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Foreign Investment in Food Sector in India

Introduction to FDI :

It has been argued by (Froot 1993) that in the time between 1980 and 1990 the foreign direct investment has grown exponentially. There are major players in the world such has Japan and America who hold highest share of money borrowed from the Federal Reserve. FDI can be explained as a method through which a country can borrow money from the World Bank for the development of all the sectors in an economy.

FDI has played an important role in the growth of many developed and developing economies. The speed of growth in the countries through FDI has shown that it has almost tripled the growth in corporate sector. FDI by definition means the foreign investment that benefits another country for example when a foreign investor invests his money in another country in form of stock land or a new business the part of the profit goes to the government which helps in the growth of a countries economy.

FDI has played a crucial part in growth of India as well and further in this article I would like to highlight the impact of FDI in growth of Indian Economy.

 

Food Sector in India and FDI

The Indian food sector is the largest sector in the country and the government has allowed 100% FDI in the food sector, there are plenty of industries around the world which has shown interest in investing in the food sector of India. The entry route of FDI in the food industry is automatic and in the years from 1999 to 2008 the food industry export and import percent have increased to 17 to 19% at annual rate. The MOFPI has asked for 100 percent invested in the food sector and the retail sector. The Indian food sector is export oriented and the survey shows that the exports of India’s processed food were Rs. 31551.99 Crores in the year 2013-14.

The FDI is permitted in India through following forms of investments:

  • Technical collaboration and joint ventures
  • Financial collaboration
  • Private placements or preferable allotments
  • Capital market via Euro issues

An efficient food processing industry can provide several benefits such as:

  1. Reduction in wastages
  2. Increment in the farm gate prices
  3. Increment in income level of farmers
  4. Improvement in food security
  5. Value additions to food products

 

Key factors attracting investments

From Demand side:

  1. Growing middle class population
  2. Rising disposable income
  3. High proportion of disposable income spent on food
  4. Rising awareness on account of multi-channel retail formats.

From supply side:

  1. Cost of Labour
  2. Skilled workforce
  3. Technological capability
  4. Vast natural resources
  5. Abundance of raw materials, specifically for the food processing sector
  6. Availability of manufacturing facilities, food parks and other supply chain infrastructure

 

Challenges and Solutions:

There are plenty of challenges the food industry of India has been facing despite all the efforts and investment which are as follows:

  • Inadequate cold storage and warehousing facilities.
  • Inadequate skills sets at different levels in food processing industry especially at operator and procurement levels.  
  • Absence of Comprehensive national level policy on food processing sector
  • Food Safety Laws & Inconsistency in State and Central policies.
  • Lack of cold chain infrastructure
  • Lack of government certified labs
  • Inadequate focus on quantity and safety standard.
  • Lack of product development and innovation
  • Long and fragmented supply chain

 

Role of Government Initiatives and Investments:

Government Initiatives

  1. Encouragement to private sector- Government encourage private sector by exempting Export earnings from corporate taxes. 100 per cent export-oriented units allowed to sell up to 50 per cent of their produce in the domestic market.
  1. Expanding existing infrastructure development schemes - The Scheme of Mega Food Park envisages a well defined agri/horticultural-processing zone containing state of the art processing facilities with support infrastructure and well-established supply chain. During the financial year 2016-17 (as on 31.12.2016), Ministry has released grant-in-aid of Rs.197.17 crore to the ongoing Mega Food Park projects. Eight Mega Food Park projects at Haridwar (Uttrakhand), Chittoor (Andhra Pradesh), Tumkur (Karnataka), Fazilka (Punjab), Nalbari (Assam), Khargone (Madhya Pradesh), Ranchi (Jharkhand) and Murshidabad (West Bengal) have become operational. In these parks about 38 units are functioning, which provide employment to more than 23,399 people directly and indirectly. In addition, through franchises, dealership/ distributorship etc, approximately 4 lakhs peoples are getting employment.
  1. Establishment of new abattoirs and modernization of existing abattoirs. The issue of ensuring hygienic meat production in the country has to be seriously considered. There is a need to modernize these abattoirs for production of clean, wholesome and hygienic meat required for domestic consumption. Hence, the Plan Scheme for establishing new abattoirs and modernizing existing ones by the government was started in the 11th Five Year Plan.
  1. Putting in place a network of food testing labs (Government/Private) by providing incentives. There is requirement for the food processing industry to (a) test domestic production in order to ensure that it complies with domestic standards as well as international standards for exports and (b) test all imports coming into the country to ensure that they are of the requisite standard and such products as are not permitted for manufacture domestically are not allowed to come in from foreign markets. The level of contaminants, additives, and pesticide residues in food items has to be monitored regularly.
  1. Availability of Affordable Credit- To boost food processing sector, a special fund of Rs.2000 crore has been set up in National Bank for Agriculture and Rural Development (NABARD) to provide credit at affordable rates. Under this fund, loan is extended to individual entrepreneurs, cooperatives, farmers producers organizations, corporate, joint venture, SPV and entities promoted by the Government for setting up, modernization, expansion of food processing units and development of infrastructure in designated food parks. The rate of interest charged is linked to Prime Lending Rate (PLR) to NABARD and the risk rating undertaken by NABARD for the borrowing entity.
  1. Events- For boosting the Indian Food Processing Sector and making India an attractive destination for Foreign Direct Investment (FDI) in that sector, Ministry of Food Processing Industries inter alia decided to hold World Food India Show in Nov. 2017.
  1. Promotion of R&D Scheme - R&D is an important area in the food processing sector where much attention is required as it is related to improvement of production, quality, enhancement of trade, consumer safety and public health. The specific outcome of the R&D scheme is creation of a shelf of technologies and innovative products and processes which will be available to industry for commercialization. In order to promote R&D activities, publicity is also done at regular intervals in the leading newspapers for submission of applications for R&D projects in Food Processing Sector through Science and Engineering Research Board (SERB) under the Ministry of Science and Technology during the 1st year of 12th plan.
  1. Skill Development- The Ministry of Food Processing Industries is working in close collaboration with Food Industry Capacity and Skill Initiative (FICSI), the Sector Skill Council (SSC) in food processing and regularly guiding and assisting it in achieving its mandate. Under the administrative control of this Ministry, two institutions namely, National Institute of Food Technology Entrepreneurship and Management (NIFTEM) and Indian Institute of Crop Processing Technology (IICPT) are also conducting regular programmes / courses on skill development and entrepreneurship for the youth, farmers, self help groups and industry.
  1. Setting up of Food Testing Laboratories- To ensure that (a) domestic production complies with domestic standard as well as international standard for exports and, (b) all imports coming into the country are of the requisite standards. Therefore, a network of Food Testing Laboratories is required to help the food processing industry in regard to quality control measures. Indian Council of Agricultural Research (ICAR) under the Ministry of Agriculture & Farmers Welfare, Department of Agricultural Research & Education (DARE) was entrusted the Food Testing Laboratory (FTL) Scheme during the 12th Plan with effect from 01.04.2012.
  1. Overcoming long & fragmented supply chain- To overcome the long and fragmented supply chain, contract farming can emerge as a significant opportunity for companies whereby they can create direct farm linkages to source appropriate quality, quantity and varieties of inputs. Currently, contract farming is supported by the governments of few key producing states in India.
  1. Taxation – Income tax deductions on capital expenditure allowed at the rate of 150% for setting up and operating cold chain or warehouse for storage of agriculture produce. 100% income tax exemption available to new food processing, preservation and  packaging units  for the first 5 year of operation and at the rate of 25% to 30% thereafter.

