|
The Environment for Agricultural and Agribusiness Investment in India
Maurice Landes
Economic Information Bulletin No. (EIB-37) 49 pp, July 2008
Although rising incomes are contributing to expanding and diversifying food demand, investment
in Indian agriculture has remained low relative to other sectors and grown slowly since the early
1990s. Lagging private investment in agriculture and agribusiness has corresponded with burdensome
regulatory policies, poor infrastructure, and weak institutional support for agricultural
markets. Even though India has one of the world’s largest agricultural economies, Indian
agribusiness is characterized by a multitude of small-scale, nonintegrated processing and marketing
firms that use mostly outdated technology and are uncompetitive in global markets.
What Is the Issue?
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.
What Are the Major Findings?
Both public and private investment in Indian agriculture and agribusiness have remained weak
since the early 1990s, despite accelerating growth in the overall economy and a large domestic
market for agricultural products. Growth in farm output has slowed since the early 1990s, and
although a turnaround is seen as critical for sustained economic growth, consensus on agricultural
reforms has proven difficult.
India’s numerous domestic policy interventions—along with weak infrastructure and limited
institutional support for agricultural markets—have been a deterrent to agricultural investment,
particularly in large vertically integrated agribusinesses. Interventions have included restrictions
on transporting, storing, and marketing of agricultural commodities, restrictions on the size of
agribusiness firms, high taxes on processed products, high-cost credit, and complex food laws.
The climate for private investment is also undermined by weak transport and power infrastructure
and lack of key services such as market information, risk management tools, and
grading/inspection systems.
For farmers, disincentives have included trade and price policies that maintained low domestic prices for many farm
commodities, inefficient markets that dampen returns to growers, and few public and private marketing services.
Onfarm investment may also be constrained by India’s many small and marginal farmers, who account for nearly 40
percent of farmland, and often have limited access to input and output markets and more limited investment
options.
Since 2000, the policy environment seems to be improving and investment in agriculture to be strengthening, as evidenced
by higher market prices and input subsidies for farmers. Movement and storage restrictions on essential
commodities, like wheat and rice, are becoming less common, restrictions on firm size have been largely removed,
State marketing laws are evolving to accommodate private marketing channels, and taxes on agricultural products are
being reduced and simplified. And although power, transport, and other infrastructure problems will likely be solved
only in the longer term, there is evidence that private investment is now on the rise in those sectors. Food marketing
ventures oriented toward development of supply chains and retail outlets represent a turnaround in investor confidence.
Recent investment in India’s food marketing sector includes a number of ventures by U.S. and other foreign
investors, mostly in collaboration with Indian firms. Since India does not permit foreign direct investment by multibrand
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.
How Was the Study Conducted?
This study was based on analysis of literature and secondary data from published and online sources, together with
interviews of representatives from Indian agribusinesses. Data collection and interviews in India were facilitated by
Indian Agribusiness Systems, Ltd, of Okhla, Uttar Pradesh. Financial support for this study was provided by the USDA
Emerging Markets Program.
|
