The role of fdi in india agriculture slide share

THE ROLE OF FDI IN
INDIAAGRICULTURE
By
Moro Seidu
gentlemoro@gmail.com
DEPARTMENT OF AGRICULTURAL ECONOMICS
COLLEGE OF AGRICULTURE,
CCS HAU, HISAR
February, 2015

Overview of presentation
Part I
 Review of various studies (Non Empirical Studies)
 FDI
 Sources of FDI in India
 AFDI
 Effect of AFDI in Agriculture
Part II
 Empirical Studies
 Effect of AFDI in Agriculture
 Conclusion
 References

Agriculture in India
 In India, agriculture is an important sector of the
economy because it accounts for almost 19% of
Indian GDP.
 Similarly, Agriculture forms the backbone of rural
India which inhabits more than 70% of total Indian
population.
 Most of the rural population in India depends on
agricultural activities for employment and
livelihood.
 Agriculture is an important sector, which
determines growth and sustainability and plays a
vital role in the development of India, with over 60
percent of the country’s population deriving their
subsistence from it.
 Indian economy in agriculture has shown a steady
growth in the last two decades.

 After globalization almost every country in Asia has welcome foreign direct
investments (FDI) in many sectors and it is growing its limits steadily.
 India is not an exception, the country has also allowed FDI in various sectors
including agriculture. This move has boosted the investment climates in
economy including the agriculture sector.
 FDIs have been playing an important role in promoting:
 economic growth,
 productivity,
 triggering technological transfer and
 creating employment opportunities.
 Increased economic growth,
 food security,
 reduces poverty and
 raises the living standards.
 FDI plays a complementary role in overall capital formation and in filling
the gap between domestic savings and investment.
Agriculture in India....

 FDI is an investment made by a foreign individual or company in productive
capacity of another country. It is the movement of capital across national
frontiers in a way that grants the investor control over the acquired asset.
 In a nutshell FDI refers to capital inflows from abroad that are invested in or to
enhance the production capacity of the economy.
 At the macro-level, FDI is a non-debt-creating source of additional external
finances.
 At the micro-level, FDI is expected to boost output, technology, skill levels,
employment and linkages with other sectors and regions of the host economy.
 It plays an important role in the long-term development of a country
 Serve as a source of capital
 enhance competitiveness of the domestic economy via
 transfer of technology,
 strengthening infrastructure,
 raising productivity and
 generating new employment opportunities.
Foreign Direct Investment (FDI)

FDI can have both negative and positive effects on the host economies
developmental efforts.
Negative Impacts (Natural Resource &Agriculture)
FDI in natural resources (such as oil and agriculture) leads to exploitation of host
country. Mostly produce for export to developed countries. (Mihalache-O’Keef
& Li, 2011; )
 Aykut and Sayek (2007) have shown that large projects in the primary sector
(comprising oil and agriculture) use few intermediate inputs and export most of their
output.
 In fact, the World Bank noted that FDI flows in agriculture tend to be highly volatile
(World Bank 2005).
 FDI in primary sector produces some benefits to the host nation though limited
(UNCTAD, 2001).
Impact of FDI in Host Economy

 The nature of agriculture FDI, largely land based,
benefits easily gets captured by elites (Sala-i-
Martin & Subramanian 2003; Isham et al 2003).
 In fact, Alfaro (2003) showed in cross-national
empirical analyses that primary FDI reduce
human capital.
 FDI leads to agricultural policies focused on
chemical-dependent technologies due to
multinational involvements in agricultural
projects (Jorgenson 2007; Clapp 2003; Altieri
2000; ).
 In some cases substances banned in developed
countries with high environmental standards are
used by foreign investors in developing countries
(Shiva and Bedi 2002; Magdoff et al 2000;).
Negative Impacts (Natural Resource &Agriculture)...

