Report No. 25415-IN India Promoting Agricultural Growth in Maharashtra (In Two Volumes) Volume 1: Main Report June 30, 2003 Rural Development Unit South Asia Region Document of the World Bank Currency Rs/ US$ Currency Official Unified Market a 1990-91 17.95 1991-92 24.52 1992-93 26.41 30.65 1993-94 31.36 1994-95 31.40 1995-96 33.46 1996-97 35.50 1997-98 37.16 1998-99 42.06 1999-00 43.33 2000-01 45.69 2001-02 47.69 Note: The Indian fiscal year runs from April 1 through March 31. Source: IMF, International Finance Statistics (IFS), line "rf"; Reserve Bank of India. a A dual exchange rate system was created in March 1992, with a free market for about 60 percent of foreign exchange transactions. The exchange rate was reunified at the beginning of March 1993 at the free market rate. Unit Measurements bcm billion cubic meters km kilometer ha hectare li liter kg kilogram mt metric tons Vice President: Mieko Nishimizu Country Director: Michael F. Carter Sector Director: Constance Bernard Sector Manager: Gajanand Pathrnanathan Task Leader: Dina Umali-Deininger Promoting Agricultural Growth in Maharashtra Table of Contents VOLUME I Acronyms ...................................................... ni Acknowledgements ...................................................... viii Executive Summary ...................................................... ix I. Introduction ....................................................... 1 A. Overview ......................................................I B. Objectives of the Study .......................................................4 II. Overview of the Agricultural Economy ....................... ................................5 A. Agriculture and the Economy .......................................................5 Agricultural Performance.... 5 Agricultural Performance..................................................................5 Livestock Sector Performance ...................................................... 10 Agricultural Terms of Trade ...................................................... 10 B. Rural Non-Farm Sector ...................................................... 10 The Agro-Industrial Sector ...................................................... 10 Rural Informal Sector ...................................................... 12 Quality of Employment ...................................................... 12 Rural Education ...................................................... 13 Conclusion ...................................................... 14 III. Agricultural Sector: Key Policies and Their Impact ................................................ 15 A. Agriculture Policy 1997-98 ...................................................... 15 B. Water Resources ...................................................... 16 Water Resources Availability and Use ...................................................... 17 Multiple Water Agencies ...................................................... 18 Surface Irrigation ...................................................... 20 Threats to Sustainability of Irrigation Systems .................................................. 21 Threats to Groundwater and Drinking Water Supply ........................................ 22 Recent Water Sector Reform Measures ...................................................... 23 C. Watershed Development and Management ...................................................... 26 D. Horticulture Development ...................................................... 27 Horticulture Development Program Linked with Employment Guarantee Scheme ...................................................... 29 Synergies among other Government and Private Initiatives .............................. 30 Emerging Challenges ...................................................... 32 E. Cotton Sector Development ...................................................... 33 Cotton Production ...................................................... 33 Government Programs for Improving Cotton Production ................................. 33 Constraints to Raising Cotton Yields ...................................................... 35 GOI Clearance for Bt Cotton Use in India ...................................................... 35 V. Agricultural Market Interventions ...................................................... 37 A. Sugar Sector Development ...................................................... 37 Sugar Cooperative Mills ...................................................... 38 B. Dairy Processing Sector ...................................................... 41 C. Cotton Marketing ...................................................... 42 Cotton Pricing under the Monopoly Procurement Scheme ............................... 42 Inability to Control Cotton Movement ...................................................... 43 iv Poor Financial Performance ....................... 43 Recent Reforms ....................... 45 D. Regulated Wholesale Markets................. ..... 45 Recent Reform s : ...................... ....................... 47 E. Labor Regulations ...................... 47 F; Rural Infrastructure ...................... 48 Roads ...................... 48 Rural Water Supply and Sanitation ............................................... 48 Exp6rt Infrastructure ............................................... 49 V. Policy Options for Promoting Sustained Agricultural Growth ................................. 51 A. Creating the Enabling Environment for Sustained Agricultural Growth ................ 52 Integrating Agricultural Productivity Growth with Sustainable Resource Use ........................................................... 52 Fostering Competitive Agricultural Marketing Systems ................................... 55 B. Strengthening Rural Infrastructure and Services in Rural Areas ............................ 58 IV. References ............................................................ 62 Map of India-State of Maharashtra (IBRD 32269) ....................................................... 68 List of Tables Table 1.1: GSDP Growth Rate by Sector, 1990/91 to 1999/2000, Constant 1993/94 Prices ............................................................1 Table 1.2: Rural Poverty Rate (head count) by Persons in Households Engaged in Specified Sectors: 1987-88 and 1993-94, Maharashtra .................................4 Table 2.1: Percentage Share in Gross Cropped Area, Percentage Area Irrigated and Average Annual Growth Rates of Major Crops in Maharashtra, 1990/91 to 1999/2000 ........................................................... 6 Table 2.2: Selected Indicators for Agriculture in Maharashtra ...........................................7 Table 2.3: Gross Value of Livestock Products, 1993/94 to 1999/2000 ..............................9 Table 2.4: Terms of Trade for Agriculture ........................................................... 10 Table 2.5:' Non-Farm Income Shares in Rural Maharashtra, 1993/94 .............10 Table 2.6: Gross State Domestic Product of Registered and Unregistered Agriculture-based Manufacturing Firms, 1993/94 to 1998/99, Rs billion, 1993/94 rupees ........................................................... 11 Table 2.7: Employment Growth in Agriculture-based Industries: Maharashtra and All India ....1;1:.:.......... . 11 Table 2.8: Number of Registered Agro-Industrial Firms and Employees, 1995/96 to 1997/98 ... 11 Table 2.9: Percent Distribution of Factories by Size of Employment in Selected Industry I Groups in Maharashtra 1998/99 ............................................. I 1 Table 2.10: Percent Distribution of Factories by Size of Fixed Capital in Selected Industry Groups in Maharashtra 1998-99 .12 Table 2.11: Informal Sector in Rural Areas: Maharashtra and All India, 1999-2000 ........... 12 Table 2.12: Proportion of Rural Enterprises by Problems Faced by Them, Percent. 13 Table 2.13: Distribution of Workers by Category of Employment (%): Maharashtra and All India, 1999-00 ............... : : 13 Table 2.14: Literacy Rate and Enrollment Ratio in Primary School in Major States in India . : : 14 Table 3.1: Fiscal Subsidies to Major Agricultural Sub-sectors in Maharashtra, v 1997/98 to 2000/01, Rs Billion, constant 2000/01 rupees .............................. 15 Table 3.2: Water Availability and Actual Use in Maharashtra ........................................... 17 Table 3.3: Agencies Involved in Water Resource Development and Management in Maharashtra ................................................................ 19 Table 3.4: Surface Water Utilization, Mcum ................................................................ 21 Table 3.5: Water Charges for Selected Crops and States in India, as of September 2001 ................................................................. 23 Table 3.6: Irrigation Department Operations and Maintenance Expenditures and Water Charge Assessment and Collections, 1997/98 to 2001/02 ................... 24 Table 3.7: ICDP Year-wise and Component-wise Outlay as Percentage of the Total Outlay, 1996-97 to 1998-99 ................................................................ 34 Table 3.8: Technology Mission on Cotton: Main Components ......................................... 35 Table 4.1: Dairy Processing in Maharashtra, 2001 ............................................................. 41 Table 4.2: Income and Expenditures of Regulated Markets in Maharashtra 1999-2000 ................................................................ 46 Table 4.3: Infrastructure in Maharashtra as Compared to all India and Selected states ................................................................ 48 Table 4.4: Access to Sanitation and Drinking Water in Rural Areas by Households (HH), 1998 ................................................................ 50 Table 5.1: Summary of Policy Options ................................................................ 60 List Of Figures Figure 1.1 Sectoral Contribution to SGDP, 1981/82 to 1999/2000 .....................................I Figure 1.2. Sectoral Shares in Employment in Maharashtra, 1981 to 200, percent .............2 Figure 1.3 District Level Source of Employment (2001) and Rural Poverty Rates in 1993/94, headcount % ....................... ..........................................3 Figure 2.1 Cropping Pattern in Maharashtra, 1987/88 and 1999/00 ...................................5 Figure 2.2. Commodity Contribution to Agricultural GDP, 1999/2000 ............ .................6 Figure 2.3. Rainfall and Percentage of Irrigated Cropped Area over Total Cropped Area by District .................................................................8 Figure 2.4. District Rural Poverty Rates (1993/94) and Percentage of Gross Irrigation Area in Total Cropped Area 1999/2000 ................ .......................8 Figure 2.5. Production of Milk, Eggs, Poultry Meat and Other Meat, TE 1995/96 and 1999/2000 .................................................................9 Figure 2.6. District Literacy Rates (2001) and Rural Poverty Rates (headcount) 1993/94 in Maharashtra ................................................................ 14 Figure 3.1. Net Irrigated Area by Source of Irrigation, 1988/89 to 1997/98, 000 ha ................................................................ 18 Figure 3.2. Major and Medium Irrigation and Flood Control Capital Expenditures, 1985/86 to 1999/00, Rs billion (constant 1993/94 rupees) ............................. 20 Figure 3.3. Distribution of Agricultural Households and Area Irrigated Using Surface (Canal) and Groundwater (Using Electric Pumps) Irrigation, 1997/98 ................................................................ 20 Figure 3.4. Surface Irrigation in Maharashtra-A Vicious Cycle .......................................... 22 Figure 3.5. Horticulture Linked EGS-Person Days Generated and Fiscal Costs, Rs billion (constant 2000/01 rupees) ............................................................... 30 Figure 3.6. Cotton Production, Area and Yields, 1980/81 to 1999/00 ....................... 33 Figure 4.1. Gross Value of Output per Ha of Selected Crops, constant 1993/94 Prices ................................................................ 37 vi Figure 4.2. Sugarcane Production, Area and Yield, 1980/81 to 1999/2000 ......................... 38 Figure 4.3. Sources of Irrigation for Sugarcane Production in Maharashtra, 1997/98 ........................................................... 38 Figure 4.4. Number of Sugar Cane Mills (1997) and Percent Share of Irrigated Sugarcane Area over Gross Irrigated Area by District (1995/96) .................. 40 Figure 4.5. Percent Share of Irrigated Sugarcane Area over Gross Irrigated Area by District. (1995/96), and Semi-Critical, Critical and Over Exploited Watershed Areas over Total Watersheds (1997) ............................................ 40 Figure 4.6. Distribution of Agricultural Households Planting Sugarcane and Area Planted, 1997/98 ........................................................... 41 Figure 4.7. MSCCGMF Cotton Procurement and Profit and Losses, 1990/91 to 1992/2000 ........................................................... 43 Figure 4.8. MSCCGMF Procurement Prices, GOI Minimum Support Price and Market Price for Cotton, 1990/91 to 1999/2000 ............................................. 44 Figure 4.9 Road Density and Rural Poverty Rates (Headcount %) by District in Maharashtra ........................................................... 49 Figure 5.1 Impact of Rural Roads Improvement on Rural Economy in Andhra Pradesh. . .59 List Of Text Boxes Box 3.1. Key Agricultural Reform Announcements During Budget Speech 2002-03 ................................................16 Box 3.2. Water User Associations in Maharashtra: Review of Experiences .25 Box 3.3. Rural Water Supply: Recent Reform Actions Taken by GOM .27 Box 3.4. Indo-German Watershed Development Program: The Bhangadewadi-Hingandara Watershed Experience .28 Box 3.5. MahaGrapes of Maharashtra .31 Box 3.6 Intensive Cotton Development Program: Major Components .34 Box 4.1 Government of India Sugar Policy as of November 15,2001 .39 Box 5.1 Utility Regulators-Some Basic Principles for Ensuring Independence . 54 Box 5.2 Roles of Govemment in Agro-Food System and Agro-Enterprise Development .55 Box 5.3 Alternative Price Risks Management Mechanism, Case of Mexico Cotton .56 Box 5.4 Alternatives in Managing Agriculture Yield and Price Risks 57 Box 5.5 Promoting the Rural Non-Farm Economy: Lessons from Latin America and Caribbean .58 VOLUME El Annexes and Statistical Tables Annex A: Govemment of India Sugar Policy as of November 15, 2001 ..............1 Annex B: Schemes of the National Horticulture Board at a Glance .....................3 Annex C Basic Principles of Supply Chain Development ...................................6 Statistical Tables .....................................................9 vii Acronyms AAP Advanced Additional Price APEDA Agricultural and Processed Food Products Export Development Authority APMC Agricultural Produce Marketing Committee CACP Commission for Agricultural Cost and Prices DPAP Drought Prone Area Project EAS Employment Assurance Scheme EGS Employment Guarantee Scheme FP Final Price GCA Gross Cropped Area GEAC Genetic Engineering Approval Committee GIA Gross Irrigated Area GOI Government of India GOM Government of Maharashtra GP Guaranteed Price GSDA Groundwater Survey and Development Agency GSDP Gross State Domestic Product HYV High Yielding Variety ICDP Integrated Cotton Development Program ID Irrigation Department IDC Irrigation Development Corporation IPM Integrated Pest Management IWDP Integrated Watershed Development Program MKDVC Maharashtra Krishna Valley Development Corporation MSCCGMF Maharashtra State Co-operative Cotton Growers Marketing Federation Limited MSP Minimum Support Price NABARD National Bank for Agriculture and Rural Development NCA Net Cropped Area NGO Non-governmental Organization NIA Net Irrigated Area NWDPRA National Watershed Program for Rainfed Areas O&M Operations and Maintenance SC/ST Scheduled Caste/Schedule Tribe TE Triennium Ending TMC Technology Mission on Cotton WTO World Trade Organization WUA Water Users Association viii Acknowledgements This report was prepared by. a team led by Dina Umali-Deininger, and comprising R.S. Pathak (water), Deepak Ahluwalia (cotton and sugar), Mona Sur (benefit incidence); Manoj Panda (Consultant, IGIDR, Mumbai- agricultural policies), Mahendra Dev (Consultant, Center for Economic and Social Studies, Hyderabad- horticulture and rural non-farm), and Sangeeta Schroff (Consultant, Gokhale Institute of Politics and Economics, Pune-cotton production.). The team especially wishes to thank Gajanand Pathmanathan (Sector Manager) and the peer reviewers, Shawki Barghouti (RDV) and Ryo Eguchi (IFC) for their helpful guidance during the preparation of this report. We thank Joelle Chassard, Vinaya Swaroop, Paramita Dasgupta, Deepak Mishra, John Briscoe, Roberto Zagha, Clive Harris, Richard Henry (EFC), Shikha Jha (IGIDR), and P.V. Srinivasan (IGIDR) for their valuable comments and contributions to the report. We appreciate very much the efficient administrative and logistical support of Lalita Gamat and the excellent production assistance by Lilac Thomas. We gratefully acknowledge the generous cooperation and valuable assistance provided by officials from the Department of Agriculture and Horticulture, Irrigation, Watershed Management, Animal Husbandry, Cooperation and Textiles, and the State Agricultural Marketing Board of the Government of Maharashtra, and the private agribusiness community during the preparation of this report. The report was discussed with the Government of Maharashtra in September 2002. Promoting Agricultural Growth in Maharashtra Executive Summary Rapid economic development has contributed to the continuing decline in the contribution of the agricultural sector in the economy of Maharashtra. The state, located in the western coast of India, was the second largest in the country in terms of both area (30.7 million ha) and population (about 97 million in 2001). It has the second highest per capita income among the States in India, amounting to Rs 26,486 (about $608) in 1999-2000. This was a close second to the state of Punjab ($613) and was higher than many other South Asian countries such as Pakistan, Nepal and Bangladesh. Since the 1980s, the agricultural and allied services (livestock, forestry and fishing) sector's contribution to gross state domestic product (GSDP) continued to decline, from 24% in 1981/82 to 16% in 1999-2000. This was the lowest in the country. The agriculture sector's contribution alone was down to only about 14% in 1999/2000. By contrast, Maharashtra's services and industry sectors contributed 52% and 32% respectively to GSDP during the same year. Although the agricultural sector's contribution to GSDP has been declining, it nonetheless displayed rapid growth in the 1990s, which at 4.2% per year far exceeded the All-India average of 3.0% per year. Fostering more rapid rural development, particularly raising the productivity and competitiveness, and accelerating the growth of the agricultural and rural non-farm sectors, are critical elements to achieving faster overall economic growth, and hence, poverty reduction in Maharashtra. About 58% of Maharashtra's population resided in rural areas and 80% were dependent on agriculture for their livelihood--42% were cultivators and 38% were agricultural laborers in 1999-2000. This is unlikely to diminish very quickly. More rapid growth in the agricultural and rural non-farm sectors will both directly and indirectly contribute to generating greater opportunities for employment and income growth. In addition, by contributing to increased rural incomes, this will build a strong foundation for consumer demand in rural areas that could in turn stimulate growth in other economic sectors. For this to happen, a careful reprioritization of policies and re-balancing of public expenditures in the agricultural sector to favor more productivity enhancing investments and away from less productive subsidies would be necessary. Agricultural productivity improved over the last decade, which in part contributed to a decline in the poverty rate in rural areas. Agricultural productivity is measured by the agricultural value added per worker (including cultivators and agricultural laborers). Analysis of the 1991 and 2001 census data showed that agricultural productivity per worker increased by over 30% in real terms, from about Rs 6,354 per capita in 1991 to about Rs 8,275 per capita in 2001. This likely contributed to the decline in rural poverty rates (headcount) from about 41% in 1987/88 to 24% in 1999/2000 (using 30 day recall and as reported by the Planning Commission).' In absolute terms, this translates to about 12.5 million poor people in rural areas. These state averages, however, masked considerable rural distributional inequities. Bhalla (2000), analyzing the NSS quinquenial survey for 1993/94, found that among different groups of rural workers, the poverty rate (headcount) was highest among agricultural laborers (57%) and construction workers (43%). Manufacturing workers (27%), cultivators (23%) and transport workers (19%) followed. More recent analysis (World Bank 2002) using the National Family Health Survey (1999) found that about 60% of agricultural laborers continued to comprise the poorest two quintiles based on per capita consumption. This sectoral distribution of rural poverty was mirrored at the 'There is considerable debate on the estimation of poverty rates in India. A recent adjusted estimate of Deaton is 29.2% x district level. Rural poverty rates also tended to be higher in districts with a higher proportion of agricultural laborers. Sustaining rapid productivity growth of the agricultural sector during this millennium, however, is jeopardized by uncoordinated, and at times inconsistent, sub-sectoral policies. Large direct and indirect fiscal subsidies to the sugar, cotton, dairy, and water sectors threatened the fiscal health of the state. Contradictory government policies for power, water, and sugar, encouraged over- extraction of groundwater in many areas, threatening the long-term sustainability of agriculture and drinking water supplies in the state. While the objective of these interventions was to protect the interest of the farming population, the unintended outcome of the states policies on sugar and power for agriculture was to transfer substantial monetary benefits primarily to a smaller number of larger farmers at the expense of increased drinking water scarcity in many areas. Moreover, low rural literacy rates and poor infrastructure and services reduced incentives for the private sector to invest in rural areas, and thus lessened opportunities for higher paying non-farm employment. This policy note focuses on examining the constraints to promoting more rapid agricultural growth in Maharashtra. It aims to: (i) review the recent status and performance of the agricultural sector in the State, focusing on selected key areas such as cotton, sugar, water and the rural non-farm sector; (ii) examine the major policy and regulatory impediments in these sub-sectors that hinder their contribution to more rapid and sustained agricultural growth and rural poverty reduction; and, (iii) propose options for improvement in these areas as well as identify areas requiring further study. A second volume provides more detailed discussion on the Government of India Sugar Policy (Annex A), development schemes of the National Horticulture Board (Annex B), and basic principles for supply chain development and additional statistical tables. Overview of the Agricultural Economy Agriculture displayed minimal change in cropping pattern, but these slight changes had a significant impact on the commodity composition of agricultural GSDP. Maharashtra agriculture remained dominated by foodgrains (rice, jowar, bajra, etc), which accounted for over 60% of the cropped area. There was a slight expansion of area planted to cotton by 2%, sugar by 1%, and fruits and vegetables by 3%. Although foodgrains accounted for 60% of cropped area, they contributed only 27% to agricultural GSDP in 1999/2000. By contrast, fruits and vegetables only covered 4% of the cropped area in the State, but they contributed about 20% of agricultural GSDP. Notably, the government's program to promote horticulture production in the State was instrumental in the expansion in area devoted to fruits and vegetables. By 1998/99, Maharashtra had the largest area devoted to fruits and the fifth largest area devoted to vegetables in the country. It horticulture development program was an integral part of the government's strategy to promote the shift to higher value crops in the State. Sugarcane output increased by 4% per year during the 1990s, primarily the result of GOM support for the establishment of cooperative sugar mills. Cotton output increased by 7% per year, in part spurred by high state procurement prices. Among oilseeds, soybean emerged as the single largest oilseed crop in Maharashtra. Soybean area grew 5 fold in the 1990s, and accounted for about 42% of total area under oilseeds and about 5% of total gross cropped area in the State. While horticultural products earlier catered primarily to the domestic market, Maharashtra has made in-roads into the world market, particularly for mangoes, cashews, and grapes. Although there is considerable competition from other countries, Maharashtra had the comparative advantage of being able to supply grapes during the months of March to April, when supplies from other countries were limited. Major markets for mangoes were Europe and the Middle East. Potatoes and onions were exported mainly to U.A.E., Malaysia, South Africa, Nepal, Canada, and Kuwait. Yield performance of various crops in Maharashtra compared to the All India average levels and other major producing states was mixed. For example, although average yields of wheat, jowar, maize, bajra, groundnuts, soybean and sugarcane in 1998/99 were higher than the all India average, xi they were below the other major producing states in India. Improving yield performance in the future would be increasingly constrained by water availability. Only about 17% of total cropped area in the state was irrigated, the rest was rainfed. Moreover, the existing limited water resources and heavy concentration of irrigation use for sugarcane production, one of the most water intensive of crops, in many water scarce areas have restricted the expansion of irrigated area for other crops. Livestock Sector. Output of major livestock products grew reasonably well during the 1990s. Milk, eggs, and poultry and other meats grew at an average rate of about 4% per year between 1993/94 and 1999/2000. In 1997/98, Maharashtra was the fifth highest producer of milk in the country. Output growth was boosted by the government's program to operate dairy milk schemes. These schemes, however, faced problems of plenty, particularly increasing stock levels and operational losses, which were covered by the GOM through fiscal transfers. Agro-Industrial Sector. In the rural non-farm sector, the agro-industrial sector expanded significantly over the last decade. The gross value of output of agri-based (registered and un- registered) manufacturing enterprises in Maharashtra increased significantly in real terms during the 1990s; expanding at about 4% per year. They accounted for about one quarter of total industry gross value added. Food product processing grew by about 9% per year during this period. Employment in agro-based industries increased by an average of 3% per year during the 1990s. There were indications, however, that the agro-industrial sector was undergoing structural change. The number of registered firms involved in food products, beverages and cotton textiles increased between 1995/96 and 1997/98, but this was largely counteracted by the decline in number in the other subsectors--textile, wood and leather manufacturing. With the exception of the beverage sector whose employment expanded by 16%, there was a significant contraction in all other sub-sectors, resulting in an overall decline in employment of over 52,000 workers. Such employment contraction is of serious concern, especially in view of the high poverty rates among casual wage laborers in the State. Rural Informal Sector. The rural informal sector was an important source of employment in rural areas, but their improved performance was constrained by a number of factors. According to the NSS 55h round survey of the sector, own account enterprises comprised more than 90% of rural informal sector enterprises and employed more than 80% of workers in the rural informal sector. An "own account enterprise" is an undertaking run by household labor, usually without any hired worker employed on a 'fairly regular basis'. About 75 per cent of the all enterprises reported encountering problems with shortage of capital (43%), lack of electricity (3%), problems of powercuts (2%), lack of infrastructure (18%) and local problems (29%). Agricultural Sector: Key Policies and Their Impact The GOM announced its Agriculture Policy in 1997-98, which aimed at the developing the agricultural sector in a sustainable basis by using available resources economically, efficiently, effectively, and in an environmentally sound manner. Key priorities included: (i) promoting agricultural development on commercial and industrial lines; (ii) strengthening the competitiveness of farmers in the context of globalization; (iii) addressing the needs of vulnerable sections, generating both skilled and unskilled employment; (iv) preparing a plan of action for full exploitation of limited water resources; (v) strengthening agricultural universities; (vi) implementing an rural road program; (vii) promoting investments in farm and infrastructure facilities for post harvest management, storage, transport, marketing and exports; and (viii) improving the marketing system under the Agricultural Produce Market Committee. To translate this framework into action, the GOM spent considerable public resources and intervened extensively in commodity markets. The government financed through the budget and market borrowings investments for the expansion of irrigation infrastructure and subsidized the cost of delivery of surface irrigation. It subsidized electricity to agriculture (for electric pumpsets) to xii promote expansion of groundwater irrigation. It implemented price support operations for cotton and financed directly (through equity) and indirectly (through loan guarantees) the establishment of sugar mills. It subsidized the operations of government and cooperative dairy processing operations. It provided start up grants for horticulture projects. Direct fiscal subsidies to these major sub-sectors alone amounted to about Rsl3.2 billion ($276 million) in 2000/01, equivalent to about 6.3% of agricultural GSDP and 0.8% of total GSDP. In addition, the GOM had to absorb the accumulated outstanding debts and interest owed by poorly performing irrigation development corporations, sugar mills and the cotton monopoly procurement scheme. GOM agencies also continued to be involved in private sector activities such as the distribution of seeds, planting materials, and other inputs to ensure their availability to farmers. While these expenditures have contributed to the expansion of the respective sub-sectors, it was increasingly recognized that the current composition of fiscal support was unsustainable over the longer term and came at the expense of more productive investments, such as rural infrastructure, health and education; that extensive government market interventions were fostering inefficiencies and were crowding out private sector investments; and these policies have resulted in second generation problems, such as the over-extraction of groundwater. Water Resources. Sustainable water resource development and management was complex and major challenge for the state. Increased access to irrigation for agriculture has benefited farmers in terms of higher productivity, reduced vulnerability to weather risks, and the opening of opportunities to cultivate higher value crops. Rising inter-sectoral competition between agriculture and other users (i.e. drinking water, industry), however, made managing both surface and groundwater resources more difficult and complex. Policies subsidizing electricity for electric pumps and programs promoting production of highly water intensive crops, particularly sugarcane ran counter to the government's priority to cost effectively ensure the availability of drinking water, especially in exclusively groundwater dependent areas, where competition with agriculture was high. The multiplicity of govemment and other agencies involved in water resources and weak coordination among them added to the difficulty of managing water in a sustainable manner. Surface irrigation development has been a major pillar of the govemment's rural development strategy. Government expenditures on surface irrigation development (including corporations) since the 1950s totaled about Rs 269 trillion (current prices). Gross irrigated area expanded by about 1.8 million ha. The benefits of surface irrigation have accrued more to smaller farmers. Analysis of the NSS 54h round survey of agricultural households found that about 83% of farmers who use surface irrigation were small (owns I to less than 2 ha of land) and marginal (owns less than 1 ha of land) farmers, accounting for about 62% of total surface irrigated area. By contrast, the benefits of subsidies to electricity for pumping groundwater through electric pumps, accrued to larger farmers. Although about half of farmers using electric pumps were small and marginal farmers, they only accounted for only about 21 % of total groundwater irrigated area. During the.last decade, surface irrigation expenditures have become a major contributor to the fiscal crisis in the State. While the Irrigation Department had the primary responsibility for surface water resource development, there were also 5 Irrigation Development Corporations (IDC) responsible for water development in the 5 major basins. Greater emphasis on building storage structures and less on construction of the distributory networks that would have generated revenues contributed to the burgeoning fiscal burden of the State. These infrastructure investments by the IDCs were mainly financed by market borrowings, which totaled Rs 82.9 billion in 2000/01 with interest payments amounting to Rs 17.4 billion. Limited cost recovery from existing systems exacerbated the fiscal crisis of the state. Moreover, weak systems management led to the deterioration of the existing infrastructure, threatening the long-term operations of these surface irrigation systems. xiii The main source of water for agriculture in the State was groundwater, but excessive withdrawals have resulted in the drying of wells in some areas. The area irrigated by wells have increased rapidly in the last decade, and accounted for about 60% of total net irrigated areas. This water is primarily drawn from the ground using electric pumps, whose numbers have jumped from 1.6 million in 1990/91 to 2.2 million in 1998/99. The increase in electric pump use and the large subsidy to power for agriculture was a major contributor to the fiscal crisis in the state. In addition, the demand for water for sugarcane cultivation has led to an increase in the number of wells in Nasik, Ahmednagar, Jalgaon, Dhule, Sangli and Satara districts. This contributed to the drying up of wells in these areas. The Groundwater Survey and Development found that of the 2,841 watershed units in the State in 1997, 132 watershed units were already over-exploited (water extraction exceeds recharge), 275 were critical (development was greater than 90% and displayed a declining trend in water table depth) and another 64 were semi-critical (development was greater than 90% but did not yet show a declining trend in water table depth). Following the recommendations of the Maharashtra Water and Irrigation Commission and the Government of India National Water Policy, the GOM has implemented reforms in several areas. These included: (i) the legislation of systematic annual adjustment of water charges; (ii) the reduction of Irrigation Department staff; (iii) the piloting of water users associations (WiUAs) and the plan to expand them state wide; (iv) planned enactment of legislation to transfer irrigation system's management to farmers and the volumetric delivery of water to WUAs; and (v) adoption of a State Water Policy, including the establishment of a State water regulatory authority. Rural Water SuDPly. Providing drinking water was of first priority to the GOM. Rural water schemes were included as part of the Minimum Needs Program. Drinking water programs were implemented by the Maharashtra Jeeven Pradhikaran (MJP), the Zilla Parishad (under the Department of Rural Development) and the Groundwater Survey and Development Agency. The govemnment's goal was to provide 40 liters per capita daily (Ipcd) or 20 Ipcd during summer months and to provide one bore well per 200 people. According the GOM guidelines, about 68% of village (27,654) fell under the difficult category. Until a reliable source could be created, these villages were to be supplied by water tankers. In July 2000, GOM adopted the demand driven approach to service delivery and use of participatory processes in rural water supply and sanitation sector and the principle of cost sharing, both in rural and urban sectors. Maharashtra was the first state to apply the sector reform agenda statewide. Groundwater was the primary source of drinking water in the state, but intense exploitation of water for agriculture seriously affected drinking water supplies in many areas. This was especially acute in areas where there has been extensive cultivation of sugarcane, in large part promoted by the GOM's program to establish sugar