FACILITATING FOREIGN DIRECT INVESTMENTS IN INDIAN BUSINESS AND INDUSTRY
FACILITATING FOREIGN DIRECT INVESTMENTS IN INDIAN BUSINESS AND INDUSTRY
Agriculture is the primary source of livelihood for about 58 per cent of India’s population. Gross Value Added by agriculture, forestry and fishing is estimated at Rs 18.53 trillion (US$ 271.00 billion) in FY18.
The Indian food industry is poised for huge growth, increasing its contribution to world food trade every year due to its immense potential for value addition, particularly within the food processing industry. The Indian food and grocery market is the world’s sixth largest, with retail contributing 70 per cent of the sales. The Indian food processing industry accounts for 32 per cent of the country’s total food market, one of the largest industries in India and is ranked fifth in terms of production, consumption, export and expected growth. It contributes around 8.80 and 8.39 per cent of Gross Value Added (GVA) in Manufacturing and Agriculture respectively, 13 per cent of India’s exports and six per cent of total industrial investment.
Market Size
During 2017-18* crop year, food grain production is estimated at record 284.83 million tonnes. In 2018-19, Government of India is targeting foodgrain production of 285.2 million tonnes. Milk production was estimated at 165.4 million tonnes during FY17, while meat production was 7.4 million tonnes. As of September 2018, total area sown with kharif crops in India reached 105.78 million hectares.
India is the second largest fruit producer in the world. Production of horticulture crops is estimated at record 314.7 million tonnes (mt) in 2018-19 as per third advance estimates.
Total agricultural exports from India grew at a CAGR of 16.45 per cent over FY10-18 to reach US$ 38.21 billion in FY18. Between Apr 2018-Feb 2019 agriculture exports were US$ 34.31 billion. India is also the largest producer, consumer and exporter of spices and spice products. Spice exports from India reached US$ 3.1 billion in 2017-18. Tea exports from India reached a 36 year high of 240.68 million kgs in CY 2017 while coffee exports reached record 395,000 tonnes in 2017-18.
Food & Grocery retail market in India was worth US$ 380 billion in 2017.
Investments
According to the Department for Promotion of Industry and Internal Trade (DPIIT), the Indian food processing industry has cumulatively attracted Foreign Direct Investment (FDI) equity inflow of about US$ 8.57 billion between April 2000 and December 2018.
Some major investments and developments in agriculture are as follows:
Investments worth Rs 8,500 crore (US$ 1.19 billion) have been announced in India for ethanol production.
The first mega food park in Rajasthan was inaugurated in March 2018.
Agrifood start-ups in India received funding of US$ 1.66 billion between 2013-17 in 558 deals.
In 2017, agriculture sector in India witnessed 18 M&A deals worth US$ 251 million.
Government Initiatives
Some of the recent major government initiatives in the sector are as follows:
Prime Minister of India, launched the Pradhan Mantri Kisan Samman Nidhi Yojana (PM-Kisan) and transferred Rs 2,021 crore (US$ 284.48 million) to the bank accounts of more than 10 million beneficiaries on February 24, 2019.
The Government of India has come out with the Transport and Marketing Assistance (TMA) scheme to provide financial assistance for transport and marketing of agriculture products in order to boost agriculture exports.
The Agriculture Export Policy, 2018 was approved by Government of India in December 2018. The new policy aims to increase India’s agricultural exports to US$ 60 billion by 2022 and US$ 100 billion in the next few years with a stable trade policy regime.
In September 2018, the Government of India announced Rs 15,053 crore (US$ 2.25 billion) procurement policy named ‘Pradhan Mantri Annadata Aay SanraksHan Abhiyan' (PM-AASHA), under which states can decide the compensation scheme and can also partner with private agencies to ensure fair prices for farmers in the country.
In September 2018, the Cabinet Committee on Economic Affairs (CCEA) approved a Rs 5,500 crore (US$ 820.41 million) assistance package for the sugar industry in India.
