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Typeset in AGaramond 11/15 by Eleven Arts, Keshav Puram, Delhi 110 035 Printed in India at De-Unique, New Delhi 110 018 Published by Oxford University Press YMCA Library Building, Jai Singh Road, New Delhi 110 001 Contents Acknowledgements vii Abbreviationsand Acronyms ix Tables, Figures, and Boxes Executive Summay 1. An Overview 2. InternationalTradc in Horticulture 3. Is there a Rationale for Protection? 4. What Undermines Comparative Advantage?The Role of Domestic Constraints I 5. Is the Externak Environment Conducive to Export Expansion? 6. Priorities for Domestic Reform and International Engagement I Appendix 1 Appendix 2 , I Bibliography hatanjaya Dasgupta and Francis K.T. Ng made a significant contribution to the empiricalanalysis in this report. Outstandingadministrative assistancewas provided byJyoti Sriram.Thework was carried out under the guidance of Ijaz Nabi (Sector Manager), Sadiq Ahmed (Sector Director), and Michael Carter (India'sCountry Director). Deepak Ahluwalia, M. Ataman Aksoy, Tercan Baysan, Guang Zhe Chen, Dina Umali-Deninger, Ejaz Ghani, Stephen Howes, Steven Jaffee, Garry Pursell, Mona Sur, Simon Thomas, John Wilson, and Martien Van Niuewkoop provided helpful comments at various stages of the report. The authors thanks peer reviewersJohn Nash (World Bank), VeenaJha (UNCTAD),and Jayanta Roy (CII) for their comments on the report. The authors are grateful to R. Gopalan andVandanaAganval'(Ministryof Commerce) for their guidance on theproject. Thestudyalsobenefitedgreatlyfrom useful discussionsheldwith Rarnesh Chand (NCAP), S.C. Garg (NHB), Ashok Gulati (IFPRI),Vijay Sardana (CITA), and Anil Sharma (NCAER). ORG Marg conducted the field survey for the study. Abbreviations and Acronyms AEZ Agricultural Export Zone FDI Foreign Direct Investment M S Aggregate Measure of Support FIPB ForeignInvestmentPromotionBoard APEDA Agricultural and Processed Food FOB Free on Board Products Export Development FTA Free Trade Agreement Authority GAP Good Agricultural Practice APHIS Animal and Plant Health Inspective GATT General Agreement on Tariffs and Service Trade APMA Agriculture Produce and Marketing Go1 Government of India Act GSP Generalized System of Preferences ATF AviationTurbine Fuel HACCP HazardAnalysisand CriticalControl BIS Bureau of Indian Standards I'oint CCFS CentralCommitteeofFoodStandards H H Household CEPII Centre dlEtudes Prospectives et HS Harmonized System d'Informations Internationales IFPRI International Food Policy Research CIF Cost, Insurance, and Freight Institute CII Confederation of Indian Industry International Organization for CITA Centre for International Trade in Standardization AgricultureandAgro-basedIndustries JNPT JawaharlalNehru Port Trust DGCIS Directorate General of Commercial MFN Most Favoured Nation Intelligence and Statistics MRL Maximum Residue Levels ECA Essential Commodities Act MT MetricTonne EMS Equivalent Measure of Support NABL National Accreditation Board for EPCG Export Promotion Capital Goods Testingand Calibration Laboratories ERS Economic Research Service NAFED National Agricultural Cooperative EU European Union Marketing Federation of India FAIDA Food and Agriculture Integrated NAFTA North American Free Trade Development Action Agreement FA0 Food and Agriculture Organization NCAER National Council of Applied FDA Food and Drug Administration Economic Research X ABBREVIATIONSAND ACRONYMS NCAP National Centre for Agricultural SSA Sub Saharan Africa Economics and Policy Research SSG Special Safeguards NHB IVational Horticulture Board SSI Small Scale Industry NPC Nominal Protection Coefficient STQC StandardizationTesting and Quality NQC National Quality Campaign Certification NTB Non Tariff Barriers TAMP TariffAuthority of Major Ports NTM Non Tariff Measures TB Tariff Barriers OECD Organization for Economic TFYP Tenth Five Year Plan Co-operation and Development TRQ Tariff Rate Quota , PSE Producer Subsidy Equivalent UNCTAD United Nations Conference onTrade Quantitative Restrictions and Development QRS R&D Research & Development URAA Uruguay Round Agreement on RCA Revealed Comparative Advantage Agriculture SEZ Special Economic Zone WTO World Trade Organization SPS Sanitary and Phyto-sanitary es, Figures, and Boxes TABLES 3.1: India's Applied Tariffs for Main Crops, 1990-2002 Domestic Support by European Communities, Marketing Year 2001-2 56 Domestic Support by US, Marketing Year 2000 57 Export Subsidy Expenditures for Horticulture Products 57 Applies MFN Tariffs for Fresh Fruits and Vegetables in the Quad Countries 58 Percentage ofTariff Lines at Different Levels/Intervals in Rich Countries: Fresh 58 Percentage ofTariff Lines at Different Levels/Intervals in Rich Countries: Processed 59 Percentage of Tariff lines on Fresh Fruits and Vegetables in Selected Developing 59 Countries by Tariff Level Applied Tariffs in Major Markets of Indian Crops, 2002-3 60 SeasonalVariation: Current MFN Import Tariffs for Selected Fruits and Vegetables- EC, US, and Japan 61 EU and US Applied and SpecificTariffs on Selected Indian Fruits and Vgetable, 2004 (in per cent) 64 Number ofTariff Quotas by Member and Product Group (35 TRQs on Fruit and Vegetable Imports into the EU 66 EU's Applied Tariffs on Selected Crops by Selected Country, 2003 67 US Applied Tariffs on Selected Crops by Selected Country, 2003 67 Tariff Escalation of Agricultural Products in US and EU, 2003 68 Detailed Information on the EU's Tariff Rate Quotas 76 Mangoes: NTMs Faced by a Sample of Indian Firms in Export Markets 7 8 A .1: Assumed Potential Competitors A2.I: Commodity-wise production in the States Surveyed A2.2: Final Choice of Commodities, States, and Districts xii TABLES, FIGURES, AND BOXES FIGURES 1.1: India's Agriculture Sector 1.2: India's Cost of Production and Market Share 1.3: Barriers to Trade: Externalvs Domestic Factors 1.4: NPCs for Horticulture: All India, 1997-2002 1.5: Price Variation across Spaceand Seasonsfor Domestic and Imported Apples and Potatoes Production and Growth of Horticulture in Selected Countries, 1980-2004 Yield per Hectare in Fruits and Vegetables in Selected Countries, 1990-2004 Decomposition of Growth Rate of Horticulture Sector Distance has a Considerable Influence on US Imports and India's Exports, but Chile's Products seem to have Broken the Distance Barrier The Perception of Exporters about the Quality of their Exports Exports and Imports in Agriculture and Horticulture Destination of India's Exports, 2003 Exports and Imports in Agriculture and Horticulture 3.1: Nominal Protection Coefficients for Fruits and Vegetables: All India, 1997-2002 3.2: Regional Price Variations for Fruits and Vegetables, 2002 3.3: Imports and Domestic Arrivals in India, Apple and Green Peas, 2002 Evolution of PriceICost across the Supply Chain Explaining India's High Delivery Costs Perishability of Horticulture Products can be a Potential Barrier to Trade Barriers to Trade in Horticulture India's InternationalTransport Costs vis-a-vis International Standards Dwell Time in India vs International Norms (in hours) An International Comparison of the Performanceof India's Ports and its Maritime Infrastructure International Transport Cost Incurred at Departure and Destination Ports Wastage at Various Stages of the Value Chain (per cent of total production) Infrastructurein Local Mandis is Perceived by the Farmers to be Inadequate and of Poor Quality ConsiderableVariation in the Amount and Quality of Infrastructure Available in the Local Mandis across States Secular Decline in Investment in Indian Agriculture ATypical Supply Chain of Fruits and Vegetables in India vs More Mature Markets (for example, US) 5.la: Entry Price for Lemons and Tomatoes into the EU, 20065 5.lb: Entry Price for Apples and Grapes into the EU, 2004-5 TABLES, FIGURES, AND BOXES xiii 5.2: Impact of, and Response to, Higher Standards in Destination Markets, 2004-5 5.3: Signals that Reflect a Failure to Meet Rising Standards and Factors Stimulating a Positive Response, 2004-5 5.4: Impact of Rising Standards on Production Costs, 2004-5 5.5: Overall Impact of Rising Standards on Exports, 2004-5 5.6: Evaluation of Barriers in Four Destination Markets, 2004-5 A2.1: Composition of Farmers Surveyed Commodity-wise A2.2: States Surveyed BOXES 4.1: Role of Transportation Technology in Expanding Exports of Perishable Agricultural Products in the US 4.2: Ennore-A SuccessfulModel for Port Privatization in India 4.3: Regulatory Policies Affecting Domestic Trade in Agriculture 4.4: India's National Horticulture Mission 5.1: India's Domestic Standards on Agricultural Products Executive Summary WHY IS POLICY5 0 DEFENSIVE FOR sanitary and phyto-sanitary (SPS) standards. 'The A SECTOR THAT IS SUPPOSEDLY horticulture sector also represents a miniature CBMPETlTlVE? 'picture of agriculture' in that here too India is a large, low-cost cost producer but has a tiny share here is persuasive evidence that India has in !globaltrade and seeksto protect its own market. a comparative advantage in agriculture. Yet its share in global agriculture exports AcompleteunderstandingofIndia's competitive~~ess is miniscule and its domestic market is increasingly in high value agricultural commodities has proved protected.In globaltradenegotiations, India's efforts elusive because the sector has not been subject to have been directed less towards the elimination of an integrated analysis-from farm to retail. Most all distortions at home and abroad, than towards existing studies have examined only a single stage retaining the right to protect. To developa caseand of the supplychain, for example,productivity at the a strategyfor both domestic reforms and proactive farm,efficiencyofagriculturalmarkets, orproblems engagement in international negotiations, it is associatedwith poor infrastructure,in isolationfrom criticalto understand whyalarge,low-costproducer the restofthe supplychain.Therefore,policymakers of agricultural commodities needs such strong arenot in apositiontoassesshowproblemsidentified protection and has such a feeble presence in the at a single stage of the supply chain compare and global market. interact with (often unidentified) problems in the rest of the supply chain. We address this puzzle in the context of the horticulture sector, one of the most dynamic This study undertakes asupplychain analysisof ten segments of Indian agriculture and international horticultural products, based on primary surveys trade.The sectorrepresentsa 'picture of the future' that covered 1400farmers,200 commissionagents, and encompassesthe major challengesthat Indian and 65 exporters across fifteen different Indian agriculture faces in a world where food patterns states. It adds to the existingliteratureby layingout are changing because of increasing incomes; the cost and price structure of all agents and all delivery schedules are more demanding with the markets in the supply chain, thus providing an emergence of supermarkets in retail; and barriers integrated view of the sector. The study makes it to trade such as tariffs and subsidies are less possible to analysethe relativeimportance offactors important than the challenges posed by high that put Indian produce at a disadvantage, relative wi EXECUTIVE SUMMARY to that from other countries, and hence to identify While India'shorticulture sector as awhole appears priorities for policy reform. to be competitive,the levelofcompetitivenessvaries considerably across cornm~dities.~Among fruits, The study comes to the conclusion that the bananasappearto be the most competitive:domestic competitiveness of Indids horticultural sector priceson average are consistently less than half the dependscriticallyon efficientlogisticsand the ability price of imports when they arrivein local markets to complywith health, safety,and qualitystandards and there is very little variation over time during abroad. Efficient logistics depend on improved the period 1997-2002. However, it should be communication, transport and distribution, recognizedthatalargepart ofthisdifferencein prices suggesting that a services revolution in India is may be explained by the significant difference in desirable not just for its own sake but also for the quality between domestic and imported bananas. transformation of India's agricultural trade. At the Grapes and oranges (limellemon) have slightly same time, India must take an aggressiveposition in higher NPCs, but both appear to be becoming theWorldTradeOrganization(WTO)negotiations, more competitive over time. Apples and mangoes seekingnot just significantlylower levels of foreign appear less competitive but mostly because there protection, but also much greater transparency, wereweather-related shocks in some of the recent simplicity,and predictabilityinforeign traderegimes. years and in the case of mangoes, from the use of Its negotiating position would be strengthened by cost, insurance, and freight (CIF) price from a willingness to reform its own trade regime. Pakistanas the reference international price.Apart from potatoes, all vegetables are found to be highly competitive and even potatoes appear to BS INDiAN HORTICULTURE REALLY be competitivevis-A-vis imports from more distant COMPETITIVE! markets. Onions and tomatoes are consistently In order to assess the competitiveness of Indian competitive. It is interesting to note that onions horticulture, we estimate the nominal protection remained cheaper than imports even in the crisis coefficient(NPC) under the importablehypothesis, year 1998. which is the ratio of domestic to international prices (appropriatelymodified to take into account THEN WHY ARE DOMESTICTARIFFS transport and other costs) for the period 1997- SO HlGH? 2002 for 10major horticultural crops.This exercise confirmsthe findingofanumber ofpreviousstudies It is not obviouswhy India has such high tariffsfor that India's horticulture sector is competitive in horticulture products that are clearlycompetitive. terms of prices,with the averageNPC consistently We attach greatest credence to a combination of below onebetween 1997and 2002. Theresults of two explanations.First,tariffsforparticular products this exercisehowevershould beviewedwith caution seem to be designed to protect domestic produce because data limitations preclude effectivecontrol in all regions and all seasons. Because of large for differencesin quality and for fine distinctions inefficienciesin the domestic logistics system and in varieties between imported and home grown storage and marketing infrastructure, there are commodities. significant variations in prices across regions (for EXECUTIVE SUMMARY example,wholesale prices of applesin Chennai can WHAT IMPEDES INDIA'S EXPOWT3;? be more than two and half-times those in Delhi) India's exports face three major impediments.The and across seasons (for example, the difference in first is the 'logistical tax' imposed by high delivery potato prices in Delhi between peak and off-peak costswhich significantlyerode the production cost periods can be as much as 350 per cent). Thus, a advantage enjoyed by Indian farmers.The second tariff that does not vary across regions and seasons is the gap between the high standards required by needs to be consistentlyhigh if the objective is to governments and buyers, especially in richer protect domestic produce even in markets far from countries, and the low standards and weak production regions and peak seasons.The second conformity assessment mechanisms in India. The explanation is that the level of tariffs is not always third problem is the trade policy barriers Indian sensitive to the specific current circumstances of exporters face in foreign markets. individual products, but is set at roughly similar, sometimes historically determined levels across a The supply chain analysis indicates that from a widerangeofproducts-a formofpolicyhysteresis. purely cost perspectivethe biggest impediments to the competitivenessof India's horticulturalexports India'sresultant tariffstructure, however, does have lieoutsidethe sector ratherthan imi&it.Theaverage thevirtue ofbeing lesscomplex,and more uniform price at the farm-gate for a typical horticulture and transparent than the tariff structure for fruits product was found to be only 12-15 per cent and vegetables in, say the European Union (EU). of the price at which the product is retailed in However, the high tariffs, vestiges of a desire for the destination market, so that a 20 per cent self-sufficiency, and comprehensive protection of improvement in yields will lead only to a 2.4-3 domesticproducers, clearlypenalize consumers in percentage point reduction in the final price. On regions located far from production sources and the other hand, a 20 per cent reduction in in seasons far from the harvest season. While the international transportation cost alonewill reduce net costs of protection are well understood, what final prices by as much as 8-1 0 percentagepoi~nts. is notable here is that tariffs restrict imports even However,this is not to understate the importance in places and during timeswhen domesticproducts for Indian farmers of developingbetter varieties of are not available in markets. The problem is horticulture products that areinternationally more compounded by the fact that India has high costs competitive, and of using methods of production of transport and storage, not as much in terms of that are internationally more acceptable. the explicitprices of theseservicesas in the implicit costsimposed by the high rates ofproduct wastage and reduced shelf-life. The result is that tariffs subsidizethe ineficient transportation,distribution, Three factors explain India's high logistical tax: and storage system more than they subsidize the (a)geography,which is important but not decisive; actualproducer.Therefore,the net welfare lossfrom (b)poor transport and storageinfrastructure,aswell protection is even larger because there are few as policies that have led to the uneven utilization offsetting benefits in terms of rents and revenues of existinginfrastructure, and the slow creation of for domestic agents. new infrastructure; and (c) high marketing costs miii EXECUTIVE SUMMARY due to the fragmentation of the supply chain, discouragedand/orprevented theprivate sectorfrom attributable to policies that have inhibited both undertaking large-scale investment in agricultural integrationand competitionalongthesupplychain. storage, marketing, or processing activities-an Inadequate attention to these issuesis perhaps the example of horizontal fragmentation preventing single-most important reason why past prognoses desirableverticalintegration.Theresult is that today about dramatic growth in India's food sector have there is no large, organized, efficient pan-Indian not come true. supply chain in the agricultural sector, including in horticulture. India's logistics systemis significantlyless efficient than that in other countries. Based on a number Some of the policies that have weakened private ofcomparisons,acrossdestinations,markets,modes investment incentives and contributed to India's of transport and comrnodities traded, we find that fragmented, small-scale, and inefficientmarketing on average, India's international transportation system are now being changed. The central costsare 15-30 per cent higher than those in other government and several state governments have countries.For example,it costs $790 to transport 1 lifted measures that restricted private storage and metrictonne ofgrapesfromIndiato Netherlands- interstate movement of grain and other essential nearly three times the cost of transporting grapes foods. Licenses are no longer needed to establish from Chile to Netherlands, although Chile is twice food-processingfirms, and replations restricting as far from the Netherlands as India. their sizehavebeen mostlyeliminated. In addition, foreign direct investment in food processing Production in horticulture is scale neutral but and marketing-with the exception of retail storing, transport, marketing, and distribution marketing-is now automatically approved for (wholesaleand retail) are subject to economies of investments involving up to 51 per cent foreign scale. A number of government policies have equity.Arelaxationoftheban on foreigninvestment prevented the realization of these economies. To in retailing is also being considered. increase its control over storage, marketing, and Teeknicalt Barriers ta Trade distribution of agricultural commodities during periods of food shortageswithin the country, the Differencesbetween domesticand foreignstandards Government enacted the Essential Commodities are an important barrier to trade in horticulture Act (ECA) (1955), Agricultural Produce and but the evidenceof their impact on India's exports MarketingAct (APMA)(1972),and the Prevention is mixed. India's fresh exports that are directed of Black Marketing and Maintenance of Supplies towards regional markets with relatively low ofEssentialCommoditiesAct (1980).Thesepolicies standards face few SPS measures-described as a have prevented the free mobility of agricultural pattern of 'defensive commercialization' in a recent ~roduceand thus segmented the Indian domestic World Bank study on the impact of standards on market into manysmallermarkets.Thegovernment horticultural trade. There is clear evidence that has also imposedrestrictions on foreign investment stringent industrial country standards have been a in the retail of agricultural commodities, and on prohibitive barrier for some products such as both foreign and domestic private investment in mangoes. In the case of other products such as wholesale. These restrictions have collectively grapes, exporters have incurred temporary losses EXECUTIVESUMMARY xix due to the rejection of consignments that do not standards accentuate underlying supply chain meetstandards. In general,producerswho havehad strengths and weaknesses, and thus impact to makeadjustmentsin responseto higherstandards differentlyon thecompetitiveposition ofindividual have typically incurred significant consignment- countries and different market participants. Some specific or recurrent transactions costs. Between countriesand industriesare even usinghigh quality 1995 and 2000, it is estimated that nearly 270 and safety standards to successfully position SPSmeasureswere introduced on imports of fruits themselves in global markets. The challenge for and vegetablesin WTO member countries. Quite India is to take a proactive rather than a defensive apart from the high level of standards, the lack of approach, so that it can exploit its strengths and harmonized technical standards and treatments is overcomeweaknessesto benefit from the emerging itselfa hindrance to trade.While somestandardsin commercial and regulatory context.Someevidence industrial countries serve protectionist goals, it is for this more optimistic view is to be found in our not easyto distinguish between suchstandardsand surveyofexporters: 15per centofexportersreported those that servelegitimate health and safety that rising standards had a beneficial impact on Moreover,some of the most demanding standards their exports, which was only slightly lower than today are imposed not by foreigngovernmentsbut the 18 per cent that reported an adverse impact. by foreign buyers, reflecting increased consumer sensitivityto quality in all its dimensions. Trade Polley Barriers Inadequacies in domestic standard setting can Indian exporters face border protection regimes legitimize foreign barriers. Concerns have been in foreign markets that are opaque, complex, and expressed about weaknesses in the Indian system deceptivelyprotectionist.Amongthemostpernicious of enforcemen: ofpesticide-related regulationsand forms of trade protection in horticulture are the standards of hygiene, which undermine the systems of: (i) entfiy prices which discriminate credibilityofdomesticcertificationprocesses.India against efficient delivery, (ii) tariff quotas that today has a plethora of regulatory authorities subjectsimports abovespecifiedlowlevelsto harsh tackling theseissues,often in a piecemealmanner. tariffs, and (iii) special safeguards (SSGs) that are Theyincludevariouscentralministries(Commerce, asource of considerable uncertainty for successful Food and ConsumerAffairs,and Food processing), exporters.Furthermore, preferentialaccessschemes export promotion institutions, standard-setting and tariff escalation discriminate against, bodies (asmany as24),a host of regulatingbodiesat respectively,imports from certain sourcesand more the statelevel, aswell as institutions like the Bureau advancedstagesofprocessing.Subsidiesin the form of Indian Standards (BIS).A major revamp of the of direct payments to producers in developed foodlawaimedat consolidatingresponsibilitiesand countries, which have occupied centre stage in jurisdiction, as well as establishing closer links to agricultural negotiationsare,however, lessimportant international standards,isnow underway,although in horticulture. Given the other serious problems there is no clear time frame for its completion. facedby Indian exporters,it is difficult to establish how far external trade regimes aretoday a binding Finally, standards need to be seen not only as an constraint on India's export expansion, although impediment but also as an opportunity. Rising there can be little doubt that these regimes would be a serious impediment if India were to emerge by creating a favourable environment for private as a major exporter. investment and undertaking the necessary public investment. The three factors, logistical costs, quality, and tariffs,interactwith eachother and have acombined Lookingahead, India needs simultaneously to take effect that is greater than the sum of the parts. steps to lower the logistical tax its farmers face at Logistical costs and foreign tariffs penalize home, strengthen its regulatory framework and exporters multiplicatively, because the latter are take an aggressive position in international trade imposed on a price that includes the former. Poor negotiations. The inefficiencies identified in the logistics (not just as a direct component of costs services sectors supporting horticulture reflect but also through waste and delay) weaken the problems affecting trade not only in agriculture incentivesforproducersto improve quality.Limited but in all other sectors.Thus deeper reform of the standardization makes physical inspection a entire range of services supporting agriculture, precondition for transactions, creatingthe need for including air, maritime, and road transportation, cross-hauling from producer to regional hubs to as well as storage and marketing is vital to India's consumers, thus adding further to transport costs. emergence as a significant trader. Enhancing Domestic protection can increase the costs, of the efficiency of supporting service sectors will transport forexporters,becauselowlevelsofimports strengthen the political casefor,and economicgains imply that exporters must bear the costs not only from, both the liberalization of Indian agriculture of the outward journey, but also the unutilized trade and improved access to foreign rnarket~.