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Agri-Infrastructure in India - The Value Chain Perspective

January 2014

Food and Agribusiness Strategic Advisory and Research (FASAR) Group, YES BANK

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The Associated Chambers of Commerce and Industry of IndiaD. S. RawatSecretary GeneralASSOCHAM Corporate Office5, S. P. Marg, New Delhi – 110021Tel : +91 11 4655 0555Fax : +91 11 2301 7008/9Email : [email protected] : www.assocham.org

AGRI-INFRASTRUCTURE IN INDIAThe Value Chain Perspective

MESSAGEIt gives me immense pleasure to note that ASSOCHAM is organizing the 6th Agri Business Summit: Infrastructure, Value Chain & Partnerships on January 13, 2014 in New Delhi.

Agricultural in India has posted significant growth in the past few decades but still faces challenges like improving agricultural productivity, minimizing post harvest losses, increasing value addition and processing levels. These impediments require collaborative efforts by the Government and Private sector to bolster Indian agriculture. Value addition in agriculture, be it high value organic crops, specialty grains or agricultural commodities, presents a tremendous opportunity to integrate agriculture with industry and market. However, to tap this opportunity, India has to address the gaps in infrastructure supporting the agricultural sector based on analysis of key challenges across various segments of the agri-business supply chain. Improving post-harvest and marketing infrastructure is perhaps the key to unlocking the potential of Agri-Business in India.

I would like to thank the Ministry of Food Processing Industries (MoFPI), Ministry of Development of North Eastern Region (DoNER), Department of Bio Technology (DBT), National Bank for Agricultural and Rural Development (NABARD) and National Institute of Food Technology Entrepreneurship and Management (NIFTEM) for their support. I also thank our Platinum and Knowledge Partner YES BANK for its extensive efforts in putting together this report. I also wish to thank all our Sponsors, Exhibitors and Media Partners for their overall support. I must acknowledge the hard work put in by Dr. Ombeer S.Tyagi and his team members Sandeep Kochhar, Vipul B. Gajingwar and Nitesh Sinha in the preparation of this Summit.

I not only wish the Summit a great success but also assure all stakeholders that ASSOCHAM shall continue to organize such programs for larger public benefit with great degree of excellence.

D.S. RawatSecretary General, ASSOCHAM


ForewordThe story of Indian agriculture has been one of tremendous growth, both on the supply as well as demand fronts. On the supply side, we are on the verge of a substantially higher Agriculture GDP growth (over 5%) on the back of record production, thereby positioning India on the cusp of becoming the world’s largest agri-producer. Production data points across categories clearly indicate the success India has achieved in this direction. Coupled with the impending adoption of various technologies at the farm level, in the long term, these numbers are only bound to rise over the next few years. On the demand side, the per capita consumption for most categories of food is rising and with the ever increasing population, we will continue to have a robust national market for our agricultural produce.

It is the balancing act between managing this huge production surge and meeting the demands of the discerning end consumer, that underlines the need for substantially improved Agri-Infrastructure in India. Coupled with the challenges of ensuring lowering of food wastages across the value chain and of improving operating efficiencies across the chain, Agri Infrastructure in India has a critical role of national importance to play. This assumes further significance in light of Food Security priorities of our country.

A host of challenges and opportunities exist in the augmentation, creation and improvement of the agri-infrastructure in India across various stages. These include farm-gate (pre-harvest, harvest), post harvest (marketing, storage, logistics) and food processing (with a focus on sectors like Dairy where a second White Revolution is needed to actualize the full benefits of the first one). A well formulated Government policy, with adequate focus on appropriate technology, PPP and other partnership models as well as creation of an enabling environment for inviting private enterprise and capital are some of the ingredients that will drive Agri Infrastructure investments in India.

Towards the foregoing, I am pleased to present the ASSOCHAM - YES BANK knowledge report “Agri-Infrastructure in India – The Value Chain Perspective” which highlights the key issues, challenges, opportunities as well as suggests the way forward for development of Agri Infrastructure in India. The report also captures some remarkable models which have been hugely successful in this sector. I am confident that the contents of the knowledge report will provide important insights to policy makers, industry leaders and stakeholders in the Agri-Infrastructure space, which will take us further along the road towards achieving food security for the nation.

Thank you.Sincerely,

Rana KapoorPresident, ASSOCHAM


Contents

Introduction .........................................................................................................................................................................................7

Pre Harvesting Infrastructure ...................................................................................................................................................... 11

Farm Mechanization ....................................................................................................................................................................... 21

Storage, Warehousing and Logistics ........................................................................................................................................ 31

Agricultural Marketing Infrastructure ...................................................................................................................................... 45

Dairy Infrastructure ........................................................................................................................................................................ 57

Food Processing ............................................................................................................................................................................... 67

Development of Agriculture Infrastructure in India: Way Forward ............................................................................... 79

References .......................................................................................................................................................................................... 83


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IntroductionBackground

Since independence, agriculture has been the mainstay of the country and is one of the prime contributors for the Indian economy. The contribution of agriculture and allied services to Indian GDP in value terms grew by 5.1 times from INR 1,47,216 crores in 1951-52 to INR 7,52,746 crores in 2012-13 (according to 2004-05 prices). But the faster growth of the services sector combined with slower growth rate in agriculture resulted in the decline in the contribution of agriculture and allied services to the economy. The sector contribution to the country’s GDP stood at 13.68% in the year 2012-13 while the same in the year 1990-91 and 1970-71 was around 31.4% and 44% respectively.

Despite playing a key role in India’s economy, agriculture sector is suffering from major roadblocks out of which agriculture infrastructure is one of the most prominent. The sector is heavily exposed to the vagaries of weather conditions. Several issues like lack of proper irrigation and water management, low mechanization, insufficient investments in the sector, low export orientation etc., are limiting the productivity of the farms in the country. The share of the farmer in the consumer rupee is low and the supply chain is plagued by intermediaries. There are huge amount of post harvest losses ranging between 25%- 40% of the production, across the value chains, mainly due to lack of scientific management and storage facilities at right locations. The food processing levels are substantially lower than most emerging and developed economies with only 6% of agricultural produce being processed properly. This shows us the need for interventions at different levels with key focus on development of agricultural infrastructure.

DefinitionAgricultural Infrastructure refers to any physical structure(s) which aid/ facilitate the competitiveness of the productive agricultural sector, and the related organizational systems that support their planning, procurement, design, construction, regulation, operation and maintenance.

Components of Agricultural Infrastructure

Agricultural infrastructure includes all the infrastructure that supports on-farm production (irrigation, soil and water management, pre- and post-harvest infrastructure), ensures efficient trading and exchange (information


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and communication technology, wholesale, private and regulated markets), adds value to the domestic economy (agro-processing and packaging facilities) and enables produce to move rapidly and efficiently from farm-gate to processing facilities and on to wholesalers (logistics, transportation and storage).

Why Agri- Infrastructure

Provision of adequate infrastructure, in terms of both quantity and quality, is very essential for the rapid achievement of sustainable economic growth, both by increasing production, productivity and consumption. While the precise linkages between infrastructure and development are yet to be firmly established, it is estimated that infrastructure capacity grows step for step with economic output. Research indicates that a 1% increase in the stock of infrastructure is associated with a 1% increase in GDP across all countries.

Lack of investment in infrastructure may increase the costs thus making production/ trading/ distribution unaffordable. This can become a disincentive to farmers/ traders/ processors to invest in the sector which will result in low capital accumulation in the sector. This in turn pushes the investment in infrastructure further down thus creating a vicious cycle which ultimately results in lower development in the agricultural sector. Investment in agricultural infrastructure results in many advantages: Investments in transportation and communication infrastructure lowers transportation costs, increases

farmer’s access to markets, and leads to substantial agricultural expansion. Improved infrastructure also leads to expansion of markets, brings in economies of scale and improvement

in factor market operations. The development of agri-infrastructure helps to enlarge markets with greater access to factors of production.

Easier access to markets allows an expansion of perishables and transport-cost intensive products. It can also lead to the conversion of latent demand into effective commercial demand which in effect accentuates the process of commercialization in agriculture.

Improved infrastructure also facilitates the most economical location for different types of non-farm activity. With many manufacturing and wholesale trading activities tend to concentrate in rural towns, many small scale activities and service activities expand in villages and rural markets as agriculture and infrastructure development proceeds.


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History of Agri Infrastructure in India - The Public Sector PerspectiveThe Government of India has been well aware of the fact that availability of adequate infrastructure facilities is vital for the acceleration of economic development of a country. Recognizing the same, in the Five Year Plans, priority was accorded to investments in sectors such as power, transport, communication etc. The First Five Year Plan (1951-56) attached priority to agriculture including irrigation and power. The plan sought that agriculture development received the highest priority thus necessitating an extensive program of investments covering minor as well as major irrigation projects.

In the 1960’s there was a sudden regression in investments in some of the major sectors of infrastructure, irrigation in particular. While the plans continued to emphasize on infrastructure development, the financial outlays were never a match. However with the Sixth Five Year Plan (1980-85) reiterated the need for massive public investment in agri-infrastructure. The Eight Plan (1992-97) accorded highest priority to strengthening of infrastructure (energy, transportation, communication, irrigation). In addition to physical infrastructure, the plan also recognized that social infrastructure needs to be attended with a degree of urgency in the next phase.

With the renewed emphasis and large-scale plan expenditure of the government, there has been a significant expansion in availability of infrastructure over the years. Irrigation facilities have increased from 22.50 million hectares to 70.25 million hectares in 1995-96. Other equally important infrastructure like marketing infrastructure, roads and transportation, storage facilities etc. witnessed a significant increase during the same period.

However with the advent of mid 90’s there has been a diminishing public investment in infrastructure with the share of agriculture sector’s capital formation in GDP reducing from 2.2% in 1990’s to 1.7% in 2004-05. However there was a reversal in trend with public investment in agriculture reaching INR 12,591 crores in 2004-05.

Current Status- Indicators

Investment in Agriculture: The Changing Private-Public EquationThe share of public sector capital formation in agriculture & allied sectors has come down from 25% in 2006- 07 to about 15% in 2011-12 where as that of private sector has gone up from 75% to 85%. It is observed that over this period, the public sector capital formation remained constant while the private sector capital formation improved by many folds. But in agriculture public investment in goods like rural infrastructure, research and development etc., complements and facilitates private investment. Hence equal emphasis should be placed in this direction to improve public spending in agriculture infrastructure.


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Exhibit 1: Share of Public & Private Investment in Agriculture and Allied Sectors (INR crores)

Source: Central Statistical Organization (CSO)

Incremental Capital Output Ratio (ICOR)One of the important measures of productivity of agriculture investments is called the Incremental Capital Output Ratio (ICOR) which is measured as growth in output for every additional unit increase in investments. According to Planning Commission, while the investment productivity for the overall economy has fluctuated and declined since the late 1990’s with the ICOR going down to 4.5 during 1997-2002 to 3.5 in 2002-07 and increasing marginally to 4.4 in 2007-12 period, the ICOR for agriculture sector has soared sharply from 4.05 in 1997-2002 and 1.99 in 2002-07 to 6.6 in 2007-12.

Exhibit 2: Comparison of Incremental Capital Output Ratio (ICOR)

Source: Planning Commission, YES BANK Analysis


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1. Pre Harvesting InfrastructureThe Food and Agriculture Organization (FAO) estimates that the global food production needs to go up by 70% by 2050 from 2005-07 levels to feed the rising population of the world. Clearly, major portion of this need comes from India and China. To satisfy this need, the agricultural sector of this country needs a boost. But with several issues like depleting ground water tables, declining arable land area per capita and an increased occurrence of natural catastrophes, the challenge is getting tougher year after year. The only option that is left out to meet this challenge is to improve the productivity levels. This requires modernization of the existing pre as well as post harvest technologies. And sufficient infrastructure is also required to take these technologies to Indian farms.

Modern infrastructure for the production of agri-inputs so as to reduce the gap between demand and supply and innovative solutions in distribution and extension services so as to take them to the village levels and make the farmers use them is the need of the hour in the country. The following section mentions the steps taken in the past by both public and private agencies in the country in this domain and the challenges this domain poses.

Seed and Planting Material

Seed is a critical and one of the basic units of agricultural production under different agro-climatic regions. It is estimated that direct contribution of quality seed alone is 20-25% in total production which can be further enhanced to 45% by management of other inputs. The response of all other inputs like fertilizer, irrigation depends upon the quality of seeds.

Realizing the same, a number of initiatives were taken up by the Indian Government in the seed sector. Many of these initiatives are focused on improving the production quantities, quality of seeds and reach by creating infrastructure in public domain as well as by encouraging private player participation. As a result these initiatives helped not only in improving the quantity of seeds produced in the country but also helped in creating demand for the good quality seeds.

Also there is a considerable increase in the participation of the private sector in the production of seeds over the years because of some of the initiatives from the government and today around 98% of requirements are


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met by private seed companies in production of seeds of some of the major crops. The following table shows the participation of private sector in the production of seeds of some of the major crops in the country.

Exhibit 3: Share of Seeds of Major Crops Supplied by Private and Public Sector Companies (2011-12)

Source: Indiastats

A number of schemes were launched by the government to promote creation of infrastructure facilities to promote research development, to improve production, processing and storage of quality seeds, testing laboratories for maintaining quality standards and distribution channels to ensure the reach. The main one is the Central Sector Scheme for Development and Strengthening of Infrastructure Facilities for Production and Distribution of Quality Seed. Under this scheme assistance through credit linked back-ended capital subsidy is provided for 25% of project cost with a cap of INR 25 lakhs is provided for boosting seed production in the private sector. Development of infrastructure facilities in the sector was also identified as one of the thrust areas for National Seeds Policy, 2002.

Also two National level corporations namely National Seeds Corporation (NSC) and State Farms Corporation of India (SFCI) were created and at the state levels State Seed Corporations (SSC) were established in the sector. Under the Seed act, Central Seed Committee (CSC) and Central seed certification board are designed as apex bodies related to seed sector. Also State seed certification agencies, state seed testing laboratories, Central seed testing laboratories, Seed law enforcement authorities and National seed research and training center have been set up to deal with all the matters relating to quality regulation of seeds.

Crops Private Sector (Percentage Share) Public Sector (Percentage Share)

Paddy 42.5 57.5

Wheat 53.4 46.5

Maize 94.7 5.2

Bajra 89.6 10.3

Jower 80.6 19.3

Pulses 30.5 69.5

Soybean 42.0 57.9

Groundnut 34.6 65.3

Sunflower 96.9 3.0

Rape Seed and Mustard 25.9 74.1

Cotton 96.5 3.4


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Exhibit 4: State-wise availability of seed testing laboratories in India

State/ Union Territory Number of Seed Testing Laboratories

Andhra Pradesh 7

Assam 4

Bihar 7

Chhattisgarh 1

Delhi 2

Gujarat 4

Goa 1

Haryana 3

Himachal Pradesh 2

Jammu and Kashmir 2

Jharkhand 1

Karnataka 3

Kerala 2

Madhya Pradesh 4

Maharashtra 7

Manipur 1

Meghalaya 1

Mizoram 1

Odisha 4

Puducherry 1

Punjab 2

Rajasthan 4

Sikkim 1

Tamil Nadu 8

Tripura 1

Uttar Pradesh 9

Uttarakhand 5

West Bengal 3

Central Seed Testing Laboratory 2

Total 93Source: Seednet India


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Substantial investments in R&D infrastructure have also been made by the private players in the seed sector to enhance their product portfolio and cater to the needs of the expanding markets. Allowing FDI in different sectors of agriculture attracted investments from private players into seed sector and majority of the investments are used in establishing necessary infrastructure.