mills. Many drinking water wells, which were mostly 30 to 50 meters deep, have dried up, requiring the GSDA to also shift to deeper bore wells. The GOM was the only state in the country that had enacted a Ground Water Regulation Act (1993) for protecting drinking water wells. Although adequate provisions were made under the Act to protect drinking water sources, the decisions and actions taken were often influenced by local politics and social pressures not to report violations of the regulations. Inadequate scientific data also constrained initiating early and quick action by relevant officials. Horticulture Linked to the Emplovment Guarantee Scheme (EGS). The Horticulture Development Program linked with EGS aimed to accelerate the expansion of horticultural production and generate additional employment in rural areas. While food crops can provide employment of about 100-115 person days per ha per year, horticulture production required up to 275 person days per ha per year (Godbole, 1990). The program applied to 25 fruit crops, spices intercropped in coconut plantations, and medicinal and aromatic plants. The scheme was open to all farmers, with a minimum required area per project of 0.2 ha to a maximum of 4 ha (0.1 to 10 ha in Konkan region). The scheme provided a 100% subsidy on wages and material inputs (planting xiv materials, fertilizer, agro-chemicals) to small and marginal farmers and scheduled caste (SC), scheduled tribes (ST) and other ethnic minorities, on a declining scale and phased out by the third year. All other farmers received a subsidy of 100% of wages and 75% on material inputs on a declining scale for three years. Wages were given in cash, while the material inputs were supplied in kind. The program could be judged as a success from the horticulture and employment perspective. Of the I million ha increase in area planted to fruits in the state between 1989/90 and 2000/01, 96% was supported through the horticulture linked EGS scheme. Since inception in 1990, about 1.28 million farmers have availed of the program, covering 35,525 villages. About 7% and 11 % of the beneficiaries were SC and ST respectively. The "grant" or subsidy received amounted to an average of about Rs 7,709 ($161) per farmer beneficiary. It appears that the scheme has also generated considerable economic benefits. Assuming conservatively that only 10% of the fruits and vegetable GSDP was due to the Horticulture linked EGS programn, and taking costs as equivalent to the total subsidies for the program during the same period (Rs 6.44 billion, constant 2000/01 rupees), the benefit-cost ratio came to about 7:1. In addition, over the last decade, it directly created an estimated 213 million person days of work or about 807,000 person years (assuming 220 days work per year). As the fruit orchards, once initiated, would normally require continuous employment to meet day-to-day labor needs, the scheme therefore also opened opportunities for permanent full time employment for agricultural laborers. In addition, the increased fruit production generated positive multiplier effects in term of increased labor demand arising from increased demand for inputs and marketing services (transport, storage, packaging, processing, trading). Several critical challenges are emerging for the future development of the horticulture and floriculture sectors in Maharashtra. These included: increasing water constraints, restrictive GOI fertilizer and pesticide policies which restricted the imports of specialized agro-chemicals required by farmers; inadequate market infrastructure (rural roads, markets, cold storage facilities, etc); and the lack of farmer awareness of quality management practices required by the export market. Agricultural Market Interventions Sugar Cooperative Mills. Fostering sugar sector development, primarily through government assistance for establishing cooperative sugar mills, has been a major pillar of the GOM for promoting rural development in Maharashtra; Sugarcane has been one of the most profitable crops that could be grown, with its gross value of output 6-7 times those of foodgrains. These sugar mills have been instrumental in increasing sugarcane production in the state. By 2000, the state had the second highest production and area devoted to sugarcane in India. Increased access to subsidized irrigation also facilitated expansion of sugarcane production. Many sugar mills assisted in the development of rural communities. They diversified their activities into food processing, co- generation of power, paper and alcohol manufacturing and schools. As of 2001/02, there were 208 cooperative sugar mills, of which 160 were operating. The remainder was classified as sick units. These cooperative sugar mills were largely funded directly and indirectly by the GOM. Usually, the farmer members only had to provide about 10% of the investment costs. About 30% was provided by the GOM as equity contribution, the remainder was financed through loans (e.g. the National Cooperative Development Corporation, IFCI, IDBI, etc), which were guaranteed by the GOM. The government's continued support to existing cooperative sugar mills and to establish new ones has become a major threat to the government's fiscal health and the environment. Most recent estimates indicated that GOM equity share in cooperative mills has reached Rs7.2 billion during 1991-2001 alone. The volume of GOM guaranteed loans was estimated at Rs33 billion, of which Rs2.1 billion were invoked in 2000/01. In view of the sizeable numbers of sick cooperative mills, many of which have closed down, their debt burden would have to be paid by the GOM. In addition, the expansion in sugarcane cultivation increasingly threatens the sustainable use of groundwater in xv the state. Incidence analysis of the direct beneficiaries showed that large farmers captured most of the benefits of the GOM's sugar policy. Analysis of the NSS 54 " Round survey found that 64% of the area planted to sugarcane was cultivated by medium (owning 2 to less than 4 ha of land) and large (owning greater than 4 has of land) farmers. Dairy Processing. The govemment was directly and indirectly (through cooperatives) involved in dairy processing in the State, which has been incurring significant losses. In 2002, there were 26,373 milk cooperative societies, which were grouped into 32 District Federations and a State Federation. The govemment and cooperative schemes accounted for 60% of milk processing capacity in the State. Their cumulative operating losses have totaled Rs22.1 billion ($460 million) by 2000/01. High procurement prices and operating costs and low sales prices contributed to the losses. Operational inefficiencies, exacerbated by increases in salaries following the 5w" Pay Conmnission Recommendations, contributed to the high operating costs. Cotton Marketing. Maharashtra was the only state in India where procurement of seed cotton (kapas2) was a govemment monopoly, legislated under the Maharashtra Raw Cotton (Procurement, Processing and Marketing) Act, 1971. Under the Act, all private trading in cotton was prohibited and farmers could only sell their output to the GOM's designated procurement agency, the Maharashtra State Co-operative Cotton Growers Marketing Federation Limited (MSCCGMF). The main objectives of the scheme were: (a) to ensure fair and remunerative price of cotton to the growers in the state; (b) to effect additional transfer of income to cotton growers by eliminating middlemen and securing in full the advantage of the sales price; (c) to bring about stability in the income of growers and thereby bring about stability and growth in the production of cotton in the state; and (d) to supply scientifically graded quality cotton to the consumer mills. The MSCCGMF was a registered co-operative society. Since 1993/94, the scheme has been incurring massive losses. Total losses from 1994/95 to 1999/2000 amounted to Rs 27.5 billion (constant 1999/2000 rupees). During the period, the Federation covered these losses through borrowings and transfers from the State treasury. As procurement levels increased during some years, so did the losses. The Federation was surviving on budgetary support from the GOM, delayed payments to farmers, and debt rescheduling. The amount owed to farmers was considerable, estimated at Rs 8 to 9 billion. The government faces increased pressure to pay it. Several factors contributed to the rising losses: (i) extremely high seed cotton procurement prices; (ii) declining cotton lint market prices domestically and globally; (iii) significant corruption in grading, resulting in "upgrading" of low quality cotton; and (iv) poor management contributing to inefficient operations (slow inventory turnover, high transport, storage, and processing costs). Regulated Wholesale Markets. Trade in most agricultural commodities was carried out through regulated markets in Maharashtra. Under the Maharashtra Agricultural Produce Marketing (Regulation) Act, 1963, all notified agricultural commodities, currently numbering 286, grown within the purview of the regulated market, if sold wholesale, have to be marketed through the regulated markets or mandis. The main objectives of the Act were to protect farmers from exploitation by middlemen and to provide facilities for auctioning of produce, and thus ensure that farmers get competitive prices. There were currently 274 principal regulated market yards and 591 regulated sub-market yards in the state in 2002. Agricultural Produce Market Committees (APMC), composed of farmers, traders, and other market functionaries, were responsible for day-to-day management of the market. The APMCs generated income by charging market fees, license fees and rentals. The market fees ranged from 0.75% to 1% of the value of the produce sold. 2 Seed cotton or kapas is what is harvested from the cotton plant. This is ginned in ginning nills to produce two products: cotton lint (for use in textile manufacturing) and seed cotton, which could be further processed into cottonseed oil and cotton meal. xvi Though the stated intention of the law was to create an efficient market structure, the provisions of the law were no longer compatible with the free and competitive market structure sought by the Government. It restricted options for farmers for marketing their produce, and in doing so can raise transaction costs. For example, farmers could sell directly to food processors and other buyers and eliminate the need to pay for the services of commission agents, who charged commission fees (2.5% for non-perishables and 8% for perishables) in addition to having to pay the market fee. The market cess functioned more as a tax on farmers, instead of serving its original purpose of covering the cost of essential services. The Act also constrained the development of markets in the State by restricting it to the public sector. The private sector, as in other sectors (e.g. roads), could potentially play a similar role in building needed infrastructure. The provision that no person could carry on trade in agricultural produce uniless he/she is a license holder of the APMC essentially granted monopoly power to the APMC. Indeed, the licensed traders of the APMC had vested interest to prevent new entrants, so that their control over the market continued without hindrance. The regulated markets generate considerable revenues, but the facilities in many markets remain very rudimentary. In 1999-2000, the regulated marketing system generated revenues of about Rs 1.5 billion from market fees alone and profits of about Rs340 million. These revenues were intended for use for providing market infrastructure, such as internal roads, auction halls, trader shops, platforms for agricultural produce, godowns and storage facilities, drinking water, drainage, common washing facilities, cattle sheds, etc. However, only 35 to 40% of the markets have these facilities. Rural Infrastructure and Services. Low rural literacy rates and poor infrastructure and services in rural areas reduced the incentives for the private sector to invest in rural areas and thus lessened opportunities for higher paying non-farm employment. Education is an important determinant of agricultural and rural non-farm employment and incomes. Relative to other states in India, Maharashtra in 2001 had one of the highest literacy rates, at 77%, in the country. The state average, however, masked regional disparities in literacy levels. In all districts, literacy rates in rural areas were lower by about 10 to 20 percentage points than urban areas. Literacy rates in rural areas also tended to be lower in districts with higher poverty rates. Maharashtra has a relatively high road density compared to other states. There were, however, distinct regional differences in access to roads. A large number of districts with the high rural poverty rates also had the lowest road density. Poor access to and quality of power supply also hindered investments in rural industries in rural areas. Policy Options for Sustained Agricultural Growth Maharashtra's rural development strategy for the 2 1Ih century must rise to the challenge of meeting the rapidly changing needs of the rural, the state's, the Indian and global economies. As experience in other developing countries illustrates (e.g. Thailand, Malaysia), economic development and increasing industrialization eventually brings about a changed and smaller role for the agricultural sector. This has already begun to happen in Maharashtra. Integral to the development process, is the importance of concurrent rapid pace of growth in the both the agricultural and rural non-farm sectors, as they jointly, directly and indirectly, contribute to generating greater opportunities for rural employment and income growth. Successfully achieving such broad-based growth, however, would require vigilantly adjusting to the rapidly changing market opportunities and challenges within the state, within India and globally. Maharashtra's transition from an agricultural economy to an industrial economy brings both opportunities and complex challenges. More than half of the State's labor force continues to depend on agriculture (as cultivators or agricultural laborers) for their livelihoods. Despite the agricultural sector's good performance in the 1990's, most the state's labor force continue to be bound to low xvii value and low productivity agricultural activities. Hence, raising and sustaining the productivity growth of those who chose to remain in agriculture, as well as fostering the enabling environment for employment-generating growth in the industrial and services sectors, would be vital to raising rural labor productivity and incomes in the state overall. At the same time, the increased liberalization of domestic and global markets brings forth tremendous opportunities and challenges to Maharashtra. It opens opportunities to expand current, and penetrate new, markets within India and globally. But this also brings heightened competition from other Indian States and other exporting countries for the same markets. Therefore, taking the bold measures required to strengthen the competitiveness of Maharashtra's agricultural and other sectors will be vital to preserving and expanding its share in both the Indian and international markets, and to sustaining the profitability, viability and growth of these sectors. Maharashtra holds considerable potential to build on its past good agricultural growth performance, and enhance its competitive advantage domestically and internationally, but there is no room for complacency. As per its agricultural policy, the GOM's goal has been to foster the development of a modem and commercial agricultural sector, that is efficient, environmentally sustainable and internationally competitive. It has made notable progress in this respect, especially in the horticulture sector, facilitated by a number of factors. Maharashtra's access to, and competitiveness in penetrating, markets domestically and intemationally have been assisted by easy accessibility of well-established ports, airports and other transport links. The state has a large base of farmers that have demonstrated their capacity to shift to modem and high value agriculture (e.g. horticulture and floriculture) in response to emerging market opportunities. It has a similarly strong and large base of private entrepreneurs, which widely perform essential market support and development activities, from input supply, to agro-processing, marketing and exports. It has a well- established financial system that facilitates access to capital for investments. Despite these important building blocks, there is, however, no room for complacency. Improving on its past agricultural performance and sustaining this over the longer term, requires boldly addressing several critical sectoral issues today. First, fostering the enabling environment, to facilitate the continued diversification of agriculture and expand the share of high value products, will remain a vital instrument for raising the productivity of the agricultural sector in the State. This will necessarily entail refocusing the role of the government to providing the appropriate regulatory framework, which ensures competition, and essential public goods to attract private investments, while withdrawing from commercial activities and devolving these functions to the private sector. Second, future agricultural growth will be circumscribed by increasing natural resource degradation, particularly water and land. Adopting consistent sub-sectoral policies and measures for sugar, power, and water is urgently needed to ensure the sustainable and efficient use of increasingly scarce water resources and land. These will be critical not only to preserving the longer term viability of agricultural production and growth in the State, but also to ensure adequate water supply for consumers and other users. Tightening competition for limited fiscal resources heightens the urgency of appropriate public expenditure reallocation. There is a critical need for careful reorientation of priorities-away from short-term and more politically attractive transfers such as cotton, dairy, sugar, and power subsidies that generate limited lasting benefits-- towards investments that bring more permanent productivity-enhancing gains (rural roads, markets, irrigation, research, extension, and education). It will also require institutional reforms of govemment agencies to ensure improved quality of delivery of rural-related public goods and services. These actions would be critical to foster more rapid growth* and ease anticipated employment pressures in the whole economy. Anything less would have serious poverty and welfare implications for the state. Many of these necessary fiscal and institutional reforms required would be highly politically sensitive. Thus it would require bold, yet strong and carefully sequenced efforts, to build acceptance among affected stakeholders. xviii A reorientation of the appropriate roles of the government and the private sector has to be an integral element for sustaining the agricultural growth and rural development in Maharashtra. In the short to medium term, reforms would need to focus on creating the enabling policy and regulatory environment and reorienting public expenditures and institutions to encourage increased private sector participation and investments in rural areas, and thus maximize the private sector's contribution to the economy. More specifically, it would require adopting a consistent multi-sectoral policy framework that promotes agricultural growth while ensuring sustainable resource use and fosters the development of efficient and competitive marketing systems. It would also require greater focus on strengthening rural infrastructure and services in rural areas to promote agricultural and rural non-farm sector growth. Integrating Agricultural Productivity Growth with Sustainable Resource Use Sustaining and improving agricultural growth performance requires a policy framework, which rationalizes the GOM's sugar, power and water policies to build synergies and eliminate current contradictions. The government financing of sugar mills, which in turn fosters the expanded cultivation of sugarcane (mostly through groundwater irrigation), is jeopardizing the longer term viability of farming in many areas-to the extent it results in the mining of water resources. It.is also threatening drinking water supply for many communities. Irrigation subsidies (i.e. power for electric pump users and surface irrigation subsidies) are not only a growing fiscal burden, but they also exacerbate the water supply problem due to the underpricing water. It encourages the inefficient and over-use of water resources and sustains the cultivation of water intensive crops like sugarcane, which in turn lead to the unsustainable over-extraction of groundwater in many groundwater dependent areas. Phasing out government direct and indirect subsidies in the sugar, water and power sectors are therefore urgently needed not only for fiscal reasons, but equally important to ensure the longer term viability of agriculture and drinking water in the state. In view of the new market opportunities that are emerging for other higher value crops, for example horticulture, which can offer higher returns to farmers, a re-balancing of the government's sectoral strategies is urgently needed. Close integration of agricultural and water resource development and management programs (i.e. surface and groundwater, watershed development, drinking water and industrial water supply) would also be critical to ensure more integrated water resource development and management. Suearcane Sector. The Government should adhere to its Budget Speech policy announcement to cease support (financial and other types) to cooperatives for establishing new sugar mills. This would contribute to substantially reducing the fiscal burden of the GOM. The prudent enforcement of appropriate environmental assessment and clearance requirements by the Environmental Pollution Control Board for the establishment of new private sugar mills would also be critical to ensure sustainable groundwater resource use. In areas where sugarcane is already being cultivated, the GOM in the short term should strengthen agricultural extension initiatives to encourage the adoption of cultural practices and technologies that promote the efficient use of water. In the medium to long term, shifting cultivation from sugarcane to other alternative crops could be explored. Power Sector. Raising electricity charges while ensuring good quality of supply for agriculture will promote the more efficient use of water. Water Resources Management. The finalization of the GOM's Water Sector Strategy and Policy and a sequenced plan of reform actions would be critical to ensure the sustainable development and management of the scarce water resources in the State. The Irrigation Department recently commissioned a report from an independent commission on the challenges for water resource and irrigation management in the State. There was much, both in substance and process that is positive about the Commission's work. But the report was not informed by a clear, simple, xix compelling vision of "what a sound water resources and irrigation sector in Maharashtra might be", and did not provide a sequenced and prioritized set of actions for moving "from here to there". Using the Commission's report as a starting point, the State would need to develop such a Strategic Vision and Action Plan. This would include attention to: * the institutional framework for resource management, including the legal framework, regulatory responsibility (i.e. State Water Regulatory Authority), pricing of bulk water and the allocation and administration of water rights; * the institutional framework for service provision, including such as managing competition amongst suppliers, ensuring accountability to users, benchmarking, regulation and pricing; * exploring opportunities for developing a "new generation of irrigation institutional arrangements" in the command areas of the Krishna reservoirs which would include clearly- defined water rights and new forms of efficiently managed service organizations (possibly including the private sector). * adoption of the State Water Policy. Surface Irriaation. Improving the management and delivery of surface irrigation to various users would require expenditure and institutional reforms in the Irrigation Department and Irrigation Development Corporations. These would contribute to increased client orientation of service delivery, ensure the financial sustainability of the operations and maintenance of these systems, and reduce the fiscal burden to the GOM. These reforms include: (i) finalizing legislation to formalize farmer participation in the management of surface irrigation systems, including Water User Association and Irrigation Department roles and responsibilities; (ii) implementing measures to raise water tariff collection efficiency to at least 70% to 80% over the next two years; (iii) reducing the off-budget borrowing by the Irrigation Development Corporations as laid out in the GOM's Medium Term Fiscal Reform Program and ensure that any borrowings are applied to capital expenditures with the highest returns; and, (iv) scaling up the use of volumetric charging for bulk water supply. Integzrated Land and Water Resource Manazement. Adopting a more holistic and integrated strategy for sustainable land and water resource management in the State would be critical. Considerable synergies to maximize the returns to available water could be achieved by formulating an integrated watershed and water strategy for a given catchment area. The development of area-based integrated plans for implementing watershed and water development projects would therefore be critical. Horticulture/Floriculture Sectors. Following its successful implementation during the past decade, the Horticulture Linked to the Employment Guarantee Scheme could be further refined in the short to medium term. First, the subsidy program could be graduated according to the income/wealth category of applicants and the location of the projects. To permit greater targeting of the program and enable a broader breadth of participation, in villages where the program is already on-going, the subsidy (labor, planting materials and agro-chemicals) could be restricted to small and marginal farmers for whom access to capital is more constrained. In villages that have not been reached by the program, a significantly reduced subsidy could be provided to medium and large farmers. The subsidy could be reduced from three years to one year for medium and large farmers, while allowing for three years of subsidy for small and marginal farmers. Second, more careful assessment of proposed projects would be vital, with particular focus on consistent availability of water, which is critical to crop survival. Integrating the horticulture development program closely with the GOM irrigation and watershed development programs would help ensure the success of horticultural projects undertaken. xx Fostering Competitive Agricultural Marketing Systems Fostering competitive agricultural marketing systems requires a careful reorientation of government roles, away from direct participation to creating the enabling environment for the private sector entry and participation. How can the GOM fulfill its goal of agricultural and rural development in this new role? The GOM would need to focus on: (i) establishing and enforcing transparent rules and regulations for private sector operations such as property and bankruptcy laws; intellectual property rights; competition policy, and negotiating favorable terms for access to international markets and ensuring fair practices on the part of international trading partners; (ii) addressing market failures, such as regulations to prevent the harmful introduction/spread of plant pests and animal diseases, ensuring the availability of information and statistics to facilitate market activity, facilitating use of risk management instruments, monitoring and regulating potential abuses of market power, and compensating losers in structural reform processes through safety nets and other targeted programs; and (iii) building physical and knowledge capital, including investing in egsential infrastructure, especially those related to transport, and energy, investing in knowledge- building to accelerate the agribusiness learning process and better enable the emergent private sector to participate/compete such as R&D; academic/technical training, and facilitating the establishment of agricultural marketing facilities. Cotton Sector. The GOM should proceed with its plans to gradually phase out the cotton monopoly scheme. As a first phase, the GOM should adhere to its Budget Speech Policy announcement to set the MSCCGMF procurement price at the GOI minimum support price, while permitting the CCI and private traders to procure cotton in the state. This would provide Maharashtra farmers the same "safety net" offered to all other farmers in India and reduce the fiscal cost to the government substantially. At the same time, the Federation could be allowed to evolve into a full- fledge cotton-marketing cooperative, operating independently of government under commercial terms. Such a transition would require strengthening the management capabilities of officials of the Federation to increase efficiency, the adoption of stricter monitoring and accounting systems to minimize rent-seeking activities of staff, and likely reduction of staff. The GOI's lifting of cotton export quotas would permit greater access by the Federation to export markets. Enhancing its export competitiveness will be strongly dependent on its commitment to improve operational efficiency. In its new role, the Federation could serve as a conduit for farmers to access alternative price risk management mechanisms. The case of ASERCA in Mexico, offers an example of an agency can use options in international commodity exchanges to hedge price risks. Cooperatives. The government should withdraw from intervening with the operations of all cooperatives. Lessons from international and Indian experience show that cooperatives must be treated as private sector enterprises for them to succeed commercially, and that the government's primary role should be to establish a conducive policy environment for their growth, not to manage or control. Ceasing government interventions in all types of cooperatives, including dairy, would be in line with the GOM's policy, announced in the Budget Speech 2002-2003, "to desist for intervening directly in the market for all agricultural commodities" and enable cooperatives to: develop competitive advantage based on their own strengths." The sick cooperative units, including those in the sugar and dairy sectors, that are unlikely to be revived, should be liquidated. Agricultural risk management. Increased market liberalization is likely to expose farmers to greater market risks. There are a number of market-based yield and price risk management instruments that have been developed in recent years. Futures contracts, for which several commodity futures exchanges are located in Maharashtra (e.g. cotton, oilseeds), offer a market-based mechanism to hedge price risks. New instruments for managing weather risks (e.g rainfall-based insurance) have also been developed in other countries. Their potential application to Maharashtra could be explored. xxi Agricultural Input SuPPIy. The time has come for the GOM to phase out its involvement in input delivery (e.g. seeds, planting materials, fertilizer). These functions are well-established in the private sector, and government activities only serve to crowd out and discourage private sector entry. It would benefit farmers in Maharashtra for the GOM advocate the reform of the pesticide policies of the Government of India. While the Central and State governments clearly have a role in regulating the production and trading (domestic and imports) of pesticides and other agro-chemicals due to environmental and public health risks associated with their use, there is an urgent need to update existing regulations and modernize agencies charged with pesticide registration and approvals to be consistent with international standards. Excessively restrictive regulations have penalized the growth of the high value agriculture sub-sectors. As they require more specialized agro-chemicals to meet highly stringent phyto-sanitary requirements in export markets, lack of or restricted access to these agro-chemicals increases production costs and acts a an additional deterrence to increased private investments in these sectors. Building Farm to Market Linkages. Adopting a supply chain perspective could be a useful tool in identifying the key bottlenecks in the marketing system. In understanding the flow of products and information and the major constraints that may impede these flows (e.g. poor infrastructure, bureaucratic difficulties in setting up a business, problems with access working capital, etc.), it provides a useful framework to guide corrective actions. One example of an impediment to the smooth flow of goods in Maharasthra is the lack of cold storage facilities at some key marketing points. The GOM should allow private sector investments in cold storage facilities, for example in Mumbai Airport. This would substantially reduce losses and improve the competitiveness of Maharashtra's agricultural exports. Another example of a constraint that impedes the development of agricultural supply chains is the lack of a regulatory framework for contract growing in India-contracts undertaken do not have a legal basis. The GOM should pursue with the GOI the establishment of the legal framework for contract farming in agriculture. Strengthening Rural Infrastructure and Services in Rural Areas Promoting agricultural and rural non-farm sector growth is closely linked due to the strong backward and forward linkages that could be created. Promoting rural non-farm sector growth would require improved access to basic infrastructure (roads, markets, electricity) and services (market information, education). Agricultural Markets. The GOM should proceed with the proposed reform of the Agricultural Produce Marketing (Regulation) Act 1963 to allow other parties to develop agricultural markets in the State and allow farmers freedom choice on the marketing channel for their produce. This would give farmers freedom to choose the best option for marketing their output, to obtain the best prices. By allowing other entrants to develop and operate markets, this would facilitate the construction of more markets and improvements in marketing infrastructure. This in turn would contribute to the reduction of losses (due to spoilage and spillage), transportation costs, and overall marketing costs, and thus strengthen the competitiveness of products produced in the state. Rural Roads. Accelerating rural growth would require increased investments in roads (rural roads and highways) while ensuring improved operations and maintenance of systems created. The impact of rural road improvement in Andhra Pradesh illustrates the cost savings and community benefits that could be achieved. Participatory planning and implementation of rural infrastructure projects, involving government and users, would be valuable to ensure the appropriateness of investments undertaken. Rural Education. Investing in rural education continues to be very important. To assist farm families to become more competitive and make the most of the new opportunities that would accompany access to improved crop varieties and technologies, basic schooling for the next generation of rural households is essential. This is not only because those staying in agriculture will xxii be making more complex management decisions, but also because those leaving will be able to adjust to non-farm life and work more easily the stronger their general education. Promoting Agricultural Growth in Maharashtra A.Overview Rapid economic development has led to the continuing decline in the contribution of the agricultural sector to the economy of Maharashtra. The state, located in the Figure 1.1. Sectoral Contribution to GSDP, 1981/82 to 1999/2000. western coast of India, is the second g 1.80 largest in the country in terms of both area = 1.60 - (30.7 million ha) and population (about 97 IT 1.40 million in 2001). It had the second a 1.20 highest per capita income among the all = 1.00 States, amounting to Rs 26,486 per capita 1 lI l (about $611) in 1999-2000. This was a 0.6 close second to the state of Punjab ($616) 0.60 - and was higher than many other South 0.40 Asian countries such as Pakistan, Nepal A 0.20 and Bangladesh. About 58% of the State's 0.00o - . V t , " | Y . l t . " l population resided in rural areas in 2001. > t - £ X I? > > fi T T ;g T T C f 9 The agricultural and allied services 0 000000 0 0000 00 a a, o a a a a C (livestock, forestry and fishing) sector's * Agriculture and Allied Services 0 Industry M Services contribution to gross state domestic Product (GSDP) has been declining, from Source: World Bank database. 