Research for Strategy Research for Strategy IMA www.ima www.ima - - india.com india.com © 2009, IMA India Indian Agriculture Indian Agriculture Challenges and Prospects Challenges and Prospects IMA India
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Indian AgricultureIndian AgricultureChallenges and ProspectsChallenges and Prospects
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DisclaimerDisclaimerThis document has been prepared by International Market Assessment India Private Limited. It provides an analysis of the key challenges facing the agricultural sector in India and IMA’s assessment of the sector’s prospects in the years ahead.
This report is not intended for decision making purposes. Whilst the information contained in the following pages is accurate to the best of our knowledge and belief, IMA India cannot assume any responsibility for the outcome of actions initiated, or decisions taken, as a result of this document. Moreover, IMA’s assessment is based on conditions as they existed at the time of writing this report, and these may no longer be applicable consequent upon changes in political, economic or trade conditions within the Republic of India or elsewhere.
The contents of this report are the intellectual property of IMA India and are copyright protected. Unauthorised copying, reproduction or distribution of the information contained in this report would amount to an infringement of law and would invite applicable penalties, as per Indian laws.
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ContentsContents
404. Summary and drawings
123. Indian Agriculture: challenges and prospects
72. The Scenario Planning approach for building strategy: an overview
41. About IMA India
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I.I. About IMA IndiaAbout IMA India
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What IMA DoesWhat IMA Does……•• Undertakes inUndertakes in--depth market studies and opportunity depth market studies and opportunity
assessmentsassessments for individual companies: leveraging a full range of business and market research capabilities
•• Provides ongoing market intelligence and risk Provides ongoing market intelligence and risk assessmentsassessments to country managers; offers research-based interpretations and top-level forecasts of the operating environment in India: economy, politics, key sectors, emerging business issues, etc
•• Provides closedProvides closed--door discussion platformsdoor discussion platforms that enable focussed and high quality intellectual exchanges between senior executives on current and strategic business issues
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Four Business StreamsFour Business Streams•• Research and Advisory ServicesResearch and Advisory Services
– Proprietary studies for individual clients across issues and sectors– Leveraging a unique methodology comprising extensive desk
analysis complemented by expert insights obtained from internal and external domain specialists
•• Peer Group ForumsPeer Group Forums– Membership-based executive briefing and research services: a
platform for obtaining country intelligence and exposure to authoritative minds; access to top-level India research
– An extensive corporate network: a forum for sharing experiences and learning from peers and pioneers
•• Conferences and Business MeetingsConferences and Business Meetings– Closed-door Roundtables for senior executives– Driven by research-based agendas and intense interaction
•• CFO ConnectCFO Connect: first-of-its-kind thought leadership journal for CFOs
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II.II. The Scenario Planning approach for The Scenario Planning approach for building strategy: an overviewbuilding strategy: an overview
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Understanding the drivers of agricultureUnderstanding the drivers of agriculture
• The key drivers that directly impactoutput can be grouped into 6 categories
– Technology (farming and crop technology)– Government policy (availability of credit, crop specific programmes, etc)– Cropping pattern (which depends on profitability, awareness, etc)– Environmental factors (water availability, soil degradation, climate change, etc)– Market forces (market openness, pricing, transparency, integration with
downstream sectors)– Global factors (supply-demand, trade norms and restrictions, etc)
• The performance of the agriculture sector depends on several drivers, which, rather than impacting the sector in isolation, interact with each other and also depend on sub-drivers, consequently strengthening or weakening specific trends
Policy factors
Market forces
Technology
Global factors
Macro-economy
Climatic factors
Performance of the agriculture sector
Source: IMA research and analysis
