[Food Processing] Export, Dumping, FDI, Finance, Taxation, Budget Provisions, CODEX, NWR, BRGF, RKVY

Economy53 Comments

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  1. Prologue
  2. Agriculture Export
    1. Tariff Barrier
    2. Dumping
    3. Non-Tariff Barrier
    4. CODEX standards
    5. HACCP
  3. FDI: Agro, Food Processing, Retail
    1. FDI: Agriculture
    2. FDI: Food processing
    3. FDI: Retail
    4. FDI: Multibrand Retail
      1. Difference In Single Vs Multibrand Retail?
      2. The Diluted Conditions
  4. Finance
    1. Why can’t Farmer get loans easily?
      1. Negotiable Warehousing Receipts (NWR)
      2. WDRA
      3. Benefits of NWR receipts
    2. Why can’t food entrepreneurs get loans easily?
    3. Permission-raj
  5. Taxation
    1. Budget 2013: Agro and Food processing
    2. Budget 2013: Taxation
      1. Income tax deduction
      2. Custom Duty
      3. Excise Duty
      4. Service tax: Negative list
  6. Misc.
    1. Backward Regions Grant Fund (BRGF)
    2. Rashtriya Krishi Vikas Yojana (RKVY)

Prologue

In the previous articles we saw

  1. Food processing industry: Awesomeness and Obstacles
  2. Food processing industry: ruckload of Government Schemes and bodies
  3. Marketing of agricultural produce: issues and constrains, Nuisance of APMC Acts and Commission Agents

Moving on:

New GS-Mains Syllabus of UPSCTopic touched in this article
  • Effect of policies of developed and developing countries on India’s interests
Agriculture export: Anti-dumping, tariff-non tariff barriers, Codex and HACCP standards.
  • Devolution of finances up to local levels and challenges therein.
Backward regions grant fund (BRGF)
  • Regulatory bodies
Warehousing Development and Regulatory Authority.
  • Government policies in various sectors
  • Effects of liberalization on the economy
FDI policy for agriculture, food processing and retail
  • Government Budgeting
Budget 2013 for Agriculture and Food industries
  • issues relating to growth, development and employment.
The finance/credit problems faced by farmers+ food-entrepreneurs.

By the way, regarding some earlier comments about what happened to my geography location factor article series? Ans. I got bored writing geography hence shifted to agro/food processing topic for a while, but rest assured [Geography] location factors article series will be finished before Mains 2013.

Agriculture Export

World Trade Organization (WTO) aims to improve international-trade by reducing the tariff and non-tariff barriers. Let’s refresh the concept:

Tariff Barrier

Taxation tools that affect import / export: Examples

  1. In the Colonization-era, British had imposed heavy taxes on Indian textile coming to London, in order to protect their local industries from competition.
  2. Before the LPG reforms of 1991, India too had imposed heavy taxes on most of the imported items: be it wristwatches, goggles, cars or radios.
  3. Aug 2013, Union Government increased the import duty on gold to 8 per cent to reduce the gold consumption (and to provide sustainable livelihood to desi-smugglers who were not given 100 days in work under MNREGA.)

Dumping

  • When businessmen export goods at a price that is less than the price charged in the domestic market- it’s called dumping.
  • WTO system=> Agreement on Subsidies and Countervailing Measures (SCM)=if a country finds evidence of dumping, it can extra impose duty (known as countervailing duty, CVD) on such dumped products. (=meaning this type of tariff barrier is permitted in WTO)
  • USA has imposed a countervailing duty (~6%) on Indian frozen shrimps, because Indian shrimp gets plenty of subsidies from Indian government for shrimp farming and export and hence Indians are able to dump shrimps to USA and hurt USA’s local shrimp businessmen. (or atleast that’s what America claims).
  • Anyways, Indian shrimps are not the only items subjected to anti-dumping duty in USA.
Shrimps fromWhy subjected to anti-dumping duty in USA?
Thailandgovernment buys shrimp from farmers and sells it to processors at low price
Chinagovernment gave finance to build the world’s largest shrimp-processing and export plant
Malaysiagovernment gave finance to build shrimp farms.

Dumping by India

List not exhaustive (but in recent news)

CountryWhich Indian export was slapped Anti-Dumping duty
ChinaRecently China also started Anti-dumping investigation on Indian exports such as

  1. food preservative chemical from India (known as TBHQ)- widely used in Chinese food industry.
  2. Optical fiber imports from India after allegations from the local Chinese industry that they were being sold at artificially low prices.
ThailandIndian steel
IndonesiaAgainst two leading Indian steel firms: Jindal and Essar.

Dumping to India (by foreigners)

List not exhaustive (but in recent news)

  1. We’ve slapped anti-dumping duty on steel wheels imported from China used in commercial vehicles.
  2. Under probe: US, China, Malaysia and Taiwan: Because They’re exporting solar equipment to India at ridiculously low prices and was bleeding the desi industry. Similar issue with glassmakers and electric cable manufacturers from those countries.

Non-Tariff Barrier

Non-tariff barriers affect import/export, without using taxation tools. For example

Quantitative restrictionsUnder Gold control Acts of 1960s, An Indian Gold Smith was not allowed to possess a stock of more than 300 gms of primary gold at any time.
Import prohibitionsOn ivory, fur, tiger skin/bones, narcotics, illegal weapons, explosives etc.
Import licensingWhen Murthy started Infosys, he had to make 50 trips to Delhi for three years just to get a license to import computers.
Export SubsidiesWe already saw some duty credit schemes for Agri-exports in the second article. click me
Labour/Environment standardse.g. some developed country banning import from third world country saying child labour was used etc.
Health StandardsCodex, HACCP- given below.

