Occasional Paper - 36 *w
COMMODITY STUDY ON DIVERSIFICATION OF INDIAN AGRICULTURE
DR. B. YERRAM RAJU
Departnnent of Econonnic Analysis and Research National Bank for Agriculture and Rural Development Mumbal
NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT HEAD OFFICE
DEPARTMENT OF ECONOMIC ANALYSIS AND RESEARCH
^ . ^ . ^ . i t ^ I ? 3 T R . / 3 f t ITT/ 207/3M-36 /2005-06 05^
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Ref.NB.DEAR.OP/207/OP.36/2005-06 05 May 2005
2005
Dear Sir Occasional Paper No. 36 on "Commodity Study on Diversification of Indian Agriculture" We have pleasure in forwarding to you a copy of the Occasional Paper on "Commodity Study on Diversification of Indian Agriculture" prepared by Dr. B Yerram Raju, Managing Director, Sandilya Consultants Pvt. Ltd, Hyderabad, on behalf of NABARD. 2. S T M l t , ^ ^ffWftlcT ^
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2. We hope, the findings of the paper will be of interest to you. We solicit your suggestions for improvements in the quality of the Occasional Paper. Yours faithfully
(K.V Raghavulu) Chief General Manager 3r3cFra5: zTsfrnxT
End: As above
Occasional Paper - 36
COMMODITY STUDY ON DIVERSIFICATION OF INDIAN AGRICULTURE
DR. B. YERRAM RAJU
Department of Economic Analysis and Reseorcti Notional Banl< for Agriculture and Rural Development Mumbai 2005
3«reT Pi^i^ich >i-ilfec^ ch'^Hc^'e>H 3T.1er., ^^TTc: ^ . 143, Rlvrj-MJi'?!, clKHIcW, t^^^TWR" - 500 017
Author Dr. B. Yerram Raju, Managing Director, Sandilya Consultants Pvt. Ltd., Plot No. 143, Vijayapurl, TEimaka, Hyderabad - 500 017
The usual disclaimer about the responsibility of the National Bank as to the facts cited and views expressed in the paper is implied.
^cITS- ^ . #-24, -^-iencp, Tfr.sFT.^. 8121, ^t^-gJeit *l«^cm, i t ^ ( ^ ) , 5 ^ - 400 051 IRT FmUlcT. Published by the National Bank for Agriculture & Rural Development, Department of Economic Analysis & Research, 4th Floor, ' C Wing, Plot No. C-24, G-Block, PB No. 8121, Bandra KurIa Complex, Bandra (East), Mumbai - 400 051.
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TABLE OF CONTENTS Page No. Ust of Figures
iv
List of Tables
iv
List of Abbrevatlons
V
31TWT Acknowledgement
vil
Executive Summary
ix xlv
Chapter I
Introduction
Chapter n
Diversification of Indian Agriculture A. Nature and pattern of DOA B. Definitions & Concepts C. Drivers of Diversification
Chapter i n
Strategic fit and Commodities Study A. Strategic fit with the Indian economy B. Commodities Study: Fruits & Vegetables C. Commodities Study: Aquaculture
21
Chapter IV
Diversification of Agriculture in Andhra Pradesh A. Overview of A.P. Agriculture B. DOA (District Level) Selected District Profiles and Case Studies (Fruits & Vegetables and Aquaculture Sub-Sectors)
49
Chapter V
Suggested Policy Interventions
65
Annexure I
Initiatives of the Ministry of Food Processing, Government of India
77
Annezure n
Hazard Analysis Critical Control Point (HACCP)
80
Notes & References
85
ill
LIST OF FIGURES No. Description 1 Per capita consumption increase by food group, India, 1977-99 2 Trends in Area and Production of Rice in AP 3 Trends in Area and Production of Jowar in AP 4 Diversification of Agriculture and Resource Endowments (Schematic) 5 Extent of Diversification in Andhra Pradesh
Page No. 30 66 66 69 70
