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)


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 UPSC Topic 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.)


  • 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 from Why subjected to anti-dumping duty in USA?
Thailand government buys shrimp from farmers and sells it to processors at low price
China government gave finance to build the world’s largest shrimp-processing and export plant
Malaysia government gave finance to build shrimp farms.

Dumping by India

List not exhaustive (but in recent news)

Country Which Indian export was slapped Anti-Dumping duty
China Recently 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.
Thailand Indian steel
Indonesia Against 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 restrictions Under 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 prohibitions On ivory, fur, tiger skin/bones, narcotics, illegal weapons, explosives etc.
Import licensing When Murthy started Infosys, he had to make 50 trips to Delhi for three years just to get a license to import computers.
Export Subsidies We already saw some duty credit schemes for Agri-exports in the second article. click me
Labour/Environment standards e.g. some developed country banning import from third world country saying child labour was used etc.
Health Standards Codex, 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 item banned/restricted abroad thanks to
  1. Groundnut
  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 (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:

EIC Export 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.

  • 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.
  • 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
collaboration We’re collaborating with USA, UK, Netherlands, Switzerland and Germany for Agri-technology transfer, financial and marketing tieup and quality control.
  • 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

Negotiation Government 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
Certification APEDA 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.
  • 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.
  • 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:

Seeds Seeds 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
  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)
  • 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.
  • 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

  • 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 Retail What do they sell?
IKEA Furniture
Pavers England British Footwear
Brooks Brothers American Luxury Clothing
Damiani Italian Jewelry
Promod French Fashion
Le Creuset Crockery
Decathlon Sporting Goods

FDI: Multibrand Retail

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

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

Difference In Single Vs Multibrand Retail?

Single Brand Retail Multi-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.
  • 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 before Diluted After July 2013 Reform
  • 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.
  • 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.
  • 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.


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

Banks regional rural banks, cooperative banks, commercial banks
NABARD offers refinance facilities for food processing, agri infrastructure, development
  • 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
  • Export Import Bank
  • Helps in financing and facilitating foreign trade/export, including for food processing companies.
  • 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.
  • 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
  • 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.
  • 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 farmer I’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 farmer Why 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.

  • 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.
  • 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.
  • 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 farmers States
High Southern
Medium Northern and Western
Low Eastern (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.



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.


  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.)


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.


  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)
Punjab tax%
market fee 2%
Purchase Tax 4%
VAT 4%
rural development fund (RDF) cess 3%
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 look@how Budget 2013 will directly/indirectly help agriculture/food processing sector


Numbers not important, the point is truckload of cash allotted to help farmers (or atleast to pretend)
Agro Ministry 25000 cr
Agro Research 3000 cr
Green Revolution To Eastern India 1000 cr
Crop Diversification Program 500 cr
Ago-Credit Target 7 lakh crores
Rashtriya Krishi Vikas Yojana 9000 cr
Integrated Watershed Program 5000 cr
Small Farmers’Agri Business Corporation 100 crores for Credit Guarantee Fund
Farmer Producer Organization (FPO) lakhs per FPO
Rural Infrastructure Development Fund (RIDF) 20000 cr.
NABARD 5000 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.
  • National Institute of Biotic Stress Management @Raipur to addressing plant protection issues.
  • setup Indian Institute of Agricultural Bio-technology@ Ranchi
  • 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!)

  • 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.
IDF Infrastructure Debt Funds (IDF) already discussed earlier. Goto Mrunal.org/economy
  • Target of skilling 50 million people in the 12th Plan period, including 9 million in 2013-14.
  • (^food processing sector will benefit)
  • 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

CTT Agricultural commodities will be exempted from the proposed Commodity Transaction Tax (CTT).
TDS Chindu introduced 1% TDS on transfer of immovable property but exempted agricultural land from this.
GST Work 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)

category income tax deduction
cold chain facility 150%
warehousing facility for storage of agricultural produce 150%
warehousing facility for storage of sugar 100%
Bee-keeping and production of honey and beeswax 100%

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

item excise duty (2013)
milk, milk products 0
nuts-fruits (Fresh and dried) 0
veggies 0
Sabudana (Tapioca Sago) 0
processed fruits and vegetables, Soya Milk, Flavored milk 2% (classified under merit goods)else 6%

Service tax: Negative list

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

Area What is exempted from Service tax?
  • 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 of chemical fertilizer and oilcakes;
  • transport  of various agro products, tea, coffee, sugar, milk, salt and edible oil etc. (except liquor.)
  • Testing activities for agriculture and agricultural produce. (this is new serviced added in the negative list)
  • agricultural extension services


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.
  • 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.
Planning Panchayats will prepare plans for

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

Rashtriya Krishi Vikas Yojana (RKVY)

When 2007, 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.


  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

States projects 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,
  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
  1. check salinity ingress in coastal areas
  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)