The Government of India is going to provide Rs 2,000 crore (US$ 306.29 million) for computerisation of Primary Agricultural Credit Society (PACS) to ensure cooperatives are benefitted through digital technology.
With an aim to boost innovation and entrepreneurship in agriculture, the Government of India is introducing a new AGRI-UDAAN programme to mentor start-ups and to enable them to connect with potential investors.
The Government of India has launched the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) with an investment of Rs 50,000 crore (US$ 7.7 billion) aimed at development of irrigation sources for providing a permanent solution from drought.
The Government of India plans to triple the capacity of food processing sector in India from the current 10 per cent of agriculture produce and has also committed Rs 6,000 crore (US$ 936.38 billion) as investments for mega food parks in the country, as a part of the Scheme for Agro-Marine Processing and Development of Agro-Processing Clusters (SAMPADA).
The Government of India has allowed 100 per cent FDI in marketing of food products and in food product e-commerce under the automatic route.
Achievements in the sector
Sugar production in India has reached 27.35 million tonnes (MT) in 2018-19 sugar season, as of March 15 2019, according to the Indian Sugar Mills Association (ISMA).
The Electronic National Agriculture Market (eNAM) was launched in April 2016 to create a unified national market for agricultural commodities by networking existing APMCs. Up to May 2018, 9.87 million farmers, 109,725 traders were registered on the e-NAM platform. 585 mandis in India have been linked while 415 additional mandis will be linked in 2018-19 and 2019-20.
Agriculture storage capacity in India increased at 4 per cent CAGR between 2014-17 to reach 131.8 million metric tonnes.
Coffee exports reached record 395,000 tonnes in 2017-18.
Between 2014-18, 10,000 clusters were approved under the Paramparagat Krishi Vikas Yojana (PKVY).
Between 2014-15 and 2017-18 (up to December 2017), capacity of 2.3 million metric tonnes was added in godowns while steel silos with a capacity of 625,000 were also created during the same period.
Around 100 million Soil Health Cards (SHCs) have been distributed in the country during 2015-17 and a soil health mobile app has been launched to help Indian farmers.
Road Ahead
India is expected to achieve the ambitious goal of doubling farm income by 2022. The agriculture sector in India is expected to generate better momentum in the next few years due to increased investments in agricultural infrastructure such as irrigation facilities, warehousing and cold storage. Furthermore, the growing use of genetically modified crops will likely improve the yield for Indian farmers. India is expected to be self-sufficient in pulses in the coming few years due to concerted efforts of scientists to get early-maturing varieties of pulses and the increase in minimum support price.
The government of India targets to increase the average income of a farmer household at current prices to Rs 219,724 (US$ 3,420.21) by 2022-23 from Rs 96,703 (US$ 1,505.27) in 2015-16.
Going forward, the adoption of food safety and quality assurance mechanisms such as Total Quality Management (TQM) including ISO 9000, ISO 22000, Hazard Analysis and Critical Control Points (HACCP), Good Manufacturing Practices (GMP) and Good Hygienic Practices (GHP) by the food processing industry will offer several benefits.
FDI promotion, facilitation and approval in India is regulated by The Department of Industrial
Policy & Promotion established in 1995 and reconstituted in 2000. According to the circulars issued
in 2011, FDI up to 100% is permitted, under the automatic route, subject to certain conditions
mentioned in Consolidated FDI Policy, in the following agricultural activities:
1. Agriculture & Animal Husbandry
a) Floriculture, Horticulture, and 100% Automatic Cultivation of Vegetables & Mushrooms
under controlled conditions;
b) Development and production of Seeds and planting material;
c) Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture under controlled
conditions; and
d) Services related to agro and allied sectors
Other conditions:
For companies dealing with development of transgenic seeds/vegetables, the following
conditions apply:
(i) When dealing with genetically modified seeds or planting material the company
shall comply with safety requirements in accordance with laws enacted under the
Environment (Protection) Act on the genetically modified organisms.
