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

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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. 8-8
BOX 8.2 PepsiCo Operations in <strong>India</strong> PepsiCo has a particularly large presence in <strong>India</strong>’s food processing sector, directly employing 4,600 <strong>and</strong> indirectly employing 60,000 in 2006. PepsiCo entered the <strong>India</strong>n market in 1989 <strong>and</strong> has invested a total <strong>of</strong> $700 million since then. The company has one syrup concentrate plant, from which it supplies all <strong>of</strong> <strong>India</strong>, <strong>and</strong> 43 bottling plants. PepsiCo also operates three Frito-Lay snack processing plants <strong>and</strong> a citrus nursery in <strong>India</strong>. In support <strong>of</strong> its orange juice business, the company has set up an agro-technology program in association with the Punjab government. The program includes a large greenhouse facility focused on orange juice-related R&D, orange juice groves, <strong>and</strong> a processing plant to commercialize the cultivation <strong>of</strong> citrus for its juice business. PepsiCo also recently introduced the Quaker Oats br<strong>and</strong> into <strong>India</strong>. PepsiCo originally entered the <strong>India</strong>n market on the condition that it invest in the food processing sector. This led to the company’s pioneering efforts in contract farming <strong>of</strong> tomatoes, to ensure sufficient product for its tomato processing plant, which produced tomato paste primarily destined for Pizza Hut. The tomato business was later sold to Unilever. PepsiCo’s Frito-Lay operations in <strong>India</strong> obtain much <strong>of</strong> their inputs through contract farming. The primary crop now is potatoes, designated for potato chips <strong>and</strong> other snack foods. Frito-Lay reportedly uses about 150,000 mt <strong>of</strong> potatoes annually, <strong>of</strong> which 50 percent is sourced through contract farming agreements with 15,000 farmers across seven states. The Tropicana division also uses contract farming. In <strong>India</strong>, PepsiCo focuses on production <strong>of</strong> food for the local market <strong>and</strong> does not export food or other agricultural products from the United States to <strong>India</strong>. Over time, PepsiCo has shifted its snack food strategy to develop more indigenous <strong>India</strong>n products, including new chatpate crackers with wheat <strong>and</strong> daal, <strong>of</strong>fered in such typically <strong>India</strong>n flavors as “special pindi masala” <strong>and</strong> “tomato <strong>and</strong> roasted spices.” Some snack foods are even more localized, with regional flavors rather than flavors designed to appeal to consumers across <strong>India</strong>. In June 2009, PepsiCo announced plans to double its overall <strong>India</strong> investment, with approximately $350 million to be invested over the next three years, in addition to the capacity additions that the company made in 2008. These new investments will support increased facilities across the manufacturing, market infrastructure, supply chain, fruit processing, agriculture, <strong>and</strong> R&D business areas. The company has begun searching for suitable locations for new greenfield manufacturing plants <strong>and</strong> plans to focus on states that <strong>of</strong>fer the best investment environment. Sources: PepsiCo, “PepsiCo Doubles Investment in <strong>India</strong> in 2009,” June 1, 2009; interviews with industry representatives; International Br<strong>and</strong> Equity Foundation (IBEF), “PepsiCo Holdings <strong>India</strong> Pvt. Ltd.,” Fortune 500 Companies in <strong>India</strong>: Success Stories; Food Biz Daily, “PepsiCo's Frito-Lay <strong>India</strong> Launched Aliva—New Baked Savory Cracker,” June 4, 2009; Animesh Banerjee, “Role <strong>of</strong> Private Sector in Contract Farming & Direct Procurement,” January 29, 2008; <strong>and</strong> press reports. in <strong>India</strong>n processing facilities. 21 <strong>India</strong>’s central <strong>and</strong> state governments also <strong>of</strong>fer targeted incentives for FDI, some <strong>of</strong> them specific to the food <strong>and</strong> agriculture sectors. Foreign investors welcome such incentives, but there is little evidence to suggest that investors see these incentives as crucial aspects <strong>of</strong> the FDI decision-making process. At the central government level, the Ministry <strong>of</strong> Food Processing has included FDI as part <strong>of</strong> its vision for promoting the food processing industry, with a focus on plans to implement a “single-window” clearance system for new FDI in food processing <strong>and</strong> to undertake sector-specific marketing campaigns to attract foreign investors to <strong>India</strong>’s food processing industry. 22 Specific tax <strong>and</strong> other incentives <strong>of</strong>fered at the national level for investment in food processing include the following: 21 Industry representative, telephone interview by Commission staff, March 3, 2009. 22 Rabo <strong>India</strong> Finance Pvt. Ltd, Vision, Strategy <strong>and</strong> Action Plan for Food Processing Industries in <strong>India</strong>, vol. 1, April 2005, 25. 8-9
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United States International Trade C
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U.S. International Trade Commission
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Abstract This report describes <str
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TABLE ES.1 India:
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U.S. agricultural products face str
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U.S. Foreign Direct Investment U.S.
