This document summarizes a research study on the export potential of Indian organic produce. Key points: 1) India has potential to access the growing global organic market, estimated to more than treble by 2010, as a leading agriculture producer with a tradition of organic farming. 2) Organic farming uses techniques like crop rotation and manure rather than synthetic inputs. India has an estimated 2.5 million hectares under certified organic cultivation. 3) Major export markets include the US, Europe, Japan, Canada and others. Certification to international standards is required. India is negotiating acceptance of its certification system. 4) Price premiums of 15-30% for organic products provide incentive for farmers

1. CAB CALLING October-December, 2006
After the lighthearted Freakonomics by differentiation. Different customers have
Reviews
Book Reviews Steven Levitt, Tim Harford’s “The different opportunity costs of money,
Undercover Economist” is a relatively depending on how rich or poor they
serious attempt to explain and solve the are. For any commodity different
most pressing economic problems of customers will offer different prices. For
our times, purely from the neoclassical same product, any firm will like to
angle. The book is divided into ten extract the maximum the price each
chapters that seek to deal with a host of customer is willing to pay. But you
issues, from pricing of products by firms cannot have different prices for different
to traffic congestion, pollution, stock customers for the same product. The
market behaviour, globalization, problem is resolved by making
poverty and even “How China Grew superficial changes in the product –
Rich”. changes that cost next to nothing to firm
– and selling the differentiated product
The first Chapter, “Who Pays for Your
at different prices. Product
Coffee?” lays the foundation of the
differentiation is a camouflage for price
paradigm in which all the subsequent
differentiation. The author gives many
issues are dealt. “Who Pays for Your
examples of price differentiation.
Coffee?” expounds the Ricardian theory
of rent and lays “scarcity” (or relative The author enters into the more
scarcity, to be precise) at the foundation controversial issues from the chapter
of price. After all, neo-classically “Perfect Market and the World of
speaking, if the pricing is right, Truth”. “The truth comes from the fact
everything else is right too. The author that stores and consumers do not have
explains how scarcity to buy or sell at a given price – they can
The Undercover Economist determines the price of
everything. Scarcity
always opt out..… a free market people
do not buy things that are worth less to
power is pricing power. them than the asking price”. By the same
Author : Tim Harford Firms will always try to create scarcity logic, in a free market people do not sell
Pages : 278 of their products. Scarcity definition of things below the cost of making the
rent, when extended to price turns every product. When a transaction takes
Price : 5.99 $
cent of price beyond the cost into rent. place, therefore, both the buyer and the
Publisher : Penguin India
The author extends the scarcity seller must be better off. Therefore, the
Reviewed by : Arnab Kumar argument to the economics of crime as author argues, the free market correctly
Chowdhury* well. In many places the mafia controls discovers values people put to different
the laundry services in restaurants. products. Markets do a great job of
Competitors are kept a bay by means processing information through prices.
of violence. This creates a scarcity for Prices convey the information about
laundry services in restaurants and peoples’ priorities and how much they
hence the exorbitant price for the value different things. If prices that
service. Of course, this also makes people are willing to pay for things were
extortion money paid by restaurants tax the ‘truth’, perfect markets indeed is a
deductible. world of truth. This world of truth
ensures that (i) companies are making
The chapter “What Supermarkets Don’t
the right things (they will not make
Want You To Know” deals with product
* Member of Faculty, College of Agricultural Banking, Reserve Bank of India, Pune
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2. CAB CALLING October-December, 2006
anything that costs more than its price); living outside the local limits of the solution that slows down the fast runners
(ii) companies are making things the schools cannot admit their children is inefficient. Instead give the slow
right way (minimizing costs), (iii) they are there. So they decide to migrate to runners a head start and allow each to
making things in the right proportions localities where good schools are run to the best of one’s capacity, without
(they are not making too much a thing housed. This pushes up property prices interfering in the race. Single lump sum
so that its price falls below the cost or in localities having reputed schools. taxes on the rich are the economic
too less so that people stop buying it); Hence in a non-market system, Harford, equivalent of head start to the poor.
and (iv) things are going to the right concludes money that could have gone Harford brings his World of Truth to
people (those who value them most). to the good schools to set up more good solve all kinds of problems. Harford is a
This makes the perfect market Harford’s schools ends up in the pockets of staunch advocate of market-based
World of Truth. property dealers. The author’s argument solutions to environmental problems.
