Text of The INDIA ECONOMY REVIEW · rate of 10 per cent while the bottom 80 per cent are experiencing 1-2...
"When the GDP is currently growing at the rate of 8
per cent,doubling of farmer's income in seven years
requires a 10 per cent annual growth of income. This
in other words, means a re-distributionn of income in
favour of the weaker section .......... But no one has
picked up on this point. There is a kind of conspiracy
of silence of this important issue. It is not just growth
but the spread of growth that is also important. At
present, the upper class that constitutes 20 per cent
of our society is experiencing economic growth at the
rate of 10 per cent while the bottom 80 per cent are
experiencing 1-2 per cent growth. This upper class
should grow at 4-5 per cent while the lower 80 per cent
should have a growth rate of 10 per cent."
- Dr. M. K. Chaudhuri, in an interview with The Times of India, 24th Feb, 2004.
“And he gave it for his opinion that whoever could
make two ears of corn or two blades of grass to
grow upon a spot of ground where only one grew
before, would deserve better of mankind, and do
more essential service to his country than the whole
race of politicians put together.”
- Jonathan Swift
"Let us together dream of a country where poor are not
just merely reduced to statistics but where there are
no poor. Let there be a day when small childrem are
taken to a poverty museum like science museum where
they last millennium. Let this dream take the form of a
revolution and as long as our dreams keep outweighing
our memories, India would remain a young and
dynamic nation on its path to global equality. And
for this let the wait not be for eternity. Let us together
achieve this in the next 25 years."
- Prof. Arindam Chaudhuri, 'The Great Indian Dream', Page No.225
The India Economy Review 20044 5The India Economy Review 2004
TT here cannot be any vision that can be chartered for a nation l ike ours discount-ing the agriculture sector For, whatever growth rate and development we envisage
as a nation, it cannot be achieved and susta ined by marginalizing 55% of our population (agricultural labourers and cultivators). Constant focus towards generation of purchasing power for this commu-nity is a strategic policy imperative. A hard nosed and an unfinching commitment towards this goal wil l definitely fuel the growth engine on a self sus -ta ining basis. Growth with human face ! ! ! . In this
context and in a nutshel l, The IIPM Think Tank a sser ts only and the only fol lowing guidel ine
“If Agriculture Survives, India Survives”The strategic importance of the Agricultural sector comes barely evident i f one were to give a cursory glance to the table mentioned below. According to Mr. G. Ramachandran, a wel l known f inancia l analyst, i f services are the magic fountain of high incomes, agriculture is the deep pit of low incomes. This par ticular pitfa l l should not be viewed in iso -lation for it misguides the policy maker and the
economist. The lowest base level incomes and the lowest growth rate of the agriculture sector has to devastating ef fects. Firstly it spel ls misfor tune for industria l and service sectors, which cur-rently and pre -dominantly earn a large par t of their incomes from the domestic market. This entire arithmetic leaves us with a simple and evident proposition. India’s per capita and income and per- capita income growth rate wil l continue to remain small i f a large par t of the popu-lation continues to be employed in agriculture, the way it stands now. Secondly, it is the back-wardness and low product iv-ity of agriculture that accounts for the widespread pover ty in India. The highest incidence of pover ty i s among sma l l - sca le farmers and casual labourers. To top it a l l , we have the strategic concern of 'Food Security' at stake. Consider this : Some esti -mates in The OECD Agricultural Outlook 2004 -2013 indicate that ( ‘OECD notes India’s progress in farm sector’; The Hindu; July 27th 2004), in the absence of sig-nificant technological changes in the agricultura l sector, growing income and population would lead to an import demand of 115 mil l ion to 142 mil l ion tones of food gra ins.
A f ter a spa n of re l a t ive stagnation during the last two decades, agriculture witnessed an improved growth of 3.2 per -
cent in the 1980s ; but the growth performance was some what sub-dued in the 1990s, and especia l ly in the last six years, with rea l GDP originating from agricul-ture growing at a modest 2.9 percent. Agriculture witnessed a very modest 2.1 percent average annual growth during the Ninth Five Year Plan, while tota l GDP grew at an average of 5.4 per-cent per annum. I f India were to achieve an 8% growth in GDP, agriculture must clock a growth rate of 4% . And this is not possi -ble until the current agricultural practices are reviewed.
Against this backdrop, The I I PM T h i n k Ta n k h a s c on -structed a matrix of problems that a re plag u ing the Ind ian agricultura l sector.
In 1980, investments in agr i -culture were twice the va lue of subsidies. In 2000, d irect and ind irec t subsid ies were tr iple the va lue of a l l investments in agriculture, which throws l ight upon the dismal state of a f fa irs. As matters stand, fer ti l izer com-panies receive the bulk of the Rs 15,000 crores fer ti l izer sub -sidy. (Financial Express editorial t it led ‘Input Subsidies’; June 4th 2004). Another main reason for the dismal per formance of our farm sector has been the per-sisting adverse terms of trade aga inst farmers. Dr. Y.K A lagh
“India needs to move from
the government driven
increase in production to
the market driven increase
CII’s National Council of Agriculture and ITC Chairman YC Deveshwar in Times of India; May 17th 2004.
Studies by the Ministry of Agriculture show that farm incomes have fallen in the past five years. Rice farmers in West Bengal, for instance, earned 28 percent less in 2002-2003 than they did in 1996-1997. Incomes of sugar cane farmers fell, 32 percent in Ut tar Pradesh and 40 percent in Maharastra. Farm incomes of Nor th Indian farmers eroded by 10 percent, on an average. (Source: ‘Mirage of goodies for farm sector’; Mr. Devinder Sharma; Business
Line; July 20th 2004.)
Name of % of Households % of contr ibution Per Capita Per–Capita Growth the Sector dependent upon in the f inal GDP Income (Rs.** ) rate dur ing 1994 to the sector 2001 in % terms
(Source: “The Progression to Prosper i t y”, The Hindu Business L ine, Januar y 28th, 2004, Mr. G. Ramachandran)
Agr iculture 55 25 Rs. 5,129.00 2.10
Industr y 18 27 Rs.17,588.00 2.51
Ser vice 26 48 Rs.21,463.00 2.88
** The f igures are applicable in cons tant 1994 monetar y uni t s.
“Agriculture is not a commodity machine
but the backbone of the l ivel ihood
security system in India, where 70
percent of the population is in the
villages. So agriculture is not just a
question of economics and trade but
of dignity and survival.”
Dr. M.S. Swaminathan, Chairman, MSSRF
Annotat ion On Agr iculture
“Agriculture is not a commodity machine
but the backbone of the l ivel ihood
security system in India, where 70
percent of the population is in the
villages. So agriculture is not just a
question of economics and trade but
of dignity and survival.”
The India Economy Review 20046 7The India Economy Review 2004
has observed that profitability has fallen by 14.2% during the nineties. This could have a varied impact on different categories of farmers, particu-larly, marginal farmers. (Please refer the box)
Capital formation in agriculture, as a percent of gross capita l formation in the country, which was 15.5% in 1980 -81, fel l to just 7.1% , in 1999 -2000. It is this sharp decl ine in capita l formation in the farm sector that has led to its stagnation. Likewise, there are other critica l problems which mars the agriculture sector today.
As was edif ied in a enl ightening ar ticle, authored by Mr. Sharad Joshi, ( ‘Budget: No good harvest, rea l ly’; Business Line, July 21st 2004), the state has not only fa i led in its duty of provi-sioning the requisite services and public goods to its farmers, it has caused more harm than good, through its pol icies. In fact, according to Mr. Joshi,(Founder, Shetkari Sanghatana and Rajya Sabha member) i f one were to draw up a ba lance sheet of what the farmers owe to the government and vice versa, the farmers wil l emerge net credi-
revea ls that in areas where pesticide use is ram-pant, chi ldren had retarded menta l development that includes analytica l abi l ities, motor abi l ities, memory and concentration. The locations chosen reported a high use of dangerous pesticides such as organophosphorous, organochloride, carba-mate and synthetic pyrethroids, in addition to “new generation” pesticides such as spinosad and nicotinoid pesticides, a l l for cotton.
A classic case of high water usage has been well researched and documented by Mr. V. Uma Shankar, Managing Director of Dakshin Haryana Bijli Vitran Nigam. According to him, in Haryana, the electricity tariff for agriculture consumers was subsidized to the extent of Rs 1,060 crore in 2002-03, of which Rs 829 crore were provided as d irect subsidy from the State budget. To put things in right perspective, the subsidy provided was 2.5 percent of the net state domestic product (NSDP). The situation in other states in the country is no dif ferent. The farmer, in areas where canal water was not available, could exercise an option of pow-ering his tube wel l by either d iesel or electricity.
The ground water resources have been fast depleting result-ing in tube wel ls being bored deeper and deeper to extract the same quantity of water, thereby requiring higher motor capaci-ties and increased agriculture consumption. In Haryana, out of 116 blocks, 52 blocks have been declared as dark areas where the ground water resources have been exploited to over 80 per -cent of their potentia l. More interesting is the fact that of the remaining 64 blocks, 40 blocks are dependent on canal water for irrigation requirements.
in the Fourth Plan to less than 6.77 percent in the Tenth Plan. Another d istressing feature of irrigation spending is that the bulk of the Plan a l location is made to major and medium irri-gation projects rather than minor irrigation projects, which are considered more cost ef fective. (Ministry of Water Resources says that irrigation potential for one hectare through large and medium irrigation projects was Rs 98,495 against just Rs 10,051 for small irr igation projects.)
Another dimension to this
According to an exper t commit tee, the loss in income caused to the farmers on account of gov-ernmental policies alone could total Rs 300,000 crore over the last 20 years. Compared with this colossal sum, the amounts owed by farmers by way of loans and electricity bills are insignificant. (Source: Extracted from an article written by Mr. Sharad Joshi titled ‘Budget: No good harvest, really’; Business Line, July 21st
According to International Water Management Ins t i tute es t i-mates, in many areas of the countr y, water tables are falling at rates of 2 to 3metres per year due to the growing number of ir r igation wells---around one million per year. ( Source: Ex trac ted from an ar t icle t i t led “L ive Wire”; Mr. V. Uma Shankar,
The Economic Times )
More than 38 million hectares of our land, which though cult ivable, has been lef t uncult ivated, classif ied as “cult i-vable wasteland”, or “old and current fallows”. This area of 38 million hectares is more than the total cult ivated area of four countr ies viz. Pakis tan, Nepal, Bangladesh and Japan, which provide succor to more than 400 million people living in those countr ies.( Source: Mr. Bhanu Pratap Singh; “Can India prosper, while i t s agr icul ture
s tagnates? ”; The Hindu “Open Page”; May 24th 2004)
Even if half of the total
rainfall received over our
country is preserved and
delivered to fields, our
entire arable land can pro-
duce two crops a year.
- Mr. Bhanu Pratap Singh; “Can India prosper, while its agriculture stagnates?”; The Hindu “Open Page”; May 24th 2004.
tors ; par ticularly, i f one takes into account the incomes lost on account of state policies, both in agriculture and commodity markets, and the amounts held by farmers as shares and deposits in various cooperative societies.
Indian agriculture, specifically commercial farm-ing, has three major concerns : decl ining land qual ity; excessive use of chemicals which results in high water usage ; and, the use of pesticides and the manner in which workers handle pesticide. For example, pesticide use in India is the highest for the cotton crop (over 50 percent), which occu-pies only f ive percent of the cultivated area. A first-of-its -kind study by Greenpeace India cal led “Arrested Development” studied the impact of pes-ticides on 899 chi ldren from six d if ferent cotton farming locations in India during April-December 2003. The report (“Transgenic muddle”, written by Ms. Meena Menon ; Hindu; May 31st 2004)
However, with the removal of subsidies on diesel as a consequence of d ismantl ing APM, diesel has become an unviable option, forcing the farm-ers to resor t to electricity consumption. A great danger lurks around the corner for the farmer, as the cropping pattern fostered by the State Policy has led to extensive cultivation of water-guzzling paddy in North-India, leading to over-exploitation of ground water over the years. Another d imen-sion to this problem is that the cultivation pattern has shif ted in favour of water intensive crops l ike r ice, sugarcane, etc. This is happening even in water scarce areas. The per- capita avai labi l ity of usable water in India has already dwindled to mere one -f i f th of what it used to be at the time of inde -pendence and projections indicate that one -third of the country’s population will have to live under absolute water scarcity in another 20 years. So, there is a high possibi l ity of conf l icts occurring with greater frequency, over water.
M r. Moh a n G u r u s w a my and Mr.Abhishek Kaul of Centre for Policy Alternatives,(Farm s e c tor — I I I : “ Wa l k i n g away from the problem”; The Hindu Business Line) points out that there is a decl ining trend as is ref lected in Plan outlays made for irrigation, under the heads of major irrigation, minor irri -gation, medium irrigation and irrigation institutional f inance, over the years. The share of irri-gation in the tota l Plan outlays has halved from 15.31 percent
problem is the distortion, for the money claimed to be spent on irrigation is actually for power generat ion. Consider ing that farm sector consumes only 28.8% of the nation’s generated power, to say it for irrigation is quite an exaggeration. Most of the amount being spent in the Plans on irrigation has been on long delayed ongoing projects. Delays in completion of 162 major, 240 minor and 74 other irrigation projects have resulted in spillover costs of Rs. 79,321 crore.
Can India Prosper, While i t ' s Agr iculture Stagnates?
Annotat ion On Agr iculture
Budget: No Good Har vest, Really
The India Economy Review 20048 9The India Economy Review 2004
Over dependence upon monsoonsAs pointed out i n Bu s ine s s Line ed itor ia l ( “Farm to the fore”; Ju ly 12 , 2004), cu lt iva -t ion on 85 mi l l ion hectares - -- - - -representing 60 percent of the countr y’s net cu lt ivated area of 142 mi l l ion hectares -- - - - - - i s ra infed and therefore, subjec t to vagar ies of the mon-soon. With less than one mi l -l ion hectares of additiona l land coming under i rr igat ion every year, there i s a big cha l lenge in ensur ing adequate water ava i l -abi l ity to vast ar id , semi-ar id and drought prone trac ts . This apa r t , a ccord ing to the Ex-Union Minis ter of State for Agricu lture, Mr. Sompa l, (The Economic Times , 29 th June 2004), the ex is t ing irr igat ion systems and other a l l ied sys -tems (monsoon forecasting sys -tems and etc), cour tesy poor maintenance, have degenerated (Plea se refer the box below).
Faulty Procurement Pract icesThe Minimum Support Price was original ly meant to be a safety mechanism to insulate farmers from vagaries of the market. Over the years, how-ever, thanks to compulsions of populist pol itics, it has become another instrument in the hands of politicians to manipulate the vote banks. This had its own nega t ive con s equence s . The food subsidy bi l l i s ba l loon-ing and a major par t of it is upon storage costs. Accord-ing to Mr. Suman Sinha, the former cha irman, Pepsi Co., India, MSP on wheat and rice are leading to diversion of land in Punjab, Haryana, Western UP, Andhra Pradesh resulting in greater surplus being created, leading to more investment in storage, carrying and holding cost. Also, it is making the crop diversi f ication, a near impos-sibility. To make matters worse, the procurement is being done
only from some select states.
(For more information on this par -t icu lar subject , please refer, The Ind ia Economy Review 2003 -2004 ; Pg-78 ) .
Size of the holdings :Over the years, the proportion of marginal holdings, that is less than one hectare, has been increasing sharply. They have gone up from 50.60 percent in 1970 -71 to 59.40 percent in
1990 -91. Another worr i some feature is that 34.26 percent of holdings were smaller than 0.20 hectares. Overa l l, the average size of holdings has gone down from 2.30 hectares in 1970 -71 to 1.55 hectares in 1990 -91 and the average size of margina l holdings has fa l len from 0.41 hectares to 0.39 hectares.
Agricultura l Research:An another d imension to this is
A c c o r d i n g t o U n io n M in i s t e r for Science and Technology, Mr. Kapil Siba l, if the Indian Meteoro-log ica l Depar t -ment ( IMD ) has t o a c c u r a t e l y forecast the mon-soon, it requires a t l e a s t 1, 850 we a t he r ob s e r-v a t o r i e s . C u r -r e n t l y , i t h a s only 182 weather obser vator ies. I t also required as many as 5,0 0 0 s a t e l l i t e - b a s e d au t o m a t i c r a i n
gauges, 50 upper air observatories, 5 0 e q u i p m e n t f o r p r e p a r i n g a prof i le o f the wind pat terns, 20 cyclone detection r a d a r s an d 35 s to r m de te c t ion radars. But, cur-rent ly i t did not even have even a s i n g l e au t o -matic rain guage or w ind pro f i l e r and storm detec-t ion radars have become obsolete.
G i v e n t h i s s tate of af fairs, it
is no surprise that IMD always comes out with faulty fore-cas t s ever y year. According to Mr. S ibal , up grada-tion of the equip-ment costs Rs. 500 crores, which can m ake I M D ab l e to provide distr ic t w ise forecas t for time spans of five to seven days with very minimal mar-gins of error. (Source: ‘Lack of equip-
m e n t t o b l am e f o r
i naccu ra t e monsoon
forecas t ’; The Hindu;
August 7th 2004.)
The larger macro-economic impac t o f t h e y e a r l y increments in the suppor t pr ices of the wheat and r ice w a s s t u d i e d b y Prof. K irit Parikh o f t h e I n d i r a G andh i I n s t i t u t e of Deve lopment Research ( IGIDR ) a n d p u b l i s h e d in t he Economic a n d P o l i t i c a l Weekly (March 03 ) . I t u n d e r s co r e s t h e f a c t t h a t e ve r y add i t i ona l rupee al located t o p r o c u r e m e n t w i l l come at the expense of some other expenditure and t yp ical ly the axe wi l l fal l on the investment . So not only will r ising MSP fuel and the problem of addi-t ional food s tocks, b u t a l s o t a k e away f rom r u ra l a t t e n t i o n a r e a s , s u c h a s i n v e s t -ment in ir r igation
a n d r o a d s . T h e b road conclus ion of the s tudy is that a 10% increase in t h e p ro cu r e m e n t pr ice of the food wi l l lead to mar-ginal decline in the GDP ( by 0 .33 % ) in t he f i r s t year. This would happen because of a non agr i GDP, despite of smal l increase in agr i –GDP. The fall in this would happen because o f h i gh e r p ro -curement p r i ce s mean higher food p r i c e s w h i c h would reduce the demand for both food and non food items in the econ-omy .This outweigh the posit ive impact of higher MSP on agr icultural GDP
The paper also b r i n g s o u t t h e welfare impact of a cascading hike in food pr ices. I t argues that there
would be wel fare l o s s fo r 8 0 % o f the rural popula-t ion and the entire urban population. The top 20% of the r u r a l popu l a t i on escape the welfare impac t thanks to t h e p r e s e n ce o f la rge marke tab le s t o c k s , s o l d a t h igher MSP. Bu t, for the res t, espe-c i a l l y t h e u r b an an d r u r a l p o o r, the welfare impact i s s h a r p a n d p r o l o n g e d . T h e immediate impact co m e s f r o m t h e r ise in pr ices, and the future loss of we l fare i s a t t r ib -utable to the few g r o w t h p o i n t s be ing shaved of f the GDP. ( Source: “Food grain
procurement cos ts may
hi t GDP grow th”; “Rural
M u r a l ”; M o h a m m a d
A d i l ; E T I n t e l l i g ence
G roup, app e a r e d i n
The Economic Times.)
