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

1. Prologue2. Indian food processing industry: Significance1. Increasing Employment2. Curbing Migration3. Curbing Food Inflation4. Crop-diversification3. Scope/Potential1. Abundant Raw Material2. Geographical advantages3. New Demand4. Government Initiatives4. Obstacles to food processing?1. Economies of scale2. Lack of organized retail3. Lack of Food testing facilities4. Lack of Skilled Manpower5. Lack of R&D6. Transport problems7. Export ProblemsPrologue

In the new Mains syllabus, UPSC has included: Food processing and related industries in India-

their Scope, significance, Location

Supply chain management (SCM)

Upstream and downstream requirements

But ^thats not the end. Food processing topicalso overlaps withGS-21. Ministries and Departments of the Government

2. Governmentpoliciesand interventions for development in various sectors and issues arising out of their design and implementation.

GS-31. storage, transport and marketing of agricultural produce and issues and related constraints;

2. Sci-Tech research e.g. Food irradiation, developing new crop hybrids, animal-breeds etc.

+ same food processing points can be selectively used for discussing rural-unemployment, food inflation, general inflation, FDI in multi-brand retail; even current account deficit and rupee depreciation: whether its essay / interview or group discussion (in case of SBI/CAT) hell even RBI Officer phase II descriptive papers.

Structure of the [Food processing] Article series:

1. We get basic overview of significance-scope-potential-obstacles

2. Truckload of Government schemes related to post-harvest management, Mega Food parks etc.

3. Model APMC acts, the direct cooperative marketing etc.

4. Finance, taxation, FDI, export related issues

5. Then we start basic theory of supply chain management (SCM), and upstream downstream issues of individual food processing sub-sectors viz. Dairy, Fruit and Veggies, Egg-Meat-Fishes, Confectionary, Wine, Edible oil etc.

References used for this article series

SourceTitlecomment

Books1. A Manual for Entrepreneurs: Food Processing Industry (Tata McGraw-Hill Publication)Initial chapters provide the challenges/problems with food processing industry. Rest goes into actual management, accounting, sales, marketing strategy for a food entrepreneur=useless from UPSC point of view.

1. Food processing: Opportunities and Challenges (ICFAI university press)Some chapters deal with food industries in China, Australia etc but hardly any good fodder points

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

1. IGNOU MBA booklets (Coursecode: MS-55)for theory on supply chain management, upstream-downstream requirements

PDFsState of Indian agriculture 2012-13 (By Agricultural Ministry)for agro-livestock-fish-production information and schemes

Vision 2015 for food industries: part 1 and 2for opportunities and obstacles in individual sector: dairy, meat, wine etc.

Flavors of Incredible India: A report by Ernst & Young and FICCIfor supply chain diagrams of individual food processing sector

+ Additional points for opportunities, obstacles.

Planning commissions report on Encouraging Investments In Supply Chains and cold storagesplenty of fodder on

supply chain,

opportunities, obstacles

various schemes

12thFYP documentsdoesnt have much specific fodder points for food processing though.

IBEF report on Food processing industrysome fancy charts, numbers.

Webpib.nic.in, Indian expressfor government schemes, salient features, export/dumping issues.

Note:All those Food processing related PDFs have been uploaded onhttps://files.secureserver.net/0sL2N0Ej5XwsWc12th Five year plan uploaded onhttps://files.secureserver.net/0sLrYY0FFJRricIndian food processing industry: Significance

size Has more than 35000 registered units

Output of ~5-6 lakh crores

Food processing contributes about 9-10% of GPD, in Agro-Mfg. sector.

locationLocation wise: Maximum factories in (ie. more than 1000 in given state)

Coastal states: Andhra, Maharashtra, Karnataka, Kerala, Gujarat, Punjab, WB

Non-coastal States: UP, Punjab

Observe majorities of the food processing factories are concentrated in the coastal states.

Increasing Employment

Food processing industry provides plenty of direct and indirect employment opportunities, because it acts as bridge between Agriculture and Manufacturing

As per ASI survey in 2010, Food processing industry generated highest employment among all industry. Giving employment to almost 17 lakh people.

12thFive year plan (FYP) wants to create more than 50 million jobs. Out of that, Food processing sector is to create one million jobs.

