies would facilitate publidprivate partnerships and subsequent commercializationo f new innovations. 0 Strengthening international alliances to access new technology and knowledge. India needs to tap into the rapid advances in science and technology globally, especially biotechnology and information technology. While the private sector i s playing an increasing role in both o f these areas, it i s narrowly focused on certain crops (hybrids) and commercial farmers. ICAR and SAUs need to develop strong linkages with advanced research organizations, both in India and abroad, to ensure access to modern tools and products, as well as upgrade capacities to use and regulate these technologies, especially in IPR and biosafety. Even traditional crop research has increased in complexity, requiring new approaches that integrate expertise from several disciplines to address problems along the commodity chain. Agricultural Extension. As proposedinthe National Extension Policy, the central and state governments and private sector could explore a mix o f options in both financing and service provision to strengthen the quality o f agricultural extension services inthe country. For higher value crops, there i s considerable experience already inIndia (chapter 4) o f farmers' willingness to pay for good quality extension services. However, the large majority o f farmers, many o f whom grow low- value crops, will continue to depend on extension support from the govemment in the short to medium term. While public financing o f the extension needs o f these farmers i s justified, private service delivery can offer an efficient avenue for meeting these needs. Figure 5.2 illustrates altemative arrangements possible inpublic and private financing and provision o f extension services. These alternatives include the traditional public sector extension services, fully private services, and 72 public-private partnerships involving some type o f contractual relationship. Contracting extension services i s one option for delinking funding from service delivery. Competitive contracting instills a private sector mentality o f cost-consciousness and results-orientation, even inpublic institutions that are forced to compete (Rivera and others 2000). When contracting out extension services, an important role for the government will be to provide the policy fi-amework for ensuring service quality standards and fair competition. Improvingthe effectiveness o f the public extension system at the state level requires reforms to make the extension services more demand-driven and address the broad information and technical needs o f farmers, including women farmers and minorities. Improving the extension system should include taking advantage o f major advances in communication technologies and innovative delivery mechanisms. It will necessitate greater state efforts to: 0 Decentralize the public extension system to district and block levels to foster greater farmer- focused extension, with increased allocation and integration o f GO1 and state government fundingto these decentralized systems. State governments could build on lessons learned from the ATMA pilot initiative (box 4.1). 0 To improve productivity andhousehold incomes, promote farmers' organizations/federations and linkthem with multiple sources o f information and market opportunities. 0 Promote the shift from a narrow commodity focus to the holistic farming systedagribusiness approach. This shift will enhance rural livelihoods and improve farm incomes through intensification and, where appropriate, diversification. This shift will require some degree o f integration o f the extension programs o f the line departments responsible for agriculture, horticulture, animal husbandry, dairy, fisheries, sericulture, and marketing, as appropriate. Box 5.9 CompetitiveResearchGrant Programs Competitive research funds are being introduced in many countries to finance agricultural research mobilize available research capacity, stimulate scientific creativity, and promote efficiencies in the research system. Competitive research funds can be an effective mechanism for allocating resources for agricultural research and can drive reform o f the overall research system. High-quality review, administrative efficiency, and transparent processes are essential to program credibility. Ecuador. The Program for Modernization of Agricultural Services in Ecuador finances a competitive research grants program (CRGP) that has funded 112 research projects. The program supported strategic work on innovations to open new export markets through controlling fruit fly (cherimoya, guava, zapote, and other Andean fruits), decreasing production costs for new export products (snails, tree tomatoes, babaco, mushrooms, and artichokes), and controlling disease and insects in traditional exports crops (banana, cacao, and coffee). The program introduced a new research culture and brought new organizations into the research system. Research projects are being executed by 45 different public and private organizations, with most projects directly linked to potential users o f the technologies. The government contracted program management to a private agency to develop procedures and ensure objectivity in program operations. Research project costs averaged US$116,000, o f which 54% is financed by grants and 46% by executing agencies, mostly through in-kind contributions. By leveraging cofinancing for research projects, the program helped increase national research funding by 92% to approximately 0.54% o f agricultural GDP. Brazil.In 1997 EMBRAPA(the Brazilian Agricultural Research Corporation) launched a competitive grants program to diversify funding for research and stimulate efficiencies and change in the national research system. The grant supported a program targeting small-farm production technology, advanced technologies, natural resource management (NRM), and agribusiness. By 1999 the program had funded 69 projects (212 subprojects) from 506 proposals submitted in 5 calls for proposals. Several factors facilitated the fast start-up. Brazil has a large agricultural research establishment with 5,500 full-time researchers distributed equally in EMBRAPA, state research agencies, and universities. The country had had extensive experience with competitive research programs, although not in the agricultural sector. The staff o f the program secretariat traveled extensively to solicit stakeholders' views on the program and to publicize the program and procedures for grant proposals. Source: World Bank 2003i. 73 Figure 5.2 Alternatives for Public-Private Financing and Provision of Extension Services FinancingExtension Services Public Private (Farmers) Private (Other) Traditional extension Fee-for-serviceextension Contracts withpublic $ 1 Farmerextensionvouchers institutions .