International Development, Q13, Q17, Q18,

Ganguly, Kavery

Gulati, Ashok

Landes, Maurice R.

English

Research Papers in Economics

42  CHOICES	 2nd	Quarter	2009	•	24(2)	
The magazine of food, farm, and resource issues
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AAEA
Agricultural & Applied
Economics Association
A publication of the 
Agricultural & Applied 
Economics Association
Indian Agriculture: Managing Growth with 
Equity
Ashok Gulati, Maurice R . Landes, and Kavery Ganguly
JEL Classifications: Q13, Q17, Q18
Ensuring food security—the availability of basic staples 
at affordable prices—for a large and growing population 
has been one of India’s biggest economic and political chal-
lenges. Since the 1960s, policies have sought to balance 
producer and consumer welfare by focusing on increasing 
wheat and rice production, supporting prices, maintaining 
buffer stocks, and broadly distributing subsidized grain to 
consumers. With improved food grain supplies, the focus is 
now turning to reducing the high cost of public food grain 
management and improving the safety net for the poor. In 
addition, significant new challenges have emerged as rising 
incomes shift demand patterns in favor of high value foods 
such as fruit, vegetables, milk, meat, and eggs, and away 
from cereals. Diversification of agricultural production and 
marketing now offers the primary opportunity to strength-
en lagging growth in farm output and rural employment. 
However, achieving diversified growth with equity also re-
quires new measures to increase investment and provide 
the market institutions needed to develop India’s inefficient 
food processing and marketing sectors, and to ensure that 
the transformation to higher-value agriculture is inclusive 
of India’s large number of marginal and small farmers.
By far the most striking transformation occurring in 
Indian agriculture is the shift from a food grain-oriented 
supply led framework dominated by the public sector, to 
a more diversified and demand driven framework with an 
expanding role for the private sector. Against this backdrop, 
we examine the emerging dynamics and challenges in In-
dia’s agricultural sector, including managing improvements 
in food access for the poor, facilitating a private sector led 
transformation to more efficient agricultural markets, and 
effectively linking small farmers to these increasingly di-
verse markets. 
Food Security: A Challenge Met?
Despite marked improvement in food grain production 
since the 1960s, when India was heavily dependent on 
food aid, ensuring adequate domestic supplies and stable 
prices remain top priorities for Indian policymakers. Al-
though India still periodically imports wheat, it is now 
a net food grain exporter that is typically among the top 
three world rice exporters and periodically a significant 
exporter of wheat and coarse grain. India’s improved do-
mestic food grain supply situation is reinforced by a dra-
matic  rise  in  foreign  exchange  reserves  stemming  from 
the increased competitiveness of its nonfarm exports since 
the early 1990s. In contrast to the 1960s and 1970s when 
cereal  import  costs  exceeded  foreign  exchange  reserves 
(Ganesh-Kumar, Gulati, and Cummings, 2007), current 
(April 2009) reserves of about $250 billion now far exceed 
the cost of any plausible grain import requirement without 
disrupting other trade and capital account transactions. 
Despite  the  improvements  in  domestic  supplies  and 
commercial import capacity, events such as the 6.3 mil-
lion tons of wheat imports required in 2006/07 and the 
global food price spike of 2007/08 continue to spark po-
litical pressure to continue to give food grain production 
top priority. The 2007/08 global price spike triggered a ban 
on rice exports to insulate domestic consumers from world 
prices, but added fuel to the rise in global rice prices. With 
the recent drop in prices for rice and other commodities, 
India is likely to resume rice exports. 
Food Grain Management: A Continuing 
Challenge 
The  efficient  management  of  public  procurement,  han-
dling, and storage of food grains by the Food Corporation 
of India (FCI), and effective targeting of consumer subsi-	 2nd	Quarter	2009	•	24(2)	 CHOICES	 43
dies on low-income groups are con-
tinuing challenges in the food grain 
economy.  Changes  in  weather  and 
price policy have driven large swings 
in public procurement and stocks of 
wheat and rice since the early 1990s 
(Figure 1). Sharp hikes in minimum 
support prices led to the accumula-
tion of large surpluses far in excess of 
targeted  food  security  needs  during 
the early 2000s—and now again in 
2009/10—to be worked off through 
domestic and export subsidies, as well 
as storage losses. The real cost of pub-
lic food grain management is grow-
ing about 9% annually, and now far 
exceeds annual public investment in 