 There is a demographic dimension to the externalities;
gender, age, low wages and bargaining power of labour
is mostly the case (Echánove & Steffen, 2005; Samatar
,1993).
 Hallam (2011) notes that based on historical evidence,
there are concerns over highly mechanised production
methods with
 limited employment creation;
 dependence on imported inputs
 adverse environmental impacts such as chemical
contamination,
 land degradation and depletion of water
resources;
 The effects of FDI to agriculture through the channels
described results in negative effects on Agriculture in
the host country
Negative Impacts (Natural Resource &Agriculture)...

Positive Impacts (Natural Resource &Agriculture)
 Increase capital inflows (Hallam, 2011; Mihalache-O’Keef, and Li, (2011)
 transfer and upgrade of technology (Hallam, 2011;)
 strengthening infrastructure (capital formation),
 raising production and productivity (Anitha, 2012)
 employment creation (FAO, 2009a; GTZ, 2009)
 quality improvement (Anitha, 2012; Hallam, 2011)

 Before liberalisation of trade in 1991, FDI in India were
restricted (very limited) and allowed moderately in few sectors.
 Inward looking strategy and dependence on external
borrowings were the focus
 Economic reforms 1991 made it possible that, FDI had suddenly
become important for India. The New Industrial Policy of 1991
gave utmost priority in attracting FDI inflows.
 The reform implies a significant relaxation of regulatory and
entry restrictions on FDI inflows.
 A.T. Kearney FDI Confidence Index ranked India second for
three years in 2005, 2007 and 2012 and was placed on the third
spot in 2010.
 India attracted $25.5 billion in FDI inflows in 2012, down from
$31.6 billion in 2011, (A T Kearney Foreign Direct Investment
Confidence Index, 2014)
 However, the country has been witnessing a cooling-off in
investor sentiment which has taken shape, with a two-place drop
from 5th (2013) to 7th (2014) its lowest rank since 2001
FDI in India

Figure 1:Trend of FDI inflow in India
FDI in India
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Amount/US$Billion
Time/years
Trend of FDI inflow in India

FDI in India
81.13(36.09%)
26.63 (11.85%)
21.33(9.49%)
16.96 (7.55%)
12.18 (5.42%)
11.53 (5.13%)
7.66 (3.41%)
6.67 (2.97%)
3.97 (1.77%)
2.77 (1.23%)
2.76 (1.23%)
1.91 (0.85%)
1.46 (0.65%)
1.39 (0.62%)
1.23 (0.55%)
0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00
Mauritius
Singapore
UK
Japan
USA
Netherland
Cyprus
Germany
France
Switzerland
UAE
Spain
South Korea
Italy
Hong Kong
FDI inflows (USD billion)
Country
Sources of FDI inflow in India
Values in parenthesis represent: Share of FDI inflows (%);
Source: SIA Newsletter, June 2014, Annex-A, DIPP.
Figure:2 Sources of FDI inflow in India

Figure 3: FDI Inflows & outflows cum Sectoral pattern of outward FDI
FDI in India
Source: Reserve Bank of India (RBI),2012; EXIM Bank,2012

Figure 4: Distribution of FDI inflow in India Economy(Per cent)
FDI in India
Source: Department Of Industrial Policy & Promotion (Ministry Of Commerce & Industry); 2013-14
Service , 30.5
Telecom, 12
Computer, 11.6
Real estate, 10
Construction,
6.6
Automobile,
6.4
Metallurgical,
5
Petroleum, 3.4 Chemicals, 3

 Agriculture has not been defined in the DIPP Circular 02 of 2011 but
Chapter VI para 6.2.1 specify some permission for FDI in agriculture.
 Hence, the share of agriculture in the total FDI in India is minimal (which is
about 1.5% of the total FDI inflows).
 The entry of FDI was confined to
 Floriculture, Horticulture, Apiculture and Cultivation of Vegetables &
Mushrooms under controlled conditions;
 Development and production of seeds and planting material;
 Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture, under
controlled conditions; and
 Services related to agro and allied sectors.
 Tea Plantations
 Food processing industries
 Agricultural machinery.
FDI in India Agriculture

Figure 5: Trends of FDI and AFDI inflow in India
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Amount/US$Billion
Time/year
Trends of FDI and AFDI inflow in India
FDI
AFDI

