SUJAY S PHATAK

MA [ECONOMICS] I SEMESTER

ROLE OF FDI IN
DEVELOPMENT
OF INDIAN
AGRICULTURAL
SECTOR

SCHOOL OF ECONOMICS, DAVV

+91-903-987-3438

Role of FDI in Development of Indian Agricultural Sector

Abstract
Agriculture plays a significant role in the overall socio-economic fabric of India as it
contributes to 13.68% of the total GDP of the country, with a share in employment near to
51% (as of 2010). It is demographically the broadest economic sector of Indian economy.
The introduction of Foreign Direct Investment policy by the Government of India in 1991
had the intent of aiding the growth and development of the Indian economy. Foreign Direct
Investment (FDI) is said to convey great advantages to the investors as well as the host
countries as it is considered beneficial in the economic development of a country.
This paper reviews the policy of FDI and its inflows in agriculture and related sectors, with the
help of secondary data collected through various government portals, newspaper articles, and
research journals.
The paper finds that the intent of the policy of FDI has been fulfilled to a great extent for the
Indian economy. This has also improved the level of growth in agriculture and allied sectors
over the years. However, the share of agriculture to the total FDI inflows in India is one of
the lowest among the Indian economic sectors. The entry of FDI into sectors related to
agriculture has not only helped agricultural activities to grow, but also strengthen the Indian
economy.

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Role of FDI in Development of Indian Agricultural Sector

Introduction
Agriculture is demographically the broadest economic sector and plays a significant role in the overall
socio-economic fabric of India as it contributes to 13.68% of the total GDP of the country, with a
share in employment near to 51% (as of 2010). The governing bodies of agriculture are the Ministry
of Agriculture, the Ministry of Rural Infrastructure, and the Planning Commission of India, who
define the role of agriculture in India with an aim to develop the sector. Introduced in the
breakthrough economic reforms of 1991 by then Finance Minister Dr. Manmohan Singh, Foreign
Direct Investment (FDI) is said to convey great advantages to host countries and investors as well.
Though not in all forms, the policy of FDI can prove itself beneficial in the economic development of
a country.
The present policy for FDI in Agriculture and Plantation sector is as under:
FDI up to 100% is permitted under the automatic route only in the under-mentioned activities viz.
Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, Aqua-culture and
Cultivation of Vegetables & Mushrooms, under controlled conditions and services related to agro and
allied sectors. FDI up to 100% with prior Government approval is permitted in Tea plantation subject
to the conditions of divestment of 26% equity of the company in favor of an Indian partner/ Indian
public within a period of five years; and prior approval of the State Government concerned in case of
any future land use change. Besides the above two, FDI is not allowed in any other agricultural
sector/activity.

Research Objectives
1. This paper reviews the policy of Foreign Direct Investment in agriculture sector.
2. This paper checks the policy and inflows of Foreign Direct Investment in agricultural related
sectors.
3. This paper analyses the impact of Foreign Direct Investment in growth and development of
agriculture sector.

Data Source
The data used in this paper is secondary in nature, collected through various government portals,
newspaper articles, and research journals, the source of which is provided in the reference section at
the end of this paper.

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Role of FDI in Development of Indian Agricultural Sector

Catalogue of FDI in Agriculture (and Related) Sectors

Table 1: FDI inflows over different periods

Sector

FDI Inflows (in million US$

US$)

% Share

Aug. 1991 to Sept.

Apr. 2000 to Sept.

Aug. 1991 to Sept.

Apr. 2000 to Sept.

2005

2013

2005

2013

Fertilizer

74.23

318.36

0.26

0.16

Agriculture

88.90

337.55

0.28

0.16

N/A

105.01

N/A

0.05

Machinery
Tea (including
Tea
Plantations)
Source: DIPP, MoCI, GoI
N/A: Not Available

Table 1 shows inflows to the Indian Economy through FDI in various agriculture related sectors along
with the percentage of share of each sector to the total FDI inflow of that period.

Fertilizer
Foreign Direct Investment (FDI) in fertilizers is allowed up to 100% under the automatic
route in India. The turnover as per Fertilizers Association of India was approximately $28.49
billion and the imports of fertilizers during 2008-09 were $13.03 billion based upon
Government of India statistics. The fertilizer demand in India is expected to grow at 4%
compound annual growth rate from FY2009 to reach 63 million tons in FY 2015. Bayer
Crop of Germany was given the approval in 2003, to invest Rs. 74 crores in Aventis Crop
Science in India involved in the production of fertilizers and pesticides. Through this
investment Bayer Crop increased its stake in Aventis Crop from 67.08 % to 100%. This made
Aventis Crop a fully owned subsidiary of Bayer Crop.1

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Role of FDI in Development of Indian Agricultural Sector

Agriculture Machinery
Agriculture machinery is an important factor in agricultural production and productivity
enhancement. Analysis says that Farm Mechanization has led to increase in inputs on
account of higher average cropping intensity and larger area and increased productivity of
farm labour. Also, it has increased agricultural production and profitability on account of
timeliness of operation, better quality of work done and more efficient utilization of inputs.
It also has displaced animal power to the extent of 50 to 100% but resulted in lesser time for
farm work2. The share of agriculture machinery industry in total FDI inflows has declined
from 0.26% to 0.16% over the years, which is not a good indicator.