agriculture [Landes, 2008].  
Even with a vastly improved avail-
ability of food staples and burgeoning 
outlays on consumer subsidies, effec-
tively targeting food subsidies on In-
dia’s large population of rural and ur-
ban poor remains a challenge. India’s 
national subsidized food distribution 
program  was  renamed  the Targeted 
Public Distribution System (TPDS) 
in 1997/98, with a sharpened focus 
on targeting people living below the 
poverty line. Although subsidies have 
been increased for the poorest con-
sumers,  the  TPDS  is  criticized  for 
pilferage,  poor  delivery  of  services, 
and failure to make an effective dent 
in hunger, particularly in states where 
the  concentration  of  poverty  is  the 
highest. The National Rural Employ-
ment Guarantee Scheme (NREGS), 
a large program introduced in 2006, 
aims  to  enhance  livelihood  security 
and  household  purchasing  capacity 
by ensuring at least 100 days of wage 
work  annually  in  rural  areas.  Local 
governance  issues  remain  critical  to 
the success of the NREGS and oth-
er efforts to target transfers to poor 
households.
The Diversification Challenge
Indian farm output has been diversi-
fying away from cereals and towards 
high value crop and livestock prod-
ucts since the early 1990s (Figure 2). 
The share of cereals in the total value 
of farm output has steadily declined, 
while  growth  in  high-value  prod-
ucts, including fruits and vegetables, 
sugar  and  fiber  crops,  milk,  meat, 
and eggs, has significantly outpaced 
that of cereals. In recent years, India 
has  emerged  as  the  world’s  largest 
producer of milk, the second largest 
producer of fruit and vegetables, and 
among the top producers of poultry 
meat and eggs. Increasingly, it is not 
just food grains that drive the agricul-
tural  sector  and  farm  incomes,  but 
growth in a broadening range of high 
value products. 
In contrast to cereals, where pol-
icy intervention has been extensive, 
the  expansion  of  high-value  crop 
and  livestock  agriculture  has  been 
led primarily by growth in consumer 
demand and changing preferences as-
sociated with rising incomes, urban-
ization, and youthful demographics. 
Although  India’s  climate,  soil,  and 
water resources provide the potential 
to diversify output, agricultural mar-
kets,  market  institutions,  and  pro-
cessing industries needed to support 
Figure 1. Stocks of Rice and Wheat with Central Pool in India
Figure 2. Real Growth in Value of Agricultural Output in India44  CHOICES	 2nd	Quarter	2009	•	24(2)	
diversification remain severely under-
developed because of weak public and 
private  investment.  The  agricultural 
marketing and processing sectors are 
characterized  by  a  large  number  of 
small-scale, nonintegrated, and inef-
ficient enterprises, and relatively few 
large  vertically  or  horizontally  inte-
grated firms. 
Accelerating  private  investment 
in marketing and processing agribusi-
ness requires overcoming a historically 
risky  central  and  state  government 
policy  climate  that  heavily  regulates 
movement, storage, and marketing of 
farm products, as well as poor power 
and transport infrastructure (Landes, 
2008). Recent domestic and foreign 
private investment activity in market-
ing and processing, in part associated 
with regulatory reform by some states, 
may signal the emergence of a more 
dynamic  agribusiness  sector  to  sup-
port  agricultural  diversification.  The 
rapid expansion of India’s poultry in-
dustry since the mid-1990s, driven by 
private investment in integrated oper-
ations that have significantly reduced 
the cost of producing and marketing 
poultry, is an example of the potential 
for private sector led growth (Landes, 
Persaud, and Dyck, 2004). Another is 
the  expansion  of  private  investment 
in milk processing and marketing af-
ter 2002, when regulatory reform al-
lowed private firms to compete with 
the  traditional  dominance  of  dairy 
cooperatives. The market share of pri-
vate players in the dairy sector is now 
expected to overtake the cooperatives 
by 2011 (Gupta, 2007).
Since  2000,  there  has  also  been 
rapid growth in investment in modern 
food wholesaling and retailing by both 
domestic  and  foreign  players.  Food 
marketing  in  India  has  traditionally 
been dominated by small-scale inde-
pendent wholesalers and retailers with 
little backward integration to farmers. 
Although  the  modern  retailers  still 
account for only about 1.5% of total 
food sales, and “back end” investment 
in supply chains remains limited, the 
expansion of modern retailing has the 
potential to spark investment in mar-
keting efficiency and processing that 
yields benefits to both producers and 
consumers. 
The Challenge of “Inclusive” Agri-
cultural Growth
The progress achieved in food secu-
rity and agricultural diversification is 
promising for Indian agriculture, but 