CODEX standards

  • In the 60s, FAO+WHO setup Codex Alimentarius Commission.
  • To develop harmonised international food standards, guidelines and codes.
  • In WTO system => Sanitary and Phytosanitary measures (SPS Agreement) – a country can impose ban on imported food products, if they do not meet the Codex standards. (=meaning this type of non-tariff barrier is permitted in WTO).
  • and as you can guess, Indian food products get banned/restricted in developed countries for not meeting those quality standards
  • This is a two-way street though, India also banned import of American Chicken to ‘prevent Avian influenza’ among Indian poultry. (Although USA has dragged India to WTO saying India has not provided any scientific evidence in line with international standards to justify this ban.)
  • Anyways, here are some of the Indian food export, there were banned in US/EU/China/Japan in past.
Indian food itembanned/restricted abroad thanks to
  1. Groundnut
Aflatoxin
  1. Mangos
stone weevil, fungus
  1. Indian Buffalo Meat
foot-and-mouth disease
  1. Indian Shrimp
Antibiotic residues
  1. Fish
Heavy metals and antibiotics
  1. poultry
bird flu/Avian influenza

Adding insult to the injury, once the ban is imposed and IF we want to get the ban revoked, then

  • We’ve to invite their food inspectors/specialists to India, let them check our premises
  • We’ve to bear all the cost of their accommodation, travel expenses etc.

=expensive game, small Indian players/companies can’t survive in the international food business.

HACCP

  • HACCP (Hazard Analysis Critical Control Point)
  • This certification system is adopted by the Codex Alimentarius Commission.
  • For preventing microbiological, chemical and physical contamination along the food supply chain.
  • So, if you want to safely export food products to US/EU, then first you need to get certificate that your plant meets the HACCP standards. (certificate system similar to ISO standards)

It doesn’t mean we haven’t anything. Here are some of the steps taken:

EICExport Inspection Council of India (EIC)

  • statutory body under Commerce Ministry
  • for inspection- certification for marine, milk, meat, poultry, marine and egg products, and honey for export units.

EIC approved units have to implement following

  1. international standards of CODEX laid down by FAO and WHO,
  2. Good Management Practices (GMP)
  3. Good Hygiene Practices (GHP)

EIC certificate is recognized in European Commission (EC) for marine products and basmati rice and by the US for black pepper.

APEDA
  • Agricultural and Processed Food Products Export Development Authority (APEDA)
  • Statutory body under commerce ministry
  • Provides financial assistance to food exporters.
  • Bears the cost for doing analysis of peanuts, grapes for meeting HACCP/Codex standards.
BIS
  • Bureau of Indian standards
  • has adopted the CODEX, hazard analysis and critical control point (HACCP) and food hygiene standards
  • helps Food processing units to adopt these systems on a voluntary basis
collaborationWe’re collaborating with USA, UK, Netherlands, Switzerland and Germany for Agri-technology transfer, financial and marketing tieup and quality control.
MoFPI
  • Ministry of food processing industries
  • Gives financial assistance for fee charged by Certification Agency, plant and machinery, technical civil works, and other expenditure towards implementation of Total Quality Management System, ISO, HACCP, GMP and GHP.

General Area: max 15 lakh assistance

NE, difficult area: max. 20 lakh

Additional Suggestions

NegotiationGovernment needs to expedite the negotiations with US, EU, China and Japan, to lift restrictions on Indian fruit/food/marine exports into these countries.
Foreign Offices
  • Encourage importing countries (primarily USA, EU, Japan) to set up offices in India for certification of export consignments
CertificationAPEDA already supports the cost of quality certification programs such as HACCP and Eurepgap for grapes and peanuts. More food-items should be included in this scheme.
Fssai
  • Food Safety and Standards Authority of India. We already saw its salient features in previous article, click me
  • FSSAI needs to harmonize the differences between Codex standards and Indian food standards.
Desi Labs
  • Encourage food testing laboratories in India to obtain accreditation from international agencies.  Given high cost of international accreditation, Government can incentivize laboratories by part funding these costs.
Zoning
  • Government should introduce certification zoning systems: e.g. pesticide free zones, organic production zones, disease free zones to facilitate high value exports from India
Sample Cost
  • Food exporters to US/EU are first required to their samples to the importing country to get trade-approval. Government should provide financial assistance to small/medium exporters for this.

FDI: Agro, Food Processing, Retail

Foreign Direct Investment: Agriculture

100% FDI with automatic approval in following sectors:

SeedsSeeds and planting material, their development and productionConditions

  1. Genetically Modified seeds/plants= have to comply with
    1. Environment (Protection) Act
    2. Genetic Engineering Approval Committee (GEAC)
  2. If seeds are imported then have to comply with National Seeds Policy
Livestock
  1. Animal rearing + dog breeding
  2. Poultry breeding farms
  3. Aquariums
  4. Pisciculture (breeding, rearing, and transplantation of fish by artificial means  aka fish farming)
  5. Apiculture  (bee keeping)
Plantation
  • No FDI is not allowed in any other plantation except Tea.
  • In Tea sector:
    • 49% FDI via automatic route
    • 100% FDI with government approval.

Note: Besides ^above, FDI is not allowed in any other agricultural sector/activity

In July 2013, Government changed FDI limits in 12 sectors, here is a fancy graphic courtesy of Indiatoday

India FDI limits & Dumping

FDI: Food processing

  • India allows 100% FDI in food processing sector.
  • Foreign firms
    1. don’t need government-approval to start business in India.
    2. Are eligible for grants, subsidies, benefits offered by various government schemes.
  • Our food industry got FDI  >Rs.6000 crore in last three years (2009 to 12)
  • When talking about FDI in food processing, a doubt comes in mind: if foreign giants are permitted in India, will there be no place for small players, will they be wiped out?
Fragmented Demand vs Economies of Scale
  • In Trivandrum, people use more than 10 different spices in their cuisine, while in New Delhi and Mumbai, barely 4-5 spices.
  • Different communities in each state prefer different blending of spices, color/pungency in chilli-powder.
  • Cottage and small units do well ^in such product segments because of their local traditional knowledge.
  • But Bigger enterprises may find it difficult to enter into such fragmented and price conscious consumer base. Their large scale of economies may not be optimized for it.
  • MNC’s economies of scale to be effective, they’ve to make something with large demand e.g. cream-biscuits, ice-cream or chocolates because kids from Kashmir to Kanyakumari like it irrespective location, community or religion.
Cheapness
  • Wheat flour has daily and universal demand in India. But most Indians prefer to get wheat grains and get it milled in Local flour mills.
  • MNCs are not likely to enter into such products, as it is difficult to charge premium prices for their brand image, advertisement costs and a narrow consumer base for readymade packaged flour.
Pace of life
  • In IT/BPO cities like Banglore, Pune, Hyderabad =fast pace of life = big demand for processed/ready to eat food among working professionals/couples.
  • But cities like Ahmedabad, Jaipur or Indore but pace of life is not that fast. Hence processed foods has not made as much an entry/demand.