24% in 1981/82 to 16% in 1999-2000, which is the lowest share in the country (Figure 1.1). The agricultural sector's contribution alone was down to only about 14% in 1999/2000. By contrast, Maharashtra's services and industry sectors contributed 52% and 32% respectively to SGDP during the same year. Maharashtra was one of the top economic performers in India in the 1990s. All sectors (agriculture and allied services, industry and services) grew faster than the All-India average (Table 1.1). Although the agricultural sector's contribution to GSDP was declining, it nonetheless showed rapid growth in the 1990s, which at an average of 4.2% per year far exceeded the All-India average of 3.0% per year. Notably, it grew at a spectacular rate of almost 7% per year during the first half of the 1990s, facilitated by good monsoons. The agricultural sector's growth rate, however, dropped drastically to 0.1% per year in the second of half of the 1990s. This was in large part due to a severe drought that hit the State in 1997/98, where in the traditional high rainfall regions of the Konkan, Marathwada and areas bordering Madhya Pradesh, the actual rainfall was as much as 90% to 99% below normal levels (Fertilizer Association of India, Fertilizer Statistics 1997-98). During the same year, agricultural GDP contracted by over 20%. The sector only partly recovered thereafter, with an annual growth rate of 1.8% between 1998/99 and 1999/2000. The industry and services sector growth rates also slowed downed in the second half of the 1990s. Table 1.1 GSDP Growth Rate by Sector, 1990/91 to 1999/2000, constant 1993/94 prices 1990/91-99/00 1990/91-1994/95 1995/96-99/00 Sector Maharashtra India Maharasthra India Maharasthra India Agriculture and Allied Services 3.9% 3.3% 6.8% 3.6% 0.1% 3.3% Agriculture 4.2% 3.0% 7.9% 2.2% 0.3% 3.5% Forestry & logging -2.4%0/ 0.4% -4.4% -0.9% -3.4% 1.7% Fishing 6.0% 4.4% 1.6% 5.0% -1.1% 2.1% Industry 6.9% 6.6% 5.5% | 0.8% | 5.4% | 5.0% l Services 8.5% 7.9% 10.5% j 8.5% j 7.3% | 8.7% otal GDP 7.1% 6.2% 8.0% 5.0% 54% 6.2% Source: World Bank database 2 The importance of the agricultural sector in the economic and social fabric of Maharashtra, however, goes well beyond that which is indicated byo its ellbeyondtribution t t Figure 1.2: Sectoral Shares in Employment in Maharashtra, 1981 to 2001, indicate d by its contributi on to the percent. economy. The majority of the 1 Maharashtra's labor force still depends 100%o _ _ directly on farming as their primary source 90% of livelihood. This is unlikely to diminish 80% 38.3% 40.4% 44.6% very quickly. In 2001, about 55% of the 70% State's labor force (combined urban and rural areas) worked as cultivators or 60% agricultural laborers (Figure 1.2).' 50% _1 26.6% 26.8% Although the proportion of cultivators 40% - 26.8% declined from about 35% to 29% between 30%___ 1981 and 2001, the proportion of 3 0 agricultural laborers remained unchanged 20% at about 27% during the same period. In 10% rural areas exclusively, four-fifths of the 0% rural labor force depended on agriculture 1981 1991 2001 for their livelihood in 2001-42% were cultivtors nd 38% were griculural * Cultivators El Ag. Laborers D Non-Agrnc Workers cultivators and 38% were agricultural laborers. Source: Economic Survey of Maharashtra 2000-2001 and Government of India Census 2001. Agricultural productivity improved over the last decade, which in part contributed to a decline in the poverty rate in rural areas. Agricultural productivity is measured by the agricultural value added per worker (including cultivators and agricultural laborers). Analysis of the 1991 and 2001 census data showed that agricultural productivity per worker increased by over 30% in real terms, from about Rs.6,354 per capita in 1991 to about Rs 8,275 per capita in 2001. Significant public expenditures and increased private sector investments in the sector contributed to this productivity growth, which in turn helped in reducing rural poverty rates (headcount) by almost half from about 41% in 1987/88 to 24% in 1999/2000 (using 30 day recall and as reported by the Planning Commission).2 Despite this reduction, however, 24% still translated to about 12.5 million poor people in rural areas in 1999/2000. This state average also masked considerable rural distributional inequities. Bhalla (2000), analyzing the NSS quinquenial survey for 1993/94, found that among the different groups of rural workers, the poverty rate (headcount) was highest among agricultural laborers at 57% and construction workers at 43% (Table 1.2). More recent analysis (World Bank 2002) using the National Family Health Survey 1999 found that about 60% of agricultural laborers were in the poorest two quintiles of per capita consumption. This sectoral distribution of rural poverty was mirrored when examined at the district level. Using the most recently available district level rural poverty estimates (headcount) from 1993/94, about 9 districts had rural poverty rates exceeding the State average (Figure 1.3). Rural poverty rates also tended to be higher in districts with a higher proportion of agricultural laborers. Although the agricultural sector performed well during the last decade, sustaining and surpassing this performance will be a major challenge in the 21st century. Uncoordinated and 'About 2.4% of cultivators and 4.4% of agricultural laborers in Maharasthra were located in areas classified as urban. 2 There is considerable debate on the estimation of poverty rates in India. A recent adjusted estimate of Deaton is 29.2% 3 Figure 1.3: District level Source of Employrnent (2001) and Rural Poverty Rates in 1993/94, headcount %. 60% 45% o ,400o .0 50% (U 35% 0. 40 30% 25% W. Souce Empoyen daa oeneto ni,Cn 01.PvryRts ..Siiaa 02 ins t water), which intr desl fet giutrlpromnc nmn ra.Wi 15% ti 0 ~~~~~~~~~~~~~~~~~~~0 O ~~~~~~~~~~~~~~~~~~~~~~~~~~~10% (L 4) 10% 0% 0% cj W % Cultivators % Ag Laborers -A. Rjral Pbverty Rate 1993-94, headcount % Source: Employment data: Government of India, Census 2001. Poverty Rates: P.V. Srinivasan 2002. inconsistent sub-sectoral policies have contributed to the degradation of natural resources (land and water), which in turn adversely affect agricultural-performnance in many areas. While the objectives of the sugar and power policies were-to promote agricultural grdwth, and improve the incomes of farmers, an unintended impact of these policies has been the Widespread over-extraction of groundwater, threatening the long-term sustainability of agriculture and drinking water supplies in many districts. Large direct and indirect fiscal subsidies to the sugar, cotton, dairy, and water sectors have contributed to the fiscal crisis in the state, limiting state resources for more productivity enhancing investments. Poor infrastructure and services in rural areas not only contributed to increasing transaction costs and limiting agricultural competitiveness, but they also reduced the incentives for the private sector to invest in rural areas and thus lessened opportunities for higher paying non-farm employment. Fostering more rapid rural development, piftilcuilay iraising the productivity and competitiveness and accelerating the growth of the agricultural and rural non-farm sectors, will be critical to achieving faster overall economic growth, and hence, poverty reduction in Maharashtra. More rapid growth in the agricultural and rural non-farm sectors will both directly and indirectly contribute to generating greater opportunities for rural employment and income growth. In addition, by contributing to increased rural incomes, this will build a strong foundation for consumer demand in rural areas, which could in turn stimulate growth in other economic sectors. Achieving the goal of rural development, however, necessitates the careful review and reformulation of government priorities. A major challenge will be defining the appropriate role of the government relative to the private sector in the rural development process in the future. This relates not only to the policy and regulatory environment, but also the nature and scope of expenditures and investments, and the functioning of public institutions in rural areas. This would involve a careful reprioritization of public expenditures in the agricultural sector to favor more productivity-enhancing investments and away from less productive subsidies. It would also involve fostering the enabling environment for more rapid growth of the non-agricultural (industrial and services) sectors, from which rural households can increasingly supplement their household incomes. 4 Table 1.2 Rural Poverty Rate (headcount) by Persons in Households Engaged in Specified Sectors: 1987-88 and 1993-94, Maharashtra Year Cultivators Agric. Construction Manufacturing Trade Transport Health & Other Laborers C Education services 1987-88 29.4 59.3 47.0 31.5 22.7 20.6 8.9 22.1 1993-94 22.5 56.6 42.9 26.5 16.6 1 18.9 5.5 16.6 Computed from NSS until level data, using the Expert Group methodology and the official poverty line. Source: Bhalla 2000. B. Objectives of the Study This policy note focuses on examining the constraints to promoting more rapid agricultural growth in Maharashtra. It aims to: (i) review the recent status and performance of the agricultural sector in the State focusing on selected key areas such as cotton, sugar, water and the rural non-farm sector; (ii) examine the major policy and regulatory impediments in these sub-sectors that are hindering their contribution more rapid and sustained agricultural growth and rural poverty reduction; and, (iii) propose options for improvement in these areas as well as identify areas requiring further study. The next chapter presents an overview of the performance of the agricultural and agro- industrial sectors in Maharashtra. Chapters 3 and 4 review key agricultural policies and their impact. Chapter 3 focuses of the Government of Maharashtra's (GOM) policy for water, horticulture and cotton sectors. Chapter 4 examines GOM's policies for intervening in agricultural markets, either indirectly through farmer cooperatives-- specifically sugar, dairy processing and cotton or directly through controls on wholesale marketing. It examines briefly access to rural infrastructure and education in rural areas. A second volume provides additional notes on selected issues and statistical tables on the agricultural sector. It contains short notes on the Government of India Sugar Policy as of November 15,2001 (Annex A), Schemes of the National Horticulture Board (Annex B), and basic principles for supply chain development (Annex C). II. Overview of the Agricultural Economy Agriculture in Maharashtra can be characterized by low irrigation and low rainfall. As approximately 85% of cultivated area was rainfed, and agricultural performance is significantly influenced by the monsoons. A large percentage of crop area has traditionally been devoted to lower value cereals such as rice and jowar. In order to improve farmers' productivity and profits, the GOM in the last decade placed considerable emphasis on changing the existing cropping structure through the promotion of private investments in high value crop cultivation, particularly horticulture, and fostering the adoption of improved varieties. This was largely successful. The agri-business sector has also expanded and but there is considerable room for faster growth. A. Agriculture and the Economy Agricultural Performance There has been limited change in cropping structure in the State during the 1990s. Maharashtra's agriculture remains dominated by foodgrains, which takes up over 60% of the cropped area (Figure 2.1). Foodgrain area declined only slightly, by 8% between 1987/88 and 1998/1999. The share of oilseed area also remained the same. This was accompanied by the slight expansion of area planted to cotton (2%), sugarcane (1%), and fruits and vegetables (3%). Figure 2.1. Cropping Pattem in Maharashtra, 1987/88 and 1999/00 Fruits& Fruits& Others Veg Others Vegetable 8% Cotton 1% 6% 4% \ 12% Sugarcane Cto 1% 14% Sugarcane 2% OilseedsJ Foodgrains 12/o - Foodgrains Oilseeeds - 60% 68% 12% 1987/88 1998199 Source: Maharashtra Directorate of Economics and Statistics and National Horticulture Board, GOI. These slight changes in cropping structure, however, had a significant impact on the composition of agricultural GSDP. Although foodgrains accounted for 60% of cropped area, they accounted for only 27% of agricultural GSDP in 1999/2000 (Figure 2.2). This was largely due to the dominance of lower value jowar in foodgrain cropped area. It accounted for about 23% of total gross cropped area, compared to 7% for rice and 5% for wheat. Jowar was predominantly grown in the rainfed and water constrained areas of the State, only 8% of jowar area was irrigated (Table 2.1). By contrast, although fruits and vegetables only covered 4% of cropped area in the State, they contributed about one-fifth of agricultural GSDP. Notably, the govemment's program to promote horticultural production in the State was instrumental in the expansion of area devoted to fruits and vegetables, which more than quadrupled from 213,000 ha in 1987/88 to 929,000 ha in 1999/2000. This program was an integral part of the govemment's strategy to promote the shift to higher value crops in the State. Increased private sector involvement in the distribution of inputs (improved seeds and planting materials, agro-chemicals, and other improved technologies such as drip and sprinkler irrigation), agro-processing, marketing and exports also helped boost growth in the sector. 6 Sugarcane and cotton output and area continued to increase, primarily due to Figure 2.2 Conimodity Contribution to Agricultural GSDP, 1999/2000 government's funded programs. The GOM Others financed directly and indirectly the 12% establishment of sugar milling cooperatives Foodgrains to promote the expansion of sugarcane / L 27% production. Cotton production .inqease.d,In.f Fruits& . -. large part encouraged by high support prices Veg for cotton, under the Maharashtra Monopoly 21% Procurement Scheme. These government sugar and cotton schemes, however, were Oilseeds unsustainable due to the large fiscal costs Cot to n 11% involved and for sugarcane, the increasing Cottoa scarcity of water. These are discussed in 1l/ Sugrcane detail in the next chaRter.;Amrpng, 18% soybean emerged as' the single largest -Source: State Income of Maharashtra 1993/94 to 1999/2000, Directorate of Economiics and Statistics. oilseed crop in Maharashtra. Soybean area grew 5 fold in the 1990s, from about 200,000 in 1990/91 to 1.2 million ha in 1999/00. It accounted for about 42% of total area under oilseeds and about 5% of total gross cropped area in the State. By contrast, groundnut area declined to 2% of gross cropped area in the late 1990s. The horticulture sector was an important contributor to agricultural growth in Maharashtra. By 1998/99, Maharasthra had the -largest area devoted to fruits and the fifth largest area devoted to vegetables in the country. Between 1987/88 and 1998/99, the state's fruit production more than quadrupled from about 1.7 million to 7.5 million mt. Among fruits, mangoes (mainly Alfonso variety), cashew nuts, oranges, bananas and grapes displayed Table 2.1: Percentage Share in Gross Cropped Area, Percentage Area Irrigated and the highest growth in area and Average Annual Growth Rates of Major Crops in Maharasthra, 1990/91 to 1999/2000. output. In 2000/2001, these % Share in % of Area Ave Annual Growth Rate 90/91-99/00 crops accounted for 70% of total Commodity GCA, 99/00 Irrigated 99/00 Prodn Yield Area Rice 7% 23% 1 % 2% -1% area planted to fruits. According Wheat 5% 74% 5% 2% 3% to the latest estimates available owar 23% 8% -2% 0% -2% (1998/99), Maharashtra 3ajra 8% 6% 2% 3% -1% o199899Maharshtr Maize I % na 13% 2% 11% accounted for 63% of grapes, Ragi % na -3% 0% -3% 31% of oranges and 23% of Gram 4% 27% 7% 1% 6% bananas produced in India. The Tur 5% 0% 6% 6% 0% Groundnut 2% 2% -5% 2% -5% state's production of vegetables Rapeseed 0.1% na 7% -6% 7% increased 5 fold between oybean 5% na 20% 5% 20% 1987/99 and 1998/99, reaching unflower 2% na -1% 0% -1% 4.4 million mt in 1998/99. The ugarcane 3% 100% 47% 4/% 3% most important vegetable crop Note: na-not available in the state was onion, which Source: CMIE, Agriculture, various issues; Maharashtra Directorate of Economics and accounted for about 23% of Statistics. total vegetable cropped area. Notably, Maharashtra accounted for about 20% of the area and 25% of the total output of onions in India. The production of vegetables was concentrated around big cities like Nashik, Pune, Satara, and Nagpur, where road conditions were good. Rising per capita incomes, an expanding middle class, and shifting consumer preferences to higher value food products in Maharashtra and India helped sustain the growth of fruit and vegetable production in the state. While horticultural products earlier catered primarily to the domestic market, Maharashtra has also been making strong in-roads into the world market for mangoes, cashews, and grapes. The 7 Table 2.2- Selected indicators for aculture in Maharashtra. Indicators Year Yields of Major Crops, kg/ha Maharashtra Kamataka Tamil Nadu Andhra Pradesh Uttar Pradesh All India Rice 98/99 1,660 2,530 3,440 2,780 1,960 1,930 Wheat 98/99 1,290 820 670 2,510 2,580 Jowar 98/99 939 890 1012 696 701 859 Maize 98/99 1,840 3,250 1,600 3,330 1,030 1,760 Bajra 98/99 850 680 1339 937 1160 750 Ragi 98/99 1,010 1,760 2,080 1,260 1,380 1,540 Groundnut 98/99 1,220 1,000 1,800 990 670 1,210 Sunflower 98/99 570 370 1,040 630 1,270 580 Soybean 98/99 1,395 670 430 1,100 Cotton, bales/ha 98/99 140 240 300 200 110 220 Sugarcane 98/99 88,998 102,630 110,270 78,040 58,990 72,560 Onions 98/99 12,370 4,730 8,220 14,930 13,910 9,930 Apricultural Inputs % GIA/GCA 97/98 7 25 54 I 43 67 39 Fertilizer Use, kglha 2000/01 76 115 144 160 113 87 No. of Tractors/000 ha 96/97 5.5 6.4 9.0 6.3 17.3 11.4 Note: GIA-gross irrigated area; GCA gross cropped area Source: CMIE, Agriculture 2001, National Institute of Agricultural Marketing, 1997. major grape variety in demand for exports was Thompson seedless, whose main export market was England (8 supermarkets each having 300-500 retail outlets). Although there was considerable competition from other countries, Maharashtra had the comparative advantage of being able to supply grapes during the months of March to April, when supplies from other exporting countries were low. Major markets for mangoes were Europe and the Middle East. Potato and onions were exported mainly to U.A.E., Malaysia, South Africa, Nepal, Canada, and Kuwait etc. Floriculture, many grown under green house conditions, has been expanding, especially in Pune, Satara, Nashik, Ahmednagar, Thane, Sangli and Kolhapur districts. In 2002, about 808 farmers and 14 corporations are producing flowers under green houses. The area planted to flowers amounted to 6,600 ha with an output of 28,000 mts in 2000/2001. The demand for flowers in and outside the country has been growing rapidly. An increasing share of these flowers, particularly roses, carnations and gerbera (a variety of daisy), were exported to Europe, with peak demand during holidays that fall during the colder months (Christmas, New Year, Valentine day, Mother's day and Easter). Domestic demand peaks during festival periods. The comparative yield performance of various crops in Maharashtra relative to the All India average levels and other major producing states was mixed. Although average yields of wheat, jowar, maize, bajra, groundnuts, soybean and sugarcane in 1998/99 were higher than the all India average, they were below the other major producing states in India (Table 2.2). To some extent this yield performance was facilitated by the widespread use of improved varieties in the state. About 95% of wheat area, 92% of jowar area and 90% of bajra and rice area were planted to higher yielding varieties (HYVs) in 1998/99. As of the most recently available estimate (1996/97), about 35% of cotton was planted to HYVs. Both the public and private sector participated in the distribution of improved seeds, with shares of about 55% and 45% respectively. The volume of improved seed sold during kharif 2001 by the public and private sector totaled about 38,000 and 32,000 mt espectively. Maharashtra has placed considerable emphasis on use of improved seeds over the years Improving yield performance further, to capitalize on the potential of HYV's and other inputs, has been constrained by water availability. Only about 17% of total cropped area in the state was irrigated, the rest was rainfed. Agriculture in Maharasthra thus primarily depends on rainfall, received through the south-west and north-east monsoons, which generally went through Maharashtra between June and October. Notably, the amount of normal rainfall received varied significantly across districts, from 579 mm per year in Ahmedagar District to 3306 mm per year in 8 Ratnagiri district. The higher Figure 2.3: Rainfall and Percentage of Irrigated Cropped Area over Total Cropped rainfall districts were generally Area by District located in the coastal and north- 3.5 - 50 eastern sections of the state. Of 3.0 - - the remaining central section, the e 2.5 - - western half was the most dry, 2.0 - - 30 receiving less than 741 mm per 1.5- 20 year, while the western half ' 1.0 - 2 generally received less than 1000 ; 0.5 - 1l mm per year.0-0 0 Access to supplemental irrigation (canal or groundwater), . g ' eQ however, was limited especially in v o the lower rainfall areas (Figure MA e Rainfall (mms) -o- % Irrigated in GCA 2.3). Moreover, the limited water Note: Yavatmal is the 1000 mm rainfall cut off. availability and heavy use of Source: Sawant, et al. 1999 and Maharashtra Directorate of Economics and groundwater for sugarcane statistics production, a water intensive crop, in many water scarce areas limited the expansion of irrigated area for other crops. Although sugarcane accounted for only 2% of gross cropped area, it accounted for about 50% of area irrigated by canal and groundwater. Maximizing the efficiency of use of available irrigation water, as a means to increase agricultural productivity and employment, will be critical as rural poverty rates have been higher in many districts where limited irrigation was available (Figure 2.4). This issue is discussed in greater detail in the next chapter. Figure 2.4: District Rural Poverty Rates (1993/94) and Percentage of Gross Irrigated Area in Total Cropped Area 1999/2000 Fertilizer use in 50 45 Maharasthra was considerably lower 45 - 40 than the All India average. This 40 35 likely affected productivity levels in (35 the state. In 2000/2001, the fertilizer , 30 30j the state. In ~~~~~~~~~~~~~~~~~25~ use rate in Maharashtra of 76 kg/ha , 25 20 was more than 10% below the all E 20 -'[ India average of 87 kg/ha and about 0 15- half of fertilizer use rates in Andhra o 10 1L Pradesh and Tamil Nadu. |0 5 Uncertainties associated with 0 rainfall and the limited access to 'Qj C:N irrigation were likely influencing fertilizer use in the state, as water is critical to efficient utilization by %GIA/GCA -o-- Piverty Rate 1993-94, headcount % plants of supplementary nutrient I applications. Source: Maharashtra Directorate of Economics and Statistics. Livestock Sector Performance Output of major livestock products grew reasonably well during the 1990s. Milk, eggs, and poultry and other meats grew at an average rate of about 4% per year between 1993/94 and 1999/2000. By the end of the 1990s, milk output reached 5.7 million mt, so that Maharasthra ranked as the fifth highest producer of milk in the country. This output growth was facilitated by the government's program to operate dairy milk schemes. These schemes, however, were facing problems of plenty, particularly rising stocks of skim milk and butter, since the late 1990s. 9 Moreover, weak management led to the poor financial performance of many Figure 2.5: Production of Milk, Eggs, Poultry Meat and Other Meat, TE government schemes necessitating 1995/96 and 1999/2000. sizeable fiscal transfers. These issues are 6,000 5,508 discussed in greater detail in the next 5,000 4,684 chapter. The poultry industry expanded . consistently. The poultry population 4,000 3149f increased by about 10 million birds 2,870 between 1987 and 1997, reaching nearly 3J23 35 million in 1997. The state was one of 2,000- _,626 largest producers of eggs in the country, e ranking fourth in 1997/98. The sustained 1,000 growth of the livestock sector in turn has 0 - also spurred the growth in production of Milk, 000 mt Eggs, million Other Meat, Poultry Meat feed crops, particularly maize. During the pcs 00 mt 00,000 birds 1990s, maize output in the state grew by TE95/96 0TE99/00 13% per year. I________O _TE99/00 The livestock sector is an Note: TE-tfiennium ending increasingly important contributor to Source: Maharashtra Directorate of Economics and Statistics. agricultural GSDP. By the end of the 1990s, it accounted for about one-third of agricultural GSDP (Table 2.3). The gross value of the major livestock product categories (milk, eggs, poultry and other meat products) increased by over 4% per year during the 1990s. The dairy sector continues to account for the largest share (70%) of the gross value of livestock output. There are 31 veterinary polyclinics, 1353 veterinary dispensaries, 2006 primary veterinary aid centers and 61 mobile veterinary clinics in Maharashtra managed by the state and local governments. There are a large number of artificial insemination centers through out the state, numbering about 4500, of which 29 were district centers, 49 regional centers and the rest sub- centers. There were three laboratories in the state for production of frozen semen. About 445,000 crossbreed calves were born in 2000-01. The artificial insemination program has been on-going for three decades, and contributed to increased animal productivity and milk production. Table 2.3: Gross Value of Livestock Products, 1993/94 to 1999/2000, constant 1994/94 rupees. ITEM Gross Value of Output, Rs Billion, constant 1993/94 rupees Ave Annual 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 Growth Rate Milk 3.9 4.4 4.5 4.6 4.7 5.1 5.2 4.5% Eggs 0.2 0.2 0.2 0.2 0.3 0.3 0.3 4.2% Poultry Meat 0.6 0.6 0.7 0.7 0.7 0.7 0.8 4.2% ther Meat Products 0.6 0.6 0.6 0.6 0.7 0.8 0.8 4.6% ther Livestock Products 0.3 0.3 0.3 0.3 0.4 0.4 0.4 3.1% otal Livestock 5.6 6.2 6.4 6.5 6.8 7.2 7.4 4.4% % Share of Livestock in gricultural GSDP 28% 31% 31 % 27% 35% 33% 32% Source: Maharashtra Directorate of Economics and Statistics. Agricultural Terms of Trade The terms of trade in recent years have moved slightly against agriculture in Maharashtra. The index of output prices have risen by 50% during 1993-94 to 1999-2000 (as indicated by the state agricultural income implicit deflator), while the index of prices of all inputs taken together have risen by 56% during the same period (Table 2.4). 10 Table 2.4: Terms of Trade for Agriculture 1993-94 1 1994-95 1 1995-96 1996-97 1997-98 1 1998-99 11999-2000 Output Price Index in Agriculture 100.0 113.1 121.9 130.2 141.3 148.4 150.1 Input Prce Index in Agriculture 100.0 110.6 117.6 131.6 142.4 150.9 156.1 Terms of Trade (output price/lnput price) 100.0 102.3 103.7 99.0 99.3 98A 96.2 Source: Derived from Value of Outputs and Inputs as reported by the Maharashtra Directorate of Economics and Statistics. B. Rural Non-Farm Sector The rural non-farm sector provided an important source of income for rural households in Maharashtra. According to the most recent estimates using NCAER data (1993/94), non-farm incomes, on average, accounted for around one-fifth of rural household incomes (Table 2.5). This proportion is the same across expenditure quintiles, with the exception of the highest quintiles. But in view of the high rates of poverty among agricultural laborers and cultivators, the more rapid growth of the rural non-farm sector would be critical to generating greater opportunities for higher paying employment in rural areas. Table 2.5. Non-farm Income Shares in Rural Maharashtra, 1993/94 Quintile Cultivators Agriculture Nonfarm Nonfarm Nonfarm Total Other Real per Wage labour Wage Self regular nonfarm sources capita labour employment employment sources income Lowest 29.3 47.8 10.0 6.9 4.0 20.9 2.1 1345 Q2 37.1 30.3 11.4 8.0 8.0 27.3 5.3 2363 Q3 50.2 19.2 5.6 8 1 10.9 24.7 5.9 3572 Q4 61.7 8.0 3.2 5.4 17.3 25.9 4.3 5635 Highest 81.2 1.8 0.4 3.9 10.4 14.7 2.3 14684 Total 66.9 10.0 3.0 5.2 11.3 19.6 3.4 5524 Source: Lanjouw and Shariff2000. The Agro-Industrial Sector In the rural non-farm sector, private sector investments in the agro-industrial sector expanded considerably in the 1990s. The gross value of output of agri-based (registered and un- registered) manufacturing enterprises in Maharashtra grew by about 4% per year in real terms between 1993/94 and 1998/99, reaching about Rs98 billion (1993/94 rupees) in 1998/99. Agri-based manufacturing enterprises accounted for about one quarter of total industry gross value added (Table 2.6). Food products (25%) and cotton textiles (23%) contributed nearly one half of the gross value of output of agri-based firms, followed by paper and paper products (16%). The gross value of output of food processing fimns grew by about 9% per year during this period. Employment in agro-based industries increased by an average of 3% per year during the 1990s. Having contracted in the 1980s, employment grew by an average of 3.3% per year from 1991/92 to 1997/98 (Table 2.7). This rate, however, is slightly below the All-India average of 4.4% per year during the same period. Most recent data on agro-industrial enterprises indicated an on-going restructuring within the agri-business sector. The number of registered firms involved in food products, beverages and cotton textiles increased between 1995/96 and 1997/98, this was largely counteracted by the decline in number in the textile, wood and leather manufacturing sectors. Hence, the total number of agri- business related firms overall increased by only 6 firms (Table 2.8). With the exception of the beverage sector, whose employment expanded by 16%, employment in other subsectors contracted, such that total employment declined by 52,000 workers. 1*1 Table 2.6: Gross State Domestic Product of Registered and Unregistered Agriculture-based Manufacturing Firms, 1993/94 to 1998/99, Rs billion, 1993/94 rupees. NIC Gross Value of Output, Rs billion, 1993/94 rupees Ave Annual Catogory .CODE- 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Growth Rate Food Products 20-21 20.2 21.8 27.6 30.9 24.7 33.9 9.2% Beverage & Tobacco etc. 22 5.6 5.3 6.4 6.4 8.5 5.6 4.2% Cotton Textile 23) 22.9 17.7 17.4 19.9 22.3 0.6% Wool and Silk 24) 8.7 6.9 6.5 7.7 9.8 28.0 22.4% Jute Products 25) 0.1 1.3 0.0 0.0 0.1 -24.0% Textile Products 26 6.9 9.4 10.0 7.4 9.3 5.8 -3.4% Wood & Wood Products 27 6.8 6.5 7.4 6.8 6.0 8.1 1.5% Paper & Paper Products 28 11.4 13.3 14.7 15.2 15.2 14.3 4.6% Leather Products 29 2.1 1.9 2.1 2.1 2.4 2.6 5.0% Subtotal 84.7 84.0 92.2 96.4 98.3 98.2 3.7% on-Agn-based Industries 200.0 206.0 252.2 259.2 302.4 276.7 8.3% otal Gross Value Added (ExcI fisim) 284.7 290.0 344.3 355.6 400.7 374.9 7.0% Source: Maharashtra Directorate of Economics and Statistics Table 2.7. Employment Growth in Agriculture-based Industries: Maharashtra and All India | 80-81 to 91-92 (%) 91-92 to 97-98 (%) Growth Accelerating industry in the post-liberalization penod Maharashtra 1 -1.78* 3.29* 20-21, 22, 26, 27, 28 All India | -0.49 4.42* 20-21, 22, 24, 26, 27,28 Note: Food and food products (20-21), beverages, tobacco and tobacco products (22), cotton textiles (23), wool, silk and synthetic fibre textiles (24), wood & wood products and fixtures (27), paper and paper products (28) Source: Compiled from Burange 2001. Table 2.8: Number of Registered Agro-Industrial Firms and Emloyees, 1995/96 to 1997/98. NIC I No. of Firms No of Employees Code Industry Category 1995-96 1996-97 1997-98 1995-96 1996-97 1997-98 20-21 Food Products 1,839 1,885 2,053 153,058 153,229 150,130 22 Beverages, Tobacco and Related Products 399 652 559 61,241 70,814 82,845 23 Cotton Textiles 1,141 1,109 1,161 162,866 156,198 157,818 24 Wool, Silk & Man-made fiber Textiles 910 682 732 70,291 63,991 55,934 26 Textile Products (including Wearing Apparel) 1,056 1,356 913 39,246 38,589 29,115 27 Wood and Wood products 285 215 261 6,079 4,193 4,166 29 Leather, Leather Products, Fur & Leather Substitutes 145 50 94 5,725 2,507 5,033 Subtotal 20,536 20,186 20,542 1,518,013 1,455,506 1,465,980 Source: Annual Survey of Industries, various issues Most agribusiness firms have less than 50 employees and there appears to be a bimodal distribution of firms in terms of fixed capital investments. The majority of agribusiness-related factories, about 80%, had less than 50 employees; about 60% had less than 20 employees (Table 2.9). About one-third had fixed capital investments of less than Rs.500,000, another one third were in the Rs 2 to 50 million range, with 20% in the Rs 2 to 10 million range (Table 2.10). Table 2.9: Percent Distribution of Factories by Size of Employment in Selected Industry Groups in Maharashtra 1998/99 Size Class of Food, beverages, Textiles and Paper and paper products, Employment tobacco, products wearing apparels publishing, printing etc. etc. pbihn,pitn t. Alidsre Below 20 60.8 45.7 61.8 55.8 20-49 16.8 29.9 29 24.6 50-99 7.6 13.6 5.0 8.8 100-199 6 5.9 1 2.3 6.2 200-499 3.4 2.1 1.3 2.6 500 and above 5.4 2.8 0.6 2.0 Total 100.0 100.0 100.0 100.0 Source: Maharashtra Directorate of Economics and Statistics. 12 Table 2.10: Percent Distnbution of Factones by Size of Fixed Capital in Selected Industry Groups in Maharashtra 1998-99 .Size Class of Fixed Food, beverages, Textiles & wearing Paper & paper products, All industries Capital, Rupees tobacco, products apparels etc. publishing, printing etc. than 250,000 22.5 30.9 19.0 22.8 250,000 to 500,000 11.4 8.1 5.8 9.5 500,000 to 750,000 6.4 9.9 7.4 7.0 750,000 to I million 6.4 5.0 5.8 5.5 I to 1.5 million 7.4 8.3 7.6 7.4 1.5 to 2 million 4.4 4.0 11.0 6.1 2 to 5 milhon 15.4 15.1 21.8 16.3 5 to 10 million 11.1 6.0 7.3 8.6 10 to 50 million 7.7 7.2 11.0 10.4 50 million & above 7.3 5.5 3.3 6.4 Total 100.0 100.0 100.0 100.0 Source: Maharashtra Directorate of Economics and Statistics. Rural Informal Sector The rural informal sector was another source of employment in rural areas, but their improved performance was subject to several constraints. NSS conducted a survey of the rural informal sector in the year 1999-2000. The survey covered both "own account enterprises" and "establishments". An "own account enterprise" was an undertaking run by household labor, usually without any hired worker employed on a 'fairly regular basis'. 'Fairly regular basis' meant the major part of the period of operation(s) of the enterprise during the last 365 days. "Establishments" consisted of enterprises that had at least one hired worker on a 'fairly regular basis'. Own account enterprises comprised more than 90% of rural informal sector enterprises and more than 80% of workers (Table 2.11). The value-added per worker of own account enterprises was about half those of establishments. Around 41% of the enterprises were located within the household and 9% of the enterprises was owned by females. Table 2.11.Informal Sector in Rural Areas: Maharashtra and All India, 19 9-2000 Item Maharashtra All India No.of enterprises (000s) (a) Own Account Enterprises 1375.54 23656.86 (b) Establishments 115.45 1411.48 (c) All Enterprises 1490.99 25068.34 No.of Workers (000s) (a) Own Account Enterprises 1965.55 34142.49 (b) Establishments 419.04 5665.8 (c) All Enterprises 2384.59 39808.28 Estimated Annual Value added per worker (Rs.) (a) Own Account Enterprises 18195 13443 (b) Establishments 38827 24442 (c) All Enterprises 21820 15008 % of enterprises owned by females 9.4 13.0 % of enterprises located within the household 40.7 44.8 % of enterprises operating on seasonalcasual basis 6.7 4.4 % of enterprises facing no specific problem 24.8 28.5 % of entrepreneurs undertaking no additional activity 50.0 52.5 % of enterprises reporting expanding business activity 18.2 18.6 Source: NSS 55"' Round, Informal Sector in India: 1999-2000. Report no.459. About 75% of the enterprises reported encountering problems relating to shortage of capital (43%), lack of electricity (3%), problems of powercuts (2%), lack of infrastructure (18%), and local problems (29%) (Table 2.12). A higher proportion of enterprises in Maharashtra reported problems compared to the All India average. Only about one-fifth of enterprises disclosed plans to expand their operations, which in part signals the perceived market opportunities in the state. 13 Table 2.12: Proportion of Rural Enterp rises by Problems Faced by Them, Percent All Y Own Enter )rises Establishments Major Problem Faced Maharashtra India Maharashtra India Maharashtra India Shortage of Capital 46 43 46 43 38 35 Lack of Lighting Facility 2 3 2 3 1 3 Problem of Power Cuts 3 2 3 1 8 6 Lack of Infrastructure I I 18 I I 19 8 15 Local Problem 15 20 15 20 15 17 Competition for Larger Units 32 13 31 13 37 18 Non-availability of Labor 0 1 0 1 2 3 Labor Problems I 1 I 0 3 3 Raw material/fuel not available 4 4 4 4 3 5 on-recovery of service charges 13 11 13 I 13 1 0 Others 4 6 4 6 3 4 Source: NSS 55t' Round, Informal Sector in India: 1999-2000. Report no.459. Quality of Employment The proportion of workers employed as casual laborers was very high in Maharashtra. Casualisation is considered as one of the indicators of declining quality in employment. About 44% of rural males and 54% of rural females were employed as casual laborers in the State in 1999/2000 (Table 2.13). This percentage shares were considerably higher than the All-India average of 36% and 40% respectively. A major challenge in the future, therefore, is promoting more rapid expansion of private investments in commercial farm and non-farm activities that provides higher paying permanent employment. Table 2.13.Distribution of workers by Category of Employment (%): Maharashtr and all India, 1999-00 Years Maharashtra All India Rural Male Rural Female Rural Male Rural Female Self Employed 44.1 44.5 55.0 57.3 Regular Employed 11.8 1.5 8.8 3.1 Casual Laborer 44.1 54.0 36.2 39.6 Source: NSS 55' Round, Informal Sector in India: 1999-2000. Report no.459. Rural Education Education is an important determinant of agricultural and rural non-farm employment and incomes. Relative to other states in India, Maharashtra in 2001 had one of the highest literacy rates3, at 77%, in the country (Table 2.14). This was 11 percentage points higher than the all-India rate, but below that of Kerala (90%). The literacy rate in the State was 86% for males and 68% for females in 2001. The enrollment ratio in primary school (number of children in school as a proportion of total population in corresponding age group) was also high for both boys and girls. This ratio for girls was close to that for boys in Maharashtra in contrast to the large difference in many other states in India. The state average, however, masked regional and rural-urban disparities in literacy levels. In all districts, literacy rates in rural areas were lower by about 10 to 20 percentage points than in urban areas (Figure 2.6). Literacy rates in rural areas also tended to be lower in districts with higher poverty rates. 