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

There is not necessarily a strong link between increased FDI in food processing <strong>and</strong>
increased trade in food products. While some inputs must be imported, food producers in
<strong>India</strong>, as elsewhere, generally prefer to use local inputs because <strong>of</strong> lower cost, greater
availability, <strong>and</strong> local tastes. U.S. firms that have invested in <strong>India</strong>’s food sector have
imported ingredients from the United States or elsewhere, but only until they were able to
find or develop locally available inputs that met company st<strong>and</strong>ards. As far as exports are
concerned, a number <strong>of</strong> global food companies see <strong>India</strong> both as an important local
market <strong>and</strong> a hub from which to export processed food products to the entire region.
Although U.S. companies export a share <strong>of</strong> their <strong>India</strong>n production to neighboring
countries, there is no evidence to suggest that they have exported significant amounts <strong>of</strong>
processed food from <strong>India</strong> to the United States. 16
Examples <strong>of</strong> U.S.-based multinational companies invested in <strong>India</strong>’s food processing
sector include PepsiCo, Coca-Cola, ConAgra, Cargill, Heinz, ADM, <strong>and</strong> Kellogg’s.
Through their investments, many <strong>of</strong> these companies, <strong>and</strong> others based outside the United
States, hold significant market shares in many segments <strong>of</strong> <strong>India</strong>’s food market. In the
confectionery market, for example, Cadbury-Schweppes held a 27 percent share by value
in 2007, Nestlé held a 16 percent share, <strong>and</strong> Perfetti van Melle a 15 percent share. 17 Coca-
Cola <strong>and</strong> PepsiCo held the two largest shares (33 percent <strong>and</strong> 27 percent, respectively) <strong>of</strong>
a rapidly growing s<strong>of</strong>t drink market valued at $3.2 billion in 2007. 18
Incentives for FDI in Food Processing
U.S. companies are investing in <strong>India</strong>’s food industry for several reasons. First, they want
to gain access to the <strong>India</strong>n local market. U.S. producers <strong>of</strong> food <strong>and</strong> other agricultural
goods are well aware <strong>of</strong> <strong>India</strong>’s growing consumer market, given its total population <strong>of</strong>
1.2 billion <strong>and</strong> its rapidly growing middle class with significantly greater discretionary
spending power than earlier generations <strong>of</strong> <strong>India</strong>n consumers. 19 Second, investing directly
in the <strong>India</strong>n market, rather than serving the market through U.S. exports, allows U.S.
companies to take advantage <strong>of</strong> local commodity inputs <strong>and</strong> cheaper labor for processing
facilities. Third, investing directly enhances U.S. companies’ ability to underst<strong>and</strong> <strong>and</strong>
adapt to local consumer preferences, which is likely a more important concern for
producers <strong>of</strong> packaged <strong>and</strong> processed foods than for exporters <strong>of</strong> commodities such as
grains, nuts, <strong>and</strong> oilseeds (box 8.2).
Aside from <strong>of</strong>fering easier access to local consumers, direct investment in <strong>India</strong> serves as
a way to avoid tariffs or other border measures affecting U.S. exports. U.S. firms report
that, in most cases, once established in <strong>India</strong>, they receive the same treatment as local
firms. 20 Local establishment through FDI may actually help U.S. firms smooth the path
for regulatory acceptance <strong>of</strong> increased U.S. exports. For example, support for lower
tariffs on U.S. pistachio exports is one motivation for U.S. pistachio producers to invest
16 Industry representatives, interviews by Commission staff, New Delhi <strong>and</strong> Mumbai, <strong>India</strong>, May 6, 11,
<strong>and</strong> 12, 2009.
17 DATAMONITOR, “Confectionery in <strong>India</strong>: <strong>India</strong> Pr<strong>of</strong>ile,” November 2008. The remainder is
fragmented between <strong>India</strong>n <strong>and</strong> other foreign countries.
18 DATAMONITOR, “S<strong>of</strong>t Drinks in <strong>India</strong>: <strong>India</strong> Pr<strong>of</strong>ile,” November 2008.
19 According to one estimate, <strong>India</strong> will be the fifth largest consumer market in the world in 2025,
consisting <strong>of</strong> approximately 583 million middle class consumers, up from an estimated 50 million middle
class consumers in 2005. McKinsey Global Institute, “The ‘Bird <strong>of</strong> Gold’: The Rise <strong>of</strong> <strong>India</strong>’s Consumer
Market,” May 2007, 13.
20 Industry representatives, interviews by Commission staff, New Delhi, <strong>India</strong>, May 6 <strong>and</strong> June 4, 2009.
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