Thus, MNC-food Giant doesn’t get automatic success is every region and every product. Small players have their own opportunities in the food processing sector, while big / international players have theirs.

FDI: Retail

E-commerce
  • 100% via automatic route
  • but only in Business to Business (B2B) e-commerce and not in retail trading.
Cash and Carry wholesale trading
  • 100% via automatic route
Single Brand Retail.
  • upto 49% via automatic route
  • upto 100% with government approval

List of Single Brand retail who’ll setup shops in India:

Single-Brand RetailWhat do they sell?
IKEAFurniture
Pavers EnglandBritish Footwear
Brooks BrothersAmerican Luxury Clothing
DamianiItalian Jewelry
PromodFrench Fashion
Le Creuset Crockery
DecathlonSporting Goods

FDI: Multibrand Retail

Maha-clichéd topic, you probably have read/heard/seen it dozen times already. Hence not going into all details.

CountryPermitted limit of FDI in Multibrand Retail
India
  • 51% with government approval
China, Thailand, Russia, Indonesia, Brazil, Argentina, Singapore
  • 100%

Difference In Single Vs Multibrand Retail?

Single Brand RetailMulti-Brand Retail
  • they sell only their own products.
  • Example in IKEA store you can buy sofa, bed, chair, table, cupboard etc- but they all belong to IKEA brand only.
  • Multi-brand retail store like Walmart sell products from more than one brand
  • e.g. mouse-keyboard from Dell, HP, Logitech and Microsoft.
  • While Printer from HP, Cannon, Epson and so on…
FDI upto 100% with government approval
  • FDI upto 51% with government approval
Need to procure of 30% of the goods from Indian MSMEs, village and cottage industries, artisans and craftsmen, in all sectors.
  • Similar condition on 30% procurement
  • +additional conditions on location and backend infra.
can be setup in any city, any state.
  • can be setup only the states that agreed. (list given below)

States/UT that permitted Multibrand Retail

  • As per the official FDI circular, State Governments/Union Territories would be free to take their own decisions in regard to implementation of FDI in Multibrand Retail.
  • As of June 2013, Following states/UT permitted foreign giants to open multi-brand retail outlets in their area.
  1. Andhra
  2. Assam
  3. Delhi
  4. Haryana
  5. HP
  6. JK
  7. Karnataka
  1. Maharashtra
  2. Manipur
  3. Rajsthan
  4. Uttarakhand
  5. Diu-Daman-Nagar Haveli (UT)

(As of June 2013)

But How / Why is Multibrand-FDI relevant/important from food processing/agro point of view?

less Wastage
  • desi food players are mostly small scale = poor economies of scale = they don’t have the money to invest in backend infrastructure.
  • Government made FDI condition that Retail giant needs to invest part of his FDI investment into backend infrastructure (=processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc.)
Better Income
  • These retail giants have deep pockets = large economies of scale = they use direct purchase / contract farming to get the fruits-veggies. Thus middleman eliminated=farmer gets more price.
Small Scale
  • Government made FDI condition that Retail giants need to buy part of their goods from small scale industries.
employment
  • Increases direct/indirect employment opportunities in the supply chain, logistics, retail and wholesale.
Tech-knowledge upgrades
  • The Foreign giants bring their own IT technology, best management practices for running the business at extreme efficiency.
  • Foreign giants will tie up with a local player (e.g. Bharti, Tata etc)=Indian managers/workers in those desi companies also learn new things
  • Later some of thm might setup their own firms utilizing the work-experience=Thus foreign business knowledge, technology trickles down and benefits Indian economy.

The Diluted Conditions

  • No investors came forward, even after Government permitted 51 per cent foreign direct investment in multi-brand retail (henceforth referred as Walmarts to save the typing headache).
  • so recently government decided to relax the conditions to attract them (+to bring more dollars to calm down the rupee fall)
Tight Conditions beforeDiluted After July 2013 Reform
CITIES
  • Walmarts can be opened only in cities with more than 10 lakh population (as per 2011 census)
  • Matter left to the discretion of the state governments.
  • Meaning Walmart can open retail stores even in cities with less than 10 lakh population (e.g. Gurgaon and Aurangabad), with the permission of the States or Union Territories.
MSME
  • Walmarts will need to buy 30% of its goods from small vendors.
  • *Small vendor= an Indian micro medium small enterprises (MSMEs) with total investment of $1 million.
  • Walmart still needs to buy 30% of its goods from small vendors but Definition of small vendor relaxed.
  • Small vendor now includes even a medium scale industry upto $2 million.
  • And, during the course of this relationship, if that small supplier outgrows the investment of $2 million, even then such dealing/procurement is allowed.
BACKEND
  • Walmarts needs to invest 50% of its FDI investment into backend infrastructure.
  • example of backend infrastructure=processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc.
  • Expenditure on land cost and rentals, will not be counted as backend infrastructure.
  • The 50% only for the first tranche of $100 million.
  • In other words, if WalMart is bringing $100 million FDI in first go, then, 50%=$50 million will have to be spend in backend infrastructure.
  • But after that, If WalMart brings another $50-100-200 million FDI, they don’t need to invest any part of that money in backend infrastructure in India.

Finance

To run any type of business: be It farming or food processing= you arrange for finance. What are the Sources of Finance?

