India - The Indian oilseed complex : capturing market opportunities (Vol. 1 of 2) : Main Report

Report No. 15677-IN India The Indian Oilseed Complex: Capturing Market Opportunities (In Two Volumes) Volume I: Main Report July 31, 1997 Rural Development Sector Unit South Asia Region Document o Oh Worfd Bank  Currency Rs/ US$ Currency Official Unified Marketa Prior to June 1966 4.76 June 6, 1966 to mid-December 1971 7.50 Mid-December 1971 to end-June 1972 7.28 1971-72 7.44 1972-73 7.71 1973-74 7.79 1974-75 7.98 1975-76 8.65 1976-77 8.94 1977-78 8.56 1978-79 8.21 1979-80 8.08 1980-81 7.89 1981-82 8.93 1982-83 9.63 1983-84 10.31 1984-85 11.89 1985-86 12.24 1986-87 12.79 1987-88 12.97 1988-89 14.48 1989-90 16.66 1990-91 17.95 1991-92 24.52 1992-93 26.41 30.65 1993-94 31.36 1994-95 31.40 1995-96 33.46 1996-97 35.50 Note: The Indian fiscal year runs from April 1 through March 31. Source:: IMF, International Finance Statistics (IFS), line "rf"; Reserve Bank of India. A dual exchange rate system was created in March 1992, with a free market for about 60 percent of foreign exchange transactions. The exchange rate was reunified at the beginning of March 1993 at the free market rate. Vice President: Mieko Nishimizu Director: Edwin Lim Sector Unit Leaders: Ridwan Ali/Michael Baxter Staff Members: Benoft BlarellDina Umali-Deininger  ABBREVIATIONS & ACRONYMS CACP Commission on Agricultural Costs & Prices CSIR Council for Scientific Industrial Research CSS Centrally Sponsored Schemes CV Coefficient of Variation DOA Department of Agriculture DOC De-Oiled Cake DRC Domestic Resource Cost EC Act Essential Commodities Act FAQ Fair Average Quality FC(R) Forward Contracts (Regulation) FFA Free Fatty Acids FMC Forward Market Commission f.o.b. free on bord - fob GATT General Agreement on Trade & Tariffs GCA Gross Cultivated Area GDP Gross Domestic Product GOI Government of India HVOC Hindustan Vegetable Oils Corporation ICAR Indian Council of Agricultural Research IFPRI International Food Policy Research Institute IPO Integrated Policy for Oilseeds and Edible Oils ITC Indian Tobacco Company MIO Market Intervention Operation MOA Ministry of Agriculture NABARD National Bank for Agriculture and Rural Development NAFED National Agricultural Cooperative Marketing Federation NCA Net Cultivated Area NDDB National Dairy Development Board NODP National Oilseeds Development Program NPC Nominal Protection Coefficient OGCP Oilseed Growers Cooperative Project OPP Oilseeds Production Program OPTP Oilseeds Production Thrust Program PDS Public Distribution System RBD Refined, Bleached, De-odorized RBI Reserve Bank of India SSI Small Scale Industry STC State Trading Corporation STE State Trading Enterprise TMO Technology Mission of Oilseeds TRIP Trade Related Intellectual Property UNCTAD United Nations Conference on Trade and Development URA Uruguay Round Agreement WTO World Trade Organization   Table of Contents CURRENCY ABBREVIATIONS & ACRONYMS ACKNOWLEDGMENT ECONOMIC DEVELOPMENT DATA EXECUTIVE SUMMARY Volume I Chapter 1. Setting the Scene .......................................................1 A. Policies Governing the Oilseed Complex: Rise and Reversal of an Import-Substitution Strategy .....................................................2 B. Production Performance ....................................................... 10 C. Oilseed Trade: Trends & Prospects .................................................. 13 Chapter 2. Marketing & Processing Performance: Assessment & Key Determinants ....................................................... 17 A. High Effective Protection of the Oilseed Complex ............................ 17 B. Roots of Processing Inefficiencies ..................................................... 21 Technical Performance below International Standards ................... 25 Compared to Others, India's Processors Are High-Cost Operators 27 Old Ways Die Hard ............................................. 27 Artificial Barriers Impede Modernization ....................................... 29 C. Poor Marketing Performance Dissipates Protection ................ .......... 31 Main Features of Oilseed Marketing ............................................. 31 No Common Market ............................................. 32 Over-Regulation Raises Marketing Costs ....................................... 35 Markets Do Not Reward Quality ............................................. 37 D. Earnings from Meals: Crucial but Low ............................................. 38 Chapter 3. Meeting Opportunities & Challenges: A Framework for Reform ............................. .......................... 41 A. Rationale for Reform: Opportunities & Challenges Ahead .............. 41 B. Towards a Strategy for Reform ....................................................... 43 Elements of Reform ........................ ............................... 43 What Makes It a Win-Win Strategy? .............................................. 44 C. Making Haste Slowly ....................... ................................ 46 A Possible Sequence of Individual Packages of Sectoral Reforms 46 D. Managing Price Instability: Further Recommendations ............ ....... 51 Managing Price & Crushing Margin Risks ..................................... 51 Managing Price Spikes ............... .............................. 53  Volume II Annex 1. The Policy Environment Annex 2. Production & Consumption: Recent Performance & Prospects Annex 3. Marketing Structure & Organization of the Oilseed Complex Annex 4. Marketing Performance: Assessment & Key Determinants Annex 5. Technical & Economic Performance in Oilseed Processing Annex 6. The Oilseed Complex & the GATT Tables, Figures & Boxes Table 1.1 Instability in Oilseed Production ................................................ 4 Table 1.2 Government Interventions in the Oilseed Complex, April 1997 ....... 5 Table 1.3 Nominal Protection Coefficients in the Oilseed Complex - Importable Hypothesis. 6 Table 1.4 Contribution to Growth of Individual Oilseeds ................................. 10 Table 1.5a Sources of Growth in Aggregate & Individual Oilseed Production.. 11 Table 1.5b Sources of Growth in Soybean, Sunflower, Rapeseed-Mustardseed Production ................................ 11 Table 1.6 Foreign Trade in Oilseeds and Derivatives ................................ 13 Table 1.7 Edible Oil Consumption in India, 1988-89 ................................ 13 Table 1.8 Demand Projections to the Year 2020 .................................15 Table 2.1 Groundnut: Effective Protection ................................ 19 Table 2.2 Rapeseed: Effective Protection ................................ 19 Table 2.3 Soybean: Effective Protection ................................ 19 Table 2.4 Sunflower: Effective Protection ................................ 19 Table 2.5 Structure of the Industry in Oilseed Processing ................................ 22 Table 2.6 Capacity Utilization - Indian Solvent Extraction Processing Sector. 24 Table 2.7 Consolidation in Soybean Processing .............................. 24 Table 2.8 Average Extraction Rates 1992/93-1994/95 .............................. 25 Table 2.9 International Comparison Economies of Scale & Technical Efficiency Indicators .26 Table 2.10 Comparison of Processing Capacity & Availability of Raw Materials ............................................ 28 Table 2.11 Relative Importance of Different Oilseed Marketing Channels ........ 31 Table 2.12 Cooperative Procurement of Edible Oilseeds ................................... 31 Table 2.13 Are Groundnut Markets Integrated in the Long Run? ....................... 34 Table 2.14 Costs of Exporting De-Oiled Soybean Cakes through Bedi Port ...... 39 Table 3.1 Potential Producer Price Gains - Alternative Scenarios of Improved Marketing & Processing Performance .44  Figure 1.1 Domestic Production and Imports of Edible Oils for Human Consumption in India, 1971/72 to 1993/94 .............. ......... 2 Figure 1.2 Per Capita Vegetable Oil Consumption in India, 1965-93 ................ 14 Figure 2.1 Nominal Protection Coefficients for Major Oilseeds 1965-1995 ...... 18 Figure 2.2 Nominal Protection Coefficients for Major Oils 1981-1995 ............. 