1. Prologue
2. Indian food processing industry: Significance
   1. Increasing Employment
   2. Curbing Migration
   3. Curbing Food Inflation
   4. Crop-diversification
3. Scope/Potential
   1. Abundant Raw Material
   2. Geographical advantages
   3. New Demand
   4. Government Initiatives
4. Obstacles to food processing?
   1. Economies of scale
   2. Lack of organized retail
   3. Lack of Food testing facilities
   4. Lack of Skilled Manpower
   5. Lack of R&D
   6. Transport problems
   7. Export Problems

Prologue

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

• their Scope, significance, Location
• Supply chain management (SCM)
• Upstream and downstream requirements

But ^that’s not “the end”. Food processing topic also overlaps with

GS-2	Ministries and Departments of the Government Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
GS-3	storage, transport and marketing of agricultural produce and issues and related constraints; Sci-Tech research e.g. Food irradiation, developing new crop hybrids, animal-breeds etc.

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

Structure of the [Food processing] Article series:

1. We get basic overview of significance-scope-potential-obstacles
2. Truckload of Government schemes related to post-harvest management, Mega Food parks etc.
3. Model APMC acts, the direct cooperative marketing etc.
4. Finance, taxation, FDI, export related issues
5. Then we start basic theory of supply chain management (SCM), and upstream downstream issues of individual food processing sub-sectors viz. Dairy, Fruit and Veggies, Egg-Meat-Fishes, Confectionary, Wine, Edible oil etc.

References used for this article series

Source	Title	comment
Books	A Manual for Entrepreneurs: Food Processing Industry (Tata McGraw-Hill Publication)	Initial chapters provide the challenges/problems with food processing industry. Rest goes into actual management, accounting, sales, marketing strategy for a food entrepreneur=useless from UPSC point of view.
	Food processing: Opportunities and Challenges (ICFAI university press)	Some chapters deal with food industries in China, Australia etc but hardly any good fodder pointsSome chapters provide details of individual food processing sector but mere copy paste job from Vision 2015 PDF document.
	IGNOU MBA booklets (Coursecode: MS-55)	for theory on supply chain management, upstream-downstream requirements
PDFs	State of Indian agriculture 2012-13 (By Agricultural Ministry)	for agro-livestock-fish-production information and  schemes
	Vision 2015 for food industries: part 1 and 2	for opportunities and obstacles in individual sector: dairy, meat, wine etc.
	Flavors of Incredible India: A report by Ernst & Young and FICCI	for supply chain diagrams of individual food processing sector+ Additional points for opportunities, obstacles.
	Planning commission’s report on Encouraging Investments In Supply Chains and cold storages	plenty of fodder on supply chain, opportunities, obstacles various schemes
	12th FYP documents	doesn’t have much specific fodder points for food processing though.
	IBEF report on Food processing industry	some fancy charts, numbers.
Web	pib.nic.in, Indian express	for government schemes, salient features, export/dumping issues.

Note: All those Food processing related PDFs have been uploaded on https://files.secureserver.net/0sL2N0Ej5XwsWc
12th Five year plan uploaded on https://files.secureserver.net/0sLrYY0FFJRric

Indian food processing industry: Significance

size	Has more than 35000 registered units Output of ~5-6 lakh crores Food processing contributes about 9-10% of GPD, in Agro-Mfg. sector.
location	Location wise: Maximum factories in (ie. more than 1000 in given state)Coastal states: Andhra, Maharashtra, Karnataka, Kerala, Gujarat, Punjab, WBNon-coastal States: UP, Punjab Observe majorities of the food processing factories are concentrated in the coastal states.

Increasing Employment

• Food processing industry provides plenty of direct and indirect employment opportunities, because it acts as bridge between Agriculture and Manufacturing
• As per ASI survey in 2010, Food processing industry generated highest employment among all industry. Giving employment to almost 17 lakh people.
• 12^th Five year plan (FYP) wants to create more than 50 million jobs. Out of that, Food processing sector is to create one million jobs.

