Decoding the FDI policy liberalization in food retail

By William Vivian John and Tanaya Sanyal, Luthra & Luthra Law Offices
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While agriculture employs almost half of India’s population, it contributes only about 14% to the nation’s GDP, resulting in low per capita income of the workforce engaged in the sector. And, while India produces a significant proportion of several of the world’s crops, its yields for certain crops are low.

William Vivian John Partner Luthra & Luthra Law Offices
William Vivian John
Partner
Luthra & Luthra
Law Offices

Besides low productivity, the key challenges facing Indian agriculture include low pricing for agricultural produce, with only a small fraction of the final price reaching farmers, and consequent lack of investment in and access to modern infrastructure. Wastage of post-harvest agricultural produce also remains a significant challenge.

In this context, the foreign direct investment (FDI) policy liberalization, through Press Note 5 of 2016, to permit 100% FDI with Foreign Investment Promotion Board approval in marketing of food products produced and manufactured in India, is a welcome move.

In essence, the implications of this liberalization may be summed up as follows:

(a) It permits FDI in multi-brand retail trading (MBRT) of food products up to 100% with government approval, as compared to the cap of 51% with government approval for FDI in the general category of MBRT of any product. While the general category includes unbranded fresh agricultural produce, the liberalization creates a separate enhanced limit of 100% FDI for trading of not just unbranded fresh agricultural produce but also branded food products.

(b) The existing sectoral restrictions on FDI in single and multi-brand retail trading (such as minimum capital commitments and mandatory investments in back-end infrastructure) will not apply to retail trading of food products. The trade-off however has been that instead of the 30% local sourcing requirement for MBRT generally, by providing that the liberalization applies to trading “in respect of food products manufactured and/or produced in India”, the requirement for food retail, in effect, becomes that all food products procured for retail should be manufactured and/or produced in India, conceivably encompassing even value addition in India on imported inputs.

(c) The terms “manufactured” and “produced” have been used disjunctively. While “manufacture” has been defined under the FDI policy to connote transformation of inputs into a new and distinct object, “produced” has not been defined. It seems clear, however, that this liberalization is intended to cover not just retail trade of manufactured food products but also farm-grown agricultural produce.

(d) Trading of food products manufactured and/or produced in India can be done through e-commerce, which is not permitted for MBRT in general.

Tanaya Sanyal Associate Luthra & Luthra Law Offices
Tanaya Sanyal
Associate
Luthra & Luthra
Law Offices

This reform thus seeks to bring FDI into the retail trading of food products, and also attempts to foster the integration of farmers into the retail chain. This would lead to: elimination of multiple intermediaries; higher prices and better price recovery by farmers; increasing participation and competition (with entities like pure-play food retailers now being eligible to receive FDI); incentivizing tie-ups of small-scale food manufacturers and cooperatives with large retail players, promising better price assurance; along with greater integration and scale in the farm-to-fork retail chain – all of which will benefit Indian agriculture.

While the above liberalization is welcome, some retail players have argued for allowing investee entities to retail a certain percentage of non-food items along with food products, though any such move is likely to be accompanied by stricter conditions for investment and hence may not meet industry expectations.

A more pressing reform would be liberalization of agricultural marketing laws, which create oligopolies of intermediaries under the agricultural produce market committees (APMCs), which license and control purchase of agricultural produce from farmers. Though, in this context, it is heartening to note that: (a) states such as Maharashtra have allowed agricultural producers to trade outside the APMC markets for specific commodities; and (b) the central government is moving to establish a unified electronic National Agricultural Market for trading in agricultural produce.

However, with no applications for FDI in food retail having been reported since the above liberalization, it remains to be seen how the government further shapes the contours of this liberalized policy.

William Vivian John is a partner and Tanaya Sanyal is an associate at Luthra & Luthra Law Offices. Gayatri Loomba, also an associate, assisted with research. This article reflects the legal position prior to the 2017-18 budget. The views expressed here are personal. They are intended for general information purposes and are not a substitute for legal advice.

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