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Food Processing: What's holding it back? - Views on News from Equitymaster

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Food Processing: What's holding it back?

Dec 14, 2007

In the last few articles we looked at the prospects of the food-processing sector. In this article we highlight the factors that are hampering its growth. Lack of Infrastructure: The major factor hampering the growth is the lack of infrastructure facilities. The food products especially the fresh food products are to be procured from various sources scattered over a vast geographical area. The agro-climatic and seasonality of the agricultural production also necessitate the procurement of products from the varied sources and its storage. The fresh agricultural products are heavy and voluminous which makes the transportation very difficult. Further, lack of connectivity between the centers due to inadequate transport infrastructure facilities add to the problem of procurement and pooling of these bulk agricultural commodities. Deficiencies exist not only for grading and packing but also in the cold storage facilities. 30% of its produce does not reach the end consumer, but gets wasted annually. This results in low prices for farmers and higher cost for consumers. Though private players are investing in cold storage facilities, support from government is needed on priority basis.

Long supply chain: The food supply chain in India is very long and fragmented. This not only adds to the cost but also results in higher wastage. Today a farmer has no contact with the end consumer or even the retailer who sells his produce and in turn, has no understanding of the pricing, consumer needs and preferences. With fewer middlemen, costs and commissions can decline up to 1.68 times the farm prices (even if retailers maintain current mark-up levels). Thus, organised retail can help achieve total savings of over Rs 1 trillion (source: CRISIL). On the distribution side, the Indian market is dominated by more than 12 m small 'mom and pop' retail outlets. However only 3% is in the organised sector, thereby reducing the reach.

Capital issues: Within the priority-sector lending target of 40% of their total deposit base, banks are mandated to lend 18% to direct and indirect agricultural activities. Food processing finds place within a further sub-category of indirect lending of 4.5%. This sub-category is usually oversubscribed by banks as even agriculture inputs are a part of this sub-category. Directed lending has its own limitations in expanding credit to this sector. Lack of financial resources further adds to the fury. Private-public partnership, government subsidy schemes, partnership with banks, JVs, SPVs for implementation as well as dedicated infrastructure financing institutions are required to give this area the requisite push.

Mindset of consumer: Indians are generally accustomed to eating fresh food rather than the packaged food. Processed foods imply a certain shelf life before consumption. Unless the consumer is assured that the storage has not led to deterioration in food quality, the consumer would shun processed foods. Further, the mindset and the spending habit of rural and urban consumer is very different. Given the diverse cultures in India, the tastes also differ as per the cultural diversity.

Regulations: Food standards in India tend to be overlapping, contradictory and highly prescriptive. Though standards have been laid for all, but there seems to be a gap in implementing them in its entirety. Further, India has the one of the highest indirect tax rates in world. However, of late there has been a draw down of taxation for the perishable sector, along with income tax waivers for reduction/waiver in excise duties on such products.

Thus, there are several hindrances that form a vicious cycle. To enable the strong of the food-processing sector, mutual effort by the government and companies is needed to add the infrastructure facilities and market linkages. Conducive regulatory environment and tax regulations should also be made to suit the growth for India to make an important mark in the global food arena.

The path breakers...
FMCG majors like Hindustan Unilever (HLL) and ITC have an established presence in contract farming in India. They have taken initiatives to strengthen their agri-linkages. Direct marketing initiatives and sourcing agreements have been signed by the players. For e.g. ITC recognized the rural potential and started the e-choupal initiative. The E-Choupal initiative creates a direct marketing channel, eliminating wasteful intermediation and multiple handling, thus reducing transaction costs and making logistics efficient. The E-Choupal project is already benefiting over 3.5 m farmers. According to ITC, over the next decade, the E-Choupal network will cover over 100,000 villages, representing 1/6th of rural India, and create more than 10 m e-farmers.

Further, Reliance and Bharti Enterprise too have invested in the agro processing space. Nestle over the last decade has helped setting up efficient milk collection system in Punjab. Starting in Moga with 511 kg of milk on the first day of collection (15th Nov 1961), today Nestle procures over 12,00,000 kg of milk per day during the peak season in the states of Punjab and Haryana. These companies have been successful in transcending the obstacles in the food-processing sector and have laid their own growth trajectories.


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