Global Outlook

Food processing industry is all set to become one of the highest yielding sectors in India

Contributed by Nirmal Bang

By Nirmal Bang

There are a few upcoming industries which will soon spell gold and India’s food processing industry is one of them. Gone are the days when all Indians could think of was fresh food. Of course, that still tops the charts. But the new generation is open to a number of options and food processing is certainly one of them. Food processing has indeed come a long way.

The Ministry Of Food Processing Industries (MOFPI) is the nodal agency of the Government of India for processed foods. It is responsible for developing a strong and vibrant food processing sector with emphasis on stimulating demand for appropriate processed foods, achieving maximum value addition and by-product utilization, creating increased job opportunities particularly in rural areas, enabling farmers to reap the benefits of modern technology and creating surplus for exports.

In an era of economic liberalization where the private, public and co-operative sectors are to play their rightful role in the development of the food processing sector, the government acts as a catalyst for bringing in greater investment into this sector. This will guide and help the industry in a proper direction, encouraging exports and creating a conducive environment for the healthy growth of the food processing industry.

The MOFPI has spelled out its aims clearly. The primary ones being better utilization and value addition of agricultural produce for enhancement of income of farmers, minimizing wastage at all stages in the food processing chain by the development of infrastructure for storage, transportation and processing of agro food produce, induction of modern technology into the food processing industries from both domestic and external sources, maximum utilization of agricultural residues and by-products of the primary agricultural produce as also of the processed industry.

The food processing sector in India is a highly fragmented industry, comprising sub-segments like fruits and vegetables, milk and milk products, beer and alcoholic beverages, meat and poultry, marine products, grain processing, packaged or convenience food and packaged drinks.

A huge number of entrepreneurs in this industry are small in terms of production and operations and are largely concentrated in the unorganized segment. This segment accounts for more than 70% of the output in terms of volume and 50% in terms of value. Though the organized sector seems comparatively small, it is growing at a much faster pace.

Changing lifestyles, food habits, organized food retail and urbanization are the key factors responsible for the growth of the processed foods sector in India. There has been a notable change in the consumption pattern in India. Unlike before, now the share and growth rate for fruits, vegetables, meats and dairy have gone up compared to cereals and pulses.

Such a shift implies a need to diversify the food production base to match the changing consumption preferences. Also in developed countries it has been observed that there has been a shift from carbohydrate staple to animal sources and sugar.

Going by this pattern, in future, there will be demand for prepared meals, snack foods and convenience foods and further on, the demand would shift towards functional, organic and diet foods.

The industry is relatively new and unorganized so it has a number of constraints such as poor infrastructure in terms of cold storage, warehousing, inadequate quality control and testing infrastructure.

Besides, inefficient supply chain, high transportation and inventory carrying cost, affordability, cultural and regional preference of fresh food, high taxation and high packaging cost are other issues that also need to be addressed at the earliest. The government is fast moving towards lessening the effect of each of these weaknesses in the sector.

In terms of foreign trade, the industry is doing well. Between 1991 and November ’06 the total inflow of foreign direct investment (FDI) in the food processing sector amounted to Rs 52.7 billion (US$ 1.2 billion). The highest investment towards the food-processing sector in a single year was recorded in 2001-02 and amounted to Rs 10 billion. During the last five years, FDI in this segment witnessed an inflow of over Rs 24 billion worth investment.

In the last five years, Maharashtra received the highest share of FDI in food processing. The dairy and consumer industries received FDI worth Rs 2.7 billion each as foreign investment. Countries such as Netherlands, Germany, Italy and France contribute nearly 30% of the FDI in the food processing sector. Perfetti, Cadbury, Godrej-Pilsbury, Nutricia International, Manjini Comaco are some of the successful ventures from countries in the European Union.