- ! .e Extensionprovidedto contract growers Farmer extensionvouchers Advertising innewspapers, Source:Alex and others 2002 F.FosteringCompetitiveAgriculturalMarketingandAgro-Industry Integrating rural areas into the state and national economy through a dynamic agribusiness sector and agricultural markets will be important drivers for growth and rural poverty reduction. The agricultural sector needs well-functioning markets that effectively transmit market signals on what to produce, supply the necessary inputs to produce what i s required by the markets, and provide facilities to competitively bringagricultural products to domestic and international consumers. More efficient and competitive markets and ago-industries will improve prices for farmers and open greater market opportunities, without necessarily raising prices for consumers. Increased efficiency and competitiveness will enhance protection for consumers and the poor, because the greater integration o f markets across India will minimize local shortages (or surpluses) that drive agricultural prices higher (or producer prices lower.). Fostering competitive agricultural marketing systems requires a careful reorientation o f government roles, away from direct intervention to creating the enabling environment for competitive markets and greater private sector entry and participation. As recommended in various government policy documents, the GO1 should remove permanently storage, movement, and credit restrictions on all commodities, and limit their enforcement duringperiods o f emergencies only, and eliminate the rice and sugar levy and small-scale reservation o f a number o f agro-industrial activities. The removal o f intemal trade restrictions will improve also the functioning o f India's commodity futures markets, which could play an important role in enabling farmers to hedge their prices risks in the context o f more liberalized markets. Storage, movement, and credit controls are not compatible with the operations o f this risk management instrument. Drawing on lessons from other countries, box 5.10 lists the priority areas on which the GO1and state governments should focus. Agricultural Wholesale Markets. The GO1 should encourage states to amend their state Agricultural Produce Market Act in line with its recently formulated model act. Two critical areas for action are enabling (1) other (nongovernmental) agencies to develop and operate agricultural markets and (2) farmers to market their produce outside o f the state-regulated markets. The latter will give farmers the freedom to choose the best option for marketing their output to obtain the best prices. Enabling other entrants to develop and operate markets will complement government efforts to improve access by farmers to key market infrastructure and services. Inview o f the government's programs to promote increased agricultural productivity and output o f various commodities, permitting private investments inwholesale markets will help ensure that the necessary infrastructure 14 Box 5.10 Role of Government in Agro-Food System and Agro-Enterprise Development Setting and EnsuringEnforcementof Transparent and Consistent"Rules Of The Game" Establish and enforce rules which define and allocate property rights (that is, property and bankruptcy laws; intellectual property rights; zoning regulations) e Establish and enforce rules which define permissible and nonpermissible forms o f cooperation and competition (that is, licensing laws, laws o f contract and liability, company and cooperative laws; anti-trust laws) Establish and ensure compliance with biosafety, food safety, worker safety, and sanitation regulations Negotiate favorable terms for access to internationalmarkets and ensure fair practices on the part o f international trading partners AddressingMarket Failures Ensure that the country is protected from the harmful introductionispread o f plant pests and animal diseases e Ensure the availability o f (production, price, industry) information and statistics to facilitate market activity and to monitor market progress Invest in or facilitate risk management instruments for agribusiness system participants ( futures contracts, options, negotiable warehouse receipts, crop insurance) Compensate for unbalanced power relationships within the agribusiness system by monitoring potential abuses o f market power, providingtraining and information, and/or supporting organizational development among weak participants Compensate losers in structural reformprocesses through safety nets and other transitional, targeted programs Build Physicaland KnowledgeCapital Invest in social overhead infrastructure, especially that related to transport, and energy e Invest in knowledge-building to accelerate the agribusiness learning process and better enable the emergent private sector to participate/compete (that is, R&D; academic/technical training) Facilitate development o f agricultural marketing facilities (that is, marketplaces; wholesale markets) Source: World Bank 2003. i s available when these initiatives come to h i t i o n . Having the correct infrastructure in place in turn will reduce marketing losses (due to spoilage and spillage), transportation costs, and overall marketing costs, and thus strengthen the competitiveness o f Indian agricultural products. GO1 Market Intervention Scheme for Horticulture. While the market intervention scheme in horticulture aims to provide price support and thus protect farmers from sharp seasonal price declines, India's experience with rice and wheat illustrates how market interventions can easily distort incentives and relative prices and thus exacerbate the supply situation. In the longer term, measures to encourage the improved functioning o f markets (for example, investments in rural infrastructure) and value-addition (for example, agroprocessing, cold chains) could offer more efficient and cost-effective methods o f dealingwith seasonal gluts. Improving the Investment Climate. Promoting agribusiness, agro-industry and overall rural non-farm sector growth requires increased focus on improving the rural investment climate. Recent assessments o f different aspects o f the investment climate in India identified a number o f regulatory, governance, and infrastructure constraints (Carter 2003, World Bank 2003h) (table 5.4). Inadditionto apculturalandpower deregulation discussedabove, these includes: Deregulatingindustry.Eliminating preferences, product reservation, and investment ceilings, which unintentionally prevent small firms from growing and competing in the world market, further easing o f foreign direct investment (FDI) including inretailing. Implementing a new value-added tax across states to reduce the distortions caused by the indirect tax regime. Implementing labor market reform. Removing legislation that blocks layoffs in medium to large firms and easing constraints to hiringcontract labor. Facilitating access to credit by small and medium enterprises (SMEs). Introducing new technologies for SMEs, facilitating the establishment o f credit information bureaus for small borrowers, promoting collateral substitutes. 