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Indian Agriculture – Easing the transition to more open global markets IPC NIA Seminar 12 th Nov 2003 Role of the Private Sector Hardeep Singh
What will the Arena look like • • More open competition Reduced barriers to entry in most segments Licensing will no longer promote inefficiency Global alliances. . World class capabilities will compete locally… borders will be breached • Composition of world trade changing much more rapidly that composition of production • Opening up of Agriculture/ WTO implications – Leveraging Competitive advantage – Losing and gaining supply positions Ø Future canvas will be vastly different…. Will require a clearly thought through…and integrated approach to succeed!!
Agriculture – Issue Dimensions • Gross Wheat and Rice production 160 myn ts – Govt/ FCI procures 20 pct. Limited to 4 states marketable surplus…. Cost/ Inequity? ? ? – Farmer own consumption/ barter/ hold back - 55 pct – Trade and barter account for 25 pct • PDS offtake now down to 14 -17 myn ts [10 pct] – FCI open market sales plus export 16 myn ts 1980 …. . Investments twice the value of subsidies 2001 …. Subsidies triple the value of investments
Leverage Country Competitiveness • Focus on commodities where India has competitive advantage & import with value of surpluses generated Yield/HA India US World China Rice 2. 9 6. 3 3. 7 6. 0 Wheat 2. 5 2. 4 2. 5 3. 5 Corn 1. 6 7. 1 3. 8 4. 9 Source : NCAER Competitiveness of Indian Crops n
Indian Vegoil Competitiveness Even Worse Off Relative to Palm Oil Equivalence Source : NCAER
Marketing … Issues • Inequity in MSP regime. . Distorted markets • Logistics constraint at gutslot – Rly rolling stock – Covered Storage Tariff and Tax Barriers / Sops add to distortion – and loopholes. . E. g. Delhi • Knee Jerk Export Regime ØDangerously continuing Supply side thought process…
Shifting Demand away from cereals…. Projected Growth Rates of All India Demand between 2000 -2
Indian Farm Sector – • Small Size – local barter/ low marketable surpluses • Regional overcapitalization of on farm private investment – Major scope for optimization/ incl non ag • Land Lease /Hiring and Dehiring- Issues Farming is largely a way of life…
Overcapacity in basic processing • • • Wheat Milling Rice Milling Oilseed Crushing Sugarcane Crushing Cotton ginning… and textiles Large Scale capacity redundancy impacts sector attractiveness and Trade Practices… knock on effect on value added processing.
Essentials • Align major commodity markets with worldwide values. . Transition mechanisms • Disintermediate and rationalize non value adding components • ‘Trade’ surpluses nationally and internationally before losing value – create supportive structures and capability • Create long term consistent environment to attract unfettered investment
Managing ‘and’ Encashing Commodity Surpluses • Leverage long term competitive advantage. . . prodn cost and destination mkts proximity • Need to build source credibility – Consistent supply origin – Reputation of quality… – Build capability to Identity preserve – Manage intake and logistics end to end Ø Market surpluses before losing value
Intervention. . • In remote areas where infrastructure/ trade capability is limited • Delink intervention operations from purchases for PDS – why just grain for PDS. . Cash/ Food stamps!! • Avoid handling costs and distr. inefficiency • Review outdated buffer stock norms - watch international supply and demand scenario
Risk Management and Mitigation • Warehouse Reciepts • Creating a more transparent market with commodity futures – States need to allow direct purchases and delivery at warehouse – Negotiable instrument – Licensing. . Money lenders * Price Discovery * Price risk management - Hedge future exposures - Lock in assured local price - Improve export capability and competitiveness
Grain Handling investments -need for an integrated approach Capability/ Objectives Components u. Identity Preservation Ø Hopper bottom trptn u. Obviate Bagging/ Cost Øprimary movement u. Ease in fumigation Ørailcars u. Optimize specs/ value Ø Silo ‘systems’ u‘Aggregate’ quality Øat ‘both’ ends u. Economy in transport ØCustomer interface and shipping Ø Farmer Financing
Transparent Grain Marketing Spin off benefits. . • Will attract serious private investment in grain handling infrastructure • Will Spur investments in food processing • Will reduce leakage of indirect subsidies • Will reduce cropping distortions • Will improve flow of technology/ genetics Will improve farm economics and make farming long term sustainable
Policymakers Considerations… • Is it possible to create policy middle ground straddling social purpose and economic drivers • Is there political consensus and will to challenge the status quo
Freebies… The Vicious Cycle Free Power Adverse Impact on state finances SEB’s go bankrupt More capital investment Encourages water intensive crops More power needed Other exploitation of ground water Lowering of Water table
Other examples of overcapacity ……. . in food processing • Roller Flour Mills – Capacity 21 myn tons… Prodn 9 myn ts • Veg. Oil Extraction and Refining – >50 pct overcapacity. Half the industry is sick… And yet new refining capacity being built on back of tax incentives on multiples of recorded investment Artificial and indirect subsidies create distortions and misplaced investments. .
Agriculture and Food. Policy Environment to Compete • Consistent policy environ will spur Infrastructure development… add transparency and rule clarity – Release domestic capital funding for agriculture • Allow unfettered investment – Don’t meddle - incentivising of distortions slows down real investment and creates idle assets • Duty is an adequate barrier- watch and see – Non tariff barriers add to distortions / inhibit flow of technology • Align thought process from Supply side to Demand driven
Way Forward • Immediate serious new study on competitive advantage • Get the best brains together… domestic and international…debate and decide. . Create support. . Heighten awareness of consequences- Get politicos, banks, farmer leaders, corporates, to buy in. . and then execute relentlessly. . Integrate investments to align upstream and downstream within selected areas. . Trash special interests • Plan should be Politically sustainable/ Socially equitable • Clean up unnecessary constraining legislation. . Immediate! • Trash indirect subsidies… all subsidies to be direct and line of sight. . With sharp understanding of WTO obligations • Plan for transition mechanisms… graded timeline • Get legislation cleaned up of useless controls Deploy the very best talent to monitor and execute plan