Banksregional rural banks, cooperative banks, commercial banks
NABARDoffers refinance facilities for food processing, agri infrastructure, development
SIDBI
  • Small Industries Development Bank of India
  • gives loan to Micro Small and Medium Enterprises (MSMEs) in the country
  • although Food processing sector forms very small part of its loan portfolio
EXIM
  • Export Import Bank
  • Helps in financing and facilitating foreign trade/export, including for food processing companies.
NCDC
  • National Cooperative Development Corporation
  • helps in promoting, planning and financing the agricultural supply chain from production, processing, storage and trade
  • also helps in marketing  fertilizers, pesticides and agricultural machinery etc.
APEDA
  • Agricultural and Processed Foods Products Export Development Authority (APEDA):
  • helps to form market linkages between desi producers vs international market
  • financial assistance for market development, infrastructure etc.
Sharad Pawar
  • Agricultural ministry
  • runs many schemes for specific crops, seeds, irrigation, farm implements, inputs, infrastructure and training
NHB
  • National Horticultural Board
  • gives financial assistance for post-harvest management infrastructure, R&D, soft loans etc.
  • with most of the schemes directed to specific horticulture subsector of the food processing industry.
MFPI
  • financial assistance  for HRD, Quality testing, food parks, slaughter houses, cold storage etc.
venture funds/angel investors
  • Non-existent for food processing sector.

But both farmers + food processing entrepreneur have trouble getting loans/financing. Why?

Why can’t Farmer get loans easily?

Bank manager hates NPA in their branch. Because it affects his reputation and further career growth/promotions. On the other hand….

shrewd farmerI’m not going to repay the loan because I know that government will launch another debt-waiver scheme just before election and my loan will be forgiven!
good farmerWhy the hell should I pay the loan diligently while ^others can get away scot-free?

Hence bank reluctant due to lack of credit-discipline among farmers.

NPA
  • Even when banks give loan, agriculture is a risky business because of pests, vagaries of monsoon=crop failure
  • Government doesn’t immediately disburse insurance money to farmers=loan default=NPA.
Manpower
  • Rural bank branches have shortage of manpower to process loan papers quickly
cost of credit
  • Farmers need small loans e.g. 10-20-50,000 rupees. =>banks need to employ a large staff to look after all the documents and processing work=>additional salary burden= cost of giving loan increases.
  • Banks find it more lucrative to use the manpower in urban branches where individuals need loan in larger amount (e.g 12-15 lakhs  or more in each homeloan)
Stamp duty
  • If farmer mortgages his land to get loan, he has to pay stamp duty =additional burden on the farmer.
  • Some states (Andhra, UP, TN, Gujarat, HP) have relaxed rules in this regard, other state governments need to take similar steps.
documents
  • many small-marginal farmers don’t have documentary proofs for their land/cattle ownership=  problem while filling up the loans-application forms.

Thus for banks, Agro-loans=risky, high-cost, low-return game.

Regional imbalance

Loan/Credit distribution among farmersStates
HighSouthern
MediumNorthern and Western
LowEastern (Bihar, Jharkhand, odisha and West Bengal) and NE

Nearly three quarters of the farmer households still do not have access to the formal credit or insurance system= have to rely on informal borrowing/credit from evil moneylender @very high interest=always in debt.

Talking of insurance: three main agro-insurance schemes run by Agriculture Insurance Company (AIC):

  1. National Agricultural Insurance Scheme (NAIS)
  • available to all farmers, irrespective of their farm size.
  • Practically all risks covered (drought, excess rainfall, flood, hail, pest infestation, etc.)
  1. Weather Based Crop Insurance Scheme (WBCIS)
  • Agro-insurance from incidence of adverse conditions of weather parameters like rainfall, temperature, frost, humidity etc.
  • Challenge: Need lot of  automatic weather stations for successful implementation/assessment . (Right now barely ~3000, while we need atleast 10000)
  1. Coconut Palm Insurance Scheme (CPIS)
  • To provide insurance to coconut growers against natural calamities.

Negotiable Warehousing Receipts (NWR)

  • WE know that prices of potatoes, onions vary significantly between peak harvesting season and lean season. The middlemen @APMC control this storage and supply and make a killing business.
  • Then why don’t farmers themselves store their produce for the lean season? Because a farmer cannot afford to wait selling his potatoes for such long time in hope of getting better money. He needs quick cash so he can buy seeds, fertilizer, pesticides for the next round of cropping cycle. (and to settle the loans he took for the previous cycle)
  • The negotiable warehousing receipts can help him here. How?

To put this without getting into all technical details:

  • Farmer bring his produce to a certified warehouse/cold storage of WDRA.
  • He Deposits his produce, gets a piece of paper called “Warehouse receipt”.
  • He deposits this “Warehouse receipt” to bank, as a collateral and gets short-term loan for next cropping.
  • The farmer can decide to sell his warehouse-produce when prices are favorable (during lean season) and use it to settle the loan.

explained-negotiable-warehouse-reciept

WDRA

Warehousing Development and Regulatory Authority.

Statutory body under Ministry of Consumer Affairs, Food & Public Distribution (2010). Main functions:

  1. Regulate, certify, and develop warehouses in the country.
  2. dispute resolution between warehouses and warehouse receipt holders;
  3. HRD, training warehouse personnel.

Benefits of NWR receipts

  1. Bank faces lower risks because collateral for the loan is a liquid asset (agro-produce recipient, backed by a central act).
  2. Previously, Small/marginal farmers couldn’t easily get loans because they didn’t have conventional loan collateral (land, gold, cattle etc.) But now they can get it easily using Kisan Credit Card +Negotiable warehouse receipt.
  3. Protects farmers against distress sale of their produce and exploitation by middlemen.
  4. Minimizes Wastage perishable produce. (Because they’re stored in certified warehouses/cold chains).
  5. Reduces hoarding and food inflation (because farmers less ‘cartelized’ than APMC Middlemen.)
  6. Provides alternate employment opportunity for those APMC middlemen- they can form a group, setup warehouse and get certificate from WDRA.
  7. Warehouse receipts are a proven tool for financing, already successful in Brazil, Indonesia, Singapore and Argentina

Enough of Farmers’ finance, time to move on:

Why can’t food entrepreneurs get loans easily?

