Agri reforms: Does pvt investment hold the key?

The World Bank has prescribed some bitter medicine for reviving accelerated growth in the Indian economy. While some of the prescriptions, such as containing fiscal deficit and reducing subsidies, are the same, others like addressing concerns over power production, scams impairing growth in telecom sector and the need to reforms in the agricultural sector are new.

The World Bank's India Economic Update of March 2012 says that growth in 2011-12 slowed to below 7 per cent. And the slowdown in GDP growth is likely to continue in 2012-13 due to “weakness in investment”.

The report forecasts growth to be around 7-7.5 per cent this fiscal. It attributes part of this slowdown to structural issues facing the economy — delay in commissioning of power projects due to coal and gas feedstock shortages, scams hitting the coal and telecom sectors and land acquisition issues impacting infrastructure development.

Industrial growth during the year dipped momentarily into negative territory. But despite the worsening global scenario, exports continued to grow during the year, says the report.

Inflation showed a significant decline in December 2011 and January 2012 after a sustained period of inflation in the last two years. Though food inflation fell, core inflation still remains high.

The most interesting part of the report pertains to the agriculture sector and its links to food inflation. The report says that the “production of high-protein foods, fruits, vegetables has not kept pace with demand growth in recent years.”

Crucially, the report says that “production and marketing of perishable agricultural goods is hampered by a lack of infrastructure, including roads and cold storage”.

The opening up of the retail sector to foreign investment has been in the news lately. The Government was keen on throwing open multi-brand retail to foreign investment but later had to back down due to stiff resistance from allies and opposition parties.

The report clearly says that instead of worrying about FDI rules in multi-brand retail, the Government should look at inviting private investment in the supply chain by easing rules and regulations.

Though some States have adopted more liberal regimes in this area, the World Bank states that “… these rules and regulations are arguably a bigger deterrent to private investment than the rules on FDI in multi-brand retail, which have received much attention recently.”

Government intervention focuses narrowly on procurement, storage and marketing of foodgrains, whose supply exceeds demand resulting in huge buffer stocks while there remains a major shortage in fruits, vegetables and high-protein foods such as meat, milk and eggs.

The report goes on to argue that regulations should be eased which will lead to greater private investments in the supply chain, alleviating bottlenecks, generating higher incomes to farmers and lowering prices for the consumers. Crucially, it will also reduce wastage and the role of middlemen.

There is also talk about the abysmal levels of private investment in agriculture, linking it to the restrictive regulatory regime. It quotes from a FICCI study, which says that 661 projects (completed and under construction) between 1992 and 2012-13 amounted to a total of about Rs 20,000 crore in real terms, a very small amount when looking at average yearly flows.

The Government is a major player in the storage and marketing of foodgrains which limits the role of private players in this area. “Partly because of the need to procure adequate quantities for the PDS, the private sector faces many restrictions in agricultural marketing,” says the report.

The Government took the initiative to reform the Agriculture Produce Market Regulation (APMC) Act in 2003. This Act was adopted by the States in the 1960s and 1970s to regulate the buying and selling of agricultural products.

The Government's proposed model Act “provides for, among others, establishment of private markets, direct purchase centres, farmer markets for direct sale, contract farming, electronic trading, and promotion of public-private partnerships in the management and development of agricultural markets in the country.”

Though some States have taken steps to reform the APMC Act, the level of implementation is uneven, which has hindered the entry of private players in the market.

The report says, “although most of India's States have amended their APMC Acts since 2003, only a few have followed the true spirit of the model Act”.

The report also gives a detailed list of the status of APMC reforms in various States.

Even in States that have initiated far-reaching reforms in the APMC Act — Maharashtra, Karnataka and Andhra Pradesh — the private sector hasn't lined up with investments.

The reasons for the lack of enthusiasm among private players include: restrictive implementation of rules and regulation, rules limiting profitability of private markets, stock control order for certain commodities and restrictions on exports.

The report says that the current system is remarkably resilient because it provides tremendous scope for political patronage.

The series of policy flip-flops on export of commodities, including rice, wheat, onion, sugar, and cotton has also dampened private sector enthusiasm.

There is also a bewildering array of incentives for agro-industries provided by different States which only adds to policy confusion.

Hence the World Bank makes a strong pitch for private investments in agricultural supply chain as it will lead to higher production, lesser wastage, help farmers by giving them better prices for their produce, and help consumers in the form of reduced food inflation.

>bas@thehindu.co.in