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But they cannot be examined in isolationBut they cannot be examined in isolation……
Cropping intensityCropping pattern Changes in land use Input usage intensity
Irrigation Contract farmingQuality of land New crop technologies
Awareness
Economic growth
Demand supply
situation
Consumption pattern
Market price Yield Cost of cultivation Crop-specific programmes
Profitability
Contract farming
Input usage (fertiliser, seed, CP
products, etc)
Technology (Hybrid, GM crops,
etc)
Market openness
Govt policy on trade
Procurement by food
processing industry
Public & private investment in R&D
Labour cost
Input cost
Availability of credit/insurance
Cost of living (CPI AL)
Alternative occupation
Migration
Cost of fertiliser, electricity, water,
etc
Govt policy on rural finance
Penetration of financial sector
Penetration of media/IT
Govt policy on crop focus
Demand supply
situation
Political outlook
Food retail
Economic growth
Urbanisation
Policy on CF
One factor alone – cropping patterns – is a function of several inter-related drivers and sub-drivers
Source: IMA research and analysis
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Indian agriculture is not Indian agriculture is not ‘‘oneone’’ conceptconcept• The dynamics for each crop are different in each state –
yields, acreage, farmer awareness and psyche, cost structures, Government infrastructure– Upstream issues vary substantially – labour availability, credit,
soil fertility and agronomy, irrigation, input and technology availability, training
– Downstream markets are even more varied across states and crops – market openness, procurement chains, processing infrastructure, food retail, etc
Hence, there is a need for a granular assessment (by Hence, there is a need for a granular assessment (by crop, by state/region, by issue) if a business or crop, by state/region, by issue) if a business or
investment decision is at stakeinvestment decision is at stake
Source: IMA research and analysis
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The scenario matrixThe scenario matrix
Liberalisation of agricultural policy/markets
Impl
emen
tatio
n of
agr
itec
hnol
ogy
Scenario I: The Tiger Uncaged
Pro-growth, market-orientation
Pro-equity, interventionist orientation
Ineffective implementation, farmers left to their own devices
Scenario IV: Crony
Capitalism
Scenario II: Nehruvian
Agronomics
Scenario III: Sleeping
Giant
Effective implementation, hand holding for farmers
Business as usual (BAU)
‘‘Scenario planningScenario planning’’ is therefore, a useful toolis therefore, a useful toolAn evaluation of all driving forces yields two dominant themes that will guide the future development of Indian agriculture
– Agricultural policy and Implementation of technologyA quadrant matrix of these two
overarching issues provides four possible scenarios
Each driver and itsimpact on the business decision
under consideration is subsequently examined for each scenario
Scenario-based forecast of each driver is woven into a complete market picture,
based on which the business decision is evaluated
Overall priorities are growth and employment, with high focus on agro-
based industries as one of the means to achieve this
A market economy with excessive regulation and
intervention (both institutional and arbitrary); political
leadership is strong and enlightened
While growth is a key priority, political dynamics and immature institutions prevent the emergence of a clear cut approach on
complex issues such as agriculture
Source: IMA research and analysis
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III.III. Indian Agriculture: challenges and Indian Agriculture: challenges and prospectsprospects
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The overriding challenge is ‘‘sustainable sustainable and profitable growthand profitable growth’’ in agriculture…
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But thatBut that’’s where the s where the generalisationgeneralisation endsends
Farm technology (fertiliser, seed, CP
products, etc)
Crop Technology (Hybrid, GM crops,
etc)
Irrigation
Crop yields
Public & private investment in R&D
Credit availability
Crop-specific programmes
Government policy
Contract farming Food retail
Farmer profitabilityCost of cultivation
Market price
Environmental factors
Water availability
Land degradation
Climate change
There is a complex web of inter-related causal relationships* which impact growth – and must be evaluated
* The schematic diagram shown here is largely illustrative. Sub-drivers of each high level driver can be further delineated to demonstrate the complexity and inter-relatedness.
Sustainable growth
For the sake of convenience, the issue of crop yieldscrop yields has been taken as a starting point for this analysis…
