Food Processing: The Rising Indian Industry


By

Prof. Medha Chintala
Ex-Faculty Member
ICFAI University
MS Program
Nagarjuna Hills, Hyderabad
 


Indian food processing aims at consumer convenience; with push from government for private participation is coming of age.

The food processing industry is coming of age it is ranked fifth among industries of India. Nearly, one third of the entire Indian food market share comprises of processed food. With policy measures from the government, the food processing Industry accounts for 13% of the country's exports. The industry's size is estimated at US $ 70 billion; including US $ 22 billion of value added products. Indians spend half of their household expenditure on food items at present. The industry would create 9 million employment opportunities from the current 1.6 m and investment of Rs 1,50,000 crore in the coming 10 years.

With over 1 billion population and 350 million strong urban middle class and changing food habits, the processed food market is promising a huge potential to be tapped. A joint study by CII and AC Nielsen (market research firm), to understand demand drivers for processed food brings forth the changing Indian meal patterns: Working lunch seems to be replacing conventional meals in the day, with a need for no fuss packaging.

In addition to this, the study says, Indians are willing to spend on global cuisines. Multi-cuisine restaurants are mushrooming even in small cities and towns. This reasons the array of foreign investors coming to India which is driving the growth of the industry. Like investments to offer Indians the real taste of Italian pasta; conglomerates from Emilla Romagina are looking at major Indian cities to set up Italian food processing plants. Most recent one was the proposal from West Midlands of UK to the Ministry of Food Processing Industries of India. Other foreign food companies like McDonald's, Pizza Hut, Cadbury's, Tropicana, Pepsi, Coke, HLL, Nestle, etc. are already earning huge returns by processing Indian food for domestic and global markets.

Besides foreign Investors, food processing sector is a major attraction for Indian corporate houses to invest. Reliance, Godrej, Bharti, ITC, Hero, Ballarpur Industries, DSCL, Tata and Mahindra & Mahindra are prominent corporate houses are  with  end-to-end integrated operations in the food chain.

Nascence of Food processing.

India is the world's second largest food producer. Yet contribution to GDP is only about 20%, despite 60% of Indians employed in agriculture related activities. This is owing to improper value-addition of the produced food. With as many as 20 agro-climatic zones and various soil types, a wide spectrum of food-types is produced like - fruit & vegetable, fisheries, meat & poultry, milk & dairy, grain & cereals, beverages and consumer foods. The wide variety and large scale production ensure India's food security and steady export revenues, topping the world's food production list in milk, sugarcane, tea, and cattle population. But the abundant food is marketed unprocessed due to inadequate infrastructure; it seems that the food processing industry is still in its nascent stage.

Only 2 % of fruits and vegetables and 15 % of milk are processed at present, despite rising demand for processed food. Further, out of total food produced in India, barely 7 % is processed, compared to China's 23%, or 188% processing in the UK food sector. Such relatively low level of food processing is due to insufficient preserving techniques and supply chain infrastructure. The loss from inadequate cold storage is 37% of annual food production which is worth a colossal Rs.30, 000 to Rs. 40,000 crore.

Besides infrastructure problems in fruit and vegetables processing, inadequate infrastructure for meat processing (seafood, poultry and cattle-meat processing) also exists. Also a huge a daunting challenge is to meet the world's basic quality standards of safety and hygiene standards like Sanitary and Phyto-Sanitary (SPS) rules and Vapour Heat Treatment (VHT) especially to build the export potential. This needs organizing the meat processing industry to adhere to modern, scientific techniques.   

To overcome the infrastructure shortage the industry needs an investment of US$ 28 billion. Unfortunately, most of the Indian farmers are small holders; their average farm size is 1.6 hectares, and farmers are linked with exploitative intermediaries in the food chain who are unable to invest in food processing units either. There a severe need to integrate the farming with the food processing. 

