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  1. Mandatory Labeling in India Bharat Ramaswami Indian Statistical Institute

  2. Plan of Talk • Mandatory labeling provisions in India • Likely Consequences • Mandatory vs Voluntary Labeling: The key difference might lie in the `stigma’ or signaling impact of labels • Consumer responses: Aversion to GM foods (as a result of labels) consists of an informational and a signaling impact. This is examined in an experimental framework.

  3. The Law • Effective from January 1, 2013 • “Every package containing the genetically modified food shall bear at the top of its principal display panel the words `GM’”.

  4. Important Features • The law applies only to packaged foods. • Unpackaged foods that constitute more than 90% of foods sold in the Indian market are exempt. • Regulation is impossible to enforce for this sector. • With greater prosperity, the packaged foods sector is increasing. At the margin, the law constitute a disincentive to transit to packaged foods.

  5. Features….II • The law does not make a distinction between processed foods and fresh/raw produce. • Packaging is more prevalent among processed foods – yet it is in processing foods that testing for transgenic DNA is either not possible or very costly. • Compliance and enforcement of labeling for processed foods would require identity preservation and segmented channels of production, processing and marketing.

  6. Features… III • The law does not prescribe a tolerance level –i.e., a maximum threshold level above which a food is considered to be genetically modified. • If even the slightest co-mingling of GM and non-GM foods is not to be tolerated, the cost of providing and tracking such perfect segregation systems would be high. • The cost of claiming `GM-free’ status for processed (and packaged foods) would therefore be high.

  7. Likely Industry Response • Bt cotton is the only GM crop that is permitted to be grown in India. • Cottonseed oil is used in many parts of the country and that is the only GM food for human consumption. • But it is mostly sold unpackaged. • Further, as it is not a premium oil, the small packaged portion of the cottonseed oil sector is likely to adopt the GM label and not bother with providing GM-free oil. • The law is not likely to have much impact in this sector.

  8. Soya oil • India is a big importer of soya oil from countries that grow GM soybean. • Often sold as blended with other oils either as packaged or unpackaged oil. • Once again, it is not a premium oil (and nor is it a traditional cooking oil like peanut, sesame or mustard). So suppliers are likely to adopt the GM label without much consequence. • Some soya oil is blended with premium oils such as sunflower or rice bran oil. This may stop.

  9. Other imported foods • With the exception of soya and palm oil, imported foods do not enter the diets of the poor. • Breakfast cereals, tortilla chips, multi-grain crackers, tofu, chocolates,…. • The demands of these foods from the wealthy may be sensitive to the GM label – one might see the composition of food imports shift towards organic labels.

  10. In sum…likely consequences • Supply chains for foods largely consumed by the non-wealthy are unlikely to be affected – either they are not packaged or if packaged, they will be labeled as GM. • Supply chains for foods consumed by the wealthy might change modestly – especially for imported foods – this might move more in the direction of organic foods.

  11. A fundamental question • Economists like the idea of voluntary labels. • If the premiums from GM-free foods do not justify the costs, there will be no product differentiation by voluntary labels. • Mandatory labeling does not change the economics of product differentiation – so if product differentiation is not profitable, then that will continue to be so. The product will be labeled GM. • Similarly, if it is profitable to product differentiate by private labels, mandatory labeling will also lead to the same outcome.

  12. Fundamental question…2 • In this sense, mandatory labeling is redundant in the presence of voluntary labeling. • But if mandatory labeling is equivalent to voluntary labeling, why are corporates and the U.S. against it?

  13. EU position • Mandatory labeling responds to the consumer’s right to know. • The label simply identifies the food and does not carry any safety warnings. • Consumers have preferences over the process by which food is produced and such informed choice is promoted by mandatory labeling.

  14. US position • Principle of `substantial equivalence’: If a GM food demonstrates the same nutritional characteristics and composition as its non-GM counterpart, then it is deemed to be safe. • No need for mandatory labeling. • Consumers have preferences over products and not processes.

  15. US position…2 • Mandatory label for a substantially equivalent GM food may mislead a consumer into believing that the food is unsafe. • “Mandatory labeling will only frighten consumers……..” (US Health Secretary, 2002) • Implication: Labels even when neutrally worded are signals and therefore change consumer behavior.