0 Investing in key infrastructure. Efficient transport services are critical to India's manufacturing competitiveness. Investing to improve roads and port infrastructure, and to promote more efficient functioning o frailways. The GO1i s giving increased emphasis to improving the connectivity o f rural villages. The GO1 aims to provide all-weather roads to the remaining unconnected villages, consisting o f upgrading or constructing approximately 1.1 million kmo f rural roads at a cost o f approximately Rs 1.1 trillion. In 2000 the GO1 launched a national program, "Prime Mantri Gram Sadak Yogna" (PMGSY, or Prime Minister's Rural Road Program), to provide all-weather road access to all habitations with over 1,000 people by 2003 and to habitations with populations o f over 500 by 2007.51To ensure greater consistency across the many ministries involved inrural road development, the Ministry o f Rural Development (MORD) should take the leadership in the policy and institutional changes that are essential, as well as in financing, technology transfer, human resources development, and monitoring rural road development in different states. The PMGSY can serve as an important instj-ument for the GO1to influence state level rural road sector reform. If the program i s properly structured and tied to policy reform commitment and outcomes, it can provide a powerful incentive for change. Panchayat Raj bodies at district, block and village levels are expected to play Table 5.4 Selected InvestmentClimateIndicators for India, an increasingly pivotal role in the China, and Thailand, 2000 construction and management o f Macro-En vironment India China Thailand` rural roads. Community GNIper capita (USS ppp) II 2,390 II 3,940 II 6,33011 participation offers significant ppenness (Imports+Exports/GDP) 28.2 Private Invest" ent, % GDP 16.6 potential for mobilizing the support I Y . l .-+ ,I I 01 r.no\ 7 1 , C I ? L C o f local communities in generating resources, acquiring land, and tailoring the rural road programs to local needs (World Bank 2003j). The GO1 also plans to accelerate its electrification program and has set targets o f covering all the remaining 62,000 unelectrified villages by 2007 and Cost o f shipping (%) 5.4 II 6.7 100 percent household connections Pave roads ( %) I 56 I 88 9 1 by 2012. The remaining 18,000 Finance Cost of capital 12.29 5.85 7.83 remote villages are to be electrified Share of credit from financial institutions 36 25 47 by 2012 through use o f non- Entry/Exit and Operation conventional technologies. Special Cost o f labor e 0.21 0.23 0.30 provision o f funds were made Median number o f days to start business III 90 III 30 II 3 under the Prime Minister's INo. permits to start business 10 6 1 3 Notes: Gramadaya Yojna (PMGY) a. Or most recent year available. program. For strategic and b. Scale o f -2.5 to 2.5. Higher values correspond to better outcomes implementation support, the c. Average for Thailand. d. Transport cost as share o f value o f export to US, textiles 1998. Ministryo f Power recently set up a e. Ratio o f average wage to average Value-added, median value. high-level mission for renewable Source: World Bank 2003h. 51 The major source of funding o f the program is the Central Road Fund, which receives its revenues from an earmarked tax on diesel and gasoline. The allocation to rural roadsin 2001 amounted to Rs 25 billion. 76 energy, To facilitate electricity service delivery for agriculture and rural development, a conducive policy environment will be required, and include (a) developing adequate incentives for the service provider. At a minimum, the agriculture and residential tariffs should cover the operating costs; (b) implementing early subsidy reform to lower subsidies to fiscally sustainable levels and to enable more effective targeting o f poorer farmers and rural consumers; (c) encouraging cost-effective technical designs o f rural networks and exploit the scope for reducing the construction and operating cost o f rural electrification; (d) improving affordability o f connection charges through subsidized connection charges and financing o f the capital subsidy for the service provider through innovative models o f subsidy provision; and (e) implementing a supportive regulatory regime for rural supply. Decentralized generation should be incorporated in the rural energy service company model to augment power supply, provide voltage support, and reduce transmission losses. These steps to reform the policy environment for rural supply need to be put inplace inparallel with reforms aimed at more conventional privatization o f the commercially viable parts o f the sector (World Bank 2003j). G.OtherIssues Addressingthe Needsof Rainfed Areas. Because o fthe high concentration o fpoor inthese areas, addressing problems inrainfed areas will be important to pro-poor growth. Rainfed issues are broad and complex, and, depending on local conditions, their solutions may extend beyond agriculture. Diverse conditions characterize "rainfed areas", including rainfall availability, agro- ecological potential (high vs. low), and accessibility o f irrigation. These conditions significantly affect a rainfed area's ultimate agricultural potential, including productivity levels, the degree o f rainfall-related production volatility and risks, and, ultimately, the degree o f income vulnerability o f those households that depend primarily on rainfed agriculture for their livelihood. Because o f these factors, the development assistance required will vary considerably across locations, states, and regions. Where physically and economically feasible, an obvious solution to eliminate rainfall- related risks i s investments in irrigation (surface or groundwater). The returns on these investments will be greatest in high-potential, ago-ecological areas. Where irrigation i s not feasible, other measures (such as generation and dissemination o f drought-resistant crop varieties, appropriate soil and water conservation measures, technical advice on alternative cropping systems) can mitigate low rainfall and its associated agriculture income risks. However, these alternative approaches may not always eliminate rainfall-related risks completely. Inthese situations, especially for areas with low ago-ecological potential, there will be a greater and more urgent need for increased diversification o f household employment and income sources outside o f agriculture as a coping strategy to deal with agricultural risks and facilitate household income smoothing and poverty reduction. These strategies inturncall for hasteningthe growth ofthe industrial and services sectors ingeneral. OECDSubsidies and Trade Reform.Itis frequently contended that India should not phase out its agricultural subsidies and trade protection until the high-income countries phase out theirs. It i s broadly recognized that producer support in rich countries, estimated at approximately $235 billion a year,52 suppresses world prices and undermines developing country exports. Recent estimates show that full elimination o f agricultural protection and production subsidies in the rich countries would increase global trade in agriculture by 17 percent, with the value o f agricultural and food exports from low- and middle-income countries rising by 24 percent. This export expansion would translate to an increase in total annual rural income in these countries (including India) o f approximately $60 billion, or roughly a 6 percent increase. Notably, the negative effects o f rich- country trade barriers andprotective subsidies are not limited to developing countries. These barriers and subsidies result in the waste o f wealthy nations' financial resources; raise domestic prices o f 52 Total OECD producer support, including agricultural research, education, and food stamps), totals $300 billion. 