Curbing Migration

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

1. Poverty among villagers,
2. disguised unemployment
3. exploitation of farmers
4. rural-urban migration
   1. unplanned urbanization,
   2. slums/hygiene/social problems in cities

Curbing Food Inflation

• In the last few years Food inflation has been a major problem. Food inflation is eventually passed through into manufactured goods through higher money wages.
• Therefore persistent high food inflation= bad for general macroeconomic stability.
• well-developed food industry + compact supply chain=reduces food inflation via:
  1. Disintermediation (meaning no middlemen/commission agents)
  2. less wastage/spoilage of perishable products

• Thus food industry is significant for reducing food inflation.

Crop-diversification

• Indian villagers are away from market= have to grow cereals. (as we learned in Von Thunen model)
• In recent years, Government increased Minimum support prices for rice and wheat.
• That leads to surplus grain production=>Pvt. Players give less price to farmer=>government has to buy wheat @Minimum support price (MSP) but FCI didn’t have enough storage capacity
• Result: Wheat gets rotten @godowns and railway stations.
• On the other hand, we’ve to rely on imported oilseeds because of higher MSP, farmers prefer to grow rice/wheat than oilseeds=> higher oilseed import adds to Current account deficit and leads to 1$=62 rupees=>crude oil expensive=petrol expensive=everything transported through petrol/diesel gets expensive=thus the cycle of middle class exploitation is complete.
• Coming to the original point: we need crop diversification, all farmers shouldn’t be growing just rice and wheat. But if want to seduce the farmers into growing other crops, then following must be done

1. Promote food industry with backward linkages to farmers growing fruits, vegetables, milk, fish, meat, poultry, grain, etc.
2. Aggressively market the processed food in India + Abroad

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

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

Scope/Potential

Abundant Raw Material

India’s world Rank	in production of
1	milk, ginger, chickpea, banana, guava, papaya, mango, buffalo meat
2	rice, wheat, potato, garlic, cashew nut, groundnut, dry onion, green peas, pumpkin, gourds, cauliflowers,  sugarcane, tea
among top five	coffee, tobacco, spices, oilseeds

With such a huge raw material base, we can easily become leading food supplier in the world. (But we haven’t, because of the obstacles discussed later).

Geographical advantages

1. 46 out of 60 soil types are present in India.
2. More than 26 types of climatic conditions= can cultivate large variety of fruits, crops, vegetables.
3. Large coastline, villagers in 13 states engaged in fishing as their secondary activity.
4. Variety domestic animals such as cows, buffaloes, goats, chicken, lamb, sheep.
5. Large irrigated area under cultivation. Ample supply of fresh water for human, plant and animals.

New Demand

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

1. Youth population (age group 15 – 25): doesn’t shy away from trying new food products.
2. More Nuclear families: usually working couple => less cooking time + expensive maids=need ready to eat / ready to cook food.
3. Rising incomes, middle class and rich families=can afford processed food.
4. Emergence of Tier 1 and Tier 2 cities, shopping mall culture.
5. Growing migration from rural to urban India + rising income = demand for bread, butter etc.
6. Media penetration, advertisements=> “demand” is created for health-drinks, noodles, cream-biscuits, cornflakes etc.
7. Celebrity chefs, cookery channels= new dishes, international cuisines introduced=>demand for their ingredients, vegetables in India.
8. Diabetes, obesity, Blood pressure, lifestyle diseases =>demand for healthy food.

As a result, food processing industry is expected to reach

year	turnover USD
2015	>250 billion
2020	>300 billion

Government Initiatives

• Many food processing sectors that were earlier reserved for small scale industries (SSI) have been de-reserved
• FDI limits have been relaxed, Excise duties have been reduced, export subsidies given
• National mission on food processing, Vision2015 for food processing,
• New schemes for mega food parks, cold chain etc.
• Many states have reformed their outdated APMC laws.

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

so far everything sounds hunky dory but if our food processing industry was so awesome, then UPSC wouldn’t have included it in the syllabus. Then, what are the….

Obstacles to food processing?

country	__ % of total fruits/vegetables processed
India	barely 6-7
China	>20
USA	>60

So, why low level of food processing in India?