~At capacity on the inward journey. the same time, India needs to continue its active role in the WTO negotiations, seeking not just significantlylowerlevels of protection in destination SUMMING UP markets, but also much greater transparency, simplicity and predictability of foreign trade Inefficienciesin supportingservicesarean important regimes.While it should continueto subjectforeign reason for the high protection that is granted to standards to scrutiny, and where necessary, legal an otherwise competitive sector.The tax imposed challenge, there is also an urgent need to improve by inefficient supporting services on the Indian domestic standards and to develop mechanisms horticultural producer maywell offsetanyassistance to credibly signal higher quality. offered by domesticprotection. At the same time, inefficient logistics are also today probably as big an impediment to exports as foreign protection and restrictive standards, and couldwell be a bigger impediment than inefficient domestic farming. 1. Theestimatesofcompetitivenessatthe commodity A large part of the inefficiency in services such level are found to depend critically on the choice as transport, storage and distribution is due to of reference international price. One issue is that restrictions on domestic and foreign competition. for many horticultural products, imports are small There are also fundamental weaknesses in the and comefrom only dose neighbowing countries. infrastructurein thesesectorsthat can be remedied For example, India imports small amounts of potatoes, mostly from its immediate neighbours upward (that is, actualNPC islowerthan estimated (that is, Bhutan and Nepal) and imports no NPC). In contrast, if the prices of products from mangoes at all, but the most relevant external more distant and more significant sources are source is Pakistan. If CIF prices from these considered, Indian potatoes and mangoes both countries are used, Indian potatoes and mangoes appear to be significantlycompetitive. appear only marginally competitive. But the 2. A discussion of the priorities and strategies for production base of many of India's neighbours is services reform is contained in the companion small relativeto India's needs, and any imports by report prepared for the Indian Government, India are likelyto raise prices in the neighbouring 'Sustaining India's Services Revolution'. Trade countries. Thus, an NPC estimate for these facilitation and standards in horticulture in the commodities that takes 'neighbouring country' Indian contextarebeingaddressedby two separate international prices as given is likely to be biased reports currently under preparation. An Overview INDIANAGRICULTURE: THE may be valid, it lacks analytical and empirical PUZZLE OF PROTECTION AND underpinnings. After all, if the sector as a whole is GOMPAWT!VE ADVANTAGE internationally competitive, and can be expected to expand outputin an undistorted world, then that should lead to increased employment and income ndia's agricultural policy presents a puzzle. for those engaged in the sector. The poor can also First of all, there is persuasive evidence that be expected to benefit from such an outcome, India has an overall comparative advantage unless we have other reasons to be skeptical about in agriculture (Figure 1.la). Second, government the distribution of benefits from trade. intervention has, in the aggregate,penalized rather than assistedIndian agriculture,even though certain Part of the solution to the puzzle may lie in two inputshavebeen subsidized.Thesetwo observations features of Indian agriculture: heterogeneityof'pro- suggest that India would take a strong aggressive duction conditions andsegmentationofthe national position in international negotiations, and would market. Even though India may have a comparative push for the elimination of trade distorting policies advantage in agriculture as a whole, certain crops, both abroad and at home. But the truth is quite regions, and holdings are not internationally com- different: India's efforts have been directed largely petitive. The heterogeneity has persisted because towards retaining the righr to protect its domestic low productivity regions have been shielded from agricultural sector, and in recent years, tariffs have competition by policy restrictions on, and the actuallybeen increasedon certainproducts. Finding high transport costs of, the internal movement of the solution to this puzzle is critical to developinga agricultural produce. Given the low level of diver- case and a strategy for both domestic reforms and sification and the large disparity in agricultural proactive engagementin international negotiations. productivity and infrastructure acrossIndian states, Thedefensiveposition and actionshavetraditionally there is concern that greater openness to interna- been explained by appealing to the fact that nearly tional trade could involve large-scale dislocation 58 per cent of India's total labour force and 75 per in the sector and significant adjustment costs. cent of itspeople below the povertyline derivetheir livelihoodfrom the agriculturalsector( ~ i ~ u1. rleb), Formulating a strategythat strikes the right balance and liberalization could have an adverse effect on between efficiency and equity will require these groups.While thisbroad argument forcaution considerable information and analysis. It would FRQM CQMPEnT88N AT HOMETO COMPWNG ABROBD a: Signs of a competitiveagriculturesector RevealedComparativeAdvantage (RCA) India's Producer Subsidy Equivalents(PSE) in agriculture in Agriculture (as a % of value of production) 3.5 q flk\ I Indonesia India Thailand Australia 1990 1993 1996 2000 b: But concern about potential large-scaledislocation Global distributionof employment in Agriculture (in per cent) Per capita income, 2001-2 (in US$) Rest of West Bengal @ Punjab Key: E C A - E U ~ O ~and CentralAsia ~ LAC-Latin America and Caribbean MENA-Middle East and North Africa ANZ-Australia and New Zealand QUAD-Canada, EuropeanUnion, Japan, and United States SSA-Sub Saharan Africa Source: Aksoy and Beghin (2004),Gulati and Narayanan (2003),GEP (2002),and Martin (2003). involve identifying the crops and the production Finally welfare gainsfromtradeliberalizationwould regionsthat arealreadyinternationallycompetitive, need to be evaluated under differentscenarios,that and the crops and regions that are not, but could is, with and without adjustment costs, as well as be, if certain constraints were overcome through with and without igricultural reforms in the policy reforms. The strategy would also require industrialized countries. identificationofcropsand regionsthat areinherently uncompetitive,wherefarmerswouldhave to switch This studyaddressessome oftheselargerquestions to alternative crops or alternative occupations in in the context of the Indian horticulture sector. the post-liberalization period, and the associated The decision to study the horticultural sectorwas adjustment cost involved in such a transition. made (in consultation with India's Ministry of Commerce) for three reasons. First, the sector is I I per cent of all vegetables and 15 per cent of all already among the most dynamic in both Indian fruitsin theworld (Figure1.2).The unitvalues of its agricultureand world trade. Shiftingfood patterns exports (free on board, FOB) are nearly half the at home and abroad, based on both increased correspondingworldunitvalues.Yet itsshareinglobal incomes and greater nutritional awareness, are exportsofvegetablesisonly 1.7per centandin fruits steadilyincreasingthe importance of horticultural a meagre 0.5 per cent. At the same time, its own production and trade. Second, the problems marketisheavilyprotected. Findingan explanation that confront perishable horticultural products, forthisstrangeconjunctionoflowcosts,lowexports, particularly relating to transportation, represent and high protection isvital to any assessmentof the in a particularly stark form those that affect the competitivenessof Indian agriculturein aliberalized Indian agricultural sector as a whole. Finally, the !globaltrading environment. horticulture sector may represent a 'picture of the future' for agriculture as a whole because it is a Many economists and policy makers have, in the sector which is less restricted by measures such past, attributed India'spoor export performanceto as subsidies and (arguably) tariffs, but sees an an overvaluedreal exchangerateand the anti-export increasing demand for higher standards due to bias in its tradepolicy,the latter being aby-product health, safety,and broader qualityconcerns. Thus of the Government of India's (GoI's) broader the sector encompasses the major challenges that objective of achieving self-sufficiency and food Indian agriculture faces in a world of increasing securityin agriculture.The gradualdepreciationof incomes,tougher deliveryschedules,lessrestrictive theIndian currencysincethe mid-1980s, the large conventional trade barriers, and more demanding devaluationsin 1991and 1993,and thesubsequent product standards. move to a flexible exchange rate regime corrected the overvaluationin the real exchangerate. During the lastseveralyears, anumber ofpolicieshavebeen HORTICULTURE: POTENTIAL initiated to reduce the anti-export bias in India's AND PROBLEMS tradepolicy.While thesereformshave relaxed some of the constraints affectingthe horticulture sector, The performance of the Indian horticultural sector the much anticipated surge in export is yet to in the last decade has provoked dramatically materialize. While India's unit value of exports differing assessments.' Some have described it as continues to be one of the lowest in the world, its a '!golden revolution', presumably to distinguish it share in global exports in recent years has been less from the earlier 'green revolution' (Bannerjee2005). than that in the early 1990s (Figure 1.2). Others have dismissed these views as a hyperbolic descriptionof afundamentallystagnant sector.We AcompleteunderstandingofIndia'scompetitiveness find that the truth from a trade perspectiveis more in high value agriculturalcommodities has proved complex. The sector is beginning to come alive elusive because the sector has not been subject to but it faces formidable constraints. an integrated analysis-from farm to retail..Most studies have examined only a single stage of the India is one of the largest and lowest cost producers supplychain, for example,productivity at the farm, ofhigh value agricultural commodities and yet has efficiency of agricultural markets, or problems a minuscule sharein globaltrade. It produces nearly associatedwith poor infrastructure, in isolation of 4 FROMCOMPETITIONAT HOMETO COlrlPFTlNG ABROAD Figure 1.2: India's Cost of Production and Marliet Share India's share in global production (2001-3) Vegetables " \ India's share in global exports Fruits 2.1 -c------------ (1991-3) .7 4 (2001-3) per cent ,. -. --. -...--. - i.; .. -.. , .. per cent Fruits 1 63 ' , - ' --....--. -- per cent Source: UN COMTRADE Statistics, Staff estimates. the rest of the supply chain. The researcherswere chain and thereby help prioritize and formulate not in a position to assess how the problems they policies that would have the biggest impact on identified at the single stage of the supply chain India's competitiveness. compared with the (unidentified)problems in the rest of the chain. WHAT IMPEDES EXPOBRTS! This study undertakes a supply chain analysis of thirteenhighvalue agriculturalcommodities,based The supply chain analysis indicates that from a on primary surveys that covered 1400 farmers, purely cost perspective the biggest imped:lments 200 commission agents, and 65 exporters across to the competitiveness of India's horticultural fifteen different lndian states (seeAppendix 2 for exports lie outside the sector rather than inside it details). It adds to the existingliterature by laying (Figure 1.3).2 out the cost and price structure of all agents and all markets in the supply chain, thus ~rovidingan Factors within the agriculture sector are found to integrated view of the sector. It becomes possible have a limited bearing on competitiveness from a to analysethe relative importanceofthe factorsthat trade perspective, with the impact on final price put Indian produceata disadvantagerelative to that seen to be much smaller than the factors outside from other countries.This framework also enables the sector.For example,theaverageprice atthe farm- us to simulate the potential costs and benefits of gate for a typical horticulture product is found to policy intervention at differentstagesof the supply be only 12-1 5 per cent of the price at which the AN OVERVIEW Figure 1.3:Barriers to Trade: Externnaf .is Donlestic Factors - - - - .- - , -.... -.. . -. - . .- .-- . . . . /--- .- ' Tariffs Abroad Quality and Inefficient High Cost of Standards Production Delivery . . - . . . - ... - . . .. . . .-.. ..... ..... .. . . . - .. .-.. . .... .... - - Source: Bank Staff. product is retailed in the destination market. This countries, and the low standards and weak implies that a 20 per cent improvement in yields conformity assessment mechanisms in India..The (which is huge, sinceyields have increasedby only third problem isthe tradepolicy barriers that Indian eight percentage points during the last 15 years!) exporters face in foreign markets. willlead onlyto a2.4-3 percentagepoints reduction in the final price. This is not to understate the Comparing India to selected countries, across importance for Indian farmers of developing destination markets, modes of transport, and better varieties of horticulture products that are commodities traded indicates that, on average, internationally more competitive on the quality India's international transportation costs are20-30 dimension. Improved agronomics and better per cent higher than those facedby other countries. technologythat canenhancethe qualityofproducts Sincetransportation costs are found to account for in terms of their appearance,size,colour,taste,and nearly45 per cent ofretailpricewhen airtransport shelf-life are of considerable significanceif India's is used and 25per centin caseofmaritimetransport, horticulture sector is to become competitive both Indian products are 5to 15per cent moreexpensive at home and abroad. But since the production- than their foreign counterparts simply on account relatedproblemsin agriculturearewell-known and ofhigh internationaltransportation costs.Logistical extensivelyre~earched,~they do not formthe major cost is dected by two factors: geographicaldistance focus of this study. whichcannot be remediedandlogisticalinefficiency whichcanbut hasnot been remedied.Ourestimates India's exportsfacethree major impediments. The suggest that an improvement in the efficiency of first is the 'logistical tax' imposed by high delivery the transportation and logistics system (both the costswhich significantlyerodethe production cost domesticaswellastheinternationaltransport costs) advantageenjoyed by Indian farmers.The second by 20 per cent could reduce finalprice by as much is the gap between the high standards required as twelve percentagepoints (thatis, a savingofRs 8 by governments and buyers, especially in richer on a final price of Rs 62). 6 FROM COMPEG1TBONAT HOME TO COMPETING AB Poor quality has two dimensions: weak safety to producers in developed countries, which have and health standards that legitimize prohibitive occupiedcentrestagein agriculturalnegotiationsare, SPS barriers imposed by foreign governments; however, less important in horticulture. Given the inadequate standardizationofproductsthat reduces other serious problems faced by Indian exporters, attractiveness for foreign retailers. Our survey of it is however difficult to establishhow far external exporters suggests that Indian products are not trade regimes are today a binding constraint on perceived to be of lower qualityby Indian exporters. India's export expansion although there can be Furthermore, many Indian exporters have focused little doubt that these regimes would be a serious on regional markets and so far there have been impediment if India were to emerge as a major limited encounters with the demanding standards exporter. of the industrial countries-described as a pattern of 'defensive commercialization' in a recent The three factors,tariffs,logisticalcosts,and quality, World Bank study on the impact of standards on interact with eachother and have acombinedeffect horticultural trade. There is clear evidence that that is greater than the sum of the parts. Logistical stringent industrial country standardshave been a costs and foreign tariffs penalize exporters prohibitive barrier for some products such as multiplicatively,because the latter are imposed on mangoes. In the case of other products such as a price that includes the former. Poor logistics (not grapes, exporters have incurred temporary losses just asadirectcomponent ofcostsbut through waste due to the rejection of consignments that do not and delay) weaken the incentives for producers to meet standards. In general, producers who have improve quality. Limited standardization makes had to make adjustments in response to higher physicalinspectionaprecondition for transactions, standards have typically incurred significant creating the need for cross-hauling from producer consignment-specific or recurrent transactions to regional hubs to consumers,thus adding further costs. Meeting increasinglyhigh standards will be to transport costs. Domesticprotection can increase a critical challenge in expanding exports to more the costs of transport for exporters, because low profitable destinations. levels of imports imply that exporters must bear the cost not only of the outward journey, but also Indian exporters face border protection regimes the unutilized capacity on the inward journey. in foreign markets that are opaque, complex, and deceptively protectionist. Among the most perniciousformsof trade protection in horticulture WHY ARE DOMESTIC TARIFFS arethesystemsof:(i)entrypriceswhichdiscriminate SO HIGH! against efficient delivery; (ii) tariff quotas that subjects imports abovespecifiedlow levelsto harsh In order to assess the competitiveness of Indian tariffs; and (iii) SSGs, which are a source of horticulture, we estimated the NPC, which is the considerable uncertainty for successful exporters. ratio of domestic to international prices (appropri- Furthermore,preferentialaccessschemesand tariff ately modified to take into account transport and escalation discriminateagainst,respectively,imports other costs), at the all-India level, both separately from certain sources and more advanced stages of and aggregated over allregionsand over all months, processing. Subsidiesin the formofdirectpayments for the period 1997-2002. AN OVERVIEW 7 Addressing this question reveals the inadequacy of competitive?There could be severalexplanationsfor analysesbased solelyonaggregativedata.Forexample, this. One isthat the tariffsarepurelyprecautionary, data limitations preclude effective control for and meant to dealwith circumstanceswhereforeign differencesin qualityand forfinedistinctionsbetween suppliersbenefit from a sudden reduction in costs, varietiesbetween foreignand domesticcommodities. thanks to an act of God or government. However, Nevertheless, our results support the findings of a we find that internationalunit prices ofhorticultural number ofpreviousstudiesthat India's horticulture products have not displayed much variability,and sector is competitive in terms of prices. As Figure governments have been remarkably restrained in 1.4shows, the average NPC has been consistently subsidizing such produce. Another explanation is below one between 1997 and 2002; there is some that the market for a product is not homogeneous variation across products (discussedin Chapter 3). but differentiated, either horizontally (that is, In the case of bananas, domestic prices on average foreignand domesticproducts aredifferentvarieties) are consistentlyless than half the price of imports or vertically (that is, foreign and domesticproducts when theyarriveinlocalmarkets.Grapesandoranges are of differentquality),in which case the tariff can have slightly higher NPCs, but both appear to be serveaprotectionist purpose.While this explanation becoming more competitive over time. Apples cannot be ruled out, our survey of exporters does and mangoes, however, appear to be borderline not suggest that Indian products are significantly competitive.Formangoes,theNPCwassignificantly inferior to foreign products. higher than one only in 1998, though it has been fluctuatingcloseto that level.All vegetablesarealso We attach greatest credence to a combination of competitive except for potatoes in some years. two explanations: tariffs are intended to protect domestic produce in all regions and all seasons Why then does India have such high tariffs for regardless of the variations in prices across space even the horticulture products that are clearly and time; and that the level of tariffs is not always Pig"" 1.4:NPCs for Horticulture: Al India, 1337-2002 1997 1998 1999 2000 2001 2002 Average Source: Staff estimates (seeAppendix for a discussion of the estimation methodology). 8 FROM COMPETITION AT HOMETO COMPETING ABROAD sensitive to the specific current circumstances of regions and over time (Figure 1.5).First of all, we individual products, but is set at roughly similar, find large regional variations in prices. This is a sometimeshistoricallydetermined levelsfor awide consequenceofthevastnessofIndia,wheredistances range of products-a form of policy hysteresis. betweengrowingand consumingregions areoften quitelarge.Theselargedistancesbecomeeven more A better understanding of the aggregate numbers of an issuebecause of high domestictransportation can be obtained by looking at the evidence across costs, and high wastage when commodities are Figure 1-1.5:PriccVariation across Spaceand Seasons for Domestic and Imported Apples and Potatoes Apples (Rs Per Kg), 2002 60 7 k8d SlmpleAverage (IPeakSeason(Sept-Nov) @ Off-peak (Dec-Aug) Potatoes (Rs per quintal), 2002 I j Imported1 @ SlmpleAverage Maximum Minimum Source: NHB Survey, Staff estimates. AN OVERVIEW 9 moved, due in largepart to poor infrastructureand throughout theyear in Delhi, but aremissing from the lackofcoldstorageinfrastructure.Consider the Chennai markets for four months of the year. case of apples. The major apple producing areas Grapes are available for eight months of the year of the country are located in the north and north- in Delhi, but for only five months in Kolkata. In easternparts ofIndia, and most appletradehappens general, availabilityof fruits and vegetables tends through Delhi. Domestically grown apples are to be better in the north, and worse in the south. much cheaper than foreign apples in markets located near these regions. However the high cost It would clearlybe efficient to allow consumers in of transporting and marketing these in thesouthern all regions and at all times to buy from the cheapest and western regions leads to very high prices in domestic or foreign source. Current high tariffs, these markets, rendering domestic production however, penalize consumers in regions located far uncompetitive.Apple prices in Chennai arealmost from production sources and in seasons far from 70 per cent higher than those in Delhi. Similarly, the harvestseason.While the net costs ofprotection the largest potato growing states are Uttar Pradesh arewell understood, it is notable that tariffsrestrict andWest Bengal,togetheraccountingfor more than imports in places and during timeswhich domestic 70 per cent of production. There is a 40 per cent products find difficult to reach. The existence of price differential between Kolkata in the east and tariffs in such circumstances creates an incentive Chennai in the south.This margin makesimported for inefficienttransport and inefficientstorage.The potatoes relatively more expensive in the north result is that tariffs hurt consumers, and they and east, but relatively cheaper in the western and subsidize an inefficient distribution and storage southern regions. system more than they subsidize producers. Therefore, the net welfare loss they create is even There are also large variations in prices and larger than usual. availabilityacrosstime becauseproduction ofmany horticultural commodities is seasonal in nature. To concludethis overview,the high costs ofproduct In India, seasonalityeffects are further accentuated delivery are today probably as big an impediment asstoragefacilitiesareboth expensiveand rare. Still, to exports as foreign protection and demanding many of the products consideredin our studywere standards, and could well be a bigger impediment found to be competitive,were availablethroughout than inefficient domestic farming. They also the year domestically and not imported at all, and increasethe cost ofsupplying the domestic market would probably not be imported in largeamounts and are probably an important reason for the even if tariffs on them were brought down to zero. high protection that is granted to an otherwise These include products such as bananas, onions, competitive sector.A large part of the high costs is and tomatoes. But in the case of some products, attributable to weaknessesin the transport, storage, there were seasons in which prices soared above and marketing infrastructure that only significant internationallevelsoravailability-declineddrastically. publicandprivateinvestmentcanremedy. However, In Delhi, for example, potato prices ranged from costs are also kept unnecessarily high by policy Rs 2.91per kg to Rs 9.53 per kg in a single year restrictions, particularly those that impede (2002).Regions also differwidelyfrom each other competitive supply of transport and distribution in terms of availability.Apples are availablealmost services. Remedying the acute inefficiencies of 10 FROMCOMPETITIONAT HOME TO COMPETINGABROAE. supporting service sectors will greatly strengthen fresh fruits include products that are only found both the political case and economic gains from in Chapters 7 and 8 respe~tivelyof the HS further liberalization of Indian agriculture. Nomenclature while'processed' fruitsandvegetables refer to products foundonly in Chapters 20 and 21. 