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Agricultural Policy
Agricultural Trade Policy
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Agricultural Policy
Since independence, India has pursued a policy of food self-sufficiency,
primarily by boosting domestic production of rice and wheat—the
two food staples. This basic goal has been achieved by boosting
rice and wheat yields through development and adoption of high-yielding
varieties, expanding irrigation, and increasing fertilizer use.
Cropped area has also increased steadily as expansion in irrigation
has boosted multiple cropping and cropping intensity. Policies and
performance for other crops have been mixed. For pulses (chickpeas,
pigeon peas, lentils, dry peas, etc.), an important protein source
in Indian diets, there has been little success in boosting output,
and India has pursued a liberal import policy since the early 1980s.
In the oilseed sector, generally high levels of protection for oilseeds
and oils have not yielded significant gains in output. As a result,
India is now among the world’s largest importers of edible
oils, while Indian consumers pay among the highest prices in the
world. In cotton, prior to a relatively recent reform, producers
were heavily taxed by export controls aimed at assuring adequate
and low-cost cotton supplies for country’s textile industry.
India’s major domestic agricultural policy instruments include
a system of minimum support prices for major crops; input subsidies
for fertilizer, power, and irrigation water; and public investments
in surface-, and to a lesser extent, groundwater irrigation. Following
the removal of quantitative trade restrictions, these instruments
are now accompanied by relatively high bound
and applied
tariffs on most major commodities. For rice and wheat, the central
and state governments procure supplies from the domestic market
at support prices in order to maintain buffer stocks and assure
adequate supplies for distribution at subsidized prices through
the Public Distribution System (PDS) and other food distribution
programs. The cost of these government rice and wheat operations,
known as the “food subsidy,” along with the power subsidy,
are generally the largest budget subsidy outlays for agriculture.
Overall, budget outlays on agricultural subsidies, and, particularly,
the food subsidy, have risen sharply in recent years, reaching about
$12 billion in 2002/03.
Although the central government plays an important role in recommending
national agricultural policies and is the primary source of funds,
agriculture is a “state subject” in the Indian constitution.
As a result, all agricultural policies—including price supports,
input subsidies, produce marketing, and consumer subsidies—must
ultimately be agreed to, and implemented, by state governments.
The support of India’s various states, which reflect a broad
range of resource endowments, is a key issue in reaching consensus
on agricultural policy and in policy implementation.
In 1991-93, India introduced major reforms to industrial, trade,
and exchange-rate policy. The growth these reforms have generated
in other areas of the economy is creating increasing pressure for
change in agricultural policy. Food demand is expanding and diversifying,
which, in turn, is placing new demands on market infrastructure
and institutions. Longstanding production, procurement, and distribution
programs that focus on cereals are increasingly expensive and out
of step with market demand. At the same time, rising subsidy outlays
appear to be constraining public investment in transforming institutions
and market infrastructure. And, despite improved growth in the overall
economy, growth in farm output and, particularly, rural employment,
is slowing.
There have been some important changes in agricultural policy since
the early 1990s, including removal of quantitative trade restrictions
that was completed in 2001, and initial steps to pare down regulation
of domestic markets. National elections in 2004 sharpened the focus
on the performance of agriculture and the necessity of reform, but
policymakers are still seeking consensus on specific and fundamental
reforms.
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Agricultural Trade Policy
From independence in 1947 until the early 1990s, India maintained
strong control over imports and exports of both agricultural and
nonagricultural goods, making India one of the most closed economies
in the world. During this period, India's domestic markets were
insulated from world markets by various restrictive practices, including
bans, licensing regimes, state trading, and other quantitative restrictions,
as well as high tariffs.
Although reforms began cautiously in the 1980s, India introduced
fundamental reform of domestic and trade policies in 1991-93. Trade
reforms implemented during this period were aimed at eliminating
restrictive licensing arrangements and reducing other quantitative
restrictions on imports and exports, and substantially reducing
basic tariffs.
In a major policy shift, import licensing for all products—except
those on the banned, restricted, and state monopoly lists—was
abolished so that any item not on the lists could be freely imported.
The lists, which included mainly agricultural products, consumer
goods, and textiles, were revised and shortened annually.
Maximum tariff rates were brought down in steps from 300 percent
to about 40 percent for most products, and countervailing duties
were reduced. The average trade-weighted tariffs were reduced from
87 percent in 1991 to 27 percent in 1997. Trade restrictions on
agricultural products were left mostly untouched in the 1991 reform,
but subsequent trade policy changes gradually lifted restrictions
on agricultural products.
- State
trading activities, once the bastion of full governmental
control over agricultural trade, have been curtailed in almost
all products.
- Market
access has been extended to agricultural products by relaxing
licensing arrangements, reducing tariffs, freeing more items from
quantitative restrictions, and allowing the private sector to
import food items.
- The private sector may import oilseeds and edible oils, and
private millers may import wheat and corn on certain conditions.
In the Uruguay Round Agreement on Agriculture (URAA), India agreed
to bind agricultural tariffs at ceiling rates ranging from 0 to
100 percent for primary products, 150 percent for processed products,
and 300 percent for edible oils. In 1997, after India lost the balance-of-payments
waiver that allowed it to maintain restrictive trade policies, India
accelerated the process of lifting quantitative import restrictions
(QRs). In April 2001, India completed the removal of QRs on agricultural
imports and nearly all items can now be imported subject to a tariff
and to sanitary and phytosanitary standards. In fiscal year 2002/03,
while the average bound tariff for agricultural goods was a relatively
high 115 percent, the average applied rate was 33 percent.
India’s agricultural trade policy also provides incentives
for exports through various mechanisms:
- Import duties are reduced for items needed by a processing
industry if the processed products will be exported.
- Firms are permitted to set up private bonded warehouses in
domestic tariff areas to import, stock, and even sell restricted
list items to holders of advance licenses.
- Export restrictions on most products have been lifted, and
some commodities are provided subsidies allowed by the World Trade
Organization on domestic transport and marketing costs.
- Agro-processing zones are being set up with government support
for infrastructure and finance, as well as concessional duties
for imported inputs for exported products.
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More Information
Additional information on India’s agricultural and agricultural
trade policies are available from:
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