Report No. 36178-IN India India's Emergent Horticultural Exports Addressing Sanitary and Phytosanitary Standards and Other Challenges May 21, 2007 Sustainable Development Sector Unit India Country Management Unit South Asia Region Document of the World Bank Cont'd. HACCP Hazard analysis and critical control point SAARC South Asian Association for Regional HWT Hot water treatment Cooperation ICAR Indian Council o fAgricultural Research SMEs Small and medium enterprises ICDCS Permanent Inter-State Committee for SPS Sanitary and phytosanitary Drought Control inthe Sahel TQM Total Quality Management IDB Inter-American Development Bank TRQ Tariff rate quota I P M Integratedpest management UAE UnitedArab Emirates I S 0 International Organization for UK UnitedKingdom Standardization U S A UnitedStates ofAmerica JMPR Joint FAOAVHO Meeting on Pesticide USDA United States Department o f Agriculture Residues VAT Value-added tax MEP Minimumexport price VHT Vapor heat treatment MFN Most FavoredNation WTO World Trade Organization MoFPI MinistryofFoodProcessing Industries Vice President: Praful Pate1 CountryDirector: Isabel Guerrero Sector Director: Constance Bernard Sector Manager: Adolfo Brizzi, Gajanand Pathmanathan Task Manager: Mona Sur ... 111 India's EmergentHorticulturalExports: Addressing Sanitary and PhytosanitaryStandards and Other Challenges Table of Contents Acknowledgments .......................................................................................................................... vii Executive Summary ....................................................................................................................... viii 1 Introduction .The .............................................................................................................................. 1 Context 1 Study Objectives and Methodology 2 Report Outline 3 2 The International Context of Horticultural Products Trade and Emerging Standards . .... 5 Value. Growth. and Composition o f Trade................................................................................. 5 Tariffs.......................................................................................................................................... 7 Directions o f Trade and Participationo f Developing Countries................................................. 8 Emerging Standards and Horticultural Trade ............................................................................. 12 3 The Domestic Setting for Horticulture . ................................................................................... Horticultural Production ............................................................................................................. 19 19 Consumption o f HorticulturalProducts I s on the Rise ............................................................... 21 Marketing Chains for Fruits and Vegetables .............................................................................. 21 FruitandVegetable Processing................................................................................................... 25 Institutions and Policy Environment for Horticulture Development .......................................... 27 4 Indian HorticulturalExports: Broad and Commodity-Specific Trends . ............................. 32 Value and Composition of Indian Horticultural Exports ........................................................... 32 33 FreshMangoes ............................................................................................................................ Direction o f India's Horticultural Export Trade ......................................................................... 36 Grapes......................................................................................................................................... 38 Mango Pulp................................................................................................................................. 40 Onions ......................................................................................................................................... 42 Dehydrated Onions ..................................................................................................................... 46 Flowers........................................................................................................................................ 47 Asian Vegetables ........................................................................................................................ 50 Pomegranates .............................................................................................................................. 51 Bananas ....................................................................................................................................... 52 Employment inExport Horticulture ........................................................................................... 53 5 SPS Management Experiences and Challenges inIndian Horticulture . .............................. 55 A Strategic Approach to PrioritizationandCapacity Building................................................... 55 Challenges. Experiences. and Options inIndian Horticulture .................................................... 59 6 Towards a Cost-Effective and Strategic Approach to SPS Management in . Horticulture 86 Have SPS Issues HeldBack India's Horticultural Export Trade? .............................................. 86 A Defensive andReactive Approachto SPS Management ....................................................... 87 iv Taking A More Proactive Stance towards SPS Management ..................................................... 89 Specific Recommendations......................................................................................................... 92 Sectoral Initiatives ...................................................................................................................... 94 References ...................................................................................................................................... 96 Tables Table 2.1 World horticultural exports. 19842004................................................................... 5 Table 2.2 Most Favored Nation (MFN)tariffs applied to fresh fruits and vegetables by the EU.USA. Japan. andCanada................................................................................... 7 Table 2.3 Tariff rates faced by India in selected markets......................................................... 8 Table 2.4 Tariff escalation for agriculturalproducts inthe U S A and EU, 2003 ...................... 8 Table 2.5 Concentration o f fruit and vegetable exports among developing countries ............. 10 Table 2.6 Relative stringency o f SPS standards facing India's horticultural trade................... 15 Table 3.1 Fruitandvegetable production, 1994and2004 ....................................................... 19 Table 3.2 Fruitandvegetable cropyields, 2004....................................................................... 20 Table 3.3 Market destination o f farmers' produce ................................................................... 23 Table 4.1 Export intensity o fproduction o f selected commodities, 2002/03 ........................... 33 Table 4.2 India's major trading partners for fresh and processed fruits and vegetables, 2004 35 Table 4.3 India's major trading partners for fresh flowers, 2003 and 2004 ............................. 36 Table 4.4 Principal mango exporting countries, 2003 .............................................................. 37 Table 4.5 Distribution o f Indian mango exports, 2001/02-2003/04 ......................................... 37 Table 4.6 EUgrape imports from selected countries, 1997-2004 ............................................ 40 Table 4.7 Principal export markets for Indian mango pulp ...................................................... 41 Table 4.8 Principal export markets for Philippine mango pulp................................................ 41 Table 4.9 Onion production seasons inMaharashtra ............................................................... 44 Table 4.10 Exports o f cut roses to Europe, 1995-2004 .............................................................. 48 Table 4.1 1 Value o f vegetables exported from India to the UK, 1996/97-2003/04 ................... 50 Table 4.12 Export horticulture and employment, 2003/04 ......................................................... 54 Table 5.1 Impacts o f SPS measures and challenges on Indian horticultural exports................ 60 Table 5.2 Unitvalue variations betweenmarkets applyinghigher andlower standards .......... 60 Table 6.1 Roles o f the public and private sector inenhancing trade-related SPS and quality management capacity ................................................................................... 92 Figures Figure 2.1 Exports o f fresh and processedfruits and vegetables. 19842004........................... 6 Figure 2.2 Composition o f horticultural exports, 2004.............................................................. 6 Figure 2.3 Major importers o fhorticultural produce, 2004 ....................................................... 9 Figure 2.4 Major exporters o fhorticultural produce, 2004........................................................ 10 Figure 3.1 Mango and onion marketing channels, Tamil Nadu ................................................. 24 Figure 3.2 Processed fruit and vegetable consumptionand expenditures.................................. 25 Figure 3.3 Segments inIndia's processedfruit and vegetable industry,2003 ........................... 27 Figure 4.1 Growth and composition o f India's fruit and vegetable exports .............................. 32 Figure 4.2 Destinations o f India's fruit and vegetable exports, 2004......................................... 34 V Figure 4.3 India's mango exports. 1993194-2003104 ................................................................. 36 Figure 4.4 Destinations o f India's grape exports by volume and value ..................................... 39 Figure 4.5 Volume o f onion exports from India. 1996/97-2003104 .......................................... 42 Figure 4.6 Value o f onion exports from India. 2001102-2003104 ............................................. 44 Figure 4.7 Value o f dehydrated onion exports from India. 1996197-2003lO4 ........................... 46 Figure 4.8 Value o f dehydrated onions exported from India to various markets. 2001102- 2003104 46 Figure 4.9 Volume o f India's cut-rose exports to the EU. 1995-2004 ...................................... 47 Figure4.10 Value o f cut-rose exports from various countries to the EU. 1995-2004 ................ 49 Figure 4.11 Pomegranate exports from India. 1996197-2003lO4 ................................................. 51 Figure 4.12 Principal banana producers and exporters. 2003 ...................................................... 53 Figure 5.1 Actors instrategic response to standards .................................................................. 56 Figure 5.2 Hierarchy o f trade-related SPS management functions ............................................ 58 Figure 5.3 Indian grape exports to the UK, 1994-2004............................................................. 69 Boxes Box 2.1 Diverse standards inthe EU"single market" ........................................................... 14 Box 2.2 New EUregulations on food and feed hygiene and safety....................................... 15 Box 2.3 Emerging segmentation inMiddle Eastem markets................................................. 16 Box 2.4 Sanitary and phytosanitary management functions inhorticulture .......................... 18 Box 3.1 Procurement patterns o f fruit and vegetable processors and exporters..................... 22 Box 3.2 The emergence o fmodem retailinginIndia: Implications for quality and safety standards for fresh fruits and vegetables .................................................................. 26 Box 3.3 India's National Horticulture Mission...................................................................... 28 Box 3.4 Ensuringdomestic food safety .................................................................................. 30 Box 4.1 Industry-grower price negotiations: Goodpractice from the pear canning industry..................................................................................................................... 43 Box 5.1 Objectives and elements o f success in a strategic response to complying with emerging standards ................................................................................................... 57 Box 5.2 The realcost o fmeeting SPS standards for Indiangrapes inthe EUmarket........... 65 Box 5.3 Benefits o fprivate sector collective action: Northwest Horticultural Council and exports o f stonefruit to Canada and cherries to Mexico ........................................... 67 Box 5.4 Peruvianasparagus exports: A success story o fpublic-private collaboration......... 68 Box 5.5 I s testing the whole fruit for pesticide residues unscientific? ................................... 70 Box 5.6 Voice and compliance inIndia's spice trade related to pesticide residues............... 71 Box 5.7 Pesticides Initiative Programme ............................................................................... Fieldtrials and regulatory submissions for tropical horticultural crops: The 72 Box 5.8 More systemic issues o f farmer awareness and good practices? An anecdote ......... 73 Box 5.9 Persistence inresolving planthealth issues: Mexico's avocado trade withthe U S A .......................................................................................................................... 77 Box 5.10 Plant healthreforms and capacity development ....................................................... 79 Box 5.11 phytosanitary compliance ......................................................................................... Framework for an ex ante assessment o f costs and benefits o f sanitary and 79 Box 5.12 Benefits o f quality management systems: Fresh-cut produce firms inthe U S A ...... 81 Box 5.13 Collective action for standards compliance: The Kenya Flower Council ................ 84 vi Acknowledgements This report was prepared by Mona Sur and Steven Jaffee, under the overall guidance o f Gajanand Pathmanathan and Adolfo Brizzi, Sector Managers. Major contributors to the report are: L. Patrick Hanemann (Tamil Nadu Case Study), Kelly Jones (Trade and Agricultural Marketing Survey Data Analysis), Annu Ratta (Maharashtra Case Study), Vijay Sardana (Institutions), Andrew Sergeant (Maharashtra Case Study), Dina Umali-Deininger (Agricultural Marketing Study), and E.Vadivel (Tamil Nadu Case Study). Administrative assistance was provided by Lilac Thomas, Michelle Chen, and Jai Mansukhani. The report was edited by Kelly Cassaday. The team wishes to thank the peer reviewers, Christopher Delgado, Shobha Shetty, and Laurian Unnevehr, for their guidance and advice during the preparation o f the report. We also thank Grant Milne, Deepak Mishra, Manuel Contijoch, and Fayez Omar for their helpful comments. We gratefully acknowledge the cooperation and valuable assistance provided by officials fi-om the Ministry of Agriculture; Ministry of Commerce-Agricultural and Processed Food Products Export Development Authority; Ministry o f Food Processing Industries; the Maharashtra State Agricultural Marketing Board; and the Tamil Nadu Directorate o f Agricultural Marketing. The team also thanks the many private entrepreneurs, exporters, academics, and researchers who provided valuable input into this report. Financial support from the Bank Netherlands Partnership Program for Mainstreaming o f Standards inBank Operations i s gratefully acknowledged. wb13057 M:WSURUNDIA SPS FINAL\SPS-India-TOC May 17.doc 05/22/20072:46:00 PM vii Executive Summary How Have Sanitary and Phytosanitary Issues Affected India's Horticultural Trade? In recent years, both the private and public sectors in India have developed aspirations for expandingIndia's participation in international horticultural trade. Despite being one o f the world's largest producers o f horticultural crops, India trades very little o f its massive production internationally. India's share in global horticultural trade was a mere 0.5 percent in2004 (US$ 575 million, compared with a global trade o f US$ 108 billion).' Given the increased attention to food safety and/or plant health concerns inmany segments o f international horticultural trade, questions have been raised as to whether sanitary and phytosanitary (SPS) measures have been or could be a "barrier" to India's present and future horticultural trade, and what the appropriate responses from Indian stakeholders should be. SPS standards are but part of a wider set of competitiveness challenges facing Indian horticultural producers, processors, and exporters. Most subsectors face on-going challenges related to varietal development, postharvest loss, local and/or international logistics, and market organization. Inmany subsectors, the very fragmented system o fproduction and trade i s not especially suited for international trade, especially in cases where there are growing demands for the traceability and/or certification o f products or raw materials. There i s a widespread perception among stakeholders that India's huge domestic production o f various h i t s should inevitably translate into large-scale exports (for example, o f mangoes, bananas, or even citrus). This perception i s inconsistent with the experience o f most leading developing country exporters, which fostered large, export-oriented supply chains backed up by smaller domestic markets. The challenges that India faces have arisen at least inpart because o f the huge rift between standards inIndia's domestic market, on the one hand, and international standards, on the other. The challenges posedby standardshave manifestedthemselvesin different ways for Indianhorticulture,including: Absolute barriers or binding constraints for accessing particular markets. The most prominent case involves fresh mangoes and the plant health concerns o f U S and Australian authorities. Temporary losses from rejected (and sometimes destroyed) consignments of fresh or processed product. The most high-profile incident occurred when some 28 containers o f grapes consigned to Holland in 2003 were rejected due to violative pesticide residues. Less visibly, yet more commonly, numerous small consignments o f processed horticultural products entering the USA have been rejected for improper labelling, poor packaging, inclusion o f illegal additives, and other reasons. In other markets, there have been a few other rejections o f fresh produce. Higher consignment-spec+ or recurrent transaction costs due to duplicative testing, high levels o f entry-point inspection, or the further treatment o f goods upon arrival in overseas markets. The profitability o f India's cut-flower trade into Japan and the Netherlands has been affected, and exporters o f other products have also had to bear added costs. Inthis study, "horticultural products" are defined as including fresh and processed h i t s and vegetables, cut flowers, and ornamental plants. Nuts or driedprocessed legumes and pulses are not included, although the Agricultural and Processed Food Products Export Development Authority (APEDA) generally includes them inits data on horticultural exports. viii 0 Patterns of "defensive commercialization, whereby firms fail to pursue opportunities for " remunerative trade with certain countries or types o f buyers because o f concerns about their inability to ensure compliance with regulatory or private standards inthose markets. This pattern is common in Indian horticulture, although additional factors have also weighed on these commercial strategies. The OfficialResponseto Trade-relatedSPS Management There is a common assumption that developing countries such as India (and individual suppliers therein) have no room for maneuvering in the face of emerging standards.That is, they face situations o f "comply or perish." Inreality, countries and suppliers face a wide range o f choices, even when they seek to comply with a particular standard, although the increased emphasis in recent years on proscriptive process/procedural requirements (rather than product or outcome standards) does somewhat curtail this room for maneuvering. Developingcountries (and individual suppliers) can pursue one or a combinationof the followingtypes of strategiesinthe context of evolvingstandards: 0 Compliance: adopting measures to meet international standards or the requirements o f one's trade partners. This strategy might involve some combination o f legalhegulatory change, the application o f certain technical or other risk management approaches, the implementation o f testing, certification, andor other conformity assessment measures, and other actions. 0 Voice: seeking to influence the "rules o f the game" and/or how they are implemented via participationininternational standard-setting fora, communications with the World Trade Organization (WTO), negotiations with bilateral or regional trading partners, andor business planningwith downstream clients. Redirection: altering commercial strategies to encompass sales to different countries or market segments, changes in the mix or form o f products, and other maneuvers, takmg into account the costs and benefits o f complying with different standards. The timing and mode of strategicresponsemay also vary. Actions may be taken on a proactive or reactive basis. A proactive response involves anticipating future requirements and taking measures ahead o f time in a manner that minimizes costs or maximizes benefits. A reactive response involves a player waiting until the requirements are put inplace and only then adopting responsive actions, perhaps hoping to limit action or at least to learn from the mistakes o f the "first movers." The strategy can be either defensive or offensive; a defensive strategy involves measures designed to minimize the changes required, whereas an offensive strategy involves trying to exploit an opportunity created by standards, such as a price premium for organic products. The locus o f strategic response may also vary. Some responses may be taken by individual firms, farms, or government agencies. Other responses involve collective action, perhaps through producer or industry organizations or interministerial task forces. There i s scope also for strategic responses that involve public-private collaboration or collaboration between developingcountry stakeholders inmultiple countries. While there are certainly diverse views, the mainstream official and private perspectivein Indian horticulture is that many, if not most, of the emerging SPS and other international standards are not scientifically based and therefore represent an unfair "barrier to trade." This situation i s considered to result either from deliberate efforts to protect farmers or processors from competition or to be fueled by unreasonable consumer fears in high- income countries and improved technologies for detecting hazards. Whatever the driving forces, ix the presumed primary solution i s seen to lie in effective negotiations with India's (official and private) trading partners and, failing that, in addressing the various measures ininternational fora for setting standards or resolving disputes. With such a perspective, arguably insufficient attention has been devoted to monitoring the requirements of official and private standards, interpreting their implications for Indian horticulture, and using current and anticipated requirements as catalysts to upgrade existing operations and strengthen supply chain management. This response i s not altogether surprising, given the limited imprint o f export horticulture on Indian agriculture thus far. Yet the absence o f a proactive or preventive approach to managing SPS standards for trade has left Indian horticulture either to adopt "defensive" strategies o f commercialization-that is, to avoid markets that apply more stringent standards-r to adopt reactive, "fire-fighting" methods when trading partners' concerns about India's noncompliance with standards leadto actual or threatened trade interruptions. These approaches contrast sharply with those taken in leading (and competing) developing countries in the horticultural export trade, such as Brazil, Chile, Mexico, Thailand, Kenya, and South Africa. The mainstream Indian approach seems to call for negotiation first and belated (and begrudging) compliance second. In contrast, many other countries are investing in compliance as a means to both improve their competitive position and enhance the effectiveness o f their negotiations on particular technical and commercial matters. With regard to trade performance patterns and the prevailing international reputation for horticultural industries, this latter approach seems to have been relatively more effective. When faced with crises relatedto noncompliancewith SPS measures,as inthe case of grapes, the public sector has focused on end-of-the line solutions. This strategy has included a combination of: (1) aggressive enforcement o f existing or modified regulations, (2) heightened requirements for mandatory testing o f raw materials and finished products, and (3) considerable investments in new "hardware," either through investment in public sector laboratories or subsidies for private investment in laboratories, factory upgrades, and other improvements. This approach has generally proven "successful," in the sense that access to the affected market was restored relatively quickly. Yet such crisis management measures have generally beenquite expensive,bothfinancially for the government andinterms o flost incomes or livelihoods for the many farmers, small and medium enterprises (SMEs), and factory workers adversely affected by regulatory crackdowns. In some cases (for example, grapes), the sustainability o f the adopted measures i s uncertain, given the higher overhead cost o f compliance. The considerable attention given to product testing has enabled the Indian government and various sectors to gain a more detailed look at the symptoms o f noncompliance (including results o f tests indicating violative levels o f microbiological parameters or pesticide residues), although insufficient attention and resources have been directed to address the underlying causes o f these problems. Recent moves to improve agricultural practices through initiatives such as the IndiaGAP program suggest a shift inthe right direction, however. Taking a More Proactive Stance Towards SPS Management Standards present an opportunity for modernizing export supply and regulatory systems and adopting safer and more sustainable practices. Countries that have taken a proactive stance, including staying abreast o f technical and commercial requirements and anticipating changes, have been able to reposition themselves in more remunerative market X segments. Consignments from such countries are subjected to comparatively less inspection by trading partners. "Good" reputations, gained through demonstrated compliance, yield lower transaction costs for farmers and exporters. Considerably more emphasis is needed to promote awareness about SPS management among agro-foodsystem stakeholders. Taking a more proactive stance requires a move towards a more cost-effective and strategic approach. Such an approach would place somewhat less emphasis on mandatory controls, inspections, and testing. It would place considerably more emphasis on promoting ago-food system stakeholder awareness about SPS management and facilitating effective individual and collective action by private firms, farmers, and service providers. By narrowing the gap between domestic and international standards, India could create a better platform for expanding exports. Extension service providers have a large role inpromoting agricultural good practices to ensure that farmers follow recommended dosages and appropriate preharvest intervals inusing ago-chemicals and in assisting with soil and water testing. There i s also a need for promoting good hygiene and manufacturingpractices and quality management to minimize food safety, environmental, and other risks. India and its private sector are in a positionto anticipate standards and take early action to gain competitive advantage through compliance and differentiation.Unlike many other developing countries, India has enormous scientific and technical capacities. It can effectively undertake research and field trials to stay ahead o f the game. For example, Indian stakeholders anticipate problems in complying with existing European Union (EU) pesticide residue tolerances for pomegranates. Indian complaints about "unfair" approaches used to test for residues in pomegranates are getting limited attention, given that this crop i s o f minimal commercial importance to India's trading partners. India needs to manage this challenge- through its own actions-by performing its own field trials to establish proper regulatory tolerances and by promoting better pest management practices among its pomegranate growers. Similarly, future challenges are expected in relation to compliance with heavy metal tolerance levels in vegetables. Proactive steps can be taken to reduce the incidence of such heavy metals, thus loweringthe risks offuture trade disruptions andthe risks to Indianconsumers. By anticipating shifting standards in existing markets, India is likely to identify opportunitiesfor expandinginto more remunerative segments in these markets. India does not currently face very stringent standards for horticultural commodities inregional markets or in the Middle East. The bulk o f Indian produce entering these markets i s targeted at the migrant worker community. This low-priced, bulk market should remain an attractive outlet for Indian exporters, who benefit from inexpensive and frequent freight links and similarities in diet and culture with the targeted importers and consumers. Yet there should also be potential to more firmly tap into the expanding high-end market segment in the Middle East, especially supermarkets. The required standards do not match those applicable at the higher end in Europe, although buyers for these supply chains will increasingly want evidence o f "good agricultural practices" andproduce traceability. There is a needto institutestronger monitoringand evaluationcomponentsto gauge the effectiveness of various investment and incentive schemes and/or instruments made available by the central and state governments to promote horticultural exports and facilitate the upgrading of postharvest practices, infrastructure, and quality assurance systems. For instance, there are plans for more than 48 Agricultural Export Zones (AEZs) for horticultural crops. Carefully evaluating the performance o f some o f these schemes will have large payoffs in terms o f future strategic decision making and resource allocation. There i s also a need to rationalize various subsidy schemes and make some o f them easier for the private sector to access. xi There is a need to carefully assess the costs and benefits of standards compliance and evaluate the trade-offs. Investments in phytosanitary and food safety risk assessment and mitigation should be guided by the market potential o f the export commodity. For example, all things considered, it is not obvious that the likely costs and administrative attention required for Indian mangoes to gain access to the Australian market would match the benefits o f participating inthat market, givenitsprobable size. Achieving compliance at apotentially highcost would not make sense ifthe actual commercialpotential o f this trade i s limited. The experience to date has been that the government has taken disproportionate responsibility for managing SPS-related "crises." It i s often assumed that the management o f food safety and agricultural health i s predominantly the responsibility o f the public sector. Indeed, many crucial regulatory, research, and management functions are normally carried out by governments. Ina variety o f circumstances, importing countries require certain functions to be performed by a designated "competent authority" inthe public sector. The private sector also has fundamentally important roles to play, however, in the process o f setting standards and in the actual compliance with food safety and agricultural health requirements. Experience elsewhere demonstrates that capacity buildingin the private sector can complement (or even substitute for) public sector capacity, including in research and development and conformity assessment (inspection, certification, and testing). This report contains both general and very specific recommendations pertaining to the redefinition of public and private sector roles and responsibilities inmanaging SPS-related challenges inIndianhorticulture. There is a much greater need for collective action by the private sector. International experience highlights the importance o f collective action within the private sector to promote awareness o f SPS matters, to find technical and institutional solutions to emerging challenges, to implement programs to promote "good" agricultural or manufacturing practices, and otherwise provide a degree o f self-regulation, which then reduces the need for government agencies to play enforcement roles. Indian horticulture presents many instances in which limited cooperation amongprivate sector actors has either created a vacuum that the government has had to fill or has forced individual firms to tackle problems on their own. For example, the absence o f an organized forum among Indian grape exporters has prevented any self-regulation, with APEDA filling the void witha mandated system o fmultistage government oversight. For crops with limited potential for short-term export development, it would be important to carefully weigh the benefits of reorienting production to the specifications of the export market versus strengthening the industry's practices and quality consciousness to increase productivity and provide India's own consumers with a better-quality and safer product. Given the size and anticipated growth o f the domestic market, there could well be far greater financial and social benefits from a program centered on improving the domestic supply chain rather than on prospective exports. Doing so may also serve as a means o f deflecting import competition from exporters such as the Philippines, assuming that on-going trade reforms will lead to a similar degree o f import liberalization as has occurred for other fruit. The emerging dynamics in the domestic market, especially the modernization of retail, will likely have a far more significant impact on Indian farmers and traders than the export market. As the food retail sector modernizes, the focus will initially be on convenience and quality, but over time more emphasis will be given to food safety parameters in the modernized sector. The growth o f the modem food retailing sector will likely induce extensive changes inthe structure o fproduction andproduct aggregation. Greater supply chain coordination will occur inparallel with more traditional supply chains involving multiple intermediaries and sales through wholesale markets. The more coordinated supply chains for the domestic market could also provide an improved platform for exports o f certain fresh fruits and vegetables, xii although the value-addition that will occur in the domestic market will likely dwarf that which couldbe obtained through exports. Prospects for exports of fresh horticultural produce to developing countries and processed products to high-income markets are the strongest. India exports a diverse range o f horticultural products. Among its various fresh horticultural exports, India has had the greatest success with supplying onions and mangoes to other developing countries. Exports o f fresh produce to high-income countries are small and have not exhibited much dynamism. India has had considerably more success in exporting processed horticultural products-including mango pulp, processed gherkins, dehydrated onions, and various traditional foods-to high-income markets. Although greater public sector attention has been devoted to promoting fresh horticultural exports to high-income countries, India's competitive prospects are likely to remain better in (1) fresh produce sales to rapidly growing developing countries and (2) processed food sales to higher-income countries. Such export supply chains also involve comparatively larger numbers o f farmers and firms, providing scope for the benefits from trade to spread more broadly. ... Xlll Chapter 1: Introduction The Context In recent years, policy makers have placed considerable emphasis on promoting high- value agriculture in India, particularly horticulture. Several factors drive this emphasis on horticulture, including the growing recognition that India's farmers-most o f whom cultivate less than two hectares-cannot realize sufficient returns from traditional staple crops such as rice and wheat. Increasing water stress inmany states has also influenced the promotion o f diversification in agriculture and a shift to less water-intensive horticultural crops. Horticultural crops also command attention for their potential to generate more jobs inrural areas, because they are more labor intensive to produce than primary staples. While increased incomes and urbanization are contributing to rapid growth in India's domestic demand for horticultural produce, there i s considerable interest among Indianpolicy makers and entrepreneurs inexpanding participation in lucrative international horticultural markets. Trade expansion i s expected to accelerate growth and employment inthis subsector and thereby help reduce poverty inrural India. Horticultural crops occupy about 8 percent o f India's gross cropped area and account for 30 percent o f agricultural gross domestic product (GDP). Over the past decade, horticultural productionhas increasedby about 3 percent per annum. Duringthe same period, the value o f India's horticultural exports grew at a remarkable rate o f 8 percent per annuminreal terms, more than doubling inreal terms.' Despite this fairly strong growth, India's share inglobal horticultural trade was a mere 0.5 percent in2004 (US$ 575 million, compared with a global trade o f US$ 108 billion). Although India exports a wide variety o f horticulturalproducts, only a handful o f commodities or products account for the bulk o f this trade. India i s the second-largest producer o f fruits and vegetables in the world (following China). India produces about 6 percent o f the world's fruit and 11percent o f its vegetables. It i s the world's largest producer o f mangoes, bananas, peas, and cut flowers and the second-largest producer o f a broad range o f vegetables. Very little o f this massive production i s traded internationally. Substantial proportions o f output-ranging from 15 to 40 percent for most crops-are not sold or consumed at all but lost or spoiled in the stages from harvest to transport and storage. Only 2-3 percent o f grape and mango production i s exported. Despite being a massive producer and consumer o f fresh horticultural produce, for most individual products India i s considered only a minor or inconsequential player in international markets. I s India therefore an awakening giant, ready to compete on and profit from the world horticultural stage? Or i s its dominant structure o f horticultural production and marketing misaligned with existing opportunities, standards, and supply chain management requirements? Many factors determine international competitiveness inhorticultural trade. International competitiveness requires suitable ago-ecological conditions, efficient trade logistics, strong business and farm management capacities, and a favorable overall environment for investment. In recent years, the capacity to manage sanitary and phytosanitary (SPS) risks has also emerged as an increasingly important component o f international competitiveness in horticultural trade. Trade infresh and processed horticultural products can contribute to the spread o f plant pests and diseases and to the consumption o f microbial pathogens, chemical residues, and/or naturally ' In this study, "horticultural products" are defined as including fresh and processed fruits and vegetables, cut flowers, and ornamental plants. Nuts or driedprocessed legumes and pulses are not included, although the Agricultural and ProcessedFood Products Export Development Authority (APEDA) generally includes these products inits data on horticultural exports. 