perhaps the key challenge in achieving 
welfare gains lies in ensuring agricul-
tural growth that is inclusive of small 
holders. It has been well documented 
that  agricultural  diversification  gen-
erates  greater  employment  opportu-
nities,  particularly  for  women,  and 
higher incomes for farm households 
(Joshi, Birthal, and Minot, 2006). The 
area shift from cereals to vegetables, in 
particular, has enhanced employment 
opportunities in rural areas (Joshi, et 
al., 2005). However, the combination 
of a large number of small farmers, 
poor  rural  infrastructure,  and  frag-
mented and underdeveloped markets 
complicates establishment of efficient 
and equitable links between farmers 
and  the  diverse,  emerging  domestic 
market. 
Marginal and small farmers, whose 
average  operational  landholding  de-
clined from 2.2 hectares in 1970 to 
1.06  hectares  in  2003,  continue  to 
dominate India’s large agrarian econ-
omy. Nearly 88% of holdings are less 
than two hectares, with these holdings 
accounting for about 44% of the op-
erated area (Figure 3). Fragmentation 
of operational holdings has expanded 
the bottom of the agrarian pyramid 
in all but a few Indian states. Small 
farms have proved to be more produc-
tive than large farms—they contribute 
about 51% of the value of farm out-
put–owing to their intensive cultiva-
tion practices and abundance of fam-
ily labor. In the case of fresh fruit and 
vegetables,  survey  results  show  that 
52% of fruit area and 61% of vegeta-
ble area is cultivated by smallholders 
(Birthal, et al., 2006).  
But, significant progress needs to 
be made in developing efficient and 
equitable markets for large numbers 
of small surpluses of perishable goods, 
and  in  managing  the  limited  risk 
Figure 3. Fragmenting Operational Landholdings in India	 2nd	Quarter	2009	•	24(2)	 CHOICES	 45
bearing capacity of small farmers. In-
dia’s agricultural markets are crowded 
with  middlemen  and  commission 
agents  who  receive  high  fees  and 
margins that eat into the farmer’s in-
comes (Mattoo, Mishra, and Narain, 
2007). Part of the problem lies in lack 
of adequate storage and transport in-
frastructure and integration between 
growers and markets which result in 
large postharvest losses. Because mar-
keting  regulations  have  historically 
prevented direct links between farm-
ers  and  agribusinesses,  a  great  deal 
needs to be done to build integrated 
processing and marketing firms, and 
to develop contract farming models 
and other market institutions to link 
small producers with markets.
Small  farmers  primarily  engaged 
in  the  traditional  grain  cultivation 
also typically lack incentives, capital, 
and  expertise  to  venture  into  high 
value markets, and have limited abil-
ity to cope with the risks that may 
be  associated  with  new  enterprises. 
Although  the  potential  gains  from 
diversification  are  higher  than  for 
producing grains alone, measures are 
needed  to  mitigate  potential  price, 
production, and marketing risks. 
Policy Challenges
Indian agricultural policy must bal-
ance a changing food security land-
scape  with  the  emerging  need  to 
diversify farms and markets towards 
high  value  commodities.  On  the 
food grain front, where the focus has 
been on increasing productivity, the 
current challenges are to reduce the 
cost and inefficiency of public food 
grain operations by the FCI, and to 
ensure an effective food safety net for 
low-income households. A key policy 
option  is  to  shift  responsibility  for 
procuring,  handling,  and  transport-
ing operational supplies of wheat and 
rice to the private sector and confine 
the role of the FCI to holding buffer 
stocks (Srinivasan, Jha, and Landes, 
2007).  To  improve  the  food  safety 
net,  current  options  include  expan-
sion  of  targeted  rural  employment 
and food distribution schemes such 
as  the  NREGS  and  school  feeding 
programs,  and  the  introduction  of 
bio-metric identity cards to improve 
targeting the poor. 
Realizing the benefits from agri-
cultural  diversification  implies  sig-
nificant  challenges  for  agricultural 
price policy. The current price policy 
of favoring rice and wheat cultivation 
with  support  prices  set  on  a  cost-
plus  basis  has  become  a  politically 
important source of income support 
in grain surplus areas, but undercuts 
incentives to diversify even when di-
versified enterprises potentially yield 
more income per hectare. Lower rela-
tive support levels for food grains are 
necessary  in  order  to  allow  market 
forces to play a larger role in resource 
allocation, but it is unclear how polit-
ically feasible this will be or if suitable 
compensating measures can be inden-
tified. The most-discussed option has 
been  to  reduce  the  minimum  sup-
port prices for grain, while purchas-
ing all operational and buffer stocks 
