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Processed Food Sector in India: A Review
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Monday, 02 May, 2016, 08 : 00 AM [IST]
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Dr Kakali Majumdar
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fiogf49gjkf0d Introduction
Food processing is the transformation of raw ingredients, by physical or chemical means into food, or conversion of food into its other ready-to-use forms. More specifically, food processing combines raw food ingredients to produce marketable food products that can be easily prepared and served by the consumer.
The techniques of food processing date back to prehistoric ages when crude processing incorporated fermenting, sun drying, preserving with salt, turmeric and so on. Such basic food processing involved chemical enzymatic changes to the basic structure of food in its natural form, as well as served to build a barrier against surface microbial activity that caused rapid decay. These types of processing techniques continued almost till the industrial revolution. Modern food processing technology started developing since 19th century. Earlier, the activities of food processing sector in India were mainly limited to the food preservation, packaging and transportation.
However, over the years, with the emergence of new markets and technologies, the sector has extended its scope. It has started producing many new items like ready-to-eat food, beverages, processed and frozen fruit and vegetable products, and marine and meat products. It also includes establishment of post-harvest infrastructure for processing of various food items like cold storage facilities, food parks, packaging centres, value-added centres, irrigation facilities and modernised abattoir. Presently Indian food processing industry mainly consists of dairy, fruits and vegetables, grains and cereals, fisheries, meat and poultry, consumers food items and so on. Among these, dairy products have the largest market share of about 37%. With the rapid growth of the economy, shift in the consumption pattern from cereals to more varied products like milk and vegetables has resulted in the development of food processing industry in India. According to the 11th Five Year Plan, food processing industry constitutes more than half of the total food products in India.
Food processing in India is one of the biggest industries and ranks fifth in terms of production, consumption, export and growth. This industry contributes around 6.3 per cent to the Gross Domestic Product of India, 19 per cent to the Indian industry, and 13 per cent to export production. Some of the leading food producing companies in India are Lansea Foods Pvt. Ltd, Cadbury India Kitchens of India, Flamingo Food Products, Grandmas Food Products, Lijjat Papad, Magnas Herbs, MTR Foods, Alkhan Exports, Parle Products Ltd, and Priya Foods. In India, the prominent food processing states are Maharashtra (14%), Andhra Pradesh (13.4%), Gujarat (12.7%), and Uttar Pradesh (12%).
Though Indian consumers have preferred fresh and unprocessed foods to processed and packaged foods, the recent changes in consumption patterns, particularly, in middle- and high- income groups show ample opportunity for processed food segments in the country. Rising income, increased urbanisation, changing lifestyle, greater willingness to experiment with new products, increase in the number of working women and so on have led to a strong growth in consumption of processed food products.
The ministry of food processing industries (MoFPI) is the authority for formulation and administration of the rules and regulations and laws relating to food processing in India. The ministry was set up in the year 1988, with the objectives to develop a strong and vibrant food processing industry, to improve employment opportunity and to help the farmers so that they could reap the benefits of modern technology.
Though India has a good base of the food processing industry, the country has been unable to tap its potential. There is lack of investment in the logistics of the retail chain which leads to an inefficient market mechanism. Though India is the second-largest producer of fruits and vegetables, it has a very limited integrated cold-chain infrastructure, with few cold storages, having a total capacity of 23.6 million MT. Out of which, 80% is used only for potatoes. Lack of adequate storage facilities, cause heavy wastages of fruits and vegetables in India. Only about 2% of the fruits and vegetables in India are processed, a figure that is much lower when compared to countries like Malaysia (83%), the Philippines (78%), Thailand 30% or China (23)%.
Exports in processed food sector
The Indian processed food sector is mainly export-oriented and ranked fifth in terms of production, consumption, export and expected growth. Its percentage share in India’s total export is 12.1% (DGCI&S). The value of processed food exports during 2013-14 was US$37.79 billion against total exports of US$312 billion. Observing increasing demand for processed food in the global market, Government of India is paying attention to export-oriented food processing industries by giving certain incentives for the export of processed foods.
