According to media reports, the lead Indian negotiator, Kamal Nath, Minister for Commerce and Industry, came home to a warm reception for refusing an agreement in Geneva. National elections must be held in India before May of 2009, and the outcome will be decided by the 70 percent of the population living in rural areas. The ruling Congress Party coalition won four years ago because the previous government was perceived as focusing mainly on urban issues. New WTO negotiations that focus on the same old issues will result in the same outcome until after the elections next year.
The world will also have to wait for more reforms within India’s agriculture. India has a growing urban middle class that can afford to eat more food and a greater variety of foods. That demand has to be met by expanding production in India or with increased imports. More domestic production can only come through regulatory reforms that free up production agriculture and increased use of modern production technology. Increased investments will come from either domestic savings or increased foreign direct investment. Indian is in the middle of a transition, but is not close to the point of making political decisions based on the new economics.
Indian agriculture’s condition is described in “The Environment for Agricultural and Agribusiness Investment in India” by Maurice Landes from the Economic Research Service of USDA. Two quotes from the Major Findings frame the issues. “Both public and private investment in Indian agriculture and agribusiness have remained weak since the early 1990s, despite accelerating growth in the overall economy and a large domestic market for agricultural products.” “Since 2000, the policy environment seems to be improving and investment in agriculture to be strengthening, as evidenced by higher market prices and input subsidies for farmers.”
India’s real GDP has been growing rapidly for 25 years averaging 5 percent per year in the late 1980s and early 1990s, then over 6 percent in the late 1990s and early 2000s and more recently averaging 8-9 percent. Over that time the portion of the population in poverty declined from near half to just over 20 percent, but per capita income still averaged only $588 in 2006. The population is young with 34 percent 14 years old or less in 2001, and 28 percent of the population is defined as urban. From 1991 to 2004 consumption of cereal crops grew by just under 2 percent per year while vegetable oil crops grew over 5 percent per year, eggs 5 percent, fruits 4 percent and vegetables, milk, fish and meat by 3 percent. Given expected GDP growth in the years ahead, those markets will continue to grow.
Gross fixed capital formation as a percent of GDP averaged 27 percent for the total economy during 2005-07, but only 7 percent for agriculture. According to the ERS analysis, investment in agriculture in India appears to be moderately lower than in China and much lower than in Brazil. Private investment has been growing more rapidly than public investment, while the government has focused mostly on input price subsidies. In the last 10 years government policies have generally moved from taxing agriculture to subsidizing it. Indian agriculture has traditionally been heavily regulated to protect small producers, and it is only in the last 10 years that the federal and state governments have begun unwinding those regulations to allow farmers to respond to market demands.
Trade policy reforms are not a new idea for India. For nonagricultural goods peak tariffs dropped from 300 percent in 1991 to 12.5 percent in 2006 and the number of basic duty rates declined from 22 to 4. In agriculture the analysis explains, “There has been a tendency in recent years to reduce tariffs when domestic shortages lead to significantly higher consumer prices for essential food commodities.” This has led to large gaps between bound tariffs and applied tariffs that have received considerable scrutiny in the WTO talks. As of January 2008 the bound tariffs on wheat was 100 percent and wheat flour 150 percent, but the applied tariff on each was 0 percent. Corn was at 70 percent and 0 percent. Oilseeds tariffs were 100 percent and 30 percent, the same as for whole poultry. Other products had no difference between bound and applied tariffs. Rice was at 70 percent on both, milk powder at 60 percent and apples at 50 percent.
India is truly a country in transition and much further along in nonagricultural goods than in agriculture. Agriculture is in a catch-up stage trying to overcome 20 years of under-funding in the 1980s and 1990s in public and private research and investment. It has also come much later to government deregulation of production that has been happening in nonagricultural areas for over 20 years. These hurdles are in addition to other problems that affect all of the Indian economy like poor transportation, a shortage of electric power, fragmented supply chains and uncertain property rights.
There is hope in trade policy reforms with India in agriculture. The natural political response and supply management response of the Indian government to trade reforms in agriculture is to say no. The key is to build on trade policy changes that India has taken that serve their own interests. Failure to make domestic policy reforms is not a valid excuse to avoid trade policy reforms, but no government in India can afford to embrace trade reforms without having made sufficient progress in agricultural productivity.