In view of above, Ministry of Food Processing Industries has proposed to re-structure the ongoing schemes of the Ministry and introduce new schemes to promote holistic growth of the sector and fill up gaps in the supply chain by proposing an umbrella Scheme for Agro-Marine Processing and Development of Agro-Processing Clusters (SAMPADA). SAMPADA is proposed to be implemented with an allocation of Rs. 6,000 crore for the period of 2016-20 coterminous with the 14th Finance Commission cycle by merging ongoing schemes of Mega Food Parks; Integrated Cold Chain and Value Addition Infrastructure; Modernization / Setting up of Abattoirs; Food Safety and Quality Assurance Infrastructure; Human Resources & Institutions and new schemes for Infrastructure for Agro processing Clusters; Creation of Backward and Forward Linkages and Creation / Expansion of Food Processing & Preservation Capacities. SAMPADA Mission will promote all the segments of food processing from infrastructure to forward linkage at the front end of the supply chain and will provide a big thrust to the growth of this sector.

 

Investments

DIPP (Department of Industrial Policies and Promotions) has provided some data according to which it can be determined that the food processing sector of India has received around 7.54Billion U.S $ through FDI during the time period of 2000-17.The estimate of CII (Confederation of Indian Industry) is that the investment should reach U.S $33 Billion in the next ten years time span.

The FDI inflows were recorded to be USD 2.31 billion in the year 2000 and were increased up to USD 43.4 Billion in 2008 but it saw a decline in the year 2011 and FDI was recorded USD 31.5 Billion in the following year the, it has also been noted that the increase in the inflows of FDI was 27.9% per annum in the time period from 2000 to 2011. The government of India has been providing investor friendly and transparent environment to the foreign investors which has led India to have a steady growth in the Food processing sector.

To reduce wastage and encourage value addition, government is actively encouraging investment in agro processing industries. The major focus of the Ministry aim at increasing Government investment in creating the farm to market supply chain, market processing infrastructure to attract more private investment. It is also proposed to strengthen R&D, HRD, in the food processing sector, establish more food testing laboratories to ensure quality of food products and compliance of national & international standards, etc. Since liberalisation several policy measures have been taken with regard to regulation & control, fiscal policy, export & import, taxation, exchange & interest rate control, export promotion and incentives to high priority industries. Food processing and agro industries have been accorded high priority with a number of important relieves and incentives.

 

Conclusion:

Despite everything we have discussed in the article the food sector of India is one of the fastest growing area of the country and the measures and plans government has taken will make it grow further more although there are issues which needs to addressed as if the government won’t deal with them sooner they will cause significant dent in the growth of Indian food sector, the major concern of Food industry is not the money but its utilization if it isn’t utilized to address the issues sooner it will cause a lot of problem for such rapidly growing sector. Since the introduction of FDI the advancement India has made in the world market is remarkable, the growth rate and the conditions government has prepared attract a lot of investors from around the world which has helped the Indian economy grow larger with every year and in the years to come the growth will be even higher the economy of India will grow even more rapidly and at this pace its possible to get in list of developed countries. There are still areas of improvement but the government has taken measures and should work on filling the loopholes for even more rapid growth and development.

Gautam Khurana
7 September 2018

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