Foodgrain Procurement Costs May Hit GDP Growth
Annotat ion On Agr iculture
"India is richly endowed
by Nature for agriculture
production. Our arable
land to the total land area
is 51 percent against the
world average of only 11
percent.( India has the
largest area of the irri-
gated land in the world). "
Mr. Bhanu Pratap Singh in an article tit led “Can India prosper, while its agriculture stagnates?”; The Hindu “Open Page”; May 24th 2004.
If the farmer's hand
slacken, even the
ascetic's state will fail.
Lack of Equipment To Blame For Inaccurate Monsoon Forecast
The India Economy Review 200410 11The India Economy Review 2004
the fact that the entire public s e c tor a g r ic u lt u ra l re s ea rch and education network is not only sl ipping into the hands of bureaucrats but its professional-ism is a lso under threat.
T he C ent r a l Bud ge t Pol i c y should provide for more funds for Central Agriculture Research Inst itut ions (CARI ) and the State Agriculture Universities, ensuring that the current trend of almost the entire expenditure in research institutions being used to pay sa laries is changed.
I f , i ndeed , our a g r ic u lt u ra l research meant to cater to the rea l ly needy farmer, how far ha s the cou ntr y succeeded ? Consider this situation. (Please refer the box)
A s poi nt e d out by M r. Surinder Sud ( ‘Research under threat’; Business Standard; 25th August 2004), there has been an assault on the professional-i sm and transparency in the recruitment and selection prac-tices of senior posts. This par -ticular issue has demoral ized the scientists and caused wide spread resentment. The process
of appointments at the senior level has been put on hold. At least a dozen major research institutions lack regular d irec-tors.
The Parl iamentary Stand-ing Committee on Agriculture has many times reiterated that the tota l a l location for agri -cultura l research and develop-ment should be ra i sed to at least 1 percent of the agricul-tura l gross domestic product (AGDP) from less than 0.3 per -cent ( la s t 10 years’ average) at present. Advanced countries spend between 2 .45 and 4. 2 percent of the AGDP on farm research. Even Sri Lanka and Latin American countries spend between 0.8 and 0.98 percent of their AGDP for this purpose. ( ‘Grant sought to upgrade farm research inst itutes’; Business Standard; 8th September 2004)
Inef f icient supply cha in:According to Mr. Y. C. Nanda, ( “Can Indian agriculture reap a r ich harvest? ” The Economic Times ; June 29 th 20 04 ) the losses in supply chain are huge ; sometimes 30 to 40% is lost by the time produce reaches the
reta i l level. Inef f icient players reta in margins without significant value addition eating into the share of the producer from what the consumer pays. Share of the rice grower in the f ina l price paid by the consumer was 44% and 47% in 1996 -97 and 97-98 respectively.
Product ivity :The yield of r ice and wheat , taken together grew at an annual rate of just 1.42 percent in the 1990s compared to 3.15 percent in the pre -v iou s d e c a d e . P u l s e s f a red wor s e , a s the i r yield growth rate plum-meted to 0.27 percent in the 1990s which was one -sixth of the level it attained in the 1980s (1.61 percent). The decl ine in the annual growth rates of both food and non-food crops resulted in a decl ine in the yield growth rates of a l l crops taken toge ther, wh ich ca me down from 2.56 percent in the 1980s to 1.02 percent in the 1990s. A point worth mentioning here is that is low productivity in agriculture af fects not only the agriculture sector but also upon the industria l sector. A case in point is the Indian textile indus-try becoming uncompetit ive. Avai labi l ity of qual ity cotton in India is poor. Productivity of cotton in India is the f i f th poorest in the world. Compare India’s productivity of 280 kg/hectare with 580 and 1500 kg/hhectare for Pakistan and China respectively.
Agricultura l Credit :The agricultura l credit del iv-
Countr y Average yield ( Per hectare/kg)
The Nether lands 7,701
United Kingdom 6,838
New Zealand 6,303
Swit zer land 6,204
(Source: Wor ld Development Indicators 2003
The Product ivity of cerea ls per hectare
Kerala prides itself a s t h e l a n d o f pepper and its cul-tivation goes back to 30 0 0 B .C . in Malabar. Yet, our ave rage y i e ld o f 294 kg per ha pales in compar ison to t ha t o f Tha i l and and Vietnam ( late comers to pepper cultivation in post-Second World War years), which have
y i e ld s o f 3, 594 and 1,100 kg per ha respectively. To top i t a l l, Kerala has the world’s firs t p e p p e r r e s e a r ch s t a t i o n i n Pa n -niyur, Kannur dis-t r i c t , e s t ab l i s hed in 1952-53 under the Kerala Agricul-tural Universi t y, a fu l l - f l edged IC AR I n s t i t u t e wo r k i ng on sp ice s , where
t h e m a i n f o c u s is pepper, and a Spices Board cater-ing to many prob-lems. There is also a R s 10 0 cro re s “Pepper Mission”( S o u r c e : D i r e c t l y
ex tracted from an ar t i-
cle t i t led ‘When farm
technology fal ls shor t
of expectations’ by Mr.
K.P. Prabhakaran Nair
in Business L ine; July
ery and infrastructure are in state of absolute d isrepair. Dr. M.S. Swaminathan, who was a member of team that made the Green Revolution in India, opines that the low productivity at the moment is more because of socio -economic causes than technologica l. In other words, it has many dimensions to it. At one stage the credit del iv-ery system had col lapsed in rura l India due to loan melas and the Harshad Mehta scam. More money was taken out of vi l lages than put in. Accord-ing to the last rura l household survey, only one -sixth of the rura l households borrow from financia l institutions, and 52 to 62 percent of farmers’ outstand-ing debt was owed to money
When Farm Technology Falls Shor t of Expectations !! !
Annotat ion On Agr iculture
“A transformation of the
national economy would
only occur when people
move form agriculture to
other sectors. This is only
possible when huge invest-
ments are made to increase
agricultural production and
productivity, which will, in
turn, create jobs in the con-
struction and engineering
sectors. In the process, the
per capita production in the
farm sector will rise making
it a commercially-viable
business. This is simple
logic, but it continues to
elude the planners, admin-
istrators and, of course, last
but not least, the leaders
who determine the allocation
- Mr. Mohan Guruswamy and Abhishek
Kaul; (“Another food crisis ahead”; The Hindu Business Line.)
"Capital formation in
agriculture has been fast
declining , and value-
addition is generally a
one hundredth for an
compared with those in
Mr. Maharaj Muthoo, in 'Seeding India' in Hindustan Times, 8th Septemeber 2004.
The India Economy Review 200412 13The India Economy Review 2004
lenders. Commercial banks met only 4 percent of the cred it needs of the non-farm sector and micro -f inance provided a mere 3 percent. Interest rates from informal sources (money lenders) ranged from 36 per -cent to 120 percent and even cooperat ive banks and rura l cred it cooperatives were not performing well due to prob -lems of management and exces -s ive government control. As mentioned by Ms. Jayshree Sen-gupta in The Hindustan Times ar ticle, t it led “Sowing Seeds of Prosperity”, interest rate caps within a range of 2 percent below the prime lending rates by the government for small loans have a lso acted as a deter -rent. The World Bank Report on India mentions that commercial banks prefer not to lend at these low rates. Without credit farm-ers cannot buy inputs for high productivity. (Please refer the box)
Private sector participation and Contract FarmingThe Union government a ims to
double agricultura l production and incomes by 2010. The target can be visual ized only through greater public and private sector investment in a l l the arenas of agriculture l ike water manage -ment, storage, transportation, information technology, post-harvest mechanization and etc.
Lack of private participation and investments have prevented rapid expansion faci l it ies. As pointed out by Planning Com-mission, (“Agro Exports Must Obtain World Standards : Plan Panel”; The Financia l Express ; May 23rd 2004) by 2010, about 25 million hectares of wasteland should be treated and recla imed for agriculture and all ied activi-t ies. Only private sector could provide the required f inancia l resources and under take devel-opment activities.
According to the industry experts, the real concern in cor-porate farming is with regard to the enforceabi l ity of contracts. Even i f d i re c t proc u rement from farmers is made possible,
both par ties to a contract must stick to it. Cur-rently, there is no cer ta inty the farmer would sel l his produce to the corporate buyer should mandi prices be higher than contracted ones. The reverse a lso is possible, that of the corporate buying from the mandi instead of from the contracted farmer, should prices that side be lower.
Food Corporation of IndiaThe FCI’s high operating cost, way above that of private trade, has a lways led to bal looning of food subsidy burden (recent estimates put this f igure at Rs. 27,000 crores). According to Mr. K.R. Prabhakaran Nair, Senior Fel low of the Alexander von Humboldt Foundation, the FCI spends close to 25% of the food subsidy bi l l just for storage a lone. The FCI’s role needs to be clearly def ined, especia l ly on procurement and pricing aspects. Now that the policy has been amended to a l low private sector into the gra in procurement, the organization should concentrate on hither to grossly neglected areas - - - - the eastern and centra l regions—for procurement to el imi-nate inter-regional distor tions. Mr.Bhanu Pratap Singh, former governor of Karnataka, says that more than 80% of government purchases are made in Punjab, Haryana and Andhra Pradesh, whose combined production is no more than 27% of the country’s output. Producers of 73% of food grains in the country hardly get any benefit from govern-ment purchases at MSPs.
Agricultura l growth rates are slowing, with catastrophic consequences i f appropriate actions are not taken. The IIPM Think Tank proposes some corrective solutions which are workable, susta inable and repl icable.
Agricultura l Credit and FinanceIt is imperative to focus upon creating an enabling environment conducive for investment in agri-infra s truc ture. In congruence with the idea mooted by Mr. Amrit Patel, Senior Consultant, Agricu lture Finance Corporat ion, The IIPM Think Tank feels that, the def inition of rura l centre now needs to be looked in terms of popula-tion. Stipulation of credit deposit ratio for rura l centres must be redef ined in terms of provision of credit and f inancia l investments by banks as a whole and not necessari ly credit-deposit ratio of rura l centres.
In order to prevent the distress sa le by the farmers, a network of rura l warehouses, near the existing branches of rura l banks, must be estab -l ished and made operational throughout the year. Here, farmers can deposit their produce and get bank loans on its security, or sel l the same to the government at the MSP. The innovative idea mooted by Mr. P. Chenga l Reddy, Co-chairman of Indian Farmers and Industry All iance is a lso wor th considering. According to Mr. Reddy, ( “View from the f ields”; The Times of India ; July 5th 2004) Venture Capita l in agricultura l credit provision and del ivery processes should be tr ied out.
According to an associate professor at I IM Lucknow, (“Enhancing the va lue chain in agri-culture”; Business Line) insurance players l ike LIC and others have a bigger role to play in the rura l f inance by developing suitable mechanisms and thereby increasing their exposure to agricul-tural loans. LIC has penetrated rural markets and mobil ized savings in rura l areas through innova-tive schemes. It is t ime LIC looked at f inancing farm credit either directly or indirectly. Strategic a l l iances with commercia l banks and uti l izing their physica l infrastructure may be one viable option. The professor a lso advocates some regu-latory changes. More sophisticated market micro-structure is required for agriculture. Agricultural capita l markets should be widened and deepened with more opportunities to ra ise equity capita l.
T h e n u m b e r o f branches at rural c e n t e r s d e c l i n e d f rom 35, 329 as o n 31s t M a r c h 1994 to 32, 481 as on 32, 481 as on 31s t March 2002 indicat ing closure of 2,848 branches and opening of 7, 253 new branches i n s e m i - u r b a n , urban and met ro c e n t e r s . O u t -s tand ing agr i cu l -tural credit as on
end- March 20 02 accounted for only 9.8 percent in the to ta l ou t s tanding c r ed i t o f s ched -u l ed commerc i a l banks as agains t the s t ipulated level of 18 percent net bank credit. Agr i-cultural lending is now e ve n l owe r by 22.43 percent t han ou t s tand ing credit of personal loans por t folio. I f loans outs tanding
“ food manufactur-ing and process-ing segment ( r ice, sugar, edible oil, t e a , f r u i t s a n d v e g e t a b l e s p r o -cess ing )” is con-sidered as a par t of farm sector, the sha re wo r k s ou t to 12.9 percent of the total outs tand-ing credit. ( Source: Januar y 5th,
2004, Financial Express,
“Rural Credit Needs A
Leg-up”; Amrit Patel.)
An independent regulatory agency is to be con-stituted to supervise agricultural credit. All insti-tutions, co -operative banks, commercia l banks, and Nabard should be brought under this agency. The RBI should concentrate more on regulation of money, debt and foreign market; agricultura l f inance should be under separate regulator. The existing Forward Markets Commission (FMC),
Annotat ion On Agr iculture
Rural Credit Needs A Leg-up
The total requirement of
credit to agriculture sector
for achieving the target for
doubling food productiv-
ity by the year 2010 has
been estimated at Rs. 3,
750, 074 crore. The total
requirement of agricultural
credit for the 10th Plan
period alone has been pro-
jected at about Rs. 7, 36,
570 crore by the Working
Group constituted by the
(Source: “Govt faces flak on tardy farm reform steps”; 21st February
2004; The Economic Times)
Agr i cu l t u re c red i t i s e s t ima ted to have increase by 15% from Rs.69,560 crores in 2002-03, to Rs.80,000 crores in 2003-04.
In budget for 2004-05, the government of India has f ixed a target of doubling the f low in agr iculture credit in nex t 3 years.
( Source : Mr. K .V. Raghavulu,' The Credi t Hierachy '
Times Agr icul tural journal July-Aug 2004)
The India Economy Review 200414 15The India Economy Review 2004
which oversees the commodity exchanges, should a lso be brought under farm credit regulating agency. This would faci l itate the development of primary and secondary market structures for farm credit.
As pointed out by Ms R a nja na Kuma r, Nabard Cha irperson,( “Nabard needs greater operational freedom”; 12th July 2004 Financia l Express) in the risk management system for the agriculture sector, the “price risk” issue (the other being “ income risk”) has been lef t unaddressed. A holistic scheme for post harvest management, including storage, marketing and va lue addition through processing could partly mitigate the risk. (Please refer the box).
Corporate FarmingContract farming can lead to disintermediation, shorter supply chain, and better access to markets and assured supplies to manufacturer and a lso end consumer. This concept can work wonders and holds sound potentia l with respect to items l ike oi lseeds.
As was rightly pointed out in a Business Stan-dard ar ticle, what is needed is a mechanism for registration of contracts and del ineation of pen-
a lties in case of any violation of mutual ly agreed terms. In fact, a model contract that safeguards both farmers and companies is urgently needed. Also required is the legislation of land leasing to help small and marginal farmers, who of ten hire additional land from absentee owners as wel l as tenants and share-croppers, to participate in these ventures. The contract farming activity is a lso characterized by lack of risk insurance for farmers in case of crop fa i lure due to induction of inferior technology and other inputs by the par ticipat-ing company. (Business Standard Editoria l t it led “Corporate farming”). This problem needs to be attended immediately.
Export Competit ivenessProbing the agricultura l market and policy situ-ation and outlook in India (for the f irst t ime in a specia l focus section), the OECD Agricultura l Outlook 2004 -2013 mentions that despite being a major producer and consumer, inward-looking trade policies have meant that India has played a relatively minor role in world agricultura l trade for many products.
As opiniated by Prof. Bhanoji Rao, Professor Emeritus of GITAM Institute of Foreign Trade, Visakapatnam, (“Agenda For the Agriculture
Commission”; The Financia l Express ; July 6th 2004) the US and European reta i l chains have assisted the Chinese export thrust in manufac-tures over the past two decades. Without necessar-i ly hurting the farmer interests in those countries, super markets there could help widen the choices for consumers by the combination of d irect investment in processing and contract farming in India. The Professor feels that a good way to l ink supply and demand is via contract farming and the Agri-Export Processing Zones (AEPZs) could be an excel lent vehicle in the development of l inkages between foreign buyers and domestic farmers. Simultaneously, the government govern-ment should focus upon transportation and stor-age sectors
Vietnam, Thailand and Australia have modern por ts equipped specia l ly to handle food gra ins. According to Mr. Pentapat i Pullarao, chief of Forum on Socia l and Human Rights, an agri-culture por t should be set up, on those l ines to boost export of r ice and other commodities. As was corroborated in Economic Times ( ‘Economist moots agriculture por t to boost exports’; 28th July 2004), the loss of qual ity in exports is of ten the result of antiquated ways of storage in the country’s por ts. In addition to this the fol lowing steps outl ined by Mr. S. Gopa lakrishnan, former chairman and MD of Vijaya Bank ( ‘Challenges and opportunities’; The Hindu; June 28th 2004) are worth considering to boost exports.
Taking the cue from recent developments, banks may consider the fol lowing:
• Financing of trucks with refrigeration faci l i -t ies for transportation of farm products, par ticu-larly, from farms to por ts.
• Financing of cold storage faci l it ies at por ts so that perishable items can be exported in good condition to destinations.
• Helping marketing teams in identifying agri-cultura l products in great demand abroad.
