MARKET OVERVIEW

REPORT

ON

FOOD INDUSTRY IN INDIA

Indo Italian Chamber of Commerce & Industry

502, Bengal Chemicals Compound, Veer Savarkar Marg, Prabhadevi,

Mumbai - 400 025 (India)

Tel - +91.22.2436 8186, Fax - +91.22.2436 8191/2438 2716

e mail : iicci@indiaitaly.com, Web Site : www.indiaitaly.com

INDEX

SECTION A: FOOD SECTOR ANALYSIS

PART 1 MARKET OVERVIEW

1.1 Introduction

1.2 Advantages & Challenges

1.3 Types of products

1.3.1 Traditional

1.3.2 Recent trends

1.3.3 Estimated consumption of packaged & processed food products

1.4 Consumer choices

1.4.1 Food preferences

1.4.2 Shopping habits

1.5 Statistics of foreign trade (Indias import from Italy)

PART 2 PARAMETERS OF COMPETITION

2.1 Company profiles

2.2 Sector trends

2.2.1 Production

2.2.2 Consumption

2.3 Competition

2.4 Major food ingredients suppliers in India

2.5 Major suppliers of selected food products in India

2.6 Best product prospects

PART 3 COMMONEST MISTAKES IN EXPORT TO INDIA

3.1 Factors for success in Indian market

3.1.1 Planning and Preparation Stage

3.1.2 Entering the Market

3.1.3 Developing and Sustaining the Business in India

3.1.4 Thinking about the Future

3.1.5 Attributes

3.1.6 Representation

3.1.7 Connections

3.1.8 Survey feedback

3.4 Precautions to be taken by Italian exporters

PART 4 COMMUNICATION AND PROMOTION

4.1 Advertising and Sales promotion

4.2 Business Etiquette

PART 5 PENETRATION IN THE MARKET

5.1 Entry strategy

5.2 Market structure

5.3 Forms of enterprise

5.4 Major types of corporation

5.4.1 Private corporations

5.4.2 Public corporations

5.4.3 Foreign corporations

5.5 Structures typically used by foreign investors

5.5.1 Subsidiary companies

5.5.2 Branch office

5.5.3 Liaison office

5.5.4 Project office

5.5.5 Joint venture

5.5.6 Appointing an agent or distributor

5.5.7 Third party arrangement for maintenance and servicing of products

5.5.8 Franchising

5.5.9 Direct Selling

5.6 Forms of business presence in India for a foreign company

5.7 Processed fruits and vegetables

5.8 Diary products

5.9 Cooking oil

5.10 Meat and poultry

5.11 Fisheries

5.12 Non-alcoholic beverages

5.13 Alcoholic beverages

5.14 Confectionary

5.15 Milling and baking

5.16 Distribution systems

5.17 Finding a business partner

PART 6 OBSTACLES

6.1 Interview with Mr Suku Shah, Gourment Foods ImporterS IMPORTER

6.2 Interview with Ms. Sapna Lawyer - A practical side to food industry in India

6.3 Precautions to be taken by Italian exporters

PART 7 PRICE POLICIES

7.1 Pricing structures and policies

7.2 Costing FVG product

7.3 Trade barriers

7.4 Indian customs & excise duties

7.5 Tariff quotas

7.6 Taxes and duties

7.7 Trade samples

SECTION B: GENERAL ANALYSIS

PART 8 INFORMATION SOURCES

PART 9 IMPORT LEGISLATION

9.1 Cost breakdown of imported processed food products

9.2 List of required export certificates

9.3 Processed food products

9.4 Purpose of the export certificates

9.5 Specific attestation required on the export certificate

9.6 Government certificate legal entry requirements

9.7 Other certification or accreditation requirements

PART 10 BANKING SYSTEM AND EXCHANGE POLICIES

10.1 Reserve Bank of India

10.2 Types of institutions

10.3 Currency

10.4 Foreign Exchange Controls

10.5 Foreign Exchange Management Act

10.6 General Permission under FEMA

PART 11 METHODS OF PAYMENT

11.1 Payment against imports

11.2 Letter of credit Vs Bank guarantee

11.3 Parties to a Letter of credit

11.4 Mode of payment

PART 12 LOCAL JUDICIAL SYSTEM

12.1 Understanding a countrys food regulations

12.2 Types of food safety and quality standards that apply in most countires

12.3 Food laws in India

12.4 Food safety and standards act

12.5 Food additives

12.6 Pesticides and other contaminants

12.7 Health claims

12.8 Genetically modified food

12.9 Halal certification

12.10 Indian judiciary

PART 13 NAMES OF EVENTUAL PARTNERS

PART 14 ANALYSES OF DIFFERENT RISKS

14.1 Internal political/ Economic events

14.2 External political/ Economic events

14.3 Handling risks of International trade

14.4 Value & Volume of retail sales of packaged food, sector by region

14.5 Country Risk

14.6 Non-collection of goods & Non-payment

PART 15 LEGISLATION ON INTELLECTUAL PROPERTY IN INDIA

15.1 Introduction

15.2 Concerns expressed over IPR protection & Indias response

15.3 Copyright protection in India

PART 16 RULES ON LABELLING AND PACKAGING

16.1 Introduction

16.2 Requirement specific to nutritional labeling

16.3 Packaging and container requirements

16.4 Food additives regulations

16.5 Pesticides and other contaminants

16.6 Other regulations and requirements

16.7 Other specific standards

16.8 Copyright and / or trademark laws

16.9 Import procedure

16.10 Regulatory agency contacts

PART 17 EXHIBTIONS

PART 18 LOGISTICS

EXECUTIVE SUMMARY

The idea of India is gradually changing as number of countries showing interest to invest in India is increasing. According to an AT Kearneys FDI Confidence index, India has displaced the US as the second most favored destination in the world after China. India attracted FDI at US$7.96 billion during the first half of FY06, as against US$2.38 billion during the same period in FY05, more than 3 times growth. Indias economy is predicted to be growing over 8% in 2006 and with a billion plus population India has its wings of varied culture and business/industry scenario across the country. At the backdrop of such characteristics prospective investors in any foreign countries will be interested to know Doing business in India in wine industry. The study aimed at highlighting macro-economic indicators of the country with its risk analysis in terms of currency, non-collection of goods and non-payment. It also discusses obstacles that the prospective investors may face and appropriate marketing strategies that they should adopt to ensure smooth landing in the country which requires a good understanding of its geographies and associated culture and business environment, least but not the last the market dynamics. Approach taken for this study was to collect information/data from various authentic sources like industry associations, trade agencies and respective ministries wherever applicable. As far as policy/regulations are concerned respective ministries reports and guidelines have been referred and an attempt has been made to explain them appropriately as relevant they may be. Salient points which are key findings in this report are given below.

Challenges in the market is still to find the right partner, knowledgeable about local market and procedural issues for foreign industries investment in India and can formulate the right strategies with solid foundation for setting up manufacturing base as JVs as the FDI policy may stipulate in respective sectors

Tariffs (although tariff structure has been reduced considerably since economic reforms but issues still remain in some specific sectors) and poor infrastructure still pose a serious challenge to FDI.

In addition, heavily bureaucratic investment processes, poor IPR enforcement, government inefficiency, and corruption have also discouraged foreign investors.

Winning strategy overcoming the market entry barriers for setting up an establishment- a solid regional plan analyzing the local market demand and economics that work out to be feasible in producing in India and exporting to other countries in the world leveraging conducive economic factors that otherwise become an impediment in future growth.

While marketing products distribution strategy can really make the difference; however merit has to be given after due diligence is done and a meticulous plan should be in place. Small distributors can really make a drastic improvement in sales growth where flexible marketing strategies play an important role.

A joint venture company is generally formed under the Indian Companies Act of 1956 and is jointly owned by an Indian company and a foreign company. This type of arrangement is quite common because India encourages foreign collaborations to facilitate capital investments, import of capital goods and transfer of technology.

All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for (i) industries reserved for the Public Sector, (ii) industries retained under compulsory licensing, (iii) items of manufacture reserved for the small scale sector and (iv) if the proposal attracts location restriction.

Being a buyers market from sellers market promotion of products matters much. The key to gaining rural market share is increased brand awareness, complemented by a wide distribution network. Rural markets are best covered by mass media - Indias vast geographical expanse and poor infrastructure pose serious challenge for communication and hence emphasis must be given in communication problems to be really effective in selling to rural market.

India is still not holding its laws high for protecting copyright issues. As a result cases of counterfeiting and violation of copyright act happens and probably judicial system is still not being able to curb the menace. Adjudication of cases is extremely slow.

Logistics play an important role in distributing products to all corners of the country. Due to its vast territory challenges in implementing a smooth supply chain model is really challenging and hence outsourcing to third parties is very common and an useful and effective strategy to reach market place just in time.

