Financial Daily from THE HINDU group of publications
Tuesday, May 31, 2005
Agri-Biz & Commodities - Insight
Farm exports: Not yielding full potential
M. Y. Khan
The Ministry has announced a reduction in export obligation from 8 times to 6 for pharma exports under the Export Promotion Capital Goods scheme in order to encourage the import of plants and machinery at concessional duty.
The quantum of bank guarantee has been reduced from 25 per cent to 15 per cent for agro-export zones. In addition, there is a package for marine products by way of a concessional duty for import of long line system for tuna fishing and 1 per cent duty free entitlement to import special flavouring and ingredients for sea-food processing.
The Ministry has also removed the export cess on various agriculture and plantation items to make agricultural goods more competitive. The Prime Minister, Dr Manmohan Singh, has ordered the Income-Tax Department to stop the ongoing tax proceedings and recovery drives against exporters in respect of income-tax collections on profits on account of the Duty Entitlement Pass-Book (DEPB) scheme.
These policy changes will definitely enable exporters, particularly those of agricultural products to sell competitively in the developed countries that lavishly subsidise agricultural exports. However, there is a danger that removal of export cess on agricultural exports may result in lower prices of our goods in the international market, and therefore invite anti-dumping or countervailing duties.
If this happens the Indian Government will lose revenue and importing countries will gain by imposing countervailing duties.
Notwithstanding the negative reaction by developed countries, the abolition of export cess on farm products is a timely move by the government. Though agricultural exports have been rising for the last 15 years, they have not kept pace with exports of manufactured goods and petroleum products.
Waning share of farm exports
The share of farm products in total exports declined from 21 per cent in 1987-88 to 18.5 per cent in 1990-91. The fall has been rapid thereafter. In 2003-04, agriculture contributed only 11.7 per cent to total exports. Commodities that have recorded a continuous decline include tea, coffee, rice, cashewnuts, spices and marine products. Statistics reveal that tea exports peaked at Rs 22,645 crore in 1998-99 but declined continuously thereafter to Rs 1,595 crore in 2003-04. Similarly, coffee and rice exports earned Rs 1,728 crore and Rs 6,281 crore respectively in 1998-99 but declined to Rs 1,082 crore and Rs 4,133 crore in 2003-04.
One may argue that this has been due to a big rise in exports of petroleum and petroleum products and miscellaneous products, which accounted for 6 per cent and 4 per cent respectively of total exports in 2003-04. But the position becomes clearer when we look at growth of exports during 1990-91 and 2003-04. While agricultural exports increased at 36 per cent per annum, exports of manufactured goods rose at 65 per cent. This is an important aspect if we examine the direction of exports of low performing agricultural products.
India's tea exports lost out, to a large extent, to Iran, Iraq, Poland, Russia and the UK. Marine products occupy a crucial position, they account for 20 per cent of the total agricultural exports. But marine exports to China, Hong Kong, Italy, Japan, Spain, Thailand, the UAE, the UK and the US have declined substantially over the last many years, falling by Rs 900 crore in 2003-04 against what they earned in 2002-03.
Like marine products, cashew kernels also recorded a fall in almost all major markets from Rs 2,461 crore in 1999-2000 to Rs 1,700 crore in 2003-04.
The major markets are the US, the UK, Saudi Arabia, Canada, and France. It is clear that the factors affecting the exports are specific to the product and the country. The Commerce Ministry should, therefore, undertake product- and country- specific studies, and arrive at relevant solutions.
Putting in place the infrastructure
Agricultural exports are perishable and so Government incentives aremeaningless in the absence of sound infrastructure. This includes a dependable and swift transport system to reach the shipment points, stringent environmental standards, quality control systems, large-scale processing facilities and research and development laboratories.
Agricultural exports, particularly products such as fruits, mango pulp, fruit juices, meat, marine products and vegetables do not have adequate processing facilities.
The government should create awareness of international environment standards through programmes on the quality aspects of exports and the need to adhere to the WTO provisions.
Another important area that requires immediate attention is storage. Though investment has trickled into this area, it is not at the rate required. The private sector will have to create not only production and packaging facilities but also modern storage systems, as close to the shipment as possible.
Warehousing facilities, especially for agricultural exports, need to be improved by setting up cold storages in foreign markets so that perishables can be preserved for a few days after they touch foreign soil.
The government should consider the setting up of Agriculture Export Zones in every State and Central Warehousing Corporation as per the Warehousing Corporation (Amendment) Bill 2001. State governments should be given incentives to develop agri-exports zones in which they can achieve specialisation.
The Ministry of Commerce has proposed the constitution of a committee to go into the structure of various taxes on agriculture and other exportable commodities to reduce the transaction cost of exports. A better policy would be for the State to waive taxes by the State on agricultural exports whether it is octroi, road tax or any other tax.
Investment to generate the desired growth in output should be accompanied by social, economic and institutional changes. Market forces need to be strengthened and the various controls in the agricultural sector liberalised.
Given the free market in the agricultural sector, people will pool in their resources should they come across attractive opportunities and dependable institutions.
This kind of an environment can be created by the government, export agencies or private organisations by providing the necessary information on international markets and technology to people working in rural industries.
Corporatising the farm sector
Scale of production is also an important aspect. Agro-production units in India are generally small-scale and therefore do not benefit from economies of scale that are essential to keep the cost of production competitive.
There is a need to corporatise agricultural production, particularly for those items that are exported. A corporate system may result in promotion of relatively bigger units with a better production pattern and correct the mismatch between the production and supply schedule.
Exporters of food products do not generally resort to advertising. In other words, they do not create demand. In the modern marketing system, advertising is important for sales promotion.
With the removal of all entry barriers, in keeping with the WTO proposals, agricultural exports should be able to compete in the international market.
It is worthwhile to note that the increase in export receipts has been to a larger extent on account of higher unit value realisation in the past two years and not due to increase in the volume of exports.
We have to strive to enhance export quantities also. If India wants to compete with China it must modernise the farm sector, provide irrigation facilities, and make available fertilisers at international prices.
So far agricultural exports have been treated as a residual item.
Areas in the agricultural sector such as export-linked research, resources management, new technologies, professional marketing and sequencing of priorities too need to be looked into.
(The author is a former economic advisor to SEBI.)
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