Agricultural Growth and Diversification since 1991

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AGRICULTURAL GROWTH AND DIVERSIFICATION SINCE 1991 India has recorded high rates of growth in overall gross domestic product, at about 5.5 to 6 percent per year since the 1980s. With falling rates of growth in population, this led to a significant growth in per capita incomes, at about 3.8 percent annually from 1980 to 2000. At purchasing power parity (a mechanism that allows comparison between the standards of living of different countries), although the per capita income of an average Indian is still quite low (about $2,850 per annum), a strong middle class of at least 150 million to 200 million people enjoys an annual income of more than $13,750.

This overall growth and prosperity sustained over a long period has led to a change in the consumption basket of Indians, more rapidly at the upper end of incomes and more gradually at the bottom. There are indications that many Indians are moving away from staples and toward high value agriculture of fruits and vegetables, dairy, fish, and meat. Since an average Indian still spends about 55 percent of his or her expenditures on food, any change in the consumption preferences has significant repercussions for India's farm economy as well as food industry, including its marketing, handling, and trade. Within this framework, one of the key questions to explore is what happens to the small farmer.

The Changing Structure of Indian Diets

The revolution in high value agriculture is driven by changing domestic consumption patterns and, to a lesser extent, increasing high value exports. Growth in Indian demand for cereals is slowing down, while demand for other foods, including fruits, vegetables, fats, and livestock products, is showing relatively high growth. On the domestic front, rising incomes, urbanization, changing relative prices, and shifting preferences are leading to dietary diversification.

How fast has the consumption basket of an average Indian changed? The per capita consumption of cereals from 1977 to 1999, for example, declined from 423 to 335 pounds (192 to 152 kilograms) per year in rural areas and from 324 to 275 pounds (147 to 125 kilograms) per year in urban areas. The consumption of fruits, on the other hand, increased by 553 percent, of vegetables by 167 percent, of milk and milk products by 105 percent, and of meat, eggs, and fish by 85 percent in rural areas over the same period. Similar changes occurred in urban diets. These changes are dramatic, though from a small base, and indicate a structural shift in Indian diets. This shift opens a window of opportunity for farmers to raise their incomes; it is also an opportunity for agribusiness to add value and generate employment in India's economy.

Consumption of high value commodities, namely fruits, milk, meat, eggs, and fish, was substantially higher among upper income groups than among lower income groups. The pace of decline of cereal consumption in upper income groups was faster than in lower income groups. Though lower income groups consumed less quantity of high value commodities than higher income groups, their consumption of these commodities did increase. For lower income groups, the consumption of milk increased by 30 percent, of vegetables by 50 percent, of fruits by 163 percent, and of meat, eggs, and fish by 100 percent from 1983 to 2000.

Urbanization is another factor affecting consumption patterns. The consumption of pulses (edible seeds of certain crops), edible oil, vegetables, fruits, milk, meats, eggs, and fish was higher in urban areas than in rural areas in 1999–2000. Only cereal consumption was greater in rural areas than in urban areas in 1999–2000, and between 1983 and 1999–2000, it decreased in both zones. In addition to rising incomes and urbanization, other forces shaping consumption patterns include changes in relative prices of cereals and noncereal foods, and in tastes and preferences. During the 1970s and 1980s, the price of cereals relative to the general price index showed a declining trend, but in the 1990s increased at the rate of almost 1 percent per annum. Meanwhile, the price of noncereal food items declined in the 1990s relative to general prices. Dietary diversification with better nutrients may help to explain the reduction in malnutrition in India for children between the ages of one and five. The incidence of moderate malnutrition fell from 45.1 percent to 41.3 percent between 1991–1992 and 2000–2001. Severe malnutrition fell from 11.1 percent to 6.4 percent over the same period.

Changing Exports and the Production Basket of High Value Agriculture

Indian exports during the 1990s grew at an annual rate of 10.1 percent, compared to 7.4 percent during the 1980s. The exports of agricultural commodities during the 1990s, however, grew at an annual rate of 8.1 percent, compared to an annual rate of 3.3 percent during the 1980s. The share of agriculture in total exports declined from 24 percent during the 1980s to 18 percent in the 1990s.