77 food and clothing, especially affecting the poor in these wealthy countries; and encourage environmental degradation through increased capital-intensive farming, which relies heavily on fertilizers and pesticides (Stern 2003a). Paradoxically, India i s facing similar problems today. The GO1has taken a leadership role inthe dialogue in the WTO to remove these rich country subsidies. Addressing them through multilateral negotiations at the WTO will be a powerful mechanism for reform. However, it also i s critical that India not wait for these external barriers and subsidies to be resolved to tackle its subsidy and trade policies at home. As noted above, to the extent that they distort farmer incentives, India's foodgrain, fertilizer, power, and irrigation subsidies are increasingly eroding the very foundation for agriculturalproduction inmany states, threatening future agricultural growth and sustainability. Rationalizing them i s thus in India's best interest. Experience worldwide also shows that, sooner or later, highprotection will create high-cost production, as land, labor, and capital move to products protected by high barriers to imports. What i s needed, therefore, i s an integrated package o f critical public investments that enhance the productivity and international competitiveness o f India farmers, while removing domestic trade restrictions to improve farmer and private sector incentives to invest in the sector, and gradually lowering trade protection to foster efficient production. As one o f the world's largest agricultural economies, India directly influences the world markets for many agricultural products. If it follows open, predictable, noninterventionist trade policies, it can broaden these markets and reduce their instability. On the other hand, if India intervenes excessively to protect its instability, its agricultural markets are large enough to increase international instability, which reinforces protectionism and intervention in other countries (Purse11 2003). The experience o f China provides testimony to the role o f trade in stimulating growth and reducingpoverty, notwithstanding the barriers erected by rich countries (Stern 2003b). H.Conclusion Agriculture will remain the mainstay for a large share o f the rural population in the next decade, many o f which also comprise the rural poor. Promoting more rapid agricultural growth, particularly achieving the government goal o f 4% percent growth per year not only exclusively during the lothPlan period but for the medium to longer term, will be extremely crucial not only to achieving strong economic performance for the country as a whole, but also inlifting large numbers o f agricultural households above poverty. The reform agenda outlined above puts inthe spotlight the difficult challenge o f balancing short vs. longer term policies and expenditure priorities to achieve these targets. The current subsidy-dominated agricultural environment i s helping to keep farming many crops viable and even highly lucrative, especially foodgrain crops in traditional "procurement states." But in distorting farmer incentives, it i s eroding rapidly the basic foundation for agriculture (i.e. that is, land and water resources), threatening the longer-term viability o f agricultural production, and thus would also diminishfuture growth prospects and risk increasing rural poverty in many o f these areas. Action to regain a better balance between short and longer-term policy and expenditure priorities to ensure sustainable poverty reducing agricultural growth can no longer be postponed. It i s well recognized that the reform agenda in the agricultural sector requires major expenditure, regulatory, and institutional reform decisions, which are highly political and socially controversial. It will require bold, but socially sensitive efforts by policymakers and strong commitment to build awareness and acceptance among affected stakeholders. In taking these difficult steps, Indian farmers could reap the maximum benefits from the country's significant agriculturalpotential. 78 References Acharya, S.S. 1998. "Agricultural Marketing inIndia: Some Facts and Emerging Issues." Indian Journal of Agricultural Economics 53 (3): 311-32 Acharya, S. 2003. India's Economy, SomeIssues and Answers. New Delhi:Academic Foundation. Acharya, S. and R.L.Jogi. 2004. "Farm Input Subsidies inIndianAgriculture". Institute o f Development Studies Working Paper 140, Jaipur, India. Alex, G. N.d."Supporting Enterprise through Direct Assistance." World Bank. http://lnweb 18.worldbank.org/ESSD/ardext.nsf/26ByDocName/DevelopingEnterprisethroughDirectAssistance #4. . 1998.Assessing Agricultural Research: Towards Consensuson a Frameworkfor Performance and Impact Assessment. World Bank. Alex, G., W. Zijp, and D.Byerlee.2002. "Rural Extension andAdvisory Services: New Directions." Rural Strategy Background Paper 9. World Bank. Asia-Pacific Association o f Agricultural ResearchInstitutions. 2002. Agricultural Research Priorities for the Asia-Pacific Region: A Synthesis. Bangkok: FAO. Baffes, J., and J. Meerman. 1997. "From Prices to Incomes, Agricultural SubsidizationWithout Protection?" Policy Research Working Paper. World Bank. Balakrishnan, P., and B.Ramaswami, 1997. "Quality o fPublic Distribution System: Why ItMatters" Economic and Political Weekly 32 (4): 162-65 Banerjee, A. V., P. J. Gertler, and M.Ghatak. 2002. "Empowerment and Efficiency: Tenancy Reform inWest Bengal." Journal of Political Economy, 110 (2): 239-80. Banga, M.S. 2001. Food Revolution: A Win-Winfor Farmer and Consumer, Mumbai: Hindustan Lever Ltd. Bansil, P.C. 1998. "Demand for Foodgrains by 2020." Economic and Political Weekly (March 7):546-48. Barnes, D.,and J. Halpern. 2000. "Subsidies and Sustainable Rural Energy Services: Can We Create Incentives without Disturbing Markets?" ESMAP Technical Paper 10. World Bank. Barnes, D., and S. Kapoor. 2003. "Agricultural Pricing and Rural Electrification InIndia: Some International Comparisons." Background paper preparedfor India Agricultural Policy Review. June 26. Mimeo. Basu, A. 1998. "Report onFoodPrice Stabilization inIndonesia, China and Chile." South Asia RuralRural Development Unit,World Bank. Mimeo. Braun, J. von. 1995. Employmentfor Poverty Reduction and Food Security. Washington, D.C.: International FoodPolicy Research Institute (IFPRI). Besley, T., and R.Burgess. 2000. "Land Reform, Poverty Reduction, and Growth: Evidence from India.'` Quarterly Journal of Economics I15 (2): 389-430. Berdegue, J. A., and G. Escobar. 2001. "Agricultural Knowledge and Information Systems and Poverty Reduction." Agricultural Knowledge and Information Systems (AKIS) DiscussionPaper. World Bank. Bhalla, G.S.2000. "Behind Poverty: The Quantitative Deterioration o f Employment Prospects o f Rural Indians." Working Paper 7. Institute o f HumanDevelopment, New Delhi. Bhalla, G.S., P. Hazell, and J. Kerr. 1999. Prospectsfor India's Cereal Supply and Demand to 2020. Food, Agriculture, and the Environment DiscussionPaper 29. Washington, DC: IFPRI. Bhalla, G.S., and G. Singh. 