3Literacy rate in Indian census is estimated as a percentage of population aged 7 years and above. 14 Table 2.14: Literacy Rate and Enrollment Ratio in Primary School in Major States in India I Literacy Rate 2001 (Percent) Enrollment Ratio in Primary School 1999- State 2000 Males Females Total Boys Girls Total AndhraPradesh 70.85 51.17 61.11 105.21 101.39 103.32 Gujarat 80.50 58.60 69.97 124.54 101.43 113.38 Haryana 79.25 56.31 - 68.59 81.22 82.98 82.04 Karnataka . 76.29 57.45 67:04 112.83 105.87 109.39 Kerala 94.20 87.86 90.92 85.80 84.74 85.28 Madhya Pradesh 76.80 50.28 64.11 126.53 102.94 115.03 Maharashtra 86.27 67.51 77:27 115.80 112.32 114.10 Orissa 75.95 50.97 63.61 125.70 91.48 108.84 Punjab 75.63 63.55 69.95 79.91 81.71 80.75 Rajasthan 76.46 44.34 61.03 137.61 83.81 111.92 Tamil Nadu 82.33 64.55 73.47 102.75 98.62 100.73 Uttar Pradesh 70.23 42.98 57.36 78.43 50.18 64.97 West Bengal 77.58 60.22 69.22 105.35 94.86 100.19 India 75.85 54.16 65.38 104.08 85.18 94.91 Note: Enrollment ratio refers to number of students in class I-V as a proportion of population in the age group 6-11 years. Source: Ministry of Finance and, Economic Survey 2001-2002, GOI. Figure 2.6: District literacy rates (2001) and Rural Poverty Rates (headcount) 1993/94 in Maharashtra. 140 45pg 450 ioo ~~~~~~~~~~~~~~~~~35 30 -8 il Rural Literacy 2001 Urban Literacy 2001 +-- Rural poverty 93-94 Source: Poverty rate: P.V. Srinivasan 2002; Literacy Rate: Maharashtra Humnan Development Report 2002. C. Conclusion Maharashtra's agricultural sector performed well in the 1990s, but will this be sustainable? Significant public expenditures and increasing private sector participation in the distribution of inputs, agro-processing and marketing promoted diversification and the shift towards the production of higher-value crops. This has been crucial to the sector's strong performance. Several factors, however, threaten the long-term sustainability of such growth performance. These include the large and sustainable fiscal costs of existing govemnment programs and the adverse environmental and social impacts of current policies. These are discussed in greater depth in the following chapters. III. Agricultural Sector: Key Policies and Their Impact A. Agriculture Policy 1997/98 The GOM's Agriculture Policy 1997/98 aimed at the development of the agricultural sector in a sustainable basis by using available resources economically, efficiently, effectively, and in an environmentally sound manner to raise farm incomes and output. Although this policy was only officially announced in 1997/98, it governed the design of government programs and priorities in the second half of the 1990s. Keeping the farmer as the focal point, the policy aimed to: * Promote agricultural development on commercial and industrial lines to achieve primacy in the agricultural sector; * Strengthen the competitive resolve of the farmers in light of emerging global scenario with a view to taking full advantage of the emerging opportunities; * Address the needs of vulnerable sections, generate both skilled and unskilled employment and make a positive intervention towards poverty alleviation; * Prepare plan of action for full exploitation of limited water resources; * Improve the performance of agricultural universities; * Implement a rural roads program; * Promote farm and infrastructure facilities for post harvest management, storage, transport, marketing and exports to ensure that farmers will get due price for their produce; and, * Improve the system relating to Agricultural Produce Market Committee. To translate this framework into action, the GOM spent considerable public resources and intervened extensively in commodity markets. The government financed through the budget and market borrowings investments for the expansion of irrigation infrastructure and subsidized the cost of delivery surface irrigation. It subsidized electricity to agriculture (for electric pumpsets) to promote the expansion of groundwater irrigation. It implemented price support Table 3.1: Fiscal Subsidies to Major Agricultural Sub-sectors in operations for cotton and financed directly Maharashtra, 1997/98 to 2000/01, Rs Billion, constant 2000/01 rupees. Rs billion, constant 2000/01 upees (through equity) and indirectly (through Sector 97/98 98/99 99/00 00/01 loan guarantees) the establishment of Electricity to Agnculturel/ 3.5 3.8 21.7 3.7 sugar mills. It subsidized the operations of Surface Irrigation2/ 3.6 2.2 1.6 0.5 government and cooperative dairy Cotton 2.3 6.7 8.0 6.7 processing operations. It provided start up Dailr 1.9 1.8 2.0 1.6 processing up ~~~~~~~~~~~~Horticulture 0.8 0.8 0.8 0.7 grants for horticulture projects. Direct GOM Total 12.1 15. 34.1 13.2 fiscal subsidies to these major sub-sectors Fertilizer (GOI) 112.5 121.9 138.0 126.5 alone amounted to about Rs13.2 billion Note: I/Electricity subsidies include subsidies for households and electric purmp sets. 2/ O&M expenditures less actual cost recovery, includes subsidy ($276 million) in 2000/01, equivalent to to agriculture, industry and drinking water. 6.3% of agricultural GSDP and 0.8% of Source: GOM. total GSDP (Table 3.1). In addition, the GOM has had to absorb the accumulated outstanding debts and interest owed by poorly performing irrigation development corporations, sugar mills and the cotton monopoly procurement scheme. GOM agencies also continue to be involved in private sector activities such as the distribution of seeds, planting materials, and other inputs to ensure their availability to farmers. While these expenditures have contributed to the expansion of the respective sub-sectors, it has been recognized that the current composition of fiscal support was unsustainable over the longer term and come at the expense of more productive investments (e.g. rural infrastructure, education, etc); that extensive government market interventions were fostering inefficiencies and were crowding out private sector investments; and current policies have resulted in second generation problems (e.g. over-extraction of groundwater). This and the foll6wing chapter explore these issues in more depth. 16 Box 3. 1: Key Agricultural Reform Announcements During Budget Speech 2002-03 Cooperative Sector: Cooperative institutions to free themselves from GOM support and develop competitive advantage. GOM will stop financial support to new commercial cooperative units. The GOM will open the process for quick liquidation of uncompetitive cooperative units. It will advice new entrants in sugar and spinning mills to take over ailing units. A three man Board will be established and empowered to restructure units, including divestment, merger, amalgamation or closure. Irrigation: GOM will permit interested parties to finish incomplete irrigation projects on a BOO.BOT basis. It will formalize farmer participation in the management of surface irrigation systems by establishing Water User Associations, who will be responsible for the maintenance and operation of distnbution networks and collect irrigation fees to meet the financing requirements of these networks. Drinking Water: GOM has adopted a new water supply policy based on demand driven and community-based principles. Village panchayats will be responsible for planning and implementing village water supply schemes costing less than Rs7.5 million. Completed projects not taken up by local bodies will be outsourced to user associations, cooperative bodies and private parties on BOT basis. Cotton: GOM will procure cotton at the GOI minimum support price and permit the Cotton Corporation of India and others to purchase cotton in the State Regulated Markets: GOM will desist from intervening in the market for all agricultural commodities. New entrants (cooperative and non-cooperative) will be allowed to set up markets in designated areas Dairy: GOM will divest as many of its dairy operations as possible. The GOM will transfer its facilities to well-run cooperatives whenever feasible. The possibility of transferring idle capacity in govemment dairies to private operators through open tender system will be explored. Source: Minister of Finance, Govemment of Maharashtra 2002. Policy Reforms in Budget Speech 2002-2003. The Minister of Finance, GOM announced a number of policy reforms in his most recent budget speech relating to the agricultural sector. If fully implemented, they would work towards addressing some of the critical challenges in the sector. These are summarized in Box 3. 1. B. Water Resources Re-evaluating and reforming the GOM's strategy for water resource development and management is of great urgency. Increased access to irrigation for agriculture has benefited farrners in terms of higher productivity, reduced vulnerability to weather risks, and in opening opportunities to cultivate higher value crops. Over the last two decades, managing both surface and groundwater resources in a sustainable manner to meet rising inter-sectoral competition between agriculture and other users has become increasingly difficult and complex. While ensuring access to drinking water state-wide has the highest priority for government, especially in exclusively groundwater dependent areas, access to groundwater for drinling, however, have been increasingly threatened by competition with agriculture, which in turn was exacerbated by government policy to promote sugarcane production (a highly water. intensive crop) and subsidize electricity for electric pumps. The burgeoning financial burden from both power and surface irrigation subsidies and market borrowings of Irrigation Development Corporation (IDCs) for surface irrigation development have become major contributors to the fiscal crisis, and threatens both the shoit and longer-term growth prospects of the state. Weak systems management in the past have led to deterioration of surface irrigation infrastructure and threatens the long-term operations of surface irrigation systems. The water resources sector is at a critical juncture and a reorientation of the existing strategy would be required. Recognizing this, the Irrigation Department, the Irrigation Department has spearheaded efforts to address the problems facing the water sector in general and the surface irrigation sector in particular. It has launched a broad-based program of reform including the formulation of a state water policy, the establishment of State Water Resources Regulatory Authority, right-sizing of the Irrigation Department, farmer participation in the management of the irrigation system, full-cost recovery of operations and maintenance to ensure the financial sustainability of the irrigation systems and the restructuring and reorientation of the IDCs into river basin management agencies. These issues are elaborated below. 17 Water Resources Availability and Use On the basis of geographical features, the state comprised 3 natural regions: Konkan region consisting of coastal area; the Sahyadri hill ranges known as Western Ghats; and the Deccan plateau. The major portion of the state is semi-arid with three distinct seasons, with the rainy season extending from July to September. There are large variations in the quantity of rainfall within different parts of the state. The Ghat and coastal districts receive annual rainfall of about 2000 mm. Most of the state lies in the rain shadow belt of the Ghat, with an average rainfall of about 600 to 700 mm. Rainfall varies from 500 to 5000 mm, with an average of 1000 mm distributed over 60-70 days. Maharashtra has with five river basins, of which four are shared with other States. The Deccan Plateau is carved into three major river basins, namely the Godavari, Tapi, and Krishna. The Narmada basin occupies a small portion of the State in the North. Maharashtra shares these four basins with other states: (i) Godavari with Andhra Pradesh, Orissa, Madhya Pradesh and Kamataka; (ii) Tapi with Madhya Pradesh and Gujarat; Narmada with Madhya Pradesh and Gujarat; and Krishna with Karnataka and Andhra Pradesh. The Konkan river basin, with 22 west flowing rivers, is the only basin located exclusively within the boundaries of the state. Various tribunals determined Maharashtra's allocation of water from these shared basins at different periods of time. Its allocation from the Krishna was awarded in 1976, the Narmada in 1979 and the Godavari in 1980. Water allocation from the Tapi basin was determined based on the reconmmendations of the "Ukai Technical Committee" appointed by the Central Government in 1957 and a subsequent agreement between Maharashtra and Madhya Pradesh in 1986. Estimates made by the Maharashtra Water Irigation Commission showed that the Konkan basin accounted for a little more than half of total water available in the state (Table 3.2). The Godavari and Tapi basins accounted for another 28% and 13% respectively. Actual water use status at present was less than 30% of the potential water available in the state. Water use in the Krishna basin was the highest (72%) in relation to its availability, followed by Tapi and Godavari basins, which were slightly below 50%. The lowest was in the Konkan basin at 5%. Notably, as discussed in later 'sections, the state's water allocations, especially for the Krishna basin, have been an important factor shaping the nature and level Table 3.2: Water Availabili and Actual Use in Maharashtra of investments Water Available for Planned use Present Status of Water Use (1996) undertaken by the Basin cubic Mm cubic Mm % of Availability government in Godavari Basin 38,882 28 17,969 46 recent years. In Tapi Basin 9,324 7 4,531 49 the longer term, ansnada Basin 343 0 33 10 the longer temi, Krishna Basin 18,356 13 13,324 73 increased inter- Basins of West Flowing state competition Rivers in Konkan 72,322 52 3,626 5 and some Maharashtra 139,227 100 39,484 28 uiiaddressed IMaharashtra excl.. Konkan 66,905 48.05 35,858 54 unaddressed Note: Includes surface water allocated to the state, ground water available and inter-basin transfers. weaknesses in the Source: Maharashtra Water and Irrigation Commission 1999c. estimation of the state water allocations would also likely become a major and complex challenge. Although the total consumption of 39.5 billion cubic meters (bcm)in 2002 was still considerably below the total water available (from planned use) of 139 bcm, these numbers masked the increasing water scarcity in some areas. According to the latest estimates (1996), about 80% of water in Maharashtra was consumed by agriculture. Gross irrigated area expanded by about 40% over the last two decades. It increased by about 1.8 million ha during this period, and reached 3.4 million ha in 1999/00. About two-thirds of this increase came from additions to the net irrigated 18 area; the remainder came from increased irrigated cropping intensity. Notably, while irrigation accounted for the largest share of water consumption, amounting to 31.4 bcm, this was still only enough to irrigate about 16.5% of total cultivated area. drinking water accounted for 7% (2.1 bcm) and industry for 3% (1.2 bcm). The other 10% was consumed by livestock or used by hydro and thermal power plants (4.1 bcm). Water supply, however, has become more acute in several areas that were exclusively dependent on groundwater. In 1997, the Groundwater Survey and Development Agency (GSDA) of the GOM, as part of the 6* Groundwater Assessment, classified the state into 2,841 watershed units. The study found that 132 watershed units are already over-exploited (extraction exceeds recharge), 275 are critical (development is greater than 90% and shows a declining trend in water table depth) and another 64 are semi-critical (development is greater than 90% but does not yet show a declining trend in water table depth). Groundwater has become the main source of water for agriculture in the State. Between 1988/89 and 1997/98, total net irrigated area increased by 686,000 ha. About 74% of this increase came from expansion of groundwater/well irrigation, the remainder was accounted for by surface (canal and tank) irrigation. The area irrigated by wells increased rapidly in the 1990s, and by 1997/98 accounted for about 60% of total net irrigated areas (Figure 3.1). This water is primarily drawn from the ground using electric pumps, whose numbers jumped from 1.6 million in 1990/91 to 2.2 million in 1998/99 (CMIE 2002a). A major Figure 3.l:Net Irrigated AreabySource of Irrigation, 1988/89 factor encouraging this growth was the electricity to 1997/98, 000 ha subsidy for electric pump use for irrigation. 1800 Unfortunately, these subsidies have become a major 1600 fiscal drain, escalating the fiscal crisis in the state.4 1 1400 Surface water from canals and tanks accounted for ° 1200 - 21% and 14% of net irrigated area respectively. 1 800 - Excessive withdrawal of groundwater led to ~ 600 the drying up of many drinking water wells. The W400- 1 water table has dropped by as much as 300 feet in @ 200 some locations. Many drinking water wells, which o - are mostly 30 to 50 meters deep, have dried up, Canal Tanks Wells Other requiring the GSDA to also shift to deeper bore Sources wells. For example, the demand for water for highly 88/89 091-92 095/96 *97/98 water intensive sugarcane led to an increase in the number of wells in Nasik, Ahmednagar, Jalgaon, Source: CMIE, Agriculture, 2002. Dhule, Sangli and Satara districts. Most of these wells were constructed without consideration for sustainable water management. The result was the rapid drying up of the wells in these areas. Increasing competition to bring more and more area under sugarcane cultivation led to the replacement of wells by bore wells to pump water from deeper aquifers. If this competition continues then the excessive number of wells and bore wells would put severe pressure on the deeper water bearing aquifers and thus lead to a severe scarcity of water in these regions in future. Multiple Water Agencies The multiplicity of government and other agencies involved in water resources in Maharashtra and weak coordination among them added to the difficulty of managing water in a sustainable manner. Water resources development and management were shared functions among several government agencies and irrigation development corporations. These departments and other agencies most directly involved are summarized in Table 3.3. While the Irrigation Department has the primary responsibility for surface water resource development, there were also 5 irrigation 4 This is discussed in detail in World Bank 2002, Maharashtra: Reorienting Govermnent of Facilitate Growth and Reduce Poverty." 19 corporations responsible for water development in the 5 major basins. In addition, several other organizations provided support for design, applied research, irrigation management and training. These included the Central Design Organization, Dam Safety Organization, Maharashtra Engineering Research Institute, Engineering Staff College, Directorate of Irrigation Research Development, Quality Control, Vigilance, Mechanical Organization, and the Water and Land Management Institute. In some cases, such as groundwater management, the overlapping functions of several agencies impeded the development of a coherent sectoral strategy and action plan. Table 3.3: Agencies Involved in Water Resource Development and Management in Maharashtra. Agency Function lrrigation Department Responsible for survey, planning design, construction and management of major, medium, and minor irrigation projects up to 250 ha. Water Conservation Department Responsible for survey, planning, design, construction and management of minor irrigation schemes with irrigable areas of 100 to 250 ha. Rural Development and Water Zilla Panshads (under administrative control of the Rural Development Department) is responsible Conservation Department/Zilla for construction of minor irrigation schemes below 100 ha. Responsible for watershed development Parishad (water and soil conservation). Water Supply and Sanitation Responsible for groundwater development and rural and urban water supply, implementing agency Department/Ground Water Survey for "Shivakaleen Pani Sathavana Yojana" which is a water storage and conservation scheme. and Development Agency Agriculture Department Director for Soil Conservation is responsible for water conservation for watershed development Maharashtra Krishna Responsible for survey, planning, design, construction and management of major, medium, and Development Corporation minor irrigation projects under the Krishna river valley, established in 1996. The total proposed irrigable area in the Krishna basin is about 2.3 million ha. It is also charged with the construction of a dam on the Dudhganga River in Kohlapur district, involving irrigation potential of about 65,000 ha of land. Godawari Marathwada Irrigation Responsible for survey, planning, design, construction and management of major, medium, and Development Corporation minor irrigation projects under the Godavari river valley, established in 1998. It is proposed to complete works on 13 major, 22 medium and 303 minor irrigation projects over 7 years in the Godavari valley. An additional irrigation potential of 1.2 million ha is expected to be created. Vidharbha Irrigation Development Responsible for survey, planning, design, construction and management of major, medium, and Corporation minor irrigation projects in Vidharba region, established in 1997. The corporation covers Akola Amravati, Bhandara, Buldhana, Chandrapur, Gadchiroli, Nagpur, Wardha and Yavatmal districts. Tapi Irrigation Development Responsible for survey, planning, design, construction and management of major, medium, and Corporation minor irrigation projects under the Tapi river valley, established in 1998. The projects will cover the districts of Dhule, Jalgaon and Nashik, and envisages utilization of 233 thousand million cubic ft of water for the three districts. Konkan Irrigation Development Responsible for survey, planning, design, construction and management of major, medium, and Corporation minor irrigation projects under the Konkan region, established in 1998. One major, 4 medium and 33 minor irrigation projects under construction were handed over to the corporation.. An additional 109,000 ha of irrigated land is expected to be created by these projects. Source: Department of Irrigation. The irrigation development corporations have become major contributors to the fiscal crisis in the state. The five Irrigation Development Corporations were established as a means to raise capital for irrigation development in general, but also to ensure the State's claim on water awarded under the Krishna Water Dispute Tribunal. For the Krishna basin, disputes regarding the sharing of the water among the river basin states, namely Maharashtra, Karnataka, and Andhra Pradesh, were resolved by the Krishna Water Dispute Tribunal, which was established by the Government of India in 1976. The tribunal awarded 594 billion cubic feet (bcf)5 of water to Maharashtra out of the total basin resource of 2,060 bcf, to be utilized before May 2000. Otherwise a reallocation of shares would have taken place. To meet this deadline, the GOM established the Maharashtra Krishna Valley Development Corporation (MIKDVC) to create the storage water infrastructure (i.e. dams) for this water. However, limited distribution facilities have been created to utilize the "stored" water. Due to limited budgetary resources, the MKVDC raised most of its funding for infrastructure development through market borrowings (Table 3.4). From its establishment in 1996 up to 2000/01, the MKVDC expenditures totaled about Rs 62.7 billion of which about 21% was contributed by the government. The rest was raised through bonds guaranteed by the State, for which the interest cost 5 Karnataka was allocated 700 bcf and Andhra Pradesh 800 bcf. 20 has become a major financial burden. By 2000/0 1, this amounted to Rs 12.3 billion, which had to be covered through the state budget. This has significantly exacerbated the fiscal crisis in the state. Moreover, as limited distributory canals have been built, the investments made so far generated limited revenues. Surface Irrigation Surface irrigation development has been a major pillar of the government's rural development strategy for the last five decades. Figure 3.2: Major and Medium Irrigation and Flood Control Government expenditures on surface irrigation Capital Expenditures, 1985/86 to 1999/00, Rs billion development (including corporations) since the 1950s (constant 1993/94 rupees) totaled about Rs 269 trillion (current prices). During 50 the last 15 years, investments in major and medium t 45 irrigation and flood control structures alone 3 5 (excluding market borrowing by corporations) ,, 3 0 accounted on average for about 28% of annual capital Y 2.5 Lru-U-l - expenditures of the government (Figure 3.2). It 2.0 ¶- --fM-lffTh W totaled about RsI2.9 billion (constant 1993/94 . Lo 4 l I _ U _ H _ _ _ rupees) over the last 15 years. The surface irrigation z 0 5 system in Maharashtra includes 28 major, 252 0.0 6 10~~~~~\ N_ 00 01 0 CZ) ,. ~ 0 'I - 00 a medium and 2,032 minor irrigation schemes.6 In T o XOhc ) e addition, another 63 major, 150 medium and 925 X ox x 0 ox ° a, C 0 a o a X minor project and 22 lift irrigation projects were o Other Expendituures * Irrigation&Flood Control under construction in 2002. These investments contributed to the expansion of net irrigated area by Source: Reserve Bank of India State Finance Database. about 28% and gross irrigated area by 40%. The benefits of surface irrigation have accrued more to Figure 3.3: Distribution of Agricultural Households and Area Irrigated Using Surface smaller farmers. Analysis of the (Canal) and Groundwater (Using Electric Pumps) Irrigation, 1997/98. NSS 54h round survey of 60% - 52% 50% agricultural households showed 50% that about 83% of farmers who use surface (canal) irrigation are 40% - - small (owns I to less than 2 ha of 30% land) and marginal (owns less - |0 N W. than I ha of land) farmers (Figure 20% 3.3). More importantly, they also 10% I i accounted for the larger share of | % _ surface irrigated land (62%). By 0% contrast, among farmers who use Ag. HH Area Irrtgated Ag HH Area Irrigated groundwater through electric w/Access to by Canal w/Electric w/Electric pumps, although about half of Canals PIups Punps farmers are small and marginal | Marginal * Small O Medium * Large farmers, they only account for I_I about 21% of irrigated area. Note: Farmers are classified according to land owned: marginal-less than I ha; small-I to less than 2 ha; medium-2 to less than 4 ha; large: greater than 4 ha. Analysis is based Surface irrigation in on area planted to 5 principal crops by each household. Maharashtra not only meets the Source: NSS 54a Round Survey. irrigation needs of farmers, but also the water supply needs of residential consumers for drinking 6 Major irrigation scheme-command area greater than 10,000 ha. Medium irrigation-command area greater than 1,000 to 10,000 ha. Minor irrigation scheme-command area up to 1,000 ha. 21 water, industry and other users. In 2000/01, about 22% of the surface water was consumed by residential consumers (16%), industry (4%) and other users (2%) (Table 3.4). During times of severe water shortages and droughts, these proportions were adjusted by the Irrigation Department in favor of residential consumers, as drinking water received first priority. This happened most recently in 2002, when surface irrigation water was re-allocated to Table 3.4: Surface Water Utilization, Mcum residential consumers to provide Irrigation Other Consumers All drinking water for about 60 Year for Agriculture Residential Industry Other Subtotal Surface df99/00 16,037 2,379 700 516 3,595 19,631 million people. This re-allocation 00/01 13,575 2,710 686 463 3,858 17,433 reduced irrigated area for 01/02 4554 1479 na agriculture by about 300,000 ha. Nnte. nther ilierc inrliide. livetqn.k. hvdrn and thermal nrnsiect In view of the multiple users of the irrigation canal system, improving its efficiency and sustainability becomes even more critical. Threats to Sustainability of Irrigation Systems A number of problems threatened the State's substantial investments in surface irrigation infrastructure, resulting in a vicious cycle undermining their long-term sustainability. Inadequate priority to and funding of operations and maintenance (O&M) led to the rapid deterioration of canal systems resulting in poor quality of services (Figure 3.4). This contributed to the need for repetitive and costly rehabilitation of systems to make up for deferred maintenance. Institutional weaknesses in the water agencies combined with minimal involvement of farmers and other users impeded greater improvement in the quality of and "user-orientation" of service delivery. The poor quality of water service delivery hurt farmers in several ways. Poor reliability of water delivery and the lack of access to water by tail-enders, combined with lack of access to agricultural extension and improved technologies, contributed to lower agricultural productivity. Lower agricultural productivity, due to lower yields or by being locked into low value crop production (e.g. rice, wheat), in turn reduced the income generating potential of farmers. Under these conditions, the collection of water charges became more difficult. With limited ability to raise funds directly, and exacerbated by the tightening fiscal situation, the Irrigation Department was unable to provide adequate resources for O&M. Overstaffmg of the department further drew resources away from needed physical works, as funding for salaries took priority. Inadequate maintenance led to the deterioration of systems, thus closing the vicious circle. Underpricing of water also led to other closely related negative effects. It reduced the incentive for farmers to save and use water efficiently. This was especially critical in view of projections of increasing competition for water among users in some areas. It encouraged the cultivation of water-intensive crops, such as paddy and sugarcane, that will not be sustainable under conditions of increasing water scarcity. Poor operational efficiency contributed to the substantial difference between the irrigation potential as per the design of the system and the actual irrigated area. The total surface irrigation potential created in Maharashtra reached is 3.7 million ha in June 2001. However, only about one- third (1.3 million ha) was actually irrigated. In large part, the deterioration of the system resulted in the low irrigation efficiency of the canal systems, which stood at about 25%. This could potentially be increased to 40%. Expanding cultivation of water intensive crops, such as sugarcane that were not factored into the original system design, further contributed to reducing the area irrigated. Poor systems management also contributed to inequitable distribution of water. It allowed farmers at the head reaches to consume more water by allocating maximum area to water intensive crops, at the expense of farmers in the tail reaches. Unavoidably, other factors also contributed to this gap. The necessary diversion of canal water for other uses, such as drinking water, and increasing problems of water salinity and waterlogging, especially in areas where drainage infrastructure was not available, removed some cultivable area. 22 Figure 3A: Surface Irgation,in Maharasfitra-A.Vicious Cycle Weak water agencies * - ,limited farmner involvemen ,- '> , u " , ' ' - poo , _+r service ;i-s "+^+ '> - + 4r < t - d i*2ksAr' /t [ ' ] + -?<- ~Lacko~f access to . ., 'r.,. . . r:;: ' ' ' > * ; ' \ ~~~~~~~~imnpToved technology, Deteriot , , . ,astrcu Weakagricultural r-! - ,-~ i' +Distortscropping , ' g porO&L M ' .:<'-- L #.......... ..decisions - ' 4 | inadequate t budget allocations low yields r , k of ~o lst recovery Iow incones lnefficient use of water i contributing to water scarcity farmer dissatisfaction - -jfar political pressure -. Threats to Groundwater and Drinking Water Supply Providing drinking water is the first priority of the GOM. Rural water schemes have been part of the Minimum Needs Program. Drinking water programs were implemented by the Maharashtra Jeeven Pradhikaran (MJP), the Zilla Parishad (under the Department of Rural Development) and the GSDA. The GSDA and Zilla Parishads were responsible for the drilling of bore wells and tube wells. The goals of the State's drinking water programs were to provide 40 liters per capita daily (Ipcd) or 20 Ipcd during summer months and to provide one bore well per 200 people. These programs to date provided about 177,000 hand pumps, 15,000 mini-water supply schemes, 17,000 individual piped water supply schemes, 50,000 open dug wells, 335 regional rural water supply schemes, and 2000 water supply schemes (by MJP) for drinking water in the State. Drinking water supply problems persisted in many rural and urban areas, despite extensive efforts by the state and local. governments to meet the drinking water goals. According the GOM guidelines, villages were classified as difficult if the source of water was not available within 500 meters, where water was not available within 15 meters below ground or where the quality of water was not potable for drinking. Based on these criteria, about 68% of villages (27,654) fell under the difficult category. Until a reliable source could be created, water tankers brought water to most of these villages. Groundwater was the primary source of drinking water in the state. According the most recent estimate (1996), drinking water consumption totaled 2.8 billion cubic meters, of which rural areas account for 38%. It is estimated that by. 2030, the demand for rural drinking water would increase by 82%. This would be rise further with more rapid industrialization in rural areas. Estimates by the GSDA indicate that 81% of drinking water.was met by groundwater and the remainder by surface water supplies. In the future, however, unless the continuing deterioration of groundwater resources is redressed, severe shortages will occur in some areas, resulting in the increased dependence on costly transport of water and/or surface water. Ground Water Regulation. The GOM was the only state in the country that has enacted a Ground Water Regulation Act (1993) for protecting drinking water wells. The act provides for: * Prohibition of construction of wells within 500 meters of another well unless certified by the District Collector; 23 - * Declaration of water scarcity areas every year, depending on the rainfall pattern for such a period as may be specified but not exceeding one year; * Regulation for extracting water from wells in water scarce areas and within a distance of I km from the drinking water source, except for drinking water; * Declaration of over-exploited watersheds and prohibition of sinking of wells in overexploited watersheds except for drinking water wells; and, * Prohibition of extraction of water from existing wells or closing down of existing wells for a certain period as decided by the appropriate authority with suitable provisions for payment of compensation. Although adequate provisions were made under the Act to protect drinking water sources, the decisions and actions taken were often influenced by local politics and social pressures not to report violations of the regulations. Inadequate scientific data also constrained initiating early and quick action by relevant officials. Recent Water Sector Reform Measures Following the recommendations of the Maharashtra Water and Irrigation Commission and the Government of India National Water Policy, the GOM has moved forward on reform on several fronts. These include: (i) the legislation of systematic annual adjustment of water charges; (ii) reduction of Irrigation Department staff; (iii) the piloting of water users associations (WUAs) and the plan to expand them state wide; (iv) planned enactment of legislation to transfer irrigation system's management and the volumetric delivery of water to WUAs; (v) adoption of a State Water Policy, including the establishment of a State Water Resources Regulatory Agency. Water Charges. In 1998, the GOM approved a government resolution governing the annual adjustment of water charges for agriculture and other users in the state. The schedule of price adjustments was designed with the aim that water charges will eventually fully cover annual O&M expenditures and partly interests on borrowings. The schedule contained a built in provision to increase water rates by 15% annually, and was most recently revised in September 2001. Table 3.5 lists the water rates in Maharashtra and other states for selected major crops. Maharashtra has the highest agricultural water rates in India. The water rate in 2002 was Rs8.5 per cubic meter for industrial consumers and Rs0.35 per cubic meter for drinking water. Volumetric supply for canal water during the Rabi season was charged Rs36 per thousand cubic meter. A complete list of water rates is presented in Annex Table 3.6 to A3.9. To ensure transparency, water rates were published for 5-year periods, the latest being for 2001-2005. Table 3.5: Water Charges for Selected Crops and States in India, as of September 2001. Crop | Maharashtra Andhra Pradesh Kamataka Rajasthan Uttar Pradesh Sugarcane 4763'/3180d8857' 875 1000 574 474 Paddy 1807/360' 494_/37_ b 250 198 287 Wheat 360 250 150 148 287 Cotton 5485/1088' 250 150 178 114 Maize 270 250 88 67 _ Pulses I _ 88 79 _ 212 Vegetables 548e/2040d _ _ 109 287 Note: a-first crop, b-second crop, c-flow, d-drip & sprinkler, c-on contract, f-on demand, g-rabi, h-hot weather, i -kharif Source: Imgation Departments of Govemment of Maharashtra, For other states, World Bank 2001, "Kamataka Rural Policy for Growth and Poverty Reduction". Progress in implementing the cost recovery program, however, has been mixed. While the Irrigation Department was consistently raising the water charges, collection efficiency, however, remaind poor (Table 3.6). Collection efficiency, whether for agriculture, industry or drinking water, about halved during the last 5 years. As a result, water charge revenues covered about 29% of O&M 24 expenditures in 2001/02. Due to poor collection efficiency, the amount of outstanding collectibles reached Rs 2.2 billion for irrigation and Rs5.5 billion for industries and drinking water in 2001/02. Table 3.6: Imgation Department Operations and Maintenance Expenditures and Water Charge Assessment and Collections, 1997/98 to 2001/02. O&M Expenditures and Revenues, Rs billion Category 1997-98 1998-99 1999-00 2000-2001 2001-2002 Actual O&M spending by the Department a) ETP costs 2.5 2.5 3.0 3.3 3.6 b) Works costs 1.8 1.3 1.3 1.6 2.0 c) Total (a+b) 4.3 3.8 4.3 4.9 5.6 Water Charges Outstanding at the beginning of the year ) Irrigation 1.4 1.5 1.6 1.9 2.2 a) Industrial & Drinking 1.9 2.1 2.6 3.3 5.5 Total (a+b) 3.3 3.6 4.2 5.3 7.7 Water charges assessed during the year I) rrigation 0.4 0.4 0.7 0.7 0.8 b) Industrial & Drinking 0.8 1.3 2.1 3.6 3.3 Total (a+b) 1.2 1.7 2.8 4.4 4.1 otal Water Charges outstanding at the end of the year 4.4 5.4 7.0 9.6 11.8 Actual collections/recoveries (From outstanding & assessed water charges) a) Irrigation 0.2 0.3 0.4 0.4 0.2 b) Industrial & Drinking 0.6 0.8 1.4 1.5 1.4 c) Total (a+b) . 