The Political Economy of Adoption of GM Rice Technology in India Gal Hochman, Latha Nagarajan, Carl Pray

Genetically modified crops

Although GM technology for some important food crops is available and has demonstrated benefits to small farmers and consumers in other developing countries, regulations and policies in India are holding back its deployment in food production.

If suitable GM technology were not available, political decisions and regulations would not have any direct bearing on the matter.

Genetically modified crops

However, scientists on the biosafety technical committees in India have reached the conclusion that some GM food crops such as Bt Brinjal are not only available for use, but they are safe and will have positive economic impacts.

However, policy makers in the Ministry of the Environment and Forests (MoEF) vetoed Genetic Engineering Approval Committee’s (GEAC) approval of Bt eggplant.

In addition field trials of most GM crops have ground to a halt because the GEAC now requires no objection certificates (NOCs) from all state Chief Ministers before the field trials can continue.

Economic interests

What is behind these policy and regulatory constraints to production of GM food in India?

To try and answer this question, we will Try and identify what economic interests can lead to the

formation of policy; and which groups and which regions of the country could gain

or lose economic benefits from the adoption of the GM technology.

What we show

When simulating the introduction of a GM technology, we separate between two effects: The impact of the technology on input uses (e.g., insect

resistance trait reduces use of insecticides, while nitrogen use efficient trait reduces the need for fertilizers), and

The adoption of the GM technology reduces crop risk and thus leads to better crop management and further investment in the production processes resulting in higher yield.

What we show

We, then, show that economic gains are largest in regions with efficient rice producers and in regions whose production process benefits the most from the GM

trait: For example, herbicide tolerance traits benefits regions whose

labor cost share is highest

While HT impacts allocation of inputs, it has less of an impact on yield. On the other hand, IR and NUE impact yield much more.

Policy maters: The minimum support price of paddy rice to Indian farmers affects (significantly) the distribution of benefits among the various stakeholders.

What do we do

We develop a state-level supply chain model that evaluates and quantifies implications from the introduction of GM rice on surpluses of stakeholders along the supply chain of rice.

The rice supply chain

The analysis distinguishes among agricultural inputs (i.e., labor, machine, chemicals, seeds,

and water) upstream paddy market Midstream milling markets Downstream market for rice and processed rice.

The upstream market

Production structure: The paddy rice is produced using chemicals,

machinery, labor, seeds, and irrigation The paddy rice production function is calibrated using cost-

share of inputs reported in the data (i.e., Indian Commission for Agriculture Costs and Prices).

We assume 5% of paddy rice produced is used as seeds for next year, the rest is sold to the mills / procurement

Throughout the analysis, the minimum support price is constant at 900 Rs. / 100 kg (i.e., 9000 Rs. / metric ton)

A shift in supply of paddy rice

Qr1Qr1

PMSP

Subsidy

D

S0

S1

Midstream market

While Qr denotes paddy rice, X denotes milled rice The mill production structure: X=B⋅Qrγ

Where 0<γ<1 and B>0

The paddy yield: Rice = 67% Husk = 21% Rice Bran = 8% Small Broken = 2% Rice Husk small = 1-2%

The milled rice price is double that of the paddy rice price

Downstream market

Rice is used for consumption, We assumed:

20% loss of paddy rice Out of the 80%

67% used to produce milled rice, which is consumed as food 29% creates value (e.g., used to produce processed food),

and adds 17 US$ per ton. Afew million metric tons are used to produce Chira, Khoi, and Muri, as well as other products.

Final rice price is 20% higher than the midstream price, reflecting a retail profit margin of 7% to 10%

The simulated scenarios

We assess the impact of adoption of the following traits: Insect resistant, Herbicide tolerant, Nitrogen use efficient, and Yield enhancer.

The rice supply chain:Total factor productivity and input shares

Farmers’ operating costs are 75% of revenues

The calibration suggests highest productivity in Gujat, Punjab, and Uttarakhand.

The analysis also suggests average total factor productivity of 0.76 The log-linear structure suggests the following average cost shares:

fertilizers – 0.07, machine – 0.10, bullock – 0.07, labor – 0.41, seeds – 0.05, insecticides – 0.02 and irrigation – 0.03.

