The Environmentfor Agricultural andAgribusiness Investmentin India

Presented by- Dr. Manda MhatreMs.Sanghmitra KambleMs.Amita PanchalMr.Moncy Mathai

CONTENT-1.INTRODUCTION2.TRENDS IN AGRICULTURE INVESTMENT3.THE PRIVATE INVESTMENT CLIMATE4.PROSPECTS FOR AGRICULTURAL INVESTMENT

INTRODUCTION-

India, with one of the world’s fastest growing and most populous economies and one of its largest farm sectors, is emerging as a potentially large market for global agricultural trade and investment. Despite the rapid productivity gains occurring in India’s service and manufacturing sectors, average crop yields remain below potential, agricultural markets are underdeveloped, and growth in farm output has slowed. Policymakers are increasingly focused on how to strengthen agricultural investment and growth, raise rural incomes, and help sustain rapid overall gains in income growth and poverty reduction.

Trends in agriculture investment

1.Output and investment in indian agriculture does not show any encouraging growth as in the indian economy.

2. Real growth in GDP and in investment which is captued by GFCF Stronger from 1990 till date .

3.Annual share of GDP i.e. invested in GFCF average increase 27% for overall economy during 2005 to 2007, but agriculture contributed only 7 %

4. Rate of investment continuesly rising in overall economy but rate of investment inagriculture is decline during 2000 to 2007

(Sources RBI, Handbook of statistics 2007)

Investment “In” and “For” Agriculture

IN agriculture.Basically the investment for public and private IN agriculture is less , which is actually for construction, farm equipment, irrigation and other land improvement.

FOR Agriculture.Related to market , storage facility , roads , electrification more investment.

Investment FOR agriculture is much faster than IN agriculture and by combining this also shows small share of GDP

Agriculture investment in India compared with other countries

Public and Private InvestmentPublic investment IN and FOR agriculture has averaged roughly half the size of private investment, and grew much more slowly than private investment during both the 1980s and 1990s .

Weak public investment in agriculture has corresponded with rapid expansion of public expenditures on price subsidies for the sector (fig. 2), including price supports and subsidized storage and distribution for wheat and rice (the so-called “food grain subsidy”), as well as price subsidies for electricity, irrigation water, and fertilizer (Srinivasan et al., 2007; Landes and Gulati, 2004).

Foreign Direct Investment

1. In 1991, the Government began to liberalize FDI policies, initially giving automatic approval for up to 51 percent foreign ownership in 34 industries, including food processing, but with continued restrictions on imports .

2.Following the 1991 reforms, growing about 36 percent annually in real terms between 1990-92 and 2003-05, but with only small amounts flowing into agriculture.

3.Overall FDI Although many agricultural sectors have been open to FDI since the early1990s, FDI in Indian agriculture has not been significant.

3.Electrical equipment- 17 % of total FDI during 1991-2006), telecommunications 11 %, transport-10 % ,services -9%, and power/petroleum refining 8 percent).

Of the $38.9 billion in total FDI inflows during 1991-2006, about $1.7 billion—or 4 percent—has been in industries that can be identified as specific to agriculture.

Food processing accounted for $1.2 billion of FDI, with agricultural machinery ($166 million), timber products ($107 million), and fertilizers($78 million) accounting for most of the remainder.

Sources of Foreign Direct InvestmentIsland nation of Mauritius- 37 percent United States - 15 percent European Union- 24 percentThe countries of East Asia -13 percent.

The Private Investment Climate Key factors likely to shape the climate for private investment by farmers and agribusinesses include

(1)the extent to which domestic demand for agricultural products makes investment potentially profitable;

(2) a range of government regulatory, credit, tax, and other policies that affect incentives for domestic and foreign investment in Indian agriculture;

(3) infrastructure constraints.

Consumer Demand •Consumer demand for food products - registered significant growth • India’s youthful demographics and rapid urbanization increases food demand ( Khwaja, 2004).•Income growth in India, establishing India as one of the fastest growing economies in the world. •Rising incomes have contributed to a steady decline in the share of the population living in poverty,( level of per capita income needed to purchase a nutritionally adequate diet) (fig. 7). •Although growth has been strong, India’s per capita income remains at a level—about $588 annually in 2006—wheremost households continue to spend a large share of new income on food, (World Bank, 2007)

India's youthful demographic –about 34%of the population was age14 or under 2001 which is also a driver of food demand Urban share of India's population was 27.8%in(285 million)2001Overall robust prospects for growth and diversification of food demand in India Contrast sharply sluggish agriculture investment.

Policy Factors Affecting Investment-

The primary goal -- To enhance food security by ensuring adequate supplies of food staples at affordable prices and to support employment growth through labor-intensive import substitution.

1.India’s Constitution vests the governments of India’s 35 States and UnionTerritories with most of the authority to make and implement regulations and policies affecting the agricultural sector.

2.Central government influence over the regulations and policies promulgated by the States stems largely from the extent to which States are dependent on the central government for funds.

3.Many States tend to have unique regulations and policies, which across State lines. The necessity for obtaining State-by-State legislation and implementation can also slow the process of reform.

Overall, the analysis of individual factors indicates that the regulatory and policy climate is becoming more supportive of new investment by farmers and agribusiness, but it is not clear if the completed reforms will be adequate to stimulate rapid growth in investment, or if the process of implementing reforms will be sustained.

