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AsianJournalofResearchinBusinessEconomicsandManagement Vol.2Issue4,April2012,ISSN22497307
ABSTRACT Food processing sector has been attracting substantial FDI and is among the top ten sectors getting FDI equity. FDI up to 100 per cent equity is permitted under the automatic route in food and infrastructure like food parks and cold chains. There are many areas for investment in this sector which include mega food parks, agri-infrastructure, supply chain aggregation, logistics and cold chain infrastructure, fruit and vegetable products, animal products, meat and dairy, fisheries and seafood cereals, consumer foods/ready to eat foods, wine and beer, machinery/packaging. Though India has a strong raw material base, it has been unable to tap the potential for processing.The paper analysis growing FDI in Food processing industry in India Key Words; Foreign Direct Investment,Food Parks
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1. INTRODUCTION Food processing sector has been attracting substantial FDI and is among the top ten sectors getting FDI equity. FDI up to 100 per cent equity is permitted under the automatic route in food and infrastructure like food parks and cold chains. There are many areas for investment in this sector which include mega food parks, agri-infrastructure, supply chain aggregation, logistics and cold chain infrastructure, fruit and vegetable products, animal products, meat and dairy, fisheries and seafood cereals, consumer foods/ready to eat foods, wine and beer, machinery/packaging. Though India has a strong raw material base, it has been unable to tap the potential for processing. Only about 2 % of the fruits and vegetables in India are processed, which is much lower when compared to countries like USA (65 %), Philippines (78%) and China (23)%. The present work aims to study the inflow of FDI in Food Processing Industry in India. The planning of the paper is as follows. After the brief introduction of chapter I, the available literatures are summarized in chapter II. Research methodologies are mentioned in chapter III. Analysis and findings are in chapter IV. Lastly chapter V concludes the paper. 2. LITERATURE REVIEW
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AsianJournalofResearchinBusinessEconomicsandManagement Vol.2Issue4,April2012,ISSN22497307
The empirical study by LIU Zhixiong (2010) on Food Processing Industry in China, from 2000 to 2008, indicates that FDI of the food industry has no significant effects on the domestically funded enterprises. Thus China can continue to introduce the foreign capital but prevention of the multinational corporation from monopolizing the food processing industries are to be taken in to consideration. The cross country statistical analysis of Tade et. all (2009),suggests, foreign affiliated enterprises play important roles in the technology transfer in compliance with food safety standars. Using data on developed countries over the period 1983-2002, Xan and Awokuse (2005) observed economy size, factor endowment, home country trade cost and host country cost have significant effect on FDI activities in the food processing sector. Makki et. al (2004) observed that the determinants of FDI inflow varies for developed and developing countries. Economic development is positively associated with FDI for developing countries but negatively associated for developed countries. Food processing sector in India is facing the problem of lack of funds (EPW Editorial, 2003). Banks are reluctant to give loan to the food processing sector because of high risk, long gestation period and low return. Low investments in marketing, transport and communication infrastructure are also other major problems of this sector. The study also mentioned, since 1998 around 200 FDI proposals in this sector is approves but less than 1% of them is converted to the actual investment. The study by Gopinath, et all (1999) analyzed the choices facing a multinational firm in supplying a foreign market -exports (produced in the home country) and overseas production. Their empirical framework consisted of a four equations system with foreign affiliate sales, exports, affiliate employment, and FDI as endogenous variables. Data on foreign activities of the U.S. processed food industry in ten developed countries for the time period 1982-94 were pooled to obtain a panel, which was then used to estimate the model. Using pooled, cross section time series data for 628 food manufacturers in 16 countries, Henderson et.al (1996) found intangible assets, product differentiation, firm size and home market share positively associated with FDI. Lipsey (1994) illustrates the effects of outward FDI upon a countrys balance of payments and the employment of its work force. The key factor impacting the home countrys welfare is the controversial relationship between FDI and trade. Using data on US food manufacturing industries, Connor (1983), documented positive impacts of firm size, advertising, R&D and home market share on FDI. 3. RESEARCH METHODOLOGY
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The study is essentially an analysis of secondary data. The data was collected from ministry of Food Processing Industries, Department of Industrial policy and promotion, RBI bulletin, Economic Survey and various website.
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AsianJournalofResearchinBusinessEconomicsandManagement Vol.2Issue4,April2012,ISSN22497307
Objective: The specific objectives of the paper are as follows: O1. To study the nature of Food Processing Sector in India O2.To study trend of FDI in the food processing sector in India. 4. RESULT AND DISCUSSION Food Processing Sector in India Food processing in India is one of the biggest industries and ranks fifth in terms of production, consumption, export and growth. The Indian Food Processing Industry has mainly consists of Dairy, , Fruits and Vegetables, Grains and Cereals, Fisheries, Meat and Poultry, consumers food (Table:1 ). TABLE:1 SEGMENTATION OF DIFFERENT SECTOR IN FOOD PROCESSING INDUSTRY Sectors Diary Fruits & Vegetables Grains & Cereals Fisheries Meat and Poultry Consumer Foods Products Whole Milk Powder, Skimmed Milk Powder, Condensed Milk, Ice Cream, Butter and Ghee, Cheese. Beverages, juices, concentrates, Pulp, Slices, Frozen and Dehydrated products, Potato Wafers/ Chips etc. Flour, Bakeries, Starch Glucose, Cornflakes, Malted Foods, Grain based Alcohol Frozen and Canned products mainly in fresh form. Frozen and packed mainly in fresh form, egg Power Snack food, Namkeens, Biscuits, Ready to eat food, Alcoholic and non Alcoholic beverages.