The sector faces several challenges like low seed replacement ratios, issues with quality of seeds and their distribution. There exists a mismatch between the seed multiplication ratio from breeder to foundation seed and from foundation to certified seeds. To tackle these challenges, efforts must be made by sufficiently investing in building seed infrastructure. There is also a significant need to reinforce the seed production as well as distribution systems and public and private player has to play a major role in this sector.

Greenhouse, Shade Nets and Controlled Agriculture

Protected cultivation has emerged as a relatively new concept for production of different agricultural commodities. With increase in population, the size of cultivable land is getting reduced along with other resources. It is imperative to enhance productivity by various means from same set of resources. Protected cultivation is one such important measure for enhancing productivity by growing crops under controlled environment.

Poly house or Greenhouse farming is a hi-tech farming method to grow crops in controlled conditions to enable year round agriculture. Many times, the weather plays a vital role in the crop growth and some sensitive and exotic crops cannot be cultivated in open fields. This technology can be effectively used to grow off-season vegetables and fruits that can fetch good returns for the farmers. Indian polyhouse farming is at a very nascent stage and has tremendous potential for growth. Typical plants that can be grown in polyhouses are tomatoes, cucumbers peppers, melons and nursery plants apart from floriculture crops. The Indian government supports polyhouse farming by providing subsidies to the farmers and entrepreneurs.

Irrigation

Across the nation, water shortages are triggering growing concern and an acceleration of efforts to increase water use efficiency. Irrigation is the largest consumer of water resources and demand of water for irrigation is increasing day by day. Time and amount of water application is very important for its growth. Every crop has unique requirement of water at different stages from pre sowing till final harvest of the crop.

National Water Policy-2002 has also specified that “Water is a scarce and precious national resource to be planned, developed, conserved and managed as such, and on an integrated and environmentally sound basis, keeping in view the socio-economic aspects and needs of the states. It is one of the most crucial elements in developmental planning. As the country has entered 21st century, efforts to develop, conserve, utilize and manage this important resource in a sustainable manner, have to be guided by the national perspective.”


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In terms of investment by government, major & medium irrigation comprises of 57% of total investment in irrigation which covers only 35% of total irrigated area. Also the irrigation infrastructure in the country is ageing. More than 60% of the dams are about two decades old. Canals and tube wells require annual maintenance apart from regular replenishments in constant allocated funds. Again there are spillover costs and time overrun from previous five year plan to next plan which causes delay and financial losses.

Ground water roughly contributes 60-65% of total irrigated area in the country. Apart from being individually managed source, ground water is also more efficient form of irrigation, with crop yields per cubic meter of water being 1.2-3 times higher than surface irrigation. Researchers have predicted an acute water shortage in near future. By 2050, about 22% of geographic area and 17% of the population will be under absolute water scarcity. In 2010, per capita availability of water was 1,704 cubic meters and is projected to slide down to 1,235 till 2050. Also ground water quality is affected by arsenic, iron, fluoride content, fertilizer and pesticide use and saline water intrusion in coastal regions.

The department of Agriculture & Co-operation has been implementing programs such as National Watershed Development project for Rainfed Areas (NWDPRA) and Watershed Development Project in Shifting Cultivation Areas (WDPSCA). Till the end of third year of 11th five year plan, around 20.81 million ha area has been developed under these programs. The projects under Integrated Watershed Development Program (IWDP) are being implemented in 470 districts of all 28 states throughout the country. For optimum use of resources, sustainable outcomes and integrated planning, Drought Prone Area Program (DPAP), Desert Development Program (DDP) and Integrated Watershed Development Program (IWDP) were merged to form Integrated Watershed Management Program (IWMP).

National Water Mission has set a target of improving water use efficiency by 20% by the year 2017. NWM stresses upon achieving this target by ensuring improved irrigation efficiency both on the demand as well as supply side.

Strategies for Improving Water Use Efficiency Irrigation Management: Irrigation supplies should be more reliable and demand based. The charges for

irrigation water should be on volumetric basis Managing cropping pattern: The cropping pattern in a command area is planned or modified on the basis

of study of soils, climate, rainfall, existing cropping patterns and marketability of the produce. Increasing awareness through training and education: Information about optimum irrigation needs and

timing of irrigation about different crops. Thus creating awareness among farmers will help in minimizing wastage and improving irrigation efficiency.

Modernization and Renovation of existing irrigation projects: The structural deficiencies, lack or inadequacy of storage, loss of water due to seepage from unlined canals, distributaries and field channels are some of the most usual problems faced by the existing structures. Thus irrigation projects for improvement of existing irrigation infrastructure must be given priority.

On Farm Development Works: This work includes maintenance/ renovation of field channels/ water courses, surface drainage system, field channel protection works etc.


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Due to acute water shortage in some parts of the country and over reliance on rainfed agriculture, it is imperative to switch to micro irrigation system in India. Low cost drip and sprinkler irrigation system are being used widely now days by farmers which help to increase their produce by effectively using water and fertilizer, also decreasing on incurred input cost.

Micro Irrigation and Drip IrrigationIrrigated area in India consists of about 36% of the net sown area and agriculture sector accounts for 83% of all water uses, rest being used for domestic purposes, industrial and energy sectors and other consumers. A considerable loss in water conveyance and application occurs in traditional irrigation method which is being minimized by adopting micro irrigation method (drip & sprinkler system).

In Sprinkler method of irrigation, water is sprayed into the air and allowed to fall on the ground surface and is developed by flow of water under pressure through small orifices or nozzles. The amount of irrigation water required to refill the crop root zone can be applied nearly uniform at the rate to suit the infiltration rate of the soil by careful selection of nozzle sizes, operating pressure and sprinkler spacing. Drip Irrigation involves technology for irrigation plants at the root zone through emitters fitted on a network of pipes (mains, sub-mains and laterals). The emitting devices could be drippers, micro sprinklers, mini-sprinklers, micro-jets, micro-sprayers, foggers etc. designed to discharge water at predetermined rates.

Advantages of Micro Irrigation Methods Increased Yield Early Maturity Water & Fertilizer Saving Increased Fertilizer Use Efficiency by crops Energy and Labour saving Irrigation of Marginal and Undulated land Reduced/ Controlled Weed growth Lesser incidence of Disease and Pests Easier Inter-culture operations Poor quality and some saline water can also be used effectively Waste and Fallow land can be brought under irrigation

Due to growing significance of drip irrigation and its relevance in diverse agro climatic conditions and variety of crops, government has also under taken measures to promote drip irrigation to farmers and producers. Low cost drip and sprinkler irrigation system are being used widely now days by farmers which help to increase their produce by effectively using water and fertilizer, also decreasing on incurred input cost.


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Exhibit 5: Drip and Sprinkler Irrigation System

Source: Indiastats, YES BANK Analysis

Case Study- Jain irrigation (Jain Drip)

Jain Irrigation Systems Ltd. (JSIL) is a pioneer in micro irrigation industry in India and established itself as a most promising and reliable brand in delivering complete solutions related to irrigation to crops. Apart from the manufacturer of drip and sprinkler irrigation systems and components, the corporation has multi product industrial profile and manufacturers PVC, Polyethylene & Poly propylene piping system, Tissue culture, Hybrid & grafted plants, poly and shade houses, green energy sources and many others. Jain offers complete system of irrigation for crop based on holistic study of all relevant factors

like topography, soil, water, crop and agro-climatic conditions A complete bundle of solutions offered by Jain irrigation like Agronomic & Extension support,

after sales service and all possible technical supports by trained professionals All system components are manufactured by Jains in their plant at Jalgaon under strict quality

norms Offers customized Micro Irrigation (MI) solutions which are crop specific Exporter of MI systems to countries in Europe, America, Africa, South East and Middle East

Asia


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Benefits of Jain Drip Irrigation System Water saving up to 70% compare to flood irrigation Early crop maturity which results in higher and faster ROI Fertilizer Use Efficiency (FUE) increases by 30% and crop yield increases up to 230% Undulating terrains, saline, water logged, sandy & hilly lands etc. can be brought under regular

cultivation Fertigation and chemical treatment can be viably done by MI system

Agricultural Extension Services

Extension and rural information services provide critical access to the knowledge and information that farmers need to increase the productivity and sustainability of their production systems, and thus improve the quality of their lives and livelihoods. There is a growing consensus that agri extension system must be pluralistic network of institutions providing diverse set of information & innovative solutions to rural people. Such extension systems must be demand-driven with closer linkages to clients, must become more efficient, and must develop more sustainable sources of financing.

Agricultural extension consists of: Dissemination of useful and practical information related to agriculture, including improved seeds,

fertilizers, implements, pesticides, improved cultural practices, and livestock The practical application of useful knowledge to the farm & household

Information and Communication Technology (ICT)

Information and Communication Technology (ICT) have three broad objectives:1. ICTs need to provide access to localized & customized information, adapted to rural users/ farmers in

a comprehensible format & language.2. ICTs need to streamline knowledge base of local farmers, local and indigenous technologies and all

these have to be documented and organized for re-use.3. ICTs need to empower rural communities. They should be intended to impart voice to farmers to

convey their needs, negotiate better with other stakeholders in the value chain and get practical benefits from the offered services.

Today use of Information & Communication Technology (ICT) in agricultural extension activities is being adopted widely and it is rapidly transforming the extension activities. Just as roads are essential for rural development, digital connectivity is becoming essential for research, extension and e-learning. There is always a challenge to streamline rural ICT infrastructure in accordance with providing user friendly appropriate content to farmers.


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The ICT kiosks link the farmers to the consortium and support the community information space. Farmers are quite prepared to pay for useful information, such as local weather forecasts and customized solutions to their day to day problems. Each Kiosk has a computer with digital camera, continuous power supply, printers, video conferencing facilities and a portal for local intranet network. ICTs have the potential to reach farmers to the last mile with timely and accessible contents but the contents delivered has more relevance if its localized and context specific which have important impacts on farm management. ICT Kiosks can help the capacity building process in a financially viable & socially acceptable way if it is designed in a way to promote two way communications (from researcher to farmer and vice versa)

The Information & Communication Technology in agriculture extension includes: Mobile Telephony Video Shows Information Kiosks Web Portals Rural Tele centers Video Conferences Offline Multimedia CDs Innovative Community Radio & Television Programs Open Distance Learning etc.

There are two pre-requisites to implement effective technical services. First, analyzing the technical capacity (infrastructure, connectivity, affordability etc.) and second being the staff capabilities in software development, IT, local government offices or research centers. ICT service will include ICT policy, rural connectivity, and user fees; the information and communication needs of potential stakeholders; existing communication channels and knowledge sources; lessons related to previous information dissemination and networking efforts; farm diversity; and demographic, political and environmental demands.

Soil testing centers, INM and IPM

Soil testing service in India began in 1955-56 with the soil testing laboratory (Centre for Soil, Plant and Water Analysis) at IARI as the hub to coordinate with all the other soil testing laboratories in the country. Soil testing helps to diagnose soil health and evolve soil specific and crop specific solutions. It helps to identify problematic soils, their nutritional status, texture and structure. Based on the results of the analysis, farmers are advised on soil fertility management through rational use of manure, fertilizers etc. A package of services designed and offered to the farming community are: Soil and plant testing for macro and micro nutrients Soil & plant testing for amount of pollutants present Assessment of water quality used for irrigation Measures to manage problematic & nutrient deficient soils Advisory on balanced fertilizer use Advisory on Integrated Pest Management


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2. Farm Mechanization Indian agriculture, in the recent times, is facing two pronged crisis of rising farm wages and scarcity of farm labour. The migration of farm labour to industrial and urban centers for employment opportunities and secondly due to policy interventions like MNERGA, launched in 2006, has resulted in escalation of farm wages. The farm population has also nearly shrunk by 8-9 million during 2001-2011.

Exhibit 6: Average Daily Farm Wages and Farm Employment (in INR)

Source: Ministry of Labour & Employment and National Sample Survey Organization (NSSO)

The average farm wages shown above is calculated by averaging daily wage cost of agricultural operations such as ploughing, sowing, weeding, transplanting, harvesting, winnowing and threshing. The average daily farm wages in India is showing an increasing trend over the years and the participation of labour in farming activities has shown a decreasing trend, with participation into non-farm activities like manufacturing, trade, hotel & restaurant, construction, transport, storage & communication, mining and other services.


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This has resulted in renewed attention on the Farm Mechanization, as it will be growth driver of agricultural productivity. Farm mechanization plays an important role in facilitating agricultural growth through efficient utilization of inputs. Farm mechanization ensures timeliness of agricultural operations, reduces cost of production, as well as reduces drudgery in carrying out various agricultural operations.

Exhibit 7: Evolution of Agricultural Machinery

Source: Italian Trade Commission

Processes Traditional Practice Current Practice

Land Development Tillage Seedbed preparation

Plough, Blade Harrow Tractors Mould Board Plough Power Tiller

Sowing & Planting Dibblers Seed Drill Zero Till Seed-cum-Fertilizer Drill

Weeding Hand Hoes, Animal driven Weeding Tools

Power Weeder

Plant Protection Dusters, Hand Sprayers Blower Power Spray

Harvesting & Threshing Sickle, Animal Trampling Self Propelled Harvesters Tractor mounted Harvesters Threshers


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The various mechanized farm equipments used for farming activities are:

Exhibit 8: Farm Machinery Major Components

Source: TNAU Agritech, YES BANK Analysis

Exhibit 9: Key Benefits of Farm Mechanization

Source: Italian Trade Commission

Savings PercentageSaving in Seeds 15-20 %Saving in Fertilizers 15-20%Increase in Cropping Intensity 5-20%Saving in Time 20-30%Reduction in Manual Labour 20-30%Overall Increase in Farm Productivity 10-15%


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Farm Mechanization in India

Although, the farm mechanization in India has picked up recently the overall penetration is at around 40-45%. The level of farm mechanization is high for wheat/rice harvesting at 60-70% and less than 5% for other crops. The level of farm mechanization for other farming activities like soil work and seed bed preparation, seeding and planting, plant protection and irrigation is still at meager 30-40%.

In India, though, there has been a considerable progress of mechanization in agriculture; its spread however has been uneven. There are wide ranging regional disparities in the levels of mechanization across states, as compared to high penetration in Northern India. Mechanization in Western and Southern states of the country viz., Gujarat, Maharashtra, Rajasthan and certain areas of Tamil Nadu, Andhra Pradesh etc., has only increased with the increase in area under irrigation. Farm equipments like, threshers and combine harvesters have found wide acceptance across the country. Special strategy also needs to drawn for hilly NE and Himalayan states. The efforts towards promotion of mechanization suited for different regions seem to be lacking.

Exhibit 10: Number of Tractor/Other Power Operated Agricultural Implements in India (Census 2003)

Source: Ministry of Agriculture, YES BANK Analysis

Agricultural Implements Numbers in ' 000sReapers 10,166Agricultural Tractors Wheeled 2,361Cultivator 1,771Power Operated Thresher 1,568Trailers 1,116Seed Fertilizer Drill 1,011Disc Harrow 933Leveller 877Mould Board Plough 748Combine Harvester-Self Propelled 308Potato Diggers 295Agricultural Power Tillers 279Sugarcane Crusher 189Crawler Tractor 171Rice Planter 164Rotovator 133Maize Sheller 118Combine Harvester-Tractor Operated 115Planter 114


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Industry Size

Indian Farm Equipment contributes to nearly 10% to the global farm mechanization industry and exports have been significantly rising in recent years. The industry is growing at a CAGR of 4-5%.

