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CURRENCY EQUIVALENTSCurrency unit: Indian Rupee (annual average)

2000: $1 = Rs47.0 2002: $1 = Rs49.3 2004: $1 = Rs45.0 2001: $1 = Rs48.5 2003: $1 = Rs46.7 2005: $1 = Rs43.0

UNIT MEASUREMENTS

FISCAL YEAR (FY)April 1–March 31

ACRONYMS

AERC Assam Electricity Regulatory Commission IRMA Inst. of Rural Management, AnandAMUL ANAND Milk Union Ltd IWMI International Water Management InstituteAPMC agricultural produce marketing committee M.E. modified estimateATMA Agricultural Technology Management

Agency (ATMA)NCAER National Council of Applied Economic

ResearchBPL below poverty line NGO nongovernmental organization EPTD Environment and Production Technology

Division (IRPRI)NPC Nominal Protection Coefficient

GCA gross cropped area NSS National Sample Survey

GDP gross domestic product O&M operation and maintenanceGGMMF Gujarat Cooperative Milk Marketing

Federation PET Potential Evapotranspiration

GOG Government of Gujarat PIM Participatory Irrigation Management

GOI Government of India R.E. Revised estimateGSDP Gujarat State Domestic Product T&V Training and VisitGSCCF Gujarat State Cooperative Cotton

FederationTPDS Targeted Public Distribution System

GSDP Gujarat State Domestic Product SEB State Electricity Board GWRDC Groundwater Resource Development

Corporation SSP Sardar Sarovar Project

HACCP/QC Hazard Analysis Critical Control Point/Quality Control

SPPWCP Sardar Patel Participatory Water Conservation Project

ICAR Indian Council of Agricultural Research TE triennium endingIIMA Indian Institute of Management

AhmedabadUNICEF United Nations Children’s Fund

IMT Irrigation Management Transfer

Vice President : Praful C. PatelCountry Director : Michael F. CarterSector Director : Constance BernardSector Manager : Adolfo BrizziTask leader/Co-task leader : Paul Dorosh/Rabih Karaky

ha = hectare(s)kg = kilogram

km2 = square kilometermil = million(s)

MCM = millions cubic meterRs = rupees

TABLE OF CONTENTS

ACKNOWLEDGMENTS......................................................................I

EXECUTIVE SUMMARY.....................................................................IACHIEVEMENTS AND CHALLENGES IN GUJARAT’S AGRICULTURE............................................ISTRUCTURE OF AGRICULTURE IN GUJARAT..............................................................................IIWATER FOR AGRICULTURE......................................................................................................IIIMARKET DEVELOPMENT..........................................................................................................IVPUBLIC EXPENDITURES.............................................................................................................VREDUCING RURAL POVERTY....................................................................................................VICONCLUSIONS..........................................................................................................................VI

INTRODUCTION..............................................................................1PLAN OF THE REPORT................................................................................................................3

RURAL INCOME AND POVERTY........................................................4CHARACTERISTICS OF THE RURAL POOR..................................................................................6INCOME DETERMINANTS...........................................................................................................9

AGRICULTURAL PRODUCTION........................................................10AGROCLIMATIC ZONES OF GUJARAT......................................................................................10MAJOR CROPS.........................................................................................................................12AGRICULTURAL PRODUCTIVITY AND INPUT USE....................................................................17REAL PRICE TRENDS...............................................................................................................18LAND.......................................................................................................................................20LAND RESOURCE POLICY AND ADMINISTRATION...................................................................20LIVESTOCK..............................................................................................................................21FISHERIES................................................................................................................................22AGRICULTURAL RESEARCH AND EXTENSION.........................................................................22AGRICULTURAL CREDIT..........................................................................................................23RURAL NONFARM SECTOR......................................................................................................23

WATER FOR AGRICULTURE............................................................25WATER RESOURCES................................................................................................................25OVERVIEW OF WATER USE IN AGRICULTURE.........................................................................27RAINFED AGRICULTURE..........................................................................................................29IRRIGATED AGRICULTURE.......................................................................................................30WATER-RELATED INSTITUTIONS AND SCHEMES.....................................................................32WATERSHED DEVELOPMENT PROGRAMS................................................................................35SMALL WATER HARVESTING STRUCTURES AND GROUNDWATER RECHARGE SYSTEM.........38WATER AND ELECTRICITY CHARGES......................................................................................39STAKEHOLDER INVOLVEMENT IN IRRIGATION MANAGEMENT...............................................41GROUNDWATER MARKETS......................................................................................................42PUBLIC EXPENDITURES...........................................................................................................42

AGRICULTURAL MARKETING..........................................................44MARKET REGULATION AND MARKETS IN GUJARAT: APMCS...............................................44COOPERATIVES........................................................................................................................45MARKETED SURPLUS...............................................................................................................46ALTERNATIVE MARKETING CHANNELS..................................................................................47COSTS, MARGINS, AND PRICES...............................................................................................47MARKETS EFFICIENCY.............................................................................................................49

CONCLUSIONS AND POLICIES........................................................52WATER FOR AGRICULTURE.....................................................................................................54MARKET DEVELOPMENT.........................................................................................................56

APPENDIXES................................................................................57APPENDIX 1. PRODUCTION FUNCTIONS OF MAJOR COMMODITY GROUPS.............................58APPENDIX 2. SUMMARY OF STATE ACCOUNTS.......................................................................59APPENDIX 3. SALIENT FEATURES OF THE 2003 MODEL ACT ON AGRICULTURAL MARKETING63APPENDIX 4. MARKET INSTITUTIONS: CASE STUDIES............................................................66APPENDIX 5. AGRO-FOOD SYSTEMS: POLICY AND OPERATIONAL SPHERES..........................72APPENDIX 6. ADDENDUM ON CONTRACT FARMING AGREEMENT AND ITS MODEL SPECIFICATIONS.................................................................................................................................................76

References.....................................................................................................90

Tables

Table 1 Population, labor force, and agriculture in other states.......................................................2Table 2 Poverty estimates for Gujarat and All-India, 1999–2000....................................................4Table 3 Gujarat regional poverty estimates over time (%)...............................................................6Table 4 Human Development Index in various Indian states, 1981, 1991, and 2001......................6Table 5 Distribution of rural households based on economic activity 1999–2000...........................7Table 6 Distribution of irrigated area by expenditure deciles...........................................................7Table 7 Rural poverty and social groups in Gujarat 1999–00..........................................................8Table 8 Income determinants............................................................................................................9Table 9 Agroclimatic zones............................................................................................................10Table 10 Growth rates in area, yields, and production of major crops 1980–2002........................15Table 11 Impact of rain shortfall on crop production.....................................................................16Table 12 Average yields of major crops (kg/ha)/use of inputs in selected states (TE 00–01)........17Table 13 Input use in selected states in India 1998........................................................................18Table 14 Growth rates of real market prices of major commodities..............................................18Table 15 Nominal protection coefficients for cotton and groundnuts 1981–2002.........................19Table 16 Distribution of land in Gujarat 1995–96..........................................................................20Table 17 Nonfarm income shares in rural Gujarat..........................................................................24Table 18 Major characteristics of the four hydrological zones.......................................................26Table 19 Share of irrigation water use in each region by crop (%)................................................27Table 20 Share of irrigation water use for each crop by region (%)...............................................28Table 21 Irrigation development and use, June 2003.....................................................................28Table 22 Irrigated area by source....................................................................................................29Table 23 Comparison of yield change: Irrigated vs. rainfed agriculture........................................29Table 24 Distribution of irrigated area by crop and technology 1998–99......................................31Table.25 Cost of irrigation by agro-ecological zones.....................................................................32Table 26 Real growth rates of farm input subsidies in Gujarat (%)...............................................39Table 27 Statewide subsidies on canal irrigation, electricity, and fertilizers (% AGGDP)............40Table 28 Distribution of canal irrigation subsidies in Gujarat, 1998–99........................................40Table 29 Distribution of agricultural power subsidy in Gujarat, 1998–99.....................................41Table 30 Market surplus percent of agricultural commodities in Gujarat (%)...............................46Table 31 Estimated production and arrivals for selected commodities at APMCs in Gujarat, 2000–01...........................................................................................................................................48

Figures

Figure 1 Sectoral contributions to GDP 1980–2000......................................................................................1

Figure 2 Trends in rural poverty....................................................................................................................5Figure 3 Trends in urban poverty...................................................................................................................5Figure 4 Location of Gujarat’s agro-ecological zones.................................................................................12Figure 5 Shares of gross cropped area and total output value by major crops............................................13Figure 6 Real agriculture GSDP, cotton and groundnut production 1980–2000.........................................16Figure 7 Groundnut import parity and producers prices..............................................................................20Figure 8 Growth in Gujarat’s fisheries’ SGDP............................................................................................22Figure 9 Relationship between rainfall variability and agricultural GDP...................................................25Figure 10 Irrigated area by crop 1998–99...................................................................................................30Figure 11 Distribution of irrigated area 1998–99.......................................................................................31Figure 12 Participatory planning process: Karnataka Watershed Development Project.............................38Figure 13 Farm input subsidies in Gujarat...................................................................................................39Figure 14 GOG expenditures in agriculture, irrigation and rural development sectors...............................42

Boxes

Box 1 Tribal population and migration in Gujarat.......................................Error! Bookmark not defined.Box 2 Sardar Patel Water Conservation Scheme.........................................................................................33Box 3 Sujalam-Sufalam Scheme.................................................................................................................34Box 4 Shkhomarji: Example of positive economic impacts of a WDP.......................................................36Box 5 Anand Model throughout India: Operation Flood.............................................................................46Box 6 Government of Gujarat Agrovision 2010 Action Plan......................................................................53Box 7 Objectives of the Gujarat state policy on agroprocessing.................................................................53

ACKNOWLEDGMENTSThis report was prepared by a team led by Paul Dorosh and Rabih Karaky, comprising Vasant Gandhi from the Indian Institute of Management (IIM- Ahmedabad) (overview of the agricultural sector, and agricultural marketing), Tushaar Shah from International Water Management Institute (IWMI-Anand) (water sector), and Derek Baker (Consultant, Abel Projects ApS of Projects–Denmark). Grant Milne (SASAR) provided substantial inputs on watershed management. The team especially wishes to thank Adolfo Brizzi (Sector Manager) and the peer reviewers Benoit Blarel and K. Palanisami for their helpful guidance during the preparation of this report. We also thank Gajanand Pathmanathan, Dina Umali-Deininger, and John Briscoe for their valuable comments on the report.

The report is based on missions’ discussions with various stakeholders, including the Government of Gujarat, agricultural laborers, private sector representatives, and academics. We gratefully acknowledge the generous cooperation and valuable assistance provided by officials from the Ministry of Agriculture and the Land Development Corporation in Gujarat.

EXECUTIVE SUMMARY

ACHIEVEMENTS AND CHALLENGES IN GUJARAT’S AGRICULTURE

1. Despite a dry climate with erratic rainfall, Gujarat’s agricultural sector has enjoyed substantial long-term growth over the past several decades. Following a decade of negative agricultural growth in the 1980s (-0.8 percent per year), the agricultural sector grew by 3.9 percent in the 1990s, surpassing the all-India average of 3.2 percent. Nevertheless, managing water and improving efficiency of agricultural markets remain major challenges to the government’s efforts to accelerate growth and reduce rural poverty. Essential to achieve these goals are (a) further diversification into high-valued products and (b) improvements in the processing, marketing, and supply chain management of agricultural produce.

2. Overall economic growth in Gujarat far outpaced agricultural sector growth. In the 1990s, while population grew by an average of 1.8 per year, total output grew by 8 percent per year, giving a per capita Gujarat State Domestic Product (GSDP) growth of 6.1 percent per year. In 2001 per capita GSDP reached Rs 15,747, 34 percent higher than the all-India average of Rs 11,752. Much of the growth was attributed to nonprimary sectors. Between 1981–82, and 2000–01, the share of the services sectors in GSDP increased from 31.4 percent to 42.5 percent, and the share of the industrial sector rose from 27.2 percent to 43.8 percent. However, over the same period, agriculture’s share in total output significantly dropped from 43.8 percent to 13.6 percent, one of the lowest shares in India. Nonetheless, agriculture is still the primary occupation of 52 percent of the labor force in the state and is a major source of income for the rural poor.

3. Gujarat’s agriculture is characterized by a cropping pattern that is among the most diverse of all Indian states. Moreover, the pattern has shifted considerably during the 1980s and 1990s to (a) increase industrial crop production (especially cotton) at the expense of food crops (especially grains) and (b) expand areas of cash crops (groundnut, cumin, fennel, black pepper, castor, and banana). Area planted to cereals has declined from 37 percent of sown area in 1980–81 to only 24 percent, due largely to declines in wheat, sorghum, and millet.

4. Over the last decade, agricultural productivity in Gujarat has improved, contributing in part to a decline in the poverty rate in rural areas. Nonetheless, yields of major crops in Gujarat are below those in other states. Rice and wheat yields are half those in Punjab. Groundnut yields are lower than in most other states. Fostering irrigation development will allow wider adoption of technical inputs and increase agricultural productivity.

5. Availability of water is the major constraint facing agricultural growth in Gujarat. A large part (more than 68 percent) of state agriculture is rain-fed, and agricultural production is highly dependent on rainfall, whose levels fluctuate widely. The unreliable volume and distribution of water (both rainfall and irrigation) are major sources of uncertainty and variability in producers’ income, agricultural value added and overall economic growth. Unavailability of water also has had severe adverse consequences for the natural resource environment, including overexploitation of groundwater and large-scale land degradation in parts of the state. Falling water tables, particularly in the northern regions of the state, have significantly increased costs of irrigation to farmers even though state subsidies on electricity for irrigation account for approximately 20 percent of state agricultural domestic product.

6. The rural nonfarm sector provides an important source of income for rural households in Gujarat, accounting for approximately one-fourth (24 percent) of total household income. Nonetheless, agriculture is still the major source of rural incomes, with 64

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percent of incomes derived from cultivation and 9.5 percent from agricultural labor. The proportion of nonfarm sources to total income tends to rise as per capita incomes increase.

7. Although there have been notable successes, including the world-famous dairy cooperatives, to permit a rapid expansion in high-value agriculture, marketing problems must be overcome. Trade in various spices (cumin, fennel) to other parts of India and international markets is well established, but substantial untapped opportunities remain for increased production and incomes through increased sales of fresh and processed fruits and vegetables. Significant market restrictions remain in place, and the adoption of new legislation to liberalize trade and promote innovations such as contract farming has been stalled.

8. Ensuring that agricultural growth and rural public investments substantially reduce rural poverty also is crucial. Gujarat is one of the richest states in India. Nonetheless, according to various poverty estimates, 4–8 million poor (8 percent–16 percent of the total population) live in rural areas. Given wide variations in access to land, water, and other resources for households in various parts of the state and of different socioeconomic backgrounds, the composition of agricultural growth has a major impact on poverty outcomes.

9. In accordance with India’s national agricultural policy, Gujarat state agricultural policy seeks to overcome these challenges as the state transitions from the pursuit of self-sufficiency to the development of a competitive, value-adding agricultural industry. In its 2001 agricultural policy framework, Agro-vision 2010, the Government of Gujarat (GOG) aimed to achieve an annual growth rate of 6.8 percent over the next decade through an increase in productivity and higher value addition to agricultural produce.

STRUCTURE OF AGRICULTURE IN GUJARAT

10. Land-holdings are concentrated among small farms, which account for the majority of farms and of cropped area. From 1970–71 to 1995–96, the number of small farms increased from 2.4 million to 3.8 million as the average farm size declined from 4.1 hectares (ha) to 2.6 ha. In 1995–96, 2 percent of farms in Gujarat were 10 ha or more in size, accounting for 14 percent of total land in the state.

11. Water is the most significant determinant of crop production in Gujarat. Rainfall data indicate large spatial and temporal variability, which lead to large fluctuations in crop production and extreme dependence on limited groundwater resources. The latter led to serious depletion of aquifers, creating a water scarcity and groundwater quality problems. Nonetheless, the agriculture sector of Gujarat shows considerable strength. Gujarat demonstrates both cost and quality competitiveness within India in most of the major agricultural commodities that it produces, including pearl millet, wheat, pigeon pea, groundnut, and cotton.

12. The share of foodgrains in Gujarat’s cropping pattern is relatively low at approximately 43 percent, compared to 65 percent nationally. Pearl millet (jowar) is the major foodgrain, in contrast to most of India, in which rice and/or wheat dominate. Oilseeds (mainly groundnut) hold a large share in the area of approximately 31 percent, which is much higher than the national average. Cotton also is a major crop in Gujarat. For several crops, including various spices and castor, Gujarat is the leading producer in both India and the world.

13. Gujarat has significantly developed its livestock and fisheries activities. Livestock accounts for approximately one-quarter of its total agriculture output. A strong dairy cooperative movement in the state has substantially boosted livestock activity. Moreover, livestock constitutes an important source of income for the rural poor. The fisheries sector also has grown rapidly, increasing its share of total agricultural GSDP from 2.8 percent in 1980 to 7.2 percent in 2000.

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WATER FOR AGRICULTURE

14. As with many other states in India, Gujarat faces severe water management problems, seen in falling water tables and rapidly expanding subsidies for irrigation and electricity Addressing these problems is not a matter of simply reducing fiscal subsidies but also requires changes in the policies and irrigation management.

15. One of the major reasons behind the excess groundwater draft has been the government’s inability to efficiently manage (and price) the supply of power to the farm sector. Attempts at metering have been plagued by inaccurate billing and apprehension from farmers as to the arbitrariness and high-handedness of meter readers. On the other hand, the flat-rate regime based on the horsepower of the pump has failed to prevent a severe drop in groundwater tables. If administered properly, the present flat rate tariff regime with reduced (rationed) supply to the agricultural sector may offer a workable solution, provided that (a) total power supply to the farms is significantly restricted, (b) more off-peak power is used, (c) the power tariff is increased gradually, and (d) accounts are kept of the power subsidy given. However, increases in tariff rates have faced significant political opposition.

16. Watershed development programs have emerged as the key strategy for sustainable economic development of the semi-arid/dryland areas in the state. These programs have yielded significant increases in the crop yields, due primarily to the increased water-table and availability of irrigation. The programs should go beyond the sheer creation of water harvesting structures to integrate water-saving techniques with water conservation efforts, and allow for better institutional arrangements that address communities’ needs and elicit their participation. If carried out appropriately, watershed development programs have great potential to control the degradation that threatens the ecology of these areas and boost sustainable development.

17. The overall experience with water harvesting structures and check-dams has been largely positive. This approach has added to the prosperity of the regions in which it has been implemented and has improved the groundwater balance. It also has increased farmers’ awareness and knowledge of water resource management. Projects that emerged based on this approach have set a good example of public-private partnership in water management in Gujarat. However the resulting increase of check-dams in the state calls for some caution. Macroplanning is needed to asses the basin-level impacts of these structures. Increasing the efficiency of water use and improving the distribution of benefits derived from these structures also are important issues needing attention.

18. The future of Gujarat agriculture will depend significantly on how water from Narmada River (Sardar Sarovar Project, or SSP) is managed and used. The project has faced major obstacles, namely (a) changing river basin hydrology, (b) increased claims from hosts of new users other than the intended beneficiaries, and (c) institutional and management challenges that hindered proper distribution and management of the system. As Shah (2002) puts it, at this conjuncture what is of immediate and also major concern is framing the rules of the game between SSP and the farmers by enabling quality supply and creating proper checks and balances to deter default in payments.

19. Promotion of water-saving technologies such as several micro-irrigation techniques will go a long way in managing water at the farm level. More systematic research is required to support adoption of these technologies on a larger scale.

20. A major difficulty in Gujarat’s large-scale projects and watershed development projects has been achieving people’s participation. This problem is a constraint on management transfer to such institutional structures as water users’ associations, so prolongs government involvement and embeds the taxpayer as a scheme manager and the source of

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running costs. Observations on state budget patterns reflect these trends and obviate the necessity for new and intensified efforts at participatory project design and implementation. Existing entrenched officials have few incentives to give up their local positions of power and patronage. Local people have little incentive to take over from them, and even less to contribute toward cost recovery.

21. Especially in watershed management projects, participation is constrained by the absence of mechanisms for sharing benefits, for example, between farmers in the upper reaches of a watershed and those in its lower reaches. This is one reason for including farm dams in project design, because upstream stakeholders gain the tangible asset of visible standing water in return for creating the more commercial downstream benefits generated by their management of runoff. Other means of benefit-sharing need to be developed, possibly, drawing on nongovernmental organizations’ (NGOs’) experience. Obviously, such means must be localized and involve local institutions rather than centralized government agencies.

22. The development of strong community institutions has been a hallmark of successful NGO projects, which tend to address small localities rather than large schemes or entire catchments. First, such institutions internalize any imbalances in costs and benefits within the project areas. Second, they provide a basis for shared land, labor, and machinery and other cooperative activities such as self-help credit and marketing groups. That these activities are enabled by the availability of water and may interrupt cycles of migration by entire communities provide impetus to community actions in water management.

23. The need for to improve monitoring and evaluation (M&E) in Gujarat’s water management has been identified by many commentators. In addition to its contribution to technical water management, M&E also identifies and publicizes achievements and invites commentary on management options. The delivery of an information stream to stakeholders is a key step in improving participation. Structures for collecting, processing, and using this information justify the existence of community institutions and provide a means to measure performance. In this way, difficulties in sharing benefits can be foreseen and managed with user participation. Project designs need to include equipment and training, and mechanisms for transferring project ownership and function to communities.

MARKET DEVELOPMENT

24. Market liberalization and creation of new market institutional arrangements can spur agricultural diversification and producer incomes. A large percentage of the marketed surplus for most of Gujarat’s major crops is sold at auction through a network of regulated markets, the Agricultural Produce Marketing Committees (APMCs). These markets are designed to protect farmers’ interests by institutionalizing fair marketing practices. Direct sales transactions of agricultural produce between farmers and traders/processors outside the purview of the act are illegal, even though they are known to be taking place on a significant scale. Legalizing wholesale trade outside the regulated markets would increase competition by providing farmers alternative marketing channels.

25. Several steps also could be taken to improve the functioning of APMCs. First, facilities for market transactions and storage as well as utilities and infrastructure need to be upgraded. Second, in many market yards, secret bidding is the prevalent method of transaction; open auctions are one possible mechanism to increase transparency of bidding. Third, as they currently function, APMCs typically provide only a marketing outlet; facilities for sorting, processing and other value-addition by market participants may be helpful. Finally, in the light of an increased number of available sales channels, APMCs’ cost recovery by buyer levies provides the wrong incentive to buyers; alternative financing mechanisms may be needed.

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26. The cooperative system has worked well in many spheres, especially the dairy sector, but needs to face the challenges of a liberalized market environment and increased competition. Facing these challenges will require substantial improvement in organizational as well as managerial capability. Cooperative institutions have the potential to bring a substantial share of the economic benefits from the market to the farmers/rural population, but cooperatives need to be more market oriented and to overcome the handicaps of politicization and government control. Many government subsidy and support schemes channeled through the cooperatives involve substantial transaction hurdles and costs, making access to them very difficult. Redesigning these schemes and their delivery systems is a necessity.

27. Development of new institutional marketing arrangements also is needed to increase the competition and efficiency of private trade. Large food retailers and processors should to be allowed to establish direct links with producers. This linkage is necessary to promote the production of the appropriate and quality output required by the market, and to generate investment of the private sector in the production system and various marketing activities. The proposed draft model agricultural produce marketing legislation offers to introduce many of these provisions and proposes a formal framework for direct contract farming links among farmers, processors, and businesses. Government and farmer groups need to make efforts to ensure that small farmers are not excluded from contract farming arrangements but have the opportunities to participate if they choose, perhaps through farmer organizations or cooperatives.

28. Private markets are unlikely to deliver higher farm incomes unless they truly compete with APMCs, as envisaged by the framers of new policy. Aside from enabling contract farming and cooperative marketing activities, the government and farmer groups should take steps to supply price and market information to farmers. This step is one of the promising aspects of GOG’s Agrovision 2010, but to make this market information more useful, the state needs to adopt recognized grades and standards for agricultural commodities.

29. Gujarat’s potential to attract foreign direct investment is significant, especially in sectors such as food processing. The state is the ideal entity to link fruit and vegetable cooperatives/farmer groups with foreign direct investment corporation retailers. These linkages will increase exports and create large-scale employment opportunities to help reduce rural poverty. These linkages also will improve post-harvest management, cleaning, grading, packaging, and storage. The GOG, in coordination with the federal government, could play a pivotal role in providing a supportive regulatory and legislative environment to attract foreign investment in the agricultural sector by reforming its policies on market and financing restrictions.

PUBLIC EXPENDITURES

30. Although agriculture gets a substantial share of planned development expenditures as well as expenditures on capital account, most of these go to develop irrigation. The share of agriculture, irrigation, and rural development in total expenditures declined, from 24 percent in 1990 to approximately 17 percent in 2003. Much of these expenditures apparently went to inefficient distribution systems, transaction mechanisms with low cost recovery, and subsidized industries (such as fertilizer). A small proportion of these expenditures found its way to small farmers.

31. Irrigation and flood management accounted for 10 percent of total expenditure in 2003, a slight reduction from 1990 (12 percent). However, the 1990 figure was largely capital expenditure, while the 2003 figure was almost all revenue expenditures. This decline in capital expenditure indicates a shift away from investments, and toward entrenched institutional and running costs.

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REDUCING RURAL POVERTY

32. Gujarat is one of the richest states in India, yet 13 percent to 27.7 percent of the 30.2 million rural inhabitants are poor, according to various poverty estimates for 1999–2000. Rural poverty is concentrated among small and marginal farm households (those with less than 2.0 ha of land) and agricultural laborers. However, the extent of poverty varies across regions, and poverty rates are highest in the eastern region of the state, where scheduled tribes (STs), the poorest group of the rural population, tend to reside.

33. Seasonal migration is a major livelihood strategy among the tribal population. Although these wage-earning opportunities raise household incomes, terms, and conditions of employment arranged before the migrants leave their village often stipulate below-market wages and offer no opportunities for training in basic skills, such as carpentry or masonry that could raise their earnings in the medium term. For poorer households, the entire household often migrates (as opposed to one or two male members in households with higher incomes), with adverse consequences for children’s education and living conditions.

34. Regression analysis of household-level data shows that education and social group (scheduled castes and tribes) are among the most important determinants of rural incomes in Gujarat. Controlling for other determinants of income, households whose heads have completed primary school have a 27 percent higher income than households whose heads have no schooling. Households whose heads have a middle school education have a 64 percent higher income than those whose head has no schooling. Members of scheduled caste (SC) and scheduled tribe (ST) households have 8 and 14 percent lower incomes, respectively, than non SC/ST households. Controlling for other factors, scheduled tribe households whose household heads have no education have incomes approximately half (52 percent) of incomes of non-SC/ST households whose household head has completed middle school. By comparison, the role of land and even irrigated land is much smaller. Increasing the amount of land from zero to one ha raises household incomes by 8 percent. If this land is irrigated, household incomes rise by 17 percent.

35. The biggest direct effects of agricultural investments and production growth on rural poverty are likely to come from interventions targeted toward small farmers, particularly tribal groups and special castes. Many of the direct benefits of improvements in irrigation, water management, and marketing tend to benefit larger farmers, although agricultural laborers and others can benefit through increased employment opportunities through multiplier effects. By contrast, projects directly involving poorer groups, such as the rural development projects in the Eastern hilly regions of the state, may have larger impacts on rural poverty per rupee invested. Interventions outside the agricultural sector also will be crucial for rapid and sustained poverty reduction, particularly investments in rural primary and secondary education, rural roads, and water supply.

CONCLUSIONS

36. The constraints and opportunities facing Gujarat are not unlike those of other relatively high income states including Maharashtra, Punjab and Tamil Nadu. As in these states (and many others in India), water issues and associated subsidies are among the most important issues. To some extent, these problems are especially severe in Gujarat, given the state’s dry climate and the very high fiscal costs of the electricity subsidy. In 1999–2000, agricultural subsidies in Gujarat were 25.4 percent of agricultural GSDP (78 percent of which was for electricity), compared with 22.8 percent in Maharashtra, 14.8 percent in Tamil Nadu, and 13.6 percent in Punjab. In all of these states, in the absence of considerable subsidies, cultivation of water-intensive crops (rice, sugar cane, and even wheat) using groundwater in dry regions with falling water tables would not be profitable. However, even if Gujarat is willing to absorb the

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fiscal costs of subsidizing irrigation, these subsidies only aggravate the basic problem of water shortage by encouraging over-exploitation of groundwater. Over the past two decades, in much of the drier part of the Gujarat, agriculture gradually has shifted away from food grains and other relatively water-intensive crops. State policies and programs should support this trend and encourage further shifts toward diversification into higher value, less water-intensive crops, along with the adoption of more efficient technologies (such as drip irrigation).