1 occurring toxins in food. Advances in scientific understanding o f these risks, recent food safety and plant health scares or crises, and other factors have increased consumer awareness o f potential food safety risks and contributed to the adoption o f more stringent SPS standards by many countries as well as byprivate importers (see World Bank 2005a, especially chapter 2). The changing context presented by evolving regulatory and private sector supply chain governance measures creates both challenges and opportunities for developing countries that engage inor aspire to expand horticultural exports. The new context requires a strategic approach, whereby emerging requirements are factored into trade and investment choices (through consideration o f costs, benefits, and risks) and, where deemed profitable or otherwise beneficial, internalized withinprivate management systems and the regulatory and administrative approaches o f government agencies. With isolated exceptions, this strategic approach has been largely absent in Indian horticulture. Although diverse views certainly exist, the mainstream official and private perspective i s that many ifnot most o fthe emerging SPS and other international standards are not scientifically based and therefore represent an unfair "barrier to trade." This barrier i s considered to result from deliberate efforts to protect farmers or processors from competition, or from unreasonable fears o f consumers in high-income countries, or from improved technologies for detecting hazards. Whatever the driving forces, the presumed primary solution i s seen to lie in effectively negotiating with India's (official and private) trading partners and, failing that, addressing the various measures ininternational fora that set standards or resolve disputes. Given this perspective, arguably insufficient attention has been devoted to monitoring the requirements o f official and private standards, interpreting their implications for Indian horticulture, and using current and anticipated requirements as catalysts to upgrade existing operations and strengthen supply chain management. This tendency i s not altogether surprising, considering export horticulture's limited imprintthus far on Indian agriculture. Little horticultural production i s grown specifically for export, and India's overall administrative systems for food safety and plant health have not been designed or oriented to support export horticulture. Yet the absence o f a proactive or preventive approach to managing SPS standards for trade has left Indian horticulture either to adopt "defensive" strategies o f commercialization-that is, to avoid markets that apply more stringent standards-or to adopt reactive, "fire-fighting" methods when trading partners' concerns about India's noncompliance with standards lead to actual or threatened trade interruptions. These defensive and reactive approaches contrast sharply with those taken by other developing countries that lead (and compete) in horticultural exports, such as Brazil, Chile, Mexico, Thailand, Kenya, and South Africa. Whereas the mainstream approach in India seems to call for negotiation first and belated (and begrudging) compliance second, many other countries are investing in compliance, both to improve their competitive position and to enhance their effectiveness innegotiations on particular technical and commercial matters. With regardto trade performance patterns and the prevailing international reputation for horticultural industries, this latter approach seems to have been relatively more effective. Study Objectives and Methodology This study was initiated by a request from the State Governments o f Tamil Nadu and Maharashtra for the World Bank to examine the current and prospective SPS-related barriers facing their tropical fruit exports. Specific interest was expressed in examining issues and outlining solutions pertaining to exports o f bananas, pomegranates, and fresh mangoes. As India 2 i s the world's leading producer o f these crops, policy makers anticipate that India can play a significant role in their international trade. Advice was sought on how state governments could assist the private sector to overcome SPS-related barriers. When initiating fieldwork in May/June 2005, the study team discovered that (1) underlying commercial prospects for exports o f fresh bananas, pomegranates, and mangoes had not yet been thoroughly examined, (2) critical constraints on export competitiveness inthese fruits extended well beyond food safety and plant health matters, and (3) many o f the most interesting Indian experiences, challenges, and opportunities relatedto SPS and horticultural trade had been associated with other product lines, including processed fruits and vegetables, grapes, and cut flowers. These observations led to the team to adjust its approach and underlying objectives. Although they could not carry out extensive external market studies, they reviewed and documented broader competitiveness constraints for the focal tropical fi-uits and probed the experiences and future needs related to SPS management in a larger array o f commodity subsectors. Despite the partial, case-study basis o f the work, this study seeks to (1) provide insights into the range o f SPS-related and broader competitiveness challenges and opportunities facing Indian export horticulture, (2) highlight strengths and weaknesses in current approaches and capacities to address these challenges, and (3) identify near- and medium-term priority actions-both specific and strategic-to enhance competitiveness and standards compliance. The study ultimately seeks to catalyze a more strategic dialogue between Indian policy makers, technical agencies, and the private sector regarding priority actions and the appropriate and sustainable division o froles and responsibilities o f different players. This work is part o f a broader study on agriculturalmarketing ofhigh-value commodities in India, which focuses on four states: Tamil Nadu, Maharashtra, Orissa, and Uttar Pradesh. Maharashtra and Tamil Nadu were selected for the SPS case study because they have comparatively more experience with exporting horticultural products. This study i s primarily based on findings from fieldwork in India in mid-2005, together with follow-up correspondence, visits to selected external markets, and reviews o f experiences elsewhere that can further inform the options available to Indian stakeholders. A broad range o f stakeholders in the private and public sectors were interviewed, including farmers, representatives o f farmer associations, agro- processors, exporters, regulatory and service providers, research institute staff, and state and central government officials. A number o f interviews were conducted with foreign buyers and regulators in the United Arab Emirates (UAE), United Kingdom (UK), and United States o f America (USA). The study also draws on findings o f the 2005 World Bank India Agricultural Marketing Survey (World Bank, 2007), a desk review o f existing institutional and regulatory structures for SPS management in India, and on various other published and unpublished secondary sources. ReportOutline Chapter 2 provides an overview o f selected international trends inhorticultural trade and introduces some o f the official and private standards. Chapter 3 shifts to the broader Indian context. It summarizes major trends in domestic horticultural production and marketing, the prevailing regulatory environment, and the complex apparatus o f government support and other interventions in this sector. Chapter 4 denotes major trends inthe growth and market orientation o f Indian horticultural exports and highlights key competitive strengths and weaknesses in the export supply chains for a range o f commodities or products. Chapter 5 examines how SPS measures and capacities affect India's current market access and the profitability o f its 3 horticultural trade. The chapter identifies "looming threats" to this trade and discusses alternatives for mitigating them, including changes in crop production or procurement, conformity assessment, andor other arrangements. Chapter 6 draws out the conclusions from the study and includes recommendations andpolicy options for the Government of India. 4 Chapter 2: The InternationalContextof HorticulturalProductsTrade andEmergingStandards Value, Growth, andCompositionof Trade World trade inhorticultural products (fresh andprocessedfruits and vegetables, cut flowers, and ornamental plants) has expandedrapidly inresponse to rising incomes, trade liberalization, and consumers' growing interest ingreater variety, freshness, convenience, and year-round availability o f horticultural products. In2004, world trade inhorticultural products reached US$ 108billion2 The value o f this trade quadrupled inthe last two decades (more than doubling inreal terms) (table 2.1). Horticultural trade now represents the second fastest growing segment o fworld agro-food trade, following that inmarine products. Horticultural and floricultural products now account for 22 percent o f developing country ago-food exports, surpassing all "traditional" export crops ~ o m b i n e d . ~ Table 2.1: World horticulturalexports, 1984-2004 US$millions Source; Authors' calculations, basedon UNComtrade data. World horticultural trade grew at a lower rate in 1994-2004 (3 percent per annum inreal terms) than duringthe prior decade (5 percent per annum). Growth inhorticultural trade stagnated during the late 1990s (figure 2.1), owing to slower economic growth, particularly within the European Union (EU), or to general economic decline, particularly in Japan and countries affected by the "Asian financial crisis." Growth in horticultural trade also slowed as prices o f mainstream horticultural products fell, due to an expanded world supply and growing market saturation for these prod~cts.~ Fresh fruit, the largest single component o f global horticultural trade, accounted for 35 percent o f the total trade in2004 (figure 2.2). While the fresh fruit trade involves a wide range o f individual commodities, almost two-thirds consists o f trade in citrus fruit, bananas, apples, and grapes. Trade in other and less traditional (sub-)tropical fruits-including mangoes, papayas, In this study, "horticultural trade" is defiied as including trade in fresh and processed fruits and vegetables and flowers. To facilitate comparison of India's horticultural exports with those o f other countries, data are taken from the United Nations (UN) Comtrade database. As Comtrade data rely o n reports from individual countries, they tend to underestimate the value o f trade as compared to Indian national data, since some o f India's trading partners are not accounted for inthe Comtrade data. Including coffee, cocoa, tea, cotton, sugar, andtobacco. See Aksoy and Beghin (2005) for a broader review o f international agro-food trade patterns. Diop and Jaffee (2005) examine longer-term horticultural trade trends ingreater detail. 5 kiwis, and others-has grown at a relatively fast pace over the past decade (8.6 percent inreal terms), yet it still accountsfor only 7percent o fthe total world fruit trade. Trade in fresh vegetables (including roots and tubers) accounted for about 22 percent o f global horticultural trade in 2004. This trade i s more fragmented than the fresh fruit trade. Tomatoes account for 20 percent o f the total. Other highly traded vegetables include onions, potatoes, beans, peas, mushrooms, asparagus, and peppers. The global fresh vegetable trade increasedby 4 percent per annum (inrealterms) over the past decade. Figure 2.1: Exports of fresh and processedfruits and vegetables, 1984-2004 1,000 800 p E 2B (ft 600 0 400 .- -B 200 Source: Authors' calculations. basedon Corntrade data. Processed fruit products and processed vegetables account Figure 2.2: Composition of horticultural exports, 2004 for 20 percent and 17 percent o f 100% global horticultural trade, 90% respectively. Much of the 80% Fresh&dried plants processed fruit trade involves fruit 70% Driedcutf!owers juices (41 percent) and dried fruits 60% Freshcutflowers (12 percent). Exports o f processed 50% Rocessedvegetables fruits and vegetables grew at a real 40% rate o f 2.9 percent per year 30% FresWdriedvegetables between 1994 and 2004. The 20% emerging trend within the 10% processed fruit andvegetable trade 0% i s a decline in the importance o f I World India canned and dried goods (tropical Source: Authors' calculations, basedon Corntradedata. fruits and mushrooms) and a rise in exports of frozen vegetables (FA0 2003). The value of global trade in cut flowers and foliage in 2004 reached approximately US$6.3 billon, with cut flowers accounting for 86 percent o f this trade. Similar to the fruit and vegetable trade, growth inthe value o f world trade incut flowers has slowed considerably, from 6 an average rate o f 16 percent per year between 1988 and 1994 inreal terms to roughly 3 percent per year between 1994 and 2004. Tariffs5 The tariff structure faced by Indian exporters in prospective markets affects the overall competitiveness o f horticultural exports. To varying degrees, the USA, the EU, and Japan use similar protection tools: low but highly dispersed ad valorem tariffs, specific duties, seasonal tariffs, entry prices, special safeguards, tariff escalation, and preferential access cum tariff-rate quotas. Average applied Most Favored Nation (MFN) tariffs are low in all these countries, ranging between 0.9 percent for fresh h i t s in Canada to 9.2 percent in the EU for the same product category (table 2.2). For a variety o f reasons, however, average tariffs do not reflect levels o fprotection. Table 2.2: Most FavoredNation (MFN) tariffs appliedto freshfruits and vegetablesby the EU,USA, Source: WTO-IDB database, as cited inDiop andJaffee2005. Simple, uniform tariffs are a rarity in horticulture. For example, under the Uruguay Round Agreement on Agriculture, the EU replaced its reference price system with a system o f minimumimport or entry prices which apply to fruits and vegetables including tomatoes, citrus, table grapes, and apples. The entry price system works in conjunction with the system o f tariffs. For example, duringthe peak European harvesting season, imports o f table grapes into the EUare charged a 14.1 percent tariff on grapes priced 54.6 euros (e) or higher per 100 kilograms net weight. Ifthe price i s below this cutoff, the tariffjumps to 17.6 percent plus an additional charge per weight that increases incrementally up to 9.6 per 100 hlograms net if the price i s below 50.2 per 100kilograms net. Many countries also use tariff rate quotas (TRQs). Tariff rate quotas essentially allow application o f lower tariff rates to in-quota shipments and much higher tariffs to out-of-quota shipments. Fruits and vegetables turn out to be particularly infested by TRQs, with 355 TRQs in place, which i s one-quarter o f all such measures. Inmany markets, India has to compete with exporters from other countries that are exempted from tariffs that Indian exporters must pay. The problem i s most visible in the EU, which has concluded preferential trade agreements with important horticultural producers, quite apart from the unilateral preferences it has granted to some o f the poorest countries. Thus Turkey enjoys duty-free access in a range o f products, whereas India must pay average tariffs o f 5-10 percent. Likewise, imports to the U S A from India often incur a tariff from which competitors (for This sectiondraws heavilyonWorldBank(2005b). 7 example, Mexico) are exempt, although it i s not clear how effectively India would compete even in the absence of the tariff advantage that Mexico enjoys. The tariff rates applied to specific agriculturalcommodities from India invarious export markets are shown intable 2.3. Source: Authors' calculations,based on UNCTAD TRAINS data. Note: EPS = entry pricesystem; indicatesaverage of includedcategories. * The tariff structure in the EU, the USA, and other countries (for example, Japan and Korea) also features a highdegree o f escalation, which creates a disincentive to export relatively more processed products. As shown intable 2.3, processed products exported from India, such as dehydrated onions and mango pulp, face tariff rates that are on average 5-8 percentage points higher than rates for the product infresh form. Ina more general sense, table 2.4 notes that tariffs on processed products are consistently higher than those on semiprocessed products, and in the EU(butnot the USA) tariffs on semiprocessed products are higher than those on agriculturalraw products. Table 2.4: Tariff escalation for agricultural products inthe USA and EU,2003 Source: WTO-IDB CD ROM2004, as citedin World Bank 2005b. Note: GSP =GeneralisedSystemof Preferences; FTA = Free Trade Agreement Directionsof Trade andParticipationof DevelopingCountries The countries o f the EU and the North American Free Trade Agreement (NAFTA) are the largest import markets for fresh and processed fruits and vegetables. The EUcountries alone account for nearly 60 percent o f global imports (figures 2.3 and 2.4). High-income countries account for more than 80 percent o f global imports, although the imports o f middle-income countries have grown especially rapidly over the past decade. There i s considerable intraregional trade within both the EU and NAFTA countries. Some two-thirds o f EU fruit and vegetable imports come from other EU member states, while almost 50 percent o f NAFTA imports come from other members o f the regional grouping. Physical geography, systems o f trade preferences, 8 and the relative strength o f cultural and commercial relations strongly influence broader directional patterns o finternational horticultural trade. Overall, trade in horticultural commodities i s highly concentrated. For example, close to 40 percent o f fresh fruit exports originate from five countries-Spain, USA, Chile, Ecuador, and Italy. Similarly, 60 percent o f fresh vegetable exports come from five countries-Spain, the Netherlands, Mexico, USA, and France. More than 80 percent o f cut-flower exports come from the Netherlands, Colombia, Ecuador, Kenya, and Israel. Figure 2.3: Major importers of horticultural produce, 2004 I Rocessed LIEU 1 vegetables NAFTA Rocessed JFN fruit CHN Fresh/dried vegetables* 1 I Fresh fruit I 0% 20% 40% 60% 80% 100% Source: Authors' calculations, basedon UNComtradedata. Note: FresWDried Vegetables excludes legumes. MidMENArefers to middle-income countries inthe Middle East andNorthAfrica; HiMena includes high-income countries inthe Middle East; HIC includes high-income countries, except those in the Middle East, EU,North American Free Trade Agreement (NAFTA), and Japan (JPN); MIC includes middle-income countries, except those inthe Middle East; and LIC includes all low-income countries, except India (IND) and China (CKN). While many developing countries have entered fresh fruit and vegetable export markets, less than two dozen o f these countries have succeeded on a sustained basis. The expanding overall share o f developing countries inworld exports o f fresh fruits and vegetables hides heavy domination by just a handful o f middle-income countries. Between 1997 and 2001, four Latin American countries alone-Mexico, Chile, Ecuador, and Costa Rica-accounted for 43 percent o f developing country exports o f fresh fruits (FA0 2003), and these countries are leading players in the most internationally traded fruit products (table 2.5). Although vegetable exports are similarly concentrated, the geographical distribution o f exporters i s wider. Mexico i s the world's leading exporter o f tomatoes, Kenya supplies 25 percent of the world's green beans, and Guatemala and Kenya jointly lead the world market for green peas.6 Between 1997 and 2001, four suppliers-Mexico, China, Argentina, and Syria-accounted for 67 percent o f fresh vegetable exports by developing countries (FA0 2003).' A very small number o f medium-income countries have succeeded in the processed segment o f the export market, and developing countries as a group account for a relatively l o w share inworld exports o f these products (36 percent in2001). China, Thailand, Chile, and Turkey Still, Mexico remains the world's top exporter of many other vegetable products, including asparagus, eggplant, and onions. The bulk of Syria's trade is with other Middle Eastern countries, while Argentina primarilytargets other LatinAmerican countries. 9 account for a combined 58 percent o f developing country exports o f processed h i t and vegetable products (FA0 2003). Secondary yet significant exporters include the Philippines, Mexico, Argentina, and Indonesia (with a combined 14percent o f developing country exports). Colombia and Kenya are the leadingdeveloping country exporters o f cut flowers, although another dozen or so countries have experiencedrelatively sustained growth inthe trade over the past decade or so. Figure 2.4: Major exporters of horticultural produce, 2004 I , Total I Processed vegetables Rocessed fruit Freshldried 0 CHN vegetables* 0 HIC Freshfruit 8 MIC 0% 20% 40% 60% 80% 100% Source: Authors' calculations, basedon UNComtrade data. Note: FresWDried Vegetables excludes legumes. MidMENArefers to middle-income countries inthe Middle East and North Africa; HiMena includes high-income countries inthe Middle East; HIC includes high-incomecountries, except those inthe Middle East, EU,NorthAmerican Free Trade Agreement (NAFTA), and Japan (JPN); MIC includes middle-income countries, except those in the Middle East; and LIC includes all low-income countries, except India (IND)and China (CHN). Product Leading suppliers Joint share of world exports (value) Source: FAOSTAT database2003; FA02003. What factors appear to separate the more successful developing country horticultural exporters from their peers? To succeed in this field, a country must have some important assets, which provide an initial source o f comparative advantage. These assets represent some 10 combination o f the following: (1) favorable ago-climatic conditions and ample and accessible land and water resources, (2) a physical location on a coast or near a major market, (3) the availability o f ample and relatively inexpensive labor, and (4) a class o f entrepreneurs with commercial experience. Many countries possess some or most o f these assets, but parleying these assets into a competitive horticultural industry capable o f maintaining or improving competitiveness over time requires a distinctive set o f investments and institutional structures, a range o f facilitative government policies, and, normally, a bit o f luck (see Jaffee 2003, Gabre- Madhin and Minot 2003, FA0 2003, and Huang2004). Jaffee (1993) examines the ingredients common to the initial growth spurt and subsequent maturation o f some o f the developing world's leading "success stories" in exporting fresh and processed fruits and vegetables.* In each case, the initial take-off occurred during a period o f stable macroeconomic conditions and inthe presence o f a favorable investment climate. Important initial catalysts for export growth included sudden shortfalls inmajor overseas markets, new foreign direct investment or strategic partnerships, and/or improvements in international logistics capacity. Strategic, international technical and marketing partnerships provided a vehicle for transferring technology, penetrating new markets, and creating an identity for products from the exporting country. Many countries have experienced only short-term spurts in horticultural exports. Countries with sustained horticultural exports, on the other hand, consolidated early gains through investments inresearch, further adaptation o f international technologies, investment in expanded and upgraded logistical facilities, continued strengthening o f vertical supply chains, the development o f industry organizations for collective action, and the development o f credible systems for quality assurance and food safety management. Industry expansion induced the development o f associated industries, such as packaging, equipment supply, and technical consulting, which further contributed to the underlying competitiveness o f the export industries. Additional investments were made in the industries' underlying assets, such as irrigation development and worker and management training. Synergies have generally developed between export horticulture and complementary industries, such as the domestic catering or tourist industry. With certain historical exceptions, most o f the long-standing export industries have featured private sector dominance inthe commercial dimensions o f the business, complemented by a rather substantial and multidimensional facilitative role for government. Inthe early stages o f industry development, critical public sector roles have typically related to investment in transportation and portlairport infrastructure, investment in research and farm advisory services, measures to facilitate investodfarmer access to suitable land, policies to facilitate the transfer o f technologies and skills, and the broad array o f policies that foster a conducive investment climate. Over time, other important functions for government emerge, including SPS control measures, the promotion of competition within the industry and in critical support services, the negotiation o f favorable international market access, andresolution o f trade disputes. * Includingthe industriesinBrazil, Chile, Mexico, Kenya,andTaiwan. 11 EmergingStandardsandHorticulturalTrade Standards have become crucial to facilitating transactions and trade, both within and between countries. Standards and technical regulations stipulate what can or cannot be exchanged and define the procedures that must be followed for exchange to take place. Inthe context o f trade in horticultural products and associated production inputs, standards can play critical roles. For example: 0 Standards can facilitate the flow o f information between consumers and producers, particularly by providing information on unobservable characteristics such as food safety. Thus standards can reduce uncertainty for consumers and indicate to producers the expectations and requirements o f consumers interms o f quality and safety. 0 Standards can provide an important mechanism for technology transfer to developing countries. Technology i s expressed through standards, which therefore help to diffuse technical information concerning products or processes. 0 Standards are crucial in allowing firms in developing countries to integrate into global horticultural production chains, by ensuring the compatibility and traceability o f products and/or raw materials from geographically dispersed places. Harmonized standards between countries and/or industries can reduce transaction costs by reducing duplicative conformity assessment functions, including inspection, testing, and certification. Historically, the standards applied to international trade inhorticultural products were quality standards related to varietal selection, physical and visual characteristics, tolerances for foreign matter, and other variables. Standards also evolved for packaging materials for fresh and processed horticultural goods. Inrecent decades, a wider set o f standards has come to govern the international trade inhorticultural products. Some countries have given much greater attention to managing food safety and plant health risks by adopting a range o f measures, including outright banning o f products (or suppliers), specifying the conditions under which products must be produced and/or the characteristics o f the end product, or mandating labeling and other information requirements. Some countries have also given increased attention to the environmental and social dimensions o fhorticultural production. Traditionally SPS standards and other measures have beenpromulgatedand appliedby public authorities and have provided a minimumset o f food safety and/or plant health standards with which suppliers must comply. Some o f these are so-called "horizontal" regulations, which affect many or most ago-food sectors, including horticulture. General food laws and plant quarantine regulations fit into this category. Other measures are more specifically targeted at horticultural products or production systems. Inrelation to horticultural products, some o f the more prominent SPS requirements commonly laid down by governments include: 0 Plant health measures, including requirements to carry out pest risk assessments; establish and maintain pest-free areas; apply chemical or physical treatments to export consignments to minimize the presence o f live pests or larvae (for example, irradiation or fumigation); carry out phytosanitary inspections o f growing areas, packinghouses, and so forth; issue phytosanitary certificates on export consignments; and otherwise follow the guidelines laid out by the International Plant ProtectionConvention (IPPC). 