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

Disincentives for FDI in Food Processing
<strong>India</strong> can be a difficult food market for foreign investors faced with unfamiliar market
conditions, difficult supply <strong>and</strong> distribution systems, <strong>and</strong> confusing or burdensome
central <strong>and</strong> state government policies <strong>and</strong> regulations. <strong>India</strong>n government regulations that
may inhibit FDI in the food processing sector include the ban on FDI in multibr<strong>and</strong> retail
(discussed below), prohibitions on contract farming in some states, barriers to interstate
commerce based on tax revenue <strong>and</strong> food security concerns, <strong>and</strong> some <strong>of</strong> the world’s
highest taxes on processed foods. Other characteristics <strong>of</strong> the <strong>India</strong>n market that inhibit
FDI, but do not result from government regulations, include <strong>India</strong>’s system <strong>of</strong> small
agricultural holdings, its inefficient infrastructure <strong>and</strong> marketing networks, poor
distribution networks, the lack <strong>of</strong> cold chain <strong>and</strong> cold storage facilities, <strong>and</strong> <strong>India</strong>n
consumer preferences that remain focused on traditional foods. 28
Even though 100 percent foreign equity ownership is permitted in food processing,
foreign investors <strong>of</strong>ten face challenges in dealing with local licensing requirements <strong>and</strong>
other regulations necessary for establishing a new business. The lack <strong>of</strong> transparency <strong>and</strong>
the difficulty <strong>of</strong> overcoming bureaucratic hurdles in establishing a locally traded
company have led many foreign investors to choose to establish affiliates in <strong>India</strong>
through a joint venture, despite a preference for sole ownership. 29 However, <strong>India</strong>n
regulations on joint venture agreements have also led to difficulties between some U.S.
investors <strong>and</strong> their joint venture partners. These regulations have changed for new
investors, but difficult situations from past joint venture relationships remain (box 8.3).
28 Govindan, <strong>India</strong>: Exporter Guide, October 1, 2008, 12. See chapter 7 for more information on these
topics.
29 USTR, 2007 National Trade Estimate Report on Foreign Trade Barriers, 2007, 246.
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