2. The barriers to trade mentioned in Figure 1.3 NOTES are only a subset of factors affecting India's trade in high-value agriculture. For a more detailed 1. For the purpose ofthis study,thehorticulturalsector discussion of potential barrier to trade, see World is defined to include fruits and vegetables, which Bank (2005a). consistofthe followingfourmain categories:(i)fresh 3. See Gulati and Pursell (2003),Gulati, Pursell, and fruits; (ii) fresh vegetables; (iii) processed fruits; Mullen (2003), Kapila and Kapila (2002), and and (iv)processed vegetables. Freshvegetablesand Umali-Deininger (2004). Ha3RTiCULTURE grewby 134and 236 per cent during the past two A GLOBALP%WSPEC+IVE decades, respectively. China is currentlytheworld's largest fruit and vegetable producer, with a share he horticulture sector in India is an of 34 per cent, followed by the Latin America and important segment of the economy. In Caribbeanregion (11per cent),India (10per cent), 20034, it contributed nearly30 per cent and Africa and the EU (both at 9 per cent).2 of agriculturalgross domesticproduct (GDP)from only 8.5 per cent of India'sgross cropped area. Its A comparison of productivity level and growth gowth in India hasbeen steadybut not spectacular. across selected countries shows that India suffers World production of fruits and vegetables grew from lowproductivity,and improvementsin yields by 30 per cent between 1980and 1990and by 56 have been considerably lower relative to other per cent between 1990 and 2003, reaching 1274 countries, especiallyChina (Figure2.2). In fruits, milliontonnes by 2003.As Figure2.1 shows,much allcountries,Brazil, Chile,India, China, and South ofthis growthoccurredin China,whereproduction Africa, have seen improvements in yield per Figlare 2.6: Pr~d~Cti~~11 and Grow& of Horti~dturein Seleded Countries, 1980-2004 Production Growth of Production .. ' . China lndia Br lndia Brazil SouthAfrica Chile @ 1980 c! China lg90 pa2004 3~ ..--.. &# 1980-90 199&2004 Source: FAO, Staff estimates. 12 FROM COMPETITION AT HOME TO COMPETINGABROAD Figure 2.2:Yield per Hectare in Fruits and Vegetables in Selected Casaneries, 1398-,2004 Fruits Vegetables 180,000 1 300.000i I 1 China India Brazil South Africa Chile India ~ o u t h ~ f r i c aBrazil China Chile Source: FAO, Staff estimates. hectare, though India's improvement has been the in land productivity (2.5 per cent per annum). lowest in the group. While Chile and SouthAfrica However, the growth in fruit production is are the clear leaders in terms of absolute yield per attributable much more to an expansionin acreage hectare, China has seen the biggest improvement (3per centper annum) than aspurtin productivity in yield between 1990and 2004. Despite asmaller (0.6 per cent per annum). In each case, the most improvement, India has maintained its fourth recent year or two has seen a slight dip in both place. In vegetables, the picture is similar to that production and productivity after a decade of in fruits, except that the yield gap between India steady gowth. and the other countries is considerable and is widening rapidly (except with South Africa). For example, in 2004, while the yield level in India was nearly 70 per cent of the Chilean level in case Trade in horticulture products has been among the of fruits, it was only 45 per cent in case of most dynamic areas of international agricultural vegetables.Thesefiguressuggestthatwith adequate trade. It has been stimulated by rising incomesand investment and the right policies, India has the growing consumer interest in product variety, potential to raise its yield in horticulture. freshness, convenience,and year-round availability. The trend growth of overall Indian horticultural A facilitating role has been played by advances in production has been 4.2 per cent per annum over production, post-harvestprocessing, and logistical the period 1991-2 to 2001-2 (Figure 2.3). technologies, and increased levels of international Vegetable production has grown a little faster (4.6 investment (Diop and Jaffee 2004). As indicated per cent per annum) than fruit production (3.6 earlier, India however has not emerged as a major per cent per annum). Growth in vegetable player in international trade, and its exports are a production has come from both an increase in small fraction of both world horticultural exports acreage (2.1 per cent per annum) and an increase and domestic production. , "<. 1 7*- INTERNATIONAL + ~ B BNHORT~CULTURE E 13 I Figure 2.3: Decomyosit3ols of Growh Fate of Horticultrare Sector (Grca>%xh due k e increase in area a d&TOW& due to increasein p r a d ~ c t i x i ~ ) 5 7 1 4 Annualizedgrowth rate !i (1991192-2000101) / Fruits Area Productivity Vegetables Area Productivity Source: W,Staff estimates. Global Trade Pztteapns to 13 per cent in 1999-2000, and from 10 to 16 per cent in the urban consumption basket over the Thestructureofworld tradein fruitsandvegetables sameperiod. In contrast, LatinAmerican countries does not reflect the structure of production. Many (for example, Mexico, Chile, and Costa Rica) are of the largest producers are not significant traders among the world's leading exporters of fruits and due to a combination of domestic demand and vegetables mainly due to their proximity to the geographicalllogisticalfactors. For instance, only large US market. asmallpercentageof China's and India'sproduction is exported due to a strong domestic demand, European Union is the world's largest market and fuelled by growing income and a largeand rapidly supplieroffreshand processedfruitsand vegetables, growing urban population. For example, the accounting for 51 per cent of world imports, and share of fruits and vegetables in the Indian rural 39.5 per cent of world exports. EU trade in fruits consumption basket rose from 7 per cent in 1972-3 and vegetables is, however, largely intra-regional. 14 FROMCOMPETETIION HOME TO CQMPET~NGABROAD AT Intra-EU imports represent 64 per cent of EU and Costa Rica, accounted for43 per centofworld imports, while 83 per cent of EU exports occur developing country exports of fresh fruit (FA0 between its 15member states.Still,with itsaffluent 2003) and the top four suppliers, Mexico, China, and ageing population and its high factor costs Argentina, and Syriaaccounted for 67 per cent of and cold winter, this region represents one of the fresh vegetable exports by developing countries largest fruit and vegetable markets for non-EU (FA0 2003).~A very small number of medium- countries ($13.2 billion). income countries have been successful in the processed segment of the export market, and Intra-regionaltrade isalso significant in theworld's developing countries as a group account for a second largest fruit and vegetablesmarket-North relatively low share in the exports of processed American Free TradeAgreement (NAFTA).Trade products (36per cent in 2001). China, Thailand, between Mexico, Canada, and the US accounted Chile, and Turkey account for 58 per cent of for 49 per cent of NAFTA's imports and 53 per developing countries' exports of processed fruits cent of NAFTA's exports in 2001. Intra-NAFTA and vegetables (FA0 2003). trade is most important for fresh vegetables. For this commodity group, 90 per cent of exports and 86per cent ofimportsoccurwithin the tradegroup The powerful influence of geography on trade in (Huang 2004). horticultural products is evident in global trade patterns. Figures 2.4a and 2.4b show, for example, Interestingly, thanks to growing incomes in that a largeproportion of the imports of US comes the 1990s, middle-income countries have seen from proximate countries and a large portion of their own markets become major destination of India's exports goes to neighbouring countries. exportsfrom other countries,with import demand totalling$1I billion in 2001.South-South trade- Geography is evidentlya barrier to India'strade in that is, trade between developing countries, horticulture. India is located in one of the poorest excluding China and India-totalled US$5.4 regions of the world, and is disadvantagedrelative billion in 2001, accounting for 45 per cent of to some of its competitors in terms of distance to developing countries' imports. Japan has also the more attractiveexport markets like the US and emerged as a significant market for fruits and EU. As shown in Figure 2.4b, distance of a region vegetables over the 1990s, with import demand from India is astrongpredictorofits sharein India's reaching $5.8 billion in 2001. exports.*Holdingeverything else constant, India's shareofexportsto any destination market is found While many countries have entered the fresh fruit to decline by ten percentage points for every 1000 and vegetable export markets, only a few middle- kilometres increase in the distance to a market, income countries have succeeded on a sustained and any market that is beyond 14,000 kilometres basis. The average shares of developing countries from Indian borders is unlikely to be served by in world exportsof fresh fruits and vegetables hide Indian exporters. the heavy domination of trade by just a handful of middle-income countries. Between 1997 and However, distanceis important but not decisive.A 2001, just four countries,Mexico,Chile, Ecuador, number of countries from the Cairns group of - INTERNWTIIBNgBE.TRADE IN WORTtCWLTJRE 15 Pigore 2.4: Distance has a Considerable Hnfliae13~eon US Irraports arad In&& Expoczs, but Chile's Products seem to have Broke11the:Disrana Barrier a: US'Shorticultureimports are influencedby distance ..... Two of US neighbours '.~+--- account for almost / 45% its exports \~ Another 50% is accounted by select Cairns group countries b 0 2000 4000 6000 8000 10,000 12,000 14,000 Distancein km b: ...And India's horticultureexports are significantiyinfluenced by distance ..... india y = -0.1478Ln(x) + 1.3872 R~ = 0.8235 Middle East Note:Size of the bubble indicatesthe share of the region in India's exports t Asia Western Europe ""1 RestoftheWorld &?? 0 2000 4000 6000 8000 10,000 12,000 14,000 Distance in km agriculturalexportershavesucceededin establishing its borders.The corresponding figure for India is 1 a significantpresence in relatively remote markets per cent. So while India's export performance is and Chile standsout as the most successfulexample considerably influenced by distance, Chile's is not. ofadevelopingcountrythat has 'broken the distance barrier.'As shownin Figure2 . 480per centofChile's ~ In Chapter 4, we argue that the improvement of horticulture exports are transported to destination international and domestic logistics can cause marketsthat are9000kilometres or moreawayfrom 'effectivedistance' toshrinkand diminish,dampening c: ... but Chile's exports appear almost invariantto distance Chile I 40 Western Europe Rest of the World M~ddleEast Africa 1 I i 7, Distancein km Source: UN COMTRADE Statistics,CEPII (www.cepii.frlanglaisgraph/bddldistances.htm)Staff estimates. the influence of remoteness on exports. Chile's the quality dimensions, indicating that higher adoption of an open seasand open skiespolicy,and quality products are being exported (Figure 2.5). Kenyan reform ofairtransporthavecertainlyplayed a role in their emergenceashorticultural exporters. A Cla~erkook iadia'o Trade Quality sf Indian Exparts India is not a major player in international trade, and its exports are a small fraction of both world Quality is an important determinant of trade in horticultural exports and domestic production. horticultureand better qualityproducts (in terms of India's horticultural exports have hovered around appearance, taste,size,and shelf-life)tend to attract 20 per cent ofits total agricultural exports (Figure considerable premium in the global market. The 2.6). However, onions are the only horticultural product where exportsarea significantproportion perception of Indian exporters about the quality of Indian exportsrelativeto foreignproducts indicates ofdomesticproduction,withthepercentagevarying between 5 and 12per cent over the period 1990-1 that Indian products could be potential candidates and 2001-2. Theonlyother product whereexports for the upper end of the quality spectrum. On a scalefrom 0, signifying'far inferiorto comparator', are more than 1 per cent of aggregateproduction and 10,signifying'far superiorto comparator',each is grapes, with the percentage varying between 1 and 3 per cent over the same period. Imports of Indian ~roductscored between 6.7 and 7.9 when horticultural products have declined from 50 per comparedwith products in the destination market. cent of total agricultural imports during the early While there may be an upward bias in these 1990s to 25 per cent in 2003. Imports are a tiny assessments, they do seem to refute any notion of fraction of domestic production in all cases, quality pessimism about Indian horticultural including peas. Bananasand orangesamong fruits, products.5At thesametime,thefruitsand vegetables and peas among vegetables, are the only products being exported from India are perceived to be whoseexportsarecloselycorrelatedwithproduction. better than those sold domestically in terms of all F.;gare 2 5 : 'ThePerception of Exporters about the Qualiv oftheir Exports Comparisonof the quallty of lnd~anexports vs quality available In the domestlc and fore~gnmarkets ,.-.-- - ---.-.-. . --.--.- . . .--- - -.....--..-. -. * --....-..-.--. .....*..-...-.. -.... .. ..--.---......- .-., .-. ......--. 7.9 Grapes -.,. . . . . . .- . . ....... .-. . . . . . . . . ...... 18.4 .......... . ...--.-.-- lnd~anexports reative to On,on !-----. .......--.. -.-:--. .....--.-.-.... ..,_%.1--. -. .. ,. . . - .... .-... .. -_... . . .._.. -. . . . ..-8.3.' q~alityIntne domestic ..-. - . -. .- - . . _ _ _. _ _ _ . . . . _..L.. .. - ... .......... ....... --. . . _ . . _ __ . __ . - _ . market Average . . . ---.'-..- .. ......'- .-.-'---. */3..."_ -.- . .... . . -.... _......... -. . . . . . 8.0 -.. -. ... ....- - -- ... -- . . . . . . .-.-.....--. -_- . . . -- -- .- , - Mango i .I--...--... , L-.. ,6:?, "- -- .--- ..i 7.2 L-- , 1 77 I r - T - - " 7 0 1 2 3 4 5 6 7 8 9 10 Quality Scale [0 = Considerablyinferior to the comparator; 10 = Far superiorto the comparator] Source: Exporters' Survey, Staff estimates. Figure 2,6:Expores and Imports in Agdculttrre and Horticdturc Exports (in billion US$) Imports (in billion US$) 2-1 I Hortrculture &-% --* ---/ .,,.","___I O ~ ~ I I I I I I I I ~ m & % 8 2 B % k % % Z 8 6 m 0 z z z z z z z z z z % g % a Source: U N COMTRADE Statistics, Staff estimates. On the whole, India is a 'net exporter' of all major Dried and ~reservedve~etablesaccountfor aquarter horticulture products. of all horticultural exports. Far more striking is the regionalcompositionofIndia'sexports.As indicated The most important items among India's in Figure 2.7, a significant proportion of India's horticulturalexportsarefresh onions, mango pulp exports of fresh fruits and vegetables goes to and fresh mangoes, driedwalnuts, and freshgrapes. countries in South Asia and Middle East. Only a FROM COMPETBPBON AT HOMETO COMPE71NGABROAD Figure 2.7: Destination a Vegetables Fruits 1 Bangladesh flMalays~a &idUAE & Sri Lanka / a UAE @@Bangladesh @ SaudiArab~a Netherlands @ 1 Nepal Saud~A a h a Bahrarn US @ UK Kuwait Nepal & Yemen a a UK @ France Rest a US @ Germany Rest Note: Fruits excludingnuts. All figures in percentage. Source: UN COMTRADEStatistics,Staff estimates. smallproportion of India'sexportsgoes to industrial mangoes-where India is a relativelylargeexporter, countries,particularlythose that arehome to alarge in the sense of faci.ng a relatively low own-price Indian diaspora. In contrast, a large part of India's elasticityof demand (FA0 2004). limited exports of processed fruits and vegetables goes to industrial country markets. Between 1990and 2003, the dollarvalueofimports of ail horticultural products more than tripled in Exports ofvegetables and fruits have grown in the value, growing from an average of about $440 year 2002-3. The fastest rates of growth have been million to $1.06 billion (and from $59 million to recordedby tomatoes,peas, driedvegetables,guavas, $178 million for the commodities under study). mangoes, onions, and apples. But India's share of Most of this increase came after the phase-out of world exports is stillsmall-the shareof vegetable quantitativerestrictions (QRs)startinginthe second exports peaked at around 2 per cent in 1992, half ofthe 1990s.Imports offreshfruits, especially declinedto less than 1.5per cent in the mid-1990s apples, have risen considerably, growing by more and recentlyrecoveredto around I per cent.Itsshare than 245 per cent per annum between 1997 and of world exports of fruits is even smaller,less than 2003, albeit on a small base. Growth has also been 1.25per cent ofworld trade in recent years.There rapid for certain processed food products such as are relatively few commodities-green peas and applejuice and dried vegetables,though the single Figure 2.8: Exports and Imports in Agriculture and Hor~culcure Composition of Horticulture Exports, 2002 Imports,2003 - Pickle and chutney ... e z Dried vegetables 4 5.3 Other processedfruits Othervegetables,fruits &&.,and vegetables 8.9 Mango pulp 10. unfermented 1 concentrated 2 Peas,fresh or chilled 8 Fresh grapes 3 Other fresh' Other fresh vegetables fruits 6.4 --- Fresh Grapes 2.7 Dried nuts (walnuts) Fresh Mangoes 3.6 5.2 Notes: All figures are percentages. This figure is based on import data for a subset of commoditiesin the horticulturesector. Source: UN COM'TRADE. most dominant item in this category continues to NOTES be dried peas (Figure 2.8). In 2003, imports of dried peas amounted to $162 million. Imports of fresh 1. This Chapter draws heavily upon Diop and Jaffee vegetables are small, mostly of green peas. However (2004), FA0 (2004), Regmi and Gehlhar (2005), despite the recent increase, import penetration and World Bank (2004,2005a). remains insignificant. For fresh fruits, it is less than 2. According to India's National Horticulture Board, 0.1 per cent of domestic production, and is also India is the second largest producer of fruits and negligible for most fresh vegetables. the largest producer of vegetables in the world. 3. Thebulk ofSyria's tradeiskithotherMiddleEastern countries while that of Argentina's is targeted Import volumes have risen at a time when world primarily towardsother Latin American countries. prices are stable or rising. For example, in the case 4. The same does not hold true for manufacturing of dried peas, periods of high imports have been exports. If we replace the share of India's exports in associated with higher prices. Similarly, for both horticulture by manufacturing goods in the y-axis apples and grapes, the fastest growing items in the of Figure 2.4b, the trend line becomes an upward fresh fruits category, unit prices have been higher slopingcurve indicatingthat distance is not a major on the average in the post-2000 period, than in determinant of the destination of exports in case of the decade preceding it. From this it seems clear manufacturing goods. that increasing import volumes are more reflective 5. However, it is important to note that a large part of of demand conditions in India, than changes in Indian horticulture exports either go to nearby international supply.6 countries in Asia or the Middle East or to ethnic 20 FROM COMPETITIONAT HOME TO COMPETINGABROAD stores in Europe and North America. It is well 6. Someeconomistshavearguedthat India'sagricultural documented that the retail customers in ethnic surpluses and deficits are potentially large relative stores are mostly Indian diaspora who give to the level of world trade and thus international preference to the type of vegetable and its origin prices arelikelyto risewhen India entersthe market over the quality and accept certain variations in as a buyer and fall when India enters as a seller. vegetable colour, texture, blemishes, and freshness Chand (2001)uses India's trade inwheat to illustrate that other 'mainstreamsupermarkets'retailshoppers this hypothesis. might reject (World Bank 2005a). s there a Rations for Protection? INTRODUCTION were subject to quantity controls. Starting in the late 1990s, India started easing many of its ndian policymakers have been cautious in export controls. It also started to gradualljr phase opening up the horticultural sector. Until out quantitative controls on imports from 1996 the mid-1990s, India was almost closed to as part of its WTO commitments. But while trade. Imports of most agricultural products were quotas were being withdrawn, tariffs on some controlled through a licensing regime as well as items were raised, and most tariffs now range quotas.Exports were canalized through designated between 30-50 per cent for horticultural products entities, and important export items like onions (Table 3.1). Table 3.1: India's Applied Tariffs for Main Crops, 19W-22002 Other potatoes, fresh or chilled .. 10 15 Tomatoes, fresh or chilled Onions and shallots,fresh or chillcd .. 10 .. Peas, freshor chilled 10 10 10 15 Dried vegetables .. 10 15 Bananas, including plantains, fresh .. 40 Guavas, mangoes, and mangosteens, fresh .. .. 40 40 Lemons and limes, fresh or dried .. 40 Fresh grapes 30 .. .30 25 Apples, fresh .. 40 200190 Other vegetables,fruits, etc., preserves .. 40 40 38.5 35 30 200950 Tomatojuice, unfermented,not contaminated .. .. 40 38.5 35 30 200960 Grapejuice, (ind. must),unfermented .. 40 40 38.5 35 30 .-------.."---- 200970 Applejuice, unfermented,not contaminated .. .. 40 40 38.5 - ----.-- 35 --- 30 w Sources:UNCTAD TRAINS database, WTO IDB CD ROM 2004. In thissection,we examinetheprice competitiveness these dimensions into the analysis. If the average of a select basket of horticultural commodities to quality of imported products is markedly better assessIndia's competitivenessin theseproducts,and than that ofthe domesticallyavailableproduce, our the rationale behind Indids tariff policy. Sincethe NPC estimateswill overestimatethecompetitiveness aim is to look at the potential disruptive effects of of Indian produce to the extent that the Indian opening up on the sector as a whole, the choice of consumeriswilling to pay a qualitypremium. This commoditieshas been madesoas to cover the most is likely to be the case for a few products such as widely grown crops among fruits and vegetables apples and grapes, though the size of quality pre- (seeAppendix 2). The chosen basket of products mium is not clear. For someotherssuch as mangoes includes apples, bananas, grapes, mangos, and or potatoes,however,the oppositeislikelyto be true oranges in fruits, and tomatoes, potatoes, onions, so that our NPC figuresmight be underestimated. peas, and okra among vegetables. In fruits, this selectioncoversabout66per cent oftotalproduction Followingfrom the earlier discussion that India is by volume. For vegetables this figure is 54 per best consideredasum ofregionalmarkets,theNPCs cent. It must be borne in mind, however,that these at the commodity level for selected fruits and selected commodities are not necessarily the vegetables are estimated at four major consuming products where India has the greatest export centres in India located in the metropolitan cities advantage, or those where it faces the greatest of Delhi, Mumbai, Kolkata, and Chennai. These import competition. citiesarelocated in the northern, western, eastern, and southern regions of the country respectively, The price competitiveness of a commodity is and are assumed to be representativeof markets in measured by estimating the Nominal Protection these regions.They account for a majority of trade Coefficient(NPC).Thisisdefined as the ratioofthe in fruits and vegetables.The all-India aggregates price of domesticproduce to the price of imported for each product are calculated as the weighted products,aftertakingaccountoftransportation and average of NPC estimates at these regional other marketing costs. An NPC greater than one markets, weighted by total arrivals in each market. thus implies that domestic prices are higher than (Fora detailedexplanationofhowNPCs havebeen internationalprices.Thismeasurehasbeenemployed estimated, seeAppendix 1.) in previous studies (Gulati et al. 1994),and its use here facilitates comparability. AWE IMPORTS CHEAPER THAN However, it is important to remember that horti- INDIAN PRODUCE? cultural commodities compete not just on prices, but also on several quality dimensions such as Indian horticulture is on thewhole, competitivein freshness, size, colour, and taste (as discussed in termsof prices.We first estimatethe NPC at the all- Chapter 2).A price-based measure of competitive- India level, aggregated over all the regions, for the -1 ness such as the NPC thus provides only a partial period 1997-2002. This is the period when India picture.The quality of both domesticproduce and started openingup to imports. Giventhe relatively imports is likely to vary across regional markets, shorttime period, the results need to be interpreted as well as across time. Unfortunately, available with somecaution. However, this exerciseconfirms information does not allow us to fully incorporate the findings by many other previous studies that 85THERE A RATlOMALEFORPROTECTIQN? overallfreshproduce in India,fruitsandvegetables, price of imports when they would arrive in local is competitivein terms ofprices. Figure3.la shows, markets andthere isvery littlevariation over time, that between 1997and 2002, the averageNPC has that is, between 1997-2002. Grapes and oranges consistently been below one. have slightlyhigher NPCs, but both appear to be becoming more competitive over time. Apples The level of competitivenessvaries among fruits and mangoes, however, appear to be borderline (Figure3.1b).In the caseofbananas,domesticprices competitive. It should be noted though that the on an average are consistently less than half the last three years in the studywereyears of relatively Figure 3.1:Nominal Protection Coefficients for Fruits and tkgetables: All India, 1997-2002 a: Variation Overtime 1997 1998 1999 2000 2001 2002 Average (1999-2002) NPC = 1 a Fru~ts Vegetables b: Variation across Commodities (Arrangedin the order of their import competitiveness) Banana Onion Green peas Grapes Mosambi Tomato Potato Okra Apple Mango NPC = 1 a Average (1997-2002) g3 Avg + lStd Dev. Avg - 1Std. Dev Source: NHB Survey, Staff estimates. 