18 Figure 2.3 Crushing Margin Risks are High ............................................... 20 Figure 2.4 Average Processing Costs per Ton of Soybeans ................................ 27 Figure 2.5 Average Integrated Factory Costs per Ton of Soft Seeds .................. 28 Figure 2.6 Markets are Poorly Integrated in the Short Run ................................ 33 Box 1.1 Is the Yellow Revolution Sustainable? .............................................. 3 Box 2.1 Producer Price Stabilization: International Experience .................... 21  I  ACKNOWLEDGEMENTS This report is based on the findings of a World Bank team which visited the states of Andhra Pradesh, Madhya Pradesh, and Rajasthan between April 9 and May 19, 1995. The mission was composed of Benoft Blarel (task manager), Michel Debatisse and T.C. Jain (World Bank), James Fry (LMC International), Sanjiv Phansalkar (Consultant). The report was produced by the mission participants and Dina Umali-Deininger (World Bank). Anning Wei (Consultant) contributed to the market integration analysis. Merlinda Ingco (World Bank) prepared Annex 6 on the GATT implications for India. Peer reviewers are R. Henry (IFC), A. Valdes and G. Feder (World Bank). The report benefited from and reflects discussions held with the Indian authorities in April 1997. We gratefully acknowledge the cooperation and valuable assistance of central government officials, and state government officials from Andhra Pradesh, Madhya Pradesh, and Rajasthan. We wish to express our gratitude to members of professional and inter-professional associations, members of the business community, representatives from the cooperative sector and NDDB, active in the oilseed industry for their valuable time and assistance, and for sharing with us their intimate knowledge of the industry. Arrangements for the mission to India were made by Marylin Chatterjee and Padma Gopalan. Production assistance was provided by Roko Morith. Alfred Friendly was the principal editor, and J. Price Gittinger also provided editorial assistaince.   ECONOMIC DEVELOPMENT DATA GNP Per Capita (US$, 1995-96): 350 a Gross Domestic Product (1995-96) Annual Growth Rate (% p.a., constant prices) % of 70-71- 75-76- 80-81- 85-86- 91-92 92-93- US$ Bin GDP 75-76 80-81 85-86 90-91 95-96 GDP at Factor Cost 294.6 89.7 3.4 4.2 5.4 5.9 0.8 6.4 GDP at Market Prices 328.3 100.0 3.3 4.2 5.6 6.2 0.4 6.3 Gross Domestic Investment 86.1 26.2 5.3 3.7 5.7 9.5 -11.0 12.8 Gross National Saving 79.8 24.3 4.4 2.6 3.5 8.7 -0.3 10.7 Current Account Balance -6.4 -1.9 -- -- -- - -- -- Output, Employment and Productivity (1990-91) Value Added Labor Force b V. A. per Worker US$ Bin. % of Tot Mill. % of Tot. US$ % of Avg. Agriculture 82.5 31.0 186.2 66.8 443 46.4 Industry 78.0 29.3 35.5 12.7 2198 230.2 Services 105.7 39.7 57.2 20.5 1848 193.7 Total/ Average 266.2 100.0 278.9 100.0 954 100.0 Government Finance General Government Central Government Rs. Bin. % of GDP Rs. Bln. % of GDP 95-96 95-96 90-91-95-96 95-96 95-96 90-91-95-96 Revenue Receipts 2174.1 19.8 19.6 1101.3 10.0 10.1 Revenue Expenditures 2539.5 23.1 23.3 1398.6 12.7 13.2 Revenue Surplus/ Deficit (-) -365.3 -3.3 -3.7 -297.3 -2.7 -3.1 Capital Expenditures d 416.2 3.8 4.2 305.1 2.8 3.4 External Assistance (net) ' 3.2 0.0 0.6 3.2 0.0 0.6 Money, Credit, and Prices 89-90 90-91 91-92 92-93 93-94 94-95 95-96 (Rs. billion outstanding, end of period) Money and Quasi Money 2309.5 2658.3 3170.5 3668.3 4344.1 5308.0 6018.4 Bank Credit to Government (net) 1171.5 1401.9 1582.6 1762.4 2039.2 2224.2 2574.1 Bank Credit to Commercial Sector 1517.0 1717.7 1879.9 2201.4 2377.7 2896.6 3409.0 (percentage or index numbers) Money and Quasi Money as % of GDP 50.6 49.6 51.4 52.0 53.7 55.7 54.8 Wholesale Price Index (1981-82 = 100) 165.7 182.7 207.8 228.7 247.8 274.7 294.8 Annual Percentage Changes in: Wholesale Price Index 7.4 10.3 13.7 10.1 8.4 10.9 7.3 Bank Credit to Government (net) 20.3 19.7 12.9 11.4 15.7 9.1 15.7 Bank Credit to Commercial Sector 14.4 13.2 9.4 17.1 8.0 21.8 17.7 a. The per capita GNP estimate is at market prices, using World Bank Atlas methodology. Other conversions to dollars in this table are at the prevailing average exchange rate for the period covered. b. Total Labor Force from 1991 Census. Excludes data for Assam and Jammu & Kashmir. c. Transfers between Centre and States have been netted out. d. All loans and advances to third parties have been netted out. e. As recorded in the government budget.  Balance of Payments (US$ Millions) Merchandise Exports (Average 1990-91-1995-96) 1993-94 1994-95 1995-96 US$ Mil % of Tot. Exports of Goods & NFS 27,947 32,760 39,636 Tea 404 2.1 Merchandise, fob 22,683 26,857 32,467 Iron Ore 487 2.5 Imports of Goods & NFS 29,798 38,150 48,540 Chemicals 1,891 9.6 Merchandise, cif 25,069 31,840 41,405 Leather & Leather products 1,439 7.3 of which Crude Petroleum 3,407 3,285 3,442 Textiles 2,708 13.8 of which Petroleum Products 2,244 2,396 3,759 Garments 2,731 13.9 Trade Balance -2,386 -4,983 -8,938 Gems and Jewelry 3,753 19.1 Non Factor Service (net) 535 -407 34 Engineering Goods 2,832 14A Others 3,423 17.4 Resource Balance -1,851 -5,390 -8,904 Total f 19,667 100.0 Net factor Income' -3,775 -3,621 -4,945 External Debt, March 31, 1996 Net Transfersb 3,825 6,200 7,480 US$ Mill. Balance on Current Account -1,801 -2,811 -6,369 Public & Publicly Guaranteed 79,725 Private Non-Guaranteed 6,618 Foreign Investment 4,235 4,895 4,347 Total (Including IMF and Short Term) 93,766 Official Grants and Aid 368 472 416 Net Medium & Long Term Capital 3,122 1,153 -1,036 Debt Service Ratio for 1995-96 Gross Disbursements 8,247 6,800 6,689 Principal Repayments 4,027 4,828 6,780 % cur receipts Public & Publicly Guaranteed 21.8 Other Capital Flowse 1,516 2,330 -308 Private Non-Guaranteed 14.7 Non-Resident Deposits 1,097 818 945 Total (Including IMF and Short Term) 28.1 Net Transactions with IMF 189 -1,174 -1,719 IBRD/ IDA Lending, March 31,1996 (USS Mill) Overall Balance 8,538 6,858 -2,005 Change in Net Reserves 8,727 5,684 -3,724 Outstanding and Disbursed 9,767 17,499 Gross Reserves (end of year)d 15,476 21,160 17,436 Undisbursed 4,116 4,583 Outstanding incl. Undisb. 13,883 22,082 Rate of Exchange End-March 1997e US$ 1.00 = Rs. 34.80 -- Not available. a. Figures given cover all investment income (net). Major payments are interest on foreign loans and charges paid to IMF, and major receipts is interest earned on foreign assets. b. Figures given include workers' remittances but exclude official grant assistance which is included within official loans and grants, and non-resident deposits which are shown separately. c. Includes short-term net capital inflow, changes in reserve valuation and other items. d. Excluding gold. e. The exchange rate was reunified at the market rate in March 1993. f. Total exports (commerce); net of crude petroleum exports.  India Social Indicators Latest siNgle year Some tgiON/ eOm group 1970-75 198945 199095 South Asia Low-4acome POPULATION Total population, mid-year (millions) 613.5 765.2 929.4 1,243.00 3,179.90 Growth rate (% annual average) 2.3 2.1 1.7 1.9 1.6 Urban population (0/of population) 21.3 24.3 26.8 26.4 28.6 Total fertility rate (births per women) 5.6 4.8 3.2 3.5 3.2 POVERTY (% ofpopulation) National headcount index* .. .. 35.0 Urban headcount index .. .. 30.5 Rural headcount .. .. 36.7 INCOME GNP per capita (US$) 180 280 350 350 430 Consumer price index (1990=100) 36 70 165 Food price index (1990=100) .. 66 174 INCOME/CONSUMPTION DISTRIBUTION lo of income or consumption) Lowest quintile 5.9 8.1 8.5 Highest quintile 49.4 41.4 42.6 SOCIAL INDICATORS Public expenditure f/o of GDP) Health .. .. 0.7 Education 2.1 2.5 2.9 Social security and welfare .. .. Net primary school enrollment rate (% of age group) Total Male Female Access to safe water (1% of population) Total 31 54 63 63.2 53 Urban Rural Immunization rate (% under 12 months) Measles .. .. 84 so '77 DPT .. 41 92 84 80 Child malnutrition (% under 5 years) .. .. 63 61 42 Life expectancy at birth (years) Total 50 55 62 61 63 Male 51 56 62 61 62 Female 49 55 63 62 64 Mortality Infant (per thousand live births) 132 108 68 7S 69 Under 5 (per thousand live births) .. .. 95 106 104 Adult (15.59) Male (per 1,000 population) .. .. 