0 Food safety measures, including requirements for registering the use o f ago-chemicals for specific crops; outright bans on the agricultural use o f certain pesticides; the setting o f tolerance levels-maximum residue levels (MRLs)-for pesticide residues and for microbiological parameters; restrictions on the use o f colorants, additives, or other 12 ingredients in processed foods; requirements for labelling and packaging; stipulations regarding needed management systems, such as requiring certified hazard analysis and critical control point (HACCP) systemsg for hit-juice makers; and requirements for the traceability o f raw materials and finished products. The private sector has also come to play a major role inspecifyingthe "rules o f the game" for participation in certain segments o f the market for horticultural products." In high-income countries and elsewhere, certain supply chain "leaders"-including major supermarket chains, fast food operators, and food processors-have established their own standards or supplier protocols as a means to comply with public standards, to ensure the quality and safety o f their products, and sometimes to differentiate their products from those o f their competitors. Different private sector protocols involve varying specifications for: (1) good agricultural practices (GAP), geared toward effective food safety and environmental management; (2) good hygiene or good manufacturingpractices (GHP/GMP), involvingthe application o f HACCP and similar principles in packinghouses and food processing operations; (3) quality management systems, including InternationalOrganization for Standardization (ISO) 9000 and others; (4) some degree o f product and raw material tracking and traceability; and (5) conformity assessment o f all o f the above through buyer, third-party, or other auditing, testing, certification, and so forth. Some private sector protocols also contain provisionsrelatedto protectingworker or farmer welfare." Multiple factors are catalyzing these evolving official and private standards, including: A set o fhigh-profile food safety crises or scares involving consumer illness andor death and associated large commercial losses and political repercussions. Examples include the E. coli outbreaks in fast-food hamburgers in the USA, contaminated olive oil in Spain, dioxin in animal feed in Belgium, dairy product food poisoning in Japan, and bovine spongiform encephalopathy (BSE) and salmonella outbreaks inthe UK. Demographic and socioeconomic trends, including rising per capita incomes, growing urbanization, and aging populations, as well as lifestyle changes leading to greater emphasis on eating out and ready-to-eat foods. Associated with these changes are changes in consumer awareness and preferences regarding food safety and the environmental and social dimensions o f food production. Improved scientific understanding o f food-related hazards, and advances in technology enabling more refined detection o f contaminants and other hazards. The expansion in international agro-food trade, which has itself increased certain risks, especially for importing pests that are not present inthe domestic environment. Rising commercial and political pressures, as reductions in conventional protection o f markets (specifically tariffs) and in logistical barriers have enhanced competition. Some stakeholders have sought to use SPS and other measures to limit such competition. HACCP i s a systematic approach to the identification, evaluation, and control o f significant food safety hazards. loSee the series o f articles inFood Policy (30) 2005. InIndiaandelsewhere, there is concernthat emerging private sector standards-including EurepGAP for primary producers and the British Retail Consortium (BRC) Global Food Standard for processors or packers-are more difficult to comply with or that compliance i s more costly to ensure (for example, through certification). While these private protocols are strongly based upon prevailing regulations, the technical requirements for specific areas are more stringent and/or need to be documented more systematically. The trend i s also for private food safety standards to be supplemented with environmental and social requirements, some o f which are either not yet reflected inregulations or officially enforced o n traded products. See Lee (2005) for a discussiono f pertinent issues. 13 While SPS measures should be scientifically based, it i s obvious that the speed with which they are developed and the relative emphasis they receive will vary among countries. These differences arise not only because o f large differences in consumer awareness and preferences, in demographic patterns, in patterns o f food consumption, in the competitive structure o f the domestic food industry, in scientific capacities, and in other variables, but also because o f the geographical and agro-ecological circumstances that make countries more or less susceptible to plant healthrisks and even to the spread o f certain food safety hazards. Thus while progress has been made in international or regional harmonization o f certain standards or conformity assessment arrangements/procedures, enormous diversity remains in the SPS standards (and related private standards) that are actually applied and enforced in different countries-and even to some extent within distinct market segments and supply chains in individual countries (boxes 2.1,2.2, and 2.3). era1high-profile food us efforts have gone into the ago-food system within e that emerges is one o f an nd consumer segments, wide s considerable variation inthe 14 d and feed hygiene hto the design and roach to monitoring s o f food and feed from ponsibilities o f member As will be hghlighted in chapter 4, India's horticultural exports are directed at a large number o f high-, middle-, and low-income countries. Indian suppliers to these markets are faced with enormous diversity inthe stringency, actual enforcement, and specific features o f SPS (and related private) standards. Table 2.6 provides a highly simplified summary o f the relative stringency o f SPS standards. Russial Other Other Former middle low Soviet income income Union L L-M L L-M L-M L L L-M L L L L Source: Authors' analysis. No&: H= high; M=medium; L= low. 15 Box 2.3: Emergin Several general observations can be made. For example: Stringent plant health measures apply for accessing US, Japanese, and Australian markets. As will be highlighted in chapter 5, these measures typically involve pest risk assessments, followed by an agreement on which risk mitigation measures the supplier will undertake to access these markets. Such measures can therefore represent absolute barriers to trade. Podairport inspections are also made on some or all consignments. Plant health measures are less exacting elsewhere andor less vigorously enforced. There are exceptions, however, as with the more stringent measures taken by Netherlands authorities to mitigate the risks o f imported pests to their own horticultural sector. India, itself, has variously applied strong phytosanitary measures against (potential) imports. Official food safety measures rarely represent absolute barriers to trade, although certain restrictions or needed tests may pose administrative challenges and shift competitiveness through their effects on the costs o f production and conformity assessment. Food safety measures tend to be higher or more regularly enforced in higher-income countries than elsewhere. Each country has somewhat different concerns or areas o f emphasis in import or market surveillance. For example, the U S A gives relatively highattention to processed foods. It requires processed food suppliers to preregister with its authorities and particularly scrutinizes labelling, additives, packaging, and other characteristics. Some EU countries give particular attention to pesticide residues, while Japanese authorities focus on the potential incidence o f various contaminants. The relative importance and stringency o fprivate food safety standards also varies among and within countries. Standards are perhaps most stringent among certain supermarket 16 chains in northern Europe, where considerable regulatory, consumer, and commercial pressures have induced responses. Various consortia o f firms have sought to harmonize private protocols. Even these markets, however, still show considerable variation in the private standards applied among different market segments (for example, among high- end supermarkets, discount supermarkets, "ethnic" food traders, or food service providers). Such variability i s likewise found elsewhere. 0 Outside o f very specific market niches inthe horticulturalproduce trade-such as organic produce-the specification and enforcement o f environmental or social standards are still relatively limited. That said, some o f the emerging private standards contain a blend o f food safety, environmental, and social provisions. This trend will likely get stronger given changes inconsumer awareness andpreferences. Clearly India's horticultural sector faces highly diverse "rules o f the game" for participating inregional and international markets-simply interms of the SPS and relatedprivate standards governing or affecting market access. This situation presents certain challenges as well as opportunities. One important challenge i s to stay abreast o f and understand the operative specifications, how they are applied, and what technical and administrative measures are needed by Indian suppliers for compliance. A second challenge is to build the necessary capacities, systems, and relationships to effectively and efficiently attain compliance. A third challenge i s to monitor and anticipate likely changes in official and private standards so that these can be internalized within one's own supply andregulatory systems.12To the extent that a supplier (or an entire industry) gains a reputation for superior standards management or i s able to anticipate regulatory, commercial, or consumer trends, standards compliance can be an opportunity for supplier differentiationina competitive marketplace. The challenges and opportunities posed by standards certainly need to be factored into the commercial and other strategies o f farming, trading, and processing enterprises operating within India's horticultural sector. They also need to be factored into the government's policy and resource allocation decisions. Compliance with SPS, quality, and other standards may necessitate changes inregulations, in production or processing operations, in institutional arrangements for supply chain coordination, andor in conformity assessment arrangements. Certain technical or administrative capacities will need to be developed or strengthened (box 2.4). These measures carry certain costs, although they could well be associated with significant near- or longer-term benefits. "Compliance costs" may include up-front investment costs in new infrastructure, equipment, management systems, and human capital. They may also include various recurrent costs such as those for inspection or testing. The level and distribution o f compliance costs (and associated benefits) may well affect the profitability andor competitiveness o f supplying particular markets or marketing channels. Both the potential costs and benefits o f compliance needto be considered inmapping strategies. l2Anticipating the trajectory of official and private standards in the high-income countries requires both judgement and guesswork. Some trends and patterns are clear, yet developments will also be influencedby episodic events-such as food safety crises-and not by systemic factors alone. There i s even greater uncertainty about the speed and trajectory o f standards evolution inwhat are now low- and middle-income countries. One can certainly anticipate more regulatory attention to bothplant health and food safety risks. Inthe private sector, the pattern likely will be dualistic inthe near- to medium-term, with an increasingly standards-conscious segment-servicing middle- and upper-income consumers-coexisting with the more traditional domestic market, where low-cost food supplies are the predominant focus. This latter pattern will also likely prevail within India's domestic market. 17 18 Chapter 3: T h e Domestic Setting for Horticulture HorticulturalProduction India produced 48 million tons13 o f fruit on 4.0 million hectares and 79 million tons o f vegetables on 7.0 million hectares in2004 (table 3.1)-more than any other nation except China. Fruit and vegetable production has increased rapidly inresponse to growing demand, fueled by growth in urbanization and real incomes and by a concerted effort to promote agricultural diversification. Fruit production grew by 2.5 percent per year in the last decade, while vegetable production increased even faster, averaging 3.9 percent per year.14 Even though India increased its vegetable production by 50 percent and its fruit production by nearly 40 percent within a decade, India's share in global production remained fairly constant, owing to the dramatic increase inhorticulturalproductioninChina." i Table3.1: : World Developed Percent Developing Percent China Percent India Percent (million countries of world countries, of world (million ofworld (million of world t) (million t) excluding t) t) China and India (million t) Source: Authors' calculations, based on FAOSTAT data. India is also one of the world's largest flower growers. There is enormous demand for flowers such as marigolds, jasmine, chrysanthemums, and tuberoses, which are used for worship, festivals, and other traditional occasions. Most flowers are produced on open fields. Following economic liberalization in the early 1990s, floriculture in greenhouses or other protected structures emerged to produce roses and other cut flowers for export. Since then the industry has been widely promoted. The lO* Plan (200247) identified floriculture as a "sunrise industry" (Desai 2004). Today 735,000 tons o f traditional flowers and about 2 billion flower stems are produced each year on about 70,000 hectares. The industry has experienced impressive growth: cut-flower production grew by 16.9 percent per year and traditional flower production by 12.2 percent per year between 1993194and 2002l03, 13All figures expressed intons inthis report are inmetric tons. l4Growth between 1992/93 and 2002/03.Based on authors' calculations; data from FAOSTAT. l5Which, according to Food and Agriculture Organization (FAO) statistics, has more than doubled over the past decade. 19 Mangoes, bananas, citrus, Table 3.2: Fruit andvegetable crop yields, 2004 guavas, and papayas are the major t/ha types o f fruit grown in India, accounting for about 80 percent o f the area under fruit production. The main vegetable crops- accounting for about half o f the area-include potatoes, tomatoes, onions, cabbages, and cauliflower. Although India's fruit and vegetable yields are comparable to world averages, in many cases they are well below yields in comparator countries and leading developing country exporters (table 3.2).16 Source: Authors' calculations, based on FAOSTAT data. Note: Comparator countries include China (for apples, onions, cauliflower, and Fruits and vegetables are overall h i t and vegetable yields); Costa Rica (bananas); CBte d'Ivoire grown throughout India. The (pineapples); South Africa (citrus); Chile (grapes); Mexico (mangoes); Brazil leading fruit producers are (papayas); Egypt (peas); Kenya (okra); Jordan (eggplant, cabbages); and Morocco (tomatoes). Maharashtra, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, and Kamataka; the leading vegetable producers are West Bengal, Uttar Pradesh, Bihar, Orissa, and Maharashtra. Fruit and vegetable production tend to be concentrated inrainfed areas, as irrigated regions specialize inrice and wheat. Production i s also concentrated in and around urban districts, because fruits and vegetables are highly perishable (Rao et al. 2004). As will be noted in chapter 5, these production conditions present certain food safety risks, because air, soil, and water pollution can introduce heavy metals and other contaminants into fresh produce. Although farmers growing horticultural crops in India tend to have larger farms than the average farmer, their farms are typically very small. For instance, on average, mango farmers in Maharashtra and Tamil Nadu own and operate only about 3 hectare^.'^ Only 5 percent o f mango farmers in Maharashtra cultivated more than 5 hectares (Korstanje et al. 2005). By comparison, 50 percent o f mango farms inBrazil are 20 hectares or more. Relatively few farmers in India use modem cultivation or postharvest practices, although such practices are more common in some states than others." Attention to quality varies, but overall the quality o f produce grown for domestic consumers i s quite poor. Certainly the quality o f most commodities i s well below the standards even o f low-end export markets. Despite efforts to promote integrated pest management (IPM) practices, improper use o f agro-chemicals is widespread. Farmers do not adhere to recommended chemical dosages, spraying regimes, and preharvest intervals (the time betweenthe last pesticide application and the harvest), and they can still obtain and use chemicals that are no longer registered or that are not recommended for use in horticulture. With growing consumer l6These average yield estimates are not specific to export supply chains. Insome cases, average yields of exportable produce are considerably lower than yields intable 3.2. Because o f certain agronomic practices, for example, grape yields on farms producing for the Europeanmarket may average 10-12 tons per hectare. Average banana yields inIndia appear impressive compared with the world average, but very little o f India's productionis o f export quality. The same point applies to citrus. 17Onaverage, farmers inTamil Naduown0.8 hectares, while farmers inMaharashtra own 1.8 hectares (World Bank 2006). l8For instance, the use o f drip irrigation i s becoming more common inTamil Nadu and Maharashtra. 20 awareness, demand for safer and better-quality fruits and vegetables i s increasing, but mainly in major urbanmarkets catering to higher-income and more quality-conscious consumers. ConsumptionofHorticulturalProductsI s on the Rise With rising incomes, food consumptionpatterns inIndia are changing rapidly. Diets are becoming more diverse, health consciousness i s increasing, and consumption o f fruits and vegetables i s on the rise. Per capita expenditures on fresh fruits and vegetables increased by approximately 25 percent inreal terms between 1993/94 and 2003 (Government o f India 2005~). In2003, the average ruralhousehold spent about 35 rupees (Rs) onvegetables and Rs 10 on fruit each month, equivalent to 12 and 3 percent, respectively, o f total food expenditures. Urban residents on average spent about Rs 46 on vegetables (11percent o f food expenditures) and Rs24 on h i t each month (5 percent o f food expenditures). Fruit i s still considered a luxury for most household^.^^ The richest households in both rural and urban areas spend about 4 times as much as the poorest households on vegetables and 20 times as much on hit. According to the UN Food and Agriculture Organization (FAO), fruit consumption inIndia i s projected to increase by 4 percent per year. Based on these estimates, demand for fruit i s projected to reach 66 million tons by 2010, with tropical fruit accounting for the bulko f demand growth. MarketingChainsfor Fruits andVegetables Integrated production and export distribution i s characteristic o f the horticultural trade in most countries with leading shares o f the export market, but most exporters and export processors inIndia still rely on traditional wholesale markets to procure fruits and vegetables (box 3.1). For several commodities, such as grapes and gherkins, dedicated export supply chains have emerged to comply with European buyers' delivery schedules and requirements for quality, safety, volume, and consistency. The more general challenges presented by the fragmented production base and system o f marketing logistics do not provide a natural basis for increasing horticultural exports, however. Marketing channels for fruits and vegetables in India vary considerably by commodity and state, but they are generally very long and fragmented. Figure 3.1 presents typical marketing channels for mangoes and onions inTamil Nadu. Most domestic fruit and vegetable production i s sold to wholesale markets, although4epending on the state and commodity-farmers may also sell to traders at the farmgate, to traders at village markets, or directly to processors, cooperatives, and others (table 3.3). l9The income elasticity o f demand for fruit is estimated at 1.89 in rural areas and 1.36 inurban areas in 2003. The comparable figures for etables are 0.60 in rural areas and 0.51 in urban areas. These estimates are based on data fkom the round o f the IndianNational Sample Survey. 21 A model Agricultural Produce Marketing (Development and Regulation) Act (APMAct) was prepared by the Directorate of Marketing and Inspection in the Ministry of Agriculture, and legislation based on this model was passed by individual states.*' Under these Agricultural Produce Marketing Committee (APMC) Acts, wholesale markets (mandis) were created to centralize and improve marketing services and infrastructure (storage, weighing, packing, grading, and market intelligence). Even so, marketing arrangements vary a great deal between states as guidedby legislation. Inmost states, all wholesaling of "notified" agricultural produce is required by law to take place in controlled markets, and market development i s centered on state 20Kerala, JammuandKashmir, Manipur, Andaman andNicobar Islands, Dadra andNagar Haveli, and Lakshadweep do not have the regulation. 22 marketing agencies.'l Tamil Nadu i s one state where there are comparatively fewer "notified" commodities, thereby enabling more transactions outside o f the state-run wholesale markets.22 In states where h i t and vegetable Table 3.3: M a r k e t destination of farmers' produce wholesaling must occur in regulated marketplaces, farmers cannot sell directly to large retailers and processing companies, which restricts the development o f shorter and more efficient supply chains. Logistical costs and crop losses tend to be relatively high for perishable h i t s and vegetables. In the majority o f states, APMC regulations also prevent the private sector from investing in wholesale markets and marketing infrastructure, Source: Fafchamps,Vargas-Hill, and Minten2006. with the result that most markets have very rudimentary infrastructure, particularly for storing and handling perishable products. For example, less than 20 percent o f markets included in a survey o f 78 wholesale markets inTamil Nadu, Maharashtra, Uttar Pradesh, and Orissa had cold storage facilities (World Bank 2007). Emergence of CoordinatedSupply Chains In the last few years, more coordinated supply chains for fruits and vegetables have emerged, catering to India's export and high-end domestic markets. On the domestic front, this trend has primarily been led by the growth o f hypermarkets, supermarkets, and other organized retailers inmetropolitancenters. The emergence o f dedicated export chains has been promptedby stricter quality and safety standards incertain export markets. Coordinated supply chains involve structured relationships among producers, traders, processors, and buyers to provide detailed specifications on what and how much to produce, the time o f delivery, quality and safety conditions, and price. These relationships often involve Formulated by the Government o f India in2003, the ModelAct to reformthe Agricultural Produce Marketing (Development and Regulation) Act, 1951aims to foster a single market inthe country by removing the restriction on selling agricultural commodities wholesale only instate-regulated markets and bypermitting the private sector to develop and operate wholesale markets. By2006, only five states had adopted the model and amended their APMC Act: Punjab, Madhya Pradesh, Himachal Pradesh, Sikkim, and Nagaland. Some states have allowed company-specific waivers (for example, Uttar Pradesh, Rajasthan, and Karnataka), whereas several other states are still amending the Act (Government o f India, Ministryo f Agriculture 2005). 22Tamil Nadu has 40 notified agricultural commodities, compared to 286 inMaharashtra and 106 inUttar Pradesh(World Bank 2006). 23 exchanges o f information and sometimes assistance with technology and finance. Coordinated supply chains fit well withthe logisticalrequirements o fmodern food markets, especially markets for fresh and processed perishable foods. Safety and quality controls can be applied all along the supply chain, which can be more effective and efficient than applying such controls only at the end o fthe chain. Figure3.1: Mangoand onion marketingchannels, Marketing channels for mangoes inTamilNadu I Growers I 1 1 I Wholesaler Source: Ramasamv 2003. Several companies in India are beginning to invest in integrated supply chain management systems and infrastructure, with an emphasis on quality and, to a lesser extent, safety. Different models are emerging, including fruit and vegetable retail outlets that directly procure produce from farmers or from grower associations through various formal or informal contractual arrangements. Collection-cum-grading centers established in rural areas move all produce through a central distribution facility with such modem infrastructure as cold storage, ripening rooms, and controlled atmosphere chambers. Growers are required to follow certain specifications and are often provided with some inputsand technical advice about agronomic and postharvest practices. Contract farming for h i t s and vegetables i s already practiced inseveral states and likely to expand considerably following recent reforms. Untilrecently, contract farming was not legally recognized in most states, and a legal framework governing contracting arrangements was missing. Under the APMC Model Act, a new chapter on contract farming provides for the registration o f contract buyers, the recording o f contract farming agreements, and time-bound mechanisms for resolving disputes. It provides an exemption from market fees for produce covered by contract farming agreements and provides indemnity to farmers' land to safeguard against the loss o f land in the event o f a dispute. Contract buyers can now legally purchase commodities through individual purchase contracts or from farmers' markets. The legislation also contains a provision for direct sales o f farm produce to contract buyers from farmers' fields, bypassing notified markets. InBangalore, arecentlyestablished terminalmarket for fruits andvegetables (known as S A F A L ) can physically handle up to 1,600 tons o f produce a day. It i s linked to some 250 Farmers Associations and 40 Collection Centers in selected producing areas. The S A F A L market receives and auctions sorted, graded, and packaged produce from these associations and centers. S A F A L also has forward linkages to a number o f retail outlets (Cash and Carry Stores). The market's infrastructure includes temperature- and humidity-controlled storage facilities and ripening chambers. The most recent budget speech announced allocations for more model 24 horticultural terminal markets to be set up through private-public partnerships under the National Horticulture Mission (discussed later in this chapter). S A F A L ' s experience should be closely monitored and lessons drawn to inform similar investments. With increasing private investment in the food retail sector and impending changes in contract and marketing laws, shorter and more direct supply chains with traceability are expected to become more common (box 3.2). Of the totalfood retail sales (estimated at US $135 billion in 2002/03), less than I percent currently occur in the organized sector (Singh 2004). The incidence and spread o f coordinated supply chains will be closely connected with the pace and direction o f modernization inIndia's food retail sector. Thus far, changes infood retail have been gradual and considerably slower thanthose observed inmany other developingc~untries.'~ Fruit andVegetableProcessing India's commercial fruit and vegetable processing sector remains small. Less than 2 percent o f domestic fruit and vegetable production i s estimated to be processed. A wide assortment o f fresh fruits and vegetables i s available year-round, and most consumers have a strong preference for consuming fresh over processed products. Moreover, although incomes are growing, the vast majority o f households cannot afford processed products. The 2003 Indian National Sample Survey found that only 2 percent o f all households reported expenditures on processed fruit juices and less than 20 percent Figure3.2: Processedfruit and vegetableconsumptionand expenditures on commercially onsumem of juice Consumers of jams, jellies & pickles. mbution byexperdllur (populaliondialnbulionbyexp~iturequlnllles) produced jams and pickles (figure 3.2). Seventy-five percent o f juice consumers fell in the top 25 percent income bracket, and these Average expenditures onjams, jellies & pickles consumers had (populationdistlibutlonbyexpnjlhlrs quinttbs) Per capita monthly expenditures that were more than two and a half times larger than the expenditure o f the average Indianconsumer. Source:Authors' calculations, based on data from IndiaNational Sample Survey 2003 At its current level of Rs 36 billion (about US$ 800 million) (Govindan 2005b), the fruit and vegetable processing industry in India i s small, even compared to that in other developing countries. In2000, exports alone o f processed fruit and vegetable products from Thailand totaled U S $ 836 million. South Africa's canned fruit and vegetable industry has a turnover o f US$ 3 23 Currently foreign chains are not allowed to invest directly in the food retail sector and have to open stores as franchises. 25 billion. For broader comparison, the fruit and vegetable processing sector in the USA has an annual turnover o fUS$40billion. Production inthe h i t and vegetable processing sector i s almost evenly split between an organized sector and an unorganized sector. There i s quite a bit o f difference in product composition between the sectors (figure 3.3), partly due to regulations that restrict the manufacture o f some items such as pickles and chutneys exclusively to the small-scale sector.24 24Firmsthat do notmeet the requirements for small-scale industrystatus canstillprocess reserved items such as pickles and chutneys ifthey export at least 50 percent o fproduction. 26 I Pickles are by far the single most Figure 3.3: Segments in India's processed fruit and vegetable important processed fruit or vegetable, industry, 2003 accounting for 30 percent o f the total output o f the sector. Juices, 100% pulp/concentrates, and potato chips make 90% up about 70 percent o f the value of 80% production inthe organized sector, while w Cooking paste 70% in the unorganized sector pickles and E! mtato chips 60% w Ready-to-eatvegetable5 saucesketchup are the main products. 50% w Squashes The industry currently has an installed w Juiceslfruit capacity o f around 2.3 million tons 40% 0 hlpkoncentrate (IBEF 2006); this capacity has doubled 30% Sauceketchup in 10 years, although utilization is 20% Rcldes estimated at only 46 percent. Currently, 10% Jam about 45 percent o f the production o f 0% processed fruits and vegetables i s Organized Unorganbed exported, and the rest primarily supplies the defense and institutional sectors Source: Govindan2005b. (Sidhu 2005). Thisbriefdescription o f India's horticultural sector provides the context for the questions posed inchapter 1. Given its huge volume o f production and extensive institutional apparatus for promoting horticulture, i s India an awakening giant, ready to compete and profit in the world's horticultural markets? Or i s India's dominant structure o f production and marketing misaligned with existing opportunities, standards, and supply chain requirements? These questions will be addressed in subsequent chapters, but first it i s useful to understand the major government initiatives and institutionsassociated with horticulture development in India. InstitutionsandPolicy Environmentfor HorticultureDevelopment The horticultural sector has received considerable attention in recent years for its potential importance as a source o f growth and employment. This government's National Horticulture Mission, launched in July 2004, has the doubling o f horticultural production as one o f its core objectives (box 3.3). Priority areas under the Mission include horticultural research and development, improving postharvest management, and promoting processing and marketing. The horticultural sector has already benefited from economywide trade and regulatory reforms that have improved the overall investment climate for domestic and foreign companies in India, as well as from more specific market or sectoral reform^.'^ 25 Some o f the mainreforms include: removal o f licensing requirements and government control over cold storage fees; amendments to state APMC Acts to allow contract farming, private investment inwholesale markets, and direct marketing between buyers and sellers; approval o f foreign direct investments (FDI) in food processing and marketing, with the exception o f retail marketing; removalhelaxation o f quantitative restrictions o n import and export o f food items (except items o n the negative list) and capital goods; abolition o f minimumexport prices (MEPs); and tax reform, including the adoption o f a value-added tax (VAT) to replace purchase and sales taxes in several states. To promote investment in fruit and vegetable processing, the 2004-05 Budget has provided tax concessions for new processing units (Government o f India 2005). 27 Institutions SupportingDomesticHorticulture The development o f the horticultural sector i s supported by a large number o f government institutions at the central and state level. The NationalHorticultureBoard (NHB) in the Ministry of Agriculture is the central institution responsible for facilitating the sector's development. The NHB mandate includes encouraging the development o f commercial horticulture through demonstration farms, developing postharvest management infrastructure, strengthening market information systems, maintaining a horticulture database, assisting research and development programs, and providing training and education to farmers and the processing industryfor improving agronomic practices and the adoption o f new technologies. The National Cooperative Development Corporation (NCDC) under the Ministry o f Agriculture supports fruit and vegetable marketing and processing cooperatives. It provides financial assistance for postharvest operations o f cooperatives, including assistance for purchasing transport vehicles, creating cold storage and marketing infrastructure, and obtaining various other types o f support. Horticultural research and education are spearheaded by the Indian Council of AgriculturalResearch(ICAR) and its affiliated research centers. The Horticulture Division o f ICAR has 9 research institutes, 11nationalresearch centers, and 13 coordinated researchprojects. Those that have most actively supported export horticulture include the National Research 28 Centres (NRCs) for grapes and for onions. The National Institute of Post Harvest Technology (NIPHT) is responsible for transferring postharvest technologies to farmers, cooperatives, and the private sector. The National Institute of Agricultural Marketing (NIAM) provides specialized training, research, and consultancy in agricultural marketing. Fundingsupport for the horticultural sector i s provided by various institutions, including the National Bank for Agriculture and Rural Development (NABARD), which has identified agro-processing, especially o f fruits and vegetables, as a focal area. The Directorate of Marketing andInspection,under the Department of Agriculture and Cooperation, enforces and implements the Agricultural Produce (Grading and Marking) Act, 1937 (as amended in 1986). Its mandate includes promoting standardization and grading of agricultural products (including horticultural crops), conducting market research and surveys, developing market regulations and infrastructure, providing training on agricultural marketing, promoting development o f cold storage facilities, and providing market information services (through AGMARKNET).As o f January 2005, the list o f commodities with AGMARK standards included 25 fruits and vegetables (AGMARKNET 2007). Different grades and standards are laid out under AGMARK for domestic consumptionversus exports.26 The AGMARK grades are primarily voluntary grades related to the size, variety, weight, color, and moisture level o f produce. The Directorate provides third-party certification under the AGMARK quality certification scheme. The AGMARK seal is intended to ensure quality and safety. Any consumer, trader, or manufacturer can have products tested at one o f the 23 regional AGMARK laboratories for designated c~mmodities.Primary responsibility for enforcing ~ ~ domestic food safety laws related to fruits and vegetables rests with the Ministry o f Health and Family Welfare and the Ministry o f Food Processing Industries (box 3.4). Since 2003, the European Commission (EC) has designated the Directorate o f Marketing and Inspection as an official authority and inspection body in India for checking conformity to marketing standards applicable to fresh fruits and vegetables prior to import into the EU. The inspection and certificationi s voluntary for exporters, with the exception o f grapes shippedto the EU. ** Primary responsibility for the development o f the food and vegetable processing sector lies with the Ministry of Food Processing Industries (MoFPI). MoFPI i s implementing a number o f schemes covering (1) infrastructure development, (2) technology upgrading and the establishment o f modern food processing industries, (3) development o f backward and forward linkages inthe value chain, (4) the strengthening o f quality management, and (5) human resource and institutional development. The first four schemes provide investment grants to the private sector. In recent years, MoFPI has emphasized upgrading the quality o f food processing establishments. To this end, MoFPI has developed a scheme for Quality Assurance, Codex 26 For example, in the case o f mangoes, the AGMARK grade specifies that for export "mangoes shall comply with the residue levels o f heavy metals, pesticides, and other food safety parameters as laid down bythe Codex Alimentarius Commission." 