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The food processing industry in India is a sunrise sector that has gained prominence in recent years. Availability of raw materials, changing lifestyles and relaxation in policies has given a considerable push to the industry’s growth. This sector is among the few that serves as a vital link between the agriculture and industrial segments of the economy. Strengthening this link is of critical importance to improve the value of agricultural produce; ensure remunerative prices to farmers and at the same time create favourable demand for Indian agricultural products in the world market. A thrust to the food processing sector implies significant development of the agriculture sector and ensures value addition to it.

The Indian food processing industry holds tremendous potential to grow, considering the still nascent levels of processing at present. Though India’s agricultural production base is reasonably strong, wastage of agricultural produce is sizeable. Processing of fruits and vegetables is a low 2%, around 35% in milk, 21% in meat and 6% in poultry products. By international comparison, these levels are significantly low - processing of agriculture produce is around 40% in China, 30% in Thailand, 70% in Brazil, 78% in the Philippines and 80% in Malaysia. Value addition to agriculture produce in India is just 20%, wastage is estimated to be valued at around US$ 13 bn (Rs 580 bn).

India, with an arable land of 184 mn hectares is, the highest producer of milk in the world at 90 mn tonnes p.a., second largest producer of fruits & vegetables (150 mn tonnes), third largest producer of foodgrains and fish and has the largest livestock population. Considering the wide-ranging and large raw material base that the country offers, along with a consumer base of over one billion people, the industry holds tremendous opportunities for large investments.

Ministry of Food Processing Industries

The Ministry was set up in 1998 and the industry segments that come under its purview are:

The Ministry of Food Processing Industries, GoI, has estimated the size of the Indian food market at US$ 191 bn (Rs 8,600 bn). The processed food market is projected to be over US$ 100 bn, of which the primarily processed food market accounts for 60%, while the value-added processed food market is around 40%.

The average annual growth of the food processing industry has been around 8% between FY01-FY06. The segments that have driven the growth are the beverages and meat & meat products and processed fish sectors. The food processing industry in India has a share of 1.5% in the total GDP of the country, and as part of total manufacturing accounts for 9%. India’s share in world trade in respect of processed food is about 1.6%.

An extensive and highly fragmented industry, the food processing sector largely comprises of the following sub-segments: fruits & vegetables, milk and milk products, beer & alcoholic beverages, meat and poultry, marine products, grain processing, packaged/convenience food and packaged drinks. A large number of players in this industry are small sized companies, and are largely concentrated in the unorganised segment. This segment accounts for more than 70% of the output in volume terms and 50% in value terms. However, though the organized sector is comparatively small, it is growing at a much faster pace.


Source: D&B Research

 

Structure of the Indian Food Processing Industry

 

Food Processing Units in Organised Sector (numbers)


Source: Ministry of Food Processing Industries, Annual Report 2003-04

Industry Sub-Segments

Fruits & Vegetables

The installed capacity of fruits and vegetables processing industry has increased from 1.1 mn tonnes in January 1993 to 2 mn tonnes in 2000 and further to 2.1 mn tonnes in 2006. The processing of fruits and vegetables is estimated to be around 2.2% of the total production in the country. The prominent processed items in this segment are fruit pulps and juices, fruit based ready-to-serve beverages, canned fruits and vegetables, jams, squashes, pickles, chutneys and dehydrated vegetables. Some recent products introduced in this segment include vegetable curries in retortable pouches, canned mushroom and mushroom products, dried fruits and vegetables and fruit juice concentrates.

The fruits and vegetable processing industry is highly decentralized, and a large number of units are in the cottage / household and small scale sector, having small capacities of up to 250 tonnes/annum. Since 2000, the industry has seen significant growth in ready-to-serve beverages, fruit juices and pulps, dehydrated and frozen fruits and vegetable products, pickles, processed mushrooms and curried vegetables, and units engaged in these segments are export oriented.

Exports of Processed Fruits & Vegetables
(Quantity in MT, Value in Rs Mn)


Source: Ministry of Food Processing Industries, Annual Report 2005-06

The domestic industry is yet to change its preference in favour of processed foods. Consumption of value added fruits and vegetables is low compared to the primary processed foods, and fresh fruits and vegetables. The inclination towards processed foods is mostly visible in urban centers.

A significant thrust can be given to this sector by strengthening linkages between farmers and processors. The weak linkage between farmers and markets, as well as, farmers and processing companies has brought about inefficiencies in the supply chain and encouraged the involvement of middlemen. The Government of India’s National Agriculture Policy envisages the participation of the private sector through contract farming and land leasing arrangements which not only assures supply of raw material for processing units, but also a market for agriculture produce, accelerate technology transfer and capital inflow into the agriculture sector.