229 239 244 Female (per 1,000 population) 219 230 211 Maternal (per 100,000 live births) 460 437 * Data for 1993-94 Source: World Development Indicators CD-ROM, World Bank, February 1997 and India: Poverty Assessment Report.   Executive Summary 1. General Overview: Fifteen years of protection and three of partial trade liberalization have brought the millions of Indians who grow, store, crush, refine, transport and trade oilseeds, oil meals, and edible oils - along with the officials who regulate their activities -- to a critical juncture. The oilseed industry faces a choice between modernizing for international competition in which it can have significant advantages or perpetuating a fragmented structure whose inefficiencies are largely borne by growers who receive lower than international prices at one end of the production chain and consumers who pay higher than international prices at the other. 2. The import substitution strategy pursued until 1994/95 delivered significant benefits. Overcoming a once-rising deficit in the supply of edible oil for domestic consumption, India has seen oilseed production double and stabilize and - most importantly - diversify as new crops (soybean, sunflower) spread to rainfed regions where poor farmers typically face more limited growth opportunities. India had become virtually self-sufficient in edible oils by the early 1990s and a major exporter of oilseed meal, a high-protein animal feed for which demand is increasing in regional markets. But beginning in the mid-1990s, cheaper edible oil and faster economic growth are accelerating the growth in edible oil demand, which increasingly is being satisfied by imports liberalized in 1994/95. Inefficiencies in marketing and processing of oilseeds are preventing growers from capturing a larger share of these market opportunities. 3. Without further trade liberalization and de-regulation - going beyond the 1994 elimination of non-tariff barriers on edible oil imports, the removal of price stabilization and of some state controls on the internal movement of seeds and oils -incentives now in place actually preserve inefficiencies in processing and marketing. Hobbled by a regime that arbitrarily restricts the domestic movement of oilseed products and reserves the processing of the two most important oilseeds to small and usually inefficient enterprises, processors cannot invest in modern equipment and integrated processing plants that would enable them to reduce high losses of oil, improve the quality of oil meals, buy raw material from the cheapest sources on the domestic market, and raise their low capacity utilization rates. Banned from participation in forward and futures markets, traders and processors are at the mercy of price volatility and imperfect information flows in a fragmented market that is a far cry from a needed, common, domestic market. 4. In such conditions, crushing margin risks are particularly high for processors. They operate in a very unstable price environment regularly unsettled by shifts in the highly uncorrelated commodity markets for seeds, oils and meals. Firms in other countries can manage these risks through technical efficiency, economies of scale, flexibility in their sourcing of raw materials, and the use of hedging in futures markets. Indian crushers generally cannot. Predictably, they pass their risks back - as low purchase prices to growers - and forward - as higher sales prices to refiners and eventually to consumers. Even that reallocation of risks and costs, however, leaves the enterprises at the heart of the oilseed complex without the capital to grow and modernize, especially when the processing of certain kinds of oilseeds (groundnuts and rapeseed-mustardseed) with certain kinds of techniques is limited to small-scale firms who are barred from handling more than ten tons of oilseeds a day and, in many cases, operate for only a few post-harvest weeks or months a year.  ii 5. Moreover, with so many roadblocks to integration and so many special policies - more social than economic in origin - designed to support small units, processing capacity is dramatically underutilized. Even in the most modern and fastest growing sub-division of the processing sector - the 130 firms that use solvent extraction technology to produce 9.5 million tons a day - only 30 percent of total capacity was actually being used in 1994/95, the same level as in 1987. That rate of utilization means that it costs 40 percent more to process a ton of soybeans in India than in China, 90 percent more than in the United States. 6. Firms in the oilseed complex and its regulators recognize the problems and are weighing various options for change. Among them, the idea of removing the ban on oilseed imports appeals to processors ready to invest in modern, large-scale facilities in port cities, gaining efficiency that small-scale crushers could not emulate. Another approach, favored by farmers, would raise tariffs on the import of edible oils, thereby strengthening the growers' position (and prices) in the domestic market --at the expense of consumers. A different strategy, one that would pay for itself, would focus on the domestic trade regime and on the central problem of the crushers' high margins and risks and the costs they impose on both growers and consumers. Its objective would be to stimulate the industry to perform better at home and compete more strongly abroad by freeing it from a host of unnecessary restraints and strengthening government's ability to promote quality and consumer health and safety. 7. That strategy envisions a series of coordinated reforms that: * Liberalize edible oilseed exports, maintain unhindered imports of edible oil under current tariffs, and install a WTO-consistent set of tariffs, rules, and regulations to deal with international price spikes; * Remove the oilseed complex from the purview of the Small-Scale Industry Reservation and the Essential Commodities Act to free it from multiple, legal controls on movement, storage and processing technology and scale and lift related limits on access to credit; * Legalize access for oilseed products to forward and futures markets; * Improve incentives -- including government enforcement capacity -- for quality management and pollution control. The incentives could include better labeling and quality standards that highlight healthier products and raise consumer and producer awareness of them, tightening food safety standards and pollution control, assuring better access to seed technology, and recognizing intellectual property rights in conformity with TRIPs under WTO; * Strengthen the capacity of government to implement a complex reform process by establishing effective surveillance over trading and marketing in a decentralized, market-oriented economy; * Improve market infrastructure to facilitate the flow of commodities and information both domestically and in external trade. This would involve a freer, wider spread of price information, and the promotion of private investment in market, transport, storage, and port infrastructure. 8. Having made such strong progress toward an oilseed industry capable of supplying domestic needs, providing attractive agricultural employment to rainfed farmers, and competing in world markets, India now has a promising opportunity to make the most of its successes by adopting further reforms. They should not only pay for themselves but repay some of the costs of the long years of protection and special treatment.  