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1.1. Crops Yields: Patchy improvement over Crops Yields: Patchy improvement over the yearsthe years……
Source: Agriculture Ministry Statistics; Economic Survey 2007-08; IMA analysis
Rice (kg/ha)
500
1,250
2,000
2,750
1994 1998 2002 2006
North SouthEast West
Wheat (kg/ha)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1994
1996
1998
2000
2002
2004
2006
Cotton (q/ha)
0
100
200
300
400
500
600
700
1994
1996
1998
2000
2002
2004
2006
• Mainstream food crops have seen a plateau-ing of yields after the effects of the Green Revolution subsided in the late 80s
• However, there are important exceptions – such as cotton, which has benefited from the introduction of Bt Cotton
• Across the board, there are significant regional variations in yields
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……and still below world standardsand still below world standards
Source: UN Statistics Division
Comparison of yields in selected commodities (Metric Comparison of yields in selected commodities (Metric tonnestonnes/ hectare)/ hectare)
1.0Nigeria1.6Australia2.4Myanmar0.8India4.6India1.1India2.0Iran2.6Thailand1.8World7.3World2.1Philippines2.3Pakistan2.9India2.0China7.6Pakistan3.3World2.7India3.9World2.4Brazil7.9Uzbekistan4.9China2.8World6.4Japan2.5Argentina9.5USA6.6Germany4.2China6.7Korea2.6USA10.9Brazil7.5France7.5France7.8USA4.0Germany11.1China9.1USA7.7UK9.8Egypt
Major OilseedsMajor OilseedsCottonCottonMaizeMaizeWheatWheatRice/paddyRice/paddy
• Despite 30 years of intense Government efforts, India’s yields for most major crops are still below global averages, and far below the highest standards
• Equally, this indicates the potential untapped opportunity –for GM crops, better farming practices, improved input usage, re-balancing of labour utilisation, etc
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There is plenty of scope for improvementThere is plenty of scope for improvementWheat (kg/ha)
01,0002,0003,0004,0005,000
Utta
rP
rade
sh
Bih
ar
Punj
ab
Hary
ana
Raja
stha
n
Guj
arat
Mad
hya
Pra
desh
Mah
aras
htra
Utta
ranc
hal
Karn
atak
a
Improved PracticeActual 2003-04
Rice (hg/ha)
02,0004,0006,0008,000
Chh
attis
garh
Bih
ar
Guj
arat
J&K UP
Utt
aran
chal
Improved PracticeActual 2003-04
• Even with current technology, yields can raised significantly: by optimising farm practices – input usage, sowing techniques, timing, etc
• In other studies (e.g. paddy cultivation in UP), it was found that the best farmer’s overall profitability is 77% higher than the average farmer’s profitability – purely because of better farming techniques
Source: Planning Commission; Steering Committee on Agriculture; TN Agricultural University; Centad, Ramesh Chand, Joshi; IMA analysis
Maize (kg/ha)
0
1,000
2,000
3,000
4,000
5,000
Bih
ar
Kar
nata
ka
Mad
hya
Prad
esh
Raj
stha
n
Utta
rPr
ades
h
Improved PracticeActual 2003-04
Sugarcane (kg/ha)
040,00080,000
120,000160,000
UP
Mah
'tra
TN
Kar
'taka
Improved Practice
Actual 2003-04
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But much else can and needs to be doneBut much else can and needs to be done
Greater fertiliser usageGreater fertiliser usage and and area under high yielding area under high yielding varietiesvarieties can greatly boost yields; can greatly boost yields; greater irrigation greater irrigation as well as as well as
pesticide usagepesticide usage can help toocan help too
Fertiliser (kg/ha) R2 =
0.93
HYV area (ha) R2 = 0.92 Irrigated
area (ha) R2 = 0.34
Pesticides R2 = 0.42
Source: Agricultural Situation in India, Directorate of Economics and Statistics
Regression-based analysis of field data indicates that, when measured on an individual basis, up to 93% yield variations can be ‘explained’ (accounted for) by fertiliser usage; 92% can be accounted for by the area under high yielding varieties seeds; 42% can be accounted for by usage of pesticides and 34% by greater irrigation
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2. 2. Better seeds can raise yields by 40%Better seeds can raise yields by 40%
Source: Agricultural Situation in India, Directorate of Economics and Statistics.
• An effective means to raise yields is through better seeds – seedshave an ~40% impact on yield variations
• Development of dramatically better seeds has been almost non-existent in the last decade – hence, greater focus on increasing adoption rates of existing seed technologies
• However, the key constraint is production/availability of certified seeds: as compared to an ideal of 1:40, average multiplication ratios (for certified good quality seeds) are 1:17 to 1:23
• Meanwhile, GM seeds have fared well: bt cotton has seen rapid adoption across states since its introduction in 2002; the launch of Bollgard II in 2006 has given a new push despite higher seed prices