The export basket has also diversified in favor of high value agriculture. Historically, there was virtually no Indian export of fruits, vegetables, livestock, or fish. Exports of fish shot up from U.S.$320 million in 1981–1982 to $1,125 million by 1999–2000, a growth of 350 percent. Exports of processed fruits, meat, and fruits and vegetables more than doubled since 1981 (reaching values of U.S.$145 million, U.S.$198 million, and U.S.$263 million, respectively, in the triennium ending 1999–2000). Exports of eggs, although erratic, increased from U.S.$0.4 million in 1981–1982 to U.S.$25.3 million in 1999–2000.

Changing consumption preferences and export outlets provide good incentives to farmers to risk changing their production baskets in favor of high value agriculture. During the 1990s, for example, the production of cereals grew at a rate of 2.3 percent annually, against that of fruits and vegetables, which had a growth rate of more than 6 percent. Unlike the "Green Revolution" of the late 1960s, the 1990s was a decade of "golden revolution," with a major breakthrough in the production of fruits, and "blue revolution," with the dramatic growth of inland fisheries. This growth has also resulted in much faster exports of fish and fruits, raising hope that India's farmers might increase their incomes by exploiting more lucrative markets in India and abroad.

Innovative institutions such as contract farming and vertical integration from "the farm to the firm to the fork" have the potential to benefit producers and consumers alike. Contract farming can reduce transactions costs and risk, and can lessen resource constraints for smallholders. A vertically integrated supply chain can respond quickly to consumers' changing tastes and preferences, and can ensure that quality and safety standards are met.

At the macroeconomic level, if India is an efficient producer of high value agricultural products, greater integration into the global marketplace will open export opportunities. But integration into the global marketplace will require that India certify the quality and safety of its high value agricultural exports. What are the implications for the smallholder? Can they be linked in such a way that a regime of grades and standards, and food safety norms, can be implemented?

Diversification to High Value Agriculture and the Smallholders

In India, 81 percent of farm holdings are of less than five acres (two hectares). Smallholders face several challenges that—unless addressed—will limit their ability to gain from the revolution in high value agriculture. High value commodities are often perishable in nature, and their markets can be fragmented, thin, and distant. Each smallholder may have only a tiny marketable surplus, for which the price is highly volatile and can fall steeply with only small increases in supply. These factors raise the transaction costs and risk to the smallholders in the production and marketing of high value agriculture. Transactions costs are the costs incurred in the exchange of goods and services between trading partners. They include the costs of information search, negotiation, monitoring, and contract enforcement. In addition, high value agriculture may require greater capital investment than the production of cereals, a constraint for smallholders. Experiences from developed countries and developing countries in Southeast Asia reveal that innovative institutions such as cooperatives, producers' associations, and contract farming have the potential to reduce transactions costs by vertically integrating production, marketing, and processing. Vertical coordination through contract farming, beyond the cooperative model for milk and sugarcane, is a relatively recent phenomenon in Indian agriculture. In this model, farmers are contracted to produce a commodity for a company. The company may have a level of control over the production process (for example, by supplying inputs or technical assistance) without owning or operating the farm, and the practice assures procurement of output at predetermined prices that may be subject to minimum quality standards.

To understand the implications of vertical integration on the smallholder, it would be worth looking at some case studies. Three such case studies, undertaken jointly by NCAP (National Center for Agricultural Research and Policy) and IFPRI (International Food Policy Research Institute), are: Nestle India Limited for milk and milk products, Venkateshwara Hatcheries Limited for broilers (young chickens), and Mother Dairy Fruits and Vegetables Limited for vegetables. The results are based on primary field surveys of contract and noncontract producers (152 and 22 producers respectively for dairy; 25 and 25 respectively for broilers; and 150 and 50 respectively for vegetables). The studies quantify the differences in tangible transactions costs and profits for contract and noncontract producers of milk, broilers, and vegetables in India.