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Source: Ministry of Food processing India Out of these Dairy products have the greatest market penetration of about 37%. With the rapid growth of the economy, shift in the consumption pattern, from cereals to more varied and nutritious diet of fruit and vegetables, milk, fish, meat and poultry products etc has resulted in the development of a sunrise industry namely the Food Processing Industries. The food processing industry contributes to 6.3 percent of the Gross Domestic product of India, 19 percent to the Indian industry, and 13 percent to the export production. The export production in food processing sector has increased from USD 6.98 billion in 2002-03 to USD 20.51 billion
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AsianJournalofResearchinBusinessEconomicsandManagement Vol.2Issue4,April2012,ISSN22497307
in 2006-07, accounting for a phenomenal rise of 193.83 percent. Though the industry is large in terms of size in India, it is still at a budding stage in terms of development, accounts for only 1.7 per cent of world trade in this sector. A number of players in this industry are small players and form the unorganized sector for this industry. About 42% of the output comes from the unorganized sector, 25% comes from the organized sector and the rest of it comes from the small scale players. The most common type of food processing units that form the organized sector are flour mills, fish processing units, fruits and vegetables processing units, meat processing units, non-alcoholic and aerated drinks units, sugar mills and modernized rice mills. FDI inflows received by main food processing companies in India are represented in Table-2. TABLE-2 FDI INFLOWS RECEIVED BY MAIN FOOD PROCESSING COMPANIES IN INDIA (FROM JANUARY 2000 TO OCTOBER 2006, AMOUNT IN MILLION) Nos. Name of the Indian Company Amount of FDI Inflows Rupees 1 2 3 JournalofAsianResearchConsortium116 http://www.aijsh.org 4 5 6 7 8 9 10 Cadbury India Ltd Metro Cash & Carry India Pvt Balarampur Chini Mills Ltd Nestle India Ltd Kelloggs India P. Ltd Parry Confectionery Ltd Cargil Foods India Ltd Brittania New Zealand Food P. Ltd Amamalgamated Bean Coffee TradingCompany Dynamic Daily Industries Ltd 7,007.7 1,403.6 1,130.8 1,007.9 659.4 644.8 625.3 575.3 479.8 346.2
Source: Ministry of Food processing India Food processing industry in India has been facing constraints like non-availability of adequate infrastructural facilities, like cold chain, packing and grading centres, lack of adequate quality control and testing infrastructure, inefficient supply chain, shortage of processable varieties of
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AsianJournalofResearchinBusinessEconomicsandManagement Vol.2Issue4,April2012,ISSN22497307
farm produce, seasonality of raw material, high inventory carrying cost, high taxation, high packaging cost, affordability and cultural preference for fresh food. The Food processing segment has experienced an increase in FDI activity. WHY FOREIGN INVESTMENT IN THIS SECTOR? The World Trade Organization defines FDI as FDI occurs when an investor based in one country acquires an asset in another country with the interest to manage the asset. New growth theory [Munisamy Gopinath ] provides support for the thesis that FDI could be a potent factor in promoting growth. The exploitation of this potential, however, requires a conducive economic climate. In the absence of such a climate FDI may becounter productive; it may thwart rather than promote economic growth, it may serve to enhance the privaterate of return to investment by foreign firms while exerting little impact on social rates of return in the recipient economy. In general the following points can be mentioned against the need of FDI in India. 1. India already has all the requirements for a head-start in the food-processing industry. Basic raw materials such as foodgrains, pulses, vegetables and meats can be sourced locally or easily imported if local availability is inadequate. 2. Diversification from conventional farming of food grains to horticulture, ornamental crops, medicinal and aromatic plants, spices, plantation crops is one of the main reasons of attracting FDI in India JournalofAsianResearchConsortium117 http://www.aijsh.org 3. India's comparatively cheaper workforce can be effectively utilized to setup large low cost production bases for domestic and export markets. 4. Many Indian firms are eagerly seeking foreign partners for joint-ventures to avail of their technological advantage. 5. No industrial license required for food and agro processing industries except for alcoholic beverages and items reserved for small scale sector. FLOW OF FDI IN INDIA FOOD PROCESSING SECTOR Ministry of Food Processing Industries have taken many steps to give impetus to this sector which include virtual delicensing of the sector, inclusion in the priority sector for lending, allowing 100% FDI except in alcoholic beverages and retail, several duty and tax reliefs, financial assistance for infrastructure building, setting up of food processing units etc. In case of export-oriented units, foreign investment is permitted even in case of items reserved for small scale sector. In addition, the export oriented units are given a number of incentives and concessions under the Export-Import Policy, such as, duty free import of capital goods, raw