Curbing Migration

When food processing plants are setup near agro/rural regions, they reduce:

1. Poverty among villagers,

2. disguised unemployment

3. exploitation of farmers

4. rural-urban migration

1. unplanned urbanization,

2. slums/hygiene/social problems in cities

Curbing Food Inflation

In the last few years Food inflation has been a major problem. Food inflation is eventually passed through into manufactured goods through higher money wages.

Therefore persistent high food inflation= bad for general macroeconomic stability.

well-developed food industry + compact supply chain=reduces food inflation via:

1. Disintermediation (meaning no middlemen/commission agents)

2. less wastage/spoilage of perishable products

Thus food industry is significant for reducing food inflation.

Crop-diversification

Indian villagers are away from market= have to grow cereals. (as we learned inVon Thunen model)

In recent years, Government increased Minimum support prices for rice and wheat.

That leads to surplus grain production=>Pvt. Players give less price to farmer=>government has to buy wheat @Minimum support price (MSP) but FCI didnt have enough storage capacity

Result: Wheat gets rotten @godowns and railway stations.

On the other hand, weve to rely on imported oilseeds because of higher MSP, farmers prefer to grow rice/wheat than oilseeds=> higher oilseed import adds to Current account deficit and leads to 1$=62 rupees=>crude oil expensive=petrol expensive=everything transported through petrol/diesel gets expensive=thus the cycle of middle class exploitation is complete.

Coming to the original point: we need crop diversification, all farmers shouldnt be growing just rice and wheat. But if want to seduce the farmers into growing other crops, then following must be done

1. Promote food industry with backward linkages to farmers growing fruits, vegetables, milk, fish, meat, poultry, grain, etc.

2. Aggressively market the processed food in India + Abroad

once weve done #1 + #2=> then even the farmers away from market area will see good income opportunity in growing non-cereal crops => crop diversification => the excessive rotting-wheat surplus problem is solved.

Some filler significance points: food processing1. Increases shelf life: milk vs butter2. Increase value: milk vs buttermoveing to.

Scope/Potential

Abundant Raw Material

Indias world Rankin production of

1milk, ginger, chickpea, banana, guava, papaya, mango, buffalo meat

2rice, wheat, potato, garlic, cashew nut, groundnut, dry onion, green peas, pumpkin, gourds, cauliflowers, sugarcane, tea

among top fivecoffee, tobacco, spices, oilseeds

With such a huge raw material base, we can easily become leading food supplier in the world. (But we havent, because of the obstacles discussed later).

Geographical advantages

1. 46 out of 60 soil types are present in India.

2. More than 26 types of climatic conditions= can cultivate large variety of fruits, crops, vegetables.

3. Large coastline, villagers in 13 states engaged in fishing as their secondary activity.

4. Variety domestic animals such as cows, buffaloes, goats, chicken, lamb, sheep.

5. Large irrigated area under cultivation. Ample supply of fresh water for human, plant and animals.

New Demand

In the upcoming years, there will be good demand for healthy, modern food products due to following reasons:

1. Youth population (age group 15 25): doesnt shy away from trying new food products.

2. More Nuclear families: usually working couple => less cooking time + expensive maids=need ready to eat / ready to cook food.

3. Rising incomes, middle class and rich families=can afford processed food.

4. Emergence of Tier 1 and Tier 2 cities, shopping mall culture.

5. Growing migration from rural to urban India + rising income = demand for bread, butter etc.

6. Media penetration, advertisements=> demand is created for health-drinks, noodles, cream-biscuits, cornflakes etc.

7. Celebrity chefs, cookery channels= new dishes, international cuisines introduced=>demand for their ingredients, vegetables in India.

8. Diabetes, obesity, Blood pressure, lifestyle diseases =>demand for healthy food.

As a result, food processing industry is expected to reach

yearturnover USD

2015>250 billion

2020>300 billion

Government Initiatives

Many food processing sectors that were earlier reserved for small scale industries (SSI) have been de-reserved

FDI limits have been relaxed, Excise duties have been reduced, export subsidies given

National mission on food processing, Vision2015 for food processing,

New schemes for mega food parks, cold chain etc.

Many states have reformed their outdated APMC laws.

and so on (^all these elaborated in later articles.) Together they facilitate the expansion of food processing industry in India. More scope points, specific to individual sector (i.e. Dairy, meat, fish etc) later articles.

so far everything sounds hunky dory but if our food processing industry was so awesome, then UPSC wouldnt have included it in the syllabus. Then, what are the.