PART 1 MARKET OVERVIEW

1.1 Introduction

India is a country of striking contrasts and enormous ethnic, linguistic, and cultural diversity. It has a population of 1.1 billion, and it is comprised of 28 states and seven Union Territories (under federal government rule). The states differ vastly in resources, culture, food habits, living standards, and languages. Vast disparities in per-capita income levels exist between and within Indias states. About 75 percent of the countrys people live in its 550,000 villages; the rest in 200 towns and cities. There are 27 cities with a population above one million people.

India has the largest number of poor, with 35 percent of the population surviving on less than $1 per day, and 80 percent of the population surviving on less than $2 per day. Nearly 51 percent of Indians consumption expenditures go for food (54 percent in rural area and 42 in urban areas); mostly for basic items like grains, vegetable oils, and sugar; very little goes for value added food items. In recent years, however, there has been an increased shift towards vegetables, eggs, fruits, meat, and beverages. Religion has a major influence on eating habits and, along with low purchasing power, supports a predominantly vegetarian diet.

Some observers of Indias economic scene are, however, highly optimistic about consumption growth potential, and believe that rising income levels, increasing urbanization, a changing age profile (more young people), increasing consumerism, a significant rise in the number of single men and women professionals, and the availability of cheap credit will push India onto a new growth trajectory. These segments of the population are aware of quality differences, insist on world standards, and are willing to pay a premium for quality. Nonetheless, a major share of Indian consumers has to sacrifice quality for affordable prices. Potential US exporters should also bear in mind that Indias diverse agro-industrial base already offers many items at competitive prices.

Results of the Market Information Survey of Households, conducted by the National Council of Applied Economic Research, show that the share of households in the upper middle/high income group (annual household income > rs. 90,000, or $11,200 on purchasing power parity basis) has grown from 14% in 1989-90 to 28% in 2001-02, and is projected at 48 percent in 2009-10. Correspondingly, there has been a decline in the low-income group.

Sixty-five million people are expected to enter the 20-34 year age group from 2001 to 2010. By 2025, 40 percent of Indians are expected to be urban dwellers.

Structural reforms and stabilization programs during the 1990s have contributed to Indias sustained economic growth, which has been relatively strong over the past two decades, averaging 6 percent annually. Since 1996, the Indian government has gradually lifted import-licensing restrictions, which had effectively prohibited imports. On April 1, 2001, all remaining quantitative restrictions were removed, putting India in compliance with its WTO commitment. Nonetheless, the government continues to discourage imports, particularly agricultural products, with the use of high tariffs and non-tariff barriers. Import tariffs on most consumer products, although declining, are still high, ranging from 30.6 to 52.2 percent. Some sensitive items, such as alcoholic beverages, poultry meat, raisins, vegetable oils, wheat, rice, etc., attract much higher duties. Non-tariff barriers include unwarranted sanitary and phytosanitary restrictions and onerous labeling requirements for pre-packaged foods. Other factors adversely affecting imports include a poorly developed infrastructure (transportation and cold chain), a predominantly unorganized retail sector, and outdated food laws. However, some positive factors are:

Rising disposable income levels

Increasing urbanization and exposure to Western culture

Growing health consciousness among the middle class

Growing consumerism

Changing age profile

Increasing availability of cheap consumer credit

1.2 Advantages & Challenges

Advantages

Challenges

Large and growing middle class

Divergent food habits

Increasing exposure to American products and lifestyle

Preference for fresh products and traditional foods

A slow but steady transformation of the retail food sector in cities

Difficulties in accessing vast untapped rural markets

Growing number of fast food chains

Poor infrastructure

Increasing urbanization and growing number of working women

Diverse agro-industrial base offering many products at competitive prices

A growing food processing industry looking for imported food ingredients

High tariffs, dated food laws, and unscientific sanitary and phytosanitary restrictions

Improved Indo-US political relations

Competition from countries with better geographic proximity

1.3 Types of products:

1.3.1 Traditional

There is no single traditional cuisine of India. The many cultures that have come to India over the centuries have contributed their flavours and recipes using the basic products available locally.

Selected Traditional Cuisines of India.

Cuisine

Description

Kashmiri.

Largely meat based, particularly lamb, goat and chicken flavoured with saffron and chillies. Other products include walnuts, dried dates and apricots used in puddings, curries and snacks. Cottage cheese is popular with meats and vegetables. Fresh water fish is also a delicacy. Popular desserts consist of fresh fruits such as strawberries, plums, cherries and apples.

Punjabi

Marinated chicken, fish, paneer, rotis and naans of many types are cooked in earthen ovens half buried in the ground. In the winter, makki ki roti (maize flour bread) is popular along with sarson ka saag (mustard leaf gravy). Fresh curd and white butter are consumed in large quantities. A popular drink is lassi (a sweet or salted drink made with curd). Other popular dishes are ma ki dal, rajma (kidney beans) and stuffedparathas.

Mughlai (Delhi).

Rich sauces, butter-based curries, ginger flavoured roast meats and delicious sweets.

Bengali.

Fish in a variety of styles. Use of mustard oil rather than coconut oil. Five basic spices used: zeera, kalaunji, saunf, fenugreek and mustard seeds. Sweets made from burnt milk, yoghurt sweetened with jaggery, crisp samosas.

Maharashtrian.

Subtly flavoured vegetarian delicacies and hot, aromatic meat and fish curries. Crispy sweets made mostly of rice and jaggery. Konkani and Malwani cuisines originated in the coastal parts of this region and are sea-food based.

Goan

Influenced to some extent by Portugese culture. Tangy pork vindaloo, spicy sorpotel and fish curry with rice. Coconut and fish based dishes. Local wines or the local liqueur called Feni. Most, but not all Goan dishes are chili hot, spicy and pungent. Seafood includes prawns, lobsters, crabs, and jumbo pomfrets (bream). Goa is not known as vegetarian. Hindus like lamb and chicken while Christians like pork and both prefer fish and seafood to any other meat.

Gujarati.

Vegetarian cuisine. Lentils and vegetables, yoghurt and buttermilk are a part of Gujarati's daily diet. Potatoes, brinjal, and green beans and other vegetable are used in the winter to prepare undhyoo. Other dishes are prepared with chickpea flour, thickened milk, nuts and the srikhand. Yogurt, flavoured with saffron, cardamom, nuts and candied fruit.

Rajasthani.

Historically the Rajas who went on hunting expeditions ate the meat of the game fowl they brought back. Vegetarian Rajasthanis cook in pure ghee, famous for its aroma. Rajasthan includes a large desert area and the scarcity of water and lack of fresh green vegetables has affected Rajasthani cooking. Dried lentils and beans from indigenous plants like sangri, ker etc. are staples of the Rajasthani diet. Gram flour is an integral cooking ingredient. Bajra and corn are used all over the state for making rotis and other breads. Other food items are millet bread, chutney, onions and milk

Hyderabadi (Andhra Pradesh).

This category includes the original red hot Andhra cooking and the Hyderabadi cuisine with its Mughlai influence. Vegetables are prepared with different masalas giving the same vegetables different flavours. Traditional Andhra cuisine includes many non-vegetarian dishes which are also spicy. Hyderabadi cuisine is rich and aromatic with a liberal use of spices and ghee as well as nuts and dried fruit. Lamb is the most widely use meat in non-vegetarian dishes. The biryanis (flavoured rice with meat or vegetables) is one of the most distinct Hyderabadi foods.

1.3.2 Recent Trends

The middle class of India has not been satisfactorily measured. It is very heterogeneous and its size depends on the definitions of several parameters. Estimates range from 25 million to 200 million but it is generally accepted that it is growing. FVG exporters are likely to find the greatest opportunities in the markets serving the middle and upper income groups of India.

The typical pattern of buying groceries and emerging trends are closely associated with both tradition and new technology. A typical household purchases less-perishable food and other groceries at the beginning of each month - sometimes having them delivered. More-perishable products such as bread and eggs are purchased every one or two weeks. Milk is purchased daily. It is estimated that only 15% the potential market for refrigerators has been exploited. As increasing numbers of Indians purchase refrigerators, the buying patterns of groceries will change.

Grocery stores are the dominant food outlets but fruit and vegetables are bought from unorganized vendors. Some grocery chains are expanding into the supermarket or hypermarket category offering a wide range of products; however, purchasing of fruit and vegetables in this context has not yet been fully accepted. Even so, supermarkets and hypermarkets are putting pressure on the traditional grocery store. Visits to a supermarket encourage much impulse buying compared to visits to a traditional grocery store or phone shopping.

Eating out is a very popular activity while attending other functions. It is estimated that Indians spend INR 350 billion eating out annually. Of this, organized establishments accounts for only INR 20 billion. International fast food chains such as Subway, McDonald's and Pizza Hut are found in shopping malls and near cinema theatres.