1997. "Recent Developments inIndian Agriculture: A State LevelAnalysis." Economic and Political Weekly 32 (March): A2-18. Bhupat, M.D.,ed.Agricultural Development Paradigmfor the Ninth Plan under the New Economic Environment. New Delhi:Oxford and IBHPublishing. I 9 Byerlee, D., and G. Alex. 2003. "Designing Investments inAgricultural Research for Enhanced Poverty Impacts." Agriculture and RuralDevelopment Working Paper 6, World Bank. Carter, M.F.2003. Opening remarks during Workshop on Improving India's Investment Climate. New Delhi. July. Center for Monitoring IndianEconomy (CMIE). 2000. Foreign Trade and Balance of Payments. Mumbai. . 2002a. Agriculture. Mumbai: CMIE. .2002b. Energy. Mumbai: CMIE. Chand, R. 1998. "Effects o f Trade Liberalization on Agriculture inIndia: Institutional and Structural Aspects." Working Paper 38. Regional Co-ordination Centre for Research andDevelopment o f Coarse Grains, Pulses, Roots and Tuber Crops inthe HumidTropics o f Asia and the Pacific (CGPRT Centre). Bogor, Indonesia . 1998. "Removal of Import Restrictions and India's Agriculture: The Challenge and Strategy." Economic and Political Weekly 33 (April): 850-54. , 1999. "Emerging Crisis inPunjab Agriculture: Severity and Options for Future."Economic and Political Weekly 34 (March 27-April 2): A8-10. . 2002. "Government Intervention inFoodgrainMarkets inthe New Context." NationalCentre for Agricultural Economics and Policy Research, New Delhi. . 2003. "Minimum Support Prices for Agricultural Commodities inIndia: Role andRelevance." Proceedings o f the Workshop on GrainPolicy. Unpublished.Centre for Development Economics, School of Economics, New Delhi. Chadha, G.K., and A. Gulati. 2003. "Performance o f Agro-Based IndustryinIndia: Analyzing Post-Reform Advances and Reverses." IFPRI, Washington, D.C. Mimeo. Chand, R., and S. Pal. 2003. Policy and Technological Options to Deal with India's Food Surpluses and Shortages. Current Science. 84 (3): 101-111. Chanda, G.K. and A. Gulati. N.d. "Performance of Agro-Based IndustryinIndia: Analyzing Post-Reform Advances and Reverses." IFPRI, Washington, D.C. Mimeo. Chawla, N.K.,M.P.G. Kurup, and V.P. S h a m . 2002. "State o f the IndianLivestock Farmer and Indian Livestock Sector. A Status Paper. A Millennium Study". New Delhi,.Mimeo. Comptroller and Auditor General o f India. 2000. Report of the CAG on the Union Governmentfor the Year Ended 1999.New Delhi:CAG. Confederation o f IndianIndustry(CII). 1998. An Agendafor Reforms in Indian Agriculture Sector. New Delhi: CII. Das, T. 2003. "Economic Reforms inIndia: Scope, Rationale, Progress andUnfinishedAgenda." Ministry o f Finance, Pune, and Bank o f Maharashtra. Datt, G., and M.Ravallion. 1996. Why Have SomeIndian States Done Better than Others at Reducing Rural Poverty? World Bank Policy Research Working Paper WPS1594. Vol. 1. .2002. "Is India's Economic GrowthLeavingthe Poor Behind?" WorldBankPolicy ResearchWorking Paper 2846. Vol 1.May. Deaton, A., 1999. "Prices and Poverty inIndia. " ResearchProgram inDevelopment Studies, Princeton University, Princeton:, NJ. Mimeo. . 2003. "Adjusted IndianPoverty Estimates for 1999-2000." Economic andPolitical Weekly (January 25): 322-26. Deaton, A., and J. Dreze. 2002. "Poverty and Inequality inIndia: A Re-Examination." Economic and Political Weekly (September): 3729-48. 80 Deininger, K.,D.Umali-Deininger. 2003. "Targeted Public Distribution System: I s It Reachingthe Poor." Draft Mimeo. Department o f Food and Public Distribution. 2002. Report of the High Level Committee on Long Term Grain Policy. New Delhi. Deshpande, R.S. 2003."Current Land Issues inIndia" Land Reform, Land Settlement and Cooperatives. Food and Agriculture Organization., Rome, Italy. 155-174 Desai, G.M., and A. Vaidyanathan. 1994. Strategic Issues in Future Growth of Fertilizer Use in India. New Delhi:IndianCouncilofAgriculturalResearchandIFPRI. Dev, S.M. 1998. "Public DistributionSystem: Impact on Poor and Options for Refonn" Economic and Political Weekly 2285-90. . 2002. "Rural Employment, Diversification and Pro-Poor GrowthInIndia." Centre for Economic and Social Studies. Hyderabad, Andhra Pradesh.Mimeo. Dev, S.M., and R.E.Evenson. 2003. "Rural Development inIndia: Agriculture, Non-farm andMigration." Draft Mimeo. Dev, S.M., and A. Gulati. 2003. "Economic Liberalization, Targeted Programmes and Food Security: A Case Study o f India." IFPRI, Washington, D.C. Mimeo. Dhawan, B.D., and S.S. Yadav. 1997. "Public InvestmentinIndianAgriculture: Trends and Determinants." Economic and Political Weekly. Special Articles. Vol. 32 (April):710-14. Drbze, J. 2001. "Starving the Poor." TheHindu (February 26,27). Dutta, B.,and B.Ramaswami. 2001. "Targeting and Efficiency inthe Public Distribution System: Case o f Andhra Pradesh and Maharashtra." Economic and Political Weekly (May 5): 1524-32. Economic and PoliticalWeekly. 2003. "Fertilizers: Revamping Pricing". Editorial. (March 15) http:llwww.epw.org.in/showArticles.php?root=2O03&leaf=O3&filename=5595&filetype=html Evenson, R.E., C.E. Pray, andM.W.Rosegrant. 1999.Agricultural Research and Productivity Growth in India. Research Report 109. Washington, D.C.: IFPRI. Expenditure Reform Commission. 2000. "Rationalizing Fertilizer Subsidies." Part I.Government o f India, New Delhi.Mimeo. Fan, S., P. Hazell, and S. Thorat. 1999. Linkages Between Government Spending, Growth and Poverty in Rural India. ResearchReport 125. Washington, D.C.: IFPRI. . 2000. "Government Spending, Growth and Poverty inRural India." American Journal of Agricultural Economics 82 (4): 1038-51. .2001. "Returns to Public Investments inthe Less-Favored Areas ofIndiaandChina." American Journal of Agricultural Economics 83 (5): 1217-22. Food andAgricultural Organization (FAO). 1999. India: Uttar Pradesh-Study on Improving Rice and Wheat Productivity. Report 991040 CP-IND. Rome. Farrington, J., R.V. Sulaiman, and S. Pal. 1998. "Improving the Effectiveness o f Agricultural Research and ExtensioninIndia." Policy Paper 8. National Centre for Agricultural Economics andPolicy Research, New Delhi. Federation o f Indian Chambers o f Commerce and Industry(FICCI). 2002. "Indian Agriculture Unbound: Making IndianAgriculture Globally Competitive." 75 Platinum Jubilee Series-2002. Policy Paper. Federation House, New Delhi. Gardner, B.2003. "US. Farm Income Support Programs: Review o f Experience." University o f Maryland, College Park. Mimeo. Gulati, A. 1998. "Fertiliser Subsidy: Who Gains at Whose Cost? Analysis under an Open Economy Environment." Institute of Economic Growth, University Enclave, New Delhi.Mimeo. 81 . 1999. "Towards RationalisationofFertiliser Subsidy: Case ofUrea underan Open Economy Environment." Paper prepared for NCAER-IEG-WB Workshop on Reforms inIndianNew Delhi, Agriculture. Institute o f Economic Growth, University Enclave, New Delhi.Mimeo. Gulati, A., and S. Bathla. 2002. "Capital Formation inIndianAgriculture: Trends, Composition and Implications for Growth. Occasional Paper 24. National Bank for Agriculture and RuralDevelopment, " Mumbai. Gulati, A., and S. Narayanan. 