Food Processing Industry in India: Challenges and Potential

India is a major producer of several agricultural/food items in the world but only less than 10 per cent of that is processed. Demand for processed food items is set to increase in India in the coming years providing opportunities for greater value addition, lower wastages and alternative employment opportunities. Analysis of corporate data shows that food processing firms have been profitable, but the value addition component needs to increase significantly.

Introduction

India has made vast progress overtime in providing food security for its people and has become largely self-reliant in agriculture. Accordingly, the policy focus has shifted from attaining self-sufficiency to generating higher and stable income for the farming population. Food processing industry (FPI) is one area which has the potential to add value to farm output, create alternate employment opportunities, improve exports and strengthen the domestic supply chain. India, with about 11.2 per cent of total arable land in the world, is ranked first in the production of milk, pulses and jute, second in fruits and vegetables and third in cereals (Government of India, 2019). It is also the sixth largest food and grocery market in the world (Law, et al., 2019).

In 2017-18, the food processing industry accounted for 7.9 per cent of manufacturing GVA and 9.5 per cent in agricultural value added. It is also a major employment provider, contributing to 11.4 per cent of organised manufacturing employment. Recognising the immense potential of FPI in promoting inclusive growth, it has been identified as one of the key thrust areas under the ‘Make in India’ Programme. This article examines the scope for higher growth in this sector in the medium run, notwithstanding the challenges.

Limited availability of granular data, particularly at sectoral level has been a major impediment to robust analytical research on the subject. This article tries to present information available from multiple sources at one place. For overall analysis, National Account Statistics is used. Sectoral analysis is based on data sourced from the Annual Survey of Industries (ASI), which captured 65.7 per cent of value added generated in the sector in 2016-17. For data on trade, the World Integrated Trade Solution (WITS) database is used. International Standard Industrial Classification is used to make industry level comparison with trade data. For the analysis of financial parameters, we have used data from annual company finance studies by the Reserve Bank of India.

Food processing industry in India :

The food processing industry in India is at a nascent stage, accounting for less than 10 per cent of total food in India (Government of India, 2016). It is expected that improvement in food processing would reduce wastages in agricultural produce. At present food wastages are very high. According to the report of Central Institute of Post-Harvest Engineering and Technology (CIPHET), wastages in major crops, in general, remained at high level during 2010-2015. 

FDI in Food Processing

The food processing sector was opened to 100 per cent foreign direct investment in 2016 under the automatic route. Further, in 2017, 100 per cent FDI under the Government route for retail trading, including through e-commerce, is permitted in respect of food products manufactured and/or produced in India. While the flow of FDI to this sector has increased over the years, its share was still low at less than 2 per cent in 2018-19. 

Over the years, India has been able to attract investment from food and beverages companies like Nestle, Cargill, McCain, Mondelez, Pepsi, Coco cola etc., and also from retail trade companies like Amazon, Walmart, etc. (Government of India, 2017). In 2018, Mondolez International invested US$15 million in India for research after investing US $190 million in a green field project in Andhra Pradesh. Similarly, Cargill, agro-food company based in USA invested in various supply chain nodes like cold storage facility in Karnataka and aqua feed project in Andhra Pradesh. Further, Amazon and Walmart’s entry into Indian food retail sector is expected to bring in more investment in this sector.

External Trade

The food processing Industry in India is largely domestic oriented, with exports accounting for only 12 per cent of its total output. Nevertheless, it is a net foreign exchange earner with a positive trade balance in recent years. Globally, India ranks first in the export of processed and preserved fish and fish products, grain mill products and fourth in the export of sugar. However, even in these products, only about one fourth of the product is exported reflecting high proportion of consumption in the domestic economy.

In terms of destination of exports, traditionally the US and the EU were the major markets for India. However, of late Vietnam has overtaken the US and the EU as the major importer of manufactured food products from India mainly due to its increasing import of meat and fish products from India. Nevertheless, the US and EU continue to be prominent destinations for export of fish products and processed fruits and vegetables.

Credit

Ensuring availability of adequate credit to the food processing industries is given utmost importance by the Reserve Bank of India. Accordingly, the Reserve Bank has accorded priority sector status to food processing industry. Loans to food and agro-based processing units and cold chain have been classified under agricultural activities for priority sector lending. Loans for food and agro-processing up to an aggregate sanctioned limit of ₹100 crore per borrower from the banking system isconsidered as priority sector. Apart from this, credit for developing agricultural infrastructure is also categorised under priority sector lending. Accordingly, loans provided for construction of storage facilities (warehouse, market yards, godowns and silos), including cold storage units / cold storage chains designed to store agricultural produce/ products comes under the priority sector lending, as also loans to MSMEs involved in food processing.