Liberalisation in India was initiated in 1990s but opening up of the agricultural sector started since 1995 with the WTO. Trade barriers, comparative advantages, geographical proximity and so on are the determinants of export destinations of any product. Since liberalisation, food processing sector is considered as one of the priority sectors and to improve the export potential most of the processed food items are exempted from licensing and excise duties. India enjoys comparative advantage for guar gum, groundnut, dried fruits and vegetables and pulses. 100% FDI is permitted under the automatic route for processed food items excluding alcoholic beverages and a few other restricted items. Most of the processed food items were exempted from the licensing and excise duties. During 1999, food processing industries were recognised as a priority sector for accessing bank credits. In 2001, the Government of India launched the programme of establishing agri export zone (AEZ). The main objective behind this is to identify the potential of the agri product in a contiguous region. APEDA was constituted as the nodal agency to promote the setup of AEZ. These incentives created a favourable environment for investments and exports in the sector.
FDI in processed food sector
FDI - up to 100 per cent equity - is permitted under the automatic route in food and infrastructure like food parks and cold chains. There are many areas for investment in this sector which include mega food parks, agri-infrastructure, supply chain aggregation, logistics and cold chain infrastructure, fruit and vegetable products, animal products, meat and dairy, fisheries and seafood cereals, consumer foods/ready-to-eat foods, wine and beer, machinery/packaging. Though India has a strong raw material base, it has been unable to tap the potential for processing. Only about two per cent of the fruits and vegetables in India are processed, which is much lower when compared to countries like USA (65%), the Philippines (78%) and China (23)%.
MoFPI has taken many steps to give impetus to this sector, which include virtual delicensing of the sector, inclusion in the priority sector for lending, allowing 100% FDI except in alcoholic beverages and retail, several duty and tax reliefs, financial assistance for infrastructure building, setting up of food processing units and so on. In case of export-oriented units, foreign investment is permitted even in case of items reserved for small-scale sector. In addition, the export-oriented units are given a number of incentives and concessions under the Export-Import Policy such as duty-free import of capital goods, raw materials and intermediates, export income being exempt from corporate tax and so on. FDI inflow in food processing is becoming stronger. There are many areas for investment in this sector, which include agri-infrastructure, supply chain aggregation, logistics and cold chain infrastructure, fruit and vegetable products, animal products, meat and dairy, fisheries and seafood cereals, consumer foods/ready-to-eat foods, wine and beer, machinery/packaging. Sensing enormous unexploited potential, foreign players are increasingly showing their interest to be a part of this rapidly rising sector. It attracted around Rs 45.19 billion FDI during 1991-2005, which is 3.3% of total FDI inflow in India, and ranked as the seventh sector attracting largest FDI in India.
Foreign Direct Investment (FDI) of around US$1 billion has already been approved in India's food processing industry since 1991. The Government of India has set a target of US$25.07 billion of FDI inflows to food processing industries to be achieved by 2015 which will increase India's global food trade from 1.6 per cent to 3 per cent along with a rise in perishable processed food items from 6 per cent to 20 per cent. The national policy on food processing aims at increasing the level of food processing from 10 per cent during 2010 to 25 per cent by 2025.
The main foreign source countries for FDI inflow in Indian processed food sectors are Switzerland, USA, Germany, Korea, France, the UAE, and Saudi Arabia.
Conclusion
Indian processed food sector has potential market within and outside the country. The country enjoys comparative advantage in the world market also. The FDI prospect is quite encouraging. Already few giant firms have started investing in processed food sector. Despite being one of the world’s major food producers, with huge potential for export, India’s share in the world food trade is only 1.7%. Most of the Indian food processing units are unorganised. Besides export incentives, more production, maintaining international quality slandered, proper infrastructure development, and proper transport facilities and so on are needed to develop this sector as well as to acquire significant share in the foreign markets.
(The author is head, department of economics, Shri Mata Vaishno Devi University, Katra, Jammu. She can be contacted at kakali_m@yahoo.com)
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