From a Bank managers’ point of view: again the fear of NPA

  1. Seasonality
  • Most of the Mango processing units in Andra run for barely 70 days per year. This type of ‘seasonal-businessmen’ are considered risky from banker’s point of view.
  1. Strength
  • Most of the food processing units hide actual sales in the account books (to evade taxes
  • Banker never gets ‘true’ picture of a firm’s financial strength. He is not sure whether the given entrepreneur is loan worthy or not?
  1. Credit Rating
  • If an urban middle class man wants to take Car/Home loan, then bank can always check his ‘credit-history’ from the Credit Information Bureau of India Ltd. (CIBIL).
  • But CIBIL doesn’t maintain such data/record for the food processing sector=> difficult for bank to find out whether given food entrepreneur has diligently paid his previous loans in from other banks or is he a scamster doing ‘iski topi uske sir pe?”
  1. Excess Capacity
  • In many food processing sectors, Government gives grants/tax exemption for first few years.
  • As a result plenty of new small players emerge=>There is not enough raw material to run each plant @full capacity (e.g. Groundnut oil refining)
  • Sooner or later ^these small players fall sick because of heavy competition=> loan defaults.
  1. New Tech=Risky
  • To improve yields: farmer/entrepreneur will need money for starting high density farming, greenhouse floriculture, controlled environment livestock farming, bio-technology, tissue culture, embryo transfer technology, bio-pesticides and bio-fertilizer, etc.
  • But from Banker’s point of view, the success of new technology = not been tested in actual situations / widely popular in India.
  • So he fears high chances of business failure= loan defaults=NPA.

Therefore,

  1. Bank manager will either refuse to give loan OR
  2. He will give loan but charge higher interest rate for the additional ‘risk’.
  3. He might give loan for the initial capital for buying plant, machinery, vehicle (for which government provides grants/subsidies) but not for the working capital requirements.

By the way what is working capital requirement?

  1. Raw Materials, Consumables & Packing Materials
  2. Electricity, phone, internet, utility bills
  3. Administrative and Selling Exposes
  4. Repairs and maintenance
  5. salaries of workers
  6. monthly bribes to food inspector

For Small sized food processing unit, the working capital requirement is quite high because high cost of raw material, many middlemen= low profits. Result?

  1. Poor Economies of scale that we already saw in first article. (click me)
  2. Can’t do any timely up gradation of technology, can’t improve quality of products / advertisement / marketing.
  3. Don’t have spare money for backward linkages with farmers. (e.g. contract farming, supplying farmer with seeds/fertilizer to get quality agro produce.)

Permission-raj

As an entrepreneur, even if you manage to get loan/finance, you still need following permissions before setting up a cold storage / food processing unit:

  1. Approval from district collector for change of land usage and land conversion.
  2. NOC from Gram Panchayat, if the land falls under Gram Panchayat.
  3. Approval of building plan
  4. Fire safety approval, If the building is taller than 15 metres.
  5. Approval under Factories Act. (has to be renewed periodically)
  6. NOC from Pollution Control Board. (has to renewed from time to time)
  7. SSI registration in case of Small Scale enterprises.
  8. Approval from local Excise Department for getting CENVAT exemption for Cold Storage equipment
  9. Truckload of forms/formalities if you want to get grants/subsidies under government schemes.

comic Rajnikanth permission problems

Thus, it takes lot of time (and bribes) to get so many permissions=> food-entrepreneur gets demotivated. Not just Food entrepreneur- any small entrepreneur has to go through same ragging by banks and government departments and as a result: low IIP + low GDP + low export + High CAD + High inflation and so many other problems to Indian economy.

License Raj

  • Today, Industrial license is not required for most food processing enterprises, except for alcohol and beer and those food items reserved for small scale sector (=Pickles, chutney, bread, mustard oil, ground nut oil.)
  • But for long, food items were reserved for SSI=hampered the growth of this industry.

Taxation

  1. Agriculture produces have long been subject to numerous taxes, charges: market fees, market cess, commission charges, Octroi entry tax, sales tax, weighing charges, labour charges for handling, loading and unloading, purchase tax, Rural Development cess etc.
  2. For example, In Punjab, the total market charges on transactions of foodgrains are more than 15% of the final value (2011 data)
Punjabtax%
market fee2%
Purchase Tax4%
VAT4%
rural development fund (RDF) cess3%
Punjab infrastructure development fund (PIDF)3%

^These are just the ‘legit’ taxes, the commission by middleman is additional burden on the final consumer.

  1. Tea/coffee/rubber plantation incomes are subjected to Income tax. Tea plantations also subjected to land tax in Assam.
  2. Previously plastic packaging, aluminum packaging had been subjected to high excise duty (~16%)= high input cost for food industry.

Budget 2013: Agro and Food processing

Let’s [email protected] Budget 2013 will directly/indirectly help agriculture/food processing sector

$pending

Numbers not important, the point is truckload of cash allotted to help farmers (or atleast to pretend)
Agro Ministry25000 cr
Agro Research3000 cr
Green Revolution To Eastern India1000 cr
Crop Diversification Program500 cr
Ago-Credit Target7 lakh crores
Rashtriya Krishi Vikas Yojana9000 cr
Integrated Watershed Program5000 cr
Small Farmers’Agri Business Corporation100 crores for Credit Guarantee Fund
Farmer Producer Organization (FPO)lakhs per FPO
Rural Infrastructure Development Fund (RIDF)20000 cr.
NABARD5000 cr. to construct warehouse

Budget 2013: Schemes/initiatives

That will directly/indirectly help agriculture/food processing sector

Green Revolution
  • Assam, Bihar, Chhattisgarh and West Bengal have increased their contribution to rice production.
Interest Subvention
  • Interest subvention scheme for short-term crop loans
  • Borrowers from private sector scheduled commercial banks also eligible.
Nutri Farms
  • Nutri-Farms will cultivate new crop varieties rich in micro-nutrients such as iron-rich bajra, protein-rich maize and zinc-rich wheat.
  • Pilot projects in districts most affected by malnutrition.
Institutes
  • National Institute of Biotic Stress Management @Raipur to addressing plant protection issues.
  • setup Indian Institute of Agricultural Bio-technology@ Ranchi
Coconut
  • Scheme to replant and rejuvenate coconut gardens in Kerala + Andaman & Nicobar.
National Livestock Mission
  • To support poultry, dairy farming and fisheries.
  • It’ll have sub-missions for
    • increasing availability of feed + fodder
    • Improving animal breeds to raise milk yields.

