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Growth and Equity Effects of Agricultural
Marketing Efficiency Gains in India
Maurice Landes and Mary E. Burfisher
Economic Research Report No. (ERR-89) 43 pp, December 2009
Growth in India’s economy and consumer buying power has accelerated sharply since the early
1990s, when a balance-of-payments crisis instigated major liberalizing reforms to exchange rate,
trade, and domestic regulatory policies. As a result, India’s food demand is expanding and diversifying,
but India’s farm sector has not shared in the benefits of policy reform, and growth in the
sector has remained sluggish. Because the farm sector accounts for a large share of total output and
employment in the Indian economy, this poor performance raises concerns about India’s ability to
sustain accelerated income growth, reduce pervasive rural poverty, and maintain food security.
What Is the Issue?
Despite the recent robust expansion of India’s economy, lagging investment and growth in its
agricultural sector are raising concerns about the need for a second round of reforms to stimulate
the farm economy. Reforms of agricultural trade protection and producer subsidies are frequent
topics of discussion and analysis, but strong evidence supports the idea that fragmented and
inefficient domestic agricultural marketing chains seriously hinder agricultural competitiveness
and growth. Measures to boost marketing efficiency by reducing regulatory barriers that have
impeded investment in agricultural wholesale and retail trade services may also improve conditions
for low-income producers and consumers, a priority for India’s policymakers. This study examines
the performance of India’s agricultural marketing system and analyzes the economywide implications
of improved marketing efficiency that might stem from future reforms to domestic market
regulations and increased investment in agricultural markets.
What Are the Major Findings?
Measures to improve agricultural marketing efficiency in India can substantially and broadly benefit
India’s economy. Improved marketing efficiency has the potential to generate economywide gains
in output and wages, raise agricultural producer prices, reduce consumer food prices, and increase
private consumption, particularly by rural and low-income households.
The broad gains from improving agricultural marketing efficiency contrast significantly with the
impacts of reducing agricultural subsidies and tariffs. Indian policymakers face domestic and
international pressures to reduce input subsidies and tariffs in the farm sector. But reducing
subsidies and tariffs, while conferring economywide benefits, may also, at least in the medium
term, create adjustment costs for labor, land, and capital markets, some commodity sectors, and
households. In contrast, improved agricultural marketing efficiency can benefit the overall economy
(see chart), as well as low-income households. The results of this study suggest that policy measures
to improve the efficiency of domestic agricultural markets may be a valuable complement to subsidy
and tariff reforms by helping to mitigate the medium-term losses that may stem from such reforms.
Greater investment and efficiency in India’s agricultural supply chains also have the potential to
enhance agricultural growth over the longer term. Whether new policies lead to rapid investment
by modern retailers and others in transforming India’s markets or the process occurs gradually, more efficient agricultural
marketing is likely to strengthen consumer demand for food and other goods. More efficient domestic marketing
may also boost net agricultural exports, although this result does not account for the changes in demand likely to occur
as higher income growth is sustained over the longer term or for constraints on crop and livestock production that
may emerge.
This analysis also does not fully assess the adjustment costs, including potential employment and income losses in some
areas of the traditional marketing system, that might result from transforming India’s traditional wholesale and retail
markets into a more efficient sector. This transformation could lead to fewer, but larger, vertically integrated, and more
technologically advanced processing and marketing enterprises. Concerns with managing these adjustment costs are
central to the current debate over regulating direct foreign investment in food retailing in India. This study suggests,
however, that although some participants in the traditional marketing system would undoubtedly face adjustment costs,
the impacts on economywide wages and welfare, as well as the welfare impacts on low-income households, are positive.
For the United States, these results suggest that increasing investment and efficiency in India’s agricultural markets is
an important potential driver of broad-based income and demand growth in India, likely bringing long-term benefits
to its trade partners. The analysis of the potential impacts of reforms to agricultural input subsidies and tariffs suggests
why these issues are sensitive for India in bilateral and multilateral negotiations. At least in the medium term, reducing
input subsidies lowers output of food staples, leading to reduced welfare for low-income households, while reducing
tariffs imposes adjustment costs on protected commodity sectors. But, the results also suggest that measures to
improve agricultural marketing efficiency, perhaps including cooperation to strengthen India’s market institutions and
investment climate, can help mitigate the adjustment costs faced by some households and commodity sectors from
such reforms. Further, the substantial increases in agricultural output and food consumption that arise from improved
marketing efficiency in this analysis suggest the potential for positive returns to private investment—including U.S.
private foreign investment—in Indian agribusiness.
How Was the Study Conducted?
The authors constructed a computable general equilibrium (CGE) model of the Indian economy. The basic model
structure was developed by the International Food Policy Research Institute (IFPRI), with expanded commodity coverage,
disaggregation of marketing and trade costs, disaggregation of rural and urban households by expenditure class, and
other extensions added by the authors for this study. Model data were supplied by the Global Trade Analysis Project
(GTAP) and official Indian sources. Model structure, extensions, and data sources are described in detail in an appendix.
The study also draws on data and results from studies of India’s agricultural markets conducted recently by ERS,
the World Bank, and other institutions.
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