Economies of scale

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

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

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

Aspect	problems of small company / poor economies of scale
Pricing	Since unit production cost is high, he can’t sell his products cheap unlike a big MNC, and Indian consumers are price sensitive.
Brand-Building	Small players=small profit, seasonal business. In global market they can’t establish themselves as a long-term player – they only do opportunistic businesses, undercut each other.
Low Technology	Can’t invest in R&D to develop new products (e.g. chilli chewing gum or tomato cream biscuit!) Can’t do marketing research / survey to find out what consumers want?
Marketing	Can’t invest in advertisement campaigns to create new demand. e.g. Kellogs is aggressively advertising its cornflakes in India, highlighting ‘weightloss’ benefits. but on the other hand, an Indian Halwai (sweet maker) can’t do same level of marketing in USA to create demand for jalebi or peda.
Un-Export Quality	can’t do backward linkage e.g. contract farming: giving seeds/fertilizer/pesticide to farmer. Instead small company relies on multiple small supplier hence Raw material=non-uniform in quality. Then their products are rejected in US/EU market for not meeting the Codex/HACCP standards. (e.g. mango juice rejected for stone weevil, buffalo meat rejected for food-n-mouth disease, fish rejected for heavy metal contamination and so on.)
retailing	Can’t do forward linkage e.g opening its own factory retail outlet like Nike, Adidas or Apple => small company has to rely on third party retailers and need to give them margin from sales= profit decrease and poor economies of scale continues.

But why do we have this poor economies of scale?

1. For long, many food processing items were reserved for Small scale industries only.
2. High input costs due to multiple taxes, middle men. Profit level is low=can’t expand.
3. Government schemes, subsidies, grants have ‘low-ceilings’ =Individual person can’t setup big plants
4. Hard to get bank loans. (more elaboration in later article)
5. Bigger the plant, bigger the headache in terms of tax-liabilities. Creative Indian entrepreneurs rather setup multiple small plants to get subsidies/tax benefits of MSME-industries, and sell unbranded food products.

Anyways, some more obstacles for Indian food processing industry:

Price Sensitivity	Indian public=Low per capita income = higher price sensitivity and higher income elasticity in relation to food expenditure.
Preference For Fresh Food	Indians prefer freshly cooked products as compared to packaged products. Traditional mindset: fresh = nutritious.
Agri Problems	truckload of agri-problem. We’ll see the individual problems in later articles. for the overview: Agriculture/Dairy production yield levels are among the lowest amongst the BRIC countries. Land holdings=small, fragmented. Area under cultivation is decreasing due to urbanization, real-estate development, industrialization and ofcourse thanks to totally awesome people like Raabert Vadhera. there is no common policy on contract farming throughout India
Supply Chain Problems	high cost of raw material (driven by low productivity and poor agronomic practices) Presence of intermediaries thanks to Nuisance called APMC acts. high cost of packaging, finance, transport and distribution lack of organized retail
Logistics	Logistics cost= transportation, warehousing, material handling etc. In India, Logistics accounts for about 13% of GDP, which translates to over USD130 billion. This cost is significantly higher as compared most developed countries.
Infrastructure	Inadequate infrastructure of storage, sorting, grading and post-harvest management. Private sector unwilling to invest in logistic or infrastructure under prevailing economic conditions and policy paralysis.
Finance	hard to get loans (for both farmers and food-entrepreneurs)
Taxation	food industry subjected to variety of taxes. Taxes on processed food in India are among the highest in the world. Except India, No country distinguishes between branded and unbranded food sectors for taxation. Multiple and complicated tax regimes have rendered the food industry uncompetitive
Schemes	Plethora of government schemes: overlapping, ambiguous, low ‘ceilings’. e.g. you need crore rupee worth machine, they barely give few lakhs- that too after months of visits to various offices.
Laws	Food laws are often inconsistent and overlapping. The Food Inspectors cause of harassment and bribe-demands in terms of pulling up entrepreneurs under the Weights and Measures Act, ingredient content and mix, labelling norms, etc. While the various acts are necessary, court cases turn out to be expensive for small-entrepreneurs- especially if involved in inter-state trade.
Market Information	Market information not easily accessible Small players cannot buy international journals/magazines to find the latest trends in demand/innovation. Most of them also don’t know how to use internet for business/marketing.
Manpower	Lack of trained manpower. Very few universities offer special courses for food processing and entrepreneurship.
Packaging	Since Indian consumers= price sensitive, most of the food products are sold in small packages (Rs.5 noodles, biscuits etc)=more plastic required= higher share of packaging costs as a proportion of total costs.*

