Working Paper Global Value Chains and Indian Food Sector : A Preliminary Analysis of Issues and Options

The increased trade in agricultural value added products has internationalized production and marketing systems. As such, a variety of forms of value chain relationships have emerged (outgrower schemes, contract farming, marketing contracts etc.) that have replaced the arms length market relationships between buyers and suppliers. The application of the Global Value Chain framework as also Production Networks to agriculture has gained significance particularly considering the importance of promoting agricultural exports from developing countries. As agriculture in most of the developing countries, as also in India, is dominated by small and medium farms, poverty reduction through exports would require production shifts and access to the global agribusiness. In recent years, the market requirements of agribusiness products have become challenging for three reasons. First, the importance of standards is increasing in global agricultural trade. Meeting the requirements of stringent food safety conditions has become complex as monitoring is required the way products are grown, harvested, processed and transported. Second, the demands of global buyers in terms of large-volume supply, speed and reliability of delivery, customization through processing and packaging and product safety guarantees have emerged as challenges for small producers. And, third, strategies for product differentiation particularly for traditional exports involved certification and/or closer links between producers, traders, processors and retailers. In meeting these challenges, organizing agribusiness value chains or integrated supply chains is necessary for global competitiveness. The Indian agri business is largely unorganized at the production, trading and consumer levels and with trade and retailing gaining importance, structural shifts in agribusiness are taking place. With exports increasing, many food chains and companies are sourcing agricultural products from India to feed their outlets in different parts of the world. Similarly, under organized retailing, several channels of procurement have developed to ensure efficiency in the value chain. Under these evolving conditions, the paper addresses the following contextual issues: Value chain linkages and coordination costs of buyer-seller relationships Information codification and transmission along value chain and supplier competence Channels of procurement of different products by food retailers Public private partnership in developing market, transportation and logistic infrastructure Building supplier competencies of the producer particularly small farmers The application of the GVC has underlined three important issues. First, with globalization and expansion of agricultural trade, India is still an insignificant part of the global production network. Though India has a comparative advantage in the production of many agricultural products, this is being undermined by the high transaction costs arising out of inefficiencies in distribution and logistics. But, considering that the market, transportation and logistics infrastructure is less developed in India and the public investments in the same being low, the policy approach should be to encourage investments by the transnationals in setting up the value chain and strengthening the support institutions like inspecting and testing facilities, certification companies, local consultancy etc. Overall, the effort should be to ensure a conducive economic environment for integrating India into global agricultural production networks. The second important issue emerging out of the GVC analysis is the development of domestic retailing in building the capacities of the local firms for forging international operations. The development of organized retailing, particularly in the urban areas, provides the ‘threshold expertise’ to organize and coordinate supply activities for greater efficiencies. Leveraging the domestic operations for entering into global markets requires development of infrastructure and support institutions. And, lastly, the third important issue arising out of the GVC analysis is the effect of trade in building the supply competencies of the producer, particularly the small farmers. The costs of compliance being high, the role of state in providing the Standards infrastructure becomes crucial. Adopting new technologies and production processes by the farmers is not scale neutral and therefore, can have the tendency of excluding the small