iii Some Terminology... Edible oilseeds grown in India are classified into two groups: traditional (e.g., groundnut, rapeseed-mustardseed, safflower) and non-traditional (e.g., soybean, sunflower, cottonseed) which have been more recently introduced or promoted as sources of edible oil. The oilseed's oil content detennines the most efficient technology used to extact the oil. The expelling process is typically used to extract oil from oilseeds with high oil content (groundnut, rapesece- mustardseed, sunflower); while the solvent-extraction process is needed for soybeans, among others, and for oilmeals. Once processed, the seeds give two joint products: edible oils and oil meals. Edible oils can be refined (the refining stage), and then further processed into margarine or vanaspati using a hydrogenation process. Oil meals as well can be processed further to extract the residual oil, leaving a de-oiled cake. 9. Evolution of Policy Regime. Faced in 1979-80 with major imbalances between domestic edible oil supply - growing at only one percent a year - and per capita consumption -- rising by 16 percent - and edible oil imports amounting in consequence almost to a third of India's own consumption, the Govemment of India set itself the objective of achieving self-sufficiency and food security in the edible oil sector. The import-substitution strategy it adopted consisted of promoting technological change in oilseed production and processing, while shielding the sector from international price competition and instability. There evolved a wide range of complementary, sometimes conflicting, policies including (a) policies covering foreign trade, price support and stabilization, marketing, credit, and taxation; (b) regulatory controls on domestic trade - physical and futures - and on agro-processing; and (c) government-sponsored programs to support technological change in oilseed production and processing. 10. In addition to successive centrally sponsored schemes for oilseed production, the government all but banned oilseed imports and channeled large-scale edible oil imports through the Public Distribution System at prices well below market rates until 1989. Regulatory controls pervaded private-sector trading and agro-processing activities, and a Small-Scale Industry Reservation policy dating to 1977 still reserves the manufacturing of oilseed crushing equipment and the processing - except through solvent extraction -- of groundnut, rapeseed-mustardseed, sesame and safflower oils exclusively to small-scale enterprises. State governments restricted the movement of edible oilseeds and oils within and between states, and central authorities banned forward and futures contracts, prompting many processors to hedge their very considerable crushing margin risks through active but illegal trading in futures contracts, especially for groundnut oil and mustard oil. On top of the other rules and acting again as a spur to evasion, various government levels levied multiple taxes, further impeding the efficient allocation of resources and the development of a truly nationwide domestic market. 11. Further extension of government interventions in the oilseed complex began with the establishment of the Technology Mission on Oilseeds in 1986, which consolidated government programs to support rapid technological change in oilseed production and processing and extended them to address concerns about domestic price instability. The Integrated Policy on Oilseeds and Edible Oils in 1989 completed the policy coverage of Government interventions in the oilseed complex by introducing price stabilization operations (Market Intervention Operations), reducing the differential between the open market price and the Public Distribution System price of edible oils, curtailing drastically the volume of edible oil imports, and strengthening the administrative structure implementing Government policies toward the oilseed complex. 12. Far-reaching reforms began in the early 1990s. Registration and licensing requirements for the solvent-extraction and refining industry were dropped in 1991. Trade reforms in 1994/95 allowed the unrestrained import of major edible oils, with only a modest 20 percent tariff by 1996,  iv and thus exposing the oilseed complex for the first time to foreign competition and international price volatility. Domestic price stabilization policies had been disbanded, and domestic controls on storage and movement of seeds and oils are progressively and selectively being relaxed. 13. Although the enforcement of some (credit access and storage controls) regulations was lifted beginning in 1996, many programs established earlier and the regulatory framework on storage, movement, credit access, and agro-processing remain unchanged. The investment ceilings for the small-scale units have been raised to Rs. 30 million (less than $ 1 million) in 1996, but the Small-Scale Reservation in the oilseed complex continues. Futures trading continues to be restricted, although a high-level committee has recommended the introduction of futures contracts on major oilseeds, their oils, and cakes. 14. Oilseed Production Impact. On the production side, protectionism bought substantial gains, not only doubling output of oilseeds -- from 10 million metric tons in 1980/81 to over 21 million in 1993/94 -- but also, and just as vital from the food-security perspective, reducing production instability by 75 percent. The rapid growth in oilseed production also contributed significantly to the acceleration of agricultural growth since the early 80s and its more equitable distribution, since oilseeds are grown mainly in rainfed areas. At least 59 percent of the aggregate increase in oilseed production between 1979/80 and 1993/94 came from technological change -- 40 percent in the form of new oilseed crops (soybean and sunflower), 12 percent and 7 percent from pure yield increases in rapeseed-mustardseed and groundnut, respectively. Better access to market outlets and favorable prices, notably in the late 80s, played an important role in the adoption of new technology and expansion of production. Soybean and sunflower, in particular, were exempted from the Small Scale Industry Reservation so that they could be processed in larger scale and modem facilities. 15. In sum, technological change, fostered under protectionism, appears to have given India's oilseed complex a comparative advantage in oilseed production. Over the last two decades, deliberate technological advancements such as the introduction of soybean and sunflower, and of faster-growing seed varieties, improved resistance to pests and moisture stress, and higher yields have enabled the better integration of oilseeds into existing cropping systems. This has resulted in higher cropping intensity, notably in the case of soybean and sunflower, and a more efficient use of scarce resources - water in irrigated agriculture, labor in rainfed agriculture. In the case of irrigated agriculture, oilseed crops are likely to represent a more efficient use of scarce resources because of their relatively low water requirements. 16. Future Demand and Supply Prospects. Increasing oilseed production and high prices of edible oils in the 1980s to the early 1990s, which slowed domestic consumption growth, helped India achieve virtual self-sufficiency in edible oils. That status, however, is changing as the recent import liberalization of vegetable oils, by bringing domestic prices down, and faster GDP growth are boosting demand and putting an end to the decade-long stagnation in per-capita consumption. At 3 percent per-capita income growth, that demand will double by the year 2020 and treble if per- capita income growth is 5.5 percent per annum. Meanwhile, the country has developed sizable export markets for de-oiled cake, albeit at discounted prices due to quality problems, notably in South East Asia and the Middle East. If GDP growth at home also stimulates increased consumption of milk, eggs, and meat, meal products now being sold abroad could well go to feed India's livestock, now only low-intensity consumers of oilseed meals. 17. Faster GDP growth and free edible oil imports offer large opportunities for a rapid market- led growth of the Indian oilseed complex. But technical and economic inefficiencies of the processing industry, poor marketing performance, and low meal realization stand in the way of  v sustaining the oilseed sector's past production achievements. Combined, these flaws act to dissipate the high level of effective protection enjoyed by the oilseed processing industry and deny most of its benefits to oilseed growers. 