*High packaging cost

Packaging cost is ___ % of total production cost
Potato Chips	20%
Fruit Juice	19%
Jam	12%
Chicken Nuggets	8%
Branded Atta	6%

A recent ICAR study on Status of Post-Harvest losses

type	post-harvest % loss
cereal	wheat	6
pulses	blackgram	6
oilseed	groundnut	10
fruits	guava	18
veggies	tomato	12
spices	turmeric	7
marine	inland-fish	7

moving to more problems faced by Food processing industry:

Lack of organized retail

In USA there are two types of retailers

1. Big malls: Walmart etc.
2. small kirana walla known as mom and pop shops

But both of them have cold-storage facilities, hence they sell l both dry and wet/fresh food products

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

• But in India, kirana stores don’t have cold storage facilities=> they only sell dry food products.
• and fresh produce is sold through vendors with push-carts=>wastage because they don’t have cold storage.
• Meat, poultry and marine products are primarily sold in separate markets but they too don’t have cold storage=>wastage.

Thus, lack of organized retail, leads to

low product quality lack of variety, choice poor shopping experience

low hygiene levels low value for money high cost of product

Lack of Food testing facilities

1. The number of laboratories in the country is insufficient. Most of these laboratories lack world-class facilities and infrastructure.  Equipment, Testing manuals outdated
2. Many laboratories are not equipped with basic facilities such as for testing antibiotic residues, heavy metal contamination and other toxic contaminants in the food items.
3. Very slow response time of Government controlled food laboratories is long, extending to upto 5 years.
4. Most laboratories at sea ports are not fully equipped to handle testing of imported products, organic foods, residual radioactive matter, new toxins and allergens, textural analysis, residues of veterinary drugs, enzymes and hormones etc. these tests are necessary for complying with Codex, HACCP , GMP , GHP etc before exporting to in US/EU markets.

Lack of Skilled Manpower

A food processing unit requires skilled manpower, including

Production Managers or Supervisors Product Development Technologists Food Engineers Food Microbiologists

Quality Control Scientists Research Technicians Technical Representatives machine operators, assistants

Problems

Lack Of Men	As per a study by National Skill Development Corporation: the annual human resource requirement in food processing industry is estimated at about 5 lakh persons including about one lakh persons in the organized sector. But right now, every year, barely ~5000 graduates and postgraduates pass out from in different disciplines of Food science and technology.
Lack Of Courses	very few universities offer graduation/PG courses, entrepreneurship courses for food science and technology Need short-term, diploma/certificate type courses for rural youth. need to introduce courses for small scale players such as retailers, halwais Need specialized institutes for training/R&D in bakery, confectionery, wine making.
Outdated Syllabus And Professors	Syllabus/courses in university departments are not being updated regularly and are in most cases, outdated with respect to the present trends and food industry requirement. The teaching faculty in most of the Indian academic institutions studied has limited industry experience / exposure.
Inspectors	Food inspectors unaware of GMP, GHP & HACCP standards, latest developments in food standards, new products, and laboratory network
Engineering	Engineering curriculum does not equip graduate engineers with the skill of designing cold chain infrastructures. Fresh graduates find it difficult to make heat load calculation and configure the plant & machineries in energy-efficient manner. There is urgent need to upgrade the syllabus accordingly.