Finding the Missing Links

Earning profits through food processing comes from an efficient backward and forward integration. Even though value addition begins at the post harvest level it needs critical integrated efforts of both pre-harvest and post-harvest functions. In this context Prof. Sukhpal Singh, professor IIMA says -"The stakeholders are expected to face this challenge on a- priori level, because success of food processing industries depends on nature of the produce and the type of processing involved. Integration begins with procurement of such superior quality of seeds". That is because traditional Indian seed varieties do not yield enough pulp content vital to undergo processing. Since the farmers are short in financial and technical abilities: the quality of food produced doesn't meet the required processing standards. They find it hard to link their farming activity with food processing and are unable to reap rewards of value addition.

If there must be a way out to the grim situation, then it is finding an end to end link in the food chain. The government has offered opportunities for FDI and private participation: a right direction for the industry's promotion. The outcome of 100% equity from foreign investments, for a majority of processed food items can be seen from the 105 FDI proposals worth Rs. 640 crore approved by the government in last three years.

Private companies can integrate the food chain with supplying quality seeds to farmers who get back their fair-share of returns, and the companies can process the food linked to hypermarkets with efficient supply chain infrastructure. Like the successful initiative taken by PepsiCo, which was one of the first to initiate integrated food processing. Initially the tomatoes from the Punjab farms did not meet the standards for making ketchup; neither a logistically efficient nor any procurement model existed. Pepsi had to integrate the farming (supply of superior tomato) activities with the processing infrastructure and only then start the tomato-processing plant in that area. This and other successful experiences are evidences for the government to invite integrated efforts in the food chain by private hands.

Government's Initiative:

Food processing has been declared as a priority sector. The National Food Processing Policy has been revised for an integrated approach in 2004-05, to facilitate speedy growth. The aim of the policy is to simplify procedures to comply with the need and growth of the sector. Under infrastructure development, Agro-Food Parks are identified in various Indian cities. Proposals to set up 20 Mega Parks and 50 Food Parks adopting the French Food Park as a model are undertaken by the Ministry of Food Processing Industry.

Tapping the industry's export potential is one of the major concerns. Presently, current exports of Indian processed food are worth Rs. 2500 billion. Agri- Export Zones (AEZs) are earmarked with nearness to highways, airports and marketing centers from the areas of food processing. The Policy urges private companies to grow processable varieties under contract farming. Under the AEZ scheme, state governments and private firms are entitled privileges of Special Economic Zones, like tax holidays up to 10 years and duty free imports of capital-goods to set up processing units.

To provide financial credit without any bottlenecks NABARD in the present plan is given with a corpus of Rs. 1100 million in single window clearing. This loan is for setting up new unit or to modernize an existing food processing units. Further, the government will give 25 % subsidies for greenfield projects up to the corpus of Rs 100 crore for Mega Food Parks and up to Rs.105 crore for Food Parks.

For holistic approach, R&D initiatives to work on emerging challenges of the food processing technology and food engineering are underway. The industry's revenues can be increased if quality rules of SPS, VHT and the Codex international standards are approved. The Thanjavur paddy processing center will be added to the nationalized list of research institutes. Likewise, Indian packaging Industry is working on low cost and competitive packaging solutions. Packaging costs, 20-70% of processed food.

Growth Potential

Over the past decade money spent by Indians on ready to eat food outside home, has more than doubled. While 5 billion USD is spend on ready to eat food this year research estimates it to double up in over five years. This year, the growth in sales (domestic and export) of processed food is more than 150 %, most remarkable are the two sectors which showed remarkable growth in sales. Processed Poultry's sales grew by 64%, and spirits and beverages by 75%. Food process outsourcing is presenting good prospects in multi cuisine hotels and restaurants abroad for processed or semi-processed Indian seafood, dairy and Indian curries. 'Made in India' brands like Amul Dairy,  Cobra Beer, Bikanervala Foods, MTR Foods, ITC's Kitchen of India, Satnam Overseas' Basmati rice are finding prime global retail shelf-space.

