The Hindu Business Line : Food Processing Sector: Opportunity by the ladlefuls

The Indian food-processing sector is in the transformation mode. Strong macro-economic fundamentals and the changing socio-economic scene are driving what was once a traditional, small-scale processed food production system into a modern industry aimed at catering to the evolving tastes and needs of discerning consumers.

Sound macro-economy

The macroeconomic fundamentals of the country are robust. A sustained 8-9 per cent GDP growth of the last three-four years makes India one of the world's fastest growing significant economies. Rapidly expanding foreign exchange reserves are set to hit the $200-billion mark. The population of 105 crores is growing at about 1.8 per cent a year. Providing food for nearly 18.5 crore families is one of the biggest challenges. The middle-class is expanding. India's trade policies — both internal and external — are liberal.

It may not be widely known; but India is world's third largest producer of agricultural products. The country's large production base for a variety of raw materials covering food crops, commercial crops and fibres results from varied agro-climatic conditions. India is world's largest producer of milk; second largest producer of rice, wheat and sugar; and third in cotton.

Changing Socio-economic scene

A definite change — hopefully for the better — is happening in the socio-economic conditions of people. Rapid growth recorded by manufacturing and services sectors — double-digit growth rates in recent years — has raised the disposable incomes of people. Urbanisation and nuclear families are becoming the norm. Liberal trade policies have ensured that consumers are able to access foods of their choice.

No wonder, food habits are changing. 'Western' style foods are in vogue, especially in cities. There is rising demand for ready-to-cook and ready-to-eat convenience foods. 'Demonstration effect' through explosion in information and communication technologies serves to create new demand where none existed before. In short, lifestyles are changing, and aspirations of the people are rising.

However, these are not without concerns. Agriculture is a laggard in the country's growth story. Farm output growth has been rather tardy — a mere 2.2-2.3 per cent average for the last 10 years. In other words, incomes in the hands of nearly 60 per cent of the population eking out a living on farm and related activities have not grown. Agrarian crisis is visible. This leads to rapid migration of rural folks into urban and peri-urban areas in search of livelihood.

Yet, the growth story is real. To put it in perspective, income increases are confined to about 30 per cent of the workforce engaged in manufacturing and services sectors. Higher demand for various goods and services including processed foods will essentially come from this segment.

Processing sector features

The food-processing industry is both nascent and highly fragmented. It employs 13-15 million people. The output from the sector is estimated at $65-70 billion or about Rs 3,00,000 crore. The sector has been growing at about 7 per cent a year. With rising incomes and demographic pressure, growth may soon register 10 per cent.

With expanding demand for foods (convenience foods, packaged, branded), awareness about health and food safety is also rising. While food standards and labelling laws are becoming stricter by the day in developed economies, they are increasingly being recognised as important in India too.

A prominent feature of the processed foods industry is the presence of multinational corporations. Many have already identified the potential of the Indian market. Soft=drinks, grains processing, dairy products and confectionary are some of the areas where MNCs are already present.

The process of disintermediation has begun and supply-chain efficiencies are set to improve. Given the huge market potential, the Government considers food processing a `sunrise' industry.

Antiquated Laws

What are the challenges? Antiquated food laws (the Prevention of Food Adulteration Act, 1954 and PFA Rules, 1955) will have to change. A Food Safety and Standards Act under consideration of lawmakers seeks to consolidate laws relating to food and establish an authority to lay down science-based standards for articles of food.

Perceived high import tariffs are also a challenge. Although peak rate of Customs duty has been brought down consistently (reduced to 10 per cent in the latest Budget), several agricultural commodities that are perceived as 'sensitive' from an Indian perspective bear higher rates of duty.

Non-tariff barriers and technical barriers to trade need to be reviewed. The supply chain is notoriously long. Logistics costs are high because of limitations of infrastructure — roads, warehouses, carriers, cold chains and so on.

Indian consumers are by and large price conscious. In addition to being income elastic, demand for processed food is price-elastic. Also, the inclination of Indian consumers to fresh food cannot be wished away. While the demand for processed or pre-cooked foods is rising, fresh food choice will pose a barrier to processed food producers and marketers.

Fragmented processing capacities, poor scale economies, poor adoption of pre- and post-harvest technologies, on-farm and off-farm losses especially of fresh produce and low level of processing are the other features of the sector. Currently, the unorganised sector dominates food processing.

Classification: The range of processed foods includes mainly fruits and vegetable based products (juices, sauces, pickles, chips); milk and dairy products; cooking oils; meat and poultry; marine foods; non-alcoholic beverages; grain and grain-based products; and confectionary.

Trends: Major trends in the Indian food processing industries reveal an expanding product variety and improved packaging. Interestingly, regional brands are coming to the fore. Improvements are seen in food retail environment. Mergers and acquisitions are beginning to happen. This trend, currently nascent, will eventually lead to consolidation of capacities and modernisation. There are also beyond-border investments taking place from India.

The Government allows 100 per cent foreign direct investment in the food processing industry. A number of overseas businesses are looking at India as an investment destination. Investment opportunities are available not merely in food production, but also in infrastructure development, marketing, inspection and testing services, technology development and so on.

Given the income distribution among the population, there will be demand for processed foods at every price point — from low-end to high-end products. This is a big advantage for producers while examining market size and investment.

Huge opportunities: India's humungous market size, ravenous appetite for food (given the existing low per capita consumption) with growing incomes and changing lifestyles create incredible market opportunities for food producers, machinery makers, food technologists and service providers. The policies are investor-friendly. Importantly, financial, technological and human resources are available aplenty in the country.

It makes tremendous investment and commercial sense to be a part of the burgeoning Indian food processing industry. To achieve success in the food business, entrepreneurs and other stakeholders should follow what I call the `Saibaba Principle'. Two words — Shraddha and Saburi — are inscribed in Saibaba temples. Shraddha is commitment and Saburi is patience. Commitment and patience are the key to success in the Indian food processing industry.

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