2002. "Demystifying Fertilizer and Power Subsidies inIndia." In Kapila and Kapila, eds. Indian Agriculture in the ChangingEnvironment, 175-208. , 2002. "Rice Trade Liberalization and Poverty." MSSD Discussion Paper 5 1. Washington, D.C.: InternationalFood Policy Research Institute. . 2003. TheSubsidy Syndrome in Indian Agriculture. New Delhi:Oxford University Press. Gulati, A., and G. Pursell. 2003. Indian Agriculture During the 1990s:Performance, Policy Environment and Incentives. World Bank Working Paper. Gulati, A., G. Pursell, and K.Mullen.2003. Indian Agriculture Since the Reforms: Performance, Policy Environment, and Incentives. Washington, D.C., IFPRI. Haggblade, S., P. Hazell, and T. Reardon. 2001. "Strategies for Stimulating Equitable Growth of the Rural Non-FarmEconomy inDeveloping Countries." RuralDevelopment Department, World Bank. Draft mimeo. Hanchate, A., and T. Dyson. 2000. "Trends inthe Composition o f Food Consumption and Their Impact on Nutrition and Poverty inIndia." London School o f Economics, London. Hanumantha Rao, C.H. 2000. "Declining Demandfor Foodgrains inRural India: Causes andImplications." Economic and Political Weekly (January 22): 201-206 . 2002. "Agricultural Growth Sustainability and Poverty Alleviation." InKapila and Kapila, 113-30. .2003. "Reform Agenda for Agriculture." Economic and Political Weekly (February 15). Howes, S., and Murgai, R. 2003. "Kamataka: Incidence o f Agricultural Power Subsidies, An Estimate." Economic and Political Weekly 38 (16) (April 19): 1533-35. Howes, S., and R.Murgai. 2004. "Subsidies and Salaries: Issues inthe Restructuring o f Government Expenditure inIndia." Paper presented during IMF-NIPFP conference on fiscal reform, January 2004. New Delhi.Mimeo. IndianCouncil o f Agricultural Research (ICAR). 2001. "ICAR N o w and Ahead..." KrishiBhavan, New Delhi. . 2002a. "Beyond Technology Dissemination: Can IndianAgricultural ExtensionRe-invent Itself?" Policy Brief 16. NationalCentre for Agricultural Economics and Policy, New Delhi. .2002b. ICAR Vision2020.NewDelhi. Indrakanth, S. 1997. "Coverage and Leakages inPDS inAndhra Pradesh." Economic and Political Weekly 32 (19): 999-1001. Institute for HumanDevelopment. 2001. "Rural Transformation in India: The Role o f RuralNon-Farm Sector." Report o f a workshop organized by Planning Commission and Institute for HumanDevelopment. New Delhi. Jha, S., and D. Umali-Deininger. 2003. "Public Expenditures on Food andNutrition Security Programs in India: Are They Meeting the Challenge?" Working Paper. South Asia Rural Development Unit,World Bank. Jha, S. and P.V. Srinivasan. June 14-15, 1999. "Options for GrainPrice Stabilisation inIndia." Report on Workshop on FoodgrainMarketingPolicies to meet Food Security Needs inthe 21st Century. Indira Ghandhi Institute o f Development Research, Bombay. .2001. "Taking the PDS to the Poor: Directions for FurtherReform." Economic and Political Weekly (September 29): 3779-86. 82 Johl, S.S., 2002. "Agricultural Production Pattem Adjustment Programme inPunjab for Productivity and Growth. Punjab." Chief Minister's Advisory Committee on Agriculture Policy and Restructuring. (October). Johl, S.S., and S.K. Ray, eds. Future ofAgriculture in Punjab. Chandigarh, India: Centre for Research inRural and Industrial Development, Markets and Structural Division. Joshi, P.K., and A. Gulati. 2003. "From Plate to Plough: Agricultural Diversification inIndia." Paper prepared for the Conference on Dragon and Elephant. IFPRI. Mimeo. Joshi, P.K., A. Gulati, P.S. Birthal, and L.Tewari. 2002. "Agricultural Diversification inSouth Asia." Paper presentedat the Workshop onAgricultural DiversificationinSouthAsia, organized inParo, Bhutan on 21-23 November 2002. IFPRI, Washington, D.C. Juarez, B.2000. "Mexico Agricultural Situation: Mexico Announces PROCAMPO Subsidies for 2000 SpringiSummer and 2000/01FalWinter Planting Seasons." Voluntary Report-Public Distribution. GAIN Report MX0068. Foreign Agricultural Service, United States Department o f Agriculture, Mexico City, Mexico. Kapila R., andU.Kapila, eds.Indian Agriculture in the Changing Environment. Vol. land 2. New Delhi: Academic Foundation. Kalirajan, K.P., and R.T. Shand. 1997. "Sources o f Output Growth inIndia Agriculture." Indian Journal of Agricultural Economics 52 (4): 693-706. Kishore, A,, A. Sharma, and C. Scott. 2003. "Power Supply to Agriculture: ReassessingOptions." Water Policy ResearchHighlight 7. IWMI-Tata Water Policy Program, Ahmedabad. Kumar, P. 2002. "Economic Analysis o f Total Factor Productivity o f Crop Sector inthe Indo-Gangetic Plain o f India by District and Regi0.n." Agricultural Economics Research Report 2002-02. NationalAgricultural Technology Project IrrigatedAgo-Ecosystem Research. IndianAgricultural Research Institute, New Delhi. Kumar, P., and V.S. Mathur. 1996. "Structural Changes inthe Demand for Food inIndia." Indian Journal of Agricultural Economics 5 1 (4): 664-73. Kumar, P., and M.W. Rosegrant. 1997. "Dynamic Supply Response o f Cereals and Supply Projections: A 2020 Vision." Economic Research Review 10 (1) (April). Kumar, P., and Mruthyunjaya. 2002. "Long-term Changes inFoodBasket inIndia." Paper presentedina Workshop on Agricultural DiversificationinSouth Asia, organized inParo, Bhutan on 21-23 November 2002. IFPRI, Washington, D.C. Lamb, J. Nd. "Non-Farm Rural EnterpriseDevelopment." Agriculture and RuralDevelopment, World Bank, http://lnweb 18.worldbank.org/ESSD/ardext.nsf/26ByDocName~on-fannRuralEnterpriseDevelopment Lanjouw, P., and G. Feder. 2001. "Rural Non-FarmActivities and Rural Development: FromExperience Towards Strategy." Rural Strategy Background Paper 4. RuralDevelopment Department, World Bank. Lanjouw, P., and A. Shariff. 2002. "Rural Non-Farm Employment inIndia: Access, Income and Poverty Impact." Working Paper Series 81. National Council o f AppliedEconomic Research (NCAER), New Delhi. Lee, F.D. 1999. "Mexico Cotton: Mexico Announces Emergency Support Program for Cotton Producer." USDA Foreign Agricultural Service, GAINReport M X 9130. Global Agriculture InformationNetwork, Mexico City, Mexico. (October 1). Mahindra Group Co. TheFuture of Indian Agriculture. Mumbai, India: Mahindra ShubhLabh Services Ltd. Mahul, 0.2004. "Farm Income Insurance Scheme." Financial Sector Operation and Policy Department, World Bank. Personal communication to author. Manage. 2003. "Contract Farming Ventures inIndia: A Few Successful Cases." Spices 1(4). Ministry of Agriculture. 2000. National Agricultural Policy.NewDelhi:Department ofAgriculture and Cooperation, Ministry o f Agriculture. ,2001a. Annual Report, 2000-2001, New Delhi: Ministryo f Agriculture. 83 . 2001b. Report of Expert Committee on Strengthening and Developing of Agricultural Marketing New Delhi: Department o f Agriculture and Cooperation, Government of India. .2002a. Agricultural Statistics at a Glance 2002.New Delhi: Directorate of Economics and Statistics, Ministry o fAgriculture.. .2002b. Policy Frameworkfor Agricultural Extension.NewDelhi:ExtensionDivision, Department of Agriculture and Cooperation, Ministry of Agriculture. .2002c. Annual Report, 2001-2002. New Delhi: Government of India. . 