24 FROM CQMPSETITION AT HOMETO COMPETINGABRWD lowproductivity for apples. Ifproductivity recovcrs could be several explaqations for this. One is that to reach the levels witnessed in the mid-199Os, the tariffs are purely ptecautionary, and are meant this product should become more competitive. For to deal with circumstanceswhere foreign suppliers mangoes, the hTPC was significantly higher than benefit from a sudden reduction in costs,thanks to one only in 1998, though it has been fluctuating an act of God or government. Another is that the close to that level. The year 1998 was a bad year market for a poduct is not homogeneous but for mango production. An important caveatis also differentiated, either horizontally (that is, foreign that comparable international prices for mango are and domestic products are different varieties) or taken as the prices prevailing in Pakistan, the vertically (that is, foreign and domestic products nearest major exporter. Any significant purchases are of different quality), in which case the tariff can by India are however likelyto raise Pakistaniprices serve a protectionist purpose. A third possibility is significantly, and erode the competitive margin that tariffs are intenddd to ensure that the entire estimated using current prices. national market, in all regions and all seasons, is reserved only for domestic producers (even when Apart from potatoes, all vegetables are also found production itself is concentrated in one region, for to be competitive. Here an important caveatis that example,in the case of apples).A fourth possibility India imports very small amounts of potatoes, and is that production is distributed across all regions that too only from its immediate neighbours (that and some of these regions are uncompetitive and is, Bhutan and Nepal).Theunit internationalprice the tariff is away to protect the producers in these used to calculate the NPCs, therefore, does not uncompetitive regions (thisseemsto be the casefor truly reflect the price India would encounter in crops like potatoes that are grown primarily in the international markets if itwere to import on a larger poorer Indian states). scale. Even bearing this in mind, there is only one year, 1998, when potatoes actually became Thereareconsiderablevariations in domesticprices uncompetitive. This was a year when potato between regions. A better understanding of the production was low, and priceswere almost double aggregate numbers can be obtained by looking at their previous year level in all the major regional the regional picture (Figure 3.2a). On an average, markets. Onions and tomatoes are consistently prices are 70 per cent higher in the most expensive competitive. It is interesting to note that onions regions compared to those in the cheapest regions. remained cheaper than imports even during the In most cases, differences in price can be best crisis year 1998. explained by distances between the growing and consuming regions. For example, the major apple producing areas of the country are located in THEN WHYARE TARIFFSSO the north and north-eastern parts of India. Not HiGH! BROTEGTlON OF surprisingly,Delhi is the cheapcst market, whereas DQMESTCC PRODUCE klNALL Chennai is the most expensive. Similarlyin the case REGBONSAND ALL SEASONS ofgreen peas, Uttar Pradeshaccountsfor nearlyhalf ofgeen peaproduction in the country.The cheapest India has high tariffs for even those horticulture, major market for peas is Kolkata,whereas the most products that appearto be highlycompetitive.There expensiveis Bangalore. IS THERE A WTBOhlAtE FOR PROTECViON? 25 What is surprising,however, is that thevariation in production respectively. The problem is further prices between different cities is 2-6 times the compounded by poor backward linkages in the variation in transportation costsbetween thesecities. distribution chain because ofwhich producers lack This is illustrated in Figure 3.2b. The variation in awareness about the requirements of the fresh prices across regions in India can be attributed to a produce industry,leadingto seasonalgluts and non- number of reasons.First, alargepart ofthe variation availabilityat off-peaktimes. In Delhi, for example, can be explained in terms of wastage that is likely potato prices rangedfrom Rs 2.91 per kg to Rs 9.53 to happen during transit. While road transport in per kg in a single year (2002). Regions also differ India is not particularlyexpensivein 'nominal' terms widelyfrom each other in terms of availability.For (US$0.02-0.03Itonne-km),theproblemiswith the example, apples are available almost throughout quality of the trucks and the service provided- the year in Delhi, but are not available in Chennai poor and slow,which leads to high wastage. This is markets for four months of the year. Grapes are exacerbatedby the poor or non-existent packaging available for eight months of the year in Dclhi, of fruits and vegetables, and the lack of adequate but for only five in Kolkata. In general,availability storage infrastructure-making the 'effective' of fruits and vegetables tends to be bettcr in the transportation cost fairly high.' This is illustrated north, and worse in the south.This is dcspiteprices in Figure 3.2c, which shows a strong negative being higher for most products in the south. relationship between regional price variations and the shelf life of products. Losses during transit, for Disaggregatingthe all-India figureacrosstime and example, can go up to as high as 35 per cent in regions shows that in many cases, a high NI'C in a peak summer (EXIM Bank of India 2002). Part of region reflects more the effectsofpoor infrastructure the price differential is also attributable to the and an inefficient distribution chain within India, inefficient distribution system where most trade rather than the un-competitiveness of domestic is routed through just a fewcities, and is mediated production. For example, the apparent price non- by a large number of intermediaries. This not only competitiveness of apples in the southern and inflates prices, but also the time taken to move the western markets seems to be more the result of the product from the farmer to the ultimate consumer. difficulty that domestic producers face in serving Finally, some part of this price variation can be these distant markets, than the high costs of attributed to various restrictions on the inter-state production on part of the farmer.Overall,itappears movement of commodities (see discussion in that Indian producers face little threat of being Chapter 4). displacedby foreign imports in marketswhich they can serviceatlowcost,andprotection simplymeans There are also large variations in prices and that consumersareleft to pay the costs ofinefficient availability across seasons. Production of many distribution and storage. horticultural commodities is seasonal in nature. In India, seasonality effectsare accentuated by the Despite the high level oftariffs,we still seepositive, fact that storage facilities are both expensive and and in some cases, rising imports. This could be rare. For instance, storage capacity in the two big because, as already noted, imports are better than, potato producing states ofUttar Pradesh andWest ordifferentfrom,domesticproducts.Someevidence Bengal was only 0.08 and 0.05 per cent of their in this regard is presented in Chapter 5. Another 26 FROM CaMPEfITSONAT HOMETO COMPETINGABROAD Figure 3.2: Regiond Price Variations for Frrai~and Vegee%bles, 2002 a: Difference in prices between the cheapestand the most expensivecity for different commodities 3001 Banana Oranges Potato Onion Grapes Okra Apples Mango Green Peas Tomato b: Apple, 2002 Mumbai Hyderabad Kolkata Bangalore Chennai Transportationcosts plus handlingcharges from Delhi (Rs per kg) D~fferencein the wholesale price from Delhi (Rs per kg) c: Relationship between regionalprice variation and shelf life of products i hPotato .Y E c Apples C $ 100 Banana e Orange at0 100 120 140 160 180 200 220 240 260 Reg~onalprlce var~atlons(per cent) Source: NHB Survey, Staff estimates. fSTBdERE A RATIONALEFOR PRGTECTfePkT reason is that imports are to a limited extent production is missing in most markets (Figure3.3). complementing rather than competing with Similarlyimportsofgrapeshappen mostlybetween domesticproduction. Imports are often limited to August to November, which is the off-peak season times when domestic production cannot meet for Indian produce. demand, either during off-peak periods or periods of domestic shortages. For example, consider the To concludethis section, there is an urgent nccd to case of apples. The bulk of apple imports happen reconsider the tariffs applied to hortici~ltural in the first half of the year, half of them just in the products. Many of the products considered in our summer months from April-June, when Indian study, such as bananas, onions, and tomatoes,were FSgare 33: I:nports awd Domestic&rivals in India, Apple and G~eenRas, 2002 DomesticArrivals vs lrnportsof Apple, 2002 (In tonnes, logarithimic scale) 1 i I 7 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -"II -- DomestrcArr~vals~nfour malorclt~es --5-e Imports DomesticArrivals vs Imports of Green Peas, 2002 (In tonnes, logarithimic scale) , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec --- - Imports (MT) -".- DomestlcArr~vals~nfour cltles (MT) Source: National Horticulture Board Database; DGCIS 28 FROM CQMPEH~T~ON HOMETO COMPETENGABROAD AT found to be unquestionably competitive across whether tariffs are subsidizing farmers, or simply regions and seasons.These products do not require an inefficientdistribution system. If,asour evidence any protection, and there seems little justification suggests,it is primarily the latter, then the reasons and little effect of the high tariffs imposed on for the inefficienciesassume significance-an issue them-prices are largely determined by domestic that we address in the next chapter. In any case, supply and demand conditions. In the case of remedying the acute inefficiencies of supporting seasonal products like grapes and oranges, the low service sectors would greatly strengthen both the average price of Indian products compared to political case for and economic gains from hrther imports, even after factoring in the effects of liberalizationof Indian agricture. inefficient logistics,means that imports are largely restricted to timeswhen domesticproducers cannot servethe market. For such commodities,tariffs raise prices for consumers, without much benefit for 1. At these distances rail should be ableto provide a producers who are mostly absent from the market competitive service. However, rail rates in India or present after incurring high storage costs. are very high in relation to costs, because they Eliminating tariffs for such products is likely to subsidizeall the passenger traffic, and alarge part benefit consumers with fa^ adverse consequences of the railwaysystemisengagedin moving regular for producers. In the case of products which are unit trains between coal field and power stations borderline competitive, there is a need to assess and/or similar activities. 4 What UnderminesComparative Advantage! The Ro Domestic Consfraints FROM COMPETING AT HOME to procure a kilogramme of grapes.1 The costs TO COMPETINGABROAD incurred by the exporter in terms of inland transportation, storageand handling, commissions ince India is one of the largest and lowest and taxes, packaging materials, plus her margin cost producers of horticulturc, it could be add Rs 24 to the price, resulting in an freight on expected to be a large exporter as well. But board (FOB)price of Rs 43. The air-freigh~tand there is a critical difference between competing the insurance charges constitute the single largest at home and competing abroad-international component of the retail price which adds another delivery costs, especially transport costs. While Rs 54, resulting in a cost, insurance, and freight high international transport costs protect Indian (CIF) price of Rs 97.2 So while the procurement commodities from foreign competition at home, price constitutes only 15-21 per cent of the CIF they arean impediment to accessto foreignmarkets. price and 11-16 per cent of the retail price, the To be a successfulexporter, the country needs not delivery costs, which includes domestic and only to be a low cost producer but also a low- internationalcostsand storageandhandlingcharges, cost and efficient transporter and distributor of together account for 60 per cent of the CIF and 45 commodities. In this chapter we examine the per cent of retail price. Thus purely from a trade importance of 'deliverycosts' in determining India's perspective, the factorsaffectingthe price between trade competitiveness and the role played by the farm-gate and the retail level are found to be domestic factors. more important than factorsdetermining the price at the farm-gate. It is important to note that the In horticultureproducts,domesticand international international delivery costs are particularly high transportation cost is the single-largestcontributor in case of air transport, which is increasingly to the retail price, accounting for nearly 25-40 per becoming thepreferred mode of transportation for cent of the price (depending on the mode of international trade (Hummels 2001).3 transport).Thisissummarizedin Figure4.1, which tracks the journey of 1 kilogramme of grapes We demonstrate that India's high delivery costs through the supply chain, from the farm-gate in arisefromtwosources, apart fromgeographywhich Hyderabad to supermarkets in London by air we have argued in Chapter 2 is important but not transport. It costsbetween Rs 14-19 to theexporter decisive: (i) poor transport infrastructure and a Figure 4.1: E\-aIution ofIP~ice!C~stX ~ G O S S the Sx~pplyChain (For a Uogv~mmesf grapes prokced in Hyderabad and sold in London) a: Contribution of various agents of the supply chain to the final price Final Price = Rs 120.2 CIF Price = Rs 96.7 FOB Price = Rs 43.1 Wholesale Price = Rs 18.9 Farm-gate Price = Rs 13.5 Differentstages of the supply chain b: Contributionof various elements of the supply chain to the CIF price - -* * E">%* iia,**' A \ \ Cert~ficate(explicit) (15) 2" , Grading and 1' Taxes and Commrniss~ons(3.2) packagingcosts (9.7) Exporter's Inlandtransport+storage+ Margins(99) handling+wastage(5 8) i Internationaltransport -- -_I--+- Total delivery costs = 59% Different elements of the cost Source: Exporter survey; Staff estimates. -- WHAT UNDERMINES COMPAMT4VE ADVc%M'T.4GEP 31 number of policy distortions that have restricted that make fresh produce much more expensive to competition and resulted in uneven utilization of transport (Huang 2004). existing infrastructure and slow creation of new infrastructure; and (ii)high storageand marketing Based on a number of comparisons between India costsdue to fragmentation in the supply chain and and selected countries and regions in the world for limited storage infrastructure. Inadequate different destination markets, modes of tra.nsport, consideration of these issues is perhaps the single- and commodities traded, we find that on average, most important reason why many past prognoses India's international transportation costs are 20- about dramatic growth in India's food sector have 30 per cent higher than their corresponding global not come true.* The rest of this chapter expands counterparts.Sincetransportationcostsarefoundto on the last two constraints (see Figure 4.2). accountfornearly 50per centofretailpricevvhenair transport is used and 25 per cent in caseof maritime How inefficient is India's logisticssystemrelativeto transport, it would imply that Indian products other countries?JafTee (2003)estimatesthat the cost could become 5to 15per cent more expensivethan oftransportingcertainvegetables(forexample,bitter their foreign counterpartssimplyon accountofhigh melon, squash,beans, and eggplants)from India to international transportation costs. the European market is $1.50/kg, comparablewith the cost of transport from Kenya but much higher We, therefore, argue that a significant reduction than the cost of transport from other sources,such in delivery costs is necessary for India to emerge as Ghana and the Dominican Republic (from as a globally competitive exporter of horticulture $0.60/kg to $l.OO/kg).Furthermore, inefficiency products. The current emphasis by Go1 on in transport is reflected not only in higher explicit infrastructure and a number of sector-specific costs,but alsoin higher spoilageand handling costs initiatives in civil aviation, maritime, and road Figure 4.2:hghaining India's High Delivery Costs --. .-- -.- -. - - . ,.-.-- .... -. . . - . .-. ._\ ..... .- . .- . . Inadequate Policy distortions Inadequate storage Lackofan Integrated a transport and bureaucratic , infrastructure Common Market1 infrastructure .--....... - . -- delay . -., ..... . .. . .-Supply Chain . ....., -- ..- -- ... - Restrictions on private Restrictionson movement : , sector (domestic and and storage of foreign) activities agriculturalcommodites . . - . . . . . . - , .- -- . . . . . - - . . . . - . 32 FROM COMPETITIONAT HOMETO COMPETlNG ABROAD transport sectors coupled with custom reforms, if have shownthat countrieswith high-shippingcosts fullyimplemented,couldhelp Indiatobreakthetime have found it difficult to promote export-led and distance barriers as has been done by many development, even after they have reduced tariff successfulhorticultureexporters,forexample,Chile. rates, removed quantitative restrictions (QRs),and followed prudent macroeconomic policies.5 The problem is exacerbated with highly perishable TUNSPORTATION COSTSAS products in horticulture,which havean averageshelf A BARRIERTOTMDE life of a month-making 'time' a critical factor in trade (Figure 4.3a). Given the current inefficiency High transportation cost has long been recognized in the logistic system, it is therefore not surprising asan important barrier to trade.For manycountries, that the ratio of exports to domestic production the protection from high transport costs has come among horticulture products is strongly correlated to exceed theprotection provided by tariffs. Studies with the degree of their perishability (Figure4.3b). Figure 4 3 : Perishabili~of Horticulaulse Products can be a Potenndd Barrier to Trade a: No of days the product can be stored 1Maxlmum shelf l~fe / "a 4 & 315 C ii2 f m :::erage) ' L &a A 32 / 39 f M~nlmums h e i f v Tomato Peas Okra Mango Mosambi 1 Average j Banana Grapes Onion Apple Potato b: Perishabilityvs Exports (as a per cent of domestic production) y = 0 0004~ + 00005 FI2 = 0 4222 @ On~on ,j Trend l~ne j(exclud~ngPotato) X *** *" ,,Apple Banana 100 1000 Average shelf life (in no. of days, logarithmicscale) Source: UN COMTRADE Statistics,Surveyof exporters (2004-5), NHB, Staff estimates. Figure 4.4: Barriers to Trade in Horticulture -- ---. -.-. --. .-- -- -.. -..-.-- -.--.---.--. -..--.. -. .--------.---.-- -. -. 7- --.- .. .-. 1 I IInterna:ionaltranspofl cost L--- -- ----. -i-- -- 6.f _-. L_... --.----- ---..- . ' --... ----.- -- --.- .. CLStom OL'Y - -- . ---: -.-.. . - 6.2 -.- -2.. -. -.-- -. -. .-..; ,. . _ . . 6.1 Payment problems ;!_i________L. _ - _ - _ L : --.." .... -------- ..*.I_ -- 7. Nan-tarifl barriers L__-L..<2....T-6.1 -.-. . ---:----. --- - . -. :..- .- -L .-- ---. Competlticnfrom orhers .- I . . 16.0 -L . -.--.-I-. i--.-..-I Lack of Ina:an bran0 name I.-- . .:. --. .-.i.... . : 5 4 ... .'.. - Note: Does not include behind the border domestic factors. Source: Survey of exporters (2004-5), Staff estimates. Holding other things constant, if the storagelife of The concern of Indian exporters regarding an average horticulture product can be increased international transportation costs is reinforced by by an additional 50 days,this alone could result in the finding that it costs as much as two to three morethan doublingofIndia's exportsofhorticulture times more to transport similar products over a products (the coefficientis 0.0004). comparable geographical distance from India than from some of its competitor countries.This Indian exportersperceivehigh international trans- is illustrated using the exampleofexport of grapes portation costsas the number one external barrier from India and Chile to Netherlands (Figure4.5).6 to trade. As shown in Figure 4.4, international The distance between India and Netherlands is transport costs as a barrier to trade is placed many 6858 kilometreswhile from Chile to Netherlands it notches above the standard tariff and non-tariff is 12,007kilometres. So,based on astandardmodel barriers (NTBs) to trade.While exportersshipping ofgeographyand trade, Chile's transportation costs to Europe and Far East consistently placed high should be around 50 per cent higher than that of international transportation costs as the number India. But the actual transportation cost is found one barrier, exporters to neighbouring SouthAsian to be oppositeofwhat is predicted by such models. countries viewcd it as the second-most important It costs $790 to transport 1metric tonne (MT)of constraint and exporters to Middle East placed it grapes from India to Netherlands-260 per cent on the third spot from a potential of eight external higherthan it takes to transportthesamefrom Chile barriers to trade. Furthermore, to an open-ended (Figure 4.5a). Thus freight and insurance charges question 'What policy changeswould you suggest make up for 48 per cent of CIF value in case of to enhance exports of fruits and vegetables from Indiacompared to only 18per centin caseof Chile. India?' two out of every five exporters who have used air or maritime transports in the past said The above example is not an isolated observation that government should undertake measures to but part of a wider observation about India's reduce international transportation costs. inefficient transportation system. A number of FROM CQMPETBTIONAT HOMEPO COMPETINGABR63BD Figure 4-5:Indids I~ntesnaxionalTrmspcprt Costs vis-b-vis Hnternationnd Stmdards a: lndia vs Chile (Destination Market: Netherlands, Year 2002) FOB, Transportationcosts and CIF price of Transporlation costs and market share of 1 MT Grapes in US$: Netherlands lndia and Chile in Netherlands , lndia India Chile per cent b: India's internationaltransportation costs benchmarksagainst selectedcountrieslregions I 1 i AirIMaritirne I Air i araoes All Commodities Developed Asia Europe America Africa India / US India Chile Countries (Survey) I (Survey) I (UNCOMTRADE) Source: UN COMTRADE Statistics,Surveyof exporters (2004-5), Staffestimates. comparisons between India and selectedcountries years, though still remains high compared to and regions in the world for different destination internationalbest practice.Accordingto Roy (2002, markets, modes of transport, and commodities 2005),the time taken for clearanceofinternational traded are shown in Figure 4.5b-all of which cargo in India in 1998 was five to sixteen times indicate that on average, India's international higher than the international norm (Figure 4.6). transportation costsare20-30 per cent higher than For example, it used to take, on average, 5 days (60 their corresponding global counterparts.' hours) to clear imported air cargoes from Delhi airport compared to the international norm of less The cargodwelling time in India, which used to be than 6 hours. But these numbers appear to have considerably high in the past, has fallen in recent changed in recentyears.Accordingto GoI's 'Report WHAT UNDERMINESCe3MPAWaTlV%ADVANT$*GEP Figure 4.6: Dwell Time in India 8s IntemationrdNorms. (inhours) - - Export Import Shipwaiting Time Export DwellTime Import DwellTime *-.