India Transformed
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Determine tariffs of generation, supply, transmission
Ensure intra-state transmission
Advise state governments on reforming the sector
Regulate electricity purchase and procurement of the distribution licensees
Though unbundling by itself would not achieve much, it is the first step towards better governance, monitoring and the eventual possibility of greater private presence in the sector. An empowered state regulator guards against the possibility of monopoly rents. Though most states have unbundled the power sector, only two, Delhi and Odisha, have gone in for privatization. In other words, the basic work done, various constraints got in the way of further effort, like the state governments’ lack of capacity to guarantee independent, skilled and credible regulatory functions (see Tables 9 and 10).
Distribution reforms in the power sector involved two parts. First was the introduction of the Multi Year Tariff system, which potentially reduces the uncertainty in returns and helps in long-term planning and improved ability to access funds. However, given that distribution has largely remained in the public sector with state budgetary support on tap, this advantage has not been realized significantly. The second is the Open Access Regulations (OAR), which enable non-discriminatory access by any licensee or consumer, including those involved in captive electricity generation. The hurdles currently are a set of regulations determined by state and central transmission utilities and regulators at both the central and state levels, based on the least technological capacity of the lines. The current status, therefore, is that though the stage is set for open access, there is very little of it currently because of inappropriate regulations and also the lack of capacities in the current distribution infrastructure. Once the OAR becomes operational, a completely new and highly competitive regime can be operationalized in the power sector.
To put it differently, there has been some, albeit limited, movement at the state level; however, there are three forces that have prevented further action in most states: the political economy and the fear of monopolization; the lack of state-level capacity (or lack of confidence in the available human resources that can adequately manage the new market-oriented regime), and poor infrastructure.
Concluding Note
The states have not been mere spectators or beneficiaries of central government reforms; they too have attempted changes in policy and improved implementation, and have benefited from such efforts. Some of these have been under direction from the central government, some have been seeded by a demand for change, and others have been the result of technological forces that overwhelmed inaction. In other words, any change has had to go through political and bureaucratic leadership that has sometimes proactively supported and sometimes inactively opposed it.
The critical and obvious questions are: Where did the states do well in bringing about change? And where did they not? There are five characteristics where change has been unambiguously promoted by state government administrations.
The first is when there is clarity of objective emanating from the central government. This was most prevalent in SSA, PMGSY and telecom. The central government’s intentions, policy changes and resource allocations were all in sync, with a clearly defined agenda. But this was not necessarily the case in, say, the APMC act or Single-Window Mechanism, where the central government itself was not keen on taking the tough calls related to correcting the Essential Commodities Act, or land and labor regulations.
The second critical characteristic was related to capacities within the state governments. The new regime required greater capacities within the state governments to deal with the private sector. Whether in electricity, regulation or PPPs, the lack of capacities hindered many large and small changes. Change is always easier to bring about when a different set of capacities is not required within the state government.
The third characteristic was a demand for change. The SSA, for all its flaws, succeeded in reaching most students when the Midday Meal was tied with it. The Midday Meal Scheme provides primary school students with a free meal when they are in school, universally. Therefore, it intimately tied a supply-driven initiative (schooling) to a demand-driven one (free food). Similarly, both rural roads and telecom benefited everyone, and almost uniformly so, and had tremendous public pressure from the outset.
The fourth characteristic is access to funds. In all cases where the central government has driven change, funds have been relatively easier to access for the state governments. Important requirements, such as building of irrigation infrastructure, were rarely taken up. Similarly, investment in cities has been negligible across all states, despite a rapid deterioration of living conditions among the poor and recent in-migrants. There has been a tremendous lack of initiative on resource generation by most state governments. It is difficult to tell whether it is simply a political-economic setup with a short-term vision or lack of capacity for bringing about difficult change.
Finally, change where the government plays the role of a provider appears to be more frequent and successful than one where it is an equal participant in the economy. It would be easy to identify the political setup as the main culprit. However, it is also true that the government in India uses levers of control designed to meet colonial requirements, and it is difficult for large segments of the government to give away their powers, even if they are market forces.
The way forward is also quite clear: if the benefits of higher growth trickle down slowly, so does the reform process. Much more remains to be done at the state level in limiting government intervention, in facilitating greater decentralization to the local government level, in improving accountability of the governments’ own functionaries.
V
THE PARTS OF THE WHOLE: SECTORAL DEVELOPMENTS
14
25 Years of Policy Tinkering in Agriculture
Ashok Gulati, Shweta Saini
Agriculture was never a part of the comprehensive agenda for reforms. The overarching trade and marketing policies in India have remained restrictive and anti-farmer. A forward-looking vision is needed, one that is science-based, aligned to market forces, and backed by ample financial resources operating in a global framework.
Backdrop
India’s economic reforms started in July 1991 in the backdrop of a severe economic crisis. Abysmally low levels of foreign exchange (in June 1991, reserves plummeted to less than $1.2 billion that were sufficient for meeting import needs of only two weeks); sticky and high double-digit inflation (yearly inflation stood at 17 per cent); unsustainably high levels of fiscal deficit (combined fiscal deficit of Centre and states in fiscal year 1991 was about 10 per cent of GDP) and current-account deficit (crossed 3 per cent of GDP) drove the ailing economy to the inevitability of undertaking economic reforms in 1991.