(Don’t you think this overlaps with the national dairy mission that we saw in last article!)

Storage
  • NABARD to finance construction of warehouses, godowns, silos and cold storage units designed to store agricultural produce, both in the public and the private sectors.
IDFInfrastructure Debt Funds (IDF) already discussed earlier. Goto Mrunal.org/economy
Skill
  • Target of skilling 50 million people in the 12th Plan period, including 9 million in 2013-14.
  • (^food processing sector will benefit)
BRGF
  • Backward Regions Grant Fund
  • New criteria for determining backwardness to be evolved.
  • more details on BRGF at bottom of the article.

Budget 2013: Taxation

That will directly/indirectly help agriculture/food processing sector

CTTAgricultural commodities will be exempted from the proposed Commodity Transaction Tax (CTT).
TDSChindu introduced 1% TDS on transfer of immovable property but exempted agricultural land from this.
GSTWork in progress.

Income tax deduction

If you setup business in following category, you’ll be given tax-deduction (how to calculate income tax and deduction? already explained click me)

categoryincome tax deduction
cold chain facility150%
warehousing facility for storage of agricultural produce150%
warehousing facility for storage of sugar100%
Bee-keeping and production of honey and beeswax100%

Custom Duty

reduced the duty on
  1. Hazelnuts
  2. De-hulled oat grain
Exempted from duty
  1. raw sugar, white or refined sugar will not attract any export duty. But, in future, exemption may be withdrawn to regulate its export in case of shortage within India.
  2. De-oiled rice bran oil cake

Excise Duty

itemexcise duty (2013)
milk, milk products0
nuts-fruits (Fresh and dried)0
veggies0
Sabudana (Tapioca Sago)0
processed fruits and vegetables, Soya Milk, Flavored milk2% (classified under merit goods)else 6%

Service tax: Negative list

Chindu put following services in ‘negative-list’ (meaning they’re exempted from service tax).

AreaWhat is exempted from Service tax?
Cultivation
  • Agro operations: cultivation, harvesting, threshing, seed testing etc.
  • supply of farm labor
  • Agro-machinery: renting/leasing
Food Processing
  • processing @Farm: drying, fumigation, curing, packaging etc. which do not alter essential characteristics of agricultural produce but make it only marketable for the primary market;
Supply Chain
  • loading, unloading, packing, storage or warehousing of agro produce;
  • Services of Agro-commission agent
Transport
  • transport of chemical fertilizer and oilcakes;
  • transport  of various agro products, tea, coffee, sugar, milk, salt and edible oil etc. (except liquor.)
R&D/Support
  • Testing activities for agriculture and agricultural produce. (this is new serviced added in the negative list)
  • agricultural extension services

Misc.

Although unrelated to the main title of this article, but let’s get overview of following, since they found mention in the Budget 2013:

Backward Regions Grant Fund (BRGF)

Who?Ministry of Panchayati Raj Institutions + Planning commission
When?2007
Why?To reduce regional imbalance in development.
What?gives additional Ca$h to backward regions

Has two components:

  1. District-Component
More than 270 backward districts in 27 statesNote: At least prepare overview of backward districts in your home-state for the profile based Interview questions @UPSC + for State PSC class 1-2 exams.
  1. State-Component
Gives special funding to

  1. Bihar
  2. Odisha: the Kalahandi-Bolangir-Koraput (KBK) districts
  3. West Bengal
  4. UP: Bundelkhand Package

How does it work?

Ca$h Movement
  1. from Union to State Consolidated Funds
  2. from state to Panchayats.
  3. Each district given min.1 crore.
Transparency
  • System of electronic tagging and tracking to ensure funds go to each Panchayat without delay or diversion.
  • (jholachhap) NGOs to help in account-keeping and social audit.
PlanningPanchayats will prepare plans for

  • improving infrastructure: water, sanitation, schools, street lights
  • agrarian reforms
  • can use money to fill gap/add value to other programs
ImplementationThrough people’s participation.

Rashtriya Krishi Vikas Yojana (RKVY)

When2007, under 11th Five year plan (FYP)
Why?to achieve 4% annual growth in the agriculture sectorto encourage States government to allocate more cash to agro and allied sectors
How much?More than 60,000 crores allotted in 12th FYP.

Sub-Schemes

  1. Green Revolution
In Eastern India: Assam, West Bengal, Orissa, Bihar, Jharkhand, eastern Uttar Pradesh and Chhattisgarh to improve in their rice cultivation
  1. Pulses
Promote Pulses Villages in Rainfed Areas.
  1. Edible Oil
Oil Palms=increase area under cultivation
  1. Veggies
Initiative on Vegetable Clusters to increase in the productivity and market linkage of vegetables.
  1. Nutri-Cereals
bajra, jowar, ragi and other millets: create awareness regarding their health benefits.
  1. Protein
National Mission for Protein Supplements: to promote animal based protein production: milk, pigs, goats, fisheries.
  1. Fodder
Accelerated Fodder Development Programme
  1. Rainfed
Rainfed Area Development Programme to  improving productivity of crops in rainfed areas.
  1. Saffron
Mission In Jammu & Kashmir.
  1. Vidarbha
Intensified Irrigation project in Vidarbha, Maharashtra.
  1. PPP
PPP for Integrated Agriculture Development

Rashtriya Krishi Vikas Yojna (RKVY) has greater acceptance among states as it provides flexibility to formulate state-specific strategies

Statesprojects undertaken
Sikkim, Arunachal Pradesh and other North East States
  1. projects on piggery,
  2. wayside market sheds,
  3. area expansion through land terracing
  4. promotion of off-season vegetable cultivation,
Maharashtra
  1. low cost onion storage structures
  2. farm ponds to  tackle water stress
Tamil Nadu, West Bengal, Bihar, Jharkhand and tripura
  1. System of Rice Intensification (SRI)
Andhra Pradesh
  1. vegetable cultivation through pandals and trellises.
Haryana and Punjab
  1. underground pipe lines for irrigation
  2. Promoting elite breed of murrah buffaloes
  3. Community animal housing
Gujarat
  1. check salinity ingress in coastal areas
Kerala
  1. Custom hiring centers providing farm machinery (to solve labour shortage problem.)

