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[Food Processing] Introduction, Scope, Significance, Awesomeness (hardly), Obstacles(truckload of) for GS Mains

1. Prologue2. Indian food processing industry: Significance

1. Increasing Employment2. Curbing Migration3. Curbing Food Inflation4. Crop-diversification

3. Scope/Potential1. Abundant Raw Material2. Geographical advantages3. New Demand4. Government Initiatives

4. Obstacles to food processing?1. Economies of scale2. Lack o f organized retail3. Lack of Food testing facilities4. Lack of Skill ed Manpower 5. Lack of R& D6. Transport problems7. Export Pro blems

Prolo gue

In the ne w Mains s yllabus, UPSC has included: Food processing and related industries in India-

thei r Scope, significance, LocationSupply chain management (SCM)Upstream and downstream requirements

But ^thats not the end. Food processing topic also overlaps wi th

GS-2

1. Ministries and Departments of the Government2. 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 itsessay / 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-obstacles2. 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 issues5. 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: FoodProcessing Industry(Tata McGraw-HillPublication)

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 andChallenges (ICFAIuniversity press)

Some chapters deal with food industries in China, Australia etc but hardly any good fodder points

Some chapters provide details of individual food processingsector but mere copy paste job from Vision 2015 PDF document.

3. IGNOU MBA booklets(Coursecode: MS-55)

for theory on supply chain management, upstream-downstreamrequirements

PDFs

State of Indian agriculture2012-13 (By AgriculturalMinistry)

for agro-livestock-fish-production information and schemes

Vision 2015 for foodindustries: part 1 and 2

for opportunities and obstacles in individual sector: dairy, meat,wine etc.

Flavors of Incredible India: Areport by Ernst & Young andFICCI

for supply chain diagrams of individual food processing sector

+ Additional points for opportunities, obstacles.

Planning commissionsreport on EncouragingInvestments In Supply Chainsand cold storages

plenty of fodder on

supply chain,opportunities, obstaclesvarious schemes

12 th FYP documentsdoesnt have much specific fodder points for food processingthough.

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 onhttps://files.secureserver.net/0sL2N0Ej5XwsWc

12th Five year plan uploaded on https://files.secureserver.net/0sLrYY0FFJRric

Indian food processing industry: Significance

sizeHas more than 35000 registered unitsOutput of ~5-6 lakh croresFood 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
https://files.secureserver.net/0sLrYY0FFJRrichttps://files.secureserver.net/0sL2N0Ej5XwsWc


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Food processing industry provides plenty of direct and indirect employment opportunities, because itacts as bridge between Agriculture and ManufacturingAs per ASI survey in 2010, Food processing industry generated highest employment among allindustry. 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 processingsector 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 unemployment3. exploitation of farmers4. 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 passedthrough 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 capacityResult: Wheat gets rotten @godowns and railway stations.On the other hand, weve to rely on imported oilseeds because of higher MSP, farmers prefer to growrice/wheat than oilseeds=> higher oilseed import adds to Current account deficit and leads to 1$=62rupees=>crude oil expensive=petrol expensive=everything transported through petrol/diesel getsexpensive=thus the cycle of middle class exploitation is complete.Coming to the original point: we need crop diversification, all farmers shouldnt be growing just riceand 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 incomeopportunity in growing non-cereal crops => crop diversification => the excessive rotting-wheat surplus

problem is solved.

Some filler significance points: food processing1. Increases shelf life: milk vs butter 2. Increase value: milk vs butter moveing to.

Scope/Potential
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Abundant Raw Material

Indias worldRank 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, teaamong topfive coffee, tobacco, spices, oilseeds

With such a huge raw material base, we can easily become leading food supplier in the world. (But wehavent, 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 followingreasons:

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 USD2015 >250 billion2020 >300 billion

Government Initiatives

Many food processing sectors that were earlier reserved for small scale industries (SSI) have beende-reservedFDI 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 UPSCwouldnt have included it in the syllabus. Then, what are the.

Obstacles to food processing?country __ % of total fruits/vegetables processedIndia barely 6-7China >20USA >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

PricingSince unit production cost is high, he cant sell his products cheap unlike a big MNC, and Indianconsumers are price sensitive.

Brand-Building

Small players=small profit, seasonal business. In global market they cant establish themselves as along-term player they only do opportunistic businesses, undercut each other.

LowTechnology

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 USAto 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-ExportQuality

Instead small company relies on multiple small supplier hence Raw material=non-uniform inquality.Then their products are rejected in US/EU market for not meeting the Codex/HACCPstandards. (e.g. mango juice rejected for stone weevil, buffalo meat rejected for food-n-mouthdisease, fish rejected for heavy metal contamination and so on.)

retailingCant 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 plants4. 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:

PriceSensitivity

Indian public=Low per capita income = higher price sensitivity and higher incomeelasticity in relation to food expenditure.

PreferenceFor FreshFood

Indians prefer freshly cooked products as compared to packaged products. Traditionalmindset: fresh = nutritious.