18. Protectionism in the Oilseed Complex. Edible oils received significantly higher levels of nominal protection, while oilseeds enjoyed only unstable and comparatively modest levels of nominal protection during the 1980s (with soybeans receiving none). In the mean time, protection levels for both edible oilseeds and edible oils have fallen dramatically since their 1987 peak as a result of several parallel developments: the devaluation of the rupee, an increase in domestic seed and oil availability, relatively high international prices of oils, and a decision to reduce tariffs on edible oils. By 1994/95, protection levels for all edible oils had fallen almost in line with the import tariff level prevailing that year (65 percent), except for groundnut oil whose price fell much lower as a result of supply conditions that year. By contrast, the protection level for all four major oilseeds, except sunflower, had actually become negative by 1994/95. 19. The Indian oilseed processing industry, however, continues to benefit from considerable effective protection except in the case of rapeseed since about 1992. Groundnut, soybean, and sunflower processors all enjoy sizable crushing margins. The level of effective protection appears remarkably stable in the face of rapidly falling protection levels for oils. This underscores the capacity of the processing industry to pass the costs of adjustment onto oilseed growers barred from exporting oilseeds (except for rapeseed and sunflower since 1995). Moreover, for all oilseeds, except groundnut and possibly rapeseed-mustardseed, the resources spent in processing oilseeds in India cost more than they are worth. The high effective protection together with the negative crushing margins (evaluated at world market prices), strongly indicate the presence of gross inefficiencies and lack of competitiveness of the oilseed processing industry. 20. Obstacles to Progress in Marketing and Processing. Among the many reasons, Indian processors - unlike their international counterparts - do not achieve high technical and economic performance levels is the fragmentation of their sector into four major segments, two involved with oilseed extraction and two with further processing of the oil. * Small-scale private expellers. There are about 150,000 small-scale expellers in India. Some 20,000 of them process about 62 percent of output. These 20,000 firms consist mainly of groundnut and rapeseed-mustardseed small-scale expellers because the Small Scale Industry (SSI) reservation -- based on the expelling processing technology-- limits their scale to no more than tens of tons per day. Small-scale expellers crush oilseeds using metal screws which press ("expel") oil from seeds, leaving the cake behind, and sell only expeller oil and expeller cake with high residual oil content often exceeding 10 percent. Ghanis, another type of small-scale expellers, account for the remaining 130,000 or so units. Ghanis are very small crushers processing at the rate of kilos, not tons, per day, who now account for barely I percent of total output. The number of ghanis (and their share in total output) has come down over time (estimated at about 300,000 in 1956) as they are being displaced by the 20,000 small-scale expellers, and the solvent-extraction units. * Large-scale, modern solvent-extraction segment. It consists of some 760 establishments, accounting for 37 percent of oilseed processing, that apply solvent-extraction technology to low-oil-content raw materials, primarily soybeans or cottonseed, and expeller oil meal. They tend to have a daily processing capacity of 125 to 150 tons -- barely 10 percent of the norm in North and South America or Western Europe. This group also includes processors who circumvent the SSI Reservation for groundnut and rapeseed-mustardseed by using a uniquely Indian, but technologically inefficient process known as expander-cum-solvent extraction.  vi * Oil refiners. Unlike other countries, because of the SSI-induced size limits, refiners in India are generally not linked to a solvent extraction plant. In addition, regulations require refiners to indicate whether the oil originates from expeller or solvent extraction process. The latter attracts lower prices. No other country insists upon this distinction which has little rationale in terms of quality. * Vanaspati industry. The vanaspati sector hydrogenates refined oil to produce margarine and a vegetable shortening or spread, somewhat similar to ghee or butter. There are strict limits as to which oils can be used, and in what proportions, in the manufacture of vanaspati. These limits - often known to be flouted - have no logic in terms of the end product except to stimulate demand for particular vegetable oils. 21. Among the consequences of this fragmentation are generally poor technical standards of oil extraction and rampant low capacity utilization, ranging from an average of 10 percent for the ghanis to no better than 30 percent for small-scale expellers whose counterparts in developed economies achieve rates of 70 percent. Consequently, groundnut and mustardseed small scale- expellers in India have unit costs 17 percent higher than those in China and 40 percent higher than in the U.S. and Canada. Even though they are free from limitations on their size, the solvent- extraction, refining, and vanaspati industries also use only a fraction of their capacity - on the order of 30 percent in India compared to above 75 percent in developed economies and 50 percent in China. This low rate of utilization, combined with high operating costs - the best intemational soybean processing factories use only 12 percent of the solvent per ton of Indian factories, roughly half the steam, and three quarters of electric power - have left the solvent-extraction sector with a poor level of profitability, even though it should be the main beneficiary of the high processing margins determined by the expeller industry. Nonetheless, its share of the market has been expanding rapidly due to (a) the desire by the private sector to find an area of activity free from capacity ceilings; (b) tax incentives given for the use of non-traditional oils in the manufacture of vanaspati; (c) the investment and sales tax incentives offered by state governments for processors to establish solvent-extraction factories in their states; and (d) the realization by a few processors of the possibility to circumvent the Small Scale Industry Reservation by installing expanders linked to extraction units. 22. Higher meal realizations would permit processors to pay better prices to growers and to charge lower vegetable-oil prices to consumers, but earnings from the sale of meals falls far short of their true potential, a matter of great concern for the entire sector. There are four main reasons for this failure: (a) the fragmented structure of the processing industry which militates against quality consistency, (b) poor development of the domestic market for high quality animal feed, (c) very high costs of exporting de-oiled cake which reduce the net return to local producers, and (d) the low quality of a great deal of Indian de-oiled cake which is reflected in large discounts for some meals on the export market. In the livestock sector, characterized by indigenous animals with low productivity, concentrate feeding is uneconomic for small producers, a situation compounded by government interventions in the dairy sector to keep producer milk prices low. The reservation of poultry-feed manufacturing to small-scale industries, lifted in 1997, contributed to increased unit costs and lower quality of feed. Inadequate domestic transport and port infrastructure impose a high cost on de-oiled cake exports. The costs of land and sea transportation, of port operations, and of wastage en route are up to 50 percent of the ex-factory price. Exported meal (other than soybean) suffer from substantial quality discounts because Indian groundnut de-oiled cakes tend to be high in aflatoxin as a result of poor post-harvest handling, and rapeseed-mustardseed meal tends to be high in glucosinolates as a result of the failure to adopt patented varieties which are low in erucic acid and low in glucosinolate, conforming to the health norm in Western Europe and North America.  vii Discounts range from about 50 percent in the case of rapeseed-mustardseed and sunflower meals to 20 percent in the case of groundnut meals. 