• Most states are approaching 80-90% rates of adoption – this should reach 100% in the next 2-3 years
• The next in line is Bt Brinjal…Key risks include price controls (e.g. Andhra Pradesh); regulatoKey risks include price controls (e.g. Andhra Pradesh); regulatory ry
issues around GM technology in food crops; and activismissues around GM technology in food crops; and activism
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3.3. Balanced fertiliser usage is equally criticalBalanced fertiliser usage is equally critical• Unbalanced fertiliser usage is one of the
biggest reasons for stagnant yield and depleting soil fertility
• Fertiliser usage continues to be skewed due to irrational subsidy structure that favours Nitrogenous fertilisers over others
• Poor fund management by the Government often leads to acute shortage as fertiliser companies complain of delayed payments
• The rising subsidy bill on this account has reached worrisome levels – by issuing off-budget fertiliser bonds, the Government is only postponing the inevitable
Fertiliser consumption in India ('000 tonnes)
0
10000
20000
30000
1952
1958
1964
1970
1976
1982
1988
1994
2000
2006
0
4000
8000
12000
16000Total consump. (left axis)
N
P
K
Source: Agricultural Situation in India, Directorate of Economics and Statistics; Planning Commission Sub-group on Fertilisers
Lack of political will has been the single most important Lack of political will has been the single most important constraint so far constraint so far –– with a strong Government now in with a strong Government now in
office, there is reason to hope for gradual improvementoffice, there is reason to hope for gradual improvement
The average NPK ratio in the past two decades has been 7:3:1,
against the recommended 4:2:1
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4. 4. Irrigation can raise incomesIrrigation can raise incomesCrop-wise irrigation availability (% of gross
cropped area)
38.4 54
.3
15.9
8.8 17
.3
72.4
7.4
56.0
89.5
21.1
15.0
36.1
92.5
28.0
0
20
40
60
80
100
Rice Wheat Maize Pulses Cotton S'cane O'seeds
1970-712005-06
Source: Agricultural Situation in India; Directorate of Economics and Statistics, Ministry of Agriculture; IMA analysis
10,18864,685Tank (sprinkler)
8,01073,225Tank (flow)
6,00079,776Lift
8,2009,666Tube Well4,74125,842Flow
Un-irrigated farm
Irrigated farm
Type of irrigation
Returns (Rs/ha) from F&V cultivation
Rice, wheat and sugarcane have received focus for irrigation Rice, wheat and sugarcane have received focus for irrigation provision provision –– largely the outcome of the governmentlargely the outcome of the government’’s s
paranoia about achieving paranoia about achieving ‘‘selfself--sufficiency in foodsufficiency in food’’; other ; other crops have been neglected, despite the fact that irrigation crops have been neglected, despite the fact that irrigation
can generate enormous economic returns for themcan generate enormous economic returns for them
Fruits and vegetables can benefit enormously from irrigation
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But irrigation progress has been slowBut irrigation progress has been slow
• In the latter half of the 90s, the Government’s investment efficiency (in terms of completing irrigation targets and utilising potential) dipped to below 50%; in the 2000s, efficiency improved marginally
• Overall, efficiency in minor irrigation has been higher than in major and medium irrigation; hence, minor irrigation is receiving increasing attention from policy planners
2.3
4.1
0.8 0.9 1.1
1.1 1.
4
2.1 2.
6
0.5 0.6 0.7
0.6 0.
9
00.5
11.5
22.5
33.5
44.5
1992-97
1997-2002
2002-03
2003-04
2004-05
2005-06
2006-07
Potential Created (m ha)Potential Utilised (m ha)
Source: Ministry of Agriculture; World Bank; IMA analysis
2.9
3.6
0.7
0.6 0.7
0.5 0.
9
2.3
1.2
0.5
0.5 0.6
0.4 0.
7
00.5
11.5
22.5
33.5
4
1992-97
1997-2002
2002-03
2003-04
2004-05
2005-06
2006-07
Potential Created (m ha)Potential Utilised (m ha)
Major and medium irrigation Minor irrigation
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5. 5. Credit and land holdings are critical from Credit and land holdings are critical from an economic perspectivean economic perspective
Overall profitability per acre rises with size of land Overall profitability per acre rises with size of land holdings, but access to credit can compensate for this holdings, but access to credit can compensate for this
and raise profitability by up to 50%; with access to credit, and raise profitability by up to 50%; with access to credit, farmers with smaller land holdings were found to be farmers with smaller land holdings were found to be
more profitable than those with larger farmsmore profitable than those with larger farmsSource: Indian Journal of Agricultural Economics, December 2006; data pertains to West Bengal
