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9/29/13

Mrunal [Agro/Food Processing] Export, Dumping, FDI, Finance, Taxation, Budget Provisions, CODEX, NWR, BRGF, RKVY Print

[Agro/Food Processing] Export, Dumping, FDI, Finance, Taxation, Budget Provisions, CODEX, NWR, BRGF, RKVY
1. Prologue 2. Agriculture Export 1. Tariff Barrier 2. Dumping 3. Non-Tariff Barrier 4. CODEX standards 5. HACCP 3. FDI: Agro, Food Processing, Retail 1. FDI: Agriculture 2. FDI: Food processing 3. FDI: Retail 4. FDI: Multibrand Retail 1. Difference In Single Vs Multibrand Retail? 2. The Diluted Conditions 4. Finance 1. Why cant Farmer get loans easily? 1. Negotiable Warehousing Receipts (NWR) 2. WDRA 3. Benefits of NWR receipts 2. Why cant food entrepreneurs get loans easily? 3. Permission-raj 5. Taxation 1. Budget 2013: Agro and Food processing 2. Budget 2013: Taxation 1. Income tax deduction 2. Custom Duty 3. Excise Duty 4. Service tax: Negative list 6. Misc. 1. Backward Regions Grant Fund (BRGF) 2. Rashtriya Krishi Vikas Yojana (RKVY)

Prologue
In the previous articles we saw 1. Food processing industry: Awesomeness and Obstacles
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2. Food processing industry: ruckload of Government Schemes and bodies 3. Marketing of agricultural produce: issues and constrains, Nuisance of APMC Acts and
Commission Agents

Moving on: New GS-Mains Syllabus of UPSC Topic touched in this article

Effect of policies of developed and Agriculture export: Anti-dumping, tariff-non developing countries on Indias tariff barriers, Codex and HACCP standards. interests Devolution of finances up to local levels and challenges therein. Regulatory bodies Government policies in various sectors Effects of liberalization on the economy Government Budgeting issues relating to growth, development and employment.

Backward regions grant fund (BRGF) Warehousing Development and Regulatory Authority.

FDI policy for agriculture, food processing and retail

Budget 2013 for Agriculture and Food industries The finance/credit problems faced by farmers+ food-entrepreneurs.

By the way, regarding some earlier comments about what happened to my geography location factor article series? Ans. I got bored writing geography hence shifted to agro/food processing topic for a while, but rest assured [Geography] location factors article series will be finished before Mains 2013.

Agriculture Export
World Trade Organization (WTO) aims to improve international-trade by reducing the tariff and non-tariff barriers. Lets refresh the concept:

Tariff Barrier
Taxation tools that affect import / export: Examples 1. In the Colonization-era, British had imposed heavy taxes on Indian textile coming
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Mrunal [Agro/Food Processing] Export, Dumping, FDI, Finance, Taxation, Budget Provisions, CODEX, NWR, BRGF, RKVY Print

to London, in order to protect their local industries from competition. 2. Before the LPG reforms of 1991, India too had imposed heavy taxes on most of the imported items: be it wristwatches, goggles, cars or radios. 3. Aug 2013, Union Government increased the import duty on gold to 8 per cent to reduce the gold consumption (and to provide sustainable livelihood to desi-smugglers who were not given 100 days in work under MNREGA.)

Dumping
When businessmen export goods at a price that is less than the price charged in the domestic market- its called dumping. WTO system=> Agreement on Subsidies and Countervailing Measures (SCM)=if a country finds evidence of dumping, it can extra impose duty (known as countervailing duty, CVD) on such dumped products. (=meaning this type of tariff barrier is permitted in WTO) USA has imposed a countervailing duty (~6%) on Indian frozen shrimps, because Indian shrimp gets plenty of subsidies from Indian government for shrimp farming and export and hence Indians are able to dump shrimps to USA and hurt USAs local shrimp businessmen. (or atleast thats what America claims). Anyways, Indian shrimps are not the only items subjected to anti-dumping duty in USA. Shrimps from Thailand China Malaysia Why subjected to anti-dumping duty in USA? government buys shrimp from farmers and sells it to processors at low price government gave finance to build the worlds largest shrimp-processing and export plant government gave finance to build shrimp farms.

Dumping by India
List not exhaustive (but in recent news) Country Which Indian export was slapped Anti-Dumping duty Recently China also started Anti-dumping investigation on Indian exports such as 1. food preservative chemical from India (known as TBHQ)- widely used in Chinese food industry. 2. Optical fiber imports from India after allegations from the local Chinese industry that they were being sold at artificially low prices.

China

Thailand Indian steel Indonesia Against two leading Indian steel firms: Jindal and Essar.