23. Markets do not reward quality. Due in large part to the lack of nationally recognized quality standards and the weak enforcement of those that do exist, Indian markets do not efficiently reflect quality through price differences. Traders continue to grade by visual means. Criteria of importance on health grounds in many countries - erucic acid, glucosinolate, aflatoxin - are almost virtually ignored. Partly for this reason and partly because of lack of intellectual property rights to protect plant patents, little attention has been paid to the availability of improved varieties of rapeseed-mustardseed or to promotion of improved post-harvest techniques to reduce aflatoxin. Of course, this limited attention to health aspects has adverse consequences on consumer safety. The many overlapping laws on quality standards with consequent overlapping jurisdictions of enforcement agencies and inspections only serve to increase the transaction costs for traders and processors. 24. Like their international counterparts, Indian crushers face large crushing margin risks. Whereas crushers in open international markets seek to maximize technical and economic efficiency, assure flexibility in sourcing raw materials, and hedging techniques to cushion against market volatility, Indian processors can pursue none of these goals effectively. Hedging through the use of futures or forward sales further than 11 days into the future is banned by Indian law. Domestic processors, therefore, are unable to avail themselves of the opportunity - open in Argentina, Brazil, the EU, Indonesia, Malaysia, and the US, and more recently, even in China -- to lock in satisfactory crushing margins. Nor do they have the option of exercising much flexibility in acquiring raw material, either domestically or on the international market. The absence of legal instruments to manage crushing margin risks --including those arising from unexpected changes in foreign trade policies -- forces processors and traders into speculative positions and to try to assure themselves acceptable returns by charging a sizable risk premium in the form of a higher processing margin than would otherwise be necessary. 25. On top of poor technical and economic performance in processing, the inefficiency of the market for oilseeds, oils, and meals operates further to erode the benefits processors receive from protection. Because of regulation, there is only scattered and high-cost stockholding by a multitude of small operators with little access to modem storage facilities and to formal sources of credit. Cooperatives, though exempt from regulatory barriers, have failed to play a significant role. As a result, storage is costlier than necessary. Not reflected in seasonal price fluctuations, the high storage costs show up instead in the high crushing margins and lower prices which oilseed growers receive on the domestic market. 26. Government policies and regulations explain much of the poor performance of the Indian oilseed processing industry. The artificial barriers that are responsible for the fragmentation of the industry, the predominance of less efficient small-scale factories with low utilization rates, and the lack of development of a common domestic market include the Small Scale Industry Reservation for the two most important oilseeds, the controls on the movement, and until 1996, controls on storage of oilseeds and oils and credit under the Reserve Bank of India's selective controls on credit for oilseed processors. The Small Scale Industry Reservation further increases the difficulty of controlling product quality and prevents small-scale expellers both from taking advantage of economies of scale and from achieving vertical integration of three processing operations in a single factory - expelling of the groundnuts and mustardseed, solvent extraction of the resultant oilseed meal, and refining of expeller and solvent-extraction oil - as is common elsewhere in the world. Moreover, the Small-Scale Industry Reservation on the manufacturing of oilseed-crushing equipment and the Reserve Bank of India investment guidelines encouraged processors to adopt  viii less efficient technologies. The ban on forward and futures trading in oilseeds and oilseed products (with the exception of castor seed, a non-edible oilseed), limits the options of traders and processors in hedging their price risks. It also limits their access to longer-term price information. Finally, government has a weak capacity to monitor and enforce environmental controls and food standards vigorously. 27. Framework for Reform: Maintaining past achievements will require that the Government establish a price and market environment in the oilseed complex that encourages sustained technological advance as domestic demand fuels an expanding market. Capitalizing on the remarkable stability in production provided by diversification will also require establishing a truly nationwide market stimulated by foreign competition to achieve higher levels of efficiency in marketing and processing. 28. Unless Indian processors and traders are allowed to trim marketing costs and crushing margins, recent gains in oilseed production will be put at risk. So far, Government policies in the oilseed complex have been shaped as much to achieve social objectives - primarily employment in the small-scale processing industry - as to promote efficiency and competitiveness. Unless the rigidities in current domestic policies are lifted and infrastructure improved, the high marketing costs and crushing margins will continue to be supported by farmers - 60 percent of whom live in rainfed areas - in the form of lower producer prices. Allowing oilseed imports, as has been recommended would not address the core problems. It would benefit only a few processors and possibly consumers, but hurt growers and the large majority of processors. 29. A strategy for reform - one that would generate most of the financial and institutional incentives for its own implementation and could stimulate significant efficiency gains equivalent to 30 percent of farmgate price gains -- would focus primarily on domestic policies to enhance the performance of marketing and processing. The objectives would be: (a) improve marketing and distribution of oilseeds and derived products; (b) improve the technical competitiveness of the oilseed processing industry; and (c) provide the means to mitigate price and crushing margin risks in a more liberal domestic and foreign trade environment which is WTO-consistent. 30. Piecemeal approaches will not release the untapped potential that is undoubtedly present. Characterized by a sequence of packages of internally consistent reforms to create a true nationwide market and remove the multiple anachronistic restrictions upon private sector activities (including those of cooperatives), a comprehensive approach is essential to lay the foundations for sustained growth in the Indian oilseed economy. A five-stage approach to reform is proposed: A. Fine-tune the external trade regime consistent with WTO rules by: * Extending the export liberalization to all oilseeds (GOI). * Legislating IPRs in conformity with the TRIPs agreement (GOI). * Completing the import liberalization of all edible oils and lifting uncertainty on tariffs; establishing the external trade rules and institutions, consistent with WTO rules, to deal with international price spikes. 31. This first set of reforms only departs from current policies in the liberalization of oilseed exports which would provide a badly needed floor to the local market so that farmers would not have to bear the brunt of any squeezes on processors' margins. At the same time, the recognition of intellectual property rights - to which India committed itself to under the Uruguay Round of the GATT - would give seed companies the needed incentives to sell improved varieties, especially rapeseed low in erucic acid and glucosinolate. Completing the liberalization of edible oil imports will help secure a ceiling on the level of domestic vegetable oil prices.  