Even though there were efforts made prior to 1991, it was only at the cusp of the major crisis that the country’s economic systems reformed in a more holistic and a transformational manner. However, unlike the widespread global and national notion, the 1991 economic reforms were not exclusively attributable to IMF’s strategy. It was the thought leadership and proactive thinking of seasoned technocrats and economists such as Dr Manmohan Singh, Montek Singh Ahluwalia and others that laid the road map of economic reforms for the country much before July 1991.
The unexpected death of Prime Minister Rajiv Gandhi in May 1991 derailed the country’s political and reform agenda. The two successive governments immediately prior to this incident lasted less than a year. By the time Prime Minister P.V. Narasimha Rao was sworn in on 21 June 1991, the country was deep-rooted in its economic crisis. Dr Manmohan Singh was asked to join the newly formed government as its Union Minister of Finance. His lecture at IIM-Bangalore, which was delivered just a few months before he joined the government, was on similar lines and formed a good academic base for the strategy he deployed going forward and as revealed in his Union Budget presented on 24 July 1991, along with the industrial policy reforms announc
ed on the same day.
As special secretary to Prime Minister Rajiv Gandhi and later to Prime Minister V.P. Singh, Montek Singh Ahluwalia authored a note titled ‘Restructuring India’s Industrial and Trade Policies’, popularly referred to as the M-document, in June 1990. In light of the evolving economic situation in the country, the document detailed the structural reforms that the country needed to undertake on an urgent basis. This document later became the basis for much of the reform strategies outlined in July 1991.
The 1991 policy package that ushered in economic reforms comprised primarily of three components:
Correction of exchange rate: rupee was first devalued by 24 per cent in quick succession in July 1991, and then by March 1993, rupee was made to fully float in the market.
Reduction in industrial tariffs: trade-policy changes were ushered in with a view to reduce the industrial tariffs from about 100 per cent to 30–40 per cent gradually and reducing peak tariffs from 200 per cent to about 65 per cent.
Delicensing of a large number of industries (except a list of eighteen, which were reserved for security reasons).
It is notable that agriculture was never a part of this comprehensive agenda for reforms. The current paper evaluates this by tracing and evaluating the policy reforms that have influenced the country’s agriculture sector, even though haphazardly. The paper structure is as follows: Section II discusses the impact of the 1991 macroeconomic reforms, especially exchange rate and reduction in industrial tariffs, on agriculture. Section III traces policy reforms in subsequent years, especially on fertilizer-price policy and agriculture trade policies. Section IV compares Indian economic reforms, particularly in the agriculture sector, with that of China. In light of the impact that the two different approaches have on poverty, lessons are drawn. After discussing the current challenges affecting the country’s agriculture sector, the last section proposes a package of reforms for making the sector competitive, inclusive and sustainable going forward.
Impact of the 1991 Exchange-rate Adjustments and Lowering Industrial Tariffs on Agriculture
Despite significant successes in agriculture during the late 1960s and 1970s, which gave India its Green Revolution (wheat) and White Revolution (milk), overarching trade and marketing policies remained restrictive and anti-farmer. On the one hand, the country’s overvalued exchange rate taxed its otherwise globally competitive agriculture sector, and on the other, the exceptionally high import duties on industrial commodities discriminated against the farm sector.
Pursell and Gulati, in fact, quantify this degree of anti-agriculture bias in India over a long period. Their analysis suggests that, on an average, Indian agriculture was discriminated against to the tune of about 20–30 per cent of the value of the agri output. This was equivalent to an implicit tax imposed on agriculture due to overvalued exchange rate and heavy protection to industry.
Therefore, the twin reforms correcting the overvalued exchange rate (that was first devalued and, later, the system was made to float in the market) and gradual reduction in industrial tariffs reduced the long-existing anti-agriculture bias in the system. This gave agriculture an immediate boost, but to tap the full potential gains from these macroeconomic reforms, there was a continuing need to reform the sector’s trade regime, which was highly restrictive. Several agricultural commodities, mainly food, were subject to stringent export and import controls. Because of the deep-rooted problems of food insecurity and poverty, and the historic mindset of the policymakers (which have indelible impressions of the country’s devastating experiences during famines and droughts), these reforms did materialize, albeit with severe caution and thinly spread over a long period. These reforms were mostly ad hoc and unpredictable in nature, oscillating between a free and controlled trading regime.
Nevertheless, on a priori basis, one would expect at least three things from these macroeconomic reforms that should favor agriculture in the medium to long term. One, with major exchange-rate adjustments, agriculture should emerge as an exportable sector, and if exports of agriculture gradually opened up, though with hiccups, at least it should reflect in the improved agri-exports performance over time. Two, with falling tariffs on industrial goods, the relative prices between agriculture and the manufacturing sector should turn in favor of agriculture; and three, private-sector investments in agriculture, if they respond to relative prices, should improve and positively influence growth rates in agriculture. How did reality fare vis-à-vis these a priori hypotheses? We examine that next.