Number of approved field trials

Approved Field Trials 2009 2010 2011 2012 Companies

Yield 2 3 2BASF, DuPont, Bayer, MAHYCO

Insect resistance 1 3 Metahelix

Herbicide tolerance 4 DuPont

Stacked (IR & HT) 1 1 Bayer

Stress tolerance 1 U of Calcutta

The simulated scenarios

Four counter factual scenarios are assumed Insect resistance (IR); Herbicide tolerance (HT); Nitrogen use efficiency (NUE); Yield increase (YI);

Insect resistance

When simulating the effect of the introduction of IR rice on various economic agents along the supply chain, we made the following assumptions: The seed cost per hectare of IR genetically modified rice increases

by 10% relative to that of the non-GMO rice. The introduction of IR rice led to a reduction in risk and thus better

crop management and use and more investment in cultivation and production of rice, formally resulting in a 5% Hicks-neutral technological change (Anderson 2008).

The introduction of IR transgenic rice results in a decline of 15% in the use of pesticides (recall that our assumptions suggests that price of pesticides is fixed). Formally, we assumed that the amount of pesticides used declines by 15%, and that the cost-share of insecticides declines by 15%.

Input use: IR

Herbicide tolerance

Assumptions made for the numerical analysis: The introduction of HT traits affects seeds costs, and the

cost of seeds goes up by 10% (Hareau et al., 2005); The introduction of HT traits results in a 5% Hicks-Neutral

shift (Anderson); The introduction of HT traits leads to a 10% increase in

the amount of herbicides used. The introduction of HT traits leads to the elimination of

weeding labor (on average, 25% of total weeding costs).

Manual weeding costs

Nitrogen Use Efficiency

When simulating the counter-factual scenario of the adoption of NUE traits, we made the following assumptions: The introduction of NUE traits affected seeds costs,

whereby the cost of genetically modified seeds goes up by 10% (Hareau et al., 2005);

The introduction of NUE traits results in a 5% Hicks-Neutral shift; and

The introduction of NUE traits leads to a 15% decline in amount of fertilizers used.

Yield increasing

Yield increasing trait will improve the crops yield, without impacting the input use.

The yield modification will also impact the price of the seeds.

Specifically, we assume seed prices go up by 10% and the yield trait increases yield via a Hicks-Neutral technological change of 15%.

Impact on Yield

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IRHTNUEYield

Impact on prices: level

Price IR HT NUE Yield

Midstream 0 1800 1800 1800 1800

Midstream 1 1675 1764 1698 1436

Downstream 0 2160 2160 2160 2160

Downstream 1 2098 2142 2109 1970

Percent price change

IR HT NUE Yield0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Midstream priceDownstream price

Benefit to farmers (hectare: 10,000 square meters)

IR HT NUE Yield

Andhra Pradesh 531 3470 707 1618

Assam 110 1519 154 407

Bihar 233 1932 335 915

Chattisgarh 198 826 272 723

Gujarat 334 2179 461 1281

Haryana 442 1410 554 1198

Karnataka 373 2146 644 1517

Madhya Pradesh 104 213 193 427

Orissa 124 1702 320 614

Punjab 1005 1398 1104 2947

Tamil Nadu 199 2036 579 977

Uttar Pradesh 234 1750 460 1030

West Bengal 258 1745 520 1077

Field trials completed

IR HT NUE Yield AverageAndhra

Pradesh (11) 2 1 2 2 1.75

Gujarat (7) 5 2 7 4 4.5

Punjab(1) 1 11 1 1 3.5

Benefits: Supermarkets and moms and pops stores

IRHT

NUEYield

0500

100015002000250030003500

Benefit to downstream retail sector (metric ton)

IR HT NUE Yield0

20

40

60

80

100

120

140

Per capita benefits to consumers

Per capita benefits to consumers

Fertilizers are over utilized in India The benefits from the adoption of NUE to the economy,

however, are much larger Assuming the price of fertilizers is fixed, a 25%

reduction in nitrogen use (which in 2005-06 accounted for about 60% of total fertilizer use) suggests a 15% reduction in cost of fertilizers equivalent to an annual saving of 33,676 million Rs. –

almost 600 million US$.

Concluding remarks

The analysis suggests that benefits are largest in the efficient rice producing regions, But also in regions where the benefit from the change in input-

use is most substantial. The results suggest that the technologies that resulted in the largest

impact on production cost, ceteris paribus, yielded the largest gain to farmers but the lowest benefit to consumers (HT versus IR and NUE).

When the technology resulted in a substantial yield increase (yield enhancing trait) the benefits to the consumers are largest.

Policy plays a key role when quantifying the benefits from the various technologies