8/21/13 Mrunal [Food Processing] Introduction, Scope, Significance, Awesomeness (hardly), Obstacles (truckload of) for GS Mains Print

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[Food Processing] Introduction, Scope, Significance, Awesomeness (hardly), Obstacles
(truckload of) for GS Mains
1. Prologue
2. Indian food processing industry: Significance
1. Increasing Employment
2. Curbing Migration
3. Curbing Food Inflation
4. Crop-diversification
3. Scope/Potential
1. Abundant Raw Material
2. Geographical advantages
3. New Demand
4. Government Initiatives
4. Obstacles to food processing?
1. Economies of scale
2. Lack of organized retail
3. Lack of Food testing facilities
4. Lack of Skilled Manpower
5. Lack of R&D
6. Transport problems
7. Export Problems
Prologue
In the new Mains syllabus, UPSC has included: Food processing and related industries in India-
their Scope, significance, Location
Supply chain management (SCM)
Upstream and downstream requirements
But ^thats not the end. Food processing topic also overlaps with
GS-
2
1. Ministries and Departments of the Government
2. Government policies and interventions for development in various sectors and issues arising out of
their design and implementation.
GS-
3
3. storage, transport and marketing of agricultural produce and issues and related constraints;
4. Sci-Tech research e.g. Food irradiation, developing new crop hybrids, animal-breeds etc.
+ same food processing points can be selectively used for discussing rural-unemployment, food inflation,
general inflation, FDI in multi-brand retail; even current account deficit and rupee depreciation: whether its
essay / interview or group discussion (in case of SBI/CAT) hell even RBI Officer phase II descriptive
papers.
Structure of the [Food processing] Article series:
1. We get basic overview of significance-scope-potential-obstacles
2. Truckload of Government schemes related to post-harvest management, Mega Food parks etc.
3. Model APMC acts, the direct cooperative marketing etc.
4. Finance, taxation, FDI, export related issues
5. Then we start basic theory of supply chain management (SCM), and upstream downstream issues of
individual food processing sub-sectors viz. Dairy, Fruit and Veggies, Egg-Meat-Fishes,
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Confectionary, Wine, Edible oil etc.
References used for this article series
Source Title comment
Books
1. A Manual for
Entrepreneurs: Food
Processing Industry
(Tata McGraw-Hill
Publication)
Initial chapters provide the challenges/problems with food
processing industry. Rest goes into actual management,
accounting, sales, marketing strategy for a food
entrepreneur=useless from UPSC point of view.
2. Food processing:
Opportunities and
Challenges (ICFAI
university press)
Some chapters deal with food industries in China, Australia etc
but hardly any good fodder points
Some chapters provide details of individual food processing
sector but mere copy paste job from Vision 2015 PDF document.
3. IGNOU MBA booklets
(Coursecode: MS-55)
for theory on supply chain management, upstream-downstream
requirements
PDFs
State of Indian agriculture
2012-13 (By Agricultural
Ministry)
for agro-livestock-fish-production information and schemes
Vision 2015 for food
industries: part 1 and 2
for opportunities and obstacles in individual sector: dairy, meat,
wine etc.
Flavors of Incredible India: A
report by Ernst & Young and
FICCI
for supply chain diagrams of individual food processing sector
+ Additional points for opportunities, obstacles.
Planning commissions
report on Encouraging
Investments In Supply Chains
and cold storages
plenty of fodder on
supply chain,
opportunities, obstacles
various schemes
12
th
FYP documents
doesnt have much specific fodder points for food processing
though.
IBEF report on Food
processing industry
some fancy charts, numbers.
Web pib.nic.in, Indian express for government schemes, salient features, export/dumping issues.