27Typically, only commodities prone to adulteration are tested, such as oils, ghee, whole and ground spices, honey, and whole and milled food grains. Blended edible vegetable oils and fat spreads are required to be certified under AGMARK. 28 Standards for 18 important fruits and vegetables-including grapes, litchis, mangoes, pomegranates, guavas, pineapples, bananas, papayas, plums, shelling peas, sugar snap peas, ribbed celery, headed cabbages, spinach, Brussels sprouts, tomatoes, garlic, and onions-have been approved, are harmonized with EC and Codex Standards, and are in the process o f formal Notification in the Gazette o f India. Standards for another 7 fruits and vegetables-pears, cherries, strawberries, melons, watermelons, beans, and cauliflower-have been approved by a Standing Committee on Fresh Fruits and Vegetables in the MinistryofCommerce andIndustry(AGMARKNET2007). 29 Standards, and Research and Development. The components o f the scheme include promotion o f total quality management, promotion o f quality assurance/safety, bar-coding, setting up quality control laboratories, andresearchand development inthe processed food sector. Each state also has its own infrastructure for the promotion o f horticulture. For example, the Maharashtra State Agricultural Marketing Board (MSAMB) supports both domestic and export marketing for horticultural crops from that state. Aside from being the nodal agency for implementing AEZs in the state, M S A M B has invested in marketing infrastructure to support exports, including facilities for precooling, cold storage, ripening chambers, and paclunghouses. M S A M B has also helped establish a vapor heat treatment (VHT) facility in Mumbai and an air cargo facility at the LohgaonAirport inPune (Korstanje et al. 2005). Institutions Involved in Horticultural Exports and Trade-related SPSManagement Several government institutions focus primarily on promoting international agricultural trade, including horticultural trade. The Agricultural and Processed Food Products Export Development Authority (APEDA), an autonomous organization attached to the Ministry o f Commerce, i s the lead agency for promoting development o f Indian agricultural exports, including fresh and processed horticultural products. APEDA advises potential exporters on market requirements, organizes product promotions, and participates in international trade fairs to 30 promote Indian exports. Given the growing importance o f international standards for agricultural trade, APEDA has also initiated numerous schemes to encourage exporters to upgrade their facilities to comply with international requirements. These include: _ _ Assistance to exporters, producers, trade associations, public institutions, and others for setting uphtrengtheninglaboratories. Assistance to exporters and producers for installing quality management, quality assurance, and quality control systems, such as I S 0 series, HACCP, and Total Quality Management. Activities related to standardization and quality control, such as the preparation o f quality assurance manuals. Recognition o f laboratories for export testing. Providing support to test for pesticide residues, veterinary drugs, hormones, toxins, and other contaminants inwater and soil. Assistance to growers, manufacturers, exporters, and export-related organizations for upgradingtechnical and managerial personnel through training inIndia. Assistance to recognized associations o f growers/exporters for organizing seminars/group activities, including study tours within the country, and for producing informational literature. The Directorate of Plant Protection, Quarantine, and Storage (PPQS) inthe Ministry o f Agriculture i s the main authority in India responsible for dealing with trade-related plant health issues. Its mandate includes ensuring that harmful pests do not enter India through agricultural trade, ensuring the availability o f safe and effective pesticides under the Insecticides Act, 1968, popularizing adoption o f IPM, undertaking export inspections, and issuing phytosanitary certification o f plants and plant products in conformity with quarantine regulations o f the importing country to fulfill India's obligations under international agreements. The plant protection and quarantine department o f the Ministry o f Agriculture i s also responsible for SPS issues related to the WTO.*' The Plant Quarantine Service (PQS) within the PPQS directorate i s the primary agency responsible for providing export inspection and certification services. The PQS i s also responsible for fumigation and other treatment o f agricultural commodities, cargo containers, and ship holds to certify that consignments are free o f pests. Fumigation operations by approved pest control operators are supervised by PQS wherever required. The PQS, in association with State Departments o f Agriculture/Horticulture, i s also responsible for identifying pest-free areas or production sites inaccordance with established international/national standards. Responsibility for preshipment inspection o f various export commodities notified under the Export (Quality Control and Inspection) Act, 1963, lies with the Export Inspection Council (EIC), an autonomous body under the Ministry o f Commerce. The EIC certifies the quality o f food items for export, as called for under agreements with several o f India's trading partners (examples include black pepper sold to the USA, fish exported to the EU, and h i t s and vegetables exported to Sri Lanka). The agency also issues Certificates o f Origin to exporters as required under various preferential tariff schemes. 29 The PPQS has a well-established infrastructure with 91 field stations, including 26 Central Integrated Pest Management Centers, 32 Plant Quarantine and Fumigation Stations, 28 Locust Substations (including 23 outposts), 1Field Station for Investigation on Locust, 2 Regional Pesticides Testing Laboratories, and a National Plant Protection Training Institute. 31 Chapter 4: IndianHorticulturalExports: BroadandCommodity- SpecificTrends This chapter begins with an overview o f broad and commodity-specific trends in Indian horticultural exports and concludes by identifying key competitiveness constraints and weaknesses in selected subsectors. The next chapter will detail SPS-related challenges to Indian horticulture and describe how the national government and private sector have responded. Value andCompositionof IndianHorticulturalExports India's share o f global horticultural exports i s only 0.3 percent for fresh and processed fruit, 0.8 percent for fresh and processed vegetables, 0.2 percent for fresh-cut flowers, and 2.6 percent for dried flowers and fresh and dried plants. In2004, India exported US$ 575 million o f fresh and processed fruits, vegetables, and equivalent to about 1percent o f India's total export earnings and about 7 percent o f its agricultural export earnings. Following major trade Figure 4.1: Growth and composition o f India's fruit and policy and exchange rate reforms vegetable exports in the early 199Os, India's horticultural exports expanded vigorously. Since 1994, fruit and vegetable exports have grown at about 8 percent per year in real terms, with exports reaching US$ 536 million in 2004 (figure 4.1). 0Freshidnedmol5 and Segments with the fastest growth I#Processedvegetables are processed vegetables and @Freshidnedvetables processed fruits, which have grown at 10 and 11 percent per annum, respectively, in real terms. Major processed fruit exports include mango pulp- which accounted for close to 50 percent of the value of this Source: Authors' calculations, basedonUNComtradedata. category of exports in 2 0 0 L a s well as pickles and chutneys from various fruits, including mangoes. Gherkms, dehydrated onions, and mixed frozen vegetables account for 60 percent o f processed vegetable exports. In2004, exports o f processed fruits and vegetables accounted for 19 percent and 31percent o ftotal horticultural exports, respectively (see chapter 2, figure 2.2). Fresh fruits make up around 11 percent o f India's horticultural exports, while fresh vegetables account for 32 percent. Growth has been slower in the fresh fruit and vegetable segment than in processed products, averaging about 6 percent per year. Grapes and mangoes account for close to 60 percent o f India's fresh fruit exports. In2004, exports o f fresh and dried vegetables were almost three times as large as exports o f fresh fruits (about US$ 182 million). The largest export earner inthis group was dried onions, with exports valued at US$ 156 million 30Recall that horticultural products are defined here to include fresh and processed fruits, vegetables, and flowers. This definition excludes nuts and fresh and dried legumes, which tendto be included inAPEDA data. Nuts and legumes involve very different commercial channels and quality and SPS considerations than h i t s , vegetables, andflowers. 32 in2003/04. Important fresh vegetable exports include okra, peas, karela (bitter gourd), sweet and hot peppers, and eggplant. Source: Authors' calculations,basedon data from AF'EDA 2004 and NHB 2004. Note: A conversion factor of 9 to 1 is assumed for conversionfrom fresh to dehydrated onions, based on Lucier, Lin, and Allshouse 2001. For mango pulp, a conversion factor of 3 to 1 is assumed, based on authors' personal communication with industry experts. Raisinhltana exports are convertedto fresh grape equivalentusingaconversionfactor of4.5 to 1basedon Sarigedik 2005. With the exception o f some horticultural crops produced primarily for the export market (gherkins, for instance), the export intensity o f production-the share o f total production that i s exported-is low (table 4.1). For example, even though onions are one o f India's largest horticultural export earners, India exports only about 17 percent of its domestic production in dried or dehydrated form.31Similarly, India exports less than 3 percent o f its mango production and i s not a major player inthe global fresh mango trade. While the basket of India's fresh and processed horticultural export products i s very diverse, only a few products account for a large share o f total earnings. In2003/04 these included fresh onions (US$ 165 million), mango pulp (US$ 56 million), processed gherkins (US$ 28 million), fresh grapes (US$ 24 million), and fresh mangoes (US$ 25 million). These five commodities together accounted for just over 50 percent o f India's horticultural earnings in 2003/04 (APEDA 2004). Directionof India's HorticulturalExportTrade Duringthe past two decades, the direction o f India's fruit and vegetable exports shifted dramatically. In 1984, half o f these exports were directed to high-and middle-income countries in the Middle East (figure 4.2), but exports to EUand NAFTAmarkets rose substantially in the last 10 years, largely because o f growth inthe processed fruit and vegetable segments. The bulk o f fresh fruits and vegetables exported by India, however, still goes to neighboring countries or the Indian diaspora in the Middle East and Southeast Asia (table 4.2). Small amounts are also distributed through "ethnic" food markets and restaurants in Europe and countries with large populations o f South Asian origin. To a large extent, this trade i s based on personal ties and consumer preferences for specific varieties o f produce, with prices closely tied to Indian domestic prices (adjusted for freight costs). India has also developed modest levels o f trade in selected fresh products (including grapes, roses, and pomegranates) to mainstream OECD markets. This trade accounts for less than 15 percent o f India's fresh horticulture trade. 31This export share has increased duringthe past two years, with exports ofdried onions exceeding 800,000 tons per annum. 33 Figure4.2 Destinations of India's fruit and vegetable exports, 2004 EU MIC LIC NAFTA H 1994 r HiMENA H1984 MidMENA CHN JPN 0% 10% 20% 30% 40% 50% Share of fruit and vegetable exports Source: Authors' calculations, basedon India-reported data from the UNComtrade database Note: MidMENArefers to middle-income countries inthe Middle EastandNorth Africa; HiMena includes high-income countries inthe Middle East; HIC includes high-income countries, except those inthe Middle East, EU,NorthAmerican Free Trade Agreement (NAFTA), and Japan (JPN); MIC includes middle-income countries, except those inthe Middle East; and LIC includes all low-income countries, except India (IND)and China (CHN). Incontrastto its exports offreshproduce, India's exports ofprocessedh i t andvegetable products are mostly directed at markets in the EU and USA. This trade has shown promising growth. Indian firms and industries have gained international market share in a range o f processed products, despite the lack o f market access preferences and the pattern o f tariff escalation inrelation to such products. It has been for processed (rather than fresh) products that India has been able to realize significant economies o f scale from its large horticultural productionbase. Seventy-five percent o f India's export earnings from h i t and vegetable exports are from 10 countries (table 4.2). Close to 60 percent o f India's fresh flower exports are to Japan and the Netherlands (table 4.3). 34 8 ITA 0.26 3 GRC 0.33 3 9 GBR 0.24 3 GBR 0.30 3 10 DEU 0.24 3 NZL 0.24 2 Subtotal 8.29 93 Subtotal 9.14 95 Total 8.91 9.61 FreshMangoes India i s the preeminent producer of fresh mangoes in the world. With an Figure 4.3: India's mango exports, 1993194-2003lO4 average annual production over the past 70000 three years o f 10.7 million tons, India 60000 accounts for 40 percent o f world 50000 production. India also boasts a broader range of mango varieties than any other production source: at least 30 varieties are in commercial production, and more than 1,000 varieties are claimed to exist in 10000 1 India. The leading mango-producing states are Uttar Pradesh, Andhra Pradesh, Bihar, Karnataka, Tamil Nadu, and Maharashtra. In 2003104 India exported about 61,000 tons of mangos (equivalent to US$ 25.5 Source: Authors' calculations, basedon data from APEDA 2004. million), a steep increase over previous No&: The large increase in 2003104 is primarilyattributed to a jump insales to Bangladesh. years (figure 4.3). Despite its dominant share o f world mango production, the extended seasonal availability o f its mangoes, and the broad range o f quality characteristics associated with its mango output, India's role in the global mango trade i s quite modest. India accounts for only 4-5 percent o f world export volumes and value (table 4.4). As a major exporter it ranks sixth-behind Mexico, Brazil, Pakistan, Peru, and the Philippines-even though the combined production o f these five countries i s less than halfo f India's. The export orientation index o f Indian mangoes i s substantially behind that o f the six major exporting countries and ahead only o f Indonesia among the principal producing countries. Exports for the three years from 2002 to 2004 amounted to 143,000 tons, representing only 0.44 percent of India's mango production o f 32.2 million tons during the same period. India also realizes lower unit revenues from its mango exports than most major exporting countries. Of the 36 11 countries featured in table 4.4, only 3 (Pakistan, Ecuador, and China) had lower average export unit values than India. At US$ 0.47 per hlogram, India's realized revenues were a full 25 percent below the global average for fresh mango exports. This gap i s even wider with respect to the mango unit price leader, the Philippines, which has an average unit revenue o f US$ 1.17 per kilogram, 60 percent above India's. The world's major mango importing countries include the USA, the Netherlands, Saudi Arabia, and the UAE.Prices in different markets vary widely. For example, average prices for mangoes imported into Japan exceed US$ 3,000 per ton, whereas prices o f mangoes imported into Malaysia and Bangladesh are less than US$ 250 per ton. This conclusionis based on field observations by the study team. Despite these differences, the bulk o f India's fresh mango exports are directed at low- or medium-priced markets (table 4.5). Thailand 8,098 1 4,550 1 0.56 Rest of world 157,397 20 144,003 29 0.91 Total 777,823 100 492,966 100 0.63 Source: Authors' calculations, basedon FAOSTAT data. Source: Authors' calculations, basedon data from APEDA 2004. While Indian mangoes are widely recognized to be o f superior quality, export logistics remain a challenge. For example, only about 25 percent o f the mango crop in Tamil Nadu is probably eligible for export because o f harvest and postharvest practices. 32 Careful attention i s given to visual quality and the internal condition o f the hit, and considerable care is taken in washing, drying, wrapping, and packing mangoes into corrugated cardboard cartons for export. Yet there are usually no provisions for cold storage at the paclung facility, although export-designated product must be held for up to 36 hours before packing and dispatch to the airport. Packing facilities also commonly lack running water, proper lighting, 32This conclusionis basedon field observations by the studyteam. 37 holding tanks (for product accumulation), and packing tables. Selection and packing are done on the floor. InTamilNadu, fruitpackedfor export is loaded onto unrefrigerated trucks for transport to the port or airport.33Fruit for air shipment i s sent to the unrefrigerated holding facility at the Chennai airport for up to 18 hours before being loaded into the unrefrigerated cargo bay o f a passenger aircraft for onward transit. The break in the cold chain duringtransit from the packing shed to the airport, and, more important, during the holding period at the airport is considerably long for a fresh product that i s shipped by air. Flight times to major markets in Southeast Asia or the Middle East from Tamil Nadu are quite short, averaging three to five hours, although air freight costs appear relatively high at 65 percent o f the cost and freight (C&F) cost. For ocean transport, the fruit can be loaded into refrigeratedcontainers duringwaiting periods inChennai or Tuticorin port before vessel departure. While the expansion o f mango exports has also been impeded by phytosanitary restrictions inprospective markets in the USA, Japan, and Australia (see chapter 5), the industry also suffers from a lack o f intelligence on potential markets outside the Middle East and Southeast Asia. Market intelligence on potential costs, earnings, and quality specifications or expectations i s vital in each market, as i s consistent product promotion overseas. As for most commodities examined in this study, for mangoes there are no regional or commodity trade associations to assist in negotiating freight rates and services, alert members to commercial and phytosanitary threats and opportunities, and explore areas where intrasectoral cooperation can improve efficiency and profitability. Grapes -India i s a significant grape producer, producing approximately 1.2 million tons from 40,000 hectares in 2004. India's grape production has increased by almost 70 percent in the past 10 years, with current production representing about 2 percent o f global grape production. Maharashtra produces the most grapes (about 75 percent o f the national Since the early 199Os, efforts have been made to export grapes to Europe. Grapes are a highly seasonal crop. There i s a potential window inthe European market from the beginning o f March until the end o f April or early May, when the main Southern Hemisphere production season (inSouth Africa and Chile) i s ending, and grapes from Egypt and Turkey have yet to enter the market. India i s one o f the few countries that can produce good quality grapes at this time o fthe year. Grape exports to the EU started in the early 199Os, mainly from Maharashtra. Grapes were exported inrefrigerated containers, but very long transit times created difficulties with some early consignments. Once the logistics were refined and growers started to meet the higher European market standards for fruit and bunch size, exports quickly expanded. Virtually all exported grapes are o f the Thompson Seedless variety. Production o f this particularly early variety finishes before that o f many other varieties in Chile and South Africa, which can grow most o f the other varieties wanted by the market inthe late season-varieties regarded as having better quality and costing less than Indian grapes. Although India's comparative advantage i s based onjust one variety during a short market window, this variety i s becoming more popular in Europe as the preference for green seedless grapes increases. 33InTamilNaduthe tripto the airport takesupto four hours. 34The Department ofHorticulture, Government ofMaharashtra estimatesthe areainMaharashtra under productionto be 29,756 hectares, with aproduction of 779,012 tons. 38 The Indian grape export industryto the EUi s characterizedby many registered exporters. Perhaps 12-15 larger exporters move between several hundred and several thousand tons per year. Many smaller exporters, with sales o f 30-100 tons per year, use an Indian agent o f a major EU-based importer to market their produce. These agents basically help coordinate a number o f smaller exporters to achieve economies o f scale and a degree o f quality consistency. The larger exporters sell directly to the importers. Most Indian grapes are sold in Europe via supermarket networks. In2003104 India exported about 27,000 tons of grapes, with an export value of around US$25 million (figure 4.4). The volume o f grape exports to the EUpeaked in 1997198, then fell very significantly, and then gradually rebounded. Initially the UK was the main target for exports, but the Netherlands has become increasingly more important. Although exports to the Middle East have increased over the last few years, they are still less than half the volume o f exports to Europe. The final and, until recently, smallest market (in terms o f value) is in neighboring countries, primarily Bangladesh. Figure 4.4: Destinations of India's grape exports by volume and value Source: Authors' calculations. basedon UNComtrade data. The C&F prices obtained for grapes are much higher in Europe than in the Middle East, and this difference i s reflected inbetter farmgate prices. Within Europe, the UK market tends to pay higher prices than the Netherlands market-a reflection o f different quality standards. However, both exporters and farmers have to invest considerably more in inputs, management, and transport to reachthe standards demanded by these more distant markets. One exporter noted that typically farmgate prices o f Rs 35-50 per kilogram could be obtained for grapes destined for the UK, Rs 2 5 4 0 for Holland, Rs 20-25 for the Middle East, and Rs 10-15 for the local or neighboring markets. Despite having lower freight rates to Europe than some o f its international competitors, India i s not a low-cost supplier to Europe. Unit production costs are comparatively high due to lower yields for the Thompson Seedless variety, the variety's relatively short harvest season in India, and failure to attain the economies o f scale realized by competing countries in many postharvest, packing, and transport operations. India i s still a relatively young player in this market, and opportunities remain to increase productivity at the farm and logistical levels. EU grape imports increased by nearly 10 percent per year from 1997 to 2004 thus reflecting strong consumer demand (table 4.6). Some countries that supply this market have seen their exports grow very significantly (such as Chile, South Africa, and Turkey), and several smaller suppliers have seen considerable growth (such as Egypt, Brazil, Argentina, Namibia, and Mexico). Incontrast, supplies from India to the EUhave been comparatively static. Ewostat data 39 on monthly imports from 2004 show that India i s only a small player, even inthe few months that it supplies this market. India supplied 10 percent o f imports inApril and May, but duringthese months, Chile and South Africa are still much more important suppliers, providing a range o f varieties. Interviews with importers confirmed the minor importance o f India in the overall EU grape market, but they agreed that India had a very important role to play in supplyingThompson Seedless grapes in April and May. The importers noted that India could easily become a more important supplier if it improved quality and accepted more competitive prices. However, India does not appear to be competitive for seeded grape varieties. As will be examined in chapter 5, India has also experienced major challenges in complying with pesticide residue tolerances in Europe. Table 4.6: EUgrapeimports fromselected countries, 1997-2004 tons Source: Eurostat. Mango Pulp Mango pulp i s one o f India's major horticultural export earners. In 2003/04 India exported close to 90,000 tons o f pulp with an export value o f some US$56 million. It i s estimated that India, Mexico, and Colombia account for over 80 percent o f worldwide exports o f mango puree and concentrate (ITC 2004). India produces puree from a number o f mango varieties, including Alfonso, Kesar, and Totapuri. Worldwide, Alfonso puree i s recognized as a superior product and obtains a significant premium over all other varieties from India, Peru, Brazil, Pakistan, or Mexico. Alfonso puree prices are determined primarily by Alfonso supplies and are relatively unaffected by the prices quoted for other varieties. The prices for Alfonso-based pulp are around US$ 1,500 per ton. The remaining varieties o f mango pulp trade in a lower price band o f US$ 800-1,000 per ton, except for brief periods o f overall market shortage. Importers indicate that product differentiationwithin the second tier o f pulp varieties i s difficult to achieve and that competition within this segment i s based primarily on price and supplier service. The Middle East i s the dominant outlet for Indian mango pulp, although supplies are sent to many countries, including some in Western Europe and North America (table 4.7). Of all mango puree worldwide, 70 percent goes into juice beverages, with food preparations, dairy, and baking applications contributing another 20 percent; the final 10percent i s used inbaby food. The generally large-scale juice, food preparation, and baby food manufacturers in Western Europe, North America, and North Asia strongly favor puree or pulp in aseptic bags in drums, because this format is easier to transfer into processing tanks than puree from Number 10 cans, and the empty packaging i s far easier to dispose of. Estimated ratios o f demand for aseptic bags versus 40 tins generally converged on a 95 percent/5 percent split, Table 4.7: Principalexport marketsfor Indian mango pulp although Alfonso puree 2003-04 value 3-year merits a higher acceptance average, 2001- Country Volume (t) (US$ 000s) (US$/t) 04 (US$/t) level in cans (85 percentll5 percent split) due to its taste and other characteristics and limited availability. Middle Eastern and Southeast Asian juice manufacturers, on the other hand, are more sensitive to price and generally operate on a smaller scale, so they are more receptive to using Number 10 cans. Allof the Middle Source: Authors' calculations,basedon datafromAF'EDA 2004. Eastern importing countries paidprices below India's three-year price average ( U S 6 3 4 per ton), while all o f the Western European and North American clients paid a 30-50 percent premium over the same average. At the same time, India i s essentially absent from the markets of the Pacific Rim, which are currently dominated by the Philippines (table 4.8). If Indian exporters their productat the Sameprice as Philippine exporters-which i s U S $ 320 Table 4.8: Principalexport markets for Philippine per ton higher than the average revenues for Indian mango pulp-Indian processors would see an increment in gross revenues o f US$ 29 million per year. Direct competition with the Philippines, however, would require changes in the product, packaging, and accompanied services providedby Indian exporters. The majority o f mango pulp in India i s manufactured in Tamil Nadu, Maharashtra, and h d h a Pradesh. Within Source: Bureauof AgriculturalStatistics, Departmentof Agriculture, Tamil Nadu, the main pulpprocessing zone thePhilippines(August2005) i s in the Krishnagiri cluster. It i s estimated that around 300,000 tons o f mangoes (65 percent Totapuri, 5 percent Alfonso, 30 percent other varieties) are produced in the vicinity o f the Krishnagiri cluster, covering some 40,000 hectares. The region claims good availability o f water, electrical power, and labor, and good communications facilities and roads.35 The first two mango processing plants in the Krishnagiri cluster were constructed between 1986 and 1990. Two additional plants came on line by 1995. Considerable expansion occurred after that. Some 19 additional units came on line between 1996 and 2001, and 9 new plants have been added since 2001. Of the current complement o f 32 separate processing plants, only a handful produce pulp inboth aseptic drums and cans. The others are can-only operations, 35 The Dharmapuri District Fruit and Vegetable Processors Federation (DDFVPF) estimates that pulp producers inthe Krishnagiri cluster generate approximately 40 percent o f India's total annual mango puree production. Ninety percent of the cluster's puree production i s exported. Of the total export volume, 90 percent i s sold through merchant exporters, and 10percent is exported directly by the processors. 41 essentially excluded from the more lucrative markets. Total available pulp processing capacity i s estimated at 65,000-70,000 tons per year, with current capacity utilization estimated at 60 percent.36 Importers complain that India suffers in relation to its Latin American competition because it cannot establish prices early in the season and maintain them at stable levels throughout the season. Current reliance on spot purchases, compounded by mistrust and antagonism between growers and processors and between processors and merchant exporters, makes it very difficult to set and sustain a stable pricing environment. This uncertainty places Indian exporters in a disadvantageous position. There i s a need for the government and industry to develop new models o f cooperation among growers, processors, and exporters to comply with prevailing commercial requirements (box 4.1). Poor crop intelligence i s cited as a major impediment to maintaining stable andpredictable product pricing, which indicates that the system for generating and monitoring crop estimates also needs to be improved. Importers in the UK and elsewhere in the EU rely on stock positions maintained by exporters inports such as Rotterdamto providejust-in-time deliveries to their industrial and retail customers. Mexico and Colombia are praised for their willingness to maintain such stock positions. Indian suppliers, on the other hand, resist requests to perform this service, puttingthem at a disadvantage compared to their major competitors. Onions Figure 4.5: Volume of onion exports from India, 1996/97- 2003/04 Onions are India's 1.000.000 leading horticultural export, at 900,000 - nearly 860,000 tons (figure 4.5) 800,000 - t and US$ 165 million in2003/04. APEDA expects that this trade 600,000 will exceed one million tons and 500.000 approach US$ 200 million in the ! 400,000 near future. India i s now the 300,000 - world's largest onion exporter, 200,000 - - having recently surpassed both xl0.000 the Netherlands and China. Maharashtra i s responsible for Onion exports increased in recent years after onions were removed from the official list o f essential commodities and onion exports were progressively deregulated. Prior to this, exports were periodically banned or restricted, which prevented traders from developing reliable commercial relationships abroad. To this day, virtually no onion production i s undertaken 36Capacity utilization in the pulp factories could possibly be improved by developing additional products for processing, such as pears, apples, pomegranates, guavas, and passion hit. The result would be longer- term employment for the labor force, more cost-effective plant operations, and the generation o f additional export earnings for owners andthe government. 