Exhibit 11: Market Size of Farm Equipment

Source: DAC, Ministry of Agriculture and Cooperation

Exhibit 12: Projection for Production and Export of Agricultural Machinery and Implements in India


Estimated Market Size (in USD Million)Estimated Market for Agriculture Equipment 185 – 225Estimated Total Export Market for Agriculture Equipment

9 – 14

Estimated Total Import Market for Agriculture Equipment

7 – 9

Estimated Total Domestic Market for Agriculture Equipment

200 – 250

Machineries and Implements Projection for 2012-13

Production(in lakhs)

Export(in nos.)

Tractor 6.56 80,000

Power Tiller 0.65 -

Combine Harvester 0.1 100

Power Thresher 0.5 2,000

Rotavator 0.47 500

Zero Till Seed Drill/Seed-cum-Fertilizer Drill 0.71 2,000

Sprayers 8.5 -

Irrigation Pump sets 8.5 -

Primary Tillage Equipments 1.5 1,000

Agriculture Trailers 2.18 3500

Tractor Operated front Mounted Loader and Backhoe 0.25 3500


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Exhibit 13: Farm Mechanization major components

Farm Machinery Market Size Nature of Market TrendsTractor Approximately

3,70,000 units sold annually. Annual growth 4-5%

Price sensitive market; sales dependant on government subsidy and there is no subsidy on tractors above 30 HP

Demand would grow for the less than 50 HP tractors for smaller holdings of 7-8 Acres. The 60-65 HP segment would grow due to contract farming

Combine Harvestor

Approximately 3,000-4,000 units sold annually

The market is in the infant stage; is growing and majority of the users go for custom hiring; the machines are brought from Punjab and Gujarat to other state

Size of the combines should be according to farm plots and in India very simple machines are required with right pricing

Thresher Approximately 20,000 units annually with annual growth of 10%

Traditional threshing of wheat and several other crops is totally replaced by power threshing; current trend is for high capacity bulk-fed power threshers

Great scope of education and training to farmers to explain to them more about the product

Rotovator Approximately 50,000 units annually

Sales depends on monsoons; buying season is October-March end

Production is increasing but not matching demand

Self Propelled Vertical Conveyor Reaper

Approximately 1,200 units sold annually

Demand is high and cannot keep pace with the supply; used by small farmers where combine harvesters are not used

High in demand; farmers are interested to custom hire

Zero Till Seed Drill

Approximately 15,000 units sold annually growing at 5%

The penetration level of the zero till seed drill is 7 for every 1,000 hectares

This would become very popular as it is a resource conserving equipment

Multi Crop Planter

Approximately 300-400 units annually

Market has not picked up yet; used mainly for planting maize and cotton

Awareness of the machine is absent amongst farmers as far as specification, plant spacing, seed size are concerned; so interaction with farmers could greatly help them understand the product


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Source: Italian Trade Commission, YES BANK Analysis

Tractor Industry

The penetration of tractors in India has grown steadily post the green revolution of the 1970s and the tractor population is estimated to have risen to 3.99 million units. The tractor industry is expected to reach INR 320-330 billion by 2014-15, at a compounded annual growth rate of 8-10%. Mahindra and Mahindra, TAFE and Escorts are the major tractor manufacturers in India with a market share of 73% of tractor sales. Tractors are classified as small, medium and large, based on the power delivered by the engine, i.e., horse-power (HP). The average size of tractors in India is 35 HP.

Farm Machinery Market Size Nature of Market TrendsPower Tiller Approximately

60,000-70,000 units annually growing at 10%

Multi use power tillers with 3-4 attachments preferred in Indi

The penetration level of the power tiller is 2 for every 1,000 Hectares

Laser Land Leveller

Approximately 2,000 units annually

Used for agricultural and construction sector

Due to the emphasis on conservation agriculture, the concept would be popular in future

Rice Transplanter

Approximately 600-800 units annually

Currently Indian companies are importing from China

Concept was not heard of 4-5 years back but now it is gaining popularity

Power Spray/Manual Spray

Approximately USD 100 million annually and annual growth is around 10%

High volume low profit marketHighly price sensitive market and there are more than 1,000 suppliers

The penetration level for the manually operated spray is 29 for every 1,000hectares and for the power operated spray is 4 for every 1,000 Hectares

Power Weeder Approximately 25,000 units annually

Purchasing Season:August – September

It would require 18 inches distance between 2 rows for a power weeder, but in India distance is 8-9 inches as seed drill is used to sow seeds; so machines are to be made accordingly


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Exhibit 14: Tractor Sales and Market Segmentation of Major Companies in India (in 2012-13)

Source: CRISIL, YES BANK Analysis

Farm Machinery Rental Model

India is mired by farm labour shortage recently, and this coupled with disinterest among the new generation to continue in agriculture and migrating to urban areas, has resulted in decline in farming activity. Custom Hiring or rental model for high cost farm machinery can be adopted in cluster based approach across crops. Although, the rental model exists in an unorganized manner, institutional initiatives like Escorts Group and Coromandel International needs to be replicated to provide incremental benefit to farmers.

Escorts Group: Escorts India has set up a nation-wide dealers network to provide expensive farm machinery at affordable rates to small and marginal farmers on rental basis. The company has appointed dealers across the country, who in turn would train students or skilled labourers to work in the field of farmers by giving machinery on rent. The machinery like Rotopuddler, wet leveler, automatic tray seeding machine, weeder, and a unique harvester, are costly at about Rs 40 lakh and are out of reach of poor farmers.

Coromandel International: Coromandel International is addressing the problem or acute labour shortage by farm mechanization activities for a fee and also provides the necessary farm hands. The company runs specialized retail stores to meet farmers’ needs and offers farmers soil sampling and testing services. The company has 500 centers in Andhra Pradesh and 100 centers in Karnataka servicing close to 2 million farmers. This has helped the company develop deeper relationship with farmers that goes beyond point of sale, ensuring brand loyalty and market share. The company is also trying to bring mechanization into the country for better productivity.


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Demand Drivers and Challenges

Farm Mechanization is essential driver for sustaining agricultural growth and there is a positive correlation between farm power availability and agricultural productivity. The following factors contribute to growth of the industry: Good Monsoons Government Declared Minimum Support Prices (MSP) Commodity Prices Crop Production expenses (including fuel, fertilizer, pesticides and other costs) Credit Policy of Banks

Farm mechanization also faces some challenges like ‘minimum scale of operation’. Small and marginal farmers comprising about 84% of cultivators, their adverse economy of scale and poor financial strength excludes them from fold of farm mechanization. Poor credit worthiness of small farmers for purchase of farm machinery through bank linkages sometimes becomes an impediment.

Government Policy

The Ministry of Agriculture is also implementing various major schemes for promotion of farm mechanization as under: Macro Management of Agriculture (MMA) Rashtriya Krishi Vikas Yojana (RKVY) National Food Security Mission (NFSM) National Horticulture Mission (NHM) Promotion and Strengthening of agricultural mechanization through training, testing and

demonstrations.

Apart from these, Government is considering a Sub-Mission on agricultural Mechanization (SMAM) for promoting farm mechanization during 12th Five Year plan. To promote farm mechanization amongst small and marginal farmer and to facilitate custom hiring facility, the Government is also considering providing assistance on procurement of agricultural machinery to establish custom hiring centres, to individual Entrepreneurs, Self Help Group (SHG)/ User Groups (UG) of farmers, Cooperative Societies etc.


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SMAM puts “Small and Marginal Farmers” at the core of the interventions with a special emphasis on reaching the unreached. Besides, the Mission also proposes to cater to “adverse economies of scale” by promoting “Custom Hiring Services” through “rural entrepreneurship“model. The Mission will aim at catalyzing an accelerated but inclusive growth of agricultural mechanization in India by way of: Increasing the reach of farm mechanization to small and marginal farmers and to the regions where

availability of farm power is lower; Offsetting adverse ‘economies of scale’ and ‘higher cost of ownership’ of high value farm equipments

by promoting ‘Custom Hiring Centres’ for agricultural machinery; Passing on the benefit of hi-tech, high value and hi-productive agricultural machinery to farmers

through creating hubs for such farm equipments; Promoting farm mechanization by creating awareness among stakeholders through demonstration

and capacity building activities; And ensuring quality control of newly developed agricultural machinery through performance

evaluation and certification at designated testing centers located all over the country.


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3. Storage, Warehousing and LogisticsPost Harvest infrastructure is a vital link of the agri–supply chain to minimize the moisture losses and prevent any bio-chemical change by keeping the product cool. Cold chain is a critical post harvest management practices used to prolong shelf life and preserve quality of fruits and vegetables. While cold storages are established in few pack houses, market yards and some airports, the available capacity is substantially low particularly at the farm level. Specialized cold storage with high humidity and facilities for ethylene removal as part of cold chain for export of fresh fruits need to be set up and made available for use on commercial basis.

India which has witnessed rapid growth in the recent past stands out for its lack of infrastructure for food grain storage and cold chain infrastructure. The country needs to recalibrate its strategy to mitigate the challenges like of high grain wastage, due to lack of scientific storage facilities and high inflation due to lack of cold chain infrastructure as it leads to wastages in fruit and vegetables. Scientific storage facilities like warehouses, silos and silo bags are the need of the hour as there is a deficit of 8 Million MT at present. In addition, the implementation of the Food Security Act has also renewed the need of modern warehousing infrastructure. Cold chain infrastructure like cold storages and refrigerated transport are needed to prevent the losses in the supply chain.

Warehousing

Warehousing accounts for the largest share of around 6-7% in the logistic segment in India. Warehousing plays a very crucial role in strengthening agricultural supply chain, ensuring food security and price stabilization. It solves the problem of glut & scarcity by maintaining uninterrupted supply of agricultural commodities in off season. It is backbone for developing trade & commerce and agro processing industry as these can’t thrive without having a strong warehousing system. Efficient and strategic storage system reduces the wastage on one hand, while on other helps in building JIT supply chain and plugs in demand supply gap.

Current scenario of WarehousingThe grain storage capacity in India has not been keeping pace with the marketable surplus and during the peak marketing season around 30 to 40 % of the grain is stored in an unprofessional manner. As the MSP for various commodities have been better than the market prices in most of the cases, the Government share in purchase of food grain like wheat, rice, mustard seed, barley, bajra, maize has substantially increased over the years.


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According to a latest estimates, the warehousing capacity available in India, in Public, co-operative and private sector is about 112.36 million MT. Another 35 million MT of warehousing capacity is required during the 12th five year plan period for the storage of all major crops highlighting the huge demand supply mismatch.

The warehouses in our country have been built following the traditional norms and without proper specification. They lack in optimal size, adequate design, ventilation facility, inventory management and storage system. Even some of the modern warehouses don’t meet international standards.

Industry StructureWarehousing industry is highly fragmented in India with organized segment having an estimated share of almost 90% of total ware house capacity. In terms of value, market size of warehouse in FY 09 was INR 19,200 crores and it grew to INR 22,810 crores in FY 11 and is expected to grow to INR 35,100 crores in FY 16 with a CAGR of 9%. In this, only 12% accounts for agro and the remaining is industrial warehousing. Warehousing space was 1.4 billion square feet in FY 09 and it grew to 1.52 billion square feet in FY 11 and expected to grow to 1.84 billion square feet till FY 16 with a CAGR of 4%. In this, only 29% accounts for agro and 71% for industrial warehousing. The agricultural warehousing requirement is projected to grow to 0.61 billion sq ft by 2015-16 from an estimated 0.52 billion sq ft in 2012-13. Currently, 70% of the warehousing space is owned by government agencies.

Exhibit 15: Current status of warehousing capacity in India

Source: Warehousing Development and Regulatory Authority (WDRA), YES BANK Analysis

Need for Modern Warehousing in IndiaThere is a record level of procurement of food grains in last 4-5 years by government/FCI and due to this several states have been facing problems of covered storage capacity. In Rabi Marketing System (RMS) 2012-13, FCI procured around 380 lakh tonnes and procurement in Kharif Marketing Season of 2011-2012 was around 344 lakh tonnes.

As there was a sharp increase in the procurement of grains from 2008-09 onwards, this resulted in the severe shortage in the storage capacity.

Name of the Organization/Sector Storage Capacity (in million MTs)Food Corporation of India (FCI) 33.60Central Warehousing Committee (CWC) 10.13State Warehousing Committee (SWC) 23.00State Civil Supplies 11.30Cooperative Sector 15.37Private Sector 18.97Total 112.37


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Exhibit 16: Gap in Storage Capacity with FCI (in lakh MT)

Source: Report of the CAG on Storage Management and Movement of Food Grains in Food Corporation of India (FCI)

Warehouse: Operational Model The players in the warehouse industry operate either on the ownership model or the lease model. In ownership model, players purchase land and develop their own warehouses and operate and incur all the operating expenditure. While in lease model, player either leases land on long term basis and develop warehouse or lease warehousing premises from the developer and pays the lease rent to developer & incurs all operating expenditure related to warehouse. This business has high operating leverage with majority of fixed costs in nature. Therefore, profitability is vulnerable to changes in utilization level and it varies significantly across players and locations.

Analyzing competitiveness of industry one can easily find out that there is intense competition in warehousing industry due to low entry barriers (lower capital outlay and lesser regulatory environment) and high fragmentation. Also unorganized segments pose a great threat and competition to modern warehouse because of lesser overheads and competitive warehousing rate in the country.

Private Entrepreneur Godown (PEG), scheme was formulated by government for creation of additional storage capacity for food grains through private sector participation in 2008 under which a proposal for creation of 15.29 million MTs storage capacity in 19 states through private sector participation with CWCs/SWCs. Subsidies are provided for construction of rural godowns under this scheme. Under the scheme for financing warehousing infrastructure under Rural Infrastructure Development Fund (RIDF), government announced allocation of INR 2,000 crores for setting of warehouse infrastructure in the country.


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Regulator for WarehousingTo increase the participation of private sector and development & regulation of warehousing industry, Government of India introduced ‘The Warehousing (Development and Regulation) Act’ in September 2007. The main focus of this Act was to establish a regulated environment for issuance of Negotiable Warehouse Receipt (NWR) under Warehousing Development and Regulatory Authority (WDRA) which was constituted in October 2010 under the Act. The functions of WDRA include registration and accreditation of warehouses intending to issue NWR. Since inception WDRA has granted accreditation to 51 applications out of 300 applications submitted as on March 31, 2011.

Constraints in Warehouse IndustryIt is estimated that around 20-30% of the total food grain harvest is wasted due to inadequate storage capacity, regional imbalance in warehouses, lack of adequate scientific storage and inefficient logistic management in the country even with significant development of storage capacity sanctioned under NABARD and NCDC schemes. It is said that each grain bag is handled at least six times before it is finally opened for processing which leads to higher storage & transportation charges and also increases to wastage of food grain during transit & handling. Food grain (mainly wheat & rice) is the main commodity stored, while the other major crops storable in the godowns include oilseed, spices and cotton. Though the government has started focusing on building storage capacity through various schemes, the focus is still largely on the storage of wheat and rice which are considered as staple food in the country.

With all these issues, much needs to be done to built additional storage capacity, renovate existing warehouses and implement a robust system of NWR to make available more funds to farm producers and simultaneously provide security to the lenders.

Silo Storage

Silos are usually constructed of steel or reinforced concrete and comprise high cells of various cross-sections placed side-by-side. They have inlets and hoppers for loading and unloading respectively. Mechanical management is also provided for loading and unloading in case of large capacity silos.