5,4945,2005,2005,6755,900FoodFoodNon foodNon foodFoodFoodNon foodNon food
67,6254,62557,375Avg62,0005,00065,000>365,0005,00062,0002-370,0004,50060,0001-273,5004,00042,500< 1
Profit/acre (farmers with Profit/acre (farmers with credit)credit)
Profit/acre (farmers without Profit/acre (farmers without credit)credit)
Land size Land size (acre)(acre)
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Fortunately, credit provision is improvingFortunately, credit provision is improvingThe share of institutional credit has risen
0%20%40%60%80%
100%
1951 1961 1971 1981 1991 2002
Non-institutional Institutional
• Two important developments in credit are the consistent increase in penetration of organised lending (institutional finance) and the penetration of the Kissan Credit Card
• Meanwhile, the success of micro-finance initiatives and joint industry financing programmes, will be critical to watch for
Source: Ministry of Agriculture; RBI
Institutional credit: rapid increase (Rs crore)
0
100,000
200,000
1985-86 1989-90 1993-94 1997-98 2001-02 2005-06
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Improved credit: an important achievementImproved credit: an important achievement• Trend changes witnessed
– Commercial banks are participating in a bigger way
– After initial hiccups, agri-insurance appears to be improving as well
• On the horizon– The Multi Application Smart
Card will create a billion credit cards in circulation
– Tradeable deficits for directed bank lending will deepen commercial bank participation
Credit disbursement (% share)
22
62
68
33
10
51992-93
2006-07
Coop banks Comm banks RRBs
Insurance
0
2000
4000
6000
8000
2001-02 2002-03 2003-04 2004-05 2005-06 2006-070
50
100
150
200
Sum insured (Rs crore, left axis)Claims (Rs crore, left axis) No. of farmers (100,000)Area covered (100,000 ha)Premium paid (Rs crore)
Kissan credit cards (mn)
31
44
70.5
2002-03
2004-05
2006-07
Source: ICREIR; Ministry of Agriculture; RBI; IMA analysis; RRB: Rural Regional Banks
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6. 6. But land fragmentation is difficult to But land fragmentation is difficult to reversereverse
• The percentage of farmers with marginal holdings (< 1 ha) has increased from 61.6% to 62.9%, while that of large farmers (> 5 ha) has fallen from 4.9% to 4.3% between 1995 and 2000
• The reasons for this are intrinsic to farming societies – fathers’ land moves to children, who tend to divide holdings amongst themselves
• To reverse this trend, the Government will need to implement far reaching changes in land laws to encourage consolidation or corporatisation – highly unlikely, given the political ramifications
% share of farmers by land holding size (ha): Land holdings are becoming smaller
61.6
62.89
33.5
32.824.3
4.9
1995
-96
2000
-01
Below 1 1 to 5 Above 5
% share of area by land holding size (ha): Land holdings are becoming smaller
17.34
18.88
50.62
51.8929.23
32.04
1995
-96
2000
-01
Below 1 1 to 5 Above 5
Source: National Agricultural Census; Department of Agriculture; NIC; IMA analysis
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7. 7. Profitability is still poor, for many Profitability is still poor, for many reasonsreasons……
• The state of the two main food crops in India demonstrates the farmer’s poor profitability: for rice, MSP doesn’t even cover cost in states like Haryana, Tamil Nadu, West Bengal and Madhya Pradesh; wheat is somewhat better, but still delivers only marginal profit in states like UP
• The reasons are related to sharp increases in farming costs and inadequate linkages with open markets where prices are typically higher
Rice profitability: MSP less cost (Rs/quintal)
-250-200-150-100-50
050
100150
Punj
ab
Har
yana AP
T N
adu
Oris
sa
W B
enga
l
Cha
tt'ga
rh MP
Wheat profitability: MSP less cost (Rs/quintal)
0
40
80
120
160
200
Raj
asth
an
Har
yana
Punj
ab
Utta
rPr
ades
h
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8.8. ……one of these is rising labour costsone of these is rising labour costs
• A key reason for rising costs is the increase in wage rates – a direct fall out of falling farm labour availability
• This trend will continue due to Government efforts (e.g. NREGA) and other measures to reduce employment dependence on farming
Rice cultivation cost (Rs/ha)
10,00015,00020,00025,00030,00035,000
2001 2002 2003 2004 2005
Punjab WB UP Bihar
The share of rural non-farm workers is rising (%)
22.5 25.5 25.9 28.633.5
16.713.713.815.313.5
0
10
20
30
40
1983 1987 1993 1999 2004
Male Female
Agriculture employment projected to fall between 2006-2016 ('000)
50,92560,638
-3,967
Agriculture Manufacturing Services
Wheat cultivation cost (Rs/ha)
14,000
19,000
24,000
29,000
2002 2003 2004 2005
Haryana Punjab UP MP
Source: Directorate of Economics and Statistics, Min of Agriculture; P K Joshi, et al, Agr Eco Res Review, Jul-Dec 2006; K Vatta, et al, Ind J Agr Eco, Apr-Jun 2008; Planning Commission; IMA analysis