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CONTENTS Page Abstract ............
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CONTENTS―Continued Chapter 6 <str
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CONTENTS―Continued Figures 1.1. <
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ACRONYMS AND TERMS AAY Antodaya Ann
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ACRONYMS AND TERMS—Continued RGGV
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TABLE 1.1 India: A
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FIGURE 1.1 India:
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India’s central
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Despite their weak economic pr<stro
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Approach Current India</str
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Bibliography Birner, Regina, Surupt
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World Bank. Agriculture for Develop
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FIGURE 2.1 India:
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TABLE 2.1 India: A
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FIGURE 2.3 India:
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premium); (2) India</strong
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include government export restricti
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TABLE 2.3 India: A
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FIGURE 2.6 India:
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Exports by Major Trading Partner <s
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CHAPTER 3 Domestic Consumption Over
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TABLE 3.2 India: P
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more likely to have been exposed to
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BOX 3.3 Indian Con
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TABLE 3.3 India: T
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are expected to see income growth <
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Food Preferences India</str
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Regional Variation Geographic <stro
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CCC. “Know India
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CHAPTER 4 Indian A
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For most crops, however, In
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The Farm Sector soybeans 29 —but
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Food processing in India</s
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BOX 4.1 The Central Government’s
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BOX 4.2 Does the Minimum Support Pr
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August 3, 2009, New Delhi announced
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known as zamindars, have doubled or
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that the PFA Act was strictly enfor
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———. Bharat Nirman: A Time-Bo
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Organisation for Economic Co-operat
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CHAPTER 5 TARIFFS Overview
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sensitive. They include vegetable f
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wholly milled rice and</str
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The Indian governm
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India also reporte
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Reference Prices Reference prices,
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Landing Fees <stro
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Simulated Effects
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and nuts” by $0.
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5-19 TABLE 5.4 India</stron
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Bibliography Acharya, Keya. “Thor
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Indian Express.com
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CHAPTER 6 Nontariff</strong
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foreign sources. 6 For example, SPS
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Page 141 and 142: Bibliography American Apparel <stro
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Page 145: ———. 2009 National Trade Esti
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Page 174 and 175: Food Processing and</strong
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Page 180 and 181: BOX 8.3 Restrictions on Foreign Joi
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Page 186 and 187: Bibliography Bahn, Niti, an
Page 188 and 189: International Center for Alcohol Po
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Page 192 and 193: BOX 9.1 The UPOV System for Plant V
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Page 208 and 209: The Honorable Sham L. Arano
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transparent sanitary regulations th
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hotel and catering
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Western Pistachio Association 26 In
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APPENDIX E POTENTIAL FOR U.S. AGRIC
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E-4 TABLE E.1 India</strong
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APPENDIX F INDIAN AGRICULTURAL PROD
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TABLE F.1 India: A
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FIGURE F.1 India:
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is in nonirrigated areas with yield
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Consumption India
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efrigeration. This characteristic i
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70 percent of tota
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eportedly preferred in southern <st
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Cotton During MY 2003/04-2007/08, <
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Government of <str
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APPENDIX G UNION AND STATE/UNION TE
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certain agricultural goods in the p
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Bibliography Chaulan, Shri U.K. “
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Simulation Framework The effects <s
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Producers determine the optimal sup
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Applied ad valorem tariff equivalen
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We considered the possibility that
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Estimation of <str
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Bibliography Anderson, Kym, Mariann
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