Financial Daily
from THE HINDU group of publications

Wednesday, April 25, 2001



Opinion | Next

Is India squeezing enough out of soya?

G. Chandrashekhar

THE Centre initiated economic liberalisation in July 1991 as a result of which there was delicensing, deregulation and decontrol of a wide spectrum of business activities. Following this, capacity expansion, output growth and export growth marked the fir st few years of the decade of the 1990s.

The solvent extraction industry rapidly expanded capacities. From 453 units, with an aggregate processing capacity of 18.4 million tonnes in July 1991, the number of solvent extraction units in the country nearly doubled to 850 with an aggregate processi ng capacity of 34.5 million tonnes by December 1998.

In addition, the country's oilseeds and vegetable oils sector, which was subjected to a host of controls and restrictions, saw the introduction of a freer trade regime, both domestic and foreign. Export and import of oilseeds and derivatives were liberal ised, storage limits were scrapped, access to credit was freed and futures trading in a number of commodities permitted.

Despite these positive developments over the last few years, currently the country's vegetable oil sector is still beset with several inherent problems. Primarily, it is characterised by low and unsteady indigenous output. There are wide swings in oilsee ds production even as the demand expands because of the rise in population and incomes. As a result, there is a serious demand-supply mismatch. Self-sufficiency is rapidly eroding as dependence on imports has increased from 5 per cent to 45 per cent over the last few years.

There are inefficiencies in the processing industry too. There is the co-existence of ancient and modern processing methods -- from bullock-driven backyard crushing operation to modern expander/extruder technology. Reservation of groundnut and rapeseed/m ustard crushing for the small-scale sector has prevented flow of investment and modernisation into oilseed processing.

Quality concerns continue to dog the oilseeds sector with issues like aflatoxin contamination in groundnut and glucosinolate in rapeseed/mustard remaining largely unaddressed. Quality related pricing is conspicuous by its absence. Poor information flow ( often distorted) results in producers and processors not being able to take an informed decision, which leads to wild speculation in the trade with poor concern for fundamentals.

It is in this background that one must examine whether Indian soya will be in a position to attain global competitiveness as it is no more insulated from world trends and is now increasingly subject to global influences. Relatively a new crop for the cou ntry, soyabean has emerged as the second largest crop of the kharif season. It is protein-rich with oil a low content of 17 per cent. Soyameal is largely export oriented and has to compete with massive and growing global production.

Indian soyabean output, which represents less than 5 per cent of global production, has been rather unsteady over the last five years. Soyabean cultivation continues to be subject to the vagaries of rainfall (the South-West monsoon) and yields are typica lly around one tonne per hectare. Production has ranged between 5 million tonnes and 7 million tonnes since 1996-97.

Among Indian oilmeals, soyameal is the only item with decent export volumes. Export of non-soya meals (meals of groundnut, rapeseed/mustard, ricebran, etc) has become negligible over the last three years because of quality concerns and uncompetitive pric e.

Soyameal accounts for as much as 90 per cent of all oilmeals exported from the country. Soyameal exports have turned sluggish in recent years, averaging around 2.4 million tonnes per annum. Projected exports for fiscal 2000-01 are two million tonnes.

For the Indian soya sector, challenges of globalisation may be viewed from the points of view of soyabean production, processing and marketing.

Production challenges: Indian yields at one tonne per hectare are among the lowest in the world. Major producers -- the US, Brazil and Argentina -- average 2.5 tonnes a hectare, while China produces 1.7 tonnes a hectare. The world average is 2.2 tonnes a hectare. Obviously, the Indian soyabean farmer will be hard put to compete with his counterpart in other parts of the world.

All these years, India's soyabean output increased because of area expansion and not through higher productivity. Indeed, farmers indiscriminately increased the area under cultivation without any concern for yields and received prices 20-30 per cent high er than the minimum support price under a regime that protected them from bearish global influences. They have been lulled into complacency and a false sense of security about high prices.

Processing industry challenges: There are challenges facing the processing industry that include low capacity utilisation, poor economies of scale, low-key domestic demand promotion and infrastructure inadequacies. Setting up of large processing capacity unrelated to domestic soyabean production prospects meant that capacities chased limited raw material supplies.

In addition, the industry never had a long-term perspective of business and failed to plough back profits for modernisation or backward integration. In sum, the industry did not have a vision or a large picture to work toward.

Marketing challenges: India never had any effective export marketing schemes or programmes for soyameal. Major origins such as the US adopt aggressive marketing strategies and have export enhancement, credit and credit guarantee schemes for export market promotion.

Under the circumstances, can Indian soya sector stay competitive any longer? In raw material production India is uncompetitive. An average Indian farmer producing one ton of soyabean cannot compete with, say an average US farmer producing 2.5 tonnes.

Similarly, an average Indian processor with a processing capacity typically of 300 tonnes a day (suffering diseconomies of scale) can never hope to compete with processors in other major producing countries with capacities of 5,000-6,000 tonnes a day. A large plant in Argentina crushes 12,000 tonnes of soyabean a day, a quantity that average Indian units process perhaps in a year.

In sum, India will be competitive neither in raw material production, nor in processing, or in export marketing, if the present trends of production are allowed to continue. There is threat that the Indian soya sector may soon turn globally uncompetitive .

Global competitiveness may be defined as the ability to produce globally acceptable quality at globally comparable cost. Obviously, India needs to considerably tighten its cost of raw material production and processing, so as to stay in contention in the export market. There is need for the policy-makers to create conditions for attaining global competitiveness and empowering agriculture and industry to face globalisation.

While there are no quick-fix solutions, some urgent measures are called for. We need a massive programme for yield increase. A definite action plan with committed financial and human resources for raising productivity is necessary. Creation of rural asse ts, especially marketing infrastructure for farmers, is necessary. The industry must go for backward-integration so that input supplies, technology and quality are better managed.

The next step should be the consolidation of fragmented capacities. There are far too many small and medium units with poor scale economies. A financial package for consolidation must be worked out.

Marketing is an area crying for attention. India does not produce genetically modified soyabean. The non-GM status must be exploited. In addition to normal trade promotion, counter-trade and other unconventional routes may be explored.

What the Indian soya sector, indeed the entire oilseed based sector, needs is a holistic approach to addressing the issues and an integrated policy support with a long-term perspective.

(Excerpts from a presentation on `Challenges of globalisation: Can Indian soya sector face them?' by the author at the India Soy Forum 2001, organised by Soyabean Processors Association of India in Indore.)

Related links:
Need to exploit non-GM status of soya
Soya forum strives to raise domestic offtake

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