India is principally an agricultural country. Agriculture and its allied activities provide a livelihood for more than half of the Indian population. In terms of gross domestic product (GDP), the sector accounts for 14% of India’s GDP. Agriculture also serves as an input for other sectors by providing them raw materials. India is the largest producer of milk, jute, organic fibers and pulses and the second-largest producer of sugarcane, wheat, rice, vegetables, fruits, groundnuts and cotton. The country is also the leading producer for certain plantation crops as well as spices.
One of the major reforms over the years for the Indian agriculture sector is the inflow of foreign direct investment (FDI). Owing to favourable numbers from the Indian agricultural story, the sector has been of prime focus for the Indian government post-independence. This also falls in line with the memorandum of economic development and poverty reduction for the current government.
Studies have shown that the economic development of a country is positively affected by foreign direct investments. While the agricultural sector was always supported, there was a major policy change which took place post the liberalization of the Indian economy in 1991. Moreover, with the passing of the Food Security Act in parliament, the need for investments in the agriculture sector will inevitably increase.
During the first half of the liberalization policy, the agriculture sector was only allowed 45% of foreign capital. This was followed by improvisation in the policies by the government in the latter half of 2000. The policy was later amended to allow 100% foreign direct investment under the automatic route.
According to Department for Promotion of Industry and Internal Trade (DPIIT), which regulates the promotion, facilitation and approval for FDI in India, the following agricultural activities are allowed for 100% FDI under the automatic route:
- Cultivation of vegetables and mushrooms (under controlled conditions)
- Development and production of seeds
- Planting material
- Animal husbandry (including breeding of dogs)
- Aquaculture (under controlled conditions)
- Services related to agro and allied sectors
Other than agricultural services, 100% FDI is only allowed in the tea sector.
The data for FDI inflows shows that foreign investors have a keen interest in the Indian market. The increased interest of foreign investors has been kindled by a young population, huge consumer base, growing middle class, increased urbanization and awareness and the rising disposable incomes.
The government of India is working relentlessly to make agriculture in India a promising sector for global investment. They have taken various steps in order to revitalize the agricultural sector and improve the farming community on sustainable basis such as:
- 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
The marginal increments in the agriculture investment scenario can be increased in case few policies are chalked out along with the stability of the government and its institutions. The agrarian economy of India can become the torchbearer for applying FDI in the agriculture sector. To learn more about FDI Policy in India, please click here.
This blog has been authored by Kanika Verma.