Note: All those Food processing related PDFs have been uploaded on
https://files.secureserver.net/0sL2N0Ej5XwsWc
12th Five year plan uploaded on https://files.secureserver.net/0sLrYY0FFJRric
Indian food processing industry: Significance
size
Has more than 35000 registered units
Output of ~5-6 lakh crores
Food processing contributes about 9-10% of GPD, in Agro-Mfg. sector.
location
Location wise: Maximum factories in (ie. more than 1000 in given state)
Coastal states: Andhra, Maharashtra, Karnataka, Kerala, Gujarat, Punjab, WB
Non-coastal States: UP, Punjab
Observe majorities of the food processing factories are concentrated in the coastal states.
Increasing Employment
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Food processing industry provides plenty of direct and indirect employment opportunities, because it
acts as bridge between Agriculture and Manufacturing
As per ASI survey in 2010, Food processing industry generated highest employment among all
industry. Giving employment to almost 17 lakh people.
12
th
Five year plan (FYP) wants to create more than 50 million jobs. Out of that, Food processing
sector is to create one million jobs.
Curbing Migration
When food processing plants are setup near agro/rural regions, they reduce:
1. Poverty among villagers,
2. disguised unemployment
3. exploitation of farmers
4. rural-urban migration
1. unplanned urbanization,
2. slums/hygiene/social problems in cities
Curbing Food Inflation
In the last few years Food inflation has been a major problem. Food inflation is eventually passed
through into manufactured goods through higher money wages.
Therefore persistent high food inflation= bad for general macroeconomic stability.
well-developed food industry + compact supply chain=reduces food inflation via:
1. Disintermediation (meaning no middlemen/commission agents)
2. less wastage/spoilage of perishable products
Thus food industry is significant for reducing food inflation.
Crop-diversification
Indian villagers are away from market= have to grow cereals. (as we learned in Von Thunen model)
In recent years, Government increased Minimum support prices for rice and wheat.
That leads to surplus grain production=>Pvt. Players give less price to farmer=>government has to
buy wheat @Minimum support price (MSP) but FCI didnt have enough storage capacity
Result: Wheat gets rotten @godowns and railway stations.
On the other hand, weve to rely on imported oilseeds because of higher MSP, farmers prefer to grow
rice/wheat than oilseeds=> higher oilseed import adds to Current account deficit and leads to 1$=62
rupees=>crude oil expensive=petrol expensive=everything transported through petrol/diesel gets
expensive=thus the cycle of middle class exploitation is complete.
Coming to the original point: we need crop diversification, all farmers shouldnt be growing just rice
and wheat. But if want to seduce the farmers into growing other crops, then following must be done
1. Promote food industry with backward linkages to farmers growing fruits, vegetables, milk, fish, meat,
poultry, grain, etc.
2. Aggressively market the processed food in India + Abroad
once weve done #1 + #2=> then even the farmers away from market area will see good income
opportunity in growing non-cereal crops => crop diversification => the excessive rotting-wheat surplus
problem is solved.
Some filler significance points: food processing
1. Increases shelf life: milk vs butter
2. Increase value: milk vs butter
moveing to.
Scope/Potential
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Abundant Raw Material
Indias world
Rank
in production of
1 milk, ginger, chickpea, banana, guava, papaya, mango, buffalo meat
2
rice, wheat, potato, garlic, cashew nut, groundnut, dry onion, green peas, pumpkin, gourds,
cauliflowers, sugarcane, tea
among top
five
coffee, tobacco, spices, oilseeds
With such a huge raw material base, we can easily become leading food supplier in the world. (But we
havent, because of the obstacles discussed later).
Geographical advantages
1. 46 out of 60 soil types are present in India.
2. More than 26 types of climatic conditions= can cultivate large variety of fruits, crops, vegetables.
3. Large coastline, villagers in 13 states engaged in fishing as their secondary activity.
4. Variety domestic animals such as cows, buffaloes, goats, chicken, lamb, sheep.
5. Large irrigated area under cultivation. Ample supply of fresh water for human, plant and animals.
New Demand
In the upcoming years, there will be good demand for healthy, modern food products due to following
reasons:
1. Youth population (age group 15 25): doesnt shy away from trying new food products.
2. More Nuclear families: usually working couple => less cooking time + expensive maids=need ready
to eat / ready to cook food.