The Essential Commodities ActThe Essential Commodities Regulation & Enforcement Act of 1955 (or ECA) authorizes the Central and State Governments to make broad ranging interventions in the markets for essential food products to ensure their availability and to protect consumers from possible exploitation by commercial traders (Government of India, Ministry of Consumer Affairs, Food, and Public Distribution, 2007).

.The ECA gives authority to the Central and State Governments to intervene at any level of the supply chain, including• Regulating production or manufacture of essential commodities;• Controlling the price at which essential commodities are bought or sold ;• Prohibiting the withholding from sale of any essential commodity ordinarily kept for sale (stock holding limits);• Restricting or preventing private movement of essential commodities across district or State borders.

State Agricultural Produce Marketing Committee Acts-Under the authority of India’s Agricultural Produce Marketing Act of 1972 (and its amendments), most Indian States have similar acts (Agricultural Produce Marketing Committee, or APMC, Acts) that regulate the establishment of markets and the marketing of agricultural produce. These acts are intended to ensure that all (or most) trade between farmers and initial buyers occurs through a regulated market, primarily to protect farmers from unfair or exploitative trading practices. But the requirement to market all produce through the regulated markets also facilitates the collection of marketing taxes and fees for State and local governments.

Land Tenure PoliciesAbout 63 percent of India’s land is farmed in operational holdings of less than 4 hectares, and holdings are becoming more fragmented as farms are divided through inheritance (table ). India’s average operational holding of just 1.3 hectares islarger than in China and some other developing countries, but small relative to holdings in other major agricultural regions such as the United States, the EU, Brazil, Argentina, Canada, and Australia.Throughout India, national and State laws prevent private companies, as opposed to individuals, from owning agricultural land except for specific approved purposes, such as producing seed or conducting scientific research.

Credit Policies1 -India’s agricultural credit system an extensive network of cooperative ,public sector, and commercial banks—has significantly improved both the availability and terms of credit for agriculture and allied activities since the late 1990s. 2.-An important mechanism for expanding the availability and use of credit by producers has been “Kisan (Farmer) Credit Cards.” The cards were introduced in 1998 and, by 2006, were available to about 64.5 million farmers (Government of India, Ministry of Finance, Economic Survey, 2008).3-Despite the improved availability of institutional credit, about 41 percent of Indian farmers, often those with smaller landholdings, remain dependent on traditional moneylenders at other non institutional sources of credit Government of India, Ministry of Statistics and Program Implementation, 2005).

Infrastructure Factors Affecting InvestmentThe climate for agribusiness investment in India is also shaped by the availability, quality, and costs of various infrastructural services required by agricultural producers, traders, and processors.

1.India’s transport, power and water infrastructure, while often available at low cost, is of poor quality.2. Similarly, the institutions that provide important agricultural services,such as market information and grading/inspection services, are considered to be weak, 3.the agricultural research and extension system is criticized for being unresponsive to emerging needs of the farm sector. These infrastructural and institutional deficiencies impose additional costs and risks for new investors.

Power costs for both agricultural and household (domestic) uses in India are low by international standards .

TransportationMore than two-thirds of India’s domestic freight is transported by road, with the remainder shipped primarily by rail. India’s road freight transport sector, while competitive and low-cost compared with other countries , tends to be slow and unreliable.

WaterGrowth in irrigated area has boosted Indian farm output through both higher yields and increased cropping intensity. About 54 million hectares—or 30% of all agricultural land—is now irrigated, making India second only to China in irrigated area

Agricultural Research and ExtensionIndia has one of the largest public sector agricultural research and extension systems in the world, as well as a growing private sector research and extension industry.

Prospects for Agricultural InvestmentContinued sluggish private investment in Indian agriculture and agri business since the early 1990s, despite sustained high growth in consumer incomes and food demand, suggests that policy and infrastructure factors have been adeterrent to new investment.

During much of the 1990s, agricultural trade and price policies resulted in taxation of agricultural production despite substantial and rising farm subsidies.

Private investment in food marketing ventures has increased noticeably in the last several years (table 9). These new ventures collectively amount to $10-$20 billion over the next 5-7 years to develop supply chains and “front-end” retail outlets. This activity represents a turnaround in investor confidence.

Recent investment in India’s food marketing sector includes a number of ventures by foreign investors, including a Wal-Mart collaboration with the Indian conglomerate Bharti.

Since India does not permit foreign direct investment (FDI) by multi-brand retailers, foreign investment has taken the form of wholesale (or “cash and carry”) trading enterprises, or partnerships with Indian “franchisees” who own the retail outlets.

Other than multibrand retailing, all other areas of agricultural processing and marketing are open to FDI. While the FDI restrictions on retailing may be deterring some foreign investment in agricultural marketing, the increased activity in chain food retailing by many of India’s largest domestic companies indicates their confidence in a supportive policy environment.

SUMMARY-

1.Public and private investment in agriculture and agriculture investment remained weak in early1990s despite accelerating growthin overall economy.

2.Indias numerous domestic policies along with weak infrastructure &limited institutional support for agriculture market have deterrent to investment

3.For farmers disincentives,insuffiecient markets and very few public & private marketing services & small farmers limited access towards the market resulted into limited investment.

4.But 2000 onwards scenario was changed due to the policy environment which is shownWith the higher market price & imput subsidies for farmer