LIST OF TABLES No. Description Page No. 1 State-wise Distribution of Districts and Share of HVC's 37 by Level of DOA 2 Average Yields of Livestock Products 1992-2002 40 3 State-wise Production of Milk in India (Lakh Tonnes) 41 4 Area and Output of Fruits and Vegetables 46 5 State-wise Area and Output of Fruits in India 47 6 State-v(/lse Area and Output of Vegetables in India 47 7 India's Share in World Exports of Fruits and Vegetables 49 8 Agro-Food Fruit and Vegetables 54 9 Agro-Food Cereals 54 10 State-wise Area Under Aquaculture 57 11 State-wise Production of Cultured Shrimp in India 57 12 India's Exports of Marine Products 58 13 Crop Shifts in Andhra Pradesh (Area) 62 14 Area Shifts in Andhra Pradesh by Region 64 15 Growth Rates for Area, Production and 67 Yield of Total Cereals 16 Growth Rates for Individual sub-categories of Cereals 67 17 Growth Rates for Area, Production, Yield etc.. in 68 Andhra Pradesh 18 Migration Coefficient between Coarse Cereals* and 70 Fruits and Vegetables fi-om 1993-94 to 1998-99 19 Area Under Principal Fruits & Vegetables in 72 Visakhapatnam and Chittoor Districts (2000-01) 20 Marine Fish Production by Districts in A.P 75 21 Migration Coefficient of Area and Production of Rice 75 and Aquaculture and Production of Shrimp: (1992-2000) IV
LIST OF ABBREVIATION AEZ
: Agri-Export Zones
AVRDC
: Asian Vegetable Research and Development Centre
BCM
:
Billion Cubic Metres
CAGR
:
Compound Annual Growth Rate
CDA
:
Commodities Diversification of Agriculture
CMIE
:
Centre for Monitoring Indian Economy
DOA
:
Diversification of Agriculture
EAC
:
Export Agricultural Crops
FAO
:
Food and Agriculture Organisation
FTA
:
Free Trade Agreement
GOAP
:
Government of Andhra Pradesh
GOI
:
Government of India
HACCP
:
Hazard Analysis and Critical Control Point
HVC
:
High Value Commodities
IFPRI
:
International Food Policy Research Institute
MDG
:
Millennium Development Goal
MSP
:
Minimum Support Price
NSS
:
National Sample Survey
RBI
:
Reserve Bank of India
SID
:
Simpson Index of Diversity
SMP
:
Skimmed Milk Powder
SPS
:
Sanitary and Phyto-Sanltary Measures
TE
:
Triennium
TIFAC
: Technology Information Forecasting & Assessment Council
TRIPS
: Trade Related Intellectual Property Rights
TVE
: Town £ind Village Enterprises
UN
:
United Nations
UPA
:
United Progressive Alliance
WB
: World Bank
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ACKNOWLEDGEMENT The author is highly thankful to Dr. P. P a r t h a s a r a t h y Rao. Senior Scientist, ICRISAT for permitting me to use the data on HVC in his draft paper and to Dr. K.J.S. Satyasai, Assistant General Manager, NABARD, Hyderabad for his valuable comments on the preliminary draft. He is also thankful to Ms. Sara Varkkl, Dr. Sujlth K.Mishra (APITCO), and Mr. Ravi Kumar Chandolu, Research Officers for helping in data collection and compilation in this Report. B. Yerram Raju
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EXECUTIVE SUMMARY 1.
T h e r e is now a n u r g e n t need for a p a r a d i g m shift in a g r i c u l t u r a l policy to a d d r e s s t h e p r o b l e m s facing t h e agricultural sector in the new economic environment, domestic a n d global. Diversification of Agriculture (DOA) h a s been adopted as a strategy for enhancing incomes of the farmers in different parts of the World.
2.
This paper is an attempt to look into the way farmers in Asia with specific reference to India have taken to the diversification strategy.
3.
A survey of available literature indicates the following, among others, in regard to motivation for diversification: Optimization of resources in the context of inadequate/continually uncertain irrigation and depleting soil wealth; Shifts in consumption patterns from course cereals to fine and superfine cereals and other products, and; Growing urbanization and its impact on specific agro-regions.