- Air Freight 4---------- Sea Freight ---'- India (1998), DelhlA~rportand Mumba~Sea Port ~1 5Internatlonalnorms n- Ind~a(January-March 2004) Sources: Roy (2002),Report on Working Group on Tradc Facilitation (2004). on Working Group on Trade Facilitation', the India's export performance remains poor despite average cargo dwelling time for export has come its low cost of production: while India's share in down, though for import cargoes the situation Netherlands' imports is only 3 per cent, the remains c~nsiderabl~worsethan the international corresponding figure for Chile is 23 per cent.9 norm. It is important to note that the report also states that Determinants;of High TranspartationCcsts in Indiafo dwell time figurcsfor exports may be understated because While the most obvious determinant of transport they do not take into account the time required to get costis!geography,transport costis alsoconsiderably clearance from several other agencies prior to arrival of affected by government policies and institutions. goods at customs. The process of prior cleatance involves 'The quality of infrastructure in air and sea-ports up to 257 signaturesLorn different agenciesthat may take and roads and rail networksislikely to considerably a couplc of days in some cases.' influence transportation costs. Countries with adequateport capacity, strongerinfrastructure,and The high international transportation costs, it turns more sophisticated packaging and loading out, is part of thesolution to thepuzzlewe stated at technologies are likely to have lower transportation thc beginning of this chapter (Figure 4.1). lndian costs. The volume of trade and the predictability grapes are 40 per cent cheaper than their Chilean of shipment also seem to matter for the overall counterparts when they leave their respective ports transportation cost. Moreover, port and handling (in terms of FOB price) but their prices are almost fees, ease of customs clearance, and the extent of thesameby thetimetheyreachNetherlands(interms bureaucratic red tape involved also affect costs. of CIF price). The delay in customs and dwelling Thereis nowconsiderableagreementamongIndian timc at ports only makes matters worse. 'l'hus the policymakers that its international transport costadvantageenjoyedby theIndianfarmersisoffset infrastructure and services can be greatlyimproved by its 'transportation disadvantage'. Consequently, and their costs significantlyreduced. 36 FROM C0MPETBT10N AT HOME TO COMPETING ABRQA9 Air Transport expanded India's linkages with global markets. Another has been the decision to limit Air India's India has aunilateralopen skiespolicyfor air cargo. monopoly on international flights by letting According to this policy, any operator, including domestic carriers operate on certain international any foreign operator, can operate any number of routes. However, thesametime,otherinftastructural flightsby any type of aircraftto any airport having constraints remain. customs and immigration facilities without any bilateral agreement. The operators are also free to GoI's Committee 'A Road Map for the Civil charge rates according to the demand and supply Aviation Sector' identifies the following major situation. But according to exporters, costsremain problemswhyairtransportcostsaresohigh in India: high because of low volume of trade, irregular shipment schedule, imbalanced traffic pattern (more one way freight traffic to Europe and North 1. Excessively high taxes on fuel and airport America), and relatively high fees and surcharges charges. While fuel costs are usually 10-1 5 per at Indian airports. cent of airline operating costs, in India, they are nearly30per cent.This isbecausethe averageprice Discussions with airline representatives indicated of aviation turbine fuel (ATF) in India is nearly that due to low volume of perishable exports and 190 per cent higher than the international price. irregular shipment schedule, dedicated freighter The exciseand sales taxes constitute nearly 45 per planes are not yet viable on the Indian routes. A cent of the ATF price. The fact that only fewairlineshave abandoned this idea afterstarting government-owned oil companies enjoy exclusive operations. According to airline sources, the air privilege over supply of ATP has led to no real transport cost could decline by as much as 15-20 competition in the fuel prices. The2005-6 Budget per cent fromcurrent levels ifthevolume ofexports trimmed the import duty on jet fuel from 20 to doubles and the shipment schedules are made 1O per cent, and continued the tax waiver on he1 more regular. Fortunately, the situation is already used to service international flights. Nevertheless, improving, as trafficvolumes are rising, and freight local duties levied by state governments remain is increasingly becoming more two-way. Import important, and add an average of 22 per cent to cargo traffic handled at the international airports he1costs. Furthermore, Indian airlinesalso cannot of Mumbai, Kolkata, Delhi, Chennai, and hedge fuel purchases through forward contracts. This reduces their ability to manage costs at a time Trivandrum, for example, grew by an average of nearly 19per cent per yearfrom 2002-3 to 20045, when oil prices are volatile, as they are currently. A while export cargo traffic grew by only 9 per cent third factor according to the Committee report is per year over the sametime." Another factor is the that airport chargesin India are 78 per cent higher entry of more airlines into freight carriageleading than international averages. to more competition. This period the result of a series of recent government decisions. Onewas the 2. Restrictionson foreigndirect investment (FDI). signingof'open skies' agreementswith countriessuch At present, in the domestic air transport services, asthe US,UK, France,Australia,China,and Qatar. equity participation by foreign individuals1 This has increased the number of international companies is capped at 40 per cent and foreign flights to be serviced by all competitors, and airlinesarenot allowedto hold equity investments WHAT UNDERMINES COMPAWTIVE ADlfANTAtE? 37 either directly or indirectly. The policy also the Indian port sector operates at 35 per cent stipulates that ownership and effective control of efElciencylevel relative to Singaporeand 60 pcr cent the airline should be vested with Indian nationals relative to China. Some of this inefficiencycan be and that the airline's Chairman and two-thirds of attributed to superior infrastructure, for example, its Directors should be Indian citizens. China has 14 timesmore containerized trade than India and this trade is growing at 4 times faster than India; fleet assignments to China are 8 times a. Inadequate and underutilized infrastructure. higher than those of India, and the Chincse While India may appear to have a vast airport national carriers have 5 times younger ships than infrastructure, only 62 of its 400 airports are India's (Figure 4.7). Clearly the lack of superior currentlybeingused.Nearly40 per centofpassenger infrastructurehas led to more time delaysandhigher traffic and disproportionatcly large part of cargo transportation costs, resulting in lost export orders are concentrated in the two main international airports at Delhi and Mumbai. As a result, the and/or higher prices of final products. Another important constrainthas been that the conn~ectivity limitedcapacityat these airportshasled to increased of ports to inland markets remainsweak (seeFigure congestion, bunching of flights, and delay in 4.8 for an illustration of high handling costs at passenger and cargo clearance.The situation has the departure and destination ports). In fact, poor been exacerbated by outdatcd infrastructure, road and rail container evacuation facilities are inadequate ground handling systems, and lack widely believed to be behind the slight increasesin of night landing facilities. In this regard, the government's policy to invite private participation averagepre-berthing and turnaround times at the in modernizing airports over the next 5-10 years Jawaharlal Nehru Port Trust (JNPT) and 7 other at an estimated costof Rs 40,000 croreiswelcome. of the major ports witnessed in 2004 (also see Box 4.1). Mari~imeTransport The governmentpolicyto dealwith these problems With a 5560 kilometres coastline and 12 major has been thrce-fold: expanding port capacity, and 184 minor ports, India has a huge potential increasingcompetition,andimprovingconnectivity. for growth in the maritime transport sector. Indian The expansion in port capacity is set to happen, ports, however, handled considerably less traffic relying partly on private participation. For this than their capacityduringthe Ninth FiveYear Plan purpose, up to 100 per cent FDI in ports and period, indicating that port capacity under the shipping has been allowed under the automatic current trade flows is not a constraint. According route, and FDI up to 51 pcr centin supportservices to India'sTenth FiveYear Plan (TFYP)report,while such as operation and maintenance of ports and , productivity in terms of ship turnaround time, harbours, loading, and discharging vessels. There waiting time, and average ship berth day output is also a ten-year tax holiday on investment in has slightly improved over the last decade, the infrastructurefacilitiesrelated to ports, inland ports, pcrformance continues to be poor when compared and inlandwaterways.Stategovernmentshave also with generally accepted international standards actively followed the Centre's lead, with Gujarat, and performance of regional ports. For example, Andhra Pradesh,Tamil Nadu, and Orissa actively accordingto the Global CompetitivenessReport,12 seeking private participation to develop minor FROMtOMPET9TFBNAT HOME'iY.3 COMPETINGABROAD Figwe 4.7: Internadofid Coanparisoe~of the Performance afIndia's Post: anad its Maritime l~~frastructure a: India's ports are considerably less efficient than their Chinese counterparts Indian ports are perceived to be only 60 per cent as efficient as ports in China and take two and a half time more to clear cargo ! ! 1 1 India Brazil Chile Turkey Thailand I China Malaysia South Africa US Netherlands Singapore i i Port efficiency index (I = Best; 7 = Worst) Median Clearence time (in number of days) b: A large part of this difference can be attributed to China's superior maritime infrastructure --+a+China has 7 times more port capacity than India ... 14times more containerized trade and growing 4 times faster ... 8 times more fleet assignments, 5 times more vessels, 5 times more regular liner (The ratio of indicators of port infrastructure of China and India) Source: UN COMTRADE Statistics, Survey of exporters (2004-51, Staff estimates. ports. Another initative under the new National especiallyin the container segmentwhich accounts Maritime Development Policyhas been to increase for most of India's high value trade (seeBox 4.2). competition by requiring that terminal facilities at major ports or adjacent major ports be run by According to India's TFYP report, the maritime different operators. Stepstoward improving ports' sector in India faces the followingchallenges: connectivityhavealso been taken. It will be crucial to give priority to these investments if India is to 1.Bureaucraticdelayhas slowed implementation. handle large forecasted increase in port traffic, The sector spent only 70 per cent of its budget WHAT UNDfRMINES GOMPAMTIVEADVANTAGE? . . - i.;(.'!.~:;,:;:, : 1 F:<,:je ,;+. in ~..~;?~~!~.i~ ..l{,,i:>~,:-*.)j' < I* i ~ ' ~ ~ 3 ~ ; : , i j5.~jL>:.> j>&j:i? !<:a<,/ : . ; i :j% .. J 18.:r:chai,!i. ;$zri::t~j:nrsi Plodll::~~r!it: t'.', ...L-...,-.-, -L ..... ...... -.. ..... ;..-... __-- ' . . . . .. . . . . . . . ( . , ,,, ': Cooling towers . . , , :- ' . . 1.. L:.:I<..;L-..- :..:L... A..- i:?..i:.-,:.!..- 92'\, - -. .L ........., ........ -............. -:.:-..-...: -............ .... --.............. --.......... .-. . . ........... . -. ,.... ........ Electron~cPrce Bulletin Boara ; :' . . . . . . . - . . '. fi -.' .': 88 -. :.: ..:.:..--. , ........ L..- ........I, .,.,. 'L . . . :. . ..:......... . . . . . -.--.. '. " . . :.',"..... :: ..--.- A !' ..- --.. . ,........... .,, .., ,,. . . . . . Grao ng mach.nes ,.i-L.-....-1..-- .. .. i 82 ,/' . 1 ' , ,"...,..........I .,I. , . i: ' -..<.... .. .,, -li.,.,, r--..- ...-..--.' . .'..' ;.. ;; . . .T....,.'... . -P-- >i... . . ..: 65 Res'rOoms : :i:. -: ' . . _ -. .. .2...... -2 ..... .. r-- . . -: Warehouse 49 Public conveniences Complaint mechanism 42 Auction shed Transport facilities Weighing machines Percentage of Farmers NOT fully satisfied with the quality of infrastructureand management in their local mandi . -..... -. ..--....----..... -...... -..... ---. --.. -. .. - Copplaint mechanism .j:-..:--l, - --:... ~. . . . . , :-:_-. . . . .L,.. .: -..-. ' 53 . \ ;: .- .- -..-. - .- --.., -. -.-. . - . . . . . .. . . . . ',.. Manageme11 of mandis . . .'. . :_.:..L:.-I.. --. -.. --. . -- - I .f 45 . --. --, ... " .....-..... . E~ectron~cPrice Bullet~nBoaro L-._1-.. _ ,> . . .....:. . ,,.... _.___ .; 38 > ..... . . . . .. . .-. ' . 38 , .< ., ' A~ctionshed L .- ..... --- 7 -... . -. . ..- --, .,-.-;--2-.2: , . 7. .. .. ----.... - d.. ~ . . - Warehouse ;I:: .... L ........ - .... 37 ~ . Cooling towers Transport facilities Weighing machines Grading machines Source: Survey of growers (2004-5), Staff estirnLes. V Mean i-5 Med~an Source: Surveyof growers (2004-5), Staff estimates. 46 FROM COMPETITIONAT HOME TQ COMPETINGABROAD seems quite regressive, that is, richer states have organized,efficientpan-Indian supplychain in the better marketing infrastructure than the poorer agricultural sector. states (Rajasthanand MP are the exceptionsto this trend).This is disconcerting,becausefarmersin the Second,the surfeitof restrictions on the movement poorerstatesarelikelyto be renderedlesscompetitive and storageof commodities (including reservation due to poorer infrastructure and thus less likely to of cold storage and agro-processing industries for be engaged in exports of horticulture products the snlallscalesector)discouragedand/or prevented compared to their counterparts in the richer states. the private sector from undertaking large-scale , investment in agricultural storage and marketing activities. With state finances under stress, the WCK OF AN INTEGMTED public sector could not undertake the required COMMON MARKETAND investments either (Figure 4.12). Consequently, FWGMEMTED SUPPLY CHAIN India's supply chain became populated with too many small and inefficient intermediaries, who Production in horticulture is scale neutral but (and not the farmers) have gradually become the storing, marketing, and distribution (wholesale largest beneficiaries and the biggest supporters of and retail) are subject to economies of scale. A the excessiveregulations in the agricultural storage number of government policies have prevented and marketing sphere. the realization of these economies.To increase its control over storage, marketing, and distribution In India, marketing chains are highly fragmented, ofagriculturalcommodities during periods offood often with six to eight intermediaries, and are shortages within the country, the government dominated by small-scale enterprises. At each enacted the ECA (1955),MMA (1972), and the stage of the chain, not only one incremental costs Prevention of Black Marketing and Maintenance and margins built into the price, but even the of Supplies of Essential Commodities Act (1980) time in hauling commodities through the chain (see Box 4.3). However, these policies had two increases.Someofthe most complexandinefficient unintended negative effects. First, sinceagriculture procurement systems in India are structured as is a state subject, many Indian states introduced follows:The first link in the chain is a consolidator legislations similar to the one adopted by GoI, at the village level who collects the marketable preventing free mobility of agricultural produced surplusfrom someofthe farmers.The consolidator and thus segmented the Indian domestic market in turn sells the produce to a commission agent. into many smaller markets.Thus the supply chains The agent passes on the produce to a trader who that developed under these legislations were operates at the district levelandwho then supplies primarily localor regional in nature, which started fruits and vegetables to various large wholesalers. and ended within the same state boundaries. The wholesaler, having made purchases from a This, along with restrictions on private domestic number ofsources,then breaksthe bulkand supplies investment in wholesale and foreign investment the produce to individualretailers. Because markets in both wholesale and retailing of agricultural are inefficient,farmerstend to receivea smallshare commodities, prevented the emergence of a large, of the (domestic) consumer price-only about 25 ---- -- WHAT UNDERMINES COMBAWTIVEADVANTAGE? 47 Figure 4-12:Secular Dedine ia Inwstment in Indim Agriculture Investment to GDP ratio in Agriculture (at constant prices,in per cent) Share of tradeldistributionand storage Investment in the total agriculture Investment(per cent) 8 i Source: Task Force on Capital Formation (GoI), Staff estimates. FROM CQMPETlTlQNAT HOME TO COMPETINGABROAD per cent in the case of unprocessed vegetables fruit and vegetable market in the US in recent years compared to 40 per cent in developedeconomies. include the following. Physical losses in the food chain, as we have indicated earlier, arehigh aswell-12-40 per cent Consumers for horticultural products. American consumers are spending more on fresh A Compauissn ebbAgricultural produce, and in addition to buying a greater Supp%y Chain: Indiavo the US quantity of produce, they are buying new value- added products. Per capita consumption of fresh Unlike in India, the fresh produce market in the fruits and vegetablesincreased6 per cent between US has changed markedly over the last fifteen 1987and 1995,and 8 per cent between 1995and years. Shifts in consumer demand, technological 2000. As consumption has increased, so has the changes in production and marketing, and retail demand for variety, convenience, and quality- consolidation have altered the traditional market the variety of fresh produce items carried by relationships between producers, wholesalers, retailers has increased from 173 items in 1987 to and retailers. 354 items in 1997. Many products (for example, lettuce and tomatoes) are available year-round, In the US, freshfruitand vegetableproducts move produceis pre-cut, andmorepackagedand branded quickly through the marketing system to combat productsareavailable.Theshareofbrandedproduce spoilage. After harvest, fresh produce is handled increased from 7 per cent in 1987 to 19 per cent and packed either bp a shipper or grower-shipper. in 1997, while fresh-cut produce and ~ a c k a ~ e d Produce grown in the United States may be salads rose from I per cent to 15per cent of total exported, or sold direct to consumers, retail stores, sales. At the same time, the share of income spent or foodserviceestablishments. Sales from grower- on food-at-home ~urchasescontinues to fall. shippersto retailers and foodserviceestablishments Consumers spent almost 47 per cent of their food might be mediated by wholesalers or brokers, or dollarsin the foodservice/restaurantsectorin 2000, might occur directly (see Figure 4.13). Prior to compared with 44.7 per cent in 1987 and 46.6 1987,fresh fruit and vegetable markets were more per cent in 1997. fragmented; most transactions took place between grower-shippersandwholesalerson a day- to-day basis, based on fluctuating market prices and quality levels. Today, a typical produce sale While a typical Indian farmer producing fresh may take place between a multi-product grower- fruits and vegetables tends to sell almost all of her shipper and a large supermarket retailer under produce to the local consolidator (Figure4.13a), a standing agreement or contract specifying the grower in US has several options to consider, various conditions and terms,including marketing for example, direct market, general-line grocer services provided by the !grower-shipper, volume wholesaler, specializedproducerwholesaler,general- discounts,and other price adjustments and quality line foodservice wholesalers, retail store, and specifications.Some of the key trends in the fresh foodservice establishments (Figure4.13b). While WHAT UNDERMGNESCOMPAMTIVEADVANTAGE! : FIs~re4.3 3::A. Tpid SupplyChaixx of Fruits andSiegetablesinn India YSMore Mature M*kett9 (far exampk, US) a: India (Commodity-Tomato; State-Karnataka) --.-- .- \ GrowerlFarmer; Price = Rs 2.00; Wastage = 20 per cenr"! -7 .J I consolidator; Price = Rs 2.20; Wastage = 8 per cent 1 $ 1MarketWholesaler; Price = Rs 2.50; Wastage = 5 p x \ + Retailer; Price = Rs 8.2; Wastage = 10 per cent 1 b: United States \ \ / \ \ / \ ----- servicewholesaler Source:a: Raghunath and Ashok (2004). Source: b: US Fresh Produce Markets Marketing Channels, Trade Practices, and Retail Pricing Behavior, By Carolyn Dimitri, AbebayehuTegene, and Phil R. Kaufman,AgricultureEconomic Report #825, September2003. 50 FRQW COMPETITION &T HOMETQ COMPETtNGABROAD the growers in US tend to receivea higher shareof fresh fruits and vegetables supply chain operate the retail price (around 30-40 per cent depending and this experience is expectcd to get repeated in on the nature of produce) than their Indian India as new investment into organized retailing counterparts (whosesharetends to be between 15- takes hold. In the US, retail consolidation has 25 per cent), but with growing consolidation of occurred rapidly as large supermarket firms have the market at the shippers and retailer ends, the merged orhavebeen acquired. Mass merchandisers market power of growershas alsoalteredover time. suchasWal-Mart,Kmart,andTargetandwarehouse clubretailerslikeSam's Clubaresellingan incrcasing volume of food products with low-pricestrategies. They have also introduced innovations in the Compared to the Indian market, the shipping procurement and distribution of the products they industry in thc US is highly concentrated. For sellto gainefficienciesandlowercosts (Kinsey2000). example, in 1999 there were 149 California grape Some mass merchandisers, such as Wal-Mart, shippers, 25 California tomato shippers (down provide supplierswith real-time store sales data to from 31in 1996),and 54 baggedsaladfirmsselling support distribution, inventory management, and to retailers (down from 63 in 1994),with the top in-store promotion activities (Kinsey2000).Wal- two firms accounting for76 per cent of total fresh- Mart also introduced astandardizedreturnable (to cut salad sales in supermarkets. In fact, for a few the supplier) plastic container that is used both fresh produce items, the concentration of sales at for distributing fresh fruit and vegetable products the shipper level is as much or more than that of to their stores and for in-store product display. the retailers. The Wal-Mart model emphasizes co-operation and co-ordination of activities in the supply chain between suppliers and buyers, with the goal Anecdotal evidence suggests that the role of of reducing system-wide costs. Supply-chain merchant wholesalers in produce has diminished managementpracticessuchascontinuousinventory while that of the foodservice sector (examples, replenishment, the use of cross-dockingfacilities, restaurants,offices,and schoolswith cafeterias)has direct store deliveryby suppliers, and selectiveuse grown. Large retail storeshave increasedthevolume of specialitywholesalers has reduced the need for of direct purchases (from grower-shippers), large distribution centres and their associated bypassing produce wholesalers. But at the same costs. To achieve these efficiencies, retailers are time, wholesalers have increased their share of consolidating,as evidencedby asignificantincrease producesalesto the foodservicechannel-from 8.4 in the share of total US grocery store sales by the per cent of sales in 1987 to 21.2 per cent of sales largest firms. By 2000, the share of the 20 largest in 1997. retailers had reached 52 per cent of total grocery sales, up from 36.5 per cent in 1987. In the US, the emergenceof supermarkets has had Mirroring the trend in the US, the global supply the largest impact on the way the wholesalers, chain for agriculture, especially horticulture, has grower-shippers, and other intermediaries of the changedmarkedlyin recentyearswiththeemergence WHAT UNDERMINES COMPAWTIVE ADVANTAGE? of supermarkets as a major buyer force.There is a formulated the model act to reform this act. The much higher degreeofvertical integration to meet model act aims to foster a single market in the the increasingly high standards. Compliance and country by removing the restriction to sell certification costs are high, as are the costs of agricultural commodities wholesaleonly in state- transmission of new technology and monitoring regulated markets and permitting the private sector of social and environmental standards. Big farm to develop and operate wholesalemarkets. Several holdings in countries such as Chile are equipped stategovernments have followedsuit and amended to realize the economies of scale in a way that the theirAPMA to allowfor direct marketing, contract small Indian farmer and entrepreneurs are not. farming, andlor developingmarkets in the private1 co-operative sector. While in seven states, the %ndia% Changing Retail and APMA has been amended to allowfor all three, in (Agricultuaai) Marketing others partial reforms have been undertaken to Landscape allowsomeofthese.There areonly two states,Bihar Vertical integration-the consolidation or co- and Jharkhand, where there has been no progress ordination of production and processing stages on this front.22Establishing legal frameworks to by one firm-is a common feature of efficient protect both farmers and processors in contract food marketing systems in most large agricultural farmingagreements,and enforcingthoseagreernents economies, but is nascent in India. Only about 4 is particularly important. With Indian agriculture per cent of output is processed, and only a handful dominated by small-scaleholdings of only about of food processors have annual turnover as large as two and a half hectares, food processorsstruggleto $150 million-a