The Hindu Business Line : Bigger bites

Given the large domestic production base, population size and income growth, India is a big and growing market for food products; and is expected to remain so.

G. Chandrashekhar

Until the turn of the millennium, India had got stuck in what may be called ‘low-level equilibrium trap’ — a state of equilibrium at low levels of production and consumption, income and growth. With economic liberalisation and gradual opening up of the markets, the economy has begun to grow.

Investment has been a key driver of growth. Rising incomes and demographic pressure have now begun to create mismatch between production and consumption demand. As incomes rise, people begin to demand and consume more. As the existing consumption levels of goods and services are relatively low, increase in income translates into higher demand for essential goods and services.

On priority chart

Obviously, food will top the chart of priorities. Indian consumers will spend an increasing share of their family budget on food until the time food needs are satisfied. The Indian food market is currently estimated at about $150-160 billion. It is estimated that 55-60 per cent of total private consumption is spent on food. There are also differences between urban and rural areas in share of food in consumer-spend or food as share of the monthly family budget.

In the US, typically, a family spends less than 15 per cent of its income on food. Agriculture is highly subsidised in developed countries, and the post-farm processes are efficient. However, food is not subsidised in India and is expensive in this country.

Other factors that contribute to high cost of food include low farm yields, high logistics costs and generally inefficient production and marketing systems. Given a large domestic production base, population size and income growth, India is a large and growing market for food products; and is expected to remain as such for long years.

In course of time, as it almost invariably happens in the development process, with rising incomes, the share of food in consumer-spend is expected to decline. With rising incomes, food use will first rise, then steady, before declining. In other words, demand for food in the near future is expected to expand considerably.

Modest consumption

Despite India being among the world’s largest producers of a number of food products (milk, rice, wheat, pulses, sugar) the per capita consumption is modest. Indeed, in some cases, the per capita use has been falling in recent years. Food grains (rice, wheat, coarse cereals and pulses) are a good example. Per capita net availability of cereals and pulses today (430 gm) is less than it was 10 years ago (495 gm). Nutritionists recommend 16 kg of edible oil per person per year; but currently it is less than 12 kg here.

India may be the world’s largest milk producer (100 million tonnes), but per capita availability is relatively low because of a huge population. Also, the consumption is skewed based on income levels. Typically, the bottom one-third of the population tends to consume considerably less than the per capita number would suggest. If incomes in the hands of the bottom one-third were to rise because of growth-oriented policies, there would be an extraordinary spurt in demand for food products.

The appended table suggests the approximate value of major agricultural commodities produced in the country. These are indicative values and would vary from year to year, depending on volume of output, market prices and so on. Most crops/products undergo various processes such as milling, crushing, extraction and packaging before they reach the retail consumer. The same product would be traded multiple times.

Scope for expansion

The fragmented nature of the processing industry, the non-integrated nature of production units and long supply chain increase the number of hands the product changes before it reaches the retail consumer. For instance, oilseed grown by farmers would go to an oil mill for crushing, where it is converted into raw oil and oilcake. Raw oil may be filtered or sent to a refinery for refining. Oilcake is sent to a solvent extraction plant where it is processed into deoiled meal/extraction and solvent extracted oil. The former is sent to animal feed manufacturers and the latter for refining.

Similarly, paddy will have to be milled into rice; and wheat into flour to facilitate consumption. In addition, we have imported foodstuffs too, such as edible oil and pulses. In other words, the aggregate turnover of the agri-commodity market would be several times the value of farm production. The scope for expansion of the food market is enormous.

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