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66,887Rice-mustard50,388Rice-wheatFaridkot, Punjab
63,352Rice-wheat52,537Rice-mustardLudhiana, Punjab
32,327Soyabean-gram25,008Soyabean-wheatWardha, Maharashtra
46,504Rice-groundnut33,378Rice-wheatNasik, Maharashtra
22,188Maize-wheat13,602Sorghum-wheat
36,399Rice-wheat29,851Soyabean-wheatAmbala, Haryana
67,496Rice-potato30,291Rice-wheatChhattisgarh
22,333Rice-toria16,749Rice-wheatKahikuchi, Assam
Net return (Rs/ha)
High profitable system
Net return (Rs/ha)
Less remunerative system
Source: Shukla & Shukla, Scope and Limitations of Crop Diversification in Indian Agriculture
If farmers shift away from the decadesIf farmers shift away from the decades--old riceold rice--wheat wheat cropping pattern, they can raise returns significantly cropping pattern, they can raise returns significantly –– this this
realisation is now driving shifts in cropping patternsrealisation is now driving shifts in cropping patterns
9.9. ……another is subanother is sub--optimal cropping systemsoptimal cropping systems
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Cropping patterns are improvingCropping patterns are improving
16.1%33.2%9.2%xx25.9%24.3%-0.1%-0.2%% change
-3.6%52.7%-3.4%-14.8%18.8%39.4-8.2%-5.4%% change
2513.0332.6597.5437.011.3774.4293.7-10-60.5East – change
381.3-4.613.9-54.5-1.267.664.3-26.0384.8West Bengal
320.2308.6116.259.3-5.3113.1-4.0-293.311.9UP
590.13.2135.7205.719.65.852.1-8.866Orissa
596.8-0.1140.1173.70128.316.7-4.0153Jharkhand
845.73.073.3281.5-0.1242.698.263.2-39.6Chhattisgarh
78.023.5119.5-117.2061.818.2269.2-261.3Bihar
-299.1-1.0-1.2-111.5-1.7155.242.7-10.3-375.3Assam
203.3
67.7
76.0
42.7
16.9
Vegetables
48.59-34.7674.6-357.2-258.2492.0-23.0-443.9South – change
Change in acreage between 2000 and 2007 (‘000 ha)
Total acreage changeSugarcaneMaizePulsesCottonFruitsWheatRice
120.31.60-9.9-3.885.60-80.5Kerala
144.6970.7203.5-157.9-47.949.3017.99Tamil Nadu
-288.9-151.1279.1-66.7-176.8-47.9-21.0-138.4Karnataka
72.546.6192.0-122.7-29.7405.0-2.0-243AP
Source: Agriculture Statistics, Ministry of Agriculture; IMA analysis
A significant shift towards high value crops (2000A significant shift towards high value crops (2000--2007)2007)
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10.10. Contract farming can raise profitabilityContract farming can raise profitability• India’s experience with contract
farming has been universally positive in raising profitability – this is being helped by the emergence of organised food retail
• However, there are issues around reneging of contracts and political opposition that need to be addressed Spinach in Delhi (profit/tonne)
1,762
1,169
Contract farmers Non contractfarmers
In Punjab, private contract farming is best for all sizes of farmers
20,000
25,000
30,000
35,000
40,000
Contract farmers ledby agribusiness farms
Contract farmers ledby PAFC
Non-contract farmers
Marginal SmallMedium LargeVery large Aggregate
Gherkins in Karnataka (profit/acre)
3,930
5,720
Non contract Contract farming
Source: Agricultural Economics Research Review, July-December 2006; Centad, India’s Agricultural challenge; IMA analysis; PAFC: Punjab Agro Finance Corporation
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11.11. Contrary to popular belief, Contrary to popular belief, ‘‘cerealcereal’’sufficiency has been achievedsufficiency has been achieved
Demand-supply gap projections (mn tonnes)
-80-70-60-50-40-30-20-10
010203040
2011
2021
2026
Rice Wheat Pulses Edible oil Sugar
The demandThe demand--supply gap is no longer foreseen in cereals supply gap is no longer foreseen in cereals but in pulses and cash crops but in pulses and cash crops –– a fact that is belatedly a fact that is belatedly
being recognised by Government policiesbeing recognised by Government policiesSource: Demand-Supply Trends and Projections of Food in India, ICRIER, 2008
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But changing consumption patterns will put But changing consumption patterns will put supply pressures on other cropssupply pressures on other crops
01020304050607080
Ric
e
Whe
at
Puls
es
Milk
Mea
t
Egg
Fish Veg
Frui
ts
1973-74 19831987-88 1993-941999 2004-05
Urban population (kg/person/year)
Rural population (kg/person/year)
0102030405060708090
Ric
e
Whe
at
Puls
es
Milk
Mea
t
Egg
Fish
Veg
Frui
ts
1973-74 19831987-88 1993-941999 2004-05
Increasing incomes will drive greater consumption of high value Increasing incomes will drive greater consumption of high value food food and cash crops and cash crops –– this is creating economic opportunities for farmers this is creating economic opportunities for farmers
and businesses that did not exist in the aftermath of the Green and businesses that did not exist in the aftermath of the Green RevolutionRevolution