scale considered small in many procure adequate suppliesof high-quality produce. other developed and developing countries. Even Contract farming is already expanding in some with more than I billion consumers and a retail regions and products, including broilers in Tamil food market estimated at $133 billion, small Nadu and Maharashtra and vegetables in Punjab, 'Mom & Pop' shops still dominate retail food sales. and has proved successful in reducing mark.eting Organizedchainstoresare emergingand expanding risks faced by both buyers and sellers. rapidly, but at present account for only about I per cent of food sales. Many policies that have, historically, weakened private investment incentives and contributed to International experience shows that a common India's fragmented, small-scale, and inefficient organizationalpattern in developingcountrieswhich marketing system are now being changed. The have managed to successfully export high-valued Central Government and severalstate governments agriculturalcommodities has been the prominence have lifted longstanding measures that restricted of contract farming and/or vertical integration in private storage and interstate movement of grain the linkages between farm-level production and and other essential foods. Licences are no longer downstream processing and trade.21 Both of needed to establish food-processing firms, and thesewere, however,prevented by the Agricultural regulations restricting their size have been mostly Produce and Marketing (Development and eliminated. In addition, FDI in food processing Replation) (APM) Act 1951. In 2003, the Go1 and marketing-with the exception of retail 52 FROMCOMPETIT~ONAT HOMETO COMPETING ABROAD marketing-is now automatically approved for There has alsobeen amoveto promote the creation investmentsup to 51per cent equity.The repeal of of special economic zones (SEZs), some focused the Cold StorageOrder 1964in 1998,eliminating on agricultural products. India's Export-Import the licencingrequirement and governmentcontrol (EXIM)policy 2003-4 says that corporate sector over cold storage fees. To promote storage and playerswith proven credentialwill be encouraged warehousing further, the Department of Food & to sponsor agriculture export zones (AEZs) for PublicDistribution is promoting the development boosting agro exports. Appropriate incentives of a negotiable warehouse receipt system in the will be provided to them to enable investments in countryto increaseliquidity in rural areas.A draft infrastructure, processing, packaging, storage, Warehousing (Development and Regulation)Bill, research and development (R&D), agricultural 2005 has been clearedbythe cabinet and isexpected extension, and other facilities relating to exports to be placed before Parliament soon. in the approvedAEZs. As many as 45 AEZs have WHAT UNDERMINESCOMPAMTIVE ADVANTdZGE? been notified so far in differentparts of the country weaknesses in the infrastructure in these sectors (also see Box 4.4). that can be remedied by creating a favourable environmentforprivateinvestmentand undertaking The development of organized retailing is the necessary public investment. Enhancing transforming India's food markets by providing the efficiency of supporting service sectors will an infusion of capital and expertise, as well as strengthenboth the politicalcaseforand economic promoting linkages and standards backward gains from the liberalization of Indian agriculture through the marketing chain. Severallarge Indian trade and improved access to foreign markets. firms have announced ventures in food retailing. FDI has alreadybegun to flow intowholesalefood NOTES distribution in Bangalore.In order to facilitatethe modernization of the retail sector in India, the 1. While exportersto developedcountries (example, Foreign Trade Policy 2005-6, has extended grapes to EU) tend to procure directly from concessionalduty benefits for capital goods under farmers, others use many alternative sources of the Export Promotion Capital Goods (EPCG) procurement.The exporterssurveyedforthis study Scheme to the retail sector. However, equipment procure 25 per cent of their exports directly from required in the retail supply chain pertaining to the farmers at the farm-gate and the rest from material handling, warehousing, and distribution wholesalers andlor commission agents.The price facilities is not included.23 Another important received by farmers in case of direct procurement change has been a partial relaxation on allowing is found to be closerto thewholesalelevel.Sowhile FDI into retail.Earlier, FDI in wholesale cash and exportersdo not seemto enjoyanysignificantprice carrytrading and FDI beyond 51per cent in export advantagefrom directprocurement, the advantage trading were allowed after getting government comes in the form of reduced time (a saving of approval.However, FDI up to 100per cent is now anywherebetween 1-3 days)and/or moreeffective allowed under the automaticroute, that is,without control over the final product. an approvalfromtheForeignInvestmentPromotion 2. These are indicative numbers and there may be Board (FIPB),for cash and carrywholesaletrading considerable variation across commodities, destination markets, and mode of transport. and for single brand products. 3. For example, 50 per cent of US exports today (excluding those to Canada and Mexico) are To conclude, we find that inefficiencies in through air transport. supporting services are an important reason for 4. See studies by McKinsey & Co. the high protection that is ganted to an otherwise 5. See Radelet and Sachs (1998). competitivesector.The cost advantagethat Indian 6. The comparison between Chile and India needs producers (farmers)enjoywhen the produce leaves to be qualified.Givenitslargevolume ofexportsof the farm-gate gets slowlyeroded duringitsjourney horticulture products, Chile has a well-established through the supply chain, rendering the product logistics system,dedicatedair-freight arrangements, less competitive at the retail end. A large part of and enjoys the benefit of economies of scale and the inefficiencyin servicessuchastransport,storage, Indiahasnone ofthoseadvantages.Thecomparison and distributionis due to restrictions on domestic however is not so inappropriate if one is looking and foreigncompetition.There arealsohndamental for a 'global benchmark' that India should strive 54 FROMCOMPETITION AT HOMETO COMPETINGABROAD to achieve in order to effectively compete in the JNPT seems to have increased productivity to global horticulture market. international levels. 7. The transportation costs for India are based on 13. Some recent evidence indicates that 70 per cent primary survey data and for others are measured of services at JNPT are now direct calls, though as the differencebetween the CIF and FOB prices. the same is not true for ports such as Kolkata or Although the latter is a widely used measure of Chennai. international transportation costs (forexample,see 14. 88 per cent of container ports in the world Radelet and Sachs 1998;Limaoandvenables 1999; conformed to this model ofprivatization in 1997. Clark, Dollar and Micco 2001; UNCTAD 15. Singh and Wallack (2005). 2004), its reliability is often challenged by its 16. This section draws on the World Bank report critics. There are two reasons why we think our (2001) 'Forging SubnationalLinksTransportation estimates may be a good approximation of the and Logistics in South Asia'. reality. First, the difference between CIF and FOB 17. FAIDA, CII, and McKinsey & Co (1997); prices for India is found to be quite similar to the Raghunath and Ashok (2004). numbers obtained from our primary survey. 18. Since there is evidence of considerable wastage at Second, unlike the previous researchers, we don't the retail-level as well, our primary survey results use the aggregateCIF and FOB prices to compute seemto reinforce McKinsey's findingthat the total the transportation costs; instead we have used wastage in the food chain could be as much as 20 commodity-specific and destination market- per cent. specificunit values. 19. The regulated market holds a key place in India's 8. There are a number of other barriers that impede food chain since all wholesale transactions in trade (for example, time to clear customs) and agriculturalproducts, byjat, are supposedto take indirectly contribute to higher trade costs. GoI's place there. Regulated markets were set up under Task Force on IndirectTaxes had made a number the Agricultural Produce Markets Act (APMA) to of useful recommendationson custom reformsand help upgrade market yards, storage, grading and those issues well-known to Indian policy makers packaging and other market services like market are, therefore, not covered here. information,intelligenceandverification ofweights 9. But high transport costs alone cannot explain the and scales. As on march 2001, there were 7177 sharp difference in market share as the CIF price regulated market yards in the country. between Indian and Chilean grapes is not much 20. This result is based on a multivariate panel different. The difference is to some extent regression where the unit price received by the explained by quality and standards, which are farmer is regressed against a number of farmer- discussed in Chapter 5. specific variables including the quantity and 10. The discussion here has broader implications for quality of infrastructure in their local mandis. the entire internationaltransport sector and is not The regression also includes state-specific and limited to the transport of horticulture products. commodity-specific dummies. 11. Singh and Wallack (2005). 21. Jafee (1992). 12. Some of these numbers may be out-of-date, and 22. Information as of 31January 2006. opening up of the sector to private investment 23. Source: FICCI. and to foreign port operators, such as P&O at s the Externa Environment Conducive to Export Expansion?' n this chapter we examine the three broad on India's export expansion,but there is little doubt classesofbarriersthat affecttradeinhorticultural that it would be a serious impediment if India products:domesticsupport,borderprotection, were to emerge as a major exporter. It is, therefore, and differencesin standards. We find that the most essential that India takes an aggressive position in serious problem is the border protection regime, theWTO negotiations,seekingnotjust significantly which is opaque, complex, and deceptively lower levels of protection, but also much greater protectionist. The level of direct payments to transparency,simplicity,and predictability in trade producers is not significant, while the assistance regimes. While India should continue to subject in the form of price support is another aspect of foreign standardsto scrutiny, and where necessary, the protectionist trade regime. Among the most legal challenge, an urgent need in this area is to perniciousforms of trade protection in horticulture improvedomesticstandardsanddevelopmechanisms arethe systemsof (i) entrypriceswhich discriminate to signal credibly higher quality. against efficient delivery, (ii) tariff quotas that subjectsimports abovespecifiedlowlevelsto harsh tariffs, and (iii) SSGs that create considerable DOMESTICSUPPORT AND uncertainty for successfulexporters. Furthermore, EXPORT SUBSlDBES preferential access schemes and tariff escalation discriminate against, respectively, imports from Though information is limited, it seems that certain sources and more advanced stages of governmentsextend less domesticsupport to fruits processing. Standards present a mixed picture. It and vegetables than to other agricultural sectors. is hard to distinguish between the standards that First of all, direct support to producers is rel.atively serve legitimate health, safetygoals and those that low in Organization for Economic Co-operation have been captured by protectionist interests. and Development (OECD) countries. Of the However, some of the most demanding standards major industrialized regions, only the EU reports today are imposed not by foreign governments but an Aggregate Measure of Support (AMS)2 for a by foreign buyers, reflecting increased consumer significant number of fruits and vegetables,while sensitivity to quality in all its dimensions. the US,Japan, and Canada indicate moderate levels of AMS support for a few commodities. In the Given the serious domestic problems identified in marketing year 2001-2, the EU's direct payments Chapter 4, it is difficult to establish how far the for fruits and vegetables were about Euro 800 external trade regime is today a binding constraint million, and took the form of production aid to 56 FROM COMPETITIONAT HOMETO COlclPETlilPIGABROAD banana producers and aid to producers of certain estimated to be around Euro 8 billion, with apples products intended for processing (for example, and tomatoes the largest beneficiaries-to the citrus fruits, lemons, grapes, and potatoes). A more extent of around Euro 2billion each. significant element of the EU's reported AMS for fruits and vegetables, is the product-specific In the marketing year 2000, the US made direct Equivalent Measurement of Support (EMs)~ payments to producers ofapples, onions, potatoes, granted through price support or minimum prices. and tomatoes, but only payments for apples ($174 In the marketing year 2001-2, the EMS was million) were above the de minimis level. Japan 'FABLE 5.1: Domestic Supp~xtby European Communities, hfarketingYear 2001.-2 (Calculationof the Current TotalAgpegateMeasurement of Support) Bananas 212.3 212.3 Apples 2059.50 2059.50 Pears 543.2 543.2 Apricots 120.5 120.5 Cherries 118.2 118.2 Peaches/nectarines 472.3 472.3 Table grapes 216.7 216.7 Plums 69.3 69.3 Lemons 280.7 280.7 Clementines 167.1 167.1 Mandarins 31.8 31.8 Satsumas 16.4 16.4 Oranges 321.0 321.0 Cucumbers 535.1 535.1 Courgettes 170.6 170.6 Artichokes 195.0 195.0 Tomatoes 1944.20 1944.20 Tinned pineapple 6.5 6.5 Citrus fruit for processing 212.8 Lemons for processing 52.0 Peaches for processing 62.8 62.8 Plums forprocessing 41.2 41.2 Pears for processing 30.5 30.5 Figs for processing 6.0 6.0 Tomatoes for processing 366.9 366.9 Grapes for processing 112.7 112.7 Potatoes for processing to starch 212.4 -178.3 34.1 Source:Compiled from WTO notificarions. - d.---pp-....p IS THE EXTERNAL ENIllRONMENT CONDUCIVETO EXPORT EXPANSION? reported price support for starches ($179 million country, Switzerland, were expenditures large ! for potatoes and sweetpotatoes in 1998)and direct relative to horticultural exports, with export paymentsto the vegetable and fruit sectors,but the subsidiesaccountingfor 21per cent ofthe country's AMS was below the de minimis level. Similarly, in exports. The EU's export subsidies represented Canada, only its support for dry beans was above less than 1per cent of the value of its total exports. the de minimis level (WTO 2000). Although not notified, the US indirectlysubsidized horticultural exports,albeit to averylimiteddegree, I Unlike in many other agricultural sectors, in through export credit guarantees. A number of horticulture the use of export subsidies is not developingcountries,includingTurkey,Brazil,and pervasive among the large industrial countries. South Africa, have also notified export subsidies Table 5.3shows the most significantexportsubsidy to the WTO, but these are unlikely to have had a expenditures based on the notification to the significant impact on world prices. WTO.Theamounts arewell belowthose reported for other agricultural categories. In only one TARIFFS Many importing countries, in particular the EU, -.r. J ABPX 5.2: Dsn~esaicSupport by US, MarkexingYear 2008 operate complex systems to regulate horticultural imports. In temperate countries, import tariffs (US Product-Specific Aggregate Measurements of Support: Non-exempt Direct Payments) and other measures tend to be the lowest and least restrictive on tropical fruits; and highest on temperate fruits andvegetables, particularlyduring Apples 169.0 5.4 174.4 the growing season.The conversetends to be true Onions 10.0 10.0 within many developing countries. Potatoes 11.3 14.4 25.7 Tomatoes 7.2 -- 7.2 --- The US, the EU, andJapan use, to varying degrees, ----.a Source: Compiled from WTO notifications. similar protection tools: low but highly dispersed ad valorem tariffs, specific duties, seasonal tariffs, TABLE Fzport StrbsidyExpenditures 5.3: entryprices, SSGs,tariffescalation,and preferential for Horricdture Pjl~rodaacts access cum tariff-rate quotas. Tariffs for a specific range of products depend on numerous factors, including the date of entry (seasonalityfactor), the degreeofprocessing(escalationphenomenon), and the relationships with exporting countries (preferentialagreements,regional, and bilateralfree European trade agreements,FTAs). Union 40 5301 0.8 Switzerland 14 69 20.6 Average tariffs are low but Colombia 13 521 2.4 this is deceptive -------- Turkey 1 1 2348 0.5 -- ~--p Sou~ce:WTO (2000) and subsequent WTO notification Averageappliedmost favourednation (MFN)tarifi updates; Export data from FAOSTAT. are low in all these countries, ranging from 0.9 per 58 FROM COMPETIBIIONAT HOME-80COMPETINGABROAD TABLE .AppliedMFN TariEs for Fresh Fruits axadVegetablesin the (&ad Countries 5.4: -. - -- ___ _.. ..-_ ma-- _^ _" I_- __l-..-.- "j Average l'ercentage Number , and ad All rates of lincs Standard of Total Country - valorem rates - -- -covered average Maxim~um Ilcviation Lincs "-- -- - - .. - - -.-- -. .. . --.-. - ._.- -.- ... - . . -. - X. -. ., .. EU Fresh Fruits (1999) Fresh Vegetables us Fresh Fruits (2001) Fresh Vegetables Japan Fresh Fruits (2001) Fresh Vegetables Canada Fresh Fruits (2001) Fresh Vegetables Source:WTO IDB Databaseat the originaltariff lone level (Gto 11digit tariff line dependingon thecountry).Cited in Diopand Jaffee(2004). cent for freshfruitsin canada to 9.2 per cent in EU TABLE Percentageof %@Lines atDifferent 5.5: Eevelsllntemds in Rich Countries: Fresh for the same product category (Table 5.4). The - . .-" -.-- -- .-- -.- average tariffs do not, however, reflect levels of - 'larifflevels ...--.. -... .Canada,. US.;EU:,Japan. Korea . . . -- .. . .- protection for a variety of reasons. Fresh fruits Duty free 60 19 2 7 0 T ~ r i @peaks 21-50% 0 6 0 9 59 Closer examinationofthe tariff structure highlights Over 50% 0 0 1 0 3 7 the importance of tariff peaks especiallyin the EU % s~ecific,corn- 31 1 25 O 5 and in Korea.79ble5.5 showsthat the US, Canada, posite mixed lines and-Japanhave the lowesttariffs,with, for instance, Fresh vegetables A 85 per cent of the US tariffs under 10 per cent. In Duty free 47 16 0 10 3 1-10% 7 59 11 69 42 sharp contrast, Korea and the EU apply high tariffs 11-20% 1 1 4 1 1 1 47 on many products. For instance, in Korea, 59 per 21-50% 0 1 6 0 7 1 cent of fresh fruit tariff lines lie between 20 and 50 Over 50% O 0 2 3 O 1 per cent and 37per cent of the lines are over 50 per % specific, corn- 45 9 5 2 5 cent. In the EU, 60 per cent ofvegetabletariff lines - - lie between 20 and 50 per cent and 23 per cent of Note:All figures in percentages.Averageappliedout-of-quota ad valorem and ad valorem equivalents of non-ad valorem the lines are over 50 per cent. We take a closerlook tariffs for equivalent data reporred. at these peaks for specific products. Source:WTO IDB Database. While the tariff structure is more transparent in countriesanalysedabove.Table 5.8 presents applied most middle-income countries than in the QUAD, tariff information on some other developing the level of average tariff is higher in the former. countries-but as we have already noted, average AverageappliedMFN tariffsin Morocco,India,and tariffs can be deceptively low. These tariffs pose a Brazil are far higher than those in the high-income potential hindrance to developingcountry exports, IS THE EXTERNAL ENVIRONMENTCONDUCIVE 88 EXPORT EXPANSION? TABU5.4:Percentageof TariELines atDifferent TABLE Percentage of'Tariff 1-ineson 5.7: Le~~;eHs/Xmtemds Rich Ccrun~triss:Processed in Fresh Fruits and Vegetables in SeEecteG -.........- ............... -................-. - .-....-..--..... Dex1oping countries by Tariff Level 7hrifTlevels Canada US EU Japan Korea .........-. .-- . . . .=..," ..---. -. .- . ... - - . . - - . . . . Ldo- G i r o - South Processed fruits 1'arifflevc.ls Brazil....India nesia cco.......... Africa - Duty free .. -. . . . . . -. . -. . . .-.. - 35 1 0 7 1 Fresh Fruits 1-10% 43 14 0 62 2 Duty free 0 0 0 G 15 11-20% 20 43 0 24 44 1-10% 0 0 100 0 47 21-50% 0 34 47 4 40 11-20% 100 3 0 0 29 Over 50% 0 0 5 3 4 2 21-50% 0 94 0 0 9 % specific, com- 2 7 0 0 10 Over 50% 0 3 0 100 0 posite mixed lines % specific, 0 0 0 0 10 Processed vegetables composite Fresh Vegetables Duty free 2 2 3 0 8 3 Duty free 24 0 2 0 46 1-10% 31 39 6 65 6 1-10% 0 0 98 0 6 11-20% 40 50 0 24 76 11-20% 76 85 0 13 30 21-50% 0 6 8 8 3 5 21-50s 0 15 0 19 13 Over 50% 0 0 3 0 3 Over 50% 0 0 0 68 0 % specific, com- 7 2 3 0 8 % specific, 0 0 0 0 6 ---- posite mixed lines . composite --- -"--- - W p m Note:All figuresin percentages.Average applied out-of-quota Note:Allfigures in percentages.Averageappliedout-of-quota ad valorem and ad valorem equivalents of non-ad valorem ad valorem equivalents of non-ad valorem tariffs for those tariffs for those equivalent data reported. equivalent data reported. Source: WTO IDB Database. Source: WTO IDB Database. particularly since South-South trade in fruits and is charged on imports with a CIF value above the vegetables is growing rapidly, and now represents entry price level. A specific duty is applied, in about one-fifth of developing countries' exports. addition to the standard ad valorem tariff,vcrhere the import price is below the entry price. This specific duty varies, depending on the level of the import price.To illustrate the complexity, the duty Simple, uniform tariffs are a rarity in horticulture. regime for lemons consists of six price bands for For example,under the UruguayRound Agreement the year, the lower end of the price band reaches its on Agriculture, the EU replaced its reference price highest level from 16August to 31October,and the system by a system of minimum import or entry specificcomponent of the duty rises very sharplyat prices which apply to fruits and vegetables such as prices below the floor in each price band. tomatoes, citrus,tablegrapes,and apples.The entry price systemworks in conjunction with the system Seasonal waniation of tariffs (FA0 2004). A band of entry prices is established for each period of importation during The seasonal variation in the entry prices itself the year, climbingin the peak European harvesting poses a problem. In effect, the tariffs faced by period (WTO2000).Thestandardadvaloremtariff India's agricultural exports may be much higher 60 FROMCOMPETITION HOMETO COMPETING ABROAD AT TABLE 5.8: Applied TariEs ;in Major Markets of Indian Crops, 2002-3 (simple average in percentage) -. - . ...- . .. . .-' - .- --. - - . -,. .& . ...- ..-. World's Major Importers (llevclopingCountries) - - . , . . --..- -.,.-. -.-.-....--. .... . .. ---. '. I! . , .:. . Saudi , ! t , . ..., 5 ' HS-6 ,.- -- l'roduc< .. --.. ' - . - - ' -.- .. -..- -.-- .---- .. . -.. -. --..- - China Kussia lndonesia. Malaysia Mex'iio .-~rabi'a "-, .->-- ---. -. ,>.--*- . 070190 Other potatoes, fresh or chilled 13.0 15.0 070200 Tomatoes,fresh or chilled 13.0 0.0 070310 Onions and shallots,fresh or chilled 13.0 15.0 070810 Peas, fresh or chilled 13.0 15.0 071290 Dried vegetables,nes 13.0 15.0 080300 Bananas, including $antains, fresh 13.0 0.0 080450 Guavas, mangoes and mangosteens,fresh 17.0 5.0 080530 Lemons and limes, fresh or dried 16.8 0.0 080610 Fresh grapes 18.4 5.0 080810 Apples, fresh 14.0 0.0 200190 Other vegetables,fruits, etc., pres 25.0 0.0 200950 Tomatojuice, unfermented,not contaminated 31.0 0.0 200960 Grapejuice, (incl.must), unferrnent 23.0 5.0 200970 Applejuice, unfermented, not contaminated 20.3 10.0 Source:LWCTAD TRAINS database and WTO IDB CD ROM files. on account of seasonal tariffs that are designed to peak harvesting season in India being between protect local producers. To illustrate, the EU tariff February and July. on apples ranges from 4.8 per cent + Euro 2381 tonne (April to July) to 11.2 per cent + Euro 2381 Table 5.9 makes an inevitably inadequate attempt tonne (Augustto December) (Table 5.9 and Figure to convey the scale and variation in protection. 5.1). Indian exporters find it difficult to take For example,tomatoesreceive anaverageprotection advantage of the lower tariff as it is applicable in the EU estimated at the 6 digit level to be only during a period of little, if any,production in India. 7.4 per cent. But if Indian imports arrive at the O n the other hand, the higher tariff is applicable wrong time and at a low unit value, they could during the peak harvesting season for apples in end up paying an ad valorem equivalentof as much India (July to October). There is also substantial as 100 per cent. seasonalvariation in tariffs for tomatoes in the EC TariRrate quotas and US, and for grapes in the US and Japan. In Japan, ad valorem tariffs for fresh grapes rise from Next, we consider the impact of tariff rate quotas 7.8 per cent between November and February to (TRQs) which were established in the Uruguay 17 per cent between March and October-the Round. Lower tariffs are applied to in-quota __7_------ - - -- -- --- - ISTHE EXTERNAL ENVlRONMENBCONDUCIVET6 EXPORT EXPANSION! TABLE 5.3: Seasowd Variation: Current MFN Import Tariffs for Selected Fruits and Vegetables- EC, US: and japan _ _ _ . ..__ ._ _- _ _ ._ . . ,._ . .^ ._ ... _- .- - -- - - -.__..I.-_ .. .- ..._. . .. ... .I- .I M FK applied cariffs " US , - - -- - ,._ ,_..- _ . - _ ,Japan.,. -. .-~. - . -... -, . -.--.-EC.- - . . -.-- . m Apples Fresh 17 11.2 (Aug l-Dec 31) 0 + 2389lt 6.4 (Jan l-Mar 31) + 2 3 8 ~ l t 0.74 Dried 9 6.4 c/kg Grapes Fresh 17.0 (Mar 1- Oct 31) 11.5 (Dec l-July 31) (Feb 15-Mar 31) 14.5 (Aug l-Oct 31) Free (Apr l-June 30) 7.8 (Nov 1-end Feb) + 96elt 11.5 (Nov l-Nov 30) + 96elt Dried 2.4 Tomatoes Fresh or 8.8 (Novl-May14) 3.9 (Mar l-Jul 15) chilled + 298elt 3.9 (Sep l-No 14) 2.8 (Jul 15-Aug 31) 14.4 (May 15-Oct 31) 2.8 (Nov 15-end Feb) + 298elt "W~ -------.