RKVY challenges:

  1. More than 80% of farmers have small/marginal landholdings= poor economies of scale. RKVY hasn’t not effectively addressed the issue of land consolidation / land reforms.
  2. Less than 10% of the plan outlet spent on Marketing / Post Harvest Management.
  3. Often the projects proposed under RKVY are not in tune with priorities and developmental gaps identified in State Agricultural Plan (SAP).

Next Time: we’ll see with the supply chain management, upstream-downstream for food processing industries dealing with F&V (fruit and vegetables)

Mrunal recommends

  1. (free) NCERT, NIOS, TN-Books
  2. Environment by ShankarIAS
  3. Indian Polity M.Laxmikanth (Hindi | English)
  4. Art & Culture by Nitin Singhania (Hindi | English)
  5. Spectrum: Modern History (Hindi | English)
  6. Bipin Chandra: Post Independence
  7. Fast-track to Arithmetic Rajesh Verma
  8. MK Pandey’s Analytical Reasoning
  9. Disha’s Topicwise Paperset (Hindi | English)
  10. School Atlas
  11. Mains: Language papers
  1. (free) NCERT, NIOS, TN-Books 4 History,Geo,Sci
  2. Indian Polity M.Laxmikanth (Hindi | English)
  3. Spectrum: Modern History (Hindi | English)
  4. Maths: Quantam CAT Sarvesh Kumar
  5. Objective General English SP Bakshi
  6. Word Power made Easy -Norman Lowe
  7. Topic wise Solved Paperset by Disha


So far 53 Comments posted

  1. sameer

    plz, can anyone tell that all the attachments of xerox like LC, marksheets and caste certificate etc.. with mains form to be posted to UPSC should have attestation from a class 1 gazzeted officer or any other local officer will do…. pls answer

    1. vibhor

      attest yourself that will do

      1. vibhor

        Don’t give such reply!
        Sameer, must be attested by gazzeted class-I officer(professors/asst. prof in Govt. colleges are also class-I officers), get from them.. or Army officers,etc. You can easily find them 🙂

      2. kkp

        doubt – after taking print out of daf there is space provided to sign on
        very page except SUMMARY FORM so should we sign on it or not please reply???

  2. divyasri

    thank u mrunal sir

  3. SUNNY

    unmatched job…mrunal sir…

  4. Ravneet Singh

    hello mrunal sir, i just found this wonderful site of yours.
    i want to know will you be doing IBPS RRB exam study plan.
    please reply
    thanks

  5. Sachin Gupta

    “ULTIMATE” is the only word Mota Bhai !!

  6. Abhishek

    bhai logon can anyone tell me if we have to include the 2013 exam in this question – Whether you have been selected or applied for U.P.S.C Examinations/Recruitments (including the Civil Services Examination)?

    Thanks,
    Abhishek

      1. kkp

        doubt – after taking print out of daf there is space provided to sign on very page except SUMMARY FORM so should we sign on it or not please reply???

        1. Abhishek

          nahin bhai I don’t think it is needed – It is written on that sheet for office use only.

  7. Gargi

    Sir,

    On an unrelated note, will the IGNOU Ethics MPYE-002 paper be of relevance while preparing for the GS-Ethics as well?

    Regards,
    Gargi

  8. NRM

    Frnds
    SBI has put up marks of all candidates for PO written exam held on 28/04/13..i got 118 out of 200 in mcq and have also cleared all sectional cut offs..but however they have given me 0.00 marks in the descriptive paper in which i was expecting 35-40 marks..cut off for gen category is 151 for GD-PI call..i wonder if that’s an error on the bank’s side..i have also mailed the bank in this regards..pls share your views if anyone has faced the same problem

  9. raj

    Mrunal
    Thanks for the awesome articles on geography and food processing.
    Please provide an article series on International Relations as well.(acc. to topics mentioned in syllabus)

  10. fan

    just superb.. Thank you Mrunal and please keep this going .. for the sake of future IAS officers!

  11. MAYU

    THANX A LOT SIR….!!!!!

  12. vikas

    its simply superb……..

  13. grateful

    Thanks a lot Sir, you’re acting as our back end infrastructure !!

  14. vivekananda

    awesome mrunal

  15. vishal

    commendable job done mrunal ,keep it up……

  16. alap

    Thanks a lot.. doing very great job..

  17. N.krishna

    friends; whats the issue about security certificate, I tried to install it but in vain. tried both chrome n explorer;should i proceed without installing it? plz guide !

  18. Uday Kumar Jha

    Thanks a lot Mrunal!

  19. shal

    so love it … 🙂

  20. Please help

    Hi Mrunal sir and friends,

    In the mains form we need to submit last 3 year income tax returns in OBC annexture for the proof father’s and mother’s income. I have OBC certificate and also the income proof by circle officer made in the block. But my parents do not fill returns.

    Could anybody please tell if not attaching tax returns with the annexture will have any serious implication on my candidature? What should I do now?

  21. Sagar

    does anybody know whether UPSC accept colored photocopies of the originals ?

  22. Pravin Karale

    Please send me previous ten years question papers of General Studies Papers of UPSC mains…………!

  23. Kartik

    To all,

    For last few months govt. has come up with many bond sales !
    I wanted to ask anyone why is it so n is it related to depreciating rupee ??

    Plz help

    Thanks in advance !