The "well-off in urban areas are increasingly eating out in coffee shops, malls or retail stores. Lounge bars are the latest trend in urban areas and are frequented by young professionals, successful executives and single women in their late 20's. This trend began in Mumbai, Bangalore, Delhi and Kolkata and will no doubt spread to other urban areas.

Among the "affluent", clubs are becoming popular. In addition to many recreational facilities they are upgrading their food facilities and can compete with some of the finest restaurants or hotels of India. The "affluent" also have an interest in the performing arts. A play in Mumbai can cost about INR 1,000.

Middle to upper income families are increasingly two income, younger families. A small proportion of Indian families are moving to quick ready-to-eat foods and frozen foods. However 90% of the population still prefers fresh foods and consider processed foods to be not fresh and containing harmful preservatives. Table below presents estimates of the consumption of packaged and processed foods. Bread had the highest estimated consumption level in 2003, (1,656.5 gms per person). The consumption of crisps/chips was the fastest growing food sector from 1998 to 2003 (77.82% over the 5 year period) although the level of consumption was still low (9.96 gms per person). Similarly, the consumption of pasta increased 76.3 % from 1998 reaching 0.705 gms per person in 2003. Both chips/crisps and pasta are popular among consumers below 19 years of age. Pasta is also popular with mothers as a snack for school-age children.

1.3.3 Estimated Consumption of Packaged and Processed Food products. India. 1998 and 2003.

Product (gms/person)

1998

2003

Change 1998 to 2003 (% /5 yrs)

Canned Meat and Meat Products

0.2

0.242

21.05

Canned Fish / Seafood

n/a

0.1

n/a

Canned Vegetables

0.3

0.317

5.56

Chips /Crisps

5.6

9.958

77.82

Extruded Snacks

5.6

7.568

35.15

Nuts

1.655

2.577

55.74

Butter

39.1

50.607

29.43

Cakes

41.5

57.179

37.78

Bread

1,355.60

1656.543

22.2

Breakfast Cereals

2.2

3.382

53.73

Baby Food

12.4

14.634

18.02

Biscuits

351.1

439.999

25.32

Chocolate Confectionery

19.3

25.939

34.4

Dried Food

283.5

407.871

43.87

Frozen Food

12.4

20.461

65.01

Ice Cream (ml./person).

29.8

47.546

59.55

Noodles

20

20.086

0.43

Oils

575.5

620.159

7.76

Other Sweet and Savoury Snacks

17.1

23.266

36.06

Other Fats

477.7

523.464

9.58

Pasta

0.4

0.705

76.3

Sugar Confectionery

58.3

78.145

34.04

Sauces, Dressings and Condiments

64.1

93.214

45.42

Soup

1

1.425

42.45

Spreads

14

15.672

11.94

Sweet and Savoury Snacks

29.9

43.277

44.74

Yoghurt

1.4

1.933

38.07

1.4 Consumer choices for tastes, attitudes, expectations & fashion factors

1.4.1 Food Preferences

India is well known for its tradition of vegetarianism. Among those who are not vegetarians, beef is still generally taboo to most Hindus (80.5 percent of the population), Sikhs (1.9 percent of the population), and Jains (0.4 percent of the population), all of whom consider cows sacred. Many Indians are vegetarians because they cannot afford a non-vegetarian diet. As India has been at the crossroads of many peoples and cultures over the centuries, some foreign elements have invariably seeped into the local culinary culture. Thus, Indias culinary tradition is constantly changing. Nonetheless, Indians have a strong preference for fresh products and traditional spices and ingredients, which has generally slowed the penetration of American and other Western-type foods. However, with urbanization, rising incomes, more working women, the arrival of some food multinationals, and a proliferation of fast food outlets, the acceptance of packaged and ready-to-eat food products is increasing, especially among the urban middle class. These products, nonetheless, are usually tailored to Indian tastes. Many Indians are quite willing to try new foods, but usually return to traditional fare. While Western foods have a reasonably good chance of succeeding in casual dining, integrating them into the main meal will be more difficult.

Demand for specialty and high-value food items, including those imported, such as chocolates, dry fruits (almonds, cashews, pistachios, etc.), cakes, pastries, exotic fruits, and fruit juices, typically peaks during the fall festive season, especially at Diwali the Festival of Lights. Hence, from October to December is the best time to introduce new food products into the Indian market.

Typical imported food items that can be spotted in retail stores in cities include chocolates and chocolate syrups, biscuits, cake mixes, fruit juices, canned soups, pastas, popcorn, potato chips, canned fish and vegetables, ketchup, and fruits such as apples, grapes, and kiwis.

1.4.2 Shopping Habits

Lacking home refrigeration and purchasing power, most Indians shop daily at neighborhood kirana shops (small retail outlets) or roadside vendors. Most consumers regard shopping as a chore, and few are familiar with alternatives to traditional store formats. Convenience to ones home is important, since daily shopping and sensitivity to food freshness is an integral part of shopping habits. Indians buy fruits and vegetables in one shop, dairy products in another, groceries in a third, and meat and fish in yet another. Quality is important, but there is a reluctance to pay a premium. Trust in the retailer, especially with regard to quality of food and replacement of defective goods, is important. Although added services such as home delivery are welcome, consumers are unwilling to (and do not have to) pay a premium for this service. Women do most of the shopping and make most of the food purchasing decisions. Households able to afford Western imports usually have servants who buy, clean, and prepare foods. Availability of many fresh foods, particularly fruits and vegetables, is seasonal, and people are accustomed to adjusting their diet to the season. Processed/packaged foods in great demand include ketchup and sauces, jams and jellies, table butter and ghee (melted butter), cooking oils, various masalas (spice mixes), pickles, wheat flour, noodles, snack foods (mostly Indian types), and health drinks. Most packaged food items are sold in small containers, due to customers limited purchasing power. Only in the past few years have Indians, mostly in cities, been exposed to supermarkets in the Western sense. Semi-urban, non-metropolitan, and rural areas have yet to feel the impact of large-scale retailing. Most people, even in cities, still associate supermarkets with expensive rather than cost effective. However, in recent years, the Shopping Mall culture has caught on in India, with many large malls built in large cities and suburbs.

1.5 Statistics of foreign trade (Indias Import from Italy)

S.No

Commodity (Value in Rs. Lakhs)

2004-2005

2005-2006

%Growth

1

Meat And Edible Meat Offal.

24.57

67.58

175.1

2

Fish And Crustaceans, Molluscs And Other Aquatic Invertabrates.

10.83

45.72

322.06

3

Dairy Produce; Birds' Eggs; Natural Honey; Edible Prod. Of Animal Origin, Not Elsewhere Spec. Or Included.

179.21

196.34

9.56

4

Products Of Animal Origin, Not Elsewhere Specified Or Included.

217.56

167.62

-22.95

5

Live Trees And Other Plants; Bulbs; Roots And The Like; Cut Flowers And Ornamental Foliage.

0.04

17.68

42,279.08

6

Edible Vegetables And Certain Roots And Tubers.

25.11

44.67

77.89

7

Edible Fruit And Nuts; Peel Or Citrus Fruit Or Melons.

281.54

413.01

46.7

8

Coffee, Tea, Mate And Spices.

181.9

404.86

122.57

9

Products Of The Milling Industry; Malt; Starches; Inulin; Wheat Gluten.

257.21

200.14

-22.19

10

Oil Seeds And Olea. Fruits; Misc. Grains, Seeds And Fruit; Industrial Or Medicinal Plants; Straw And Fodder.

128.94

329.48

155.53

11

Lac; Gums, Resins And Other Vegetable Saps And Extracts.

340.65

379.48

11.4

12

Animal Or Vegetable Fats And Oils And Their Cleavage Products; Pre. Edible Fats; Animal Or Vegetable Waxex.

650.52

1,034.58

59.04

13

Preparations Of Meat, Of Fish Or Of Crustaceans, Molluscs Or Other Aquatic Invertebrates

3.28

59.26

1,709.07

14

Sugars And Sugar Confectionery.

14.15

87.23

516.26

15

Cocoa And Cocoa Preparations.

21.19

33.38

57.53

16

Preparations Of Cereals, Flour, Starch Or Milk; Pastrycooks Products.

366.41

562.55

53.53

17

Preparations Of Vegetables, Fruit, Nuts Or Other Parts Of Plants.

261.57

68.52

-73.8

18

Miscellaneous Edible Preparations.

46.21

257.25

456.72

19

Beverages, Spirits And Vinegar.

419.08

732.51

74.79

20

Residues And Waste From The Food Industries; Prepared Animal Foder.

153.2

281.32

83.63

THE SOURCE OF ABOVE INFORMATION IS GOVERNMENT OF INDIA DEPARTMENT OF COMMERCE & INDUSTRY Http://Commerce.Nic.In/

PART 2 PARAMETERS OF COMPETITION

2.1 Company Profiles

Indian food processors may be divided into the following main categories:

Large Indian companies that have their production base in India or neighboring countries (for tax-saving purposes)

Multinational and joint-venture companies that have their production base in India

Medium/small domestic food-processing companies with a local presence

Small local players in the unorganized sector

The following table shows some of the major food-processing companies in India and their products. This list is neither exhaustive nor ranked according to the order of importance. The end use channels for most of them are retail and hotel, restaurant and institutional (HRI) markets. Sales figures for these companies are not available.