Dumping to India (by foreigners)


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Mrunal [Agro/Food Processing] Export, Dumping, FDI, Finance, Taxation, Budget Provisions, CODEX, NWR, BRGF, RKVY Print

List not exhaustive (but in recent news) 1. Weve slapped anti-dumping duty on steel wheels imported from China used in commercial vehicles. 2. Under probe: US, China, Malaysia and Taiwan: Because Theyre exporting solar equipment to India at ridiculously low prices and was bleeding the desi industry. Similar issue with glassmakers and electric cable manufacturers from those countries.

Non-Tariff Barrier
Non-tariff barriers affect import/export, without using taxation tools. For example Under Gold control Acts of 1960s, An Indian Gold Smith was not allowed to possess a stock of more than 300 gms of primary gold at any time. On ivory, fur, tiger skin/bones, narcotics, illegal weapons, Import prohibitions explosives etc. When Murthy started Infosys, he had to make 50 trips to Delhi Import licensing for three years just to get a license to import computers. We already saw some duty credit schemes for Agri-exports in Export Subsidies the second article. click me Labour/Environment e.g. some developed country banning import from third world standards country saying child labour was used etc. Health Standards Codex, HACCP- given below. Quantitative restrictions

CODEX standards
In the 60s, FAO+WHO setup Codex Alimentarius Commission. To develop harmonised international food standards, guidelines and codes. In WTO system => Sanitary and Phytosanitary measures (SPS Agreement) a country can impose ban on imported food products, if they do not meet the Codex standards. (=meaning this type of non-tariff barrier is permitted in WTO). and as you can guess, Indian food products get banned/restricted in developed countries for not meeting those quality standards This is a two-way street though, India also banned import of American Chicken to prevent Avian influenza among Indian poultry. (Although USA has dragged India to WTO saying India has not provided any scientific evidence in line with international standards to justify this ban.) Anyways, here are some of the Indian food export, there were banned in US/EU/China/Japan in past. Indian food item 1. Groundnut banned/restricted abroad thanks to Aflatoxin
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Mrunal [Agro/Food Processing] Export, Dumping, FDI, Finance, Taxation, Budget Provisions, CODEX, NWR, BRGF, RKVY Print

2. Mangos

stone weevil, fungus foot-and-mouth disease Antibiotic residues Heavy metals and antibiotics bird flu/Avian influenza

3. Indian Buffalo Meat 4. Indian Shrimp 5. Fish 6. poultry

Adding insult to the injury, once the ban is imposed and IF we want to get the ban revoked, then Weve to invite their food inspectors/specialists to India, let them check our premises Weve to bear all the cost of their accommodation, travel expenses etc. =expensive game, small Indian players/companies cant survive in the international food business.

HACCP
HACCP (Hazard Analysis Critical Control Point) This certification system is adopted by the Codex Alimentarius Commission. For preventing microbiological, chemical and physical contamination along the food supply chain. So, if you want to safely export food products to US/EU, then first you need to get certificate that your plant meets the HACCP standards. (certificate system similar to ISO standards) It doesnt mean we havent anything. Here are some of the steps taken: Export Inspection Council of India (EIC) statutory body under Commerce Ministry for inspection- certification for marine, milk, meat, poultry, marine and egg products, and honey for export units. EIC EIC approved units have to implement following 1. international standards of CODEX laid down by FAO and WHO, 2. Good Management Practices (GMP) 3. Good Hygiene Practices (GHP)
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EIC certificate is recognized in European Commission (EC) for marine products and basmati rice and by the US for black pepper. Agricultural and Processed Food Products Export Development Authority (APEDA) Statutory body under commerce ministry Provides financial assistance to food exporters. Bears the cost for doing analysis of peanuts, grapes for meeting HACCP/Codex standards. Bureau of Indian standards has adopted the CODEX, hazard analysis and critical control point (HACCP) and food hygiene standards helps Food processing units to adopt these systems on a voluntary basis

APEDA

BIS

Were collaborating with USA, UK, Netherlands, Switzerland and collaboration Germany for Agri-technology transfer, financial and marketing tieup and quality control. Ministry of food processing industries Gives financial assistance for fee charged by Certification Agency, plant and machinery, technical civil works, and other expenditure towards implementation of Total Quality Management System, ISO, HACCP, GMP and GHP. General Area: max 15 lakh assistance NE, difficult area: max. 20 lakh

MoFPI

Additional Suggestions
Negotiation Foreign Offices Government needs to expedite the negotiations with US, EU, China and Japan, to lift restrictions on Indian fruit/food/marine exports into these countries. Encourage importing countries (primarily USA, EU, Japan) to set up offices in India for certification of export consignments

APEDA already supports the cost of quality certification programs Certification such as HACCP and Eurepgap for grapes and peanuts. More food-items should be included in this scheme. Food Safety and Standards Authority of India. We already saw its
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Fssai

salient features in previous article, click me FSSAI needs to harmonize the differences between Codex standards and Indian food standards. Encourage food testing laboratories in India to obtain accreditation from international agencies. Given high cost of international accreditation, Government can incentivize laboratories by part funding these costs. Government should introduce certification zoning systems: e.g. pesticide free zones, organic production zones, disease free zones to facilitate high value exports from India Food exporters to US/EU are first required to their samples to the importing country to get trade-approval. Government should provide financial assistance to small/medium exporters for this.

