1. FDI in food welcome step by Narendra Modi govt, but will it work?

FDI in food welcome step by Narendra Modi govt, but will it work?

India must clean up the institutional mess created by APMC Act and Essential Commodities Act

By: | Published: July 18, 2016 6:18 AM
food The APMC and ECA framework, in most states, doesn’t allow direct procurement from farmers or holding of large stocks. This hampers the retailers’ efficiency and dissuades them from making meaningful investments. (Reuters)

In a rather bold move, on June 20, 2016, the Modi government opened several key sectors such as defence, pharmaceuticals, civil aviation and food products to 100% foreign direct investment (FDI). The objective behind this FDI policy is to attract higher investments, better technologies in manufacturing, commerce, and 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), the 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 why, 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. Imports need to be governed by trade policy and not retail policy. Nevertheless, FDI in food is a welcome move.

The key question is: 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% FDI was allowed through the automatic route. The answer, in brief, is that it attracted more FDI, though with much volatility, e.g., while in FY11 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 for trade of 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. Innovation lies in mainstreaming small-holders on the procurement-side and small kirana stores and vendors on the other side of these food value-chains. But where are such players likely to invest? Business principles would suggest that the investment be made where demand is growing fast, and good infrastructure is lacking, and has led to large wastages. This is the case with high-value perishable foods, particularly, fruits and vegetables, milk, meat, fish, etc.

The economic worth of food so lost is estimated to be around Rs 92,651 crore. The new FDI policy can help reduce these losses 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 much-needed FDI for infrastructure.

Two major roadblocks are the Agricultural Produce Market Committee (APMC) Act and the Essential Commodities Act (ECA) —these do not allow procuring directly from farmers in most states or holding of large stocks by big corporations. This hampers the retailers’ efficiency and dissuades them from making large investments, defeating the very purpose of the FDI policy. This should encourage policy-makers to reform APMC and ECA, for a magnified effect of the new FDI policy.

In any case, what are the emerging food demand trends in India in the recent past, say, between FY05 and FY12, which may attract FDI for building efficient value-chains? Interestingly, Indians are progressively turning towards non-vegetarianism, and consuming more eggs, meat, and fish. The household consumption data of NSSO suggests that the proportion of non-vegetarians has increased from 58.2% in FY05 to 62.3% in FY12. The rise in the meat-eating population has come mainly from poultry-meat eaters, whose numbers increased by about 68%. The increase is not just in the number of people but also in the level of consumption—monthly per capita consumption of chicken has grown by a staggering 224% compared to just 10.7% in milk, 28.3% in fish and 93% in eggs between FY05 and FY12. Poultry is clearly the favourite meat among Indians. Interestingly, supply has also responded commensurately to the growing demand for poultry, given this is 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 slaughterhouses. Processed chicken meat accounts for not more than 5-10% of the total poultry meat production in the country. Apart from cultural biases, 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 smallholders into their model for procuring milk and local kirana stores for their distribution network. Having the same for fruits, 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 segment of the business—about 45 million people are regularly buying food online. Big e-commerce companies like Alibaba and JD Online are dedicated to rural expansion. Apart from the push of cost and convenience factors, direct procurement from producers and availability of sophisticated supply-chains have enabled online sale of standardised and fresh food in China.

If India wants its FDI policy for 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 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.

By Ashok Gulati and Smriti Verma

Gulati is Infosys chair professor for agriculture and Verma is a consultant at ICRIER

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