The major food processing companies in India include MNCs like Nestle, Pepsi, Coke, Kellogg’s, Unilever, Heinz and Perfetti and Indian companies like ITC, Dabur, Britannia, Parle, Amul, Haldiram and Godrej. A host of big Indian companies such as Reliance, Bharti, Tata and Wipro are likely to enter this sector very soon.

With the advent of multinational companies into the Indian market, the competition in the food processing industry has increased. These multinational companies are facing tough competition from strong Indian brands. Such competition has obviously increased innovations.

It has also facilitated sustained growth of the sector and improved global competitiveness. The growth phase of the sector is in its initial stages and India has the potential to emerge as the leading food supplier in the world.

The size of the Indian urban food market is estimated at Rs 3,50,000 crore. The domestic market for processed food is huge and fast growing. The retail boom will create a huge demand for the food processing sector in the coming years.

Little wonder that 2007 was designated the Year of Food Technology. The private sector is yet to realize its full potential in the food retailing sector, as the market is yet to be explored. It has now started discovering the money that can be made in the urban food retailing market.

Urban centres have the advantage of process development. But they do not produce food as they lack agricultural land; on the contrary rural areas do have land for food production.

In that sense urban areas provide an assured market for the food produced by farmers. The urban food marketing system thus assumes considerable importance for both feeding the urban population and helping farmers.

There are certain distinct characteristics of urban food demand. The urban population generally has a higher purchasing power. The rising average income is leading to greater demand for high-value processed food. A considerable number of urban women work, creating a demand for heat-and-serve foods.

The urban population density is high and this demands a chain or a network of retail outlets. Indian food retailing is poised for a quantum leap. Not only are newer names set to dot the retail landscape but also new formats like hyper markets and super markets are likely to emerge.

The key drivers for increased demand in value-added processed food products are:
a) growth in consumer class
b) change in lifestyle characterized by expanding urban population, increased number of nuclear and dualincome families
c) change in attitudes and tastes with increasing modernization and to a lesser extent westernization of tastes, particularly, of the youth
d) low penetration rates
e) ability to offset seasonal supply and demand effects in fresh products.

It has been estimated that during the next Plan period, an investment of Rs 1 lakh-crore is expected to be made in the food processing sector. Realizing the need for a regulatory framework for the retail sector, the government has merged 16 laws relating to the food processing sector into one piece of legislation and this is expected to be put in place soon.

However, to tap into the huge market for processed foods, an efficient marketing system is necessary to bring about demand-driven production; marketing becomes the key to catalyze agricultural development and with that fostering inclusive growth. Besides, it reduces intermediaries, increases farmers' realization and also lowers consumer prices.

An efficient marketing system can reduce post-harvest losses, promote graded processing, packaging services and food safety practices, induce demand-driven production, enable high value addition and facilitate exports.

Marketing reforms are needed, as they are critical for the development of the potential urban food demand. The National Commission on Farmers, headed by Dr M S Swaminathan, has suggested encouraging public-private partnership besides encouraging private sector investments to tap this huge potential.

At present, there are more than 7,500 regulated markets. Most of these lack the required critical infrastructure. Therefore, massive investment is needed to provide critical agricultural marketing infrastructure. It is estimated that over Rs 12,000 crore is needed for the regulated markets.

The initiative needs to be taken to promote public-private partnerships as it ensures efficient resource utilization and better management practices. There are many examples of successful public-private partnerships. Safal market in Karnataka is an instance of modernization of wholesale markets.

ITC's e-Chaupal, Haryali Kisan Bazaar, Mahindra Subh Labh, Cargil Farmgate Business and Tata Kisan Sansar are all initiatives of marketing distribution in the publicprivate partnership format.

Besides, commodity exchanges and futures markets have come up in the form of National Commodity and Derivative Exchange Ltd (NCDEX) and Multi-Commodity Exchange Ltd (MCX) which shows how serious these exchanges are about commodities and to what extent the industry can grow.

All in all, the food processing industry is poised for growth and is all set to become one of the highest yielding sectors in India.