(ii) Any import of genetically modified materials if required shall be subject to the
conditions laid down vide Notifications issued under Foreign Trade
(Development and Regulation) Act, 1992.
(iii) The company shall comply with any other Law, Regulation or Policy governing
genetically modified material in force from time to time.
(iv) Undertaking of business activities involving the use of genetically engineered
cells and material shall be subject to the receipt of approvals from Genetic
Engineering Approval Committee (GEAC) and Review Committee on Genetic
Manipulation (RCGM).
(v) Import of materials shall be in accordance with National Seeds Policy.
(vi) The term “under controlled conditions” covers the following:
a) ‘Cultivation under controlled conditions’ for the categories of Floriculture,
Horticulture, Cultivation of vegetables and Mushrooms is the practice of cultivation wherein rainfall, temperature, solar radiation, air humidity and culture medium are controlled artificially. Control in these parameters may be effected through protected cultivation under green houses, net houses, poly houses or any other improved infrastructure facilities where microclimatic conditions are regulated anthropogenically.
b) In case of Animal Husbandry, scope of the term ‘under controlled conditions’
includes –
• Rearing of animals under intensive farming systems with stall-feeding. Intensive farming system will require climate systems (ventilation, temperature/humidity management), health care and nutrition, herd registering/pedigree recording, use of machinery, waste management systems.
• Poultry breeding farms and hatcheries where microclimate is controlled through advanced technologies like incubators, ventilation systems etc.
c)In the case of pisciculture and aquaculture, ‘under controlled conditions’ includes –
•Aquariums
• Hatcheries where eggs are artificially fertilized and fry are hatched and
incubated in an enclosed environment with artificial climate control.
2. Tea Plantation
i) Tea sector including tea plantations
ii) Other conditions:
(a) Compulsory divestment of 26% equity of the company in favour of an Indian partner/Indian public within a period of 5 years
(b) Prior approval of the State Government concerned in case of any future land use
change. Although India is traditionally an agro based and agro dependent economy, average per
hectare yield is lower than the global yield. This is due to lack of finance with the farmers. Banks
and financial institutions do not play an impactful role in financing the agricultural sector and hence
the sector is severely suffering from lack of finance. Even the foreign investors do not find the
agricultural sector of India an attractive one and the share of agriculture in the total FDI in India is
negligible. The recent data shows that agriculture accounted for only about 0.8 per cent of the total
FDI inflows into India.
Challenges for FDI Inflow in Indian Agriculture
Main problems in the agricultural sector, as listed by the World Bank, are:
·India's large agricultural subsidies are hampering productivity-enhancing investment.
·Overregulation of agriculture has increased costs, price risks and uncertainty.
·Government interventions in labour, land, and credit markets.
·Inadequate infrastructure and services.
There are constraints in the development of agriculture sector at each and every level vis-à-vis
Local, National and regional level. Some of the key constraints are given in Table 1.
Tepid economic growth, lack of transparency and consistency in foreign direct investment (FDI)
policies, infrastructure bottlenecks and regulatory hurdles seems to have taken a toll on India's
attractiveness as an investment destination for foreign investors, says Ernst & Young's third India
Attractiveness Survey. Any business in the country – local or MNC will need to follow local law,
rules and regulations. Thus permission for FDI cannot supersede other provisions in the country.
The MNC will need to follow import regulations, pay import duty, and fulfill all statutory
requirements. To list just a few:
a. Import duties – for food items are quite high. For instance for cheese, butter and ghee it is 40%
Honey attracts 60% duty.
b. APMC rules – restrict the ability of any player to deal directly with a farmer.
c. Storage may be subject to Essential Commodities Act.
d. Government control on sales (releases into market) as in Sugar
All these constraints need to be dealt with by the Governments (State and Central) before any
impact can be made. Here there can be no discrimination between a local player and a company
with FDI.