4.
The key drivers of diversification noticed from the secondary data are: (1) Food Security; (2) Employment Generation through creation of off-farm and non-farm investment opportunities within the capabilities of the resource-poor farmers; (3) Changes in crop patterns and farming systems; (4) More effective use of land and water resources; (5) Market access initiatives replacing risk aversion with risk acceptance; (6) Changing consumer demands irrespective of the nature of habitation and standards of living due to spread-effect of health consciousness caused by the visual media and non-discriminatory demand for quality goods, a n d (7) The role of urbanization in fast developing countries like India.
5.
Diversification often meant shifts from food to commercied and non-food crops; from un-remunerative crops to horticulture and aquaculture and within horticulture from long gestation fruit crops to short duration fruits and vegetables.
6.
The Study proposes to examine the hypothesis thg.t with the opening of the economy. Diversification of Agriculture (DOA) as a strategy would, to a large extent, open up opportunities for value addition in agriculture and enhanced income earning o p p o r t u n i t i e s for t h e farming community. The s t u d y also xiv
e x a m i n e s t h e drivers of diversification at aggregate a n d disaggregated levels and why certain commodities were in focus in the attempts towards diversification while others were not. 7.
The s t u d y also a d d r e s s e s t h e i s s u e : If s u i t a b l e policy interventions are in place, would the DOA and within t h a t Coinmodity Diversification (CDA) rapidly transform the sector, promote more balanced regional development and assure secure livelihoods for millions of farmers who are threatened by the swift policy and economic changes in recent years?
8.
Crop-choice at the farm level is determined by several factors of which the farmer's risk perception is crucial. A weak assetbase, inadequate and as5rmmetric information, uncertain market outlook, and limited reach of extension services lead to the tendency to cultiva:te "safe crops" and risk-aversion.
9.
If DOA is to become a sustainable strategy, the relationship between "DOA and risk behaviour needs to be understood in greater depth, particularly in the context of trade liberalisation where the volatility of global agricultural prices and sudden or unexpected changes in the relative profitability of different agricultural commodities are additional factors operating on the farmer's decision-making p r o c e s s . However, some s t u d i e s conducted by the FAO and World Bank in the South Asian countries revealed that it is the single most Important source of poverty alleviation. Also, several researchers pointed out that increased DOA would reduce vulnerability to commiodity price volatility due to a wider range of outputs and thereby reduce risk for farmers to a certain extent.
10. India is the fourth largest economy in the world in terms of P u r c h a s i n g Power Parity (PPP). Per capita income Is now $2,530. With 143 million hectares of cultivable land and about 650 million persons dependent on agriculture, India has one of the largest agricultural sectors in the world. However, the overall growth rate of the economy at 5.8 per cent since the early 1990s and projected growth rates of above 8 per cent for the next few years has deflected attention from declining growth rates in agricultural output and rural employment. The primary t a s k facing t h e a g r i c u l t u r a l sector is to e n s u r e food a n d nutritional security to a vast and growing population with food grain production targeted at 300mt over the next decade to meet demand for food and animal feed. The average a n n u a l XV
growth rate of food grain production h a s fallen from 2.85 percent during 1980-90 to 1.66 percent during 1991-2001. Policy interventions, therefore, will have to be framed keeping food security and farmers* livelihoods as goals with the highest priority. The large n u m b e r s of resource-poor farmers who constitute about 80 per cent of cultivators and the fact that rain fed/dry land agriculture accounts for almost two-thirds of cropped area makes the achievement of these goals a difficult task over the next two decades, unless crop-specific and regionspecific s t r a t e g i e s a r e designed. The WTO Agreement on Agriculture, the DOHA and CANCUN rounds of discussions, the Geneva Agreement have led to intensification of efforts at DOA. 11. In the Indian context, major diversification occurred in crop shifts to superior grains on one hand and in livestock, fruits, vegetables, fish and aqua on the other. Inter-State and intras t a t e indicators of diversification revealed the following: The s o u t h e r n S t a t e s , particularly Kerala and A n d h r a Pradesh, witnessed significant shifts from food grain to non-food grain crops by the early 1990s - with almost 20 per cent increase in Gross Cropped Area under non-food crops between 1970-71 and 1990-91. The highest percentage change in area under non-food grains was witnessed in Haiycina, Kerala, Rajasthan and Orissa. 