Monday, April 19, 2010

Food processing – Modernisation, scalability key for take-off

Food processing is of utmost importance to the growth of India's rural economy. This is due to its innate potential to increase value proposition to the farmer, reduce post-harvest wastage and generate greater non-farm realisation. It is estimated that a one per cent growth in food processing has the potential to generate an additional direct employment for five lakh people, and indirect employment for 15 lakh individuals. It is this multi-dimensional incremental propensity of the food processing industry to positively affect the socio-economic fabric of rural India that has kept policy makers strongly focused on driving the development of this industry.

The Indian processed food industry is in a demanding stage of growth and development. Contributing to more than 35 per cent of the total food market, the processed food industry has been growing at a healthy 14 per cent in the recent past. This growth is expected to continue in the near future due to three extremely strong drivers namely – high domestic demand, excellent supply strengths, and focused Government support.

Growth drivers

On the demand side, factors such as steadily increasing population, rapidly changing demographics and lifestyles, and increasing disposable income especially among the young middle class population are driving an unprecedented growth in consumption of high value food items.

On the supply side, remarkable natural advantages such as diverse agro-climatic zones, varying soil types and a vast irrigated area have contributed towards making India one of the largest producers of food commodities in the world thus providing a strong raw material base for the processed food industry.

In addition, to the demand and supply advantages, the food processing industry enjoys intense focus and support from policy makers. The Government of India has accorded priority status to the food processing industry and has taken numerous initiatives to boost the growth of this sector. The Ministry of Food Processing Industry (MFPI) set up to boost food processing has introduced a multitude of support schemes and interventions to increase the levels of processing in the country. These schemes have brought about the much needed focus on key success factor functions such as infrastructure development, technology up-gradation, quality assurance, research and development, and human resource development.

Extremely positive demand trends combined with strong supply strengths and a favourable policy environment has resulted in remarkable acceleration of investor interest to tap the potential that the food processing industry offers. The growing interest for private investment in this sector can be gauged by the fact that the inflow of foreign direct investment (FDI) has increased at a CAGR of 27.7 per cent from Rs 17,400 crore in 2004-05 to Rs 46,200 crore in 2008-09. Though the industry is on a rapid growth path, it is still in the early stages of its life cycle.

This is reflected in the fact that the processing levels and value addition across key perishable segments are extremely low. For instance, in the case of fruits and vegetables just about 2.2 per cent of the production is processed compared to 30 per cent in Thailand and close to 80 per cent in Philippines and Malaysia. Likewise, the levels of processing in the dairy sector are about 37 per cent compared to above 60-70 per cent in developed countries.

Issues and Challenges

While the low levels of processing clearly reflects the untapped potential that is yet to be leveraged, it also indicates that the industry faces certain critical challenges which need to be overcome to sustain continual growth in the future.

Some of the key challenges faced by this industry include: High inefficiency in procurement: Due to factors such as low productivity, fragmented supply base, extremely high intermediation, and poor flow of information between farmer and processor. Non-availability of suitable varieties and raw materials that are amenable for processing: Lack of critical mass in domestic demand

Fragmented industry resulting in poor economy of scale. Lack of sufficient cold chain and post-harvest facility. Low quality standards of raw material and poor adoption of traceability and certification restricting exports. Inadequate availability of trained manpower.

Recommendations and the way forward:

While the efforts taken by policy makers for increasing the processing levels are highly commendable, there are certain policy initiatives that need to focus on facilitating modernisation and up-gradation, increasing scale of operations, and increasing business viability so as to further enhance the growth of this sector.

These include: Supporting backward integration of processors with farmers by building organisational capital and market intelligence capital at the farm level through supporting the formation of farmer groups. Promoting specific commodity clusters and intensive livestock rearing - to support increase in scale of aggregation and uniform application of quality standards.

Facilitation of contract farming

Rationalisation of marketing laws - to facilitate better private participation in aggregation, grading, quality certification, and post-harvest handling of agricultural produce. Developing India-centric food brands with strong geographic appellations (e.g. Assam Tea, Ratnagiri Mangoes) with traceability and trust marks. Review of policies with specific reference to infrastructure development such as Land Laws and Zoning Laws: Such that all agriculture-related post harvest activities are permitted to be carried out without having to change the definition of the land use. Power tariff for post-harvest handling projects: Such that special tariff rates be applied for all post harvest projects to make them more viable. Restrictions on multiple subsidy provision for agri-infrastructure projects such that the subsidy provision is not capped in terms of value and number of applications for a firm. Enable better access to credit: for instance by increasing the upper cap of investment in plant and machinery to qualify as priority sector credit. The current limit of Rs 5 crore is very low and needs to be increased substantially given the high cost of modern technology and the need for scale.

While policy makers have rightly focused on protecting the small and medium enterprises, the need for scale has largely been neglected. It is imminent for policy makers to focus on attracting large business houses into the food processing sector and in the process push for introduction of higher scale of operations and modernization of technology.


In conclusion, it may be stated that while extremely positive demand, supply and policy environment are driving the growth of the food processing industry, the sector is facing teething problems especially in the areas of technology up-gradation, modernization and increased scale of operations. Strategic handling of these issues by means of specific policy reforms from the government and through focus on new ideas and innovations by private players holds the promise of taking the food processing industry into a take-off growth path in the near future.

(Rana Kapoor, The writer is Founder/Managing Director & CEO, YES Bank)

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