Initiatives For Improving FDI Inflow In Agriculture
The government has taken several steps to revitalise agriculture sector and improve the conditions
of farming community on sustainable basis by increasing investment, improving farm practices,
rural infrastructure, delivery of credit, technology and other inputs. Some of the major initiatives
taken by the Government of India include:
·The Government of India plans to set up two spice parks at Sitarganj and Sahaspur in
Uttrakhand with the help of Spice Board of India, said Mr Anand Sharma, Union Minister
for Commerce and Industry, Government of India. It has also opened fifth spice park at
Mattupetty Sivaganga in Tamil Nadu (TN) for processing turmeric and chilli
· The government has allowed 100 per cent FDI under the automatic route in storage and
warehousing including cold storages. 100 per cent FDI is also permitted for development of
seeds
· The Cabinet Committee on Economic Affairs (CCEA) has approved the implementation of
the National Mission on Oilseeds and Oil Palm (NMOOP) during the 12th Plan with
financial allocation of Rs 3507 crore (US$ 559.51 million). This would help in enhancing
production of oilseeds by 6.58 MT and also bring additional area of 125,000 hectares under
oil palm cultivation
· The government has launched an initiative to spend US$ 65.1 million to promote 60,000
pulses villages in rain fed areas for increasing crop productivity and strengthening market
linkages
· The Government of India has set a target of 259 MT of foodgrains production in 2013-14. It
is implementing various crop development programmes/ schemes for achieving production
targets of various crops
·The total outlay of Rs 27,049 crore (US$ 4.31 billion) is proposed for the Ministry of
Agriculture. The government has allocated US$ 145.8 billion for agriculture credit, an
increase of US$ 26.04 billion compared to FY13
·Allocation to the Rashtriya Krishi Vikas Yojana (RKVY) has been increased to US$ 2.1
billion, an increase of about nine per cent from the previous fiscal
·National Food Security Mission, a scheme to bridge yields gap of major crops, has been
provided US$ 468.7 million
·The National Bank for Agriculture and Rural development (NABARD) has opened a
lending window to private sector for creation of warehouse space and also to set up cold
storages and cold chains.
·Unique Organics plans to set up an integrated herbal tea processing facility in West Bengal
with total outlay estimated at Rs 500 crore (US$ 79.73 million). Further, a mobile
application named TRA Tocklai on Android and IOS platforms has also been launched
by Tea Research Association (TRA) in India. The application includes all research and
development (R&D) work done in the past 100 years.
· The Technology Mission on Coconut (TMOC) has cleared 14 projects with an outlay of Rs
19.25 crore (US$ 3.06 million) and a subsidy of Rs 2.86 crore (US$ 456,044.92). Under the
project component ‘Processing and Product Diversification’, proposals from 10 coconut
processing units have been sanctioned assistance.
· Tata Chemicals Ltd has announced the pan-India launch of FarmGro (foliar spray) and
FarmGro G (granules) as organic plant growth regulators.
·Indian Council of Agricultural Research (ICAR) has sought Rs 5,700 crore (US$ 909.18
million) to strengthen KVK in the 12th Five Year Plan. The allocation for KVK was Rs
2,000 crore (US$ 319.02 million) during the 11th Five Year Plan.
Conclusion
FDI is one of the most important means of arranging finance for the economy of any country. India
has also been realizing this since 1991 when The New Economic Policy came into force making
Indian economy a liberal and global one. For fast growing economies like India, getting
international know-how and global marketing capabilities are as important as access to capital.
Increased trade between nations increases foreign direct investment. Apart from other sectors, the
government of India is relentlessly working towards making agriculture a promising investment
sector for global players. The agriculture sector witnessed a steady decline in growth rate from 7.9
per cent in 2010-11 to 3.6 per cent in 2011-12 and further to 1.9 percent in 2012-13. In order to
improve the graving situation, Government of India should focus on providing subsidies to small
farmers as subsidies in India are too low when compared to countries to Canada, Japan and USA.