In India, bulk storage metallic silos were erected in the year 1958, in Hapur, Uttar Pradesh. Food Corporation of India (FCI) is having its own silos with a capacity of 4.62 lakh tonnes which were set up in the years 1960-1982. Out of this capacity, 1.10 lakh tonnes are currently being utilized. Under the national policy of bulk storage and handling, a capacity of 5.50 lakh tonnes has been created through silo structure out of which 2 lakh tonnes is at Moga in Punjab and 2 lakh tonnes at Kaithal in Haryana.

Some of the private players have also initiated installation of Steel Silos such as Adani Agri Logistics and LT Foods. The silos, set up by private partner Adani Agri Logistics Ltd. are located at Chennai (Tamil Nadu), Coimbatore (Tamil Nadu), Bangalore (Karnataka), Navi Mumbai (Maharashtra) and Hooghly (West Bengal).


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The transportation of foodgrains from Moga and Kaithal takes place in bulk in customized wagons which are then procured by the investor i.e. Adani Agri Logistics Ltd.

Food Corporation of India (FCI) has floated a tender for building giant and ultra-modern steel silos in several parts of the country for modernization of its food grain logistics. The silos will be operated under Design, Build, Finance, Own and Operate (DBFOO) model for a total of 17.50 lakh tonne capacity in 36 locations across in nine states under the public-private partnership (PPP) mode.

Successful Silo Projects in PPP Mode – India

Punjab Silos – LT Foods: In Punjab, which produces more food than any other state in India (22% of the national total) had a shortage in storage capacity of seven million tons of foodgrains storage during the period. In response, the state government launched a pilot public-private partnership to allow a private firm to build, own and operate a 50,000 metric ton storage facility, using modern technology and inventory management methods. LT Foods, a leading exporter of basmati rice with a strong distribution network, won the 30 years concession to build and operate modern, temperature controlled steel grain silos with a capacity of 50,000 MT. the facility enhances India’s ability to meet its food security objectives by increasing storage capacity, reducing losses and increasing the efficiency of purchasing and distributing grain. If successful, the pilot will be expanded to add capacity of 2.5 million MT in Punjab alone.

FCI – Adani Agri Logistics: In a pilot project during 2012, FCI had entered into a BOO agreement for 20 years with Adani Agrilogistics, an arm of the Adani Group, for setting up two silos with a capacity of more than 500,000 tonne at Moga in Punjab and Kaithal in Haryana in 2005. The company has since invested INR 650 crores for building the two-base silos and five-field depots (at Chennai, Coimbatore, Bangalore, Navi Mumbai and Hooghly).

Madhya Pradesh: Madhya Pradesh Warehousing & Logistics Corporation (MPWLC) had in Dec 2013, awarded contracts for eight locations for set up of Steel Silos, each of 50,000 MT each for development, operation and maintenance of Silos and storage of wheat through Public-Private Partnership (PPP) on Design, Build, Finance, Operate and Transfer (DBFOT) basis.

Silo BagsTill now, grain storage capacity enhancement has been in shape of flat storage or godown storage, in which bulk, handling is not feasible. Steel silos being costly were not taken up aggressively. Bulk handling will be widespread in the near future. Silo Bags offer the most efficient, economical and bulk handling system for uncertain storage requirements which will be known only during the harvesting season. Silo bag storage technology which was introduced in the country for the first time in 2011 is very much relevant to Indian conditions as it promotes bulk handling at economical cost; Moreover, it is a mobile, flexible & quick storage solution. Currently over 2 lakh MT of storage has been set up in this system in Madhya Pradesh, Rajasthan and Maharashtra.


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Silo Bag is a hermetic storage technique, where the oxygen is removed from the bag, as it suppresses the generative capacity of insects, pest and fungi. It is made of polyethylene, sized in 60/75 meters long and 2.75 meters in diameter designed for storing grains in the open complex. Commodities such as Wheat, Maize, Mustard, Barley, Soya and others can easily be stored and their quality and quantity will remain intact from two to three years.

Exhibit 17: Comparison of Warehouses, Stand alone Silo and Silo Bags

Source: Silo Bag India, YES BANK Analysis

Warehouse Stand Alone Silo Silo Bag System

Capex

Large one time capex, does not suit varying requirements

Large one time capex, does not suit varying requirements

Can take care of varying requirements

Lead time for mobilization of system

Minimum one year At least 2 years One Month

Bulk Procurement & Handling

Not Possible Partially Possible Always Possible

Labour Involvement

Manual Mechanized Mechanized

Mobility of storage structure

Fixed Fixed Mobile & flexible

Chemical & organic

Fumigation Required Fumigation Required No fumigation required

Chances of Infestation and Damage

There is threat of damage due to cross infestation & climatic changes

Chances of infestation are low and mortality rates are quite high.

Silo Bag is hermetically sealed having zero chances of cross infestation. Self generating CO2 has 100% mortality rates

Grain Health/Nutrition Loss

Average Insignificant Zero loss

Grade Segregation during storage

Possible Not Possible Possible


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Agri – Logistics

Road & Rail TransportationAlthough India boasts of being the second in the world in terms of farm output, supply to end consumers is highly fragmented and inefficiencies are present due to presence of chain of intermediaries, inadequate infrastructure, logistics, storage and transportation facilities.

Railways are preferred for foodgrain transportation while road transport is also used extensively due to lack of adequate rail infrastructure as well as the need for movement of small lots over smaller distances. Even the Food Corporation of India (FCI) is dependent on roads for last-mile and secondary transportation.

Exhibit 18: Percent share in Foodgrains Movement (2006-07 to 2012-13)

Source: CRISIL Research, YES BANK Analysis

In the case of FCI, 80-85% of the total produce from the local markets is carried by rail to their godowns or warehouses.


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Public Transportation of Foodgrains The position of inter-state movement of foodgrains by rail & road during the period 2006-07 to 2011-12 was as under:

Exhibit 19: Movement of Foodgrains by Rail & Road during 2006-07 to 2011-12

Source: Storage Management & Movement of Foodgrains in FCI – CAG

Foodgrains are brought to the nearest of the mandis from surrounding farms generally by roads. FCI has around 1,820 storage hubs across India, which helps limit lead distances (from FCI’s facilities to the public distribution centres) to 100-150 km.

Various challenges encountered are: Transportation of foodgrains entails high first- and last-mile costs due to the presence of several small

distributors and farmers Cost of loading/unloading is higher, as it is done manually. Storage facilities at railways are inadequate, and consignments often get damaged due to humidity

or rain. There was a shortfall in the supply of rakes by the railways thus affecting procurement of foodgrains

for FCI. The shortages in rakes ranged between 6 to 17% during the six year period from 2006-07 to 2011-12. According to computer based Linear Programming developed by FCI exclusively for Ex-North the compliance levels (shortest route between dispatch & receipt centers involving least cost) are as low 49%. Inefficiencies in movement of food grains majorly diversion of rakes, payments for demurrage etc.

Transit & Storage losses of foodgrains amounting to transit loss of almost INR 100 crores and storage loss of INR 41 crores for FCI between 2006-07 to 2011-12.

Air Cargo Transportation: The demand for air cargo transportation has increased significantly over the last few years, because product life cycles have shortened and demand for rapid delivery has increased. Efficient supply chain management particularly in case of perishables therefore offers significant benefits including lower inventory and intermediary costs; and simplicity in order placement, delivery and management of suppliers and customers. These benefits directly contribute to making businesses more competitive.

(in MT) 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12Overall Movement

Rail 203.3 204.0 204.6 249.2 279.6 303.2Road 18.5 17.8 20.6 26.7 25.6 24.5Total 221.8 221.8 225.2 275.9 305.2 327.7

Movement Ex-North

Inter 175 178 167.4 188.5 221.2 201Intra 1.6 1.9 2.2 0.8 3.3 7.5Total 176.6 179.9 169.6 189.3 224.5 208.5


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Perishables Air Cargo Facilities: The composition of trade in fresh agro-food products is shifting towards horticultural products, fruits and vegetables, fish, and spices which have led to an increase in demand for airfreight to meet the delivery times. The quality of logistics is an essential element of competitive advantage. Cost is equally important and provides an advantage for countries that already have well-developed air freight routes, whether through scheduled freighters or space on passenger flights.

Cool chain processes effectively safeguard product quality and maximize shelf life, thereby enhancing profitability. But currently there is lack of sufficient cold storage capacity for perishables cargo in most of the major cargo handling airports in India. Currently airports in all the four metropolitan cities i.e. Delhi, Mumbai, Chennai & Kolkata have centre for perishables cargo most of which are managed by Airports Authority of India. In addition perishables cargo facilities are available in Amritsar, Kochi & Ahmedabad airports.

AAI has also set up perishables centre at Guwahati, Lucknow, Coimbatore airports. GMR Hyderabad International Airport too has set up a Centre for perishables cargo with a handing capacity of 12,000 tonnes. Most of the facilities are funded with a subsidy component from APEDA (The Agricultural and Processed Food Products Export Development Authority) and investment by AAI and other private operators for airports to cover for land cost and infrastructural facilities like roads, freighter bay and land.

Benchmarked against these best practices in the world, it is observed in most Indian airports there is need to focus more on these areas so that handling of e.g. agricultural and other perishables. Most of the facilities present are highly inadequate in terms of handling of perishable produce. Even now many airports do not have any perishables cargo centres. India should aim to benefit from the benefits of cold chain logistics for air cargo operations like other countries.

Perishables Handling Area Dubai Cargo Mega TerminalPossibly the most advanced cold storage is the Dubai Flower Center, a multi-storey facility located next to the Dubai Cargo Village. It is designed for the storage and processing of flowers imported primarily from Africa for both the local market and for distribution to the region. The initial phase on this center is designed for an annual throughout of up to 1,80,000 tonnes of flowers. The perishable handling area in Dubai Cargo Mega Terminal is about 4,623 square metres floor space, with 3,927 square metres of 218 individual cells of temperature zones.

Cold Storage

The Cold Chain Industry in India comprises majorly of two segments i.e. temperature controlled warehouses and temperature controlled vehicles. The total industry size is estimated at INR 150-160 billion in 2012-13 (CRISIL Research). 88-90% of market share is of the temperature controlled warehouse and balance 10-12% of temperature controlled transportation. The number of reefer vans (2012) in India was estimated to be 7,000 units.


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Current Status of the Cold Chain Sector in IndiaA strong infrastructure of cold storage is must for any country to develop a processed food market. Also a number of Mega Food parks are coming in near future which also requires a sound foundation of cold storage facilities across the country. Unfortunately, India’s cold storage facilities are focused mainly on one commodity: potato. The sectors which demand cold storage facilities ranges from fruits and vegetables, dairy, poultry, meat and fishing, flowers and processed foods. Indian agriculture is witnessing a major shift from traditional farming to horticulture, meat, poultry and

dairy products. Also demand for fresh and processed fruits and vegetables is increasing on backdrop of rising urban population and transforming consumption habits.

About 68% of the cold storage capacity is concentrated in the states of West Bengal, Uttar Pradesh and Bihar, wherein storage of potatoes constitutes 85-90% of the capacity.

Potatoes constituted the largest share, accounting for 69% in volume terms. However, in terms of value, the share of potatoes was a mere 17%, which is mainly due to substantially low storage rentals, low value of the produce, and rentals being charged for the season (spanning 8-9 months).

On an overall basis, average capacity utilization rates were 65-70%. This was primarily because utilization levels of potato storage capacities have been low at 60-65%, due to the seasonal nature of the produce. Utilization levels for multipurpose cold storages were relatively higher at 75-80%.

There is still a wide scope of improvement as majority of cold storage are under utilized in the country

Value Chain of Cold Chain Logistics

Exhibit 20: Percentage distribution of Cold Chain sub sectors in India

Source: Ministry of Food Processing Industries (MoFPI), National Horticultural Mission (NHM) and Agricultural & Processed Food Products Export Development Authority (APEDA)


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Market Size & GrowthIn 2009-10, market size of cold chain and reefer industry was INR 97-100 billion and INR 8 billion respectively which grew to around INR 141 billion and INR 13 billion respectively in 2012-13. According to CRISIL Research, over the next 3 years (2012-13 to 2015-16), revenues of the cold chain industry is expected to grow by 15-17% CAGR

As per the latest estimates available with the Directorate of Marketing and Inspection (DMI) upto September 2012, India has 6,307 cold storages with a capacity of 30.1 million tonnes.

Exhibit 22: Segment-wise Break-up of Cold Chain Industry in India

Source: Industry Sources, YES BANK Analysis

Exhibit 21: Market Size & Growth – Cold Chain Industry



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Exhibit 23: Growth on Cold Storages in India

Source: National Centre for Cold-chain Development (NCCD) and Directorate of Marketing and Inspection

Over the years, there has been a steady growth both in terms of number of cold storage units as well as capacity created. During 2005-09, the number and capacity of cold storages in India increased at a CAGR of 3.01% and 5.66% respectively. Out of the 301 lakh MT cold storage capacity, nearly 140 lakh MT has been created between 2000-2011 on account of interventions by National Horticulture Board (NHB), National Horticulture Mission (NHM), Horticulture Mission on North East and Himalayan States (HMNEH), Agriculture and Processed Foods Export Development Authority (APEDA), Ministry of Food Processing Industries (MoFPI) Department of Animal Husbandry (DAHD).

As per report of the Task Force on Development of Cold Chain in India, the all India capacity utilization is around 48% while Andhra Pradesh has the highest capacity utilization at 92% followed by Karnataka 60%, Maharashtra (55%), Rajasthan (52%), Gujarat (51%), Uttar Pradesh (46%) and Punjab (43%). Majority of states have capacity utilization lower than national average which is due to significant number of potato stocking cold storages in these states which remain closed during the lean seasons. It is higher in Andhra Pradesh because of storage of red chilies, usually stored round the year.

Year No. of Cold Storages Installed Capacity (in lakh MT)

Before 2004 2,607 54.02

2004 4,748 195.52

2007 5,316 233.34

2009 5,381 244.5

2010 5,837 269.03

2012 6,156 286.82

2012 (Sept.) 6,307 301.10

Exhibit 24: Region-wise Spread of Cold Storages in India (2012)



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Storage units in Maharashtra, parts of Gujarat and the country’s southern states are designed for storing commodities such as dairy products, fruits, processed fish and meat products, and seasonal vegetables. Taking into consideration the Geographic spread majority of the cold storages are located in and around potato growing areas.

Reefer Vans (Refrigerated Transport)In India, unlike Western Europe or USA, cold chain distribution or refrigerated transport is still at a nascent stage. When compared with the world standards for cargo movement through cold chain, India is still far behind. The percentage of movement of fruits and vegetables through cold chain in USA is around 80 to 85%, Thailand is 30 to 40% while it is negligible in India.

Currently, most of the refrigerated transport segment is fragmented with large number of small, non integrated private players focusing on select commodities /regions. Their key assets comprise of modified trucks with additional insulated fixed containers and air conditioning units. Currently there are about 6,500-7,000 Reefer vans in India. Market studies have revealed that about 40% of the vehicles are for long haul movement while 60% vehicles are for short haul movement. Also, 70% of revenue in the market is from primary movement and the balance 30% is from secondary movement.

Market size of the Refrigerated Transportation segment is expected to increase to INR 19-21 billion in 2015-16 from INR 12-14 billion in 2012-13, a CAGR of 16-18%. Confectionery, ice creams, meat and fish products, processed foods and pharmaceuticals are expected to be key growth drivers.