2002d, Report of Inter-Ministerial TaskForce on Agricultural Marketing Reforms. New Delhi: Department o fAgriculture and Cooperation. .2003. Agricultural Statistics at a Glance 2003. New Delhi:Directorate of Economics and Statistics, Ministry of Agriculture. Ministry of Civil Supplies, Government ofIndia. 1997. Focus on thePoor: Guidelinesfor the Implementation of the Targeted Public Distribution System, New Delhi:Department o f Goods and Public Distribution. Ministry of Chemicals and Fertilizers. 1998.Fertilizer Pricing Policy: Report of the High Powered Review Committee. New Delhi:Department o fFertilizer, Ministry o f Chemicals and Fertilizers. Ministry of Consumer Affairs, Food and Public Distribution, 2000, Annual Report 1999-2000, NewDelhi. . 2002. Report of the High Level Committee on Long-Term Grain Policy. New Delhi. MinistryofFinance. 1998. Economic Survey 1997/98.New Delhi. .2001a. "Budget Speech 2001-02." New Delhi.Mimeo. .2001b. "Implementation of Budget Announcements. Budget Speech2000-01 ." Ministry of Finance, New Delhi.Mimeo. ,2001~.Economic Survey 2000-01. New Delhi. .2002a. "Budget Speech 2002-03." New Delhi.Mimeo. .2002b. "Implementation o fBudget Announcements: Budget Speech2001-02." New Delhi.Mimeo. ,2002~.Economic Survey 2001-02. New Delhi. .2003a. "Budget Speech 2003-04." New Delhi.Mimeo .2002b. Economic Survey 2002-03. New Delhi. .2003a. "Implementation o f Budget Announcements: Budget Speech2002-03 ." New Delhi.Mimeo. Ministry of Finance and Company Affairs. 2003a. Economic Survey 2002-2003. New Delhi. . 2003b. "Budget Speech 2003-04." New Delhi. MinistryofRuralDevelopment. 2001. Annual Report 2000-2001. NewDelhi. Mittal, R. 2003. "Power Susbidies to Agriculture inSelected States." Personal communication. Monari, L.2003. "Power Supply to Agriculture." Background notes. Mimeo. Narayanan, S., and A. Gulati. 2002. "Globalization and the Smallholders: A Review o f Issues, Approaches, and Implications." Markets and Structural Studies Division, IFPRI, Washington, D.C. Mimeo. National Sample Survey Organization. 2000. Household Consumer Expenditure in India 1999-2000. Key Results,NSS 55IhRound (July 1999-June 2000). New Delhi: Ministry o f Statistics and Program Implementation. .2003. Household Consumer Expenditure and Employment-Unemployment Situation in India. NSS 58Ih Round (July-December 2002). New Delhi:Ministry o f Statistics and Program Implementation. 84 Pal, S. N o date. "Improving Competitive Agricultural Research Funding inIndia." Policy Brief 10.National Centre for Agricultural Economics and Policy Research, ICAR, New Delhi. Pal, S., and R. Suleiman. 1997. "Agricultural Research and Extension inIndia: Institutional Structure and Investments." Policy Paper 7. National Center for Agricultural Economics and Policy Research, New Delhi. Pal, S., and D.Byerlee. 2003. "The Funding and Organization of Agricultural Research inIndia: Evolution and Emerging Policy Issues." Policy Paper 16. National Centre for Agricultural Economics and Policy Research, ICAR, NewDelhi. Pehu, Eija. 2003, "Agricultural Research Support to India and China." Agriculture and Rural Development, World Bank. Mimeo o fpower point presentation. Planning Commission. 2001a. Mid-Term Appraisal of the Ninth Five Year Plan. New Delhi. . 2001b. Report of the Working Group on Private Sector and Beneficiaries Participation for the Formulation of the Tenth Five Year Plan (2002-07). New Delhi. .2003. Tenth Five-Year Plan 2001-02 to 2006-07. New Delhi. Prime Minister's Economic Advisory Council. 2002. "Report o f the Prime Minister's Economic Advisory Council." Mimeo. New Delhi. Punjab Agricultural University. 1998. "Proceedings of Brain Storming Meeting on Farmers and Farming in Punjab." Punjab Agricultural University (October). Pursell, G.2003. "Indian Trade Policies in2003." India Trade Policy Note. (February 21). Ramaswami, B. 2002, "Efficiency and Equityo f FoodMarket Interventions." Economic and Political Weekly XXXVII(12). Ravallion, M.2002. "Why Has Economic Growth BeenMore Pro-Poor inSome States o f India than Others?" Journal of Development Economics 68: 38 1-400. Ravallion, M.,and G.Datt. 1994. How Important to India's Poor Is the Urban-Rural Composition of Growth? Policy Research Working Paper 1399. World Bank. . 1995. Growth and Poverty in Rural India. Policy Research Working Paper 1405.World Bank. Rawal, V. 2001. "Agrarian Reform and LandMarkets: A Study o f LandTransactions inTwo Villages o f West Bengal, 1977-1995." Economic Development and Cultural Change 49 (3): 611-29. Ray, T. 1999. "Share Tenancy as Strategic Delegation." Journal of Development Economics 58 (1): 45-60. Rivera, W., W. Zijp, and G. Alex. 2000. "Contracting for Extension: Review o f Emerging Practice." A K I S Good Practice Note. Agricultural Knowledge and Information SystemThematic Team, World Bank. Rivera, W.M., and W. Zijp. 2002. Contractingfor Agricultural Extension, International Case Studies and Emerging Practices. U K N S A : CAB1Publishing. Rosenzweig, Andres. 2003. "Changes inMexicanAgricultural Policies, 2001-2003, www.farmfoundation.org/farmpolicy/rosenzweig.pdf Sadoulet, E.,A. de Janvry and B.Davis. 2001. "Cash Transfer Programs with Incoming Multiplier: PROCAMPO inMexico." WorldDevelopment 29 (6): 1043-1056,. Saxena, N.C. 2000a. "Tenancy Reforms vs. Open Market Leasing: What Would Serve the Poor Better?" Planning Commission DiscussionPaper. New Delhi.Mimeo ,2000b. "Theme Paper on Enhancement o f Property Rights Including LandRights o f Women." Planning Commission DiscussionPaper. New Delhi.Mimeo. Seth, A., and P. Sidhu. 2003. "Innovations inAgricultural Extension Management inIndia." Mimeo o f power point presentation. South Asia Rural Development Unit,World Bank. 85 Shariff, A., and A.C. Mallick. 1999. "Dynamics o f FoodIntake andNutrition by Expenditure Class inIndia." Economic and Political Weekly.(July 3-9). 1790-1900 Shariff, A., P. Ghosh, and S.K.Mondal. 2002. "State-Adjusted Public Expenditure on Social Sector and Poverty Alleviation Programmes." Economic and Political Weekly. (February 23).767-787. Sharma, A. 2002. TheAgricultural Sector: In Economic and Policy Reforms in India.New Delhi:National Council o f Applied Economic Research 185-2 13. Sharma, V.P., andA. Gulati. 2003. TradeLiberalization, Market Reforms and Competitiveness of Indian Dairy Sector. Washington, D.C.: IFPRI, Markets and Structural Division. Sidhu, R.S., and S.S. Johl. 2002. "Three Decades o f Intensive Agriculture inPunjab: Socio-Economic and Environmental Consequences." InS.S. Johl and S K.Ray, eds. Future ofAgriculture in Punjab. Stem, N.2003a. Dynamic Development: Innovation and Inclusion. Munich Lectures inEconomics. Munich: Center for Economic Studies, Ludwig MaximillianUniversity. ,2003b. "Opportunities for India ina Changing World." Keynote address for the Annual Bank Conference on Development Economics. Bangalore, Kamataka. (May 22). Subbarao, K. 1997. "Public Works as an Anti-Poverty Program: An Overview o f Cross-country Experience." American Journal of Agricultural Economics: 79678-83, Sulaiman, R. 2003a. "Innovations inAgricultural Extension inIndia." Sustainable Development Dimensions, Sustainable Development Department, Food and Agriculture Organization. Rome. . 