37. Raising rural incomes and conserving water through diversification into higher-value products will require market reforms. Gujarat has a history of success with agricultural cooperatives, particularly dairy. However, the state lags behind some other states, notably Tamil Nadu and Andhra Pradesh, in liberalizing agricultural markets. Gujarat has significant marketing restrictions that hinder private sector investment in market infrastructure and market innovations, such as contract farming. Adoption of the new marketing act would be a major step toward liberalizing agricultural marketing in the state and improving the sector’s efficiency. Such steps are particularly important given the potential for foreign direct investment in domestic marketing in India, which could enhance producer incomes by improving the quality and prices received for fruits and vegetables sold in urban supermarkets.

38. Finally, in framing policy, the government should carefully consider the poverty-reduction implications of agricultural investments and rural development strategies. Because rural poverty is concentrated among small farmers and agricultural laborers, interventions that target medium and large farmers will raise incomes of most poor households only through increased demand for agricultural laborers or other multiplier effects. Careful consideration should be given to projects and programs that directly raise the real incomes of poor households. In the short run, these projects/program would be investments in community infrastructure and watershed management in these areas, and vocational skills training for migrant laborers. In the long run, the projects/program would raise incomes through improving access to education for children.

vii

INTRODUCTION39. Gujarat’s agricultural sector is one of the most diversified in India. Despite a dry climate with erratic rainfall, the sector has enjoyed substantial growth over the past decade. Following a decade of negative agricultural growth in the 1980s (-0.8 percent per annum) that accompanied a series of droughts, the agricultural sector grew by 3.9 percent per annum in the 1990s, surpassing the all-India average of 3.2 percent. However, since the late 1990s, agricultural growth has again slowed, largely because of droughts.

40. Overall economic growth in Gujarat far outpaced agricultural sector growth. In the 1990s, while population grew by an average of 1.8 per annum, total output grew by 8 percent per annum, giving a per capita GSDP’s growth of 6.1 percent per annum. In 2001 per capita GSDP reached Rs 15,747, 34 percent higher than the all-India average of Rs 11,752.

41. With rapid overall growth, and especially rapid expansion in the nonagricultural economy, agriculture’s share in total output has fallen sharply over time (figure 1). Agriculture and allied services’ (livestock, forestry, and fisheries) contribution to GSDP fell from 43.8 percent in 1981–82 to only 13.6 percent in 2000–01, one of the lowest shares in the country. In the same period, the services sector’s share of GSDP increased from 31.4 percent to 42.5 percent, and that of the industrial sector rose from 27.2 percent to 43.8 percent.

Figure 1 Sectoral contribution to GDP 1980–2000

0

100

200

300

400

500

600

700

800

900

80 82 84 86 88 90 92 94 96 98 00

Rs B

illio

n (c

onst

ant 1

993-

1994

Rup

ees)

Agriculture & Allied Industry Services

Source: World Bank Statistical database.

42. Despite its declining importance in the overall economy, agriculture remains a major source of employment and earnings for the rural poor. Approximately 63 percent of the state’s population of 50 million (2001 census) reside in the rural areas. More than half (10.6 million workers) of an estimated 20.4 million person workforce are employed in agriculture. The labor force is evenly split between cultivators (27.6 percent) and agricultural laborers (24.5 percent)

1

(table 1). The Labor Bureau estimates for 2000 reveal that of an average rural household size of 4.67 persons in Gujarat, 1.63 are employed as agricultural laborers, compared to 1.44 for all of India.

Table 1 Population, labor force, and agriculture in other states

  Gujarat Maharashtra Punjab Tamil Nadu All-IndiaPopulation (2000 census) Total (mil) 50.6 96.8 24.3 62.1 1027 Rural (mil) 31.7 55.7 16 34.9 741.7 Urban (mil) 18.9 41 8.2 27.2 285.4 % rural 62.6 57.6 66.1 56.1 72.2

Labor force in agriculture as % of total 52.0 55.4 39.4 49.5 59.2 Cultivators (% total) 27.6 28.6 23.0 18.4 31.6 Agric laborers (% of total) 24.5 26.8 16.4 31.2 27.6 Agric laborers/cultivators 0.89 0.94 0.71 1.69 0.88

GSDP/capita (2001) 15,747 17,394 17,436 14,393 11,752

Share of agric and allied 13.6 12.6 38.7 17.3 24.2 Agriculture GSDP growth 3.9 3.8 2.5 2.9 3.2 Agric and allied/capita 2,135 2,199 6,740 2,486 2,847Agricultural GSDP/worker 5,303 5,059 17,909 5,552 7,603

Input subsidies (% AGGDP) (1999–00)

25.4 22.8 13.6 14.8 10.1

Agricultural wage (1999–00) (Kharif, Rs/person-day) 66.9 43.7 77.7 62.2 51.8Source: Population Census 2001; Reports of the Commission for Agricultural Costs and Prices 2001–02 (2002).

43. Given the importance of agriculture in the incomes of the poor in Gujarat, appropriate policies and investments can help maintain or even accelerate agricultural growth and ensure that this growth contributes to rapid poverty reduction. Analysis based on household expenditure surveys reveals that, between 1993–94 and 1999–00, rural poverty declined by 4.8 percent–12.5 percent (depending on the methodology used).1 Rural poverty reduction has been driven in part by improved agricultural productivity, via higher farm yields to small producers, and partly by a rise in real wages to agricultural laborers.2 Nevertheless, 3–8 million rural poor remain in Gujarat (1999–00), representing 11 percent–28 percent of the rural population.

44. Water is one of the major constraints to Gujarat agriculture. A large part (more than 68 percent) of state agriculture is rain-fed. Agricultural production fluctuates according to the level and timing of rainfall. Large variations in rainfall and frequent droughts, as well as distorted

1 See chapter 2.2 Real wages in Gujarat agriculture are now among the highest in India, raising the cost of production

in agriculture but contributing to higher incomes of agricultural laborers.

2

price incentives also have adversely affected the natural resource environment. Some of the visible consequences are groundwater over-exploitation and widespread degradation of land.

45. The cropping pattern in Gujarat is one of the most diversified in India, reflecting the diverse agro climatic conditions. The importance of crops such as pearl millet, groundnut, and cotton indicate that scarcity of water is a major factor influencing agriculture in Gujarat. Nonetheless, yields of these and other crops decline sharply in drought years. Production of a large number of crops shows no positive long-term trend since 1980–81 but rather features large annual fluctuations. Area cultivated in wheat, sorghum, and millet has declined significantly, and the share of cereals in total area has fallen sharply. However, areas cultivated in, and production of, minor crops, including various spices, fruits, and vegetables, have expanded rapidly. Dairy production also has increased over time, although milk yields remain very low.

46. Given the size, diversity, and commercial orientation of Gujarat’s agriculture sector, agricultural marketing assumes great importance for rural income growth in the state. Gujarat has a strong history of development of agricultural marketing institutions, including world-renowned dairy cooperatives and the recent expansion of the private sector into trade in national and international markets.

47. However, high marketing costs reduce competitiveness of many of Gujarat’s agricultural commodities as well as farmers’ incomes. The GOG is becoming increasingly aware of this problem and of the need for the private sector to engage and for market performance to improve. Proposed draft model agricultural produce marketing legislation would promote these features of market development. In particular, it proposes a formal framework for direct contract farming as a way to link agro-processors and food manufacturers with farmers. It also redefines relationships between state agencies and the marketing chains. Other pending legislation proposes new structures and functions for cooperatives.

PLAN OF THE REPORT

48. Against this background, the objectives of the study are to assess agricultural policies in Gujarat and their implications for future agricultural growth and rural poverty reduction, and to recommend reform change. This report focuses on how to accelerate agricultural growth in Gujarat, particularly the types of agricultural growth that would rapidly reduce rural poverty. The report (1) reviews recent agricultural performance in Gujarat; (2) reviews key sectoral policies and their impact on resource allocation, sustainable use of land and water resources, and the incomes of the rural poor; (3) examines the structure and performance of agricultural markets; (4) identifies the main constraints to more rapid and sustainable agricultural growth; and (5) explores reform options.

49. The next chapter presents data on the extent of rural poverty in Gujarat and the characteristics of poor households. Chapter 3 provides an overview of the structure of the agriculture sector and the rural economy, focusing on the major crops and cropping patterns, livestock, and fisheries. Chapter 4 examines the importance of water for agriculture. Chapter 5 focuses on agricultural markets and marketing policies. Conclusions and a policy discussion are presented in chapter 6.

3

RURAL INCOME AND POVERTY50. Gujarat is one of the richest states in India. Why then, according to various poverty estimates for 1999–2000, are 4 million–8.4 million (13 percent–27.7 percent) of the 30.2 million rural inhabitants poor? Rural poverty is concentrated among small and marginal farm households (those with less than 2.0 ha of land) and among agricultural laborers, although there are marked regional variations. Poverty rates are the highest in the eastern region of the state, where the poorest rural group (scheduled tribes, or STs), tend to reside. Seasonal migration is particularly common among the tribal populations, which tends to lead to their remaining in low-skilled employment and reduced access to education for their children. The rural nonfarm sector is not a major source of full-time employment. Environmental and natural hazards such as cyclones, droughts, and earthquakes increase the vulnerability of the rural poor through the loss of risk mitigation assets, including standing crops, livestock, and irrigation water.

51. Estimates of rural poverty in Gujarat vary according to the statistical methodology used in estimating consumption and the poverty line (table 2). The incidence of poverty in rural versus urban in Gujarat also varies according to the methodology used. Planning commission estimates indicate that the incidence of poverty is lower in rural areas than in urban areas (13.2 percent vs. 16.6 percent).3 Adjusted estimates from Deaton and Drèze (2002) suggest the opposite, reporting urban poverty at less than half the incidence of rural poverty (20.0 percent rural and 6.4 percent urban). More recent estimates (Kijima and Lanjouw 2003) also find that urban poverty is much lower than rural poverty (11.9 percent urban vs. 27.7 percent rural).

Table 2 Poverty estimates for Gujarat and All-India, 1999–2000

Head count (%) No. of poor (mil)Rural Urban Overall Rural Urban Overall

Poverty estimates for Gujarat (1999–00)Planning commission official estimates 13.2 15.6 14.1 4.0 2.8 6.8Deaton and Drèze (2002) 20.0 6.4 14.9 6.0 1.2 7.2Kijima and Lanjouw (2003) 27.7 11.9 21.8 8.4 2.1 10.5

Poverty estimates for All-India (1999–00)Planning commission official estimates 27.1 23.6 26.1 193.2 62.1 260.3Deaton and Drèze (2002) 26.3 12.0 22.0 187.6 31.5 219.1Kijima and Lanjouw (2003) -- -- -- -- -- --Sources: Deaton and Dreze 2002, Kijma and Lanjouw 2003.

52. However, all three estimates of poverty in Gujarat in 1999–2000 suggest that the rural poor outnumber the urban poor in the state. According to planning commission estimates, 59 percent of the total poor in Gujarat reside in rural areas, somewhat less than the figure for all-India (74 percent). Deaton and Drèze estimate the rural poor’s share of total poor is essentially the same in Gujarat (84 percent) as in all-India (86 percent).

53. Poverty estimates also report a decline in rural poverty in Gujarat between 1993–94 and 1999–2000. Planning commission estimates suggest a decline in the rural poverty of 9.01 percent during this period.4 Deaton and Drèze calculate a steeper decline in rural poverty of 12.5 percent, and a reduction in urban poverty of 8.3 percent. Their figures compare favorably with

3 3 Estimates for 1999–00 are based on a 30-day recall period. According to planning commission press releases, poverty estimates based on 7-day recall are 12.2 percent and 13.76 percent for rural and urban Gujarat, respectively.

4

declines in poverty in other major states and the all-India rural and urban averages (figures 2 and 3).5

Figure 2 Trends in rural poverty

in selected states

05

101520253035404550

% H

eadc

ount

Rat

ios

1993-94 1999/00

Figure 3 Trends in urban poverty

in selected states

0

5

10

15

20

25

% H

eadc

ount

Rat

ios

1993-94 1999/00

Source: Deaton & Dreze (2002)

54. Gujarat exhibits marked regional variations in rural poverty (table 3). A higher incidence of rural poverty in 1999–2000 was observed in the Eastern and the Dry Areas of the state. Data from the 1999–2000 NSS indicate that poverty rates were highest in the Eastern and Dry Northern Areas, with estimates of poverty in these areas ranging from 23.7 percent–36.1 percent, compared to only 13.4 percent–18.8 percent in Saurashtra (southwestern Gujarat). According to Deaton (2003), all regions experienced a decline in rural poverty between 1993–94 and 1999–2000, with the sharpest declines occurring in the Southern region (the area with the greatest amount of rainfall and canal irrigation). However, Kijima and Lanjouw find relatively little change in poverty in most regions, with only the Southern region experiencing a significant decline (from 41.1 percent in 1993–94 to 25.1 percent in 1999–2000).

4 4 There has been much controversy surrounding the change in poverty levels in India over time, due to different methodologies used between the 50th round (1993–1994) and the 55th round (1999–2000) of the National Sample Survey Organization (NSS). For details, refer to Deaton and Drèze (2002), and Kijima and Lanjouw (2003).

5 5 Kijma and Lanjouw (2003) estimates suggest a decline in rural poverty of 4.8 percent.

5

Table 3 Gujarat regional poverty estimates over time (%)

  1993–94 1999–2000

 Deaton (2003)  Deaton (2003) Kijima and Lanjouw (2003)

Eastern 34.2 26.7 36.08Dry Areas 38.7 23.7 35.19Southern 41.1 20.8 25.13North 32.1 17.8 26.24Saurashtra 21.6 13.4 18.75

Source: Deaton 2003, Kijima and Lanjouw 2003.

55. Other measures of welfare have suggested an improvement, as Gujarat’s income poverty has declined. The human development index (HDI), which includes nonincome measures such as access to health and education services, vulnerability, and social exclusion have improved over time in Gujarat as well as throughout most of India. The HDI for Gujarat has risen in absolute terms from 0.36 in 1981, to 0.43 in 1991, and 0.48 in 2001 (table 4). Gujarat ranked sixth among all Indian states in HDI in 1981 and maintains sixth place two decades later.

Table 4 Human Development Index in various Indian states, 1981, 1991, and 2001

  1981 1991 2001State HDI Rank HDI Rank HDI RankKerala 0.50 1 0.59 1 0.64 1Punjab 0.41 2 0.48 2 0.54 2Tamil Nadu 0.34 3 0.47 3 0.53 3Maharashtra 0.36 4 0.45 4 0.52 4Haryana 0.36 5 0.44 5 0.51 5Gujarat 0.36 6 0.43 6 0.48 6

Source: Planning Commission, UNDP 2002.

CHARACTERISTICS OF THE RURAL POOR

56. Rural poverty is concentrated among small farmers (cultivating less than 2.0 ha) and agricultural laborers, who together account for an estimated 83 percent of the rural poor (table 5). Small farmers alone account for half of the rural poor. Nonetheless, even among this group, only 12.3 percent are poor; the large majority of farmers have expenditures above the poverty line. Within this group, small farmers without irrigation (27 percent of the rural population) account for approximately a quarter of the rural poor. Agricultural laborers, who make up 22.8 percent of Gujarat’s rural population, account for approximately one-third of the poor, with 14.1 percent of agricultural laborers living in poverty.

6

Table 5 Distribution of rural households based on economic activity 1999–2000 Type of household % of

rural popula-

tion

Poverty incidence

(%)

% of poor

Exp. per capita

(average)

Average land own

(ha)

Average land cult. (ha)

Average land irrig. (ha)

# of obs.

Medium and large farmers

15.7 1.5 2.5 756.4 4.59 4.35 1.97 529

Of whom w/o irrig 4.9 3.7 1.8 683.6 4.3 4.15 0 142Small farmers 40.1 12.3 50.2 560.1 0.74 0.73 0.4 941 Of whom w/o irrig 15 17.5 26.8 510.9 0.67 0.66 0 360Rural agric laborers 22.8 14.1 32.8 492.6 0.02 0 0 495Rural nonfarm non-poor

20.1 0 0 698 0.04 0 0 481

Rural nonfarm poor 1.4 100 14.5 239.3 0.01 0 0 33Source: NSS data, 55th round. Based on a poverty line of 318.94 (Rs/per capita/month).Note: Medium (large) farmers are those cultivating 2.0 to 4.0 ha (greater than 4.0 ha). Small farmers (including marginal farmers) are farmers cultivating less than 2.0 ha. Gujarat has very few landless farmers (pure tenants), (0.3 percent of the rural population according to the NSS 1999–2000 sample).

57. In Gujarat, households with little irrigated land are more likely to be poor than those with more irrigated land. In 1999–00, only 23 percent of the rural poor in Gujarat had access to irrigation, compared to 28 percent for all-India. Of these, 19.3 percent are marginal farmers (who constitute the majority of the rural poor); 3.6 percent are small farmers; and 0.14 percent are medium-sized farmers. On average only 2 percent of the land operated by the very poor is irrigated, compared to 98 percent by the nonpoor.

58. The distribution of irrigated land across income deciles reveals that, in 1999–00, almost 49 percent of irrigated land was concentrated among households belonging to the two top deciles of per capita expenditure, compared to 1.88 percent of irrigated land for the bottom two deciles (table 6). The table also suggests that this inequity has widened over the last decade. The same proportions stood at 30.6 percent and 3.12 percent in 1993–94 for the upper and lower two expenditure deciles respectively.

Table 6 Distribution of irrigated area by expenditure deciles

Expenditure deciles 1987/88 1993/94 1999–00

1 (Poorest) 0.46 1.16 0.952 1.07 1.96 0.933 5.74 5.89 3.494 3.10 8.82 3.455 7.82 9.00 5.516 9.20 11.32 6.087 13.92 14.16 12.928 15.51 17.04 17.809 20.09 14.70 20.54

10 (Richest) 23.09 15.95 28.34Total 100.00 100.00 100.00

Source: Based on NSS round data, as cited in World Bank 2003a.

59. Approximately one-fifth of the population in Gujarat belongs to scheduled castes and scheduled tribes, whose average living conditions are considerably lower than the rest of the population. SC and ST households are concentrated in the impoverished Eastern part of the state.

7

They have very high illiteracy rates and very low mean per capita consumption, compared to the rest of the population. They are highly represented in the two poorest household categories in rural Gujarat: marginal households and agricultural laborers. Estimates from 1999–00 reveal that approximately 57 percent of ST household heads are illiterate. Moreover, poor ST and SC households account for more than 80% of the total rural poor in the state (table 7).

Table 7 Rural poverty and social groups in Gujarat 1999–00

Social group

Total HHs

('000)% total

HHs

Poor HHs

('000)

% poor HH of total HHs

% poor HH of total

rural poor

Ave expenditure

per capNumber of obs

Scheduled Tribe 1,309.09 19.33 281.80 21.53 42.47 478.82 478Scheduled Caste 2,817.16 41.60 276.61 9.82 41.69 547.55 1020Others 2,645.85 39.07 105.10 3.97 15.84 712.28 981

Source: NSS data 55th round.

60. One of the factors that contribute to low educational achievement is annual seasonal migration, a common livelihood strategy especially among the tribal population. Although migration may provide subsistence and generate extra income to pay off debts, it makes it difficult for families to enroll their children in school. Migration also has contributed to low health indicators. Migrant households often find themselves living and working in bad conditions stimulating sicknesses and aggravating diseases. Moreover, terms and conditions of employment arranged before the migrants leave their village often stipulate below-market wages and offer no opportunities for training in basic skills, such as carpentry or masonry that could raise their earnings in the medium term. For poorer households, the entire household often migrates (as opposed to one or two male members in households with higher incomes), with adverse consequences for children’s education and living conditions. Box 1 provides more insight into migration in Gujarat.

Box 1 Tribal population and migration in Gujarat

Migration is particularly acute in tribal villages, in which it is primarily seasonal. Tribal villages migrate for 8–9 months of the year. Almost 70 percent to 80 percent of the tribal population leave their villages after the kharif (monsoon crop) season and come back in the next kharif season.

In a study involving the Bhil tribal villages in Gujarat, Mosse and others (2002) identified two patterns of migration, namely, the migration of young adult males and the migration of whole families. Female migration also was found to be common. These patterns are driven primarily by patterns of borrowing and levels of indebtedness. Poor households are forced to migrate to service high interest debts. Migration peaks in the monsoon seasons (July-September). Younger males undertake migration in a more flexible way to repay debts.

Migrants typically are engaged in a wide range of occupations including agricultural labor, but primarily urban construction. Due to the low skills of tribal migrants, they often get involved in low-paying casual labor with harsh working conditions. They have little opportunity to achieve any upward mobility to skilled labor, so migrants are trapped in this low-paid, difficult seasonal migration for a very long time.

Source: Mosse and others 2002.

8

INCOME DETERMINANTS

61. Regression analysis of household data suggests that education and social grouping (SC and ST) are among the most important determinants of rural incomes in Gujarat (table 8). Controlling for other determinants of income, households whose heads completed primary school have a 27 percent higher income than households whose heads had no schooling; households whose head had a middle school education have a 64 percent higher income than otherwise; and members of scheduled caste (SC) and scheduled tribe (ST) households have 8 percent and 14 percent lower incomes, respectively, than non-SC/ST households. Controlling for other factors, ST households whose heads had no education have incomes approximately half (52 percent) of incomes of non-SC/ST households whose heads completed middle school. By comparison, the influence of land and even irrigated land is much smaller: increasing the amount of land from 0 to 1 ha raises household incomes by 8 percent. If this land is irrigated, household incomes rise by 17 percent.

Table 8 Income determinants

Variable Mean Estimate t-valueHousehold size 4.9645 -0.1236 -8.15Squared household size 30.5174 0.0050 5.5Dependency ratio 0.3518 -0.2661 -5.83Per-capita land owned (log) 1.3262 0.0271 4.51Per-capita land irrigated (log) 0.9695 0.0252 2.51HH head's age 43.8749 0.0031 3.67HH head's education - below primary 0.2062 0.1191 4.41HH head's education - primary 0.1327 0.1217 3.96HH head's education - middle 0.1152 0.2543 6.54HH head's education - secondary 0.1157 0.3284 9.04HH head's education - graduate 0.0251 0.6064 9.11Gender - woman 0.0618 -0.0295 -0.76Scheduled caste† 0.4160 -0.0780 -2.6Scheduled tribe 0.1933 -0.1539 -2.62Northern Region 0.2745 -0.0109 -0.18Dry Areas 0.1487 0.0729 1.12Saurashtra 0.2014 0.1480 2.76Eastern Region 0.2066 -0.0901 -1.35Constant 6.5729 69.94

R-squared 0.4248Observations 2481

Source: National Sample Survey Various rounds. Data files. † = Scheduled caste includes other “backward” castes.

9

AGRICULTURAL PRODUCTION62. Over the past 20 years, Gujarat has enjoyed substantial long-term growth in agricultural output, in spite of its dry climate and erratic rainfall. Cropping patterns in the state have become increasingly diversified, as production has gradually shifted from a heavy concentration on grains to a wide variety of fruits, vegetables, spices, and industrial crops. Gujarat is India’s leading producer of cotton, groundnut, castor, sesame, tobacco, and fennel. It produces two-thirds of the world’s castor and fennel, is the world’s second largest producer of cumin and isabgul, third largest for groundnut, fifth for sesame, and eighth for cotton (at 3.5 percent of world cotton production). Gujarat also ranks sixth among Indian states in dairy production, mainly milk from cows and buffaloes.

AGROCLIMATIC ZONES OF GUJARAT

63. Although Gujarat is a water-scarce state, there is substantial diversity in rainfall and other agroclimatic variables across the state. The Tropic of Cancer effectively divides a somewhat temperate northern Gujarat from a tropical south that includes mountains in the far south. A range of soil types is present: black soils in south and central Gujarat give way to alluvial soils in the northern central region of the state, and desert occupies the northwest which borders Pakistan. Such diversity results in an array of fertilizer requirements and cropping patterns throughout the state.

64. Seven agroclimatic zones are commonly delineated in Gujarat based on topography, climate, average rainfall, and soils: Southern hills, South Gujarat, Middle Gujarat, North Gujarat, North Saurashtra, South Saurashtra, and North West Arid. Salient features of their cropping patterns, fertilizer requirement, and the districts that they occupy, are presented in table 9.

Table 9 Agroclimatic zonesZone Districts Rainfall

(mm/yr)Climate Soil Major crops Fertilizer

application (kg/ha N, P, K)

Southern Hills

Dangs, Valsad, Navsari 1793

Semiarid and dry sub humid

Deep black coastal alluvium

Rice, sugarcane, fruit

97

Southern Gujarat

Surat, Bharuch, Narmada

974Semiarid and dry sub humid

Deep black coastal alluvium

Rice, tur, cotton, sugarcane

111

Middle Gujarat

Vadodara, Anand, Dakor, Panchmahals, Kheda

904 Semiarid Medium blackRice, cotton, tobacco, vegetables.

87

North Gujarat

Ahmedabad, Gandhinagar, Mehsana, Sabarkantha, Banaskantha

735 Semiarid to arid

Grey brown coastal alluvium

Wheat, bajra, jowar, mustard, castor, cotton, spices

65

North Saurashtra

Amreli, Jamnagar, Bhavnagar, Rajkot, Surendranagar

537 SemiaridMedium black, shallow calcareous

Bajra, groundnut, cotton, jowar, castor

62

South Saurashtra

Junagadh, Porbandar 844

Dry sub-humid (low mountain)

Medium black coastal alluvium

Groundnut, wheat, bajra 74

North West Arid Kachchh 340

Arid, desert-like(limited agriculture)

Grey brown deltaic alluvium. Sandy and saline

Bajra, jowar, tur, groundnut 30

Source: Joshi 1995.

10

65. The first three zones, Southern Hills, South Gujarat, and Middle Gujarat, are characterized by higher rainfall than the others and together account for three-quarters of the state’s rice cultivation and 90 percent of sugar cultivation in the state. The Southern Hills and South Gujarat zones encompass the districts of Valsad, Dangs, Navsari, Surat, Bharuch, and Narmada. These zones are characterized by relatively high rainfall, sub-humid conditions, and deep black or coastal alluvial soils. Rice and sugarcane dominate cropping patterns, particularly in the Southern Hills, and the region also has substantial fruit cultivation. The Middle Gujarat districts of Vadodara, Kheda, Anand, Dakor, and Panchmahals have somewhat lower rainfall and medium black soils. The region has semi-arid to sub-humid conditions and important crops include rice, cotton, tobacco, and vegetables.

66. Northern Gujarat includes the districts of Ahmedabad, Mehsana, Gandhinagar, Sabarkantha, and Banaskantha and arid to semi-arid in conditions with grey brown alluvial soils. The region is water-scarce with severely depleted ground water. The important crops in the zone are bajra, oilseeds (castor and mustard), and cotton, wheat, and various spices and condiments.

67. The North and South Saurashtra regions in southern and central Gujarat are the major groundnuts areas and to a lesser extent, cotton (the latter mainly in North Saurashtra). The North Saurashtra region, (Amreli, Bhavnagar, Jamnagar, Rajkot, and Surendranagar districts), is typically semi-arid with shallow medium black soils. It provides suitable conditions for crops such as groundnut, cotton, bajra, jowar, and castor. The South Saurashtra comprises the districts of Junagadh and Porbandar, and it has low mountains and significantly higher rainfall with medium black and coastal alluvial soils. Its major crops are groundnuts, fruits, sugarcane, and wheat.

68. The North-West Arid zones consisting of district of Kutch is arid with desert-like climate, very low rainfall, and sandy and saline soils. Agriculture is rather limited in this region and features dryland crops such as bajra (pearl millet), jowar (sorghum), pulses, and oilseeds. A map delineating the seven agroclimatic zones is presented in figure 4

11

Figure 4 Location of Gujarat’s agro-ecological zones

Source: GOG 2001a.

69. Like the cropping pattern, the capacity for multiple cropping is dictated largely by the availability of irrigation: both the volume of water and the infrastructure and institutions to deliver it. Multiple cropping in the form of rapid rotations, intercropping, and cover crops are commonly seen in irrigated regions, while nonirrigated land generally lies uncultivated outside the monsoon season. Seasonal migration is often seen as an attractive alternative to a dry season crop.

MAJOR CROPS

70. Gujarat’s total land area is 19.6 million ha, 54 percent of which is under cultivation (approximately 10.7 million ha) (GoG 2004a). The most recent available detailed analysis of crop areas (1999–2000) places groundnut (20 percent), cotton (18 percent), and bajra (11 percent) as the single crops that occupy the largest areas in Gujarat. However, other oilseeds also are very significant (figure 5).

12

Figure 5 Shares of gross cropped area and total output value by major crops

(TE 2000–01)

Source: CMIE, "Agriculture," December 2002.

71. Food grains still occupy the predominant share of gross cropped area (GCA). However, increasingly they have been replaced by higher value industrial crops such as cotton, groundnuts, and horticultural crops. In the TE 2000–01, food grains (cereals and pulses) occupied 40 percent of the GCA but contributed only 17 percent of total output value in crop agriculture. The major industrial crops in the state, oilseeds (mainly groundnuts), and cotton accounted for nearly half of GCA and approximately 40 percent of value of production. Not surprisingly, the share of sugarcane in GCA is small (2 percent) due to the high water requirement of sugarcane in a water-scarce state. Nonetheless, sugar contributed to 9 percent of total agricultural output value in the state. Fruits and vegetables were grown on only 4 percent of the GCA but contributed 16 percent of total value of agricultural output.