3. Rising incomes, middle class and rich families=can afford processed food.
4. Emergence of Tier 1 and Tier 2 cities, shopping mall culture.
5. Growing migration from rural to urban India + rising income = demand for bread, butter etc.
6. Media penetration, advertisements=> demand is created for health-drinks, noodles, cream-biscuits,
cornflakes etc.
7. Celebrity chefs, cookery channels= new dishes, international cuisines introduced=>demand for their
ingredients, vegetables in India.
8. Diabetes, obesity, Blood pressure, lifestyle diseases =>demand for healthy food.
As a result, food processing industry is expected to reach
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year turnover USD
2015 >250 billion
2020 >300 billion
Government Initiatives
Many food processing sectors that were earlier reserved for small scale industries (SSI) have been
de-reserved
FDI limits have been relaxed, Excise duties have been reduced, export subsidies given
National mission on food processing, Vision2015 for food processing,
New schemes for mega food parks, cold chain etc.
Many states have reformed their outdated APMC laws.
and so on (^all these elaborated in later articles.) Together they facilitate the expansion of food
processing industry in India. More scope points, specific to individual sector (i.e. Dairy, meat, fish etc)
later articles.
so far everything sounds hunky dory but if our food processing industry was so awesome, then UPSC
wouldnt have included it in the syllabus. Then, what are the.
Obstacles to food processing?
country __ % of total fruits/vegetables processed
India barely 6-7
China >20
USA >60
So, why low level of food processing in India?
Economies of scale
When you produce something on large scale, the unit production cost decreases. How / Why?
1. When you purchase raw material in large bulk, you negotiate/bargain with supplier.
2. Fixed cost remains same (building rent, cost of lights, initial cost of buying machinery etc.) e.g. you
bought a ice cream machine for 10 lakh- whether you make 100 liters ice cream or 1000 liters ice-
cream per day- its upto you but the more ice cream you produce, the average unit cost decreases.
(think of 100/5 vs. 100/50)= hence bigger the plant, cheaper to produce.
Most of Indian food processing units/companies/enterprises/factories are small sized meaning = poor
economies of scale. It leads to following problems:
Aspect problems of small company / poor economies of scale
Pricing
Since unit production cost is high, he cant sell his products cheap unlike a big MNC, and Indian
consumers are price sensitive.
Brand-
Building
Small players=small profit, seasonal business. In global market they cant establish themselves as a
long-term player they only do opportunistic businesses, undercut each other.
Low
Technology
Cant invest in R&D to develop new products (e.g. chilli chewing gum or tomato cream
biscuit!)
Cant do marketing research / survey to find out what consumers want?
Marketing
Cant invest in advertisement campaigns to create new demand.
e.g. Kellogs is aggressively advertising its cornflakes in India, highlighting weightloss
benefits.
but on the other hand, an Indian Halwai (sweet maker) cant do same level of marketing in USA
to create demand for jalebi or peda.
cant do backward linkage e.g. contract farming: giving seeds/fertilizer/pesticide to farmer.
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Un-Export
Quality
Instead small company relies on multiple small supplier hence Raw material=non-uniform in
quality.
Then their products are rejected in US/EU market for not meeting the Codex/HACCP
standards. (e.g. mango juice rejected for stone weevil, buffalo meat rejected for food-n-mouth
disease, fish rejected for heavy metal contamination and so on.)
retailing
Cant do forward linkage e.g opening its own factory retail outlet like Nike, Adidas or Apple
=> small company has to rely on third party retailers and need to give them margin from sales=
profit decrease and poor economies of scale continues.
But why do we have this poor economies of scale?