42 specifically for export, although exporters are beginning to source some o f their supplies directly from farmers. India exports onions to a wide range of countries, although Bangladesh, Malaysia, the UAE,and SriLankaaccountedfor some 85 percent ofsalesin2003/04 (figure 4.6). Eachofthese markets has very distinct quality preferencesrelatedto onion size, color, and pungency. As noted, much of the recent growth in export volumes was associated with a large increase in sales to Bangladesh. Shipments to the Middle East have remained steady for the past few years. Several attempts have been made to export onions to Europe during the late winter but have not yet succeeded. India's main onion varieties are too pungent for European tastes, and special yellow 43 onion varieties are needed for that trade. Some research and trial shipments have been undertaken. The supply channel for Figure 4.6: Value of onion exports from India, 2001102- exports to the -Middle East and 263104 regional markets i s a simple extension o f the local market: -1 exporters have a system of agents who buy either from the wholesale markets or sometimes directly from farmers. The onions are sorted again to ensure that they are the correct size for export, and damaged or diseased onions are removed. The various export markets have slightly different grading requirements. The Gulf market demands slightly larger onions and pays a higher price, Source: Authors' calculations, based on datafrom AF'EDA 2004. while Bangladesh takes smaller and cheaper ones. After grading, onions are loaded into containers for shipping to various markets. Sometimes they will be loaded onto smaller "country craft," a cheaper but more erratic form o f transport than containers on cargo ships. There are 60- 70 regular exporters o f onions. About 15 export more than 25,000 tons each year, 30 export 10,000-25,000 tons, and the remaining 20 export less than 10,000 tons. This large number o f exporters ensures that there i s considerable competition. Intheory, the minimumexport prices (MEP) are set at meetings betweenthe exporters, who meet regularly under the auspices o f the National Agricultural Co-operative Marketing Federation o f India (NAFED).The exporters recognize but do not adhere to these prices; through natural competition, the price i s establishedon the basis o f supply and demand. The two main growing seasons for onions in Maharashtra are rabi (winter) and kharif (summer), although the rabi season may be divided into early and late phases (table 4.9). Onion exports occur throughout the year, but most occur from the rabi crop because it i s the biggest and has the best storage characteristics. Season Planting Harvest Storage quality Percentageof production Kharif June/July August`Sept Poor 10 Late kharif Sept/Nov DecIJan Poor 30-40 Rabi DecIJan MarcWApril Good 5 M O Average yields o f onions inIndia are low (10.4 tons per hectare)37compared to yields in other countries competing inthe world market. For example, yields inthe U S A are almost 50 tons per hectare, and the average yield inChina-a major threat to India in some regional markets-is twice that o f India. Countries such as China and the U S A have sufficient variation indaylength to grow long-day hybrids, which yield and store better. Because India cannot grow long-day hybrids, it will not get comparable yields. This potential yield and storability disadvantage i s not 37Data providedbyNRC-Onions. 44 a serious issue for local and nearby export markets, but as transport costs increase and quality receives more o f a premium, Indian exports could be disadvantaged. Onion exporters did report that Chinese onions were becoming a more serious threat to their markets in, for example, Malaysia and Singapore. The National Horticultural Research and Development Foundation (NHRDF) and NRC- Onions are making efforts to target the European export market, where they see an opportunity for selling in the European winter, before produce i s imported from countries such as Egypt. However, a significant number o f issues make it difficult for Indian exporters to target this market. Exports would come from the late kharif crop, which keeps very poorly and makes transport indry (nonrefiigerated) containers very difficult. Virtually all o f the onions produced in India are red varieties, whereas Europeans prefer yellow types. Farmers would have to be contracted to grow varieties specifically for the European market, and if European market conditions became unfavorable, farmers could be left with onions that they cannot sell. A trial shipment o f onions was made to Germany in 2004. Specific yellow varieties were grown under contract and it was claimed that these exports were successful. However, this trial did not continue in 2005 because there were problems with delayed plantings, low market prices, or the lack o f an importer. Indian onion exports have a very significant comparative advantage in local, regional, and Middle Eastern markets. The comparative advantages for Indian onions in regional and Middle Eastern markets-which are a simple extension o f the local market-include: low productioncost; the preferred varieties traditionally have been grown inIndia; India offers a year- round supply because o f its three onion growing seasons; the poor storage characteristics o f the kharif crop are not an issue because these markets are close at hand; and India has lower transport costs than virtually all other countries competing inthe Middle Eastern market (India competes at some times o f the year with Pakistan, Egypt, Iran, and, to a lesser degree, China). Considerable progress has been reported in promoting low-cost, on-farm storage techniques and facilities for onions, and now the bulk o f the crop i s stored on the farm rather than by wholesalers. Important agronomic and market supply chain challenges remain, however. For example, an estimated 90 percent o f production i s based on farmer-saved seed, even though at least 30 improved varieties from Indian institutions or commercial seed companies are available. Widespread use o f farmer-saved seed has contributedto considerable genetic mixingo f varieties, so the delivered crop rarely represents a single, uniform variety. N o more than 60 percent o f the harvested onions are saleable. The rest are either too small, affected by pests or diseases, or lost duringstorage because ofhighmoisture content. While certain export markets (Malaysia) have preferences for larger onions and are willing to pay a premium for them, these and other quality-price market signals are still only weakly reflected through the wholesale market inNasik and elsewhere. Exporters report that they need to purchase large lots o f onions and have been restrained by local competition from being more selective intheir purchases. This situation i s beginning to change. Exporters are expected to purchase more onions directly in the future, especially as the last restrictions on exports- including the need to obtain "no objection" to exportation from a state marketing agency-are removed. 45 DehydratedOnions Figure 4.7: Value of dehydratedonion exports fromIndia, 1996197-2003104 The total value o f India's dehydrated onion exports in 2003/04 was US$ 12 million, nearly 12. double the level o f this trade in the 10 - mid-1990s (figure 4.7). Approximately half o f this trade i s e - directed to the EU. India has a e - number o f processors o f dehydrated onions. The largest company has 4 - bought up several factories and may now account for the majority o f 2 - capacity within the industry. It 0, primarily targets large food $ w e 7iwvw i w w i w m m o l m i / mmco xrmw manufacturers in Western Europe Source: Authors' calculations, basedon data from APEDA 2004. and elsewhere. The other, smaller players in the industry direct the bulk o f their sales to lower- priced markets in Eastern Europe, the Middle East, and developing countries. The onion- dehydrating industry i s based on white varieties, in contrast to India's fresh market, which i s based on red ones. The main processors contract with farmers to grow varieties specifically for dehydration. The processors provide seed and technical advice. Within the EU, Germany and the UK Figure 4.8: Value of dehydratedonionsexported fromIndia to various are the main importers markets,2001102-2003104 o f dehydrated onions. 7,000,000 North America, Eastern 6.000.000 Europe, and the regional market are also 5 5,000,000 important outlets in .-eeE 0 -Middle East some years (figure 4.8). 8 4,000,000 AEU Sales to the regional $ 3,000.000 x North market between H America +Russia 2002/03 and 2003104 2,000,000 ~ benefited from an increase in sales to I Bangladesh, from zero looo'ooo to almost 2,000 tons- albeit o f relatively low- Source: Authors' calculations, basedon data fromAPEDA 2004 value product (less than US$ 500 per ton). Owing to this increase, the regional market became slightly more important in 2003/04, in terms o f volume, than the EU market. Indian exporters face considerable competitionfrom the USA, Egypt, and France. 46 Flowers Inthe early tomid-I990s, Indiasought to identify locations suitable for growing flowers for the Europeanmarket. A number o f significant investments innew technology and new flower types were made. Prior to this, most flowers were grown outdoors, with little investment in greenhouses or ina cold chain. Quality and shelf-life were poor. Efforts to develop the EUmarket yielded major changes in growing methods and quality, but most initial investments were financially unsuccessful. The government recognized that improved flower production technology could lead to significant exports, however, and APEDA decided to support the industry,for example, byproviding air freight subsidies. These first investments were based on India being a counter-seasonal supplier-in other words, selling to Europe in winter when local production was low or costly. Countries such as Zimbabwe and Zambia had targeted the same market for a few years, and they very quickly realized that freight was the largest cost and vital to their comparative advantage. The other lesson learned from these countries was that cut roses were potentially the most profitable. The very large market for out-of-season roses made them a sufficiently high-value crop to cover the freight costs. Virtually all o f India's cut-flower exports are roses o f the short-stemmed "sweetheart" types that are best suited to local growing conditions. Ingeneral, sweetheart types are cheaper than the larger intermediates or T-hybridflowers. A number o f Dutch marketing and consultancy companies that successfully developed cut-flower production in southern Africa prepared feasibility studies for rose projects in India. Maharashtra (especially around Pune) was identified as a suitable production site. These studies recommended investing in such technology as greenhouses, cold chain systems, and imported varieties. A number o f large Indian companies decided to diversify into rose production, and by the end o f the 1990s, about 250 hectares o f flowers were estimated to Figure 4.9: Volume of India's cut-rose exports to the EU, be grown in greenhouses. Exports to 1995-2004 Europe peaked at just under 50 million stems in 1997 but had declined to 18 609000 I million by 2004 (figure 4.9). Initially 50,000 the main market was the Dutch auctions, but now a much more P 40,000 0 diversified approach to marketing f 30,000 includes sales to a range o f European 3 20,000 i countries as well as Japan and Australia. Exports to Japan and j Australia have partly compensated for 10,000 the decline in exports to Europe, but it i s interesting to note that the two large exporters interviewed for this study exported to at least six countries. In contrast, most big flower-exporting Source: Authors' calculations, basedon data from Eurostat. companies in other countries have a carefully targeted approach to their marketing . Since the large corporations first invested in growing roses for export, very little further investment inexports has occurred. Infact, many original investors now produce a wider range o f flowers for the local market, having failed to generate a satisfactory return on exports. 47 Considerable effort i s being made to stimulate small-scale production for the local market. For example, the Horticultural Training Centre offers courses on cut-flower production, and the National Horticultural Board offers grants to help small-scale producers establish greenhouses. Some o f these small-scale producers sell flowers to larger growers for export to Europe, especially around occasion days, but most o f their crop i s sold locally. In addition, APEDA i s encouraging the establishment o f Dutch-type local auctions for selling flowers; the first i s scheduled to open soon inBangalore, and a site near the international airport has been identified in Mumbai. Flower auction centers are also planned for Noida (near Delhi) and Kolkata. This approach should help local producers achieve better or more transparent prices but will probably not help with exports, although it might encourage better quality if buyers pay a premium for higher quality. The size o f the European market for imported roses has increased dramatically over the past decade (table 4.10, figure 4.10). The data show that India i s an extremely small player inthis market and has not taken advantage o f the ~ p p o r t u n i t y ,whereas Kenya and Uganda took ~ ~ considerable advantage o f the expansion. These countries can produce roses throughout the year, whereas Zimbab~e,~'Zambia, and India are only seasonal producers. The two key factors for successful cut-flower exports to Europe are climate and the cost of air freight. An appropriate climate is neededto produce good-quality flowers and ensure a long marketing season.40The cost o f air freight i s critical, because it i s the biggest budget item. India's climate gives it a significant comparative disadvantage. The very hot summers reduce flower q~ality,~'which limits the main export window to mid-October through mid-March. Equatorial countries such as Kenya and Uganda have more uniform temperatures and can supply the market all year. The longer season means that more roses can be harvested: yields o f 120-140 stems per square meter are reported by Indian exporters, compared with 200-250 stems for similar varieties grown inEast Africa. The highhumidityinIndia duringthe rainy season adds considerably to the fungal disease pressure and further reduces rose yields.42 Table 4.10: Exports of cut roses to Europe, 1995-2004 300stems ?ource:Authors' calculations, basedon data from Eurostat. 38The value o fthe Europeanmarket for imported roses is almost US$400million, with imports fromIndia worth only about 0.5 percent o fthe total. 39Zimbabwean exports also declinedbecause o f the political situation. 40A long marketing season is vitally important to achieve highyields and spreadoverhead costs. 41Hightemperatures reduce stem andbudlength, which are key factors indetermining quality. 42Indianroses have a poor reputationinthe Europeanmarket. A number o f importers and managers at the Dutch auctions were interviewed, and although some importers notedthat exporters who have good farm managers deliver reasonable quality, most stated that the reputation o f Indianroses inEurope was not good: the quality i s poor, and they are not consistently on the market. India i s generally regarded as a supplier for special occasions. Indianexporters chase highprices and, as they do not focus their efforts on specific markets, are not regarded as serious suppliers anywhere. 48 The cost o f air freight can sometimes be as high as 50 percent o f the C&F value of cut roses. Air freight costs from Mumbai to Northern Europe vary, but most exporters interviewed to pay Rs I 2 O Figure 4.10: Value of cut-rose exports from various countries to the EU, (us$ 2*8) per 19952004 kilogram-signi ficantly more than most other countries supplying roses to the European market. Air freight rates 150,000. are currently in a state 9 o f flux as a number o f 0 Z -#-Kenya fuel surcharges have ~ l w ~ O O O . Zindabw e been added, but Indian 3 +Zandia W +Manda exporters Pay considerably more than +Tanzania their c0mpetitors.4~To I ----)i- +-----X?-Kr2 ~ disadvantage, APEDA " 7 - I offers a freight subsidy 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Because they are not competitive in the European markets, many o f India's flower exporters turned their attention to Japan and other markets. Unlike Europeans, Japanese consumers prefer soft pastel colors such as pink and light purple. Another issue facing exporters to Japan i s the strict phytosanitary regulations (see chapter 5). The Japanese cut-flower market i s large, valued at US$ 5 billion, although only US$ 313 million or 6 percent o f the market i s supplied by imports. However, imports are expected to expand owing to the advanced age o f many Japanese growers and the increasing scarcity o f agricultural land. Indian growers face competition inthis market from growers in Malaysia and Australia, but inthe longer term China i s likely to be the most significant competitor. India has expressed some interest in supplyingthe Middle Eastern flower market, which i s currently well supplied from traders operating in the Dutch auctions. The Middle Eastern flower market differs from the market for fruits and vegetables, however, in which a distinct segment o f consumers will pay for cheap Indian produce. There are possible plans to open a flower auction in Dubai to resemble the Dutch auctions, where produce i s sold to buyers for on- shipment to countries around the world. It i s hoped that many o f the Afhcan flower-producing 43 The cost of air freight is determined by a number o f factors, including journey length, airport landing charges, the opportunity for back-hauls, the availability o f subsidies, consignment size, and the regularity o f supply. The precise reason why Indian exporters pay so much more than their competition i s not fully understood, but the high cost o f freight disadvantages flower exports. In addition, the total tonnage o f perishable exports out o f India to Europe i s small-about 2,000 tons of vegetables and less than 1,000 tons o f flowers. Regardless o fthese small volumes, it is believed that ifthe whole industry rather than individual exporters negotiated with the airlines, better rates could be achieved. 49 countries would use this auction and bypass the Netherlands, but it i s unlikely that Indian flowers would be any more competitive with Afkican flowers inDubai than inEurope. AsianVegetables Statistics for vegetables air-freighted to Europe from India are difficult to evaluate, because most data combine produce sent by sea and air, and most vegetables from India are classified as "other vegetables" in Eurostat or "mixed vegetables'' in APEDA data. However, an effort has been made to evaluate the trends in exports to Europe. By far the most important European destination for air-freighted vegetable exports i s the UK. APEDA data suggest that the value of air-freighted fresh vegetables is only about US$ 2 million per year (table 4.11). The value o f exports increased significantly between the mid-1990s and the early 2000s but has been more or less constant since then. Most exports fall into the "mixed vegetables" category, which includes the range o f traditional "Asian" vegetables-the fresh chilies, eggplant, okra, and broad range o f leafy and root vegetables that are staples o f the South Asian diet. Most o f the exports are freighted from either Delhi or Mumbai, although vegetables are also exported from other airports. The total value o f exports air-freighted to the UK from Maharashtra is small, especially when compared to the sea-freighted exports of other vegetables to the Middle East or to local markets. Table 4.11: Value of vegetables exported from India to the UK,1996/97-2003/04 US$ Source: APEDA 2004. The total volume o fair-freighted vegetables from India to Europe i s almost certainly less than 3,000 tons, down from a possible peak o f 5,000 tons in2001/02. T o put this into perspective, note that Kenya exports more than 50,000 tons o f vegetables by air every year-and even Bangladesh exports over 3,000 tons per year to Europe. The average unit value o f vegetable exports from India to the UK i s very low, generally less than US$ 700 per ton. India's competitive advantage inexporting fruits and vegetables by air i s based on being able to produce a wide range o fproduce specificallyrequired by the SouthAsian ethnic market in the UK. Exporters claim that Indian produce has the correct quality and taste. The main disadvantage i s that air freight i s much higher out o f India than Palustan, Bangladesh, and some African countries that are also trying to compete in this market, although the APEDA freight 50 subsidy brings the air freight cost more inline with competing countries.44Another challenge in developing these exports i s obtaining traceability from farmers; some exporters try to purchase from specific villages, ifnot from specific farmers. Finally, exports to Europe are disadvantaged by the import duty charged on the vegetables. The duty is equal to about 8 percent o f the C&F value, which reportedly adds "0.70 to 0.90 pounds (f.) per carton"---or roughly f. 0.15 per kilogram. Indian vegetables have considerable competition from a number o f countries, such as Bangladesh, Pakistan, Kenya, Ghana, and the Dominican Republic. Pakistan and Bangladesh are important suppliers o f certain vegetables to migrant populations from these countries. Total exports from Bangladesh are slightly higher than those from India; vegetable exports from Palustan are reportedly low. Exports o f Asian vegetables from Kenya surpass 6,000 tons per year, and exports fkom Ghana are over 7,500 tons per year. The reputation o f Indian air-freighted vegetables in Europe i s very mixed. Although Indian exports are important for making a wide range of vegetables available inthe market, most importers would much rather deal with Ghana, Kenya, or the Dominican Republic, because these sources are cheaper and the quality o f service i s reportedly much better. One importer interviewed was satisfied with the produce imported from Maharashtra, but the exporter was a close relative and considerable effort hadbeen made to ensure quality and consistency o f exports. The importer also notedthat he only imported certain, more unusual, product lines from India that could not be imported from other countries; in more traditional product lines, the highcost o f air freight and import duties makes India noncompetitive with other countries. Other importers are much less positive, because some have hadbad experiences dealing with India. The most frequent comments are that unless the exporter has very strong management and a serious commitment to quality and customer service, the produce i s much too variable, the supply i s too erratic, and it i s relatively costly. Pomegranates Figure 4.11: Pomegranate exports from India, 1996/97-2003104 12,000 India produces an estimated 50,000 tons o f x),ooo pomegranates, o f which 70 percent (35,000 tons) are 8.000 produced in Maharashtra. Pomegranate exports have been remarkably constant at between 4,000 and 6,000 tons per year (figure 4.11). However, in the 2003/04 season, exports 2,000 increased to over 10,000 tons, O I mainly owing to a big increase P96197 PS7l98 7998/99 P99/00 2000/01 ZOOYOZ 2002/03 2003/04 in exports to Nepal and the Source: Authors' calculations, basedon data from APEDA 2004. Middle East, although exports to the EU also increased significantly. Traditionally most o f India's pomegranate exports have been to the Middle East (almost 7,000 tons in 2003/04), but there i s interest in further developing the market for this fruit 44 One exporter noted that much lower rates could be obtained by using dedicated cargo planes. Ifexporters worked more cooperatively, more of them could make use o f such aircraft. 51 inEurope. Inthe 2003/04 season, exports to the EUwere just over 1,500 tons, with a value of US$ 1.75 million. There are a number o f reasons for this interest in developing pomegranate exports to the EU. First, there is a desire to build on the relative success o f grape exports and use the same packinghouse facilities and cold chain logistics to spread prevailing overheads. Second, there i s interest in the health and medicinal characteristics o f pomegranate and its juice, raising the prospect for servicing the health food market segment. Finally, Indian researchers have introduced a new variety (Bhagwa) which i s well colored and attractive and therefore should appeal to the Europeanmarket. Most o f the European consumption of pomegranates i s supplied from southern Europe between July and December, providing India with a market window in the first half o f the year (although there i s competition then from Iran). A number o f exporters are reportedly trying to develop trade with supermarkets, primarily in the UK. It i s important that the scale o f the European market opportunity be thoroughly researched. In addition to marketing the fresh fruit, there is considerable interest in evaluating the opportunity to export pomegranate juice. There i s some interest in developing this concept in Europe. As yet there i s no commercial-scale juicing o f pomegranates in India, although pomegranate juice based on imported concentrate i s packed and sold in the UK. Studies have reportedly been undertaken into the viability o f a pomegranate-juicing factory, but no investment has been made.45 Bananas As in the case o f mangoes, India is also the world's preeminent producer o f fresh bananas. With an average annual production over the past three years o f 16.9 million tons, India accounts for 24 percent o f world banana production (figure 4.12). Indian banana production i s polyclonal, with over 200 cultivars claimed to be grown inthe country and nearly 40 varieties in commercial production. India's leadership in banana production i s not reflected in its involvement in the global trade in bananas. Only 0.07 percent o f production i s exported.46 In 2003/04 India exported around US$250,000 worth o fbananas. Tamil Nadu bananas appear to have virtually no potential for short-term export development on an economically viable basis. Current cultural and postharvest practices frequently result in high internal and external damage to the fruit. The external appearance o f bananas i s o f major importance inthe internationaltrade yet i s not presently an area of concern in the Tamil Nadubanana supply chain.47 45 A studyevaluating the feasibility o festablishing a pomegranate-juicing factory inMaharashtra was recently undertaken. An initial study reportedly showed that a U S $ 4 millioninvestment was required, but the studywas reevaluated, and the initial investment was reduced to U S $ 2 million, which made the concept more viable. 46 At slightly more than 15 kilograms per capita per year, banana consumptionlevels inIndia are among the highest inthe world. These levels o f consumption clearly mitigate the need to institute the enormous structural andprocedural changes to improve export competitiveness inthe banana sector. 47 The team didnot examine the banana supply chain inother states. 52 Figure 4.12: Principal banana producers and exporters, 2003 Banana-producingcountries (2003) Banana-exporting countries (2003) Source: Authors' calculations, basedon data fromFAOSTAT. InTamil Nadu, bananaplantingsarerotatedevery one to three years, reportedlyout o f concern for nematode infestation and for spontaneous mutation. The producing section i s then left fallow for a year before replanting. This practice requires an enormous amount o f planting material, which, in the absence o f reliable tissue culture labs, i s rarely true to type. The primary effect o f poor planting material can be seen within most stems, which contain an extraordinarily highpercentage o f deformed hands. Stems are staked at the peduncle, which guarantees a high incidence o f pole damage to the outer bananas on most hands. Plants are cropped, or stunted, to maximize harvest during March, April, and May, reportedly for a combination o f market and weather considerations. Cropping causes further stress and aggravates deformity. Based on a visual examination o f stems on trees in several farms, it i s estimated that no more than 35 percent o f the hands on the stems would yield clusters that could be packed into cartons, due to point scar, excessive curvature, finger deformation, and prop damage. By comparison, commercial farms in Latin America would expect no more than 20 percent packinghouse shrink, including the weight o f the stalk.48 EmploymentinExportHorticulture As there are no readily available data on employment inthe horticultural export trade, an attempt has been made to estimate this number for the six commodities inthis study usingdata on export volumes, yields, area devoted to export production, and labor used in processing (table 4.12). For these six crops, which account for about 50 percent o f India's horticultural export earnings, it appears that 170,000-240,000 farmers are involved in export supply chains. The majority o f these farmers produce for the domestic market as well, with gherkins being an exception (the bulk o f production i s for export). Therefore, approximately 120,000 full-time equivalentjobs are generated by export-oriented horticulture for the six commodities. 48 T o harvestbananas, stems are cut from the peduncle and allowed to fall into baskets borne by backers. Stems are carried, sometimes 2 or 3 to a basket, to an open-stake truck, where they are lifted from the basket and stacked seven highfor the trip to the market. On arrival at the auction market, the stems are tossed down to bearers, who deposit them o n the asphalt outdoor auction floor. The rough handling results infurther damage. 53 Estimated 7 number of full- time equivalent millionof jobs in export- exports oriented farm production (000s) 7 40 37 1,340 29 6 496 5 I Source: Authors' calculations. Export volume and valueIdata are from APEDA 2004; area planted for export: s estimated using I I I average yields of 10.4 tha for onions, 7.8 tha for mangoes, 12 tha for grapes exported to Europe, and 16.8 la for other grape exports. It assumed that about 35 percent of the volume of grape exports went to Europe. Gherkin area is estimated baseh on communications with the industry. Labor requirements used are 750 daysha for grapes, 544 daysha for gherkins, 125 daysha for onions, and 167 daysihafor mangoes.Labor involved for processingonions andmangopulpis estimatedat 20 days/t. 4.1 Despite the considerable interest in expanding exports o f fresh horticultural products, the employment numbers suggest that exports of processed products such as mango pulp, pickled gherluns, and dehydrated onions generate relatively more jobs than fresh commodities. Pickled gherkins, mango pulp, and dehydrated onions generate about 500-1,300 jobs for each million dollars o f exports, compared to 200-300 jobs per million dollars o f exports o f fresh grapes, onions, and mangoes. While export horticulture has generated a considerable number o f jobs in India, the large number o f farmers and the fragmented production base raise challenges in meeting SPS standards, particularly, as discussed inthe next chapter, when product traceability i s a requirement. 54 Chapter 5: SPS ManagementExperiencesandChallengesinIndian Horticulture A StrategicApproachto PrioritizationandCapacityBuilding Developing countries such as India, and individual suppliers in those countries, are commonly assumed to have no room for maneuver in the face o f emerging standards: they must either "comply or perish." In reality, countries and suppliers face a wide range o f choices even when attempting to comply with a particular standard, although the increased emphasis in recent years on proscriptive processes and procedural requirements (rather than product or outcome standards) does somewhat curtail this room for maneuver. Developing countries and individual suppliers can pursue one or a combination o f strategies to meet different objectives ina context o f evolving standards (box 5.1): 0 Compliance: adopting measures to meet international standards or the requirements o f one's trade partners. This strategy might involve, for example, some combination of legalhegulatory change, the application o f certain technical or other risk management approaches, and the implementation o f testing, certification, andor other conformity assessmentmeasures. 0 Voice: seelung to influence the "rules o f the game" andor how they are implemented via participation in international standard-setting fora, communications with WTO, negotiations with bilateral or regional trading partners, and/or business planning with downstream clients. 0 Redirection: altering commercial strategies to encompass sales to different countries or market segments, changes inthe mix or form o f products, and other maneuvers, taking into account the costs andbenefits o f complying with different standards. The timing and mode of strategic response may also vary. Actions may be taken on aproactive or reactive basis. Proactive strategies involve anticipating future requirements and taking measures in advance to minimize costs or maximize benefits. Players pursuing reactive strategies respond only after the requirements are put inplace, perhaps hoping to limit the action they must take or at least to learn from the mistakes o f the first movers. The strategic response can also be either defensive or offensive: the former involves measures to minimize the changes required, whereas the latter involves trying to exploit an opportunity created by standards, such as a price premium for organic products. The locus o f strategic response may also vary (figure 5.1). Some responses may come fkom individual firms, farms, or government agencies. Others involve collective action, perhaps through producer or industryorganizations or interministerial task forces. There i s also scope for a strategic response that involves public-private collaboration or collaboration between developing country stakeholders inmultiple countries. 