*- Note: Value for customs purposes. Source: FA0 (2004) and staff compilations. shipments, and much higher tariffs to out of quota products, the EU does not have country-specific shipments. Fruits and vegetables turn out to be allocations,exceptinbananas,wherehistoricalshares particularly infested by TRQs, with 355 TRQs in are a determinant of individual country quotas. place, which is a quarter ofall suchmeasures (Table 5.1). Norway has as many as 1I 6 TRQs, followed The available evidence, and discussions with by Poland and Hungary with 37 and 33, Agriculturaland Processed Food Products Export respectively. From the Indian perspective, the 25 DeveopmentAuthority (APEDA)officialsindicate measures maintained by the EU are of the greatest that the current level of exports of fruits and significance,for whichTable 5.16 presents detailed vegetables from India are in most cases below the information. In addition to tariff quotas registered quota limit and hencemany ofthe tariffrestrictions at the time of the Uruguay Round, the EU also imposed by the EU are non-binding on India. For establishes country-specific, perally duty-free, example,with regard to bananas, EU's tariff quota preferential quotas for certain products, such as limit is 2.2 million metric tonnes, while Indids potatoes, dried onions, and sweet peppers from exports to the EU in 2002 were 20 metric tonnes, which India does not benefit. In respect of most worth $73,000, while a country like Ecuador FROM CObtlPET1740NAT HOMETO COMPETING ABROAD exported bananas worth $683,204,000.Similarly, the quota is 10,000 metric tonnes whereas India's the EU's non-specific quotas on potatoes and exports in 2002 were 16,491 metric tonnes. apples were, respectively, 4000 and 1500 metric Special safeguards tonnes, whereas India's exportswere 1and 2 metric tonnes, respectively. Oneareawhere Indian exports The possibility of resort by an importing country exceedthe levelof the tariffquota isfor tablegrapes: to SSGs,can undermine market access. Under the Figure 5.la: Entry Price for Lemons and 3-omaroes into the EU, 2804-5 LemonILime:Importprice (in Euro per 100 kg) EU Tarlff rate for Fresh Lemons (8 d ~ gHSt Code), May 2004-Apr 2005 ~ I c9 &3 Tomatoes: Importprice (in Euro per 100 kg) EU: Tariff rate for Tomatoes (8 digit HS Code), May 2004-Apr 2005 i I 4 0 : , ,I-~-~~TTI-T^-I-T-TTII , r v , . i 1 : I : i i I i c: I ~ 7 ~ ~ m o w m m ~ ~ o ~ ~ - c q q - ~ ~ q ~ o ~ ~ ~ ~ w - ~ ~ 4 m G w o ~ ~ o m G ~ ~ ~ g ~ ~ ~ ag m~ m ~ k~ O o~ ~ ~~ . Z ~a O ~ ~ o ~ w m h K W W W L D l n V l d d ` D ` D W I O V l ~ b IS THE EXTERNAL ENVIRONMENTCONDUCIVETO EXPORT EXPANSION? i 63 Figwe 5.I$: Entry Price for Apples ,md Grapes inre the EU, 2004-5 Apples: Import price (in Euro per 100kg) EU: Tariff rate for Apples (8 digit HS Code), Jan-June 2005 Grapes: Import price (in Euro per 100 kg) EU: Tariff rate for Grapes (8 digit HS Code), Aug-Nov 2004 2 m Lo z t 2 C? N N 2 ' 2 2 2 4 7 0 LD LO LD L? In d d d e d Source:WTO IDB Database. 64 FROMCOMPETITIONAT HOMETO 60MPETlMGABROAD Uruguay Round Agreement on Agriculture been notified for taking SSGs, especiallyvolume- (URAA),a number of countries have reserved the based SSGs. For examplein their latestnotification right to implement SSGs if the import price of to the WTO, the EU specifies that it too had certain products falls below a 'trigger price', or volume-based SSGs in the period 2001-2 on a if the quantities being imported exceed a 'trigger wide range of products, including tomatoes, volume'. SSGs have been registered for all cucumbers, artichokes, courgettes, oranges, those products to which entry prices apply. The clementines, mandarins, tangerines, satsumas, relationship between trigger pricesand entry prices wilkings and similar citrus hybrids, lemons, table varies depending on the commodity and the grapes, apples, pears, apricots, cherries, peaches, time of the year. In practice, many trigger prices including nectarines and plums. Price-basedSSGs are well above entry prices, limiting the relevance are rarer for fruits and vegetables,for examplesuch of the SSGs to importers. But a number of action has been taken byJapan for peas and Poland products in the fruits and vegetables categoryhave for tomatoes. TmE5.10: EU and k;SApplied and SpecificTaiffson SelectedIndim Fruitsmavegetable, 2004 .. - - .. -.--. --- -- -- - - (in per cent) . --..-- ---.....-.-. ----.--...----..--...- .-- ..... ---- -...-- ---.-. --.-.-.-- . -, .... Applied Tariffs No: of HS- : . . . . .:. -..Tariff..-.Rate at HS-8 * .. . .. . ...- . HS-6 . "-- Product Name -.. at-HS-6-. - s ---.- Maximum ~.-... , . . -. .- . .- 8 ~ i n..e.--. Minimum .-- . .-. .. -am.- -, w EU Markets: 070190 Potatoes, fresh or chilled 13.4 070200 Tomatoes, fresh or chilled 14.4% + 298 EUWmt 070310 Onions, fresh or chilled 9.6 070810 Peas, fresh or chilled 13.6 080300 Bananas, including plantains, fresh 680 El1000 kglnet 080450 Guavas, mangoes, and mangosteens 0 080530 Lemons and limes, fresh or dried 6.4% + 256 EUWmt 080610 Fresh grapes (seedless) 17.6 + 96 EUWmt 080810 Apples, fresh 6.4% +238 EURlmt US Markets: 070190 Potatoes, fresh or chilled 30 0.3 clkg 1.7clkg 070200 Tomatoes, fresh or chilled 45 22.4 c/kg 6.6 clkg 07031O Onions, fresh or chilled 45 0.8 clkg 5.5 clkg 07081O Peas, fresh or chilled 31 0.5 clkg 8.6 clkg 080300 Bananas, including ~lantains,fresh 45 0 1.4 080450 Guavas, mangoes, and mangosteens 45 1.5 clkg 33.1 c/kg 080530 Lemons and limes, fresh or dried 46 $O.O2/kg $O.O25/kg 080610 Fresh grapes 46 $1.13/m3 $8.83/m3 080810 Apples, fresh 15 1.1 clkg 1.1 c/kg Source:WTO IDB database. -- ISTHEEXTERNAL ENVlRQNMEtidTCONDUCIVETO EXPORTEXPANSION? TABLE 1 Number of 'rariffQuotas by Member andProduct Group 5.1 - --- - - cO^- .6.'". -. - -.-. . - .,-- .-- ---.--. .-- . . -. --m. . .- A. CE 01 ~d A ME EG B\' FV TB FJ , Member Cereals Oilsccds Sugar Dairy Meat Eggs Beverages Fruit & Tobacco Fibres Coffee Other All -.... Vegetables ..-... Australia - - - 1 - - Barbados 1 1 1 2 4 1 Brazil 1 - - - - - Bulgaria 6 2 4 6 2 6 - Canada 4 1 - 11 4 1 Chile - - 1 - - - China 4 3 1 - - - ChineseTaipei 1 1 1 1 5 - Colombia 13 20 4 5 1 7 - Costa kca 3 - 1 1 3 6 1 Croatia 1 - 3 - 3 - Czech Rep. 2 5 1 4 5 - Dominican Rep. 2 - 1 1 1 - Ecuador 6 2 3 1 2 - El Salvador 1 - 1 4 4 - EC-15 15 - 3 12 28 3 Guatemala 6 7 1 1 3 - Hungary 7 4 2 4 8 1 Iceland 17 22 3 4 1 3 1 Indonesia 1 - - 1 - - Isreal 1 - - 4 3 - Japan 4 1 - 12 - - Korea 15 5 2 5 7 1 Latvia 3 - 1 - - - Lithuania - 1 1 - 2 - Malaysia 1 - 1 2 1 0 2 Mexico 3 - 1 2 2 - Morocco 5 6 1 1 3 - New Zealand - - - - - - Nicaragua 3 1 1 1 2 - Norway 37 2 2 14 32 3 Panama 2 - - 11 2 - Philippines 2 - 1 - 9 - Poland 12 4 2 8 1 4 3 Romania 1 - - 3 1 - Slovak Rep. 2 5 1 4 5 - Slovenia 4 1 - 2 1 2 - South Africa 11 8 3 6 5 1 Switzerland 3 - - 2 6 3 Thiland 2 6 1 2 - - Tunisia 3 - 1 3 3 - United States 1 2 6 2 4 1 - Venezuela 20 19 3 6 1 0 - -------- AllMembers 217 124 --- 51 181 247 21 Source: OECD Agricultural MarketAccers (AMAD)database. IS THE EXTERNALENVlRQNNENBCBNDUCIIBBE TBg EXPORT EXPANSBOMB TA-BIZ 5.13: EU$ Applied Tarif&on Selected Crops by Selected @ourrt~~-~ 28693 (simple average inper cent) ------- ".-=---.. .----.---. -.-------- ---.---- ~--->- ,- _ HS-6 ~ Product Name .--".I_IUII^_ World India Morocco South Africa ~ u r g i r - -mr.-. =.-" I^-- X_l_r"-*e ;;;---- -""^--ii"-yl .m" IX,""I.IIIIPld-I.-%--- I-- 070190 Potatoes, fresh or chilled 6.23 7.1 0.8 3.29 070200 Tomatoes, fresh or chilled 7.36 4.32 10.9 0 070310 Onions, fresh or chilled 5.65 6.1 3.05 7.3 4.8 070810 Peas, fresh or chilled 3.03 6.37 6.37 6.37 0 071290 Dried vegetables, nes 4.84 7.61 0.99 7.35 0 080300 Bananas, including plantains, fresh 6.36 12.5 0 080450 Guavas, mangoes and mangosteens 0 0 0 0 080610 Fresh grapes 8.2 9.43 2.79 9.05 5.15 080810 Apples, fresh 2.49 2.9 0 151620 Vegetable fats and oils 3.96 4.8 4.8 0 0 200190 Other vegetables or fruits 6.81 10.46 5.21 6.37 0 200950 Tomato juice 10.99 ---- .- 0 ------p-.---a--m---" ~ Source:UNCTAD TRAINS Database. TmLE 5-1.4:GS Applied Tariffs opr Selected Crops by Selected Counrr~i2003 - (simple average inper cent) .~---.--&- -- - -.-, .----. -. --- -- --- -- ---~ --" W~ -.*--- --HS-6 -- ---Product- -.--.- ---.." World ---- - India Chile Mexico .- .- - m-- --" "-- .---.--~m"---- 070190 Potatoes, fresh or chilled 0 0 070200 Tomatoes, fresh or chilled 0 0 0 070310 Onions, fresh or chilled 0 0 0 0 070810 Peas, fresh or chilled 0 0 0 071290 Dried vegetables, nes 4.4 3.85 3.85 1.05 080300 Bananas, inluding plantains, fresh 0.04 0 0 080450 Guavas, mangoes, and mangosteens 0 0 0 080610 Fresh grapes 0 0 0 080810 Apples, fresh 0 0 151620 Vegetable fats and oils 6.82 7.7 7.7 0 200190 Other vegetables or fruits 4.28 2.32 2.32 0 200950 Tomato juice . - - 0E - _ - _ - l0 - ~ ~ - ~ ~ ~ ~ Source: UNCTAD TRAINS Database. 68 FROM 60MPETiT10N AT HOME TO COMPETINGABROAD ABLE 5.15: Tariff Escalation of Agriculturd themselves in differentways forIndian horticulture, Products in US and EU, 2003 including:prohibitivebarriers to accessingparticular markets; temporary losses due to the rejection of consignments that do not meet standards; higher consignment-specific or recurrent transactions costs due to duplicative testing, inspections or further treatment; and patterns of defensive products 6.9 4.5 0.5 3.5 commercialization whereby firms fail to pursue Agri, semi-pro- potentially profitable opportunities because they cessed products 4.4 1.1 0.3 7.0 believe that they are incapable of complying with Agricultural pro- cessed products 9.9 6.6 0.7 10.9 the relevant standards. Source:WTO IDB CD ROM 2004. A significant constraint on horticultural trade in generalare the SPScontrols imposedby destination at the 8 or higher digit level of disaggregation, and buyers. These are particularly stringent in the US SSGs creates a nightmarish trade regime. In andJapan. Between 1995and 2000, it is estimated particular, the entryprice regimes (which operate that nearly 270 SPS measures were introduced on for tomatoes, lemons, grapes, and apples) create a importsoffruitsandvegetables.Themostprominent strongdisincentive to export at a lowprice because case of prohibitive barriers to accessingparticular the specific tariff is designed to increase the price markets involves fresh mango exports to Australia, of importsto the entry pricelevel.Thus, the import Japan, and the United States. Quite apart from regime itself is designed to dampen the incentive the high level of standards, the lack of harmonized for efficient delivery. technical standards and treatments may be a hindrance to trade (FA0 2004). For example,some STANDARDS countries applythe CodexAlimentarius standards for maximum (pesticide) residue levels (MRLs), Differences between domesticand foreignstandards while other countriesapplytheirown, often stricter have been identifiedas an important barrierto trade MRLswhich mayonlypartially conform to Codex. in horticulture but the evidenceof their impact on India's exports is mixed. SPS measures are not a In the EU, marketing standards are in operation major barrier for the bulk of fresh exports that are for a wide range of fresh horticultural produce directedtowardsregional marketswith relativelylow (FA0 2004). The standards apply at all stages of standards. But some of the attempts to penetrate distribution, and include imports and exports.The higher income markets have been impeded by the standards apply to products produced within the failure to comply with required standards. Our EU, so tropical fruits and vegetables, for example, survey-based approach can only identify some of are excluded. Produce exported from a non-EU the issuesthat arisein a complexarealikestandards. origin must meet the standards applied to domestic Our findingsareneverthelessconsistentwith amore produce, in respect of quality, packaging, and detailedWorld Bank studyon the role of standards labelling.Productsthat meet the required marketing in India's horticultural trade which finds that the standards are issued with a conformity certificate; challenges posed by standards have manifested those failing to meet the standards are refused ~ IS THE EXTERNAL ENVlWQNMENT COIPbDUCBVETO EXPORT EXPANSION? entry.Somecountriesareableto carryout their own imported agricultural products. Importers must conformitychecks.Only two ofthese,Morocco and obtain phytosanitary certificates from the country SouthAfrica, are non-European. of origin. Quarantine laws require a cargo to be inspectedat the firstUS port ofarrival.Where pests Japan's phytosanitarybarriers are afar more impor- arediscovered,unless theyareendemic,APHIS will tant determinant of what can and what cannot undertake fumigation. Where APHIS determines enter the market than its import tariff regime (FA0 that imports of a certain product (often frolm a 2004). All consignments of fresh fruit and veg- specificorigin)mayleadto the introduction ofnew, etables require a phytosanitary certificate and are or not ~idel~distributed,plant pests into theUnited subjectto import inspectionon arrival.Dried fruits States it introduces a ban. are subject to import inspection but are excluded fromplant quarantine.Imports ofanumber offresh Somewhatsurprisingly,our surveyof Indianexport- vegetablesare banned from most countriesbecause ers revealscontrastingexperienceswithstandards.As ofplant diseaserestrictions. Fruits suchasmangoes, Figure 5.2 reveals, less than half reported a decline papayas, and iycheesmay be imported from speci- in exports as a consequence of rising standards. fied origins (principally China, the Philippines, Similarly,onlya few reported making adjustments and Thailand) provided they receive vapour heat in the product, its packaging, and even shifting and/or cold treatments. sales away from certain markets. A large number of exporters did not however report any response at Other products are affected by the policy of all to higher standards. One explanationis that the fumigating any fresh produce shipments where bulk ofIndia'sexportsare to regionalmarketswhere insects are seen to be present, even if these are standardsarelower (reflectingthe pattern of defen- alreadyendemic inJapan. Fumigation can seriously sive specialization noted already), and the small damage the quality of imported produce, and this proportion that was directed to industrial country has been a problem in the case of light coloured markets did in fact suffer adverse consequencesbe- vegetables such as lettuce and cauliflowers. In the cause of demanding standards.There are two other case of the organic sector, random fumigation of reasons, however, why our survey may not tell the organicfresh produce presents a major disincentive whole story. First, there is a selection bias in that to export organic produce to Japan, because once we were only able to interviewexporters regarding fumigated the product can no longer be sold as conditions in markets where they were 'able to organic. Exportershave experiencedproblemseven export'. Any exporterswho may have been obliged where hot air treatments have been applied and to exit asa consequenceofprohibitivelycostlystan- the products have been cleared by quarantine dards were not part of the sample. Second.,our arrangements in the country of origin. surveyfocusedon the impact ofchangingstandards rather than already high standards, which could In the United States, all products are subject to deter exporterswithout any change in their level. examinationby the Food and DrugAdministration (FDA) when they enter (FA0 2004). By law, all There is other evidenceto suggestthat standardsdo products must meet the same standards as pose a problem in industrial country markets. In domestically produced products. The Animal and the WTO's SPS Committee, India has supported Plant Health Inspection Service (APHIS) inspects several complaints raised against measures 78 FROM COMPE69TIQB4 AT H O M E $0COMPETINGABROAD Figure 5 2 : lmpaca sf, and Response to,Higher Standards in Desciinarian Markets, 2804-5 a ReportedImpactof h~gherstandardson export sales 1 .,...,.--.---.. ....-. .--.... -.,..-- --- - -- + 0 No response LL.2..-:fi:tiii:;-j-;.+,. _..I- ..- . ,,.-. .-. . _..- .37 n 2 - 0 Difficult to determine 16 5 -- ..-- . 7 , 0 5 10 15 20 25 30 35 40 Per cent of exporters reportingeffect b: Response of lnd~anexportersto higher standards 87 Changedthe products Changedthe formula, Shifted sale to Shifted sale to being exported packing and nature of domestic market alternativeexport the products markets 2Yes No c: Modificationsof the productionprocessin responseto higher standards Applied additionaltreatments Undertook additionaltesting Upgradedpack house quality management systems Changed packingtechnologies Upgradedpack house infrastructure Promoteddifferentproduction/post-harvestpractices Segregatedraw materialsfor exports vs domestic sales 79 Intensifiedthe supply chain oversight Changed raw material sourcing No changes ?---77---- T i 0 10 20 30 40 50 60 70 80 90 100 a Yes g# No Source: Survey of exporters (2004-5). -A --.- pp I ISTHE EXTERNAL ENVIRONMENTCONBUClVETO EXPORT EXPANSION? k regulating imports of fresh and processed fruits It is also important to note that statutoryfood safety andvegetables (Robertsand Krissoff 2004).These policy instruments are being overtaken by a large include complaints against the EC on sampling number of private standards imposed by ,global methods for aflatoxins in dried fruits and other retailersand processors,led by supermarkets.Jaffee ~roducts;against Australia on import restrictions (2003) draws an important distinction between on durian and tropicalfreshfruit (suchas mangoes, compliance standards which are legally mandated bananas, and pineapples).Furthermore, in theyear and those which are a commercial requirement. 2003, Indian grapes were found to be in violation Supermarket standards are usually even higher.5 ofEU pesticideresiduetolerances.The government All export firms must now have sophisticated respondedby imposingaset of mandatory controls qualityassurancesystemsin placeto document seed and product checks designed to excludeproducts procurement, planting schedules, agrochemical that did not meet EU norms, which appearto have and fertilizeruse, and which ensurefulltraceability been successful because no further adverse tests through the supply chain (FA0 2004). have been reported in the last two years. However there remain outstanding technicaland institutional The importance of buyer standards is revealed in issues that need to be resolved, and in the longer Figure 5.3a,which showsthat most of theproblems term, the private sector will need to address the have arisen not in the form of restrictionsby foreign standards-related challenges facing the industry. authorities, but warnings and reductions in price and demand from foreignbuyers. Similarly,Figure A case study of the experience of ten mango 5.3b reveals that by far the most important factor exporting firms reveals that they faceat least seven was demands from external buyers. different types of non-tariff measures (NTMs) in overseas markets (Wignarajaet al. 2001).~These Compliance with standards can be costly. In our include packaging and labelling regulations, sample, one in ten firms reported a cost increase pesticide residue limit regulations, chemical greater than 11 per cent, and two-thirds reported content limitations, fruit fly related regulations, at least some cost increase (Figure 5.4).Table 5.8 uniformity requirements, labour standards, shows how the mango firms surveyedin Wignaraja and documentation procedures. Each of these et al. (2001)have responded to the standards.The regulations has a negative effect on Indian estimates of the costs of compliance are patchy, exporter's performance in their respective export but do confirm that in some cases there are likely market.The imposition ofNTMs follows aspecific to be increasesin furedcosts,variablecosts,or both. pattern. Industrial countries such as the US, EU, That the cost of meeting standards is poteritially and Japan impose sophisticated regulations like high is also consistent with the findings of Jaffee registration, packaging and labelling, pesticide (2003) that one large Kenyan producerlexporter residue limits and aflatoxin content, fruit fly, and expects to spend around $300,000 per annum, labour standards.On the other hand, the problems or 3 per cent of turnover, on annual food safety faced by exportersin the Gulf countries arecaused management costs. Collinson (2001), writing on mostly by uniformity in size of product and the Kenyan flower industry, reports that the documentation procedures (Table 5.17 lists the management time to implement compliance, in barriers). the form of documentation and record keeping, is 72 FROMCOMPETITIBN AT HOMETO COMPET~NGABROAD Figere 5.3: Signails &at ReBect a Failure to Meet Rising Sta~~dards Fact~rsStimula~inga and Positive Response, 2004-5 a: Signals that reflect a fa~lureto meet risingstandards -- -- 11- ----- ---- i--- no response 35 -- - -- -- j( -..._ .-_" _.____-__I.__-._ .-___, CLI inordersfrom~mportanlb~yer,.. back .,., ., .:.., . , ;;., ., . , 24 . ' .--...::.:,. ~ , -.... ...:, . .A. *- ., . , warning from b~yerof off'cial agency :.,---x-L- -1:. . -. .-. ..,, . 13 __I_d , reducedprice from buyer 10 frequent product rejection 8 oneiperiodicrejection by Indianauthorities other 1 0 banitemporary ban on imports by foreign authority l o 1 o banitemporary ban on exports by Indian authorities oneiperiodicrejection by external officialagency I 0 oneiperiodic rejection by external buyer r----7 0 5 10 15 20 25 30 35 40 b: Most important factors stimulating responseto rising standards Most important Second Third technlcaVfinancialsupport provided own sense of opportunity and by industry organizat~ons need to remain competitive a ~ncent~vesor techn~callf~nanc~alsupport lncentlves or techn~calif~nanc~al from the lnd~angovernment support from external buyers %+stncter regulatoryenforcement @? demands from external buyers by lnd~angovernment demands of external regulatory authority Source: Survey of exporters (2004-5). 74 FROM COMBaEBITiBPIIAT HOME 80 COMPETINGABROAD Figure 55.4:Impact of Rising Standards on Production Costs, 2004-5 Change in ex-pack house or ex-factory costs of products due to measurestaken in response to rising food safety or plant health standards >lo per cent increa, IT.---7.: (_.---? i:.: ,.111 L --..;:>:-;. :.-. .! , -. ..... . --..-- .-. - -.-.....-. ...- -.. . . . -? . -... -.. , , . ,:. . ,.. . . > ~ 8-10per cent increase -i '. . . ,,l! . .,.. . L : x L L : ::i.i.--.,1.. ' : 28 ' '. ' , ...:. ._.. ....- , ..?. ., , -..-,..i<~- 2.. -.~.-2;2 -C. ---- - '::' : ...' , ~ . C _ . . i . . . _ . ---.. ____.__._.T , .. .. .ii . ., , ... ;:: I < . ,'..: -.-.--. . 1 , , ,. 'V 1-5 per cent increase : ~ . . :, . . " +-'--.--2::-Li-- . ,.I ..:I .,.'. . : .*-! '. :, -' . . . ; 38 5 1 -1.': -.-.L 1_: i.:LL& ...-- -. .. no noticablechange in cost 15 - reduced average cost of production 8 Source: Surveyof exporters (2004-5). one of the biggest costs faced by growers and falls Testing and Quality Certification (STQC).What disproportionately on small growers. is needed perhaps is integration among these bodies, harmonization, and a national notification It would be wrong to describeall standard-related of standards. A major revamp of the food law problems as a manifestation of protectionism in aimed at consolidation of responsibilities and industrial countries. Inadequacies in domestic jurisdiction, as well as closer links to international standard settinglegitimizeforeign barriers. Indian standards, is now underway, although there is no food law now falls under five outdated statutes, clear time frame for its completion. with jurisdiction spread acrossfour ministries,thus greatly increasing the cost and complexity of In fact, standards need to be seen not only as an compliance. Concerns have also been expressed impediment but alsoas an opportunity, as has been about weaknesses in the enforcement of pesticide- argued by Jaffee and Henson (2004).They show related regulations and ensuring standards of that rising standards accentuate underlying hygiene, which undermine the credibility of supply chain strengths and weaknesses, and thus domestic certification processes. India today has impact differently on the competitive position a plethora of regulatory authorities tackling these of individual countries and different market issues, often in a piecemeal manner. They include participants. Some countries and industries are various central ministries (Commerce, Food and even using high quality and safety standards to Consumer Mairs, and Food Processing), export successfullyposition themselvesin global markets. promotion institutions, standard-setting bodies The challenge for countries like India is to take a (24 of them), and a host of regulating bodies at proactiverather than adefensiveapproach, so that thestate level. Other important authorities include they can exploit their strengths and overcome the BIS, National Accreditation Board forTesting their weaknesses to benefit from the emerging and Calibration Laboratories (NABL), National commercial and regulatory context. Someevidence Quality Campaign (NQC), Central Committee for this more optimisticview is to be found in our of Food Standards (CCFS), and Standardization survey of exporters (Figure 5.5). Fifteen per cent I IS THE EXTERNALENVIRONMENTCONDUCIVETO EXPORT EXPANSION? of exporters reported that rising standards had a they facein the four markets where most of them beneficial impact on their exports, which was only operate: Bangladesh, East Asia, Europe, and the slightly lower than the 18 per cent who reported Middle East. IYTBsemergeas moreimportant than an adverse impact. customs duties in all markets, and are comparable in significance with international transport costs. Finallx be Of some interest to It isalsoevidentthat payment problemsarea serious exporters' evaluationofthe differenttypesofbarriers iSue in allmzkekewbut are mostacutein ~ ~ ~ ~ l ~ d ~ ~ h Figure 5.5: 0%-era11Impact of Ksing Standards on Exports, 2884-5 Impact of rising standards on exports Major adverse impact L!4 2 I Minor adverse impact 16 J .... .. - - , . . . . . , ' . . .. . . .