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india: outlook | |
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Macroeconomy Macroeconomy Macroeconomic stability is expected to continue, although government budget deficits are cause for concern. Current budget deficits, at 6.5 percent of gross domestic product (GDP), are considered high. Experts believe budget deficits must be brought down to less than 4 percent for the country to achieve higher economic growth. Growth in real GDP is expected to be strong, perhaps averaging 6 percent in the next decade. Higher GDP growth was expected with implementation of the reforms, but uncertainties tied to the fragility of coalition governments in the last few years have slackened the progress of reform and dampened the prospects of attaining higher GDP growth. With the reform-minded government currently in power, it is expected that GDP growth will accelerate. Inflationary pressure on the economy has been relaxed by increased domestic production and liberalized imports. Inflation, currently under 5 percent, is expected to remain in single digits. The balance of payments has vastly improved after the 1991 reforms as foreign exchange reserves increased from $1 billion in 1991 to more than $30 billion in 1999. Despite concerns over the economic sanctions imposed after the nuclear tests, larger foreign direct investments and increased foreign exchange reserves are expected in the future. The exchange rate for the rupee has been free floated under the reform package and the rupee was made convertible on the current account. The financial reforms and steps taken by the Reserve Bank of India seem to have protected the rupee from an exchange rate crisis similar to those of Southeast Asia. It is expected that the real exchange rate depreciation in the future will remain within 1-2 percent annually and that the rupee will remain stable. Further trade growth is on the horizon, because of substantive tariff rate reduction, the removal of quotas, and improved administrative transparency. India is expected to fulfill its WTO commitments within the specified time period. Favorable macroeconomic and external sector performance and a strong rupee also improve trade prospects. Agricultural exports, which fell in 1998 primarily because of low import demand caused by the Asian financial crisis, are expected to rebound with the end of the crisis. Agriculture and
food policy Price policy for food grains is expected to continue to support moderate improvement in producer incentives with internal prices gradually moving toward, but remaining well below, border prices. More aggressive steps to raise producer incentives may have unsustainable impacts on consumer prices, the food subsidy budget, or both. The government has sought to control the cost of the food grain subsidy incurred by selling government-procured wheat and rice at less than the cost of procurement, distribution, and storage. The government also continues to try to improve the targeting of subsidized distribution to both urban and rural poor, but with limited success. Stocks that are well above the food security target exacerbate current food subsidy costs. Barring a major domestic supply shock, the scope for boosting public distribution is constrained by ample private supplies and potential undermining of producer prices. Although efforts to gradually reduce unit subsidies and improve targeting are likely to continue, major changes in procurement, distribution, and stock policy are not anticipated. Procurement and distribution of rice and wheat are expected to continue to rise consistent with past trends and, barring a supply shock, stocks are expected to decline gradually toward target levels. Recent surpluses and market opportunities have led to relaxation of government controls on exports of wheat and rice, leading to a surge in rice exports but limited success in exporting wheat. Trade policy is expected to continue to permit controlled levels of wheat and rice exports from private and government stocks, unless there is a major supply shock. Exports, particularly of wheat, are constrained by competition and poor quality. A significant farm policy change has been the shift of vegetable oil imports to open general license (OGL). In addition to reducing consumer oil prices and boosting imports, this shift is likely to pull down relatively high internal oilseed prices and slow or reverse the shift of crop area away from food grains and other crops and toward oilseeds. Although rising vegetable oil imports may spark some concern, the vastly improved foreign exchange position is expected to allow imports to remain on OGL during the projection period. Perhaps the most significant policy shift has been the removal
of quotas from agricultural and consumer products. Import quotas
have been lifted from a substantial number of agricultural products,
and it is expected that by 2001 all import quotas will be fully
removed. Open agricultural trade policy will provide market access
to imported products and will reduce domestic prices. Food demand
