Do we want FDI in agriculture?There are few studies showing that foreign investment in farming stimulates growth.
Foreign direct investment (FDI) in agriculture has several dimensions. Scholars around the world are debating whether FDI in agriculture is desirable or not. This division is partly associated with a particular school of thought. The capitalist school, generally, does favour FDI in agriculture as any investment. The socialist school opposes it. But these dogmatic views changed after the 2007-08 global food price hike. Currently, most food-deficit countries are interested in FDI in agriculture for food security purposes.
In the traditional view, the highest negative magnitude of opposition is related to the access to land which is generally depicted as land grabbing. Other worrisome aspects are water and the environment. However, people think that employment, market access, infrastructure, food security, technology transfer, education, working conditions and health aspects of FDI in agriculture are positive facets.
Transparency, social justice and the environment are major concerns associated with FDI in agriculture. Still, scholars are struggling to access the exact data on FDI due to hesitation to disclose all information for fear of capital flight. Interestingly, a recent amendment to the Foreign Direct Investment and Technology Transfer Act in Nepal has not been considered as a routine phenomenon. Several conspiracy theories have surfaced regarding the intention of the government in making this sudden amendment.
For a long time, Nepal has been protecting the primary agriculture sector from FDI. However, the secondary sector of agriculture was still open to foreign investors. For example, establishing a dairy industry, juice factory or tea processing plant, among others, was not prohibited under this act. The 20-year vision document for the agricultural sector, Agriculture Development Strategy 2015-35, which has been endorsed by the Cabinet, has also prohibited FDI in primary sectors. Several interest groups had actively, but unsuccessfully, lobbied to have FDI opened in the primary sector during the preparation phase of the Agriculture Development Strategy.
Do we benefit?
It is worth discussing the potential advantages and disadvantages of FDI in agriculture. Theoretically, economists believe that FDI not only brings capital but also technology and employment to the recipient. Most FDI was found to be directed towards areas where investment in agriculture is extremely low. In Nepal's case, public investment is much lower. The farm budget has never crossed 3 percent of the gross domestic product even though agriculture accounts for two-thirds of the jobs. In this scenario, FDI can be looked at positively; but the issue is whether any big deal can be expected from foreign capital, considering the existing political and socio-economic setting.
Currently, capital is not a primary issue in Nepal's farm sector. Many motivated youths, and even some corporations, are investing in agriculture. Furthermore, despite a low budgetary allocation, the government has instituted the provision of subsidised credit facilities for the target sector including agriculture. This provision is pivotal for offsetting the investment gap in the agriculture sector. But poor demand for such credit facilities partly indicates that, in the current situation, investment deficiency might not be an immediate issue. If Nepal gets technological inputs from FDI, demand for capital may also increase.
Doing Business is one of the most important indexes which reflects the perspective of FDI inflow. In the latest Doing Business Report 2020, Nepal ranks 94 with a Doing Business score of 63.2 which is a weighted average of several sub-indexes ranging from 37th rank (Getting Credit) to 175th rank (Paying Taxes). Nepal ranks in a relatively lower position regarding enforcing contracts, getting electricity, starting a business, dealing with construction permits, registering property, resolving insolvency and protecting minority investors. Similarly, trading across borders is also a relatively difficult task to perform in Nepal. Considering these issues, a huge inflow of FDI, especially in agriculture, is not likely to happen.
The last three years were considered to be a stable period in Nepali politics. However, the recent political turmoil has destabilised the political setting. An unstable political system has a significant and direct effect on the confidence of the business community. Furthermore, the landholding structure and cost of labour and other factors are not attractive for significant FDI. In the last fiscal year, despite the strong message of political stability, just four foreign-funded agro and forestry-based industries were registered in Nepal. The per-unit cost of the projects is just Rs133.75 million and the per-unit employment is just 45 people.
Empirical results suggest that FDI inflow is not significant even in countries having a good track record in agricultural exports. Brazil, the Netherlands, India, Thailand, Australia and the United States are a few among them. According to the latest statistics of the Department of Industry, there were 5,052 FDI-funded projects in Nepal as of the fiscal year 2019-20. Among them, the services sector attracted the highest number of projects whereas agriculture and forestry-based sectors received just 288 projects. Furthermore, the cost per project (Rs30.73 million ) and employment per project (36 jobs) were also the lowest in agriculture and forestry-based projects.
Those statistics are of secondary agriculture industries. More interestingly, the profit margin for the secondary sector is far greater than for the primary sector (production). India has also opened agriculture to FDI. Despite having larger landholdings and various benefits and subsidies compared to Nepal, a significant amount of FDI has not been observed in India.
Strong screening, monitoring and evaluation are critical factors for success. Moreover, FDI should be restricted in the Nepal Trade Integration Strategy priority crops if the real intention of the government is to promote export. Further, there is not much empirical evidence showing that FDI in agriculture stimulates economic growth. Therefore, both extreme instigation and frustration are not necessary for FDI in agriculture. Even then, a strong safety net must be in place to ensure that no single marginal farmer is harmed from FDI in agriculture.