&. I * , (' I ( NCI not~ceaoleimpact ; . . ' . i 68 % L.. -.L-. ...: -L ...... _L --_I ..L.1;.1 Minor benefit to trade 10 a - L3% Malor beneft to trade 5 0 10 20 30 40 50 60 70 Per cent Source: Survey of exporters (2004-5). Pigwe 5.6: E~~duationBarriers in bur DestinaGon h4arhts, 2004-5 sf Barriers to Exports:Variations across destinationmarkets ....--- *..,; .. .&' .. -.n);,--- . ... .--157:.I ..',l %'. -?- & - . - " . ~ 2 * . . - + v ' w > . d ! . . ~ . ~ : ~ : ~ . ~ . ~ < . . = . Internationaltransportcost *.. --.--;-----....--..- . . "....-....-. .--- .*--.- ............... \ . .,. . . .-- .< -.,-i-. .- -.. - --..---..-.... -. ..- ...... - . - ... - --.- ..-A i-..-,,. ..* t-iwf<; . 2m.xT-.q.. ":.,.- , -,"-..- , . - - Qr%-----~---.--- '.-_.I -F ?.'-''"L.''"ii"'c~*i. +..+u.__. , . . High custon duty :-.:::--:,.... 2: +;L.-'&L LI.L.; _._.-:&....-r-_ :;----_L... ...... -....-... --. -....-. - T-. -2 . .. - ..... - ....-......... Payment problems =- ..r-?.m-~..iTi.n-....r:---x.lr-.. ...... Non-tari" oarriers -s.-:--~ .f T : ! ~ ~ * : ~ ~ ~ ~ A + ~ ~ : ~ ~ * ~ ~ * ~ ~ ~ ~ + - , ...... ..... __....A ... T __I_ ................... -. ... -. .. -.... -. ..-. ,..-.-.:-:.&+LA-> *;-,5L--xm ---.,+ ..-... -..7;,-:- .-.-. . .- Competitionfrom others Fz%.%-f:+T- , . _ -irir- .. ..-yET? %+.-a+--&..& ...... ,............... T..-.. ....... ....................... ... e7-a7".: . . ~ ; . - ~ . ~ - . > ~ j : : j - * ~ - ...-2 i __T .. 57 , ....... ~ ~ ;i Lack orand name ;:: .---:I-*;_A.-:~""---c.~ ,._:I-3-L-L_' _.;:; --. .--.-. ..-. - - - -- &z%.w7-v*?-TAT-F, ---- ..:..,- 4,..&+,&:?.$.c..- -.;T:c.:- : ! -. -- Volatil.ty of oemand - - .-zT:~-:"~~~~--~TzY:-?I~.._'.-".::--~.x-x.--_~. .. ,, . . . . . : .--.-. ...... - Anti-dumping issues 0 1 2 3 4 5 6 7 8 9 10 @ EastAsla B M~ddleeast @ Europe 3 Bangladesh Source: Survey of exporters (2004-5). i r ~ ~5-16:' ~ , l neeailed Indornrraaioaon the EU's 'TariERate Quotas -- .- . -. . - - .- - - -- 1 3 -.4 ,G -.*-_ - - - - _ --- 5- N - ;r -"'--- - - --, 7 9 1 1 -1- -. - 12- . -, --* . - - 2 .. - 4, -8 . j j - ~ -. - ,.- q - .'rr - . - - . . & b e --' - I r,lde Hound Tariffs $ - = - - k - -> : - .- - 'A. - . ,,,- - - * . - - =- .. " -- . '-- .u - .T -- :- - _(r . .--- - . --- - Rate - A = Spccific rsci ap- -of .- -- :i: - -= 2- In- - . - --> - . i- -- * . - (1) plied Quota Q u o d l'run- - - . - . . a - - . "; -r r1.1) 7 b . --... - ik ((r7) care . . -- x tnl bi - - - .- Global (pel (per. (per --. IOLII- .- .Imports "-- . (prr -I)es'clipi~or~"- . 1EG-115No- _ _ (0,- . - - - - . Unitc Quota* - ccnc) cenc) -- -- - - - - cent) Vaiuc- - - - -- " *- - -- - = - - Quantity cent) -.--- - .A. & .A. -" Manioc (casava) LD 071410 TNE Manioc (casava), other than pellets... LD ex071410,ex071490 TNE Sweet potatoes (not China) LD 07142090 'TNE Sweet potatoes (China) LD 07142090 TNE Fresh bananas, other than plantains HI 08030019 TNE Oranges FC ex080510 TNE Other citrus hybrids FC ex080520 TNE Lemons FC 08055010 TNE Table grapes, fresh (21.7 to 31.10) FC ex08061019,08061010 TNE Apples, fresh (1.4 to 31.7) FC 08081099,08081020,08 TNE Pears, fresh, other t h a n i n bulk (1.8 to FC ex08082050 TNE Apricots, fresh (1.6 to 31.7) FC ex08091000 TNE Cherries, fresh, other than sour cherries FC ex08092095 TNE Manioc starch (manufacture of food prep) ID ex11081400 TNE Manioc starch (manufactureof rnedicarne) LD ex11081400 TNE Mushrooms, prepared or preserved HI 20031020,20031030 TNE Potatoes, fresh or chilled: new FC 07019051 TNE (1.1 to 15) Carrot and turnips, fresh or chilled FC 07061000 'TNE 10,989 100 Other vegetables...sweet peppers FC 07096010 TNE 87,277 100 (cont4 Table 5.16 (contd) Dried onions FC 07122000 TNE 12,000 0 13 10 13 56,752,209 29,207 81 Almonds, other than bitter FC ex080211, ex080212 TNE 90,000 0 4 2 5 368,517,190 136,113 100 Orange juice FC ex20091199 TNE 1500 0 15 13 15 78,160,331 91,620 6 Grape juice (includ~nggrape must) --- - ---- 35-,- 95 --.,---.,-.-"..--- .--.- LD 20089943 00 0 .-.- 4 3,449,550 - - - - 3965 -- 20 -.--=.* "*--"--=*--. ".w-- " ~ --v =.-- Notes: Descript~on:detalled descript~onof each TRQ tariff line from WTO in column 1. REG: Administration Methods In column 2. Code Administration Methods AT Applied Tariffs FC First-come first-served LD Licences on Demand HI Historical Importers ST StateTrading and Producer Groups MX Mixed -.. ... , " .. ..".,. . HSNO: Harmonized System (HS) Numbers, typically 4-6-10 digits long in column 3. Most countries recognize the same first 6 'harmonized' digits. Units: the unit reported in the Notifications or TNIAGISIS paper in column 4. Quota: the quota as shown in Notification and TNIAGISIS paper in column 5. Specific versus global: allocation of quotas to a specific country or to all countries in column 6. This information is available in the Notifications. Trade weighted applied tariffs: weighted average applied out-~f-~uotatariffs in column 7.It refers to the ratios of applied tariff revenue over total value import by TRQ. Bound tariffs T1 and T2: columns 8 and 9 indicate the in-quota and out-of quota bound tariffs. These data come from ERSIUSDA data base, which is available at: www.ers.ztsda.ou/d/Wt~/Wt~Tariff databme/ Total value imports: total value import reported in IDB in column 10.FAOSTAT were used to check some values imports. Total quantity import: total quantity import reported in IDB in column 11. Total in-quota and out-~f-~uotaimports but not non-quota. Fill rate truncated: the simple averagefill rate ( defined as the average of the ratios of the value of in-quota imports over the vaiue of quota) except it takes a maximum value of iOO per cent in column 12.It ignores over-quota imports. Source: Database developed by de Gorter and Kliauga (2005). 98 FROM COMPETITlONAT HOMETO COMPETING ABROAD TABLE 7:Mangses:NTMs Faced by a Smple ofTndim Fii-rs~sin Export h4arkers 5.3 . . .-. -- . .- --.....-----.-.-. ....-.......... -............... - -.. . . .--....-...- --..-----.-..----..---.-- --. . Export-'.Marker Y.I.Lfs . . . - . .- ..... . ---. . ...,-...-- ...... --.---- . .. ....-.-..-,...-....-. I--...-.. --I- - 2 . USA Packaging and labelling regulations on mango pulp, import ban on fresh mangoes. Uniform size and adherence to the FDA pidelines on fruits and vegetables Japan The packaging and labelling regulations for mango pulp exports, import ban on fresh mango export Europe Uniform size of fresh mangoes, aflatoxin residue limits in dried mangoes, excessive documentation, pre- andpost-harvesttestingand otherproceduralrequirementsrelated to use of certain pesticides and fungicides,labour standards (child labour issue) Pesticide residue level, uniformity in ripeness, colours, and size for fresh mangoes, pesticide residue regulations regarding mango chutneys and pickles Germany Pesticide residue regulations in mango chutneys and pickles Spain Pesticide residue regulations in mango chutneys and pickles Gulf countries Uniform size of fresh mangoes, ban on export of Neelam mangoes, legalization of documents Uniformity in ripeness and size, checks at port of entry by non-technical personals with vague and arbitrary specification Kuwait Uniformitv in ri~enessand size Source:Wignaraja et al. (2001) which also happens to be the market where Indian that is not exempt from Uruguay Round reduction exporters face least competition. commitments. Pricesupport can be provided either through administered prices (involving transfers from consumers) or through certain types of direct NOTES payments from governments. For the purpose of total AMS calculations, price support is generally 1. This Chapter draws upon Diop andJaffee (2004). measured by multiplying the gap between the 2. The AMS was defined in the Uruguay Round applied administered price and a specified fixed Agreement on Agriculture ( U M ) as an aggregate externalreferenceprice ('worldmarket price') by the measure,designedto quantifjrand comparecountries' quantity of production eligible to receive the annual levels of domestic support. In principle, the administered price. Calculation detailsarespecified AMS aggregates the effects of all trade-distorting inAnnexes 3 and 4 oftheAgreementonAgriculture. policies (directsubsidiesplus implicit subsidiesfrom 3. Where it is not practicable to calculate a product- border measures) into a single measure of support. specific AMS as set out in the Agreement on But theWTO definition ofAMS does not explicitly Agriculture, provisions are made of an 'Equivalent take into accountprotection granted through tariffs. Measurement of Support' (EMS). The ELMSis The impact oftariffsis, however, implicitlyincluded generally calculated on the basis of budgetary insofaras they lead to, or make it possibleto sustain, outlays-the money spent by governments to a domestic price above world prices. In fact, price support a product, for example, rather than market supportmeasures have been the most important type price support calculated with respect to a fixed of policy measure within the category of assistance external reference price. -- iSTHE EXTERNALENVIRONMENTCONDUCIVETO EXBOW EXllANSlON? 79 4. A recent World Bank mission focusing specifically traceability,adherence to good agricultural practice on standards issues in horticulture has identified a (GAP), and the possessionof a hazard analysis and number of similar problems in other commodities critical control point (HACCP) system are not as well. This Report is expected to be complete in legallymandated but may be imposed by the buyer. 2005-06. Reardonet al. (2002) note that allexport firmsmust 5. For example, adherence to maximum residue levels now have sophisticated quality assurance systems. (MRLs) of pesticides in food and the possession of Increasingly, retailers have expanded standards to a phytosanitary certificateare legalrequirements for include broader social, environmental and ethical any exporter. Many other requirements such as issues (Dolan and Humphrey 2000). 6 Prioritiesfor Domestic Reform nternationa Engagement ooking ahead, India needs to servicessector.TwoWorld Bank reports are under simultaneouslylower the logisticaltax at preparationthat will providecomprehensivepolicy home and take an aggressive position in recommendations on trade facilitation issues theWTOnegotiations.Theinefficienciesidentified and on standards in horticulture. These reports, in the servicessectorssupportinghorticulturereflect aswell as other work by the Government of India, larger problems affecting trade in all agricultural the World Bank, and other research, suggest that products. Thus greater liberalization of services the following measures could support trade in supporting agriculture, including air, maritime, Indian agriculture. and road transport, as well as improvements in storage and marketing infrastructure and services are critical if India is to emerge as an important 0NEGOTIATIIONS:TARIFFS exporterin agriculturein generaland in horticultureAND STANDARDS in particular. At the same time, it is essential that India plays a more active role in the WTO India should use the negotiations under the Doha negotiations, seeking not just significantly lower Development Agenda to eliminate distortionary levels of protection in destination markets, but protection at home and abroad. In particular, it also much greater transparency, simplicity, and should addressthe opacityandvariabilityof tarifh predictability of foreign trade regimes. abroad, as well as the escalation in foreign tariffs that dampens the incentive to move into more There alreadyexista number ofstudies/reportsthat highly processed categories. At the same time, it have persuasivelyargued for further liberalization should consider elimination of high domestic of services sectors both at home and abroad to tariffs which tax consumers far from production stimulate and sustain India'shigh growth rate.The regions and in the off-season and end up World Bank's report 'Sustaining India's Services subsidizing not the farmer, but the inefficient Revolution:Access to Foreign Markets, Domestic domestic logistics and storage systems. Reforms and International Negotiations' is one such report that contains a detailed discussion of There is a need to distinguish dispassionately the priorities and strategies for reform in the betweenthe SPSrequirements imposed abroadthat PRsOWBTlES FOR DOMESTICREFORM AND INTERNATIONAL ENGAGEMENT are unnecessarily burdensome and protectionist, MARITIME TMNSPORT from measures that servelegitimatesafetyand health INFMSTRUCTURE AND concerns.Theformershouldbe the basis for bilateral SERVICES consultations and, where necessary, should be challenged under the WTO's Agreement on SPS India's TFYPreport contains the followingrecom- standards. Accepting the critical role of standards mendations to improve the quality of port services in horticulture trade, given the evidence that and to reduce maritime costs: (i) Amendment of private standards are becoming more important the Major Port Trusts Act, 1963, to enable faster than mandatory standards, India should adopt corporatization of major ports staring with JNPT a coherent, forward-looking strategy to position and Haldia (this Bill has already been introduced its horticulture in regional and international in Parliament in 2001); (ii)development of multi- markets. In particular, there is a need to strengthen modal transport from the two gateway ports, and build confidence in India's food safety and JNPT and Chennai, which arecapableof berthing agricultural health management systems- mother vessels,by a raillroad bridge and equipping including enforcement of pesticide-related them with modern container handling facilities; regulations,assuranceofproper hygienicconditions (iii) revision of the tariff policy with the overall in factories, and enhanced credibility of phyto- objective of moving towards competitive pricing, sanitary certifications. elimination of cross-subsidization, and improve- ment in standards of services. For this to happen, AFIR TMNSPORT theTariffAuthority of Major Ports (TAMP)should INEMSTRUCTURE be restructured as an appellate body; and (iv)steps should be taken to involve private sector in a big AND SERVICES wayto augmentport capacityandto executeprojects on a BOT basis. The Committeeon CivilAviation Sectorin itsreport has suggested a number of measures to reduce air transport costs and improve the quality of services POLICEESTO CREATE A including (i) substantial lowering of excise duty COMMON DOMESTICMAWMlfT and sales tax on ATF and freedom to source ATF from both public and private sectoroil companies; AND TO INCREASE loweringof airport chargesandliberalfiscal regime; COMPETITIONAT HOME (ii)foreign equity investment norms pertaining to both domestic and international scheduled air A recent World Bank report on Indian agriculture transport servicesshould be further liberalized to makes the followingpolicy suggestionsto increase allowfrom 49 to 100per cent foreign investment in domesticcompetition in agriculturalmarketingand different air transport servicesand allowingforeign storageactivities: (i)removepermanentlyallstorage, airlines to invest in airline sector; and (iii)gradual marketing,andcreditrestrictionson allcommodities privatizationof airports,starting with Mumbai and except during periods of emergencies; (ii) remove Delhi, which has been recently completed. all reservationsof agro-industrial activitiesfor SSI; 82 FROM CBMPETBTIONAT HOME TO COMPETINGABROAD (iii) The government should encourage states to (iv)The government can foster the development amend theAPMA to allowthe non-governmental of contractual arrangements in agriculture by sectorto developand operateagriculturalwholesale facilitatingthe creation of producer organizations, markets and farmers to market their produce legislatingappropriate contract law and enforcing wholesale outside the state-regulated markets it effectively. (already being done in some states); and Appendix and taste are also important. However, the NPC estimate does not capture these. he study relies on price comparison-based estimates of the nominal protection of Domestic Price: In estimatingthe NPC, domestic India's principal horticultural crops. regional price is taken as the average monthly The crops covered are apples, bananas, grapes, wholesale price prevailing in the local mandis mangoes, and oranges among fruits; and green (producemarkets) in thesecities.Theseareobtained peas, okra, onions, potatoes, and tomatoes among from the Indian Horticultural Databasefor various vegetables. The hTPC at the commodity level for years,publishedby theNational Horticulture Board selectedfruits and vegetables are estimated at four (NHB).Yearly prices are obtained as the weighted major consuming centres in India located in the average of monthly prices, weighted by monthly cities of Delhi, Mumbai, Kolkata, and Chennai. arrivals. These cities are located in the northern, western, eastern, and southern regions of the country Border Price:Theprocedurefollowedfor estimating respectively, and are assumed to be representative international prices depends on whether the of markets in these regions. These cities account commodity in question is actually being imported for a majority of trade in fruits and vegetables. into the country or not. The price competitiveness of Indian commodities For products which are being imported into India, is measured through the NPC. This coefficient is month-wise information on quantity of imports, defined as the ratio of domesticprices in a market and their rupee valuewas obtained from the office to the international referenceprice. An NPC that of the Directorate General of Commercial is greater than unity implies that imports have a Intelligence and Statistics (DGCIS).International price advantage over.domestic produce which import prices are estimated as the unit import price renders domestic produce uncompetitive. It is, (CIF) which is derived by dividing the value of however, important to remember that there are imports by quantity Usingthis methodology allows several dimensions along which horticultural us to get a rich database of the spatial variation in commodities compete with eachother. Other than price competitiveness of produce across different price, quality aspectssuch as freshness,size, colour, regional markets 2nd also of the time variations in 84 APPENDIX I NPCs across months. This is important given the Tha$leAl.1: Assumed Potential Colnpetitors - seasonalityof production. '.-~..--. Product .---...d--1-...L-. ..!.- Assumed competitor . ' . , I ::''> .... ... "-. Banana Malaysia For products which arepotential importables, but Mango Pakistan for which there have been no actual imports, the Tomato China comparison is with made with prices of potential low-cost exportersin India's neighbourhood.Table Okra Malaysia A1.1 providesa list of theseassumed competitors. Onion Emt Unit export prices (FOB) are calculated using information on actualexport quantities and export assumed that all imports arrive here first and earnings obtained from the FA0 database. The are then transported to the various centres by reference CIF import price is estimated by adding road. Transportation charges were estimated by international freight charges from these countries contacting various transport companies and to Mumbai and is based on information obtained obtaining their rates. from actual transporters (data pertain to 2004). The freight charges have been deflated to cover Importers' Margin: Traders' margin is estimated the study period using the liner freight indices at 6 per cent of the landed cost (import CIF price published by the UNCTAD Secretariatin various + port charges). issues of the Review of MaritimeTransport. Costs quoted in dollars were converted to rupee terms International Reference Price: The international by multiplying with the yearly exchange rate. referenceprice is the border price adjusted for port Port ClearanceandOther Charges:These estimates charges,transportationcosts,andimporters'margin. have been obtained from importers and traders' The NPC is calculatedas the annual international surveyed for the study. reference price divided by the domestic price. All-India aggregates are obtained by averaging Transportation Costs: Since most of the trade regional NPCs, using yearly arrivals at each centre in fresh produce takes place in Mumbai, it is as weights. Appendix 2 importance in trade, since this can also be taken as a rough measure of its future importance. On .he studyis based on aprimary surveythat this basis we arrive at a basket comprising five covered 1400 farmers, 200 commission fruits, and an equal number of vegetables ('Table agents, and 65 traders across 15 Indian A2.1).This basket coversthe most important crops states for 10 commodities. in the fruits andvegetables categories:in fruits this Choiceofcommodities:There arethreecriteriathat TABLE M ,1: Gommodiey-wise Produceon have been used to prioritize among commodities: in the StatesSurveyed (i) share of that crop's production in total volume of production within its broad category, (ii) share of total production by value; and (iii) its current Okra. 106 Banana 70 33 19.6 Grapes 90 2.8 7.1 Mango 58 23.3 53.8 Mosambi 92 2.8 3.5; Average 78 64.7 91.9 Green peas 77 2.3 8.5 Okra 81 3.8 9.5 Onion 56 5.9 5.3 Potato 75 27.6 35.2 Tomato 46 8.4 12 - Average 63 53.7 --- 70.6 ---- -"- Soyabean, 102 Mustard, 100 Source: Indian Horticultural database 2003; NHB Own h:j Vegetables pjCash Crops Fru~ts Calculations. covers about 65 per cent of total production by conditions that prevail across states), and (ii) crop volumeand 92 per cent by totalvalue. Comparable yield or productivity. The following methodology figures for vegetables are 54 per cent and 71 per was used to choose the states. cent (TableA2.1). Choose two high income states, one with the highest productivity for that crop in that For thefarmers' survey astratifiedrandom sampling income category, and one with the lowest; technique was followed. For each commodity up Choose two low income states using the same to fivemajor producing stateswere chosen. In each criterion; state,oneor two districtswere selected,and in these The fifth stateis chosen as onewith the highest districts,farmersfromdifferentvillageswerechosen volume of production. randomly according to the following criteria. District: In each state, one or two districts with Choice of states: From a trade point of view the the highest production for the commodity under objectives while choosing the states to be covered study were chosen. This selection was based on foreachcropare: (a)to coverstatesin differentsocio- production data availablewith the state statistical economic conditions, and (b) to cover as large a abstract. range of cost differentials as possible. Since the The final choice of commodities, states, and the secondisnot directlyobservable,we useproductivity districts is listed in Table A2.3. as a proxy. BlocMvillage:In each district, two blockswith the Thus two different criteria were used to create a highest production were chosen. In each blockone matrixofstates:(i)levelofper capitaincome(which village was covered. served as a proxy for the diverse socio-economic Farmers: In each village, at least five farmers have FigureM.2: States Surveyed been surveyed, ensuring that at least one farmer belongs to each of the four land holding classes Karnataka, 45 \ (large,medium, small, and marginal).The sample JK, 20 0.---a 4 ,4n size for farmers is about 20 per state and 100 per HP, 20*2% I commodity. In order to maintain the randomness of the sample the followingmethod was followed: a. Identify the total number of households (HH) in the village producing the commodity under survey; b. Identifythe samplinginterval(ratioof total H H and five); c. Generate one random number between 1-sampling interval (by lottery); d. Pick this H H as the first sample; Bihar, 20 Assam, e. Subsequently using right hand rule identify the a H~ghIncome M~ddleIncome Low Income secondhousehold by addingthe samplinginterval; r l 'A2*2Final~Choice~of Commodities, States, ~ ~ ~ anll Districts - .-- -..." ..--..~.--,-....~ -,-."*~--,-.~,* -...-. .. ,ym"""~",-- ~ ~ - , ",,"-%-~ " ~ .,*,-~ .",* " ? Commodities States Apple Jammu and Kashmir Srinagar, Anantnag Himachal Pradesh Shimla, Kulu Uttaranchal Nainital Banana Maharashtra Jalgaon, Nanded Tamil Nadu Tiruchirapalli Gujarat Anand, Surat Madhya Pradesh Khandwa, Banvani Assam Carpeta, Nagaon Grapes Punjab Bhantida, Phirozpur Haryana Fatehabad, Sirsa Maharashtra Nasik, Sangali Karnataka Belgaum, Bangalore Mango Maharashtra Ratnagiri, Sindhugarh Uttar Pradesh Lucknow Gujarat Junagadh, Valsad Andhra Pradesh Krishna, Chittoor Orissa Angul, Ganjam Mosambi Maharashtra Jalna, Nagpur Punjab Ferozepur, Hoshiarpur Andhra Pradesh Anantapur, Nellore Okra Haryana Karnal Gujarat Surat, Baroda West Bengal Nadia, 24 Parganas Bihar Vaishali, Patna Orissa Jajpur Onion Maharashtra Nasik, Pune Gujarat Bhavnagar,Junagadh Tamil Nadu Coimbatore Uttar Pradesh Bulendshekhar, Ghazipur Orissa Angul, Kalahandi Peas Punjab Amritsar, Hoshiarpur Haryana Sonipat, Kurukshetra Uttar Pradesh Jalaun, Jhansi Uttaranchal Udham~in~hnagar,Nainital Madhya Pradesh Ujjain, Jabalpur Potato Gujarat Banaskantha, Sabarkantha Haryana Kurukshetra, Karnal West Bengal Hoogly, Burdwan Uttar Pradesh Agra Assam Barpeta, Nagaon Tomato Maharashtra Pune, Nasik Gujarat Kheda, Mehsana Karnataka Haveri Orissa Ganjam, Keonjhar ~- - -- - Assam - _ Nagaon, Sonitur " - - _ . - _ - - .**-.- -. ,* . --." - I I_ I "1.- L..- I " ., , , " I",",*-"*R ,** ,..*" 88 APPEHDBX2 f. 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