ix B. Modernize the domestic trade and processing policy environment by: * Removing the oilseed complex from the scope of the Essential Commodities Act (GOI). * Removing permanently the oilseed complex from the Small-Scale Industry Reservation- crushing equipment; groundnut, rapeseed-mustardseed and safflower expelling; and poultry feed manufacturing (GOI). * Allowing forward and futures trading in oilseeds and derived products (GOI); promoting the establishment, in coordination with the private sector, of standard quality norms and contracts, and improving contract arbitration procedures (GOI). * Harmonizing and standardizing the taxation of oilseeds and their products, at a rate consistent with processing margins, as by replacing sales taxes with an excise tax (GOI, state governments). * Phasing out government interventions in operations of cooperatives (state governments). * Establishing an agricultural price and trade surveillance unit (GOI). 32. Although regulatory changes can be rapid, the implementation of the reforms and their gestation period is likely to take some time, an important reason for the creation of a surveillance unit to monitor in a transparent fashion the price and trade deregulation and the performance of agricultural markets and agro-industry. With vegetable oils freely importable and oilseeds and oilseed meals freely exported, the Essential Commodity Act restrictions will have outlived their usefulness, since foreign trade can overcome hoarding and price squeezes. Similarly, the credit controls applied by the Reserve Bank of India could be eliminated and the use of warehouse receipts as collateral promoted in order to facilitate access and reduce the costs of financing larger inventories than currently permitted. Allowing futures contracts would largely amount to the normalization of already widespread, but now illegal, futures trading, while improving its transparency, efficiency, and reliability. The impossibility of protecting the Small-Scale Industry Reservation from the advances of new technologies should be recognized by eliminating the Reservation in the oilseed expeller sector and expelling equipment. The distortions caused by different rates of taxation in different states need to be removed. C. Modernize the market, post-harvest, transport, and port infrastructure by: * Decentralizing the financial and management authority of regulated markets (state governments). * Developing grading facilities, facilities for the bulk transportation and handling of seeds in markets which should lead to the promotion of quality incentives in payment schedules by seed purchasers (state governments). * Disseminating price information (state governments). * Establishing the policy framework necessary to promote private investment in market, storage, transport, and port infrastructure (GOI, state governments). * Improving, in collaboration with the private sector, port infrastructure (GOI; state governments) 33. Since this third package of reforms is likely to require a long gestation period and complements the second set of reforms, it should be initiated early in the process. D. Improve the regulatory and institutional framework to raise health and quality performance by: * Tightening national food safety standards (GOI).  x * Improving monitoring and enforcement capacity of food safety institutions (GOI, state governments). * Strengthening and directing pollution controls and enforcement towards better treatment of effluents and the reduction of hexane (a toxic solvent) losses in oilseed processing (GOI, state government). * Rationalizing food labeling regulations, reinforcing monitoring capacity to raise awareness of health issues by product labeling that distinguishes between the traditional pungent mustardseed and healthier rapeseed oil manufactured from varieties with low amounts of erucic acid and glucosinolate. 34. This set of reforms - introducing strong, financial, market-based incentives for the oilseed complex to improve its performance on health and quality issues -- is likely to require the longest gestation period. Even among the most developed economies, quality regulations and standards keep evolving. Yet India's problems need to be addressed sooner rather than later., notably the lack of strict controls that other countries maintain over the erucic acid content of mustardseed-rapeseed oil and over the free, fatty-acid content of edible oils sold to the general public. Aflatoxin and glucosinolate levels are well above the levels accepted in many foreign markets. Adulteration of edible oils is widespread. E. Complete external trade liberalization by: * Liberalizing exports of vegetable oils (GOI). * Liberalizing the importation of oilseeds (GOI). 35. This package represents the least critical reforms to improve the marketing and processing performance of the Indian oilseed complex and can be implemented last, although the liberalization of oilseed imports could begin earlier if there is evidence that crushing and marketing margins are fast declining and oilseed farmgate prices rising accordingly towards parity level. Eventually such imports, by putting a ceiling on oilseed prices, will be needed to protect oilseed processors from having their margins squeezed to uneconomic levels. 36. Finally, managing price instability will be critical to the success and political acceptability of the reform strategy. It can be accomplished through (a) provision of market-based instruments - among them, futures markets as recommended for a number of agricultural commodities by the Kabra Committee in September 1994 -- for managing oilseed price and crushing margin risks, and (b) establishment of instruments to deal with price spikes - sudden and short-lived, rapid price increases or declines - originating either from the domestic or the world market. Managing price spikes would probably require price-support operations limited to government interventions at low "safety net" price levels to protect growers from the most extreme fluctuations while leaving sufficient price volatility to provide financial incentives for storage and for risks to be covered through risk management techniques. India could deal with world price spikes by resorting to safeguard measures provided under the World Trade Organization which allow tariffs or quantitative restrictions to be imposed for a limited period if imports are growing in such a fashion as to cause serious injury to the domestic oilseed and edible oil industry.  1 Setting the Scene 1.1 India's growers of groundnuts, rapeseed-mustardseed, and safflower and of newer crops such as soybean, sunflower, and cottonseed as well as the warehousers, processors, transporters and traders of edible oil, cakes and meal face remarkable opportunities to grow and profit in free- market conditions. For the oilseed complex to realize most of those possibilities, however, officials will have to dismantle and/or rationalize the exceptionally variegated protectionist regime behind which the oilseed complex sheltered and prospered during the last decade and a half. The sweeping liberalization of edible oil imports initiated in 1994 has yet to be matched by parallel actions to simplify and reduce the host of central as well as state government regulations that inhibit open markets -- sometimes even within states -- and that reserve the processing of some seeds and the manufacture of some oils and extracts to notably inefficient and often technologically retrograde firms. While past protection fostered major production gains for farmers, domestic regulations continue to stunt productivity growth and competitiveness of the oilseed processing industry. Unless domestic regulations are attended to, potentially large increases in future oilseed production will not be realized. 1.2 The situation represents the unintended consequence of the successful import substitution strategy that India adopted in the early 1980s after years when oilseed consumption so outpaced domestic supply that imports came to take almost a third of the market and substantial amounts of scarce foreign currency. Under a protectionist umbrella India's annual oilseed production grew more than 100 percent between 1980 and 1993/94 (from 10 to 21 million metric tons). It caught up with demand at home, allowing India to export oil meals. The strategy also brought a high degree of production stability by spurring the diversification of both oilseed crops and across the regions where they are grown. Along with these achievements and, to a degree, underpinning them, technological advance has permitted higher crop yields and more efficient use of such scarce resources as water in irrigated areas and labor where rainfall sustains agriculture. 