• I f need be, they may consider f inancing importers abroad after evaluating their worth and assessing their credit requirements. (Please refer the box)
The IIPM Think Ta nk s trong ly endorses rhe idea mooted by Prof. Va sa nt Ga ndhi, ( June 30th 2004, Financia l Express) Chairman, Centre for Management in Agr icu lture , I IM-Ahmed-abad . Ind ia’s s tand , approach and negot iat ions on WTO are of great impor tance for Ind ian fa rmers . The world market place for fa rm prod-uc ts can be h igh ly unfa i r and ha s substant ia l imper fec t ions . Lack of caut ion and v ig i lance on th i s count can resu lt in substant ia l d i s tres s and loss of oppor tunity to the Ind ian fa rmers . At the same t ime, lucrat ive oppor tunit ies would be denied to them. A proac t ive s tance i s hence -for th, a prerequis ite to protec t the interes t s of the Indian farmer community. The policy makers can not forget this simple fact: The conventiona l crops (wheat , paddy etc) wi l l not withstand the cheap and highly subsid ized impor ts from devel -oped countr ies . ( "Many oppor tunit ies to boost farm incomes”;Mr. N. Maha l ingam; The Hindu)
An empir ical s tudy by Prof. Meuwissen and Prof.Hardaker of the Universit y of Holland and New England on r isks identif ied by farmers and r isk management s trategies preferred by them broadly classif ies the r isks under business and f inance categor y. The main business r isks in farming relate to pr ice, production, personal, ins t i tut ional, and technology. The f inancial r isks relate to the change in interes t rates, the changes in the exchange rate, and the abili t y to repay. Adequate identif ication of r isks helps in mapping farmer specif ic r isk profile, which marks the beginning of r isk management. The s tudy identif ied 12 r isk management s trategies. These r isk management s trategies can be classif ied into two categor ies.Strategies in which r isks are shared with/transferred to others: These include • Buying pr ice insurance, • Buying personal insurance, • Buying pr ice contracts for inputs/outputs, • Buying marketing contracts• Use of f inancial der ivatives.
Strategies for on-farm r isk management include • Production at the lowest possible cost, • Of f-farm employment, • Trade-of f between economies of scale and specializat ion in crop production and • Self-insurance. ( Source: ‘Solut ion in search of problems’; Mr. B.S Mur thy; Business L ine; July 28th 2004)
The policy imperative in front of the government is to provide some kind of of f icial suppor t or subsidies to make them acceptable to farmers in the longer run. Such a suppor t is imperative also for social, environmental and health considerations and is enti t led for inclusion in the “green box subsidies” permit ted by the WTO. Also, the IPM is limited by the other constraints like limited and uncer tain supply of bio pest icides, their high cost, shor ter shelf l i fe and relat ively more complicated nature of that technology requir ing special training. In order to counter act upon these bot t lenecks, the following measures are needed.
• More investments and par t icipation from Pr ivate sec tor through tax holidays & f iscal sops• Massive Ex tension Programmes aimed at increasing the awareness levels.• Promotion of IPM technologies on contiguous larger area blocks• Enlis tment of Communit y Par t icipation through Socio-poli t ical init iat ives( Source: Ex tracted from an ar ticle tit led “”Alternatives to pesticides”; Surnider Sud’s “Farm View”; Business Standard)
Alternatives to pest icides
Annotat ion On Agr iculture
Solution In Search of Problems
The India Economy Review 200416 17The India Economy Review 2004
I nte g r a te d Pe s t Ma na g ement (IPM)India loses approximately Rs 50,000 crore worth of crops because of pests, according to Mr. P. Chen-gal Reddy, Co-chairman of Indian Farmers and Industry Alliance, The Integrated Pest Management (IPM) is a new plant protection concept that relies largely on bio-logical, cultural, physical and other means of pest and disease control. The basic premise of IPM is that no single method can be success-ful over a long period. Therefore, a mixture of biological, physi-cal and chemical methods must be integrated to sustain a pest management system. The ultimate goal of the IPM is sustainable agricultural systems with minimal or no pesticide use. This policy, which talks about using pesticides as a last resort and in bare mini-mum necessities, is an integral part of the agricultural develop-ment since 1985. As a result, pes-ticide consumption is estimated
to have dropped by 35 percent in the 1990s. But this strategy has its own limitations. A study was con-ducted by agriculture economist Mr. Pratap S Birthal of the Delhi based National Centre for Agri-cultural Economics and Policy Research (NCAP), that have been brought out in a policy paper titled “Economic potential of biological substitutes for agrochemicals”. The NCAP study has found that the use of IPM technology can help reduce pesticide use by 66 percent in cotton, 45 percent in cabbage and almost 100 percent in paddy. The crop yield through IPM too could be higher by some 4 percent in cotton, 3 percent in paddy and 5 percent in cabbage. It is therefore, obvious that any increase in the cost of bio pesti-cides or fall in prices of output could easily upset the economics of IPM use.
Organic FarmingAnother a lternat ive ( in fac t ,
T he I I PM T h i n k Ta n k fe e l s that it the most cost ef fective and appropriate one, keeping the Indian conditions and context, in perspective) is going “Organic”. In fact , g loba l reta i l sa les of organic products has been rising and is expected to jump a lmost 30 percent to $25 bi l l ion from $19 bi l l ion in 2001 and 16$ bi l -l ion in 2000. The growth has been triggered by the outbreak of mad cow disease, foot and mouth disease in sheep and pigs, dioxin-poisoned chicken and eggs cre -ated scares which resulted in a lmost instantaneous booms in consumption of organic prod-ucts. The US organic market, the largest in the world, is esti -mated to grow at an annual rate of 15 to 20% . But Indian agri -culture has a d if ferent story to t e l l . M r. K a lya n Cha k r ava r-thy, manager and strategic advi-sor, food and reta i l business , brings home the point that there were only 1,426 organic farms in February 2002, with an area of 2 ,275 hectares under cultiva-tion, which amounts to a minus -cule por tion of tota l cultivable land. Tota l organic production in India is around 14,000 tonnes, with rice, tea, fruits , vegetables, wheat and cot ton accounting for more than 80 percent of the tota l production. More than 85% of th i s orga n ic produc -tion is exported, which industry sources put at 11,925 tonne, a f igure which is l ikely to double by 2007. Organic food, spices and herbs have a large interna-tional market, where India can increase its share. However, the cer ti f ication arrangements, in par ticular, would be required to be strengthened.
Product ivityThe National Commission for I n t e g r a t e d Wat e r R e s ou r c e s
has estimated that, to meet the requirements of foodgrains alone the net sown area of around 142.2 mil l ion hectares wil l have to increa se by 2050 and the cropping intensity by 145% . It is unlikely that the increase in net cultivated areas would be possible at a l l. A case in point i s Kera la , which star ted pro -ducing cash crops and Punjab and Haryana, where production reached a plateau. According to Mr. R.K Pachauri ( ‘Floods and Droughts’; Times of India ; July 28th 2004), growth of food grain production can be achieved only through rapid increases in pro -ductivity.
Mr. Bhanu Pratap Singh opines that (The Hindu, May 24th 2004, “Can India prosper, while its agriculture stagnates ?) achieving higher productivity in agriculture is the surest way to reduce incidence of poverty. The two states, Punjab and Haryana, whose yields per hectare are the highest in India, are a lso the two states with the minimum incidence of pover ty. Maharas -tra, which is sa id to be the most industria l ized state in India, has much higher incidence of pov-er ty than Punjab and Haryana.
Quality Control :M r . S u r e s h B a b u , S e n i o r Re s e a rch Fe l low a nd S en ior Training Advisor, International Food Pol ic y Re s ea rch I n s t i -tute, Washington, points that, many countries have realized the potentia l of “Self Regulation” in a l l the strategic activities in the farming like Quality control, Conformance to international safety standards and in el imi-nating the other bad and unsus -ta inable agricultura l practices. Examples are aplenty. Bologna, I t a ly, i s f a mou s for v i nega r
Annotat ion On Agr iculture
The MR Morarka G D C R u r a l Research Foun-d a t i o n f l o a t e d b y M u m b a i -based indus t r i -a l i s t and Rajya S abha membe r Kamal Morarka has s tar ted of f b y i d e n t i f y i n g problems of 123 villages relat ing to health, educa-t ion and agr icul-ture and helped many small and medium farmers in the region to b e c o m e a g r i -cu l t u r a l e n t r e -
p r e n e u r s . T h e f o u n d a t i o n h a s s u p p o r t e d o v e r 300 such agr i-pre-neurs to es tablish business centres at an average invest-ment of Rs 5 lakh. A n d t h e y h a v e earned an average of Rs. 2.5 lakh net income in the ver y f i r s t y e a r. T h e i r m e t h o d i n vo l v e s the use of ear th-wo r ms to gene r-ate vermicompos t which protec ts the soi l. The founda-tion, headed by Mr. Mukesh Gupta, an
MBA from Ahmed-a b a d , h a s t i e d up w i t h a com-pany called Abha P r e c i s i o n Fa r m -ing to market the o rganic p roduc t s in USA. To lever-age t h e t ou r i sm po ten t i a l , i t ha s s tar ted the Shek-h a w a t i f e s t i v a l i n co l l ab o r a t i o n with direc torate of tour ism. (Source: Extracted from
The Economic Times,
Ms. Ishani Duttagupta)
"There is a need for
attaining economies of
scale and the goals of
enhanced income and
productivity per person,
per hectare of land, per
KW of energy and per
litre of water."
Mr. Maharaj Muthoo, in 'Seeding India' in Hindustan Times, 8th Septemeber 2004.
For the first time in the
history of the world every
human being is now
subjected to contact with
dangerous chemicals from
the moment of conception
- Rachel Carson
The India Economy Review 200418 19The India Economy Review 2004
despite most of Europe produc-ing it. The secret is simple - - -grape owners in Bologna have set up their own associations to ensure better produce and manufacturing practice. Or take the examples of Wine Growers Association in France and asso -ciations of aquaculture produce in Bangladesh. Accord ing to Mr. Babu, the product or the country may be dif ferent, but the centra l theme is a lways the same- - -the pivotal role played by farmers’ association. The farm-ers have been proactive and able to mobilize themselves to put in a monitoring system to improve the quality of the produce. Only a “ fa rmers’ a s sociat ion” can
ensure that the supply chain is ef fectively implemented to meet the deadlines and improve qual ity. For example, consider this simple task: ensuring that once transported to por t, the produce does not remain in the por t for more than one day, even under control led tempera-ture condit ions. ( ”Farmer in the driver’s seat; R. Prasad; The Hindu; January, 22nd, 2004). The government needs to launch a well-planned trade and quality l iteracy movement.
Crop Diversif icat ionMr. Suman Sinha, the former chairman, PepsiCo, India opines that the problem of “over con-
centar tion” upon paddy and wheat can be tackled by making the MSP on other crops more attrac-tive. Countries l ike Israel and Netherlands are concentrating on high value horticultural and f lo -r icultura l crops which have high demand in inter -national markets. I srael with a l l its constra ints on land and water resources produces around 350 roses per square meter of land and markets them in Holland. Each rose (cut f lower) earns one US dollar in the export market. From one hectare of land they are able to earn $ 3.5 mil l ion. Mr. N. Mahalingam mentions in an ar ticle in The Hindu, ti led, “Many opportunities to boost farm incomes”, that, cultivation of vani l la can be taken up as an intercrop in coconut and arecanut areas. Another potentia l opportunity is the cultivation of medicinal plants. According to Mr. S. A runa-jatesan and Mr. O. Henry Francis, ( ‘Promises versus implementation’; The Hindu; June 28th 2004), India’s export of medicinal plants last year was Rs.600 crores where as China was exporting to the tune of Rs. 16 ,000 crores. Though India has the advantage of biodiversity and climate with soil suitabi l ity it has a long way to go in the produc-tion and export of medicinal plants which fetch a higher return for farmers. According to them, banks have a big role to play
The per hectare d irect subsidy for growing the crops instead of indirect subsidy on fer ti l izer, electricity, irr igation may need to be provided to diver t land from rice and wheat. Assurance of ready markets and remunerative prices are the other prerequisites to wean growers away from rice and wheat.
A n a r t ic le by M r.P.K . Josh i , M r. A shok Gulat i and others in the Economic and Politica l Weekly (also quoted in Hindustan Times, “Cultur-ing Agriculture”; June 21st 2004) has pointed out to the steady shif t towards diversif ication in favor of high-va lue commodities l ike fruits , vegetables, l ivestock and f ish in ra in-fed areas because gov-ernment policy remains biased towards cerea ls in irrigated areas. The paper a lso mentions that the regions that were diversifying in favor of non-cere-als had a better growth performance. According to Mr. Manoj Doshi, ( “Culturing Agriculture”; Hin-dustan Times, June 21st 2004) to turn this trend into a revolution requires government input in the form of creating better markets, providing roads, electricity and other infrastructure for encourag-ing diversi f ication.
Between 1955 -56 and 2003 - 04, tota l output of pulses has r isen marginal ly from 11.4 mt. to 15.23 mt., even as the country’s combined food gra ins production has shot up from a mere 66.85 mt to 212.05 mt. As pointed out earl ier, the imports of pulses are r ising (other being edible oi l) . As pointed out by Mr. Harish Damodaran ( ‘Pulses output hit as cultivation shif ts to marginal areas’; Business Line ; August 18th 2004), the rea l reason for stagnation in pulses production l ies not in the lack of research, but in the fact that their cultiva-tion has over the years been pushed to marginal areas. There was a time when pulses were grown widely in Punjab, Haryana and UP. But, with the development of irrigation faci l it ies , these areas have shif ted to wheat. Pulses cultivation, as of now is now confined largely to ra infed areas prone to
I n the s ta te of Tami lnadu, continued cultivation of paddy over the last so many years has added a lot of dif ficul-t i e s . I ne f f i c ien t wa te r use, c rop fa i lu re, r ura l pover t y and e tc . s t ra tegic a l te rna-tive crops available to a state like Tamilnadu, includes sweet sorghum and jatropa, opines, Mr. Madhavan of Financial E xp re s s . Not on l y do th i s strategy of cultivating dif fer-ent crops conser ves water, but also meet the demand
for the bio-diesel, the fuel of the future (par ticularly, Indian Railways)
The bene f i t s o f cu l t i va t ing sweet sorghum and jatropa are manifold. They consume less water (according to exper ts, it is as low as 40 percent of what is consumed by sugarcane). By promoting such crops, Tamiln-adu would e set ting the crop-ping pat tern in line with the ground realit y. Second, they grow in a wide range of soil,
such as saline, alkaline, etc., and these are season crops. Thus apar t from the existing cult ivable land, large trac ts of wasteland can be brought under cultivation. Third, and most impor tant, the advent of bio-fuel has paved the way for an assured market for these crops.(Source: “Remove Policy Dis tor t ion
To Make Alternat ive Crops At trac-
tive”; Mr. N. Madhavan; The Finan-
cial Express; July 5th 2004)
Annotat ion On Agr iculture
E n t r e p r e n e u r s enter ing the agri-cu l t u r e bu s i n e s s n o w a r e s l o w l y i n t r o duc i n g n ew cash crops which p r o m i s e h i g h e r returns with fewer r isks consider the case of Raghuveer Pershad. He inher-i ted some money and was we igh -ing some business op t ions when he came ac ro s s an ad abou t a new crop called Safed M u s l i ( c h l o r o -phy tun bo r i v i l i a -num) and the high re turns expec ted. ( Safed Musli is a herb used in over 1 0 0 a y u r v e d i c and unani prepa-rations, also con-s i d e r e d a s a n aphrod i s iac . ) He r e a d up o n i t ,
at tended a seminar in New delhi and consulted the seed s u p p l i e r s , c r o p buyers and others. Then, he purchased land in Medak dis-trict and sowed the crop in 10 acres for the f irs t t ime. His input cos ts---- inc luding seeds, i r r i ga t ion equ ip -men t, bo re we l l expenses minus the land value worked ou t to R s . 2.80 lakh per acre. The seeds alone cos t Rs. 2 lakh per acre. Though the price of Safed Musli tubers have crashed from Rs 400 per kg to Rs 200/ 250 per kg by the time he har-vested his crop, he still made a profit of Rs 2 lakh per acre.
A n i l G u p t a , another entrant to the farming busi-ness, has sown the Safed Musl i in 6 acres for the firs t time this year. He e x p e c t s t o h a r-ves t 2,000 kg of the tuber per acre, which could fetch h im over R s 2.5 lakh af ter deduct-ing all input costs. H is ra t ionale for get ting into farm-ing: “Why not, if I get good returns. There is no sales t a x , no cus toms duty, and no labour problem. It is very hassle free.”
(Source: Extracted from
an ar ticle t it led ‘Cash
crop is money in AP’;
Hindus tan Times; July
“……I believe India can
become an agricultural
superpower. We have thou-
sand varieties of mangoes.
We have failed to realize
that this can be converted
into an advantage. If kiwi
can become a global fruit,
why can’t we market Indian
fruits? It is just that we need
to change our mindset.”
(Source: Mr. P Chengal Reddy, Co-chairman of Indian Farmers and Industry
Alliance, Times of India; July 5th 2004; “View from the Fields”)
Cash Crop Is Money In Andhra Pradesh Remove Policy Dis tor t ion To Make Alternative Crops At trac tive
The India Economy Review 200420 21The India Economy Review 2004
moisture stress. The IIPM Think Tank endorses the view point of Mr. Damodaran, where in pulses cultivation should be extended to irrigated areas, par ticularly in Haryana and Punjab. Scientif ic studies have proven that pulses can f ix atmo-spheric nitrogen ( l ike other legumes). In Punjab and Haryana, continuous recourse to paddy-wheat rotation has led to severe ‘nutrient mining’ and environmental degradation. This problem can be addressed i f one were to resor t to cultivation of pulses.
State’s Expenditure on Agriculture is DismalAccording to Ms Shobha A huja, ( “State’s Spend-ing On Agr icu lture Disma l ”; The Financia l Express ; July 5th 2004) economist with PHDCCI, New Delhi, investment in agriculture is showing signs of stagnation even in the vanguard agrarian states in the post reform period. Consider this : in Rajasthan, the proportion of revenue of expendi-ture on agriculture has consistently been below
the national benchmark. In recent years, accord-ing to Ms. Ahuja, Punjab, UP and to some extent, Haryana have a lso suf fered from neglect in agri -culture spending. All the northern states, except, Haryana and J&K, have seen a sharp decl ine in canal and tank irrigation since 1990’s, resulting in a lower Tota l Factor Productivity and fa l l in agricultural yield. The Southern states witnessed the maximum deceleration in the proportion of fund allocation to agriculture and allied activities, from 7% in 1996 to a lmost 5% in 2003.
IrrigationAs pointed out in Economic Times, June 9th 2004, by Mr. S Mahendra Dev, Director, Centre for Economic and Socia l Studies, Hyderabad and Mr. Ashok Gulat i, IFPRI, Washington, irriga-tion investments and institutional reforms for water management wil l have to be accorded high priority. According to them, Water-user associa-tions have not shown the desired results. These
associations need to be reoriented and have wel l-def ined rights and responsibi l it ies. On the same lines, watershed development programmes need to be launched and nurtured through the routes of ‘socia l mobil ization’ and ‘capacity bui ld ing’.