A clear change in consumption pattern is visible in both urban and rural India –declining/stagnant consumption of cereals accompanied by increasing consumption of higher value foods – milk, meat, vegetables and fruits
Source: Planning Commission Steering Committee for Agriculture; IMA analysis
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12.12. BioBio--fuels is one such fuels is one such ‘‘opportunityopportunity’’• Indian bio-diesel acreage (Jatropha) could rise to 5.6 mn
hectares by 2012 and 13 mn ha by 2018– Of this, the Government expects up to 3 mn ha to come from
currently cultivated area (i.e. diversion from one crop to another)– The balance is expected to come from rejuvenation of fallow land
and diversion from non-agricultural sources
5.584.38NA
Acreage (Mn ha)
11.1913.386.692.793.3566.902011-128.7610.475.232.192.6252.332006-07NA7.963.98NA1.9939.812001-02
Acreage (Mn ha)
Bio-diesel @20% (MMT)
Bio-diesel @10% (MMT)
Acreage(Mn ha)
Bio-diesel @5% (MMT)
Diesel demand(MMT)
Year
Source: Planning Commission; Committee on Bio-Fuels
Acreage for bio-fuels: Government estimates
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13.13. The GovernmentThe Government’’s efforts towards pulses and s efforts towards pulses and nonnon--food crops are fragmentedfood crops are fragmented
• In response to changing demand-supply dynamics, the Government has increased focus on crop-specific schemes: National Food Security Mission; National Horticulture Mission; the Integrated Scheme of Oilseeds, Pulses and Maize
• However, each of these suffers from a variety of inefficiencies
• As yet, there is no credible strategy to address these i.e. we should expect ‘more of the same’as far as Government-sponsored action and implementation is concerned
NHM* allocations (Rs crores) aren't fully utilised
1405
2222.4 21761951
1195.78
1916.4
1202.9
2005-06 2006-07 2007-08 2008-09
Budgetary estimates Actual expenditure
Targets and achievement in pulse production
14,200
13,390
13,130
14,905
11,125
Actual production
-12.3
-14.7
-14.2
+0.7
-22.7
% deviation from target
16,2002006-07
15,7002005-06
15,3002004-05
14,8002003-04
14,4002002-03
Production target (‘000
tonnes)
Source: Ministry of Agriculture; Directorate of Pulses Development
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In fact, Government spending is inadequate and In fact, Government spending is inadequate and ineffective across the boardineffective across the board
Public spending on research and extension
0
1,000
2,000
3,000
4,000
5,000
1990
1992
1994
1996
1998
2000
2002
2004
00.10.20.3
0.40.50.6
Absolute spends (Rs crore), left axis
% share of total revenue expenditure, right axis
Source: RBI; Parliamentary Standing Committee on Agriculture; Steering Committee for the XI Plan; IMA analysis
012345678
1971-75
1976-80
1981-85
1986-90
1991-95
1996-2000
2001-2003
Investment as % of Ag-GDPSubsidies as % of Ag-GDP
• A Rupee spent on capital formation is 3-4 times as effective as a Rupee spent on subsidies – but politics prevents reform
• Agricultural investment as a % of GDP has been falling; instead greater expenditure is being incurred on subsidies
• Although allocations for research and extension programmeshave been increasing, there are inefficiencies that prevent funds from being fully utilised
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14.14. Meanwhile, environmental degradation is Meanwhile, environmental degradation is emerging as a major threatemerging as a major threat
• Soil degradation is approaching worrisome levels in most parts of India; 50% of total land and 66% of cultivated land degraded – the highest amongst Asia Pacific countries
• Water scarcity projected as the single biggest factor for civil and social strife in the next decade
Physical water scarcity
Approaching physical scarcity
Economic water scarcity
Little or no scarcity
Not estimated
Source: FAO; Sara J Scherr; IFPRI, Ramesh Chand, Centad
Land degradation
Water scarcity
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As are falling water tablesAs are falling water tables
8682
7863
6150
4738
3330
1816
149
5
Rajasthan Punjab
Delhi Haryana
TamilNadu Gujarat
Karnataka AndhraPradesh
Kerala Uttaranchal
UttarPradesh MadhyaPradesh
WestBengal Maharashtra Chattisgarh
Source: Ministry of Water Resources; Planning Commission, FAO; IFPRI, Centad
Increasing dependence on groundwater irrigation can be Increasing dependence on groundwater irrigation can be a potential source of failure of future projects, due to a potential source of failure of future projects, due to
high levels of groundwater depletionhigh levels of groundwater depletion
% of blocks/talukas/mandals with groundwater scarcity
010203040506070
Maj
or a
ndM
ediu
mirr
igat
ion
Min
or -
Surf
ace
wat
er
Min
or -
Gro
undw
ater