At no point, Harford, mentions that is based on the premise that property His solutions include pollution tax on
markets seldom function perfectly. In prices are high in regions where good car owners to tackle the menace of
fact, markets love to function schools are located because good pollution, rather than high excise duties
imperfectly. He does not consider that schools are located there. It could just on cars or taxes on fuel.
perfect markets can produce no more be that good schools are expensive
In the chapter titled “Rational Insanity”
than normal profit, which is just enough because they are located in areas with
Harford examines the irrational
to cover the costs and a reasonable high property prices. And to use
behaviour of the stock markets.
return on capital. The problem is you Harford’s own argument elsewhere,
Refreshingly, he offers no apology for
cannot leash human greed with ‘normal good schools might just be located in
stock markets’ routine failures. He
profits’. To keep capitalism going areas with high property prices because
neatly explains the random walk theory.
corporations need supernormal, not that is where most price blind parents
The bottom line of the chapter: “It is folly
normal profits that only imperfect are located. After all, there is no dearth
to be sane when the world goes mad.”
markets can produce. Harford shows in of studies that show that more expensive
schools are not necessarily better In the chapter “The Men Who Knew the
the first chapter, scarcity power is pricing
schools. Value of Nothing” Harford pays glowing
power, which every successful firm
tributes to Neumann and Nash as he
wants to maximize. But pricing power Citing every neo-liberal argument
explains the evolution of the game
itself is a market imperfection! Market, against redistribution, Harford takes to
theory. In this chapter he shows how
left to it, provides powerful incentives semantics to show why what is just is
game theory can be applied to designing
for the market to stray far away from not necessarily fair. He forgets to
auctions and also how improperly
perfect. The telecom bubble and the consider that the notions of just and fair
designed auctions can go horribly
dotcom bubble in the US are two cases are value-laden. There is no objective
wrong. Harford shows that unless the
in point. Over investment to insane solution to the problem of something
design of auctions is continuously
levels in the telecom sector led to $3 being just to one but unfair to another.
changed the bidders learn to cheat. In
trillion of market capitalization loss by The other weakness in Harford’s 1990s US government employed game
2002. Few governments in the world reasoning is that equity-efficiency trade- theory to auction spectrum rights. The
have managed to lose that kind of off exists only in perfect market. In first few years it seemed to work very
money. imperfect market, which is what the well. Three years later in 1997 an
Harford also examines certain non- world is, equity may actually enhance auction raised less than 1 per cent of
market systems that prevail in the UK, efficiency. For distributional justice, the expected price: like selling
especially, government-controlled Harford pitches for Kenneth Arrow’s $600,000 house for less than $6000.
education. UK regulations require head start theorem. Head start theorem, The most amusing of all is the account
schools to take students locally. This one of Arrow’s most brilliant shots, states of Vickrey auction. This is a sealed bid
means that parents who are willing pay says that when the race is between auction strategy in which the highest
a higher price for a good schools but runners with unequal capacities, the bidder wins but has to pay only the
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3. CAB CALLING October-December, 2006
second highest bid. We know that enlighten the reader beyond laying the to affect the market price” But then, is
every bidder wants to be the highest poverty of poor countries at the quality not perfect market – The World of Truth
bidder and at the same time does not of governance. There is much more to – is a place where no individual
want to outbid the second highest poverty than just governance. producer has no power to affect the
bidder by a long margin. The elegant market price? According to Harford then
The chapter “Beer Chips and Globalization”
reasoning behind Vickrey strategy is coffee growers in East Timor are poor
tackles the issue of trade and
that no bidder has any incentive to because they live in the World of Truth!
globalization. Here, Harford is
shave off his bid to make more profit
painstakingly simplistic in many of his The final chapter “Why China Grew
and thus on the whole, fetching a higher
analyses. He pooh-poohs concerns Rich” is written in The End of Poverty’s
price for the commodity auctioned. The
arising from relocation of toxic traveler’s tale mode. Here the economist
New Zealand government had to face
industries in the developing world, the metamorphoses into a narrator of tales.
tremendous embarrassment for
larger environmental issues, the He ends his book with the tale of Yang
following Vickrey auction in selling out
cartelization of global corporations, the Lee who by working in a sweatshop
spectrum rights. The government found
negative fallout of globalization on apparently amassed enough savings to
it impossible to explain to public why
developing countries and others by start her own salon. Today she does not
the highest bidder in one auction who
superficially denying them. Harford work in the sweatshop any more and
bid NZ$ 100,000 had to pay only $6
maintains stoic silence over trade related prefers to spend more time with her
or why the highest bidder in another
intellectual property rights, the most family. “Economics is about Yang Lee’s
auction who bid NZ$ 5000,000 had to
powerful oraginised market- choice” is Harford’s parting punch line.
pay only NZ$ 5000!