    1. Payal

      When RBI sales Bond den Liquidity in the country crunches…So the businessman or the banks doesnot have Enough Many in Hnads and for Business.Rupee is depreciating cz of CAD and Quantitative Easing by Feds.Govt Wants to lower down the demand of Gold in the country dats why sucking the liquidity from the Country by selling Bonds

      1. ravi

        sucking rupee will increase inflation and reduce lending to businessmen as well. it may be a short term step to control falling rupee but slow down the economic growth in long run. slow economic growth will ultimately wide CAD and devaluate rupee.

        1. vibhor

          sucking rupee will mean less money in hand less demand less inflation as far as i know correct me if i am wrong

          1. ravi

            yes less money means less demands of goods but demands of essential items like petroleum can’t be compromised which is main guilty of price hike because of high cost of transportation. further, sucking rupee means less money in hand of people and hence less demand of other non essential items which is also not good for growth of manufacturing sector and result is low economic growth. ultimately low domestic productivity and high import of petroleum will lead to widening CAD and sliding rupee. inflation will also boost due to these reasons.

          2. Shailesh

            A few corrections in Payal’s comment
            1) Rupee is depreciating because
            a) Apprehensions that FED is going to curb its quantitative easing( basically they are going to slow down printing millions of $ that they were doing on monthly basis to overcome 2008 crisis). these started after Fed’s head talked about its possibility. Now it is almost certain as US economy is growing @2% now.
            b) hasty decisions and changing policies like curbing remittances, absorbing rupee, changing interest rates by RBI and finMin has made things worst as market seems unstable to investors.
            c) These are the POLITICAL YEARS… Govt. will do anything( any expenditure) to woo poor and lower middle class(~70% population), that makes businessmen insecure.

            Absorbing rupee is little related to curb gold demand and more to reduce rupee from market, so that value of rupee vis a vis $ stays stable. It is very short term solution and rarely works( as we can see no one is buying bonds from RBI). Its economic consequences are well explained by Ravi. Bottom line is that Development and growth is the only solution to rupee’s fall rather than ‘artificially’ reducing visible rupee and hindering the long term solution.

  24. Haribabu

    Hi Guys,

    SSC CGL 2013 Result out,…

    Cutoff is more than previous year…please check

  25. Kartik

    @ ravi
    @ payal

    I got ur point but then what does this mean

    ” the rbi ll buy long dated govt. securities/bonds worth rs 8000 cr. this open market operation route ll infuse liquidity and push down bond yields which in turn ll favourably impact bank lending ”

    The hindu 26-8-2013 , page no 14 , rhs

    Plz clarify ” infuse liquidity ” coz u said govt intends to suck liquidity !!

    Thanks !

    1. ravi

      in july middle RBI took some steps to curb rupee sliding. selling of govt bond was one of those steps but it didn’t bring desirable result. now in mid of August govt rolled back and decided to buy govt bond to infuse liquidity.

    2. Shailesh

      This is happening because
      1) The purpose of Bond sales by RBI failed.(1 $ = Rs 65 now)
      2) On the downturn it slowed down growth. (quarter 1 growth of GDP = 4.8%). This is happening when Mohan has promised to bring back economy to 6- 6.5% by end of this fiscal( Lol!!).

      So RBI has decided to focus on reducing growth as well by infusing money into market.

      1. 6260

        when there is panic in the market, usually the yields on bonds (govt securities) go up since more and more people want to invest in safer financial instruments, and there is nothing safer than govt securities.

        this phenomenon was observed in indian market, when the yields on long term govt securities have reached to record levels.

        however, such a thing is not good for economy in the long run, bcoz –
        1. high yields – govt has to pay more as interest – more expenditure of govt – greater fiscal deficit – no good!
        2. high inflation scenario of today – regular investment not safe – high yields on bonds looks more lucrative – productive investment i.e. gross capital formation falls – bad for growth.

        to correct such a tendency for the long term, RBI intervenes, by buying bonds, from the market and tries to set the bond rates.

        in turn, this also infuses liquidity in the market – good for growth side.

        hope this will help.

  26. rahul

    sir i have passed BA (private) from CSJM unvi 2013, result was declared on around 9th aug 13, so am i eligible for IBPS CWE CLERK in terms of its condition ie THE RESULT SHOULD BE DECLARED ON OR BEFORE 1.08.2013?? PLZ HELP. AND HOW DO THEY WILL COME 2 KNOW THE DECLERATION DATE?? plz help!!!!!

  27. Mansoor Ahmad

    Still to read this write-up. But I believe it will be awesome as usual !

  28. sanjay

    w.r.t. to pg no. 10.3 indian polity by laxmikant
    6 th point which states that representation of states should be done by special majority of parliament and consent of states
    my doubt —-
    1–what does this representation of states mean
    2—and but creation of new states can be done by simple majority also and if its done there will be representation in parliament by default or any special voting for its representation

  29. chandu

    Well explained and easy to understand.Thank you.

  30. arjun

    please note exception made to amazon to do e-commerce retail trade in india sidestepping regulations..

  31. Abhishek

    Mrunal Bhai , I appreciate your concern for details but I think this whole series has way too much info than anyone can hope to remember – I believe at least one article could just had problems of food processing and what are the possible policy interventions/solutions. Second set could have been government schemes. I seem to have lost the gist of problem with details like excise duties, negative list…may be this is just a problem at my end. Nevertheless, your hard work is much appreciated.

  32. Mains

    @Mrunal Sir and other veterans here,

    We know how much marks people got in the last year mains exam. But can anybody tell how many questions do people generally attempt in GS mains paper. Are people really able to attempt 100%? For me, it seems even after preparing, I wont be able to attempt more than 60% in GS..

  33. Nipun

    @mrunal

    while filling my DAF form for mains, i made a mistake i have left blank 2-3 fields which were not mandatory and i have submitted it finally. But it is written that we have to write NIL in the field which is not applicable. please tell me will i be able to sit in the examination or not. please reply soon

  34. rajendrasing patil

    mrunal sir
    happy new year in advance of 26 days to you
    i am at chalisgoan maharashtra
    i want to start flour milling under govt food processing subcidy & grants scemes
    guide me for papers helpline to pass the fianances

    thanking you

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  36. subhash rai

    i am just following ur notes, and i think it is sufficient for exam

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