The national task force on micro -irrigation headed by Mr. Chandrababu Naidu pointed out that there is a huge potentia l in the country to expand the coverage of sprinkler and drip irriga-tion. It can be taken up to the level of 69 mil l ion hectares from the existing 0.5 mil l ion hectares under drip and 0.7 mil l ion hectares under sprin-kler irrigation. Though drip irrigation was prac-tices in the country since 1980, it was confined only to 12 states besides a negligible portion in the Eastern and Northeastern states. This possibi l ity needs to be explored. (Please refer the box).
Food Corporat ion of India :The FCI needs to primari ly concentrate on main-ta ining the minimum food gra in buffer, so as to ensure food security. The size of the buffer, too, needs to be sca led down- - -as suggested by severa l exper t committees. As was pointed out in a Busi-ness Standard editoria l titled “Financing the food bi l l ”, running the public d istr ibution system is a lready a state subject. As such, the state should logica l ly arrange to procure the stock they need, in case they need to continue the PDS. As pointed in the other Business Standard ar ticle t it led “Rooted in logic”, the FCI should be a l lowed to tap the capita l markets to ra ise funds at cheaper rates and force the banks to reduce the unreason-ably high interest it charges on food credit. There is l it t le logic in a l lowing the banks to f leece the FCI and in turn, the exchequer by charging the
interest rates that are higher than market deter -mined rate.
Agricultura l ResearchAs has been reported by Mr. Ashok B Sharma in Financia l Express, July 12th 2004, the country’s apex agri research body, Indian Counci l of Agri-cultural Research ( ICAR) has long being demand-ing that the a l location in the Five Year Plan period be ra ised at least to the level of 1 percent of agriculture GDP amounting to Rs 11,300 crore. A sum of only Rs 1,480 crore was a l located in the last two years of the current Plan period. This means that i f the government intends to increase the a l location to the level of 1 percent of the farm GDP in the 10th Plan period, it has to a l locate Rs 9,820 crore for agricultura l research in the remaining three years, inclusive of the Rs 1,000 crore a l located in the current year (2004 -2005). (Please refer the box)
It has been pointed out earl ier that ( in this issue and previous annual issue) agricultura l research in India has to be expanded to new dis -ciplines such as biotechnology, vaccines and diag-nostics. The same is not being happening. India has to learn a lot in this respect from China.
Sca le economies to small farmersA very ef fective and radica l solution was for -mulated by Prof. M. S . Swa minatha n, ( “Pov-er ty Eradication is dependent on farm sector”; Financia l Express ; June 9th 2004). He opines that government should provide the advantage of scale economies to small farmer so that they could surmount the handicap of cost-r isk-return trap of farming. A small farm is idea l for susta inable
• Resource allocation to agr iculture and allied activi t ies as propor t ion of total expenditure s tagnant at 5 to 6 percent dur ing 1990s
• Fall in share of agr icultural inves tment as a percentage of GDP from 1.6% in 1993-1994 to 1.3% in 2001-2002
• State’s cumulative expenditure on agr iculture 4—6% since mid-1990s (8% in 1990-1991)• Centre’s contr ibution to farm sector up from 44% in 1990-91 to 63% in 2002-2004• State’s contr ibution to farm sector down from 56% in 1990-1991 to 37% in 2003-2004(Source: Ex trac ted from an ar t icle wr i t ten by Ms. Shobha Ahuja, t i t led “State’s Spending On Agr icul ture Dismal”;
The Financial Express; July 5th 2004)
• Set ting up of National Council on Precision Farming (NCPF), an apex body to develop micro-irrigation, provide technical guidance, channelize resources and establish market linkages
• Set ting up a network of 17 Precision Farming Development Centres (PFDC) for the development of regional and dif ferentiated technologies on micro-irrigation, besides impar ting training to farmers and s taf f of various s tate agri-depar tments.
• Central government, State government and the beneficiary must share the investments in the ratio of 40:10:50.
• Financial assis tance of 50 percent of the cost of ins tallation of micro-irrigation to all categories of farmers
• Sales tax, trade tax, purchase tax and local taxes like octroi, entr y tax, etc, levied on the micro-irrigation sys tems should be waived.
• Abolit ion of impor t duties on plastic raw materials and 16 percent excise duty on micro-irrigation sys tem including its components.
(Source: Financial Express ar t ic le t i t led “Micro irr igation: Naidu’s Task force sugges ts slew of reforms”; February
9th2003; Mr. KV V V Charya.)
Specif ic Recommendations of National Taskforce on Micro- Irrigation:
Cultur ing Agr icultural R&D
Annotat ion On Agr iculture
A s tudy team from the Uni-versit y of California at Davis indicates that China’s invest-ment and accomplishments in the Bio-Technology f ield exceed India’s by a fac tor of 10. China accounts for more than half of the developing world’s expenditure in plant biotechnology and looks set to keep the lead. India and Ch ina began r e s ea r ch i n
biotech in agr iculture at the same t ime in the mid-1980s. But Beijing has surged ahead o f I nd ia . B y 20 0 0, Ch ina had genetically modif ied 141 agr icultural plants, approved 45 for f ield tr ials and 31 for commercialization. The com-parable f igures for India: 16, 10 and four. The Davis s tudy es t imates Bei j ing’s research spending was $ 112 million in
1999. India’s was $ 22 mil-lion. I t says China has 2000 pe r sonne l do ing re search. An Erns t & Young s tudy says India has about 800. ( Source: NEP paper submission by
Spr ing-Summer 2003-2005 Batch
at IIPM New Delhi )( P l ease a l so re fe r t he box t i t l ed
“ L e s s o n s f r o m Ch i n a ” i n Pa g e
N umb e r—10 2, I n d i an Eco n o m i c
State's Spending on Agr iculture Dismal
The India Economy Review 200422 23The India Economy Review 2004
intensification, diversification and value addition in relation to major farming systems. According to him, however, a small farm suffers from many handicaps caused by the cost-risk-return structure of farming. The attention areas are production and post-harvest technology phases of farm-ing. The roaring success of the d iary industry is attr ibuted to this strategy. The only easy way out is to help small sca le farmers to overcome their handicaps.
Agri-market ing reformsMr. Amit Mitra, FICCI Secretary General, points that (Times of India; May 17th 2004; “It’s time to l i f t agr icu lture , say exper ts” ), it i s easy to buy rice from Thailand to anywhere in the country than mov i n g whe a t or rice from Punjab to Coch in. The I IPM Think Ta nk obser -vations upon Indian a g r i c u l t u re s e c tor h igh l ights the fac t that there are barely 7,000 regulated mar-kets in the country- - -just one market for every 460 sq.kms. Against this backdrop, The IIPM Think Tank advocates for a complete overhaul of agri-marketing processes.
Seafood Sector :
Data available with The Seafood Exporters Asso-ciation of India (SEAI) mentions that India was the second largest producer of fish with 6.1 mil-lion tonnes of harvest from wild and aquaculture sources. Also, this sector can create 0.5 million direct and indirect jobs. In spite of this, this sector is characterized by severe bottlenecks. Some of them are described here:
At present, three central ministries manage various segments of the sea food industry. The Commerce Ministry controls and regulates seafood export issues and the ministry of food processing provides assistance to sea food units. The agricul-
ture ministry regulates the fisheries sector through its two departments: the animal husbandry, dairy-ing and fisheries department looks after fishing harbors and fishing activities and the department of agriculture research and education controls the fisheries institutions. Such a situation would lead to substantial complexities and according time over-runs in decision making processes. As opposed to India, China, Indonesia, Thailand and Vietnam have separate ministries to cater to the needs of the seafood sector. The Marine Products Export Development Authority Act should be amended to empower MPEDA to author a national marine policy aimed at reforms in the statutory frame work. Another reform long over due is the passage of the
in the country. Of this, only 20 percent of the insta l led capac-ity, that is a meager 700 tonne, is produced as processed prod-ucts. Due to lack of infrastruc-tural faci l ities, l ike cold storage and refrigerated transportation, 30 to 40 percent of the fruit and vegetable produced there goes rotten. Nagaland ’s Industries and Commerce Minster, Mr. I. Imkong states that , the reasons for behind the untapped poten-t ia l inc lude lack of techno -managerial expertise, marketing channels for farm and processed products and adverse invest-ment cl imate in the past. The conditions are so shoddy that a number of states in this region were yet to take the advantage of assistance available under the Rs 650 crores Mini-Mission-IV.
W hat's need to be done ?McKinsey & Co’s Food & Agri-culture Integrated Development Action (FAIDA) plan reasons that the pace of growth within the food indus tr y i s depen -dent on Government initiatives. B e s id e s , S t a t e gover n ment s should also offer a single-window clearance for investments in the food sector and work with the industry on increasing aware -ne s s about proce s sed food s . The repor t projects that the food market has the potentia l to touch Rs 5,00,000 crore by 2005, and va lue added foods touch Rs. 2 ,50,000 crore. Ti l l
now, India has been an exporter of primary commodities. Value-Addition is one of the great-est chal lenges in agriculture. Consider this fact: India fares a poor 7% as compared to Chi-na’s 23% , Phil ippines’ 45% and 188% in the UK. Guatemala, a smal l country, earns more from pepper export than we do because of va lue addition. Mr. S . A ru najate sa n and Mr. O. Henry Francis points out that ( ‘Promises v implementation’; The Hindu; June 28th 2004), processing of atta and milk has tremendous potentia l in India and wil l increase the va lue four times. Also, as mentioned in the Hindu, ( ‘Cha l lenges and opportunities’; June 28th 2004) India produces 16 percent of the world ’s milk supply. However, only 20 percent of the milk is processed
FDI in food retailing will encourage investment in food processing/cold chain activities and will also encourage other foreign investors to set up food processing facilities in India both for domestic and export market. For example, the food process-ing industry in the north-eastern region can not only export the products to rest of India, but also to Asean countries using the Indo-Myanmar border route as well as Bangladesh. At this juncture, it is pertinent to pinpoint the course of action undertaken by the West-
Benga l govern-m e n t , a s k i n g the sma l l - sca le players to leave v a l u e - a d d e d food processing exclu s ively for M u l t i n a t i o n a l companies with d e e p p o c k e t s . Here, the small
According to Mr. N.Ma ha l inga m, farmers get a raw deal as there is no ser ious con-cern over the ef for ts to process the produce and provide an at trac tive package that will enhance consumer preference. Consider this: one kilogram of maize which will fetch jus t Rs.10 at the farm gate can be processed and given an appropr iate packaging to generate a value addit ion of Rs.200 per kilogram.
• Single point marketing levy----at the point of f irs t transaction with the producer
• Exemption of fees for expor ts and processing• Allowance to the sale of agro-produce outside the s tate of or igin• Time bound mechanism for dispute resolution and indemnit y to farm-
er ’s land ( in specif ic circumstances)• Permission for expor ters, processors and other users of agr i-produce
to direc t ly source from the farmers. (Source: Business Standard editorial titled “Private Markets for Agri-Produce”; 5th October,2003)
Highlights of Model Act draf ted by the Minis tr y of Agr iculture
“The main constraints
are lack of proper infra-
structure and institutions
that can effectively link
‘farms, firms and forks’
(producer to consumer)
and cut down the costs
in the exchange process.”
Mr. Ashok Gulati, International Food Policy Research Institute, Washington, “Can Indian agri-culture reap a rich harvest?' The Economic Times; June 29th2004.
Annotat ion OnAgr iculture
Aquaculture Bill, which provides the framework for sustainable development of this activity. In addition to that, steps must be aimed at integrating the entire supply chain and boost exports.
Food Processing Sector:
Mr. Vivek Mehra, Executive Director, PriceWa-terhouseCoopers, opines that India has fa i led miserably in having a signif icant food process -ing industry. The organized sector constitutes only 35% of the tota l size. The Second Green Revolution wil l only happen i f there is va lue add to India’s surplus agricultura l production. The north-eastern region has conducive agro-cl imatic conditions for a variety of agro -horticultura l crops, including pineapple, orange, jackfruit, papaya, mango, banana, ginger, chi l l i and lemon. In fact, these states can produce lot of such fruits and other products. But, according to Manipur’s commerce and industries minister in the year 2003, Mr. T.H. Debendra Singh , the region has just 73 fruit and vegetable processing units. This is a mere 1.5 percent of the tota l number of such units
The India Economy Review 200424
scale sector firms are encouraged to concentrate upon semi-processed products, and form forward-linkages with MNC’s. MNC’s in turn, would set up automatic plants for manufacture of wide varieties of finished products to cater to the needs of domes-tic as well as export markets. The IIPM Think Tank perceives that a farmer can emerge successful when there is a processing industry. Consider the exam-ples that are noticeable in crops like spices, rubber, tobacco or sugar. The marketing infrastructure and other allied support should also be placed in the right order. Mechanized berths, cold storage facili-ties, auction centers and other facilities should be set up by APEDA on a war footing basis, given the ambitious targets set in the Foreign Trade Policy.
According to Mr. MP Pusalkar, Godrej Food Industries Food Division, Executive Director and President, the sales tax continues to be as high as 15 to 18 percent for categories like fruit juices and soya drinks. The current excise duty at 16 percent on breakfast cereals should be ideally eight percent, while sales tax rate should be rationalized by around 3 to 4 percent from the prevailing rates of 9 to 14 percent. According to Aseptic Food Processing and Packaging Industry Association, (AFFPA), the aseptic packaging is the magic wand that could work wonders for boosting growth in the industry. Import duty on aseptic processing and filling equipment is over 50% as compared with only 15% in China
of 100 million tonne over the next few years with a phenomenal growth rate of 3% and the fact that 85% of the produce is unorganized sector. The most important and overlooked reason in this process is that the high taxes and duties were detriment not just for domestic sales and export competitiveness, but also to hygiene and cost effectiveness.
In addition to the above mentioned aspects, The IIPM Think Tank recommends that food processing sector restructuring should be focused, broadly upon these aspects:
• Adjusting the layout of agricultural production• Improving the quality of farm products• Increasing the added value of farm products;
and pushing forward employment restructuring in rural areas. (Refer the box)
Conclusion Faster growth in GDP does not necessarily trans-late into the well being of the masses. Mr. Bhanu Pratap Singh, former governor, Karnataka, reveals that, during the last five years only 7.6% of the growth in real GDP has accrued to the farm sector. Average annual growth in agricultural GDP during the last five years has been 1.67%, which is less than the growth rate of population of India’s agricultur-alists. Also as pointed out in Business Line editorial (“Farm to the fore”; July 12th 2004), erratic farm
Annotat ion On Agr iculture
Around Rs 50,000 crore of agr icultural production is wasted annually. This translates into 35 percent of the actual f iscal defici t for 2002-2003. Currently, the countr y processes only 2 per-cent of i t s vegetables and fruits as agains t 15 to 40 percent in other countr ies. Proper infra-s truc ture s torage alone can enable the countr y to process 10 percent of i t s fruits and vegetables by 2025. This will generate over 3.7 crore direc t and indirec t jobs by 2025.
( Source: The Financial Express edi tor ial, “Want Not, Waste Not”, (Augus t 4th 2004) )
and 10% in Pakistan. Also, the 16% excise duty on aseptic packaging material increases manifold the final cost of the packaged liquid food. According to AFFPA officials, (as mentioned in the Economic Times, 25th July, 2003), currently, exports of asep-tically packaged products is negligible since few manufacturers are able to export their products. Reduction of duties will mean they can now look at this option particularly, in the milk deficient markets of Asia. Some serious figure crunching on the food processing business here shows that while packaging is a billion sector worldwide, in India, the size of the market is an approximate Rs 220 crores. Put that next to India’s projected milk production
income growth in the last 5 to 6 years has further widened the urban-rural divide. The farm sector needs more sovereignty coupled with more openings to reach out to the national and international mar-kets. This sector also needs affinity and free market that enable it to display its massive eagerness for drastic productivity breakthroughs. There is a great need for trade literacy, quality literacy and farmers need information empowerment. Couple this with expanding the area under irrigation, encouraging crop diversification, bringing user charges for inputs, building rural infrastructure and delivering commer-cial information, we can see agriculture spearheading the nation’s progress in the coming years.
WHEN 'NUTS AND BOLTS' REVOLT...
"The great cry that rises from all our
manufacturing cities, loder than the furnace
blast, is all very deed for this - that we
manufacture everything there except men."
- John Ruskin
Source : www.firstlight.com
The India Economy Review 200426 27The India Economy Review 2004
“Developing countries, again and again,
are tr ipped by microeconomic fai l -
ures….countries can engineer spurts
of growth through macroeconomic and
financial reforms that bring floods of
capital and cause the illusion of prog-
ress as construction cranes dot the
skyline….unless firms are fundamen-
tally improving their operations and
strategies and competition is moving
to a higher level, however, growth will
be snuffed out as jobs fail to mate-
rialize, wages stagnate, and returns
to investment prove disappointing….
“Developing countries, again and again,
are tr ipped by microeconomic fai l -
ures….countries can engineer spurts
of growth through macroeconomic and
financial reforms that bring floods of
capital and cause the illusion of prog-
ress as construction cranes dot the
skyline….unless firms are fundamen-
tally improving their operations and
strategies and competition is moving
to a higher level, however, growth will
be snuffed out as jobs fail to mate-
rialize, wages stagnate, and returns
to investment prove disappointing….
Annotat ion On Industr y
TT he t rad it iona l inter pre tat ion of the growth in services having come at the cost of manufacturing is some what over-played. While it is undoubtedly true in
a statistica l sense, this pattern loses much of its sting when seen as a par t of dynamic process. As mentioned by Mr. Narender Pani in an ar ticle in The Economic Times, some of the increased com-petition after l iberalization has translated into the bui ld ing of larger and more ef fective service net-works. At the same time, there has been a growth in outsourcing. As a result severa l activities that would previously have been done by manufactur-ers themselves are now carried out by independent service units. In other word, much of the growth in services over the last two decades has been not at the cost of manufacturing but rather as a support to it. Consider this : Nearly half the increase in the share of services in GDP between 1991 and2001 can be attributed to trade, transport, storage and communication.