12. There has been a shift not only in area from food grain to nonfood grain crops, but also, within non-food crops, shifts have been occurring in the crop-mix across regions. In several regions, there is a decline in area u n d e r millets and coarse cereals, and in favor of pulses a n d / o r oilseeds. Even in the c a s e of o i l s e e d s , some shifts h a v e o c c u r r e d away from traditional crops such as groundnut, towards non-traditional crops such as sunflower and soybesm. There is also growth in new sectors such as horticulture, floriculture and mushroom cultivation, which are in response to growing demand for these products. Shifts in area have strongly favored oilseeds in some regions, fruits and vegetables in several States followed by spices and sugarcane. The changing pattern of DOA across S t a t e s s i n c e 1 9 7 0 - 7 1 showed i n c r e a s e s in a r e a u n d e r g r o u n d n u t in Andhra Pradesh, Karnataka and Tamilnadu; coconut and rubber in Kerala; Soya bean and sunflower in M a h a r a s h t r a ; r a p e s e e d / m u s t a r d in G u j a r a t ; c o t t o n in R a j a s t h a n , Punjab a n d H a r y a n a a n d s u g a r c a n e in Uttar Pradesh. xvl
13. The shift from food crops to non-food crops has been highest in t h e s o u t h e r n a n d w e s t e r n S t a t e s (due partly to t h e slow expansion of irrigation for water-intensive crops), while the northern States have moved more rice and wheat specialization (due to price support policies, which are a main contributory factor for this crop pattern). Maize is gaining area in the south, driven by the demand for poultry feed; and pulses, oilseed§' and fruits & vegetables are also witnessing an area shift in their favor. Though the eastern region remains rice-based to ^. large extent and has seen less DOA than the other regions, a major crop shift towards vegetables h a s been witnessed i n d e c e n t years with this region accounting for about 44 per cent of total area under vegetables in the country. DOA in favor of livestock and horticulture was found to be more in rain-fed regions bypassed during the Green Revolution and the shift to non-cereal crops was more by small farmers in r a i n fed a r e a s . D a t a i n a d e q u a c i e s prevented t h e a u t h o r from e s t a b l i s h i n g a n y correlation between the flow of credit and CDA though there is no denying the fact that easy and quick flow of credit in time would have accelerated the pace of CDA. 14. A n d h r a P r a d e s h h a s b e e n c h o s e n for a c a s e s t u d y in diversification particularly in the districts of Chittoor (Fruits and Vegetables) and Viskhapatnam (Aqua) as the diversification initiatives in these districts have not led to the suicides of farmers that were noticed in the Telangana and Rayalaseema districts. Where some suicides were reported in the past six m o n t h s in these two districts, they were more due to t h e family, faction and caste-ridden disputes. These districts have s h o w n i n c r e a s e s in incomes due to high value fruit a n d vegetable crops and aqua and favorable market responses. They also lead u s to conclude t h a t demand-led initiatives have a better scope for sustainability than supply driven initiatives, (see Chapter FV for case study details) 15. Gross inadequacies are noticed in terms of value addition due to inadequate attention to crop specific infrastructure and postharvest technologies like pre-cooling, cold storages with assured power at uniform voltage, price hedging operations, m a r k e t reforms in farm sector etc. Some States have initiated special studies in this regard to prioritize their investments in these areas and deploy the needed resources. The impacts of these initiatives would be felt in due course. However, there is a regulatory overhang in India with more t h a n twelve Union xvii
Ministries, corresponding State Ministries, laws framed by the Union Government with rules framed by the State Governments for implementing them, still seventy-odd food control orders governing the production and trade of those commodities and crops into which the farmers would like to diversify, the farmer, rural industry and farm trade are virtually strangulated. While there is an awakening In respect of these areas, the speed of reforms and actions In these areas deserve an urgent attention. Around 80 percent of resource use, flow of credit and active State interventions are noticed in just half of the Indian States. 16. Major attention is urgently required in terms of conferment and regularization of property rights, freer flow of agricultural goods and services across the States, easier access to information through information, communication and technologies (ICT) on weather and markets and extension supports in order to take advantage of t h e quick shifts in c o n s u m p t i o n p a t t e r n s by appropriate DOA.
