FNB News - Cold chain industry in India – Present status and future prospects

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Cold chain industry in India – Present status and future prospects

Thursday, 10 March, 2016, 08 : 00 AM [IST]

Sateesh Kulkarni

Overview
Cold chain involves the transportation of temperature-sensitive products along a supply chain through thermal and refrigerated packaging methods to protect the integrity of these shipments. There are several means in which cold chain products can be transported: Refrigerated trucks and railcars; Refrigerated cargo ships; and Air cargo.

India's integrated cold chain industry
India’s cold chain sector is a combination of surface storage and refrigerated transport. The industry has been growing at a CAGR of 20% for the last three years. The cold chain market in India is anticipated to reach Rs 624 billion (US$13 billion) by 2017, according to 2014 estimates. Cold stores are the major revenue contributors of the Indian cold chain industry.

Currently, India has 6,300 cold storage facilities unevenly spread across the country, with an installed capacity of 30.11 million metric tonne. These are mostly used for storing potatoes. However, the market is gradually getting organised and focus towards multi-purpose cold storages is rising. More than 50% of the cold storage facilities in India are currently concentrated in Uttar Pradesh and West Bengal, while other states still face a challenge with investments from the government and private operators.

Facts

Organised players contribute only ~8%–10% of the cold chain industry market
36% of these cold storages in India have capacity below 1,000 MT
65% of India’s cold chain storage capacity is contributed by the states of Uttar Pradesh and West Bengal
At the current capacity only less than 11% of what is produced can be stored

Government initiatives
India is one of the largest producers of agricultural products and one of the global leaders in the pharmaceutical sector. Yet, it is known to have a fledgling cold chain, which results in supply chain losses of food and other resources. These losses have been stated to be as high as US$8 to 15 billion per annum from the agriculture sector alone. To address this concern, the government had earlier constituted a National Task Force on Cold Chain in 2008.

The agriculture and food processing sectors in India have been developing and today India is a net exporter of food grains. This is a dramatic transformation from the 70s and 80s when India used to import food grains to feed its population. This has largely been a result of the higher yields achieved as a result of the Green Revolution. Alongside this, there have been significant strides in the production of fruits and vegetables.

Segment-wise size & products in Food Processing Industry

Segment	Size (Million Tonne)	Key Products	Expected Growth (%)
Dairy Products	121	Value-added Milk, Butter, Cheese	8
Fruits & Vegetables	233	Raw Fruits & Vegetables, Pulp, Canned Food	7
Meat & Poultry	11	Poultry, Beef	18
Seafood	8.4	Seafood Products	7
Packaged Products	Rs 8,000 crore	Ready-to-eat & Ready-to-cook	8

However, lack of proper and adequate food storage, processing and cold chain logistics remains a serious challenge. The Government of India is one of the driving forces in developing the cold chain industry and supports private participation through various subsidy schemes and grants. Investment in cold chain in India was also opened under the automatic route for 100% FDI participation. The existing cold chain in India largely comprised comparatively small private companies with a regional or local footprint.

In the previous two decades, India has been developing at a quick pace and an increasing demand for high value foods with a shift towards horticultural crops has been documented. This, coupled with rapid urbanisation resulted in multi-fold changes to the spending and consumption pattern of India's population. The existing food supply chain systems were unable to cope with these fast changing demographic trends and the lack of efficient and effective supply chains is understood to lead to a variety of losses in the perishable food segment.

In 2012, Indian farmers produced 240 million metric tonne of horticultural produce, almost equal to its grain and cereals production. Various studies indicate that 18% to 40% of this produce was lost due to supply chain inefficiencies, concluding that a focussed effort was required to promote the development of the cold chain in the country. The Indian government and its Planning Commission spelt out clear intention, that cold chain has to be supported. Amongst the core identified development areas are the base infrastructure, environmentally-friendly technologies, standards and protocols, enabling policies and specialised skills.

The Indian government is taking steps to improve the cold chain infrastructure, by recognising the cold chain industry as a sub-sector of infrastructure in the previous Union Budget and creating an additional Budget to construct new cold storage facilities. In addition, the private sector is being encouraged to develop the cold chain industry further by implementing the latest and most effective refrigeration technology solutions available today.

For private players the high level of initial capital required to construct a cold chain unit continues to be the biggest challenge. But if the government pitches in with a clear plan and promotes more PPP initiatives in this field, we could see a momentum growth in the cold chain industry in India.

Initiatives to boost the cold chain infrastructure

100% FDI through government route
Since 2011-12 cold chain has been given infrastructure status
Viability gap funding up to 40% of the cost
5% concession on import duty, service tax exemption, excise duty exemption on several items. Subsidy of over 25% to 33.3% on the cold storage project cost
Establishment of National Centre for Cold Chain Development
Proposed financial outplay for cold chain infrastructure & food parks of US$335 million and US$650 million respectively. Over 50%-70% capital grant on projects.

Key challenges

Lack of quality cold warehousing infrastructure: There is a severe shortage of cold chain warehousing capacity as only 25% of the capacity is available for fruits, vegetables, processed foods and pharmaceuticals, whereas 75% of the capacity is dedicated to potatoes.
Lack of standards and protocols in construction and operation of facilities: Technical standards followed in India are mostly unsuitable for Indian conditions, which results in lower performance of standard refrigerated systems.
Low awareness of labour in handling temperature-sensitive products: In India, the supply chain of most products is long and fragmented. A product changes many hands from source to delivery point. Most workers involved in this are not properly trained in handling temperature-sensitive products resulting in deterioration of product quality before reaching the consumer.
High fuel cost and power cuts: Fuel costs in India constitute around 30% of operating expenses of cold storage in India as compared to 10% in the West. Further, cold storages are dependent on steady supply of power. Most Indian regions face power cuts. Hence, these companies have to invest in power back-ups, which push up the capital investment requirement.

Future prospects
With a large number of global food and retail chains targeting the India markets, FDI in retail is just around the corner and is likely to be implemented soon. Then government is also promoting the food safety and security bill which would further demand storage and cold chain facilities in order to reduce the amount of food wastage. With the expected future development in road and rail infrastructure, along with the changing lifestyle of the Indian consumer – Indian cold chain industry is expected to grow at a CAGR of 28 per cent over the next three years and reach a market size of $13 billion in 2017, although it is largely unorganised in nature. Thereby, presenting a great opportunity for foreign players. But for this to happen, the government will have to play a very important catalyst role.

Globally cold chains have now become an integral part of supply chain management for the storage and transportation of temperature-sensitive goods. The focus has now shifted from increasing production to better cold storages and transportation of food produce. The utilisation of cold chain logistics includes both cold storages and refrigerated transportation and is used to increase the shelf life of food produce.

With 35-40% of agricultural produce in India being wasted due to lack of proper cold storage facilities, it is immensely important that a focussed effort is required on part of the government to encourage the use of cold chain among market participants. Some of the likely steps that the government could take are mentioned below:

Provide requisite support like lower cost of funding for setting up cold chain infrastructure facilities.
Promote awareness campaign and educate market participant about the importance of cold chain facilities.
State governments can encourage setting up of cold storage facilities by providing subsidised power tariff as power forms a significant proportion of the operating cost.
Encourage better and more efficient refrigeration technologies to improve the shelf life of perishable products.

(The author is director, Corporate Catalyst India Pvt. Ltd. He can be contacted at sateesh.kulkarni@cci.in)