Desi Labs

Zoning

Sample Cost

FDI: Agro, Food Processing, Retail


Foreign Direct Investment: Agriculture
100% FDI with automatic approval in following sectors: Seeds and planting material, their development and production Conditions Seeds 1. Genetically Modified seeds/plants= have to comply with a. Environment (Protection) Act b. Genetic Engineering Approval Committee (GEAC) 2. If seeds are imported then have to comply with National Seeds Policy 1. 2. 3. 4. Animal rearing + dog breeding Poultry breeding farms Aquariums Pisciculture (breeding, rearing, and transplantation of fish by artificial means aka fish farming) 5. Apiculture (bee keeping) No FDI is not allowed in any other plantation except Tea. In Tea sector:
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Livestock

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Plantation

49% FDI via automatic route 100% FDI with government approval.

Note: Besides ^above, FDI is not allowed in any other agricultural sector/activity In July 2013, Government changed FDI limits in 12 sectors, here is a fancy graphic courtesy of Indiatoday

FDI: Food processing


India allows 100% FDI in food processing sector.
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Foreign firms 1. dont need government-approval to start business in India. 2. Are eligible for grants, subsidies, benefits offered by various government schemes. Our food industry got FDI >Rs.6000 crore in last three years (2009 to 12) When talking about FDI in food processing, a doubt comes in mind: if foreign giants are permitted in India, will there be no place for small players, will they be wiped out? In Trivandrum, people use more than 10 different spices in their cuisine, while in New Delhi and Mumbai, barely 4-5 spices. Different communities in each state prefer different blending of spices, color/pungency in chilli-powder. Fragmented Demand vs Economies of Scale Cottage and small units do well ^in such product segments because of their local traditional knowledge. But Bigger enterprises may find it difficult to enter into such fragmented and price conscious consumer base. Their large scale of economies may not be optimized for it. MNCs economies of scale to be effective, theyve to make something with large demand e.g. cream-biscuits, ice-cream or chocolates because kids from Kashmir to Kanyakumari like it irrespective location, community or religion. Wheat flour has daily and universal demand in India. But most Indians prefer to get wheat grains and get it milled in Local flour mills. MNCs are not likely to enter into such products, as it is difficult to charge premium prices for their brand image, advertisement costs and a narrow consumer base for readymade packaged flour. In IT/BPO cities like Banglore, Pune, Hyderabad =fast pace of life = big demand for processed/ready to eat food among working professionals/couples. But cities like Ahmedabad, Jaipur or Indore but pace of life is not that fast. Hence processed foods has not made as much an entry/demand.

Cheapness

Pace of life

Thus, MNC-food Giant doesnt get automatic success is every region and every product. Small players have their own opportunities in the food processing sector, while big / international players have theirs.

FDI: Retail
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E-commerce

100% via automatic route but only in Business to Business (B2B) e-commerce and not in retail trading. 100% via automatic route upto 49% via automatic route upto 100% with government approval

Cash and Carry wholesale trading Single Brand Retail.

List of Single Brand retail wholl setup shops in India: Single-Brand Retail IKEA Pavers England Brooks Brothers Damiani Promod Le Creuset Decathlon What do they sell? Furniture British Footwear American Luxury Clothing Italian Jewelry French Fashion Crockery Sporting Goods

FDI: Multibrand Retail


Maha-clichd topic, you probably have read/heard/seen it dozen times already. Hence not going into all details. Country India China, Thailand, Russia, Indonesia, Brazil, Argentina, Singapore Permitted limit of FDI in Multibrand Retail 51% with government approval 100%

Difference In Single Vs Multibrand Retail?


Single Brand Retail Multi-Brand Retail Multi-brand retail store like Walmart sell products from more than one brand e.g. mouse-keyboard from Dell, HP, Logitech and Microsoft.
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they sell only their own products. Example in IKEA store you can buy sofa, bed, chair, table, cupboard etc- but they all belong to IKEA brand only.

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While Printer from HP, Cannon, Epson and so on FDI upto 51% with government approval Similar condition on 30% procurement +additional conditions on location and backend infra. can be setup only the states that agreed. (list given below)

FDI upto 100% with government approval

Need to procure of 30% of the goods from Indian MSMEs, village and cottage industries, artisans and craftsmen, in all sectors.

can be setup in any city, any state.

