Facilitating investment in organic food business through the right policies

By Souvik Dutta and Dr. Arpita Mukherjee

Souvik Dutta is an Assistant Professor of Economics at Indian Institute of Management, Bangalore.

Dr. Arpita Mukherjee is a Professor at ICRIER.

India, with a wide range of agro-climatic conditions, has the potential to produce a variety of organic crops. In 2015, India ranked 1st in terms of the number of organic producers, 9th in terms of the area under organic agriculture, and 11th among organic product exporters. While only 0.7% of the land in India in 2015 was under organic cultivation, the country ranked 3rd in terms of increase in land under organic cultivation, after Australia and the US.  According to a report by TechSci Research in 2015, the size of the Indian organic food market was estimated to be around Rs. 33.5 billion, and it was projected to grow at a compound annual growth rate (CAGR) of approximately 25% during 2015-2020. The corresponding figure for the global organic food market was over 16%.

Current policy measures to support organic food

The Indian government has undertaken several policy initiatives to promote organic farming and organic food exports. Since organic trade is dependent on the recognition of standards and processes by the importing countries, Agricultural and Processed Food Products Export Development Authority (APEDA), under the Department of Commerce, took the initiative to develop a regulatory framework for organic exports in early 2000, known as the National Programme for Organic Production (NPOP). NPOP is largely based on the European Union (EU) organic policy/regulation, but tailored to meet Indian requirements. NPOP lays down certain standards, labeling process, logo, and third-party certification requirements, which are mandatory for export of organic food products from India.

Subsequent to the development of export regulation under the NPOP, Ministry of Agriculture and Farmers’ Welfare came up with a Participatory Guarantee System for India (PGS-India). PGS-India aims to encourage small- and mid-sized farmers to take up organic farming and promote organic farming in the domestic market on a large scale. It adopts a subsidy-based approach under schemes such as the Paramparagat Krishi Vikas Yojana (PKVY), which is in partnership with state governments. PGS-India is based on voluntary self-certification process, unlike the NPOP. Thus, as of today, while India has export regulations, the country is yet to put in place regulations for the domestic market and imports. The Food Safety and Standards Authority of India (FSSAI) is in the process of drafting a regulation policy for domestic market and imports.

In January 2016, the Prime Minister of India declared the state of Sikkim as India’s first fully organic state. In March 2017, the Cabinet Committee on Economic Affairs gave its approval for removal of quantitative ceilings on exports of organic products (except pulses and lentils), thereby allowing unrestricted exports of organic agricultural and organic processed food products irrespective of any existing or future restriction/prohibition on the export of conventional (non-organic) products. A number of state governments have taken initiatives to develop organic farming and have come up with conducive policies and state government subsidies. States such as Karnataka, Sikkim, and Gujarat have set up state certification bodies to reduce the cost of mandatory third-party organic certification.

Several domestic and foreign companies have responded positively to these measures and several start-ups have come up in organic food segment in the last 10 years. A number of conventional food manufacturers, retailers, and exporters have diversified their businesses to include organic food products. This is the fastest growing segment of food processing.

What do companies want?

Given this background, we – along with our co-authors ? conducted a survey of 75 companies to understand their views on the growth potential of this sector and what policies can support the growth (Mukherjee et al. 2017). We find that companies, on average, estimate a 14% growth of the organic food market in 2017 but the growth rate can be 20%, on average, in the next five years, if supported by the right policy.

Specifically, the companies want the government to implement the NPOP standards in the domestic market, which will help to have guidelines for product labeling and standardisation based on international best practices, ensure a premium price for the produce and, eradicate fraudulent and malpractices. The implementation of NPOP standards by FSSAI will enable India to sign bilateral equivalence arrangements/mutual recognition of standards and procedure agreements with major trading partners such as EU, Canada, and the US. Such agreements will reduce the cost of exports as the importing country recognises laboratory test results, organic labels, logos, and standards of the exporting countries. Also, implementation of NPOP for imports will ensure that quality products are imported into India. Today, in the absence of a sound policy, we find that some traders are mixing conventional and organic food products and selling the products in the domestic market as organic at a premium price. Not only is this harmful for consumers’ health, the latter are skeptical of buying organic products in the absence of regulation ensuring the authenticity of the produce. The NPOP logo is a mark of identification and authenticity of the products and is recognised by India’s key trading partners. Hence, it can be adopted by the FSSAI.

We also find that while the companies recognise that the government has implemented reforms such as the single goods and services tax (GST), which will benefit businesses, too many reforms and changes have also led to an uncertain business environment. The companies pointed out that a vision document of the government on organic food, laying down the short- and long-term objectives and policies for the development of this sector, will reduce operational uncertainties and help them to invest.

Since organic food production is a holistic agricultural practice, the focus of the government should not only be on improving soil quality but also on cattle feed and eradication of cattle diseases. In India, the focus on sustainable agriculture practices is low. There are around 51 pesticides used by farmers, which are banned in US and EU. Some of these are even subsidised by the government and are so harmful that they can lead to diseases such as cancer (Blaurock-Busch et al. 2010). India has not been declared free from cattle foot-and-mouth disease by the Office International des Epizooties. Unless the government bans harmful chemicals, there is focus on improving cattle feed and cattle health, and sustainable agriculture practices are adopted, it will be difficult to move towards organic food in a big way.

According to the survey participants, some of the subsidies given for chemical inputs can be diverted to provide small- and mid-sized farmers with bio-fertilisers and inputs such as good quality organic seeds. Organic farming needs better on-farm technology to protect crops against pest infestation. In India, farmers do not have access to technology such as netting and this has led to loss of organic crops in states such as Sikkim (oranges) and Maharashtra (mangoes, eggplant, okra) due to fruit flies and other pest infestation. Government can give subsidies for crop protection technologies.

Although Sikkim, other regions in the northeastern part of India, and tribal areas of states such as Madhya Pradesh and Orissa, have huge acreage of land on which organic farming is practiced, companies are unable to source from these areas due to lack of supply chain. Subsidies are needed for establishment of organic supply chains, especially storage facilities and packing houses, in hilly and remote areas.

If the above measures are implemented it will not only increase the growth of organic food products in the domestic market but also increase exports, create employment, and help in doubling the farmers’ income by 2022. Quality of food produce will improve which can have long-term positive effects on consumer health. It will hence contribute to India’s progress towards meeting the Sustainable Development Goals (SDGs).

This article has been previously published in Ideas for India.
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