Mill
ion
Hec
tare
s
Ultimiate irrigation potentialIrrigation potential createdIrrigation potential utilised
Future sources of irrigation will depend increasingly on groundwater…
…but the level of groundwater is already in a critical condition in most states
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This will have serious long term implicationsThis will have serious long term implications
Climate change impact assessment• The impact of climate change on the environment is
visibly obvious (IPCC, Working Group II, 2007)• India’s overall crop yields could fall by 30% by 2050
according to the IPCC; other impact: coastal flooding, greater drought incidence, reduced water availability
• Other studies suggest vulnerability of 5-15% in rice yields and 25-42% in wheat yields (Parikh and Kumar, 2002); response times of mitigation measures are 5-15 years
Climate change presents a Climate change presents a ‘‘realreal’’ and exogenous force and exogenous force that will work against productivity improvement that will work against productivity improvement
measures locallymeasures locallySource: IPCC; Parikh and Kumar, 2002; others
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IV.IV. Summary and drawingsSummary and drawings
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In Summary: negative or stagnant trendsIn Summary: negative or stagnant trends• The lack of new technologies after the effects of the Green Revolution have
worn off, is becoming worrisome; very few promising seeds have been commercialised and most other innovations are still languishing due to poor extension or lack of investment
• Corrective action regarding fertiliser subsidy, inadequate seed production, market rigidities and other market-distorting policies is desperately needed – but as yet, political commitment is not visible
• Achievement of irrigation potential unlikely to surpass 50% of targeted acreage, given the large backlog of previous projects to be completed and the fact that no tangible change has been made in the strategy – hence, monsoon dependence and erratic growth will continue to plague the sector
• In general, the effectiveness of Government measures/schemes will remain erratic across the country – private participation can help but this will happen very slowly, at best (fundamental enabling measures such as land reforms, corporatisation, taxation of agriculture do not look likely at this time)
• Fundamental degradation in environmental parameters and lack of Good Agricultural Practices (GAP) are not likely to be addressed in the foreseeable future – this will create a serious long term threat
Source: IMA research
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In Summary: positive trendsIn Summary: positive trends• Declining per capita cereal intake and rising F&V and other cash crop
consumption will continue on the back of rising incomes and awareness – this will be helped by food retailing, bio-energy demand and create new opportunities for farmers and businesses
• A consistent movement of labour away from agricultural occupations will lead to rising wages; this should prompt greater mechanisationand productivity-enhancing measures
• The provision of greater finance to agriculture will continue toincrease – through bank lending, the Kissan credit card scheme, and the possible introduction of trade-able deficits (for directed bank lending) as well as private-sector micro-finance programmes – this will raise farmer incomes and hence, rural demand
• There is a shift in Government priority from an overwhelming emphasis on food-grains and cereals to a more broad-based focus on profitable and sustainable farming – this will have cascading benefits for the entire agriculture-to-food value chain in the long term
• Individual states are taking the lead on issues like private participation, land reforms and other measures – this can create opportunities in the absence of a concerted push from the Centre
Source: IMA research
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Implications for business: general thoughtsImplications for business: general thoughts• Indian agriculture presents several opportunities:
– Contract farming– New crop technologies – seeds, fertiliser, crop protection– Trading and procurement– R&D– Retail and distribution
• However, most opportunities are at nascent stages – this presents both an inherent advantage and a risk that must be explicitly realised
• A granular analysis is critical before any business or investment decision is made – generalisations are hazardous in the context of Indian agriculture
• Given the complexity of inter-relationships, it is important to be in sync with the broader economic, political and market context, before initiating a new business/activity
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