Surinder Sud: Horticulture's long distance problem

India's horticulture exports cost 5-15 per cent more than those of the competition thanks to freight costs.

Horticulture is among those sectors where most Indian products are globally cost competitive. In terms of production too, India is among the world's largest producers of fruits and vegetables. But when it comes to the export of horticultural produce, the country's record is rather dismal. Exporters find it hard to increase their share in international horticultural trade which is growing rapidly on the back of rising incomes and changing food habits and preferences.

One argument frequently offered to explain this paradox is that the quality of Indian fruits and vegetables is usually not up to world standards. This is largely, even if not wholly, true. But this alone cannot be held responsible for the poor export performance. In any case, measures are already afoot to address the quality issues. For one, the import of seeds and planting material is now permitted to facilitate the introduction of top quality produce. Besides, foreign companies are also free to sell their seeds here. Moreover, Indian horticulture scientists have now turned quality conscious and have re-worked their research and breeding priorities to meet the needs of the exporters.

This apart, the export hurdles obtaining in the pre-reforms period, such as adverse exchange rates, export-shy government policies (in the name of self-sufficiency), cumbersome procedures and the like, have largely been removed.

In fact, horticulture is now among the priority sectors for boosting exports. The National Horticulture Mission, set up in 2004, has also been mandated to give a special thrust to promote horticultural exports through the establishments of Agricultural Export Zones (AEZs). The commerce ministry, on its part, has identified a large number of products which are believed to possess a potential for exports. These include mangoes, grapes, pineapple, banana and pomegranate among fruits and mushrooms, garlic, okra, asparagus, cucurbits and onions among vegetables.

A World Bank-sponsored study on the supply-chain related impediments to Indian horticultural exports has concluded that the problems lie mostly outside the horticulture sector rather than inside it. As such, they relate mostly to inefficiencies of the marketing system, post-harvest handling infrastructure and the hurdles at the export destination points.

Conducted by Aaditya Mattoo, Deepak Mishra and Ashish Narain, the study From Competition at Home to Competing Abroad "" A case study of India's horticulture has shortlisted three factors that are basically responsible for the poor export performance. First, the problem of logistics as reflected in high transportation and delivery costs; second, the gap in the sanitary and phyto-sanitary standards (SPS) demanded by the rich countries (not so much by others) and the existing Indian standards; and third, the trade policy barriers put up by the foreign countries at their entry points.

The study has reckoned the Indian transportation and delivery costs for export cargoes to be 20 to 30 per cent higher than in most countries. Considering that transportation costs account for nearly 45 per cent of the retail prices in case of air-lifting and 25 per cent in shipping of export goods, the Indian products turn out to be 5 to 15 per cent more expensive than their foreign counterparts in the destination markets. This erodes the lower production cost advantage that Indian products usually enjoy. The study has further estimated that a 20 per cent improvement in the efficiency of transportation and logistics system (both domestic and international transport) could reduce final prices by as much as 12 percentage points, making the Indian products price competitive in other markets.

This issue assumes added significance because some of the most lucrative markets for horticultural exports, like the US and the EU, are located at considerable distances from India. According to this study, holding everything else constant, India's share of exports to any destination market is found to decline by 10 percentage points for every 1,000-kilometre increase in the distance to the market. As a result, any market that is beyond 14,000 km from the Indian borders is unlikely to be available to Indian exporters for marketing their produce, the study has concluded. This is in sharp contrast to the situation in other countries, especially in those having efficient logistics regimes, where distance is usually not a limiting factor for exports.

No wonder then that the largest proportion of India's exports of fresh fruits and vegetables goes to the neighbouring countries in south Asia. But in the case of processed fruits and vegetables, (low volume and high value products), the larger part of exports is accounted for by the rich, industrialised countries.

Regarding SPS, the study says there is clear evidence that stringent industrial country standards have proved a prohibitive barrier for some horticultural produce, notably mangoes. Other products like grapes have also come across temporary losses due to the rejection of consignments on the grounds of SPS mismatch. This has constituted a critical challenge in expanded exports to more profitable destinations.

The border protection regimes that Indian exporters come across in foreign markets have been described by this study as 'opaque, complex and deceptively protectionist'. These protections are in the form of entry prices which discriminate against efficient delivery; tariff quotas that subject imports beyond specified quantities to harsh tariffs; and special safeguards which are a source of considerable uncertainty for the exporters. Barriers to exports are also put in the form of preferential access schemes and tariff escalation.

Considering all these issues, the study has recommended that India should reform its logistics systems and simultaneously take a tough stand at the WTO talks to ensure elimination of trade barriers at the destination points. "Greater liberalisation of services supporting agriculture, including air, maritime and road transport, as well as improvements in storage and marketing infrastructure and services are critical if India is to emerge as an important exporter in agriculture in general and in horticulture in particular," the study has concluded.

Besides, India needs to add certain fresh priorities in its stand at the WTO negotiations on the Doha agenda""which are currently stalled but may resume later on""to ensure the elimination of distortionary protections at home and abroad. The issues that need to be taken up in particular include the opacity and variability of tariffs abroad and the escalation in foreign tariffs that dampen the incentives to move into more highly processed categories.

In the case of SPS requirements, the study suggests making a clear distinction between those that serve legitimate safety and health concerns and the others that are needlessly burdensome and protectionist. Unless the latter are eliminated, fair trade may not be possible.