  16. Summary of EU and US positions • Both agree that mandatory labeling will reduce demand for GM foods. • However, they differ in mechanisms. • EU: Labels have an informational role. Previously uninformed consumers become informed and adjust their demands accordingly. • US: Labels have a signaling role. Consumers see label as a signal that the product may have unspecified health consequences and adjust demand accordingly. • If preferences change because of labeling, mandatory and voluntary labeling may not be equivalent. Standard welfare analysis is also not possible.

  17. Stigma and the non-equivalence of mandatory and voluntary labeling • Suppose there are 3 types of consumers: decisively GM averse, the stigma sensitive and indifferent. The stigma sensitive are GM averse only when they see the label. • Under voluntary labeling: supplying only GM (i.e., no labeling) loses the decisively GM averse consumers. • Under mandatory labeling: supplying only GM (i.e., labeled product) loses the decisively GM averse and the stigma sensitive. • If there are fixed costs of supplying `GM-free’, then it is possible that for some range of fixed costs, supply of `GM-free’ is not profitable under voluntary labeling but it is under mandatory labeling.

  18. Bansal, Chakravarty and Ramaswami • Can we figure out the extent of `stigma’? • Devise an experiment that elicits consumer reactions to labels. • Design the framework such that we can estimate a lower bound of the informational impact of labels on GM food aversion. • We are not aware of this being done earlier or even the problem being posed in this manner. • Another novelty: investigating consumer preferences in a developing country using experimental methods.

  19. A theoretical framework

  20. Idea of Experiment • Measuring aversion to GM foods requires two data points: consumer valuations for a non-GM food and consumer valuations for a GM food that is otherwise identical. • The idea of our experiment is to insert an intermediate stage and obtain three data points. • The intermediate stage consists of valuations for a food that is perceived as genetically modified with some probability (in the interior of the unit interval).

  21. Experiment in brief • The experiment consists of three rounds of bidding for two products – a GM cookie and non-GM cookie. In the first round, price bids are elicited on the basis of blind tasting. • In the second round, subjects are invited to read a one pager describing GM foods and their status in regulation. Subjects are also asked to speculate on the probability that the products are genetically modified. Thus after planting some doubt that either one or both products might be transgenic, subjects are asked to make price bids. • The third round price bids happen when one of the products is labeled and, thus revealed to be, as genetically modified.

  22. The informational component of GM Aversion • The difference in third round price bids between the unlabeled non-GM product and the labeled GM product (normalized by the first round quality difference) is the expressed aversion to GM foods. • The difference between the price bids of the two products in the second round (normalized once again) is the aversion to GM foods that comes from the diffuse and generalized information distributed in the second round. This information is crystallized in terms of subjective probabilities that one or both products are genetically modified. • The extent of aversion in the second round relative to the third round is the lower bound to the informational impact of labels on GM aversion. This is formally shown in the paper.

  23. Our Experiment • Subject Pool: 64 students and 50 university teachers. 39% of pool is female. • Sample representative of urban consumers with above average family income and education. • Their attitudes and lifestyles aspired to by other socio-economic groups • Primary consumers of packaged foods that are subject to labeling laws.

  24. Experiment Design • Subjects endowed with 200 units of lab currency (equivalent to Rs. 50). • Were required to bid for two products A (non-GM cookie) and B (Gm cookies). • 4 rounds of auctions: BDM mechanism • At the end, one round was randomly picked and a price for each of the two products was picked from the uniform distribution [1,100]. • Participants whose bid was above this valuation purchased a unit at the drawn price; otherwise the endowment is cashed in as rupees.

  25. Auction Design • First round: Subjects sampled both products without its packaging or labeling. • We elicited their ranking on a taste scale from 1 to 7. • Then products were auctioned simultaneously • Second round: At the beginning, subjects received a handout containing information about GM foods. Information neutrally worded. • Subjects then asked to evaluate the likelihood of either product being GM on a scale of 1 to 5. • Both products auctioned simultaneously

  26. Auction Design…2 • Third round: Product B labeled “This product subject to genetic modification”. • Both products simultaneously auctioned

  27. Taste Rankings – Blind Test (cumulative density function): Product A dominates

  28. Subjective probability that product is GM: Product B dominates

  29. Prior subjective probabilities • Out of 113 subjects that report subjective probabilities (of whether a product is GM), 88 of them have a probability of at least 0.5 on either or both products. • In addition, only 20 subjects report prior probabilities of less than or equal to 0.25 on both products. • Therefore, for the bulk of the subjects, the probabilistic perception about the products is in mid-range. Background information on GM foods provided in round 2 leads subjects to form high subjective probabilities for at least one of the products. • Such high probabilities should affect the price bids of those who are GM averse.

