Trade Policies and Incentives in Indian Agriculture : Methodology, Background Statistics, and Protection and Incentive Indicators, 1965-95

This paper is the first in a series of studies to provide background data and protection and incentive indicators for 13 major Indian crops, which have been estimated in connection with extensive research on Indian agricultural incentives. The general methodology of the studies is described in the first section of the paper. The second section of the paper focuses on sugarcane and sugar. It shows that between 1965 and 1994 real domestic prices of sugar and cane were quite stable in India, declining an average of 0.6 percent (sugar) and 0.3 percent (cane) a year. During the same 29 years the free market price of sugar fluctuated widely (expressed in India rupees) but in real terms increased about 1.3 percent a year. This contrasts in trends reflects the real devaluation of the rupee after 1986 but meant that by the early 1990s, at world sugar prices of US 13-15 cents a pound or higher, India's domestic prices were roughly equivalent to, or below, world reference prices. Because of the fluctuations in world free market prices, nominal protection of sugar and sugarcane production in India--as measured by differences between domestic prices and border reference prices--also fluctuated. Nominal protection was 1) high during low world prices in the 1960s and the mid-1980s; 2) negative when world prices were high in the mid-1970s and early 1980s; and 3) moderate to low by previous standards between 1989 and 1994. Incentives for cane production did not change much when allowance is made for the nominal protection and tradable inputs (principally fertilizers) or subsidies for the principal nontradable imports (canal irrigation, credit, and electricity for pumpsets). Incentives for cane production were somewhat higher in Uttar Pradesh than in Maharashtra and Tamil Nadu. Half of Indian cane production is used by artisanal producers of gur and small-scale de facto unregulated producers of khandsari sugar. Because of India's complex regulatory system--especially in the important sugar producing state, Uttar Pradesh--incentives are significantly higher for unregulated activities than for the modern sugar mill sector. Regulations subject sugar mills to controls that require them to 1) sell specific quantities of their sugar productions at low "levy" prices; 2) sell molasses production at a fraction (0.1 or less) of open market and border prices; and 3) pay minimum prices (for specific quantities of cane) at above free market prices, except in years of cane shortages