Food processing has an important role to play in linking Indian agriculture to consumers in the domestic and international markets. With low farmer price realisations and significant wastage in the food supply chain even with the current level of production, only processing of food can secure farmer incomes against a slump in prices as well as reduce wastage.
Further, a vibrant food processing industry can be a catalyst for crop diversification. Also, food processing leads to significant employment generation – not only directly but also indirectly across the supply chain in production and procurement of raw materials and distribution of food products to consumers. This article attempts to analyse some of the challenges facing the Indian Food Processing sector and also highlights a few suggestions for addressing the same.
The big opportunity for India
As a food supplier…
India, with the second largest arable land in the world, and with diverse agro-climatic zones across the country, has tremendous production advantages in agriculture, with the potential to cultivate a vast range of agricultural products. If leveraged optimally, these advantages can lead to India becoming a leading food supplier to the world. Hence it is critical to develop the food processing industry to become a significant player in global agricultural and food Trade.
And as a consumer…
With a population of 1.16 billion, growing at about 1.4 percent per annum, India is a large and growing market for food products. Food products are the single largest component of private consumption expenditure. With a significant shift in India’s demographic profile in favour of younger population, increasing surplus incomes and changing socio-economic environment, food consumption patterns are set to change, in favour of processed foods which are convenient, hygienic and of consistent quality. Further, with liberalisation of trade in the post-WTO regime, India has the opportunity to export agricultural and food products to the world.
Growth of food processing industries has been sub-optimal because of high cost, low level of domestic demand and lack of competitiveness of Indian food products in the global market. A long and fragmented supply chain is the single largest bottleneck facing the sector. Supply chain constraints together with demandrelated issues as well as regulatory distortions have cumulatively resulted in several inefficiencies. The key impediments to growth of processed foods include demand-side, supply-side and regulatory issues. The demand side factors include:
• low per capita income
• socio-cultural factors such as preference for freshly cooked products as compared to packaged products and
• availability of low-cost domestic help The supply side factors constraining the demand for processed foods include:
• long and fragmented supply chain with independent players engaged in various value-addition activities such as input supplies, cultivation, processing, distribution, storage and retailing (unlike in other major agriculture/food producing countries, where a large number of food companies are integrated across the chain. e.g. ADM, Cargill, Tyson Foods)
• high cost of raw material (due to low productivity and poor agronomic practices) and lack of varieties amenable for processing
• lack of scale
• high cost of packaging
• lack of infrastructure (cost of power, lack of cold chains, storage, handling and transportation)
• high cost and poor quality of distribution Distribution of foods in India
Food products are sold through over five million food and grocery stores in India. The organised food retail market is estimated at INR 150-200 billion (less than two percent of total food retail in India). This is in contrast to developed countries, where food distribution is highly consolidated. The majority of food and food products are retailed through neighbourhood kirana stores, which focus on dry food products in the absence of infrastructure for cold storage. Bulk of fresh produce is sold by vendors with push carts, while meat, poultry and marine products are primarily sold by small retailers in wet markets. Such produce is associated with low product quality, lack of variety and low hygiene levels.
Exports of agricultural and food products
India has less than two percent share of global food and agricultural trade, despite its production leadership in agriculture. India’s exports primarily constitutes commodity and primary processed items, where price realisations are low. In addition, many products are showing single digit or negative growth.
The reasons for India’s insignificant share in global trade include supply side factors such as lack of consistency in supply and quality, lack of cost competitiveness, and demand side factors such as non-tariff barriers, short product life cycles and perception of Indian food products in overseas markets. Most exporters from India lack scale which has resulted in lack of economies in operations and renders them uncompetitive. Hence, exporters are not able to establish themselves as long-term players in the export market, rely on opportunistic businesses and are consequently, unable to develop technical and managerial expertise. These factors cumulatively lead to low investments by exporters in brand building, quality improvement and brand development.
Financing of the food processing sector Financing of farmers
Farmers often rely on unorganised sources of credit due to bottlenecks in access, timeliness in availability and adequacy of credit from organised sources. The key hurdles faced by banks in financing farmers are their inability to provideadequate collateral as security, and the potential for default, in the absence of an assured market for their Produce.
Financing of food processing enterprises
The food processing enterprises primarily comprise small and medium- sized companies, a large proportion of which have stand alone operations, with no linkages with farmers, and reliant on other organisations to undertake marketing/ further processing of their products. Consequently, companies in the food processing sector usually bear a steep cost of interest for the high risk perception associated with the nature of their operations.
Absence of well-developed risk mitigation tools has further impacted availability of finance to the food and agriculture sector. Additionally, crop insurance schemes in India have faced various issues including assessment of farmer yields at the mandal level, lack of past statistical data to calculate premia, high premia for certain crops and administrative hurdles in managing claims, thus resulting in poor economic viability as also limited benefit to farmers. FDI in food processing FDI in the food processing sector is low, constituting a mere one percent of total FDI in India for the period April 2000 to April 2009.
Government provides assistance to the industry and entrepreneurs under various schemes. While there are significant overlaps in these on the one hand, there are several unaddressed need gaps of the industry, on the other. Further, the restriction on quantum of financial assistance per unit disincentivises scale. Additionally, the structure of the scheme needs to be based on specific sectoral requirements. The Government needs to have a robust monitoring mechanism to assess the direct and indirect impact of such assistance.
Research and Development
Indian R&D institutions have not been able to develop innovative products, processes and machinery of global stature as reflected in India’s share in global trade. The industry is dissatisfied with the quality of research output and response of existing R&D institutions. The key reasons for this are segregation of academics from applied research, inadequate industry interface, low commercial orientation and lack of collaborative efforts with global peers.