Contract farming in wheat practiced in Madhya Pradesh by Hindustan Lever Ltd and by Pepsi Foods Ltd in Punjab for tomatoes, foodgrains, spices and oilseeds are some successful examples of contract farming in India, which changed the farming landscape and promoted the cultivation of processable variety of farm produce. Such innovative practices will power the fruits, vegetables and grain processing industry. Apart from such initiatives, fiscal incentives and tax concessions will also give impetus to the sector. The five-year 100% tax exemption announced by the Government in FY05 was one such incentive for upcoming fruits and vegetable processing units.

Milk and Milk Products

India has one of the highest livestock population in the world, accounting for 50% of the buffaloes and 20% of the world’s cattle population, most of which are milch cows and milch buffaloes. India’s dairy industry is considered as one of the most successful development programmes in the post-Independence era.

As of 2005-06 total milk production in the country was over 90 mn tonnes with a per capita availability of 229 gms/day. The industry has been recording an annual growth of 4% during the period 1993-2005, which is almost 3 times the average growth rate of the dairy industry in the world. Milk processing in India is around 35%, (with the organized dairy industry accounting for 13% of the milk produced) while the rest of the milk is either consumed at farm level, or sold as fresh, non-pasteurized milk through unorganised channels.

Dairy Cooperatives account for the major share of processed liquid milk marketed in the India. Milk is processed and marketed by 170 Milk Producers’ Cooperative Unions, which federate into 15 State Cooperative Milk Marketing Federations. Over the years, several brands have been created by cooperatives like Amul (GCMMF), Vijaya (AP), Verka (Punjab), Saras (Rajasthan). Nandini (Karnataka), Milma (Kerala) and Gokul (Kolhapur).

The milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Gujarat, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. The manufacturing of milk products is concentrated in these milk surplus States.

As per data released by the Ministry of Food Processing Industries, exports of dairy products have been growing at the rate of 25% p.a. in quantity terms and 28% in value terms since 2001. Significant investment opportunities exist for the manufacturing of value-added milk products like milk powder, packaged milk, butter, ghee, cheese and ready-to-drink milk products.

Meat & Poultry

Since 1995, production of meat & meat products has been steadily growing at a rate of 4% p.a.. Currently, the processing level of buffalo meat is estimated at 21%, poultry 6% and marine products 8%. Only about 1% of the total meat is converted into value added products like sausages, ham, bacon, kababs, meat balls, etc. Production of meat is governed under local by-laws as slaughtering is a state subject. Processing of meat is licensed under the Meat Food Products Order, 1973.

In 2003 India had a livestock population of 470 mn that included 205 mn cattle and 90 mn buffaloes. The country produces about 450 mn broilers and 30 billion eggs annually. Cattle, buffaloes, sheep and goat, pigs and poultry are the types of animals which are generally used for production of meat. Slaughter rate for cattle as a whole is 20%, for buffaloes it is 41%, pigs 99%, sheep 30% and 40% for goats. The country has 3,600 slaughter houses, 9 modern abattoirs and 171 meat processing units licensed under the meat products order.

The poultry industry is among the faster growing sectors rising at a rate of 8% per year. Vertical integration of poultry production and marketing has lowered costs of production, marketing margins and consumer prices of poultry meat. There are eight integrated poultry processing units in the country, which hold a significant share in the industry.

Exports of Meat and Meat Products
(Quantity in MT, Value in Rs Mn)

Source: Ministry of Food Processing Industries, Annual Report 2005-06

Meat exports have been growing at close to 30% p.a. in quantity terms, largely driven by poultry, buffalo, sheep and goat meat. Exports of value added meat products are insignificant. In the domestic market, the growing number of fast food outlets in the country has had a significant impact on the meat processing industry.

Marine Products

India is the third largest fish producer in the world and ranks second in inland fish production. India’s vast potential for fishes, from both inland and marine resources, is supplemented by the 8,000 km coastline, 3 mn hectares of reservoirs, 1.4 mn hectares of brackish water, 50,600 sq km of continental shelf area and 2.2 mn sq km of exclusive economic zone.

Processing of marine produce into canned and frozen forms is carried out almost entirely for the export market. Infrastructure facilities for processing of marine products include 372 freezing units with a daily processing capacity of 10,320 tonnes and 504 frozen storage facilities with a capacity of 138,229.10 tonnes. Apart from these, there are 11 surimi units, 473 pre-processing centres and 236 other storages.