Predominantly vegetarian dietary preferences distinguish India's present and future food demand picture from most other countries. Dairy products and eggs are important and growing components of many diets. Poultry meat and mutton find acceptance among a significant and growing segment of the population, while demand for pork and beef find a much more limited consumer acceptance. Although animal product demand is rising, it is likely to remain a small share of the diet relative to other developing countries, even as purchasing power grows. Consumption of dairy products and poultry is likely to account for most of the growth. The limited potential for animal product demand is expected to lead to higher levels of demand for food grains, fruits, and vegetables than in other countries at a similar stage of development. Despite significant progress in boosting availability and stability and despite a large public distribution system, food access associated with persistent poverty remains a major food security concern. Roughly 20 percent of the population, or 180 million people, lack access to a nutritionally adequate diet because of insufficient income. Gains in availability and stability have likely helped improve the status of and shrink this segment of the population, but more significant improvements may depend on finding better ways to target subsidized food distribution and on longer-term progress in increasing rural wages and income. Historically, declines in the incidence of poverty have been strongly associated with gains in farm output and stability in food grain prices, and this may be a pattern that continues to hold in the future. Agricultural resources
and technology Irrigation, stemming from large public outlays for surface systems and strong growth in private investment in groundwater irrigation, has probably been the key factor in yield growth, particularly for wheat, rice, cotton, and other crops for which high-yielding varieties are available. India now has about 79 million hectares of irrigated land, the most in the world, with irrigation potential estimated at about 110 million hectares. Private investment in groundwater development now accounts for most of the irrigated area and is expected to continue to account for most of the future growth as long as adequate producer incentives are maintained. Public investment in irrigation is under pressure because of large fiscal deficits and reduced donor support and is expected to decline in real terms. Public investments in research and extension have also been important components of gains in agricultural productivity. Outlays on research are reportedly declining, threatened by pressures on the fiscal deficit, although it is not clear to what extent private research and development can or will substitute for any decline in public research efforts. Crop yields are expected to continue to rise, but at a slower pace than in the past, based on adoption of existing varieties and improved cultural practices and incremental gains associated with ongoing research. The projections implicitly assume that the combination of public and private investment will be adequate to support the somewhat slower yield growth projected for most crops. Commodities
Wheat. Production is projected to grow, driven mostly by steadily improving yields and by a cropland shift into wheat as irrigation expands and procurement prices provide inducements. Area growth is driven by expected declining returns for oilseeds, principally rapeseed, as well as sustained wheat producer price incentives and further growth in irrigated area. Wheat yield is projected to increase due to availability and adoption of high-yielding varieties, improved cultural practices in northern and central India, expansion of irrigation, and favorable weather conditions. Rising incomes, urbanization, stable prices, and steady availability of low-priced wheat through the public distribution system (PDS) support strong growth in wheat use relative to other food grains. Wheat consumption is growing at a fast rate due to population growth as well as substitution for coarse grains food use. Nevertheless, India is now becoming self-sufficient in wheat as production usually meets demand. Government procurement continues to build large stocks, most of which is released to the consumers through the PDS. When the government stock level is low, due to either slow procurement or large off-takes, it is replenished through imports. Government imports, often around 2 million tons, have gradually declined with increases in the stock level. India exports some wheat when the government stock level becomes high. However, low quality and competitive prices in the world market may preclude India from becoming a major exporter. Rice. High rice procurement prices induce growth in rice yields and area across northern and eastern India, resulting in output expansion. Projected area growth is consistent with anticipated gains in irrigated area and cropping intensity, and yield growth is consistent with long-term trends associated with the gradual spread of improved varieties, improved practices, and input use. Per capita rice consumption, which has stabilized in recent years despite stronger growth in incomes, is not projected to rise. Government procurement builds large stocks, part of which is exported. India exports basmati rice, for which world demand remains strong. It is expected that India will try to consolidate its exporter position in the world rice market with large exports.