States/UT that permitted Multibrand Retail


As per the official FDI circular, State Governments/Union Territories would be free to take their own decisions in regard to implementation of FDI in Multibrand Retail. As of June 2013, Following states/UT permitted foreign giants to open multi-brand retail outlets in their area. 1. 2. 3. 4. 5. 6. 7. Andhra Assam Delhi Haryana HP JK Karnataka 8. 9. 10. 11. 12. Maharashtra Manipur Rajsthan Uttarakhand Diu-Daman-Nagar Haveli (UT)

(As of June 2013)

But How / Why is Multibrand-FDI relevant/important from food processing/agro point of view? desi food players are mostly small scale = poor economies of scale = they dont have the money to invest in backend infrastructure. Government made FDI condition that Retail giant needs to invest part of his FDI investment into backend infrastructure (=processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house,
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less Wastage

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agriculture market produce infrastructure etc.) These retail giants have deep pockets = large economies of scale = they use direct purchase / contract farming to get the fruitsveggies. Thus middleman eliminated=farmer gets more price. Government made FDI condition that Retail giants need to buy part of their goods from small scale industries. Increases direct/indirect employment opportunities in the supply chain, logistics, retail and wholesale. The Foreign giants bring their own IT technology, best management practices for running the business at extreme efficiency. Foreign giants will tie up with a local player (e.g. Bharti, Tata etc)=Indian managers/workers in those desi companies also learn new things Later some of thm might setup their own firms utilizing the workexperience=Thus foreign business knowledge, technology trickles down and benefits Indian economy.

Better Income

Small Scale

employment

Techknowledge upgrades

The Diluted Conditions


No investors came forward, even after Government permitted 51 per cent foreign direct investment in multi-brand retail (henceforth referred as Walmarts to save the typing headache). so recently government decided to relax the conditions to attract them (+to bring more dollars to calm down the rupee fall) Tight Conditions before Diluted After July 2013 Reform Matter left to the discretion of the state governments. Meaning Walmart can open retail stores even in cities with less than 10 lakh population (e.g. Gurgaon and Aurangabad), with the permission of the States or Union Territories.
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CITIES

Walmarts can be opened only in cities with more than 10 lakh population (as per 2011 census)

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MSME

Walmarts will need to buy 30% of its goods from small vendors. *Small vendor= an Indian micro medium small enterprises (MSMEs) with total investment of $1 million.

Walmart still needs to buy 30% of its goods from small vendors but Definition of small vendor relaxed. Small vendor now includes even a medium scale industry upto $2 million. And, during the course of this relationship, if that small supplier outgrows the investment of $2 million, even then such dealing/procurement is allowed. The 50% only for the first tranche of $100 million. In other words, if WalMart is bringing $100 million FDI in first go, then, 50%=$50 million will have to be spend in backend infrastructure. But after that, If WalMart brings another $50-100200 million FDI, they dont need to invest any part of that money in backend infrastructure in India.

BACKEND

Walmarts needs to invest 50% of its FDI investment into backend infrastructure. example of backend infrastructure=processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, will not be counted as backend infrastructure.

Finance
To run any type of business: be It farming or food processing= you arrange for finance. What are the Sources of Finance? Banks NABARD regional rural banks, cooperative banks, commercial banks offers refinance facilities for food processing, agri infrastructure, development Small Industries Development Bank of India gives loan to Micro Small and Medium Enterprises (MSMEs) in the country
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SIDBI

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although Food processing sector forms very small part of its loan portfolio Export Import Bank Helps in financing and facilitating foreign trade/export, including for food processing companies. National Cooperative Development Corporation helps in promoting, planning and financing the agricultural supply chain from production, processing, storage and trade also helps in marketing fertilizers, pesticides and agricultural machinery etc. Agricultural and Processed Foods Products Export Development Authority (APEDA): helps to form market linkages between desi producers vs international market financial assistance for market development, infrastructure etc. Agricultural ministry runs many schemes for specific crops, seeds, irrigation, farm implements, inputs, infrastructure and training National Horticultural Board gives financial assistance for post-harvest management infrastructure, R&D, soft loans etc. with most of the schemes directed to specific horticulture subsector of the food processing industry. financial assistance for HRD, Quality testing, food parks, slaughter houses, cold storage etc. Non-existent for food processing sector.

EXIM

NCDC

APEDA

Sharad Pawar

NHB

MFPI venture funds/angel investors

But both farmers + food processing entrepreneur have trouble getting loans/financing. Why?

Why cant Farmer get loans easily?


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Bank manager hates NPA in their branch. Because it affects his reputation and further career growth/promotions. On the other hand. shrewd farmer good farmer Im not going to repay the loan because I know that government will launch another debt-waiver scheme just before election and my loan will be forgiven! Why the hell should I pay the loan diligently while ^others can get away scotfree?

Hence bank reluctant due to lack of credit-discipline among farmers. NPA Even when banks give loan, agriculture is a risky business because of pest

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