INDIAN COMPANIES

Company Name

Products

Godrej Foods Ltd.

Vegetable oils, fruit juices, tomato paste, soy beverages

Dabur India Ltd.

Fruit juices, cooking paste, honey

Mother Dairy

Dhara

Dairy products, ice cream, canned vegetables, fruit juices, cooking oils

Amul

Dairy products, ice cream, chocolate

ITC

Branded wheat flour, biscuits, ready-to-eat food, confectionary

Hindustan Lever (HLL)

Ice cream, branded wheat flour, bread, sauces, jams, jellies

VH Group

Poultry products

Britannia Industries

Biscuits, bread, packaged food

Parle Products

Biscuits, candies, toffees

Nutrine Confectionary Company

Confectionary, chewing gum

Weikfield Products Company

Custard powder, baking powder, jelly crystals, drinking chocolate, sauces, soups

Rasna (Pioma Industries)

Instant drink, health drink, soft drink concentrates, flavors

Haldirams

Snack foods

UB Group

Beer, alcoholic beverages

Marico Industries

Vegetable oils, jams

MTR Foods

Ready-to-eat foods, soups, spices, ice cream mixes, pickles

Punjab Markfed

Canned food, rice, vegetable oils

Vista Processed Foods

Frozen chicken and vegetables

Dynamix Dairy Industries

Cheese, whey, other dairy products

MULTINATIONAL/JOINT VENTURE COMPANIES

Company Name

Products

Pepsi

Soft drinks, potato chips, snack food, fruit juices

Cargill

Vegetable oils

Heinz

Ketchup, health drinks

Kelloggs

Breakfast cereals, biscuits

Bunge

Vegetable oil, margarine

Nestle

Coffee, chocolates, confectionary, instant noodles, milk products, beverages, health drinks

Cadbury

Chocolates, health drinks

Coca Cola

Soft Drinks, beverages

Agro Tech Foods

(ConAgras)

Branded vegetable oils, branded wheat flour, snack food, popcorn

Pillsbury

Wheat flour, cake mixes

GlaxoSmith Kline

Health drinks

Perfetti

Chewing gum, candy

Wrigley

Chewing gum

Lotte India Corporation Ltd. (Parrys)

Confectionary

McCain Foods

French fries

Adani Wilmar Ltd.

Cooking oils, bakery shortenings

The Solace Company

Soya nuggets

Effem India (Mars)

Pet food

2.2 Sector trends

2.2.1 Production:

The food-processing industry in India has undergone big changes over the last six to seven years, in terms of types, variety, quality, and presentation of products, which is mainly a result of the liberalization that led to foreign direct investment (FDI) in the processed food sectors.

Most food-processing sectors have been brought under the liberal, transparent, and investor-friendly FDI policy, which allows 100 percent FDI.

However, the small-scale farming system in India, marketing problems, lack of grading and standards, poor distribution channels, and onerous government policies continue to pose problems for the processing industry to source the right type of raw materials and to discourage more investment in the sector.

Nevertheless, the proportion of FDI in the food-processing sector to total FDI into India is low, constituting about 4 percent of total FDI inflow from 1991 to 2004.

Several multinational companies, including US-based companies like Pepsi, Coca Cola, ConAgra, Cargill, Heinz, Kelloggs, IFF, and Mars (pet food only) have entered the Indian food-processing industry with significant investments.

Indian food and beverage companies are expanding their operations to neighboring countries like Bangladesh, Nepal, Sri Lanka, Commonwealth of Independent States countries, and the Middle East.

Takeovers and mergers are beginning to occur in the Indian food-processing sector, leading to consolidation.

The food-processing industry is beginning to focus on, and invest in, advertising and awareness campaigns about products and brands.

Companies have added extras to their existing brands, including stylish packaging.

The growth in the food-processing sector has generated increased interest in high quality food ingredients in order to produce high quality foods.

The ready-to-eat food sector is growing at a high rate due to the changing lifestyles of the middle-class consumers (both partners working, etc.).

Some previously unknown regional brands are gaining national acceptance because of consistent quality and product safety, thereby providing some competition to established companies.

The GOI is in the process of enacting a Food Safety and Standards Bill, which if properly done and implemented, would provide increased transparency, better food safety management systems, and science-based standards.

2.2.2 Consumption:

The following factors influence the type and quality of inputs in processed foods:

A large and an exceedingly wealthier middle class is creating growing demand for a wider variety of high quality processed foods.

The changing age profile (sixty-five million people expected to enter 20-34 year age group by 2010) and increasing exposure to western-type products and lifestyles.

The market entry of several multinational food-processing companies and ingredient suppliers.

The increasing number of fast food chains.

The recent trend toward a healthier lifestyle has generated a niche market for diet, healthy, low-calorie, and non-fat food products.

The increasing urbanization and growing number of working women.

A slow but steady transformation of the retail food sector in cities.

2.3 Competition

Indias domestic industry is the primary competitor for FVG food-processing and ingredients suppliers in India. India, with diverse agro-climatic conditions, has a production advantage in many agricultural goods, with the potential to cultivate a large range of agricultural raw materials required by the food-processing industry. India is a major producer of spices, spice oils, essential oils, condiments, and fruit pulps. Significant variations in food habits and culinary traditions across the country translate into a competitive advantage for small and medium local players, who are familiar with local food habits and markets. Some Indian food-processing companies have increased market share by decreasing product prices. High import duties on processed food and food ingredients make imports relatively costly. Existing domestic food laws restrict the use of several ingredients, flavors, colors, and additives, thus posing an additional challenge to FVG exporters interested in the Indian market.

Foreign competition to the FVG is mostly from countries in closer geographic proximity to India, such as Australia and New Zealand. European suppliers are major competitors in the food ingredient sector. Several foreign firms, including some from the United States, have started operations in India.

2.4 Major food food ingredient suppliers

Company Name

Country

IFF

United States

DANISCO

Denmark

Chr. Hansen

Denmark

AB MAURI

United Kingdom

Fine Organics

United States

MSC CO. Ltd.

Korea

Davars M.P. Organics

India

The Solae Company

United States

Doehler

Germany

AVT McCormick Ingredients Ltd.

India/US joint venture

Synthite

India

Plant Lipids

India

2.5 Major suppliers of selected product categories

Product Category

Major Supply Sources

Strength of Key Supply Countries

Advantages (A) & Disadvantages (D) for FVG Suppliers

Vegetable Oils

Imports:

US$: 2.6 billion

Indonesia

Malaysia

Argentina

49%

24%

18%

Low prices

Local production is significant but inadequate (A)

Pulses

Imports

US$: 563 million

Myanmar

Canada

Australia

41% 21% 8%

Low prices

Local production is significant; competitive in some categories (D)

Spices & Condiments

Imports

US$ 95 million

Indonesia

Sri Lanka

Nepal

25%

16% 15%

Low prices, freight advantage

India is a major producer (D)

Almonds

Imports:

US$: 68 million

USA

Afghanistan

Iran

73%

12% 12%

Low price, high quality

Domestic production insignificant (A)

Dairy Products

Imports:

US$: 29 million

Australia

U.K.

Belgium

17% 8% 7%

Low price

High production, seasonal shortages (A)

Food ingredients

Imports:

US$: 14 million

USA

Brazil

Nepal

52% 8% 4%

Quality, reliability

Large domestic production (D)

Cocoa & products

Imports:

US$: 13 million

Malaysia

Singapore

Indonesia

30% 17% 15%

Low price

Domestic production is small (A)

Fish & fish products

Imports:

US$: $11 million

Bangladesh

Myanmar

USA

48% 9% 9%

Border trade

Large exporter of shrimp (D)

Fruit juices

Imports:

US$: 8 million

Nepal

Brazil

Philippines

42% 12% 5%

Border trade

Poor quality (A)

Data relates to IFY 2003/04 (Apr-Mar)

Source: Ministry of Commerce, GOI

2.6 Best product prospects

Product

Category

Imports

2003/04

$ Million

1/

Expected Avg.

Annual

Import

Growth

Import

Tariff

Rate

Key Constraints

Market Attractiveness for FVG

Cocoa & products

13.0

10%

52.2%

Competition from other suppliers and domestic suppliers

Import liberalization and consumer preference for imported products

Almonds

Pistachios

Prunes

68.0

29.0

0.1

5%

5%

10%

Rs.35/kg

30.6%

25.5%

Competition from Iran and Afghanistan

High seasonal demand; increasing use; health consciousness

Fruit juices

8.0

10%

30.6%

Competition from nearby suppliers and domestic production

Increasing health awareness among middle class and shortage of quality products locally

Miscellaneous food ingredients

(yeasts, sauces , mixed condiments and seasonings, soft drink concentrates, flavoring materials, etc.)