0.8 1.1 1.7 2.0 1.6 ercentage Share Actual collection or Recoveries/ Annual Assessment a) Irrigation 60% 78% 55% 55% 300/o b) Industrial & Drinking Water 75% 61% 65% 42% 41% c) Total (a+b) 70% 65% 63% 45% 390/o Actual collection or Recoveries/ O&M spending 90/0 30% 400/o 400/o 290/o Source: Department of Irrigation, GOM. Reduction of Staff. The Irrigation Department has begun rationalizing its staffing structure and right-sizing its staff numbers. About 11,650 positions out of a total of 40,000 have been identified as redundant. Of these, 5,074 posts have been abolished and the process of eliminating the other posts was in progress. This has resulted in a reduction of establishment costs of about Rs600 million. Adoption of Particinatory Irrigation Management. Since 1989/90, the Irrigation Department piloted participatory irrigation management approaches through WUAs. These were implemented in 4 irrigation projects (Waghad Project in Nasik, Mula Project in Ahmednagar, Bhima Project in Solapur, and Katepurna Project in Akola). As of September 2001, there were about 600 WUAs in operation in Maharashtra and an additional 217 were being proposed. A recent review of the performance of some WUAs, organized with support from the Irrigation Department as well as NGOs, suggested their relative success in improving systems management and promoting more equitable distribution of water (Box 3.2). Collection of water charges, however, continued to pose a problem. These experiences, however, provide useful lessons for the Irrigation Department in scaling up WUAs through out the State. In 2002, the GOM decided to form WUAs in all irrigation projects and to transfer systems management of minor schemes to them. Water will be supplied to WUAs on a volumetric basis. They will be responsible for regular maintenance and repair of the system under their jurisdiction. The Irrigation Department would initially provide limited a subsidy for O&M,7 which would be phased out over a 9 year period. WUAs would be responsible for payment of water charges to the government. The GOM is finalizing the draft for a Maharashtra Farmers Management of Irrigation Systems Act that will provide the legal framework for this program. 7The subsidy amounts to Rs6O/ha for the first five years, Rs5O/ha on Year 6, Rs40/ha on Year 7, Rs3O/ha on Year 8 and Rs20/ha on Year 9. 25 Box 3.2: Water User Associations In Maharashtra: Review of Experiences A recent study by Brewer, et al (1999) of irrigation management transfer in India reviewed the performance of 21 water users associations in Maharashtra (7), Gujarat (5), and Tamil Nadu (9). The following provides a brief overview of the performance of the 6 WUAs from Maharashtra. Ozar Society. Nasik: The Ozar village is located at the tail end of the right bank canal of the Waghad irrigation project. Ozar suffered from the usual problems of being in the tail end, the actual irrigated area was barely 30 ha compared to the irrigation potential of 1,151 ha. To overcome this problem, farmers in the area decided to form a water user's organization with the help of an NGO, the Samaj Parivatan Kendra. As the farmers were geographically dispersed, 3 societies were formed. They began operations in 1992. The irrigated command area to be covered by the societies totaled 1,151 ha. Each society was given a water quota, was permitted to store any unused quantity and transfer their unused Kharif quota to other seasons. Before handing the canal system over, the Irrigation Department (ID) undertook repairs, to ensure the appropriate volume of water reached the societies. The changed in systems management permitted more intensive cultvation of the area, including the adoption of many new crops (sunflower, vegetables, grapes,etc), some destined for export. Crop yields have increased. The water charges for different crops were determined based on the water requirement plus a management fee. These rates differed from those charged by the government. All the societies regularly paid the water charges of the ID, taking advantage of the 5% discount for timely payment. Collection of fees continued to pose a problem and the society levied penalties for late payment. The societies were concemed about the high seepage losses. Despite this, the gross area increased, the efficiency of water usage increased. Laxmi Narasimha Cooperative Water Distribution Society. Shevare: Even though the small village of Shevare, served by Minor No. 10 was located in the head reach of the main canal, reliability of water supply and equity in distribution was poor. To overcome these problems, the farmers decided to organize a cooperative society for water distribution. Assisted by the ID, the society become operational in 1992/93, and had about 100 members. The society received water from the ID on a volumetric basis and supplied water to its members on a crop area basis. The society was allowed to draw unused quota and use it in other seasons. The cropping pattem in the 169 ha command area changed significantly. Sugarcane production increased, replacing pulses and oilseeds. The society was financially viable and its viability depended on the difference between the volumetric water rates charges by the ID and those charged to farmer members. The society collected all it dues from farmers and paid its dues to the ID on time, so as to avail of the 5% discount for timely payment. Shri Datta Cooperative Water Distribution Society. Mula: With assistance from the Center for Applied System Analysis in Development (CASAD), the society, consisting of 114 farmers, was established in 1987. In June 1989, the society began receiving water from the Mula Canal System. The WUA was expected to operate and maintain the minor system and distribute the water. The society was to receive enough water to irrigate 94 ha during Kharif season, 120 ha during Rabi season and 62 have during the summer season. By 1994/95, membership increased to 203. The net command area expanded from 119 to 261ha and gross irrigated area increased by 30%. The society, however, encountered difficulties in recovering water charges from farmers. Average recovery rates was 40%. The society can be financially viable if it was able to collect full the water charges from members. Mahatma Jvotirao Phule Cooperative Society. Phulewadi: The society was established in 1958 as a multi-purpose cooperative society. The society drew water from the lift irrigation scheme from the nearby Rajaram weir, irrigating 1380 has. Initially, the society invested its own resources to establish a 5,500 ft pipeline to the weir. This scheme was subsequently expanded with assistance from the GOM in the form of a Rs 550,000 loan and Rsl 75,000 subsidy. The WUA operated successfully through the years. About 90% of the irrigated area was planted to sugar cane. Water rates were determined by the society and varied according to expenditures incurred. Recovery rates were fairly high, even though the society was not linked to a sugar factory. Members perceived the performance of the society to be satisfactory and considered the distribution of water to be equitable. The society was strict in maintaining discipline and levied penalties on members who violated distribution rules. Shri Sambhaii Warana Cooperative Lift Irrieation Scheme. Ltd. Kadoli: The society began operating in 1988/89 and was established with the support of the Warana Sugar Factory. It irrigated 240 has of land, 90% of which was planted to sugarcane. The investment for the lift irrigation scheme (Rs 1.4 million) was financed by loans from the Bank of India and Warana Bank, using member's land as collateral, and share capital contributed by the farmers. Recovery of water charges was 100I/o because of the linkage of the society with the sugar factory. Management support from the sugar factory helped the society in managing its financial transactions. Members of the lift society were quite satisfied with the management of the society and believed water was distnbuted equitably. Shri Brahamanath Cooperative Water Distribution Society Ltd. Parunde: The society was established to manage the water distribution and O&M of a flow irrigation canal linked to a small dam built across the Meena River. The canal irrigated 181 ha. An official from the Irrigation Department (ID) initiated the formation of the group by meeting the villagers and explaining the potential benefits to them. Some farmer leaders also put considerable effort to from the society. The ID also helped the farmers register the society in 1992 and advised members on how to distribute the water. The society purchased water from the ID and sold the water to members on a crop basis. The society received a 20% discount if dues were paid on time. Irrigation enabled farmers to grow crops in the Rabi season and some (vegetables, flowers) through out the year. O&M costs were still fully covered by the grant from the govemment. The society will be able to meet other costs only if it was able to fully recover charges from member. The society enforced rules to stop delivery of water in the following season to farmers who did not pay their water charges. Record keeping has improved, especially in correcting the difference between the area declared by farmers and actual area irrigated. Source: J. Brewer, et al. 1999, Irrigation Management Transfer in India, Policies, Processes and Performance. 26 Expenditure Prioritization. The Irrigation Department has initiated a process of prioritizing the completion of unfinished irrigation projects. Projects with more than 75% of construction completed will be given higher priority, while taking into account regional balance. A statutory constitutional provision empowers the Governor to reallocate funds to ensure regional balance. State Water Policy. Water is becoming increasingly scarce, creating tighter competition within and among sectors. At present, there is no transparent and effective institutional mechanism for allocating water among various consumers (farmers, drinking water, industry, etc). This applied to all water resources, surface and groundwater, in Maharashtra. The existing agencies have not kept pace with the changing needs of the water sector, particularly with respect to: (a) water resources management, allocation and planning, (b) expenditure prioritization, and (c) institutional arrangements for the provision of reliable and accountable services for which users are willing to pay. Institutional changes are necessary at a number of levels. Recognizing these deficiencies, the GOM was finalizing its State Water Policy. One additional outcome from the preparation of this policy was the Cabinet decision to establish a State Water Resources Regulatory Agency that would deal with issues including strategic inter-sectoral planning, development, management and allocation of water, water pricing, and resolution of interstate water disputes. An Act for its establishment is under preparation. The Regulatory Authority will be responsible for planning and managing water resources in the state on a multi-sectoral basis and provide the regulatory framework for the sector. It will have authority to decide and set water charges for various users and resolve water-related disputes in the state. Rural Water Supply. In July 2000, GOM took a major policy decision to adopt a demand driven approach to service delivery, use participatory processes in rural water supply and sanitation sector, and adopt the principle of cost sharing in rural and urban areas. Maharashtra was the first state to apply the sector reform agenda statewide. The key features of the reform program were: * Cost sharing: beneficiary to finance of 100% cost of operation and maintenance (O&M) and partially contribute to the capital cost of water supply (minimum 10%) and sanitation schemes; * Participatory planning and implementation: beneficiaries to participate in planning, implementation and O&M of the scheme; emphasis on women's involvement in water and sanitation and related decisions through representation in Village Water and Sanitation Committee (VWSC), increased role of "Mahila Mandals" (women's committee) in certifying scheme completion, preference in training and selection of women caretakers; * Reorientation of government roles: shift in the role of government from direct service delivery to that of policy formulation and providing capacity support to local governments, villages and communities; and * Resource management: adoption of a three-pronged strategy for water conservation, preservation and utilization through increasing water supply, managing demand and regulating over extraction of ground water. The challenge would be operationalizing the reform agenda. Since July 2000, the GOM has taken several key actions; these are summarized in Box 3.3. C. Watershed Development and Management Watershed development has been an important component of the agricultural development program in Maharashtra as a means to stabilize the carrying capacity of land and water resources in rainfed areas. Works on soil conservation were undertaken in a large scale in the state, since nearly two thirds of cultivable area is under rainfed farming. They aim at increased production from dry land farming and prevention of degradation of land quality. 27 Box 3.3: Rural Water Supply: Recent Reform Actions Taken by GOM * Operational guidelines issued in September 2001 on commnunity involvement and participation at all stages: identification, planning, design, implementation, procurement, O&M, repair, rejuvenation and rehabilitation. Decision making has been transferred to the beneficiary level; * Powers of Zilla Parishads have been enhanced to take up schemes upto a capital cost of Rs.7.5 million (from the existing Rs.1.5 million); * Based on sector reform, GOI has sanctioned pilot projects in four districts, Raigad, Nanded, Amravati and Dhule for water supply and sanitation; five districts for total sanitation campaign under CRSP, Chandrapur, Sangli, Ratnagin, Yavatmal, Aurangabad; and four districts, Chandrapur, Sangli, Ratnagiri, Yavatmal are sanctioned for IEC for water supply program; * KfW has sanctioned proposals for three districts , namely Pune, Ahmednagar and Aurangabad, to operationalize the reforms. * A Cabinet decision, in principle, was taken to review/reform the old commitments in the rural drinking water sector; * The Gadge Baba Clean Village Movement was initiated state-wide; * A formal decision was taken to restructure the Maharashtra Water Authority (MJP); * The "horse power" (capacity) basis for calculating electricity charges for pumps was discontinued and replaced with a kwh basis of consumption, but 50 % of the electricity charges calculated on a kwh basis were reimbursed by GOM to the GPs and ZPs; * An independent Water Supply Department was set up within ZPs and staff from MJP and GSDA were transferred to ZPs to manage it. Around 462 officials from MJP and 800 officials from GSDA were transferred to 33 ZPs; and, * The cap on water charges levied by GPs was removed to enable them to cover 100% O&M charges and create a sinking fund for future replacement. Source: World Bank Rural Water Supply Mission Aide Memoire, February 2002. The watershed development program in Maharashtra was implemented under a number of Central and State sponsored schemes. The major initiatives include the: (i) National Watershed Development Program for Rainfed. Areas (NWDPRA), a 100% centrally sponsored scheme (75% subsidy and 25% loan); (ii) Drought Prone Area Project (DPAP), another centrally sponsored scheme operating since 1995; (iii) Integrated Watershed Development Program (IWDP), a centrally sponsored scheme initiated in 1997/98; and (iv) Watershed Development through the Employment Assurance Scheme (EAS) where in 50% of the labor requirement was funded through EAS. This was discontinued in 1999. In 2000, however, the NWDPRA was integrated into the DPAP and IWDP and the implementation procedures were being harmonized. A separate Water Conservation Department was created in the government, to ensure effective coordination among the different activities like water conservation, soil conservation, social forestry and minor irrigation. Evaluations of government watershed programs found that successful implementation required intensive participation of beneficiaries. Micro programs were often not sustainable due to the failure of government agencies to involve the community and consider local needs. This resulted in the lack of community commitment to proper maintenance, and led to abandonment of structures after a couple of years. Farmers' faith on technical advice were also strengthened by proper demonstration, training and interaction. The watershed program under the Indo-German Watershed Development Project (IGWDP), which has been founded on the participation by stakeholders, has been more successful. The government hopes to replicate this approach statewide; The IGWDP approach involved participatory watershed planning and implementation, with active participation by stakeholders, following a framework of field level collaboration among NGOs,, community-based organizations and government departments (Box 3.2). NABARD monitored the projects through physical verification every six months and release of funds depended on this verification. D. Horticulture Development Over the last decade, the GOM implemented a multi-pronged program to promote the development of the horticulture sector in the state. Maharashtra's agriculture had been traditionally dominated by lower value cereal production. In order to improve farmers' productivity and incomes, the GOM gave priority to promoting the shift to higher value agriculture, through the introduction of improved varieties of high value horticulture crops. Horticulture development was advantageous to Maharashtra, because a variety of crops could be grown in the different agro-climatic zones in the State. Marketing, both domestically and internationally, was facilitated by the easy accessibility of 28 Box 3.4: Indo-German Watershed Development Program: The Bhangadewadi-Hingandara Watershed Experience The Bhangadewadi village lies in the Pamer Taluka of Ahmednagar District, which, being a rain-shadow zone is chronically drought-prone. The area receives rainfall in the range of 400-500 mm, and this too is often uncertain and untimely. Recurrent drought had made the situation in the village grim with severe scarcity of water for drinking and agriculture for most part of the year. During the summer months, the govemment tanker would supply water. Only 10% of the entire area of the watershed was irrigated and the rest was unirrigated, fallow or waste land. With livelihood opportunities almost nil within the village, the villagers used to migrate to nearby villages in search of work. During the years from 1989-1994 many of the villagers of Bhangadewadi worked as laborers at the watershed work of the neighboring Ranmalawadi, which was being implemented by the Social Center, an NGO, with financial support from the Watershed Organization Trust (WOTR), established as part of the Indo-German Watershed Development Program (IGWDP). WOTR is the official capacity building organization of the Indo-German Watershed Development Program (IGWDP). Its activities is founded on participatory watershed development, not only to improve the economic condition of the people, but also to create an environment which catalyses people into an industrious, innovative community. On seeing the transfornnation that the village had undergone, the villagers of Bhangadewadi approached the Social Center to undertake watershed development in their village. After a number of visits and Gram Sabhas, during which the rules, regulations and social discipline of the Indo-German Watershed Development Program (IGWDP) were explained to the villagers and their acceptance obtained, the capacity building program (CBP) began in Bhangadewadi in May 1994. A community shramdan was organized in which trenching was done and gully plugs constructed. Since Bhangadewadi itself did not form a technically complete watershed, as the balance of the area fell under the Hingandara hamlet of the neighboring village Hiware Korda, the two were combined after obtaining the consent of the villagers, to form the complete Bhangadewadi-Hingandara watershed (1199 Ha). During the CBP, funded by the GTZ through WOTR, various new village level institutions were set up like the Village Watershed Community (VWC), the Forest Protection Committee (FPC) and men's and women's Self-Help Groups (SHGs). With a view to strengthening the capacities of the village community and enabling them to plan, execute and maintain the watershed work, several trainings such as project planning and management, nursery raising, enterprise development were conducted. Exposure visits. were organized to other ongoing or completed watershed projects like Kasare and Kalamkarwadi as well as to the Agriculture University at Rahuri and Krishi Vigyan Kendra at Bhenda factory. Practical aspects of undertaking watershed development were understood by the 'leaming-by-doing' method, in which an area of 160 ha. was treated as planned by the net planning method. This activity helped the villagers leam the process that would be applied to the rest of the watershed, as well as see for themselves the resulting impact. The project was eventually expanded, funded by the KfW through NABARD, to cover the balance area of 1039 ha. Besides the regular watershed work, various govemment schemes such as horticulture and biogas were also implemented in the village. The project was completed January 2001. During implementation, a concerted effort was made to involve the women in the development process and ensure their participation in the village level institutions. The women's SHGs gave the women the opportunity to come together, undertake various social development and income generating activities and, in the process, helped build up their confidence. Today, among the 21 members in the VWC, there were 5 active women participants. There were a total of 6 SHGs having 82 members and a total saving of Rs. 196,111 . An apex body of the women's SHGs was formed called the Samyukt Mahila Samiti (SMS) through which loans to the SHGs were disbursed. The Watershed Project had a major impact on the community. The number of perennial wells increased from 4 to 31, those providing water for at least 8 months increased from 37 to 80. The area that could be irrigated nearly tripled from 121 has to 527 ha. Households were able to diversify cropping from low value coarse grains (jowar and bajra) to include maize, vegetables, flowers, and fruits. Some lessons leamed included: * The participatory approach, strict rules, regulations and pedagogy of the watershed program were vital to the high quality of community involvement as well as of the watershed work. * The regular monthly meetings of the VWC and SHGs helped bind the community, improved their planning and organizing skills and fostered accountability. * Regular support and monitoring visits of WOTR and NABARD also helped in guiding the work. Source: WOTR (www.wotr.org) major ports and well-established domestic and international airports. Conventional food grain crops generated incomes of about Rs.4,000 to Rs. 12,000 per ha. By contrast, per hectare incomes for some main fruit crops were estimated at: Rs. 132,000 for sweet orange, Rs.226,000 for banana, Rs.88,000 for Mango and Rs.469,000 for Grapes per ha in 1999-00. Moreover, horticultural activities were more labor intensive and could provide more year-round employment, compared to other seasonal crops. While food crops can provide employment of about 100-115 person days per ha per year, the labor requirement for horticulture crop could reach up to 275 person days per ha per year (Godbole, 1990). To achieve this goal, the GOM initiated the Horticulture Linked to the Employment Guarantee Scheme (EGS) program and financed the development of supporting infrastructure (e.g. nurseries, pesticide residue laboratories, etc). These programs were spearheaded by the Department of Horticulture, which was established in 1982. In addition, the completion of the Pune to Mumbai expressway was critical to reducing the transport and marketing cost for horticultural products, by reducing the travel time from about 10 to 12 hours to about 3 hours. In view of the high perishability of horticultural and other agricultural (floriculture, vegetables, etc) products, this improvement in 29 road infrastructure was vital to maintaining the quality and competitiveness of produce from Maharashtra. Horticulture Development Program Linked with Employment Guarantee Scheme The Horticulture Development Program linked with the Maharashtra Employment Guarantee Scheme (EGS), primarily aimed to accelerate the expansion of horticultural production to improve the socio-economic conditions of farmers and generate additional employment in rural areas. Initiated in 1990, the scheme supported the GOM's strategy to encourage the shift from low value to higher value agriculture. The program also aimed at increasing the productive use of 290,000 cultivable wastelands, control soil erosion and pollution. At inception, it covered only fruits. In 2002, the program covered 25 fruit crops (mango, cashew nut, chikoo, pomegranates, oranges, coconut, custard apple, etc), spices intercropped in coconut plantations (cinnamon, clove and pepper), and medicinal and aromatic plants. The scheme was open to all farmers. The minimum required area per beneficiary per project was 0.2 ha to a maximum of 4 ha (0.1 to 10 ha in Konkan region). The farmer could cultivate additional area at his/her cost. Of total project costs, the scheme provided a 100% subsidy on wages and material inputs (planting materials, fertilizer, agro-chemicals) to small and marginal farmers and scheduled caste (SC), scheduled tribes (ST) and other ethnic minorities during the first year. The subsidy was gradually reduced and phased out by the third year. For all other farmers, it provided a subsidy of 100% of wages and 75% on material inputs also on a declining scale over three years. Wages were given in cash, while the material inputs were supplied in kind. The schedule of subsidies for different crops is presented in Annex Table 3.x. The total subsidy ranged from Rs 17,281 ($360) to Rs49,189 ($1,024) per ha. This amount was deposited directly by demand draft to the beneficiaries' bank account, with payments made starting only on the second year, provided that the farmer followed the recommended farming practices set out in the program. Farmers were eligible to apply to the scheme for a second time for other crops, if s/he was successful in the first project. The program has been a success from the horticulture and employment perspective. The total area planted to fruits in Maharashtra reached 1.2 million ha in 2000/01, the highest in the country. Of the 1 million ha increase in area planted to fruits in the state between 1989/90 and 2000/01, 96% was supported through the horticulture linked EGS scheme.8 This included the introduction of horticulture production in 276,000 ha of previously waste or fallow land. Since inception in 1990, about 1.28 million farmers have availed of the program, covering 35,525 villages. About 7% and 11% of the beneficiaries were SC and ST respectively. The scheme generated considerable economic benefits. It could be argued that, as the scheme was channeled through private individuals owning land and the projects funded probably required some sizeable additional capital investments, that the program was likely benefiting the more better off farmers and not necessarily targeted to the poor, as per the conventional design of employment and other subsidy schemes. Unfortunately, data on the socio-economic characteristics of the farmer beneficiaries were not readily available. Analysis of the fiscal costs of the program, however, indicated that the average "grant" or subsidy received was relatively small, amounting to an average subsidy of Rs 7,709 ($161) per farmer beneficiary. The total fiscal cost of the program from 1990/91 to 2000/01 amounted to Rs 9.9 billion in real terms (constant 2000/01 rupees) with total beneficiaries of 1.28 million (Figure 3.5). What are the returns from the program? As a very rough approximation of the benefit-cost ratio, the total value of the contribution of the fruits and vegetable sector to the GSDP from 1993/4 to 8 About 623,000 ha. (64%) have been brought under different dry land horticulture crops like mango, cashew, Ber, custard apple, tamrarind, anola, jackfruit etc. About 347,000 ha. (36%) have been brought under irrigated fruit crops like sapota, sweet orange, pomegranate, coconut, guava, lemon and fig etc. Mango accounts for the highest share of area planted (38%). 30 1999/2000, as estimated by the Directorate of Economics and Statistics, amounted to Rs453 billion (constant 2000/01 rupees). Assumiing Figure 3.5: Horticulture Linked EGS-Person Days Generated and conservatively that only 10% of the fruits and Fiscal Costs, Rs billion (constant 2000/01 rupees). vegetable GSDP was due to the Horticulture linked 1.4 30.0 EGS program, and taking costs as equivalent to the . total subsidies for the program during the same 1.2 25.0 period (Rs 6.44 billion, constant 2000/01 rupees), \ the benefit-cost ratio c6mes to about 7:1. In 8 1.0 20.0 o C_ l) addition, over the last decade, it directly created an o 0.8 -5 estimated 213 million person days of work or about :8 5I 807,000 person years (assuming 220 days work per o0 0 year). The program reached it peak around the mid- 0.4 A . 1990s, where it was generating as much as 26 - 50 million person days a year. 0.2 + ++ ++ 0.0 As the fruit orchards, once initiated, would 0.0 e 1 o X O normally require continuous employment to meet z 2 e 0 0 52 c as day to day labor needs, the scheme also opened opportunities for more permanent and full time =Subsidy + Person days employment for agricultural laborers. In addition, the increased fruit production has also generated Source:DepartmentofAgncultureandHorticulture positive multiplier effects in term of increased labor demand arising from increased demand for inputs and marketing services (transport, storage, packaging, processing, trading). Synergies among other Government and Private Initiatives To promote horticulture development, the GOM adopted programs to ensure the supply of key inputs and services. During the first seven years, 140 Government nurseries and 24 nurseries in the 4 agricultural universities were established to supply high quality planting materials. Planting material supply was further expanded by the entry of about 1,670 private nurseries. In 2002, the state was self-sufficient in planting materials. Pesticide residue testing laboratories with international standards have been established in Pune and Nagpur. In order to face the challenges of WTO, an executive committee has been appointed under the chairmanship of Minister for Agriculture for monitoring the situation and making necessary recommendations to Government of India. A website "agri.mah.nic.in" on agriculture-horticulture was launched by the Department of Agriculture to disseminate information about the program. A centrally sponsored scheme that facilitated the expansion of horticulture and floriculture production in Maharashtra was the sprinkler-drip irrigation scheme. In view of water scarcity conditions in many areas, the scheme aimed to promote increased efficiency in water use. The scheme, whose cost was shared between the Central and State governments at a ratio of 75:25, provided a subsidy equivalent to 75% of costs for all farmers and 90% of cost for SC/ST, up-to a limit of Rs32,000. To date, about 193,000 ha under various crops use drip irrigation, mostly for banana, grapes, citrus, bananas, pomegranate and sugarcane.9 The total subsidies granted have totalled Rs 3 billion. The state has also been participating in a 100% centrally financed scheme for commercial floriculture. The program includes the provision of a subsidy to marginal and small farmers to enter into floriculture production (up to 0.10 ha). It covers 50% of the cost of the project up to a maximum of Rs 6,000. Private sector initiatives and investments in rural areas also contributed to the growth of horticulture and floriculture in the state. Large farmers and corporate investors in horticulture and 9 Of these 22% is for banana, 18% for grapes, 13% for sugarcane, 12% for pomegranate, 5% for cotton, and 5% for mango. 