India: Foreign Investment In The Food Sector – The Present And The Road Ahead

Last Updated: 6 September 2017
Article by Vineet Aneja and Kaveri Kumar

India is at the cusp of establishing a robust and organized food sector. Many global players such as Amazon (USA), Nestle (Switzerland), Unilever (United Kingdom) and Yakult (Japan) are playing a key role in the food retail and processing sector. Foreign food retailers are eyeing the Indian market on account of investment opportunities and the huge consumer potential. Among the many demographic and economic reasons, the prominent factors luring foreign investors are the liberalization of the Foreign Direct Investment ("FDI") policy pertaining to food processing and food product retail trading, rapid rise in urbanization, steady growth in income levels, change in food habits demanding premium and packaged foods, and the transformation towards a fast paced digital economy.

It is projected, not only the big retail giants but also the mid-level foreign retailers are rolling out vigorous plans to enter the Indian market, estimating a third of the investments in the food and beverage segment. The center of attraction for the new entrants is not only limited to the big metros, but also towards the tier I and tier II cities and the immense demand that they hold.

The government in its thrust for attracting foreign investment relaxed the FDI policy pertaining to food product retail trading, in June last year. The present FDI Policy allows:

  • subject to the conditions stipulated in the FDI policy, 100% FDI under the automatic route for food processing industries; and
  • notwithstanding the FDI policy provisions on the trading sector, 100% FDI under government approval route for trading, including through e-commerce in respect of food products manufactured or produced in India.

As per the data provided by the Department of Industrial Policy and Promotion ("DIPP") FDI equity inflows received in food processing industries sector for the year 2016-17 was US$ Million 727.22. Further, the cumulative statement on sector-wise FDI equity inflows issued by DIPP, for the period from April 2000 to March 2017, indicated food processing industries aggregating 2.27% of the collective FDI inflow.

As food product retail trading is under government approval route, three retail giants namely M/s Amazon Corporate Holdings Private Limited ("Amazon"), M/s Grofers India Private Limited ("Grofers") and M/s Super Market Groceries Supplies Private Limited ("Big Basket") became one of the first companies allowed to sell food products online. Pursuant to receiving approvals for opening online stores, Grofers, Amazon, and Big Basket further submitted investment proposals to the erstwhile Foreign Investment Promotion Board ("FIPB"), for expanding their operations in retail trading of locally produced food products and for making investments worth USD 695 million over a period of time. The approval process for these investment proposals experienced a bottleneck with the recent abolition of FIPB; however, in the interim absence of FIPB, the approval process was taken forward by DIPP under the Ministry of Commerce and Industry.

In a recent development, Amazon, Grofers and Big Basket are reported to have received the FDI approval regarding their FDI proposals in food retail from DIPP. The approval is indicated to allow the three retail food giants to open food only retail stores, in order to sell their own brand of food products and procure food items from third parties (provided the local manufacturing norms are complied with).

Policy Initiatives Undertaken by the Ministry of Food Processing Industries ("MoFPI")

MoFPI through policy initiatives is working towards spearheading reforms in the food sector. Some of the prominent reforms undertaken by MoFPI towards attracting foreign investments are:

  1. Investor's Portal Set Up – information on potential investment opportunities in the food processing sector along with the incentives provided by the State and Central governments are made available to prospective investors in a single window.
  2. Uploading Food Map of India – the feature of a food map is introduced on MoFPI's website, to assist investors to deliberate on the viable location of their projects. The food map highlights mapping the potential of food processing in surplus production areas.
  3. Help Desk for the Industry - setting up of an investment tracking and facilitation desk for foreign investors. The help desk identifies potential investors and provides hand holding services and has also been involved with organizing events and investment meets in India and abroad.

The Present Environment and the New Reforms

Though the demand and market are ripe for tapping into the food retail segment; however, limiting foreign investments to only food based products has raised concerns for many foreign retailers, questioning the viability and profitability of the economic model. Many retailers are of the view that limiting the sale of products to only food items is not a feasible opportunity, as it limits the choices for attracting consumers on account of fewer selections. Many foreign retailers such as Walmart, Tesco, Metro Cash and Carry, Auchan Group have shown interest in potential investment opportunities in food retail, provided consideration is given to further relaxing the FDI policy to include non-food items (such as household, personal care items and other FMCG products).

Based on the interest shown by foreign retailers in bringing in further investments, provided non-food items are also allowed to be traded, MoFPI has placed a proposal before the central government to allow foreign food retailers to sell locally produced non-food items worth 25% of their investments at farm gate level, along with edible products ("Proposed Reform"). The Proposed Reform according to MoFPI will boost the investment climate in the sector. The proposal made by MoFPI is yet to be accepted, subject to comprehensive deliberations among the Ministry of Commerce and Industry, MoFPI, and the Ministry of Finance.

Viability of Further Reforms

The Proposed Reform is based on a fixed formula requiring certain percentage of foreign investments being used for non-food items manufactured in India. The leap provided by the Proposed Reform is said to deliver the much awaited push to local manufacturing, infusing it with new technologies and processes and enhancing back end infrastructure (such as warehousing facilities, services, quality control and logistics). The retail sector is considered to be among the top employment generators in India. It is projected that further liberalization of the food retail sector will be driven by generation of mass employment opportunities at different levels of the economic strata. Additionally, apart from having an impact on manufacturing and employment, relaxing the FDI policy in food retail has also become the need of the hour on the alarming situation of the agrarian economy being marred by drought and the lack of adequate infrastructure for sustainability.

The Proposed Reform is expected to propel healthy competition encouraging the sale of quality products at competitive prices, being beneficial for the consumers; however, its impact on crippling the Indian companies is also argued by some. Niti Aayog has put forth the proposal for incentivizing domestic investments based on generation of employment opportunities. On the other hand, the ease of doing business program initiated by the government along with enforcing amendments in various legislations has provided foreign entrants with a comprehensive platform for doing business in India with ease. The right balance would be in providing an economic environment conducive for foreign investments, along with focusing on providing incentives and addressing the concerns of the domestic companies leading to accelerated local investments and growth opportunities.

This update is authored by Clasis Law, Clyde & Co's associated firm in India

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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