Inflow of foreign direct investment in the

agricultural sector of India

By Ananya Mitra on September 12, 2016
The agricultural sector in India is the main source of livelihood for more than 70 percent of
the rural population. Similarly half of the households in the rural population show some sign
of poverty (Singh & Walis 2015). In this scenario if the main aim of the Indian government is
economic development and poverty reduction, then the priority should be the growth of the
agriculture sector.
One of the major reforms in the agriculture sector in recent years is the inflow of foreign
direct investment. Even though most of the areas in agriculture sector is still closed for the
foreign investment. There has been significant increase in foreign investment in
several sectors.

Inflow of foreign direct investment in agricultural sector

since 1991
Since Independence, the government of India has encouraged the flourishment of the
agricultural sector. The sector is aided with several reformational policies and subsidies.
However, a major policy change took place after the liberalisation of the Indian economy in
1991. Along with other economic reforms an inflow of foreign investment in agricultural
sector was also opened (Wadhwa & Arora Wadhwa 2015).
Though the foreign direct investment in agriculture was permitted but the size of
the investments were small. This is due to the primitive structure of the sector and lack of a
technological base. Out of 129 million dollars of total inflow in 1991 only 6% was invested
in the agricultural sector (Dutta & Sarma 2008). Eventually with the development of the
Indian agricultural market and the improvising technology usage in the agricultural sector the
inflow of capital has increased to USD 40,885 million. The graph below evaluates the growth
of the agricultural sector with importance to the main crops of the country.

Growth of the agricultural sector. (Source: Handbook of Statistics on the Indian Economy
Reserve Bank of India 2014-15)
Inspite of the agricultural sector being a major source of employment for a large section of
the population in India, it does not get as much importance as the food processing sector.

Major agricultural products attracting foreign direct

investment
With the progress in technology the agricultural service sector attracted USD 76 billion of
investment which is 0.93% of the total inflow of foreign direct investment. And the
agriculture sector contributed 0.14% to the GDP as a whole. Moreover, the food processing
industry had USD 86 billion investment which is 1.05% of the total foreign capital inflow
(Kumar 2014). Similarly 100% foreign direct investment was allowed through the automatic
route in various sectors. These include horticulture, floriculture, development of seeds,
animal husbandry, pisciculture, aqua culture, cultivation of vegetables, mushroom and
services related to agro and allied sectors (Wadhwa & Arora Wadhwa 2015). In agriculture
machinery, total inflows during the period of 2001-2015 was USD 418.65 million.
Consequently foreign investment in horticulture and floriculture was USD 534 million
(Adhana 2016).

FDI in food processing industry. (Source: Handbook of Statistics on the Indian Economy
Reserve Bank of India 2012-2013)
The figure above shows the growth of the agricultural sector with an importance to the
percentage of investment in the food processing industry since 1991. A sharp increase in the
growth of the agricultural production between 2003 and 2004 is noticeable. Whereas, there
was fall in the following years with the maximum decline was in 2007-2008 because of the
recession worldwide. Along with the food processing sector, horticulture, floriculture and
animal husbandry had an increase in foreign direct investment after the liberalisation as the
demand for these goods increased in the foreign market.
Increasing demand of agricultural services and chemicals for cultivation has induced the
foreign investors to invest in above mentioned industries. However, the increasing demand of
the cash crops like tea, coffee, jute in the foreign market has initiated the government to
liberalise the policies referring to these industries.

FDI in different sectors related to agriculture

Major changes in the foreign direct investment policies in

agricultural sector
During the first half of the liberalization policy implementation the agricultural sector was
permitted with only 45% of foreign captial. Limited foreign investment has reduced the scope
of growth for the agricultural sector. However, in the later half of 2000, government
announced policies that indicated the improvisation of the agricultural sector with the
permission of 100% foreign direct investment in the agricultural sector through automatic
route. With higher inflow of foreign direct investment the growth rate of the agriculture
sector has increased to 4% (Singh & Walis 2015). 100% FDI was granted for sectors such as:

floriculture

horticulture

apiculture

cultivation of vegetables & mushrooms (under controlled conditions)

development and production of Seeds

planting material

animal Husbandry (including breeding of dogs)

pisciculture

aquaculture (under controlled conditions)

services related to agro and allied sectors

(Department of Industrial Policy and Promotion 2015).

Impact of foreign direct investment in the overall growth

of the sector
After the reformation in 1991, agriculture sector was opened for foreign investment and was
also followed by better technology, better seeds and thus rapid growth. However, the growth
was confined to certain areas which led to increase in equality in the country (Sawant 2014).
The interest of the investors in the allied sectors of the agriculture aided the export of goods
which perused a greater demand for them. However the production of food crop cultivation
declined for those products which have comparatively less demand in the international
market. However, the overall growth in the agricultural sector has been immense compared to
the period before liberalisation. Now India stands as one of the leading exporters of the
agricultural goods in the world (Agrawal & Khan 2011).
Service and manufacturing sector has largely been benefited from high inflow of foreign
capital. However, foreign direct investment in agriculture requires a more detailed research.
Both positive and negative impact should be closely analysed, in the context of Indian
economy. In a nutshell, there has been an immense reformation and the growth in the sector
after the introduction of the economic reform. However, better monitoring and regulation of
foreign direct investment is required for a good growth. Policies related to foreign investment
needs to be liberalised for the food crops. This might lead to technological boom and growth
in the sector.
References

Adhana, D.K., 2016. Foreign Direct Investment in Indian Agricultural Sector:

Opportunities and Challenges. KIJECBM, 16(3).

Agrawal, G. & Khan, M.A., 2011. Impact of FDI on GDP: A Comparative Study of
China and India. International Journal of Business and Management, 6(10), pp.71
79.

Chaudhuri, S. & Banerjee, D., 2010. FDI in agricultural land, welfare and
unemployment in a developing economy. Research in Economics, 64(4), pp.229239.

Department of Industrial Policy and Promotion, 2015. CONSOLIDATED FDI

POLICY, New Delhi.

Dhungana, B.R., 2013. The Role of FDI on Agricultural Sector in India. Department
of Business Administration. In FDI in India. New Delhi: Deen Dayal Upadhaya
University.

Dutta, M.. & Sarma, G.K., 2008. Foreign Direct Investment in India Since 1991:
Trends, Challenges and Prospects. SSRN. Available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1443577.

Kumar, S., 2014. Foreign Direct Investment in Indian Agricultural Sector:

Opportunities and Challenges States. Socio-economic voices, pp.113.

Sawant, A., 2014. Strength and Weaknesses of Indian Agriculture Sector in the Era of
Globalization. Procedia Social and Behavioral Sciences, 133, pp.2837.

Singh, K.R. & Walis, R.K., 2015. Foreign Direct Investment ( FDI ) & Agriculture
Sector in India. Indian Journal of Research, 4(3), pp.68.

Wadhwa, S. & Arora Wadhwa, S., 2015. FDI IN AGRICULTURAL SECTOR IN

INDIA: STATUS AND CHALLENGES Dr. Ideal Institute of Management &
Technology (Unpublished Work).