Retailing
The Indian Retail Sector is one of the pillars of the Indian economy. FDI in retail sector is a
common topic of argument in Indian political arena. The current policy of FDI in Retail
allows Single-Brand Product Retail Trading up to 100% through government route and
Multi-Brand Product Retailing up to 51% via government route, both of which require
certain conditions to be fulfilled.
India in 1997 allowed foreign direct investment (FDI) in cash and carry wholesale. Then, it

required government approval. The approval requirement was relaxed, and automatic
permission was granted in 2006. From 2000 to 2010, Indian retail attracted about $1.8
billion in foreign direct investment, representing a very small 1.5% of total investment flow
into India.Single brand retailing attracted 94 proposals between 2006 and 2010, of which
57 were approved and implemented. The organized retail market is growing at 35 percent
annually while growth of unorganized retail sector is pegged at 6 percent.3
The policy of FDI in retail needs the multi-brand retailers to have at least 50% of the amount
invested in back end infrastructure, including cold chains, refrigeration, transportation,
packing, sorting, and processing to considerably reduce the post-harvest losses and bring
remunerative prices to farmers. Another condition states that the Government will have the
first right to procurement of agricultural products. These conditions will greatly help in the
development of agriculture sector in India. There are certain effects of FDI in Retailing on
farmers which are defined as under:

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Role of FDI in Development of Indian Agricultural Sector

Farmers benefit significantly from the option of direct sales to organized retailers. Also,
profit realization for farmers selling directly to organized retailers is about 60 per cent higher
than that received from selling in the mandi. The difference is even larger when the amount
charged by the commission agent (usually 10 per cent of sale price) in the mandiis taken into
account.4

Tea (including Tea Plantations)

Tea, the unofficial national drink of India, is the most widely consumed beverage (after
water) in the country. According to Mr. D.S. Rawat, Secretary General of ASSOCHAM, India
is world's largest consumer, second largest producer and fourth largest exporter of tea after
China and accounts for nearly 30% of global output and nearly 25 per cent of tea produced
worldwide is consumed in India. Total area under tea cultivation is 579.35K hectares on
which 1095.46 million kilograms tea is being produced (as on December 31st, 2011). The
production of tea has increased since 2011 to 1135.07 million kilograms in FY 2012-13.
According to The Telegraph, in 2011, the Union finance ministry has cleared two foreign
direct investment proposals from the Darjeeling tea industry, the first FDI approval since 1974
for the branded brew sector in the hills. M/s Everton Tea India Pvt. Ltd., Bangalore was given
approval by FIPB on August 24th, 2012 for transfer of equity shares to foreign collaborator
to carry out the business of manufacturing black and green tea bags, herb tea bags and
instant tea bags, with FDI inflow of
0.98 crores already invested by the company.
Table 2 Tea Area and Production in FY 2011-2012

State

Area under Tea (in Thousand Hectares)

Production (in
Million Kgs)

Assam

322.21

581.26

West Bengal

115.10

269.43

Total North India

459.61

865.59

Total South India

119.74

229.87

All Total

579.35

1095.46

Source: Tea Board of India

Table 2 provides the area under tea sector with the production in FY 2011-2012 in different states as
well as overall nation.
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Role of FDI in Development of Indian Agricultural Sector

Cold Chain Infrastructure

Cold Storage is a very helpful tool which is used to extend and ensure the shelf life of
products such as fresh agricultural produce. Investment in cold-chain in India was also
opened under the automatic route for 100% FDI participation. The existing cold-chain in
India largely comprised (in 2010) of comparatively small private companies with a regional
or local footprint. According to a report by The U.S. Commercial Service, the total value of
Indias cold chain industry is currently estimated at US$ 3 billion and reportedly growing at an
annual rate of 20-25 per cent. The total value for the industry is expected to reach at US$ 8
billion by 2015 through increased investments, modernization of existing facilities, and
establishment of new ventures via private and government partnerships. Some of the foreign
companies have already started their businesses in this sector in India in the areas of Pre-Cool
Chambers, Reefer Trucks, Cold Storages, Controlled Atmosphere Storages, Retailing Systems,
Food Processing machinery, Food Packaging machinery.
Table 3 Distribution of Facilities by Commodity

Commodity

Capacity (million Tons)

Potato
Multi-Purpose
Fruits and Vegetables

92.282
0.763
0.107

Meat
Fish
Milk and Dairy Products
Others

0.009
0.073
0.068
0.036

Source: Unofficial Estimates5

Table 3 shows the distribution of facilities by commodity. As shown in table, a major part of
the cold storage facilities is used to store potatoes. This shows the need of expanding the
sector to make more cold storage facilities available for other perishable goods.