Exhibit 25: Share of Commodities in Refrigerated Transportation Space



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Major Features of MarketThe industry is witnessing a growth phase in India One of the important features of the industry is that it is fragmented with large number of players

focusing on selective commodities Meat forms the major commodity segment Large addition in reefer van capacity by private logistics players in India Capacity addition has happened in primary as well secondary transportation Major customers include meat exporters, large FMCG companies (processed food), imported fruit

dealers

Key Challenges in the Cold Chain Sector Low capacity utilization (67-69%) due to the presence of higher numbers of single commodity cold

storages (64% capacity utilization) and lesser multipurpose cold storage facilities (80% capacity utilization).

Limited effectiveness of specific incentives like deduction schemes (due to low profitability of cold chain units) and investment subsidies

Cost of land and other investments in urban areas to remain prohibitive in nature. Higher fuel costs affecting the profitability of TCT player as more than 50% of the operating cost is due

to fuel expenditure

Snowman Logistics Ltd.

Snowman Logistics Ltd (SLL) is into renting of cold storage space, refrigerated transportation business, and trading of marine and other perishables. The company, which is headquartered in Bengaluru, is a joint venture between Gateway Distriparks Ltd (GDL) of Singapore, Mitsubishi Logistics Corporation, Mitsubushi Corporation, International Finance Corporation (IFC) and Nichirei Logistics Group Inc of Japan. SLL was incorporated in 1993 as a joint venture company between Amalgam Foods Ltd, Mitsubishi Logistics Corp and Nichirei Corp. Gateway Distriparks Limited is our promoter and the largest shareholder. Snowman’s investor profile also includes Mitsubishi Corporation, Mitsubishi Logistics Corporation, International Finance Corporation and Norwest Venture Partners VII-A Mauritius. It has been a pioneer in setting up frozen and chilled food distribution system on a pan-India basis.

Business ModelSnowman is handling over 3,000 products. The company operates around 21 cold storages across the country Fleet size of around 238 refrigerated trucks (owned and leased) Capable of warehousing 46,751 pallets and 3,000 ambient pallets Vegetarian and non-vegetarian products separation The company specializes in providing cold chain logistic solutions for seafood, dairy products, ice

creams, fruits and vegetables, retail and food service industry.Its key clientele include Mother Dairy, Amul, Mars Chocolate, Metro, Domino Pizza, Pizza Hut and

KFC.


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4. Agricultural Marketing InfrastructureAgricultural marketing involves an array of activities which brings the farm produce to the final consumer. Activities like grading, sorting, packaging, transportation, storage, food processing, distribution and sales all structure into the agri marketing activities. Marketing infrastructure, one of the major components of agricultural marketing takes account of all those facilities needed for the smooth performance of marketing in the system.

The existence of adequate marketing infrastructure is important not only for transferring the right product at the right time to the right place but also for conveying appropriate price signals to the producers. Presence of adequate infrastructure affects the choice of technology to be adopted, reduces the cost of transportation, impacts production and raises the level of access to the market. In a developing country like India, marketing infrastructures play a pivotal role in rural and economic development. Many regions of the country still suffer from infrastructural impediments that restrict the region’s agricultural and horticultural development.

Agricultural Marketing in India

Agricultural marketing system in India has evolved over the years. The traditional marketing channel involving number of intermediaries at each stage is now being overcome by cooperative marketing or producer organizations. The existing marketing system consists of channels viz. Through wholesalers and retailers Through public agencies Through processors Direct marketing e.g. Ryathu bazaar in Andhra Pradesh Cooperative marketing e.g. Dairy cooperatives Farmer organizations in marketing e.g. Mahagrapes

To facilitate marketing, market infrastructure plays a very important role. In India the wholesale markets and rural primary markets are the two most prominent types of markets. The concept of terminal market is emerging in India however it is still in the stage of conceptualization and needs more efforts to actualize it on ground.


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Status of the Rural Primary Markets in India (RPMs)

Rural Primary Markets constitute the periodic markets known as haats, shandies, painths and fairs which are estimated to be more 22,500 in the country. Majority of Rural Primary Markets are owned and managed by private individuals, panchayats and municipalities. The markets are located in rural and interior areas and serve as a focal point for the farmers for marketing of their farm produce. It is estimated that close to 90% of the total marketable surplus in the remote areas is sold through these markets. However, the facilitating infrastructure in such markets is negligible. Improved rural market outlets in the form of improved supporting facilities, better storage and handling will facilitate price information; minimize costs and thus improve the marketing efficiency of these primary markets.

Status of Wholesale Markets in India

Government intervention in agricultural markets started off with objective of improving the efficiency of markets and ensuring remunerative prices for producers as well as affordable prices for consumers. Agricultural marketing was perceived to be badly organized, leading to low prices for the producer, large physical losses and high marketing costs. A large number of regulations were therefore put in place, including controls on private storage, transport, processing, exports, imports, credit access, and market infrastructure development, as well as a small-scale reservation policy for selected industrial sectors.

One of the main interventions by the government was to establish a large number of public wholesale market yards for agricultural products and to regulate these market yards through an Agricultural Produce Marketing Committee (APMC) act which centred the formation of Agricultural Produce Marketing Committees (APMCs). The purpose of APMCs was to protect farmers from the exploitation of intermediaries and traders and also to ensure better prices and timely payment for their produce. However, over the years these APMCs have become restrictive and monopolistic, providing limited help in direct and free marketing, organized retailing and smooth raw material supplies to agro-industries. Exporters, processors and retail chain operators cannot procure directly from the farmers as the produce is required to be channelized through regulated markets and licensed traders. The introduction of the Model Act in 2003 was directed towards allowing private market yards, direct buying and selling, and also to promote and regulate contract farming in high value agriculture. Several states have already amended the APMC Act as per provision of the Model Act while others have partially implemented it.


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Exhibit 26: Current status of implementation of model act

Source: Ministry of Agriculture

The number of regulated agricultural markets stood at 7,190 in March 2012 as compared to just 286 in 1950. The average area served by these regulated markets comes close to 457 sq. km which is considerably higher than 80 sq. km that has been recommended by the National Farmers Commission. Accordingly there is a huge deficit of regulated markets in India which can efficiently handle the marketable surplus.

There also exists an uneven spread of these regulated markets within states and also within districts of each state. For example average area served by each regulated market varies from 118 Sq. Km per market in Punjab, 130 in West Bengal, 156 in Haryana, 304 in Andhra Pradesh, 347 in Assam, 349 in Maharashtra, 378 in Karnataka and 389 in Uttar Pradesh. States like Himachal Pradesh, Meghalaya and Sikkim, are among those where the average area served by a regulated market is more than one thousand sq.km.

Exhibit 27: Agricultural Produce Markets in India (As on March 2012)

Stage of Reform States/Union TerritoriesReforms done for Direct Marketing; Contract Farming and Markets in Private/Cooperative Sectors

Andhra Pradesh, Arunachal Pradesh, Assam, Goa, Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Maharashtra, Mizoram, Nagaland, Odisha, Rajasthan, Sikkim, Tripura and Uttarakhand .

Partial reforms NCT of Delhi, Chhattisgarh, Haryana, Madhya Pradesh, Punjab and Chandigarh

States/ UTs where there is no APMC Act and hence no reforms

Bihar, Kerala, Manipur, Andaman & Nicobar Islands, Dadra & Nagar Haveli, Daman & Diu, and Lakshadweep.

States/ UTs where APMC Act already provides for the reforms

Tamil Nadu

States/ UTs where administrative action is initiated for reforms

Meghalaya, Jammu and Kashmir, West Bengal, Pondicherry and Uttar Pradesh.

Name of the State/UT Total Markets (wholesale + Rural

primary)

Total Regulated Markets

(principal + submarket

yards)

Area covered by regulated

markets (sq. km)

Requirement of Markets

West Bengal 7,204 685 130 1,109Maharashtra 4,381 881 349 3,846Uttar Pradesh 4,048 613 389 2,982Bihar 1,794 Act Repealed 1,177Punjab 1,771 425 118 630


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Source: Directorate of Marketing & Inspection (DMI), YES BANK Analysis

Status of infrastructure in Regulated marketsThere exists considerable gap in the essential facilities available in the market yards for the producers. Auction platforms are needed for the settlement of price of the produce between buyers and sellers. Both covered

Madhya Pradesh 1,567 521 592 3,854Odisha 1,548 314 496 1,946Kerala 1,362 Act not enacted 486Karnataka 1,237 507 378 2,397Assam 1,140 226 347 980Chhattisgarh 1,134 184 734 1,689Tamil Nadu 977 292 445 1,626Andhra Pradesh 905 905 304 3,438Jharkhand 804 201 397 996Rajasthan 746 434 789 4,278Tripura 638 21 499 131Haryana 478 284 156 553Gujarat 334 400 490 2,450Nagaland 193 18 921 207Meghalaya 123 2 11,215 280Manipur 118 Act not enacted 279Mizoram 115 - - 264Arunachal Pradesh 85 131 639 1,047Himachal Pradesh 77 50 1,113 696Uttarakhand 66 58 963 698Delhi 30 18 82 19A&N Islands 28 0 103Goa 28 8 463 46Jammu & Kashmir 24 - - 2,778Sikkim 19 1 7,096 89Puducherry 9 9 55 6

Name of the State/UT Total Markets (wholesale + Rural

primary)

Total Regulated Markets

(principal + submarket

yards)

Area covered by regulated

markets (sq. km)

Requirement of Markets


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and open auction platforms exist in only 67% of the regulated markets. Drying yards are also an essential feature of regulated markets because some commodities when brought for sale contain higher moisture than desired level and hence require drying. Such drying space is available only in 25% of the markets. Platform in front of shops exist in 63% of the markets. Cold storage units are needed in the markets where perishable commodities are brought for sale. The cold storage units exist only in 9% of the markets and grading facilities exist in less than 33% of the markets. The basic facilities viz. internal roads, boundary walls, electricity, loading and unloading facilities and weighing equipment are available in more than 80% of the markets.

Exhibit 28: Status of facilities in regulated markets

Source: National Council of Applied Economic Research (NCAER)

Grading Facility in Market YardsGrading is classified as functional infrastructure that helps to segregate different qualities of a product. Grading may be done on the basis of size, shape or color. Technology has evolved and solutions are available to grade and sort products to a large number of categories. Grading and sorting has gained prominence with the development of the food processing industry in the country. However, the existing grading facilities available in the country are inadequate. Only 7% of the farm produce is graded before sale by the farmers. The number of grading labs in each state also varies drastically. While Rajasthan has more than 200 grading facilities, others like Jharkhand, Odisha, Uttarakhand and Chhattisgarh have less than 10 grading units in the entire state. Besides unavailability of infrastructure, another major reason for not grading the produce is unavailability of remunerative prices for superior quality of produce. The aggregation at farm level by the middle men is for ungraded produce and the entire lot is transported to the mandi. Thus the farmer producing better quality gets no incentive for his produce.


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Exhibit 29: Statewise number and density of grading facilities

Source: Directorate of Marketing & Inspection (DMI)

Terminal Markets in India

Modern terminal markets were conceptualized with the objective of providing multiple choices to farmers for sale of produce along with a comprehensive solution to meet key needs of the stakeholders in terms of marketing infrastructure. Since such concept entails a very high investment cost and efficient management skills, terminal markets call for private sector participation.

Features of a Terminal Market A terminal market

operates on a Hub-and-Spoke Format wherein


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the Terminal Market (the hub) is linked to a number of collection centres (the spokes). The spokes are conveniently located at key production centres to allow easy farmer access and the catchment area of each spoke is based on meeting the convenience of farmers, operational efficiency and effective capital utilization of the investment.

Electronic auctioning is an important aspect for transparent transactions in a terminal market Facility for direct sale to exporter, processor and retail chain network under a single roof. Storage infrastructure thus offering the choice to trade at a future date. A one-stop-solution that provides transportation support, cold chain support, facility for storage

(including warehouse, cold storage, ripening chamber), facility for cleaning, grading, sorting, packaging and palletization of produce, extension support and advisory to farmers.

The Terminal Market would be built, owned and operated in a Public-Private-Partnership Mode by a Corporate/ Private/Co-operative either by itself or through adoption of an outsourcing model.

Though several states in India have announced MTM projects through PPP model, no major progress has been achieved so far due to slow pace of marketing reforms. Implementation and successful operation of this path-breaking initiative would necessitate State Government support and a conductive regulatory and legal framework.

Unity Infra projects and Deepak Fertilizers and Petrochemicals (DFPCL) will set up India’s first ultra modern terminal market in Mumbai marking the entry of corporates into agricultural marketing, a sector currently dominated by the government.

Risk Management and e-Trading Infrastructure

Agricultural commodities experience wide fluctuations in their prices largely due to seasonality factor and dependence on monsoons. Due to these fluctuations farmers are susceptible to huge uncertainties in terms of production and price realization. Derivative products like forward, future and options are the risk management tools which can be used to avoid the impact of unexpected price changes in future price movements. Forward and future contracts enable price discovery. The price discovery function allows important economic decisions to be made like which commodity to produce, how much to sell and at what prices, how much to store and for how long etc. This enhances the share of farmer in consumer rupee. Commodity future markets in the country have been promoted by establishing various exchanges. The transaction undertaken through these exchanges so far has been experiencing a rising trend. Efforts are needed to establish more exchanges for enhancing trading in agricultural commodities as well as e-trading so as to promote direct marketing of produce.

However, strict regulations also need to be set in place so that episodes like that of NSEL are not repeated. Such incidents lead to losing trust and confidence in the system which is unfavorable for all stakeholders. The NSEL


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episode clearly states lack of regulation in the system. A commodity spot exchange is neither allowed to offer forward contracts nor settle contracts beyond 11 days. However, NSEL was doing both. After a few warnings by the concerned department, a notice was sent to the exchange and the settlement cycle of contracts was shortened resulting in a situation where absence of collateral to back the commodities exposed the flaws in the system. This is one instance of wrongful intentions of a specific organization and not a comment on the electronic markets’ functioning, which with due systems and processes can ensure such instances do not occur again.

Private Mandis

Private Mandi is a relatively new concept in India. Conventionally only the public sector set up mandis in the state, however with reforms coming in, even private players are now trying their hand at setting up state of the art infrastructure for the farmers. Private Mandis shall ensure transparent pricing, correct weighment, recording of all transactions and good facilities to buyers as well as sellers. However, they are likely to face stiff challenges like Diverting the flow of goods to the private mandis Establishing new relationship with farmers Attracting traders and buyers Providing competitive prices Competing with the existing system of mandi Farmers’ views that price realization in a private mandi would not be as high as the traditional mandi Resistance of adhatiyas to move out from existing system Existing strong relationship between farmers and adhatiyas

Marketing of Horticultural Produce

Rising household income, change in dietary patterns and increasing outreach of the supply chain has made production as well as consumption of fruits and vegetables increasingly important. However, the sector suffers greatly from postharvest losses. Some estimates suggest that this share reaches to about 30–40% of the total production. This reduces the overall viability of horticultural production and leads to diminished returns to producers.

India has been stressing on increasing the productivity levels of fruits and vegetables, however greater stress is needed in interventions for marketing the produce effectively. India’s varied climatic and soil conditions make it a favorable location for growing a wide variety of horticultural crops including those which have a huge demand overseas. Thus, there also lies immense export opportunity which can be tapped by building on the infrastructure for proper handling, storage and processing of the produce.