India competes with Pakistan in the basmati rice trade but as higher world prices are reflected in internal prices, exports of traditional basmati varieties will go up. In recent years, India has entered the world rice market with relatively low quality traditional varieties by exporting between 2 and 4 million tons of rice primarily to the neighboring countries. Coarse grains. Coarse grain production will grow slowly, not so much by expansion of area but by growth in yield. With the bulk of coarse grain supplies used for food, sluggish growth in production stems largely from steadily declining food demand as consumers switch to superior grains, particularly wheat. While feed use appears to be expanding rapidly, primarily to meet demand of the expanding commercial poultry and dairy enterprises, its share remains small relative to total supply. As feed demand expands, it may strengthen domestic prices and producer incentives and stimulate growth in production.
Among the coarse grains, corn production is expected to grow fastest due to more scope for yield gains and anticipated demand for feed use by the growing poultry and starch industries. With the feed use demand increasing and domestic prices rising, the Government has recently liberalized import restrictions on corn, thus opening doors for corn imports. Oilseeds. India is a big producer of oilseeds. Oilseed production has doubled in the past decade. Several varieties of oilseeds are produced in the country, the most important ones being peanut, rapeseed, cottonseed, soybean, and sunflower seed. Soybean and sunflower seeds, introduced some years ago, have been adopted so well that their production has sharply increased. India now produces about 6 million tons of soybean and 1.5 million tons of sunflower seed and ranks as the fourth and fifth largest producer of soybean and sunflower seed respectively in the world.
Growth in the production of oilseeds is projected to be slow as large imports of lower priced vegetable oil sharply reduce price incentives. Both area and yield of all oilseeds are projected to grow at a slow rate, except for soybean and sunflower seeds that are expected to have faster growth under the new policy environment. Soybean and sunflower seed profitability is buoyed by strong domestic demand for oils and export demand for meals. As demand for edible oils continues to rise, soybean and sunflower output are expected to increase.
India had followed a strong oilseed production policy with a view to attaining self-sufficiency; and, except for occasional imports of soybeans, it had not imported oilseeds in the past, despite shortages of oils and the existence of over capacity in the crushing industry. To process soybeans and sunflower seeds, specialized plants have been built by the private sector with support from the government. Domestic crushing plants supply 650,000 tons of soybean oil and 500,000 tons of sunflower oil, but even with the increased production of soybeans and sunflower seeds, plants remain underutilized. Recent policies have allowed soybean imports by the private sector subject to the condition that soymeal be exported. Soybeans are now permitted for imports but only if split. In 1999, the Government allowed imports of all oilseeds without license, while maintaining a high tariff rate at 45.6 percent. But the higher tariff on oilseeds vis-à-vis edible oils (21.6 percent) makes their imports not commercially viable. Also, stringent sanitary and phytosanitary restrictions make imports infeasible. Exports of all oilseeds have been liberalized. But high domestic prices preclude any large export of oilseeds other than peanuts and sesame seeds, for which India has a comparative advantage. Edible oils. Demand for edible oil is projected to grow, spurred by increases in the population, higher incomes, more liberal import policies, and low domestic prices. The dietary preference of the population for meals cooked with oils has created a great demand for edible oils. The level of oil consumption is positively correlated with income levels. Average per capita consumption of vegetable oils is about 9 kilograms (kg), with the urban average higher than the rural by about 3 kg. Wealthy consumers use as much as 15 kg, while poor consumers use less than 1 kg. With increases in income and population, India's edible oil consumption is projected to rise.
India produces 6 million tons of vegetable oils annually from the 26 million tons of oilseeds grown domestically. Nearly all of the domestically produced oilseeds are crushed domestically including coconut and palm, yet the supply is not enough to satisfy demand. To meet demand, India currently imports over 3.5 million tons of oils. Edible oil is India's second largest import item. Palm oil constitutes about 85 percent of the edible oil imports due to its low price in international markets, although rapeseed and peanut oils are most widely preferred by India's consumers.
