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The Indian Food Processing Industry

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India can be defined clearly as a “Land of Gaps” and thus, a “”. These gaps and the aligned opportunities are two sides of the same coin which has a vital impact on the production of food, and on ecosystem security. It is clear that the country’s much-vaunted production potential is still unrealized. The contrast between actual production and processing capabilities always offers an array of opportunities thanks to which food processing is one of the fastest evolving sectors in India. The opportunity in the food processing industry is vast, but so are the challenges; the need of the hour is to improve technology and productivity in order to be competitive globally.

The food processing industry has gained wider acceptance across the nation and is poised to grow manifold in the near future. Food processing is on the radar of many investment engines as processing sectors like dairy, bakery products, ketchups and gourmet segment present a slew of attractive opportunities. This industry provides direct employment to 1.6 million Indians and constitutes a sizable share (~9-10%) of the overall manufacturing output by value. Unlike other manufacturing, food processing not only adds to the economic value but also lifts the nutritional and calorific value of the produce.

The size of the Indian food processing industry can be estimated at USD 150 billion and is expected to grow at a CAGR of 10% to reach USD 200 billion by 2015. An estimated 15 private equity and venture capital funds deals, with a total value of USD 285 million, were clinched in 2011. The huge consumption potential, as well as the ample supply of raw materials, provides the backing for such deals.

Currently, a large part of food processing happens primarily on the commodity side. However, as the nutritional needs of the Indian consumer increase, alongside a shift towards an urban lifestyle, it is expected that value-added products will witness high growth. Apart from rapid urbanization, the Indian food processing industry is set to benefit from such other promising growth drivers as changing lifestyles, increasing disposable income, rising health consciousness, growing culture of nuclear families, greater presence of women in the workforce and higher nutritional needs. The almost year-round availability of fresh products across the country, combined with consumers’ preference for fresh products and freshly-cooked food, stands out as a huge challenge against the acceptance of processed food.

In 2010-11, the export of commodities related to Indian food processing clocked a remarkable USD 9 billion. , or , inflows also supported the attractiveness of the sector, touching the USD 2.7 billion mark for the period from April 2000 to November 2011. The domestic consumption of processed food is expected to grow by 10-15%, while the export market is also seeing high potential and is expected to growth at a CAGR of 18-20%. The major markets for Indian processed food are Europe, the Middle East, Japan, Singapore, Thailand, Malaysia and Korea. The food processing industry, which was primarily driven by exports in the past, is now witnessing rapid growth in the domestic market as well.

In addition to the changes on the demand side, there are also changes occurring on the supply side with growth in organized retail, increasing FDI and new product introductions supporting the industry’s growth. Moreover, the central government has given priority status to all agro-processing businesses. Government incentives in the field of mega food parks, cold chain, research and development, etc., supported by exports, are also playing an important role in promoting food processing, but come with their own challenges.

By mapping the perishability, processing level and organized segment penetration it can be seen that there is a clear need for improvement across the supply chain to uplift the penetration of organized processing.

Specifically in key sectors such as Fruits & Vegetables, Dairy, Seafood and Marine Products, the perishability index is high and supply chain improvements represent enormous investment opportunities.

Analyzing the high wastage level clearly reveals that the extant state of our infrastructure is incapable of coping with crop surpluses. This leads to price reduction due to logistical challenges impairing market access. Food processing is one of the solutions poised to solve crop surplus issues as perishability can be countered through processing and price realization can be maintained while assuring quality.

Supply side constraints are more crucial to the processed food value chain and need immediate attention. There is also a clear need for effective and implementable action points as these constraints will result in blockages in the food processing growth story.
This segment concentrates on the different, crucial enablers of the food processing industry. The progress and importance of, and the challenges associated with, these enablers directly impact the industry’s development. Among the various influencers, the most crucial ones are cold chain, packaging and retailing.

From the demand side, the higher awareness level among consumers is diluting the preconceived notions regarding the unhealthy nature of processed food day by day. Consumers are proactively accepting processed and packaged food as healthy food; even diet charts have included many processed foods as potent ingredients. Increased spending power and lower availability of food preparation time has supported the growth of the industry.

Processed food has gained more shelf space in a majority of retail formats; this is poised to increase further in future. Also, processed food is not restricted only to imported segments in a retail store but has also spread to staples, FMCG, F&V, Dairy, Frozen & Meat categories. Retailers are stepping out and extensively launching specific processed foods as private labels. The wide acceptance is boosting the quality of offerings. The benefits associated with processed food still need to percolate to the consumer level; this will enable consumption across the masses. Improvements and better reach of food retail will be the key driver to speed up the penetration of processed food.

There are some specific processed food sectors such as dairy, bakery and breakfast cereals witnessing a higher growth rate and higher acceptance among consumers. These have seen ample activity and investment opportunities across procurement, processing and distribution levels.

To sum, India as a nation is shifting towards consolidation, improving from a situation of excessive wastage. Food processing is an imperative and will sustain India’s growth story.

About the Author
Ravindra Yadav is Principal Consultant and Aneesh Saraiya is Senior Consultant, Food services & Agriculture at .