Convenience, variety and health issues are key drivers for quality of packaged food. With clear demand in the future if India can harness its production to the quality its dream to become the world's food basket is sure to come true.

QUOTE:
Food processing creates form, time and place utilities.  Value addition through food processing and exports makes the farmer benefit through better returns to his produce due to larger demand- Prof Sukhpal Singh, professor IIMA.

I. INDIAN FOOD PROCESSING

1. How important is food processing Industry to India? What is its potential?

They are expected to play, on a-priori grounds, an important role in promoting agricultural development at least in those areas from where the raw materials are drawn.  The second facet of their role is to bring about a greater integration in agricultural marketing.   This integration may be vertical or horizontal.  Whereas the former refers to the linking together of successive functions or operations in the production or marketing of a product under unified control, the latter means linking of different business units in the same stage of production or marketing under unified control.  Whatever may be the form of integration, processing generally leads to the tying up of different onfarm and offfarm functions such as production, storage, transportation, wholesaling and distribution.  In fact, the modern processing plants not only create form utilities, but their integrated structure, combining processing and distribution, has led to the adding of place and time utilities as well. Value addition through food processing and exports helps the farmer benefit through better returns to his produce due to larger demand.

The growth of food processing industries reduces post harvest (raw material) losses which ranged from 15 -31 percent across fruits and vegetables in Gujarat. A large part of it (50 per cent) was at farmer level and the remaining at the APMC (10 per cent), local trader (3 per cent), wholesaler (3 per cent), broker (7 per cent) and retailer (25 per cent) levels. In wheat and rice, it is estimated to be 10 per cent and 12 percent at farm level respectively and 13 percent and 10 percent at trader and FCI level in paddy alone compared with only two per cent in the USA. The losses account for almost 20 percent of total farm production and are valued at Rs. 50, 000 crore annually. In fruits and vegetables, the wastage is of the order of 40 percent of total value of production and estimated at Rs. 23,000 crore annually. It is more than the value of annual fruit and vegetable consumption in the U.K.

Food processing like many other agro industries also generates offfarm employment as in India it is found to be more labour intensive and capital saving than many other industries. It also encourages agricultural production through assured market and remunerative prices and adds value to the primary product in various ways. 

The processed foods can be promising item in the exports from the developing countries and thus, may help in saving and earning foreign exchange. 

Still, the value addition to food production in India is only 7 per cent compared to over 22 per cent in China, 45 per cent in Philippines and 188 per cent in the UK. Further, only two per cent of the fruit and vegetable production is processed in India compared with 30 per cent in Thailand, 70 per cent in Brazil and the USA, 78 per cent in Philippines, and 83 per cent in Malaysia.. 

Value addition in agro processing should also take into account, besides the value added to main product due to processing, the value addition due to byproduct processing.

2. Would setting up of the Food Zones help in realizing the potential of Indian food processing industry?

Yes, as it will help it will generate economies of agglomeration and help achieve quality production  with the help of centralized product testing labs and mechanisms.

3. How are the State and Central government working on increasing this momentum? What are the thrust areas under the agro processing zones?

Many states are providing incentives for such zones in terms of investment and export facilities especially in horticultural and related high value businesses. Interestingly, the focus of many of these project sand schemes is domestic market which is a step in the right direction.

4. What are the challenges in setting up Agro-processing zones?

Infrastructure, large investments required, and acquisition of land are major issues involved in such projects. Leasing out of land does not help unless it is very long term lease w3hic his possible only in case of govt. land, as investors want to make longer term fixed investment for which they need to own land.

5. How will the existing lack of processing and storage infrastructure be tackled?

Through public private partnerships which brings together the resources and strengths of the two sectors.
 


Prof. Medha Chintala
Ex-Faculty Member
ICFAI University
MS Program
Nagarjuna Hills, Hyderabad
 

Source: E-mail January 8, 2008

          

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