72. Table 10 summarizes the changes in crop area, yield, and production over 3 decades. During the 1980s, foodgrains declined, driven by a decline in both areas and yields. In the 1990s, production recovered: despite the continuing decline in area, yields increased. An average annual decline of 4.2 percent in the 1980s was reversed to an average of 1.7 percent annual increase in the 1990s. The increase was achieved by impressive yield growth performance (average of 3.49 percent per annum during the 1990s) although area continued to decline at 2.6 percent per annum. Large annual fluctuations are observed that might be attributed to erratic rainfall, although some foodgrains (such as rice) tend generally to be irrigated.

73. The reduction in food grains is most apparent for total cereals: a decline from 4.3 million ha in 1980–81 to 2.0 million ha in 1999–00 was partially offset by improved yields to deliver an overall 18 percent decline in production. Gujarat’s total production of cereals stands at approximately 3.5 million tons at a comparatively low average yield of 1.3 tons/ha . Cereals are grown throughout Gujarat, with rice concentrated toward the south (Southern Hills and South Gujarat), wheat in Middle and North Gujarat as well as South Saurashtra, and sorghum and millet in the dry north and northwest. Maize appears to be thinly distributed across the state and is usually in association with livestock.

74. Driven mainly by growth in area, rice production grew by 2.9 percent per annum in the 1990s, when production reached 1 million tons, compared with only approximately 685,000 tons in 1980–81. However, production of wheat, bajra (pearl millet), and jowar (sorghum) declined during the 1980s and 1990s, due largely to reduced sown area. Wheat yields averaged approximately 2 tons/ha in the 1990s and have not improved much since. Maize production increased by an average of 2.3 percent per annum from 1990 to 2002, due to increases in both area cultivated (1.8 percent per annum) and yield (2.3 percent per annum).

13

Spices4% Cereals

14%

Oilseeds24%

Sugar9%

Fibers17%

Tobacco3%

F& V16%

Other crops10%

Pulses3%

Cereals32%

Pulses8%Oilseeds

31%

Sugarcane2%

Cotton18%

F&V4% Spices

2%

Other Crops2%Tobacco

1%

75. Gujarat is India’s leading producer of cotton, accounting for approximately one-third of national production. In the 1980s, cotton production in the state was plagued by pests, high input costs, and several years of drought, resulting in an overall decline in production. However, in the 1990s, production increased by approximately 10 percent per year due to a 6 percent annual growth in area, combined with a 4 percent per year growth in yield. Improved technologies, specifically the widespread adoption of Bt cotton, which increased yields and lowered pesticide costs, were largely responsible for increased yields and provided the incentives for growth in area cultivated. Gujarat grows a great variety of types and qualities of cotton. Production is regionally concentrated with some 85 percent of production occurring in just 7 districts, primarily in Saurashtra. District data indicates that approximately two-thirds of cotton production comes from irrigated cotton areas, and one-third comes from unirrigated cotton area.

76. Among edible oil crops, groundnut is by far the most important in Gujarat. It makes up 65 percent of the oilseeds area and 66 percent of oilseeds production. Groundnut is concentrated in North and South Saurashtra (particularly in Rajkot and Junagadh) and, to some extent, in the Northwest Arid region. Following a severe decline in production (an average of 6.5 percent per annum during the 1980s), production recovered in the 1990s (growing at 6.2 percent per annum). The recovery was due largely to improved yields, which increased by 5.9 percent per annum. Other important oilseeds include castor (12 percent of oilseeds area and 18 percent of production), sesame, rapeseed, and mustard. Oilseeds production also shows large fluctuations, associated with the unreliable monsoon in the largely nonirrigated areas in which they are grown. Castor has high drought tolerance, and is generally a dry area crop. Castor is concentrated in the northern districts of the state, specifically Mehsana, Banaskantha, and Kutch.

77. Sugarcane production sustained an increase during the 1980s and 1990s, from approximately 4.4 million tons in 1980/81 to over 14 million tons in 1999–00. This increase has been due largely to increased areas planted, particularly in South Gujarat and parts of Saurashtra.

78. Spice production in Gujarat is concentrated in the northern districts of Meshana and Banaskantha. Of these spice areas, 75 percent is in guar and cumin but other significant crops are garlic, chilies, and fennel. Given the general trend of increased areas and production of spices, individual crops show substantial variation in production between both years and regions. For most spices, 80 percent–100 percent of production occurs in just 3–4 districts, although these districts vary according to crop.

79. Between 1991 and 1998, areas under horticultural crops increased by 84 percent, and many fruit crops (mango, sapota, and citrus) doubled in area. Fruit productions increased by 33 percent in the same period, as the trees have matured slowly. In terms of area, mango (50 percent) and banana (28 percent) are the major fruit crops.

80. Areas under vegetables doubled between 1991 and 1998, with substantial increases in potato, onion, and tomato. Vegetable production more than doubled in the same period, with a huge increase shown by onion, but large increases also for tomato and potato. The largest areas are occupied by potato, brinjal, and onion (for a combined total of over 70 percent of the vegetable area).

14

Table 10 Growth rates in area, yields, and production of major crops 1980–2002

  %

GCA   Area     Yield     Production

 1998–

991980s 1990s 1990–

20021980s 1990s 1990–

20021980s 1990s 1990–

2002Rice 16.2 -0.605 1.966 0.292 -0.734 0.937 -1.356 -1.34 2.924 -1.071Wheat 16.5 -5.636 0.618 -2.76 -0.746 1.078 0.309 -6.325 1.7 -2.462Pearl millet (bajra) 26.7

-2.443 -2.419 -2.501 -2.107 3.919 2.105 -4.495 1.406 -0.451

Maize 10.0 0.937 1.462 1.75 -9.668 2.772 2.293 -8.822 4.273 4.273Sorghum (jowar) 8.2

-3.934 -11.78 -11.782

-5.447 10.29 5.462 -9.177 -2.42 -6.963

Total cereals 77.7

-2.464 -3.383 -1.379 -2.307 5.205 0.367 -4.714 1.647 -1.018

Total pulses 22.3

2.751 -1.756 -2.702 -4.639 1.602 -2.228 -2.015 -0.19 -4.875

Foodgrains 100.0 (43.0)

-2.165 -2.647 -1.508 -1.761 3.494 1.217 -4.207 1.738 -0.24

     Groundnut 65.7 -3.446 0.219 0.121 -3.202 5.932 1.961 -6.537 6.163 2.085Sesamun 10.1    Rapeseed & mustard 11.9

6.914 -2.793 -5.873 9.549 0.843 -0.271 17.104 -1.97 -6.381

Castor 12.3    Total oilseeds 100.0

(31.1)

-2.177 0.121 -0.271 -0.829 4.36 0.787 -2.992 4.526 0.514

Cotton 64.7 -4.36 6.023 4.847 -1.804 4.075 -2.876 -6.762 10.36 1.848Sugarcane 7.2 1.121 6.481 4.702 3.779 -3.061 -1.917 5.015 3.227 2.692Tobacco 4.6    Fruits 7.4    Vegetables 7.9    Spices 8.2    Other crops total 100.0

(25.9)

                 

Source: Gandhi 2005a.* = Total shares of GCA for crop categories are shown in parentheses.

81. Rainfall is one of the strongest determinants of crop production in Gujarat. Slow agricultural growth rates in the 1980s were due largely to several years of droughts and to the pest and disease problems for the cotton crop described above. A recovery in the production of both cotton and groundnut due to better weather, and in the case of cotton reduced losses to pests, contributed to overall agricultural growth in the 1990s (figure 6).

15

Figure 6 Real agriculture GSDP, cotton and groundnut production 1980–2000

0

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Cotton Prod Index Groundnut Prod Index Agric GSDP

Source: CMIE data.Note: Indices of cotton and groundnut production and agricultural GSDP = 100 in 1980.

82. Table 11 illustrates the direct impact of rainfall, based on fitted production function estimates.6 The results suggest that a 30 percent reduction in rainfall would lower all crop production by 10.1 percent, rice production by 10.5 percent, and groundnut production by 41.9 percent. The largest shortfall was of 68.1 percent in the 1987–88 drought. The estimated resulting production decline (relative to trend) due to the drought has been estimated at 22.9 percent in all crops, 23.9 percent in rice, 42.1 percent in pearl millet, 95.2 percent in groundnut, and 24.7 percent in cotton.

Table 11 Impact of rain shortfall on crop production

 

Coefficient of log of

rainfall Index

(elasticity)% effect of 30% rainfall shortfall Deviation from trend

Drought 1987–88

Drought 1999–00

Deviation in rainfall index 30.00 68.10 37.20All crop index 0.34 10.09 22.91 12.51 Rice 0.35 10.53 23.90 13.06 Wheat 0.27 7.96 18.06 9.87 Pearl millet 0.62 18.53 42.06 22.97 Groundnut 1.40 41.93 95.18 51.99 Cotton 0.36 10.88 24.69 13.49Source: Gandhi 2005b.

6 Production functions for different crops were estimated using regression analysis. The following variables were considered: cropped area, area irrigated, fertilizer use, area under high-yielding variety, and rainfall. Results appear in appendix 1.

16

AGRICULTURAL PRODUCTIVITY AND INPUT USE

83. For most crops in Gujarat, yields are close to all-India averages. However, yields of major food grains crops, particularly rice and wheat, are only half those in Punjab. Fertilizer use per ha in Gujarat is only roughly half of that in Punjab, however, in large part because of Gujarat’s drier climate, more erratic rainfall and more limited access to irrigation. Climatic factors and low fertilizer use also contribute to groundnut yields of only approximately 700 kgs/ha, which are lower than in most other states and approximately 25 percent below the all India average (table 12) Fostering more irrigation development and wider adoption of technical inputs across the state agro-ecological zones, particularly fertilizers, is crucial to improving agricultural productivity.

Table 12 Average yields of major crops (kg/ha)/use of inputs in selected states (TE 00–01)

Crop Gujarat Maharashtra Punjab Tamil Nadu Karnataka All-IndiaWheat 2270 1304 3335 2692Rice 1308 1541 3335 3492 2532 1913Jowar 897 875 1002 906 772Bajra 995 702 933 1463 668 720Maize 1515 1409 2552 1597 3021 1840Gram 635 594 907 622 589 720Groundnut 705 1092 944 1777 818 924Soybean 810 217 962 1020Sugarcane 70176 87584 66633 110993 102246 69584Cotton 251 134 317 308 255 191Input use:% GIA/GCA, 99/00 38 16.6 95.6 55 26.1 40.8Fertilizer use, kg/ha, 01/02 85.5 76.3 173.4 141.5 101.5 90.1

Source: CMIE, Agriculture 2002.Notes: TE = triennium ending; GIA = gross irrigated area; GCA = gross cropped area.

84. Table 13 presents a closer examination of farm households’ use of inputs, drawn from NSS data from the 54th round. Owing to water scarcity, the number of households owning electric and diesel pumps is lower in Gujarat than in many states in India. Gujarat households’ use of fertilizer also is low. However, use of improved seed is common in Gujarat. To improve agricultural productivity and increase income, especially in the arid and semi-arid areas of the state, the GOG is emphasizing three actions. They are conserving soil and rainwater, promoting water-saving crops and irrigation techniques, and rationalizing cropping patterns through crop substitution and diversification to higher value crops.

Table 13 Input use in selected states in India 1998

Region/state

Ave principle cropped

area (ha)

HHs using HHs owning

No. of agric. HHs(mil)

Tractors/

Fertili-zers ( %)

Pesti-cides( %)

Improved seeds

Weedi-cides ( %)

Electric pumps

Diesel pumps

Power tillers (%) ( %) (%)

(%)      

Gujarat 1.9 59.8 46.2 71 81.6 21.6 21 23.5 3.1Punjab 2.6 92.4 72.1 86.9 80.1 78.6 51 38.1 1

Maharashtra 1.7 13.7 56.2 49.7 70.3 15.1 28.8 3.8 5.9

Tamil Nadu 0.9 50 67.2 86.4 66.9 52.7 32.7 14.7 3.3

Karnataka 1.8 16.1 53.4 63 69.2 28 19.4 2.3 4.4

All-India 1.3 41.2 51.3 47.7 55 20 13.3 12.6 81.4Source: NSS data 54th round.

17

REAL PRICE TRENDS

85. Although consistent data sets are difficult to find, there are indications that real market prices of most crops increased in the 1990s, with price movements favoring production sugar and rice relative to cotton and groundnuts (table 14). Among the major crops shown in table 14, only the price of groundnuts declined (by 2.8 percent per annum) in this period. However, in the same period, the price of groundnut oil rose rapidly in real terms (3.1 percent per annum), which indicates difficulties in price transmission. In contrast, in the 1990s, gur and refined sugar prices increased by 4.7 percent and 4.2 percent, respectively.

Table 14 Growth rates of real market prices of major commodities

Groundnut MaizeRice

(Rajkot)Bajra

(Rajkot)Moong (Patan) Gur Sugar

Ground-nut oil

Cotton (aggreg.)

average % change per annum1980–1990 -0.39 -1.77 -- -- -- -- -- -- -1.471990–2000 -2.83 2.17 3.83 1.89 1.74 4.66 4.19 3.13 0.981980–2000 -0.60 -0.39 -- -- -- -- -- -- 0.83Source: Based on data from the Commission of Agriculture Costs and Prices, various years.

86. India’s national agricultural trade policies, particularly for cotton and edible oils, have important implications for prices received by Gujarat’s farmers. Historically, cotton trade policies (particularly export quotas and import tariffs) have been designed mainly to support the domestic textile industry. Support for cotton farmers generally has come through subsidies on inputs (especially irrigation, fertilizer, and pesticides). From the mid-1970s until the mid-1990s, India was a net exporter of cotton.7 During this time, export quotas and exports of cotton fluctuated dramatically according to the estimated surplus of domestic production over textile industry demand. However, following trade reforms in the early 1990s and a series of relatively poor harvests, India became a major importer of cotton, averaging 353,000 tons of net imports from 1999 to 2002, equivalent to 8.6 percent of production. A major increase in national production in 2003 and 2004 lead net imports to decline again to negligible levels (USDA FAS data).

87. From 1991–2002, Indian seed cotton prices averaged considerably below world market prices, benefiting textile mills and consumers at the cost of farmers. The nominal protection coefficient (NPC) averaged 0.72 using import parity price of cotton and 0.78 using an export parity price of cotton (table 15).8 However, based on the minimum support price for cotton for all India, these calculations may somewhat overstate the negative effect of trade policy on Gujarat’s cotton farmers, because Gujarat’s cotton prices remained above the minimum support prices for most cotton varieties during this period.9 Moreover, analysis of the domestic resource costs (DRC) used to produce cotton (net of costs of tradable inputs) in 1996–97 suggests that cotton production in Gujarat was more efficient than in other major producing states.10

7 India was a major importer of cotton from the 1960s through the early 1970s, with imports (especially of long-staple cotton) averaging approximately 150,000 tons per year. However, increases in domestic production made India largely self-sufficient in cotton until the mid-1990s. See World Bank 2000.8 The NPC is the ratio of the domestic producer price to the international price, adjusted for transport

and marketing costs.9 This price differential is due in part to a quality premium for medium and long staple cotton varieties,

in comparison with the mixed variety of different staples lengths standard for the official producer price quoted here.

10 The DRC ratio for Gujarat was 0.55, as compared to Punjab (0.65), Andhra Pradesh (0.78), and Haryana (0.96). In Maharashtra (DRC = 1.35), the domestic resource costs used in production exceeded the value of cotton produced net of tradable input costs. (Mohanty, Fang, and Chaudhary 2002).

18

Table 15 Nominal protection coefficients for cotton and groundnuts 1981–2002

  1981–1990 1991–2002 1981–2002Cotton (India) Import parity 0.87 0.72 0.79 Export parity 0.97 0.78 0.86Groundnuts (Gujarat) Import parity 1.27 0.88 1.06

Source: Gulati & Others 2003; Authors’ calculations.

88. India designed its trade policy regarding edible oils (including groundnut, soybean, and palm oil) and edible groundnuts to spur domestic production and reduce import volumes through substantial import tariffs. In 2001 tariffs on edible groundnuts and groundnut meal were 45 percent, and the tariff on groundnut oil was 35 percent. The tariff on groundnut oil was increased to 65 percent–75 percent in 2002 and to 85 percent in 2003–04. Despite these substantial import tariffs, domestic prices of groundnuts have been below estimated import parity prices (without tariffs) since the large depreciation of the Indian rupee in the early 1990s (figure 7). For example, from 1992–2002, the domestic producer price of groundnuts in Gujarat was on average 16 percent less than the import parity price (without tariffs). These low producer prices even with trade protection are due largely to inefficiencies in processing and marketing. Inefficiencies include requirements for farmers to sell their products in regulated markets instead of directly to processors. In addition, the small-scale reservation policy in groundnut processing limits fixed assets of enterprises, preventing them from achieving economies of scale in processing and thus increasing their costs (Diop and others 2005).

Figure 7 Groundnut import parity and producers prices

02468

1012141618

Rs/k

g

Import Parity Domestic price

Source: World Bank databases.

19

LAND

89. Gujarat’s 1995–96 agricultural census identified 3.8 million agricultural holdings: an increase of 7 percent over the 1990–91 census figure. Table 16 presents the distribution of farm size by number of holdings and by area. Both the numbers and the area of large holdings have declined steadily since 1970, while the number and area of marginal and small holdings have increased steadily (GOG 2001b). The average size of agricultural holdings declined from 2.93 ha in 1990–91 to 2.62 ha in 1995–96, with substantial variations across districts.

Table 16 Distribution of land in Gujarat 1995–96

Size classNo. of

holdings

% of holdingsin each size

class

Area ineach sizeclass (ha)

% of areain each

size classAveragefarm size

< 1 ha 1,041,000 28 626,744 6 0.541-2 ha 1,056,000 28 1,726,294 16 1.472-4 ha 968,000 26 3,012,767 27 2.804-10 ha 633,000 17 4,145,304 38 5.9010 ha + 91,000 2 1,495,388 14 14.81Total 3,780,000 100 10,995,500 100 2.62Source: GOG (Government of Gujarat). 2001b. Report on Operational Holdings in Gujarat State (Agricultural Census 1995–96). Gandhinagar.

90. The average size of a female operator’s holding was found to be slightly smaller than that of a male. Although the total number of holdings by tribal people increased, the total area farmed by tribal people in Gujarat declined slightly between 1990/91 and 1995/96, A similar change was observed for scheduled castes.

LAND RESOURCE POLICY AND ADMINISTRATION

91. Following Indian independence, the Government of India formulated a comprehensive land reform policy designed to (1) abolish feudal land ownership structures, (2) provide security of tenure, with regulation of tenants’ and sharecroppers’ rents, (3) redistribute land to the landless, (4) consolidate land holdings, (5) regulate tenancy, and (6) improve land records.

92. One major element of land reform was India’s law on ceilings on agricultural land holdings. It was amended by a number of states in 1972, and in Gujarat through the revised Land Ceiling Act implemented in 1976. With the objective of reducing disparities in land ownership, land in excess of the ceilings was allocated to landless agricultural workers in small allotments. Land ceilings were determined in accordance with the financial viability of farming the land , local geophysical characteristics, and soil quality. Villages were divided into 9 classes and land types split into 4 groups: year-around irrigated, seasonally irrigated, superior dry crop land, and dry crop land. In the distribution of surplus land, the highest priority was given to scheduled tribes and scheduled castes.11 Nonetheless, because of higher ceilings for lower quality land and because a single farm may be formed of plots of land officially registered under the names of several individual family members, large farms still exist in Gujarat. In 1995–96, 2 percent of farms in Gujarat were 10 ha or more in size, accounting for 14 percent of total land in the state.

LIVESTOCK

93. Gujarat’s livestock sector accounted for one-quarter of total value of agriculture output in TE 2000–01 and has been one of the state’s most dynamic sectors for the last several decades. Milk is the most important livestock product, at approximately 86 percent of total livestock output. During the 1990s, the total value of livestock and milk outputs increased by

11 Batra and Ghosh 1999.

20

4.6 percent and 4.4 percent per annum, respectively. More rapid development of the sector is constrained by (1) water scarcity and (2) low animal productivity.

94. The animal density per ha varies substantially across regions. The Southern Hills region has the highest density at 3.04 animals per ha of GCA, followed by Middle Gujarat (2.46) and Northwest Arid (2.47), with the latter being mainly sheep, camels, and goats. Two million sheep, 4 million goats, and a substantial number of draft animals (donkeys, horses, and camels) are on farms, along with 7 million poultry both on farms and in peri-urban areas. Animal numbers and production vary considerably among districts in overlapping patterns (for example, buffalo and cattle populations are distributed quite differently). Only a fraction of Gujarat’s cattle and sheep are improved breeds; the great majority is indigenous. Conversely, half of Gujarat’s poultry are of an improved breed.

95. In the 1997 livestock census, Gujarat had approximately 6.7 million cattle and 6.2 million buffalo (Gujarat Directorate of Animal Husbandry 2004). These numbers provide the basis for the state’s strong and growing dairy industry. Gujarat’s livestock population is over 20 million. Cattle and buffalo constitute 60 percent; sheep and goats, 33 percent. Cattle, buffalo, sheep, and dairy goat populations appear to be increasing by 2 percent–4 percent per annum, although rates vary by district. In poultry, numbers of layers of improved breeds are increasing by over 12 percent per annum, while total poultry numbers appear to be falling.

96. Approximately 65 percent of Gujarat’s milk comes from buffalos, 33 percent from cattle, and 4 percent from goats. Milk production grew by 4 percent in 2002–03 and stands at approximately 6,000 tons. Milk production from cattle grew the most quickly, at approximately 6 percent. Local breeds of cow average 3.0 liters per day, improved-breed cows 8.05, and buffalos 3.88. Milk production within the state is concentrated by region, with some 45 percent produced in Northern Gujarat (Mehsana, Banaskantha, Ahmedabad, and Sabarkantha) and in Kheda in middle Gujarat.

97. Although Gujarat ranks fifth in wool production among Indian states with 2,700 tons, its wool production is falling rapidly. Egg production rose by 7 percent in 2002–03 to an estimated 385 million, with a 7 percent increase among improved breeds.

FISHERIES

98. Gujarat’s long coastline (1,600 km), broken as it is by numerous bays, inlets, and wetland marshes, provides the basis for an abundance of fish. According to the 1997 livestock census, Gujarat has 886 fishing centers, classified into marine (190), inland (618), and estuarine (78), which employ some 450,000 fishers. During 2003–04, total fish production was estimated at 171,000 tons, worth over Rs 45 billion. Marine fish production constitutes approximately 92 percent of the total. Recent developments have sought to increase inland fisheries.

99. The contribution of the fisheries sector to total agricultural and allied sector GDP has increased from roughly 2.8 percent in 1980 to 7.2 percent in 2000. Growth rates consistently fell below the all-India averages, with the exception of the first half of the 1990s, when Gujarat’s fisheries value added grew at a faster rate than all of India’s (figure 8).

Figure 8 Growth in Gujarat’s fisheries’ SGDP

21

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

80-85 85-90 90-95 95-00

Gro

wth

in F

ishe

ries

SDP

(%)

GujaratAll India

Source: Gujarat Socioeconomic Review 2004.

AGRICULTURAL RESEARCH AND EXTENSION

100. Agricultural research in Gujarat is conducted primarily through four academic institutions: Navsari Agricultural University (NAU) in South Gujarat, Anand Agricultural University in Central Gujarat, Sardar Krushi Nagar-Dantiwada Agricultural University in North Gujarat, and Junagadh Agricultural University in Saurashtra (western Gujarat). Priorities for crop research are largely determined by these agricultural universities and vary by region. Cash crops (particularly cotton, groundnut, castor, and spices) receive greater priority than food crops (rice, wheat, bajra) across the state. The bulk of funding for agricultural research (80 percent) comes from the Indian Council for Agricultural Research (ICAR); the state government contributes the remaining 20 percent.

101. Public agricultural extension activities are conducted through the Directorate of Agriculture. Until recently, the state government used the Training and Visit (T&V) method for extension activities that had been adopted by many states in India in the 1980s. However, as external funding declined, budgets were cut, the number of extension workers was reduced, and the number of visits to farmers fell. An alternative integrated extension system, promoted through the Agricultural Technology Management Agency (ATMA) is organized at the district level and places more emphasis on agricultural diversification and improving rural incomes. This new approach, endorsed in 2002 in the Government of India’s (GOI) new Policy Framework for Agricultural Extension, recognizes an important role for the private sector in extension activities and focuses on high value crops, livestock, and value-added processing, instead of the earlier, largely supply-driven focus on food crops (particularly cereals). In Gujarat, these ATMA activities are based at the Agricultural University at Anand, with support by the government offices in Gandhinagar.

AGRICULTURAL CREDIT

102. Formal sector agricultural credit in Gujarat is disbursed through commercial banks, regional rural banks, and cooperative banks. The system is monitored by an apex committee called the State Level Bankers’ Committee–Gujarat, which is coordinated by the Dena Bank through its office in Ahmedabad. Targets are set by district, and the committee monitors the achievements of the targets. The recent nationally mandated government objective is to double the flow of credit to agriculture in three years recently moved to use the cost of cultivation data as a base for finance and insurance.

103. Overall, loans for agriculture accounted for 23 percent of all formal outstanding advances in June 2005, totaling Rs 10,254 crores ($2.2 billion). Of this total, nationalized banks and district central cooperative banks each account for approximately one-third of total agricultural credit

22

disbursed. Private banks accounted for only 8 percent of agricultural lending. Over one-fourth (26.4 percent) of loans due in June 2005 were not paid.

104. Nearly half (Rs 4,876 crores or 48 percent) of total agricultural credit is disbursed through Kissan credit cards, a national agricultural credit channel created in 1998–99 and designed for land-holding farmers. As of June 2005, the program in Gujarat included 1.97 million farmers, (slightly more than half), with an average credit of 27,400 Rs ($540) per card.

105. Experience with microfinance in India and elsewhere suggests several ways to increase the access of the rural poor to formal financial sector services, including medium-sized loans for agricultural credit. Commercial banks could introduce more flexible products that permit loan repayments in small installments, simplify procedures for opening a bank account and accessing credit, and recruit local staff who understands clients’ needs. Government policy measures also can promote access to rural finance by removing interest rate caps (which generally remove the incentive to loan to poor, higher-risk households in rural areas) and promoting the entry of new private banks in rural finance through revising licensing policies (Srivastava and Basu 2005).

RURAL NONFARM SECTOR

106. The rural nonfarm sector provides an important source of income for rural households in Gujarat, accounting for approximately one-fourth (24 percent) of total household income in 1993–94 according to NCAER data. Nonetheless, agriculture is still the major source of rural incomes, with 64 percent of incomes derived from cultivation and 9.5 percent from agricultural labor. The proportion of nonfarm sources to total income tends to rise as per capita incomes increase, with the exception of the highest per capita income quintile (the 20 percent richest households) (table 17). The share of own-farm (cultivation) incomes also rises with per capital income quintiles. The share reaches 77 percent for the top quintile, highlighting the importance of agricultural incomes even for the highest income group. In contrast, income from agricultural wages falls steeply as income increases. Agricultural wage labor accounts for 45 percent of incomes of the poorest 20 percent of households and only 2 percent of incomes of the richest 20 percent of households.

23

Table 17 Nonfarm income shares in rural Gujarat

Quintile Cultivation

Agriculture wage labor

Nonfarm wage labor

Nonfarm self-

employment

Nonfarm regular

employment

Total non- farm

sourcesOther

sources

Real per

capita income

Lowest 36.7 44.7 11.3 2.9 3.2 17.4 1.2 1081Q2 41.4 34.7 9 6.7 5.5 21.1 2.7 2091Q3 49.7 21.5 7.3 7.3 11.6 26.1 2.7 3239Q4 48.6 7.0 3.4 11.3 25.2 39.9 4.5 5133Highest 77.1 1.6 1.0 5.7 12.5 19.2 2.1 14788Total 63.7 9.5 3.3 6.9 13.9 24.2 2.7 5272

Source: Lanjouw and Shariff 2000.

107. Agricultural processing is a major part of Gujarat’s rural nonfarm sector, even though a frequently aired comment is “only 1 percent of Gujarat’s agricultural produce is processed in Gujarat” (GoG 2001a). For example, the Cotton Cooperative Federation estimates that approximately only 20 percent of Gujarati cotton is spun in Gujarat.

108. Large food processing plants are located near to many of Gujarat’s commodity markets, but these are highly concentrated in only a few districts. Beyond adding value, processing is likely to play a key role in preserving and storing products to avoid the price instability associated with seasonal surplus and shortage, and perishability. Although its distribution is narrow (almost half of the capacity is in Kheda district), Gujarat’s cold storage capacity has expanded rapidly in recent years (Gandhi 2005b). Gandhi also reports that Gujarat has 171 food industry processing plants (presumably not including small plants). The former are strongly concentrated (63 of the 171) in the “fruit belt” of Valsad and Surat districts.