31 Box 3.5: MahaGrapes of Maharashtra Mahagrapes was one of the largest exporters of fresh grapes, mainly seedless grapes from India. In keeping with the intemational trend of fruit growers becoming exporters, the vineyard owners of Maharashtra entered intemational markets with their own brand, Mahagrapes. It was set-up in January 1991 with support from: (i) National Co-operative Development Corporation (NCDC), GOM through the Department of Co-operation and the Maharashtra State Agriculture Marketing Board, Agricultural & Processed Food Products Export Development Authority (APEDA), and National Horticulture Board (NHB). Mahagrapes was a partnership firm of 16 cooperative societies. Its main aim was to export grapes and other fresh product to different parts of the world,; and more specifically, to uplift farmer communities, grow the co-operative movement, maximize foreign exchange eamings, and update the farmers on latest technology in farming. The Board of Directors of Mahagrapes comprised of seven members nominated by the heads of the 16 Co-operative Societies. Executive Partners manage the day-to-day affairs. A team of professional managers, composed of a General Manager (Exports), Manager (Liaison & Logistics), Manager (Finance), Manager (Quality Control) assisted by a team of Quality Control Officers assisted the Executive Partners. This team of professional performed the delicate balancing act of locating intemationally acceptable "Quality Product" on one hand and identifying the lucrative markets to increase net retums to its growers on the other. Societies: Grape growers in areas of Sangli, Solapur, Latur, Pune & Nasik regions of Maharashtra formed 16 cooperative societies with a membership of almost 2,500 farmers. Each co-operative society was equipped with a pre-cooling and cold storage facility. Products: Grape growers produced 4 varieties of seedless grapes for exports: Thompson Seedless, Sonaka Seedless, Flame Seedless, and Black Seedless. Ouality Control: Quality occupied prime importance at Mahagrapes. A team of Quality Control Officers monitored fruit quality at different stages of operation, beginning from cultivation in the farm to packing the fruit for export. Fruit not meeting quality specifications was rejected at source. Post Harvest Activities: Grapes suitable for export were harvested during the early and cool hours of the moming. Thereafter, the fruit was graded for size and color and packed in corrugated cartons. The other packaging used in the carton were polyethylene bags to hold the fruit and air-bubble sheet at the bottom of the carton for cushioning purposes. The fruit was then pre- cooled to I degree Celsius by forced air-cooling method within 6 hours of harvesting. The cartons were palletized and loaded into 40 feet refer containers. The temperature of the containers was maintained between 0 degree - 2 degrees Celsius till the fruit reached the destination. Performance: During a short span since its activity began, Mahagrapes has established itself as a major organization exporting quality grapes from India. Mahagrapes has succeeded in establishing its brand name in the highly competitive and quality conscious intemational markets. The major share of the fruit was sold through the supermarket chains in the United Kingdom and Europe. Persevering grape growers, strict quality control, use of packaging of intemational standards, proper maintenance of cool chain in the export process and maintaining cordial relations with clients, the world over, contributed to the success of Mahagrapes. Source: Mahagrapes floriculture, who have invested in supporting marketing infrastructure, such as pre-cooling facilities, cold storage, refrigerated transport, agro-processing, also promoted the production and organized supply from other (smaller) farmers to meet the bulk requirements for export and local demand. These arrangements included providing technical advice to meet export quality requirements. Some private companies have also been instrumental in introducing new technologies in the state. Some companies involved in planting material production (e.g. tissue culture for flowers) and irrigation equipment (drip and sprinkler) offered combined technology and advisory packages. In addition to supplying new varieties of planting materials, the firms provided year-round technical advice on cultural management of the new crops. Irrigation equipment suppliers provided technical advice and maintenance services year round for the drip and sprinkler irrigation systems. Increased private participation in input supply (fertilizers, agro-chemical, improved seeds) increased the accessibility by farmers to key farm inputs. Some commodity marketing organizations, e.g. Mahagrapes, Mahamangoes, and the Western India Floriculture Association, have also been quite instrumental in promoting exports of local products (Box 3.5). New GOI Agricultural Export Initiatives. The Exim Policy for 2002-07 announced recently by the Government of India has adopted a "farm-to-port" strategy' The policy listed several incentives and facilities to promote agro-exports, The Policy lifted all quantitative restrictions on agriculture, except for onions and jute, removed the registration and packaging requirements, provided compensation for the cost of transporting agricultural commodities to the ports, and offered a special 3% duty entitlement pass book (DEPB) rate for primary and processed foods exported in retail packaging of 1 kg or less. Twenty agri-export zones have been identified for encouraging the export of specific horticultural products from the regions where they were produced, including four for Maharashtra: grapes and grape wine, mangoes, Kesar mango and, flowers. The GOM was also exploring the potential for establishing additional export zones for other fruits such as 32 oranges and pomegranates. The new policy proposed transport assistance for the export of fresh and processed fruits, vegetables, floriculture, poultry, dairy products of wheat and rice. Emerging Challenges To ensure the success of these initiatives, a more integrated approach would be needed. While the GOM, with the help of consultants, have prepared feasibility studies, there is a need to examine critical concerns. In the short term to medium term, there is a need to address issues relating to the (i) emerging resource constraints--water will be a critical binding constraint; (ii) meeting the significant technical support required, especially training farmers to meet stringent export quality standards, and (iii) increasing bottlenecks in rural infrastructure (roads, markets) to reduce post-harvest losses. As the majority of local production catered to the domestic market, seasonal surpluses of fresh produce were already resulting in glut situations and drastic declines in prices. Promoting private investments in supporting marketing infrastructure (cold storage facilities) and agro-processing and value addition would become increasing critical in the future, especially when existing plantations come into full production. Water constraints. Despite the relative success of the Horticulture linked to EGS program, problems of high mortality rates due to water constraints have emerged in some areas. The program has had a degree of success especially in the Konkan Region (mangoes and cashew) and oranges in North-eastern Maharashtra where water is more plentiful. Restrictive GOI fertilizer and pesticide Policy. Highly restrictive GOI nutrient and pesticide policies restricted imports of several fertilizers and pesticides (some that are more environmentally friendly) that are required by the new varieties of fruits, vegetables and flowers. If special waivers were granted, imports could only be made by state agencies. These procedures increased transaction costs, created delays that increase production risks, and limited access by farmers in general to these chemicals. The cost of domestic registration of chemicals was also prohibitive (Rs 1 to 1.5 million per molecule) due to the highly complex and outdated registration procedures. These discouraged furms to invest in product research and development for agro- chemical products with only small niche markets such as floriculture. Inadequate market infrastructure. Several exporters have pointed to the urgent need for setting up cold storage facilities at the Mumbai International Airport. The lack of such facilities meant that all fruits, vegetables, flowers and planting materials destined for export were left to sit in the tarmac at high temperatures for as much as 4 to 6 hours, prior to loading into the aircraft. As these products were highly temperature sensitive and perishable, such that they were transported from production centers to the airport in refrigerated containers, the sudden exposure to heat increased post harvest losses. While private sector companies were willing to invest in building the cold storage facility at the airport, this was restricted to the public sector, i.e. APEDA and state agencies. No action has been taken for over five years, resulting in large cumulative losses for local entrepreneurs. As many of the fruit plantations come into full production in the coming years, existing bottlenecks in marketing will worsen. Currently, there are only about 857 regulated markets (main and sub-market yards) in the State, many of which do not have the appropriate supporting infrastructure (e.g. cold storage facilities) required to handle highly perishable horticulture products. This is discussed in more detail in Chapter 4. Constraints to Private Investments. Goverrnent conditions regarding cold storage use have undermined the economic feasibility of firms. During the last decade, the GOM provided financial assistance to grape grower's societies to establish pre-cooling and cold storage facilities. This assistance came in the form of an equity share capital contribution by GOM and the National Cooperative Development Corporation (NCDC), a loan from NCDC, and subsidies from APEDA, 33 National Horticulture Board, the Regional Development Corporations, etc. A recent study of 34 export oriented grape co-operative societies found that 8 units were financially viable, 9 units were sick but can be rehabilitated, and 8 units were sick and cannot be considered for rehabilitation. 10 One of the major causes of the poor financial performance of the societies was the restriction that the pre-cooling and cold storage facilities could only be used for grapes, under the conditions laid-down for units declared as 100% export oriented units. As grapes were only harvested during three months in the year, the facilities were forced to stand idle for the remaining 9 months. Other factors deterring private sector investments in agro-industry that the entrepreneurs noted included multiple clearances required in setting up a business and rent-seeking by officials granting clearances. Quality Control to Meet Export Standards. Meeting stringent export quality standards was made more difficult by a lack of awareness among farmers of appropriate cultural practices. A recent survey (MITCON 2000) found that many farmers were not aware of the strict export quality requirements and were not following the recommended methods to obtain consistent "quality", improved productivity and low pesticide residues. In one instance, this resulted in the costly rejection of exports of Indian grapes to Europe in 1995-96, due to high pesticide residues in the fruit. This arose because cloudy weather and unexpected rains led to pest and fungus attacks, so that farmers used more pesticides, without realizing its post-harvest implications. E. Cotton Sector Development Cotton Production Maharashtra was one of the principal cotton growing states in India. About 3.3 hectares was planted to cotton in 1999/00, which accounts for 37% of total area (the highest) in the Figure 3.6: Cotton Production, Area and Yields, 1980/81 to 1999/00 country. The state, however, only ranked 3500 200 second in terms of output, which reached Ca - 180 about 3.1 million bales (170 kg each) in the CD 160 same year (27% of All-India output). e 2500 140 Moreover, production fluctuated < 2000 Q - 120 considerably (Figure 3.6). These wide o- lo variations were largely due to yield o 1500- 80 Z volatility, resulting from predominantly o 1000 60 rainfed cultivation. About 97% of cotton 40 was planted in rainfed areas where rainfall 2 -00 20 was highly volatile. It also contributed to o2.0._._.___ o lower average yields (128 kg/ha in , _ TE1999/00) relative to other major i m 4 'o ; m |: 00 producing states, such as Gujarat (317 00 00 00 00 a > ; a kg/ha) and Rajasthan (288 kg/ha). The Area -U- Prodn - Yield contribution of cotton to agriculture GSDP in Maharashtra (inclusive of cotton seeds) varied from 5 to 11% between 1993/94 and 1999/2000. Cotton was produced by about 2.4 million farmers (20% of farmers in the State) in 23 of the 25 districts in the state. Government Programs for Improving Cotton Production Two centrally sponsored schemes were implemented in Maharashtra to improve cotton production. These were the Intensive Cotton Development Program (ICDP) and the Technology Mission on Cotton (TMC). 'o There is no complete information for two units and seven units have not started operation. 34 Box 3.6: Intensive Cotton Development Program: Major Components Demonstration of Production Technology: These included field demonstration on the use of delinted seeds, dry sowing, inter cropping, paired row planting, altemative furrow irrigation or any other ICAR recommended production technology which the state would like to demonstrate to the farmers to improve the productivity of cotton. The demonstration plot would cover 10 hectare and assistance for inputs used limited to 50 percent of cost. Integrated Pest Management (IPM): The scheme provided for organizing IPM demonstration and draining to farmers. In each demonstration, 30 farmers were to be trained for 10 days and IPM kits, each costing Rs. 100 were to be provided to trainee farmers. The IPM training to the farmers included propagation of cultural, mechanical, biological and chemical control measures and integrated pest management practices Farmer's Training: This component aimed to teach farmers about improved cotton production practices namely, use of hybrids, fertilizers, irrigation and pest management practices. The trainings were organized by the Indian Council of Agricultural Research and other institutes. Distribution of Certified Seed: This component sought to popularize location specific improved varieties and for replacement of the older varieties with new varieties. Under this scheme, certified seeds of improved varieties of cotton, which were not older than 15 years were to be made available to farmers on subsidy basis. Hybrids were not covered in the program. Seed production Program: This program included production of breeder seed, foundation seed and certified seed. Under this scheme, incentives were provided (upto 50 percent of production cost for breeder seed) to state seed producing agencies to produce varieties, which were not older than 10 years. Plant Protection Equipment: The scheme provided plant protection equipment, namely (a) manually-operated sprayers/dusters at 50 percent of the cost of equipment, limited to Rs.600 per equipment; (b) power operated back mounted sprayers at 50% of the cost of the equipment limited to Rs. 1500 per equipment; (c) tractor mounted sprayers at 25% of the cost of the equipment limited to Rs.4000 per equipment. Sprinklers irrigation sets: Subsidies were provided for distribution of sprinkler irrigation sets for a one acre farm in non- surface irrigated areas to small and marginal farmers only, at the rate of 50% of the cost of sprinkler set, limited to Rs. 10,000 per uniL Source: Department of Agriculture and Horticulture. Intensive Cotton DeveloDment Program. The ICDP was initiated in 1979-80, with the objective of increasing the production of exportable and domestically required cotton through the adoption of improved farm practices and advanced production technology, such as drip and sprinkler technology and integrated pest management. Maharashtra shared the cost of the program with the GOI on a 75:25 arrangement. The Directorate of Agriculture was responsible for implementing the program in 20 cotton-growing districts." The major components of the program are described in Box 3.6. Table 3.7 lists the expenditures on various activities. A recent review of the Agricultural Finance Corporation (2000), however, found several weaknesses in the program. Contrary to the GOI guidelines, some of the varieties used in demonstration were more than 10 years old. For example, the LRA 5166 variety in Maharashtra released more than 15 years back was extensively taken up for demonstration in the state seed production program. The 10 ha demonstration plot was difficult to manage and state officials encountered problems in encouraging farmers to adopt the recommended cultivation practices and to apply inputs uniformly in all the plots in the demonstration area. The planning, organization and follow-up of the field demonstrations were not systematically and carefully monitored. For example, though distribution of soil ameliorates was recommended, only seed, fertilizers and plant protection equipment were distributed. The quality of IPM materials supplied was poor and inadequate and often delayed. Agricultural university scientist participation was also low. Table 3.7: ICDP Year-wise and Component-wise Outlay as Percentage of the Total Outlay, 1996-97 to 1998-99 Year Name of components and % of Total Outlay Prodn Distribution Demonstration on Total of breeder Of certified Prodn Pheromone NPV 1PM Supply of Sprinkler Farmer Expenditure seed seed technology Traps Demonstration Plant Sets Training Rs. million & training Protection I_____ ___________ _________ program Equipt 96-97 2.0 24.1 12.1 2.9 0.4 15.7 19.7 17.4 1.1 43.4 97-98 0.8 1 5.2 8.8 2.6 2.0 21.8 25.7 20.9 1.3 36.7 98-99 0.5 1 2.1 8.3 2.3 2.8 22.1 21.6 27.7 1 .8 54.2 Source: Directorate of Agriculture, Pune. " These districts comprised Dhule, Nandurbar, Jalgaon, Jalna, Solapur, Satara, Aurangabad, Beed, Parbhani, Hingoli, Nanded, Buldhana, Akola, Washimn, Amravati, Yeotmal, Wardha, Nagpur, Chandrapur, and Latur. 35 Technologv Mission on Cotton. The TMC, launched in February 2000, was a modified version of the ICDP. It aimed to raise yields, improve the quality of cotton particularly with respect to trash contamination, and increase the income of farmers by reducing the cost of cultivation. It also sought to improve cotton processing facilities by providing assistance for upgrading and/or modernizing existing ginning and pressing factories, so as to reduce to a minimum or eliminate contamination. The Department of Agriculture was charged with the transfer of technology under ICDP. The Cotton Corporation of India (CCI) and non-governmental organizations (NGOs) also played an important role in the TMC in disseminating technology. The TMC's 4 mini-missions. And their implementing agencies are listed in Table 3.8. Table 3.8. Technology Mission on Cotton: Main Components Mini Mission Objective Nodal Agency Cotton research and technology generation Indian Council of Agricultural Research Development and transfer of Technology Ministry of Agriculture Improvement of Marketing Infra-structure Ministry of Textiles IV Modemization/ Upgradaion of Ginning & Pressing Factories Ministry of Textiles Source: Directorate of Cotton Development. The TMC aims at integrating efforts on all fronts to promote cotton production and quality. Under Mini Mission I, whose objective was cotton research and technology generation, germplasm that had inherent resistance to kill pests and bollworms were identified. Village demonstrations (50- 140 acres per site) to adopt integrated pest management through bio-intensive measures were conducted. Under the genetic improvement component, emphasis was placed on short duration varieties. Under Mini Mission II, whose objective was the development and transfer of technology, bio-control labs were established to produce bio agents. Eight laboratories were being established in Maharashtra, specifically Dhule, Jalgaon, Nanded, Parbhani, Buldhana, Yeotmal, Amravati and Wardha. Cottonseed delinting machines were also being erected by the Maharashtra State Seed Corporation in Akola. These plants were essential as the fuzzy seed did not allow proper germination and also tended to carry diseases and pests resulting in reduction of cotton yield. Under the TMC, hybrids were eligible for the subsidy, unlike the ICDP. The aim of Mini Mission III was to develop the market infrastructure to eliminate contamination during the handling of cotton in market yards. However, since the Maharashtra Monopoly Procurement scheme collected cotton from the cotton and ginning & pressing factories, Maharashtra was not eligible to participate in this component, despite the urgent need for market improvements. Mini Mission IV aimed at modernizing and upgrading ginning & pressing factories. Under this component, 75 factories have received assistance for the modernization of the factory. Constraints to Raising Cotton Yields Yield levels remain low and continue to fluctuate despite the cotton programs implemented by the government. The major constraints that retard yield levels include: (i) Dependence on rainfed production: the major cotton regions were characterized by scanty and uncertain rainfall. Only 3 percent of the cotton area was irrigated. The crop was also grown under varying soil types with varying soil depth and a wide range of soil moisture storage capabilities. Yields therefore varied significantly from year to year. (ii) Limited use of certified seeds: the area under certified seeds did not exceed 40 percent in the state. (iii) Limited adoption of improved cultivation practices by farmers: examples include sowing in ridges and furrows and irrigation to alternate furrows, adoption of proper seed rate, and use of recommended dose of fertilizer. (iv) Limited adoption of Integrated Pest Management (IPM): Fanners were accustomed to frequent spraying of insecticides to control pests. With IPM, farmers need not or spray 36 only once, instead of their current practice of 7 tolO times. Timely availability of good quality bio agents at economical rates was also a major constraint. GOI Clearance for Bt Cotton Use in India With the approval granted for the commercialization of Bt cotton, India has stepped into the age of agri-biotechnology. Bt cotton, the seeds of which acquired a pest-resistant character with the introduction of a gene derived from a common soil bacterium, was India's first officially approved transgenic crop. The clearance, accorded by the Genetic Engineering Approval Committee (GEAC), the high level committee constituted under the Union Environment Ministry, was restricted to Bt cotton developed by one seed company, Maharashtra Hybrid Company (MAHYCO). At the same time, all new technologies contain an element of risk and biotechnology is not free from it. Therefore, the clearance was invariably conditional. Among other conditions laid down, the GEAC was reported to have directed farmers to set aside a portion of their land for conventional or non- genetically modified varieties (as a reburial). The refuge was meant to prevent the onset of Bt toxin resistance among bollworm. The refugee strategy has been used widely abroad, but doubts have been raised by some on how effectively this could be implemented in India where holdings are small and where farmers may be reluctant to sacrifice a portion of their land to grow conventional cotton in order to encourage non-resistant pests. However, it is expected that Bt cotton's adoption will lead to a reduction in pesticide use in cotton. IV. Agricultural Market Interventions The GOM has been a strong proponent of cooperatives as an instrument for economic development. The government valued its basic principles of non-exploitativeness, voluntary membership, equity (one person-one vote), decentralized decision making, and self-imposed curbs on profit making. Initially confined to agricultural credit, the government expanded its support to other activities, including agro-processing, agro-marketing, rural industries, social services, etc. While several of these cooperatives have had a beneficial impact in raising the standards of living of rural people in the state, the survival of many are increasingly threatened by poor financial and organizational management. Of the 100,366 cooperative societies for which financial data were available, about 46% were incun-ing losses. Sugar, dairy and cotton cooperatives have been no exception. The following sections describe the performance of cooperatives in the sugar, dairy and cotton sectors in Maharashtra. A. Sugar Sector Development Fostering sugar sector development, primarily through government assistance in establishing cooperative sugar mills, has been a major pillar of the GOM's strategy for promoting rural development in Maharashtra. Sugarcane Figure 4.1: Gross Value of Output per Ha of Selected Crops, is one of the most profitable crops that could constant 1993/94 prices. be grown, with its gross value of output 6-7 times those of foodgrains (Figure 4.1). 100000 Sugarcane contributed 18% of agricultural 80000 - GSDP in 1999/2000, while accounting for 2% 1,, 60000 to 4% of gross cropped area. Support for the establishment of sugar mills ensured a ready , 40000 market for farmer produce as well as 20000 generated additional employment o opportunities directly in the mills and 0 indirectly (transport, haulage, etc) in rural D * C o areas. Some successful sugar mills also ' aX .s diversified to subsidiary activities, such as e food processing, co-generation of electricity,'2 o paper and alcohol manufacturing, dairy o1 993-94 01999-00 processing, and set up schools in rural prcsmunitie. . Source: Directorate of Economics and Statistics, GOM. communities. These sugar mills have been instrumental in increasing sugarcane production in Maharashtra. By 2000, the state was the second largest producer, after Uttar Pradesh, with output of 115 million mt in 1999/2000. It has the second largest area devoted to sugarcane in India, accounting for 15% of area planted in the country. Over the last two decades, although production fluctuated considerably, it followed an increasing trend (Figure 4.2). These increases, however, came as a result of increasing area. Average yields have fluctuated around 80 to 90 mt per ha during the last two decades, which was considerably below yields in other major producing states such as Tamil Nadu (110 mt/ha) and Kamataka (102 mt/ha). Sugarcane had traditionally been grown over 15 to 18 months. Due to increasing water scarcity, there has been an increasing shift to shorter duration annual crops, with lower yields. 12 Of the 8 cooperative sugar factories, 6 used bagasse and 2 used bio-gas, which were co-generating electricity. In 2000, they supplied 69.6 kwh to the Maharashtra State Electricity Board. 38 Increased access to subsidized irrigation facilitated expansion of sugarcane production. Sugarcane is a highly water intensive crop. In 2001/02, it accounted for about 17% of Figure 42: Sugarcane Production, Area and Yield 1980/81 t gross irrigated area in the State. Analysis of the NSS 54th round (1997/98) survey of 60,000 - 1000 agricultural households in Maharashtra - 900 X showed that 95% of sugarcane area 50,000 800 cultivated was irrigated. Of total irrigated E 40,000 700 g area, 85% was irrigated with groundwater, 8 600 only 5% was irrigated using canal (Figure 30,000 500 < 4.3)13 Three quarters of the area irrigated 20,000- 400 by groundwater was through the use of a. 300 : electric pumps. Large subsidies on 10,000 200 E electricity for use in agriculture have been a 0 .0 D major factor driving increased groundwater 0A ,L - ) 0 LA ec use in the state. The Irrigation Department 2 E MM ;O estimated that about 70% of surface irrigation was going to sugarcane Prodn Area A Yield production. These subsidies to canal irrigation and groundwater use with electric Source: CMIE, Agrculture, various issues pumps were major causes of the worsening fiscal crisis in the state. Sugar Cooperative Mills In line with the priority for cooperative sector development in various sectors, the GOM financially supported the establishment of cooperative sugar mills in the state. As of 2001/02, there were 208 cooperative sugar mills, of which 160 were operating. The remainder was classified as sick units.'4 Mills purchased sugarcane supplied by farmer members and processed them into sugar. Figure 4.3: Sources of Irrigation for Sugarcane Production in Maharashtra, 1997/98 Prior to 1997, sugarcane marketing was subject to Conjunctive zoning. Zoning &Others requires that all 10% farmers -.ric-P growing sugarcane 85% within a specified area < . . ~~~~~Electric&Diesel_D- specified area have to deliver Ony Canls their cane to a Onl designated mill. Diesel Pumps This was 5% relaxed in 1997, whereby the I compulsory Source: Based on NSS 54 Round, computed by authors. 13 In the survey, each household reported area cultivated with 5 major crops. The analysis applied to all households reporting sugar cane cultivation. 14 Sick units were defined as those that have completely eroded equity and incurred losses for two consecutive years. 39 supply to sugar factories was limited to cooperative members, and only up to volume that is equivalent to their shareholdings. The mills were also involved in the scheduling of planting, harvesting and financing of the sugar crop. They covered the harvesting and transport costs to the mill. The price paid by the mill is approved by the GOM. Until the cooperative mill has repaid GOM's equity share and all guaranteed loans, a Committee of Ministers approved a mill specific cane price. Within 15 days of delivery of the sugarcane, farmers were given an advance payment, with the value of the sugarcane being based on the Government of India minimum support price for sugar (SMP). The balance was paid to the farmer when the sugar was sold, based on the final price received by the mill. Due to the poor financial condition of many mills, most farmers did not receive more than SMP. A number of Government of India policies also influence the performance of the sugar milling sector and the prices faced by consumers. The mills had to deliver a percentage of their output (10% in 2001/02, down for 40% earlier) to the government to meet the sugar requirement of the GOI Public Distribution System (Box 4.1). The GOI also sets the volume of sugar that could be released into the free market and influenced domestic prices through its export and import policies. In 2001/02, sugar imports were subject to a 60% tariff. Below poverty line households also had access to subsidized sugar from the public distribution system, in addition to purchases from the free market. Due to the large number of policies affecting the sugar sector, that in turn also generate complex interactions, it was not possible to estimate their net effect on producer and consumer welfare, without more extensive data and more rigorous analysis. The establishment of these cooperative sugar mills has been largely funded directly and indirectly by the GOM. Usually, the farmer members only had to provide about 10% of the investment costs. About 30% was provided by the GOM as equity contribution, the remainder was financed through loans (e.g. the National Cooperative Development Corporation, IFCI, IDBI, etc), which was guaranteed by the government. In addition, the GOM provided a subsidy of 50% on shares purchased by SC/STs. Most mills established were small by international standards -- 7,000 mt per day (tpd). Of the 116 cooperative sugar mills established in 1998, 37 had processing capacity of 1,250 tpd or less, 53 had capacity between 1,250 to 2,500 tpd, 19 had capacity from 2,500 to 4,500 tpd and 7 had a capacity of 5,000 tpd. This was in part due to an earlier GOI policy to give preference to granting licenses to mills with processing capacity below 2,500 tpd. This GOI licensing policy was abolished in 1998. The small units, however, contribute to higher processing costs. Fiscal Impact. The government's continued program to support existing cooperative sugar mills and to establish new ones has become a major threat to the government's fiscal health. Most recent estimates indicated that GOM equity share in cooperative mills have reached Rs7.2 billion during 1991-2001 alone. The volume of GOM guaranteed loans was estimated at Rs33 Box 4.1: Government of India Sugar Policy as of November 15,2001 Suear Lev: This requires all sugar mills to deliver 15% of total output to the govemment to meet the requirements of the Public Distribution System. Mills are paid a below market price for the levy sugar. Factory-wise Ouarterlv Release of Suear:The govemment instructs the volume of sugar that can be sold by the mill in the free market. The GOI has shifted from a monthly to a quarterly release/quota system. Mills have also been allowed to sell upto 10% above its quarterly free sale quota for payment of cane price dues to farmers only. Zoning: Farmers can only deliver their sugarcane to designated sugar mills. Public Distribution System (PDS) Suear: Access to PDS sugar is now limited to Below-Poverty Line households in all states and union territories, except the northeastern states. The allocation amount was also increased from 425 gm to 500 gm per capita per month. Trade: Sugar imports are subject to a 60% tariff. Sugar exports (raw and white) are exempted from the sugar levy. Sugar mills are eligible for the duty exemption passbook benefits at 5% of the f.o.b. value of exports. Source: Department of Sugar and Edible Oils, GOI. 40 billion, of which Rs2. I billion were invoked in Figure 4.4: Number of Sugar Cane Mills (1997) and Percent Share 2000/01. In view of the large number of sick of Irrigated Sugarcane Area over Gross Irrigated Area by District cooperative mills, many of which have closed (1995/96) down, their debt burden will have to be paid Sugar/GIA No of by the GOM. This poses a major threat to the 90% Mlls 25 already precarious GOM's fiscal status. 80% 70% - - 20 Environmental ImDact. Expansion 60% - t of sugarcane cultivation, however, is 50% -1 5 threatening the sustainable use of groundwater 40% - I I i in the state. As intended, the establishment of 30% - / 1 I10 cooperative sugar mills contributed to the 20% - l 5 expansion of sugar cultivated area (Figure 10% "inn l l 4.4). As discussed in the section on 0% 0 groundwater, the number of watersheds that a r@ = have reached critical groundwater levels have 'D En$ m2 m mm.- E ° p c also been increasing. As shown in Figure 4.5, m 6m I y there appears to be a close correlation between the number of critical watersheds and the rate % Irrigated Sugar area + No of Sugar Mlls of groundwater use (as measured by the I percentage of net irrigated area using Source: Department of Agriculture and Horticulture, Departmnent groundwater). In some districts, where there' of Irrigation. were a large number of watersheds reaching critical level, the percentage share of irrigated land devoted to sugarcane was also quite high. As noted earlier, declining water tables and increasing water shortages were exacerbated by increased sugarcane cultivation. Hence, it would be critical that the current policy of promoting sugarcane production be reevaluated to also put greater weight to managing water resources appropriately, not only for agricultural purposes, but also for other competing uses, such as drinking water. Figure 4.5: Percent Share of Irrigated Sugarcane Area over Gross Irrigated Area and Well Irrigated Area over Gross Irrigated Area by Beneficiaries of the GOM's Sugar District (1995/96) and Semi-Critical, Cfitical and Over Exploited PoUff. Inidence anlysis of he direct Watershed Areas over Total Watersheds (1 997). Policv. Incidence analysis of the direct beneficiaries found that large farmers 900% - captured most of the benefits of the GOM's 90% - 1 AA sugar policy. Analysis of the NSS 54th 70% A Round survey found that 64% of the area 70% planted to sugar were cultivated by medium 60% - (owning 2 to less than 4 ha of land) and s0% large (owning greater than 4 has of land) 40% A A farmers (Figure 4.6). Hence, most of the 30% benefits derived either through canal 20% irrigation or power subsidies for electric 10% pump irrigation, or higher incomes 0% - . . . . generated were mostly captured by wealthier 9 - 8 farmers. Marginal farmers (owning less i < iZ than I ha) and small farmers (owning 1 to >- o c z less than 2 ha) cultivated only 14% and 19% M % Irrigated Sugar Area -- Critical Watershed of sugar area respectively. I %Irrigated by Wells Source: Department of Agriculture and Horticulture, Department of Irrigation. 41 B. Dairy Processing Sector Figure 4.6: Distribution of Agricultural Households Planting Sugarcane and Area Planted, 1997/98. The government has been directly 45%_-139'__5 and indirectly (through cooperatives) involved in dairy processing in the State. 40% 38% In 2002, there were 26,373 milk 35% cooperative societies, which were grouped 30% into 32 District Federations and federated 25% 75% 240/c under a State Federation. The government 25%21% 1 and cooperative schemes accounted for 20% - 60% of milk processing capacity in the 15% _ 4 OX State, totaling about 5.8 million li per day 5% (Table 4. 1). 5% The government and cooperative o- dairy operations, however, have been 0% incurring significant losses. Cumulative No. of Households Sugarcane Area losses have amounted to Rs22.1 billion ($460 million)." Several factors I Marginal *Snall OMedium OLarge contributed to the losses. The Source: Based on NSS 54" Round Survey, computed by authors. government's policy was to purchase milk at highly remunerative prices. High procurement and operating costs and low sales prices in turn contributed to the losses. In 2002, the processed cost of the milk was Rs 14 per Ii, while the milk was sold at Rs 12.5 per li. Operational inefficiencies, exacerbated by increases in salaries following the 5h Pay Commission Recommendations, contributed further to the high operating costs. Procurement volumes exceeding sales also led to the accumulation of stocks of skim milk power (4,000 mt) and butter (2,000 mt) and rising interest charges. In 2000-2001, only about 50% of the milk processed per day could be sold. Table 4.1 Dairy Processing in Maharashtra, 2001. Govemrnment Cooperative Total Private Sector Activity No. Capacity,000 li No. Capacit,000 li No. Capacity,000 li Capacity,000 li Chilling Plant 69 | 657 46 1410 115 2110 Dairy Processing 32 3230 28 3490 61 6730 3855 Milk Power Plants 4 51 mt/day 5 90mtda 9 141 mt/da Source: Department of Animal Husbandry, Dairy Development and Fisheries Development. The GOM announced several reform measures during the last budget speech 2002-2003. The key reforms included: * Phased handover of some dairies and chilling plants to financially sound cooperatives; * Exploring privatization of idle capacity in government dairies; * GOM withdrawal from milk distribution in Mumbai, resulting in savings of Rs 100 million. * Discontinuation of departmental distribution of milk; retailers pick up milk and milk products ex-dairy. This will contribute to reduction of overtime costs of Rs 100 million per year; * Program of rehabilitation of assistance to sick cooperatives; * Reduction of Dairy Development Department by 1,283, reducing staffcosts by 10%; and * Review of dairy procurement price policy. t5 Losses amounted to about Rs1.4 billion in 1996/97, Rs 1.7 billion in 1997/98, Rsl.9 billion in 1999/2000, Rs 1.6 billion in 2000/01, and Rs 1.7 billion in 2001/02. 42 C. Cotton Marketing Maharashtra is the only state in India where procurement of seed cotton (kapas'6) is a government monopoly. The monopoly procurement scheme came about with the legislation of the Maharashtra Raw Cotton (Procurement, Processing and Marketing) Act, 1971. Under the Act, all private trading in cotton was prohibited and farmers could only sell their output to the GOM's designated procuring agency, the Maharashtra State Co-operative Cotton Growers Marketing Federation Limited(MSCCGMF). The main objectives of the scheme were: (a) to ensure a fair and remunerative price of cotton to the growers in the state; (b) to effect additional transfer of incomes to the cotton growers by eliminating middlemen and securing in full the advantage of the wholesale price; (c) to bring about stability in the incomes of growers and thereby bring about stability and overall production growth of cotton in the state; and (d) to supply scientifically graded quality cotton to the consumer mills. The MSCCGMF is a registered co-operative society. Under the scheme, the state was divided into 12 zones with 60 sub-zones spread over 8-9 centers in 4 regions: Vidarbha (6 zones), Marathwada (4 zones) and Khandesh (1 zone, Nasik area) and Western Maharashtra (1 zone, but with negligible procurement). They cover 22 districts and 3 million farmers over 3 million ha. Raw cotton is procured from farmers at 500 procurement centers (with different villages attached to different centers) from where it is taken to 800 different factories for unloading, weighing and grading. The Federation has its representatives at zones, sub-zones and factories. At each center there is a MSCCGMF representative, who helps with weighing, checking quality and making payments for raw cotton. Cotton Pricing under the Monopoly Procurement Scheme The scheme assures cotton growers a guaranteed - variety-specific price for seed cotton fixed for the season. In implementing it, farmers actually have to deal with three different prices: * Guaranteed Price (GP): The GOM fixed this price, normally at a level higher than the GOI Minimum Support Price (MSP). It is based on the recommendations of the Cotton Coordination Committee appointed by the GOM. The GOI MSP is based on the recommendations of the Commission of Agricultural Costs and Prices (CACP) for different varieties of seed cotton based on the demand and supply situation, cost of production, change in input prices, price parity with competing crops etc. In other states, the CCI on behalf of the GOI purchases cotton at regulated markets when open market price falls below MSP. * Final Procurement Price (FP): This price was the sum of GP plus a bonus to farmers as fixed by the GOM. The bonus was calculated as 75% of the "net surplus" of the scheme. The surplus was the difference between the "scheme income" and its total cost. This was distributed between the cultivators and the Price Fluctuation Fund (PFF) in a 75:25 ratio.'7 The PFF was intended to cover scheme losses when needed. In principle, the cultivators' 75% share of the surplus, converted into rupees per quintal (100 kg), was added as bonus to GP to arrive at the FP. Different varieties of kapas were acquired at their FP during the season. * Advance Additional Price (AAP): In practice, the net surplus from the scheme cannot be known at the beginning of the year. Thus, the Federation gives a bonus in advance in the form 16 Seed cotton or kapas is what is harvested from the cotton plant. This is ginned in ginning mills to produce two products: cotton lint (for use in textile manufacturing) and seed cotton, which could be further processed into cottonseed oil and cotton meal. " The surplus is the difference between revenues for the sales of lint, cottonseed and cotton waste and all expenditure incurred in procurement, processing and marketing operations under the monopoly procurement scheme. 