1.3 The drawback to the strategy is an inefficient and non competitive oilseed industry that is being held back by a tangled network of policies, rules and regulations. Having served their purpose, these policies, rules and regulations need to be revised and simplified as India and its oilseed complex become exposed to foreign competition and move into the less-regulated market regime envisioned by architects of the broad economic policy reforms begun in 1991. Within the oilseed complex, different systems of support and different prohibitions apply to different crops and to different credit, storage, transport and processing activities. Deregulation is not a matter of undoing a few universally applicable policies. It will require a host of separate political and economic judgments and reform measures. To understand the scope of the challenge, this chapter's three main sections describe, first, the policies that currently govern the oilseed complex and the recent changes in them; second, analyze oilseed production performance, its sources of growth, and their relation to the policy environment; and, finally, examine the demand patterns for oilseed products, identify recent developments, and relate those to the oilseed complex policy environment.  -2 - A. Policies Governing the Oilseed Complex: RISE AND REVERSAL OF AN IMPORT-SUBSTITUTION STRATEGY 1.4 The basic impetus for early oilseed trade rules was the need to rectify major imbalances between domestic supply (that grew at just one percent a year from 1968 to 1981) and demand (escalating between 1965 and 1975 at annual per- capita rates of 16%). Imports filled the gap, supplying 32% of the domestic market (Figure Domestic Production and Imports of Edible Oils for Human Consumption in 1.1) by 1979-80. A 1981 India, 1971-72 to 1993-94 (million mt) World Bank study, million mt moreover, projected that by 6 1990 satisfying India's * appetite for oilseed products would mean spending 4 __'F Cn b between US$3-4 billion (6- 3 8% of total imports) and 2 absorbing between 8-1 0% of total projected world 1 exports of vegetable oils."' 0 Government of India (GOI) b '1- , 0 r0- T c X $ o OZ n f N ' C' U') N 0 - officials recognized that the CD a) r co co XC co 0) drain on foreign exchange and the risks to both food 0 Prodn 3 hkorts] security and price stability Source: A. Gulati, A. Sharma and D. Kohli, "Self-Sufficiency and Allocative required policy change. Efficiency: The Case of Oilseeds in India," draft mimeo, January 1996. 1.5 In the early 1980's, building on green-revolution successes in wheat and rice, Indian policymakers set out to attain self-sufficiency and food security in edible oils by replacing imports with domestic production (Box 1.1). The initial (1979-80 to 1985-86) strategy consisted of promoting technological change in oilseed production and processing, while shielding the sector behind high trade barriers from international price competition and instability. That narrow policy focus gradually widened to a more comprehensive coverage of marketing and pricing (1985-86 to 1993-94), including special treatment for different crops and for different processors. 1.6 Oilseed Production Stabilizes. The strategy worked impressively in two respects. First, production of the nine major oilseeds jumped from less than 10 million mt in 1980 to more than 21 million mt in 1993/94. With a 5.8% growth rate per annum between 1981-82 and 1993-94, oilseed crops registered the fastest expansion of all major crops and not only contributed 22% to all-India crop growth but also, as a farm product found predominantly in rainfed areas, improved the regional balance in agricultural growth. Just as striking but much less known is the 75% drop in production instability which accompanied the rapid increase in production and made a vital improvement in food security.2 Its coefficient of variation declined steadily from 20% in 'India: Demand and Supply Prospects for Agriculture. World Bank Staff Working Paper, No. 500. 1981 2 See Annex 2 for a more detailed treatment of oilseeds recent production performance.  -3 - 1971-77 to 5% in 1989-94 as regional, seasonal and varietal diversification of crops, along with the expansion of oilseed production into irrigated areas helped stabilize production (Table 1.1). Box 1.1 Is the Yellow Revolution Sustainable? There is considerable debate about the import substitution strategy for oilseeds pursued by India during the 80s and early 90s. While there is consensus about the achievement of virtual self-sufficiency by 1993/94, the controversy centers on the sources of growth in oilseed production and whether the "Yellow Revolution" is sustainable. One view, shared by the World Bank in its 1991 CEM, argues that such a strategy was economically costly and unlikely to be sustainable. High prices explained most of the virtual achievement of self-sufficiency in oilseeds. It was economically costly since the high degree of protection to oilseeds (NPCs above unity) shifted the allocation of resources in agriculture towards crops for which India had little to no comparative advantage. The limited contribution of technological change to the growth in oilseed production, the significant contribution of area expansion, and large changes in cropping patterns at the expense of other crops, were seen as evidence of the inefficient allocation of resources prompted by the high oilseed prices. It was unsustainable since free imports of edible oils under modest tariffs would reverse the production achievements by driving down the prices of oilseeds. The opposite view argues that the import substitution strategy was justified on food security grounds and the need to develop a comparative advantage in oilseed production through technological change. Proponents of this infant industry argument point that technological change in oilseed production, such as the rapid development of rabi oilseed crops and non-traditional oilseeds, played a major role in achieving self-sufficiency. Accordingly, free imports of edible oils under modest tariffs are unlikely to threaten the past achievement in self-sufficiency. This report argues that the oilseed import substitution strategy was a conditional success. Rapid technological change in oilseed production did occur, and several indicators suggest the development of India's comparative advantage in oilseed production (see paras 1.31 and 1.32, and Annex 2): * At least 59% of the aggregate increase in oilseed production increase between 1979/80 and 1993/94 came from technological change --40% in the form of new oilseed crops (soybean and sunflower), 12% and 7% from pure yield increases in rapeseed-mustard and groundnut, respectively. * Rapid technological change in rapeseed-mustard (yield grew at more than 3% per annum) and groundnut (introduction of rabi crop) also caused their area expansion by inducing growers to devote more land to more profitable activities, even in the absence of higher oilseed prices. * Higher oilseed prices further facilitated technological change by making the new technology even more profitable. High prices contributed to pure area expansion into oilseeds, notably in the late 80s and early 90s, possibly substituting for competing and more efficient crops. * There is little evidence of inefficient crop substitution in the case of soybean and sunflower. The soybean and sunflower area expansion in Madhya Pradesh and Karnataka resulted in (statistically significant) higher cropping intensity by occupying land that would have remained idle otherwise. * There is emerging evidence that area expansion of rapeseed-mustardseed may have contributed to a more efficient resource allocation. Although it did not lead to higher cropping intensity in Rajasthan and Madhya Pradesh,rapeseed-mustardseed (statistically) substituted for sugarcane and wheat, suggesting a more efficient use of scarce resources such as water or electricity. * Soybean production is price competitive (NPCs below unity throughout). * Indian groundnuts are cost competitive with other major producing countries (China, Senegal, USA); and most likely to be price competitive (India dominates world production --30