55 Figure5.1: Actors in stra Subsidies/cofinancing Joint ventures Findfarm investments Company "codes o f practice" Grower association program Coordinated supply chainpartnerships Source: Authors' analysis. More often than not, developing counties respond to emerging trade-related standards in reactive-defensive ways, frequently in the context o f a crisis such as a trade ban or disease outbreak. The requisite public systems and private investments often are set aside until trade with an important market i s likely to be interrupted. Inthis mode o f response, both government and the private sector typically (and unfortunately) have fewer technical or administrative options to achieve compliance with the required standard. Their credibility in influencing how the standard i s developed or implemented("voice") may be underminedby weaknesses inthe basic regulatory and private management systems for compliance. The array o f pertinent SPS management functions and the associated institutional, technical, and other capacity needs may appear daunting to developing countries aspiring to increase horticultural exports. A pragmatic and strategic approach i s needed. For such countries, prevailing levels o f capacity are either very low or concentrated in certain firms or agencies. At the same time, resources are limited, and the opportunity cost associated with investing in improved SPS management capacity i s high.Countless other potential uses compete for scarce resources. It i s essential to prioritize capacity-building efforts in terms o f the integral functions o f SPS management-considering technical as well as economic factors. A useful framework inthe development o f priorities is the concept o f a hierarchy o f SPS management functions (figure 5.2) (World Bank 2005a). Functions towards the base o f the pyramid represent the foundation stones. Functions towards the top add value and sophistication to the entire system o f SPS management and gain in importance as export sectors mature and they encounter increasingly complex technical, administrative, and even political challenges. Thefoundation of any SPS management system is emphatically not sophisticated equipment and accredited laboratories. The true foundation of a functioning system is broad awareness among participating stakeholders about the relevance and importance of food safety and agricultural health to the competitiveness of their country/sector/firm and recognition of their own role in this system. Where this awareness i s especially weak, any system o f regulatory enforcement will almost certainly be overwhelmed, and advanced testing will simply demonstrate the serious, systemic problems within the supply chain. Awareness o f major SPS challenges and opportunities i s needed at several levels, including: (1) senior agricultural and trade officials, in order to assign appropriate priorities for public programs and expenditures; (2) owners and managers o fproducing/exporting firms and their industryorganizations, as these people make pertinent investment, personnel, and other decisions; and, perhaps most important, (3) large numbers o f farmers and farm and industry workers who produce and handle agricultural raw materials on a day-to-day basis. Lacking strong awareness at all o f these levels, the system's foundations will be weak. 56 57 Box 5.1 Cont'd. trategic approachrequires that efforts to nts are likely to change and incorporating Source: Authors' analysi A Figure 5.2: Hierarchyof trade-related SPS mana ement functions SPS diplomacy Technically demandingrisk // \\ managementfunctions Institutionalstructuresandrole clarity Suitable and appliedregulation Applicationofbasic `goodpractices' for hygieneand safety Awarenessandrecognition Source: World Bank 2005a. Another core set o f buildingblocks that proceed from broad awareness i s the application of basic and recognized risk and quality management practices at the farm and processing levels o f supply chains, including HACCP, GMP, and GAP. The application of such practices mostly 58 involves training staff and family members in basic hygiene, the proper use and storage o f potentially hazardous substances, improved record-keeping related to productionpractices, and the ability to conduct simple assessmentso fpossible risks, among other skills. Withbroad awareness and common applicationo f goodpractices, many potential SPSrisks can be managed effectively at the enterprise (or farm) level. Other risks cannot be fully controlled on such a decentralized basis. These risks are more systemic in nature and demand broader oversight or collective action. They require basic research, risk analysis surveillance systems, and quarantine and emergency management systems. Insuch contexts, scientific testing and verification systems become essential, because even if individual farms and firms apply good practices, they may not be able to control all hazards. Many of these higher-order functions require particular technical skills, often specialized equipment and well-defined procedures, supported by recurrent funding. Some o f these functions need to be mandatedby law to ensure that they are implemented appropriately. An effective regulatory framework and transparent institutional structures are therefore placedinthe middle o fthe pyramid. At the top of the pyramid is so-called "SPS diplomacy," which includes the international obligations o f individual WTO members but also relates to engagement in the technical and political realm o f official and private international standard setting, including negotiations with bilateral trade partners and with regional integration partners on matters dealing with harmonization, equivalence, joint programs, special considerations, and related matters. SPS diplomacy thus relates to the concept o f "voice" in responding to emerging regulatory and commercialrequirements. Once established, SPS management capacity (at any level o f the hierarchy in figure 5.2) must be sustained in terms o f effectiveness, scientific and technical relevance, and access to financial, physical, and human resources. Sufficient political and economic priority must therefore be given to maintaining this capacity, perhaps from the perspective o f trade promotion as well as the promotion o f domestic producers' and consumers' welfare. Cost recovery systems, such as user fees, may be needed where appropriate. To be sustained, SPS management capacity must also be viewed from a dynamic perspective: the efficacy o f the integral hnctions must be reassessed and updated in light o f developments in science and technology, changing commercial aspirations, emerging food safety and phytosanitary challenges in the domestic setting, and changes in standards applied by major trading partners. Challenges,Experiences,andOptionsinIndianHorticulture The challenges posed by standards have manifested themselves in different ways for Indian horticulture, including: Absolute barriers or binding constraints for accessing particular markets. The most prominent case involves fresh mangoes and the plant health concerns o f authorities in the Australia (and untilrecently inU S A and Japan). Temporary losses due to rejected (and sometimes destroyed) consignments of fresh or processed product. The most high-profile incident occurred in 2003 when some 28 containers o f grapes consigned to the Netherlands were rejected due to violative pesticide residues. Less visible yet more common instances include the rejection o f numerous small consignments o f processed horticultural products by the U S A because o f improper labelling, poor packaging, inclusion o f illegal additives, and other problems. Other markets have experienced a few other episodes inwhich fresh produce was rejected. 59 Higher consignment-specijk or recurrent transaction costs due to duplicative testing, high levels o f entry-point inspection, or the further treatment o f goods upon arrival in the overseas market. These costs have affected the profitability o f India's cut-flower trade into Japan and the Netherlands and added to the costs o f exporters o f other products. Patterns of "defensive commercialization, whereby firms fail to pursue opportunities for " remunerative trade with certain countries or types o f buyers because o f concerns about their inability to ensure compliance with regulatory or private standards in those markets. This pattern i s common inIndian horticulture, although additional factors have also weighed on these commercial strategies. Table 5.1 summarizes the types o f impact that SPS measures and challenges have already had on Indianhorticultural exports and notes several looming threats, all o f which will be discussed below. Table 5.1: Impac horticultural expc ts Bindingconstraint Temporary losses High compliancecosts Defensive Loomingthreats commercialization Freshmangoes GrapeConsignment Pesticidemonitoring Processed fruit and Heavymetals in fresh and enteringthe USA rejectionsinEurope programfor grapes vegetablesales by processedvegetables and Australia SMEs Borderrejections of Fumigationof cut Pesticidesinpomegranates many small flowers in Japan Grape export strategies consignmentsof Requirementsfor processedfruits and Stalledupgradingof Onion export traceabilityinprocessed vegetables mangopulp operations strategies fruits andvegetables Onionconsignment EurepGAPand Avoidance of certain Environmentaland social rejectioninEurope smallholdervegetable cut-flower markets requirementsincut flowers growers Periodic pricediscounts by privatebuyers Source: Authors' anal The defensive commercialization impact i s perhaps least noticed but most pronounced in Indian horticulture. All other impacts appear vividly on the radar screen owing to specific events, bilateral negotiations, or clear, tangible costs. There are large differentials in the unit values o f Indian exports to different markets and distribution channels (table 5.2). For many products, a majority o f sales are directed at lower-value markets. This trend partially reflects comparative advantage-for example, India's location permits access to South Asian and Gulf markets at relatively low freight costs, and the resident and immigrant populations inthese markets prefer h i t and vegetable varieties commonly grown in India. For some o f these markets, transactions are readily managed by Indian suppliers, as commercial behavior strongly resembles the patterns found inthe Indiandomestic market. Table 5.2: Unit value variationsbetween markets applying higher and lower standards average FOB unit values on Indian exports. 2002-03, in US$/t Source: APEDA 2004 60 Yet at least some o f these commercial patterns reflect either an inability or a lack of confidence among processors and exporters to comply with the quality, food safety, andor plant health requirements o f the higher value markets. These patterns may also reflect an implicit calculation on their part that they would not be commercially compensated for the investments and recurrent costs necessary to attain higher quality andor comply with food safety or plant health standards. Nothing i s wrong with serving less-demanding customers, especially if they provide consistent business and margins are adequate to sustain the supply chain. Insome of these markets, India may face relatively less competition and thus command a large or even dominant market share. Being a cheap, reliable supplier may not be a sustainable commercial strategy in the long term, however. Dynamic horticultural markets may see new entrants. Lax food safety and plant health standards may not prevail inthe future inthe targeted middle- and low-income markets. Grape Expectations: Successful Fire-Fighting? India's export trade in grapes dates to the late 1980s and early 1990s, when domestic production surged, market prices fell, and some entrepreneurs and cooperatives sought higher returns in external markets. The primary initial focus was on supplying Middle Eastern markets, where specifications for quality and presentationwere relatively similar to those inIndia's domestic market. Some exporters made small inroads into the European market with Thompson Seedless grapes, as described inthe previous chapter. Following the alleviation o f shortages in staple food grains, the Indian government provided considerable support to the production o f horticultural crops, including grapes. Research and development were expanded, and support was provided to develop irrigation systems, packinghouses, and other infrastructure. Domestic grape production boomed, increasing from an estimated 251,000 tons in 1987-88 to 1.1 million tons by 1996-97. Only a tiny proportion o f this growing output was directed at export markets. Fresh grape exports increased from 5,300 tons in 1990-91 to just under 21,000 tons in 1996-97. By the mid-l990s, the majority o f exports were directed at Europe.49 This small export trade attracted considerable attention, seemingly illustratingthe potential for Indian nontraditional agricultural exports more generally. Various cooperative societies were formed and, with government support, targeted export markets. Private companies also entered this trade, typically diversifying into the export business from other, related activities, such as transport, cold storage, packaging, or freight forwarding. Progress was uneven and mistakes were made, yet the level o f commercial and official interest in the horticultural export trade remained high. A specialized national research center for grapes was formed in 1997, and state and federal governments provided continued support. Quality and other specifications for grapes differed in Europe compared to the Indian domestic and Middle Eastern markets. Buyers wanted larger berries with deeper color, no external blemishes, and higher sugar content. Bunches o f grapes needed to be a certain size and packed for good visual presentation. Imported grapes were expected to have a certain shelf-life. These and other buyer specifications necessitated major changes in the production practices typically adopted for Indian grapes. Additional pruningwas needed, at the sacrifice of yield. Shade netting was used to reduce direct sunlight and enhance fruit color. Synthetic growth regulators were applied to affect berry size. Much greater use was made o f pesticides to control insect pests and mildew, thus 49See Naik (2004) for a review o f the emergence and subsequent development o f India's grape industry. 61 ensuring a blemish-free product. A crop cycle involving 30 or more rounds o f chemical spraying was not unusual. Fromthe mid-to late 1990s, some limited testing was done for pesticide residues inexport- oriented grapes. Testing was voluntary, and testing capacity was quite limited. For example, the government laboratory in Pune could test only for some 15 organochlorines and lacked clear guidelines on how to conduct the tests. In 1998-99, Pune analyzed only 31 grape samples. Testing was made mandatory in 2000, yet most o f the testing equipment was not up to date, could not provide the same level o f detection as in Europe, and could not detect certain heat-sensitive chemicals such as acephate and methomyl. In2001-02 and 2002-03, the government lab at Pune tested 604 grape samples, o f which only 10 failed to comply with applied standards. This remarkably low failure rate probably reflected the limited testing capacity more than the actual status o f the Indian grape crop. Inparallel, major changes were afoot in the way the EU and individual member states registered agro-chemicals and monitored the presence o f pesticide residues in food. A more rigorous set o f environmental and human safety criteria were being applied to new pesticide approvals. Agro-chemical companies were required to submit extensive dossiers on all formulations for which re-registration was requested. This process substantially reduced the number o f approved active substances for plant production. It removed many older pesticides and approved uses on so- called "minor" crops. Measures were also taken to harmonize legal tolerance levels for pesticide residues and to develop coordinated EU-wide programs o f pesticide residue monitoring. Individual countries also stepped up their own distinctive programs to monitor pesticide residues. Pesticide residues were found to be relatively common in grapes grown within Europe (Italy, Spain, and Greece) and imported from external sources (South Africa and Chile). Countries including the UK and Netherlands regularly included grapes in their pesticide residue monitoring programs. Violative residues were periodically found in Indian grapes, as with carbendazim in grapes imported into the Netherlands in 1997.50Aside from periodic government-to-government communications on suchresults, the grape trade continueduninterrupted. A subset ofIndian f m s and cooperatives were not waiting for trouble to happen. They had already started to keep more extensive records o f growers' practices, especially agro-chemical use, and devoted considerable attention to training farmers about buyers' requirements. They had buyers test for pesticide residues to confirm or augment local testing results. A few firms and cooperatives had their members or outgrowers prepare for and gain certification under EurepGAP. Inresponse to buyer requests, upgrades were made in packinghouses, including the introduction o f formal HACCP procedures. Yet this was not the total or indeed the mainstream response from this increasingly fragmented industry.Many exporters had little direct interaction with growers, except at harvest time to agree on prices and logistics. When agronomic advice was provided and growers experienced problems, they sometimes blamed the exporters and sought compensation. Inearly May 2003, duringthe last week of India's export season to Europe, a bombshell hit.A Dutchimporter, inthe midstofacommercial dispute with anIndianexporter, hadsamples of that exporter's grapes tested by a private lab. Residues o f the insecticide methomyl were found in excess o f the MRL (0.05 micrograms per lulogram) for the EU. The importer placed an advertisement in the local paper indicating that grapes from the Indian supplier contained "poison" and alerted Dutch authorities. The latter took samples from the 28 containers o f Indian grapes in Rotterdam port. Some 75 percent o f the samples had violative residues o f methomyl and/or 50As reportedinBuurmaet al. (2001). 62 acephate. The problem was reported on the EU Rapid Alert system. The price o f Indian grapes dropped sharply, leading the shippers of those grapes to incur losses, either in selling to the Netherlands or diverting grape shipments to other markets. This event came as a shock to the industryandto the Indiangovernment. Previous overseas testing o f Indian grapes had given no indication o f any particular problem with methomyl or acephate. Ifthe Dutch surveillance data are representative o f the wider picture, however, there were indeed more serious issues, at least inrelation to the insecticide methomyl. Of the 20 samples with violative levels o f methomyl, 6 exceeded the MRZ,by 10times, but most o f the others were also far in excess of the MRL.51Still, the overall manner in which the event was handled-with the publicity o f the "toxic" advertisement and the embarrassment associated with a series o f Rapid Alert notices-perhaps damaged the reputation more than the finances o fthe Indian industry. Inthe monthsfollowing the endofthe 2002/03 grape export season, APEDA consultedwidely with the industryand with external experts and devised an integrated scheme o f grape supply chain oversight to restore the industry's reputation and minimize future noncompliance with EU standards. Designed for implementationinthe 2003/04 season, the new system would involve: Registration with the Department o f Agriculture o f all farms growing grapes destined for Europe. Some 6,200 growers registered for the 2003/04 season. Formation o f a cadre o f horticultural field inspectors who would visit each registered grape grower at least three times during the crop cycle. Some 244 inspectors were initially appointed and trained (there are now 291). Inspection and registration o f all grape export packinghouses by APEDA. Approximately 100pachnghouses were inspected, o fwhich 20 failed to meet certain basic requirements. Mandatory testing prior to harvest for pesticide residues in samples from each registered field o f export grapes. Authorization for exporting grapes was given only to fields that passed the test. Grapes from fields with failed results would need to be sold in other markets or retested. Checking o f every consignment by AGMARK to ensure conformity with EU quality specifications for grapes. AGMARK would issue certificates. Issuance o f a phytosanitary certificate by PPQS for every consignment o f grapes for export. In2005, anotherprocedurewas added, wherebyNRC-Grapes tooka5percentsample from grape consignments exiting the packinghouse to test again for pesticide residues. Ultimately the grape crisis gave rise to a heavily laden system o f checks and controls to ensure that fruit shipped to Europe met prevailing standards. This system required considerable resources. Laboratory testing capacity needed to be enhanced quickly, so considerable supplementary resources were provided to public laboratories and partial subsidies were directed at supporting upgrades in private sector laboratories. Private and cooperative packinghouse upgrades were supported by a 25 percent government subsidy. Budgetary increases facilitated the training and placement o f the grape field inspectors and the expanded work o f AGMARK. Ongoing support to NRC-Grapes was enhanced, both for overseeing the pesticide monitoring program and for conducting an expanded program o f research on pest management. Recognizing this considerable burden, APEDA committed to subsidizing 50 percent o f the costs o f the mandatory pesticide residue testing. During2003/04, implementationo fthe systemwas uneven. Getting the laboratories online was a particular problem. They were adapting to new equipment and methods, sometimes with recently 51See the analysisprovidedbyvander Schee (2004). 63 hired staff, and they were unable to handle their much-expanded workload. Delays occurred in obtaining and testing field samples. The labs could not effectively test for certain chemicals that were routinely screened within Europe. With only limited confidence inthe local test results, many exporters sent samples abroad to private laboratories. The costs o f such tests were typically four to five times higher than the local tests. Of the 2,900 local tests on sample plots, some 20 percent failed, leading many farmers to redirect samples to other outlets. This remarkably high failure rate seemed to imply that while Indian exporters and government agencies had begun to understand the significance o f the problem, growers' awareness and practical response remained inadequate. The entire apparatus o f grower registration, inspector visitation, and mandatory testing had highlighted symptoms o f the problem, but the underlying challenge o f improving awareness and good practice remained. Since then, some improvements have apparently been made. For the 2003/04 season, the failure rate inthe 4,200 tested samples was 12 percent. In2006 the failure rate dropped to 6 percent (APEDA2006).s2 In at least some parts of the industry, major changes are underway to promote better agricultural practices and attain improved oversight and control o f the entire supply chain. Several more companies are moving to have their outgrowers certified under EurepGAP as groups or so- called Produce Marketing Organizations. An estimated 30 percent o f currently registered export grape growers (3,5004,000) are either EurepGAP certified or will be so shortly. Increased attention i s given to pest scouting and reducing the overall level o f chemical spraying. Questions have been raised about the accuracy o f preharvest intervals recommended on pesticide labels, and recommendations are being revised. Both private companies and cooperatives are closing export channels to growers who do not consistently follow good agricultural practices. Record-keeping i s being improved, as are overall systems o f tra~eability.'~The Government o f India i s also developing a nationalprogram for good agriculturalpractices (IndiaGAP). The experience in managing the grape crisis i s regarded by Indian stakeholders as a "success," although many people acknowledge that it i s not a replicable model, given its high cost inrelation to the applicable trade (see below). The fact that no consignment o f Indian grapes has been officially rejected or put on the EU Rapid Alert System in the past two years may be seen as outward evidence o f "success." Published surveillance data show that in 2004 the UK authorities included far more samples o f Indian grapes intheir testing because o f the events o f 2003. None of the samples from India in2004 were found to have violative MRLs, although cases were associated with supplies from Chile and Egypt.In2005, the sampling o f Indianconsignments was reduced and again no violative MRLswere found.s4 The inward evidence o f "success" i s that the crisis improved growers' awareness and led a number o f exporting companies and cooperatives to further upgrade their management systems and strengthen interactionwith and oversight o f growers. Yet considerably more effort i s needed inthis area, together with an additional stream o f research findings to refine grape production practices, especially in relation to pest management. There i s still a lack o f trust and confidence in what growers are doing. As one exporter noted, "If you can't trust the process, you have to control it." The experience gained by the public sector during the grape crisis also raised awareness o f the importance o f SPS management for promoting horticultural exports. 52For comparison, South African pesticide monitoring programs covering grapes (and the fruit export sector more generally) have beenencountering violative pesticide residues inless than 4 percent o f samples. 53One fmis developing a sophisticated database combining information on farmers' pesticide spraying, weather, and residue tests to provide more exact recommendations to growers. 54Pesticides Residues Committee, Pesticide Residues Monitoring Reports, 2004 and 2005. 64 The current top-heavy system cannot be sustained either by industry or the government, however. Several o f the policing checks-including the multiple visits o f field inspectors and the quality sign-off by AGMARK-appear to provide little value or little real assurance o f anything. Devoting nearly 300 horticultural field officers to advising or policing 3,0004000 Europe-focused grape growers may not be the best use o f Department o f Agriculture extension staff. The mandatory testing o f every field prior to harvest may have been necessary in the midst o f the crisis, but it should give way to a more surveillance-based approach, managed and paid for by exporters to complement their own capacities to monitor farm practice^.^^ With a shift toward surveillance testing, there i s scope to phase out and then completely eliminate the pesticide residue testing subsidy. This testing should be regarded as a normal cost o f business-as it is in many other countries exportinghorticultural products. The current compliance costs incurred by this industry are very high and way out o f line with broader international experience. The cost o f pesticide residue testing alone (to the government and private sector) i s equivalent to 4.5 percent o f the FOB value o f India's grape trade to Europe (box 5.2). Given the investments that have gone into the pesticide monitoring program, as well as other costs associated with the oversight o f the grape supply chain, SPS compliance costs are estimated to account for 10 percent o f the FOB value. Consider some comparisons. Inthe Indian spice industry, the estimated cost for testing dry chilies for pesticide residues and aflatoxin i s 2.8 percent o f FOB value (Jaffee 2005). Inthe Bangladeshi and Nicaraguan shrimp industries, the total recurrent costs o f compliance with export food safety requirements i s 1.1 percent and 1.3 percent o f export revenues. Ina broader set o f case studies, the World Bank found these patterns to be typical. That is, recurrent compliance costs-at a broad industry level-were normally in the range o f 1-3 percent. For no industry reviewed did the World Bank find the proportionate level o f recurrent compliance costs found inthe Indian grape industry(World Bank 2005a). 55 For comparison, pest residue monitoring and assurance in the South African grape export industry is handled predominantly by the private sector. Exporters follow the guidelines provided by their overseas supermarket or other clients. The exporters typically require their farm suppliers to submitresults o f pesticide residue tests (paid for by the farmers) as well as grape cultivation plans, including plans for pestcide use. Any changes in pesticide use are communicated to the exporters. Exporters also randomly test batches from suppliers, perhaps once or twice per year. Supplemental surveillance testing is also conducted by the South African National Department o f Agriculture, although this testing is based on random samples and is not used as a mechanismto approve export consignments. 65 provided. A very conservative assumption is that Rs 0.5 crore is allocated to administering the pesticide monitoring programandto the recurrent costs o ftesting product leaving the packinghouse. As all packinghouses have to be registered and approved by APEDA, there will be a small administrative cost. 0 A small administrative charge and a cost for three farmvisits will be incurred when farmers who wish to export grapes to Europe register their fields withthe Department ofAgriculture. 0 Pesticide residue analysis is Rs 7,000 per sample, divided evenly betweenAPEDA andthe exporter. Costs incurredby AGMARK are mainly administrative and associatedwith transport and subsistence. Based on estimates inthe table, the total cost o f SPS compliance is nearly US$ 1.5 million per year, the equivalent o f about 10 percent o f the FOB value o f grape exports to Europe. Ifonly the costs o f pesticide analysis (excluding capital expenditures) are considered, the cost is still almost US$700,000, or 4.5 percent of the FOB value. Because the analysis of samples represents such a significant portion of total costs, expanding the volume ofexports willnot reduce costs significantly. Table 5.3: Estimatedannualcost of meetingSPS standardsinthe EU 200s US$ Source: Authors' analysis,basedon communicationwith APEDA, grape exporters, andlaboratories Note: Assumingexports of 15,000 t, the SPS compliancecosti s US $98/t.Assumingaverage FOBprice i s US$ I k g , the cost of SPS complianceis 10%. The cost ofresiduetestingalone, not includingany capitalexpenditures,is US$45hor 4.5% ofFOBvalue. Inaddition to the actions listed earlier, some exporters have organized (and paid for) their farmers to become EurepGAP registered. Some have also paid for their grapes to be analyzed inEurope to confirm results from Indian laboratories-and to prove they have taken every precaution to prevent grapes with excessivepesticide residues from reaching the European market. We have not included those efforts inthis calculation, becausevery little duplicative testing was still done in2005. Source: Authors' analysis. a Internationalexperienceshows that equipment used to test for residues generally has no market value after 5 years due to rapid technological advances. However, the Governmentof India assumes a depreciation period of 10 years for laboratory equipment, . and thesenorms are adoptedhere. Entirely missing from the compliance regime i s any form o f collective action within the grape industry itself, creating a vacuum that the government-through AF'EDA-has had to fill (box 5.3). The formation o f a Grape Exporters Association could contribute meaningfully to designing and implementing a sustainable "code o f practice" for how the industry will manage pesticide residue concerns and deal with other problems. Only firms and cooperatives that effectively implement this code would remain members o f the association and perhaps affix a stamp on their export consignments which, over time, would acquire a value in signaling industry good practice. 66 67 Curtailing the role o f government in pesticide residue monitoring in the grape industry i s strongly recommended. If Indian exporters cannot-through their own or collective efforts- manage this problem, then grape exports should target markets where compliance i s not a problem (for an example o f successful public-private collaboration, see box 5.4). That said, appropriate roles for government remain, such as conducting further research on managing grape pests, ensuring proper labeling o fpesticides (including properly designatedpreharvest intervals), ensuring that pesticides that are no longer registered for agricultural use in India are removed from the market, and performing other, related regulatory functions. Given the relatively narrow market window for Indian grapes in Europe, one cannot anticipate much o f a growth trajectory for this specific trade. The types o f "infant industry"' support that the government has provided to this industry should not continue, as other dimensions o f horticulture exhibit considerably greater growthpotential and scope for muchwider smallholder participation and employment generation. continued to increase canbe internationally ction by reinforcingthe of the Peruvian Export I s the management o f pesticide use and pesticide residues the only quality or SPS-related challenge facing India's grape export industry with respect to European trade? The industry's performance in the UK market suggests that there may be additional issues. The UK market has relatively more demanding quality requirements for table grapes, including size and color requirements. The increased consolidation o f food retailing in the UK has placed greater pressure on international suppliers, not only to have EurepGAP-certified growers but also to have their packinghouses certified under the BRC Food Standard. The supply o f Indian grapes that meet these management system and quality standards could well be insufficient, thereby explaining why Indian exports to this most remunerative market have not demonstrated a positive trend over the past decade (figure 5.3), despite considerable increases inoverall UK grape imports. 68 Figure 5.3: Indian grape exports to the UK,1994-2004 I I 14 I I I 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Authors' calculations, basedon UNComtrade data. Note: These are calendar-year UKimports from India. Pomegranates: More Pesticide-related Concerns India i s a large producer o f pomegranates, with production estimated at some 50,000 tons per year. Inrecent years, between 10 and 20 percent o f this productionwas exported. This crop was not specifically grown for export. Exporters o f grapes and other fruits have bought pomegranates o f f the wholesale markets and used the same infrastructure and marketing channels to handle this fruit. The bulk o f India's pomegranate trade has been directed either to neighboring countries (especially Nepal) or Gulf countries, where pomegranates are eaten fresh or squeezed for juice. Apparently no plant health or food safety issues have been raised in relation to that trade. There i s growing interest in India about the scope for expanding the fresh pomegranate trade with Europe, including the possibility o f supplyingmainstream supermarket chains. There has been some recent growth in this trade, although the actual market potential needs to be thoroughly examined. Some market players believe that considerably greater potential lies in the commercialization o f pomegranatejuice, buildingupon its health and medicinal properties. Challenges to pomegranate production in India include the management o f fruit flies, other insects, and bacterial blight.Various pesticides are used. The application o f safe and effective pest management practices-and conformity with official pesticide residue tolerance levels-could prove a major hurdle for any strategy to expand fresh pomegranate sales to Europe (box 5.5). Proper field trials to establish suitable MRLs have never been undertaken in India, and levels established where the crop i s grown commercially-for example, the USA, southern Europe, and Israel-may not be applicable for Indian conditions. Because pomegranates are such a minor crop, agro-chemical manufacturers and European regulatory authorities have shown little interest in investing in establishing new MRLs based on field research for pesticides used in pomegranate production (see box 5.6 for a description o f Indian spice industry efforts to establish MRLs for spices grown intropical countries). 69 getpest speciesare ry from country to country the associated MRL are be safe andacceptable. 70 information on h 71 At present, the EUhas established some 186 MRLs for pesticides and pomegranates. All but 11are set at the "limit o f determination," which is the lowest level o f detection possible given existing testing technology. It i s not certain that any o f these MRLsreflect results from field testing under tropical or subtropical conditions, although it i s doubtful. As mentioned, aggregate pesticide use on this crop i s too small for any agro-chemical company on its own to invest in gaining regulatory approval o f a higher MRL. If India wants such approval, it will need to invest its own resources in proper field trials and/or collaborate with a program such as the Pesticides Initiative Programme (PIE'), implemented by the Europe-Africa-Caribbean-Pacific Liaison Committee (ComitC de Liaison Europe-Afrique-Carai%es-Pacifique, COLEACP) (box 5.7). Indian stakeholders contend that the primary issue here is the method by which European authorities want pesticide residues to be tested. Followingthis method, the entire fruit, including the shn, is crushed and tested rather than only the fleshy, edible part within. Indian stakeholders contend that tests o f the fleshy part alone rarely reveal violative levels o fpesticide residues, and this should be the proper means of testing. At least two counter-arguments can be made (box 5.8). First, this procedure is not unusual. European authorities commonly use the entire (crushed) fruit to measure pesticide residues in bananas, oranges, melons, and other fruits whose skin is not widely eaten. Second, in the specific case o f pomegranates, the skin i s in fact eaten sometimes; in the Middle East and elsewhere, pomegranate skin i s commonly made intojam. 