An analysis done by Mr. G Ramachandran, a
f inancial analyst and frequent contributor to Busi-ness Line columns and ar ticles, state that, i f one were to regard the qual ity of the national business environment as a proxy for the microeconomic environment, then the empirical evidence provided by Prof. Michael Porter i s informative and most encouraging. India’s qual ity of national business environment had a global rank of 42 in 1998. The rank improved by nine places - - - - the biggest jump in the world- - - to 33 in 2001. By contrast, China improved its microeconomic rank from 44 to 41. India is ahead of China by eight places. China’s reforms pre -dated ours by f i f teen years ; but main-land China had no strong private industria l enter -prises like India. Many industrial groups have built India’s industria l foundations - - - - - -pioneering in steel, power, cement, pharmaceuticals, chemicals, aluminium, automobiles and IT. Creation of indus-trial assets apart, they harnessed new technologies and built strong organizations and marketing net-works that spanned the country. Mr. Kiron Kas-bekar, a s mentions in an Economic Times ar ticle that the Tata Group’s senior managers bel ieve
India heads the list of low-income coun-
tries with microeconomic capability that
could be unlocked by microeconomic
and political reform.”
India heads the list of low-income coun-
tries with microeconomic capability that
could be unlocked by microeconomic
and political reform.”
Prof. Michael Por ter, of HBS, in "Enhancing the Microeconomic Foundat ions of Prosper ity: The Current Compet it iveness Index", September 2001.
The India Economy Review 200428 29The India Economy Review 2004
they created “ institutional ized enterprise.” There are many sup-por ting evidences to prove the emerging industria l strength of India. In 2003, four Indian com-panies in the auto-parts industry, Brakes India Ltd., Mahindra and Mahindra, Rane Brake Linings, and Sona Koyo Steering Systems won the pre s t ig iou s Deming prize in Tota l Quality Manage -ment. The Japanese Institute of Plant Management has rewarded 18 manufacturing plants belong-ing to 10 Indian companies for excel l ing in Tota l Productive Maintenance. ONGC, Reliance, Hindustan Lever, IOC, Wipro, SBI, Infosys, ITC, Ranbaxy and HDFC figure in a recent Busi-ness Week survey of the top 20 0 emerg ing market compa-nies. One out of three laminated tubes conta ining toothpaste or cosmetics squeezed anywhere in the world is produced by Essel Propack located in Thane, Maha-rashtra. BPL exports over 100 mil l ion a lkal ine batteries every year. Eleven of the top twelve technology brands buy optica l storage d iscs from Moser Baer, headquar tered in New Delhi. Tecumseh, the world ’s largest producer of refr igerator com-
pressors, decided to outsource a l l of its components in India rather than China. Bajaj Auto is the best known brand in three wheeler automobiles in South-east Asia. Finding auto compo-nents made in India 35 to 40 percent more cost- competitive than those made in the Euro-pean Union, Piaggio Ita ly CEO, Mr. Rocco Sabel l i has decided to source more than 50 percent of the components from India. Ind ia Inc has a l so concluded a number of dea ls to acquire running concerns in advanced western countries during the last one year as the pace of over -seas acquisitions by India’s Old Economy companies has picked up dramatica l ly. Hindalco and Sterl ite have acquired mines in Australia (Mount Gordon, Nifty and etc) in order to have control over raw materia l sources. The AV Birla group is ramping up capacity at its Egyptian carbon black plant to 1.7 lakh tones, over taking Cabot’s Brazil ian plant as the biggest in the world. It is a lso ramping up capacity at its China plant from 12,000 tonnes to 60,000 tonnes per year. ( Sources : “Enterprise makes the d i f fer -ence”; The Economic Times, February
Earlier India wanted
to be on the GM map.
Today, it is time for GM
to be on the India map.”
Mr. Aditya Vij, President and Man-aging Director, General Motors
(GM) India, being quoted in Busi-ness Standard’s The Strategist,
June 1st 2004.
Measure of Performance Improvement between 1998-99 and 2001Net Sales to Capital Employed 32.33%
EBDIT to Capital Employed 8.97%
EBIT to Capital Employed 7.98%
Earnings Ploughed Back to Capital Employed 9.15%
EBDIT to Net Sales -17.59%
EBIT to Net sales -18.34%
Corporate Tax to Capital Employed 39.79%
Corporate Tax to Net Sales 5.72%(Source: “India proves Porter right”; Business Line; G.Ramachandran; 21.01. 2004.)
Annotat ion On Industr y
3rd , 2004 ; Mr. Kiron Kasbekar ; “Manu-facturing our way to glory”; Mr. G Anan-da l ingam, The Economic Times, 30th January, 2003 ; “Increased ef f iciency, hesitant recovery” ; Mr. S .D.Naik, The Business Line ; December 25th 20 03, “Capita l iz ing on bra in power” The Economic Times editoria l ; June 1st 2004 and “Emergence of the fracta l savant”; Pravir Mal ik; Business Line, December 30th 2003.)
An in-house study by the Tata group shows that the Indian private sector in genera l and the top 50 companies in par ticular have made great str ides in pro -ductivity in the post-reform era. As pointed out by Ms. Kanika Datta of the Business Standard, the Business Standard Research Bureau ( BSR B) s tudy of 462 companies a l so sugges t s that corporations are ga ining in a major way from the self-imposed crash diet- - - -gross profit mar-gins are up nearly 2 percent for the companies in the study. Mr. Ya suthoshi Wa shio, the wel l -known Japanese exper t on TQM predicts that Indian manufactur-ing qual ity wil l over take Japan in 2013.
W hat a i ls India Inc ?Inspite of the recent posit ive developments, (The IIPM Think Tank considers these develop -ment s on ly s uper f i c i a l ) , the industria l sector is in d ire need of some rad ica l changes and other restructuring processes.
Mr. Subrata Chakraborty, Professor at I IM Lucknow feels that the Indian companies con-tinue to have a history of taking something on a ‘s tand -a lone’ basis. One had seen companies going in for “Quality Circles” without making those an integral par t of company-wide qual ity control ; they a lso adopted ISO
9000, but without graduating to TQM; and Six-Sigma fa i led to focus on critical processes. Many take to latest fads primari ly as status symbol, rater than out of any genuine desire to build qual-ity. According to Mr. Subrata, the key ingredient in any quality initiative is the adoption of “Sys-tems Thinking”. It is a process where in the system must have an a im, and the development and statement of the a im must a l low people in the system to under-s tand what they are working towards. Such an understanding helps in bui ld ing up co -opera-tion between components ; and this co -operation is va lued as it leads to the overall success of the system and a l l its components.
T h e I I P M T h i n k Ta n k strongly favours the idea mooted by Mr. G. A nanda lingam, Pro -fessor of Management Science at the Smith School of Business, University of Maryland. As men-tioned by him, “Investments” should be oriented towards the less g lamorous manufacturing sectors. Production need not only look to the global markets for sustenance. The Indian domestic market, especia l ly at the lower end, is extremely large and very price and functionality sensitive. Prof. C .K. Praha lad opines that Indian consumer durables com-panies have not really introduced any innovations since the sachet revolution which created such a lather in the shampoo industry. The same is true for any other industry. Ms. Kanika Dutta of Business Standard points the basic requirement, that India Inc now needs to develop “ innova-tion, as a unique strength that wil l increase its sa l ience both in global and domestic markets. Considering R&D spending as a percentage of GDP, India sti l l
"Most of us would rather
follow Best Practices from
around the world than
create Next Practices for
the world to follow"
Prof. C.K. Prahalad, being quoted by Tony Joseph in Business World, 4th October 2004
The India Economy Review 200430 31The India Economy Review 2004
has a long way to go. While it was 0.843 % in the year 2003, for the US and Japan it was 2.8% and 2.9% respectively. Even a small country l ike Korea spends 2.9% . And for the people interested in the Indo-Chinese studies and their comparison, The People’s Republic of China spends more than 1% of it’s GDP on R&D. Overa l l , R&D expenditure of India Inc ( l isted companies) is
competence’ of our ‘core units’? Financia l Exper s s ; 23rd Ju ly 2004), depending totally on tech-nology import, both for initia l e s tabl i shment and for subse -quent modernization/expansion, India’s core sector industries, by and large, d id not concurrently chalk out any corporate plans to develop autonomously the abi l -ity to cl imb up the technology ladder on their own through
“…..during the green revolu-
tion, it was the hybrid seed
technology and the happy tri-
umvirate of Mr. C. Subrama-
niam, Mr. M.S.Swaminathan
and Dr. Sivaraman, which
went ahead with thousands
of demonstration farms with
agricultural extension leading
to success. In software tech-
nology parks, which provided
the basic infrastructure, the
critically-required 64 kbp per
second connectivity and the
policy incentives that clicked.
As for nuclear technology,
again it was merit and the
inspired leadership of men
like Homi Bhaba. In space
technology, Vikram Sarabhai
and Satish Dhawan produced
results by focusing on merit
and devising flexible personnel
policies. When it comes to the
area of manufacturing, can we
think of one critical factor that
can break the jinx?.........”
- Mr. N. Vittal, former Secretary, dept. of Electronics and former CVC
Youngjae Lim and Chin Hee Ha hn have conduc ted a research t i t led “Bankruptcy Policy Reform and Total factor Productivity Dynamics in Korea: evidence form Micro Data” for the state of South Korea. T h e i r r e s e a r c h documented plant e n t r y an d e x i t ra te s , e xamined t h e d y n a m i c r e l a t i o n s h i p b e t w e e n p l a n t t u r n o v e r s a n d plant productivit y
a n d q u a n t i f i e d t h e con t r i bu t i on f r om en t r y and exit to productivity growth. They have concluded that the implementation of an economic efficiency criterion in Korea has made it impossible for vested interests to oppose the exit of the firms that have no economic value.
Result: for sus-tained total factor productivity growth, “it is impor tant to establish policy or
institutional environ-ment where efficient b u s i n e s s e s s u c -ceed and inefficient bus ine s se s f a i l .” The South Korean exper ience points out that productiv-ity in existing forms is much lower than in those that survive the market selection process. (Source: Extracted from
an ar t icle t i t led “How
to boot out inef ficient
firms”, writ ten by “TCA
S r in i vasa Raghavan”,
“ O K O N O M O S ” ;
some Rs.2 ,650 crore - - - -a meager 0.33% of its net sa les as of FY 2003. One of the reasons for America’s dominance in business is its technological prowess. With 98,594 patents and $282 bi l l ion spent on R&D, the gap is huge. (Source : The Economic Times, Ja nu a r y 30 t h 2 0 0 4 , “ I nd i a’s R&D: New ‘n improved”)
M r. A . D. D a mo d a r a n , a former director, CSIR Regional Research Laboratory, Thiruva-nanthapuram, has another bad story to tel l. (Where is the ‘core
wel l - s tructured and dedicated in-house R&D and T&D pro -g r a m m e s . A l a r m i n g l y, t h i s malady has not rea l ly been ade -quately appreciated by successive governments even af ter the New Economic/Liberalisation Policy reg ime , i nc lud ing enac tment of the TR I PS - compl iant I PR Regime. He cites the examples of the petroleum/oi l ref ining companies in the infrastructure category and antibiotics units in the hea lth sector. Among a l l the ref ining companies, Indian Oil Corporation a lone has a mean-
Annotat ion On Industr y
ingful R&D Centre. While in fa irness, it must be presumed that IOC would have made use of i t s R& D re su lt s wel l ; i t s weak patents por tfol io (USPTO describes only 19 patents during 1976 -date) highlights its contin-ued backwardness in the Inno-vation Index. Contrast this with that of Shel l Oil Company with a tota l of 5,634 patents during the same period and with 1,082 for cata lysts a lone, both thrown to the same vagaries of the inter -nat iona l g loba l i s ed s cena r io. The antibiotics scenario is more alarming. Hindustan Antibiotics Ltd, set up by the government as a prestigious company, is now before the BIFR and those under the private sector which were establ ished only in the 90s at a cost of Rs 500 crore are facing closure due to ‘unsurmountable’ competition from China. Here aga in, one must remember that though Indian R&D has virtually forgotten the penici l l in f ield , USPTO has granted 412 pat-ents during 1976 -date with the latest US 6,383,773, dated May 7, 2002, from the prestigious MIT. Neither the penici l l in industry nor the depar tments of indus -try/biotechnology nor any other establ ished R&D centres seem to be interested in such R&D programmes, even though they are essentia l for mainta ining a state -of-the -ar t industria l base for such a l i fe - saving antibiotic.
According to Mr. N. Vit ta l, the single most critica l factor that expla i n s d i sma l per for -mance in the industria l sector is the faulty labour policies and procedures that prevented the leverage of low-cost manpower. Mr. Vivek Bharat i, an advisor to FICCI, strategizes that, the texti le industry of fers the best scope for absorbing rura l work-
ers d isplaced from farming.
Ind ia spend s upward s of 12% of her GDP on transporta-tion and logistics, compared to less than 10% in developed coun-tries, largely because of the poor infrastructure, and inefficiencies in inventory management. Mr. Wil l iam J Flynn, of GeoLogis -tics Corporation, (“GeoLogistics expands operations in India”; The Economic Times) points that the demand for ef f icient supply chain solution in India is estimated to be huge and the potentia l for reducing costs by bet ter inventory management and through intelligent structur-ing of the supply chain is there -fore substantia l.
In 20 01, Venture Capita l Funds invested a l it t le shor t of $1 bi l l ion in Indian companies. In contrast, in 1999 investors pumped in a record $56bi l l ion (excluding the money invested by big companies in their own ven-ture funds or directly by wealthy individual ‘angels’ ) . According to Mr. Mythil i Bhusnurmath of the Economic Times, it does not make any sense to bar Venture Capita l Funds from investing in rea l estate, non-banking f inance or gold -f inancing companies . Similarly, the requirements of a one -year lock in of shares a f ter l i s t ing needs to be scrapped. Another requirement is the exis -tence of corporate bankruptcy laws, so that companies can be wound up fa s ter.(Plea se refer the box.)
T h e I I P M T h i n k Ta n k strongly believes that more taxa-tion is not warranted. Remember the Kauti lya’s dictum that “Milk is not got by drying the cow.” A s ment ioned by M r. V ive k Bha rat i , lower ing of ind irec t
Labor market restrictions on
hiring and firing workers are
one of the greatest challenges
of doing business in India,
according to the Global
ranks 73rd of 75 countries
(China ranks 23rd).
Employment in India's
registered firms (those with
more than 100 employees) is
Sources : Page No.64,India - Sustaining Reform, Reducing Poverty, A World Bank Development Policy Review
How To Boot Out Inef f icient Firms?
The India Economy Review 200432 33The India Economy Review 2004
taxes at a l l levels, including those levied by states, would play a critical role in global competitiveness. Over half the d if ferences between manufacturing costs between India and China is expla ined by high taxes here, the remainder by high transaction costs imposed by the poor qual ity and high price of infrastructure and lower labour productivity. Hence for th, “Fisca l Rectitude” is the need of the hour. Implementation of VAT is another initiative that can make a tangible d if ference to the pro -duction and consumption patterns. According to Mr. A nand Mahindra, ( “Build ing Bridges”; The Hindustan Times ; July 1st 2004) there are many economic vir tues to a VAT system, but the most graphic one is that a lthough we cla im to have a large internal (domestic) market, the multipl ic -ity of tax rates and systems in each state and the complexity of transferring goods between them go against our advantages. The absence of a common taxation system, on the l ines of VAT, results in for-mation of a series of regional markets by rendering it d if f icult for national players to d istribute their products ef f iciently across the country.
In addition to the faulty taxation system, India Inc has to l ive with the dismal infrastruc-ture. Consider this : The MAIT-Emerson survey of 302 f irms in November 2004, (The Economic Times, December 5th 2004) points that power disruptions across ha lf a dozen business cities in the country is estimated to cost India Inc Rs.22, 000 crores. This translates into 2.2% of business GDP and accounts for only direct losses due to the impact of power downtime on the operating environment. Other circuitous losses include the unlikable impact of down time on employee ef f i -ciency, work in progress, management time and customer delivery processes, performance and l ife of equipment. To cope with this grave conditions, in a city l ike Delhi, 83.1% of the f irms have opted for uninterrupted power through the grid, DG set and UPS solutions.
Another d imension to this problem is the
high tari f f costs, more par ticularly for industria l customers. A case in point is “INDAL”. Indal has been forced to close down its factory in Alupuram near Kochi rendering a lmost 10,000 workers job -less fol lowing high power costs which had made their plant economical ly unviable. The a luminum company was paying a hef ty tari f f to the tune of Rs. 3.55 per unit. ( The Economic Times, January 27th 2003)
The primary reason why Indian companies have not produced the global brands over the last so many years is on account of faulty government pol icies . According to Prof Jagdish N Sheth, Professor of Marketing at the Goizueta Business School, during the l icence raj the capacity was l imited. For exports, the owner has to set up a separate unit. The domestic and the global mar-kets were not a l lowed to mix. In the old business model, one remained domestic and diversi f ied into as many industries as possible. India a lso had a shor tage of capita l and to expand global ly one needs a significant amount of money. For example, to introduce an FMCG brand in America today, a f irm need, at least $75 mil l ion to $100 mil l ion. To top it a l l , Indian companies lack the “sca le” para-d igm. The economic system was organized a lot more around the unorganized sector. Even today, the unorganized sector is big. A case in point is India’s luggage industry. The top three brands, namely, VIP, Safari and Aristocrat produce only 35 percent of the tota l moulded luggage. The remain-ing 65 percent is in the unbranded sector.
W hat needs to be done ?India needs to learn a lot on the policy lessons from the neighbouring country, China, which has become the global manufatcuring base (hub). The IIPM Think Tank has col lated a lot of data and other materia l information from various sources and some of them find a mention here. (The infor-mation is col lated from NEP Paper Presentations of Spring Summer 2003 -2005, IIPM New Delhi)
In China land is provided at concessional rates to at tract investment. Loans are given for 100 percent of the cost of plant construction. A case in poin t i s the V ideocon’s
internet TV plant-cum R&D centre, where the provisional government was wil l ing to lend 100 of the out fit. Power cos ts are almost one-third of India’s (A bare 4 cents a
unit ). Tax holiday is of fered for f irs t two year ’s of pro-duc t ion. The re i s a huge domestic market to tap (by paying 7% VAT). The countr y is also marked by many other
The Tale of Hidden Dragon: Policy Lessons From China.
Annotat ion On Industr y
advantages some of which are discussed here below:
Policy Consistency The benefi t s and incentives in terms of taxes and tar-if fs have been clearly ar ticu-lated in the laws and policies. Unlike India, China has not instituted any sectoral caps. Rather, it has maintained a prohibited and restr ic ted lis t under the Indus t r ia l Cata-logue that it keeps revising. Fur ther, these have not been w i t hdrawn o r taken away. Rather, the scope of these incentives has expanded and the focus changed from east-ern & southern province in the earlier s tage to western and other reg ions in Main land China in the recent years.