The results indicate that as a result of contract farming, transactions costs were reduced by over 90 percent in the case of milk, 70 to 90 percent in the case of vegetables, and 60 percent in the case of broilers. For milk and vegetables, the transactions costs were less on farms that had contract arrangements due to savings in time, cost for transportation of the product to a market, and labor in marketing the product. Collection of milk and vegetables by the firm from the village itself is the main reason for the savings in time and transportation costs. For broiler production, the lower transactions costs on contract farms were mainly due to the elimination of need for extension services, and communication and transportation costs for inputs, as the company supplied chicks, medicines, and feed to farmers under contractual arrangements.

In addition to high transactions costs, price and yield risk can also be significant for many high value agriculture products. The study also examined the implications of the risk sharing between the producer and firm in the case of broiler production. Under the contractual arrangements, the firm bears the full market risk. The producer and firm share in the production risk, including the broiler mortality risk. The study found that the coefficient of variation of profit (a proxy for risk) for noncontract farmers was very high (from 50 percent to nearly 300 percent, due to seasonal differences in mortality rates) compared to that of contract farmers, which ranged from 20 to 26 percent for the entire year.

In terms of profit, the study showed striking differences in the profit between contract and noncontract farmers. The contract farmers received substantially higher profits compared to the noncontract farmers. The milk contract farmers attained 85 percent higher profits than the noncontract farmers. For vegetables and broiler production, the profit difference was 78 percent and 31 percent, respectively. Given the opportunities for producers to increase profits by tapping into innovative institutions such as contract farming, some have expressed concerns that smallholders may be left out. Firms may reduce their transactions costs by contracting with a few large farms rather than many smallholders. For example, in a case of contract farming with two multinational firms to grow tomatoes, chilies, and potatoes in Punjab and Haryana, it was found that the average size of the contracted holding was 72 acres and ranged from 53 to 90 acres. On the other hand, the studies found that small farmers were well represented (45 percent, 32 percent, and 37 percent of the total farms involved in contract farming of dairy, broiler and vegetables, respectively). To take advantage of economies of scale, dairy and vegetable firms organize farmers into groups or cooperative associations to gain efficiency in the distribution of inputs and technical advice and the collection of output. This innovation helps the firm to reduce transactions costs associated with many geographically scattered smallholders. In the case of smallholder dairy and vegetable contact farmers, the total costs of production were 25 percent and 27 percent less, respectively, than for noncontract small farmers, due mainly to lower transactions costs. For large contract farmers, costs of production were 17 and 21 percent less than noncontract large farmers.

Linking the Supply Chain from Farm to Firm to Fork

Given the rapid changes in consumption patterns in India, it is not just the production sector that is adopting a new system, but also the retail sector. Supermarkets are starting to serve the growing urban food demand in Asia. The rate of supermarket growth in China in 2003 was three times that of Brazil and Argentina in the 1990s. Between 1999 and 2001, supermarkets' share of urban retail food sales rose from 30 to 48 percent in China, which in 2003 had 3,000 supermarkets, with investments planned for five to ten times as many in the next five to seven years. In India, Food World was the largest supermarket chain in 2003, with 80 outlets in South India and plans for 20 more by the end of the following year.

From the farmer's perspective, the three major incentives to vertically integrate are to reduce transactions costs and risks, and to reduce resource constraints. In India, the institutional framework must safeguard the interests of smallholders without impeding the progress of vertical integration in high value agriculture and the rise of supermarkets, which can be mutually beneficial to small scale producers, wholesale and processing firms, retailers and consumers. India's small farmers can ride this new wave and exploit its potential benefits, provided that proper institutions protect them, while helping to develop vertical integration between the farm, the firm, and the fork.

Ashok Gulati

See alsoContract Farming ; Rural Credit, Evolution of since 1952


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Agricultural Growth and Diversification since 1991

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Agricultural Growth and Diversification since 1991