72 In2005, surveillance testingofpesticideresiduesinso-called"exotic hit" was introduced as part o f a program coordinated by the EC. Samples were taken from consignments o f passionhit, persimmons, and pomegranates. The results from the UK monitoring program are published on the website o f the Pesticides Monitoring Committee. From January to June 2005, 36 samples were tested (12 from each fruit). No residues were detected in 27 samples, yet violative residues (above MRLs) were found in7. Of these, 3 were samples o f Indian pomegranates with violative residues for dithl~carbamates.~~The other violative samples were from Kenya (for passionfruit) and Israel (for persimmons). No healthrisks were associated with any o f these samples. The Indo-European dialogue on the appropriate method for pesticide residue testing should be resolved, but testing i s probably not the central issue. If indeed there i s commercial potential to expand fresh pomegranate sales to the mainstream European market, then the Indian industry- perhaps together with government agencies-will need to (1) invest in proper field trials to establish suitable MRLs for this crop, (2) refine and promote farmers' adoption o f better practices for pest management for this crop, including reduced and better-timed applications o f agro- chemicals, and (3) adjust current systems o f crop procurement in the direction o f more dedicated export supply chains with attendant systems for product traceability. Asian Vegetables:ActingNow toAvert a Future "Crisis" Some 15-20 Indian companies regularly export "Asian" vegetables-fresh chilies, eggplant, okra, and a broad range o f leafy and root vegetables that are staples o f the South Asian diet-to the UK and elsewhere in Europe, where they are still widely consumed by immigrant or second-generation communities. India competes in the Asian vegetable trade with other suppliers fkom South Asia, East and West Africa, and Europe itself. The trade and distribution channels for these vegetables as well as other "ethnic" produce remain somewhat distinctive within Europe, with continued prominent roles for traditional wholesale markets and smaller greengrocers and only very geographically specific entry into this product range by larger supermarket chains. The Asian vegetable trade-both historically and at present-has featured a market structure based on personal and familial ties, and the predominantemphasis i s on meeting consumer quality preferences at a low or reasonable cost. Phytosanitary issues have had little effect on trade, although certain issues-such as h i t fly in karalla and insect borer in okra-have had to be addressed. The Asian vegetable trade appears to be subjected to minimal levels o f official border inspection or coverage in national programs o f surveillance testing for pesticide residues or other food safety hazards. Ifproblems have been detected, they have not been reported publicly. Unlike 56The recordedlevels were 0.9, 0.8, and0.6, as against the MRLof 0.5. 73 inthe mainstreamvegetable trade inthe UK or Netherlands, inthis trade there is practically zero demand for certified GAP or HACCP compliance among suppliers. Some selected buyers have begun to ask questions about traceability, yet Indian exporters report no specific requirements in this area. The leading Indian exporters report having some regular suppliers o f certain Asian vegetables but purchase the bulk o f their supplies from the wholesale markets. Very little o f the 3,000 tons o fproduce supplied to the UK "ethnic" market is specifically grown for export by Indian farmers. N o specific tests are done for pesticide residues, microbiological parameters, heavy metals, and other contaminants. Indian exporters note that if such tests were undertaken, some samples would almost certainly fall outside o f EUtolerances. Insummary, this trade i s based uponpersonal ties and company reputations for reliability and continuity o f supplies, and it has not been inhibited to date by SPS measures, perhaps more because o f official (European) inattention rather than assured compliance from India and el~ewhere.'~ Even though Indian suppliers and exporters face little immediate external (official or private) pressure to modify practices to comply with food safety or other requirements, the Asian vegetable trade would seem vulnerable to future interruptions, should greater official (or other) scrutiny be givento this product line, either as part o f a targeted surveillance program (unlikely) or simply as a result ofperiodic testing o f different food products. At the same time, the Indian supply chain for Asian vegetable exports i s ill-prepared to take advantage o f any emerging opportunities to supply safety-assured, traceable produce to European supermarkets that are trying to carry such lines for their ethnic minority and mainstream clientele. The greatest vulnerability o f this trade i s likely to be the presence o f high levels o f heavy metals-such as lead, zinc, and cadmium-in parts o f the Indian vegetable crop. These heavy metals may accumulate on the leafy surface o f vegetables or be taken up by the crop roots and absorbed into plant tissue. The presence o f heavy metals in vegetables may derive from air pollution or the use o f irrigation water contaminated by sewage and industrial effluent. The incidence i s thus highest in urban or periurban agriculture. Prolonged consumption o f unsafe concentrations o f heavy metals can disrupt numerous biological processes in the human body, with some elements acting as carcinogens. Due to these risks, many countries have begunto adopt more stringent standards for heavy metal tolerances in food and to increase surveillance testing. For example, in2005 the EC amended earlier food safety regulations to require that member states put in place-by February 6, 2006-a system for official monitoring and testing o f foodstuffs for the presence o f lead, cadmium, mercury, and other heavy metals." The UK, through its Contaminants in Food (England) Regulations 2005, makes provisions to implement this Commission Directive. Official surveillance has begun in fish products and eventually will extend to other foodstuffs. Recent survey work in the Delhi region measured the presence o f heavy metals in a range o f vegetables sold through wholesale markets (Marshall et al. 2003). High levels o f heavy metals were found in many samples. For example, several hundred samples o f palak (spinach beet) were tested. Some 72 percent had lead concentrations exceeding the Indian permissible limit of 2.5 milligrams per kilogram, while 100 percent exceeded the more stringent Codex limit of 0.3 57 Supply chains for Asian vegetablesinKenyaalso donotfeature heavy levels ofproductionoversight or product testing. However, much o f the production dedicated for export is contracted for and some level of product traceability i s achieved. Commission Directive 2005/4/EC. 74 milligrams per kilogram. Approximately one-half o f the lead concentration in palak was found in plant tissue, implying that diligent washing would not resolve the risk to consumers. While 100 percent o f the samples had concentrations o f cadmium within the Indian Prevention o f Food Adulteration (PFA) Act limits (1.5 milligrams per kilogram), 70 percent o f the samples exceeded the more stringent EU standard (0.2 milligrams per kilogram). For zinc, 21 percent o f samples exceeded Indian and international standards. It is certainly possible that the periurban origin o f the tested vegetables would not render these testing results indicative o f the heavy metal concentrations that would be found in Asian vegetables exported out o f Delhi or Mumbai. Yet, as noted previously, the bulk o f India's Asian vegetable exports are procured in wholesale markets, and their specific origins are not known by the exporters. There i s currently no regular testing o f heavy metals in vegetables by Indian health authorities." Even if the objective i s only to maintain the current modest level o f this trade-at about 3,000 tons, worth US$ 2-3 million per year-a prudent risk management strategy would involve some level o f industry surveillance testing o f delivered and export-graded produce to determine signs o f underlying hazards, and then the development o f specific measures-perhaps in a cooperative initiative involving a clustering o f exporters, APEDA, and pertinent state agricultural departments-to address these issues. While it i s well beyond the scope o f these entities to influence environmental pollution at its source (that is, the industrial and vehicular pollution o f water, soil, and air), some specific measures can be taken. Such measures could include more selective geographical sourcing o f supplies, screening o f contract growers through water and soil testing, and thorough washing o f vegetables packed for export to at least remove heavy metals from exterior surfaces. Inthe future, it may not be viable simply to purchase vegetables from the wholesale market. It i s recommended to address this risk of trade interruption now, before the Indian vegetables are identified-by UK or other external authorities-as a dietary source o f hazardous heavy metals, and before this issue finds its way onto the front pages o f popular media. The healthrisks associated with heavy metals invegetables are almost certainly higher for India's domestic consumers. There is an evident need to increase consumer awareness o f mitigation practices (such as washing vegetables thoroughly), promote other supply chain practices to reduce the exposure o f vegetables to pollutants, and more systematically monitor levels and sources o f heavy metal contamination o f vegetables (and selected other foods). Fresh Mango and Plant Health Requirements: Will the Benefits Match the Costs? As noted, India is by far the world's largest mango producer but a relatively small player in the expanding international trade in fresh mangoes. The bulk o f India's mango exports are directed 59Other periodic tests do point to a potentially broad problem that could adversely affect India's trade and the health o f consumers in India. For example, Dhaliwal (2005) reported that a 2005 survey by the Punjab Control Board found relatively high concentrations of heavy metals in samples o f green and root vegetables. A study published in the Journal of the American Medical Association found that 20 percent o f samples o f Ayurvedic herbal medicine products made inSouth Asia andpurchased instores inthe Boston area contained violative levels o f heavy metals (Saper et al. 2004). Earlier research published inthe British Medical Journal (Shukla et al. 1998) noted that high concentrations o f cadmium in irrigation water and vegetables grown in eastern Uttar Pradesh and western Bihar could be associated with relatively high rates o f gastrointestinal disorders inthese areas. 75 to neighboring countries (Bangladesh and Nepal) and selected Gulf countries, where unit values are only one-fourth to one-half o f the average international FOB values for traded mangoes. A small mango export trade i s also directed to the UK and other EU markets, yet Indian mangoes feature minimally in the mainstream supermarket segment and are more generally distributed through "ethnic" food channels. These trading patterns are surprising, given India's diverse range o f mango varieties, the excellent and distinctive taste o f some varieties, and the more extended seasonal availability o fmangoes inIndia compared with major exporting countries. It is doubtful that concerns about quality have inhibited India's fresh mango trade. Rigid standards are not generally applied in the international mango trade, in part because each-supply source has its own distinctive characteristics in terms o f fruit size, shape, color, fiber, aroma, and shelf life. The intrinsic quality of many Indian mango varieties i s considered to be either good or superior, as seen worldwide through India's competitive exports of mango pulp. One set o f factors that probably inhibit the development o f the fresh mango trade to Europe i s the highly fragmented structure o f production, the general lack o f direct sourcing o f export supplies, and limited investments in improved packinghouse facilities that would ensure microbiological safety. Nearly all production comes from smallholders' farms and i s channeled via intermediaries to wholesale markets. There are a limited number o f larger orchards, although most o f these are not export-oriented. In general, there i s a lack o f oversight o f production practices for mango, including pesticide use, and buyers cannot trace supplies to their source. Few dedicated mango export operations apply HACCP or certified quality management systems. This type o f fragmented and unspecialized supply chain i s not problematic for nearby, lower-value markets or even the "ethnic" food market in Europe, but these systems and possible assurances would not comply with private standards inmuch o f the mainstream European market. Inaccessing other significant (including higher-value) markets, the bindingconstraint has been plant health concerns. Some 564 pests are considered to be associated with mango production inIndia, including some 476 arthropods, 19nematodes, 62 fungi, and various bacteria and viruses (Australian Government 2004). Many o f these pests are not present in potential mango-importing countries. Some could survive long-distance transport and storage and cause considerable damage to fruit and other agricultural production in the importing countries. Some o f these pests are difficult or impossible to detect through visual inspection or cannot be contained simply by cleaning the h i t ' s surface. More elaborate phytosanitary measures are needed to manage the potentialrisks posedby these pests. For extended periods, Indian fresh mangoes have been barred from markets in the USA, Japan, and Australia, although protracted negotiation between trading partners to resolve phytosanitary constraints i s not unusual (box 5.9).60Inrelation to the U S A and Japan, the primary concern was the risks posed by various species o f fruit fly. India has been conducting a long- standing dialogue with the U S A (lasting more than a decade) to agree on suitable phytosanitary measures to enter the U S market. In March 2006, a Framework Equivalency Plan was outlined, which could enable Indian fresh mangoes to enter the U S market within 18 to 24 months. The central part o f this agreement i s that Indian mangoes destined for the U S A would be irradiated, at a low dose, at specially approved facilities. The system o f compliance would also involve procedures for produce inspection (including preclearance), irradiation facility certification and auditing, and other measures. Indian regulations would also need to be modified to permit irradiation as a 6o Pest risk issues also inhibited Indian mangoes from entering the Chinese market, although an agreement o n market access was reached inJuly 2005. 76 phytosanitary measure. Various tests would need to be undertaken to determine how different Indian cultivars tolerate radiation and how it would affect their quality and shelf-life. onwould be allowed to uldbe authorized to all With regard to Japan, there has also been a long-standing dialogue on measures that could resolve Japan's plant health concerns.61The proposed solution has been to use vapor heat treatment (VHT) to manage the risk posed by fruit flies. Equipment for this technology was imported by APEDA and a testing and demonstration chamber created at Vashi. InJune 2006, Japan formally lifted the ban on Indian mangoes. Initial trial shipments o f Indian mangoes to Japan took place in July 2006. Several exporters have expressed interest intapping this market and are willing to invest intheir own VHT facilities. The Japanese mango market is well supplied from Southeast Asia and elsewhere, yet there could well be commercial opportunities for Indian exports. These should be examined further before investments inspecialized treatment facilities are made. 61 The Japanese have negotiated market access arrangements for fresh fruit with many countries, based o n agreed methods o f phytosanitary treatment. For example, agreements were reached for using VHT o n Australian, Philippine, and Thai mangoes, o n Israeli papayas, and Taiwanese litchis. Methyl bromide treatment is the agreed treatment for cherries from Canada, Colombia, New Zealand, and the USA. See Gupta and Khetarpal(2005) for elaboration on Japanese plant healthrequirements. 77 With Australia, more elaborate measures have been defined and agreed upon to enable Indian mangoes to enter that market again. Prior to 1996, Indian mangoes were regularly consigned to Australia and treated with ethylene dibromide (EDB).This trade was suspended following global phase-out o f EDB because o f concerns about worker health and safety. In2000, APEDA proposed to Australia authorities that VHT be used as an alternative to disinfest fruit flies. In2002 and 2003, the Indian government preparedupdated pest lists and test results on the efficacy o f usingVHT and hot water treatment (HWT) to manage fruit flies. Australian authorities then carried out a very detailed pest risk assessment. The pest risk assessment focused on 32 potentially transmissible pests that could damage Australian agriculture. The assessment examined the incidence o f these pests inIndia and Australia, their probability o f import, entry, and spread, and the possible consequences. Some 26 pests and 1 pathogen were determined to present sufficient risks to warrant control measures. The combination o f required remedies i s similar to those adopted in prior Australian agreements on mangoes with Mexico, Haiti, and the Philippines. These measures would include: Pre-export VHT or HWT to manage h i t fly species.62Such treatment would be conducted infacilities or pachnghouses registered andauditedbythe Indiangovernment. Designated pest-free places o f production or production sites for the management o f mango pulp weevil and mango seed weevil. The Indian government would be responsible for establishing such areas through surveying and monitoring. Inspection and remedial action for other identified quarantine pests, including those for which visual detection i s possible. Supporting operational systems to maintain and verify phytosanitary status. These measures would include the registration o f export orchards, the registration o f packinghouses, preexport inspection by the government, specifications on packaging and labeling, phytosanitary certification, specific conditions for storage and transport, and on-arrival phytosanitary inspection and clearance by Australian authorities. The Indian government has already designated several locations as free o f mango pulp weevil and mango seed weevil. These include three locations inthe Lucknow region o f Uttar Pradesh, two locations in Gujarat, and five locations in Maharashtra. Terms o f reference and institutional responsibilities for establishing and maintaining such pest-free areas have been outlined. One pilot scheme reportedly has begun in Maharashtra. Pursuing this approach will be an enormous challenge, given the unusually strong coordination required between federal and state agricultural agencies and research institutions, and given the lack o f internal quarantine control mechanisms to prevent the movement o f mangoes from one production site or state to another (although plant healthreforms have recentlybeen made; see box 5.10).63 62The PPQS issuedguidelines for the certification o f HWT facilities inM a y 2005. 63The PPQS issuedguidelines for establishingpest-free areas for fruit flies and mango nut and pulp weevil in M a y 2005. 78 undertaken various Various other initiativ and training for scientists, All things considered, it is not obvious that the likely costs and administrative attention needed to fulfill all the requirements for accessing the Australian market would match the benefits o f participating inthat market. Costs and benefits must be more thoroughly assessedbefore malung any major investments or public resource commitments, Achieving compliance at a potentially high cost would not make sense if the actual commercial potential o f this trade i s limited. However, instituting several o f the required supply chain oversight and product inspection measures would likely have spillovers for enhancing India's fresh mango trade in other countries. A detailed assessment could better inform government policy and resource allocations (box 5.1 1). Part o f that assessment should include a closer examination o f the actual market potential for Indian mangoes inthose countries that would especially value the improvedIndianphytosanitary controls. 79 ProcessedFruit and VegetableProducts: Building on the Current Core Although maintaining a lower profile and receiving comparatively less attention from Indian trade promotion and agricultural institutions, India's trade in a range o f processed fruit and vegetable products appears to have a stronger basis for international market access and competitiveness than its trade in fresh horticultural produce. With processed products, Indian suppliers do not encounter the plant health issues inhibitingthe fresh produce trade. They also have somewhat less difficulty managing risks related to pesticide residues and other contaminants, greater flexibility with regard to domestic and international logistics, and greater potential for product differentiation and company branding. The industry already draws upon large numbers of farmers for raw materials and employs significant numbers o f people relative to the capital invested. India's fruit and vegetable processing industryi s highly fragmented, although much less so with respect to exports. Some 70 percent o f the entities licensed under the FruitProducts Order are cottage industryhousehold units producing traditional sauces or beverages. Another 20 percent o f licensed operators are also very small, producing between 50 and 250 tons o f output per annum. There i s a cluster o f older, medium-sized companies and then a relatively small number of larger companies with modem facilities. While precise data are not available, it is estimated that no more than two dozen companies account for upwards o f two-thirds o f India's expanding processed fruit and vegetable product exports. Many other companies do participate in the export trade, yet on a comparatively small scale. Despite the recent expansion o f exports, all the main subsectors face challenges in improving their productivity and capacity utilization, in upgrading factory operations 80 to comply with food safety requirements andbuyer preferences for packaging, and inimproving the reliability and safety o f their raw material sourcing. India's trade in dehydrated onions has expanded in recent years. This i s a bimodal industry. Many o f the players operate on a small scale and target a low-price market within the region and among other developing countries. Quality and other specifications in that market segment are quite lax. Incontrast, at least one major firmhas targeted leading food service and food manufacturing companies in high-income countries. Recognizing the benefits o f quality management systems (box 5.12), the firm has invested to meet buyer requirements for certified HACCP and I S 0 9000 systems and to comply with official and private microbiological tolerance levels. Resources have been invested in research and development to breed a white onion variety that yields well under Indian growing conditions and provides sufficient factory out-turn (interms o f total soluble solids) to make the firmcompetitive with firms inthe U S A and elsewhere. The firm i s visited annually by its main buyers for technical audits and commercial discussions. Some buyers want to obtain preshipment samples for testing and require sufficient records to trace raw material supplies. Farmers are contracted to grow the nontraditional onion variety, which does not have a ready local market. There i s apparently potential to expand this trade, essentially by taking market share from alternative sources. Further refinement and expansion o f the smallholder outgrower program are possible. A handful o f Indian companies have developed an expanding trade in frozen vegetable products sold into the UK and other markets where there are middle- and high-income immigrants o f South Asian origin. The product mix includes various Asian vegetables and vegetarian prepared meals. These products are sold under own-company or buyer brands. Primary competition comes from UK-based companies. The companies active in this trade also produce mango pulp, which enables them to use their factories more fully over much o f the year. Raw materials are purchased both directly from farmers and wholesale markets. Certified HACCP systems have been adopted, and each firm has a dedicated quality control team. At least one o f the companies i s currently preparing for certification under the BRC. Future challenges for the industry include moving toward more direct raw material procurement (to enable traceability and further manage risks related to pesticide residues and heavy metals), continuing to upgrade in-house food safety management, and developing systems to manage or recycle water effluent. 81 India's trade in processed gherkins i s expanding rapidly as part o f a broader global restructuring o f this industry.With its ability to harvest gherkins over most o f the year and with its relatively low labor cost, India has considerable cost advantages over traditional leading suppliers, including the USA, Hungary, and Russia. Global demand for processed gherkins i s experiencing only slow growth (1 percent per year), yet Indian suppliers are taking market share from others. The industry, consisting o f some 42 companies and nearly 50,000 smallholder outgrowers, is concentrated inKarnataka, Andhra Pradesh, and Tamil Nadu. The leading players-including three companies featuring majority foreign ownership- have initiateda shift from exports inbulk containers to exports o fbranded final consumer jars. That product i s targeted at high-income countries. That segment o f the industry has functional HACCP systems, conducts regular product tests for microbiological parameters and pesticide residues, and i s regularly visited by international buyers.64The less well capitalized companies continue to supply product inlarger containers to lower-priced markets inRussia, Eastern Europe, and elsewhere. Less rigorous attention i s given to food hygiene and possible contaminants. Some training or advisory services could help to reduce current risks. The gherkin industry largely relies upon contract farming, as the varieties preferred for export have little or no domestic demand. The leading companies each have several thousand farmers under contract. Companies typically hold numerous field days, provide intensive oversight inthe field, andkeep extensive records of farmers' practices, especially pesticide use. At least one company has initiated efforts to certify outgrowers under EurepGAF', although this process has proven to be relatively costly and complex, given the nature o f the prevailing production systems. There i s certainly scope for more collective action within the industry-perhaps inpartnership with state agricultural agencies-to promote "good agricultural practices" among the growing cluster of export-oriented gherkin producers. Given this industry's apparent growth potential, the scope for a private-public partnership to upgrade infrastructure and farm support services in the main production areas should be considered. India's export trade in mango pulp features clusters o f firms in parts o f Tamil Nadu, Maharashtra, and elsewhere. Although India i s a leading world supplier o f mango concentrate and puree, the bulk o f its exports are directed to very price-conscious juice and food manufacturers in the Middle East and Southeast Asia, with comparatively small quantities going to industrial consumers in higher priced European, North American, or North Asian markets. As in the case o f processed gherkins, this industry also appears to have a bimodal structure. A limited number o f companies operate modem factories with certified HACCP systems and have shifted to aseptic technology to prepare andpackage products for high-end customers. The broader set o f companies have less sophisticated quality and food hygiene management systems and would rarely confer with laboratories to test their raw materials, processing water, or finished product. These firms still use Number 10 cans, which can be sold only to the lower end of the global customer base. Relatively few firms have made the transition from one industrystructure to another. Many older factories would need considerable adjustments in their physical facilities and product flow to improve food safety management substantially. One company reported spending US$ 35,000 to position itself to implement a proper HACCP system. The adoption of aseptic technologies would likely entail an investment o f up to US$ 1million and require a scale o f operation considerably larger than the norm in this industry. Even if such technologies are not adopted and these companies remain targeted on lower-priced international markets, there would 64 One o f the companies i s said to be the first food company inAsia to be certified under the BRC, 82 still be benefits-in terms o f reduced risk o f trade intemption and impact on the industry's international reputation-f an organized program to provide training and advisory services on food safety and quality management.65 Inthis and the other h i t and vegetable processing subsectors, it is recommended that a benchmarking survey be done to properly assess and characterize the status o f quality and food safety management among active exporting companies. This survey would be the basis for adjusting existing or designing new industrial training, advisory service, andor licensing arrangements. There i s also scope for providing assistance to firms to help them refine their raw materialprocurement arrangements. Cut Flowers As noted inchapter 4, the Indian cut-flower export trade has developed unevenly over the past 15 years. Many pioneering companies went out o f business, and many current players face broad competitiveness challenges and find more attractive returns, at lower risk, in the domestic market. Roses dominate India's exports o f fresh-cut flowers. Rose exports to Europe peaked inthe mid-1990s and have since declined. Some exporters have shifted to alternative markets-including Japan and Australia-with these sales partly compensating for the declining trade with Europe. Plant health issues weaken the profitability o f India's cut-flower exports, although other competitiveness factors-related to air fi-eight rates, climatic conditions, and enterprise management-are probably more significant in the overall picture. During the rainy season, cut- flower growers face considerable challenges in managing thrips, aphids, spider mites, and other insects as well as powdery mildew disease. Effective pest scouting and chemical spraying are needed. Some exporters indicate that they have received periodic warnings fi-om Dutch officials or even have had (partial) consignments destroyed because insects andor mildew were present. More diligent checking and inspection o f flower consignments before they are loaded into pallets within India could minimize the incidence o f such events. The Dutch tend to sample consignments of cut flowers at different rates, depending on their past experience o f finding live or dead pests and on the underlying method and effectiveness o f phytosanitary inspections or checks within the country o f origin. Several countries have improved their inspection arrangements, substantially reducedthe incidence o f pests in their consignments, and reduced the level o f entry-point inspection by Dutch authorities (for example, Kenya has achieved this reduction and Zambia i s in the process o f doing so). There i s likely to be good scope for India to negotiate some type o f protocol with the Dutch authorities and, upon its effective implementation, experience a similar reduction in entry inspection. This measure should prove to be cost effective, with exporters paying fees that cover the costs o f the official inspection service. The experiences inthe Dutchmarket have been one factor leadingIndian exporters to direct their flower consignments elsewhere. For the Australian market, Indian rose stems need to be dipped in a chemical before shipment to control against mildew. Upon arrival, consignments undergo compulsory fumigation with methyl bromide to control any living pests. For Japan, each rose consignment i s inspected upon arrival. If there i s any evidence o f live pests, the entire consignment i s fumigated at the exporter's expense. Exporters indicate that this happens with 25- 65 India i s routinely the most prominent origin o fprocessed food products rejectedby the U S Food andDrug Administration. Some exporters have not registered withU S authorities, while others find their products rejectedbecause of improper labeling or the inclusiono f unapproved colorants or additives. 83 33 percent o f consignments. The costs can be considerable, especially if the volume o f the consignment i s relatively small. For a one-ton consignment, the costs o f fumigation are equivalent to 6.5 percent o f the C&F value, substantially erodingprofitability for the exporter. Fumigation also reduces the shelf-life o f the product. In contrast with most of the leading flower exporting countries, India's flower export segment lacks a cohesive industry association to address common problems facing members or to undertake collective action. In Kenya (box 5.13), Uganda, and elsewhere, industry associations have played important roles, not only inrelation to managing air freight requirements or addressing such issues as plant breeders' rights or registration o f specialty chemicals, but also in the development and application o f industry"codes o f practice" related to environmental management and labor practices and conditions. Such organizations have facilitated members' access to advisory and certification services for the effective adoption o f such codes and the various external protocols to which they are benchmarked. This has been fundamental in the mutual branding and risk management measures inthese industries. India, by contrast, appears to lack an industrywide approach for addressing the types o f environmental and social concerns being raised by consumers, at least in some high-income countries. Overall awareness, let alone adoption o f certified environmental and labor management systems i s uneven, with each firm seemingly pursuingthis matter on its own. Recent commercial challenges facing certain firms may have delayed or deterred investments inthis area, which tend to involve up-front expenditures but provide benefit streams that accrue over time. With little cooperation among firms, there i s little sharing o f implementation experiences or cost-sharing of advisory, certification, or other services. While certainly not constituting a "magic bullet" to resolve all competitive challenges facing India's rose exports, the formation o f an industrywide association, with a modest initial program of collective service provision, would effectively complement the current range o f initiatives being implemented to promote the development o f India's domestic market for cut flowers. 