Cover Story

Packaged for growth

The Indian food processing industry, considered a sleeping giant at the moment, is expected to attract huge investments with a little help from the government. Praveen K Singh looks at the current scenario and the sector's potential growth.

Ranked fifth in terms of production, consumption, export and expected growth, the Indian food processing industry is one of the largest industries in India. While the industry is large in size, it is still at a budding stage in terms of development. Of the country's total agriculture and food produce, only two per cent is being processed. The second-biggest food producer in the world after China, India's share in the US$ 6.2 billion global processed food market stands at less than one per cent, leaving a huge scope for growth.

However, with the opening of the Indian economy plus favourable regulations, the Indian food processing sector in coming years is expected to attract huge investment. The sleeping giant, it seems, it about to wake up. The minister for food processing industries, Subodh Kant Sahay, says, "The food processing industry sector in India is one of the largest in terms of production, consumption, export and growth prospects. The government has accorded it a high priority, with a number of fiscal relief and incentives, to encourage commercialisation and value addition to agricultural produce; for minimising pre/post harvest wastage, generating employment and export growth."

He explains that the industry is expected to grow at nine to 12 per cent, on the basis of an estimated GDP growth rate of six to eight per cent, during the tenth plan period. There are several sub sectors in food processing industries namely fruit and vegetable processing, fish processing, milk processing, meat and poultry processing, packaged/convenience foods, alcoholic beverages and soft drinks and grain processing, etc.

Changing market

With changing and fast-paced lifestyles, nuclear family system, increasing number of working wives and Western influence in the urban areas, there has been a rise in demands for packaged foods. Today, people want to spend less time on cooking; they want convenience and they have money to spend. Market analysts predict that India's middle class segment will hold the key to success or failure of the processed food market in the country.

Of the country's total population of one billion, the middle class segments account for about 350-370 million. Though a majority of families in this segment have non-working housewives or can pay for hired domestic help and thus prepare foods of their taste in their own kitchens, the profile of the middle class is changing progressively and hired domestic help is becoming costlier. This is contributing to a growth in demand for ready-to-eat foods.

Then, the advertising world is persuading the market for processed foods such as beverages, confectionery, bakery, ice-cream and snack food items. Travel and tourism has also impacted the market as people with more exposure are going for processed foods. Even the Indians living abroad have popularised Indian foods abroad thus leading to export of processed and semi-processed foods in places like US, Canada, Australia, Middle East and several European countries.

In the past scenario, the government had restricted the entry of goods including food products either by banning or by imposing heavy duties. However, in the changed scenario, with the WTO agreement, boundaries have been opened for international trade. These foreign processed food products are competing with Indian products and giving them a tough fight as they are relatively low priced. According to data available, foreign direct investment of around US$ 1 billion has already been approved in India's food processing industry since 1991.

Major hurdles

One of the major problems is the lack of technological inputs in the small scale sector of the industry which makes up the bulk of the industry. Smaller manufacturers have not taken benefits of technological upgradation.

There are many manufacturers who are not ready to take help from outsiders and consultants as they fear their secrets will be leaked. Market analysts feel that if they don't employ technological modernisation it will be tough for them in future as once the market is filled with foreign products at same or lesser price it will kill these local manufacturers. Thus, it is necessary to take vital steps to invigorate the local manufacturers.

Recently, several key players in the retail sector are pushing hard for elimination of or amendment to the Agricultural Produce Marketing Commission Act (APMC) to accelerate growth in the food processing industry, which is expected to bring in the major chunk of their trade. The APMC Act as one of the major hurdles impeding growth - it does not allow processing units to store fruits or vegetables for more than a month, which obstructs firms that trade in seasonal produce like mango or litchi. It should be noted here that the state of Bihar has led the growth strategy by abolishing this act, and some other states are following suit.

A study denotes that the system of seeking licenses for each item prepared by the same unit should also be abandoned. The study also suggests a 10-year tax holiday, excise relief, fiscal incentives for cold-chain set-ups and a regulatory mechanism. Special incentives have been suggested for investors who enter all levels of the processing industry in an integrated manner and as those providing one or more services. As garnish, excise exemption has been sought on equipment and refrigerated trucks to attract investments and keep the prices down. According to a market analyst, the biggest bottleneck in expanding the Indian food processing sector, in terms of both investment and exports, is lack of adequate infrastructure.