14.0

10%

30.6

Competition from domestic suppliers

Increasing popularity; growing food-processing and fast food sectors

1/ Source: Ministry of Commerce, GOI

PART 3 COMMONEST MISTAKES IN EXPORT TO INDIA

3.1 FACTORS FOR SUCCESS IN INDIAN MARKET

Marketing

Education

Visibility

Events & Promotions. Work with Key organizations.

Exposure to your facilities

Right Partner: Work with National players.

Youth appeal is important in a country where more than 50 million population is below the age of 25.

Mistakes occur at different stages while doing export business with the Indian importers.

We found that unsuccessful companies committed mistakes in the four key steps and were negatively influenced by three important factors, as given below:

Steps

Influencing Factors

Planning and Preparation

Attributes

Entering the Market

Representation

Developing and Sustaining the Business

Connections

Thinking about the Future

3.1.1 Planning and Preparation Stage

Entering the Indian market requires a substantial amount of preparation and patience, and takes a considerable period of time to accomplish. Time and other resources need to be invested in developing knowledge of the institutional environment. Generating credibility in the market before entry is also beneficial.

Tenders and competitive contracts require considerable background work, not only with regard to the content of the tender request, but also on building relationships with key decision-makers and people to understand the tender process.

Finding a partner who has knowledge of the local market and procedural issues is a must for successful business development. For Italian business men, ideally, the Indian partner should be conversant with the language and customs of Italy.

Appropriate and sufficient infrastructure must be in place in India to support the business.

In many cases, it is necessary to wait until the infrastructure has been developed, or else invest in developing local infrastructure to a level sufficient enough to accommodate the products or services being offered.

Success in India may take longer to achieve than in other international markets. It requires a lot of preparation and investment before gains are realised, and there is relatively a high level of risk.

3.1.2 Entering the Market

Decision-making in India is slow, particularly with the public and government sectors, and it is important to assess the amount of time that obtaining an initial order is likely to take. Decision-making blockages are sometimes overcome by drawing on the influence of network links of Italian companies in India.

Some times companies have failed to understand the implications of licensing and tariffs only to make a retreat. However, some of these companies made a re-entry when restrictions on import licenses were partly or fully waived.

The importance of having other critical factors, such as initial relationships with customers, solutions to bureaucratic barriers, and a period of time becoming familiar with the Indian market, cannot be undermined.

3.1.3 Developing and Sustaining the Business in India

Pricing is the key to gaining orders, and there is little doubt that Indian customers will negotiate prices aggressively.

Local labour is necessary for a number of Italian companies wanting to do business in India, for tasks such as assembly, installation, and implementation. The companies generally have to rely on their agents or distributors to assist with hiring and managing local labour, in particular, with monitoring performance and dealing with local labour laws.

Government involvement is considered to be both a help and a hindrance to doing business in India. State- and nationally-funded projects have led to business opportunities for many of Italian companies.

3.1.4 Thinking about the Future

Although the opportunities for future growth in India are well recognised by global companies, not all of them anticipate this market becoming a substantial part of their business, at least in the near future. At this stage, it is still considered relatively high risk and uncertain, with considerable change needed in the country to encourage further investment.

3.1.5 Attributes

Establishing credibility and reputation may involve a substantial initial investment of time and money, often before any payback is realised.

Credibility and a strong reputation are achieved by the companies in a number of ways: building links with large Indian corporation or government customer (for example, one company has endorsement from one of the largest banks in India); using the links of a credible or reputable agent (or distributor/partner) or opinion-leader; leveraging from an international reputation (e.g. with world funding agencies); becoming part of a wide professional network that provides legitimacy in the market; drawing on links with international partners that conduct business in India; and leveraging from customers experiences with the product or service in Italy such as professionals returning to India.

3.1.6 Representation

Getting the right agent for a company is critical to success. A key attribute of successful agents or distributors is their connectedness with political representatives and officials, as well as with potential customers and decision-makers. Agents are also instrumental in sourcing skilled labour.

Power and size symmetry between company and agent can help engender trust. Strengthening links with agents is best done gradually.

3.1.7 Connections

Being linked to a local network is critical for success in the Indian market. An Italian companys access networks through their agents, distributors or partners, and, over time, build relationships and become part of the local network involved in their business. The networks include a range of stakeholders, but of primary importance are the decision makers (often policy officials) and customers.

Frequent visits to India are critical, in order to build relationships, and stay informed about the business and customers in India. The frequency of visits for the New Zealand company managers varies, ranging from 2 to 8 times per year, depending on the particular needs at the time. At critical times during a tender process, for example, an Italian manager may need to make numerous visits over a short period of time.

Working with large companies provides substantial opportunities for Italian companies. These arise from a range of factors: the reputation of the large company, the opportunity to tap into their business networks, including customers, and access to markets, and technical and political knowledge. In many cases, large corporations have influence at government level, and are able to lobby for industry-based regulatory changes, access tender information, or negotiate with key decision-makers.

3.1.8 Survey feedback

Survey was conducted among a few members of Indo Italian Chamber of Commerce taking a few industries and units and they are summarised below.

Generally for matured Italian companies exporting goods/services Indian companies do not have much issues as far compliance with custom procedures are concerned

New companies sometimes do not comply with export regulations (in terms of adequate documents). They should get professional support if required

Price quoted is high and that spoils the market opportunities sometimes

Even free replacement is there in the contract clause but some principals charge the courier cost and applicable duties on the parts to be supplied which causes enough dissatisfaction amongst Indian customers

PART 4 COMMUNICATION AND PROMOTION

The government of India has banned any directly print or display (television etc) advertisement or promotion of alcohol. Hence, the companies should focus on promoting the brand without actually showing the alcohol. There are various advertisement agencies in India which could guide the companies with the same.

According to the Advertising and Marketing (A&M) magazine, a leading trade journal, advertising is a US$3 billion industry in India today. The Indian industry grew 11.5% in 2004-05. Media accessibility has increased exponentially, competition is unlimited, budgets are large and expectations of advertising are high. Practically every aspect of media is available for advertising, from print to outdoor advertising to satellite channels to movie theatres.

Italian companies have a choice of many advertising and trade promotion channels in India. The print media, almost completely controlled by the private sector, is well developed and advertising and promotional opportunities are available in a large number of newspapers including daily, weekly or monthly business publications, news magazines and industry-specific magazines.

The Times of India and the Hindustan Times are the largest selling English-language newspapers, with a readership base across India.

Leading business newspapers include the Business Standard and the Economic Times.

Leading magazines include India Today, Business India, Business Today, Business World and the Outlook.

Advertising opportunities are also available on satellite and cable television channels. Doordarshan, the government-owned television network, can reach almost 90% of the population. In addition, more than 80 satellite and cable television channels, including many U.S. and international channels such as STAR TV, CNN, NBC, Discovery, National Geographic and BBC, are available for advertising.

Satellite TV has grown explosively from 134m viewers in an average week in 2002 to as many as 190m viewers in 2005. Another advertising media is the radio, by which the government-owned All India Radio (AIR) reaches over 90% of the population. Private radio channels are restricted to the FM music channels and are currently available only in a few cities. Radio improved its performance in urban India (23% listen to the medium, up from 20% three years ago) mainly due to FM. Another widely accessed medium is the Internet. Today, net access is estimated by over 20m people. Internet advertising is expected to grow exponentially over the next several years. All the above media are available in English, Hindi, and a variety of regional languages.

Italian companies interested in advertising in any of the above media can work through the many advertising agencies in India. Many large and reputable U.S. and other international advertising agencies are present in India in collaboration with local advertising agencies. The advertising sector in India is technologically advanced.

In addition to advertising, established public relation firms are also available to Italian companies that require such services. In public relations too, a few Italian and other international companies are present in collaboration with local partners.

In India, advertising is no different from other businesses - local advertising companies that need to have access to the best global technologies and practices in their industry have global collaborations. Mumbai remains the centre of the advertising industry in India.

Italian companies can select from a number of quality international trade fairs, both industry-specific and horizontal, to display and promote their products and services.

Communication and Promotion Wine Trade Shows

Through trade shows exporters can create awareness among the end-user clients.

Costs Involved : Average costs borne by foreign exhibitor

Cost Head

Cost

Type of stall

Two Side Open: 15 % Extra, Three Side Open: 25 % Extra

Logistics (personnel and exhibited items)

Variable

Power Connection

US$450 per KVA

Compressor

US$450 per Connection

Service Tax

12.24%

Total costs excluding logistics

Two Side Open: US$1162

Three Side Open: US$1263

Source: Cygnus Research

4.1 Advertising and Sales Promotion

Advertising and trade promotion are highly developed in India, and most major International advertising firms choose local partners, as they know India and Indians well. In addition to government-controlled television in various regional languages, there are several popular national, international, and regional privately-owned channels. Most urban households have televisions, and they are increasingly present in rural areas.