43 of Advance Additional Price (AAP), which in 2000-01 was close to Rs.500/quintal. In recent years, the AAP exceeded the bonus due to farmers, necessitating withdrawals from the PFF to cover up the difference between the two. In some years, AAP exceeded 100% of surplus. A Capital Formation Fund was also established under the Monopoly Procurement Act to provide margin money or equity basefor the proper and smooth functioning of the scheme. For this Fund, 3% (originally 1% until 1981-82) of the price of tendered cotton was deducted from growers at source and a separate account was kept. The money in the Fund was supposedly intended to serve as a forced savings, to be subsequently paid back to the farmers with 12% interest. However, the farmers apparently were generally not informed about the savings made from this source nor how its funds were utilized. Inability to Control Cotton Movement As per the Act, the scheme placed restrictions on movement and export of cotton outside state boundaries. Every year the .MSCCGMF constituted "flying squads" to prevent the smuggling of cotton across the border. According to a policy directive issued on November 7, 2001, farmers were allowed to sell cotton in the market outside Maharashtra but, curiously, not to the private sector within the state. Similarly, cottonseed could not be sold to oil manufacturers. This was in line with the nature of monopoly procurement. However, although the GOM purchase price exceeded the local market price by approximately Rs.50/mt, about 20% of the produce was sold in neighboring states such as Gujarat and Andhra Pradesh, due to delayed payments and uncertainty of transactions with the MCCGMF. This was in spite of having to incur additional transport cost, amounting to about 5% of the total transaction. The govermment's policy announced in the 2002-03 budget speech to help cotton farmers to market their produce at the best possible price will now give farmers the freedom to sell to the MSCCGMF, the Cotton Corporation of India, or other buyers. Poor Financial Performance The scheme was able to contain losses only during the first Figure 4.7: M MSCCGMF Cotton Procurement and Profit and Losses, 1990/91 two decades of operation. From to 1999/2000. 1972/73 to 1993/94, it suffered losses 10.00 4000 in only 8 out of 22 years. The major f 8.00 3 losses were in 1984/85 and 1985/86, 2 e 6.00 CD when the scheme lost Rs.770 million o 6- 0 a; ~~~~~~~~~2000 and Rs.3.08 billion, respectively. 4.00 E There was a bumper crop of cotton in X 2 1000 200 the country and prices in all primary markets crashed. The monopoly 0 ° °° - scheme was under strain as it had paid .2 -2.00 n ) A high guaranteed prices to the farmers, B 4Qf) ct, * a when market prices drastically lz -2000 declined. The Price Fluctuation Fund, -6.00 - which was devised essentially to -8.00 -3000 ensure payment of guaranteed prices in years of losses, was completely -10.00 -4000 wiped out. A sum of Rs.3.31 billion was transferred from the state Prof U Loss + Cotton rocurement exchequer to the federation. From the Source: Shikha Jha, 2002, "Public Spending on Cotton in Maharashtra, period 1986-87 to 1993-94, the Effectiveness and Options for Reform". 44 scheme was largely self-financing, mainly because of its policy of the fixing guaranteed price at the GOI support level. Since 1993/94, the scheme has been incurring massive losses. Total losses from 1994/94 to 199/2000 amounted to Rs 27.5 billion (constant 1999/2000 rupees). Through this time, the Federation covered these losses through borrowings and transfers from the State treasury (Figure 4.7). As procurement levels increased during some years, so did the losses. The Federation is now surviving through budgetary support from the GOM, delayed payments to farmers, and debt rescheduling. The amount owed to farmers were considerable, estimated at Rs 8 to 9 billion, and the government has been under considerable pressure to pay it. The Federation has also not paid its loans to the Maharashtra State Cooperative Bank (MSCB), its principal lender. As a result, the Reserve Bank of India has recommended MSCB to stop lending to the Federation, until all dues were paid. There were several causes for these rising losses. These are elaborated below. High seed cotton procurement Prices. Since 1994/95, the cotton procurement prices set by the GOM consistently exceeded market and the GOI minimum support prices, at times by as much as 30% to 50% (Figure 4.8). These high prices attracted illegal inflow of cotton from neighboring states in some years. Declining Cotton Lint Prices. Declining domestic and international prices made it more difficult for the Federation to sell its stocks. Due tohighl sof domestic and world production, Figure 4.8: MSCCGMF Procurement Price, GOI Minimum to high levels odoetcadwrdpduin,Support Price and Market Price for Cotton, 1990/9 1 to world prices have been hovering around their 1999/2000. lowest levels. The Cotlook index which was 91 230 in 1994 came down to 57 in 2000-01 and is 210 projected at 54 in 2001-02 (EICA 2001). In such 210 a global scenario, the Federation was unable to 190 offload its stocks in foreign markets. Problems 170 with quality, further limited international E 150 competitiveness. Even under the quota regime, z 130 its exports were negligible. For example in 110 1999-2000, it exported only 55,000 bales. 90 Corruption in gradina. "Upgrading" 70 of lower quality cotton reduced potential 50 revenues. While illegal, traders in general buy r0 cotton from farmers at a low price and, in o\9\ 9\9Z'b\90fi4 ao, A\ 99\ connivance with officials, sell it to the Federation for a higher price as "upgraded" or higher quality cotton. In a survey carried out in A MSCCGMF Price 2000-01 by MSCCGMF, 20% of 7,800 samples Source: Shikha Tha, 2002, "Public Spending on Cotton in of cotton collected were "upgraded" in this Maharashtra, Effectiveness and Options for Reforr". fashion. In another survey (i.e., covering 100% of processed bales), each bale was linked to the cotton procured and the latter linked to the price paid to the growers. Of the 25 million bales analyzed, 80% were of poorer quality than reported. Higlh operatin2 costs. The MSCCGMF's marketing costs (excluding the procurement price) increased by about 23% in real terms (1999/2000 rupees), from about Rs 35 mt in 1990/91 to Rs 43 mt in 1999/2000. Several factors contributed to increasing operating costs: higher ginning and pressing charges, higher transportation costs, and very slow turn over of stocks. Despite the high procurement volumes (and hence the potential for economies of scale), ginning and pressing costs in Maharashtra, which accounts for about one quarter of operating costs, were 45 about 10% higher than other major cotton producing states. For example, the total ginning and pressing cost was Rs940/mt in Maharashtra compared to Rs 870/mt in Gujarat and Rs 830/mt in Andhra Pradesh. The limited number of integrated processing facilities also increased the transportation costs. There were about 800 cotton factories in Maharashtra in 2002, half were cooperatives and half were private. However, only 150 out of these 800 factories have integrated ginning and processing facilities. This means that the raw cotton was first moved from non- facility centers to ginning factories where it was processed into lint, then it was transported to pressing facilities for pressing into bales, before it was again transported to the storage facility. These raised the transport costs from less than Rs.40 million in 1990-91 to more than Rs.140 million in 1998-99. MSCCGMF stored cotton for longer periods than the private sector, contributing to higher interest costs. The Federation produced the bales from November to April, but stored them for longer periods, ranging from 15 and 23 months during 1994-95 and 1998-99. Prior to the commencement of the 2001-2002 cotton-marketing season, the Federation had stocks worth Rs 22.2 trillion. Holding stocks over long periods also leads to the deterioration of the quality of cotton, which the Federation in turn has to sell at a discount. In 1998-99, storage costs were about Rs.1200/mt, of which more than 90% was towards interest payment. Moreover, in disposing the existing bales the Federation has to compete with private trader in the market, who numbered about 8000-9000 traders with an average annual turnover of about 1500 bales each. "The speed with which they finalize their deals, change their prices, service their clients can not be matched by the Federation, because of it's very bureaucratic set up. ... Most of the big consumers like to deal with these traders because of the flexibility available" (Sanstha Committee 2000).. Rising deficits and storage costs resulted in rising interest charges to the Federation. Due to large borrowings from various lending agencies, including cooperative banks to finance its losses, the Federation has built up a huge financial liability. Between 1994-95, interest costs incurred by the Federation to cooperative banks alone totalled about Rs10.7 billion. Recent Reforms During the GOM budget speech 2002-03, the government proposed major changes in the operations of the cotton procurement scheme. These included: procurement of cotton at the GOI minimum support price, permitting the Cotton Corporation of India and others to procure cotton in the state. D. Regulated Wholesale Markets Trade in most agricultural commodities was required to be carried out through regulated markets in Maharashtra, as in other states of India. Under the Maharashtra Agricultural Produce Marketing (Regulation) Act, 1963, all notified agricultural commodities, currently numbering 286, grown within a notified area of the regulated market or mandi, if sold wholesale, must be marketed through the designated mandi. The controlled commodities include cereals, pulses, oilseeds, sugarcane, fruits, vegetables, condiments and spices. The main objectives of the Act were to protect farmers from exploitation by middlemen and to provide facilities for auctioning of produce, and thus ensure that farmers get competitive prices. The Act restricted the development of wholesale markets to the government. In 2002, there were 274 principal regulated market yards and 591 regulated sub-market yards in the state.'8 Agricultural Produce Market Committees 18 In addition to these regulated markets, there are about 2,700 unregulated village markets in the State. The retail sales ('sales by an agriculturist who sells his own produce' or sale to a person who 'himself sells to another who buys for personal consumptions') in daily or weekly local bazaars are outside the jurisdiction of the regulated markets, as also livestock products. 46 (APMC), composed of farmers, traders, and other market functionaries, were created for each regulated market or mandi. They were responsible for the day-to-day management of the market. The members of the APMC were elected by members of agricultural credit societies and other cooperative societies and by village panchayats within the area. The APMCs were supervised by the state level Agricultural Marketing Board. The APMCs generate income by charging market fees, license fees and rentals. A part of the APMC net income was passed on to the state level Agricultural Marketing Board to undertake infrastructure development. All functionaries like traders, commission agents, weigh persons and loading workers must hold a license from the APMC to operate in the mandi. The market fees range from 0.75% to 1% of the value of the produce sold. They control and regulate admissions to the market, issue and renew trader licenses, and suspend or cancel them. The state Agricultural Marketing Board, located at Pune, provided various services to the APMCs. These include training, extension, and financial support for modernizing infrastructure and other development initiatives in regulated markets, by way of loans and subsidies. The Board also assisted in the establishment of producer marketing organizations, such as MAHAGRAPES. The Board assisted MAHAGRAPES and its member societies in establishing pre-cooling and the cold storage units. Though the stated intention of the law was to create an efficient market structure, the provisions of the APMC Act are no longer compatible with the free and competitive market structure sought by the Government. The Act adversely affects farmers by restricting their marketing options in forcing them to sell only through the mandis. In some instances, this unnecessarily raises transaction costs. For example, farmers could sell directly to food processors and eliminate the need to pay the marketing fees and the fees of commission agents (2.5% for non-perishables and 8% for perishables) in the mandi. The market fee functions more as a tax on farmers, instead of serving its original purpose of covering the cost of essential services. The Act hampers the development of wholesale markets in the State by restricting their establishment to the public sector. While there has been an increasing need for more modem market infrastructure, the existing public monopoly has not kept pace with market needs. The private sector, as in other sectors (e.g. roads), could potentially play a similar role in building needed infrastructure. The provision that no person could carry on trade on agricultural produce unless he/she is a license holder of the APMC essentially granted monopoly power to the APMC. Moreover, the licensed traders of the APMC had vested interest to prevent new entrants, often on the plea that there was no potential for additional business, so that their control over the market continues without hindrance. New entrants were often not permitted even in activities like weighing, loading and unloading due to pressures from respective trade unions. The Expert Committee, for example, notes of an unwritten agreement by transporters' union with the APMC, Pune that outsiders would not be permitted to enter transport operation in the principal market yard in .Pune. This led to a situation where transport charges from the Principal Yard were exorbitantly high. Table 4.2: Income and Expenditures of Regulated Markets in The regulated markets generate Mabarashtra, 1999-2000. considerablerevenues,but the facilities ReIncome Expenditure Profits considerable revenues, but the facilities Region Rs million Rs million Rs million in many markets remain very Mumbai 385 284 101 rudimentary. In 1999-2000, about 17.7- Nasik 254 220 33 millon mt of agricultural produce were Pune 302 229 74 sold through these markets, with a total Aurangabad 198 180 18 Amarawati 1210 148 6 value of about Rs139 billion rupees Nagpur i 181 128 53 (Table 4.2). This generated revenues of Total 1530 1189 340 about Rs 1.5 billion from market fees Source: Maharashtra State Agncultural Marketing Board. alone and profits of about Rs34G 47 million. Despite the tremendous revenues generated by these markets, the availability and quality of market services remained poor. These revenues were intended for investments in market infrastructure, such as internal roads, auction halls, trader shops, platforms for agricultural produce, godowns and storage facilities, drinking water, drainage, common washing facilities, cattle sheds, etc. However, only 35% to 40% of the markets have these facilities. Recent reforms In the Budget 2002-03 of Maharashtra, the finance minister declared that "it is my government's intention to desist from intervening directly in the market for all agricultural commodities as a matter of policy". Included in the policy pronouncement was a proposal to permit fresh entrants (both cooperative and non-cooperative sectors) to set up market yards in designated areas. E. Labor Regulations As part of the Industrial Policy of Maharashtra 2001, the GOM initiated a review of labor laws and procedures, including central statutes, to enable industry and labor to meet the new economic challenges. The review was intended to remove disincentives to additional employment generation, facilitate restructuring and technological upgrading in the context of increasing global competition, provide an impetus to industrial dispersal, and promote production at efficient levels. It was also intended to safeguard labor interests and provide workers with greater financial security during restructuring. As an outcome of the first phase of the review, the Government planned to take the following steps * Subject to the approval of the legislature and the GOI, the Industrial Disputes Act will be amended to limit the applicability of Chapter V-B to industries employing 300 or more workers, as against 100 workers at present'9. * Subject to the approval of the legislature and GOI, the Contract Labor (Regulation and Abolition) Act will be amended to exclude certain activities such as cleaning services, loading and unloading of materials and goods, canteen services, distribution of mail, gardening etc. from its purview20. Keeping in view the context in which 100% EOUs operate, such units would also be excluded from the purview of the Act. * A committee, which will include representatives of industry and labor, will be set up to comprehensively review the Maharashtra Recognition of Trade Unions and Prevention of Unfair Labor Practices Act * The multiple minimum wages will be rationalized and reduced. 19 The most frequently voiced complaint against Indian labor laws relates to the provisions governing retrenchment layoffs and closure in the Industrial Disputes Act (1948). Until 1976, the law in this respect was not very different from the position elsewhere and employers could retrench labor if the situation warranted provided they followed the 'last come first go' rule in drawing up the list of workmen to be retrenched, gave a month's notice or pay in lieu of notice, paid half a months wages per year of service and informed the government. The Act was amended in 1976 to add a new Chapter V.B which made it mandatory for employers employing more than 300 workmen to seek prior consent of government before effecting retrenchment or closure of a part of the enterprise (permission for closure or retrenchment has to be given by the appropriate government as defined under Chapter VB of the Industrial Disputes Act"). 20The Contract Labor (Regulation and Abolition) Act was originally enacted to regulate the practice of contract labor to avoid exploitation of sweat labor. Section 10 of the Act empowers the Government to prohibit contract labor in certain situations at the discretion of the Government. In practice, the Act has been interpreted as requiring the abolition of contract labor for all services which are of a regular nature and performed on the factory premises. Two Supreme Court judgments in two different cases involving the Gujarat State Electricity Board and Air India have had the effect that employers using contract labor to perform regular services on the premises of the employer become liable to absorb such labor permanently on the rolls of the employer. 48 * The process of inspections under various labor laws will be rationalized, and the number of such inspections will be reduced and regulated. * The paper work required of industrial units under various labour laws will be reduced. 46 registers, forms and retums required from industrial establishments have recently been clubbed, substituted or deleted. The proposed actions above are in the right direction. But, the first two (changes in Industrial disputes Act and Contract Labor Act) actions will have to be approved by the Central Govemment. F. Rural Infrastructure Inadequate infrastructure remains a major obstacle to the more rapid development of rural areas. The development of adequate rural infrastructure will be vital not only for improving the quality of life in rural areas, but also for the successful achievement of the govemment's goals for the modemization of agriculture, poverty alleviation and rural industrialization. Roads Maharashtra has a higher road density than many other states. They are higher per sq km than Kamataka, Andhra Pradesh, Uttar Pradesh and the All India average (Table 4.3). The total road length in the state by 2000 was 257,000 kIn. Out of this 87,573 km were village roads. The road length amounted to 282 km. per 100,000 people. Of the total 43,772 inhabited villages (as per Census 2001) in the state, all weather roads connected 34,744 villages, while fair weather roads connected 3,501 villages. There are, however, distinct regional differences in access to roads. A large number of districts with higher rural poverty rates also had the lowest road density (Figure 4.9). While over 95% of villages with populations of 1,000 to 1,500 and almost 100% of villages with population greater than 1,500 were connected by a road, only 26% of villages with less than 1,000 people have road connection. Table 4.3. Infrastructure in Mahar shtra as com to all India and Selected states States Road % of Villages connected by Road, 1995 Railways Telecommu Post Length surface %of Total Villages nications Offices 1996/97 roads Knv'ooo 1996-97 Popn Popn. Popn.> Km/ 000 No.of Per 10 Sq.km. <1000 1000-1500 1500 sq.km phones/100 sq. km . . ~~~~persons Maharashtra 1176.1 75.1 25.7 94.5 99.7 17.7 3.1 0.41 A.P. 647.2 61.1 32.8 59.3 96.5 18.4 3.7 0.59 Gujarat 463.7 87.3 81.7 98.7 99.6 27.1 4.9 0.46 Haryana 637.1 90.7 98.6 99.9 99.9 35.1 3.9 0.60 Kamataka 750.9 69.0 34.6 74.5 86.1 15.5 4.4 0.51 Kerala 3749.5 31.1 100.0 100.0 100.0 27.0 6.9 1.30 Punjab 1277.8 81.5 99.3 100.0 100.0 41.7 6.6 0.78 Tamil Nadu 1587.8 68.0 60.7 100.0 100.0 32.2 4.0 0.93 All India 750.1 56.5 37.5 75.9 91.7 19.1 2.4 0.49 Source: CMIE, Infrastructure, 2001 ;Central Statistical Organization 2000. Rural Water Supply and Sanitation Rural drinking water supply schemes were implemented by providing piped water supply, borewells and dug wells depending on source of water, terrain and population of the village. In 2000, there were 29,882 villages/wadis having problems of drinking water in the state. During the Eighth Five Year Plan 27,518 villages/wadis were tackled. An outlay of Rsl.8 billion 49 was earmarked for the Figure 4.9: Road Density and Rural Poverty Rates (Headcount %) by District in rural water supply and Maharashtra. sanitation program in the Annual Plan 2000- 1.2 40 01. This is about 0.07% 1 of GSDP. 0.8 30 Around 86% 2~ 0.6 Co and 25% of households a) do not have access to lo0. sanitation facilities and ng. drinking water facilities 0 respectively in rural ' \ 44 Maharashtra (Table 4.4). The proportion of households reporting insufficient drinking Ra egh q m water (25. 1%) in ~ odLnt/q m Maharasbtra was higher - Rural poverty 93-94 (percent below poverty line) than other devcloped I sthane xcepthKeraelod Source: Road Density-Department of Public Works; Poverty Rates-Srinivasan 2002. states except Kerala. Export Infrastructure In order compete in the context of globalization and the challenges and opportunities arising from the World Trade Organization, a well developed infrastructure is necessary for growth of agricultural and non-agricultural exports. Marketing for export would require marketing infrastructure to be created at the airports. At present such export facilities were available only at the Mumbai airport. In Pune, the Maharashtra State Agricultural Marketing Board has made some efforts. Export facilities are also needed in Nagpur to facilitat, exports. Facilities for cooling, cold storage, sanitary and phytosanitary clearance with testing facilities, for export and import of agricultural produce are needed also at these locations. Refer vans to collect exportable surplus and to load the same are also required. As the state has become a major producer of exportable flowers, a flower auction house as well as pre-cooling and cold storage facilities would facilitate flower exports. There is also a need to have perishable cargo handling facility complex at air terminals. Air cargo centers for handling perishable produce are an important link in the export of fresh fruits and vegetables out of India. Except grapes and few other products, most of the exports were undertaken by air. However, exporters/ farmer exporters have no access to a full-fledged, modem and scientific handling center in or near air cargo terminals. At the cargo terminal, value addition can take place through such basic operations as cleaning, washing, sorting, grading, packing as needed for pre-cooling and cold storage to enhance shelf life. The private sector should be allowed and encouraged to develop and invest in these facilities. 50 Table 4.4. Access to Sanitation and Drinking Water in Rural Areas by Households (HH), 1998 State Proportion of Proportion of HHs Proportion of Households Reporting Insufficiency of HHs without Reporting insufficiency Dnnking water by Source (%) sanitation (%) of dnnking water Tap Tubewell Well Others Maharashtra 85.8 25.1 31.9 13.6 19.5 29.2 A.P. 88.5 22.1 31.0 14.2 14.1 17.9 Gujarat 79.9 12.3 18.7 21.2 20.1 41.5 Haryana 84.5 18.0 77.7 39.8 8.6 29.3 Karnataka 88.9 16.2 65.3 10.7 34.8 19.0 Kerala 23.1 30.4 25.0 66.3 59.8 56.5 Punjab 67.9 3.7 48.7 89.8 19.2 81.9 Tamil Nadu 88.5 18.2 48.0 18.9 13.9 16.4 All India 82.5 13.0 - - - -- Source: NSSO 1999. V. Policy Options for Promoting Sustained Agricultural Growth Maharashtra's rural development strategy for the 21kh century must rise to the challenge of meeting the rapidly changing needs of the rural, the state's, the Indian and global economies. As experience in other developing countries illustrates (e.g. Thailand, Malaysia), economic development and increasing industrialization eventually brings about a changed and smaller role for the agricultural sector. This has already begun to happen in Maharashtra. The increasing movement of agricultural labor to higher paying jobs in the industrial and services sectors and the increasing diversification of rural household incomes are consistent with this economic transformation. Integral to the development process, is the importance of concurrent rapid pace of growth in the both the agricultural and rural non-farm sectors, as they jointly, directly and indirectly, contribute to generating greater opportunities for rural employment and income growth. In addition, by contributing to increased rural incomes, they also build a strong foundation for consumer demand in rural areas, which could in turn stimulate growth in other sectors in the economy. Successfully achieving such broad-based growth, however, will require vigilantly adjusting to the rapidly changing market opportunities and challenges within the state, within India and globally. Maharashtra's transition from an agricultural economy to an industrial economy brings both opportunities and complex challenges. More than half of the State's labor force continues to depend on agriculture (as cultivators or agricultural laborers) for their livelihoods. Despite the agricultural sector's good performance in the 1990's, many continue to be bound to low value and low productivity agricultural activities. Hence, raising and sustaining the productivity growth of those who chose to remain in agriculture, as well as fostering the enabling environment for employment- generating growth in the industrial and services sectors, will be vital to raising rural labor productivity and incomes in the state overall. At the same time, the increased liberalization of domestic and global markets brings forth tremendous opportunities and challenges to Maharashtra. It opens opportunities to expand current, and penetrate new, markets within India and globally. But this also brings heightened competition from other Indian States and other exporting countries for the same markets. Therefore, taking the bold measures required to strengthen the competitiveness of Maharashtra's agricultural and other sectors will be vital to preserving and expanding its market share in both the Indian and international markets, and to sustaining the profitability, viability and growth of these sectors. Maharashtra holds considerable potential to build on its past good agricultural growth performance, and enhance its competitive advantage domestically and internationally, but there is no room for complacency. As per its agricultural policy, the GOM's goal has been to foster the development of a modem and commercial agricultural sector, which is efficient, environmentally sustainable and internationally competitive. It has made major progress in this respect, especially in the horticulture sector, facilitated by a number of factors. Maharashtra's access to, and competitiveness in penetrating, markets domestically and internationally have been assisted by easy accessibility to well-established ports, airports and other transport links. The state has a large base of farmers that have demonstrated their capacity to shift to modern and high value agriculture (e.g. horticulture and floriculture) in response to emerging market opportunities. It has a similarly strong and large base of private entrepreneurs, which widely perform essential market support and development activities, from input supply, to agro-processing, marketing and exports. It has a well- established financial system that facilitates access to capital for investments. Despite these important building blocks, there is, however, no room for complacency. Improving on its past agricultural performance and sustaining this over the longer term, require boldly addressing several critical sectoral issues today. First, fostering the enabling 52 environment, to facilitate the continued diversification of agriculture and expand the share of high value products, will remain a vital instrument for raising the productivity of the agriculture sector in the State. This will necessarily entail refocusing the role of the government to providing the appropriate regulatory framework, which ensures competition, and essential public goods to attract private investments, while withdrawing from commercial activities and devolving these functions to the private sector. Second, future agricultural growth will be circumscribed by increasing natural resource degradation (water and land). Adopting consistent sub-sectoral policies and measures for sugar, power, and water is urgently needed, to ensure the sustainable and efficient use of increasingly scarce resources, such as water and land. These will be critical not only to preserving the longer term viability of agricultural production and growth in the State, but also to ensure adequate water supply for consumers and other users. Tightening competition for limited fiscal resources heightens the urgency of appropriate public expenditure reallocation. There is a critical need for careful reorientation of priorities-away from short-term and more politically attractive transfers (e.g. in cotton, dairy, sugar, and power subsidies) that generate limited lasting benefits, towards investments that bring more permanent, longer-term, productivity-enhancing gains (rural roads, markets, irrigation, research, extension, and education). It will also require institutional reforms of government to ensure improved quality of delivery of rural-related public goods and services. These actions would be critical to foster more rapid growth and ease anticipated employment pressures in the whole economy. Anything less would have serious poverty and welfare implications for the state. Many of these necessary. fiscal and institutional reforms required will be highly politically sensitive. Thus it will require bold, yet strong and careful efforts, to build acceptance among affected stakeholders. A reorientation of the appropriate roles of the government and the private sector has to be an integral element for sustaining the agricultural growth and rural development in Maharashtra. Clearly the role of the govemment is to provide the enabling policy and regulatory environment for private sector participation, and the withdrawal from activities that could be efficiently and effectively performed by the private sector. In the short to medium term, reforms would need to focus on: (ii) creating the enabling policy and regulatory environment and reorienting public expenditures and institutions to encourage increased private sector participation and investments in rural areas, and thus maximize the private sector's contribute to the economy; and (ii) strengthening rural infrastructure and services in rural areas to promote agricultural and rural non-farm sector growth. A. Creating the Enabling Environment for Sustained Agricultural Growth Improving the policy and regulatory environment and reorienting public expenditures and institutions would be essential pillars in the strategy to promote agricultural growth and increased rural incomes. It would require adopting a consistent a multi-sectoral policy framework that promotes agricultural growth while ensuring sustainable resource use and fosters the development of an efficient and competitive marketing system. Integrating Agricultural Productivity Growth with Sustainable Resource Use Sustaining and improving Maharashtra's agricultural growth performance requires a policy framework that rationalizes the GOM's sugar, power and water policies to build synergies and eliminate current contradictions. The government financing of sugar mills, which in turn fosters the expanded cultivation of sugarcane (mostly through groundwater irrigation), is jeopardizing the longer term viability of farming in many areas-to the extent it results in the mining of water resources. It is also threatening drinking water supply for many communities. Irrigation subsidies (i.e. power for electric pump users and surface irrigation subsidies) are not only a growing fiscal burden, but they also exacerbate the water supply problem due to the under-pricing of water. It 53 encourages the inefficient and over-use of scare water resources water and sustains the cultivation of water intensive crops like sugarcane, which in turn leads to the unsustainable over-extraction of groundwater in many areas. Phasing out government direct and indirect subsidies to the sugar, water and power sectors are therefore urgently needed not only for fiscal reasons, but equally important to ensure the longer term viability of agriculture and drinking water in the state. In view of the new market opportunities that are emerging for other higher value crops, for example in the horticultural sector, which can offer higher returns to farmers, a re-balancing of the government's sectoral strategies is urgently needed. These crops are also more labor intensive and thus could also contribute to raising labor demand in rural areas. By contrast, sugarcane requires considerably less labor and is often referred to as "a lazy man's crop." Closer integration of and coordination between agricultural and water resource development and management programs (i.e. surface and groundwater, watershed development, drinking water and industrial water supply) would also be critical to ensure synergies among them. Sugar Sector. The Government should adhere to its Budget Speech policy announcement to cease support (financial and other types) to cooperatives for establishing new sugar mills. This would contribute to substantially reducing the fiscal burden of the GOM. The prudent enforcement of appropriate environmental assessment and clearance requirements by the Environmental Pollution Control Board for the establishment of new private sugar mills would also be critical to ensure sustainable groundwater resource use. In areas where sugar cane is already being cultivated, the GOM in the short term should strengthen agricultural extension initiatives to encourage the adoption of cultural practices and technologies that promote the efficient use of water. In the medium to long term, shifting cultivation from sugarcane to other alternative crops could be explored. Power Sector. Raising electricity charges while ensuring good quality of supply for agriculture will promote the more efficient use of water. Water Resources Mananement. The finalization of the GOM's Water Sector Strategy and Policy and a sequenced plan of reform actions would be critical to ensure the sustainable development and management of the scarce water resources in the State. The Irrigation Department recently commissioned a report from an independent