imperfecting device. At one point, If there would ever be a Nobel Prize for
In explaining “Why Poor Countries are Harford observes “Coffee growers (in reducing economics to a one liner trust
Poor”, Harford goes into the economics East Timor) are poor” because “No Harford to walk away with it.
of political systems. Sadly he fails to individual coffee grower has any power
Soil degradation and toxic residues on food produce are the fall out
of use of chemical inputs in conventional farming. This has led to
adoption of organic farming. There is demand for food produce that
is not only healthy for human consumption but also protects the soil
and the environment. With about 120 countries adopting organic
farming, the global market, it is expected, will more than treble by
2010 from its present size. As a leading agriculture producer, and
with a tradition of organic farming, India can access the global market
in a big way. It has already made a mark in case of organic tea and
coffee, basmati rice and
spices. The M. Visvesvaraya
Potential Produce
Export Potential of Indian Organic Produce Industrial Research and
Development Centre
Pages : 194 (MVIRDC), Mumbai, has brought out the research study under review
Price : Rs.250/- as part of its ongoing research in international trade, technology and
Publisher : MVIRDC World
Trade Centre, Mumbai * Member of Faculty, College of Agricultural Banking, Reserve Bank of
Reviewed by : R.R. Borbora* India, Pune
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4. CAB CALLING October-December, 2006
markets. This timely study addresses, differential in the overseas market, crucial to export opportunities. NGOs,
inter-alia, important issues in organic ranging between 15 to 30 percent cooperatives and the corporate sector
farming in India as also the dynamics of between conventional products and can play an important role in production
the major overseas markets. organic ones, drives conversion to and marketing of organic produce. The
organic production. Besides, it partly study concludes with a SWOT analysis
Organic farming, the study points out,
compensates the drop in yield in the of organic food exports from India and
is knowledge-based rather than input-
initial years of conversion. Taste, calls for product-wise strategic action
based. Globally accepted international
freshness, quality, income changes, life plans, region-wise collaboration plans,
rules prohibit use of synthetic fertilizers,
style decisions, food safety concerns grower group organizations, marketing
pesticides, livestock feed additives and
and age of consumers drive the growth linkages, dissemination of knowledge
require long-term soil management,
of the organic food market. It is also among farmers, post-harvest technology
emphasis on animal welfare and
viewed as beneficial to sustainable and infrastructure, market and
extensive record keeping and planning.
agricultural development and a boon commercial intelligence, brand
Organic production uses techniques
to small and marginal farmers. creation and making value added
such as crop rotation, inter-cropping
produce.
with legumes, animal manure, green India is presently exporting about 35
compost and biological pest control. organic products. Organic tea and rice The study contains 6 chapters and 21
are the leading products followed by annexes. The latter provide useful
According to official estimates, only 2.5
fruits and vegetables. The major export information, inter-alia, about country-
million hectares are presently under
markets include the USA, Europe, wise area under organic management,
certified organic farming in India. Small
Japan, Canada, South Africa, the Middle inspection and certification agencies in
farmers in certain areas are practicing it
East, Australia and Singapore. Exports India, organic certification tariffs, models
by default. Expansion of the area under
to the principal markets require organic of contract farming, involvement of
organic farming in India is an official
certification by accredited agencies NGOs and corporate houses in organic
priority. Several initiatives to promote
under Indian norms developed as per farming/marketing, commercial
organic farming in India include the
international standards. While efforts are information on US, European and
National Policy on Organic Production
on globally to move to a uniform set of Japanese markets for organic food and
(2000), setting up of the National
standards, India is negotiating with the traditional knowledge on organic
Institute of Organic Farming (2003) to
USA and the European Union for farming in India.
form rules and regulations for organic
acceptance of its accreditation and
farm products and established The study, it is expected, will be useful
organic certification standards. This,
certification infrastructure in line with for not only the producing and
together with the group certification
internationally accepted standards, and exporting community of organic farmers
scheme, will help address the issue of
on going research in the field. but also for bankers, students and
cost of certification, particularly for the
government agencies involved in
Apart from Europe, America and Japan, smaller producers. As the gestation
organic farming. Despite the few
organic farming and consumption of period for complete conversion to
repetition of facts that can make the
organic products are extending to Asia, organic farming is for 3 to 4 years, long-
reading tedious, the study report is a
the Middle East and the Latin American term commitment to organic farming is
useful addition to the literature on
consumers. Organic food occupies retail essential for sustainable growth. The
organic farming.
shelves in supermarkets. Restaurants Government could also consider
and food programmes in schools monetary incentives for conversion at
include organic food. It has attracted the pre-harvest stage. Post-harvest
attention of multinationals. Price infrastructure and transport logistics are
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