  30. Informational Effects on Price Bids • From the regression in levels, an individual with a probability perception of 0.5 has a valuation lower by Rs. 8 than an individual with a probability perception of zero. • These effects are entirely due to information (no label as yet).

  31. Information Inert Consumers • Out of the 101 subjects who report price bids for both products, 36 (about a third) did not alter price bids from period one to period two. • Their price bids are invariant to the background information and elicitation of prior probabilities: “information inert” subjects.

  32. Classification of Subjects

  33. GM Aversion: Magnitudes and Informational Component

  34. Lower bound to the Informational Impact • Among the GM averse, 60% of the aversion to GM foods (in entire sample) is accounted by the probabilistic information provided in round 2. Thus, the informational component dominates. • For GM averse who are not information inert, 76% of the non-GM value premium comes in round two, i.e., most of their GM aversion is because of information.

  35. Signaling Impact? • For information-inert consumers, there is no action in round two. • The fact that all the aversion to GM foods for information-inert consumers comes from the label is suggestive that signaling is more important for these consumers. Cannot be inferred for sure since a label also provides information.

  36. Concluding Remarks • Current mandatory labeling provisions are not likely to have a large effect. • There could be some effect on food demand from the wealthy. • Is it likely to be because of greater information (given preferences) or because of signaling that changes preferences? • Previous studies looked at the impact of labels on consumer behavior and aversion to GM foods. • But what happens prior to the expression of aversion to GM-labeled foods? • This is what we did – looking at the effect of probabilistic information on GM food aversion.

  37. Conclusions…. • Findings are contextual. Studies have shown very low awareness of GM foods in India. • On average, sample consumers are willing to pay a price premium of about 16% for GM free products. • However, GM averse consumers account only for about 50% of subjects. • Within GM averse consumers, the informational impact of labeling dominates the signaling impact. • Finally, there is a subset of GM averse consumers who are information-inert. For them, the signaling impacts are probably important.

  38. Information Handout • 1. What are genetically modified foods? • Foods derived from plants that are genetically modified are called genetically modified (GM) foods.  A plant is genetically modified if it contains genes that have been inserted using genetic engineering techniques.   • 2. How is genetic engineering different from traditional plant breeding? • Genetic engineering makes it possible to insert a gene from another organism (such as another plant species, bacteria or animal) into the plant variety of interest. This is not possible with the traditional techniques of producing improved plant varieties. • .

  39. Handout…2 • 3. Why are GM foods produced? • GM foods are developed – and marketed – because there is some perceived advantage either to the producer or consumer of these foods. The first generation of GM plants have given more direct benefits to growers than to consumers although the latter have possibly gained from lower prices. • 4. What are examples of genetically modified plants? • The principal examples of genetically modified crops occur in soyabeans, maize (i.e., corn) and cotton.  For instance, genes from a commonly found soil bacteria have been used to produce soybeans, maize and cotton that are naturally resistant to certain pests.

  40. Handout 3… • 5. Why are GM foods regulated? •  There are two broad concerns with GM plants. First, because the foods are novel, the must be tested for toxicity and possible allergenicity. The second issue is whether the engineered gene can escape into wild populations and other unintended plants. For these reasons, GM crops must be assessed for food and environmental safety before they can be planted. •  6. What is the status of GM foods in India? •  In India, no GM food crop has been approved for planting yet.  Therefore, foods produced from domestically produced crops are not genetically modified.  Foods that are imported could contain ingredients that are genetically modified.  As of now, India does not have separate regulations for imports of GM food other than what applies to imported foods generally.."

  41. Handout 4… • 7. Why do some people oppose GM foods? • Several NGOs and individuals claim that GM plants pose unacceptable risks to food safety as well as environment safety. They argue that transferring genes between organisms creates new risks for human health that cannot be fully comprehended by our existing scientific knowledge.  They would therefore recommend that GM foods should be banned or severely curtailed until risk assessments are more comprehensive in testing the adverse effects on human health.This is disputed by biotechnology advocates who point out that GM crops are extensively tested before they are approved. According to the World Health Organization (WHO), "GM foods currently available on the international market have passed risk assessments and are not likely to present risks for human health. In addition, no effects on human health have been shown as a result of the consumption of such foods by the general population in the countries where they have been approved