Human Resources Development
There is lack of world-class managerial talent and entrepreneurship with adequate technical background in food sciences and technology. The curriculum for food sciences and technology courses is often outdated, and not in line with industry requirements. Further, there is lack of focus on capacity building of human resources employed by the food processing sector through periodic training.
Unlike in several leading food producing countries in the world, there is no updated and reliable source of information pertaining to the food processing sector such as on government policies, demand supply outlook, food standards etc. The process of obtaining information from existing industry agencies/bodies, even if available, is tedious. Further, there is limited sharing of information across institutes/bodies collating data. Small and medium sized players are particularly at a disadvantage on account of lack of availability of Information.
Food Safety, Hygiene and Regulations
Compliance with international food standards is a prerequisite to gain a higher share of world trade. At the same time there is growing consciousness among Indian consumers given recent controversies on quality standards of many food products. The existing mechanism for setting and harmonising food standards is inadequate in the context of the increasing importance of food hygieneand safety and evolution of international standards.
Many laboratories do not have basic facilities to test antibiotic residues, heavy metal contamination and other toxic contaminants in food products. Testing manuals do not describe parameters and procedures adequately. Moreover, limited coordination between the various food testing laboratories has led to inefficient utilisation of the food testing infrastructure available in the country.
The tax incidence (excise/ customs, state taxes) in Indian food products is higher than in many other countries. This has led to low affordability of processed products. Concessions have been extended to different products of food processing industry in last few budgets, but this has happened in a selective manner. The reasons based on which concessions were extended for one category hold true for all sectors of the industry.
Apart from the above, there are several other sector-specific issues, which influence the growth of the food sector. These include lack of cultivation of varieties amenable to processing, unequal advantage to the unorganised sector, absence of direct farmer-processor linkages and lack of focus on tapping specific sectoral Advantages.
Strategy and way forward Rabo India recommends the following strategy to harness the potential of the Indian Food Processing Sector.
1. Shift from supply-driven to demand-driven approach and commercialise agriculture There is a need to increase the availability of appropriate variety of raw material at reasonable price through increased productivity, efficient extension services (both public & private), focused R&D in and liberal imports of new seed/breed.
This can be further strengthened through an efficient futures market, enhanced credit availability and crop insurance to farmers. Contract farming needs to be promoted to deal with tiny and fragmented holdings, erratic production due to natural factors, subsistence farming, non-uniform and inconsistent supply of raw material, and long chain of intermediaries.
Increase affordability of food products by reducing costs through rationalisation of the tax regime and increasing supply chain Efficiency.
Rabo India recommends a ‘Zero’ excise duty and state-level taxes (VAT, octroi etc) on all food and beverage products (except foods with adverse health implications). Also, the peak custom duties on food processing and packaging machinery needs to be reduced to the lowest slab.
Enhance financing to the agriculture and food processing sector in a comprehensive manner given the intrinsic linkages of the two sectors
4. Improve food standards and safety systems through science-based setting of standards and strengthening of food testing network There are a number of measures that could be implemented in this regard. There should be a phase-wise approach for harmonization of Indian food standards with Codex, to the extent possible. There is a need to train small and medium enterprises
in the unorganised sector. Also the training of food inspectors on GMP, GHP & HACCP should be made mandatory.
A three-tier food testing infrastructure could be developed wherein the state / local laboratories could be involved largely in routine testing. Regional labs could undertake testing requiring more sophisticated and skilled testing procedure / techniques / equipments / manpower. National level laboratories could undertake only those tests which cannot be undertaken by state and regional laboratories.
5. Strengthen institutional framework to develop manpower and R&D capabilities to address global challenges Indian institutions should focus on developing cutting edge products, processes and packaging which are in line with the changing industry needs and global scenario. They should engage in both fundamental research and applied research focusing on industry needs.
They should focus on process optimisation and scale up from lab to commercial scale, which includes development of equipment and plant layout / design in a commercially viable manner. There is also a need for entrepreneurship development programmes and specialized management programmes to meet the specific requirements of the food processing sector.
6. Increase competitiveness of the small and medium enterprises by facilitating their access to best practices, technology, capital and marketing Opportunities.
Special enabling mechanisms are required to help these enterprises to access efficient technology, knowledge of market, soft credit. There is also a need to develop SSI clusters, anchor industrial centres/or linkage with anchor industrial units to have a network of small and tiny processing units.
7. Effective market development and awareness campaign to enhance the image of Indian food products, particularly overseas Modern format of retailing should be encouraged to eliminate intermediaries and provide large choice and hygienic food to consumers and expand processed food market. Accordingly, the need for FDI in food retailing needs to be reassessed against the apprehension of overall loss of employment due to displacement of retail stores and hawkers and also increasing bargaining power of big retail chain vis-a-vis farmers and processors.
There are a number of other measures which could increase the extent of exports from India. For example, a strong market intelligence network needs to be developed to cater to the information needs of stakeholders. Similarly, aggregation of small producers (particularly organic produce) could be promoted to build scale to make sourcing viable for importers.
Also, there is a need to improve the quality of infrastructure at ports, airports and railway stations for better storage and handling of fresh as well as processed food products. Ethnic and traditional
food could be promoted, especially among NRIs. Finally, abattoirs and integrated meat plants could be promoted for meat exports. 8. Foster public-private partnerships for infrastructure creation and technology upgradation There is a need to promote modern integrated cold chain (from farm to processing facility to retail outlet), set up pre-processing centres and pre-cooling facilities near farms and mandis, encourage investor-friendly food parks, upgrade food processing clusters, modernise agriculture markets/ warehouses and abattoirs.
8. Replicate successful Indian and international business models including cooperative models, in production, processing and marketing of food products.