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The decision to delist “fruits and vegetables” from their Agricultural Produce Markets Committee (APMC) Act by January 15, 2014 from all Congress ruled states shall give free choice to farmers to sell their produce. The move to remove middlemen is seen as an effective way to check hoarding and price rise. Presently, farmers have to sell at “mandis” that is normally a closed group of traders who indulge in cartelization. It would allow people, be it individuals or traders, to buy directly from the growers and would end the exploitation of farmers. Farmers are forced to sell their produce at lower price determined by a cartel of traders in the mandis. The Congress-ruled states will also initiate steps to open fair price shops, government-owned or run by women’s self help groups, to sell fruits, vegetables and eggs.

Challenges in Marketing of Horticultural Crops Horticultural crops are highly vulnerable to market fluctuations Producers are unaware of the demand patterns Complications due to perishable nature of the crop which often leads to distress sale by farmers Absence of storage facilities like cold storage/CA chamber Lack of supporting infrastructure like connecting roads, power etc. Absence of processing infrastructure Available cold storages meant for single commodity only (majority for potatoes) Lack of quality consciousness amongst farmers due to lack of price differential for better quality

To capitalize on India’s strengths, the Government should ensure adequate infrastructure for storage as well as processing. The frequent occurrence of either glut or scarcity in the market is due to lack of planning by farmers and an unorganized environment where the grower has no control. Increased post-harvest management can help in regulating and stabilizing demand and supply. This alone can ensure optimum returns to the farmer. Most crops are harvested within a short span of two months. A good post-harvest infrastructure can ensure that the produce is available to consumers across the year in quality that is acceptable to them. Also, the government should not overlook the fact that providing subsidies for setting up cold storages or food parks alone is not sufficient unless supporting infrastructure like power availability, connectivity to markets, water supply etc. is in place.

Challenges and Gaps in Agri Marketing Infrastructure

The share of specialized markets like fruits and vegetables in total regulated markets is low. Only few states have separate fruit and vegetables wholesale regulated markets. The availability is not even one per 1,000 sq. km. Even horticulture states which account for approximately 20% of fruits and vegetables production do not have adequate number of regulated markets

Markets which have been exclusively developed for handling of fruits and vegetables, do not have sufficient facilities for handling of total produce available in the area.


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Most of the regulatory markets lack facilities for handling of produce like less space for auction platform, inadequate number of shops and godowns in the premises etc. thereby reducing the effective participation of traders

Only around 7% of the total quantity sold by farmers is graded before sale. This is due to lack of facilities as well as lack of incentives for growing superior quality produce.

There are about 22,500 rural periodic markets in the country. The minimum necessary infrastructural facilities do not exist in these rural periodic markets

Licensing system in APMCs which makes it compulsory to own a shop/godown in the regulated markets to own a license has led to the monopoly of these licensed traders acting as a major entry barrier in existing APMCs for new entrepreneurs thus, preventing competition.

High market fee is another challenge that needs to be overcome. In some states the total market charges including market fee, commission, purchase tax, weighment charges etc. works out to be around 15%. Also, the market charges vary from state to state and there is no standardization on these charges.

The long gestation period in agriculture marketing infrastructure projects and the seasonality of agricultural produce which affect the economic viability of the projects is a deterrent for investments in the sector.

ITC e-Choupal: Agri InfrastructureFor Empowering Farmers, Raising Productivity and Incomes

Indian agriculture is a paradox of immense proportions. Despite abundant arable land, diverse agro-climatic zones, hardworking farmers, farm productivity in India remains low. Farm sizes are fragmented, impacting both economic scales as well as the bargaining power of the farmer. Wide geographic dispersion makes it difficult to access critical information like market prices, news that impact prices and weather forecasts on real-time basis. Besides, there is tremendous heterogeneity in the conditions of different farmers that necessitate customized solutions, which in turn increases costs and complexity. All this spirals a vicious circle of lower productivity, low farm incomes, inadequate investments and low capacity to absorb knowledge.

It was in this context that the ITC e-Choupal was conceived as an innovative market-led social business model to enhance the competitiveness of Indian agriculture. Designed to empower farmers and raise rural incomes, the e-Choupal helps create a virtuous cycle of higher productivity, enlarged capacity for farmer risk management, and thereby larger investments to enable higher quality. The e-Choupal network has provided a unique source of competitive advantage to ITC’s Foods Business by enabling identity-preserved procurement and also by driving supply chain/logistics efficiencies thereby reducing transaction costs. By leveraging the power of Digital Technology, the e-Choupal empowers farmers with a host of services related to know how, best practices, timely and relevant weather information, transparent discovery of prices and much more. This connects farmers with markets and facilitates virtual integration of the supply chain thereby creating significant efficiencies.


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The e-Choupal system enables efficient transmission of market signals empowering farmers to align their produce with market needs.

Recognizing that enhanced farm productivity can significantly raise rural incomes, the ITC e-Choupal promotes sustainable agricultural practices to small/ marginal farmers through the Choupal Pradarshan Khet.

The services are customized to meet local conditions, ensure timely availability of farm inputs including insurance and credit, and provide a cluster of farmer schools for capturing indigenous knowledge. The e-Choupal network also contributes to the entire rural ecosystem by building community assets and providing income generation opportunities.

The ITC Choupal Integrated Watershed Development programme promotes the development and local management of water resources through community-based participation. Over 4,000 water harvesting structures provide soil and moisture conservation to nearly 1,30,000 hectares. The ITC Choupal Livestock Development Programme aims at upgrading livestock quality to boost milk productivity. This programme has covered over 8,00,000 milch animals.

The e-Choupal network also comprises physical infrastructure in the form of Choupal Saagars, which offer multiple services such as procurement and storage, a store front for agricultural equipment and personal consumption products amongst others. In addition, the e-Choupal network serves as an effective rural marketing platform together with other channels established by ITC in rural markets. Several companies ride this channel for access to rural markets.

The e-Choupal system helps in refining rural marketing efforts by understanding the gaps in the current scenario as well as channel alternatives, thereby contributing to the creation of a system that is effective and cost efficient to take care of the market heterogeneity across geographies. The ITC e-Choupal has benefitted over 4 million farmers across 40,000 villages in rural India, transforming Indian agriculture to serve the evolving needs of the consumers, while at the same time improving the quality of life of millions of farmers in the country.


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5. Dairy Infrastructure

Overview

India ranks first in milk production in the world producing 132.43 million tons of milk (2012-13) and accounting for approximately 17% of world’s milk production. As per Economic Survey Statistics, 2012-13, the per capita availability of milk has increased from 176 grams per day in 1990-91 to 290 grams per day in 2011-12 and this is comparable with the world per capita availability of milk at 289 grams per day for 2011. Strong farm gate prices supported by growth of the Indian economy and the rising domestic demand for value-added dairy products are factors contributing to increased milk production. Growing private investment in dairy processing facilities is also expected to provide further impetus to India’s milk production over the coming years.

As per CRISIL Research, the Indian milk and milk products industry is expected to grow by 13-15% CAGR to INR 450,000 crores by 2015-16 from around INR 3,05,000 crores in 2012-13. The market size of milk and milk products (2012-13) has been given below:

Exhibit 30: Market size of milk and milk products (2012-13)

Source: CRISIL Research

Segment Market Size Branded Market Share Growth over next three years (INR ‘000 crores) (%) Volume in % CAGR

Overall Industry 305.0-310.0 60-65Milk 190.0-193.0 85-90 ~4Curd and Yogurt 19.0-20.0 ~10 7-8Buttermilk and lassi 10.0-10.5 ~5 4-6Ghee 42.0-42.5 ~10 ~4Butter 11.0-11.5 15-20 ~5Ice Cream 3.5-4.0 60-65 8-9Cheese 4.5-5.0 85-90 8-9Paneer 21.5-22.0 10-15 6-8Dairy Whiteners and Creamers

2.3-2.5 90-95 ~5


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Also, milk is amongst the agri produce which fetches a high realization for the farmers making dairy farming a lucrative option. Considering the value chain analysis for sale of processed whole pouch milk through cooperative model, the realizations are at INR 42-44 per litre, of which approximately 65-70% goes to the farmer. The agents at various village collection centers are paid INR 1-2 per litre of unprocessed milk. The cost of processing the milk is usually around INR 2 per litre, and the transportation, chilling, packaging and selling costs for the pouched milk range between INR 6-8 per litre.

But despite the exponential growth of dairy industry, the country is still facing challenges of poor milk quality, low yield, lack of infrastructure and fragmented production. A number of infrastructure related bottlenecks are still present in both back end and front end supply chain. The Indian government is promoting the industry to overcome these challenges through various development schemes and by providing assistance to cooperatives. The government has recently approved an outlay of INR 1,800 crores to implement the National Programme for Bovine Breeding and Dairy Development (NPBBDD) during the 12th Five Year Plan. The programme aims to create milk chilling capacity of 2.8 million litres of milk per day and processing capacity of 3.01 million litres along with delivering breeding inputs to the farmers. Many cooperative and private players are also contributing in strengthening of dairy infrastructure by setting up of model dairy farms, cattle feed plant, procurement and cold chain infrastructure and capacity building through training.

Dairy Farming Infrastructure

Integrated dairy farming is an emerging trend in India, as traditionally milk is produced by small and marginal farmers with dairying as a subsidiary activity. During recent years commercial dairy farming has grown in India with coming up of many medium and large scale integrated dairy farms with automatic milking, feeding and dung management. Moreover, farmers working directly with organized players now have access to modern extension services, thus improving the herd size, management, feeding, fertility and veterinary care. Increasing demand of good quality milk is pushing the whole industry to change and make ways for modern solutions of dairy farming. The key drivers of commercial dairy farming are listed below.Stagnation in crop production sector and need for alternate diversification opportunitiesGradual reorientation of livestock production systems into demand driven systems with greater

emphasis on technological adoption Shift from buffalo to cow production evident from establishment of a large number of hi-tech

commercial dairy farms with high yielding crossbred cows Increased demand of good quality farm milk due to consumer awareness.Active participation of private players in establishment of processing units. Adequate marketing avenues

Potential Benefits of Commercial Dairy FarmingSome of the key benefits of commercial dairy farming are listed below.Adoption of better farm management practices and automation in milking helps in reducing

operational costs as well improving milk quality


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Better feed management practices help in achieving farm economies as well as increase in milk yield per animal

Proper medical care and veterinary facilities help in reducing the risk of disease outbreak thus improving the productivity and milk quality

Adoption of new breeding techniques helps in improving the genetic potential of the herd

Emerging Dairy Farming ModelsCommercial dairy farming in India is gradually emerging with a mix of various models operating with different herd sizes and configurations at the farm. A successful model which is replicable on a large scale has not yet emerged however many players are entering into dairy farming with innovative models trying to achieve high yields and economies of scale. Some of the key models emerging in dairy farming are listed below.

Large scale single location integrated dairy farms - Large scale integrated dairy farms with facility for housing and milking of high yielding cross bred cows, milk processing and storage along with feed production where the ownership and responsibility for the operation and maintenance of the farm lies with a private player. The private player may enter into contract farming model with the farmers for procurement of green fodder. The milk is either sold to other dairies or for processing into value added milk products at its own plant.

Progressive dairy farming model - Mid size dairy farms with 300-500 cattle would be evolving in near future as that would bring in size economics in the business by better management of labor, veterinary services, feed etc. Industry players are also providing financial support through financial institutions and technical assistance to farmers for scaling up of their current herd size, providing necessary information related to farm management, modern breeding techniques and feed management.

Community dairy farms - The Chinese dairy model of setting up of community dairy farms or hostels for milch animals owned by people in neighborhood to attain scale is also gaining acceptance in India. This model envisages investment in farm infrastructure by a private player with the ownership of the stall lying with the individual milk producer who is responsible for housing of cows and managing them under guidance of the private player. The milk would be purchased under the buy-back arrangement by the private player.

Hub and spoke model - Hub and spoke model of dairy farming includes the main farm (hub) having all the integrated facilities including processing and other connected farms (spokes) having basic infrastructure for milking and feeding. The connected/satellite farms will be owned by progressive dairy farmers/rural entrepreneurs in relatively close proximity to the main farm. The main farm will provide technical support to the satellite farms.

Some of the major integrated dairy farms currently operating in India are Bhagyalaxmi Dairy Farm, PuneSahyadri Dairy Farm, PuneABIS Dairy Farm, RaipurMacro Dairy Farm, Ludhiana


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India is still far behind in milk yield as compared to EU-27, US and Israel with average milk yield per cow per year at 6,692 litres, 9,865 litres and 11,706 litres respectively. The average milk yield of HF cows during initial years in a large professionally managed farm in India is approximately 12-13 litres per day for a lactation cycle of 300 days which could gradually increase to 15 litres per day. The average feed requirement is approximately 3% to 4% dry matter basis body weight. Feed is given depending on milk production and stage of cows. Fragmentation of farms has made handling and managing logistics quite costly and complex in India.

Key Challenges in Dairy Farm Infrastructure Lack of breeding infrastructure - The basic infrastructure for breeding is not of very high quality

and also there is inadequate availability of breeding bulls in India. The skills and veterinary care is not widely available for advance breeding methods like artificial insemination (AI) and embryo transfer and their proliferation is hampered by non-availability of wide spread infrastructure.

Small farm size -Due to small animal holding automation of milking, feeding and dung disposal is not feasible which in turn affects the productivity and milk quality.

Poor healthcare infrastructure – There is an inadequate establishment of infrastructure for veterinary clinics, vaccine production units and semen production units and feed plant.

Dairy extension services - The institutional arrangement in the state departments of animal husbandry primarily emphasize the clinical and diagnostic aspects of animal health rather than the preventive and extension aspects.

In order to overcome these challenges greater emphasis needs to be on achieving economies of scale, and continuous yield improvements with high quality milk production. This would need conceptualization and implementation of new production models that would inculcate the following crucial requirements of high tech dairying: Mechanization and automation of dairy farms. Sustainable measures to provide better quality feed and fodder. Adoption of best quality breeding programs for increasing the average milk yield of indigenous as

well as cross bred cattle. Provision of improved seed varieties for fodder cultivation and also encouraging seed replacement. Maximization of environmental benefits through adoption of green energy measures such as

reutilization and effective disposal of manure. Establishment of community based high herd size farms which would ensure investment in scaling

up, thus improving dairy management systems.


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Milk Procurement Infrastructure

Milk procurement is the most important component of the dairy supply chain but it has become very challenging in India due to fragmentation and small volume of milk handled by individual farmer. This is further compounded by a lack of availability of bulk milk chillers (BMC), milking machines as well as know‐how on management of large dairy farms. Many players do not prefer to invest in procurement infrastructure due to long gestation period, fragmented suppliers, high investments, low milk volumes and uncertainty of returns. Milk collection by dairy plants is undertaken twice a day which becomes difficult to manage due to small farm size, long distances and lack of cooling infrastructure at farm level. This issue is more pronounced for private dairies as they do not usually invest in building a dedicated supply chain network.

Cooperatives are currently procuring approximately 260 lakh kilograms of milk per day contributing to 16% of the national marketable surplus covering around 21% of the country’s villages and 18% of the rural milk producing households. Under cooperative structure of milk procurement, milk producers come together and form a village dairy cooperative society (DCS) with the support of Milk Union and start supplying the surplus milk to the DCS, after retaining milk for their household consumption. Major operation of a DCS involves reception, testing, dispatch of milk, payment and accounts keeping. Milk union provide input services support like artificial insemination, supply of cattle feed, fodder seeds, providing extension services to producer members including propagation of clean milk production practices with the help of DCS.