With the Food Security Act passing in parliament, the need for more investments in the agricultural
sector of India is only bound to increase. Already the increments are being felt as in 12th five year
plan (2012-17), FDI inflows of Rs 875 crore in 2012-13, and Rs 70 crore up to June in current
(financial) year 2013-14, have been received in agriculture sector. If a few more policies are
chalked out alongwith the stability of the upcoming government this marginal increment will follow
an increasing trend in coming years and making the agrarian economy of India will become the first
one in applying FDI in agriculture sector.
FDI promotion, facilitation and approval in India is regulated by The Department of Industrial
Policy & Promotion established in 1995 and reconstituted in 2000. According to the circulars issued in 2011, FDI up to 100% is permitted, under the automatic route, subject to certain conditions mentioned in Consolidated FDI Policy, in the following agricultural activities:
1. Agriculture & Animal Husbandry
a) Floriculture, Horticulture, and 100% Automatic Cultivation of Vegetables & Mushrooms under controlled conditions;
b) Development and production of Seeds and planting material;
c) Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture under controlled conditions; and
d) Services related to agro and allied sectors
Other conditions:
For companies dealing with development of transgenic seeds/vegetables, the following
conditions apply:
(i) When dealing with genetically modified seeds or planting material the company
shall comply with safety requirements in accordance with laws enacted under the
Environment (Protection) Act on the genetically modified organisms.
(ii) Any import of genetically modified materials if required shall be subject to the conditions laid down vide Notifications issued under Foreign Trade (Development and Regulation) Act, 1992.
(iii) The company shall comply with any other Law, Regulation or Policy governing genetically modified material in force from time to time.
(iv) Undertaking of business activities involving the use of genetically engineered cells and material shall be subject to the receipt of approvals from Genetic Engineering Approval Committee (GEAC) and Review Committee on Genetic Manipulation (RCGM).
(v) Import of materials shall be in accordance with National Seeds Policy.
(vi) The term “under controlled conditions” covers the following:
a) ‘Cultivation under controlled conditions’ for the categories of Floriculture, Horticulture, Cultivation of vegetables and Mushrooms is the practice of cultivation wherein rainfall, temperature, solar radiation, air humidity and culture medium are controlled artificially. Control in these parameters may be effected through protected cultivation under green houses, net houses, poly houses or any other improved infrastructure facilities where microclimatic conditions are regulated anthropogenically.
b) In case of Animal Husbandry, scope of the term ‘under controlled conditions’ includes –
• Rearing of animals under intensive farming systems with stall-feeding. Intensive farming system will require climate systems (ventilation, temperature/humidity management), health care and nutrition, herd registering/pedigree recording, use of machinery, waste management systems.
• Poultry breeding farms and hatcheries where microclimate is controlled through advanced technologies like incubators, ventilation systems etc.
c)In the case of pisciculture and aquaculture, ‘under controlled conditions’ includes –
•Aquariums
• Hatcheries where eggs are artificially fertilized and fry are hatched and
incubated in an enclosed environment with artificial climate control.
2. Tea Plantation
i) Tea sector including tea plantations
ii) Other conditions:
(a) Compulsory divestment of 26% equity of the company in favour of an Indian partner/Indian public within a period of 5 years
(b) Prior approval of the State Government concerned in case of any future land use
change. Although India is traditionally an agro based and agro dependent economy, average per hectare yield is lower than the global yield. This is due to lack of finance with the farmers. Banks and financial institutions do not play an impactful role in financing the agricultural sector and hence the sector is severely suffering from lack of finance. Even the foreign investors do not find the agricultural sector of India an attractive one and the share of agriculture in the total FDI in India is negligible. The recent data shows that agriculture accounted for only about 0.8 per cent of the total FDI inflows into India.
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