Inflow of foreign direct investment in the agricultural sector of India

The agricultural sector in India is the main source of livelihood for more than 70 percent of the rural population. Similarly half of the households in the rural population show some sign of poverty (Singh & Walis 2015). In this scenario if the main aim of the Indian government is economic development and poverty reduction, then the priority should be the growth of the agriculture sector.

One of the major reforms in the agriculture sector in recent years is the inflow of foreign direct investment. Even though most of the areas in agriculture sector is still closed for the foreign investment. There has been significant increase in foreign investment in several sectors.

Inflow of foreign direct investment in agricultural sector since 1991

Since Independence, the government of India has encouraged the flourishment of the agricultural sector. The sector is aided with several reformational policies and subsidies. However, a major policy change took place after the liberalisation of the Indian economy in 1991. Along with other economic reforms an inflow of foreign investment in agricultural sector was also opened (Wadhwa & Arora Wadhwa 2015).

Though the foreign direct investment in agriculture was permitted but the size of the investments were small. This is due to the primitive structure of the sector and lack of a technological base. Out of 129 million dollars of total inflow in 1991 only 6% was invested in the agricultural sector (Dutta & Sarma 2008). Eventually with the development of the Indian agricultural market and the improvising technology usage in the agricultural sector the inflow of capital has increased to USD 40,885 million. The graph below evaluates the growth of the agricultural sector with importance to the main crops of the country.

Inspite of the agricultural sector being a major source of employment for a large section of the population in India, it does not get as much importance as the food processing sector.

Major agricultural products attracting foreign direct investment

With the progress in technology the agricultural service sector attracted USD 76 billion of investment which  is 0.93% of the total inflow of foreign direct investment. And the agriculture sector contributed 0.14% to the GDP as a whole. Moreover, the food processing industry had USD 86 billion investment which is 1.05% of the total foreign capital inflow (Kumar 2014). Similarly 100% foreign direct investment was allowed through the automatic route in various sectors. These include horticulture, floriculture, development of seeds, animal husbandry, pisciculture, aqua culture, cultivation of vegetables, mushroom and services related to agro and allied sectors (Wadhwa & Arora Wadhwa 2015). In agriculture machinery, total inflows during the period of 2001-2015 was USD 418.65 million. Consequently foreign investment in horticulture and floriculture was USD 534 million (Adhana 2016).

The figure above shows the growth of the agricultural sector with an importance to the percentage of investment in the food processing industry since 1991. A sharp increase in the growth of the agricultural production between 2003 and 2004 is noticeable. Whereas, there was fall in the following years with the maximum decline was in 2007-2008 because of the recession worldwide. Along with the food processing sector, horticulture, floriculture and animal husbandry had an increase in foreign direct investment after the liberalisation as the demand for these goods increased in the foreign market.

Increasing demand of agricultural services and chemicals for cultivation has induced the foreign investors to invest in above mentioned industries. However, the increasing demand of the cash crops like tea, coffee, jute in the foreign market has initiated the government to liberalise the policies referring to these industries.

Major changes in the foreign direct investment policies in agricultural sector

During the first half of the liberalization policy implementation the agricultural sector was permitted with only 45% of foreign captial. Limited foreign investment has reduced the scope of growth for the agricultural sector. However, in the later half of 2000, government announced policies that indicated the improvisation of the agricultural sector with the permission of 100% foreign direct investment in the agricultural sector through automatic route. With higher inflow of foreign direct investment the growth rate of the agriculture sector has increased to 4% (Singh & Walis 2015). 100% FDI was granted for sectors such as:

• floriculture
• horticulture
• apiculture
• cultivation of vegetables & mushrooms (under controlled conditions)
• development and production of Seeds
• planting material
• animal Husbandry (including breeding of dogs)
• pisciculture
• aquaculture (under controlled conditions)
• services related to agro and allied sectors

(Department of Industrial Policy and Promotion 2015).

Impact of foreign direct investment in the overall growth of the sector

After the reformation in 1991, agriculture sector was opened for foreign investment and was also followed by better technology, better seeds and thus rapid growth. However, the growth was confined to certain areas which led to increase in equality in the country (Sawant 2014). The interest of the investors in the allied sectors of the agriculture aided the export of goods which perused a greater demand for them. However the production of food crop cultivation declined for those products which have comparatively less demand in the international market. However, the overall growth in the agricultural sector has been immense compared to the period before liberalisation. Now India stands as one of the leading exporters of the agricultural goods in the world (Agrawal & Khan 2011).

Service and manufacturing sector has largely been benefited from high inflow of foreign capital. However, foreign direct investment in agriculture requires a more detailed research. Both positive and negative impact should be closely analysed, in the context of Indian economy. In a nutshell, there has been an immense reformation and the growth in the sector after the introduction of the economic reform. However, better monitoring and regulation of foreign direct investment is required for a good growth. Policies related to foreign investment needs to be liberalised for the food crops. This  might lead to technological boom and growth in the sector.

References 

• Adhana, D.K., 2016. Foreign Direct Investment in Indian Agricultural Sector: Opportunities and Challenges. KIJECBM, 16(3).
• Agrawal, G. & Khan, M.A., 2011. Impact of FDI on GDP: A Comparative Study of China and India. International Journal of Business and Management, 6(10), pp.71–79.
• Chaudhuri, S. & Banerjee, D., 2010. FDI in agricultural land, welfare and unemployment in a developing economy. Research in Economics, 64(4), pp.229–239.
• Department of Industrial Policy and Promotion, 2015. CONSOLIDATED FDI POLICY, New Delhi.
• Dhungana, B.R., 2013. The Role of FDI on Agricultural Sector in India. Department of Business Administration. In FDI in India. New Delhi: Deen Dayal Upadhaya University.
• Dutta, M.. & Sarma, G.K., 2008. Foreign Direct Investment in India Since 1991: Trends, Challenges and Prospects. SSRN. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1443577.
• Kumar, S., 2014. Foreign Direct Investment in Indian Agricultural Sector: Opportunities and Challenges States. Socio-economic voices, pp.1–13.
• Sawant, A., 2014. Strength and Weaknesses of Indian Agriculture Sector in the Era of Globalization. Procedia – Social and Behavioral Sciences, 133, pp.28–37.
• Singh, K.R. & Walis, R.K., 2015. Foreign Direct Investment ( FDI ) & Agriculture Sector in India. Indian Journal of Research, 4(3), pp.6–8.
• Wadhwa, S. & Arora Wadhwa, S., 2015. FDI IN AGRICULTURAL SECTOR IN INDIA: STATUS AND CHALLENGES Dr. Ideal Institute of Management & Technology (Unpublished Work).