India also has a diverse and growing number of newspapers and glossy magazines appealing to various social, cultural, and gender groups. According to the National Readership Survey 2005, the reach of the press medium (dailies and magazines combined) has increased to 300 million people from 179 million three years ago. Satellite television has grown explosively to reach 190 million people, whereas radios reach has stagnated at 23 percent of the population. The internet now reaches more than 10 million people, with 34 percent of users surfing from home and 32 percent from cyber cafs. Among the fast growing tribe of mobile phone owners, 14 percent access value-added features like downloads, news, SMS, etc.

Delhis Annual Food Exposition AAHAR, and smaller food shows in Delhi and other cities (IFE India, Agro Tech, Am Fest) provide opportunities for US exporters to showcase their food products to potential clients.

4.2 Business Etiquette

Although Hindi is Indias leading national language, almost all Indian officials and business people have an excellent command of English. Most Indian businessmen have traveled abroad and are familiar with Western culture. Indians appreciate punctuality, but dont always practice it themselves. Keep your schedule flexible enough for last minute rescheduling of meetings. Business is not conducted during the numerous religious holidays that are observed throughout the many regions and states of India. Verify this information with your Consulate or Embassy before scheduling a visit. Indian executives prefer late morning or afternoon appointments between 11:00 a.m. and 4:00 p.m.

Indians are famous for having longer-than-scheduled meetings, so be sure to leave plenty of time between appointments. The climate in India can be very hot, so it is advisable to wear lightweight clothing to avoid discomfort. Men should wear a jacket and tie (and women should wear corresponding attire) when making official calls or attending formal occasions. Always present a business card when introducing yourself. Refer to business contacts by their surname, rather than by their given name. Use courtesy titles such as Mr., Mrs., or Miss. Talking about your family and friends is an important part of establishing a relationship with those involved in the business process. Hospitality is a key part of doing business in India; most business discussions will not even begin until chai (tea), coffee, or a soft drink is served and there has been some preliminary small talk. To refuse any beverage outright will likely be perceived as an insult. While an exchange of gifts is not necessary, most businessmen appreciate token momentos, particularly if they reflect the subject under discussion. Business lunches are preferred to dinners. Try to avoid business breakfasts, especially in Mumbai. The best time of year to visit India is between October and March, so that the seasons of extreme heat and rains can be avoided. Although Delhi (the capital) has a cool, pleasant winter (November - February), summers (April June) are fierce with temperatures of up to 120 degrees Fahrenheit. Mumbai (the business hub) and most other major cities have a subtropical climate hot and humid year around. Most Indian cities have good hotels and are well connected by domestic airlines.

The following websites were found to be informative and user-friendly in providing information on Indian business culture and business etiquettes.

http://stylusinc.com/business/india/cultural_tips.htm

www.executiveplanet.com/business-etiquette/India.html

PART 5 PENETRATION IN THE MARKET

5.1 Entry strategy

It is essential to survey existing and potential markets in India for products before initiating export sales. The Indo-Italian Chamber of Commerce India, Mumbai and market research firms in India can assist new exporters. If the FVG companies do have products of promising sales potential in India, they can either set up a base in India or appoint distributors or agents. The Indian government encourages foreign investment in the food-processing sector. Hundred percent equity participation or joint ventures with Indian companies are possible. Tax benefits and incentives are available to companies setting up operations in Special Economic Zones (SEZ).

For FVG food ingredient suppliers, direct interaction, such as visits, with large Indian food companies would help create awareness about new products and their uses in the Indian context. However, as the majority of Indian food-processing units are small-and-medium sized, it would be difficult for FVG companies to reach their intended audience directly. In such cases, appointing agents and distributors is the best alternative. Consider the following before selecting an agent or distributor:

Determine through surveys who their potential customers are, and where in India these customers are located.

Recognize that agents with fewer principals and smaller set-ups often are more adaptable and committed than those with large infrastructure and big reputations.

There may be a conflict of interest where the potential agent handles similar product lines, as many agents do.

FVG firms should examine all distributor prospects, and thoroughly research the more promising ones. Check the potential agents reputation through local industry/trade associations, potential clients, bankers, and other foreign companies/missions.

Aspiring FVG suppliers should also be aware of Indias varied and dated food sector laws, particularly those pertaining to the use of additives and colors, labeling requirements, packaging, weights and measures, shelf-life, and sanitary and phytosanitary regulations. Refer to the GOIs Department of Health website relating to the Prevention of Food Adulteration Act and Rules at www.mohfw.nic.in/pfa.htm. The GOI is planning to enact a new Food Safety and Standards Act, which is intended to be comprehensive, and which aims to meet the dynamic requirements of international trade and the Indian food industry. This is a move in the right direction if formulated according to international standards and practices, and should help attract investment in the food-processing sector.

5.2 Market structure

FVG food ingredient suppliers can access the Indian market in three ways: (a) supply directly to local food processors; (b) supply through local agents/distributors to local food processors; or (c) start production/distribution centers in India. Some of the leading food ingredient producers like IFF, Danisco, and Doehler have a production base in India. As small players, scattered all over the country, dominate the Indian food-processing industry, appointing agents/distributors would be the best way for FVG exporters to reach them. However, some of the large Indian and multinational companies can be supplied directly. The chart below gives an overview of the usual distribution channel for imported food ingredients (and processed foods) applicable to FVG food suppliers.

FVG FOOD SUPPLIERS

Indias food-processing industry can be broadly classified into the following categories:

Fruits and vegetable based products

Dairy products

Cooking oils

Meat and poultry

Fisheries

Non-alcoholic beverages

Alcoholic beverages

Confectionary

Grain and grain-based products (milling & baking)

5.3 FORMS OF ENTERPRISE

5.3.1 Companies

The principal forms of business organization in India are: Corporations, Partnerships and Sole Proprietorships. Corporations incorporated in India and foreign corporations having a presence in India are regulated by the provisions of the Companies Act 1956, which draws heavily from the Companies Act of the UK. The Registrar of Companies and the Company Law Board (CLB), both working under the Ministry of Company Affairs, have been entrusted with the responsibility of ensuring compliance with the provisions of the Companies Act, 1956.

5.4 Major Types of Corporation

5.4.1 Private Corporations

These corporations have restrictions on the right to transfer shares, and can make no offer to the public to subscribe to its shares and debentures, and cannot invite acceptance of deposits from persons other than members, directors or relatives. The maximum number of shareholders is limited to 50. It is required to have a minimum paid-up capital of Rs. 0.1 million ( U.S. $ 2,170).

5.4.2 Public Corporations

A public corporation is required to have a minimum paid-up capital of U.S. $ 11,100 ( equivalent of Rs 0.5 million).

5.4.3 Foreign Corporations

Foreign Corporations that are incorporated outside India but have a presence in India in the form of liaison offices, project offices, branch offices etc, are also governed by the Companies Act 1956, which contains special provisions for regulating such entities.

5.5 Structures Typically Used by Foreign Investors

5.5.1 Subsidiary Companies

Foreign corporations can set up their subsidiary companies in the form of private companies in India. It is treated as a domestic company for tax purposes. In comparison with branch and liaision offices, a subsidiary company provides maximum flexibility for conducting business in India. However, the exit procedure norms for such companies are more cumbersome. Funding could be via equity, debt and internal accruals and no approval is required for repatriation of dividends. Indian transfer pricing regulations apply.

5.5.2 Branch Office

Foreign corporations need RBI approval to start a branch in India. A foreign corporation cannot undertake any activity in India not specifically permitted by the RBI and is required to register itself with the Registrar of Companies. A branch office is permitted to export/import goods, render professional or consultancy services, carry out research work in which the parent company is engaged, promote technical or financial collaboration, represent the parent company for buying/selling, render services in IT and software development, render technical support to the products supplied by the parent group, undertake activities of foreign airline/shipping companies and manufacture by a branch located in a Special Economic Zone.

A branch office provides ease of operation and uncomplicated closure but its operations are strictly regulated by foreign exchange control guidelines.

5.5.3 Liaison Office

Foreign Corporation are permitted by RBI to open Liaison Offices in India, subject to approval for undertaking liaison activities and acting as a communication channel between the foreign corporations and Indian customers. The Liaison office is permitted to represent the Indian company, promote import/export to India, promote technical and financial collaborations and act as a communication channel with the parent company.

5.5.4 Project Office

A foreign corporation which has secured a contract from and Indian company to execute a project in India may establish a project office in India without obtaining prior permission from the RBI. However, the exchange control norms prescribe certain requirements.

Like a branch office, a project office is also treated as an extension of the foreign corporation in India and taxed at the rate applicable to foreign corporations.

