India: Effects of Tariffs and Nontariff Measures on U.S. ... - USITC

CHAPTER 8
Foreign Direct Investment in <strong>India</strong>n
Agricultural <strong>and</strong> Food-Related Industries
Overview
U.S. firms have become active participants in <strong>India</strong>’s food <strong>and</strong> agriculture sector.
Normally, they do not engage directly in agricultural production: under <strong>India</strong>n
government regulations, foreign firms <strong>and</strong> individuals are not permitted to own
agricultural l<strong>and</strong> in <strong>India</strong> directly, with a few exceptions as detailed below. However,
they have found many other opportunities through investing in the broader food sector.
The majority <strong>of</strong> U.S. foreign direct investment (FDI) is in food <strong>and</strong> beverage processing,
alcoholic beverages, <strong>and</strong> quick-service restaurants. U.S. companies focus on those
segments <strong>of</strong> the market because those industries <strong>of</strong>fer the most lucrative opportunities,
not because they face particular regulatory or non-regulatory obstacles to FDI in other
parts <strong>of</strong> <strong>India</strong>’s food <strong>and</strong> agriculture sector. Other than the alcoholic beverages
distribution <strong>and</strong> retail sectors, industry representatives did not report significant
regulatory barriers to U.S. investment.
Because foreign firms do not engage for the most part in direct agricultural production,
they obtain their agricultural inputs through imports, local commodity markets, or
contract farming operations. U.S. firms report that, in areas open to foreign investment,
the <strong>India</strong>n government encourages them to establish operations, <strong>and</strong> they generally have
not experienced market access or national treatment barriers. Many U.S. firms prefer to
operate in <strong>India</strong> through joint ventures rather than wholly owned affiliates, since local
partners can be particularly important in helping U.S. firms navigate their way through
central <strong>and</strong> state government bureaucracies <strong>and</strong> the intricacies <strong>of</strong> local business customs.
U.S. food industry firms must weigh a number <strong>of</strong> business environment factors when
deciding whether or not to invest in the sector. Investment incentives include (1) U.S.
companies’ keen interest in accessing <strong>India</strong>’s large <strong>and</strong> growing consumer market; (2) the
need for a local presence to underst<strong>and</strong> how best to adapt products to local needs <strong>and</strong>
requirements; (3) high tariffs <strong>and</strong> nontariff measures (NTMs) in <strong>India</strong> that encourage
entry into the market through investment rather than U.S. exports; <strong>and</strong> (4) policy
incentives, such as tax rebates linked to Special Economic Zones (SEZs). Disincentives
include regulations that ban FDI in most farming activities; occasionally difficult
relations with joint venture partners; complex licensing <strong>and</strong> regulatory systems; a
disjointed national market in which it is difficult to achieve economies <strong>of</strong> scale because
<strong>of</strong> logistical constraints <strong>and</strong> differing state regulations; <strong>and</strong> changing agricultural
marketing regulations for many commodities, primarily related to the Agricultural
Produce Market Committee (APMC) Act <strong>and</strong> the Essential Commodities Act (ECA).
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