Although the Indian economy is poised to grow at a healthy 8.6 per cent this fiscal, the continued sharp decline in foreign direct investment (FDI) inflows, rising cost of exports and high prices of essential commodities, food items and their wastage during transportation from the farm to the markets need to be seriously addressed.
The 2011-12 annual Budget to be unveiled by Finance Minister Pranab Mukherjee will also have to address the growing demand from various quarters including countries like Britain, the U.S. and France, business chambers and lobbies to open up its insurance, multi-brand retail and banking sector for enhanced FDI participation.
The Indian retail industry is the fifth largest in the world majority of which is unorganised.
With the high economic growth scenario, this industry is expected to grow at a pace of 25-30 per cent annually and it accounts for over 10 per cent of India's gross domestic product (GDP) and around 8 per cent of the employment.
The recent spurt in prices of essential commodities, especially food items, has provided the trigger to the government and those who favour opening up of the retail sector for enhanced FDI. A strong view seems to be emerging within the government that it was time that a strong infrastructure from ‘ farm-to-fork' is put in place to reduce the gap between prices of commodities, what the farmers get and demand for the same.
Farm-to-fork refers to, in the food safety field, the stages of production of food: harvesting, storage, processing, packaging, sales, and consumption.
FDI in farm sector
There is thinking within the Commerce and Industry Ministry that allowing FDI into the sector would help reduce the gap between prices of a commodity from farm to fork. India's infrastructure development needs are vast and there is scope for development of retail and logistics.
The Prime Minister's Economic Advisory Council has also expressed concern over the decline in FDI in the current year stating it was important for policy makers to examine the concerns of foreign investors, which has resulted in this outcome and take considered and appropriate steps. “The need is also to continue to encourage the flow of other kinds of equity investments and understand and meaningfully act on the concerns that this class of foreign investors may also have,” it said.
Official data is not very encouraging with FDI inflows declining by 23 per cent to $16.03 billion in April-December 2010 from $20.87 billion in the same period in the previous year. The Prime Minister's Economic Advisory Council has stated that inbound FDI could decline by 22.47 per cent to $27.6 billion in 2010-11 from $35.6 billion in 2009-10. India received FDI worth $21 billion during April-December 2010, a decline of 22 per cent over the year-ago period. The country had attracted FDI valued at $27 billion in 2009.
The country has been under pressure to open up more sectors, including insurance, banking and multi-brand retail trade for increased FDI. There has also been a strong demand for raising FDI in the defence sector to at least 49 per cent despite strong resistance by the Defence Ministry. The President, Pratibha Patil, also echoed the sentiments of the Government when in her address to Parliament she said: “We have to strive to make the domestic environment more conducive to investment particularly foreign direct investment.” There is also a need to address the issue of allowing ways to spur investment in cold chains and retail to reduce wastage, without hitting the small stores.
On the other hand, Indian exports are back on the path of robust growth and the country has projected a $450 billion export turnover by 2014.
The nation is all set to breach the $200 billion target and post a record $225 billion for 2010-11. However, exporters are still plagued with high transaction costs and certain other disadvantages compared to their competitors, including the neighbouring countries.
The Federation of Indian Export Organisations (FIEO), while welcoming the efforts of the Government to reduce costs, has argued for a more pro-active action to address the issue.
A Task Force recently submitted a report on reducing transaction costs but other than this, drastic action needs to be put in place in the shape of incentives and tax breaks for exporters to make Indian exports competitive. Exporters incur transaction costs not only in transportation of goods to various destinations and dealing with banks, but also in complying with various laws and procedures, besides meeting onerous documentation requirements.
In fact, the costs involved in getting the benefits of various export promotion schemes are very high. At every stage of obtaining excise rebates, refunds of unutilised Cenvat credit, verification of duty credit scrips, proving discharge of export obligation, release of bonds furnished to Customs and fixation of input output norms or brand rates of duty drawback, exporters have to pay a heavy price.
The Finance Minister would do well to address some of these issues and more the procedures simplified and more responsive to the needs of the country as a whole rather than limiting them to certain sections of exports.
Keywords: Run-up to Budget 2011-12