Environmental awareness

Due to consumer pressure and increasing regulations, environmental awareness in the food industry has become increasingly important in recent years. Manufacturers are trying to achieve environmentally-friendly food production, reviewing the assessment of various food products and the ways in which the industry can improve their operations and become more environmentally responsible.

Government is becoming cognizant of environmental hazards and problems created by adulteration so stricter norms are being set for the industry. Ajit Kumar, joint secretary of ministry of food processing industries, says, "Manufacturers are fast learning the good practice in food processing reviewing packaging, recycling and waste treatment, as well as methods of improving energy consumption and environmental training for the food industry."

Patents and IPR

Post globalisation and following the WTO agreements, the importance of patents and other intellectual property rights have increased. In comparison to other countries, in India, a process can be patented and not products. But soon products in India will also be patentable. Government needs to take steps to curb patent violation. As for now, patents have to be filed in each country, but soon regional or even global patents may also be available.

Our experience with this regard has been sour with patents of basmati rice, neem products, turmeric, etc and India needs to be informed about others filing patents on products or processes involving our resources. Our professionals should start filing for patents so we can also get marketable advantages of products and processes developed by us.

Calibrating global food code

The industry is largely of the view that regulations in the country should be strengthened to facilitate upgradation and implementation of food safety standards at the international level. A high standard of hygiene is a prerequisite for safe food production, and the foundation on which HACCP and other safety management systems depend. Explaining the Integrated Food Law, Sahay says, "This is a major breakthrough as 15 laws belonging to seven to eight ministries are going to be repealed and have been merged into a single law. The idea is that there will be one law governing all processed food issues."

Soaring spirits

Meanwhile, the alcohol sector generates an estimated Rs 20,000 crore a year. At present, the industry is dominated by three brewers - the United Breweries (UB), Shaw Wallace and Mohan Meakins dominate the market. However, a number of international brewers are starting to establish themselves. Several joint ventures are being signed as the distribution network in India is complex. Also, of late, an acquisition spree by companies like UB has marked an impact in the industry.

There are around 25,000 licensed liquor outlets in India, with another 10,000 outlets such as bars and restaurants. States vary as to their treatment of liquor and there are restrictions on the transfer of alcohol between states. In Tamil Nadu, Kerala and Andhra Pradesh the distribution is controlled by the state government, which enables changes in political parties to dramatically affect the availability of alcohol. In Andhra Pradesh a change of government resulted in a ban on the sale of alcohol in the state, while in Uttar Pradesh, Rajasthan and Punjab, liquor distribution licenses are auctioned to the highest bidder. Such a system encourages market concentration by favouring existing suppliers. Only in states such as Maharashtra, where distribution is relatively open, are new entrants able to compete effectively. Draught beer is popular in Mumbai and Bangalore as a result of which a large number of pubs and bars operate here.

The country liquor and IMFL (Indian Made Foreign Liquor) cater to two quite different sectors of the liquor market. Country liquor is consumed in rural areas and by low-income groups in urban areas. IMFL is consumed by the middle and high income groups, primarily in urban areas. As was found to be the case with beer, so it is with whisky. Increasingly more and more of major international liquor companies are introducing new brands in India through local joint venture arrangements.

Government's role

Initially, the Indian government considered processed foods to be elitist. However, later on, in the past two decades, it increased its role - it introduced incentives like tax or duty cuts, which were at times removed and reinstated without a long-time policy.

However, the industry expects more than this if the government wants the industry to make a amidst today's intense global competition. It should ideally create an environment that will not only encourage entrepreneurs to start food processing units but also help producers and end-users. The ministry of fFood processing industries, set up in July 1988, is the central agency of the government responsible for developing a strong and vibrant food processing sector, with a view to create increased job opportunities in rural areas, enable the farmers to reap benefit from modern technology, create surplus for exports and stimulating demand for processed food.

The Indian food processing industry can forge ahead only with a wisely drawn game plan. Market analysts feel that Indian companies will have to survive on economic feasibility rather than subsidy and rebates. Smaller players are not feasible compared to bigger ones which have economy of scale in their favour. Thus smaller players will either have to find a niche product with limited market which will interest the bigger companies or make the product or process exceptional to have an advantage of rate and/or quality.