A significant development in India's edible oil market is the increasing price sensitiveness of consumers for imported edible oils. Indian consumers are price sensitive, so much so that they are replacing their traditional preferred domestic oils with cheaper imported oils. Traditional tastes and preferences among the consumers are slowly changing in favor of cheaper imported palm oils. India long followed a policy of state trading under which only the parastatals were permitted to import oils and oilseeds. The policy was liberalized in 1994 by moving palm oil to the open general license list and letting the private sector import it with a 65-percent import tariff. The policy was further liberalized in 1995 by allowing imports of all types of vegetable oils, except coconut oil, palm kernel oil, bleached palm olein, and palm stearin. In 1999, imports were further liberalized for all oils, including palm oil, with an applied tariff rate of 21.16 percent, considerably lower than the bound rate. Import demand, driven by sustained growth in per capita incomes and by the decline in domestic vegetable oil prices resulting from the new import regime, is projected to remain strong. Since U.S. soybean oil is appreciated for its quality, the prospects
for increased U.S. oil exports to India are high even though the
bulk of the oil is expected to be imported from Malaysia and Indonesia. Oilseed meals. India is a large and growing exporter of oilseed meals. With nearly all oilseeds crushed for oil, production of oilseed meals slows down along with oilseed production. Domestic demand from the feed sector is rising, but remains small relative to the total supply, resulting in excess supply of oilseed meals.
India is a major exporter of soybean, rapeseed, and peanut meals
to Asian and Middle Eastern countries and is projected to retain
this position. The Asian financial crisis reduced demand for oilmeals
in Southeast Asia and China; but, with the crisis over, it is expected
that demand will rebound in the long term and that India's oilseed
meal exports will increase. Cotton. Cotton output growth remains strong, primarily
as a result of the use of improved varieties and cultivation practices
that increase yield. The disease problem that caused a decline in
the production in the mid-1990's seems to have been solved. Domestic
mills are expected to consume most of the domestically produced
cotton to meet both internal and foreign demand for textiles and
yarns. Raw cotton imports will gradually decline and some exports
are expected. Pulses. Pulses are an integral part of the Indian diet as they represent an important source of protein at prices cheaper than any other source. For a sizable segment of the Indian population who are vegetarian, pulses provide most of the dietary protein. Non vegetarians supplement their protein needs with pulses. According to the standards set by the Indian Council of Medical Research, the per capita requirement of pulses is 17.2 kg per year. Per capita consumption levels reported from surveys, however, are now 11.5 kg per year, about 30 percent below the standard. Low production and increased population caused per capita availability of pulses to decline steadily from 25.2 kg in 1961 to 11.5 kg in 1999. Prices have increased due to low supply but not enough to induce a shift in area out of high-yielding cereals to pulse production. India is the largest producer of pulses in the world with 1999 production peaking at 15.8 million tons. Several varieties of pulses are grown in India, including chickpeas, pigeon peas, green peas, various types of beans, and lentils. Pulses are produced mostly under rainfed conditions with low input use and yield variability resulting from weather. As irrigated land has expanded, more profitable high-yielding cereal crops have displaced pulse production to marginal lands. Consequently, potentials for growth of pulse area or yield are limited. Pulse imports were allowed under open general licenses (unrestricted) after 1979. Imports rose to over 800,000 metric tons in 1989, but have since declined. Pulse imports in 1995 were 580,000 metric tons, which included:
In 1995, the import duties applicable to pulses were cut in half to 5 percent and private businesses were allowed to import without restrictions. Though trade has fallen in recent years, India remains a major importer of pulses. U.S. dry green peas have a major market in India. In 1995, India
imported about 10,000 metric tons of U.S. dry green peas. Although
in recent years Canadian peas have dominated the market, thereby
reducing U.S. market share, U.S. peas are preferred for their quality
and find more favorable acceptance in urban markets. The pulse market
in the rural areas, however, is largely driven by prices, not by
quality. U.S. export potential for dry green peas as well as other
types of peas, lentils, and some dry beans to the Indian market
is good if prices remain competitive. Major competitors are Australia
(chickpeas), Canada (green peas), Turkey (chickpeas and lentils),
and Burma (dry beans). Production of tree nuts and fruits is concentrated mostly in the northern and southern parts of India. Walnuts and almonds are generally produced in the Kashmir Valley. Because of continuing unrest there, the orchards have been neglected and production of almonds has stagnated. Cashew nuts and grapes for raisins are grown in the southern States. India is a large producer of cashew nuts. India exports cashew nuts, but also imports them primarily for processing. Import levels vary according to production, which depends on weather. Despite large production, domestic supply of cashews meets only two-thirds of the consumption demand of the processing industry. In 1996, India imported 280,000 tons of cashew nuts valued at $220 million. Consumption of nuts, particularly of almonds, reaches peak levels during the festival seasons. India's current production of almonds is about 1,300 tons, which is far less than the current consumer demand. The United States is the major supplier of almonds to India, holding more than 80 percent of the market share. In 1998, India imported 14,500 tons of almonds from the United States.