Decentra lisat ion The prov inces and munici -palit ies have the authorit y to approve foreign inves tment to the tune of $30 million. Moreover, special incent ive zones that are set up with the help of the state are autono-mous and come under the purview of the province/local government.
Thus, through decentrali-sation, red-tapism and various approval hassels have been removed for foreign investors. Also, since the local adminis-tration is more at tuned to the needs of these investors, the adminis t rat ion concent rates on providing bet ter facilit ies to foreign investors. India has a union structure and power is concentrated at the center.
Quality of Infrastructure Over the past decade China’s road network has expanded by more than 40 percent, water production has grown by more than 50 percent, and power generat ion has exceeded 300 gigawat t s—mak ing China the wor ld ’s second largest energy pro-ducer. Most of these invest-men t s ( abou t 90 % ) have come from Chinese govern-men t t hough p r i va te par-ticipation has star ted picking up.
Labour Costs and Productivity Ch e a p l a b o u r c o s t a n d higher productivit y are other macro-economic advantages that China has over India. In China, more than 4 mil-lion workers toil in 22,000 factories, churning out every-thing f rom pat io chair s to power too l s and one can say that China’s low wages have been the main catalyst for its manufacturing boom. The average fac tor y wage is about 40 cents an hour. To put things in perspective, India’s low-wage democracy had an annual average man-ufacturing output of $3,118 pe r wor ke r f rom 1990 to 1994, Pro f. Rodr ik found. I t s average manufac tur ing wage: $1,192 a year. By con-trast, China, with a similar productivit y level of $2,885 per worker, pays its factory labour just $498 a year.
Economic fragmentat ion Of more significance is the fact that unlike India, China’s
cap i ta l and p roduc t mar-kets are severely fragmented, which means that a Chinese f irm located in Province A cannot invest in Province B. The economic fragmentation gives an enormous advan-tage to foreign firms, which are not faced by similar capi-tal constraints. FDI r ises on this account because foreign firms can choose more proj-ects to invest in than domestic firms. According to a detailed study on this topic, provincial governments resor t to out-r ight impor t bans, enforc-ing discr iminator y produc t and health cer tif ication stan-dards, imposit ion of tar i f f s and dumping charges, con-f iscat ion of prof i t s earned on marke t ing fore ign-pro -vincial goods, subsidies to local commercial uni t s for b u y i n g l o c a l l y - p r o d u c e d products, etc. This is done p r imar i l y because income tax revenues generated by regionally owned and oper-ated enterpr ises accrue to t he r eg iona l gove r nmen t s whereas income tax revenues gene ra t e d b y en t e r p r i s e s owned and operated by the cent ral government accrue to the central government. In India, however, taxes are shared between the central government and the states as directed by the finance com-mission. For addit ional information upon this
par t icular issue, please refer the box
t i t led ‘How China is racing ahead in
industr y? ’, Indian Economy Review
2003-2004; page number 111.
EntrepreneurshipIndia Inc’s critica l success factor (CSF) l ies in an entrepreneuria l class that is ta lented, gutsy and conversant. It is assimilating the world class
manageria l practices from abroad and learning that constant innovation is the key to produc-tivity. This combination is a necessity and can make the world a playground for Indian players.
The India Economy Review 200434 35The India Economy Review 2004
As pointed by Prof. R ishikesh Krishnan, Associate Professor at I IM Bangalore, in Business Line (“Indian entrepreneurship on a high; May 29th 2004”), a l l the four companies that recently made it to the bi l l ion dol lar club ( Infosys, Wipro, Bharati and Ranbaxy) are focused on a d e f i ned cour s e of a c t ion , global in outlook, proactive in approach, and meticulous in execution. Representative of the new Indian entrerprenuership, it is their clear vision, self-bel ief, team ba sed deci s ion making structures and the abi l ity to learn from their experiences set them apar t.
Ac c or d i n g t o M r. A r u n Maira, Chairman, Boston Con-sulting Group, India needs a modern view of manufacturing and its intersection with service. Just as many Japanese industries-- - camera s , appl iances , enter -ta inment devices, and machine tools—propel led their growth in the eighties by combining mechanica l engineering into a new category of “mechatron-ics”, India’s unique opportunity
in the next decades l ies in the intersection of manufacturing and services, “manuserving”.
Innovat ionThe IIPM Think Tank advo -cates a strong focus upon R&D to build a strong base for the coming years to come. As was pointed out in a Business Stan-da rd Ed itor ia l t i t led “Grow your own technology”, India should grow its own technology. Consider the fol lowing success stories in R&D. The US sa les of Ranbaxy Laboratories have over taken its Indian sa les. It as been able to do this by achiev-ing global standards, cer ti f ica-tion through USFDA approvals, and most crucia l ly, emphasis upon R&D. Currently, it spends 5 percent of its turnover and proposes to ra ise it in a few years to 8 percent. The case of TVS Motors, down south, is more interesting. It came to a parting of ways with Suzuki pre-cisely over its desire to develop and use it s own technology. Today, it ha succeeded with its new motorcycle launch, Victor, and is even contemplating set-
• The cost of doing R&D is a frac tion of that in developed world
• There is pret t y robust technical education sys tem, produc-ing some excellent manpower
• Foreign companies are seeking access to high quali t y engineers due to problems of availabili t y/costs in their home countr ies
• Globally, R&D has become mult i-geographic with innova-t ion-specif ic pat terns of collaboration and dif fusion.
• All this was compounded by the fac t that there had been a reverse brain drain of sor ts with research fellows coming back to the countr y af ter receiving high quali t y training abroad.
( Source: Ex trac ted from an ar t icle wr i t ten by Mr. R . Gopalakr ishnan t i t led
“Hyped, but wi th jus t i f icat ion”, Business L ine, June 12th 2004 & ‘The r ise
of Indian mult inat ionals’; The Hindu; 22nd Augus t )
Points that make India a favorable location for R&D
Annotat ion On Industr y
Innovation is the
specific instrument of
The act that endows
resources with a new
capacity to create wealth.
- Prof. Peter. F. Drucker
ting up manufacturing faci l it ies in countries l ike Indonesia.
Product ivityAs quoted by Mr. R . Sunda ram in Business Line, ( “Power of productivity”; July 20th 2004), the McKinsey study says that small and medium companies in India on an average have a labor productivity of only 15 percent of what their US counterpar ts achieve. The study a lso ca lculated that these companies could increase their pro -ductivity to about 40 percent of the US average without any additional capita l investment, just by reorganizing the way they conduct work. The same study a lso revea ls how the income level of a country is determined, above a l l, by the produc-tivity of its largest industries. The study observed that the rapid growth of productivity in the US in the 1990s d id not come from the new fangled dotcoms and hedge fund companies but just by six industries; construction, manufacturing, retailing and wholesa l ing being chief among them. Like wise there are many other voluminous and com-prehensive sets of data that buttresses the point that productivity plays a strategic role. In India, majority of the closures in a state l ike West Bengal can be traced to the poor productivity norms ema-nating from the iron claws of the trade unions. Accordingly policies that promote various kinds of productivity should be harped upon.
For addit iona l information upon this i s sue, please refer Ind ian Economy Review 2003 -2004 ; page number 112.
Also as pointed out in the Economic Times ed itor ia l t it led “Missed Oppor tunit ies” (5th August, 2004), qual ity of infrastructure, avai l -abi l ity of f inancia l intermediation, depth of local
into the industria l sector of any state. Despite the middle -order rankings in the labour cost-to -sa les ladder (7% of the costs are labour/wage costs), states l ike Maharastra, Tamilnadu and Karna-taka have attracted a lot of investments into the industria l sector and the consequent vibrancy of manufacturing system.
Emerging Oppurtunit ies :Like in the case of sof tware and pharma sectors, the global machine tools manufacturers are view-ing India as a potentia l destination for outsourc-ing their production of low-end tool, especia l ly with the domestic industry beginning to come into international focus, after it recently uncorked its “Made in India” brand campaign. The Indian industry size is worth Rs.1, 200 crores. A pointer to the increasing importance of this sector is the par ticipation of 530 companies from 26 countries and more importantly from Switzerland, which is among the world ’s 10 major machine tools export-ing countries. ( “Machine tools sector too goes for outsourcing”; Mr. Amit Mitra , Febraury 3rd 2004, The Business Line.)
As pointed in the Financia l Express edito -ria l t it led “The Big Small Car Hub”, one industry which immediately requires more attention is the small car industry. Driven by space constraint, the demand for fuel-efficient, world class small cars is going to increase in the near future and this where India needs to cash in. Taking into consideration, the emerging threat and thereby the potentia l competition from Chinese economy, the govern-ment needs to put in place a framework of policies which attracts more players (only Hyundai and Suzuki have made India, their R&D hubs, as of now) and would make the vision of India becom-ing a small car hub, a rea l ity.
A report from Kotak Securities states that the global market for the “cl inica l research” is $9 bi l l ion right now, and l ikely to reach $17 bi l -l ion by 2007. India’s biggest advantage, ironically, is its large d iseased population. According to a recent ar ticle in the Financia l Times as quoted by Mr. Sunil Ja in, India has 30 mil l ion people with hear t d iseases, 25 mil l ion with type -I I d iabetes and 10 mil l ion with psychiatric d isorders. And thanks to poverty, most of these patients are what are called “treatment-naive”- - - -that is they hardly use medicines, much less any that rival those they are being tested for. According to Kotak, thanks
A comparison between China & India, in the basic economic parameters of annual pro-duction & activi t y.
• Steel 103million/ton/yr vs 19. • Cement 650m/t/y vs 95. • Crude oil 150m/t/y vs 30. • Coal 1300m/t/y vs 300. • Telephones 220m vs 27. – • Color TV’s 400million vs 75.
markets, corruption on the ground and the extent of industria l ization are the remaining strategic factors that can inf luence the investment f lows
The India Economy Review 200436 37The India Economy Review 2004
to th i s huge adva ntage , the costs of doing cl inica l research in India are 40 to 60 percent lower than in developed coun-tries. Since cl inica l tr ia ls com-prises around 70 percent of total costs of a new drug, using India cou ld br ing down the aver -age cost of $800 mil l ion for a new drug by around $200 -250 mil l ion. According to exper ts a key factor which comes into the blooming of this par ticu-lar business opportunity is the lack of the provision of law upon “Data Exclusivity”. This par ticular constraint blocks off a huge business potentia l of at least 17 bi l l ion US dollars.
The potent ia l of Ind ian pharmaceutica l sector is a lso very vast and unlimited. After IT, India can def initely grab a large sl ice of pharmaceutica l pie. True, Indian drug manu-facturers racked up only $6.5 bi l l ion in sa les, including their exports, compared with Pfizer, which made $ 8 bil l ion from just one drug. The tota l va lue of the global pharma Market is about $470 bi l l ion. However, in terms of volume, the country was the four th largest consumer and manufacturer. Mr. Ajay Pira-mal, Chairman, Nicholas Pira-mal, states that India was a lso among the top f ive manufactur-ers of bulk drugs and growing at 30 percent . As pointed a Times of India column (View and Counterview tit led “Lab India Could Become a Global Pharma Player” ), though the India pharma industry is cur-rent ly ba s ing it s grow th on generic drugs, this is a va luable f irst step in the evolutionary cycle. There is a lot of cheap drug market that needs to be tapped (All of Africa, the Indian sub cont inent , perhaps even
Centra l Asian republics.) Also, accord ing to Mr. Ajay Pi ra-mal, ( ‘The rise of Indian mul-tinationals’; The Hindu; 22nd August), development of drugs for tropica l d iseases had a great potentia l with more than 12 percent of the demand coming from this segment, but only 15 drugs had been developed over the past 25 years. India a lso enjoys a great cost advantage in terms of developing a new prod-uct- - - $ 30 to 35 mil l ion against $ 1.2 bi l l ion that it would cost in the U.S.
ConclusionIndustry is, in many ways, going to be the cash cow that can be milked by any government. In a f lexible labour market envi-ronment, it wil l provide both employment growth and rev-enue growth. Manufac tur ing last year grew by 7.3% and this is simply not good enough. It is way short of the double d igit growth registered for 19 months in the mid-1990s, or when con-trasted with the Chinese indus -tr ia l growth rate of 23% in the last year. Comparisons also show that the share of manufacturing in India’s GDP is way below what obta ins in South Korea and other late industria l isers in ASEAN or Latin America. As pointed out in the Finan-cia l Express (“Manufacturing Pol icy Being Manufactured ”; August 5th 2004) the share of the manufacturing sector in the gross domestic product in India is 17 percent compared to 33 percent in China, 29 percent in Korea, 25 percent in Brazi l and 27 percent in Thailand. Share of manufacturing export in tota l exports has a lso gone down to 0.76 percent in 2003 compared to 0.8 percent in 2002, accord-ing to a WTO report.
Annotat ion On Industr y
Even if 25% of gross sales
are invested in R&D,
the Indian Pharmaceuti-
cal Industry’s total R&D
budget is comparatively
very small. Individual
R&D budgets of many
US companies probably
amount to much more than
the cumulative R&D bud-
gets of all the companies
(Source: Mr. Hemant Joshi; “With Emphasis on Opportunities in 2005”; Pharmaceutical Technology; January
Manufacturing sector must be vibrant enough to assimilate some of the surplus hands now sub-optimally employed in the agricultura l sector. Anything the government does to sti f le industria l growth wil l come back to appear once again. The time has come for the government to be helpful in d ismantl ing the market-d istor ting policies.
Once upon a time, in history, India control led more than a quar ter of the global trade in texti les. A susta ined ef for t backed up by the right policies can revive India's g lory days in texti les and gar-ment sector. I f the IT boom benefited the educated class, a quantum jump in textile exports will lift the poorer sections of the population. So, from the employ-ment potentia l perspective, texti les stand a very good chance. Indian garment manufacturers now service over 20 top global brands to earn over $3 bi l l ion. Analysts bel ieve that India’s strengths in texti le production include inexpensive, abundant and ski l led labour force that is suited for labour intensive apparel exports, suf f icient raw materia l supplies because India is third largest producer of cotton with highest area under cotton cultivation in the world. Government’s new texti le policy has set a target of texti le and apparel exports of$50 bil-l ion by 2010 from the present level of $12 bil l ion of which the share of garments wil l be $25 bi l l ion (at present $6.20 bil l ion). The growth potential of the industry is a lso evident from the expected growth of the global texti le trade, which is estimated to increase from $400 bi l l ion to $700 bi l l ion by the year 2010.
The Indian textile industry is marked by many constra ints l ike the ones undermentioned:
“Lack of Economies of scale” The reser-vation for small-scale industry has resulted in the lack of economies of sca le. Large garment exporting units in India employ less than 1, 500 workers, where as in China that number goes up to 25,000. It is not surprising that the $6 bi l l ion garment exports from India are spread across over 10,000 units. Even Sri Lanka’s garment exports of $3.5 bi l l ion come from only 300 units.
“Low productivity” ( It is imperative for Indian workforce to real ize that the average cost per hour of an Indian worker is $0.60 while of an Indone -sian worker is just $0.30 ). According to the report (“Texti les and Apparel : Assessment of the Com-petitiveness of Cer ta in Foreign Suppliers to the US Market” ) released by US International Trade Commission, the labour productivity in India, Bangladesh and Pakistan was 20 to 25 percent lower than in China despite the fact that India had a very large pool of ski l led and unski l led workers and well- educated management and technicians.
Weak “Quality Control” & severe technological obsolescence. (The government has estimated that expenditure of approximately Rs980 bill ion would be required to upgrade the entire texti le indus -try.) Ms. Sangita Shah mentions in the Business Standard ar ticle, dated 25th December 2003, that, currently India is focused more upon low value fabric exports than high va lue apparel/clothing exports. While India’s quantitative share of the global texti le trade is around 8 percent, its share of value added in the global trade is only 3 percent. According to Mr. S. Sivakumar, the d iscrimina-tory duty structure and lack of profits has resulted in a vicious cycle of new investments to embark on modernization. The lack of tra ining and develop-ment of workforce in modern technology has led to poor quality, impairing global competitiveness. Government’s misplaced ideological obsession has led to the weakening of some of its vita l segments. For instance, the growth of the mil l sector has been stunted to such an extent that it now accounts for hardly f ive percent of the tota l cloth produced in the country compared to about 60 percent in the early 1950s. Accordingly, it lost the spirited edge it once enjoyed to its South-East Asian competitors. The profitability of large mills was severely eroded by fiscal concessions extended to power looms and the imposition of obligation to sel l hank yarn at f ixed prices to the hand loom sector. The result
Contribution of the textile industry to the Indian economy.
To GDP 4%
To Industr ial Production 14%
Overall Expor t Earnings 30%
Low Import Intensity Only 2% of exports
Excise Revenue Rs. 6,000 crore
Employment (direc t & indirec t ) 9.30 crore
(Source: www.texminnic.in )
The India Economy Review 200438 39The India Economy Review 2004
was complete stagnation of mil l sector which had l it t le money lef t for modernization and technol-ogy upgradation. For instance, in the year 2000, China had six times more shuttle less looms than India. Even Pakistan had twice the number.
A number of US f irms cited the “ lack of transparency in lega l requirements and compli-cated paperwork” which led to an increase in producer’s costs and necessitated the appointment of a broker instead of the much- preferred direct-dea l ing with manufacturers. Poor infrastructure included a lack of deep water por ts and an anti -quated ra i lway system.
The policy prescriptions rhat can make the Indian texti le sector g loba l ly competit ive are fa irly stra ight forward.
Mr. S. Siva Kumar has outl ined the fol-lowing four-pronged strategy in the Business Standard article titled “Textile industry: Renewal strategy”:
Firstly, companies need to internal ize the global trend of fa l l ing prices (average prices have fa l len down by 47%), emerging technology and focus upon specia l ized and va lue -added products to protect margins.
Secondly, expedite consolidation in the weaving and processing segments either by debt restruc-turing or winding down and fully rationalizes the duty structure in the industry.
Thirdly, while facilitating the exit of textile compa-nies, workers must be provided free retraining and development in new technology to become part of the modern workforce
And Finally, there must be a thrust to lower the enabling infrastructure costs such as power and transportation. Prohibitive power costs are clearly eating into the global com-petitiveness of the Indian texti le indus -try, according to the data released by the International Texti le Manufacturers Federation.
