Developing competitiveness of Indian floriculture industry: a study based on Israeli experience

Abstract

Countries in the present world-order are compelled to compete with each other; not only for development, but also for their existence. The new unfolding world 'order' with developments in international trade, moving towards a market orientation has made the countries to device their economic plans and policies geared to meet the competition and have compelled the industries of these nations to innovate and improve to have a superior performance. The agro-based commodities form a major part of the developing countries' trade because of various 'factor advantages' enjoyed by these countries. Deregulation and the globalization of competition due to GATT agreement, tariffication of non-tariff barriers and reduction of tariff barriers in shorter time period give more opportunities for the developing countries to have market access to their agricultural commodities in developed countries which so far had high levels of entry barriers.

With the on going economic reforms, India has also entered a new era of globalization and economic liberalization, which has given possibilities of increased trade in global markets. This process of globalization requires that the country becomes efficient, competitive and innovative both in production and mark- aspects, which mean the comparative advantage it enjoys in certain sectors, should be converted into sustainable competitive advantage. 'Thrust areas' like floriculture are identified where India is considered to have competitive and/or comparative advantage due to its natural resources, climatic conditions, bio-diversity, factor input conditions, labor cost, etc.

The international floriculture industry which is highly dynamic and competitive, with the recent developments has influenced the policies and strategies of many floriculture products producing countries. In wake of this, the research objectives of this study are: 1. To assess the potential for trade of floriculture products in the international market. 2. To compare the position of India vis-a-vis a major flower exporting country in terms of determinants of competitive advantage and competencies. 3. To examine how different policy scenarios would affect the competitiveness of the floriculture industry in India vis-a-vis the major flower exporting country.

To satisfy these research objectives of the study following research questions have been Identified: i) what are the market trends in floriculture trade across countries in terms of a) change in the structure, b) direction, c) product-market mix - their growth and share of different countries, and d) changes in major markets; ii) what are the major determinants - a) in terms of factor conditions, market conditions, industry structure and process, related and supporting industries and government policies in development of floriculture industry on the dimensions of evolution, strengths and weaknesses, and b) how are they linked with the performance variables; iii) how does the Indian floriculture industry compare with a major exporter in international floriculture trade and iv) what would be the impact of various policy scenarios on the firm level performance. Policy scenario includes a) variations in macro economic policy variables such as exchange rate, subsidy component, the export duty on the products, etc. b) variations in the cost components (inputs and investments related) and c) variations in firm level decision variables such as production capacity, capacity utilization, variety selection, wastage level etc.

Israel has been chosen as the sample country, for the cross-country analysis with India, as it has close similarity with the floriculture production centers in India in terms of agro-climatic conditions. The methodology adopted for the study involved case studies conducted at the industry and firm level in India and Israel. The data has been collected through meetings, discussions, field observations, panel discussions, archive records and published materials. A model to understand the value chain – ‘'TRIPLE I - P - P - M" (Investments-Inputs-Intercultivation-Product-Processing-Mm) of this industry and computer simulation packages to analyze the firm level performance in the sample countries have been developed.

The major findings of the study are as follows:

International floriculture trade across the countries has been highly dynamic with major structural changes in the last decade (1982-1992). Major floriculture products category is cut flower, and roses are the major cut flower traded across different markets. Major markets are the triad of international trade - EU, USA and Japan, with 9.7, 10.4, 20.9 percent growth respectively, between 1993-94. The production centers are being shifted to the countries located in proximity to these markets. The developed countries, which are the major flower producers, are limited by factors such as increasing production and investment costs and hence have declining market share. The developing nations from Africa and Latin America have increased their market shares and trying to build their comparative advantage into sustainable competitive advantage.

India has had high growth rates in terms of export value (1992-1995), but has not done well in terms of productivity and financial performance. The market attractiveness for floriculture industry from developing countries is high because of the structural dynamics in the international trade. On account of this, the future growth of the industry from the present level depends on the 'country-image' to be developed, diversification of product-market mix and a definite strategy to get higher market share in near future.

The determinants of industry competitiveness in India compares with Israeli floriculture industry as follows:

a) The industry has higher per firm acreage which reduces the per unit fixed costs. However, existing 'organization culture' of Indian firms delays decisions regarding production operations, while in Israel the 'entrepreneurial farming' is able to make these decisions quickly. Mutual cooperation within Indian industry and from the Indian government is lacking, even though the industry has grown considerable in recent years.

b) The transport cost, import duty and marketing cost of floriculture products in I n k accounts for more than 50 per cent of the sales realization, while in Israel these account for 40 per cent. Lack of coordination in marketing the produce has increased the per unit costs for every firm, in India.

c) The factor conditions such as inputs, labor etc. and investment components have given the advantage of lower cost of production with adequate level of availability in India. But, these factors of production are at a lower quality and productivity, in comparison with Israel. Some of them have lower cost (labor) in India even after compensating for the productivity difference. d) The related and supporting industries have been serving the 'less intensive open-field crops' in the past and the availability of these product lines required for the hi-tech agriculture at international standards, are poor. This coupled with the restrictions on imports of raw materials with duties has affected the performance of the industry in lndia

e) Overall, the government policies have not been aggressive with respect to establishing facilitating agencies such as - an apex body as coordinating agency & regulatory body, an organizational setup for mark- the produce, an association of the growers in the industry etc.

Most of the policy scenario simulations have a positive impact on the expected returns in Indian conditions. Policy scenarios such as depreciation of rupee against dollar, decrease in import duty levied by Netherlands as per GATT regulations, increased transport subsidy, increased investment subsidy, increased capacity utilization and market sell-out ratio, and area under cultivation have a positive impact on the expected returns. Most of these policy scenarios are likely to be implemented or would be formulated in the near future and hence a combination of all of them would give very high expected returns to Indian floriculture farms. In Indian conditions, policy scenarios such as appreciation of rupee against dollar, decreased transport subsidy increase in transport cost, and increased investment with increased capacity utilization have negative impact on the expected returns.

Most of the likely scenarios have a negative impact on the expected returns in Israeli conditions. Policy scenarios such as appreciation of NIS, increased marketing cost increased import duties as per the GATT regulation, increased transport cost owing to cost escalation I individual transportation, reduced subsidy on investments, increased labor costs, and increased investments with increased capacity utilization have negative impact on the expected returns. Policy scenarios such as depreciation of NIS and increased area under cultivation have a positive impact on the expected returns.