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CHAPTER I INTRODUCTION 1.1
Backdrop
Never did Indian Agriculture, after attaining Green Revolution, receive so m u c h attention as now. Political parties that went through the h u s t i n g s realized t h a t ignoring agriculture from the purview of economic reforms that commenced in the aftermath of post-1991 Balance of Payments crisis harmed the interests of the farmers and t h e economy a s a whole. T h e r e is now a n u r g e n t n e e d for a paradigm shift in agricultural policy to address the problems facing the agricultural sector in the new economic environment, domestic and global. The agricultural sector in India is enormously significant despite its declining share in GDP. Sectoral shifts occurring as a result of the development process have raised the share of the Services sector in GDP during the 1990s, while Agriculture, which had a predominant share in GDP in the 1950s, contributes only 22.5 per cent by the end of March 2004 (Economic Survey, GOl, 2003-04). The annual compound growth rate for production (all crops) declined from 3.19 per cent during the 1980s to 1.73 per cent in the following decade well below the average annual population growth rate of 1.93 per cent. For the sector as a whole, the average annual rate of growth for Agriculture and Allied activities fell to 3.6 per cent during the period 1992-2000 compared with a growth rate of 3.9 per cent during the period 1980-1992 (at 1993-94 prices) and further down to 2.6 percent after 2000. The slow growth of employment in the economy (stagnant at 2.04 per cent per annum since 1983) and the declining emplo5nTient opportunities in the farm and non-farm sectors (with employment growth rate in agriculture falling from 1.51 per cent in 1983-84 to -0.34 per cent during 1994-2000) h a s kept development of the agricultural sector at the top of the policy agenda. Another issue relates to the regional imbalances. States like Bihar, Orissa, and West Bengal have rich natural resources in terms of water and virgin soils have not reached their potential even to the extent of meeting their own States' needs. These States are also the victims of natural calamities annually. Backwardness in agriculture and poverty are interrelated issues. Indian agriculture bears the attack of continual droughts, frequent cyclones, floods and uncertain monsoon, causing untold misery to millions of farm households
a c r o s s t h e c o u n t r y . Added to high m o n s o o n - d e p e n d e n c e a n d inadequate crop insurance, there are several other factors affecting the performance of the sector: declining productivity growth rates, stagnation in irrigated area, ineffective and poorly implemented policies over several decades, growing financial constraints of the Central and State Governments, declining public investment in agriculture, input supply bottlenecks, inadequate infrastructure and extension services, environmental factors and climate change, deterioration in the n a t u r a l resource base, among many other factors. Credit has been made out to be the villain of the piece and t h e UPA G o v e r n m e n t moved in to r e m e d y t h e s i t u a t i o n in furtherance to the recommendations of the Vyas Committee Report (2004). Planning Commission, in its mid-term review of the Tenth Plan mentioned that it would be difficult to reach 6-6.5 per cent growth per a n n u m without the terminal years touching 11-11.5 per cent growth rate and that the prospects of agriculture reaching 3 percent p e r a n n u m would also b e a c h a l l e n g e . (Financial E x p r e s s , 10.07.2004) The World Banks' Millennium Development Goal (MDG) of halving the poverty numbers by 2015 suggests that removal of subsidies to food grains could in the short term reduce agricultural output that received t h e m m o s t . But, t h i s could lead to significant crop diversification in these States. Again, the States that did not receive them in the past may benefit from the release of resources for rural infrastructure, research and extension leading to drop in the poverty levels. (WB, September 2004) Do the existing levels of DQA support this stance? 1.2
Scope and Objectives
Agsiinst this backdrop, the Study proposes to examine the hj^othesis that with the opening of the economy, Diversification of Agriculture (DOA) as a strategy would, to a large extent, open up opportunities for value addition in agriculture as well as lead to better crop planning and enhance income earning opportunities from the farm sector. It would also examine the drivers of diversification both at the aggregate and disaggregate levels. Further, within the range of diversification in the country which commodities responded to the initiatives and why? If suitable policy interventions are put in place, would the DOA and within t h a t Commodity Diversification (CDA) rapidly transform the sector, promote more b a l a n c e d regional development and assure secure livelihoods for millions of farmers
who are threatened by the swift policy and economic changes in recent years? The Study would rely on the secondary and data and information. Objectives would accordingly be: 1.
