EVENTS AND ISSUES

New Delhi, 8 May 2006

Food Processing

WILL FDI REJUVENATE AGRI-BUSINESS?

By Dhurjati Mukherjee

The Union Ministry of Food Processing Industries wants 51 per cent foreign direct investment (FDI) in agri-business and there are expectations that the Cabinet will accord approval very soon.  If cleared, retailing of dairy, poultry, fruits and vegetables, marine products, winery and ready-to-eat products would be opened up for foreign investment.  The proposal, however, may meet with some opposition from the Left parties which were against opening up of the retail sector to FDI completely.  There are about seven intermediaries between the grower and the end consumer in the agri-business chain. While it leads to inefficiencies in the system with around 30 per cent of the produce being wasted, it also employs a large number of people.

The growth of the food processing industry in the country has been rather poor because of various reasons.  These can be attributed to the vicious circle of high unit cost, low demand and low capacity utilization.  However, the cultural barriers of preference for fresh food and eating at home are steadily going away in India due to urbanization as also other factors like nuclearization of families, lack of time of working couples and costs and availability of reliable domestic help.

While lack of infrastructure facilities is a big problem, low technology and inefficient use of machinery and management practices add to the development of this sector.   Product innovation is sporadic and low.  A wide network of R&D institutions like the Indian Council of Agricultural Research (ICAR) and the Council of Scientific and Industrial Research (CSIR) exist but these have little linkage with users like farmers and industry, resulting in lack of R&D of commercial significance.  Moreover, cost of packaging is quite high and sometimes exceeds 20 per cent of the end consumer price.

In the long and fragmented supply chain, right from farm to mandi to processor to distributor to retailers, there are too many points of intermediation.  In the process, there is mismatch between demand and supply, limited choice to the consumers, unacceptable wastage, avoidable cost addition and opportunistic profiteering.  In fact, marketing and distribution is largely unorganized and fragmented.  Fragmented retail structure also results in inefficient storage, transportation, distribution wastages and value loss.

Taxes are another area of concern as these are high by international standards.  Central and State taxes in the country together increase costs to consumer by around 20 to 30 per cent.  In contrast, the UK, Ireland, Malaysia and many other countries have very little or virtually no tax.

The global scenario is vastly different from that of Inida The last two decades have seen tremendous growth in sales of processed food – sales now total $3.2 trillion or about three-fourth of the total world food sales.   However, although consumer demand for processed foods continues to grow rapidly, growth in trade has generally stalled since the mid-1990s. 

Developing countries are expected to largely account for future increases in food demand, including processed food. Annual growth rates of packaged food products in developing countries range from 7 per cent in upper middle-income countries to 28 per cent in lower middle-income countries, much higher than annual growth rates of 2-3 per cent in developed countries.

It may be pertinent to mention that ready-to-eat meals account for about 4 per cent of total retail sales in the United States and the United Kingdom but only 0.06 per cent in Mexico, 0.55 per cent in China and 0 per cent in India.  On the other hand, intermediate products such as fats and oils account for over 7 per cent in India, 13 per cent in Indonesia and over 5 per cent in the developing world while it is less than 2 per cent of retail sales in high-income countries.

The potential for growth of processed food in the developing countries such as China and India is indeed immense.   There is thus an imperative need to open up the sector to foreign investment to improve the critically needed infrastructure.  And this point was also emphasized by the Union Food Processing Minister, Subodh Kant Sahay, at a recent seminar organized by the FICCI.  He rightly maintained that all-round development of this sector would come about with foreign players coming to this country. A comprehensive policy is being formulated in this regard which would help farmers with financial resources, who will no longer have to resort to distress selling.

In the eastern region of our country, the level of food processing is especially very low.   These States (specially Bihar, Jharkhand, Orissa and West Bengal) are faced with various problems which include i) lack of modern technology in various areas; ii) infrastructural constraints including inadequate food storage and processing facility; iii) limited understanding of alternate uses of processing facility; iv) low credit flow to the sector; v) inability to invest in market development; and vi) low quality standards of processing units.

It has been found that specially in the fruits and vegetables sector, there is enormous potential for these States to develop in a big way.  The States can leverage on the fact that almost no chemicals are used in the cultivation of most fruits and vegetables and thus organic processed food can be produced.  These fetch a premium in the export market and have great prospect overseas.

Apart from this, grain-based products like rice bran oil and bio-ethanol have great potential for exports. Also expanding process in edible oils like palm oil (mainly imported), soyabean oil and mustard oil would greatly help to cater to the increasing Indian demand as also eyeing the neighbouring export market, including that of South East Asia and China.

There is also a drastic increase in consumption of animal protein, globally and in India, over the few years. Orissa and West Bengal have huge potential for developing their processing sector in inland fisheries and prawn aquaculture.

In such a scenario, there is an imperative indeed for these States to at least cope up with their counterparts like Punjab, Maharashtra and Karnataka, where in recent years some headway has been made in the food processing sector.  These States have experimented in various ways through technical tie-ups with overseas partners, introducing new products and improving the infrastructure facilities in a big way.  Especially in Punjab, there has been commendable success in contract farming and agri-processing for value additions and tie-ups with various buyers which obviously ensured better returns for the farmers.

Emerging countries like Brazil, China and India with their cheap production potential has to capitalize in the present scenario by resorting to agri-processing in an aggressive manner so as to add value to crops and try to make their presence felt in the international market. The pro-industry bias in such populous countries has to be balanced through agricultural regeneration, as a lot of people in these countries are dependent on the farm sector for their livelihood.  If the agricultural growth rate can be boosted up, the economy of these countries would be further strengthen---INFA

(Copyright, India News and Feature Alliance)