Lack of R&D

Sarkari Domain	Indian food processing industry is mainly madeup of small scale players= they can’t invest money in R&D=> becomes government’s responsibility to do the R&D. But Sarkari Research objectives are outdated, food market requirements keep changing frequently given the new product launches by MNCs.
Baba Adam’s Mindset	Multinational Food companies typically have an in-house global network of R&D professionals. Although they’re willing to work with Indian institutions for developing India-specific products and processes. But the quality of R&D currently undertaken by existing Indian institutions is not in line with their requirements.
Manpower	The chairmanship of public research institutes usually given to (retired) IAS or politicians=> lack of dynamism/market-orientation of the hardcore professionals in food-MNCs. Many students prefer alternate careers which are found to be more fulfilling and remunerative. There has been a significant drop in the quality of people entering the R&D field
Implementation	Indian Government recently introduced a variety of kiwifruit in North India, but could not provide adequate support/advice on cultivation practices. Result= domestic kiwi produce is much smaller in size than imported kiwi.

5. There is a huge opportunity for developing and commercializing desi foods for export e.g. ethnic beverages such as kokum, coconut water and ethnic food such as khakra, amla preserve etc. But, to make them appealing to foreign consumers, R&D required for product development, food-texture, rheology, mouth-feel, smell, color, packaging etc.
6. Internationally, following research-developments are ongoing, while we are generations behind in research:

area	What foreign players are doing in R&D?
processing	Non-thermal food processing technologies to preserve the nutrients in  milk, fruit juices and also for killing microorganisms in eggs. Role of ozone in fresh food sterilization Calcium treatment to extend the shelf life of melons
packaging	Packaging films that offer optimal barrier properties to extend shelf life. Biodegradable films made from pectin and starch Silicon oxide films that improve oxygen and moisture barriers. Use of natural antioxidants in packaging materials for shelf life extension of combat rations for soldiers. Active and intelligent packaging systems – To monitor product quality and trace a product’s history through critical points in the food supply chain.

Transport problems

Transport capacity	India	developed countries
Normal distance covered by trucks/trailers	250 -300km / day	600- 800 km/day
roads’ capacity to handle maximum weight	16 tonnes	36 tonnes (USA)

• Indian national highways account for only 2% of the total road network but carry 40% of all cargo.
• This puts a high pressure on the highways due to the high traffic volumes => delays in transit + damage to perishable products
• Though highways are well-spread, they’re yet to connect all 550,000+ villages in India

Railway problems

Railway is cheaper than road transportation but railways currently contribute barely ~25% of the total cargo transported Last mile connectivity from rail transporters =absent. Inefficiencies associated with a government monopoly. (timing-schedules, technology upgrades etc) Lack of wagons with cold storage facilities. Congested rail stations, lack of sorting, grading, warehousing facilities nearby. Road transport operators provide more flexibility. Although The Dedicated Freight Corridors are expected to improve the connectivity of  the railways, increase carrying capacity and reduce the transit time.

Ports

Environmental and social hurdles in land acquisition= hard to get setup new port / expand the existing port. High dependence on manual labor + low technology usage= increases the turnaround, loading/unloading times at ports, thus impacts entire supply chain lead time and increases cost For e.g. the cost of an import container in India=~$500, elsewhere ~350 in foreign ports.

Export Problems

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

expensive Raw Material	Fragmented base of suppliers=uniform quality not available Lot of intermediaries=raw material cost increased. High duties on imported raw material:  additives/flavorings etc. As a result input cost =high, hence pricewise, we cannot compete with other exporters.
low processing	Our processing has largely remained in primary forms like pickling, sun drying and/or making preserves. Sometimes we just export intermediate product to second country – they’ll further process it and sell to third country @even higher price. (e.g our shrimps to Japan, Japan selling them to US)
low quality	Often our products rejected from US/EU markets for not meeting Codex, HACCP quality standards
Branding	yet to Build global brands on the back of India’s strengths (Darjeeling tea, Basmati rice, Durum wheat, Alphonso mango, Tamilnadu Banana or Kashmiri Apples) Developed countries view India as an unpredictable and unreliable source of food and agro products.
transport	Poor cargo facilities at airports and ports are other bottlenecks discussed earlier
Packaging	yet to develop packaging technologies for Indian food products to make them more acceptable to foreign consumers.
Dumping	Desi shrimps face Anti-dumping duties in USA.
Devaluating	1$=~60 Indian rupees while 1$=~100 Paki rupees Given these exchange rates and local prices of Basmati in India vs Pakistan. From an American/European’s point of view, it is cheaper to import Basmati from Pakistan than from India.

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