ABIS Dairy FarmIndian Broiler (IB) group entered in to dairy business in the year 1998, with a small scale dairy farm of around 50 crossbred cows and buffaloes. The group today owns over 5,000 high yielding cows and Murrah buffaloes in its farms located at Godmarra (Buffalo farm), Arjuni (Heifer farm), Godri (Cow farm), Machanpar and Rewadih (Quarantine farm) in Chhattisgarh. All adult cows are housed in well ventilated free stall barn, equipped with rubber mats, fans and foggers for cow comfort. Open paddock is provided to facilitate free movement of cows. Buffaloes and heifers are housed in open system with proper arrangement of cooling facility inside the sheds. In quarantine farm all animals are housed in tie up barns provided with cooling facility.

A team of dedicated, qualified veterinarians continually monitors the health of all livestock and the effectiveness of the breeding programme. Total mixed ration (TMR) is offered twice a day by TMR wagon which is standardized for different group of animals. To ensure quality feed to its highly productive animals the group is cultivating hybrid napier and is also procuring fodder through contact farming. Cows are milked three times a day in a 50 head rotary parlor and buffaloes are milked in a 2X24 herringbone parlor. Milk produced at the farms is processed and packed in a state of the art processing plant. The group is marketing milk and milk products under the brand ‘ABIS’.


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Unlike the three tier system followed by the cooperatives, the private dairies generally have a loose arrangement for procurement of milk wherein the milk is procured from the agents/contractors who in turn procure milk from the producers. The agents are responsible for guaranteeing the quality of milk given to the private dairies. To enhance their milk procurement, private players have been focusing on increased investments in preserving the quality of milk through installation of bulk milk coolers and chilling centers.

Key Challenges in Milk Procurement InfrastructureSome of the key challenges in milk procurement infrastructure include: Milk production by small and marginal farmers: The majority of dairy farmers being small and

marginal with an average animal holding of around 3-5 animals per farmer, there is a logistical issues in daily collection of milk and chilling of milk at farm.

Involvement of intermediaries: Involvement of large number of intermediaries results in increased microbial contamination and fluctuation in the volume of milk before reaching the collection centers and processing plants.

Lack of cold chain infrastructure: There is a lack of required infrastructure of chilling plants and bulk coolers to prevent contamination and spoilage at village level.

Power availability: Many chilling plants suffer due to shortage of electricity and do not run optimally leading to poor quality of milk.

Lack of quality testing infrastructure and trained manpower: Adequate quality testing infrastructure is not available at milk collection centers. The problem is compounded by the lack of trained manpower to undertake quality testing.

Hatsun Milk Procurement Hatsun procures approximately 2 million litres of liquid milk per day, from over 3 lakh farmers in south India covering over 8,000 villages. The company has around 4,500 ‘Hatsun Milk Banks’ (HMBs) and operates more than 800 rural milk procurement routes. These routes have a regular route plan with the timing to pick up milk cans for each HMB/village in the morning and evening. Each farmer’s data (quantity, Fat & SNF% along with the farmer’s unique number) are captured directly into automated system and based on the same the farmer is paid every day. The entire farmer’s data base is managed through a state-of-the-art computer software system.

Hatsun has installed rapid milk chillers at their procurement centers in order to overcome the challenges of irregular power supply , low capacity utilization and low chilling rate of bulk milk cooler (BMC). Hatsun has improved this technology for on ground implementation. These chillers use thermal battery that could store electricity even when available for 12 hours daily and release that energy to run a refrigeration cycle. Hatsun has already installed 20 rapid milk chillers, each costing approximately INR 5 lakh each and is planning to increase it to 700 by next year.


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National Dairy Plan (NDP I) - Allocation for Milk Procurement Infrastructure Development of Dairy Cooperatives

NDP I will focus on 14 major milk producing states namely Andhra Pradesh, Bihar, Gujarat, Haryana, Karnataka, Kerala, MP, Maharashtra , Odisha, Punjab, Rajasthan, TamilNadu, Uttar Pradesh and West Bengal. There is a need for village based milk procurement systems for weighing, testing quality of milk received and making payment to milk producers. Under NDP I, an outlay of INR 747 crores is allocated for the development of village based milk procurement systems. This component would improve access to markets by developing village level milk collection and bulking facilities. Proposed activities to be financed would include: Mobilization and institution building of small holder milk producers through expansion of selected

existing milk unions who in turn will strengthen selected existing village DCSs and organize new DCSs in the uncovered villages.

Training and capacity building of milk producers and other functionaries Investments in village level infrastructure for milk collection and bulking such as milk cans, bulk

milk coolers for a cluster of villages, associated weighing and testing equipment, and related IT equipment.

The project envisages the coverage of additional 11,900 villages under milk procurement systems, an additional of about 0.6 million milk producers pouring milk to village based milk producers’ institutions, an additional milk procurement of about 26.65 lakh kg per day and improvement in the quality of milk received by achieving more than 90 minutes of Methylene Blue Reduction (MBR) time.

Milk Processing Infrastructure

Milk processing capacity in the country has increased over the years due to increase in demand of good quality, hygienic and packed milk and milk products. The processing capacity of plants registered under Milk and Milk Products Order (MMPO) has increased from 983.16 lakh litres in 2010 to 1,205.48 lakh litres in 2011, an increase of 23%. Currently, processed milk accounts for approximately 65% to 70% of the Indian milk and milk products industry and the rest is contributed by dairy products like cheese, butter, ghee, ice cream, curd etc.

Packed milk sub-segment is largely dominated by various co-operatives in the states of Gujarat, Tamil Nadu, Karnataka, Punjab, Rajasthan, Kerala etc. Production of milk products such as ghee, cheese, paneer, butter, ice creams and other traditional milk based products is increasingly getting organized with players investing heavily in technology and infrastructure to meet the surging demand, both in domestic and export markets.


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Dairy cooperatives account for the major share of processed liquid milk marketed in India. Milk is processed and marketed by 177 Milk Producers’ Cooperative Unions, which federate into 15 State Cooperative Milk Marketing Federations. According to National Dairy Development Board (NDDB), the dairy cooperative network in the country spans over 418 districts covering 1.48 lakh village level societies owned by around 15 million farmer members as on March 2012. At the end of March 2011, 1,065 units (including cooperatives, private and Government) were registered under Milk and Milk Product Order (MMPO). Out of these, about 25 % were cooperatives with the total capacity of 432.51 lakh litres per day and 72 % were private players with the total capacity of 732.52 lakh litres per day indicating the increased private sector participation in milk processing.

Exhibit 31: State wise capacities of cooperatives and private dairy plants registered under MMPO as on March 2011.

Source: Department of Animal Husbandry, Dairying and Fisheries

Key Issues in Milk Processing Infrastructure Seasonality issues and variability in milk supply: The capacity utilization of the processing plants

in lean season is lower on account of reduced supply of milk. This greatly hampers the small scale dairies with limited product mix.

Lack of commercialization of ethnic dairy products: India has huge demand for ethnic dairy products which is currently dominated by the unorganized sector with limited shelf life and poor quality in spite of attractive profitability.

Cold chain logistics and infrastructure: Milk being a highly perishable product requires cooling as soon as possible after milking, so as to prevent spoilage and contamination. There is a lack of refrigerated vans and insulated tankers for transporting the chilled milk to the processing plants.


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Distribution Infrastructure

Managing distribution network in dairy industry is quite challenging because of the varied product portfolio which requires different storage and transportation conditions. Companies have to manage logistics depending on products like transportation of milk powder and ghee will be done under ambient conditions, ice-cream and frozen paneer under refrigerated conditions and fresh items like fresh milk, curd, yoghurt under chilled conditions. The dynamics of distribution infrastructure vary in cooperatives and private dairies. Cooperatives have adopted the conventional producer-wholesaler-distributor-retailer channel for distribution of milk and milk products. Private companies are following mix of conventional and own distribution channel including warehousing, refer trucks, tempos, vans etc to deliver products to the retail outlets.

Key Challenges in Distribution Infrastructure Power unavailability hamper the storage of milk and milk products at retail level unless they have

back up arrangements thus greatly reducing the shelf life of the dairy products. Lack of basic infrastructure like all weather roads act as a deterrent for dairy companies to reach rural

markets.

Conclusion

Milk demand is expected to reach about 200 million tonnes by 2021-22. To meet the growing demand it is necessary to maintain the annual growth of over 4% in the next 15 years. However, the rate of growth will depend greatly on the stability of milk supply chain as well as the expansion of necessary procurement, processing and distribution infrastructure. Both private and cooperative players have to work in tandem for upgradation of necessary infrastructure facilities by establishing bulk milk coolers, chilling centers, adoption of modern processing techniques and providing farmers with necessary inputs and extension services related to cattle breeding, management, feeding etc. It is imperative that required infrastructure should be developed in order to meet the increasing domestic demand of milk and milk products and to maintain India’s leading position in the dairy industry.


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6. Food ProcessingThe Indian Food Processing Industry

The food processing industry, correctly regarded as the sunrise sector of the Indian economy in view of its large potential for growth, employment and income generation is an important constituent of the Indian economy. With an estimated value of INR 5400 billion in FY 2012, India’s Food Processing Industry (FPI) accounts for almost 32% of total food market. The sector contributes 9-10% to GDP in Agriculture and manufacturing sector. It is among one of the largest industries in India and ranks fifth in terms of production, consumption and exports. Being one of the largest producers and consumers of food products, the Indian food processing industry has all the more importance. The industry being in its nascent stage has a huge underlying potential.

The GDP (at 2004-05 prices) in India has gone up from INR 35,64,364 crores in 2006-07 to INR 52,43, 582 crores in 2011-12 with a CAGR of 8.0%. In comparison contribution of FPI sector to GDP has witnessed a CAGR of 8.4% from 2006-07 to 2011-12 (including both registered and unregistered).

Exhibit 32: Contribution of Food Processing Industries to GDP

Source: MoFPI Annual Report 2012-13

Exhibit 33: Growth in Contribution of FPI & Agriculture to Total GDP

Source: MoFPI


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As seen in the graph above the growth in contribution of FPI to GDP is higher in comparison to the contribution of agriculture to GDP, thereby indicating that the level of processing in value terms has been increasing.

Global Food Processing Sector

The Global Processed Food Industry accounts for over 3/4th of global food sales. Despite the large size of the industry, only 6% of the processed food is traded the world over as compared to bulk agricultural commodities where 16% of produce is traded.

Comparing the Indian industry with global figures just over 2% of annual production is processed, an abysmally low figure when compared to countries such as Malaysia, China and US, where around 83%, 23% and 65% of produce is processed.

The “Vision 2015” plan put forth by Ministry of Food Processing Industries (MoFPI) envisages tripling the size of the processed food sector by increasing the level of processing of perishables from 6% to 20%. It further projects to increase the value addition from 20 to 35% and boost the share of Indian food exports in the global food trade from 1.5% to 3%

Levels of Processing

The three major categories of the Indian food industry-agri products, milk and milk products and meat, poultry and marine products are consumed through 3 levels of processing, depending on their category.

Primary processed food are consumed in their original state with no value addition. Secondary processed food undergoes basic level of processing like grading, sorting, cutting etc.

Exhibit 35: Tertiary level of processing leads to a change in the form and shape of the input provided

Exhibit 34: Level of processing in various countries

Source: Economic Services Group, National Productivity Council, New Delhi

Segments Primary processed Secondary processing Tertiary processingFruits and vegetables Cleaning, Cutting, Sorting Pulp, flakes, paste Jams, Jellies, Juice, ChipsGrains and cereals Sorting and Grading Rice puff, flour Cakes, biscuitsOilseeds Sorting and Grading Oil cakes Soya oil, olive oil, mustard

oil, Fortified oil


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Source: Planning Commission, MoFPI, YES BANK Analysis

Exhibit 36: Levels of processing in various food products (In USD billions)

Source: Planning Commission, MoFPI, YES BANK Analysis

In India a major part of the fruits and vegetables and meat & marine products are consumed at primary levels of processing, however products like grains and cereals are majorly consumed after the secondary processing. Tertiary processing is most prevalent in oils and beverages and account for a negligible portion in the other categories. Tertiary Processing is mostly prevalent in oils & beverages and accounts for a negligible portion in the other categories.

A Snapshot of the Sectoral Food Processing

Currently the unorganized sector form major part of the food processing (42%) followed by small scale industries (33%) and the organized sector (25%). In value terms the organized and unorganised sector almost has equal shares therefore implying the need for investments in infrastructure to bring in more organized sector investments into food processing.

Milk Grading and Refrigeration Cottage cheese, cream, khoya

Cheese, butter, yoghurt

Meat and poultry Sorting and Refrigeration Cut, dries, frozen products

Ready to eat

Marine products Chilling and Freezing Cut, dries, frozen products

Ready to eat


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Exhibit 37: Trend in size of the Food Processing Industry

Source: Annual Survey of Industries (ASI), MoFPI Vision Document 2015 and YES BANK Analysis

Grains & CerealsThe grain processing sector comprises of milling of cereals, pulses and oilseeds. India is self sustaining in grain production with annual production touching 259 million tonnes in 2011-12 India is the second largest producer of wheat and rice in the world. Other food grains produced in India include cereals such as maize, barley, jowar, bajra and ragi and pulses such as gram and lentils. While processing of grains occupies a lion’s share in the food processing sector accounting for 40% of the industry size, more than 96% of this segment is accounted for by primary processing and focused on three sub-categories – rice, wheat and dal (lentil). About 65% of rice production is milled in modern rice mills. Wheat milling is dominated by the unorganized sector with about 3 lakh small units operating in this sector while there are just about 820 large flour mills. Dal milling is the third largest in the grain processing industry, and has about 11,000 mechanized mills in the organized segment.

Fruits & VegetablesFruits and vegetables by far dominate the Indian horticulture sector occupying about 65% of the area under horticulture crops and contribute to more than 90% of total horticultural production.


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Though the organized sector contributes substantially towards processing of fruits and vegetables, most of the processing units are managed by small and medium enterprises. While more than 5,000 industries are registered under the Fruit Products Order (FPO), 1955, industry estimates indicate that the share of organized sector in processing is about 48% approximately, with 85% of the units in small and medium sector. Individual capacities of most of the processing units range from 250 tonnes per annum for very small scale industries to 30 tonnes per hour for bigger manufacturers. It is projected that F&V processing has the potential to reach a value of INR 345 billion (USD 7.7 billion) by 2015(MoFPI)

Oilseed Processing: Oilseeds processing is another major segment in the food processing industry. According to industry estimates, the size of the Indian Edible Oil market is about 19.5 million tonnes and expected to increase at a CAGR of 6-7 to 23.6 million tonnes in 2014-15.

State-wise Status of Food Processing Industries:

Looking at the statewise distribution of registered food processing industries the highest number of factories are situated in Andhra Pradesh (23%) followed by Tamil Nadu (15%) and Punjab (8%). Many of the states have initiated measures to bring about overall improvement in the food processing infrastructure setup. For example the Maharashtra government has initiated a Private-Public Partnership (PPP) for Integrated Agriculture Development (PPP-IAD) project. Twenty companies have been selected and have agreed to partner with such group in everything — from inputs and processing to marketing. They will be working in eleven different projects — sugar, cotton, soybean, pulses, pomegranate, grapes, potato, tomato, onion, maize and E- content. The government is targeting 10 lakh farmers to be made partners in the initiative over the next five years.