109. Much of agricultural processing takes place among small firms and/or in the informal sector. Gujarat’s statistical service divides industry into small and medium-large, categories. “Manufacturing of food and beverages” employs approximately 41,000 in small firms and 65,000 in large firms. Together, these workers comprise much less than 1 percent of the total workforce and approximately 9 percent of the industrial workforce. For example, small-scale cotton textile mills employ 145,000 workers; large-scale textile manufacturing (including synthetic textiles) employs an additional 170,000.

110. In 2002–03, Gujarat’s food and beverage manufacturing contributed 5 percent of all of its industrial value-added, a much lower share than its share of industrial employment (9 percent). The average value-added per employee in Gujarat’s large-scale food industry (Rs 128,000), as with its textile manufacture (Rs 98,000/employee) is much lower than the average for large-scale Gujarati industry (Rs 232,000/employee). Value-added is not measured for small-scale industry, but food and agro-processing and cotton textile processing generate revenue/employee approximately equal to the average for all Gujarati small-scale industry.

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WATER FOR AGRICULTURE111. Situated at the monsoon’s most northern limit, Gujarat’s rainfall is unreliable both between and within seasons, with some regions exhibiting extreme variability. In the state as a whole, drought occurs 1 year in 5; but in Kachchh and Banaskantha, drought frequency is 1 year in 3. Kumar’s (2002) analysis of district-by-district rainfall revealed an average of 834 mm, with a standard deviation of 487 mm during 1997–2003.12 This pattern of standard deviation at more than half the average prevailed in 6 of 25 districts. The extreme variability of rainfall is seen as a major constraint on the state’s economic and social development. Figure 9 traces the strong relationship between rainfall and agricultural GDP in Gujarat. This relationship particularly impacts agriculture as a generator of income to poor and rural people and, in turn, influences seasonal migration by the state’s poor.

Figure 9 Relationship between rainfall variability and agricultural GDP

AGGDP and Rainfall

0

50

100

150

200

90 91 92 93 94 95 96 97 98 99 00 01

Cons

tant

Rs

Billi

ons

0

50

100

150

200

Agriculture & Allied GDP Rainfall Index

Source: World Bank statistical database and Gandhi 2005a.

112. Overuse of wells and tube-wells has drawn down water tables and allowed salt water ingress in coastal Saurashstra and build-up of pollutants and chemical concentrations in several parts of the state. Over-watering has led to water-logged soils. These affect both rural and urban quality of life, and influence land use, cropping patterns, and livestock husbandry. Low water availability and quality are major constraints on economic development. This chapter describes recent reforms and ongoing challenges concerning the current and future water needs of Gujarat’s agriculture and rural communities.

WATER RESOURCES

113. Gujarat’s annual water availability is 48,107 million m3. This equates to 962 m3 per capita, which is less than half of the all-India average of 2,200 m3 per capita. As with many aspects of Gujarat, the regional and economic distribution of the water resource is as important as the total amount of resource. The Southwest monsoon (June/July to September/October) provides almost all of the state’s rain, but this rainfall is subject to considerable spatial and temporal distribution between and within years. Gujarat can be divided in four hydrological regions that correlate with the agro-ecological zones referred to in the previous chapter (table 18).

12 As cited in Sharma and others 2005.

25

Table 18 Major characteristics of the four hydrological zones

Region

Incorporating agro-ecological

zonesIncludingdistricts

Mean rainfall (mm)

Variability of rainfall

Surface water

potential (MCM)

Annualusable

groundwater recharge(MCM)

Recharge rate (MCM/KM2)

South &CentralGujarat

Southern Hills, Southern Gujarat, Middle Gujarat

Dangs, Valsad,Navsari, Surat,Bharuch, Narmada, Vadodara, Anand,Dakor,Panchmahals,

1092 Low 32,260 4533.11 0.119

NorthGujarat North Gujarat

Ahmedabad,Gandhinagar,Mehsana,Sabarkantha,Banaskantha

627 Extreme 2,012 - 0.106

Saurashtra

North and South Saurashtra

Amreli, Jamnagar, Bhavnagar, Rajkot, Surendranagar,Junagadh, Porbandar

568 Extreme 3,613 4539.23 0.087

Kachchh Northwest arid Kachchh 377 Extreme 648 501.6 0.014 Source: Kumar 2002a, IRMA/UNICEF 2001.Note: MCM = Million Cubic meters.

114. South and Central Gujarat is the most water-abundant region. It receives more than 40 percent of the state’s total rainfall and contributes to 84 percent of the runoff. This region is endowed with all three of the state’s large year-around rivers (Mahi, Narmada, and Tapi). Heavy rainfall; hard rock terrain; steep slopes; and heavy, medium, and deep black soils create large runoff. The surface water potential of the region is very high. For example, a catchment of 1,000 Km2 can generate an average runoff of nearly 1,600 million m3 in South Gujarat with 50 percent probability (Tahal Consultants, quoted by Kumar 2002). The region also has an annual usable groundwater recharge of 4533.11 million m3 (after Saurashtra) while the recharge rates are the highest in the state, at 0.119 million m3/km2.

115. North Gujarat receives low to moderate, and highly erratic, rainfall. It has very few watercourses, and these are seasonal (carrying stream flows only during 3–4 monsoon months). The region has deep unconsolidated alluvium and is endowed with high groundwater potential. The recharge rates also are high, just after South and Central Gujarat at 0.106 million m3 per km2.

116. Saurashtra (other than the coastal strip and parts of Surendranagar) is formed from a plateau underlain by hard rock basalt of the Deccan trap formation. Rainfall is highly erratic with significant spatial variations in precipitation and the number of rainy days. Saurashtra has several small and large rivers with a total of 84 river basins. The region has a radial drainage formation, and its steep topography leads to large-scale runoff that is discharged into the sea. The aquifers in the region (except those in the coastal region and most parts of Surendranagar) are shallow and unconfined. Groundwater occurs in fractures and weathered zones. The region has the state’s highest gross annual usable groundwater recharge of 4539.23 million m3. Saurashstra is suitable for open well construction, but these wells dry up in the summer. Evapotranspiration, which is a bane, especially for the already water-scarce regions, is the highest in Rajkot, with the PET (Potential Evapotranspiration) figure at 2144 mm. The per capita renewable fresh water availability in the region is well below the normal requirement, at 734 m3. The region faces severe drinking water scarcity problems, exacerbated during low-rainfall years.

117. Kachchh receives very little precipitation (an average of 377 mm per annum), and it is highly erratic. Moreover, it averages just 16 rainy days each year. Kachchh’s surface water resources include a large number of small rivulets carrying small annual flows. They have steep gradients so that the (frequently high-intensity) rainfalls of short duration cause flash floods. The

26

surface water potential of Kachchh is extremely low (648 million m3) and of only a 50 percent dependability. The geology of the region is hard rock basalt, sedimentary sandstone, limestone, and coastal alluvium with varied groundwater potential. The annual usable groundwater recharge and recharge rate figures are 501.6 million m3 and 0.014 million m3/km2, respectively, the lowest of Gujarat’s hydrological regions.

118. The source of Gujarat’s water is unevenly divided between surface water (75 percent, due to bountiful rivers) and groundwater (25 percent) for a total of 48,100 million m3 per annum. However, irrigation and associated agricultural development have overwhelmingly favored the use of groundwater. As urbanization and industrialization continue, cropping patterns change, and livestock gains popularity (see Livestock section, chapter 3), demand for water resources will increase. In particular, the state’s strategic plans for increased agricultural processing and for livestock production both depend crucially on the availability of high-quality water.

OVERVIEW OF WATER USE IN AGRICULTURE

119. Each year, agriculture consumes 89 percent of Gujarat’s water and livestock another 1 percent to 2 percent in the aggregate (although in individual locations, livestock is a more significant user). Agricultural use alone is projected to rise from 17.1 billion m 3 today to 43.31 billion m3 in 2025. While disaggregated data on areas of each crop irrigated in each region are unavailable, tables 19 and 20 present such data based on volumes of irrigation water used. Each region has a small number of crops that dominate irrigation water use (table 19). These crops differ in each region: sugarcane and kharif paddy in South and Central Gujarat; wheat and castor in North Gujarat; cotton, wheat, and alfalfa in Saurashstra; and summer groundnut, alfalfa, and castor in Kachchh. The intensity of irrigation water use is highest for South and Central Gujarat (0.225 MCM/Km2), followed by Northern Gujarat (0.209 MCM/Km2), Saurashtra (0.135 MCM/Km2), and Kachchh (0.085 MCM/Km2) (Kumar 2002).

Table 19 Share of irrigation water use in each region by crop (%)

Crop S.& C. Gujarat N. Gujarat Saurashtra KachchhKharif paddy 21.04 – – –Banana 9.82 – 0.14 –Sugarcane 48.08 – 1.92 –Cotton 4.98 7.16 66.95 9.34Wheat 3.90 27.76 15.30 16.57Alfalfa – 12.94 7.64 19.91Summer bajra 2.44 8.92 – –Summer groundnut – – 2.71 22.69Castor – 22.07 0.98 15.28Mustard – 16.49 – –Other crops 9.74 4.67 4.36 16.19Total 100.00 100.00 100.00 100.00Source: Based on data in IRMA/UNICEF 2002, as cited in Sharma and others 2005.

120. The regional distribution of irrigation water use for each crop shows that 1 or 2 regions dominate water use for almost all crops (table 20). For example, South and Central Gujarat uses all the water used in Gujarat to irrigate kharif paddy, and 99 percent and 97 percent for banana and sugarcane, respectively. For wheat, the state-wide irrigated area is shared among most regions.

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Table 20 Share of irrigation water use for each crop by region (%)

Crop S.& C. Gujarat N. Gujarat Saurashtra Kachchh Total

Kharif paddy 100.00 – – –100.0

0

Banana 98.88 – 1.12 –100.0

0

Sugarcane 96.86 – 3.14 –100.0

0

Cotton 7.50 9.38 81.89 1.23100.0

0

Wheat 9.31 57.62 29.63 3.44100.0

0

Alfalfa – 58.65 32.32 9.03100.0

0

Summer bajra 23.94 76.06 – –100.0

0

Summer groundnut – – 52.66 47.34100.0

0

Castor – 90.02 3.74 6.23100.0

0

Mustard – 100.00 – –100.0

0

Other crops 51.95 21.67 18.86 7.52100.0

0Source: Based on data in IRMA/UNICEF 2002, as cited in Sharma and others 2005.

121. “Major and medium schemes” include the State Tube well Program, large rural water supply schemes, construction of major dams,13 and promotion of water harvesting structures such as Sardar Patel Participatory Water Conservation Project (SPPWCP) in Saurashtra. Recent schemes include the Sujalam-Sufalam (box 4.3) and Kalpasar projects. Features of recent large projects include their integration of watershed management, water harvesting, and groundwater recharge; new water-saving technologies; and judicious choice of crops based on their water demands. Particularly in these last respects, such projects also are characterized by participatory planning. In Gujarat 1.5 million ha of used irrigated area (45 percent) uses surface water, while over 2 million ha (65 percent) uses groundwater (table 21). This relationship is nearly opposite of the distribution of the state’s water resources.

Table 21 Irrigation development and use, June 2003

Source

Potential irrigated area

(‘000 ha)

Irrigated area

(‘000 ha)

Used Irrigated

area(‘000 ha)

1. Surface water 3940 1700 1481Of which

1.1 Major and medium schemes 1800 1410 12941.2 SSP (including conjunctive use) 1792 25 251.3 Minor irrigation 348 265 162

2. Groundwater (including privately-owned) 2548 2035 2034Total (1+2) 6488 3735 3515Indirect benefit through water conservation programs 215 215Source: Gujarat Socioeconomic Review 2003–04.Note: SSP = Sardar Sarovar Project.

13 Excluding the Sardar Sarovar Project on the Narmada River (SSP) which is entered in table 21 as a separate item, and is described above.

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122. Table 22 traces the development of irrigated area by source over 20 years. Groundwater sources (wells and tubewells) supplied 65 percent of gross irrigated area in 1980–81, and 67 percent in 1999–2000. In terms of water volumes, irrigation is primarily (78 percent) from groundwater, which explains why the large share of area with groundwater potential is used for irrigation (table 21). A total of 0.59 million ha (5.85 percent of sown area) is under canal irrigation in the state while the comparable figure for groundwater irrigation is 2.32 million ha (25.7 percent). Between 1980–81 and 1996–97, the area under wells and tube-wells grew by more than 150 percent (Directorate of Agriculture, Gujarat). Moreover, canal irrigation is highly localized: over 95 percent of Gujarat’s canal irrigation is concentrated in one-fifth of its talukas (groups of villages) whereas groundwater-irrigated area is far more dispersed (Shah and Singh 2004).

Table 22 Irrigated area by source

Area irrigated in each year (‘000 ha)Source 1980–81 1990–91 1994–95 1995–96 1996–97 1997–98 1998–99 1999–00Government canals 367 473 593 577 613 636 602 492Wells-tubewells 1,588 1,930 2,366 2,267 2,386 2,387 2,431 2,452Tanks 41 31 35 42 29 30 25 18Other sources 7 3 8 11 14 24 25 18Total net irrigated area 2,003 2,438 3,002 2,892 3,042 3,059 3,082 2,980Gross irrigated area 2,334 2,911 3,655 3,499 3,642 3,780 3,841 3,627 % NIA to net area sown 21 26 31 30 32 32 32 32% of GIA to gross cropped area 22 27 33 32 33 34 34 34Source: Gujarat- Socioeconomic Review 2004.

123. For most crops, rainfall and the availability of irrigation are major determinants of areas planted, yields, and overall production in Gujarat. Water’s influence exceeds that of chemical use and adoption of new varieties (Gandhi 2005). Nampoothiry (2003) finds some evidence that water availability has been a strong influence on Gujarat’s changes in cropping pattern: stronger than the influence of price, for example. Shah (2005) cites the data in table 23 (drawn from Kerr and others 1996) to demonstrate certain complex patterns of yield development. In essence, different decades saw different patterns emerge, but for the most part, irrigated yields grew at faster rates than those on rainfed land. Table 23’s data must be interpreted in the context of changing cropping patterns in Gujarat: some crops may have migrated between categories of land quality due to substitution effects (Acharya 2003).

Table 23 Comparison of yield change: Irrigated vs. rainfed agriculture

Crop

Annual growth rates in yield (%)1970–73 to 1979–82 1979–82 to 1986–89 1970–73 to 1986–89Irrigated

yieldRainfed

yieldIrrigated

yieldRainfed

yieldIrrigated

yieldRainfed

yieldRice 0.07 -2.08 3.35 0.53 1.49 -0.95Jowar 5.14 8.67 -6.96 5.51 -1.23 7.28Bajra 1.88 2.28 -3.34 -5.94 -0.44 -1.40Maize 6.30 -1.18 -2.89 1.41 2.18 -0.06Wheat 3.21 -1.86 -0.01 -1.94 1.79 -1.90Gram -1.03 -0.52 -2.23 -3.67 -1.56 -1.91Groundnut -1.36 -1.75 8.01 -2.14 2.63 -1.92Cotton 1.75 -2.37 1.13 -5.58 1.48 -3.78Source: Kerr and others 1996.

RAINFED AGRICULTURE

124. Substantial areas in Gujarat are used for rainfed agriculture. These areas tend to be low in agricultural potential because of the soil conditions, shorter growing seasons, lower and uncertain

29

rainfall, and a host of other natural resource constraints. Given the sheer proportion of rainfed agriculture in the state (more than 68 percent), planning for agricultural development without a sound strategy to develop these rainfed areas is impossible. Watershed development programs have been the key policy initiative for these areas. However, this policy appears to be suffering from a supply side obsession with excessive emphasis on creation of water harvesting structures and little attention to understanding the unique demands of these areas. GOG has given very little attention to integrating better dryland agriculture practices with water conservation efforts.

125. The rainfed areas of the state clearly require an ideal mix of technological and institutional innovations. Appropriate technologies include drought-resistant and better quality seeds, better means of water harvesting, efficient water use, and advanced farming practices. Along with boosting the capacity of such areas to sustain local rural livelihoods, these actions call for better institutional arrangements and greater provision of resources for dryland cropping strategies and pastureland development for livestock.

126. Water-logging affects canal-irrigated agriculture, either as surface ponding or as rising water table. This has been shown to be due to inadequate drainage followed by excessive use of water. Over-irrigation may be due to water being available at cheap rate. The problems of rainfed farming are exacerbated by draw-down of water tables and other consequences of farmers’ actions on irrigated land. For this reason, recharge of groundwater has received considerable attention across a range of areas, social groups, and land uses.

127. In Saurashtra and Kachchh, a “groundwater recharge movement” has developed, driven largely by local philanthropies, NGOs, and some hands-on hydrologists. Approximately 40,000 check-dams have been built in those regions, with some promising results claimed. On a broader scale, “watershed development programs” have addressed sustainable economic development of Gujarat’s semi-arid and dryland areas. These programs appear at both national and state level. Notably, they encompass the generation of alternate livelihoods in the non-farm sector and the development of institutions.

IRRIGATED AGRICULTURE

128. Of the 10 million ha of sown area in Gujarat, in 1997–98 irrigated area was estimated at just 3 million ha. Proportions vary among hydrological regions. North Gujarat receives the highest level of irrigation (31 percent of the sown area), followed by Middle Gujarat (30 percent), South Saurashtra (24 percent), North Saurashtra (23 percent), and North West (11 percent). Aggregate data on the areas irrigated for each crop are presented in figure 10. While cotton, wheat, and rice are mostly irrigated, groundnut (grown primarily in the north), millet, and oilseeds are predominantly rainfed.

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Figure 10 Irrigated area by crop 1998–99

Sources: Gandhi 2005a and GOG 2004a.

129. The distribution of irrigated area by technology and farm size (figure 11) reveals that, in 1998–99, 38 percent of canal-irrigated area is operated by marginal households, as compared to 12 percent of groundwater irrigated area. On the other hand, 48 percent of groundwater irrigated area and 31 percent of canal irrigated area are operated by large households. Thus, irrigation programs that focus on canal irrigation development could benefit both marginal farmers (for whom poverty incidence is highest) and large farm households, in addition to the small and medium households.

Figure 11 Distribution of irrigated area 1998–99

0

10

20

30

40

50

60

Marginal (< 1ha) Small (1-2 ha) Medium (2-4 ha) Large (>4 ha)Dist

ribut

ion

of ir

rigat

ed a

rea

(%)

Canal Irrigated area Groundwater Irrigated area

Source: World Bank 2003a, based on NSS 54th round.

130. The bulk of Gujarat’s irrigated area is devoted to cereal crops other than rice and to oilseeds. The largest share of canal-irrigated area is allocated to rice (24 percent), whereas oilseeds dominate the area irrigated by electric pumps (22 percent) (table 24).

Table 24 Distribution of irrigated area by crop and technology 1998–99

Irrigated areaArea of canal

irrigationArea irrigated by

electric pump('000 ha) % ('000 ha) % ('000 ha) %

Paddy 440 8 100 24 220 8

31

Wheat 860 16 80 19 440 17Other cereals 1020 19 70 17 530 20Pulses 170 3 10 2 40 2Oil seeds 1010 19 70 17 590 22Mixed crop 300 6 0 0 80 3Sugarcane 180 3 0 0 130 5Vegetables 100 2 0 0 60 2Fodder 170 3 10 2 70 3Fruits and nuts 40 1 0 0 20 1Other cash crop 1010 19 50 12 440 17Others 10 0 0 0 0 0Total 5300 100 420 100 2640 100Source: World Bank 2003a, based on NSS 54th round

131. The most common problem associated with irrigated agriculture is draw-down of the water table due to over-pumping from wells and tubewells. Sharma and others (2005) identify 12 of the state’s 184 talukas for which the water table is hugely depleted, well beyond its capacity to recharge from surface water or subsurface sources. These locations appear throughout the state but are concentrated in North Gujarat. For example, in the Netravati basin in the Mangrol coast of Saurashtra, groundwater extraction exceeds the recharge capacity by 300 percent in drought years (Sakthivadivel and Talati 2004, as cited in Sharma and others 2005).

132. Consequences include: reduced availability of water, which impacts particularly the poorest small and marginal farmers and ingress to the water table by pollutants (in industrial regions), various ions (particularly fluoride in parts of the state), and salt water (coastal areas), along with a decline in the performance of rainfed agriculture. The resultant fall in water table is associated with a rise in the cost of irrigation, although this varies by region (see table 25 for selected crops). Notably, the irrigation cost as a proportion of total variable cost is highest for all crops in Mehsana (in the north), a region suffering from rapid fall in its water table.

Table 25 Cost of irrigation by agro-ecological zones

CropWheat Castor Cotton

Site Region Irrigation costs as % of all variable production costs

Central Gujarat South and Central Gujarat 29Junagadh Saurashstra 14 12Kachchh Kachchh 18 39 23Mehsana North Gujarat 36 45 41North Saurashtra (Electric Tubewell) Saurashstra 4North Saurashtra (Diesel Pump) Saurashstra 8Source: IRMA/UNICEF 2001.

133. Increasing levels of salinity and total dissolved solids (TDS) have accompanied groundwater overdraft. Gujarat has 1,048 villages with more than 7,500 ppm TDS in their groundwater. Half of these villages are on the Saurashtra coast, with 1.1 million people and 1 million ha of land being affected. These areas have already experienced massive and rapid saline intrusion in groundwater, and a host of associated problems brought about by inappropriate responses (such as overpumping). Bandhara (stop-dam) schemes have been used by GOG and NGOs to counter saline ingress.

134. Gujarat’s industrial sector is dominated by chemical and petrochemical industries, both of which are highly polluting and water-intensive. Their activities have reduced water availability for agriculture. Even when water is available, yields were lower due to the highly polluted

32

resource. Furthermore, rapid urbanization and industrialization have intensified demands for existing resources at the expense of traditional uses (Kumar 2002).

135. In line with the growing industrial sector, industrial wastewater has been examined as a source of water for agriculture. Health and environmental hazards could be caused by the pathogens, heavy metal, and chemicals found in it. Nevertheless, wastewater has emerged as a cheap, reliable source to sustain agriculture in Gujarat’s northern areas and has enabled farmers to switch from rainfed to irrigated agriculture.

WATER-RELATED INSTITUTIONS AND SCHEMES

136. Gujarat’s water resource is managed by three ministries. They are: the Ministry of Narmada and Major Irrigation (administering design, construction, operations, and maintenance of major canals and irrigation systems), Ministry of Water Resources (design, construction, operations, and maintenance of small and medium-sized irrigation systems based on groundwater and surface water), and Ministry of Water Supply (construction of delivery systems).

137. A number of other government agencies play a significant role in water management. For example, the Gujarat Groundwater Resource Development Corporation (GWRDC) under the Ministry of Water Resources operates the public tubewell program. The State Electricity Board (SEB) can regulate water use by manipulating the power supply to users’ pumps and the Gujarat Land Development Corporation implements government programs aimed at water conservation and augmentation.

138. NGOs also carry out a range of activities that coexist with local-level government programs in a manner that is not well defined. In many cases, NGOs employ water management (particularly, water harvesting and improved use) to achieve social goals (such as employment and health) for target groups (women, tribal people), rather as a goal in itself. As a consequence, beneficiaries receive a package of assistance including improved access to credit and inputs, extension support, help with business management and marketing, and ongoing training on a range of topics including self-help and awareness of social issues. Such principles often also guide projects funded by foreign development assistance. Although there have been spectacular successes by NGOs and initiatives by local government, they tend to be localized and not necessarily replicable on a larger scale. Cooperation between government and NGOs has been slow to develop, as have good practices in stakeholder involvement and participation.

139. Sharma and others (2005) describe the Gujarati water policy environment as comprising:

1. Government’s “direct action: Investment in irrigation infrastructure (dams and canals)2. “Taxes and subsidies”: Regulation of prices of irrigation water and electricity that is

either favorable to farmers (for example, canal water is priced at 5 percent of the price of tubewell water) or artificially equitable (equal electricity prices throughout the state)

3. “Regulatory and promotional framework”: Laws on water resource management.

140. Under direct action, major government initiatives include the State Tubewell Program, large rural water supply schemes (RWSs), construction of major dams and promotion of water harvesting structures such as the Sardar Patel Participatory Water Conservation Project (SPPWCP) in Saurashtra (box 2) and the Sujalam-sufalam (box 3) and Kalpasar project.

Box 2 Sardar Patel Water Conservation SchemePopularly known as the Narmada Dam project, SSP is one of several large projects comprising planned development of the Narmada river system. It is a multistate project involving Gujarat, Maharashtra,

33

Madhya Pradesh, and Rajasthan. Although the project was opposed by the international antidam movement, it largely has been welcomed in Gujarat as the “only solution” to Gujarat’s water problems. The project would provide irrigation for 1.8 million ha spread over 3,393 villages of 14 districts in Gujarat. This exceeds the combined irrigation generated by all existing major, medium, and small irrigation projects in Gujarat (1.57 million ha). Other benefits include generation of up to 1 billion units of power per annum and provision of drinking water to 8,215 villages and 135 urban centers. Aspects of the project also will help recharge groundwater-irrigated areas of North Gujarat and Saurashtra.

Water was released for the first time in the Summer 2002 onto 80,000 ha of land. The government has constructed the conveyance structures up to the minors, and farmers are expected to take control through water user associations (WUAs) and construct their own water distribution systems. GOG has formed a large number of WUAs to manage water distribution, but their application to tasks has been limited by various constraints.

The project area has experienced change since the design stage. In particular, the shift from subsistence to intensive irrigated farming resulted in a decline of groundwater level, and diminished water resources available for the project. There are also increasing claims on Narmada water from other users not included as beneficiaries (such as urban users) and widespread lifting of water by powerful farmers from the banks of Narmada and its tributaries.

Management problems also have been encountered. First, scheduling of institutional development alongside engineering works appears to have been poorly planned The result was that few areas were ready to receive early releases of water. Second, WUAs have not proven effective as management tools. Third, large and locally powerful farmers have used water in areas outside the original design area and have lifted water directly from canals, thus departing from the project design. Last, neither funding of the project nor cost recovery has been well implemented.

The anticipated environmental damage by the project largely has not eventuated. Rather, the presence of soil and groundwater recharge from canal systems is turning out to be both an economic and environmental benefit to the project area.Source: Sharma and others 2005.

141. “Direct action” includes farmers’ participation in water allocation mechanisms. Farmers submit requests ahead of the cropping season, which the irrigation department sanctions based on supply (quantities and conveyance efficiency). During the season, farmers’ access is restricted by the number of hours during which pumping may occur and the specifications of the pumps to be used. Inherent difficulties in this system include: corruption at the lowest levels of irrigation departments, poor maintenance, wastage due to poor reliability of supply, and inappropriate pricing incentives faced by farmers. Many of these difficulties have been addressed in the planning of large-scale developments. Various commentators have noted some perverse farmer incentives (such as farmers’ tendency to respond to improved water supply by planting more water-intensive crops) and inequities (farmers in upper reaches tend to do the land development work, while farmers downstream receive the benefits) in the system. Direct action in water conservation also has been addressed on a large scale (such as the Sujalam-Sufalam project, focused on farm dams to recharge groundwater in North Gujarat), (box 3).

Box 3 Sujalam-Sufalam Scheme

This project is the latest in a series of government schemes to find a permanent solution to water problems in the drought-prone areas. The project promotes a range of water harvesting and storage techniques, income generation, and groundwater recharge. Notably, it builds on experience with water harvesting and reservoir construction at a number of small-scale projects in isolated locations. Its design includes the entire watershed and a macro view of groundwater recharge, while attempting to harness local energy and experience and the direct connection between investment and benefit.

Launched in February 2004, the project has four components: (1) recharging North Gujarat aquifers

34

through unlined recharge canals, (2) lifting water from Narmada Main Canal (NMC) to existing reservoirs in North Gujarat, (3) constructing check-dams and bori bandhs (sand-bag dams), and (4) constructing khet talavdis (small farm ponds).

The recharge canal for North Gujarat will originate from the Kadana reservoir in Panchmahals and run north-westward parallel to the NMC. It is expected to supply 55 m 3/sec of water for 130 days per year, a total volume of approximately 700 million m3. Between them, the NMC and Kadana recharge canal enclose an area of approximately 700,000 ha. While this area will receive no direct irrigation, benefits are expected in the form of reduced energy consumption because of groundwater recharge. To enhance the recharging efficiency, a network of recharge channels is planned. This canal will replenish a total of 109 village tanks.

The most ambitious of these links, the Rs. 3.110 billion crore NMC-Dharoi link, was expected to be operational by September 2004. The pumping head works of the NMC-Dharoi link at village Piyaj in Mehsana district are fully operational and have been operated on one test run. The final stage of pipe-laying is still in process. Giant pipes of 2.1 m in diameter are being laid, expected to supply water at the rate of 4.96 m3/sec for 210 days, a total volume of 90 million m3, or 10 percent of the total storage capacity of Dharoi reservoir.

The project will also construct 100,000 check-dams on the 80/20 model (that is, 20 percent of costs will be borne by the beneficiaries and the rest will be met by the government) and 50,000 bori-bundhs (sand-bag dams). The part of the project attracting maximum media attention is the construction of 100,000 khet-talavadis to promote small water-harvesting structures.