84 85 Chapter 6: Towardsa Cost-Effectiveand StrategicApproachto SPS ManagementinHorticulture Have SPS IssuesHeldBackIndia's HorticulturalExportTrade? Both the private and public sectors inIndia aspire to expand participation ininternational horticultural trade. The increased concern over food safety andor plant health in many international markets has raised questions about whether SPS measures have posed or could pose a barrier to India's international horticultural trade andhow Indian stakeholders shouldrespond. To what extent can India's growing yet still relatively minor role in international horticultural trade be attributed to increasingly stringent SPS requirements in major importing countries? The short answer i s "relatively little," although SPS matters have contributedto certain periodic interruptions in trade and to a more general pattern o f defensive commercialization among many Indian exporters. Overall, a range o f factors explains India's role as a leading producer yet hesitant exporter o f horticultural products. Owing to India's large and rapidly growing domestic market for horticultural products, horticultural exports have not been a necessity for most stakeholders inthe horticultural industry. Export trading has been exploratory and opportunistic. Most o f India's fresh horticultural trade has simply catered to the consumption preferences o f South Asian migrant workers or people o f Indian origin in the Middle East and Southeast Asia. This trade i s largely based on personal and ethnic ties among traders, and more or less represents an extension o f India's domestic market. Much o f India's fresh produce trade to Europe i s also directed at "ethnic" food markets and restaurants. Unlike many other countries, India does not rely on foreign exchange earnings from horticulture, and few concentrated efforts have been made to develop exports for high-income, mainstream markets. However, when opportunities have presented themselves, Indian exporters have taken advantage o f them. Grape exports are a good example: Indian exporters exploit a short market window in Europe when grape production in the Southern Hemisphere has ended and before production in Turkey and Egypt i s ready for the market. Similarly, most o f India's rose exports occur around occasion days, such as Valentine's Day and Mother's Day, when peak demand in Europe ensures that prices are sufficiently high to cover the high costs o f air freight from India. The common varieties o f many other horticultural crops grown in India, however, have very limited potential for short-term export development on an economically viable basis. Little production i s export-focused. Common agronomic and postharvest practices lead to patterns o f quality and o f produce loss which are either inconsistent with export market requirements or render supply chains noncompetitive internationally. For example, in bananas, a combination o f h i t damage and deformities sharply reduces the commercial (and potentially exportable) yield from most farms. For bananas, mangoes, and several other commodities that India produces in very large quantities, the fragmentation o f production and intermediate trade, the virtual absence o f coordinated supply chains, and weaknesses in crop and market intelligence and local/international logistics all contribute to relatively minor international market shares. Plant health issues have posed an absolute barrier for fresh mangoes from India to enter certain high-income markets. Even so, the commercial potential for Indian mangoes in these markets remains to be seen, and it i s not clear if other competitiveness challenges will emerge 86 once mutually agreed phytosanitary measures are inplace. Other competitors already have a head start in these markets. Will India's somewhat unique mix o f mango varieties take market share from established suppliers? Will it help to expand overall mango consumption (and thus imports) inthese markets? India's relatively poor performance incompeting inthe European fresh mango trade-where plant health issues have featured far less prominently-suggests that a range o f other issues, including those noted above, constrain trade. Still, the opening up o f markets, such as the recent reentry into Japan and the USA, could catalyze new investment inmango production or supply chain coordination. The bulk o f India's exports o f processed horticultural products i s directed at markets in OECD countries and to some high-income Middle Eastern countries, such as Saudi Arabia and the UAE.Indian firms and industries have gained international market share in a selective range o f products, despite the lack o f preferential market access and the pattern o f tariff escalation in such products. For processedproducts, India has been able to realize economies o f scale from its large production base. Interestingly India's exports o f processed horticultural products (fruits, vegetables, and flowers) have grown fastest in the era o f increasingly stringent SPS standards. Exports o f both processedfruits and vegetables have grown at about 10 percent per annum inreal terms. Similarly, India has established itself as one o f the top five exporters o f dried flowers in the world, although this trade i s very small (US$ 5 million). For India's processed horticultural exports, the expansion into higher-income OECD markets would require exporters to contend with other commercial challenges in addition to stricter SPS standards for trade. An example i s the preference in OECD markets for mango pulp in aseptic packaging. Two tiers of companies in India supply mango pulp today. A limited number with modem factories have shifted to aseptic technologies, and a broader set of companies uses less sophisticated technologies. Relatively few firms have made the transition from one tier to another. Many o f the older factories would need to make substantial adjustments to their physical facilities and product flow to compete in the high-end markets. In addition, mango pulp importers inEurope rely on stock positions maintainedby exporters inRotterdam to provide just-in-time deliveries to end-users. India's main competitors provide this service, while most Indian firms do not. These are but a few o f the examples cited in this report o f how SPS- related challenges form a subset o f a broader range o f competitiveness challenges inhibitingthe growth and international market share o f Indianhorticulture. A Defensive and Reactive Approach to SPS Management As discussed inchapter 5, the challenges posedby standards have manifested themselves in different ways for Indian horticulture, including: absolute barriers or binding constraints for accessing particular markets; losses due to rejected (and sometimes destroyed) consignments o f fresh or processed product; higher consignment-specific or recurrent transaction costs adversely affecting profitability; and patterns o f defensive commercialization, whereby firms fail to pursue opportunities for remunerative trade with certain countries or types o fbuyers because of concerns about their inability to ensure compliance with regulatory or private standards in those markets. This pattern is common inIndian horticulture, although additional factors have also weighed on these commercial strategies. While there are certainly diverse views, the mainstream official and private perspective in Indian horticulture i s that many, if not most, o f the emerging SPS and other international standards are not scientifically based and therefore represent unfair barriers to trade. These barriers are considered either to result from deliberate efforts to protect farmers or processors from competition or to be fueled by unreasonable fears o f consumers in high-income countries 87 and by improved technologies for detecting hazards. Whatever the driving forces, the presumed primary solution i s seen to lie in effective negotiations with India's (official and private) trading partners and, failing that, in addressing the various measures in international fora for setting standards or resolving disputes. Given this perspective, it i s arguable that insufficient attention has been devoted to monitoring the requirements o f official and private standards, interpreting their implications for Indian horticulture, and using current and anticipated requirements as catalysts to upgrade operations and strengthen supply chain management. This situation i s not altogether surprising, considering the relative size o f India's horticultural export markets. Yet the absence o f a proactive or preventive approach to managing SPS standards for trade has left Indian horticulture either to adopt defensive strategies of commercialization-such as avoiding markets where more stringent standards are applied-r to adopt reactive, "fire-fighting" methods to limit the damage from apparent noncompliance with trading partner requirements. Inresponse to various crises that have arisen on the SPS front (in grapes, for example), the strategy o f the public sector has combined (1) aggressive enforcement o f existing or modified regulations, (2) heightened requirements for mandatory testing o f raw materials and finished products, and (3) considerable investments innew "hardware," either through investment inpublic laboratories or subsidies for private investment inlaboratories, factory upgrades, and other improvements. These are all end-of-the-line solutions. They contrast sharply with approaches taken by leading (and competing) developing countries in the horticultural export trade, such as Brazil, Chile, Mexico, Thailand, Kenya, and South Africa. The mainstream Indian approach seems to call for negotiationfirst and belated (and begrudging) compliance second. Incontrast, many other countries are investing in compliance as a means both to improve their competitive position and to enhance the effectiveness o f their negotiations on particular technical and commercial matters. With regard to trade performance patterns and the prevailing international reputation for horticultural industries, this latter approach seems to have been relatively more effective. India's reactive approach has generally proven "successful," in the sense that access to the affected market was restored relatively quickly. Yet such crisis management measures have generally been quite expensive, both financially for the government and interms o f lost incomes or livelihoods for the many farmers, SMEs, and factory workers adversely affected by regulatory crackdowns. Insome cases (such as grape exports), the sustainability o f the adopted measures i s uncertain, given the higher overhead cost o f compliance. The considerable attention given to product testing has enabled the Indian government and various sectors to gain a more detailed look at the symptoms o f noncompliance (including results o f tests indicating violative levels o f microbiological parameters or pesticide residues), yet insufficient attention and resources have been directed to address the underlying causes o f these problems. Recent moves to improve agricultural practices through initiatives such as the IndiaGAP program suggest a shift inthe right direction, however. Internationally, there appears to be little confidence inIndia's food safety and agricultural health management systems, a situation which may lead to more intensive scrutiny o f Indian products at border entry points. Among trading partners, India i s commonly perceived as (1) having significant deficiencies in domestic and export-related SPS management systems and (2) periodically (mis-)using SPS measures to protect its own domestic market. This perception strongly undercuts the likely effectiveness o f Indian complaints about "unfair" or "unscientific" measures on the part o f its trading partners. International experience suggests that the effectiveness o f SPS-related "diplomacy" i s strongly tied to how well a country is perceived to have up-to-date legislation and functional systems o f pest and disease surveillance, food 88 establishment inspection, and conformity assessment. Inother words, voice i s effective when the main ingredients for compliance are already in place. In such circumstances, negotiations can center on the details o f implementation and mutual recognition. When confidence i s laclung in the underlyingintegrity or accountability o f SPS management systems, there i s little basis for true negotiation. Taking a MoreProactive Stancetowards SPS Management Standards present an opportunity for modernizing export supply and regulatory systems and adopting safer and more sustainable practices. Countries (and individual exporters and supply chains) that have taken a proactive stance, including staying abreast o f technical and commercial requirements and anticipating future changes, have been able to reposition themselves in more remunerative market segments. Consignments from such countries are subjected to comparatively less inspection by trading partners. "Good" reputations, gained through demonstrated compliance, yield lower transaction costs for farmers and exporters. While it i s important to be critical about standards and to bring legitimate cases o f discriminatory practices or protectionism to the attention o f the SPS Committee, the use o f official rhetoric to delegitimize standards as "trade protectionism" becomes problematic, inthat it sends entirely the wrong signals to the private sector and to public officials involved in the technical fields o f SPS management. Rather than encouraging these stakeholders to adopt proactive strategies to address emerging standards/concerns, these declarations underplay the importance o f legitimate concerns and present a misleading message that somehow these concerns can be negotiated away. A more constructive and ultimately more effective approach necessitates more strategic, forward planning, in which the evolution o f commercial and regulatory requirements i s anticipated; the technical, administrative, and institutional options for pursuing compliance are determined; and priority measures are undertaken to build awareness and enhance necessary capacities within the private and public sectors. For India, this kind o f planning may require a broader shift in the modalities o f official action, away from an approach that emphasizes the imposition o f mandatory controls, inspections, and testing-overseen by various central and state government agencies-to one that devotes greater attention to promoting awareness about SPS management among agro-food system stakeholders and to facilitating effective individual and collective action by private firms, farmers, and service providers. This shift will not come overnight. Even so, this report has outlined circumstances in which the respective roles and responsibilities o f government and the private sector can and should begin to change inways that may enable export-oriented horticulture to become more flexible and responsive to the needs and requirements o f India's tradingpartners. India and its private sector are in a position to anticipate standards and take early action to gain competitive advantage through compliance and differentiation. Unlike many other developing countries, India has enormous scientific and technical capacities. It can effectively undertake research and field trials to stay ahead o f the game. For example, many countries have begun to adopt more stringent standards for heavy metal tolerances in food and to increase surveillance testing. This trend could pose a riskto India's Asian vegetable trade, as local surveys have found relatively high heavy metal content in vegetables grown in periurban areas. The Indian export sector needs to work with local researchinstitutes and departments o f agriculture to further determine the risks and, if necessary, shift crop procurement to different locations or to farmers whose production practices minimize the risks. Also, Indian stakeholders anticipate problems in complying with existing EU pesticide residue tolerances for pomegranates. Indian 89 complaints about "unfair" approaches to testing are getting limited attention, given this crop's minimal commercial importance to India's trading partners. India needs to manage this challenge-through its own actions-by performing its own field trials to establish proper regulatory tolerances and by promoting better pest management practices by pomegranate growers. By anticipating shifting standards in existing markets, stakeholders are likely to identify opportunities for expanding into more remunerative segments in these markets. India does not currently face very stringent standards for horticultural commodities inregional markets or inthe Middle East, where it earns more than 40 percent o f its horticultural export income. The bulk o f Indian produce entering these markets i s targeted at the migrant worker community, with Indian produce competing with produce from other South Asian or nearby countries. This low-priced, bulkmarket should remainan attractive outlet for Indian exporters, who benefit from inexpensive and frequent freight links and similarities in diet and culture with the targeted importers and consumers. Yet there should also be potential to more firmly tap into the expanding high-end market segment in the Middle East, especially that involving supermarkets. The required standards do not match those applicable at the higher end in Europe, although buyers for these supply chains will increasingly want evidence o f "good agricultural practices" and produce traceability. Stronger monitoring and evaluation components must be instituted to gauge the effectiveness o f various investment and incentive schemes and/or the instruments made available by central and state governments to promote horticultural exports and facilitate the upgrading o f postharvest practices, infrastructure, and quality assurance systems. More than 48 AEZs are planned for horticultural crops. Careful evaluation o f the performance o f some o f these schemes will have large payoffs in terms o f future strategic decision-making and resource allocation. Various subsidy schemes must be rationalizedand become easier for the private sector to access. It is also important for public agencies to communicate effectively with growers and exporters regardingthe different services that are available. A careful assessment o f the costs and benefits o f standards compliance and evaluation o f the trade-offs i s necessary. Investments in phytosanitary and food safety risk assessment and mitigation should be guided, at least partly, by the market potential o f the export commodity. For example, all things considered, it i s not obvious that the likely costs and administrative attention required for Indian mangoes to gain access to the Australian market would match the benefits o f participating in that market, given its probable size. This possibility needs to be assessed more thoroughly before any major investments or public resource commitments are made. Achieving compliance at a potentially highcost would not make sense ifthe actual commercial potential o f this trade is limited. Trade-offs also need to be carefully evaluated. For instance, incommitting public resources to resolve SPS management issues it i s important to weigh the cost-effectiveness and equity implications o f investingresources when the benefits may be conferred on a relatively small group o f arguably better-off farmers. Investing in other public goods may have higher retums and benefit a larger population. For example, the analysis in this report raises questions about the suitability and sustainability o f the government's continued large investment in monitoring standards compliance in grape export supply chains aimed at European markets. The costs are relatively high, and the benefits seem to accrue to a comparatively small number o f growers. Such resources might have a stronger impact on both trade and poverty reduction if reallocated. The experience to date has been that the government has taken disproportionate responsibility for managing SPS-related "crises." It i s often assumed that the management o f food 90 safety and agricultural health i s predominantly the responsibility of the public sector. Indeed, many crucial regulatory, research, and management functions are normally carried out by governments. In a variety o f circumstances, importing countries require certain functions to be performed by a designated "competent authority" in the public sector. As indicated in table 6.1, the primary responsibilities o f the public sector include diplomacy, awareness building, promoting good agricultural practices, and assessing and managing food safety and plant health risks. Within the public sector there are clear roles and responsibilities for the central and state governments. For instance, at the central government level, India's Ministries o f Agriculture and Commerce are responsible for gaining market access through bilateral negotiations with trading partners. On the other hand, raising stakeholder awareness and promoting good agricultural practices are joint responsibilities o f the central and state governments. However, the private sector also has fundamentally important roles to play-in the process o f standard-setting and in actual compliance with food safety and agricultural health requirements. Experience elsewhere demonstrates that capacity buildingin the private sector can complement (or even substitute for) public sector capacity, including capacity in research and development and conformity assessment (such as inspection, certification, and testing). There i s a much greater need for collective action in the private sector. Indian industry groups tend to form and operate to lobby government, but international experience highlightsthe importance o f collective action within the private sector to promote awareness o f SPS matters, to find technical and institutional solutions to emerging challenges, to implement programs to promote good agricultural or manufacturing practices, and otherwise provide a degree o f self- regulation, which then reduces the need for government agencies to play enforcement roles. Indian horticulture presents many instances in which limited cooperation among private sector actors has either created a vacuum that the government has had to fill or forced individual firms to tackle problems on their own. For example, the absence o f an organized forum among Indian grape exporters has generally prevented self-regulation. APEDA has filled the void with a mandated system o f multistage government oversight. For crops with limited potential for short-term export development, it would be important to carefully weigh the benefits o f reorienting production to export market specifications versus strengthening industrypractices and quality consciousness to increase productivity and to provide India's own consumers with a better-quality, safer product. Given the size o f the domestic market and its anticipated growth, there could well be far greater financial and social benefits from a program centered on improving the domestic supply chain rather than on prospective exports. The emerging dynamics in the domestic market, especially the modernization o f retail, will likely have a far more significant impact on Indian farmers and traders than the export market. As the food retail sector modernizes, the focus will be initially on convenience and quality, but over time more emphasis will be given to food safety parameters in the modernized sector. The growth o f the modem food retailing sector will likely induce extensive changes inthe structure o f production and product aggregation. Greater supply chain coordinationwill occur, in parallel with more traditional supply chains involving multiple intermediaries and sales through wholesale markets. The more coordinated supply chains for the domestic market could also provide an improved platform for the exports o f certain fresh fruit and vegetables, although the value-addition that will occur in the domestic market will likely dwarf that which could be obtained through exports. 91 Publicsector role Privatesector role Diplomacy: "Good" managementpractices: (Responsibility of central government) Implement appropriate management practices to Undertake continuous dialogue and periodic minimize food safety, environmental, and other risks. negotiations to addressemerging constraints or Examples include "good" agricultural, hygiene, and opportunities. manufacturing practices and HACCP principles. Emphasizecommitments, confidencebuilding, and Where commerciallyvaluable, gain formal opportunities for mutual recognition andjoint certification for such adopted systems. problem-solving (rather than conflictsper se). Developincentives, advisory services, and oversight systems to induce similar adoption o fthe above "good Building awarenessandpromotinggood practices: practices" by supply chainpartners. (Responsibilities lie with central and state governments) Raise stakeholder awarenessabout and promote good Traceability: agricultural, hygiene, and manufacturing practices and Develop systems and procedures to enable the quality management. traceability ofraw materials and intermediateand Incorporatethese areas into curriculao f public final products in order (for example) to identify agriculturalitechnical institutes and universities as sources o f hazardsor manageproductrecalls or other well as consumer awarenesscampaigns. emergencies. Accredit private laboratories and conduct referenceiconsistency testing. Developtraining, advisory,and conformityassessment Facilitate technical, administrative, and institutional services: change and innovationwithin the private sector (for On a commercial basis, provide support services to example, through public-private partnerships for agriculture, industry, and government related to product innovationor product traceability systems). quality and food safety management. Investin the neededhuman capital, physical infrastructure, and Riskassessmentand management: management systems to competitively supply such Adopt suitable food safety and agricultural health services. legislation modeled on international good practices and consistent with India's WTO and other treaty Collective action and self-regulation: obligations. (Responsibility of central government) Work through industry, farmer, and other Manage national or state systems o f pest and animal organizations to share the costs o f awareness-raising disease surveillance. (Responsibilities lie with central and systems improvement, alert government to and stategovernments) emerging issues, advocate for effective government Undertake coordinated market surveillance programs services, andprovide a measureo f self-regulation to gauge the incidence ofvarious food safety hazards through the adoption and oversight o findustry "codes inthe domestic agro-food system.(Responsibilities lie o fpractice." with central and state governments) Find solutions to phytosanitary constraints that limit domestic (for imports) and foreign (for exports) market access. This effort might entail pest risk assessment, productinspection, agreeddevelopment o f pest- or disease-freeareas. (Primay responsibilities lie with the central government, but state governments have an important role in implementation) Support researchto address food safety and agricultural health concerns (for example, field trials to determine alternative pest management approaches or to establish suitable M Ufor crops with market potential; improve the quality ofplanting material). (Responsibilities lie with central and state governments; rolefor national- and state-level agricultural research organizations) Source: Authors' analysis Specific Recommendations Inaddition to the general recommendations discussed previously, several more specific recommendations arise from the findings and analysis in this report. These crop- and product- specific recommendations are outlined here. 92 For grapes, it i s recommended that: 0 NRC-Grapes and other research institutes undertake further research to confirm or modify recommended preharvest intervals displayed on labels o f pesticides used on grapes and other h i t s and vegetables that India will currently or potentially export to high-income countries infresh form. NRC-Grapes, in conjunction with participating laboratory agencies and the grape exporting sector, conduct a deeper analysis o f pesticide residue test results over the past three seasons to differentiate among various potential factors separating compliant from noncompliant growers, including geographical location (specifically, proximity to other cash crop production), climate, farm size, farm production diversity, intensity of oversight of grape buyers, and other variables. 0 Modify the role o f Horticultural Field Inspectors from their current function o f policing export-oriented grape production to a broader role in promoting "good agricultural practices," IPM, and other practices in multiple crops grown for export in Maharashtra and other states. Some o f these field staff could be assigned to programs o f awareness- raising and farmer training, jointly managed by state agricultural departments and private sector associations. The government plans to promote good agricultural practices and private extensionthrough the proposed IndiaGAP. Review the functionality o f the mandatory AGMARK inspection and grading o f export- oriented grapes and either modify or eliminate this intervention to add rather than subtract value from the supply chain. Over a three-year period, phase out mandatory testing o f grape field plots for conformity withpesticide residue tolerances (and phase out the testing subsidy program). Inits place, institute a surveillance program involving random sampling o f grapes at the field, pachnghouse, and export levels, perhaps overseen by the Export InspectionAuthority. For pomegranates, it i s recommendedthat: Pertinent research institutes, with backing from APEDA and the export industry, conduct field trials on pomegranates to establish proper MRLs and recommendations for preharvest intervals under Indian growing conditions for pesticides approved for use by India's trading partners. Such trials could be done in coordination with European regulatory authorities andor authorities in other pomegranate-exporting countries. These trials would form the basis for revising current international, European, and domestic MRLsrelatedto thiscrop. For vegetables, it i s recommendedthat: The Vegetable Exporters Association, in conjunction with state agricultural departments and research institutes, more closely examine the incidence of heavy metals invegetables sourced from different locations and develop an action plan-potentially involving direct sourcing from certain areas-to mitigate the risk posed to the export trade. To protect domestic consumers, parallel programs should be developed involving more regular market surveillance and the identification and promotion o f risk-mitigating farming practices. 0 Remove restrictions on onion exports, eliminating the need for "no objection" from state marketing authorities. This uncertainty inhibits the development o f forward contracting between exporters and growers, on the one hand, and exporters and overseas buyers, on the other. 0 Evaluate the need for NAFED to retain its current infrastructure and consider the potential market development benefits if some o f that infrastructure were sold or leased to the private sector. 93 For mangoes, it i s recommended that: 0 The true commercial potential o f fresh mango exports to Japan, Australia, and the U S A be examined before further committing India's public resources to plant health surveillance systems or infrastructure for fruit treatment. APEDA might retain the services o f a consultancy firm to gauge this commercial potential in relation to market trends, competing sources o f supply, and considerations o f seasonality, comparative costs, and quality and other preferences. For cut flowers, it i s recommendedthat: 0 Inspection arrangements be improved to ensure more diligent checking and inspection o f flower consignments prior to their loading into pallets within India. Negotiate protocol with Netherlands authorities on acceptable inspection arrangements, and improve inspection arrangements in India in accordance with these protocols to reduce levels of entry-point inspection. SectoralInitiatives The prior sections provided recommendations at the broad strategic level and in the context o f specific subsectors. These are supplemented by recommendations for action at the sectoral (or multisectoral) level. It i s recommendedthat: 0 APEDA, inconjunctionwithpertinentChambers o f Commerce and industryassociations, conduct a baseline survey o f fruit and vegetable processors that are regularly active inthe export trade to define their status and their strengths and weaknesses interms o f facilities, staffing, and procedures to apply quality management and GMP/GHP. Based on the results o f this survey, appropriate measures should be taken-which may involve adjustments in licensing, the introduction o f training or technical assistance programs, or the development/implementation o f industry "codes o f practice," among others. Subsequent initiatives could be targeted at nonexporting companies, with the objective of facilitating incremental adoption o fbetter quality management and GMP/GHP. 0 Inselected subsectors, state agricultural departments could undertakejoint "supply chain initiatives" with clusters o f private companies (or an overarching association), involving farmer outreach and organization and promotion o f GAP and fadpostharvest hygiene and quality management-to ensure compliance with industry (and downstream buyer) requirements. Such initiatives are underway in Maharashtra, where they are directed at the mango industry. Pertinent federal and state apcultural departments work closely with the Indian agro- chemical industry and relevant commodity associations (in horticulture, spices, and so forth) to address problems in agro-chemical product labeling and distribution and to promote safer pesticide use, storage, and disposal. This effort might involve further training o f chemical stoclusts and farmers and better enforcement o f existing regulations. A program o f regularized surveillance o f pesticide residues in domestic produce should be introducedto further guide extension and targeted pest managementprograms. The broad proactive and strategic orientation laid out in section 6.3 may be difficult to implement across India's large, complex, and geographically dispersed horticultural sector. Rather, this type o f strategic approach may be more feasible within a more 94 specific geographical area, involving a particular cluster of firms, farmer groups, public institutions, and supply chain clients. Thus, this type of strategic planning and collaborative implementation might best be pursued at the state level or, more narrowly, at the level of particular AEZs or localized clusters. 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