To examine the nature and pattern of crop diversification in India at the aggregate as well as disaggregate level (State/ District level to the extent data becomes available at t h e disaggregate level)
2.
To examine the drivers of diversification s u c h a s income maximization objectives, changing consumption basket, price, incentives support by the b a n k s and government, contract farming etc.,
3.
To analyse crop diversification strategies in relation to wider processes operating in the Indian economy; for example, rural industrialization, WTO stipulations on quality standards like t h e H a z a r d Applications a n d Critical Control A n a l y s e s (HACCP), conservation of land a n d water r e s o u r c e s a n d sustainable development and
4.
To suggest policy interventions that would facilitate crop shifts t h a t a r e technologically feasible a n d e n v i r o n m e n t a l l y sustainable.
1.3
Data and Methodology
Review of literature on the subject and study of secondary data and information: Post-green revolution in India has brought about food security to a considerable degree more in comparison to the p r e - g r e e n r e v o l u t i o n period t h a n in r e g a r d to t h e i n t e r n a l requirements of food security. While the period 1980-91 reflects the ushering in of economic reforms in most South Asian economies intensification df reforms occurred in the post 1990-91 in India. The Study, therefore, proposes to anlayse the data on area, production and yields of principal food and non-food crops in different States where the crop shifts occurred during the past ten years (1991-2001) to examine the reasons behind them. Again, within the non-food crops, in view of t h e a p p a r e n t surge in d e m a n d of fruits a n d vegetables and aqua products, the extent to which the migration had occurred in terms of area and production would be studied. These two s e c t o r s also require adoption of global s t a n d a r d s even in domestic markets due to WTO stipulations to gain better market access. A brief examination of the essential components of these s t a n d a r d s t h a t require compliance from t h e p r o d u c e r s to t h e
manufacturers and traders would be done with regard to the value addition and its sustainability. The consumption patterns and their influence on the DOA in respect of fruits, vegetables and a q u a products would be also analysed from the last ten years data. The main data sources are: CMIE, National Sample Survey results of the relevant years, Indian Council for Agricultural Research: National Horticulture Board under the Ministry of Agriculture, NCAER data: Union Ministry of Commerce and Industry for d a t a on exports; APEDA and MPEDA: Ministry of Food Processing Industry, RBI and NABARD. Commodity Diversification occurs due to changes in consumption patterns in the markets that the relative commodities access or intend to access at ajuture date. It is also spurred by the favorable regulatory mechanisms. After examining the implications of DOA for the country I looked at its effects in Andhra Pradesh more as a case in point. Since the objective is to study the effects of DOA in relation to Fruits and Vegetables and aqua products 1 preferred to look at a couple of districts-Chittoor and Nellore-where t h e impulses for diversification were s p u r r e d by the State initiative a n d farmer initiative respectively. I relied on t h e NSS d a t a on h o u s e h o l d consumption of these commodities to examine the shift that has so far occurred on one hand and its further prospects on the other. It is considered worthwhile to establish the relationship empirically over a decade through a migration coefficient. Migration Coefficient is arrived at as follows:
'Zxy