Horticulture
India has a wide and varied horticulture base, which includes fruits, vegetables, tuber crops,
mushrooms, spices, medicinal and aromatic plants, flowers and foliage and plantation crops
like coconut, areacanut, cashew nut, cocoa and bamboo. The horticulture sector has been an
engine of growth for the rural economy while providing food and nutritional security to the
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Role of FDI in Development of Indian Agricultural Sector

people. It ranks second in fruits and vegetables production in the world, after China. As per
National Horticulture Database 2011 published by National Horticulture Board, during
2010-11 India produced 74.878 million metric tons of fruits and 146.554 million metric tons
of vegetables. The area under cultivation of fruits stood at 6.383 million hectares while
vegetables were cultivated at 8.495 million hectares. During the 11th Plan, an additional area of
23.5 lakh hectares (with supporting infrastructure in term of 2306 nurseries, 78 tissue culture
units, 9156 post-harvest management units and 221 markets) under horticultural crops has
been brought. Horticulture production of 257.3 million MT was achieved by end of the 11th
Plan. This increase in production has resulted in higher per capita availability of fruits and
vegetables, besides substantial increase in its exports, which has helped the country to earn
foreign exchange to the tune of Rs. 14,000 crore.

Conclusion
The Indian agriculture sector is growing rapidly since independence. But the share of this
sector has decreased greatly for the same period. The introduction of Foreign Direct
Investment policy by the Government of India in 1991 had the intent of aiding the growth
and development of the Indian economy as it was not able to perform at that period. The
intent of the policy of FDI has been fulfilled to a great extent for the Indian economy. This
has also improved the level of growth in agriculture and allied sectors over the years.
However, the share of agriculture to the total FDI inflows in India is one of the lowest among
the Indian economic sectors. The entry of FDI into sectors related to agriculture has not only
helped agricultural activities to grow, but also strengthen the Indian economy.

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Role of FDI in Development of Indian Agricultural Sector

References

Dr. Sushama Deshmukh (February 2012): The Impact of Foreign Direct Investment on
Agriculture Economy, International Referred Research Journal.
Prof. S R Verma: Impact of Agricultural Mechanization on Production, Productivity,
Cropping Intensity Income Generation and Employment of Labour.
Ms. Shivani Gupta and Dr. Surender Kumar Gupta: FDI AND IMPACT ON INDIAN
ECONOMY (SPECIAL REF. TO RETAIL SECTOR).
The Indian Council for Research on International Economic Relations: Impact of Organized
Retailing on the Unorganized Sector.
Renie Subin: Country: Indias Cold Chain Indusrty, U.S. Commercial Service,
https://www.iaccindia.com/userfiles/files/India's%20Cold%20Chain%20Industry.pdf,
Department of Commerce, U.S.A.
http://dipp.nic.in/English/Policies/FDI_Circular_01_2013.pdf, Consolidated FDI Policy,
Department of Industrial Policy and Promotion, Ministry of Commerce and Industry,
Government of India.
http://www.pib.nic.in/newsite/erelease.aspx?relid=89525, 100% FDI Permitted for Cold
Storage Facilities.
http://www.dipp.nic.in/English/policy/pr120706.pdf, Press Release, DIPP, MoCI, GoI.
http://www.iipmthinktank.com/publications/archive/ier/ier-sep-04.pdf, The Indian
Economy Review 2004: Agriculture Industry Services.
http://teaboard.gov.in/pdf/stat/Area.pdf, Area Statistics, Tea Board of India.
The Telegraph: First FDI approval for Darjeeling tea - Companies look forward to Rs 150
crore investment, http://www.telegraphindia.com/1110506/jsp/siliguri/story_13946386.jsp
Press Information Bureau: India Earned Foreign Exchange of Rs.14, 000 Crore From Export
of Horticulture Produce, http://pib.nic.in/newsite/erelease.aspx?relid=80384
Press Information Bureau: Approval of Integrated Mission for Development of Horticulture
during 12th Plan, http://pib.nic.in/newsite/PrintRelease.aspx?relid=101601
Press Information Bureau: 100% FDI Permitted for Cold Storage Facilities,
http://www.pib.nic.in/newsite/erelease.aspx?relid=89525
Directorate of Economics and Statistics: http://eands.dacnet.nic.in/latest_2006.htm

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