The numerous benefits envisaged under the project are mitigation of the groundwater quality problems such as high fluoride content (in 2,791 villages), high nitrate content (in 455 villages), and salinity (in 792 villages); annual savings of Rs 5 billion on water supply, and reduced energy consumption to the extent of 2,694 MW as a result of groundwater recharge. The project also is expected to encourage agro-industries and increase farm output by Rs 24 billion.

Source: Sharma and others 2005.

WATERSHED DEVELOPMENT PROGRAMS

142. Watershed development programs (WDPs) have emerged as the main strategy for sustainable economic development of India’s semi-arid and dryland areas. These programs are being promoted both at the national and state levels. The two large national-level projects are the National Watershed Development Program for Rainfed Plains Areas (NWDPRA) and the WDPs. At the state level, Gujarat State Land Development Corporation (GLDC) is responsible for implementing all soil-water conservation activities and WDPs. In 1998 the total land under GLDC project activities was 1.12 million ha, approximately 6 percent of the total reporting area of the state.

143. The WDP approach advocates sustainable use of natural resources and emphasizes harnessing water resources for maximum agricultural productivity. A typical watershed contains good quality agricultural lands in its lower reaches, typically flat and either irrigated, or with irrigation potential. Upper watersheds typically feature small farms on poor soil, common lands, forests of varying quality, and uncultivated land. Degraded land in upper watersheds reduces infiltration of water when rain falls, thus increasing the rate of runoff, which can lead to soil erosion and downstream siltation. WDP essentially integrates the interests of the upper and lower reaches (3).

144. Watershed development was originally understood as a soil and water conservation program, but this focus has changed. WDPs are now positioned as a comprehensive program for rural development that promotes rural livelihoods, especially of the poor and disadvantaged. Given this broad focus, effective watershed development programs not only address critical soil and water conservation issues but also encompass activities including the generation of alternate

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livelihoods in the non-farm sector and promotion of institutions. A large number of NGOs are involved in watershed development activities, acting in association with government programs as Project Implementing Agencies/Partners, or independently.

145. WDPs have been found to significantly increase crop yields, due primarily to elevated water table and availability of irrigation. However, they also often suffer from serious design and implementation challenges and have yet to achieve development momentum. In particular, some of these challenges include: (a) lack of coordination among implementing institutions, (b) lack of people’s participation, (c) low resource base of beneficiaries who are unable to invest in better inputs, (d) poor quality of the structures constructed, (e) lack of funds for maintenance and repair; and (f) absence of monitoring.

146. As one example, in 1999 an impact study on two micro watersheds, Danta (Saraswati) of Banaskantha district and Dayapar (Lakhpat) of Kachchh district, found that in both the projects the quantum of benefits achieved by the farming community was uneven and lower than project expectations. The impact was significant in areas with moderate to good rainfall (Danta) but limited in low-rainfall areas (Dayapar). The soil and moisture conservation methods had improved the moisture retention capacity of soils, and water levels also had risen, although moderately. Overall, the financial condition of beneficiaries had improved; crop yields had improved (by 10–20 percent more than those of non-beneficiaries); and soil erosion and runoff of rainfall were somewhat reduced. However, in the nonarable areas, because of their common property resource nature and lack of care, the impact was negligible.

147. WDPs lack explicit mechanisms for sharing benefits. The programs have been criticized for accentuating inequity between rich and poor, because they are essentially land-based activities and benefit the landowning class only. Sharing benefits is not equal between the upper and lower reaches: most of the land development work is done by the upper reach population, while the benefits are received in the lower reaches. Creation of small farm ponds was one effective solution offered to resolve the problem of sharing benefits with those who do not derive any direct benefits from the watershed development structures. These ponds also would increase the efficiency of water use (Shah 2000). However, to date, the WDPs have not sufficiently promoted these small structures;

Box 4 Shkhomarji: Example of positive economic impacts of a WDP

The famous watershed village of Sukhomajri in Haryana, which helped inspire watershed projects elsewhere, experienced numerous watershed benefits. An economic analysis of the project estimated a rate of return (ERR) of 10 percent–19 percent depending on the assumptions. Revegetation of the upper watershed increased the tree density by approximately 100-fold between 1976 and 1992. Production of useful grasses rose from 40 kg/ha to an average 3 tons. Harvests of bhabbar grass yielded an average income of $3,000/year for the village in the 1990s. The increase in irrigated area enabled a major increase in crop production, with maize and wheat yields more than doubling within 10 years. Crop diversification also has increased..

Irrigation enabled a transformation of the livestock population from grazing goats and local cows to mainly stall-fed buffaloes and improved dairy cows. The number of goats fell from 246 in 1975 to 10 in 1986, while the number of buffaloes rose from 79 in 1975 to 291 in 1986. Subsequently milk production increased from 334 liters per day in 1977 to over 2000 in the late 1990s. This transformation enabled the village to become a major producer of milk, with annual sales of approximately $8,000.

Higher dairy and crop production and employment and wages, all made possible by the protection of the Sukhomajri watershed, greatly improved the local living standards. Household incomes rose by an average of 50 percent between 1979 and 1984, with all households gaining. Before the project, most people lived in mud-and-thatch houses, but, by 1998, 89 percent of people lived in modern brick and mortar houses, while the remainder lived in semi-modern houses. A 1998 survey showed that

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Sukhomajri village contained a smaller proportion of people living below the poverty line than the state of Haryana as a whole, even though Haryana is one of the richest Indian states and Sukhomajri lies in one of its poorest regions.

Sukhomajri’s watershed project also offered economic benefits 15km downstream in Chandigarh. Siltation into Sukhna Lake on the edge of the city declined by approximately 95 percent, saving approximately US$200,000 annually in dredging and related costs.

Source: Kerr and others 2005.

148. Given the broad focus of WDPs (figure 12), to be effective, they must emphasize four major areas: (a) soil and water conservation, (b) building strong community institutions, (c) addressing broader and more equitable rural development, and (d) monitoring and evaluation

a. Soil and water conservation

Programs should be planned and implemented at the watershed level and focused on strategies to improve water management by planning water supply and demand on all land uses and types.

An integrated planning approach will assess and modify land-use practices in upper and lower watersheds to maximize water supply to meet local needs. This approach usually means a range of crop, slope, vegetative, and physical interventions.14

Project planning will evaluate externalities, mainly between upper and lower watershed users. Water demand can be addressed through irrigation delivery systems.

b. Building strong community institutions

Field implementation favors community user groups15––although in larger watersheds, wider representation may be required, possibly linked with local authorities.

Within communities, various social groups are formed as part of the rural development objectives, for example, self-help groups to receive training and seed funds to establish small income-generating businesses.

Group formation requires effort by the community, which ultimately assumes ownership of these projects.

c. Addressing broader and more equitable rural development

On their own, soil and water conservation improvements usually will lead to enhanced crop yields. However, these benefits often are captured by farmers in the lower reaches of the watershed who have larger plots and are in a better position to meet cost-sharing requirements of projects. On the other hand, the poor and landless often benefit through increased employment. Project interventions are needed to improve the long-term economic position of more disadvantaged groups.

Creating strong self-help groups and providing microfinancing for sound income-generating activities are proven techniques for broader and more equitable rural development in watershed projects.

On the upper reaches where forests, open, and common lands tend to dominate, project interventions must avoid rent-seeking by village elites.

Livestock enhancements are possible through strengthening low-cost, local veterinary services (such as Gopal Mitras) and appropriate feeding.

14 Examples are construction of check-dams, rehabilitation of tanks in the watershed, borewell recharging pits, farm ponds, and clean-up of water channels from upper watershed reaches.

15 To facilitate the group in opening a bank account to receive project funds, these communities would be registered through the Societies Registration Act.

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d. Monitoring and evaluation

Monitoring and evaluation (M&E) is critical to support local planning, track progress of field implementation, evaluate efficiency and effectiveness, and assess distribution of costs and benefits across income groups.

A strong M&E system will be underpinned by appropriate equipment, techniques, and data management.

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Figure 12 Participatory planning process: Karnataka Watershed Development Project

Source:” Managing Watershed Externalities in India, Draft Report” World Bank report (2006).

SMALL WATER HARVESTING STRUCTURES AND GROUNDWATER RECHARGE SYSTEM

149. The popular groundwater recharge movement in Saurashtra and Kachchh is one of the greatest responses by farmers in Gujarat to water scarcity––massive in scale and largely driven by local philanthropies, NGOs and grassroots hydrologists. As noted earlier, an estimated 40,000 check-dams have been built up across the region. A large contribution to it also has come from the government which joined later with a big Sardar Patel Water Conservation Scheme. Evidence suggests that the movement has added to the prosperity of the region and positively affected the groundwater balance. Among other benefits has been farmers’ increased awareness toward water resource management. According to Shah (2000), the realization that water as a resource also needs to be “produced, planned and husbanded” has guided Gujarat to the first steps of groundwater management.

150. Government programs also actively support water-saving irrigation technology (including trickle, drip, and other micro-emitters). Notably, these technologies suit high-value perennial crops better than they do traditional food crops. Post-harvest and marketing activities of high-value crops play a significant role in turning investment into income for the farmers involved. As such technologies are often advocated for locations with the most serious water shortages, they may be deployed in areas that are poorly suited to generate a return due to remoteness from markets; stakeholders’ lack of experience and training; and the poor services offered locally by APMCs, cooperatives, and technical extension services.

151. GOG is placing considerable emphasis on future diversification into horticulture, plantation crops, and medicinal and aromatic herbs. Part of this enthusiasm is focused on the capacity of some of these crops to be used as tools in water resource management . In

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particular, less water-intensive crops have been targeted. However, their adoption in Gujarat has been very slow, even in the presence of government subsidies.

WATER AND ELECTRICITY CHARGES

152. The inability to charge properly for social and economic services provided by the state, and poor cost recovery, has contributed to poor performance in revenue generation and fiscal management. Low water rates and electricity charges for agriculture are examples from the economic sectors. Between 1981 and 1999 (January), the water rate charges to agriculture in Gujarat remained constant. Even if fully recovered, such minimal rates hardly would cover the annual operation and maintenance costs. With the recently revised water rates, the state might be able to recover at most the operation and maintenance (O&M) costs plus less than 1 percent rate of return on the capital employed (Dholakh 2000).

153. Low price input and poor cost recovery mean that the input is implicitly subsidized . Acharya (2004) estimates that in 1999–00, the implicit subsidy on canal water amounted to Rs 2,930 million. “Subsidy” was defined as the difference between the water charges collected from farmers and the O&M cost of irrigation works. The subsidy on electricity for agriculture was equal to Rs 34,660 million. Here “subsidy” was defined as the difference between the unit cost of generation and distribution and user charges collected from farmers, multiplied by the total electricity supplied to the agricultural sector. Finally, the fertilizer subsidy amounted to Rs. 7,080 million. Thus, the total estimated farm inputs subsidy in Gujarat in 1990–00 was Rs. 44,670 million––one of the highest in India.

154. Over the last 20 years, the trend in farm input subsidies in Gujarat has been to increase (figure 13). However, compared to the 1980s, growth rates decelerated during the 1990s, with the exception of canal irrigation subsidies, which increased slightly (table 26).

Figure 13 Farm input subsidies in Gujarat

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Table 26 Real growth rates of farm input subsidies in Gujarat (%)

 Period Fertilizer ElectricityCanal

irrigationAll farm inputs

1980/81–1989/90 18 27 9 211990/91–1999/00 4 12 9 101980/81–1999/00 8 19 9 15

Source: Based on Acharya and Jogi 2004.

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155. Recent numbers indicate that Gujarat’s subsidies to canal irrigation, electricity, and fertilizers remain among the highest in India. In 1999–00 combined subsides for these three sectors totaled almost one-quarter of agricultural GDP (table 27).

Table 27 Statewide subsidies on canal irrigation, electricity, and fertilizers (% AGGDP)

State  1980–81 1987–88 1990–91 1993–94 1996–97 1999–00Gujarat 2.8 12.4 10.7 14.2 11.9 25.4Maharashtra 0.7 4.0 5.9 7.5 11.4 22.8Tamil Nadu 6.8 9.8 13.1 8.9 11.7 14.8Punjab 6.7 13.1 13.3 11.3 10.9 13.6

Source: Based on Acharya and Jogi 2004.

156. Extensive use of taxes and subsidies has distorted some incentives for water users. An example is that irrigation water from canals is supplied at a price one-twentieth of that at which the farmers buy water from private tubewell owners in the same village. Another is that state tubewells charge the same price for groundwater irrigation in water-logged upper reaches of canal commands as they do in the lower reaches (for example, Mehsana district in North Gujarat).

157. Estimates from 1998/99 reveal that only 9.5 percent of agricultural households in Gujarat use canal irrigation. Hence, only a small fraction of agricultural households benefits from theses implicit subsidies. Of the 9.5 percent of households with access to canal irrigation, 71.6 percent are marginal farmers, 11.5 percent are small farmers, 9.7 percent are medium farmers, and 7.1 percent are large farmers. Marginal farmers, who represent 46 percent of agricultural households, receive 37.2 percent of the canal irrigation subsidy (that is, they operate 37.2 percent of the canal irrigated area). In comparison, large farmers, who represent 15 percent of agricultural households, obtain 31.5 percent of the canal irrigation subsidies. 16 The average subsidy received per household using canal irrigation in 1998–99 was Rs. 10,075. Calculations in table 28 indicate that the average subsidy benefiting large farmers is 8 times larger than that enjoyed by marginal farmers, and 4 times that of small farmers.

Table 28 Distribution of canal irrigation subsidies in Gujarat, 1998–99

 Size of landholding

Distribution of canal

irrigated area(%)

Canal irrigation subsidies

(Rs millions)

No. HHs with access to canal

irrigation(000)

Subsidy Rs/HH

Marginal 37.3 1,100 210 5,246Small 11.8 349 34 10,374Medium 19.3 570 28 20,079Large 31.5 930 21 44,759All 100.0 2,950 293 10,075

Source: Based on World Bank Policy Note on the Incidence of Canal Irrigation Subsidies in India 2003a. 158. One of the major reasons behind the excess groundwater draft has been the inability to manage (and price) the supply of power efficiently for the farm sector . For example, electricity is sold at identical prices in South and North Gujarat (Shah 1998) as part of a flat-rate electricity charge for agriculture. This price restriction has reduced the marginal cost of pumping to almost zero. Farmers therefore treat scarce water as free, pumping for long hours and wasting water. 159. High rates and effective rationing of power supply are very important for the efficient working of a flat rate regime. Unfortunately, the state electricity supply is unable to

16 Estimates in this paragraph were derived from World Bank 2003a and calculated using the 54th round of the NSS data.

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deliver on either account. The tariff rates have not been revised for a decade and in real terms seem to have fallen. One study in Anand district (Kishore and Verma 2003) shows that, at the current pumping levels, the effective unit cost of energy is as low as Rs. 0.39 for a pump-owner while the utility’s cost of supplying energy to agriculture is approximately Rs. 2.50 per unit. Farmers frequently use phase capacitors to run their pump sets outside scheduled hours, especially during peak agricultural seasons. It has been anecdotally observed that farmers with diesel pumps (diesel being a cost related to volumes pumped) pump far less water than those using electric pumps. However, a metered electricity charge appears to be impractical due to the corruption of meter-readers and high transaction costs of billing mechanisms.

160. Just as in the case of canal irrigation subsidy, the distribution of benefits from the power subsidy reflects inequity and bias toward the large farmers who own pump sets . Estimates from the NSS 54th round indicate that one-third of agricultural households enjoy the benefits of the implicit power subsidy (table 29). Approximately 33.6 percent of agricultural households use electric pump irrigation. Of these, 41.6 percent are marginal farmers; 22.2 percent are small farmers; 18.4 percent are medium farmers; and 17.7 percent are large farmers. The benefit-incidence of the subsidy indicates that marginal farmers receive 12.7 percent of the power subsidy compared to 47.7 percent for large farmers. The average subsidy benefiting large pump set owners is 9 times as large as that enjoyed by marginal farmers, and more than 3 times that of small farmers. The average subsidy received per households using electric pump irrigation in 1998–99 was Rs. 28,641.

Table 29 Distribution of agricultural power subsidy in Gujarat, 1998–99

 

Distribution of area irrigated

by electric pump(%)

Distribution of electric pump

ownership(%)

Total subsidy Rs millions

Average subsidy per pump set

ownerMarginal 12.7 41.6 3,752 8,760Small 16.4 22.2 4,832 21,094Medium 23.2 18.5 6,850 36,026Large 47.7 17.7 14,066 77,109All 100 100 29,500 28,641

Source: Based on “World Bank Policy Note on the Incidence of Canal Irrigation Subsidies in India” 2003a.

STAKEHOLDER INVOLVEMENT IN IRRIGATION MANAGEMENT

161. While NGO initiatives have claimed some success with participatory methods of project planning and implementation, Shah (2004) identifies significant disappointment in their overall application in government water management programs and projects. In particular, this refers to attempts at Irrigation Management Transfer (IMT) to farmer groups such as Water Users’ Associations (WUAs). A first obstacle Shah identifies is that farmers have very limited willingness and capacity to participate in management. A second is that many schemes have substantial deferred repairs and maintenance that farmer groups have neither the funds nor the willingness to carry out. A third is that lower-level and local government staff, have few incentives to expedite the transfer of management to others. Finally, WUAs usually have no control over water supply.

162. Nevertheless, IMT remains a focal point for all government water management programs and new institutions at the village level. The target set for the Participatory Irrigation Management (PIM) program in 1997 was to turn over 50 percent of the 1.5 million ha of command area of its existing irrigation schemes by 2003, in addition to large areas under the Narmada project. However, a mid-term assessment (Planning Commission 2000) showed that the area covered under PIM was 19,000 ha (only 0.62 percent of the total irrigated area in the state and 1.26 percent of the target).

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163. Some of these difficulties have been overcome in the simpler process of transferring tubewells to operation by stakeholders, although a lack of alternatives (power shortages and lack of access to the Mahi canal) also may have contributed. A reasonable operational model already exists as “tubewell partnerships,” whereby tubewell water is shared among member farmers and sold to nonmembers. A flexible approach was used that waived conditions such as compulsory formation of cooperatives to take charge of a tubewell. Informal groups of five farmers each also were allowed to lease the tubewells for one year after which the contract could be renewed depending on the performance of the group. The performance of these transferred wells was quite satisfactory, making the transfer process an overall success.

164. However, cost recovery under stakeholder management presents a more systemic problem. Throughout Gujarat, charges for water in government schemes generally are too low to cover costs of operation and maintenance (covering as little as one-third of such costs), let alone new investments or building human capacity. Moreover, for various reasons billing and collection is commonly incomplete.

GROUNDWATER MARKETS

165. Notwithstanding the problems with market mechanisms, well-developed water markets have existed in Gujarat for the last 6 to 7 decades. They became more important and pervasive after the introduction of the modern water-lifting devices (Shah 1989 cited by Kumar 2002). These water markets operate in two different ways. In the first case, water is sold on hourly basis, and the water charges are decided based on the discharge of the water supply. The latter affects crop yields, because the ability of a buyer to irrigate his/her fields largely depends on the willingness of the seller to give water. In the second arrangement, water is given on a crop-share basis, and the water-seller also provides fertilizers and pesticides.

PUBLIC EXPENDITURES

166. Public expenditures on agriculture, irrigation, and rural development have been declining since the early 1990s. The total share of these combined expenditures declined from 24 percent in 1990 to 17 percent in 2003 (figure 14), of which 54 percent went to irrigation and flood management expenditures.

Figure 14 GOG expenditures in agriculture, irrigation and rural development sectors

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Source: World Bank state database, various years.

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167. Public expenditures on irrigation and flood management amounted to 10 percent of total expenditures in 2003, slightly down from 12 percent in 1990. However, in 1990, the predominant share of irrigation and flood management control expenditures was accounted for by capital expenditures (79 percent). This share plummeted to 16 percent in 2003, meaning that most expenditure on irrigation and flood management was accounted for by the revenue expenditures account (84 percent). These figures mean that funds were shifted away from irrigation investment and completion of unfinished irrigation schemes toward running costs, possibly salary costs in irrigation agencies.

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AGRICULTURAL MARKETING168. Given the size, diversity, and commercial orientation of Gujarat’s agriculture sector, the activity of agricultural marketing assumes great importance. Gujarat has remarkably a good history of developing agricultural marketing institutions.

169. The great majority of Gujarat’s major crops are sold at auction through a network of markets owned by regional branches of the state trading monopoly, the Agricultural Produce Marketing Committee (APMC). The dairy and cotton sectors have their own sales mechanisms. Cotton is sold through the All-India Cooperative Cotton Federation, which has a subsidiary in Gujarat. Dairy operates as a largely private system of vertically integrated, farmer-owned cooperatives. A significant proportion of fruits and vegetables are sold through other, largely privately controlled outlets, including some preliminary contract farming arrangements

MARKET REGULATION AND MARKETS IN GUJARAT: APMCS

170. Under the provisions of the Gujarat Agricultural Produce Act, passed in 1963, regulated wholesale markets in Gujarat are organized under representative APMCs.17 The act covers the development of existing markets and the establishment of new markets. It also regulates the marketing of 101 agricultural and horticultural commodities, including foodgrains, pulses, cotton, oilseeds, fruits and vegetables, livestock, and condiments.

171. A market area in Gujarat is generally defined as a taluka, while the market is generally defined to comprise the villages located within 10–15 km of the market yard. All the notified commodities in this defined market are legally required to be brought to the market yard and should be sold only in the market yard. Only licensed functionaries––licensed by the Agricultural Produce Market Committees (APMC)––are allowed to operate in the market. The license fees for traders and commission agents as well as other market functionaries such as brokers, carting agents, weighmen, and laborers are determined and collected by the APMC under its by-laws.

172. By 2002–03, Gujarat had 201 APMCs, 180 main market yards, and 220 submarket yards, totaling 400 market yards covering more than 226 talukas. The largest number of APMCs and market yards are in the Sabarkantha district in the East, and Junagadh district in the Saurashtra region. These are followed by others in Baroda and Surat in the East, Ahmedabad, and Banaskantha in the North, and Amreli district in North Saurashtra. Forty APMCs are located in tribal areas of the state, principally in Surat district in Eastern Gujarat.

173. APMCs help market farmers’ agricultural produce through implementing open auction, standardizing weights and measures, and ensuring cash payment. They also provide information on market price and volume, albeit limited by not ascribing prices to standard quality definitions. There are important exceptions, particularly for spices. The Unjha APMC in Northern Gujarat is emphatic about the quality of its service: it is reputed to be the biggest spice market in Asia.

174. The market committee operates the market, including supervising and maintaining the market yard, preventing adulteration, promoting grading and standardization, and enforcing the Marketing Act’s provisions in the market area. The market committee has the status of a local authority. It is given powers to sanction budgets, appoint staff (with the exception of the secretary), issue licenses to the traders and other functionaries, and levy and collect market fees and other fees within prescribed limits. The market committee typically consists of different representatives from the agriculturists/farmers, traders, Cooperative Marketing Society representatives, and nominees of local and the state governments.

17 Appendix 3 gives a detailed description of the act.

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175. The market committee collects fees on agricultural produce bought or sold in the market yard of 0.3 percent–2 percent of turnover and charges traders for license and market fees. The market committees’ main sources of income are the license and market fees. Recent data indicate that the goods transacted through these market yards amount to 9,760,000 tons, for a value of Rs.78780 million.

176. APMCs generally are financially strong with substantial permanent funds. However, this strength has declined in recent years – from 37 percent in 1998–99 to 6 percent in 2002–03. The number of license holders in the APMCs, although still large, has fluctuated by 6 percent between 1998–99 and 2002–03, down to 13,000 licenses. Of these, 2,136 are held by cooperative societies.

COOPERATIVES

177. One of the outstanding features of agricultural marketing in Gujarat is cooperatives’ strong involvement. There are nearly 2,000 cooperative marketing societies in the state of Gujarat with a working capital of nearly Rs. 10 billion. These cooperatives are involved in the marketing of a variety of products produced by farmers. The 11,512 dairy cooperatives have played a major role in developing Gujarat’s dairy sector. There also are over 4,000 agricultural societies, over 4,000 cooperatives in cotton ginning and pressing, and 26 sugar cooperatives that are involved in sugarcane processing on a very large scale.

178. Gujarat’s well-known dairy cooperative system dates back to before Indian independence. It began with a small cooperative in the town of Anand (appendix 4) and now features 12 district cooperative unions, each developed along the “Anand pattern” to include village and local cooperatives in a pyramidal structure with several key aspects (box 5) First, price-quality linkages are maintained throughout the system by consistent and transparent pricing and payment procedures. Second, the logistics of product collection and delivery are well established. Third, marketing has featured strong brand development, as exemplified by AMUL (Anand Milk Union Ltd). Fourth, extension and technical assistance continue and reinforce the concept of farmer ownership.

179. Today, the apex organization, Gujarat Cooperative Milk Federation (GCMMF), is India’s largest food industry enterprise. It is jointly owned by more than 2.28 million milk producers throughout Gujarat. Its products range from milk, milk powder, flavored milk, butter, ghee, cheese, chocolate, and ice cream to pizza, sweets, and soups under the brand name of AMUL, which is India’s largest food brand (annual turnover is approximately Rs. 27 billion). GCMMF has a daily processing capacity of 6.3 million liters, representing 89 percent of the state’s capacity. Dairy processing is concentrated in North Gujarat. The largest center is in Anand, but several others are located in the other regions.

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Box 5 Anand Model throughout India: Operation Flood

Indian dairy production has been characterized as a new phase of the green revolution. Dairy production grew by only 0.7 percent per annum in the 1950s–60s. However, in subsequent decades, it achieved annual growth rates of 4 percent–5 percent, outstripping wheat and rice production. This acceleration in growth is largely associated with Operation Flood, a bi-pronged approach by the Indian government that simultaneously ended public sector direction of the dairy industry and diverted food aid to dairy development.

Operation Flood has followed, to a certain extent, the Anand model of pyramidal marketing structures of farmer-controlled dairy cooperative. This model is closer to a Scandinavian farmer cooperative than to Asian models. The Anand model features farmer control, professional management, fully commercial operating principles, and technical assistance to members. Initially, the cooperatives had to compete with investor-owned enterprises that received substantial subsidies and operated excess processing capacity. Many states provided such subsidies to companies, not to cooperatives to encourage dairy development. This policy has been rationalized to avoid discrimination against the cooperatives.

Beneficiaries of Operation Flood include the poorest farmers, farm laborers, and women. Six million milk producers have benefited from the program. Some 6,000 women’s dairy cooperative societies were formed, and the reorganization of households’ labor around dairy production empowered women and enhanced children’s access to education. On the broader stage, consumption of dairy products has almost doubled in India since the 1970s, delivering considerable nutritional benefits. Moreover, dairy products have become more accessible to the population as retail prices have fallen due to enhanced production, processing efficiency, and product volume.

Source: “India’s Dairy Revolution,” World Bank 1998.

MARKETED SURPLUS

180. The marketed surplus for most major crops in Gujarat has grown substantially in recent years. In the case of wheat, the marketed surplus rose from 65 percent in 1999–00 to 78.8 percent in 2001–02. The bajra marketed surplus rose by 18 percent over the same period (table 30). In the case of other crops such as groundnut, rapeseed, sesamum, and cotton, which are commercial crops, the marketed surplus was almost 100 percent by 2001–02. The large percentage of marketed surplus implies the huge importance of an efficient marketing system to farmers’ incomes.

Table 30 Market surplus percent of agricultural commodities in Gujarat (%)

Crop 1999–2000 2000–01 2001–02Wheat 65.0 81.0 78.8Bajra 63.4 56.3 81.5Groundnut 85.4 95.9 93Rapeseed 99.9 99.9 99.9Sesamum 98.1 98.7 97.8Cotton 98.2 100 99.7

Source: Gandhi 2005b

181. Table 31 gives information on the quantities and values of production and arrivals of some important commodities at the APMCs for the 2000–01 crop year. The highest quantities are seen in wheat, cotton, groundnut, and castor. The highest values are seen in castor and cotton, followed by groundnut and wheat. The highest unit prices are seen in cumin and groundnut. The results also indicate that arrivals in relation to production of some commodities exceed 100

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percent because of arrivals from other states. This is an indication of the attractiveness and the increasing dependence on Gujarat markets.

ALTERNATIVE MARKETING CHANNELS

182. There is evidence that some market activity is occurring outside the regulated markets. Recent data from markets in the vicinity of Rajkot in Northern Saurashtra, indicate that farmers dispose of their produce through alternative channels. Gandhi and Koshy (as cited in Gandhi 2005b) show that, of the wheat produced, only 41.6 percent is sold through commission agents, 9.8 percent is sold to traders, and 28.6 percent is sold directly to consumers. Data on fruits and vegetables purchased by commission agents in the regulated markets of Ahmedabad, shows that 36.3 percent of fruits and vegetables are purchased from other traders, compared to 47.1 percent from farmers and the remainder from cold storage and commission agents. These figures indicate that alternative channels are at work (Gandhi and Nambooridi 2004).