Obstacles to food processing?

country__ % of total fruits/vegetables processed

Indiabarely 6-7

China>20

USA>60

So, why low level of food processing in India?

Economies of scale

When you produce something on large scale, the unit production cost decreases. How / Why?

1. When you purchase raw material in large bulk, you negotiate/bargain with supplier.

2. Fixed cost remains same (building rent, cost of lights, initial cost of buying machinery etc.) e.g. you bought a ice cream machine for 10 lakh- whether you make 100 liters ice cream or 1000 liters ice-cream per day- its upto you but the more ice cream you produce, the average unit cost decreases. (think of 100/5 vs. 100/50)= hence bigger the plant, cheaper to produce.

Most of Indian food processing units/companies/enterprises/factories are small sized meaning = poor economies of scale. It leads to following problems:

Aspectproblems of small company / poor economies of scale

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

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

Low Technology Cant invest in R&D to develop new products (e.g. chilli chewing gum or tomato cream biscuit!)

Cant do marketing research / survey to find out what consumers want?

Marketing Cant invest in advertisement campaigns to create new demand.

e.g. Kellogs is aggressively advertising its cornflakes in India, highlighting weightloss benefits.

but on the other hand, an Indian Halwai (sweet maker) cant do same level of marketing in USA to create demand for jalebi or peda.

Un-Export Quality cant dobackward linkagee.g. contract farming: giving seeds/fertilizer/pesticide to farmer.

Instead small company relies on multiple small supplier hence Raw material=non-uniform in quality.

Then their products are rejected in US/EU market for not meeting the Codex/HACCP standards. (e.g. mango juice rejected for stone weevil, buffalo meat rejected for food-n-mouth disease, fish rejected for heavy metal contamination and so on.)

retailing Cant doforward linkagee.g opening its own factory retail outlet like Nike, Adidas or Apple => small company has to rely on third party retailers and need to give them margin from sales= profit decrease and poor economies of scale continues.

But why do we have this poor economies of scale?

1. For long, many food processing items were reserved for Small scale industries only.

2. High input costs due to multiple taxes, middle men. Profit level is low=cant expand.

3. Government schemes, subsidies, grants have low-ceilings =Individual person cant setup big plants

4. Hard to get bank loans. (more elaboration in later article)

5. Bigger the plant, bigger the headache in terms of tax-liabilities.CreativeIndian entrepreneurs rather setup multiple small plants to get subsidies/tax benefits of MSME-industries, and sell unbranded food products.

Anyways, some more obstacles for Indian food processing industry:

Price SensitivityIndian public=Low per capita income = higher price sensitivity and higher income elasticity in relation to food expenditure.

Preference For Fresh FoodIndians prefer freshly cooked products as compared to packaged products. Traditional mindset: fresh = nutritious.

Agri Problemstruckload of agri-problem. Well see the individual problems in later articles. for the overview:

Agriculture/Dairy production yield levels are among the lowest amongst the BRIC countries.

Land holdings=small, fragmented.

Area under cultivation is decreasing due to urbanization, real-estate development, industrialization and ofcourse thanks to totally awesome people likeRaabert Vadhera. there is no common policy on contract farming throughout India

Supply Chain Problems high cost of raw material (driven by low productivity and poor agronomic practices)

Presence of intermediaries thanks to Nuisance called APMC acts.

high cost of packaging, finance, transport and distribution

lack of organized retail

Logistics Logistics cost= transportation, warehousing, material handling etc.

In India, Logistics accounts for about 13% of GDP, which translates to over USD130 billion.

This cost is significantly higher as compared most developed countries.

Infrastructure Inadequate infrastructure of storage, sorting, grading and post-harvest management.

Private sector unwilling to invest in logistic or infrastructure under prevailing economic conditions and policy paralysis.

Finance hard to get loans (for both farmers and food-entrepreneurs)

Taxation food industry subjected to variety of taxes.

Taxes on processed food in India are among the highest in the world.

Except India, No country distinguishes between branded and unbranded food sectors for taxation.

Multiple and complicated tax regimes have rendered the food industry uncompetitive

Schemes Plethora of government schemes: overlapping, ambiguous, low ceilings. e.g. you need crore rupee worth machine, they barely give few lakhs- that too after months of visits to various offices.

Laws Food laws are often inconsistent and overlapping.