AgriProblems

truckload of agri-problem. Well see the individual problems in later articles. for theoverview:

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 Raabe rt Vadhera.

there is no common policy on contract farming throughout India

Supply ChainProblems

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-harvestmanagement.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 foodsectors for taxation.Multiple and complicated tax regimes have rendered the food industryuncompetitive

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 monthsof 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 upentrepreneurs 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.

MarketInformation

Market information not easily accessibleSmall players cannot buy international journals/magazines to find the latest trendsin demand/innovation. Most of them also dont know how to use internet for

business/marketing.

ManpowerLack of trained manpower.Very few universities offer special courses for food processing andentrepreneurship.

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 shareof packaging costs as a proportion of total costs.*

*High packaging cost

Packaging cost is ___ % of total production costPotato 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 % losscereal wheat 6

pulses blackgram 6oilseed groundnut 10fruits guava 18veggies tomato 12spices turmeric 7marine 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 coldstorage.Meat, poultry and marine products are primarily sold in separate markets but they too dont have coldstorage=>wastage.

Thus, lack of organized retail, leads to

1. low product quality2. lack of variety, choice3. poor shopping experience

4. low hygiene levels5. low value for money6. 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 outdated2. 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 veterinarydrugs, 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 SupervisorsProduct Development TechnologistsFood EngineersFood Microbiologists

Quality Control ScientistsResearch TechniciansTechnical Representativesmachine operators, assistants

Problems

Lack Of Men

As per a study by National Skill Development Corporation: the annual humanresource 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 fromin 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.

OutdatedSyllabusAndProfessors

Syllabus/courses in university departments are not being updated regularly and are inmost cases, outdated with respect to the present trends and food industryrequirement.The teaching faculty in most of the Indian academic institutions studied has limitedindustry experience / exposure.

InspectorsFood inspectors unaware of GMP, GHP & HACCP standards, latest developments infood 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 heatload 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 responsibilityto do the R&D.But Sarkari Research objectives are outdated, food market requirementskeep changing frequently given the new product launches by MNCs.


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2. Baba AdamsMindset

Multinational Food companies typically have an in-house global network of R&D professionals.Although theyre willing to work with Indian institutions for developingIndia-specific products and processes.But the quality of R&D currently undertaken by existing Indian institutionsis 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 morefulfilling and remunerative. There has been a significant drop in the qualityof people entering the R&D field

4. Implementation

Indian Government recently introduced a variety of kiwifruit in NorthIndia, but could not provide adequate support/advice on cultivation

practices. Result= domestic kiwi produce is much smaller in size thanimported 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, tomake 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 inresearch:

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 sterilizationCalcium treatment to extend the shelf life of melons

packaging

Packaging films that offer optimal barrier properties to extend shelf life.Biodegradable f ilms made from pectin and starchSilicon oxide f ilms that improve oxygen and moisture barriers.Use of natural antioxidants in packaging materials for shelf life extension of combatrations 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/dayroads 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 productsThough 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 transportedLast mile connectivity from rail transporters =absent.Inefficiencies associated with a government monopoly. (timing-schedules, technologyupgrades 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 ofthe 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 andincreases cost For e.g. the cost of an import container in India=~$500, elsewhere ~350in foreign ports.

Export Problems

Although India is the second largest producer of food in the world but its share in worlds exports is verylow despite its inherent strength in tea, spices and rice. Why?

expensiveRawMaterial

Fragmented base of suppliers=uniform quality not availableLot 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.

lowprocessing

Our processing has largely remained in primary forms like pickling, sun dryingand/or making preserves. Sometimes we just export intermediate product to secondcountry theyll further process it and sell to third country @even higher price. (e.gour shrimps to Japan, Japan selling them to US)

low quali tyOften our products rejected from US/EU markets for not meeting Codex, HACCPquality standards

Branding

yet to Build global brands on the back of Indias strengths (Darjeeling tea, Basmatirice, Durum wheat, Alphonso mango, Tamilnadu Banana or Kashmiri Apples)Developed countries view India as an unpredictable and unreliable source of food andagro products.

transport Poor cargo facilities at airports and ports are other bottlenecks discussed earlier

Packagingyet to develop packaging technologies for Indian food products to make them moreacceptable to foreign consumers.

Dumping Desi shrimps face Anti-dumping duties in USA.

Devaluating

1$=~60 Indian rupees while 1$=~100 Paki rupeesGiven these exchange rates and local prices of Basmati in India vs Pakistan. From anAmerican/Europeans point of view, it is cheaper to import Basmati from Pakistanthan from India.

^these are just few of the many problems/obstacles faced by Indian food industry. In the next article, we seevarious government schemes related to post-harvest management, food processing industries and agro-export.


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URL to article: http://mrunal.org/2013/08/food-processing-introduction-scope-significance-awesomeness-hardly-obstacles-truckload-of-for-gs-mains.html

Posted By Mrunal On 21/08/2013 @ 21:06 In the category Economy

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Mrunal » [Food Processing] Introduction, Scope, Significance, Awesomeness (Hardly), Obstacles...

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