Sector-Wise FDI Inflows in India
FDI inflows in Agricultural services
 FDI inflows in the Indian agricultural services is allowed up to 100 per cent
and allowed through automatic route in India.
 FDI inflows in agricultural services sector during April 2000 - April 2014
stood at US$ 1687.83 million (DIPP, 2014).
 The role FDI in agriculture services sector are as follows:
 Farm credit target of 225,000 crore for 2007-08 was set with an addition of 50
lakh new farmers to the banking system
 35 projects have been completed in 2006-07 and additional irrigation potential of
900,000 hectares to be created and training of farmers arranged.
 A pilot programme for delivering subsidy directly to farmers has been arranged
 Loan facilitation through Agricultural Insurance and NABARD has also been
facilitated
 Corpus of Rural Infrastructure Development Fund to be raised

Sector-Wise FDI Inflows in India
FDI inflows in Agricultural services ….
 FDI Inflows to Agriculture Services also facilitated growth of other allied areas,
 Irrigation
 Roads
 Housing
 FDI Inflows to Agriculture Services has effected development of rural
infrastructure, such as:
 Connection of 66,800 habitations with population over 1000 with all weather roads
 construction 1,46,000Km of new rural roads
 upgrading and modernization of 1,94,000Km of existing rural roads
 Total investment of 1,74,000 crore envisaged under "Bharat Nirman", investment on
rural roads estimated to be at 48,000 crore
 Corpus of (8000 crore ) to Rural Infrastructure Development Fund (RIDF) to be raised
 Water Supply
 Electrification
 Telecommunication Connectivity

Sector-Wise FDI Inflows in India…
• FDI inflows in agricultural machinery
• FDI inflows in the Indian agricultural machinery are allowed up to 100
percent and allowed through automatic route in India.
• FDI inflows in the Indian agricultural machinery is predicted to have a
significant positive impact on 700-million rural population, living in about
600,000 small villages of India.
• FDI inflows in agricultural machinery sector during April 2000 - April 2014
stood at US$ 338.21 million (DIPP, 2014).

FDI inflows to fertilizers industry
 FDI in fertilizers industry India is allowed up to
100% under the automatic route in India.
 The total amount of FDI Inflows to Fertilizers
industry in India was US$ 78.22 million between
August 1991 and December 2005.
 The total amount of FDI Inflows to Fertilizers
industry during April 2000 - April 2014 stood at
US$ 318.55 million (DIPP, 2014).
 The total percentage of FDI Inflows to Fertilizers
industry in India stood at 0.15% (April 2000 - April
2014) and 0.26% (August 1991 and December
2005) out of the total foreign direct investment in
the country.

FDI inflows to fertilizers industry in India….
 Bayer Crop (Germany)was given the approval in 2003, to invest 74 crores
in Aventis Crop Science (67.08 % to 100%) in India involved in the
production of fertilizers and pesticides.
 The role of FDI inflows into the fertilizer industries resulted in:
 growth,
 quality,
 improved technology, and
 expansion of fertilizer industry.

FDI inflows to Food processing Industries
 Food processing has a vital link with agriculture sector.
 100 per cent of FDI is permitted in almost all the food processing units with
the exception of alcohol.
 The total amount of FDI Inflows in Food processing industry during April
2000 - April 2014 was estimated at US$ 5360.89 million (DIPP, 2014).
 The role of FDI in Food processing industry include the following:
 It has increase the share of agricultural export i.e.
 The share of exports of agricultural and processed food products in overall
exports rose to US$ 13,281.47 million [10.6 per cent] (2012-13). Similarly
between April–November 2013, total exports of agricultural and processed
foods stood at US$ 14,515.10 million. (APEDA, 2014).

FDI inflows to Food processing Industries…
 The role of FDI in Food processing industry include the following:
 Increase investment in post-harvest infrastructure that would:
 increase the shelf-life of produce and
 Minimize food wastage (now as high as 20-30%).
 Create other positive externalities such as
 better seeds and stricter standards that would increase quality and productivity while
lowering costs.

