Came across an article by article by Sajjid Chinoy of J.P. Morgan that outlines the benefits of FDI but also points out (rightly) that this is only the tip of the reform imperative.
Take the case of multibrand FDI. With food inflation averaging a staggering 10 per cent over the last seven years why haven’t we seen a supply response? Put differently, if the terms of trade have finally turned so decisively in favour of agriculture — and away from industry — why haven’t we seen more investment? Why haven’t farmers re-optimised their production process in response to the higher prices of some food groups?
In part, because they often don’t see these higher prices. The highly segmented supply chain means consumers pay more, farms get less and the middlemen pocket the difference. So the transmission of price signals from fork to farm — so critical to generating an efficient response — is severely compromised right now.
Of course, this is not the only distortion. Higher minimum support prices, for example, have also impeded an efficient response by skewing production unduly towards cereals and away from crops that most need it.
The experience of several countries has shown that FDI — exploiting the economies of size and scale — has typically streamlined the chain, facilitated better price signal transmission and helped keep food inflation in check.
More than 30 per cent of fruits and vegetables rot before being sold due to the lack of cold-storage facilities and poor transport infrastructure. FDI is not a panacea, but it is a means to fix the massive infrastructural shortfall and inefficiencies that characterise our food supply chain.
Between 2005 and 2009, FDI used to finance 80 per cent of our current account deficit (CAD), but over the last two years, it has financed only a quarter of the CAD — leaving us more exposed to volatile capital flows — a key reason why the exchange rate has gyrated so sharply over the last year.
Better governance and better regulation
The key to a near-term turnaround lies in resolving implementation bottlenecks on the ground. One in every 10 projects — in value terms — is currently stalled. It’s all about governance and regulation — land acquisition, environmental clearances, coal linkages, regulatory uncertainty in mining and power. Focusing on the brass tacks of project execution still remains key.