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AsianJournalofResearchinBusinessEconomicsandManagement Vol.2Issue4,April2012,ISSN22497307
materials and intermediates, export income being exempt from Corporate Tax etc. FDI inflow in food processing is becoming stronger. Sensing enormous unexploited potential, foreign players are increasingly showing their interest to be a part of this rapidly rising sector. It attracted around INR45.19 billion FDI during 19912005 which is 3.3% of total FDI inflow in India, and ranked as the 7th sector attracting largest FDI in India. Foreign direct investment of around US$1 billion has already been approved in India's food processing industry since 1991. The government of India has set a target of USD 25.07 billion of FDI Inflows to Food Processing Industries to be achieved by 2015 which will increase India's global food trade from 1.6 percent to 3 percent along with a rise in perishable processed food items from 6 percent to 20 percent. The national policy on food processing aims at increasing the level of food processing from 10 per cent during 2010 to 25 per cent by 2025. The Foreign Direct Investment (FDI) in food processing sector in India during the financial year 2010-11 up to November 2010 is Rs. 576.50 crores as compared to total FDI of Rs. 5344.22 crores- marking around 11% of the overall FDI in the country, says a latest press release from the Ministry of Food Processing Industries. Switzerland, USA, Germany, Mauritius etc are the main important source countries of FDI in Food processing in India (Table-3). TABLE : 3 MAIN SOURCE COUNTRIES OF FDI IN FOOD PROCESSING SECTOR IN INDIA (2003-2006) Country JournalofAsianResearchConsortium118 http://www.aijsh.org Switzerland USA Germany Mauritius Korea France UAE Saudi Arabia Total Source: Ministry of Food processing India
Amount (Rs) (Million) 1943.84 1900.09 1795.02 1572.82 858.47 366.12 333.50 270.50 9040.36
Percentage 21.50 21.20 19.86 17.40 9.50 4.05 3.69 2.99 100
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AsianJournalofResearchinBusinessEconomicsandManagement Vol.2Issue4,April2012,ISSN22497307
5.
CONCLUSION
Though there are many promising dynamics which support good growth of food processing Industry in India, there are still some significant constraints which, if not addressed sooner, can impede the growth prospects of this Industry. One of the biggest constraints is that this industry is capital intensive. It creates a strong entry barrier and allows lesser number of players to enter the market. Lesser players mean lesser competition and lesser competition means reduced efforts to improve the quality standards. The second constraint is poor infrastructure for storing raw food materials. Two main types of storages the warehouses and the cold storages, lag in storage standards. The pests infest the grains sometimes due to lack of monitoring, proper use of pesticides and proper ventilation. Similarly, the power outages result in sub-optimal function of the cold-storages and the quality of food material in the cold storages becomes questionable. One of the best methods of addressing these constraints is more and more FDI. REFERENCES Economic Political Weekly, (2003), Food Processing: Unrealised Potential, Editorial, Vol-38, No.29. Connor, John M. (1983), Determinants of Foreign Direct Investment by Food and Tobacco Manufacturers, American Journal of Agriculture Economics 65, pp.395-404. Gopinath, M., D. Pick, and U. Vasavada(1999). The Economics of Foreign Direct Investment and Trade with an Application to the U.S. Food Processing Industry. American Journal of Agricultural Economics, 81,442-52. JournalofAsianResearchConsortium119 http://www.aijsh.org Henderson, Dennis R., Charles Handy and Stephen Neff (1996) (eds). Globalization of the Processed Food Market. U.S. Department of Agriculture, Economic Research Service, Agricultural Economic Report, Number 742, Lipsey, R.E.(1994) Outward Direct Investment and U.S.Economy, Working Paper No. 4691, Cambridge MA:National Bureau of Economic Research. LIU Zhixiong (2010) on Food Processing Industry in China, from 2000 to 2008,paper presented in International Conference on Industry Engineering and Management. Makki, Shiva S.,Agapi Somwaru and Christine Bolling (2004), Determinants of Foreign Direct Investment in the food processing Industries: A comparative analysis of Developed and Developing economics, Journal of Food Distribution Research, Vol 35, No.3, pp 61-67. Tada, M; Hu DingHuan; Tokrisna. R(2009), The Role of FDI and Food Processing Industry towards high value agriculture in Asia: Cross country statistical analysis and firm level evidence, Japan Agricultural Research Quarterly, Vol 43, No. 4, pp 317-322.
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AsianJournalofResearchinBusinessEconomicsandManagement Vol.2Issue4,April2012,ISSN22497307
Xun, Lei and Titus O. Awokuse (2005), The determinants of US Outgoing FDI in the Food Processing Sector, Presented at the American Agricultural Economic Association Annual Meeting, Providence, Rhode Island, July 24-27, 2005.
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