1. For long, many food processing items were reserved for Small scale industries only.
2. High input costs due to multiple taxes, middle men. Profit level is low=cant expand.
3. Government schemes, subsidies, grants have low-ceilings =Individual person cant setup big plants
4. Hard to get bank loans. (more elaboration in later article)
5. Bigger the plant, bigger the headache in terms of tax-liabilities. Creative Indian entrepreneurs rather
setup multiple small plants to get subsidies/tax benefits of MSME-industries, and sell unbranded food
products.
Anyways, some more obstacles for Indian food processing industry:
Price
Sensitivity
Indian public=Low per capita income = higher price sensitivity and higher income
elasticity in relation to food expenditure.
Preference
For Fresh
Food
Indians prefer freshly cooked products as compared to packaged products. Traditional
mindset: fresh = nutritious.
Agri
Problems
truckload of agri-problem. Well see the individual problems in later articles. for the
overview:
Agriculture/Dairy production yield levels are among the lowest amongst the BRIC
countries.
Land holdings=small, fragmented.
Area under cultivation is decreasing due to urbanization, real-estate development,
industrialization and ofcourse thanks to totally awesome people like Raabert
Vadhera.
there is no common policy on contract farming throughout India
Supply Chain
Problems
high cost of raw material (driven by low productivity and poor agronomic
practices)
Presence of intermediaries thanks to Nuisance called APMC acts.
high cost of packaging, finance, transport and distribution
lack of organized retail
Logistics
Logistics cost= transportation, warehousing, material handling etc.
In India, Logistics accounts for about 13% of GDP, which translates to over
USD130 billion.
This cost is significantly higher as compared most developed countries.
Infrastructure
Inadequate infrastructure of storage, sorting, grading and post-harvest
management.
Private sector unwilling to invest in logistic or infrastructure under prevailing
economic conditions and policy paralysis.
Finance hard to get loans (for both farmers and food-entrepreneurs)
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Taxation
food industry subjected to variety of taxes.
Taxes on processed food in India are among the highest in the world.
Except India, No country distinguishes between branded and unbranded food
sectors for taxation.
Multiple and complicated tax regimes have rendered the food industry
uncompetitive
Schemes
Plethora of government schemes: overlapping, ambiguous, low ceilings. e.g. you
need crore rupee worth machine, they barely give few lakhs- that too after months
of visits to various offices.
Laws
Food laws are often inconsistent and overlapping.
The Food Inspectors cause of harassment and bribe-demands in terms of pulling up
entrepreneurs under the Weights and Measures Act, ingredient content and mix,
labelling norms, etc.
While the various acts are necessary, court cases turn out to be expensive for
small-entrepreneurs- especially if involved in inter-state trade.
Market
Information
Market information not easily accessible
Small players cannot buy international journals/magazines to find the latest trends
in demand/innovation. Most of them also dont know how to use internet for
business/marketing.
Manpower
Lack of trained manpower.
Very few universities offer special courses for food processing and
entrepreneurship.
Packaging
Since Indian consumers= price sensitive, most of the food products are sold in
small packages (Rs.5 noodles, biscuits etc)=more plastic required= higher share
of packaging costs as a proportion of total costs.*
*High packaging cost
Packaging cost is ___ % of total production cost
Potato Chips 20%
Fruit Juice 19%
Jam 12%
Chicken Nuggets 8%
Branded Atta 6%
A recent ICAR study on Status of Post-Harvest losses
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type post-harvest % loss
cereal wheat 6
pulses blackgram 6
oilseed groundnut 10
fruits guava 18
veggies tomato 12
spices turmeric 7
marine inland-fish 7
moving to more problems faced by Food processing industry:
Lack of organized retail
In USA there are two types of retailers
1. Big malls: Walmart etc.
2. small kirana walla known as mom and pop shops
But both of them have cold-storage facilities, hence they sell l both dry and wet/fresh food products
dry fresh
bakery items, noodles, pasta, flour, cheeze etc. fruits, milk, veggies, meat, chicken, fish
But in India, kirana stores dont have cold storage facilities=> they only sell dry food products.
and fresh produce is sold through vendors with push-carts=>wastage because they dont have cold
storage.