Performance of India’s Agri Exports and Imports
The share of India’s agriculture exports in global agri exports rose from less than 1 per cent in 1990–91 to 2.6 per cent by 2013–14. Overall, agri trade (exports plus imports), which was less than 5 per cent of agri GDP (AGDP) in 1990–91 stood at almost 20 per cent by 2013–14 (see Graph 1). There has been some moderation in trade in the recent years of FY 2015 and FY 2016 mainly on two accounts: falling domestic supplies due to two consecutive droughts in 2014 and 2015 and plummeting global prices affecting India’s global competitiveness. Despite these, the country’s agri trade was still at 17.6 per cent of its AGDP in FY 2016.
Not surprisingly, India, despite being a net importer on its overall trade account for all commodities, is a net exporter of agriculture to the rest of the world (see Graph 1). Overall, Indian agri exports in FY 2014 crossed $42 billion as against imports of about $16 billion, giving a net trade surplus of about $26 billion. This is the highest-ever trade surplus that Indian agri trade has generated.
In anticipation of transmission of global volatile food prices, during the global food crisis of 2007–08, to domestic markets, India banned its wheat and rice exports. The bans were finally lifted in September 2011. While there was a complete wheat ban between February 2007 and September 2011, rice faced a more general ban between October 2007 and September 2011, where its trade policy fluctuated between minimum export prices (MEPs) and bans. Since September 2011, however, the rice and wheat exports have surged and in the three years between 2012–13 and 2014–15, India exported about 62 MMT (million metric tonne) of cereals to the world. Market-based exchange rates1 have undeniably played a significant role in this rising agri-trade surplus.
Graph 1: India’s Exports and Imports of Agri Produce, 1990–91 to 2015–16
Source: Compiled by authors, based on data from DGCIS, GoI (various years).
In this regard, it is interesting to note that the findings from estimates of the Balassa Index of Revealed Comparative Advantage (RCA)2 suggest that Indian agriculture outshines other sectors of the country on a global platform. With higher estimates of RCA than the manufacturing sector and commercial services (M & CS), agriculture sector establishes its comparative edge. Across time and within a year, the agriculture sector has been gaining greater competitiveness relative to the other two sectors. For example, between 2011 and 2014, the RCA for M & CS was around 1.05, but for agriculture, it improved from 1.06 to 1.24 (see Table 1). In 2014, the RCA value for agriculture was 1.24, while that for manufacturing or even for the combined M & CS, it was 0.8 and 1.05 respectively.
Table 1: Estimates of Balassa Index of RCA for India
Year
Agriculture
Manufacturing
Manufacturing and Commercial Services
2011
1.06
0.82
1.05
2012
1.33
0.81
1.06
2013
1.37
0.80
1.03
2014
1.24
0.83
1.05
Source: Computed by authors.
In the three years between 2012–13 and 2014–15, India exported close to 62 MMT cereals in global markets and 78 per cent of this, i.e., more than 48 MMT, was only rice and wheat. Cereals have clearly emerged as an important component of India’s agri-trade basket. Back in 1991–92, cereals and cereal prepa
rations had a share of 9.83 per cent in total agro exports and in FY 2015, the share of rice alone was 20.4 per cent. About 60 per cent of India’s agricultural exports basket in FY 2015 comprised rice, meat, marine products, spices and cotton.
Relative Terms of Trade for Indian Agriculture
The relative price index3 (with the base 2004–05 = 100) between the agriculture and manufacturing sectors has witnessed a secular upward trend. The index touched a low of eighty-nine in 1993–94. However, it has improved since then, reaching 157 by 2014–15. A major part of this improvement started from 2004–05 onwards, when the new government decided to reduce the gap between low domestic prices and high global agriculture prices. Increases in the procurement prices or the minimum support prices (MSPs) of wheat and rice, along with several other agri commodities, became one of the conduits for this, particularly since 2007. The year coincided with the launch of the National Food Security Mission (NFSM) domestically and the onset of food price eruption globally. Thus, on the one hand, the government undertook a mission under NFSM to increase domestic foodgrain production by 20 MMT in the next five years, and this necessitated an aggressive increase in MSPs; on the other hand, the global food crisis of 2007–08 widened the gap between the domestic and global prices. Consequently, to draw parity between the domestic and global prices and to incentivize the producers to produce more, the government increased MSPs strategically to catch up with world prices over a three- to four-year period. Intermediate events of bans in 2007–11 delayed the process, but over a medium- to long-term period, the two prices do appear to have converged.
Several economists blamed the aggressive hikes in MSPs during 2007–08 and 2012 on the high and sticky double-digit food inflation that the country suffered, mainly between FY 2009 and FY 2013. The myopia inherent in the view above is evident from the historical trends in domestic prices that have over time followed their global counterparts. This is largely true for at least rice and wheat that have suffered the most because of ad hoc trade restrictions and bans. Imposing bans can at best delay the transmission of the global volatility to domestic markets but cannot stall it for good.