India imports dried fruits, such as pistachios, prunes, dates, and raisins, and recently allowed imports of fresh figs, apricots, and filberts. India does not produce dates and is entirely dependent on imports. However, high tariffs and import bans on consumer products continue to hinder imports. Processed and semiprocessed foods. India ranks third in the world (after the U.S. and China) as a producer of raw food products. India accounts for 12 percent of the world vegetable production and 8 percent of the world fruit production, but less than 25 percent of its total vegetable and fruit production is processed. The storage capacity is limited to only about 10 percent of the annual average production of 100 million tons of fruits and vegetables in the country. Most raw food products are marketed as primary products, and much is either sold in the open market at low prices or goes bad. Demand for processed food products is rising. Growth in income and population, increasing numbers of urban consumers, the emergence of small families with both spouses working, and changing dietary patterns are raising consumer interest in ready-to-eat food products. Consumer-ready food products are mostly marketed for the middle- and upper-income group of consumers estimated to number around 250 million. The buying power of this group is consistently expanding with the growth of income and exerting considerable control over the market. India maintained severe import restrictions on consumer food products for a long time. It has begun to lift import restrictions in phases and is expected to remove quota restrictions from all consumer food products by 2001. With this policy change India has opened the door to significant potential consumer food product imports. Realizing the growth prospects of food processing, the Government now encourages processing foods with agricultural raw materials grown in the country. To promote food processing, the Government has adopted liberal policies toward foreign investments, imports of machinery, and intermediate products and encourages the export of processed or semiprocessed products. The Ministry of Food Processing has been established to facilitate food-processing ventures with domestic and foreign direct investment. The Government allows 51 percent foreign equity ownership in new food-processing units and encourages the setting up of more ventures for 100 percent export-oriented processed food. A large domestic market, low-cost production, and a large export potential have drawn attention to this sector from foreign investors, especially from the United States. Food processing is emerging as one of the fastest growing sectors in India's food system. The Ministry of Food Processing approved joint venture proposals amounting to $1.3 billion between 1991 and 1996. The Confederation of Indian Industry estimates that the value of food processing will increase from $19.5 billion in 1997 to $54 billion in 2005. Most of the growth will take place in the areas of mass-oriented, high-volume products such as milk processing, poultry, packaged wheat products, and bakery products. References World Agricultural Supply and Demand Estimates reports provide monthly updates of India's import market for wheat, soymeal, and cotton. Foreign Agricultural Service Oilseed
circulars (monthly) provide analysis and data on production,
use, and trade in India's oilseed sector. Foreign Agricultural Service Current World Production, Market and Trade Reports provide analysis and data on grains, livestock and poultry, oilseeds, sugar, tropical products, cotton, and other commodities important in India. The Foreign Agricultural Service office in New Delhi prepares annual reports on:
The latest reports and archives of earlier reports are available through the Foreign Agricultural Service. for more information, contact:
Tom Vollrath or Suresh
Persaud |
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