5.5.5 Joint Ventures: Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners.

Joint Venture may entail the following advantages for a foreign investor:

Established distribution/ marketing set up of the Indian partner

Available financial resources of the Indian partners

Established contacts of the Indian partners which help smoothen the process of setting up of operations.

5.5.6 Appointing an Agent or Distributor

A company interested in only a distribution arrangement with a suitable Indian company can appoint an Agent or a Distributor. The arrangements with the Agent/Distributor can vary depending upon the product/service. For example, payment terms can be negotiated between the parties. However, one of the major issues relates to sending back products that are not sold. This, under the current system, is not easy.

5.5.7 Third party arrangement for maintenance and servicing of products

Some companies that sell high value items often find it useful to appoint an Indian party who would be responsible for service and maintenance of their products sold into India. An example is when IBM decided to move out of India in 1977 rather than dilute their holdings in the Indian company (as was required by the then Indian Government), they tied up with Indian companies to maintain the IBM equipment already installed in the country. Similarly, Omega watches set up operations for servicing of their products in Delhi through a third party.

In all these cases, the technical personnel of the company are trained by the parent company to service and maintain their products. One problem that existed in the past in such arrangement was the import of spares. However, it has now become relatively easier.

5.5.8 Franchising

Franchising has been operating in India for several decades. One well-known example of this is the Bata shoe Chain, started in the 1960s. New franchise business concepts include as diverse sectors as healthcare, pharmaceuticals, specialised food services, garments and apparel, education, entertainment, fitness and personal grooming clinics and courier services, to name a few.

India does not have any specific law on franchising. Franchising is covered within the broad definition of transfer of technology contained in domestic legislations. A legal framework for new franchisers interested in setting up master franchises in India however exists, in terms of brand protection and rules regarding payment of franchise fees.

Some of the features of the Indian franchising industry are as follows:

Wide spread sectors (from education to hospitality)

Over 40,000 franchisees currently

Annual turnover from franchising approximately $2.2 billion

Total investments made by franchisees approximately $1.1 billion

Over 300,000 people directly employed by franchised businesses

Variety of hybrid formats in practice

Numerous international franchises already existing and rapidly expanding

While franchising has mushroomed in India, the concept has initially functioned mainly on an agent basis. It is still evolving and being refined and will take a couple of years for franchising to become more organised in India. Franchising in India is often perceived as a tool to cover the high cost of real estate that a company interested in retailing would have to bear. As a result, if business projections are not met, franchisees can and sometimes do shift to other franchises. With minor variations, in a typical franchise operation, a company approaches an owner of prime commercial space to provide the real estate, to invest in interiors and inventories to run a franchise business, and to hire staff for the operation. Franchisees prefer to recruit staff directly, but most franchisers insist on training the staff themselves, particularly in educational and computer training academies. Usually, the two parties work out an arrangement by which the franchisee agrees to sell the companys products on an exclusive basis. Typically, the companys investment is reduced by about 15% if the same operation is run by a franchisee. Also, the company has no worries about hiring and dealing with staff or worker unions.

The franchise agreement is a comprehensive document that specifies everything from the franchise location to the finer details of operating the franchise. There are no standard franchise agreements because every franchiser and every business is different. Many details in the agreement are settled by bargaining, but the normal clauses that should be on the checklist of every franchiser includes use of brand name, protection of intellectual property, conflict of interest, indemnity, business promotion, definition of territory, period of validity, and termination. By the same token, the franchisee will seek to ensure that the agreement maintains his/her intellectual property rights; covers training, consultation and equipment and includes a suitable indemnity clause.

Franchise fee payments in hard currency are allowed. A potential franchisee must submit a proposal for a franchise operation to the government ministry that regulates the particular industry sector. Among other details, the proposal must contain the amount of franchise fee that will be paid to the franchiser. The proposal moves from the relevant ministry to the Ministry of Industry and the Foreign Investment Promotion Board. Reserve Bank of Indias approval of the franchise fee is automatic when the Ministry of

Industry clears the proposal. There are value or percentage limits on approvals of franchise fees, with franchise involving advanced or high-technology, receiving the highest limits. Royalty payments ranging from 3-8% are allowed in hard currency, in addition to the franchise fee, although the norm is closer to 5%. The royalty is calculated on total turnover for the year for the franchise operation.

5.5.9 Direct Selling

Direct selling is one of the fastest growing industries in India and is an unusually good income generator for entrepreneurs from all walks of life. In addition, direct selling offers consumers a convenient and more informed way to buy, along with money-back guarantees and refund policies. According to the Indian Direct Selling Association, the direct selling industry reported a total turnover of $545m (Rs24bn) during fiscal year 2004-05.

In India, direct selling traditionally meant contracting of outside agencies by manufacturers to move surplus or promotional products or small manufacturers resorting to door-to-door selling because of their inability to compete in the retail market. It has also meant deploying direct sales employees to demonstrate products with the objective of making a spot sale. The traditional view of direct selling is changing. One of the first Indian companies to practice direct selling in India was Eureka Forbes, which sells a range of household appliances through direct selling. Though some form of direct selling had been in practice in India, a new wave of interest to sell in the Indian market through the modern concept of direct selling has begun only during the last decade.

At present, the direct selling industry employs more than 1.3m people, an increase of 100,000 from 2003-04 to 2004-05. There are about 750,000 active direct sales executives (including men, women and couples working as a team) who buy or sell products at least once every two months. The total number of product offerings increased to 380 with 2,100 variants and product categories ranging from cosmetics to kitchenware, education, home care and natural products.

According to industry estimates, there are roughly 20 direct selling companies in India with nation-wide coverage and approximately 100 smaller companies with localised city-specific presence. Many Indian and multinational companies like Amway, Aero Pharma, Avon, Herbalife, Sunrider, Tupperware, Lotus Learning, Oriflame, AMC Cookware, and Time Life Asia have started operations in India through joint ventures or wholly-owned subsidiaries. Amway, with more than 200,000 distributors spread across 26 cities servicing more than 306 locations, is perhaps the largest direct selling company in India today. Tupperware entered India in 1996 and currently has more than 40,000 dealers in 40 Indian cities. Established retail companies in India have also started direct selling operations, the most prominent being Hindustan Lever Limited of the Unilever group.

Since their launch, many direct selling companies have had to rework their strategies with emphasis on the three critical Ps of marketing - product, pricing, and packaging. Once

considered as the medium for sales of premium products, direct selling in India today is moving towards lower priced products to meet the demands of the price sensitive Indian consumer. Package sizes are being reduced to bring down the psychological price barrier and make the products sold through the direct selling channel more affordable. Some multinational direct selling companies have also customised products to meet the needs of Indian consumers. Major foreign direct selling companies have also established manufacturing facilities in India.

Direct selling companies follow different plans of compensation for their sales force. Some follow the single level plan under which sales people earn commission on sales made by them alone, and do not earn anything on sales made by people they have introduced in the business. They may earn a one-time reward for people they help recruit. There are still some others who also compensate a sales person for the sales made by persons recruited by the first sales person, and from the sales of the group or network recruited by the first sales persons personal recruits.

5.6 Forms of business presence in India for a foreign company

A foreign company may wish to set up a business presence in India. It can do so by setting up any one of the following:

Liaison Office;

Branch Office; or

Company (either a joint-venture or a subsidiary)

Different regulations apply to each of the above three forms. The following summary table highlights key differences between them.

Liaison Office (LO)

Branch Office (BO)

Joint-Venture or Subsidiary Company

PERMISSIBLE ACTIVITIES

Product/Corporate Promotion

YES

YES

YES

Business Development

YES

YES

YES

Technical Support

YES

YES

YES

Purchase/Sales co-ordination on behalf of the overseas parent (e.g. Italian) company

YES

YES

YES

Earning Income

NO

YES

YES

Buying Products

NO

YES

YES

Selling Products

NO

YES

YES

Export

NO

YES

YES

Import

NO

YES

YES

Manufacturing

NO

NO

YES

LEGAL, FINANCIAL & TAX ISSUES

Opening A Bank Account

YES

YES

YES

Recruiting People

YES

YES

YES

Owning Premises

NO

YES

YES

Income-Tax Rate Applicable On Profit

N.A.

41.82%

33.66%

Can It Repatriate Profit

N.A.

YES

YES

Can It Repatriate Capital

N.A.

N.A.

YES

Minimum Authorised Capital Legally Required

Minimum Paid-up Capital Legally Required

NIL NIL

NIL NIL

INR.100,000 for a private limited company

INR.500,000 for a public limited company

INR.100,000 for both.

Maximum shareholding that a foreign company can have

N.A.

N.A.

100% (Subject to applicable regulations)

REGULATORY PERMISSIONS/REGISTRATIONS

Permissions/Registrations Required From

Reserve Bank of India

Reserve Bank of India

Registrar of Companies; Reserve Bank of India;

Foreign Investment Promotion Board (in some cases).