FDI Inflow in sugar industry
 FDI in Sugar industry India is allowed up to 100% under the automatic route in
India.
 The Government has established an authority for quality standards and also by
giving exemption from various taxes and duties to make the industry more
investor friendly
 FDI Inflows to Sugar industry in was US$ 33.82 million (1991-2007)
representing 0.08% out of the total flow of FDI in the country.
 The role of FDI Inflows include
 Introduction of latest technology into the industry.
 Improved the standard and quality of the products of the industry.

FDI inflow on Market Size of Agriculture
 In 2013-14 India achieved a record food grain production of 264 million tonnes
(MT), beating the previous year's (2012-13) 257 million MT, (DES, 2015).
 Agricultural profitability has increased over the last decade with record increases in
MSPs (minimum support prices) for agricultural produce for all covered crops.
 India is the second largest producer of sugar in the world and the government has
aimed to increase the exports from 1.3 MT in 2013 to an average of 2 MT in 2014
and 2015.
 Spice exports from India are expected to reach US$ 3 billion by 2016-17.The Indian
spices market is pegged at Rs 40,000 crore (US$ 6.46 billion) annually, of which the
branded segment accounts for 15 per cent.
 India is the largest producer of milk since 1998 and accounts for about 17 per cent
of the world's milk production. The average growth in milk production in the
country in the last decade was 4.2 per cent as against the world average of 2.2 per
cent, indicating a healthy trend.
 The procurement target for rice during Kharif Marketing Season (KMS) 2014-15
has been finalised as 30.05 million tonnes (MT).

Table 1.1: Sector-Wise FDI Inflows in India during April, 2000 - January,
2014
Name of the Sector
FDI Inflows in
(US $ million)
Share in Total Investment
(%)
Agriculture Services 1687.83 0.8
Agriculture Machinery 338.21 0.16
Fertilizers 318.55 0.15
Food Processing Industries 5360.89 2.53
Source: Department Of Industrial Policy & Promotion (Ministry Of Commerce & Industry); 2013-14

General Objectives of Study
 To determine the effect AFDI inflow on agriculture inputs, output, capital
formation and trade while considering the pre and post period of trade
liberalisation and globalisation.
Specific Objectives
 To the determine the effect of AFDI inflow on fertilizer consumption
 To the determine the effect of AFDI inflow on Irrigation
 To the determine the effect of AFDI inflow on pesticide consumption
 To the determine the effect of AFDI inflow on seed distribution
 To the determine the effect of AFDI inflow on Mechanisation
 To the determine the effect of AFDI inflow on Agriculture GDP
 To the determine the effect of AFDI inflow on Agriculture Capital formation
 To the determine the effect of AFDI inflow on Agriculture export
 To the determine the effect of AFDI inflow on Agriculture import
 To the determine the effect of AFDI inflow on Agriculture trade
 To the determine the whether there has been a shift of AFDI inflow on Agriculture
between the pre and post period of trade liberalisation and globalisation.
 To the determine the whether there has been a shift of AFDI inflow on Agriculture
between the pre and post period of trade liberalisation and globalisation.
Role of FDI in India Agriculture

Hypotheses
AFDI inflow has influence on inputs use, output, capital formation and trade
AFDI has shifted in the post period of trade liberalisation and globalisation
Dependent Variables Hypotheses of AFDI
Fertilizer use +
Pesticide use +
Seed distribution +
Mechanisation +
Agriculture Electricity use +
AGDP +
A. Capital formation +
Agriculture Export +
Agriculture Import +/-
Agriculture Trade +
Table 2.1 Apriori expectations of Independent variable and variable description in empirical model
Source: Author’s construction,2015

Methodology
The trends of FDI in the whole economy and Agriculture sector as well as change
in both intercept and slope for the two periods (before and after globalization)
trend lines of FDI were determined using the models fitted below:
 Moreover the effects of AFDI on inputs, output, capital formation, and trade
as well as finding whether there were change in both effect and shift in trend
line of AFDI on inputs, output, capital formation, and trade;
 the following regression models were specified:
 
 
log log log 1
log log log 2
i i i i i
i i i i i
FDI D t D t
AFDI D t D t
    
    
    