183. Arya (1993a) found that significant quantities of rice, wheat, and bajra are traded outside the regulated markets in the district of Kheda in central Gujarat. The share of rice sold outside the yard is small, but in the case of wheat and bajra, the proportions of wheat are substantial (40 percent–60 percent in some cases). Farmers of all holdings sizes seem to be trading outside the market yard. Traders’ purchases outside the yard come directly from farmers, commission agents and other traders. The same study found that, for rice, wheat, and bajra, in most cases, prices obtained by the farmers inside the market yards are higher than those outside the market yards.

COSTS, MARGINS, AND PRICES

184. Comparisons of marketing costs inside and outside the market yard generally are inconclusive For grains, transport is the main cost borne by farmers to bring their produce from the village to the market place. All other charges, such as market fee, commission charges, weighing charges, and labor are paid by the trader. Arya (2003b) found that the transport cost per quintal paid by farmers of paddy, wheat, and bajra was larger when the farmers took the produce to the market yard, and as expected this charge increases with the distance. The transport cost paid for sale outside the market yard is lower perhaps because the trader may purchase goods at or near the village. Other charges also may be greater inside the market yard. The commission charged is greater (0.7 percent vs. 0.4 percent in the Borsad market), and so is the labor charge. However, weighing charges are greater outside the yard.

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Table 31 Estimated production and arrivals for selected commodities at APMCs in Gujarat, 2000–01

Name of commodity

Prod (‘000 tons)

Average price (Rs/ ton)

Value of prod

(billion Rs)

% value of prod

Arrivals (000 tons)

Arrival as % of

production

Arrivals share(%)

Value of arrivals (billion

Rs)

(%) value

of arrival

Cotton 1161.4 19510 22.66 21.20 542.8 46.74 17.37 10.59 17.21Wheat 649.0 6360 4.13 3.86 834.0 128.51 26.68 5.30 8.62Paddy 472.7 8540 4.04 3.78 312.4 66.09 9.99 2.67 4.34Jowar 79.3 8350 0.66 0.62 58.8 74.15 1.88 0.49 0.80Bajri 550.9 6430 3.54 3.31 259.8 47.16 8.31 1.67 2.72Maize 288.5 7410 2.14 2.00 122.1 42.32 3.91 0.90 1.47Tur 107.2 20490 2.20 2.06 52.8 49.25 1.69 1.08 1.76Mung 38.2 20700 0.79 0.74 18.3 47.91 0.59 0.38 0.62Groundnut 626.9 56260 35.27 33.01 273.2 43.58 8.74 15.37 24.98Sesamum 98.4 9910 0.98 0.91 169 171.75 5.41 1.67 2.72Castor Seed 638.8 45110 28.82 26.97 471.6 73.83 15.09 21.27 34.58Tobacco 148.6 11080 1.65 1.54 10.8 7.27 0.35 0.12 0.19Total 4859.9 -- 106.86 100.00 3125.6 -- 100.00 61.53 100.00

Source: Gandhi 2005b.

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185. Gandhi and Namboodiri (2002, quoted in Gandhi 2005b) estimate that the marketing costs for vegetables at the APMC in Ahmedabad, range from Rs. 71 per quintal to Rs. 219 per quintal. For fruits, it ranges from Rs. 157 per quintal to Rs. 331 per quintal. Again, transportation and commission emerge as the largest marketing costs. The same study indicates that the price spread between the consumer and the farmer for fruits and vegetables is in general very large. On average, the farmer receives only 48 percent of the consumer rupee for vegetables, and only 37 percent for fruits. However, this spread is not due primarily to marketing costs, which accounts for 7 percent–43 percent of the farmer-consumer price differential, but to large margins captured further down the chain at the retailer/consumer level. As much as 60 percent–70 percent of the farmer share is eroded at this level. Such large erosion indicates substantial scope for improving marketing efficiency to possibly improve returns to farmers. .

MARKETS EFFICIENCY

186. An efficient agricultural marketing system might loosely be defined as providing “the right product in the right place at the right time.” Empirical measures of efficiency address this topic in more limited ways, one of which is through “market integration”: measurement of the degree to which related prices move together over time. Gandhi (2005b) finds that both maize and bajra prices tend to move together, indicating active arbitrage between locations and stages of the marketing chain. Cotton markets appear to be less integrated, perhaps because of quality differences, although the results show substantial variation. .

187. Arbitrage is not so widely observed by the operators of the new National Multi-Commodity Exchange of India, in Ahmedabad. There, considerable difficulties remain in trading grains and cotton due to interlocking maximum and minimum price policies, APMC actions, and differential tax rates applied to movements of products across state borders. The result has been that rather fewer commodities are traded on the exchange. They include seeds, oils, and oil cakes for castor, groundnut, and sunflower. .Marketing Reforms Proposed

188. The Standing Committee of State Ministers on Agricultural Marketing Reforms constituted by Government of India’s Ministry of Agriculture, met in 2003 to formulate a model law on agricultural marketing to guide the states in implementing legal reforms in agricultural marketing. The draft model legislation is being discussed at various levels including the APMCs and the cooperatives (appendix 3). .

189. At present, the markets are set up at the initiative of the state government alone. The reforms in the draft model legislation provide for the establishment of markets by private persons, farmers, and consumers and permit more than one market in a market area. Existing provisions would be replaced with an omnibus provision that any individual can set up a market, provided governmental minimum standards, specifications, formalities, and procedures are met. The Government of Karnataka has initiated action by amending its act to enable the National Dairy Development Board (NDDB) to set up a wholesale fruit and vegetable market at Bangalore with subsidiary collection centers to promote integrated marketing of horticultural produce grown in the state. Private sector, corporate, and joint venture initiatives similarly would be encouraged to set up markets for more free and competitive trade. .

190. One of the problems with the market yard system is the disconnection that it causes between individual producers, and the buyers/processors. This enforced separation affects efforts for development, improvement, and investment linkages. The Model Act allows and promotes direct marketing as an alternative marketing system. The objective is to create and

50

transmit incentives for quality and enhanced productivity, better technology and technology support, reduced distribution losses, and increased farmer income. In this model, the government would be a facilitator rather than control the management of the markets. A common code of conduct and modalities regarding ownership, operation, and infrastructure development will be prepared and circulated to promote the concept of direct marketing by the farmers. .

191. To establish fruit and vegetable markets on the lines of NDDB’s initiative in Karnataka, the Government of Gujarat has set up a special committee under the chairmanship of the Minister of Agriculture and Cooperation. A separate provision also is made for notification of “Special Commodities Markets” for specified agricultural commodity markets to be operated in any market area in addition to existing markets. .Contract Farming

192. Contract farming is now recognized as a promising alternative in improving marketing linkages between farmers and the rest of the marketing chain. A proposal for inserting provisions for contract farming in the Gujarat Agricultural Produce Markets Act of 1963 has been submitted to GOG as a new chapter in the act. These proposed provisions call for compulsory registration of all contract farming sponsors, recording of the contract farming agreements, exemption from levy of market fee on produce covered by a contract farming agreement, resolution of disputes arising out of such agreement, and indemnity to producers’ title/possession over his land from any claim arising out of the agreement (appendix 3). .

193. A number of concerns regarding potential problems with contract farming have been raised. Concerns include that multinationals may insist on certain inputs that may not be acceptable to the small farmer, such as the selection of only fertile and irrigated lands, which would increase regional and economic imbalances. It also is feared that farmers’ independence would suffer if companies controlled all decisions; the farmer would become only a laborer. Another concern is that delays in payments, unfair deductions, and rejections for lower quality may take place, but farmers cannot afford the cost of litigation against company. Mono-cropping as well as excessive use of fertilizers/pesticides may erode soil fertility, which could affect the food security. Contract farming could affect the income viability of the existing APMCs. .

194. The principal advantage to farmers of contract farming is that the buyer normally will purchase all produce grown, within specified quality and quantity parameters, often at predetermined prices. Another advantage is that contracts can provide farmers with access to a wide range of managerial, technical, and extension services that otherwise could be unobtainable. Small-scale farmers frequently are reluctant to adopt new technologies because of the possible risks and costs. In contract farming, private agribusiness usually will offer improved methods and technologies because it has a direct economic interest in improving farmers' production to meet its needs. In many instances, the larger companies provide their own extension support to contracting farmers to ensure that production meets specifications. Skills the farmer learns through contract farming may include record-keeping, improved methods of applying chemicals and fertilizers, and knowledge of the importance of quality and the demands of export markets. Finally, the returns that farmers receive for their crops on the open market depend on prevailing prices and their ability to negotiate with buyers, but contract farming can, to a certain extent, overcome this price uncertainty. Frequently, agreements specify in advance the prices to be paid. .

195. The provision for the direct sale of farm produce to a contract farming buyer, thus avoiding routing through regulated markets, is very important. Provision for a single point levy of market fee on the sale of notified agricultural commodities in the market

51

area also is important, as is the state government’s discretion in fixing a graded levy of market fees on different types of sales. .

196. Contract farming arrangements can add value by (a) facilitating the emergence of agro-processing plants, which otherwise would not exist if supplies were not forthcoming in an organized manner; (b) enabling the export of produce from small farmers who otherwise would could not access these demanding markets; (c) encouraging higher quality production and better handling and sorting, thus increasing the value of small-holder production; and (d) enabling producers and processors to achieve economies of scale, thereby make these activities more competitive. .

197. A few companies have begun experimenting with contract farming in Gujarat, but they have not yet advanced beyond the confidence-building stage with farmers. An example is the McCain Foods India Pvt Ltd. Established in 1998, McCains’ has developed all forms of vertical linkage (seed supply, quality control, storage) essential to its position as a market leader in supplying high-quality potatoes to fast-food operators. The company made a number of purchasing and communication arrangements with farmers that are quite new to Gujarat, such as strict quality-oriented pricing. These arrangements also confront the existing policy environment to some extent (for example, the requirements of a specified minimum price for farmers and that farmers remain free to sell their products elsewhere other than to McCain). Despite its long history of contract growing of potatoes in many countries, McCain has found this a difficult procurement mechanism to set up in Gujarat. After five years of awareness-building, promotion, and demonstration, McCain is now purchasing small quantities of potatoes in Gujarat but has not been able to implement a supply contract. Clearly, despite imminent enabling legislation, contract farming is some way off in taking hold in Gujarat. To overcome contract farming’s exploitative image is a major promotional challenge for Gujarat’s emerging agribusiness sector. .

198. Perishability is a major problem in marketing agricultural produce. In response, a large number of cold storages facilities have opened in Gujarat. Today, the state has more than 200 cold storage units with a capacity of 303,000 MTs.18 Kheda district in Central Gujarat has a very large share of the state’s cold storage capacity. To enhance the marketability of agricultural produce, a large number of food processing industries also have sprung up. .

199. Gujarat hosts at least 171 food industry units. A large number are located in the fruit belt of Valsad and Surat, and a substantial number in Rajkot, Ahmedabad, and Bhavnagar districts.

200. Contract farming initiatives are being considered and implemented in other states in India. Tamil Nadu reports successful experience with cotton contract farming, which has involved superior coordination of the market chain. The ginner obtains premium prices for his/her lint while passing on major benefits to the farmers. Other contract farming schemes in Tamil Nadu involve companies engaged in buyback contracts with gherkin farmers and contract farming for poultry. .

201. In Punjab, contract farming schemes have been implemented for vegetables and Basmati rice. Punjab Agro Foodgrains Corporation (PAFC), a fully owned subsidiary of Punjab Agro Industries Corporation (PAIC), has been helping in diversifying agriculture through promotion of contract farming in the Punjab. This diversification was facilitated by the state authorities’ willingness to waive certain usually mandatory charges associated with grain procurement. In Punjab, Pepsico and Nijjer Foods successfully organized contract

18 The Desai case study is an example of a cold storage facility (appendix 2).

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farming to produce tomatoes, chilies, and potatoes for processing. Pepsico started contract farming with basmati rice in 1998 and was followed by Hindustan Lever Ltd. (HLL) in 2000.

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CONCLUSIONS AND POLICIES

202. Gujarat’s highly diversified agricultural sector has enjoyed substantial long-term growth over the past several decades. Today, managing water and improving the efficiency of agricultural markets are the major challenges to the government’s efforts to accelerate growth and reduce rural poverty. To achieve these goals, further diversification into high-value products is essential. .

203. In Gujarat, food grains occupy the lowest share of sown area of any Indian state. This low prevalence is due to several decades of crop diversification and accompanying expansion of high-value industrial (cotton and sugar) and other cash (spices, fruits, and vegetables) crops. Some of the crops being planted to replace food grains have significance far beyond the area they occupy. Fruits and vegetables occupy just 4 percent of Gujarat’s sown area but contribute 16 percent of its total value of agricultural production. Similarly, sugarcane uses just 2 percent of area but creates 9 percent of value. . .

204. Availability of water is the major constraint to agricultural growth in Gujarat. Unreliable volume and distribution of water (both rainfall and irrigation) are major sources of uncertainty and variability in producers’ income and, therefore, of overall economic growth. Water management faces a fundamental problem in that the great majority of Gujarat’s water resources are surface water, while irrigation uses mainly ground water. Location and orientation of agricultural production and marketing activities largely reflect this imbalance. The imbalance also has caused severe adverse consequences for the natural resource environment, including overexploitation of groundwater and large-scale land degradation in parts of the state. State subsidies for irrigation (specifically on electricity for irrigation) have greatly increased and represent nearly 20 percent of state agricultural domestic product. Nevertheless, falling water tables, particularly in the northern regions, have significantly increased costs of irrigation to farmers.

205. Gujarat has had notable successes, including its world-famous dairy cooperatives. However, to permit a rapid expansion in high-value agriculture, marketing problems must be overcome. Trade in various spices (cumin and fennel) to other parts of India and international markets is well established, but substantial untapped opportunities remain for increased production and incomes through increased sales of fresh and processed fruits and vegetables. Significant market restrictions remain in place, and adoption of new legislation liberalizing trade and promoting innovations such as contract farming has been stalled. .

206. Ensuring that agricultural growth and rural public investments substantially reduce rural poverty also is crucial. Gujarat is one of the richest states in India. Nonetheless, 4–8 million poor (13 percent–27 percent of the total rural population) live in rural areas. Given the wide variations in access to land, water, and other resources for households in various parts of the state and of different socioeconomic backgrounds, the composition of agricultural growth has a major impact on poverty outcomes. .State Agricultural Policy

207. Gujarat state agricultural policy, in accordance with India’s national agricultural policy, seeks to overcome these challenges as the state transitions from the pursuit of self-sufficiency to the development of a competitive, value-adding agricultural industry. In its 2001 agricultural policy framework, Agrovision 2010 (box 6), the GOG aims to achieve an annual growth rate of 6.8 percent over the next decade by increasing productivity and adding higher value to agricultural produce. .

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Box 6 Government of Gujarat Agrovision 2010 Action Plan

In its Agrovision 2010 Action Plan, the Government of Gujarat lists nine priorities to develop the agricultural sector in Gujarat. They are to:

1. Conserve soil and rainwater by using integrated Watershed Development Programs to improve productive capacity of land

2. Manage surface water through encouraging conjunctive use of water and enforcement of water-saving devices such as drip irrigation and sprinklers

3. Restrict overdraft of groundwater in water-scarce regions of Saurashtra and North Gujarat 4. Rationalize cropping patterns through crop substitution and diversification to minimize risk of crop

failure and income in arid and semi-arid rainfed areas of the state 5. Correct inland and coastal problem soils 6. Improve livestock and expand poultry activity by augmenting fodder supply through grassland

development, silo storage, fodder conservation, use, and enrichments of crop byproducts.7. Encourage the horticulture sector in suitable subregions and link it with the processing industry to

increase value addition and rural employment. 8. Enhance the production of marine, inland, and brackish water fisheries through modernizing

fishing gear and infrastructure9. Explore the potential offered by 1,640 km of coastline, 0.188 million ha of inland water bodies

(ponds, tanks, reservoirs, and rivers), and approximately 0.368 million ha of saline marshlands to develop marine, inland, and brackish water fisheries.

Source: GOG 2001a.

208. The main objective of the GOG’s agroprocessing policy is that more and more of what a farm produces should make its way into the processing chain. GOG is striving to create a world-class supply chain; promote the infrastructure development important for agro-industries; ensure close interface among research, extension, farmer, and the industry as well as among the farmers. The state government will provide assistance to small-scale agro-based units to improve their competitiveness in global markets and to increase their exports of value-added agriculture products. Box 7 lists the specific objectives of GOG’s agro-processing policy. .

Box 7 Objectives of the Gujarat state policy on agroprocessing

The state policy objectives related to agroprocessing are:

1. Double the processing of agro products in the next five years. 2. Establish food parks that meet international standards by recycling the cooling energy of

liquified natural gas (LNG) at Dahej and Hazira. GOG is exploring the possibility of using the “chilling” generated from the regasification of imported LNG at the Dahej and Hazira port areas by setting up food parks with agroprocessing units.

3. Declare Agriculture Export Zones (AEZs). Through the Agriculture Produce Export Development Authority (APEDA), GOI has sanctioned AEZs for 12 products including onion, mango, and several vegetables. GOG has proposed declaring AEZs for these same products to boost its agricultural exports and to help them compete at the international level.

4. Promote backward and forward linkages. GOG recognizes that, to compete in the international market, efficient backward and forward linkages are essential. To promote them, The state will encourage certified seed distribution, improved pre- and post-harvest management practices, and post-harvest facilities, including cold chain. These linkages will reduce costs, improve consistency in delivery schedule, and maintain product quality.

5. Introduce quality systems. To compete in the international market, quality is paramount. Good agricultural practices, good hygiene and sanitation, and important systems such Hazard Analysis and Critical Control Points (HACCP) will be encouraged.

6. Encourage organic farming of groundnut, sugar, rice, and horticulture products.

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7. Encourage bio fuel. GOG plans to encourage the use of agro-based renewable sources of energy, particularly bio fuel.

8. Establish effective, ongoing linkages among agricultural universities, R&D institutions, and farmers.

9. Revamp Agriculture Producers’ Marketing Committees (APMCs) through using modern technology and good management practices. These include:

Establishing linkages with multicommodity exchanges Strengthening future markets for agricultural commodities Eliminating intermediaries to make the transfer chain direct Encouraging transactions through e-commerce.

Source: Gandhi 2005a.

WATER FOR AGRICULTURE

209. Like many other states in India, Gujarat faces severe water management problems, as seen in its falling water tables and rapidly increasing subsidies for irrigation and electricity. Addressing these problems is not a matter of simply reducing fiscal subsidies but requires changes in policies and irrigation management that vary across states, and within Gujarat, by type of irrigation. .

210. One major reason behind the excess groundwater draft has been the inability to efficiently price and manage the power supply to the farm sector. Attempts at metering have been plagued by inaccurate billing and apprehension from farmers as to the arbitrariness and high-handedness of meter readers. On the other hand, the flat-rate regime based on the horsepower of the pump has failed to prevent a severe drop in groundwater tables. The present flat-rate tariff regime with rationed supply to the agricultural sector may offer a workable solution, provided five caveats are observed. They are that (1) the flat rate regime is properly administered; (2) total power supply to the farms is significantly restricted; (3) more off-peak power is used; (4) the power tariff is increased gradually; and (5) accounts are kept of the power subsidy given. However, tariff rate increases have faced significant political opposition. .

211. Watershed development programs have emerged as the key strategy for sustainable economic development of the state’s semi-arid/dryland areas. WDPs have significantly increased crop yields, by increasing the water-table and availability of irrigation. From hereon, WDPS should go beyond the sheer creation of water harvesting structures to integrate water-saving techniques with water conservation efforts and enable better institutional arrangements to address communities’ needs and elicit their participation. Carried out appropriately, WDPs have great potential to control the degradation that threatens the ecology of these areas and boost sustainable development. .

212. The overall experience of water harvesting structures and check-dams has been largely positive. This approach has added to the prosperity of the regions in which it has been implemented and has positively affected the groundwater balance. It also has helped in increasing the awareness of the farmers toward water resource management. Projects based on this approach in Gujarat also have set a good example of public-private partnership in water management. However, the resulting increase of check-dams in the state calls for some caution. Macroplanning is needed to asses the basin-level impacts of these structures. Increasing the efficiency of water use and improving the distribution of benefits derived from these structures also are important issues that require attention. .

213. The future of Gujarat agriculture will depend significantly on how water from the Narmada river (Sardar Sarovar Project, or SSP) is managed and used . The project has faced major obstacles, namely (1) changing river basin hydrology, (2) increased claims

56

from hosts of new users other than the intended beneficiaries, and (3) institutional and management challenges that hindered proper distribution and management of the system. As Shah (2002) puts it, at this juncture what is of immediate and major concern is “ framing the rules of the game” between SSP and farmers and seeing to it that these rules are followed steadfastly. This point is crucial, because the rules or practices followed in the early years will shape the future of the project. What is essential is to establish a strict business relationship between SSP and the farmers by enabling quality supply and creating proper checks and balances to deter payment default. .

214. Promotion of water-saving technologies such as several micro-irrigation techniques will go a long way to manage water at the farm level. More systematic research is required to support adoption of these technologies on a greater scale. .

215. A major difficulty in Gujarat’s large-scale projects and WDPs has been achieving people’s participation. This problem constrains management transfer to such institutional structures as water users’ associations, so prolongs government involvement and embeds the taxpayer as a scheme manager and the source of running costs. Observations on state budget patterns reflect these trends and obviate the necessity for new and intensified efforts at participatory project design and implementation. Existing entrenched government officials have few incentives to give up their local positions of power and patronage. Local people have little incentive to take over from them, and even less to contribute toward cost recovery.

216. Especially in watershed management projects, participation is constrained by the lack of benefit-sharing mechanisms, for example, between farmers in the upper reaches of a watershed and those in its lower reaches. This is one reason for inclusion of farm dams in project design, as upstream stakeholders gain the tangible asset of visible standing water in return for creating the more commercial downstream benefits generated by their management of runoff. Other means of benefit sharing need to be developed, possibly drawing on NGO experience. Obviously such means must be localized and involve local institutions, rather than centralized government agencies. .

217. The development of strong community institutions has been a hallmark of successful NGO projects, which tend to address small localities rather than large schemes or entire catchments. First, such institutions internalize any imbalances in costs and benefits within the project areas. Second, they provide a basis for shared land, labor and machinery and other cooperative activities such as self-help credit and marketing groups. That these activities are enabled by the availability of water, and may interrupt cycles of migration by entire communities, provide impetus to community actions in water management. This impetus is missing from the larger schemes and projects. .

218. The need for improved monitoring and evaluation in Gujarat’s water management has been identified by many commentators. In addition to its contribution to technical water management, monitoring and evaluation also identifies and publicizes achievements and invites commentary on management options. The delivery of an information stream to stakeholders is seen as a key step in improving participation. Structures for collecting, processing and using that information justify the existence of community institutions and provide a means of measuring performance. In this way, difficulties in sharing benefits can be foreseen and managed with user participation. Project designs need to include equipment and training, and mechanisms for transferring its ownership and function to communities. .

219. Agriculture must increasingly compete with other uses of water, both in terms of volume and the availability of high quality water. Water markets have a long history in

57

Gujarat and this may be a future basis for allocation between industries, which might then be extended to allocation within industries. .

MARKET DEVELOPMENT

220. Market liberalization and creation of new market institutional arrangements can help spur agricultural diversification and producer incomes. A large percentage of the marketed surplus for most of Gujarat’s major crops is sold at auction through a network of regulated markets, the APMCs. These markets are designed to protect farmer interests by institutionalizing fair marketing practices. The direct transaction of agricultural produce between farmers and traders/processors outside the purview of the Act is considered illegal, even though this is known to be taking place on a significant scale. Legalizing wholesale trade outside the regulated markets would help increase competition by providing farmers alternative marketing channels. .

221. Several steps also could be taken to improve the functioning of APMCs. First, facilities for market transactions and storage, as well as utilities and infrastructure need to be upgraded. Second, in many market yards, secret bidding is the prevalent method of transaction; open auctions are one possible mechanism to increase transparency of the bidding process. Third, as they currently function, APMCs typically only provide a marketing outlet; facilities for sorting, processing and other value-addition by market participants may be helpful. Finally, APMCs’ cost recovery by buyer levies provides the wrong incentive to buyers in the light of an increased number of available sales channels, and alternative mechanisms for financing may be needed. .

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APPENDIXES

59

APPENDIX 1. PRODUCTION FUNCTIONS OF MAJOR COMMODITY GROUPS

Table A1.1 Production functions of major commodity groupsDependent var. log of production

    Estimated coefficients of the logs of each independent variable

 

  Const Area Irri Fert Hyv Rain R2All crops production index

Coeff -33.531 3.0079 1.1296 -0.4051 0.454 0.3364 0.92t-stat -2.899 2.896 2.447 -1.375 2.066 3.358  Signf ** ** **   * ***  

Cereals

Coeff -5.2028 0.769 2.0966 -0.6675 0.3707 0.6491 0.9t-stat -1.742 2.984 3.06 -1.63 1.127 5.542  Signf   *** ***     ***  

Pulses

Coeff -6.3617 1.3902 0.245 0. 074 -0.6041 0.555 0.69t-stat -1.832 2.571 0.251 0.119 -1.079 3.721  Signf * **       ***  

Food grains

Coeff -5.9705 0.9498 1.8273 -0.5123 0.2371 0.5498 0.92t-stat -1.877 3.088 3.375 -1.513 0.88 5.164  Signf * *** ***     ***  

Groundnut

Coeff -8.539 0.8297 3.241 -2.016 1.0186 1.3977 0.83t-stat -1.616 1.092 1.985 -1.857 1.217 4.431  Signf     * *   ***  

Oilseeds

Coeff -4.3369 0.5156 2.3975 -1.2013 0.7377 0.9868 0.89t-stat -1.546 1.119 2.335 -1.875 1.424 5.586  Signf     ** *   ***  

Cotton

Coeff -9.2568 1.7736 0.7584 -0.1311 0.6183 0.3625 0.9t-stat -5.365 7.407 0.865 -0.233 1.413 2.55  Signf *** ***       **  

Sugarcane

Coeff 5.1572 0.6227 -0.1752 0.4316 0.3001 -0.098 0.95t-stat 10.097 3.459 -0.44 1.595 1.454 -1.559  Signf *** ***          

Source: Gandhi 2005a. Note: Significance: *** at 0.99, ** at 0.95, * at 0.90.

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APPENDIX 2. SUMMARY OF STATE ACCOUNTS

Table A 2.1 Expenditure on capital account (Rs. in Crore)Sr.no.   Item 2000–01 2001–02 2002–03 %

2003-04(R.E.)

2004-05(M.E.) (%)

1 2 3 4 5 6 7I Developmental expenditure

A. Social services 1063.10 860.82 1018.53 4.91 1333.13 2039.21 28.431 Education, sports, art, and culture 12.41 5.40 10.39 0.05 13.56 37.50 0.522 Health and family welfare 25.17 13.29 16.68 0.08 10.78 18.69 0.263 Water supply, sanitation, housing,

and urban development 1013.18 288.53 442.16 2.13 575.57 862.75 12.034 Information and broadcasting 0.06 0.01 0.35 0.00 0.25 0.90 0.01

5Welfare of scheduled castes, scheduled tribes, and other backward classes 10.68 3.16 4.74 0.02 10.4 20.58 0.29

6 Social welfare and nutrition 0.47 0.49 0.62 0.00 6.41 1.10 0.027 Others 1.13 549.94 543.59 2.62 716.16 1097.69 15.31

B. Economic services 2629.83 902.39 1482.18 7.14 3230.52 1916.97 26.731 Agriculture and allied services 208.96 128.43 89.18 0.43 198.77 127.44 1.782 Rural development - - - - -3 Special area programs 1.33 0.44 0.31 0.00 1.86 0.86 0.014 Irrigation and flood control 1151.76 529.77 847.92 4.09 2068.54 1089.03 15.185 Energy 607.41 -34.28 82.29 0.40 290.25 53.48 0.756 Industry and minerals 144.86 11.62 10.92 0.05 33.98 49.7 0.697 Transport 468.97 247.02 427.49 2.06 599.77 547.34 7.638 Communications - - - - -9 Science, technology, and environment - - - - -

10 General economic services 46.54 19.39 24.07 0.12 37.35 49.12 0.68Total-I 3692.93 1763.21 2500.71 12.05 4563.65 3956.18 55.16

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Table A.2.1 Expenditure on Capital Account (contd.)

Sr. No. Item 2000–01 2001–02 2002–03 (%) 2003–04(R.E.)

2004–05(M.E.) (%)

1 2 3 4 5 6 7II Nondevelopmental expenditure

A General services 8.61 9.72 14.25 0.07 19.11 32.16 0.45B Public debt 5191.41 18510.44 18065.42 87.05 15103.31 2405.47 33.54

1 Internal debt of state government 4105.17 17768.2 15555.55 74.96 10450.52 1526.05 21.28

2 Loans and advances forcentral government 1086.24 742.24 2509.87 12.09 4652.79 879.42 12.26

C Loans and advances by state government 210.47 212.98 172.00 0.83 2010.13 778.13 10.85

D Other expenditure - - - 0.01 0.01

Total-II 5410.49 18733.14 18251.67 87.95 17132.56 3215.77 44.84

Grand total (I+I(1) 9103.42 20496.35 20752.38 100.00 21696.21 7171.95 100.00R.E. = revised estimates, M.E. = modified estimates.