commission on the challenges for water resource and irrigation management in the State. There was much, both in substance and process that is positive about the Commission's work. But the report was not informed by a clear, simple, compelling vision of "what a sound water resources and irrigation sector in Maharashtra might be", and did not provide a sequenced and prioritized set of actions for moving "from here to there". Using the Commission's report as a starting point, the State would need to develop such a Strategic Vision and Action Plan. This would include attention to: * the institutional framework for resource management, including the legal framework, regulatory responsibility (i.e. State Water Regulatory Authority), pricing of bulk water and the allocation and administration of water rights; * the institutional framework for service provision, including such as managing competition amongst suppliers, ensuring accountability to users, benchmarking, regulation and pricing; * exploring opportunities for developing a "new generation of irrigation institutional arrangements" in the command areas of the Krishna reservoirs which would include clearly- defined water rights and new forms of efficiently managed service organizations (possibly including the private sector). * adoption of the State Water Policy. An integral and path-breaking element of the Water Strategy and Policy formulation process has the GOM Cabinet's approval for the establishment of a State Water Resources Regulatory Authority. Due to the critical role that such an agency will play in the directing the future of the 54 Box 5.1: Utility Regulators-Some Basic Principles for Ensuring Independence Creating independent regulatory agencies has become a key element of utility sector reforms around the world. These agencies are intended to insulate decision-making from improper pressures and foster technical expertise. Specialist utility regulators can be organized on three main bases (i) Industry-specific, in which there is a separate agency for each industry-such as gas, power, water, and telecommunicatons-as in the United Kingdom; (ii) Sectorwide, in which there is an agency for each more broadly defined sector, such as the energy regulator in Colombia and the transport regulator in Canada. (iii) multisector, in which there is a single agency for all or most utility industries, such as the state-level regulators in Brazil and the United States, and the national regulators in Costa Rica and Jamaica. Establishing an independent agency is challenging, especially in countries with a limited tradition of independent public institutions and limited regulatory experience and capacity. The two main elements of independence-insulation from improper influences and measures to foster the development and application of technical expertise-are mutually supporting: technical expertise can be a source of resistance to improper influences, and organizational autonomy helps in fostering (and applying) technical expertise. There is strong consensus on the formal safeguards required: (i) Providing the regulator with a distinct legal mandate, free of ministerial control. (ii) Prescribing professional criteria for appointment. (iii) Involving both the executive and the legislative branches in the appointment process. (iv) Appointing regulators for fixed terms and protecting them from arbitrary removal. (iv) Staggering terms so that they do not coincide with the election cycle, and, for a board or commission, staggering the terms of the members. (v) Exempting the agency from civil service salary rules that make it difficult to attract and retain well-qualified staff. (vi) Providing the agency with a reliable source of funding, usually earmarked levies on regulated firms or consumers. Source: Wamck Smith, 1997, "Utility Regulators-The Independence Debate, " Public Policy for the Private Sector Note 127, World Bank; Warrick Smith, 1997, "Utility Regulators-Roles and Responsibilities," Public Policy for the Private Sector Note 128, World Bank. water resources sector in the state, ensuring its careful design and independent operations would be essential. Box 5.1 lists some basic principles for ensuring effective and independent operations of a utility regulator. Surface Irrieation. Improving the management and delivery of surface irrigation to various users would require expenditure and institutional reforms in the Irrigation Department and Irrigation Development Corporations. These would contribute to increased client orientation of service delivery, ensure the financial sustainability of the operations and maintenance of these systems, and reduce the fiscal burden to the GOM. These reforms include: * Finalizing the Maharashtra Farmers Management of Irrigation Systems Act to formalize farmer participation in the management of surface irrigation systems, including Water User Association and Irrigation Department roles and responsibilities; * Implementing measures to raise water tariff collection efficiency to at least 70% to 80% over the next two years; * Reducing the off-budget borrowing by the Irrigation Development Corporations as laid out in the GOM's Medium Term Fiscal Reform Program and ensure that any borrowings are applied to capital expenditures with the highest returns; and, * Scaling up the use of volumetric charging for bulk water supply. Integrated Land and Water Resource Management. Adopting a more holistic and integrated strategy for sustainable land and water resource management in the State would be critical. Due to increasing water scarcity and competition from various users in some districts, the GOM has placed high priority to both water (surface and groundwater) resource development and management and watershed development for soil and water conservation. Programs supporting these are closely inter-linked as they both aim to maximize the utility gained from the same scarce resource-water. Considerable synergies to maximize the returns to available water could be achieved by formulating an integrated watershed and water strategy for a given catchment area. The lack of coordination between programs, on the other hand, could potentially lead to conflicts-e.g. watershed structures to recharge groundwater upstream could reduce surface flows to a tank downstream-and thus reduce the returns to both government and farmer development investments. The development of area-based integrated plans for implementing watershed and water development projects would therefore be critical. 55 Box 5.2: Roles of Government in Agro-Food System and Agro-Enterprise Development 1. Set and Ensure Enforcement of Transparent and Consistent 'Rules of the Game' * . Establish and enforce rules which define and allocate property rights (i.e. property and bankruptcy laws; intellectual property rights; zoning regulations) * Establish and enforce rules which define permissible and non-permissible forms of cooperation and competition (i.e. licensing laws, laws of contract and liability, company and cooperative laws; anti-trust laws) * Establish and ensure compliance with bio-safety, food safety, worker safety, and sanitation regulations * Negotiate favorable terms for access to internaional markets and ensure fair practices on the part of intemational trading partners 11. Addressing Market Failures * Ensure that the state is protected from the harmful introduction/spread of plant pests and animal diseases * Ensure the availability of (production, price, industry) information and statistics to facilitate market activity and to monitor market progress * Invest in or facilitate risk management instruments for agrifood system participants * Compensate for unbalanced power relationships within the agri-food system by monitoring potential abuses of market power, by providing training and information, and/or by supporting organizational development among weak participants * Compensate losers in structural reform processes through safety nets and other transitional targeted programs 111. Build Physical and Knowledge Capital * Invest in social overhead infrastructure, especially that related to transport, and energy * Invest in knowledge-building to accelerate the agribusiness learning process and better enable the emergent private sector to participate/compete (i.e. R&D; academic/technical training) * . Facilitate and potentially finance selective agricultural marketing facilities (i.e. marketplaces; wholesale markets) Source: World Bank 2001, "Promoting Agro-Enterprise and Agro-Food Systems Development in Developing and Transition Countries. Towards and Onerational Strateav for the World Bank GrouD. Mimeo. Horticulture/Floriculture Sector. Following its successful implementation during the past decade, the Horticulture Linked to the Employment Guarantee Scheme would benefit from further refinements. This program has demonstrated the profitability and economic benefits of horticulture/floriculture production, not only to meet domestic market demand, but also exports. Its demonstration effect has encouraged not only farmners, but also the corporate sector to invest in this sector. In the short to medium term, the program could benefit from further refinements. First, the subsidy program should be graduated according to the income/wealth category of applicants and the location of the projects. To permit greater targeting of the program and enable a broader breadth of participation, in villages where the program is already on-going, the subsidy (labor, planting materials and agro-chemicals) could be restricted to small and marginal farmers for whom access to capital is more constrained. In villages that have not been reached by the program, a significantly reduced subsidy could be provided to medium and large farmers. The subsidy could be reduced from three years to one year for medium and large farmers, while allowing for the three years of subsidy for small and marginal farmers only. Second, more careful assessment of proposed projects would be essential, with particular focus on consistent availability of water, which is critical to crop survival. Integrating the horticulture development program closely with the GOM irrigation and watershed development programs would help ensure the success of horticultural projects undertaken. Fostering Competitive Agricultural Marketing Systems Fostering competitive agricultural marketing systems requires a careful reorientation of government roles, away from direct participation to creating the enabling environment for the private sector entry and participation. Integrating the rural areas, where most of the poor are, into the economy through a dynamic agribusiness sector (from small to large enterprises) and agricultural markets would be important drivers for growth and rural poverty reduction in the State. The agricultural sector needs well-functioning markets that effectively transmits market signals on what to produce, supplies the necessary inputs to produce what is required by the market and provides facilities to competitively bring them to domestic and international consumers. How can the GOM fulfill its goal of agricultural and rural development in this new role? The key areas where government would need to focus on are listed in Box 5.2. Cotton Sector. The GOM should proceed with its plans to gradually phase out the cotton monopoly scheme. As a first phase, the GOM should adhere to its Budget Speech Policy announcement to set the MSCCGMF procurement price at the GOI minimum support price, while 56 permitting the CCI and private traders to procure cotton in the state. This would provide Maharashtra farmers the same "safety net" offered to all other farmers in India. This would reduce the fiscal cost to the govemment substantially. At the same time, the Federation could be allowed to evolve into a full-fledge cotton-marketing cooperative, operating independently of government under commercial terms. Such a transition will require strengthening the management capabilities of officials of the Federation to increase efficiency, the adoption of stricter monitoring and accounting systems to minimize rent-seeking activities of staff, and likely reduction of staff. A review of international experience of producer organizations by Rondot and Collion (2001) list several factors that contribute to successful operations of producer organizations and offers a useful guide in the restructuring and reorientation of the Federation. These include: strong "strategic capacities" (capacity to access information and acquire expertise in strategic areas, as well as the capacity to carry out a diagnosis of itself and its environment); (ii) "organizational viability" characterized by legitimate leadership; functioning goveming bodies; cohesion among members; (iii) existence of an efficient system of information; (iv) existence of an appropriate system of financing; and (iv) existence of transparent and efficient financial management and accounting systems. The GOI's lifting of cotton export quotas would permit greater access by the Federation to export markets. Enhancing its export competitiveness would be dependent on its commitment to improve operational efficiency. In its new role, the Federation could serve as a conduit for farmers to access altemative price risk management mechanisms. The case of ASERCA in Mexico, offers an example of an agency can use options in intemational commodity exchanges to hedge price risks (Box 5.3). Cooperatives. The government should withdraw from intervening in the operations of cooperatives. Lessons from intemational and Indian experience show that cooperatives must be treated as private sector enterprises for them to succeed commercially, and that the govenmment's primary role should be to establish a conducive policy environment for their growth, not to control or takeover management. Ceasing government interventions in all cooperatives (including dairy) would be in line with the GOM's policy, announced in the Budget Speech 2002-2003, "to desist for intervening directly in the market for all agricultural commodities" (para 16) and "enable cooperatives to: develop competitive advantage based on their own strengths" (para 12.1). The sick cooperative units, including those in the sugar and dairy sectors, that are unlikely to be revived, should be liquidated. Agricultural risk mana2ement. Increased market liberalization is likely to expose farmers to greater market risks. There are a number of market-based yield and price risk management Box 5.3: Alternative Price Risk Management Mechanism, Case of Mexico Cotton Because of the recent liberalization of agricultural trade and intemal marketing systems in Mexico, farm-level prices of several agricultural products are now determined mainly by intemational markets, and farmers have had to cope with price uncertainty between planting and harvest times to a degree unknown before. In response, the Government of Mexico, through ASERCA, a govemment organization providing support services for agricultural commercialization, assists Mexican cotton producers in managing their price risks during the harvest period as well as guarantee a minimum price during the planting season. Unlike other programs, which simply transfer price risks from producers to the government budget through the floor price mechanism, ASERCA transfer price risks from growers to international markets. During the planting season, ASERCA offers farmers the chance to participate in a program guaranteeing a minimum cotton price for a fixed fee. The minimum price is fixed using the New York cotton futures exchange. For a fee, ASERCA offers a guaranteed price (in US dollars) and hedges its own risk by using the fee to purchase a put option on the exchange for future delivery at harvest time. (The put option gives ASERCA the right to sell cotton on a specific future date at a prescribed price, known as the strike price). Should prices subsequently fall, ASERCA pays farmers the difference between the New York price at harvest and the minimum price. The difference is exactly equal to the payoff value of the put option. If prices rise instead, ASERCA makes no payments to farmers. By paying a fee and participating in the program, a farmer in effect purchases insurance against a drop in prices below a certain level -in fact, the program refers to the fee as a "premium". As with insurance, payouts do not always occur, so the program is not without costs to farmers. Private brokers could offer similar programs, although the private sector has had little experience in providing such services directly to growers. Since ASERCA's program is inexpensive to administer and demand driven, ASERCA can readily reduce its presence should a market for private brokers develop. Source: P. Varangis, D. Larson (October 1996): "Dealing with Commodity Price Uncertainty", Policy Research Working Paper No. 1667, World Bank. 57 instruments that have been developed in recent years. Futures contracts, for which several conmmodity futures exchanges are located in Maharashtra (e.g. cotton, oilseeds), offer a market-based mechanism to hedge price risks. New instruments of managing weather risks (e.g rainfall-based insurance) have also been developed in other countries. These could offer an alternative to direct government intervention in commodity markets, which aim to shield farmers from these risks. Their potential application to Maharashtra could be explored (Box 5.4). Agricultural Input Supply. The time has come for the GOM to phase out its involvement in input delivery (e.g. seeds, planting materials, fertilizer). These functions are well-established in the private sector, and govermment activities only serve to crowd out and discourage private sector entry. Pesticide Policy. It would benefit farmers in Maharashtra for the GOM advocate the reform of the pesticide policies of the Government of India. While the Central and State governments clearly have a role in regulating the production and trading (domestic and imports) of pesticides and other agro-chemicals due to environmental and public health risks associated with their use, there is an urgent need to update existing regulations and modernize agencies charged with pesticide registration and approvals to be consistent with international standards. Excessively restrictive Box 5.4: Alternatives In Managing Agriculture Yield and Price Risks Agricultural production is inherently a risky business, and farmers face a variety of crop yield and price risks, input cost risks, interest rates risks, health, and government policy and regulation risks. Given an uncertain income each year, farmers must wony about their ability to repay debt, to meet overhead costs (e.g. land rents and taxes) and, in many cases, their ability to meet essential living costs for their families. These same risks are also of concern to agricultural lending institutions. Confronted with risky borrowers, lenders must seek to reduce the possibility of poor loan recovery rates in unfavorable years, even if this means only modest levels of lending to agriculture. The variation of these events can wreck havoc with economic decision-making. How can one make rational long-term economic decisions in an environment characterized by such large variations in important variables that determine income? How can farm producers and/or marketers plan when they cannot accurately predict future yields and pnces? Unfortunately, risk cannot be eliminated. One cannot control the weather, or insect infestation, or commodity prices. Yet, while risk cannot be eliminated, it can be managed but only at a cost. There are various risk management products and techniques, both new and old, available to manage both yield and price risks. Private sector has demonstrated the capacity to manage certain risks, where as in the case of catastrophic risks which affects the whole state or country. Some of the new instruments that are being piloted in various countries to manage both yield and price risks are listed below: a) Traditional or indemnity-based croR yield insurance: provides insurance protection against yield losses caused by perils other than hail. These crop insurance programs are generally multiple peril or all risk programs, meaning that the insurance compensates all yield losses, regardless of cause. Although insured hazards are often enumerated, the lists of covered hazards are so comprehensive that uninsured hazards cannot be excluded in practice, including losses from bad management. Indemnities are typically based on the difference between actual yield and a pre-specified target yield, not on actual crop damage or ihput costs lost. b) Area-based croR vield insurance - In this case the insurance is written against the average yield for a region (e.g. a state or district), and a payment is made whenever the measured yield for the region falls below some pre-defined limit (say 80 percent of normal). Payments are made based on the protection (liability) selected by the farmer and the percentage below the trigger yield (coverage times the expected county yield). Since state or district yield data are available for long periods of time, adjustments to the trigger yield are made for technical advances. c) Rainfall insurance contracts (RlCs) or Weather-based index insurance- are written against specific rainfall/weather outcomes (e g. drought or flood or temperature) recorded at a local weather station. The rainfall outcomes should be defined at catastrophic levels (meaning affecting a huge area such as many districts or the whole state) and should be highly correlated with the value of regional agricultural production or income. For example, an insured event might be that rainfall during the most critical month of the growing season falls 70 percent below normal. This program could be less expensive to administer, since there are no individual contracts to write, no on-farm inspections, and no individual loss assessments. It uses only data on a single regional index, and this can be based on data that is available and generally reliable. It is also simple to market; insurance contracts could be sold rather like vouchers or tickets, and presentation of the certificate would be sufficient to claim a payment when one is due. The insurance would be useful to those whose income is correlated with the insured event, including agricultural traders and processors, input suppliers, banks, shopkeepers, and laborers. d) Revenue or income insurance- are those that pay for revenue shortfalls for an individual comrnodity (such as cotton or rice or coffee). The individual commodity revenue insurance product's use an intra-year, futures-based price in establishing the guarantee, rather than a long-term average pnce. In essence, the future's market is used to forecast the current year's harvest price. The only thing that is insured is within year price declines. The guarantee was set on a crop-specific basis. For example, if the 15 year moving average income (price times yield) were $400 per acre and the guarantee was based on 70 percent of average revenue, the grower would be indemnified anytime revenue dropped below $280. Indemnity payments would be made to make the revenue equal to $280. This mechanism, however, presumes no govemment intervention to influence prices. Source: Vijasekar Kavalkonda, 2002,personal communications. 58 Box 5.5: Promoting the Rural Non-farm Economy: Lessons from Latin America and Caribbean Berdegue, Reardon, Escobar and Echevenia (2000), in a recent note, summarized some basic policy principles for promoting the growth of the rural non-farm economy, based on the experience in Latin America and the Caribbean. These are outlined below: * Agricultural policies can promote non-farm activities such as agro-processing and the other industrial, commercial and service sectors that characterize modem agriculture. Agricultural policies in areas such as technology generation and diffusion, infrastructure, education, agrarian reform, credit, etc, should therefore be designed and developed with these links in mind. * Projects and policies aimed at promoting the rural non-farm economy should not just focus on improving the capacity of households to become involved in the non farm economy, but should also stimulate the engines that pull rural households into it. Tourism and manufacturing are examples of such engines that are not traditionally viewed as part of the rural landscape. Engines for non-farm growth that offer employment to women in particular should be emphasized. * Local governments and institutional participation will need to be engaged in a whole variety of capacities, ranging from land use planning, education provision, infrastructure investment, regulation, training, and financing. * Efforts must be directed to ensuring public institutions with responsibilities relating to non-farm activities (education, public works, small-scale industry, etc) coordinate efforts and long beyond traditional competencies to include the non-farm economy. Education and transport infrastructure in particular, must receive concerted attention, * Richer and poorer zones must be treated differently, with less emphasis on richer zones on subsidization and more on reducing transactions cost. In poorer zones, public intervention to provide the basic enabling environment will continue to be requires. Source: Julio A. Berdegue,Thomas Reardon, German Escobar, 2000, "Rural Nonfarm Income and Employment in Latin America and the Caribbean, " Paper presented during the conference on "Development of the Rural Economy and Poverty Reduction in Latin America and the Caribbean," New Orleans, March 24, 2000. regulations penalized the growth of the high value agriculture sub-sectors, such as fruits and floriculture in Maharashtra and the rest of India. As they require more specialized agro-chemicals to meet highly stringent phyto-sanitary requirements in export markets, lack of or restricted access to these agro-chemicals increases production costs and acts a an additional deterrence to increased private investments in these sectors. Building Farm to Market Linkages. Adopting a supply chain perspective could be a useful tool in identifying the key bottlenecks in the marketing system. Supply chains relate to the linkages among the various market participants from producers to processors, marketers, distributors, retailers and consumers (See Annex C for more detailed discussion). In understanding the flow of products and information and the major constraints that may impede these flows (e.g. poor infrastructure, bureaucratic difficulties in setting up a business, problems with access working capital, etc.), it provides a useful framework to guide corrective actions. One example of an impediment to the smooth flow of goods in Maharasthra is the lack of cold storage facilities at some key marketing points. The GOM should allow private sector investments in cold storage facilities at the Mumbai Airport for example. This would substantially reduce losses and improve the competitiveness of Maharashtra's highly perishable agricultural exports. There appears to be no justification for the need for public investments in this private sector activity, given the high private sector interest in investing in these facilities. Another example of a constraint that impedes the development of agricultural supply chains is the lack of a regulatory framework for contract growing in India- contracts undertaken do not have a legal basis. The GOM should pursue with the GOI the establishment of the legal framework for contract farming in agriculture. B. Strengthening Rural Infrastructure and Services in Rural Areas Promoting agricultural and rural non-farm sector growth is closely linked due to the strong backward and forward linkages that could be created. Forward linkages take the form of the agricultural sector supplying products for downstream processing or direct consumption, agricultural surplus providing investment funds to the non-farm economy, and consumption of rural household of goods and services from the non-farm sector. Backward linkages take the form the non-farm sector stimulating growth in the agricultural sector by supplying inputs and investing in the agricultural sector (Lanjouw and Feder 2001, Haggblade et al 2001). This is consistent with global experience (Box 5.5). Promoting rural non-farm sector growth would require improved access to basic infrastructure (roads, markets, electricity) and services (market information, education). 59 Agricultural Markets. The GOM should proceed with its plans to amend the Agricultural Produce Marketing (Regulation) Act 1963 to allow other parties to develop agricultural markets in the State and allow farmers freedom choice on the marketing channel for their produce. This would give farmers full freedom to choose the best option for marketing their output, to obtain the best prices. By allowing other entrants to develop and operate markets, this would facilitate the construction of more markets and improvements in marketing infrastructure. In view of the government's program to promote increased agricultural productivity and output of various commodities (e.g. horticulture), ensuring that the necessary infrastructure is available when these initiatives come to full productive stage will be critical. This in turn would contribute to the reduction of marketing losses (due to spoilage and spillage), transportation costs, and overall marketing costs, and thus strengthen the competitiveness of products produced in the state. Rural Roads. Accelerating rural growth will require increased investments in roads (rural roads and highways) while ensuring improved operations and maintenance of systems created. Notably, studies (Fen, Hazell, and Thorat 1999) have shown that additional government expenditures on roads have the largest impact on poverty reduction as well as a significant impact on agricultural productivity growth. But the importance of rural roads could not be understated. The impact of rural road improvement in Andhra Pradesh illustrates the cost savings and community benefits that could be achieved (Figure 5.1). Participatory planning and implementation of rural infrastructure projects, involving government and users, would be valuable to ensure the appropriateness of investments undertaken. Figure 5.1: Impact of Rural Roads Improvement on Rural Economy in Andhra Pradesh Average Freight Charges Impact of Improvement of Rural Roads (Opinion Survey of the Rural Population) 3 Higher intensity Bringing outside Ew 1 211 CAIVVeadwRoadsinof cultivation teachers Bringing outside 25% 6% doctors i>b 2-l |l Good Conditon - L 10% 0 5 - s e l ° ~~~~~Fair Watlher F;cads Purchae ofetbr f 1.5 more ferttz our -~~~~ I 0BreSROaI ~~~~~~~~~~~~~~~14% acopn cesoipoe Bcrp Marintiedn s Rands tcnlge,bscshoigfrtenx 0.5 More seasonal EVransion of opportunitrs cultivated land 0 ~~~ ~ ~~~~~~~~~24% 21% Source: Rural Transport Surveys (I1997) - Andhra Pradesh Economic Restructuring Project. Rural Education. Investing in rural education continues to be very important. To assist farm families to become more competitive and make the most of the new opportunities that would accompany access to improved crop varieties and technologies, basic schooling for the next generation of rural households is essential. Improving the quality of teaching and learning in rural schools would have a high-payoff for public investment. This is not only because those staying in agriculture will be making more complex management decisions, but also because those leaving will be able to adjust to non-farm life and work more easily the stronger their general education. 60 Table 5.1. Summary of Policy Options Sector Short Term Short to Medium Term 1. Creating the Enabling Environment for Sustained Agricultural Growth A. Integrating Agricultural Growth with Sustainable Resource Use Sugar Sector * GOM to phase out direct and indirect financial support for * GOM to explore crop altematives for sugarcane establishment of cooperative sugar mills * Environmental Pollution Control Board to enforce requirements for environmental assessment and clearance requirements for establishment of new private sugar mills * Strengthen agricultural extension to encourage adoption of water- saving cultural practices and technologies. Power Sector * GOM to gradually raise electricity tariffs to agriculture Water Sector * Finalize legislation to formalize farmer participation in the * Finalize Water Resources Strategy and Policy, taking into account: management of surface irrigation systems, including Water User (i) institutional and regulatory framework for resource management, including such critical issues Association and Irrigation Department roles and responsibilities; as the legal framework, regulatory responsibility (i.e. Water Resources Regulatory Authority), * Implement measures to raise water tariff collection efficiency to at pricing of bulk water and the allocation and administration of water rights; least 70% to 80%; (ii) institutional and regulatory framework for service provision, including such critical issues as * Reduce the off-budget borrowing by the Irrigation Development competition amongst suppliers; accountability to users; benchmarking, regulation and pricing; Corporations as laid out in the GOM's Medium Term Fiscal Reform (iii) opportunity for developing a "new generation of imgation institutional arrangements" in the Program and ensure that any borrowings are applied to capital yet-to-be-developed command areas of the Knshna reservoirs which would, inter alia, include expenditures with the highest retums. clearly-defined water rights; new forms of efficiently managed service organizations (possibly including the private sector). * Rationalize the roles of the multiple agencies involved in water resource management and dinking water supply * Adopt measures to ensure integration and coordination of activities in agriculture, watershed development and water resource development and management. * Implement transfer of systems management to WUAs * Scale up the use of volumetric charging for bulk water supply to WUAS. Horticulture * Reform subsidy program to improve targeting. In villages with on- Sector going programs, limit subsidy to small and marginal farmers. In new villages, reduce subsidy to one year for medium and large farmers. * Establish stricter criteria for projects, including assurance of availability of year-round water supply B. Fostering Comp titive Agricultural Marketing Systems Cotton Sector * Commit to procuring cotton at the GOI minimum support price and * Phase out monopoly procurement scheme allow other parties in procure cotton within the State * To enable the Federation to function as a commercially independent full-fledge marketing organization, strengthen management capacity of officials, adopt stricter monitoring and accounting systems, and rationalize staffing. * Explore altemative options for Federation to offer market-based instruments for farmers to hedge price risks (e.g. futures and options contracts) Cooperatives * Phase out govemment interventions in cooperative operations. In dairy, proceed with divestment of government dairy processing facilities. Liquidate sick units. 61 7- Short Term | Short to Medium Term B. Fostering Comfp titive Agricultural Marketing Systems, con'td Agricultural Risk * GOM to explore use of alternative risk management mechanisms (cotton futures and options, Management . rainfall insurance, etc) Agricultural * GOM to pursue reform of GOI fertilizer and pesticide policies to * GOM to phase out involvement in input supply (seeds, planting materials, fertilizer) where Input Supply update them to international norms private sector is well-established. Farmn to Market * GOM to allow private investments in cold storage and other critical . Adopt supply chain management approach to identifying market bottlenecks and to assist in Linkages post harvest facilities in key shipping points (airports and ports), possibly defining areas for possible GOM support through BOO and BOT and management contracts to hasten establishment of these facilities. II. Strengthening Rural Infrastructure and Services in Rural Areas Agricultural * Amend Agricultural Produce Marketing (Regulation) Act to allow Markets other parties to develop wholesale markets in Maharashtra, establish guidelines for operations of these markets Rural Roads * Strengthen rural road infrastructure and increase priority in budget allocation to operations and maintenance of existing infrastructure. Rural Education * Improve availability and quality of education in rural areas. 62 References Agarwal, A., Water Harvesting in a New Age (When the state has reached its limits, community participation becomes essential), Centre for Science and environment, New Delhi. Agricultural Produce Market Committee, "Horticulture At a Glance," Power Point Presentation, Pune. Agriculture Production Market Committee, Annual Report 2000-2001. Agro Advantage Maharashtra, November 6-9, 1998, Mumbai, Government of Maharashtra, Pune. 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Watershed Organisation Trust 2002, Guidelines on Participation in Indo-German Watershed Development Programme, Through Non-Govemmental Organizations in Maharashtra, National Bank for Agriculture and rural Development, Mumbai. Westem India Floriculture Association, Floriculture (International Trade '99-'00), Century Aracade, Pune. 67 World Bank, 1997, India-Achievements and Challenges in Reducing Poverty, Report No. ISSN: 0253-2123, A World Bank Country Study, Washington, D.C. ----------, 2001, "Promoting Agro-Enterprise and Agro-Food Systems Development in Developing and Transition Countries, Towards and Operational Strategy for the World Bank Group. Mimeo. ----------, 2002, Maharashtra: Reorienting Government to Facilitate Growth and Reduce Poverty, Report No. 25053-IN, Washington, D.C.: World Bank. 73- . 7A- , 75' 7B 77' 73- 79- BO. Bi. r ~ ~ ARVAIN.9P~ BH-ANDARA S0900, ; 5 u -J D \NAGPU 2 JA GAON ) ' Amr ovni, WARDHA LI '-v)BULDHANA ' . 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