Exhibit 38: State-wise distribution of Food Processing Industries (2009-10)

Source: MoFPI Annual Report 2012-13


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Public-Private Collaboration on Agriculture in Maharashtra

Maharashtra government has initiated a Private-Public Partnership (PPP) for Integrated Agriculture Development (PPP-IAD) project under the World Economic Forum’s (WEF) “New Agriculture Initiative” in March 2012. The scheme entails the government and the corporate sector joining hands to organize growers’ associations through appropriate partnership with NGOs or otherwise identify/select aggregators (links to take produce to markets) and enable tie-up with farmers’ associations/groups. Presently 8 commodity based working groups, each comprised of multiple companies working with the state government, will work to develop action plans for a pilot initiative to be activated by June 2012. The group includes domestic players Rallis, UPL, Mahindra and MNC’s like ADM, Bayer, Syngenta, Monsanto and PepsiCo. Groups will engage additional companies from the food, beverage and retail sectors; as well as finance and insurance providers with capacity for smallholder-farmer finance.

Opportunities in Food Processing

According to Vision 2015, MoFPI, the food processing industry is expected to grow at a CAGR of 11% to INR 15,600 billion in 2022. This will be mainly driven by the tertiary processing industry (Bread & bakery), meat & poultry, dairy and food grain milling. While the share of Food Grain segment would decline, Meat and Poultry Processing, and Bread and bakery products would gain maximum in the overall processed food market.

Exports of Food processing related items: Food Processing relating items share in total exports (2012-13) is 12%. The value of exports has been showing an increasing trend with an average growth rate of 20% for the last five years. Majority of the share of processed food exports is from Guar gum, Rice (Basmati & non Basmati), marine products and Meat & Preparations. Exports of processed Fruits and vegetables have an overall negligible share in exports in spite India being the second largest producer of fruits and vegetables.

Exhibit 39: Share in Food Processing Industry (in value terms) 2022

Source: MoFPI Vision 2015


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Lower Levels of Processing: Only 2% of agriculture produce is processed at present. As compared US about 65-70% of agriculture produce is processed.

Processing levels are highest in case of Milk and Dairy Products followed by Meat and Poultry Products. Processing levels in case of Cereals is quite low. All the pulses are subjected to moderate processing. Most of the important fruits and vegetables undergo minimal processing. Spices are processed to an extent of 30% and have generally higher rates of processing.

In the last few year except for a few commodities there haven’t been a significant percentage growth in the extent of processing thereby implying gaps in infrastructure availability, awareness and efficiency of value chain.

Exhibit 40: Exports of Processed Foods & related items (in USD million)

Source: MoFPI Annual Report 2013

Exhibit 41: Share (%) of Processed Food Exports

Source: MoFPI Annual Report 2013

Exhibit 42: Level of Processing in India of Select items (in percent)

Source: MoFPI, National Skill Development Corporation (NSDC)


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As visible from the exhibit, there exists immense opportunity particularly in terms of F&V for processing which is still much lower as compared to the production.

Investments in Food Processing

As per the FDI policy, GoI, Foreign Direct Investment (FDI) is permissible for all the processed food products up to 100% on automatic route except for items reserved for Micro and Small Enterprises (MSEs).

Annual flow of Foreign Direct Investment (FDI) inflows to Food Processing sector in the country during the last few years is given below:

Exhibit 44: FDI Inflows - Food Processing (in USD million)

Source: Department of Industrial Policy & Promotion

As visible FDI inflows into food processing has witnessed a robust growth accounting to almost 30% of overall investments into food and agriculture sector. According to a recent release by DIPP, India has received a total FDI equity inflow of INR 13,516 Cr. between April to October 2013, which is the highest amongst the different sectors even toppling services and pharmaceutical sector.

Exhibit 43: Comparison between Production & Processing (in value terms)

Source: MoFPI, YES BANK Analysis


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Govt. Policy in Food Processing Sector: Recognizing the importance of the food processing sector the government has accorded the industry a high priority status and has taken up a number of initiatives to boost the sector. This coupled with increased private participation, FDI, increasing domestic demand for high value food products and improved governmental focus on rural infrastructure development has taken the food processing industry into a fast growth trajectory. In addition other plethora of schemes has been initiated to further boost the development as listed below:

Focus on Infrastructure Development Govt. has envisaged setting up of 60 Agri Export Zones in the country. Through this concept some of

the states like Andhra Pradesh, Punjab, and Karnataka etc showed remarkable improvement in the exports but other states have not been able to do equally well

Plan to establish 30 food parks in PPP mode across the country out of which 10 has already been approved in the first phase

Incentives for Back-end Development: Investment –linked tax incentives of 100 % deduction of capital expenditure for setting up and operating cold chain & warehousing facilities

Focus of R&D and Modernization – Launching of National Mission on Food Processing

National Mission on Food Processing

Ministry of Food Processing Industries (MoFPI) understanding the need to decentralize the implementation of different schemes to stimulate food processing through involvement of the states/UTs launched the National Mission on Food Processing (NMFP) as a centrally sponsored scheme on 1st April, 2012. The schemes focus completely on the creation of infrastructure for the development to food processing industries. NMFP is implemented as a new centrally sponsored scheme with financial contribution of Government of India and States/UTs in the ratio of 75:25, except for North Eastern States, where the ratio is 90:10. Further, in UTs administered by Government of India it is funded 100% by Government of India. This funding pattern is applicable to all components of the scheme.

The NMFP contemplates establishment of a National Mission as well as corresponding Missions in the State and District level. The proposed structure would be a three-tier structure at National, State and District levels. However, States would be at freedom to have mission structure at District levels or otherwise.


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Exhibit 45: 12th Five Year Plan (2012-17) Outlay Shares - Food Processing

Source - MoFPI

Investments in Infrastructure Development – Food ProcessingWith the increased focus of the Govt. to provide excellent infrastructure facilities in the food processing sector opens up various opportunities for private investments. Schemes providing capital grant (NMFP), subsidy (back-end), duty free export sops and tax incentives is expected to attract interest of the private investors.

From 10th Five Year plan to 12th Five Year Plan the fund allocation has grown at a CAGR of almost equivalent to 27% thus indicating Government increased importance to food processing infrastructure development.

Exhibit 46: Fund Allocation for Infrastructure Development in Food Processing (USD million)

Source: MoFPI, Planning Commission, Indian Brand Equity Foundation (IBEF)


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Challenges for the Food Process-ing Industry

Processing is important part of supply chain, essentially to add value to the raw commodity. Indian Food processing industry is facing many challenges in terms of unavailability of infrastructure facilities, lack of proper quality control and testing infrastructure, issues in supply chain, high costs of inventory, seasonality of the commodities and other operational constraints.

Inefficiencies in supply chain: According to the study sponsored by Ministry of Agriculture and carried out by CIPHET, estimated harvest and post-harvest losses at national level was of the order of INR 44,143 crores per annum at 2009 prices.

Absence of economies of scale: Some of the processing units demand very low technology and investment and this have led to the proliferation of unorganized players in the processed food segment. As the processing activity is highly diffused in India, achieving economies of scale to increase output has been constrained

Technology Up-gradation Challenges: The small scale of most food processors in India prevents any timely up gradation of technology, which is vital to improve quality of product

Quality issues: While the quality norms and measures for the domestic and international trade have been laid out for processed food, many small scale processors lack the necessary monitoring mechanisms to implement these quality norms

Case Study: AEZ for Cumin and Coriander in RajasthanTo boost the exports of these commodities, Rajasthan established AEZs with an investment of INR 50,225 lakh. Out of this investment around INR 39,648 lakh (79%) was from government institutions, while the remaining INR 9,757 lakh (21%) was from the private sector. Post the setup, there was a significant increase in the exports observed. The exports have increased by around 79% since 2004-05 which is a remarkable growth. These AEZs were also successful in providing forward and backward linkage to the production of the commodities.

Exhibit 47: Project-wise Allocation of Funds 12th Five Year Pan

Source: MoFPI, Planning Commission, Indian Brand Equity Foundation (IBEF)


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Exhibit 48: Export value in INR lakhs (Cumin and Coriander)

Source: Agricultural & Processed Food Products Export Development Authority (APEDA)

Forward Linkages: (Till April, 2012) Around 20 processing units for cumin and 105 processing units for coriander were setup in the

state. Another 10 processing units for cumin and 8 processing units for coriander are under construction.

4 cold storages for coriander and 2 cold storages for cumin were completed and another 2 cold storages for coriander are under construction.

11 new godowns were constructed/ upgraded for coriander while 10 new godowns were constructed/ upgraded for cumin.

2 small pack houses for cumin and 1 small pack house for coriander were established in the state

2 new food parks at Kota and Jodhpur are set up in the AEZ 39 drying and curing yards for coriander and 15 drying and curing yards for cumin were set

up

Backward Linkages 2290 farmers were imparted training under 27 training camps set for cumin. Similarly 33

camps were setup for coriander and 3182 farmers were imparted training on several aspects. In addition several R & D activities, seed multiplication programmes etc. are being carried out


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7. Development of Agriculture Infrastructure in India: Way ForwardAgriculture sector in India has undergone notable changes since Independence, but is still constrained by a number of roadblocks, of which Infrastructure is one of the most prominent ones. Need for adequate Supply Chain infrastructure has been felt necessary to keep pace with the increased agriculture production and overall changing pattern of consumer demand for food products.

Considerable need & opportunity exists in sprucing up infrastructure that supports on-farm production (irrigation, soil and water management, transportation, pre- and post-harvest storage), ensures efficient trading and exchange of goods (information and communication technology, wholesale and regulated markets), adds value to the domestic economy (agro-processing and packaging facilities) and enables produce to move rapidly and efficiently from farm-gate to processing facilities and onwards to all the supply chain players (logistics, transportation and storage), till the point of consumption.

Some of the recommendations suggested to achieve sustainable development of Agri Infrastructure in India, are elaborated below:

Policy

Expenditure on agriculture marketing sub-sector ranges between 4-5% of total public expenses on agriculture, while expenditure on marketing infrastructure development has been less than 1%. Agriculture marketing infrastructure needs to be given more thrust. Some of the recommendations would be: Suitable restructuring & reclassification of Priority Sector guidelines for enabling larger credit flow

into Agri Infrastructure. Viability Gap Funding (VGF) in marketing infrastructure development projects so as to attract

Investments. Increased investment in R&D focused on various sub segments in Agri Infrastructure- including farm

level technologies, post harvest infrastructure, logistics & processing, in the Indian context. The current multiplicity of Government Agencies in facilitating implementation of various projects

is an impediment to smooth set up of infrastructure projects, especially for the ones in PPP mode. A mechanism to have integrated nodal/ single window agencies will be helpful here.


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Private Wholesale Markets: The provisions for setting up of Private Wholesale Markets and Terminal Market Complexes must be specified in the amended APMC Acts of the respective states. These private mandis should be treated at par with existing APMCs.

Provision of electronic trading in various local markets (Mandi) which should be at least at district level to ensure farmers best better price discovery & freedom of choice for a larger market for their produce.

Appropriate administration & facilitation for legal and institutional structure to ensure orderly functioning of agricultural markets.

States to take initiatives for establishment of grading units & primary processing units Adoption & acceptance by the Government of appropriate systems & technologies- for enhancing

bulk handling for grains. Favorable government policy, customized farm equipments designed keeping in mind the Indian

agro-climatic conditions, increasing acceptance of custom hiring models, rising rural incomes and awareness among farmer communities will contribute to the growth of the farm equipment industry in the next decade.

Public Private Partnerships (PPP) in Agriculture Infrastructure

Large scale agriculture infrastructure projects suffer an inherent weakness of being commercially unattractive for the private players. For potential investors of physical infrastructure aimed at agricultural development, the cost of capital is also prohibitive. Therefore to facilitate large scale integrated projects, PPP model led by private sector players in the agriculture and allied sectors offers a number of advantages. Substantially enhanced investments under PPP mode in export oriented agri infrastructure creation

for tapping into the high value opportunity in various fruits, vegetables, spices & meat products, considering our national potential and the opportunity to utilize this for better management of the macroeconomic balance.

Private sector can leverage its advantages in creative financing, greater operational efficiency, lower costs of distribution, more complex delivery systems, faster decision making, management flexibility and innovation.

The public sector can provide strategic direction – the choice, location and pricing of infrastructure; ensure value for money and transparency in procurement; and, above all, through subsidies, or commitments to purchasing agreements, enable ‘private firms to enter large markets with guaranteed consumers.

Rail movement & transportation infrastructure is a prominent case in point here, wherein marked improvements in the rail logistics map of India can be implemented by formulating and implementing a PPP initiative for inviting private players to come up in a big way for providing services for grains, fresh produce & finished goods in Food & Agriculture.

VGF needs to be promoted for large scale projects considering the national importance & need for creation of infrastructure and to reduce payback period of projects.


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Innovative Models

For financing, Agriculture Infrastructure Projects are no different from general infrastructure projects and are typically complex, capital intensive and have long term gestation periods that involve multiple risks to project financers. Due to its non-recourse or limited recourse financing characteristics and the sheer scale of complexity, infrastructure financing requires a varied mix of finance and contractual arrangements amongst multiple parties including project sponsors, commercial banks, Govt. agencies and financial institutions among others. This will aid in limiting the inherent bottlenecks in agriculture infrastructure lending and thus stimulate more investments into the sector.

Commercial Dairy Farming initiatives of various configurations & forms for enhancing the milk yields, improving the quality of end produce & increasing the efficiency of backend services administration.

Integrated end to end Cold Chain facilities will be enablers for providing infrastructure with greater end to end efficiency for operations.

Larger R&D for development of appropriate technologies that are cost effective from the power consumption operational perspective


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References1. Rural Infrastructure and Growth in Agriculture – M.S. Bhatia (Economics & Political Weekly – Volume

34)2. Report on “State of Indian Agriculture 2012-13”, Ministry of Agriculture, Govt. of India3. Market Oriented Agriculture Infrastructure: Appraisal of Public Private Partnership - FOOD AND

AGRICULTURE ORGANIZATION OF THE UNITED NATIONS, Rome, 20084. Keynote paper on “Rural Infrastructure and Growth” presented during the 66 th Annual Conference of

the Indian Society of Agricultural Economics, 20065. Working Group Report , Ministry of Civil Aviation, Govt. of India – “Air Cargo Logistics in India -2012”6. Report of CAG India on “Storage Management b& movement of Foodgrains in Food Corporation of India

– 2013”7. Ministry of Food Processing Industries (MoFPI)Annual Reports8. Draft Report of Working Group, MoFPI ” FOOD PROCESSING INDUSTRIES For 12th Five Year Plan” 9. Planning Commission, Govt. of India – “Report of the Working Group on Agriculture Marketing

Infrastructure, Secondary Agriculture & policy required for Internal & External Trade – 12th Five Year Plan 2012-17”

10. Planning Commission, Govt. of India – “Report of the Working Group on Warehousing Development & Regulations– 12th Five Year Plan 2012-17”

11. CRISIL Research12. pib.nic.in13. M.S. Jairath – “Agriculture Marketing Infrastructure Facilities in India”14. CRISIL Research 15. Indiastats16. Ministry of Agriculture, Govt. of India 17. Agriculture and Processed Food Products Exports Development Authority (APEDA)18. Directorate of Marketing & Inspection (AGMARKNET)19. Ministry of Food Processing Industries (MoFPI) Annual Report 2012-1320. ASSOCHAM India Report on “ Second Green Revolution – Agriculture to Agribusiness”21. European Commission milk and dairy production statistics-2011


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22. National Agricultural Statistics Services , USDA, 2012 data23. Israel Dairy Board 2012 data24. Outlook Business December 2012 Issue “THE BIG DAIRY BOOM”25. National Dairy Plan Phase 1- Guidelines on Village Milk Procurement Systems through Dairy

Cooperatives.26. Outlook India – Business May 2013 article on “ Danone- The Milky Way”

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