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Table A2.2 Expenditure on revenue account (Rs. in Crore)Sr. No.

    Item 2000–01 2001–02 2002–03 (%)2003–04

(R.E.)2004–05(M.E.) (%)

1 2 3 4 5 6 7I Developmental expenditure

A. Social services 7716.48 7722.19 6539.20 30.50 7108.81 7011.26 29.481 Education, sports, art, and culture 3672.36 3258.15 3623.97 16.90 3675.42 3699.46 15.552 Health and family welfare 893.75 715.48 846.86 3.95 874.82 894.78 3.763 Water supply, sanitation, housing,

and urban development 699.65 507.50 699.57 3.26 1047.83 842.10 3.544 Information and broadcasting 29.44 19.89 21.81 0.10 29.87 25.12 0.11

5Welfare of scheduled castes, scheduled tribes,and other backward classes 427.36 344.84 397.81 1.86 502.78 468.16 1.97

6 Labor and labor welfare 121.21 100.54 122.68 0.57 122.61 121.02 0.517 Social welfare and nutrition 1854.36 2757.51 806.87 3.76 834.75 937.55 3.948 Others 18.35 18.28 19.63 0.09 20.73 23.07 0.10

B. Economic services 8201.57 7810.1 6568.58 30.64 7598.56 7272.52 30.571 Agriculture and allied activities 708.63 895.88 630.52 2.94 756.51 847.65 3.562 Rural development 760.73 379.14 578.91 2.70 625.77 782.93 3.293 Special area programs 28.02 24.13 25.23 0.12 29.05 29.54 0.124 Irrigation and flood control 1948.84 1805.53 1939.50 9.05 2286.34 2305.70 9.695 Energy 3547.65 3551.10 2219.36 10.35 2641.08 2016.19 8.486 Industry and minerals 285.58 365.23 266.73 1.24 248.32 273.4 1.157 Transport 607.04 591.36 658.32 3.07 623.16 643.09 2.708 Communication 0.01 0.01 0.01 0.00 0.01 0.01 0.009 Science, technology, and environment 4.22 3.31 3.70 0.02 28.61 34.67 0.1510 General economics services 310.85 194.41 246.3 1.15 359.71 339.34 1.43

Total-I 15918.05 15532.29 13107.78 61.14 14707.37 14283.78 60.05

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Table A2.2 Expenditure on revenue account (Rs. in crores) (contd.)

Sr. no. Item 2000-01 2001-02 2002-03 Percent 2003-04(r.e.)

2004-05(m.e.) Percent

1 2 3 4 5 6 7Ii Nondevelopmental expenditure

A General services 117.73 130.56 200.64 0.94 167.97 236.13 0.99B Fiscal services 176.45 142.83 156.01 0.73 156.61 168.92 0.71C Interest payment and debt service 3120.63 4202.51 4944.93 23.06 5688.55 5999.84 25.22D Administrative services 1041.57 1008.64 1127.67 5.26 1119.38 1131.72 4.76E Pension and miscellaneous general services 1616.75 1644.79 1798.96 8.39 1667.23 1873.34 7.88

Total-II 6073.13 7129.33 8228.21 38.38 8799.74 9409.95 39.56

Iii Other expenditure 49.64 55.98 104.14 0.49 100.32 92.6 0.39Grand total (I+II+II(1) 22040.82 22717.6 21440.13 100.00 23607.43 23786.33 100.00

R E. = revised estimates, M.E. = modified estimates. Source: As reported in Gandhi, V.P. 2005a . “Overview of Agriculture in Gujarat.” Report to the World Bank. Indian Institute of Management Ahmedabad (IIMA).

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APPENDIX 3. SALIENT FEATURES OF THE 2003 MODEL ACT ON AGRICULTURAL MARKETING

Agricultural markets in most parts of India are established and regulated under the State Agricultural Produce Marketing Committee (APMC) Acts. The entire geographical area of each state is divided and declared as a market area wherein the markets are managed by the market committees constituted by the state governments. Once a particular area is declared a market area and falls under the jurisdiction of a market committee, no person or agency is allowed to carry on wholesale marketing activities. The monopoly of government-regulated wholesale markets has prevented the development of a competitive marketing system in the country. These markets provide no help to farmers in direct marketing, organizing retailing, maintaining a smooth raw material supply to agro-processing industries, and adopting an innovative marketing system and technologies.

Efficient agricultural marketing is essential to develop the agriculture sector because better marketing would provide outlets and incentives for increased production. The marketing system contributes greatly to the commercialization of subsistence farmers. Worldwide, governments have recognized the importance of liberalized agricultural markets. The Task Force on Agricultural Marketing Reforms set up by the ministry has suggested the promotion of new and competitive agricultural markets in private and cooperative sectors to accomplish three things:

Encourage direct marketing and contract farming programs Facilitate industries and large trading companies to procure agricultural commodities directly

from farmers’ fields Establish effective linkages between the farm production and retail chains.

Integrating farm production with national and international markets is essential to enable farmers to make market-driven production plans and adopt modern marketing practices.

If agricultural markets are to be developed in private and cooperative sectors and to be provided a level competitive environment vis-à-vis regulated markets, the existing framework of state APMC Acts must change. The state has to facilitate various market ownership models to accelerate investment in the area and enable private investment in owning, establishing, and operating markets. The functioning of the existing government-regulated markets also needs to be professionalized by promoting public-private partnerships to manage them. An appropriate legal framework also is required to promote direct marketing and contract farming arrangements as alternative marketing mechanisms.

Salient Features

In the 2003 model act, the title has been changed to highlight the objective to develop agricultural marketing, in addition to regulating it. Accordingly, the Preamble has been redrafted to provide for the development of an efficient marketing system, promotion of agroprocessing and agricultural exports, and establishment of procedures and systems to implement an effective infrastructure to market agricultural produce. (Sec. 1)

Under existing law, markets can be set up only at the initiative of state governments. Under the model law, legal persons, growers, and local authorities can apply to set up new markets for agricultural produce in any area. Consequently, in a market area, more than one market can be established by private persons, farmers, and consumers. (Sec. 3)

Growers will not be compelled to sell their produce through existing markets administered by the APMC. However, an agriculturist who does not bring her/his produce to the market area for sale will not be eligible for election to the APMC. (Sec. 14)

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Separate provision is made in any market area of “Special Markets” or “Special Commodities Markets” for specified agricultural commodities to be operated in addition to existing markets. (Sec. 20)

APMCs have been made specifically responsible to: Ensure complete transparency in the pricing system and transactions taking place in the

market area Provide market-led extension services to farmers Ensure same-day payment to farmers for agricultural produce sold Promote agricultural processing Publicize data on arrivals and rates of agricultural produce brought into the market area for

sale. Set up and promote public-private partnerships to manage agricultural markets. (Secs. 26–27)

Other new provisions in the model law are for:

Appointment of a chief executive officer of the market committee from among the professionals drawn from the open market (Sec. 36)

Compulsory registration of all contract farming sponsors; recording of contract farming agreements; resolution of disputes, if any, arising out of such agreement; exemption from levy of market fee on produce covered by contract farming agreements; and indemnity to producers’ title/possession over her/his land from any claim arising out of the agreement (Chap. VI (1))

Specification of contract farming agreements (Addendum)

Direct sale of farm produce to contract farming sponsor from farmers’ field without the necessity of routing it through notified markets (Chap. VI (1))

Imposition of single-point levy of market fee on the sale of notified agricultural commodities in any market area, and discretion to the state government to fix the graded levy of market fee on different types of sales (Sec. 42)

Time-bound registration to replace licensing market functionaries, and registration for market functionaries to operate in one or more market areas. (Sec. 44)

Prohibition of commission agency in any transaction relating to notified agricultural produce involving an agriculturist, and of deduction toward commission from the sale proceeds payable to agriculturist seller (Sec. 44(6))

Purchase of agricultural produce through private yards or directly from agriculturists in one or more market area (Sec. 45)

Establishment of consumers’/farmers’ market to facilitate direct sale of agricultural produce to consumers (Sec. 46)

Resolution of any disputes arising between private market/consumer market and market committee (Sec. 50)

Conferral of power by state governments to exempt any agricultural produce brought for sale in market area from payment of market fee (Sec. 56)

Permission for market committees to use their funds to create market facilities such as grading, standardization, and quality certification; and to create infrastructure on their own or

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through public-private partnerships for post-harvest handling of agricultural produce and development of modern marketing system (Sec. 59)

Two options for the Chairmanship of State Agricultural Marketing Board, namely, Minister in charge of agricultural marketing as ex-officio, or to be elected by the chairperson/members of market committees (Sec. 63)

The State Agricultural Marketing Board is made specifically responsible for:

Setting up a separate marketing extension cell in the board to provide market-led extension services to farmers

Promoting grading, standardization, and quality certification of notified agricultural produce; and setting up a separate Agricultural Produce Marketing Standards Bureau (Sec. 73)

Funds of the State Agricultural Marketing Board are permitted to be used by the board or through a public-private partnership to promote:

Market survey, research, grading, standardization, quality certification Development of quality testing and communication infrastructure Development of media, cyber, and long-distance infrastructure relevant to marketing

agricultural and allied commodities (Section. 79)

 

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APPENDIX 4. MARKET INSTITUTIONS: CASE STUDIES

This appendix summarizes 9 case studies presented by Gandhi (2005) of commercial elements of Gujarat’s food and agricultural system (table A.4.1).19 These cases are distributed throughout Gujarat and handle a broad range of commodities. This appendix discusses the activities of each, and the challenges and opportunities each faces, against the background of the salient physical, economic, and social features of Gujarat’s agriculture amidst its massive reorientation to international markets.

Table A.4.1 Case study subjectsName, location Agro-econ.

zoneMain business Operations

APMC, Rajkot North Saurashstra

Market yard management and service provision

Licensing and administration of trading

Sale-by-inspection auction markets serving 3 talukas (Gujarat’s largest market area) for food grains, vegetables, and livestock

APMC, Unjha North Gujarat

Market yard management and service provision

Licensing and administration of trading On-site storage

Specialized spice sale-by-inspection auction market (Asia’s largest) serving Unjha taluka as well as parts of Rajasthan.

Source of most raw materials for processing industry based around Unjha. (Limited) market information service Active supporter of community development and local charities

APMC, Valsad Southern Hills

Market yard management and service provision

Licensing and administration of trading fruits (other commods. sold by other organizations)

Markets feature shops and amenities

Wholesale auction market Wholesale/retail shops Major trading location for Alphonso variety of mango

APMC, Ahmedabad North Gujarat

Market yard management and service provision

Licensing and administration of trading fruits (other commods. sold by other organizations)

3 auction wholesale markets in Ahmedabad, resp. specialized in potato and onion, vegetables, and fruits

(Limited) market information service

Desai’s private Cold Storage company, Navsari

Southern Hills

Purchase and sale of fruits, adding value by preparation and storage

Export of mango to UK and Middle East (Limited) contract farming, with inputs and extension support

19 Gandhi 2005b. “Agricultural Marketing in Gujarat” Commissioned report for the World Bank, Centre for Management in Agriculture, Indian Institute of Management, Ahmedabad.

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McCain Foods India, operating throughout India with Gujarat operations in Neesa and Kheda

Middle Gujarat

Processing of contract-grown potatoes for value-added processing

(Limited) contract farming, with inputs and extension support

Gujarat State Cooperative Cotton Federation

Throughout Gujarat, with strong links to national body

Apex organization of 9 regional Cooperative Cotton Marketing Unions and 502 Cotton Producer Cooperatives

Procurement of cotton from farmers, including channeling of payment through cooperative banks.

Price formation Distribution of seeds and fertilizers Quality testing R&D on ginning and gin maintenance

Sarbhan Cooperative Agricultural Produce Processing and Marketing Society, Sarbhan

Southern Gujarat

Multi-purpose service organisation for farmers and rural communities, as well as cotton processing

General store and farm inputs supply Farm equipment store Hiring out go-down space Credit Ginning and pressing plant for cotton Fair price shop

Gujarat Cooperative Milk Marketing Federation

Throughout Gujarat

Apex organization for 12-district Cooperative Milk Producers’ Unions

Owner of “Amul” brand

State-wide dairy procurement, processing and marketing organization (India’s largest food organization)

Animal breeding service Extension and veterinary service Price formation mechanism and milk collecting infrastructure

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Current Shifts

The orientation of Indian agriculture is in transition from food security and the social protection of farmers toward agricultural supply chains that respond to market (particularly international market) signals. This massive shift presents a set of challenges that, among Indian states, Gujarat is perhaps most advanced in recognizing and addressing. As one example, incomes in rural areas increasingly are tied to local industries, specifically farming and food processing. While successful farmers benefit financially from the new orientation to markets, new mechanisms must be found to transfer welfare to social groups that are vulnerable to market orientation. Moreover, farmers must learn to use the market mechanism to their advantage and government must provide an infrastructure and environment that makes this possible.

As another example, for a generation, institutions such as APMCs and cooperatives have functioned as the protectors of farmers against the price-related actions of traders and processors, and have removed the influence of international markets. Gujarat’s network of cooperative banks is deeply involved in financial flows among these institutions. Now, new procedures and functions are needed to align product quality and quantity with the specific demands of the new agricultural economy. These demands, in turn, are governed largely by international trade and trading behavior (competitive and otherwise). Significant challenges face the APMCs and cooperatives in transforming their functions, consolidating their activities along regional and/or commodity lines, and linking their revenue and cost streams to market incentives faced by farmers.

These major shifts are taking place as Gujarat implements large-scale projects in irrigation, water harvesting and storage, and improved land management. These projects will boost food production in a state that is already self-sufficient in food and has a relatively slow-growing population that is predominantly rural. GOG recognizes that the food industry must be able to store and process seasonal surpluses, export annual surpluses, and compete with products imported from abroad or from other states. All of these functions of the agro-economy place demands on farmers, traders, processors, government, and other institutions. These demands include standardization of product quality descriptions, handling, packaging, and selling methods. These demands extend to the necessity for processors to provide specialized inputs on a contract basis; and for the control of production, transport, processing, and packaging by processors or intermediaries. In some key commodity areas, such controlling interests may be foreign companies.

Fundamentally, it is no longer possible to shelter farmers from market forces . In response, GOG is working on what amounts to a new legal basis for farming and the food industry. New legislation is to increase competition in service provision by permitting selling mechanisms other than APMCs and by liberalizing input markets. Similarly, cooperatives are to function as farmer-controlled agribusiness units rather than as implementers of rural and social policy that supplied produce to APMCs.

Traditionally, in Gujarat, APMCs have been monopsonies (single buyers) and monopolies (single sellers) across a range of commodities, with statutory governance including, farmers, traders, and local government. However, their services are not necessarily in line with the demands of Gujarat’s agricultural supply chains. Universally, APMCs offer auction on delivered lots of sale-by-inspection produce. This is a high-cost alternative to the sale-by-sample method that is enabled by product quality standards and market information. As Gujarat’s cropping pattern continues to shift and diversify within the defined APMC market areas, small quantities will be

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particularly expensive to sell. While APMCs remain the only players, competition among them will blur boundaries among markets and lead markets to specialize.

Unjha APMC spice market is one example. It has dispensed with other commodities and totally dominates spice markets in the state. Although moving slowly toward standardization, it offers services to international traders and serves the current needs of resident spice processors. Valsad APMC market has moved in another direction. While it specializes in fruits (specifically mango), it has moved up the value chain to provide wholesale and retail facilities and has relinquished control of commodities other than fruit. Both Unjha and Valsad are located on major transport routes, which are predisposed to specialized services for large-volume traders.

However, APMCs’ general lack of storage facilities and concentration on auction markets means that, despite off-season price premiums, seasonal supplies from farms dictate availability, and quality signals are lost because relevant market information is not released. Accordingly, Ahmedabad APMC (located in a large city with many restaurants and food shops) has transformed in another direction: toward wholesale services from specialized facilities. It features a lower level of participation by farmers than many APMCs and is connected to cold storage networks to offset seasonal shortages. A low proportion of transactions occur through open-outcry auction, because other mechanisms have replaced it.

Scale and scope of operation are other avenues of change at APMCs. Originally a foodgrain trading center, Rajkot APMC has expanded into a very broad range of fruits, vegetables, and spices, while foodgrain production in Gujarat continues to decline. Rajkot APMC also continues to emphasize its service to farmers and local buyers, because they continue to dominate trade across an increasingly broad range of products. Buyers and sellers from further afield would require storage and preservation, and with them the regularity of high-volume trades to use it.

The Desai Cold Storage Company set out to offer such a storage facility to buyers and sellers of perishables in the Navsari area. However, the business developed in another direction entirely, once again based on the supply of a small number of standard quality, high-value products (in this case, one variety of mango). Based on the firm’s ability to handle large volumes and store surplus product through to the off season, an export business developed. The company has seen little success in procuring product directly from farmers or in implementing quality control throughout production, for example, via seed supply. Rather, it continues to purchase from traders or in APMC markets. Desai’s functions in grading, shaping, and cleaning product apparently add sufficient value to justify the persistent additional stages in the marketing chain, although these additions may not be sustainable in the long run.

The position of the McCain Company is a little different. It sells a highly processed product that relies on stringent production and handling standards for a highly specialized and highly demanding market. An example is French fries for fast food outlets. Like the Desai Company, and despite its long history of contract growing of potatoes in many countries, McCain has found this a difficult procurement mechanism to set up in Gujarat. After 5 years of awareness-building, promotion, and demonstration, McCain is now purchasing small quantities of potatoes in Gujarat, but has not yet been able to implement a supply contract. Clearly, despite imminent enabling legislation, contract farming is some way off in taking hold in Gujarat. Overcoming its exploitative image is a major promotional challenge for Gujarat’s emerging agribusiness sector. However, international giants such as McCain are better positioned to wait for change than are small cash-flow-oriented businesses such as Desai.

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Through change in the cooperative movement, farmers have opportunities to help themselves through group action that is commercially oriented. As in other countries, the commercial actions of Gujarat’s cooperatives take two different forms: toward a complete set of services to support farmers; or toward narrow specialization, often accompanied by vertical integration. The Sarbhan Cooperative in Bharuch district is an example of the first approach. It has a wide (and widening) set of activities, all designed to meet the needs of its members, who number fewer than 1,000. In summary, Sarbhan suffers from the problems imposed by scale. Limited use of processing and input supply capacity has raised costs while issues such as nonrepayment of loans have been magnified in importance by low membership and the concentration of credit risks. Attracting new members to a poorly performing enterprise has proven difficult, so Sarbhan has been forced to purchase cotton for processing in the open market, which has in turn depleted its operating capital. Insistence on performing social functions, such as running a fair price shop, further confuses members’ interpretation of the cooperative’s role.

Scale and specialization are notable features of cotton marketing in Gujarat, specifically in the form of the Gujarat State Cooperative Cotton Federation (GSCCF), which operates throughout Gujarat from offices in Ahmedabad. While GSCCF embraces most aspects of cotton production and marketing, it maintains specialization by (1) lack of involvement in any other commodity and (2) a clear definition of role and responsibility between layers and regional demarcations that characterize the cooperative movement among Gujarat’s cotton growers. One of its responsibilities is pricing, specifically the administration of a payment system that is implemented by lower-level organizations in association with cooperative banks. Price is based on costs of production.

This system extends even to villages in which no local cooperatives operate, reflecting the need for any agribusiness to use collection, processing, and processing capacity. Recent change in the regulation of cotton marketing has reduced the dominant position of GSCCF,and has improved the prospects for private traders, particularly in serving export markets. Obviously, traders are not in a position to provide the GSCCF’s range of services, but they are well-placed to identify and buy (at a price premium for farmers) high-quality cotton as demanded on transparent world markets.

Gujarat’s dairy industry is not so closely connected to international markets as its cotton counterpart, and milk’s perishability has made it less attractive to traders. The Gujarat Cooperative Milk Marketing Federation (GCMMF) is a vertically-integrated agribusiness built on a framework of small regional producer cooperatives. More akin to Northern European models of cooperation than to the conventional Indian ones, GCMMF has achieved considerable success in raising farm incomes through brand-oriented marketing. Price-quality schedules are rigidly applied across the entire milk catchment of over 2 million producers, many with very small herds. Quality has been achieved and maintained by relatively large investment in technology at the collection and processing stage; and support to breeding, feeding, and animal husbandry. Most commentators on the success of GCMMF note the significance of inspired leadership and the use of a replicable model of dairy development (“the Anand pattern”) backed up by logistic excellence. A future challenge for the leadership will be whether higher-cost areas for either production or collection can continue to be cross-subsidized by members in lower-cost areas.

North Gujarat’s frequent droughts aside, in recent years, Unjha APMC has demonstrated increasing product volumes and market revenues across a narrow range of high-value spices. The APMC has been profitable in every year since 1997 and is in a strong financial position. It appears to enjoy support from its client base of farmers and traders, and is well-placed to serve the needs of international traders for products in which Gujarat is a major world supplier.

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In contrast, Rajkot APMC has seen its traditional role (foodgrains and vegetables) decline and has focused on supplying the diverse needs of the local market. This local focus has enabled it to report profits in recent years and maintain support from farmer clients. Ahmedabad APMC has moved away from its farmer client base toward facilitating trader-wholesale transactions, and it also reports a substantial financial surplus. Valsad APMC has dropped much of its conventional business to become a service supplier to retail and wholesale traders. No estimate of Valsad APMC’s financial performance was available, nor of the extent to which it has maintained its service orientation toward farmers.

Conclusion

Alternative means of connecting farmers to the market apparently have been slow to develop in Gujarat. Although it set up as a service operation to counter farmers’ difficulties with seasonal surplus, Desai’s Cold Storage has converted to a trading operation with little interest shown by farmers and traders. Little success has been achieved in contract farming, either by Desai or by the far more experienced McCain Company.

Cooperation has played a significant part in Indian development, but clearly pressures are coming to bear on the structure and function of cooperatives as well as on their relationships to cooperative banks and APMCs. The various layers of cotton cooperative and the apex organization face options for the future that focus on their attitude to the international market. Quality orientation is an obvious requirement. However, independent traders are probably making better progress, because they are unencumbered by service and credit provision and complex payment mechanisms. An orientation toward international trade would expose farmers to world cotton price fluctuations and the politics of market access under current and future trade agreements. A move toward processing would compete with existing buyers of Gujarat’s production, thus securing a better price for farmers.

The considerable success of Gujarat’s dairy cooperative movement has not been characterized by the familiar aspects of cooperation––diverse activities, pooling of product, poor leadership––that have led to difficulties in Gujarat and elsewhere. The clear focus on product quality and its harvest of high-value brands has shown tangible rewards to farmers during the period of rapid change. The Sarbhan Cooperative has featured an inward-looking development on a small scale, with little reference to the demands of the new marketplace. It has accumulated substantial losses in recent years and lacks the working capital to boost product and service volumes (and membership) to a sustainable level.

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APPENDIX 5. AGRO-FOOD SYSTEMS: POLICY AND OPERATIONAL SPHERES

Table A5.1 Agro-food systems: Policy and Action Matrix Illustrative agrofood system entry points

Domestic staple food markets Domestic higher value Traditional exportPossible actions food markets agro-industry Nontraditional agro-exports

Reform of ~ Warehousing laws ~ Franchising laws ~ Warehousing laws ~ Grades/standards and qualityRules/Laws/ certificationRegulations/ ~ Grades/standards Cooperative laws Grades/standardsPolicies Urban and peri-urban zoning Food safety regulations and quality Organic production

laws~ Grades/standards/packaging ~

certification

Certification laws

Strategic reserve policies laws Competition and Phytosanitary/sanitary

and ruleslicensing policies ~ Landing rights/other transport

~ Laws of association

Laws of association policies Laws of association Foreign investment ~ Foreign investment ~ Laws of association Foreign investment laws/policies laws/policies

laws/policies ~ Foreign investment

Phytosanitary/sanitary laws Trade licensingpolicies and

~ Trade policies and laws/policies Transport policies licensing

Trade policies and licensing ~ Trade policies and licensing Policies/taxes ~ Intellectual property rights

Transport policies regarding value-added regime

Transport policies

Intellectual propertyrights regime

Private Sector ~ Market intelligence training ~ Supply chain mgt. training ~ Market intelligence ~ Training in HACCP/QCCapacity building Supply chain management Management systems for training systems

training contract farming ~ Supply chain ~ Supply chain management

Strengthening farmer and Franchising management management training

commodity association training ~ Small business incubators~ Strengthen farmer/industry ~ Strengthening

association. ~ Traceability/identityfarmer -and preservation

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Illustrative agrofood system entry pointsPossible actions Domestic staple food markets Domestic higher value food

marketsTraditional export

agro-industryNontraditional agro-exports

farmer andcommodityassociations

HACCP and otherquality controlsystems

training

~ Management systems-contract farming

~ Strengthen farmer/commodityassociations

Infrastructure ~ Sale/lease of public storagefacilities

Marketplacerehab/management

Rural roadsrehab/maintenance

~ Marketplace rehab/managementWholesale markets

~ Rural roads rehab/maintenance

Port rehab andmanagement

~ Dry portdevelopment

~ Port and airport freightstorage and handling facilitiesand management

~ Dry port development

Finance ~ Warehouse receiptguaran tees

~ Direct investment (IFC)

Medium-term investmentcredit

~ Warehouse receiptguarantees

~ Direct investment(IFC)

~ Venture capital funds

. Medium-term investmentfunds

Contract farmingcredit/guarantees

Direct investment (IFC)

Other ~ Analysis and training onappropriate technologies formicro and small-scaleprocessing

~ Financing private extensionservices

~ Marketing extensionfor farmers

~ Financing privateextension services

Post-harvest/applied productresearch

Joint venture match-makingservices

Financing private extensionservices

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Other domains for agribusiness support actionPossible actions Agricultural input supply systems Community and sub-

regional developmentRegional trade and

integrationPrivatization of state-owned

enterprisesReform ofrules/laws/regulations/

~ Intellectual property rights regimeSeed import laws/phytos. regulations

~ Seed testing/approval/certificat. laws

Agrochemical registration laws

Environmental regulations for agro-chemical production/storage/distribution.

Veterinary products laws/regulations

Transport policies

Fertilizer trade and marketing policies

Foreign investment laws/policies

~ Zoning laws insecondary towns

~ Trade policiespolicies

Foreign investment

Foreign investment laws/policiesCompetition and

Laws of association Harmonization oftrade policies,transport policies,food safety laws,agro-input laws andregulations.

Transport policies

Public sector capacity-Building

~ Inspection/customs facilitat. servicesSeed inspection services

Facility safety inspection services

Biosafety management processes

Intellectual property rightsawareness/management

~ Market informationsystems

Inspection,phytosanitary, andcustoms facilitationservices

~ Trade promotion andinformation services

Industry monitoring and statistics

Private sector capacity-Building

~ Community-based seed multiplication

Training for input stockists andenterprise representatives

Seed enterprise development training

Biosafety management processes

Intellectual property rights awareness

Farmer/commodityassociationsManagementsystems for contractfarming

Small businessincubators

~ Regionalindustry/commodityassociations

~ Farmer/industry/commod-ity associations

~ Supply chainmanagement training

~ Quality control training

~ Management systems forcontract farming

Infrastructure Port rehabilitation and management

Rural roads and bridge rehabilitationand maintenance

Rural roads andbridgesrehabilitation andmaintenance

Rail and roadcorridors

Port

Road and marketinginfrastructurerehab/maintenance/financingcing

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Other domains for agribusiness support actionPossible actions Agricultural input supply systems Community and sub-

regional developmentRegional trade andintegration

Privatization of state-ownedenterprises

rehab/management

Marketplacerehab/managementRural and enterprisezone electrification

~

~

Regionaltelecommunicationsservices

Dry port development

Finance ~Working capital for input enterprisesand stockists through regular bankingand rural finance channels

~ Micro and small business credit and

savings facilities

~

Regional tradefinancing andclearinghousemechanisms

Regional venturecapital funds

~ Seasonal and medium-term credit

Other ~Public-private partnerships in appliedagro-biotechnology R&D

~ Analysis andtraining onappropriatetechnologies formicro and small-scale agro-process ing

~

~

Regional centers ofexcellence inagribusiness analysisand/or training.

Regionaltrade/investment foraand joint venturematch-making

~ Marketing extensionservices

Source: World Bank report, “Promoting agro-enterprise and agro-food systems development in developing and transition countries,” 2003b.

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APPENDIX 6. ADDENDUM ON CONTRACT FARMING AGREEMENT AND ITS MODEL SPECIFICATIONS

9th Sept 2003 - Contract Farming Agreement and Model Specifications

Contract farming is an agreement among processing and/or marketing firms, market intermediaries, and farmers for the production and support of agricultural products under forward agreement, frequently at predetermined prices. The arrangement invariably involves the purchaser in providing a degree of production support to farmers through, for example, the supply of inputs and the provision of technical advise. The basis of such arrangements is a commitment by the farmer to provide a specific commodity in quantities and quality standards determined by the purchaser and a commitment by the registered market intermediaries to support the farmer’s production and to purchase the commodity. Contract farming is thus a means of allocating the distribution risk between processor and grower. The latter assumes risk associated with production while the former assumes the risks of marketing the final produce.