Meat, poultry and marine products are primarily sold in separate markets but they too dont have cold
storage=>wastage.
Thus, lack of organized retail, leads to
1. low product quality
2. lack of variety, choice
3. poor shopping experience
4. low hygiene levels
5. low value for money
6. high cost of product
Lack of Food testing facilities
1. The number of laboratories in the country is insufficient. Most of these laboratories lack world-class
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facilities and infrastructure. Equipment, Testing manuals outdated
2. Many laboratories are not equipped with basic facilities such as for testing antibiotic residues, heavy
metal contamination and other toxic contaminants in the food items.
3. Very slow response time of Government controlled food laboratories is long, extending to upto 5
years.
4. Most laboratories at sea ports are not fully equipped to handle testing of imported products, organic
foods, residual radioactive matter, new toxins and allergens, textural analysis, residues of veterinary
drugs, enzymes and hormones etc. these tests are necessary for complying with Codex, HACCP ,
GMP , GHP etc before exporting to in US/EU markets.
Lack of Skilled Manpower
A food processing unit requires skilled manpower, including
Production Managers or Supervisors
Product Development Technologists
Food Engineers
Food Microbiologists
Quality Control Scientists
Research Technicians
Technical Representatives
machine operators, assistants
Problems
Lack Of
Men
As per a study by National Skill Development Corporation: the annual human
resource requirement in food processing industry is estimated at about 5 lakh
persons including about one lakh persons in the organized sector.
But right now, every year, barely ~5000 graduates and postgraduates pass out from
in different disciplines of Food science and technology.
Lack Of
Courses
very few universities offer graduation/PG courses, entrepreneurship courses for
food science and technology
Need short-term, diploma/certificate type courses for rural youth.
need to introduce courses for small scale players such as retailers, halwais
Need specialized institutes for training/R&D in bakery, confectionery, wine making.
Outdated
Syllabus
And
Professors
Syllabus/courses in university departments are not being updated regularly and are in
most cases, outdated with respect to the present trends and food industry
requirement.
The teaching faculty in most of the Indian academic institutions studied has limited
industry experience / exposure.
Inspectors
Food inspectors unaware of GMP, GHP & HACCP standards, latest developments in
food standards, new products, and laboratory network
Engineering
Engineering curriculum does not equip graduate engineers with the skill of
designing cold chain infrastructures. Fresh graduates find it difficult to make heat
load calculation and configure the plant & machineries in energy-efficient manner.
There is urgent need to upgrade the syllabus accordingly.
Lack of R&D
1. Sarkari Domain
Indian food processing industry is mainly madeup of small scale players=
they cant invest money in R&D=> becomes governments responsibility
to do the R&D.
But Sarkari Research objectives are outdated, food market requirements
keep changing frequently given the new product launches by MNCs.
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2. Baba Adams
Mindset
Multinational Food companies typically have an in-house global network
of R&D professionals.
Although theyre willing to work with Indian institutions for developing
India-specific products and processes.
But the quality of R&D currently undertaken by existing Indian institutions
is not in line with their requirements.
3. Manpower
The chairmanship of public research institutes usually given to (retired)
IAS or politicians=> lack of dynamism/market-orientation of the hardcore
professionals in food-MNCs.
Many students prefer alternate careers which are found to be more
fulfilling and remunerative. There has been a significant drop in the quality
of people entering the R&D field
4. Implementation
Indian Government recently introduced a variety of kiwifruit in North
India, but could not provide adequate support/advice on cultivation
practices. Result= domestic kiwi produce is much smaller in size than
imported kiwi.