The Food Inspectors cause of harassment and bribe-demands in terms of pulling up entrepreneurs under the Weights and Measures Act, ingredient content and mix, labelling norms, etc.

While the various acts are necessary, court cases turn out to be expensive for small-entrepreneurs- especially if involved in inter-state trade.

Market Information Market information not easily accessible

Small players cannot buy international journals/magazines to find the latest trends in demand/innovation. Most of them also dont know how to use internet for business/marketing.

Manpower Lack of trained manpower.

Very few universities offer special courses for food processing and entrepreneurship.

Packaging Since Indian consumers= price sensitive, most of the food products are sold in small packages (Rs.5 noodles, biscuits etc)=more plastic required= higher share of packaging costs as a proportion of total costs.*

*High packaging cost

Packaging cost is ___ % of total production cost

Potato Chips20%

Fruit Juice19%

Jam12%

Chicken Nuggets8%

Branded Atta6%

A recent ICAR study on Status of Post-Harvest losses

typepost-harvest % loss

cerealwheat6

pulsesblackgram6

oilseedgroundnut10

fruitsguava18

veggiestomato12

spicesturmeric7

marineinland-fish7

moving to more problems faced by Food processing industry:

Lack of organized retail

In USA there are two types of retailers

1. Big malls: Walmart etc.

2. small kirana walla known asmom and pop shopsBut both of them have cold-storage facilities, hence they sell l both dry and wet/fresh food products

dryfresh

bakery items, noodles, pasta, flour, cheeze etc.fruits, milk, veggies, meat, chicken, fish

But in India, kirana stores dont have cold storage facilities=> they only sell dry food products.

and fresh produce is sold through vendors with push-carts=>wastage because they dont have cold storage.

Meat, poultry and marine products are primarily sold in separate markets but they too dont have cold storage=>wastage.

Thus, lack of organized retail, leads to

1. low product quality

2. lack of variety, choice

3. poor shopping experience1. low hygiene levels

2. low value for money

3. high cost of product

Lack of Food testing facilities

1. The number of laboratories in the country is insufficient. Most of these laboratories lack world-class facilities and infrastructure. Equipment, Testing manuals outdated

2. Many laboratories are not equipped with basic facilities such as for testing antibiotic residues, heavy metal contamination and other toxic contaminants in the food items.

3. Very slow response time of Government controlled food laboratories is long, extending to upto 5 years.

4. Most laboratories at sea ports are not fully equipped to handle testing of imported products, organic foods, residual radioactive matter, new toxins and allergens, textural analysis, residues of veterinary drugs, enzymes and hormones etc. these tests are necessary for complying with Codex, HACCP , GMP , GHP etc before exporting to in US/EU markets.

Lack of Skilled Manpower

A food processing unit requires skilled manpower, including

Production Managers or Supervisors

Product Development Technologists

Food Engineers

Food Microbiologists Quality Control Scientists

Research Technicians

Technical Representatives

machine operators, assistants

Problems

Lack Of Men As per a study by National Skill Development Corporation: the annual human resource requirement in food processing industry is estimated at about 5 lakh persons including about one lakh persons in the organized sector.

But right now, every year, barely ~5000 graduates and postgraduates pass out from in different disciplines of Food science and technology.

Lack Of Courses very few universities offer graduation/PG courses, entrepreneurship courses for food science and technology

Need short-term, diploma/certificate type courses for rural youth.

need to introduce courses for small scale players such as retailers, halwais

Need specialized institutes for training/R&D in bakery, confectionery, wine making.

Outdated Syllabus And Professors Syllabus/courses in university departments are not being updated regularly and are in most cases, outdated with respect to the present trends and food industry requirement.

The teaching faculty in most of the Indian academic institutions studied has limited industry experience / exposure.

Inspectors Food inspectors unaware of GMP, GHP & HACCP standards, latest developments in food standards, new products, and laboratory network

Engineering Engineering curriculum does not equip graduate engineers with the skill of designing cold chain infrastructures. Fresh graduates find it difficult to make heat load calculation and configure the plant & machineries in energy-efficient manner.

There is urgent need to upgrade the syllabus accordingly.

Lack of R&D

1. Sarkari Domain Indian food processing industry is mainly madeup of small scale players= they cant invest money in R&D=> becomes governments responsibility to do the R&D.

But Sarkari Research objectives are outdated, food market requirements keep changing frequently given the new product launches by MNCs.