For some critics, "contract farming" is just another of the ills associated with economic globalization. On one hand are a mass of unorganized small-scale farmers with little bargaining power and few of the resources needed to raise productivity and compete commercially. On the other are powerful agribusiness entrepreneurs, offering production and supply contracts, which––in exchange for inputs and technical advice––enable them to exploit cheap labor and transfer most risks to the primary producers. Contract farming, the critics say, essentially is an agreement between unequal parties and more likely to generate debt than development for the small farmer. A 2005 FAO guide, Contract Farming: Partnerships for Growth, argues that well-managed contract farming has proven effective in linking the small farm sector to sources of extension advice, mechanization, seeds, fertilizer, and credit, and to guaranteed and profitable markets for produce. The guide states, "It is an approach that can contribute to both increased income for farmers and higher profitability for sponsors."20 When efficiently organized and managed, contract farming reduces risk and uncertainty for both parties and provides the producer the opportunity to add value to her/his production.

Merits of Contract Farming

The prime advantage for farmers is that the sponsor normally will undertake to purchase all produce grown, within specified quality and quantity parameters, often at predetermined prices. Contracts can provide farmers with access to a wide range of managerial, technical, and extension services that otherwise might be unobtainable. Small-scale farmers frequently are reluctant to adopt new technologies because of possible risks and costs. In contract farming, private agribusiness usually will offer improved methods and technologies because it has a direct economic interest in improving farmers' production to meet its needs. In many instances, the larger companies provide their own extension support to contracting farmers to ensure production is according to specification. Skills the farmer learns through contract farming may include record-keeping, improved methods of applying chemicals and fertilizers, and knowledge of the importance of quality and export market demands. The returns that farmers receive for their crops on the open market depend on prevailing prices and their ability to negotiate with buyers. However, contract farming often can, to a certain extent, overcome this price uncertainty. Frequently, sponsors indicate in advance the prices to be paid, and these are specified in the agreement.

20 FAO 2005.

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Contract farming arrangements can add value by (1) facilitating the emergence of agroprocessing plants that otherwise would not exist if supplies were not forthcoming in an organized manner; (2) enabling the export of produce from small farmers who otherwise would not be able to access these demanding markets; (3) encouraging higher quality production and better handling and sorting, thus increasing the value of small-holder production; and (4) enabling producers and processors to achieve economies of scale, thereby lowering costs and becoming more competitive.

Risk Factors in Contract Farming

Farmers experience the uncertainty of growing new, unfamiliar crops and producing for markets that might not always live up to their expectations––or to their sponsors' forecasts. Inefficient management can lead to overproduction, and in some cases, sponsors "may be tempted to manipulate quality standards to reduce purchases.” One of the biggest risks for farmers is debt, which can be caused by production problems, poor technical advice, significant changes in market conditions, or a company's failure to honor contracts. On the sponsor's side, risks can arise when dealing with farmers who, in turn, may have negotiated use of the land with traditional owners. Before entering into contracts, the sponsor needs to ensure that access to land is secured, at least for the term of the agreement. The more serious problem occurs when farmers break the contract and sell their produce in alternative markets, sometimes encouraged by rival sponsors or ruling higher prices in open market.

Managing Arrangements

The contract farming system must be seen as a partnership between agribusiness and farmers. Good service delivery by the sponsor is a precondition for successful contract farming. Thus, sponsors must take responsibility to coordinate production and marketing activities well. Managers must ensure the transparency of all interactions with farmers, and the former must ensure that farmers understand both their own obligations and those of the sponsor. Farmer default in contract farming arrangements can be reduced by following interventions:

Organizing farmers’ associations. Peer pressure within the group screens out potential defaulters and can reduce the risk of default. In addition, economies of scale can be realized in the delivery of services, thereby reducing costs. Farmers also will benefit by having a stronger hand in negotiations with companies.

Good communication and close monitoring of farmers. Good communications help to foster good company-farmer relations and trust, reducing strategic default. When ensuring quality and traceability of produce, and proving due diligence throughout the chain, are necessary, group members can monitor one another.

Range and quality of services offered. The better and broader the range of services offered, the closer the relationship between farmer and the business, and more the farmer stands to lose by breaking the relationship.

Types of Contract Farming

Contract farming agreements can be classified in three, not mutually exclusive categories: (1) market-specification, (2) resource providing, and (3) production management. Market specifications contracts are preharvest agreements that bind the firm and grower to a particular set

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of conditions governing the sale of the crop. These conditions often specify price, quality, and timing. Resource-providing contracts oblige the processor to supply crop inputs, extension, or credit in exchange for a marketing agreement. Production management contracts bind the farmer to follow a particular production method or input regime, usually in exchange for a marketing agreement or resource provision. In various combinations, these contract forms permit firms to influence the production technology and respond to missing markets without having to operate their own plantations. in their book, Contract Farming: Partnership for Growth" (FAO 2001), Eaton and Shepherd present five organizational models for contract farming:

1. Centralized model. The sponsor purchases crops from farmers for processing and markets the product. The sponsor distributes quotas at the beginning of each growing season and tightly controls quality. This model is generally associated with tobacco, cotton, sugar cane, bananas, coffee, tea, cocoa, and rubber crops.

2. Nucleus estate model. The sponsor owns and manages a plantation, usually close to a processing plant, and introduces technology and management techniques to farmers (sometimes called "satellite" growers). This model is used primarily for tree crops but also has been applied to dairy production.

3. Multipartite model. Usually, statutory bodies and private companies participate jointly with farmers. This model is common in China, where government departments, township committees, and foreign companies have entered into contracts with villages and individual farmers.

4. Informal or individual developed model. Individual entrepreneurs or small companies make simple, informal production contracts with farmers on a seasonal basis, particularly for fresh vegetables and tropical fruits. Supermarkets frequently purchase fresh produce through individual developers.

5. Intermediary model. Formal subcontracting of crop production to intermediaries is common in Southeast Asia. In Thailand, large food processing companies purchase crops from individual "collectors" or farmer committees, who make their own informal arrangements with farmers.

Specifications of Contract Farming Agreements

The content of a contract farming agreement depends on multiple factors such as the nature of the product; primary processing required, if any; and the market demands regarding supply reliability. Quality incentives, payment arrangements, and the level of control the sponsor wants to have over the production process also influence the nature of the agreement and the extent to which the parties have capital tied up in the contract. A contract covering, for example, oil palm, tea, or sugar, in which significant long-term investment is required from all parties will differ from a contract covering annual crops such as fruits and vegetables for local supermarkets. The latter may not be the same as one covering such produce destined for overseas markets, which may have more rigid controls on pesticide use and product quality as well as higher presentation and packaging standards. Although corporate bodies, government agencies, and individual developers necessarily are the catalysts of the contract, farmers and their representatives must be given the opportunity to contribute to drafting the agreement and to assist in wording the specifications in terms that farmers can understand. Management also must ensure that agreements are fully understood by all farmers. The terms and conditions entered into must be

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written down for independent examination and copies given to the farmers’ representatives. Copies also should be available to relevant government agencies.

The legal framework of the agreement should comply with the minimum legal requirements of the Indian Contract Act. In addition, local practice must be taken into account and arrangements for arbitration addressed. Agreements, in the form of a written contract, usually cover the responsibilities and obligations of each party, the manner in which the agreement can be enforced, and the remedies to be taken if the contract breaks down. In most cases, agreements are made between the sponsor and the farmer. However, in the case of multipartite arrangements, the contracts can be between the sponsor and farmer associations or cooperatives.

Specifications: Within the broad categories of market-specification, resource-providing, and produce-management contracts, firms must specify terms that include:

1. Marketing: How much of the product will be purchased, when, and at what price for what quality? Must the grower deliver all of his/her product, a share, or set amount?

2. Inputs and technical assistance: How will inputs and technical assistance be delivered, how much, and at what price and quantity?

3. Credit: Will the grower receive credit in cash or kind? How much will s/he receive, and at what interest rate? What will be the collateral?

4. Production management: Which technological procedures must the grower follow? How will the grower be monitored?

5. Delivery and grading: Who will transport the harvest to the processor, and how will quality be graded?

6. Duration of the contract7. Way in which the price is to be calculated using

a) Prices fixed at the beginning of each seasonb) Flexible prices based on world or local market pricesc) Spot-market pricesd) Consignment prices, when payment to the farmer is not known until the raw or

processed product has been solde) Split pricing, when the farmer receives an agreed base price together with a final

price when the sponsor has sold the product

8. Procedures for paying farmers and reclaiming credit advances9. Arrangements covering insurance10. Registration of Contract Farming Agreement with the notified government agency and

dispute resolution mechanism.-----------------------------------------------

CONTENTS OF A MODEL CONTRACT FARMING AGREEMENT

Mandatory Provisions

I. Parties to the Agreement

A. Contract Farming Sponsor. It may be a sole proprietor, a company registered under the Companies Act 1956, a partnership firm registered under the Partnership firm 1932, a Government Agency, or a Cooperative Society registered under the State Cooperative

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Societies Act; and shall include its administrators, successors, representative, and assignee.

B. Contract Farming Producer/s includes an agriculturist, farmers’ associations, self-help groups, authorized tenants, and farmers cooperatives societies registered under the State Cooperative Act. The expression shall include the successor, heirs, executors, and representatives of the party contracting the agreement.

II. Description of Farm Land Covered by Contract Farming Agreement

A. Acreage, location. Provides land particulars as recorded with the revenue authority of the concerned area.

B. Facilities available. Stipulates availability of irrigation, its type, and other specific features of production.

C. Specifies nature, tenure, rights, etc. of the Contract Farming Producer/s on the land.

III. Duration of Agreement

A. SeasonalB. AnnualC. Long-term (3–5 years)

Explanatory note: The duration of an agreement depends on the nature of the crop. Contracts for short-term crops such as table vegetables normally are issued and renegotiated on a seasonal basis, whereas crops such as tea, coffee, sugar cane, and cocoa require long-term contracts that can be amended periodically.

IV. Description of Farm Produce

Clearly indicates name of the agricultural produce that the buyer wants the producer to grow on the contracted land identified in clause II, and specific variety, or any other characteristic.

V. Quantity Specification of the Farm Produce

Indicates the quantity of produce for which the agreement is entered into. Quantity could be based on one of the following:

A. VolumeB. AreaC. Entire cropD. Fixed quantity.

Explanatory note: Quotas are employed in the majority of contracts to use processing, storage, and marketing capacities efficiently; guarantee markets for all farmers; ensure quality control; and monitor farmers’ performance. The allocation and distribution of production quotas will vary according to crop and circumstances. If no alternative market for the crop exists and farmers have made significant long-term investments in production (tree crops) or processing facilities (such as tobacco curing barns), the sponsor must commit to purchase the entire crop covered by the quota. Of course, this obligation is subject to the crop’s meeting the agreed quality specifications.

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The most common and practical method is to allocate quotas on an area basis, with sponsor calculating the total area to be cultivated in relation to the project’s processing capacity and their knowledge of each farmer’s expected yield. If alternative markets for crops under contract exist, quite often farmers are tempted to sell outside the contract. Quotas deliberately set at levels lower than the farmers’ actual production capacity may enable them to take advantage of high open market prices when they occur. Such an arrangement is likely to apply particularly when the pricing arrangement is for a fixed rather than a market-based price.

VI. Quality Specifications of Contracted Commodity

A. Quality specifications in terms of size, weight, degree of maturity, packaging, intrinsic quality such as juice content, safety requirements if any

B. In case of dispute, agency to decide qualityC. Consequences of nonconformity with quality specifications:

1. Rejection2. Reduction in price3. Other

Explanatory note: Contracts should contain quality specifications of produce covered by the agreement and indicate whether produce that does not conform to the agreed criteria can be rejected. It is important that farmers fully understand the reasons for standards. Contract sponsor should demonstrate the grades to farmers at the beginning of each season and explain the rationale for the specifications. Wherever possible, the number of grades should be kept to a minimum, and each grade’s specifications should be presented in clear terms. Often, however, there may be a need for only one standard, with all produce delivered being required to fall within a particular range.

VII. Crop Delivery Arrangements

A. At farm gateB. At processing unitC. At specified collection centersD. Transportation arrangements

Explanatory note: Arrangements for collection of products or delivery by the farmers vary widely. Some ventures stipulate that farmers should deliver their harvests to processing plants at given dates; others may include the use of the sponsor’s transport to collect harvested crops at centrally located buying points. For contracted fresh vegetables, a normal practice is farm gate collection. When the sponsor’s transport is used, there is normally no cost to the farmer. In the sugar industry, farmers deliver their harvested cane to a central loading point from which it is then transported to the crushing mill, weighed, and purchased. Many formal contracts have clauses that outline the obligations of both the farmer and the sponsor regarding delivery and collection, respectively. As a routine practice, sponsors and their extension staff should confirm delivery or collection arrangements at the beginning of each season and reconfirm these prior to harvest.

VIII. Pricing Arrangements

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A. Fixation of priceB. Payment and loan/credit recovery procedureC. Advance paymentD. Credit in cash/kind (input)E. Recovery of bank loanF. Payment on deliveryG. Final paymentH. Arrangement with banks

Explanatory note: Pricing and payment arrangements are the most discussed and challenging components of all farming contracts. The choice of which crop pricing structure to use is influenced by whether the crop is intended for the local or export market, the seasonal nature of production, and the degree of competition in the marketing system. The application of transparent pricing formulas is crucial. Drafting a clear pricing structure and organizing a practical payment method encourage confidence and goodwill.

Prices offered to farmers can be calculated in several ways. Fixed prices are the most common method. The usual practice is to offer farmers set prices at the beginning of each season. In almost all cases, fixed prices are related to grade specifications. Flexible price structures apply to prices calculated on a formula tied to changing global and local markets . Flexible pricing is common in, for example, the sugar industry, in which the final price to the farmer is known only after the processed sugar has been sold. Under the split pricing system, an agreed base price is paid at the time of purchase or at the end of the harvesting season. The final price is calculated once the sponsor has on-sold the commodity, and depends on the prevailing market price. If the crop is sold in its fresh form, the second price usually can be calculated within a month. When the product is processed, getting the second payment may take much longer.

IX. Registration and Dispute Resolution Mechanism

In the majority of cases, a sponsor is highly unlikely to take legal action against a smallholder for breach of contract. The costs involved are inclined to far exceed the amount claimed, and legal action threatens the relationship between the sponsor and all farmers, not only those against whom action is being taken. Action by a farmer against a sponsor is similarly improbable. As neither side is likely to seek a legal remedy through the courts, it is important that the agreement identifies quick and easy ways to resolve disputes. A body representing the sponsor, farmers, and other interested parties, such as the market committee, might be the most appropriate entity to act as an arbitrator. For this purpose, appropriate legal provision must be made in the law governing the marketing of agricultural produce (APMC Act) to provide for, among other things, compulsory registration of all contract farming agreements and the dispute-settlement procedure arising therefrom.

X. Indemnity in Favor of Producer

To protect a producer’s land and properties, an indemnity must be provided to him/her. In any case, the sponsor shall have no right whatsoever over the title or possession of the producer’s land.

Optional Provisions

XI. Cultivation/Input Specifications to Be followed by the Producer

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A. Land preparationB. NurseryC. FertilizationD. Pest managementE. Irrigation F. Harvesting

Explanatory note: When the sponsors provide seeds, fertilizers and agrochemicals, they have the right to expect that these inputs will be used in the correct quantities. Sponsors also have the right to expect that farmers will follow the recommended cultivation practices. Of particular concern is the possibility that farmers may apply unauthorized or illegal agrochemicals, which can result in toxic residues that have dramatic repercussions for market sales. Thus, it is essential to clearly spell out the project’s input policies so that all contracted farmers adhere strictly to them. Sponsors and their extension staff must make every effort to explain to farmers why the specifications and input recommendations must be followed.

XII. Insurance Arrangements

A. Price fluctuationsB. Pest epidemicC. Natural dalamitiesD. “Acts of God”E. Destruction of assetsF. Loan defaultG. Production lossH. Buyer’s insolvency

Explanatory note: Agricultural investments always involve risk. The five most likely reasons for investment failure are poor crop management, climatic calamities, pest epidemics, market collapse, and price fluctuations. The standard agribusiness approach to indemnify against quantity shortfalls is crop insurance. As the farming involved in a contract arrangement advances technologically, the range of risks to which it is subject generally becomes more limited. In many cases, some of the remaining risks can be managed with the assistance of insurance. When prices are fixed, there is no apparent risk to farmers with regard to payment for their crops. If a market collapses, the sponsor should automatically shoulder the loss. However, if the sponsor becomes bankrupt, farmers could be permanently affected. In contracts based on a flexible spot price, the stability of farmers’ incomes is always at risk. In theory, the proposal of crop and property insurance for farmers in contract farming ventures is appealing. However, a qualified risk analysis must be made to determinate the economic advantages of insurance against the specific risks applicable to the particular crop. Some authorities classify the four main categories of crop insurance in order of "their comprehensiveness in terms of coverage of risks" as follows:

A. “Acts of God." This category encompasses natural disasters such as drought, floods, hail, storms, cyclones, lightning, insect plagues, and disease epidemics that are beyond management control.

B. Destruction of specified assets. Tractors and farm implements can be insured against damage and theft. When growing tobacco under contract, farmers must insure their curing kilns. If a contract-farming venture is well established, management sometimes can organize the insurance of noncontractual farm buildings and housing as part of the sponsor’s total indemnity policies, reducing the cost of premiums to the grower.

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C. Loan default. In almost all ventures, sponsors assume the liability for credits advanced by management to the farmer for the contracted crop. It is therefore important that advances do not accumulate into debts that the farmer cannot repay. Sponsors normally allow farmers who cannot repay advances because of climatic or other mitigating factors to extend their loans to the following season. Sponsors, of course, do have the option to indemnify their farmer loans against default through their own insurance brokers.

D. Production and income loss. Insurance against both production and income loss is expensive and complex. Production loss may be caused by a combination of factors that are difficult to insure against. To determine who is culpable when a crop is destroyed by insects is an example. Was it an "Act of God," or the failure of the farmer to take measures to control pests at the appropriate time, or was it the fault of management for not training and instructing the farmers in pesticide techniques? Social risks, such as theft and animal damage, also could cause crop loss.

XIII. Support Services to Be Provided by Sponsor:

As part of the agreement, the sponsor of a large volume of produce may provide one or more of the following services:

A. Production coordination, which includes identifying suitable production areas and forming farmer groups

B. Provision of extension advice on new cultivation/harvesting practices, appropriate use of chemicals, and efficient farm management

C. Technology transfer leading to higher yield and/or improved qualityD. Cropping schedulesE. Training and awareness programs.

XIV. Farmer-Management Forum

A. Organization of farmers’ associationsB. Interacting with associations

Explanatory note: Intermediary bodies that link management/sponsor and farmers to negotiate and interact are necessary for all contracts. By creating farmer-management fora, sponsors can negotiate contracts with farmers either directly or through their representatives. The representatives should meet with management/sponsor periodically, but at least three times in a season. The first meeting should be at the beginning of the season to ratify the pricing structure and the season’s crop schedules. A second meeting is advisable immediately before harvesting to discuss the crop progress and to confirm buying procedures. A final meeting to review performance is advised at the end of harvest. This meeting may coincide with the final payment to farmers. The farmer’s management fora include Farmers Associations, Farmers Cooperatives, Farmers Groups, or any organizations of farmers by whatever name (to be named in the agreement).

XV. Monitoring Quality and Yields

Each contract farming agreement must incorporate a quality control and monitoring system suitable for its particular operation. The sponsor must prioritize monitoring procedures and decide how often they should be carried out, in what locations, and who should be inspected and at what locations. Checking product quality can take place before, during, and immediately after

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harvesting as well as at the time that farmers grade their own production and when the produce reaches the company’s processing or packaging facility.  Model Agreement for Contract Farming

(All clauses of the agreement are subject to the respective explanatory notes given under "contents of a model contract farming agreement.")

THIS AGREEMENT is made and entered into at ___________________ on the ______ day of ____________, 20XX between ________________ age ________ residing at _______________________________________, herein after called the party of the First part (which expression shall unless repugnant to the context or meaning thereof mean and include his heirs, executors, administrators and assigns) of the one part, and M/s._________________________ a Pvt./Public Limited Co. incorporated under the provisions of Companies Act-1956 and having its registered office at ___________________ herein after called the party of the Second part (which expression shall unless repugnant to the context or meaning thereof mean and include its successors and assigns) of the other part.

WHEREAS the party of the First part is the owner/cultivator of the agricultural land bearing the following particulars.

Village Gut no. Area (ha) Tehsil and district State

         

AND WHEREAS, the party of the Second part is trading in agricultural produce and also providing technical know-how in respect of land preparation, nursery, fertilization, pest management, irrigation, harvesting, and alike things.

AND WHEREAS the party of the Second part is interested in the items of the agricultural produce more particularly mentioned in Schedule-I hereto annexed and at the request of the party of the Second part, party of the First part has agreed to cultivate and produce the items of agricultural produce mentioned in the schedule-I hereto annexed.

AND WHEREAS the parties hereto have agreed to record in writing the terms and conditions in the manner hereinafter appearing.

NOW, THESE PRESENCE WITNESSETH AND IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES AS FOLLOWS :

Clause 1:The party of the First part agrees to cultivate and produce and deliver to the party of the Second part and the party of the Second part agrees to buy from the party of the First part the items of the agricultural produce. Particulars of the items, quality, quantity, and price of the items are more particularly mentioned in the schedule-I hereto annexed.

Clause 2:The agricultural produce particulars that are mentioned in the schedule-I hereto will be supplied by the party of the First part to the party of the Second part within the period of _________ months/years from the date hereof.

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ORIt is expressly agreed between the parties hereto that this agreement is for agricultural produce particulars that are described in schedule-I hereto and for a period of _____ months/years; and after the expiration of said period, this agreement will automatically come to an end.

Clause 3:The party of the First part agrees to cultivate, produce, and supply the quantity mentioned in the Schedule-I hereto annexed to the party of the Second part.

Clause 4:The party of the First part agrees to supply the quantity contracted according to the quality specifications stipulated in Schedule-I. If the agricultural produce does not meet the agreed quality standards, the party of the Second part will be entitled to refuse to take delivery of the agricultural produce only on this count. Then

A. The party of the First part shall be free to sell the produce to the party of the Second part at a mutually renegotiated price.

ORB. In open market (to bulk buyer, viz. exporter/processor/manufacturer), and if s/he gets a

price less than the price contracted, s/he will repay to the party of the Second part proportionately less for his/her investment.

ORC. In the market yard, and if the price obtained by him is less than contracted price, then

s/he will repay proportionately less to the party of the Second part for his/her investment.

In the event that the party of the Second part refuses/fails to take delivery of the contracted produce for his/her own reasons, then the party of the First part will be free to sell the produce in the open market. If the price received is lower than the contracted price, the difference will be on account of the party of the Second part so the party of the Second part shall pay the said difference to the party of the First part within a period of ___ days from the latter’s asserting the said difference.

Clause 5:The party of the First part agrees to adopt instructions/practices in respect of land preparation, nursery, fertilization, pest management, irrigation, harvesting, and any other, as suggested by the party of the Second part from time to time and cultivate and produce the items per the specifications in Schedule-I hereto.

Clause 6:It is expressly agreed by and between the parties hereto that buying will be as per the following terms, and buying slips will be issued immediately after the purchase.

Date Delivery point Cost of delivery

     

It is further agreed that it will be the responsibility of the party of the Second part to take possession of the contracted produce at the delivery point agreed after it is offered for delivery,

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and if s/he fails to take delivery within ______ (period), then the party of the First part will be free to sell the agriculture produce contracted:

A. In open market (to bulk buyer, viz. exporter/processor/manufacturer), and if s/he gets a price less than the price contracted, s/he will repay to the party of the Second part proportionately less for his/her investment.

B. In the market yard, and if the price obtained by him is less than contracted price, then s/he will repay proportionately less to the party of the Second part for his/her investment.

It is further agreed that the quality maintenance in transit will be the responsibility of the party of the Second part and that the party of the First part shall not be responsible or liable for the same.

Clause 7:The party of the Second part shall pay to the party of the First part the price/rate mentioned in Schedule-I when his crop has been harvested and delivered to the party of the Second part after deducting all outstanding advances given to the party of the First part by the party of the Second part. The following schedule shall be followed for the payment.

 Date Mode of payment Place of payment

     

Clause 8:

The parties hereto shall insure the contracted produce mentioned in Schedule-I hereto, for the period of __________ against the risk of losses due to acts of God, destruction of specified assets, loan default, production and income loss, and all acts or events beyond the control of the parties, such as very low production caused by the outbreak of a serious disease or epidemic; or by abnormal weather conditions, flood, drought, hailstorm, cyclone, earthquake, fire, or other catastrophe; war; acts of Government; or action existing on or after the effective date of this agreement that totally or partially prevent the fulfillment of the obligation of the farmer. Upon request, the party of the First part invoking such acts shall provide to the other party confirmation of the facts. Such evidence shall consist of a statement or certificate from the appropriate Governmental Department. If such a statement or certificate cannot reasonably be obtained, the party of the First part claiming such acts may as a substitute thereof make a notarized statement describing in detail the facts claimed and the reasons why such a certificate or statement confirming the existence of such facts could not be obtained. Alternatively, subject to mutual agreement between the two parties, the party of the First part may fill his quota of the produce through other sources, and the loss suffered by him thereby due to price difference shall be shared equally between the parties, after taking into account the amount recovered from the insurance company. The insurance premium shall be shared equally by both parties.

Clause 9:The party of the Second part hereby agrees to provide following services to the party of the First part during the period of cultivation and post-harvest management, particulars of which services are:

A.

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B.C.D.

Clause 10:The party of the Second part, or its representatives, agrees to have regular interactions with the farmers forum set up/named by the party of the First part during the period of this contract.Clause 11:The party of the Second part, or its representatives, at their cost shall have the right to enter the premises/fields of the party of the First part from time to time to monitor farming practices adopted and the quality of the produce.Clause 12:The party of the Second part confirms that s/he has registered with the Registering Authority ________________ on ________ and shall pay the fees in accordance with the law prevailing in this regard to the Registered Authority, which has jurisdiction to regulate the marketing of agriculture produce that is cultivated on the land described ____________.OR The party of the Second part has registered on _______ with a single point registration Authority, namely, _______________, prescribed by the State in this regard. The fees levied by the respective Registering Authority shall be borne by the party of the Second part exclusively and will not be deducted in any manner whatsoever from the amounts paid to the party of the First part.Clause 13:The party of the Second part will have no rights whatsoever as to the Title, Ownership, or Possession of the land/property of the party of the First part nor will it in any way alienate the party of the First part from the land property particularly, nor mortgage, lease, sublease, or transfer the land property of the First party in any way to any other person/institution during the period of this contract.Clause 14:The party of the Second part shall submit a true copy of this agreement signed by both parties within 15 days from the date of execution thereof with the ________ market committee/registering authority as required by the APMR Act/any other registering authority prescribed for the purpose.Clause 15:Dissolution or Termination/Cancellation of the Contract will be with consent of both parties. Such dissolution or termination/cancellation deed will be communicated to the registering authority within 15 days of such dissolution, or termination/cancellation.Clause 16:In the event of any dispute or difference arising between the parties hereto or as to the rights and obligations under this agreement or as to any claim, monetary or otherwise of one party against the other or as to the interpretation and effect of any terms and conditions of this agreement, such dispute or difference shall be referred to the arbitration authority declared by State Government in this regard.Clause 17 :In case of change of address of any party to this agreement, the change should be intimated to the other party and also to the Registering Authority.Clause 18:Each party hereto will act in good faith diligently and honestly with the other in the performance of its responsibilities under this agreement and will do nothing to jeopardize the interest of the other.

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In witness whereof the parties have signed this agreement on the ____ day, _______ month, and _________ year first above mentioned.

SIGNED, SEALED, AND DELIVERED by the)within-named “PARTY OF THE FIRST PART” )in the presence of ..........................)1.......................................................)2.......................................................) SIGNED, SEALED, AND DELIVERED by the )within-named “PARTY OF THE SECOND PART”)in the presence of ..........................)1.......................................................)2.......................................................) 

Schedule-IGrade, Specification, Quantity, and Price Chart

 Grade Specification Quantity Price/Rate

Grade 1 or A Size, color,aroma, etc.

   

Grade 2 or B  

      

 

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REFERENCES

Acharya S.S. & Jogi R.L. 2004, Farm Input Subsidies in Indian Agriculture, Institute of Development Studies, Jaipur, Working paper, 140

Acharya, S.S. 2003. “Crop Diversification in Indian Agriculture.” Agricultural Situation in India 60 (5):239–50.

Arya, A. 1993. Agricultural Marketing in Gujarat. Concept Publishing Co. Ltd. New Delhi 1993

Batra, S., and A. Ghosh. 1999. “Land Reforms in Gujarat (Distribution of Ceiling Surplus Land among the Rural Poor).” Council for Social Development GYAN SAGAR Publications. Delhi.

Center for Monitoring Indian Economy. Various issues.

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Papers in the Series:

Discussion Series No. 1: Managing Watershed Externalities in India

Discussion Series No. 2 Gujarat Agricultural Development for Growth and Poverty Reduction

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