5. There is a huge opportunity for developing and commercializing desi foods for export e.g. ethnic
beverages such as kokum, coconut water and ethnic food such as khakra, amla preserve etc. But, to
make them appealing to foreign consumers, R&D required for product development, food-texture,
rheology, mouth-feel, smell, color, packaging etc.
6. Internationally, following research-developments are ongoing, while we are generations behind in
research:
area What foreign players are doing in R&D?
processing
Non-thermal food processing technologies to preserve the nutrients in milk, fruit
juices and also for killing microorganisms in eggs.
Role of ozone in fresh food sterilization
Calcium treatment to extend the shelf life of melons
packaging
Packaging films that offer optimal barrier properties to extend shelf life.
Biodegradable films made from pectin and starch
Silicon oxide films that improve oxygen and moisture barriers.
Use of natural antioxidants in packaging materials for shelf life extension of combat
rations for soldiers.
Active and intelligent packaging systems To monitor product quality and trace a
products history through critical points in the food supply chain.
Transport problems
Transport capacity India developed countries
Normal distance covered by trucks/trailers 250 -300km / day 600- 800 km/day
roads capacity to handle maximum weight 16 tonnes 36 tonnes (USA)
Indian national highways account for only 2% of the total road network but carry 40% of all cargo.
This puts a high pressure on the highways due to the high traffic volumes => delays in transit +
damage to perishable products
Though highways are well-spread, theyre yet to connect all 550,000+ villages in India
Railway
Railway is cheaper than road transportation but railways currently contribute barely
~25% of the total cargo transported
Last mile connectivity from rail transporters =absent.
Inefficiencies associated with a government monopoly. (timing-schedules, technology
upgrades etc)
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problems Lack of wagons with cold storage facilities.
Congested rail stations, lack of sorting, grading, warehousing facilities nearby.
Road transport operators provide more flexibility.
Although The Dedicated Freight Corridors are expected to improve the connectivity of
the railways, increase carrying capacity and reduce the transit time.
Ports
Environmental and social hurdles in land acquisition= hard to get setup new port /
expand the existing port.
High dependence on manual labor + low technology usage= increases the turnaround,
loading/unloading times at ports, thus impacts entire supply chain lead time and
increases cost For e.g. the cost of an import container in India=~$500, elsewhere ~350
in foreign ports.
Export Problems
Although India is the second largest producer of food in the world but its share in worlds exports is very
low despite its inherent strength in tea, spices and rice. Why?
expensive
Raw
Material
Fragmented base of suppliers=uniform quality not available
Lot of intermediaries=raw material cost increased.
High duties on imported raw material: additives/flavorings etc.
As a result input cost =high, hence pricewise, we cannot compete with other
exporters.
low
processing
Our processing has largely remained in primary forms like pickling, sun drying
and/or making preserves. Sometimes we just export intermediate product to second
country theyll further process it and sell to third country @even higher price. (e.g
our shrimps to Japan, Japan selling them to US)
low quality
Often our products rejected from US/EU markets for not meeting Codex, HACCP
quality standards
Branding
yet to Build global brands on the back of Indias strengths (Darjeeling tea, Basmati
rice, Durum wheat, Alphonso mango, Tamilnadu Banana or Kashmiri Apples)
Developed countries view India as an unpredictable and unreliable source of food and
agro products.
transport Poor cargo facilities at airports and ports are other bottlenecks discussed earlier
Packaging
yet to develop packaging technologies for Indian food products to make them more
acceptable to foreign consumers.
Dumping Desi shrimps face Anti-dumping duties in USA.
Devaluating
1$=~60 Indian rupees while 1$=~100 Paki rupees
Given these exchange rates and local prices of Basmati in India vs Pakistan. From an
American/Europeans point of view, it is cheaper to import Basmati from Pakistan
than from India.
^these are just few of the many problems/obstacles faced by Indian food industry. In the next article, we see
various government schemes related to post-harvest management, food processing industries and agro-
export.
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Posted By Mrunal On 21/08/2013 @ 21:06 In the category Economy