The Hindu Business Line : Problems of processing

Fragmentation is as much a striking feature of the Indian agri-produce processing industry as it is of landholding, crop production and markets. The domestic agro-processing industry comprises a large number of small players across the country. Often, the processing units do not enjoy economies of scale. Lack of scale is further compounded by high cost of funds, of power, high transaction costs and poor logistics support. Supply chain management is all but absent. Limitations of capital and entrepreneurship often force businesses to continue with traditional technology.

Small size also means limited production volume. There is little value addition beyond primary processing. Most units cater to a local area. Labour costs are relatively modest but productivity needs to be improved through education and training.

Too modest, by far

Most processing units are generally located at or near raw material production centres. From the sheer numbers, it may be inferred that the installed capacity of most units is modest.

Take the solvent extraction industry, for example. Many units that process soyabean have a capacity of 300-400 tonnes of soyabean crushing per day. In major soyabean producing countries, typically, a solvent extraction plant would have capacity to process about 5,000 tonnes a day. Considering India’s raw material production and scarce capital, it perhaps made sense 10-15 years to set up small or medium-sized plants. Because of scale disadvantage, an average Indian soyabean crushing plant may not be able to stand in competition against large units in other countries. No wonder, many units are turning sick.

The vanaspati industry too suffers from a similar fate. The sugar mills are no different. Although a number of studies have placed the viable minimum capacity at 4,000 tonnes of cane crushing per day, a large number of mills operate at sub-optimal capacity. Recently, many private sugar mills invested heavily in capacity expansion; but cooperative mills continue to languish.

A majority of the 5,000-plus units that process fruits and vegetables have an installed capacity to process just about one tonne (1,000 kg) a day. Capacity utilisation is low. There is lack of modernisation.

It is common knowledge that the nascent Indian food processing industry holds tremendous potential to growHowever, there are weaknesses that need to be addressed.

Time to tackle wastage

It is estimated that close to a fourth of horticulture products is lost on-farm for want of post-harvest handling and infrastructure. About 10-15 per cent of grains is believed to be lost on field due to rodent menace and poor care.

Despite a large production base, the amount of food crops processed is rather small. Estimates suggest processing of fruits and vegetables is as low as 2 per cent; milk about one-third; about a fifth in meat and a mere 6 per cent in poultry products. There is dire need for consolidation of capacities and to encourage the processing industry to benefit from scale economies.

There are legal, financial and technological hurdles that may come in the way. So, a comprehensive examination of consolidation is necessary, keeping in view social desirability, technological feasibility, economic viability and political acceptance.

A case for privatisation

Mergers and acquisitions are expected to become the norm soon. The process of company acquisition, as also brand acquisition, in the food sector has already started. Several multinational corporations are already big players in the country’s food processing sector. It may also be prudent for the government to get out of public sector food processing units and start a process of privatisation. For example, sugar mills in the public sector are candidates for privatisation.

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