As pointed by Mr. S.D Naik, in The Business Line ar ticle tit led “Chal-
lenges of post-quota regime”, at present, the only scheme through which the government can assist the industry is the Technology Up gradation Fund Scheme (TUFS), which offers a 5 percent interest subsidy on loans/finance ra ised from designated f inancia l institutions or the banks and State Financia l Corporations co -opted by them. The Rs. 25,000 crore TUFS was introduced with effect from Apri l, 1, 1999 for a f ive -year period up to end March 2004. However, because of a number of reasons, the scheme fa i led to make much head-way. While the tota l amount sanctioned under the TUFS up to December 2002 was Rs. 6 ,100 crore, the actual amount disbursed was just Rs. 4,202 crore. This scheme needs to be expanded in its scope. More over, there is an urgent need to formulate some a lternative schemes, including provision of foreign exchange loans and seeking assistance from multi latera l institutions.
Mr. O.P Lohia, Managing Director, Indo-Rama Synthet ics Ltd feel s that Government should negotiate bi latera l agreements with large consumer countries (US and EU) to provide market access to Indian exporters.
Mr. T.S.R. Subramaniam, opines that with-drawal of SSI reservation for knitting and knit-wear, abolishing hank yarn obligation and repeal of Handloom Reservation Act are drastica l ly needed to make this industry a vibrant and viable one.
Mr. Vivek Bharat i, brings us to the point that the government must encourage the growth of man-made fibre industry through a fiscal struc-ture that encourages va lue -addition as over two-thirds of the global trade in texti les is in products based on synthetic f ibre.
Mr. Atul Chaturvedi, Joint Secretary, Min-istry of Texti les, emphasizes upon the need for high qual ity raw materia l. The launching of the Technology Mission on Cotton has yielded results
( Source: Indian tex t i le cos feel the pinch of high power cos ts; Business
L ine; Augus t 3rd, 2004)
Share of power in the manufacturing costs
Kind of fabr ic Brazil China Korea India
Woven r ing-yarn 7% 13% 9% 17%
Woven O-E yarn 6% 12% 13% 12%
Woven tex tured yarn 6% 14% 10% 15%
Annotat ion On Industr y
Chinese expor ts in tex tiles have of late, been boom-ing at the cost of all other d e v e l o p i n g e c o n o m i e s l i ke B ang l ade sh, Ph i l i p -pines, Indonesia, Mex ico, Sri Lanka, Turkey, Vietnam, Ghana and etc. According to a WTO estimate, China’s share of clothing and tex tile expor ts is set to jump from 19 percent in 2002 to nearly 50 percent by 2010.T h e Ch i n e s e e co n o my star ted its restructuring pro-cess in the early 1980s and focused on building large-scale capaci t ie s in eve r y segment. For example, the spinning capacity in China increased from 18 mill ion spindles in 1980 to 55 mil-lion spindles in 2003. Chi-na’s share in world installed capacity of modern shut tle-less looms increased from
6 percent to 15 percent ( three-fold) over the same period. The high economies of scale have increased its share of tex tile expor ts dra-matically from 9 percent to 22 percent. According to Mr. Har ish Anand, Econ-omis t, Vardhman Group, the key fac to r tha t con-tr ibuted to the success of the Chinese tex t i le indus-tr y is the speed of reforms and restructuring, and the marauder approach to inter-nat ional t rade in tex t i les and clothing. In 1980, when China embarked upon the economic reform process, vir tually all the enterprises were owned by the s tate. Following the reforms, the industr y landscape is s tr ik-ingly di f fe rent f rom what p reva i l ed 20 year s ago. I t d i smant led 10 mi l l ion
o ld sp indles and removed 1.2 mi l l ion people dur ing t he r e s t r uc t u r ing p roce s s to avoid under-employment of resources. This lead to increases in profitabilit y and produc t iv i t y. For ins tance, industr y profit increased from $44 million to $4 billion (56 percent) in 1997-2002. Also, the labour cos t s in China are competi t ively ver y low. Wages are as low as $70 per month. With distr ibution companies in Hong Kong, it can move goods much faster, feeding thousands of stores worldwide.
( Source: The dragon of spindles;
M r. P rabha t Kumar ; The H indu
Business Line; Januar y 9th 2004;
“Can India weave the same magic”;
December 26th, 2003, The Hindu
China: The Dragon of Spindles:
and it must be vigorously pursued. Quality seed is the key to better productivity and it must been ensured that l imited varieties are permitted in par ticular regions to achieve maximum produc-tion and to avoid inter -mixing of cotton. This would require changes in the Seed Act and suc-cessful implementation of extension services. The private sector needs to be encourages to par tici -pate in extension services under the concept of integrated cotton cultivation based on farmer-corporate co -operation.
ConclusionAs pointed out by Mr. Ranabir Ray Choudhury in Business Line ( Indian texti les in quota free world ; Macrh 9th 2004), a tough future awaits the Indian texti les and apparel industry af ter the end of the MFA quota d ispensation. Competition wil l be r i fe. Lef t to itself, the industry wil l do its best to protect extant market share and robbing the same from China. A well t imed and ef fective support from the government can make a vital dif-ference to this sector in the near future.
Small Sca le SectorA shortsighted and of ten naive policy regime has shackled India's small sca le sector to a point where it is incapable of adapting new technology and investing in innovation.
Mr.P.N Vijay, a Delh i ba sed investment banker and Convenor of the BJP Centra l Eco -nomic Cel l, opines that “Lack of f inance” is the reason behind the closure of many SSEs. The ratio of working capita l avai lable to turnover for small sca le units has come down four times, form over 8 percent to a mere 2 percent, making the f irms to rely upon more internal accruals than outside f inance. On the other hand, it is rather surprising to f ind banks sit ting upon pi le of surplus funds and investing the same in risk free government bonds and other instruments. This situation needs to be recti f ied on an urgent basis. According to Mr. R. Gopa lakrishnan, ( “Small industry faces big problems”; The Hindu), an early implementa-
The India Economy Review 200440
tion of recommendations of the Second national Commission on Labour is aga in, the need of the hour. Currently, the tiny sector’s obl igations fa l l under as many as 15 dif ferent legislations. This needs to be recti f ied with the enactment of the proposed Small Enterprise Development Bi l l.
Latest Census (March 2001) points out that, out of 23.6 lakh registered small sca le units , 8.7 lakh or close to 40 percent have closed down per -
manently. Another 15 percent have gone sick. The employment and employment potentia l foregone with this trend i s s ub s t a nt i a l . From employment generation perspective, this sector has huge latent poten-tial. A drastic reform on this front is absolutely essentia l.
Also a s has been harped in CII’s agenda, “Development and Growth: Issues and Challenges- - -for achieving 8 percent sus-tained growth in GDP” (Business Line; August 7th 2004), early enactment of Small Industries Devel-opment Bill, clear definition of small, medium and tiny sectors and introduction of a limited partner-ship Act are the measures that have to be taken for upliftment of SME’s.
The s trategic impor tance of the small scale industr y in the Indian manu-factur ing sector is always underplayed. Consider this:
• 95 percent of all industr ial units in India are in the SSI sec tor. • 49 percent of manufactur ing output in India is from SSI sec tor. • 80 percent of the employment in manufac tur ing is in the SSI
sec tor.• 34 percent of the countr y’s expor ts are from SSI units.(Source: “The Big Small Scale Industry”; Mr. P.N. Vijay; February 26th 2004; The Financial
“Unknelled, Unsung and Unknown”
Annotat ion On Industr y
"We evaluate the services that anyone
renders to us according to the value he
puts on them, not according to the value
they have for us."
- Fredrick Nietzsche
The India Economy Review 200442 43The India Economy Review 2004
SS ince the 1990’s, the share of services has r isen from 47.5% to 56.1% . As was cor -roborated in “Susta ining India’s Services Revolution: Access to Foreign Markets,
Domestic Reform and International Negotia -tions”, 2004 (The Financia l Express ; Monday June 28th 2004), India’s services driven growth ref lects the increasing synergies with the com-modity-producing sectors, booming demand for consumer services and external demand for IT and BPO services. India's rich intellectual capital will enable the country to increasingly move up the va lue chain in global services market, vastly.
The IIPM Think Tank i s of the opinion that the fol lowing sectors are of great potentia l, not only to earn dollars, increasing the dollar earnings for the economy, but a lso to launch a broadside against poverty by generating significant employ-ment oppurtunities.
• Reta i l ing • Enter ta inment
• IT Enabled Services• Animation• Tourism
Reta i l ing With 12 million retail outlets India has more stores than rest of the world put together and there is hardly any product, which is not avai lable within the country. The equations would dramatica l ly a lter even i f ha lf of the India’s $180 bi l l ion reta i l market (CII-Mckinsey report estimates) becomes organized. The $180 bi l l ion Indian reta i l market is , by far, the most fragmented in the world, with just 2 percent of the entire reta i l ing business being carried out by the organized sector. The development of this par ticular sector emanates many positive external ities in both urban and rura l arenas. Some of them were discussed here.
Mr. K ishore Biya ni point s out that the amount of tax collections through direct and indi-rect taxes and levies would increase substantia l ly. The same has been corroborated by the Crisi l
Source: “FIEO plans to organize global congress on trade in services”; Business Line August 7th 2004.
India’s share in global trade in
services was about 1.3 percent
as per 2002 data. The global
trade in services was estimated
at $1, 750 billion in 2002.
India’s share in global trade in
services was about 1.3 percent
as per 2002 data. The global
trade in services was estimated
at $1, 750 billion in 2002.
Annotat ion On Ser v ice
( ‘Indian reta i l sector most frag-mented; Study; Business Line ; August 18th 2004’ ). According to the analysts, the d isadvan-tages of having much of the reta i l business in the unorga-nized sector is apparent with most loca l small sca le reta i lers operating on a low-cost and size format, thereby evading tax and fol lowing cheap labour models to of fer customers low prices. Another naked truth lying in front of us is the strong bearing it has upon the tourism services and the foreign exchange earn-ings from tourists. Singapore, Hong Kong and Dubai prove this point.
A s d i s c u s s e d b y M r . A nurag Mehra, ( ‘Who is Afra id of Organised Reta i l ing? ’; The Financia l Express, August 11th 20 0 4 ) , Di rec tor a t Pos i t ron Advisory Services, organized reta i lers wil l increasingly star t sourcing products from smaller ma nu fac t u rer s for the i r i n -house brands. This wil l give the SME sector a chance to survive in an increasingly competitive and globalizing world. Another positive feature is the f i l l ip that wil l be given to small manufac-turers. According to Mr. Mehra, today, a small manufacturer of a consumer product can not compete with a larger player on the branding front. Reta i l -ers wil l a f ford small manufac-turers the opportunity to sel l large quantities, as long as they manufacture good qual ity at a reasonable price.
W hat needs to be done ?Also a s ha s been harped in CI I ’s a genda , “Development and Growth: Issues and Chal-lenges - - - for ach iev ing 8 per -cent susta ined growth in GDP” ( Bu s i ne s s L i ne ; Aug u s t 7th
20 04), there ought to be an ef f icient mechanism for tra in-ing, retraining and professional education provision for poten-tia l and existing employees.
A Crisi l report mentions that ( ‘Indian reta i l sector most f ragmented ; Study; Busines s Line ; August 18th 2004’ ), with China a l lowing FDI inf low up to 49 percent in 1992, foreign players have taken the initiative and at present, around 40 for-eign reta i lers constitute a lmost 20 percent of the organized reta i l ing in the country. For-eign reta i lers can a lso serve to increase domestic procurement. Mr. B. S . Nagesh, managing d irector & CEO of the l i fe -style depar tmenta l chain Shop-per’s Stop, says the government could make it mandatory for international reta i lers to spend the equivalent of 50 per cent of thei r Ind ian turnover on buying from Ind ia for their international operations. It will cer ta in ly br ing more g loba l brands, and larger, g l itzy, a ir -conditioned stores and malls , adding to the genera l excite -ment in reta i l, in addition to the ef fective task of improvis -ing the supply chain ef f icien-cies. As pointed out by many reta i l sector analysts,( ‘FDI in reta i l : I s India ready for it? ’Mr.Sujit John; Times of India,2nd June2004) India cannot achieve susta inable GDP growth rates of 8 to 10 per cent with its cur -rent supply chain.
Enterta inmentAnother closely related (a l l ied) service, which also falls into this category of 'resource - l ight' and rapidly evolving sector is the Indian enter ta inment industry.
Motion Pictures and the
“For India, Bollywood
would have to do much
better than offer turgid
tamasha to expats in UK
and USA and the dias-
pora in South Africa and
Surinam. Think what an
Indian movie that wins a
clutch of Oscars can do
to Brand India.”
Mr. Chidanand Rajghatta in Times of India February 1st 2004.
The India Economy Review 200444 45The India Economy Review 2004
ar ts and enter ta inment in gen-era l are increasingly being rec-ognized as major assets in the global war of ideas and inf lu-ence u nder the l abe l c a l led “Sof t Power”. It a l so makes good economics to concentrate upon this industry for the huge stake (monetary gains) involved in this game plan. Consider the fol lowing facts mentioned in The Times of India (February 1st 2004) column ‘Bollywood needs a new act’ written by Mr. Chidanand Rajghatta
• Of the 10 0 top gros s ing f i lms of a l l t ime, 35 have come in just the last three years.
• I n 20 02 , t en Hol ly wood f i l m s g ros s ed over $ 20 0 mil l ion each.
• Fox raked in close to $1 bi l l ion with the two “Star Wars” movies
• Universa l made $400 mil-l ion with “ET”
• The three par t “Lord of the Rings”, with bel ls and whistles, earned a stagger-ing $3 bi l l ion, the GNP of a small sized country.
• “Finding Nemo” has made $350 mi l l ion, more than Infosys’ profit for the year 2003.
Against the above mentioned facts, consider the present situa-tion. India’s contribution to the global $1.2 tr i l l ion enter ta in-ment industry is less than half a percent at $ 300 mil l ion. Mr. Amit Khanna, one of the l ime-l ights in this industry points that ( ‘Fi lm industry has the potentia l to grow 70 percent’;
Business Line ; May 4th 2004), today, Indian f i lms are viewed not only by the Indian Diaspora a lone but by the South Asian Diaspora. And it is not jut f i lms but a lso television content that goes to about 100 countries. Today in a year 3.2 billion people see a Bollywood f i lm while 2.8 mil l ion see a Hollywood f i lm. Mr. Khanna, opines that f i lm industry has fa i led to capita l -ize on this potential. Currently, export of f i lms, television con-tent and animation stands at Rs 1,000 crore annual ly and has the potentia l of growing at 70 to 80 percent over the next f ive to ten years.
W hat needs to be done ?According to Fi lm Producers Guild of India (FPGI), there was enough untapped poten-tia l to grab at least 10% of the $1.2 tr i l l ion. Effor ts must be aimed at delineating the various r ights of a f i lm which can lead to multiple revenue generating streams which are now growing exponentia l ly a ided by techno-logica l developments. Accord-ing to Mr. Kuna l Da sgupta , CEO, Sony and Co-Chairman, FICCI Enter ta inment Commit-tee, (The Economic Times, 5th December, 2003) the broadband revolution can be the key driver and India is in fact far ahead of India in this aspect. Secure environments at home and the pay-per-view window wil l a lso be some of the new ways of aug-menting f i lm revenues.
Another crucia l and over-looked fact i s the multipl ier ef fect of this par ticular sector. This sector can contribute a lot for tapping the potentia l of the domestic tourism. Accord-ing to Ms. Renuka Chowdhary (Times of India ; August 9th
20 04 ) , Ind ian producer s a re travel ing to foreign loca les for mountains, lakes, deser ts, a l l of which are avai lable in India it sel f. There are many com-pla ints by the industry. Con-sider this : One needs to take 13 depar tment clearances for one shot of a hel icopter. Given the right kind of impetus and policy support by the state, this sector can def initely contribute a lot to the economy in the form of employment and taxes.
A nimationAnimation is the ar t of con-ceiving an action by drawing inanimate objects or charac-ters, which are made suitable for f i lming. The demand for an imat ion wa s ma in ly f rom fi lms, TV programmes, adver-t i sements , educationa l f i lms, besides simulation. Animation work being highly labour inten-sive should have made India a natura l outsourcing destina-tion. While the global anima-tion industry is set to leapfrog from $25 bi l l ion in 20 01 to around $50 bi l l ion by 2005, Indian companies wil l have to surmount severa l chal lenges to make most of the opportunities in this space. A study done by Economic Times Intel l igence Group ( ‘ET Knowledge Series -- - I nd i a n BPO S e c tor ’ ) a nd appeared in Economic Times, (21st November 2003) mentions that India is not l iving up to its potentia l, with annual exports less than $20 mil l ion. Another study by Andersen Consulting (The Hindu ‘Oppor tunit ies’; August 25th 20 04) conf i rms that India’s animation indus -try (domestic and exports) wil l touch USD 2 bi l l ion and create employment for around three lakh professiona ls , includ ing content developers and anima-
tors by 2008.
W hat needs to be done ?The IIPM Think Tank agrees with the idea and and thought proc e s s of M r. A . S . R av ip -ra k a sh, MD, Mi l l itoon Ani -mat ions . There need s to be government suppor t in form of establ ishment of animation schools to train staff. Establish-ing animation schools would solve the manpower inadequacy currently plaguing the indus -try, which requires more than 50,000 animators in the near term. Also, the industry players should srategize to move from servicing just the small domes-tic market to targeting the mas -sive overseas market.
IT Enabled ServicesForrester estimates that the US BPO market wil l be worth $146 bi l l ion in 20 08. This repre -sents around 3 mil l ion jobs of which they foresee 1 mil l ion end ing up of fshore. Accord-ing to Prof. Nirupama Bajpa i and Jef frey D.Sachs, India is meeting a lmost 70 percent of the worldwide business process outsourcing. In India, unlike in China and the Philippines, BPO is sought af ter not just on cost considerations, but for better qual ity as wel l. As far BPO in India i s concerned, f irms go there for cost, and stay there for qual ity. The internet based services, of which Business Pro-cess Outsourcing (BPO) is the most visible, grew at a dazzl ing 59% in 20 02-20 03, and now stands at $2.3 bi l l ion. It a lone employs 171,000 professionals from operationa l ana lysts to design engineers.
India produces 2.1 mil l ion graduates, 0.3 million post-grad-uates and 0.9 mil l ion engineers
IT has contributed
significantly is the US
from 1.4 per cent a couple
of decade ago to 2.5
per cent now. now what
should get more priority,
IT or other instrument of
Mr. N.R. Narayana Murthy
The India Economy Review 200446 47The India Economy Review 2004
every year. Specif ica l ly, the Indian Institutes of Management produce 2000 MBAs every year, tra ined in the American case -study format and a good understanding of western practices.
terms of generating employment at the loca l level and improving the infrastructure, tourism is a mountain that Indian policy makers must cl imb. The Tourism Industry, world wide, is seven times
the size of Information Tech-nology, about US$3700 bi l l ion per year, and generates a lot of jobs, as wel l forces countries to improve their Governance, Ad m i n i s t r a t ion a nd I n f r a -structure. Tourism benefits a country also in trade and invest-ments, since people travel, meet people and then some of them invest in that country. A case in point is China. Just 25 years ago China was ranked 41st in terms of the overseas visitors earnings. By 2001, China sur -passed Germany and Brita in to usurp the f i f th position in the world ranking. By 2020, China aspires to be the number one destination in the world with projected visitor f igure of 130
mil l ion.