2003b. "Private Extension inIndia: Recent Initiatives." National Center for Agricultural Economics and Policy Research, ICAR. New Delhi.Mimeo. Sulaiman, R., and V.V. Sadamate. 2000. Privatizing Agricultural Extension in India. Policy Paper 10.New Delhi:National Center for AgriculturalEconomics andPolicyResearch. Sulaiman, R., and A. Hall. 2002. "Beyond Technology Dissemination: Reinventing Agricultural Extension." Outlook on Agriculture 31 (4): 225-33. Sulaiman, R V and A.W van denBan (2003) Funding and Delivering Agricultural Extension, Journal of International Agricultural and Extension Education, 10 (1),2 1-30. Sur, Mona. 2003. "The Incidence o f Agricultural Power Subsidies inAndhra Pradesh." South Asia Rural Development Unit,World Bank. Mimeo. Sur, M.,and D.Umali-Deininger. 2003. "The Equity Consequenceso fPublic IrrigationInvestments: The Case o f Surface Irrigation Subsidies inIndia." Paper presented during the International Agricultural Economics Association Conference, Durban, South Africa. (August). Suryanarayana, M.H.2000. "How Real I s the Secular Decline inRural Poverty?" Special Articles. Economic andPolitica1 Weekly (June 17): 2129-40. Swaminathan, M.Nd.Consumer Food Subsidies in India: Proposalsfor Reform. Mumbai: Indira Gandhi Institute o f Development Research. mimeo. . 1999. "Understanding the Costs of the Food Corporation of India," Economic and Political Weekly A121-32. Swaminathan, M.,andN.Misra. 2001."Errors o f Targeting: Public Distributiono f Food ina Maharashtra Village, 1995-2000." Economic and Political Weekly: 2447-53. Swanson, B.E., and P.N. Mathur. 2003b. "Review o f the Agricultural Extension System inIndia." Working Paper. South Asia Rural Development Unit,World Bank Taimini, B.K.2001. Food Security in the 21st Century:Perspective and Vision. New Delhi:Konark Publishers Pvt. Ltd. Tata Energy ResearchInstitute. 2001. "Cost o f Un-served Energy." New Delhi.Mimeo. 86 Thind, H.S., andB.D.Kansal. 2002. "Nitrate Contamination of Groundwater underDifferent Anthropogenic Activities." Symposium 54. Paper 712. 17" WCSS 14-21. August. Thorat, S. 1997. "Trends inLand Ownership, Tenancy, and Land Reform." InBhupat, ed., Agricultural Development Paradigmfor the Ninth Plan. Tsakok, I. "Review o f the Income Support PrograminMexico and Turkey and Agricultural Reform 2003. Program inNew Zealand: Case Studies." Working paper. SouthAsia RuralDevelopment Unit,World Bank. Umali-Deininger, D.L.1997. "Public and Private Agricultural Extension: Partners or Rivals?" World Bank Research Observer 12 (2): 203-24. .2003, "Agriculture inAndhra Pradesh: Recent Performance and Challenges," South Asia Rural Development Unit, mimeo Umali-Deininger, D.L.,and K.W. Deininger. 2001. "Towards Greater Food Security for India's Poor: Balancing Government Intervention and Private Competition." Agricultural Economics 25: 321-35. Vaidyanathan, A. 2002. "India's Agricultural Development Policy." InKapila and Kapila, eds. Indian Agriculture in the ChangingEnvironment, 83-104. Venkatasubramanian, K.,2000. "Land Reforms Remain an UnfinishedBusiness." Planning Commission DiscussionPaper. New Delhi.Mimeo. Venkateswarlu, S, and Sen, Anindya. 2002. "Fertilizer IndustryinIndia: Molded by Government Policies." Economic and Political Weekly (January 26): 326. Virmani, A,, and P.V. Rajeev. 2002. "Excess Food Stocks, PDS andProcurement Policy." Working Paper Series 512002-PC. Planning Commission, Government o f India. New Delhi. (January 26). von Braun, J. 1995. Employmentfor Poverty Reduction and Food Security. Washington, D.C.: International Food Policy Research Institute. Vyas, V.S. 1999. "Agricultural Trade Policy and Export Strategy." Economic and Political Weekly (March 27): A-27. . 2002a. "Agriculture: The Second Round of Reforms." InKapila andKapila, eds.Indian Agriculture in the Changing Environment, 143-74. . 2002b. "Changing Contours o f IndianAgriculture." InKapila and Kapila, eds. Indian Agriculture in the Changing Environment, 41-74. Vyas, V.S. 2003. "Market Reforms inIndian Agriculture." Draft mimeo. World Bank. 1997. "India: NationalAgricultural Technology Project." Project Appraisal Document, Report 17082. South Asia Rural Development Sector Unit. (September 5). . 1998b. "A Practitioner's Guideto Competitive ResearchGrant for Agriculture with Focus on Countries inEurope andCentralAsia." Draft discussion paper. Europe andCentralAsia Environmentally and Socially Sustainable Development (ECSSD). . 1999a.India Foodgrain MarketingPolicies: Reforming to Meet Food Security Needs. Report 18329- IN.SouthAsia RuralDevelopment Sector Unit. (August 17). . 1999b. India: TowardsRural Development and Poverty Reduction. Vol. Iand 11.SouthAsia Rural Development Sector Unit.(June 24). . 2000. India Policies to Reduce Poverty andAccelerate Sustainable Deveopment. Report No. 19471-IN. South Asia Poverty and Economic Management Sector Unit. (January 31). ,2001a. India: Improving Household Food and Nutrition Security. Report 20300-IN. South Asia Rural Development Sector Unit.(June 25) .200lb. India: Power Supply to Agriculture. Report 22171-IN.South Asia Energy and Intfrastructure Sector Unit, SouthAsia Region. (June 15). 8 1 . 2001c. "Karnataka RuralPolicy for Growth and Poverty Reduction." A PolicyNote. SouthAsia Rural Development Sector Unit. . 2002a. "Improving the Investment Climate inIndia". South Asia Finance and Private Sector Development Sector Unit and Development Economics Group. . 2002b. "Improving Rural Access to Electricity Services inIndia." South Asia Energy and Infrastructure Sector Unit.Mimeo. . 2003a. "The Incidence o f Canal IrrigationSubsidies inIndia." A Policy Note. South Asia Rural Development Sector Unit. . 2003b. "Revitalizing Punjab's Agriculture." A Policy Note. South Asia RuralDevelopment Sector Unit." . 2003c. India Promoting Agricultural Growth in Maharashtra. Report 25415-IN. SouthAsia Rural Development Sector Unit.(June 30). . 2003d. "Promoting Agro-Enterprise and Agro-Food Systems Development inDeveloping and Transition Countries." Agriculture and Rural Development Department. . 2003e. "Water Resources and Irrigation Management inKarnataka, Focus on the Krishna Basin Nigams." PolicyNote. South Asia RuralDevelopment Sector Unit. . 2003f. "Unlocking Andhra Pradesh's GrowthPotential: AnAgenda to Achieve the Vision 2020 Growth Targets." Policy Note. South Asia Poverty and Economic Management Sector Unit. . 2003g. "Tamil Nadu Agricultural Policy." Policy Note. South Asia Rural Development Sector Unit. .2003j. India: Sustaining Reform, Reducing Poverty. Washington, D.C.:South Asia Poverty and Economic Management Sector Unit. . 2003i. "Trade Policies inSouth Asia: An Overview." South Asia Poverty and Economic Management Sector Unit.Draft. . 2003j. "Toward Modernization o f Agricultural Knowledge and Information Systems and Sustainability o f Competitive Grant Programs inECA." Agriculture and RuralDevelopment Department. . 2003k. "Karnataka Crop Insurance." Policy Note. South Asia Rural Development Sector Unit. . 2004. Agricultural Investment Source Book. Washington, D.C.: Agriculture and Rural Development Department. 88