required  for  subsidized  distribution 
programs at prevailing market prices. 
In contrast to the dominant role 
played by the public sector in the de-
velopment of India’s food grain sec-
tor, the process of diversification into 
high-value agriculture will largely de-
pend on participation and investment 
by the private sector. The policy chal-
lenge is to shift from the role of domi-
nant market player, to that of facilita-
tor of private investment and efficient 
private markets. The pace of diversi-
fication is likely to hinge on an im-
proved climate for private investment 
in  agribusiness  and  infrastructure, 
including continued market-oriented 
reform of central and state level regu-
lations that impede the emergence of 
modern,  integrated  marketing  and 
processing firms. 
Meeting  the  challenge  of  foster-
ing  inclusive  growth  appears  to  be 
tied closely to easing restrictions on 
private  sector  participation  in  agri-
cultural  markets.  Policymakers  are 
increasingly focused on reforms that 
can help develop firm-farm linkages, 
including  contract  farming,  coop-
eratives,  and  grower  organizations. 
These activities have been restricted 
by  state  marketing  regulations  now 
being  amended  in  some  states  to 
permit  backward  integration  to  the 
farm level by private agribusinesses. 
India’s poorly developed land rental 
markets are also a potential obstacle 
to firms and farms coming together 
to do business. Current laws do not 
adequately  protect  either  party  in 
land rental agreements, creating risks 
that minimize formation of larger op-
erational holdings that might be more 
conducive  to  improving  farm-firm 
linkages  and  on-farm  investment. 
However, the politically sensitive le-
gal reforms and costly improvements 
in land records needed to develop a 
more viable land rental market appear 
unlikely in the foreseeable future. 
For More Information
Birthal, P.S., Joshi, P.K., Roy, D., and 
Thorat, A. (2006). Diversification 
in  Indian  Agriculture  towards 
High  Value  Products:  What  de-
termines it and who participates 
in  it?  In  From  Plate  to  Plough: 
Agricultural Diversification and its 
Implications for the Smallholders in 
India. Submitted to Ford Founda-
tion, New Delhi, by International 
Food  Policy  Research  Institute, 
Washington D.C.
Ganesh-Kumar,  A.,  Gulati,  A., 
and  Cummings  Jr.,  R.  (2007). 
Foodgrains  Policy  and  Manage-
ment in India: Responding to To-
day’s Challenges and Opportunities. 
Unpublished  manuscript.  Inter-
national  Food  Policy  Research 
Institute. New Delhi Office. New 
Delhi.
Gupta,  P.R.  (2007).  Dairy  India 
2007. Dairy India Yearbook. New 
Delhi.46  CHOICES	 2nd	Quarter	2009	•	24(2)	
Joshi, P.K., Birthal, P.S., and Minot, 
N. (2006). Sources of Agricultural 
Growth in India: Role of Diversi-
fication towards High-Value Crops. 
MTID  Discussion  Paper  No. 
98.  International  Food  Policy 
Research  Institute.  Washington, 
DC. 
Joshi, P.K., Gulati, A., Birthal, P.S., 
and  Tiwari,  L.  (2005).  Agricul-
ture Diversification in South Asia: 
Patterns, Determinants, and Policy 
Implications.  In  S.C.  Babu  and 
A.Gulati  (Eds.),  Economic  Re-
forms and Food Security. USA: The 
Haworth Press, Inc.  
Landes,  M.R.  (2008).  The  Environ-
ment  for  Agribusiness  Investment 
in India, EIB-37. Economic Re-
search Service. U.S. Department 
of Agriculture, Washington. DC. 
Available  online:  http://www.ers.
usda.gov/Publications/EIB37/ 
Landes, M.R, Persaud, S., and Dyck, 
J.  (2004).  India’s  Poultry  Sector: 
Development  and  Prospects,  Ag-
riculture  and  Trade  Report  No. 
WRS04-03.  U.S.  Department 
of  Agriculture.  Economic  Re-
search  Service.  Available  online:   
http://ers.usda.gov/publications/
WRS0403/ 
Mattoo, A., Mishra, D., and Narain, 
A.  (2007).  From  Competition  at 
Home  to  Competing  Abroad:  A 
Case Study of India’s Horticulture. 
New Delhi: The World Bank and 
Oxford University Press.
Srinivasan, P.V., Jha, S., and Landes, 
M.R. (2007). Indian Wheat and 
Rice Sector Policies and the Im-
plications  of  Reform,  ERR-41. 
Economic Research Service. U.S. 
Department of Agriculture. Avail-
able online: http://www.ers.usda.
gov/publications/err41/
Ashok  Gulati  (a.gulati@cgiar.org)  is 
Director  in  Asia,  International  Food 
Policy  Research  Institute,  New  Delhi 
Office. Maurice R. Landes (mlandes@
ers.usda.gov)  is  Senior  Economist, 
USDA/ERS/MTED, Washington D.C. 
Kavery Ganguly (k.ganguly@cgiar.org) 
is Senior Research Analyst, Internation-
al Food Policy Research Institute, New 
Delhi Office.
The  views  expressed  here  by  Maurice 
R. Landes are those of this author, and 
may not be attributed to the Economic 
Research  Service  or  the  U.S.  Depart-
ment of Agriculture. 

Indian Agriculture: Managing Growth with Equity

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