Ms.Jayshree Sengupta a s mentions in The Hindustan Times ar ticle tit led “Roll out the red carpet”, that some of the best places are so remote that one has to spend at least a day by taxi or tra in to reach them. A case in point is the city of Jodhpur, and par ticularly the state of Rajasthan. It is cheerless that there is hardly any infrastruc-ture for real and meaningful travel into Rajasthan. There are only two inadequate f l ights per day and is impossible to get a seat in the f l ight, even i f one were to book 2 months in advance. There are not even enough beds in towns and cities. According to Ms. Malvika Singh , the columnist of “Capita l Dairy” in the Financia l Express, the Palace on Wheels is no palace - - - - it is kitsch. We must be the most unhygienic country in the world, a very important reason for the comparative lower number of travelers than anywhere else in the world. Ita ly, a nation of nearly six crore people, now gets eight crore tourists in a year. Compare it with the 30 -odd lakh (that is , counting every airl ine crew member who walks past immigration at our a irports) that we, a nation of hundred crore people, 3000 years of civi l ization, d iversity, his -tory and culture, are able to attract. Mr. Shekhar Gupta of the Indian Express, categorica l ly insists
Annotat ion On Ser v ice
Mr. S. Sadagopan, Director of Indian Insti -tute of Information Technology, Bangalore,ideates that (“Make Way for Specialized BPO”; S. Sadago-pan; Financial Express; March 5th 2004), India can emerge as a leader in niche area of “Print Process Outsourcing’. The fol lowing episodes substanti-ate this conjecture. a few of the high-end tools (from companies l ike Adobe, Macromedia and Quark) are developed out of their Indian devel-opment centres. Many of the scientif ic content creators ( John Wiley, Addison Wesley, Harcourt, Random House, Harper Collins and Blackwell Sci-ence) are reportedly outsourcing their key print processes and in some cases, even the f ina l print-ing to India. More than three mill ion copies of the Bible are printed in India. With multiple language and script ski l ls and the widespread avai labi l ity of PCs, it is l ikely that many of the scientif ic typesetting including multiple scripts processing will be outsourced to India. Legal, textbook, map, statistica l, and picture books print processing would be another area. The very large number of journals, magazines and in-house corporate com-munications magazines are the next set of print outsourcing opportunities for India.
TourismPotentia l ly, one of the most promising sectors in
that Ita ly’s rea l economic muscle comes not form its cuisine, its agriculture, hi-fashion designers or even the mafia. It comes, instead from the truly magnif icent way it has preserved its heritage. Every bit of a crumbling old wal l has been saved and used. There were fancy shops and restaurants inside old bui ld ings which would have been in ruins if not commercial ly exploited, old lanes and streets have been la id bare of the asphalt that some misguided rulers may have covered them with to expose the old bricks and cobble -stones
W hat needs to be done ?The IIPM Think Tank has col lated the best ideas and other workable solutions from dif ferent exper ts in this f ield and some of them are elabo-rated here.
The spending pattern and the amount of expenditure on tourism sector needs to be changed and amplified respectively. The central plan outlay
for the depar tment of tourism was Rs 225 crore in 2002-2003. Though the adver tisement budget of the government for promotion of tourism has been hiked by 60 percent to Rs 65 crore, it is sti l l small considering the amount of work needed to make the latest slogan “Incredible India” work.
The best way to prepare for international tourists is to encourage domestic tourism which has now reached 30 mil l ion. Better services in remote places meant mainly for domestic tourists could create the requisite infrastructure for for-eign tourists at a later stage. Even for domestic tourists , lower taxes and better package tours would help. This is how most ASEAN countries and China develop their tourism industry within a few years. Ms. Malvika Singh points what Africa has managed to do should be a lesson for a l l those who call shots in India, in the area of tourism. The young entrepreneurs in the business should be on decision-making bodies and not the bureaucrats.
Arr iving at Shanghai‘s Udong air por t and dr iving to the c i t y ‘s in f ras t r uc ture unfo ld themselves along the 65 km journey. Soon th is journey w i l l t ake jus t e igh t min -utes on the Magley train buil t with German assis tance .Shanghai will get 70 more hotels . I t already has more hotel rooms than all of the India. The Shanghai Munic-ipa l Gove r nmen t p lans to inve s t $10 0 0 0 mi l l i on on 70 tour ism related projec ts i n a round t he c i t y . O ve r 100 re ta i l ou t le t s o f fe r ing souvenirs, food, ref lexology and por trait paint ing ensure that ever y visi tor is enticed to spend. Over $24 million have been earmarked for the cons t ruc t ion of publ ic to i -lets in Beijing in preparation for the Olympic games. The number of f i ve s tar hote ls will be doubled. Around 3, 25,000 s tudents enrolled for
the tour ism related course at 1195 college and schools. N e a r l y 8 0 0 0 0 0 e mp lo y -ees in the tour is t industr y receive training to improve ser vice s tandards.
A long w i t h t he spec-tacular growth of the cites a vigorous ef for t is on to use to uplif t poorer rural economies .Bonds cumulat-ing to $73 mill ion have been used to fund the devel-opment of the tour ism in the remoter western region . S p e c i a l i n t e r e s t t ou r s focused on demonstrat ing Ch ina ‘s succe s s in t he hor t iculture and f lor iculture combined with the visi t to museums showcas ing the bamboo and cane furniture have helped spread the gain from tour ism . This is consis tence with the Chinese philosophy of regarding the plum, bamboo, chr ysanthe-
mum and orchid as the men of honor.
Mingling with the domes-t ic holiday crowds at the forbidden Cit y brought into the focus the benefi t enjoyed by using the pr imar y holiday week to encourage locals to travel . This has resulted in 200 million people spending $10000 million. The contr i-but ion from Japan, South Korea , Malays ia , S inga-pore, Philippines , Mongolia, Thai land , Indones ia ,V ie t -nam and Russia is a healthy 6.6 million visi tor while the European Nor th Amer ican and Australia visi tors add up two million.
( Source: Edi ted ex t rac t s f rom an
ar t icle t i t led “Chinese Checkmate”,
appeared in the Times of India and
authored by Mr. Prem Subrama-
niam. He has wr i t ten the piece af ter
paying a vis i t to China.)
BPO BENEFITSAdvantages Of Combining Outsourcing With Of fshor ing
Engineer ing & Design Accounts Payable & Receivable
(Source: Economic Times, dated 9th January 2004; Mr. Phaneesh Murthy and Jessie Paul)
The India Economy Review 200448 49The India Economy Review 2004
The Financia l Express edi-torial titled ‘Blueprint For Tour-ism’ aptly mentions the strategic blueprint that could be adhered by the Ministry of Tourism. Co-operation and Co-ordination is required from key ministries such as Home (for a fr iendlier Visa regime), Civil Aviation (for r idding PSU airl ines of State shackles) and Finance ( Inter -nationa l s tudent community, one of our target markets, need Budget hotels).
For add it iona l information upon this par ticular student tourists , please refer sec t ion t it led ‘Backpackers’, Ind ian E conomy Re v ie w 2 0 03 -2 0 0 4 ; pa ge number 135.
The IIPM Think Tank vehe -mently advocates the fol lowing a lternatives for leveraging the potentia l in the tourism ser -vices.
• Mountain Tourism• M ICE ( Mee t i ng s , I nc en-
t i v e s , C onve nt ion s a n d Events)
Port TourismThe Committee set up by the Shipping Ministry to study the cruise service proposa l strat-eg izes that the government run major por ts l ike Mumbai, Goa, Mangalore and Kochi can launch a major drive to pro -mote “Port Tourism”. A par t of the water front on these por ts can be conver ted to enter ta in-ment centres on the l ines of some of the great piers around the world. Por ts such as Goa and Mumbai have been witness -ing a fa l l in conta iner traf f ic. Mumbai, the premier port of the country unti l a few years ago, is losing cargo to the neighboring JN port and rendering it d if-f icult to attract large conta iner
“………Our tragedy is
two fold: First, we confuse
heritage with religious
politics. Second, we con-
fuse tourism with foreign
airlines’ landing rights.
The result is, our gov-
ernment does not have a
tourism policy but an Air-
- Mr. Shekhar Gupta, in an article tit led “Do as the Romans do”, in
The Indian Express; July 12th, 2003.
Cambod ia ’s on l y at traction for tourists is Angkor Wat. And yet, Cambodia gets n e a r l y a s m a ny tour i s t s as Ind ia. T h e r e a r e m any reasons fo r t h i s . First, “Kampuchea” w a s c l o s e d f o r tour i sm for year s under Pol Pot and i n t h e E i g h t i e s , i t was a count r y l i t te red wi th land mines. Angkor has now been declared as a world heritage
m o n u m e n t a n d much of its charm has been captured and promoted by the French for years. An impor tan t reason for the popular i t y of Angkor is that it has been packaged well. The modern airpor t in Sien Riep al lows tour is t s to come from Bangkok and s t ra igh taway set of f to see the temples by car or bus. There are at least 50 to 60 big
hotels that handle the heavy tourist traffic. T h e w h o l e t ow n thr ives on tourism. Today, it has all the trappings of a boom town and the way it’s growing, it could very well emerge as Cambodia’s largest c i t y a f t e r Phnom Penh. ( Source: Adapted f rom
a The ‘HT ar ticle tit led
“Roll out the red carpet”;
• Port Tourism• Spiritual/Religious Tourism• Heritage Tourism• Wild l i fe Tourism• Sports Tourism
vessels in the future. Its larger work force wil l continue to be a dra in on the por t’s revenues. In the l ight of this background, it has been suggested that Mumbai
Annotat ion On Ser v ice
Roll Out The Red Carpet
port, being the city’s biggest landlord can ear mark par t of
set up by ports and the cruising service operated by private par-
‘…..After all, forex inflows
from apparel, or diamond
exports are no different
from the money that would
be brought in by 2,00,000
to 3,00,000’ tourists who
want to watch an inter-
national face-off in the
field? Nor is the entry of
eagle-eyed foreign sports-
entrepreneurs any differ-
ent from foreign investors
into India to buy up the
best real estate, the deepest
oil-bearing deposits or even
the gargantuan seams of
below the Deccan Plateau?
(Mr. Soumya Kanti Mitra, ‘The Brawn Drain’; The Economic Times; July 4th 2004)
In 1954, Dien Bien Phu was just a small village, comprising no more than seven or eight houses and surrounded by sev-eral low-lying hills, 260 miles nor th-west of Hanoi and 13 miles from the L a o t i a n b o r d e r. Around it the jun-g le s we re dense where t iger s and elephants roamed. It was there that the French forces under General de Castries regrouped to make t he i r s t and, no t knowing that Viet-namese guer r i l las under Vo Nguyen Giap, haul ing in their arms and sup-plies on bicycles, had secretly occu-pied the surround-i ng h i l l s . T he r e w e r e n o r o a d s then in Dien Bien Phu, only pedes-trian tracks. Today, i t s main s t reet is f i l led wi th t rucks and car s coming f rom or going to
Laos, carr ying the burdens of a grow-ing border t rade. And the road from Hanoi brings in an increasing number of tourists, includ-ing foreigners, who want to savour the glor y of a bat t le they have read so much abou t and that has become a legend of modern t imes. The airpor t has been upgraded and a new termi-nal has been put in. Las t year, the per capita income of Dien Bien Phu’s 75 , 0 0 0 p e o p l e reached $600 and tour ism made up 37 per cent of the provincial economy. All over the prov-ince, where Thai, H’mong, Khmer, Tay and Nung e thnic m i n o r i t i e s f o r m a subs tant ial par t of the population, specia l “cul tural ” villages have been set up for tourists. They go there to
buy native handi-craf t, like brocade bags, par t ic ipate in nat ive cul tural shows, and enjoy nat ive hospital i t y. Af ter a decade of new cons truc t ion, Dien Bien Phu has become an attrac-tive young city with modern hotels, a 3 0 0 - b e d h o s p i -tal, a brand new provincial cultural a n d c o n f e r e n c e centre, a medical high school, and all the other accoutre-ments of a prosper-ing border trading post. By next year, expectedly, the city will have expanded to an area of over 110 sq km, a vast t r a n s f o r m a t i o n indeed from a puny hamlet lost in the jungle.(Source: extracted from
an ar ticle titled ‘Cities
that came in from the
cold’; by Mr. Barun Roy,
Business Standard; 11
Cit ies That Came From The Cold
its land (may be the dock area) for a modern convention and entertainment centre, which can be run by private par ties. Like wise, Kochi, Goa and Manga-lore ports can also fully tap the opportunity with the operation of cruising services. The passen-ger terminals can be individually
ties. (“Minister moots plan to boost ‘port tourism”; the Hindu Business Line; July 12th 2004)
Rel ig iou s Tou r i sm / Spi r it ua l TourismEven where there are more star-tl ing temple complexes in India, temple tourism is rather thin.
The India Economy Review 200450 51The India Economy Review 2004
The Financia l Express editoria l ( ‘Blueprint For Tourism’) quotes the NCAER’s survey that the vast majority of leisure trips by Indians have been pi lgrimages. As mentioned by Mr. M Shirodkar, ( ‘Star ting Life On A Clean Slate’; The Financia l Express, May 23rd 2004), people travel ing for rel igious reasons primari ly belong to the elderly community as well as NRIs both of whom are very particular about accommodation and other ameni-ties. The same are severely lacking. India needs to learn a lot from coutries l ike Cambodia in this respect. (Please refer the box).
Heritage TourismHeritage is tradition repackaged as spectacle. India boasts of a magnif icient cultura l, rel igious and historical heritage that goes back 3,000 years. Running a 'Palace on Wheels' is just the tip of the ice -berg. Heritage tourism can be a huge market in every state and region of India.
Wildlife TourismIndia has adequate bio -diversity and rich forest cover. No less than 23% of our country is in forest depar tment’s hands. But India has not tapped the latent potentia l. Consider this : Up to three fourths of revenue from forests in European countries comes from recreational use.
As pointed by Ms. Chandrika Mago of Times News Network ( ‘Laissez forest: Govt plans con-trol led tourism’; The Times of India ; July 2nd 2004), so far, wild l i fe tourism is a l lowed, suppos -edly under str ict control, in national parks and sanctuaries. But the assessment is that the loca l people have not really benefited, expect for excep-tions l ike Karnataka. One has to take the locals on board, teach them modern ski l ls of preservation of their eco -systems and treat the system with great sensitivity and care. Wildl i fe tourism as a concept holds very lucrative potential. The follow-ing options are worth giving a try that have a lso find a mention in the guidelines of Environmental ministry:
• Trekking• Angling• White water raf ting• Riding tra i ls• Rock cl imbing• Mountaineering• Paragl id ing• Hot a ir ba l looning
• Bird watching• Ski ing• Camping in abandoned rest houses• Elephant, cycle, photo or canoeing safaris and etc.
Wild-l i fe/Eco-Tourism can maximize the pro -ductivity of India’s national, technica l, human, cultural and scientific resources. It a lso eradicates poverty in an environmentally sustainable manner by enhancing employment potentia l within the tourism sector as wel l as fostering the economic integration, developing l inkages with other sec-tors
Sports TourismMr. Soumya Kanti Mitra, observes that ( ‘The Brawn Drain’; The Economic Times ; July 4th 2004), India’s immense complement of young people has put it very f irmly in the sights of today’s spor ts entrepreneurs. A case in point is Mr. Andrew Krieger, who along with his par tners is committing a $120 mil l ion to create a state -of-ar t spor ts tra ining faci l ity, IMG Academies Bharata, in Hyderabad. Faci l it ies l ike these not only bui ld the spor ting ta lent in India, but a lso help in attracting more tourists , wil l ing to watch international spor t events being held in India.
Mounta in Tourism Mountain tourism plays a signif icant role in national economies. India, despite having many attractive snow destinations, has not been able to leverage and exploit its tourism potentia l. Its share in total tourism earnings remains below 5%. The Economic Times ( ‘Cold Mountain’; Novem-ber 21st 2003) mentions that Mountain tourism constitutes 15 to 20 percent of worldwide tourism, or $70 to 90 bi l l ion per year. But India’s share in it is less than 0.5% .
MICE (Meet ings, Incentives, Conventions and Events)It is estimated that the tota l national and interna-tional MICE meetings market a l l over the world is in excess of $270 bi l l ion. ( ‘Inbound MICE reve -nue up by 40%’; Economic Times ; 5th September) This segment holds potentia l for any country. It is estimated that a person travel ing to a country for a conference or convention spends anywhere four to eight times more than a normal leisure traveler. The tourist spends more on food, more on business centre services.
Annotat ion On Ser v ice
The IIPM Think Tank opines that robust tourism infrastructure is very imperative for this segment. Major competitors l ike Thai land, Singapore, Dubai and Malaysia have a lready achieved the critica l mass. A vibrant Public-Pri -vate Par tnership is a suitable option. According to Mr. Shyam Nagpal, MD, International Conference and Exhibition Services, India need to have world class convention centres in prominent locations in metros to qualify to bid for the mega conferences (with capacity 8000 to 10000, with multiple halls for parallel sessions, exhibitions and events)
As mentioned in The Economic Times (‘India’s travel and tourism demand growing by 8.8%’; May 5th 2004), various policy changes by the state such as gradual and slow increase in the allocation, removal and reduction in taxes on tourism and travel, f lex-ible policy on charters, introduction of open skies for peak tourism season, privatization of Delhi and
Mumbai airports, divestment in government hotels and etc have made a considerable positive dent upon this service sector. But, a lot needs to be worked upon Public-Private Par tnership model, which holds a lot of potentia l. India the butter f ly of Asia never got the chance to be dressed up in a Fairy’s dress for her tourists. We rea l ly need to take care, so that our beautiful lady becomes the biggest attraction in the name of tourism.
ConclusionSlow economic growth does not a l low a greater absorption of the rura l poor in other activities and many Indians sti l l survive as marginal farm-ers or marginal landless labourers. They require specia l attnetion. As a country of one bi l l ion, we should gear ourselves to take up the oppurtunities offered by the service sector in our march towards an India, where ebery Indian will have wealth and well-being.IER
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