1. Baba Adams Mindset Multinational Food companies typically have an in-house global network of R&D professionals.

Although theyre willing to work with Indian institutions for developing India-specific products and processes.

But the quality of R&D currently undertaken by existing Indian institutions is not in line with their requirements.

1. Manpower The chairmanship of public research institutes usually given to (retired) IAS or politicians=> lack of dynamism/market-orientation of the hardcore professionals in food-MNCs.

Many students prefer alternate careers which are found to be more fulfilling and remunerative. There has been a significant drop in the quality of people entering the R&D field

1. Implementation Indian Government recently introduced a variety of kiwifruit in North India, but could not provide adequate support/advice on cultivation practices. Result= domestic kiwi produce is much smaller in size than imported kiwi.

1. There is a huge opportunity for developing and commercializing desi foods for export e.g. ethnic beverages such as kokum, coconut water and ethnic food such as khakra, amla preserve etc. But, to make them appealing to foreign consumers, R&D required for product development, food-texture, rheology, mouth-feel, smell, color, packaging etc.

2. Internationally, following research-developments are ongoing, while we are generations behind in research:

areaWhat foreign players are doing in R&D?

processing Non-thermal food processing technologies to preserve the nutrients in milk, fruit juices and also for killing microorganisms in eggs.

Role of ozone in fresh food sterilization

Calcium treatment to extend the shelf life of melons

packaging Packaging films that offer optimal barrier properties to extend shelf life.

Biodegradable films made from pectin and starch

Silicon oxide films that improve oxygen and moisture barriers.

Use of natural antioxidants in packaging materials for shelf life extension of combat rations for soldiers.

Active and intelligent packaging systems To monitor product quality and trace a products history through critical points in the food supply chain.

Transport problems

Transport capacityIndiadeveloped countries

Normal distance covered by trucks/trailers250 -300km / day600- 800 km/day

roads capacity to handle maximum weight16 tonnes36 tonnes (USA)

Indian national highways account for only 2% of the total road network but carry 40% of all cargo.

This puts a high pressure on the highways due to the high traffic volumes => delays in transit + damage to perishable products

Though highways are well-spread, theyre yet to connect all 550,000+ villages in India

Railway problems Railway is cheaper than road transportation but railways currently contribute barely ~25% of the total cargo transported

Last mile connectivity from rail transporters =absent.

Inefficiencies associated with a government monopoly. (timing-schedules, technology upgrades etc)

Lack of wagons with cold storage facilities.

Congested rail stations, lack of sorting, grading, warehousing facilities nearby.

Road transport operators provide more flexibility.

Although The Dedicated Freight Corridors are expected to improve the connectivity of the railways, increase carrying capacity and reduce the transit time.

Ports Environmental and social hurdles in land acquisition= hard to get setup new port / expand the existing port.

High dependence on manual labor + low technology usage= increases the turnaround, loading/unloading times at ports, thus impacts entire supply chain lead time and increases cost For e.g. the cost of an import container in India=~$500, elsewhere ~350 in foreign ports.

Export Problems

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

expensive Raw Material Fragmented base of suppliers=uniform quality not available

Lot of intermediaries=raw material cost increased.

High duties on imported raw material: additives/flavorings etc.

As a result input cost =high, hence pricewise, we cannot compete with other exporters.

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

low quality Often our products rejected from US/EU markets for not meeting Codex, HACCP quality standards

Branding yet to Build global brands on the back of Indias strengths (Darjeeling tea, Basmati rice, Durum wheat, Alphonso mango, Tamilnadu Banana or Kashmiri Apples)

Developed countries view India as an unpredictable and unreliable source of food and agro products.

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

Packaging yet to develop packaging technologies for Indian food products to make them more acceptable to foreign consumers.

Dumping Desi shrimps face Anti-dumping duties in USA.

Devaluating 1$=~60 Indian rupees while 1$=~100 Paki rupees

Given these exchange rates and local prices of Basmati in India vs Pakistan. From an American/Europeans point of view, it is cheaper to import Basmati from Pakistan than from India.

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

URL to article:http://mrunal.org/2013/08/food-processing-introduction-scope-significance-awesomeness-hardly-obstacles-truckload-of-for-gs-mains.htmlPosted ByMrunalOn 21/08/2013 @ 21:06 In the categoryEconomyClickhereto print.