Chanakya IAS Academy Blog

The article analyses the government’s decision to open food sector for FDI to augment ‘made in India’ and the challenges lie ahead.

  • Recently the government opened several key sectors such as defence, pharmaceuticals, civil aviation and food products to 100 per cent foreign direct investment (FDI).
  • The objective behind this FDI policy is to attract higher investments, better technologies in manufacturing, commerce, and the agri-food space to promote growth, jobs, and incomes of people.
  • By allowing FDI in trade, including e-commerce, of food produced or manufactured in India (call it “Made in India”), government seems to be inching towards FDI in retail, albeit through the approval route, and only for “made in India” food.
  • Although, it is somewhat puzzling that while large domestic retailers (like Big Bazaar) can sell imported food, foreign retailers won’t be permitted to do so under the new FDI policy. Nevertheless, FDI in food is a welcome move.
  • How much difference can it make in promoting efficiency in food value chains?
    • In this regard, it will be good to see what happened in the food processing sector when 100 per cent FDI was allowed through the automatic route.
    • The answer in brief is that it attracted more FDI, though with much volatility: For instance, while in FY2011 FDI in food processing was $190 million, it jumped to $400 million in FY13 and to almost $4 billion in FY14, and then came down drastically to about $500 million in FY16.
    • The new FDI policy in trade for food can have a similar or even bigger impact by attracting big players like Walmart, Tesco, Amazon, Alibaba, etc.
    • They can help build more competitive and inclusive value chains by investing in procurement, storage and distribution networks.
    • The new FDI policy can help reduce losses in high value perishable goods where infrastructure is lacking, but is unlikely to be a game-changer by itself .
  • The government must change the rules of the game and clear up the policy environment holistically to attract FDI in much needed infrastructure.
  • Two major roadblocks are the Agricultural Produce Market Committee (APMC) Act and the Essential Commodities Act, which do not allow procuring directly from farmers in most states or holding large stocks by big corporations.
  • This hampers their efficiency and dissuades them from large investments, defeating the very purpose of the FDI policy. This should encourage the policymakers to reform the APMC and ECA, for a magnified effect of the new FDI policy.
  • Recent NSSO data suggests that food demands of Indians are changing and Indians are progressively turning towards non-vegetarianism, and consuming more eggs, meat, and fish.
  • The rise in the meat-eating population has come mainly from poultry-meat eaters, that increased by about 68 per cent. The increase is not just in the number of people but also in the level of consumption.
  • Supply has also commensurately responded to the growing demand for poultry especially as they are beyond the purview of the APMC Act.
  • The classic unorganised backyard production model has been mostly replaced by organised large-scale poultry farms rearing hundreds of thousands of birds.
  • Still, the sale of poultry meat has remained confined to wet markets and open roadside slaughter houses. Processed chicken meat accounts for not more than 5-10 per cent of the total poultry meat production in the country.
  • Apart from cultural biases, the absence of well-developed reliable cold-chains is to blame. Efficient value chains are the need of the hour.
  • The challenge is to bring in foreign investment in ways that help compress the value chain by taking on board small players both at the back-end and front-end.
  • Dairy is leading by example where domestic cooperatives like AMUL and multinationals like Nestle have incorporated even small-holders into their model for procuring milk and local kirana stores for their distribution network.
  • Having the same for fruit, vegetables and meat that are registering much higher growth in demand than dairy, needs a non-restrictive environment for foreign firms to function and scale up their operations many fold.
  • In China, e-commerce is growing fast and food is a major part of the business — about 45 million people are regularly buying foods online. Big e-commerce companies like Alibaba and JD Online are dedicated to rural expansion.
  • If India wants its FDI in food to deliver, it must clear up the institutional mess that regulations such as the APMC and ECA have created.
  • To this effect, permitting FDI through the automatic route (rather than through approval) will be a much desired and well-awaited annexure to the new policy prescription.
  • Efficient, integrated, well-developed and reliable value chains for high value perishable agri-commodities will reduce food losses and improve the stakes of small players in the value chain.
  • It is high time India worked towards becoming not just an open economy but also a competitive and inclusive one.

New FDI policy in food products is unlikely to be a game-changer by itself. If India wants its FDI in food to deliver, it must clear up the institutional mess that regulations such as the APMC and ECA have created. Discuss.
Suggested Approach

  1. Major features of the new FDI policy in food products.
  2. Problems with APMC and ECA.
  3. Measures needed to tackle these problems.

Link: http://indianexpress.com/article/opinion/columns/india-fdi-policy-modi-government-food-products-fdi-2920249/

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