Government Initiatives

Recognising the role that FPI can play in promoting employment and income in the rural sector, the Government of India has identified it as a priority sector under the ‘Make in India’ Programme. FPI offers an opportunity to reduce dependence on agriculture in the rural areas as the main employment generating sector. Various initiatives have been taken by the Government to promote this sector considering the challenges faced by the sector. The Ministry of Food Processing Industries has identified six key challenges faced by the food processing industry: (i) gaps in supply chain infrastructure (i.e., lack of primary processing, storage and distribution facilities); (ii) inadequate link between production and processing; (iii) seasonality of operations and low capacity utilisations; (iv) institutional gaps in supply chain, viz., dependence on APMC markets, etc.; (v) inadequate focus on quality and safety standards; and (vi) lack of product development and innovation (Government of India, 2018). Accordingly, the focus has been to smoothen the supply chain by creating infrastructure, promoting exports, improving quality standards, expanding supply of formal credit, particularly to small and medium enterprises, and broadening skilled labour pool in the economy. Specifics of key policies are outlined

Government Initiatives for Development of FPI in India

Infrastructure: To address small size of enterprises involved in food processing, the Government promotes a cluster approach which brings together farmers and entrepreneurs through well-equipped supply chains and aims at development of modern infrastructure and common facilities to set up food processing units. Under the scheme, each agro-processing cluster will have two basic components, i.e., Basic Enabling Infrastructure (roads, water supply, power supply, drainage, effluent treatment plan, etc.), and Core Infrastructure/ Common facilities (warehouses, cold storages, individual quick freezing, tetra pack, sorting, grading, etc.) and at least 5 food processing units with a minimum investment of ₹25 crore (Government of India, 2017). Implementation of Mega Food Parks (MFP) scheme in 2008, Modern Terminal Markets (MTM) and bulk storage facilities as well as modernisation of markets, quality control laboratories are some of the efforts in this regard.

Further, financial support and fiscal incentives are given for creation of common supply chain infrastructure, like cold chain, dry storage, packaging, logistics, back and front-end infrastructure, expansion of processing capacities, etc. to reduce cost of investment, enhance viability and ensure higher conformity to regulatory standards. Under project imports, all goods relating to food processing are charged a uniform customs duty of 5 per cent irrespective of their tariff classification.

Standardisation of Food Safety Norms: Due to legacy issues and infrastructural challenges, the Indian states have different levels of implementation of food quality standards and procedures. Over time, awareness about food quality and safety standards have increased due to the growing middle-class population, globalisation and health awareness, etc. For uniform implementation of food quality standards, Food Safety and Standards Authority of India (FSSAI) launched “One Nation, One Food Law” initiative.

Availability of credit: To boost credit disbursement at affordable rates to the food processing sector, a special fund of ₹ 2000 crore has been set up in National Bank for Agriculture and Rural Development (NABARD). Under this, loans are extended up to 95 per cent of the project cost for setting up, modernisation and expansion of food processing units and development of infrastructure in designated food parks.

Human Resource and Skill Development: The Government has taken up the initiative to develop sector specific skills of the workers with support from the National Institute of Food Technology, Entrepreneurship and Management (NIFTEM) and the Indian Institute of Food Processing Technology (IIFPT). In 2017, merging seven major schemes under one umbrella scheme, i.e., the Pradhan Mantri Kisaan Sampada Yojana, has been implemented. This is expected to boost efficiency of infrastructure investment as well as of farmers.

Though India is a major producer and exporter of agricultural produce at raw material stage, only less than 10 per cent of them are processed and traded. One major reason for this is the large consumer base domestically and having preference for fresh produce over processed food. Slow pace of urbanisation and low labour force participation of women have resulted in the preference for fresh foods at the All-India level. Empirical literature suggests that as more women enter the workforce, consumption of processed food increases (Wang, et al., 2015). India has the potential to emerge as a major exporter of processed food by adhering to the quality standards. The Government initiatives for strengthening quality standards can provide impetus to the sector.

An analysis of corporate data showed that profitability of food processing firms has been either higher or comparable with the levels of other firms. However, the value-added component in food processing firms was found to be lower than other firms operating in the industrial sector. The econometric analysis on credit reveals the importance of credit for growth in this sector. Relative to the share of the food processing sector in industrial GVA, sectoral credit data suggest adequate availability of credit for the sector.

With the bourgeoning urban and young population, demand for processed food items is set to increase in the coming years. The food processing industry in India needs to gear up to meet the demand by investing in necessary infrastructure. The industry requires a steady flow of raw materials from the producers/farmers meeting specific quality standards and at stable prices. Farmer producer organisations, by bringing together small farmers and agricultural entrepreneurs, can enhance the opportunity to build more stable supply chain. Besides ensuring steady flow of income to the farmers, greater linkages with industry could also reduce wastages, particularly in perishables.