5.7 Processed fruits and vegetables: Less than 2 percent of all fruits and vegetables produced in India are processed. The main products, the industry size, and major players are shown in the following table:

Products

Industry Size

(Million Rupees)

Key players in the organized segment

Organized

Unorganized

Jam

900

450

HLL, Marico, Mapro, Malas

Pickles

1,500

10,000

Priya Foods, Preveen, Desai Brothers, Cavin Kare, GD Foods

Sauce/ketchup

1,000

3,000

HLL, Nestle, Heinz, GD Foods, Bector Food Specialties

Pulp/concentrate

4,000

0

Foods and Inns, BEC, Claen Foods, Jain Irrigation, Usha International

Juices/fruit drinks

5,000

0

Pepsi, Dabur, Parle, Godrej, Mother Dairy

Squashes

1,000

2,000

HLL, Haldiram, Mapro

Ready-to-eat vegetables

1,000

0

ITC, MTR, Tasty Bite

Potato chips

2,500

3,000

Pepsi, Haldiram

Cooking paste

300

0

Dabur, HLL

Total

35,650

Source: Rabobank Analysis

5.8 Dairy Products: About 37 percent of Indias milk production of 86 million tons is processed, 15 percent in the organized sector and 22 percent in the unorganized sector. A major share of the milk processed in the organized sector (mostly by dairy cooperatives) is in the form of packaged liquid milk. Other processed items include ethnic sweets, milk powder, ghee (melted, clarified butter), butter, cheese, and ice cream. In the unorganized sector, a major share is processed into milk-based sweets, and a smaller share for making yogurt, butter, and ghee. The main products, the industry size, and major players are shown in the following table:

Products

Industry Size

(Billion Rupees)

Key Players in the Organized Sector

Organized

Unorganized

Packaged milk

98.0

0

Mother Dairy, Amul, various state cooperatives, Paras Dairy

Ethnic sweets

62.5

455

Mother Dairy, Amul, various state cooperatives, Haldiram, Bikanerwala

Yogurt

6.3

160

Mother Dairy, Amul, Nestle

Cheese

2.0

21

Amul, Vijaya, Britannia, Dynamaix Dairy

Ice Cream

8.0

0

HLL, Mother Dairy, Vadilal

Butter

5.2

60

Amul, Mother Dairy, Vijaya

Ghee

35.0

210

Amul, Vijaya, various state cooperatives, Paras

Milk powder

38.0

0

Amul, Nestle

Total

255

906

1,161

Source: Rabobank Analysis

5.9 Cooking oil: Total annual sales of branded cooking oils in India are estimated at rs. 50 billion ($1.1 billion), and have been growing annually at 7 to 8 percent over the past five years. Branded edible oils account for only 9 percent of the total edible oil market by volume and 17 percent by value. Mustard, sunflower, and peanut oils together account for around 80 percent of branded edible oil consumption. The edible oil companies are focusing their marketing strategy on the emerging healthy eating habits of a growing number of Indian consumers. Branded players attempt to deliver better value for money through innovative packaging. Although there are hundreds of regional/local processors and brands, the national-level players are Godrej, Dhara, Marico, Liberty, and Ruchi. In recent years, a number of multinational companies including Cargill, Adani Wilmar, and Bunge have set up operations in India, either through port-based refineries, trading subsidiaries, or brand acquisitions.

5.10 Meat and poultry: Indian consumers prefer mostly fresh meat from the wet markets. Only a very small share of production is further processed into value added products, mostly for export. Major players include VH Group, Godrej, Sugunas, and Arambagh in the poultry processing sector, and Allana's, Hind Agro, Al Kabeer in the buffalo meat (beefalo) processing sector. Cow slaughter is prohibited in most states due to religious sentiments.

5.11 Fisheries: As in the case of meat, most fish consumed comes from the wet markets. Processing is mostly for export, and includes conventional block-frozen and individual quick frozen products, minced fish items like sausage, cutlets, pastes, texturized foodstuffs, and dried fish. The frozen products usually undergo primary processing such as cleaning, deveining, descaling, peeling, etc.

5.12 Non-alcoholic beverages: India is the worlds largest tea-producing country with an annual production of around 860,000 tons and is also one of the worlds largest tea exporters. Tea processing includes withering, rolling, fermenting, drying, blending, packing, and branding. Instant tea production is limited. Major players are Tata Tea, HLL, Manjushree Plantations, Jay Shree, Goodricke, Harrison Malayalam, Eveready, and Warren.

With an annual production of around 300,000 tons, India is a small but competitive producer of coffee. Traditionally a tea-drinking country, average annual coffee consumption in India is only ten cups per person. The instant coffee segment is entirely branded and packaged, and caters mostly to the export market. Major players are Tata Coffee, HLL, Nestle, Barista, Qwikys, Narasu, Leo, and ABCTC.

Pepsi and Coca Cola dominate the Indian soft drink industry.

5.13 Alcoholic Beverages: Whisky, mostly low-priced, accounts for about 55 percent of the Indian spirit consumption, followed by rum, brandy, and vodka. Key players are UB, Shaw Wallace, Jagatjit Industries, Mohan Meakins, and International Distilleries. With the recent take-over of Shaw Wallaces liquor business by the UB Group, the latter has emerged as the worlds second largest liquor producer. Major multinationals operating in India include Diageo, Seagram, and Baccardi Martini. UB, SABMiller, and Mohan Meakins are the major beer-producing companies. The wine market in India is nascent, having emerged as a distinct segment about a decade ago. Chateau Indage is the largest domestic player in wines, followed by Grover Wines and Sula Wines. Key international players who have a presence in India through distribution alliances include E&J Gallo, Hardys, Canandaigua, and Fetzer.

5.14 Confectionary: The size of the Indian confectionary market is estimated at rs. 26.0 billion ($600 million). Sugar confectionary accounts for 61 percent of this market, with the balance being chocolates, mints, and gums. The confectionary market has been growing at over 6 percent annually over the last five years. The gum-based confectionary segment has grown even faster at over 10 percent. The confectionary market is highly fragmented with several local players such as Parles, Nutrine, and Ravalgaon. Key foreign companies are Nestle, Cadburys, Perfetti, Lotte, Wrigley, Candico, and Joyco.

5.15 Milling and baking: 75 percent of Indias wheat production is milled into wheat flour (atta) to make rotis or chapattis (unleavened flat bread), mostly in small chakkis (small wheat grinding mills) in the unorganized sector. Branded atta is a relatively new segment, developed to provide consumers a more hygienic quality, as compared to chakki atta. Annual production of branded atta is about 1 million tons, and is growing at 7 to 9 percent annually. Major players are ITC, Pillsbury, HLL, Agro Tech Foods, and Shakti Bhog Foods.

Bakery products constitute the largest segment of grain-based processed foods. Small and medium unorganized local players, and a limited number of organized units dominate the industry. Major players are Britannia, HLL, ITC, Parle, Priya Gold, and Cremica.

The grain-based snack market, comprising extruded snacks and savories, is estimated at around rs. 29 billion ($667 million). Of this, the organized segment contributes only 15 percent of sales. Major players are Pepsi, Haldiram, SM Dyechem, Bikanerwala, etc.

Breakfast cereal production in the organized sector is very small, and is mainly confined to corn flakes. Major producers are Kelloggs and Mohan Meakins. Pepsi is reportedly interested in investing in the breakfast segment over the next five years.

5.16 Distribution Systems

Domestic consumer goods are distributed through a multi-level distribution system. With the cost of establishing warehouses nearly prohibitive, clearing and forwarding agents (CFAs) are fast becoming the norm. Typically, the CFAs transport merchandise from the factory or warehouse to stockists or distributors. While the CFAs do not take title to the product, they receive 2 to 2.5 percent margins, invoice the stockists, and receive payment on behalf of the manufacturer. The stockists have exclusive geographical territories and a sales force that calls on both the wholesalers and on large retailers in urban areas. They usually offer credit to their customers and receive margins in the range of 3 to 9 percent. The wholesalers provide the final link to those rural and smaller retailers who cannot purchase directly from the distributors. Sales to these retailers are typically in cash only and the wholesalers receive a margin of 2 to 3 percent. Margins for retailers range from 5 to 15 percent, and the total cost of the distribution network represents between 10 and 20 percent of the final retail price.

Most imported food products are transshipped through regional hubs such as Dubai and Singapore, due to their liberal trade policies and efficient handling facilities. Major importers are located in Mumbai, Kolkata, Delhi, and Chennai. Although a large share of imported foods enter India through illegal smuggling, normal imports are also increasing. Under-invoicing is a commonly used practice to lessen the burden of import tariffs.

5.17 Finding a Business Partner

It is essential to survey existing and potential markets for products before initiating export sales to India. Market research firms in India can assist new exporters. If the aspiring FVG companies have products of promising sales potential in India, they can either set up a base in India or appoint a distributor or an age