    
 
 
 
3
4
5
i i i i i
i i i i i
i i i i i
I D AFDI DAFDI
O D AFDI DAFDI
T D AFDI DAFDI
    
    
    
    
    
    

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Fertilizerconsumption/100000tonnes
AFDIinflows/US$billion
Time/ years
Trend of AFDI inflow and Fertilizer consumption in India AFDI
Fert
Figure 6: Trend of AFDI inflow and Fertilizer consumption in India

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Pesticidesuse/milliontonnes
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Pattern of AFDI inflow and Pesticides Consumption in India
Pesticide
AFDI
Figure 7: Pattern of AFDI inflow and Pesticides Consumption in India

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Areaequipedforirrigation/1000Ha
Time/Years
Pattern of AFDI inflow and Area equipped for irrigation Series2
Series1
Figure 8: Pattern of AFDI inflow and Area equipped for irrigation

Figure 9: Pattern of AFDI inflow and Pesticides Consumption in India
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Seeds/100000Qtls
Time/years
Trend of AFDI inflow and Seeds in India
AFDI
Dist Quality

Figure 10: Trends of AFDI inflow and Agril. Electricity Consumption in India
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ElectricityConsumption(GWh)
Time/years
Trends of AFDI inflow and Agril Electricity Consumption
AFDI
Agril_Electricity

Figure 11: Trends of Agriculture labour and AFDI inflow in India
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25
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No.ofeconomicallyactivelabourinAgr(10million)
Time/Years
Trend of labour and AFDI inflow in India AFDI
T. labour
Male
Female

Figure 12: Trends of AFDI inflow and Trade variables in India
0
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0
5000
10000
15000
20000
25000
30000
35000
VolumeofTransaction/US$million
Time/Years
Trends of AFDI inflow and Trade variables in India Imports
Export
Trade
AFDI

Figure 13: Trends of AFDI inflow and Agril. Capital formation in India
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Volume/US$billion
Time/Years
Trend of AFDI inflow and Agriculture capital formation
AFDI
Capital form.

Figure 14: Trends of AFDI inflow and Agril. GDP in India
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Voume/US$billion
Time/Years
Trend of AFDI inflow and Agril GDP in India
AFDI
AGDP

Table 2.2: Effect of AFDI in Agriculture in India
VARIABLES Electricity Fert labour Irrigation AGDP Cap_Form
AFDI 3,400** 6.889** 0.393*** 1.067** 2.599 0.904
(1,382) (3.195) (0.130) (0.435) (1.888) (1.125)
Shift 61,825*** 79.81*** 4.904*** 14.24*** 41.79*** 11.59**
(6,619) (15.30) (0.624) (2.083) (9.043) (5.385)
Ch. Slope -3,307** -6.576** -0.383*** -1.033** -2.448 -0.798
(1,382) (3.195) (0.130) (0.435) (1.889) (1.125)
Constant 12,327** 58.83*** 17.66*** 40.52*** 70.26*** 16.40***
(5,556) (12.84) (0.523) (1.749) (7.591) (4.520)
Observations 36 36 36 36 36 36
R-squared 0.912 0.876 0.895 0.877 0.844 0.811
Standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1
Source: computed from various statistical data

Table 2.3: Effect of Agriculture in India
Source: Author, computed from various statistical data
VARIABLES Export Imports Trade Pesticide
AFDI 33.74*** 15.64*** 49.38*** 0.00364***
(6.011) (3.447) (9.347) (0.000530)
Constant 2,084 1,041 3,124 2.082***
(1,349) (773.4) (2,097) (0.119)
Observations 23 23 23 23
R-squared 0.600 0.495 0.571 0.693
Standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

Conclusion:
The study concluded that AFDI has a positive impact on Agriculture in India,
thus increasing AFDI inflow improves fertilizer & pesticide consumption,
irrigation adoption and production levels. Moreover, AFDI has increased the
involvement of India in the international market (trade ).
However AFDI does not has effect on capital formation in Agriculture

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