Processed fish products for export include conventional block frozen products, individual quick frozen products (IQF), minced fish products like fish sausage, cakes, cutlets, pastes, surimi, texturised products and dry fish etc.

Exports of marine products have been erratic and on a declining trend which can be owed to the adverse market conditions prevailing in the EU and US markets. The anti-dumping procedure initiated by the US Government has affected India’s shrimp exports to the US.

Fish Production & Exports

Source: Ministry of Food Processing Industries, Annual Report 2005-06

Grain Processing

Grain processing includes milling of rice, wheat and pulses. As of 1999-00, there were over 91,000 rice hullers and 2,60,000 small flour mills engaged in primary milling. Also, there are about 43,000 modernised rice mills/huller-cum-shellers. Around 820 large flour mills in the country convert about 10.5 mn tonnes of wheat into wheat products. Also there are 10,000 pulse mills milling about 75% of pulse production of 14 mn tonnes in the country.

Primary milling of grains is the most important activity in the grain processing segment of the industry. However, primary milling adds little to shelf life, wastage control and value addition. Around 65% of rice production is milled, mostly in modern rice mills. However, the sheller-cum-huller mills operating give low recovery. Wheat is processed for flour, refined wheat flour, semolina and grits. Apart from the 820 large flour mills, there are over 3 lakh small units operating in this segment in the unorganised sector. Dal milling is the third largest in the grain processing industry, and has approximately 11,000 mechanised mills in the organised segment. Oilseed processing is another major segment, an activity largely concentrated in the cottage industry. According to estimates, there are approximately 2.5 lakh ghanis and kolus (animal operated oil expellers), 50,000 mechanical oil expellers, 15,500 oil mills, 725 solvent extraction plants, 300 oil refineries and over 175 hydrogenated vegetable oil plants.

Indian rice, especially Basmati rice, has gained international recognition, and is a premium export product. Branded grains as well as grain processing is now gaining popularity.

Beer & Alcoholic Beverages

India is the third largest market for alcoholic beverages in the world, and the domestic market is largely dominated by United Breweries, Mohan Meakins and Radico Khaitan. The demand for beer and spirits is estimated to be around 373 mn cases per year. There are 12 joint venture companies having a licensed capacity of 33,919 kilo-litres p.a. for production of grain based alcoholic beverages. Around 56 units are manufacturing beer under license from the Government of India.

The two segments in the liquor segment, country liquor and Indian Made Foreign Liquor, both cater to different sections of society. The former is consumed in r ural areas and by low-income groups, while the latter is consumed by the middle and high income groups.

There are approximately 23,000 licensed liquor outlets in India, with another 10,000 outlets in the form of bars and restaurants. Regulations in this sector differ state-wise. In Tamil Nadu, Kerala and Andhra Pradesh, the distribution is controlled by the state government, and any change XVIII in the ruling party has a direct impact on the availability of alcohol. In Uttar Pradesh, liquor distribution licenses were earlier based on bidding, and the highest bidder was given the license. This has not changed to the lottery allotment system. Gujarat Government has banned the sale and distribution of liquor in the state.

The wine industry in India has come into prominence lately and has been receiving support from the Government as well. The market for this industry has been estimated to be growing at around 25% annually. Maharashtra has emerged as an important state for the manufacture of wines. There are more than 35 wineries in Maharashtra, and around 1,500 acres of grapes are under cultivation for wine production in the state. The Maharashtra Government has declared wine-making business as small-scale industry and has also offered excise concessions.

Consumer Foods

This segment includes packaged foods, aerated soft drinks, packaged drinking water and alcoholic beverages.

Packaged / Convenience Foods

Consumer food industry mainly consists of ready-to-eat and ready-to-cook products, chips, salted snacks, pasta products, cocoa based products, bakery products, biscuits, soft drinks, etc.

There are around 60,000 bakeries, 20,000 traditional food units and several pasta food units. The bakery industry is among the few processed food segments whose production has been increasing steadily in the country in the last couple of years. Bakery products include bread, biscuits, pastries, cakes, buns, rusk etc. This activity is mostly concentrated in the unorganized sector. Bread and biscuits constitute the largest segment of consumer foods with an annual production is around 4.00 mn tonnes. Bread manufacturing is reserved for the small scale sector. Out of the total production of bread, 40% is produced in the organized sector and the remaining 60% in the unorganised sector. Similarly, in the production of biscuits, share of unorganized sector is about 80%.

Cocoa Products

There are 20 units engaged in the manufacture of cocoa products like chocolates, drinking chocolate, cocoa butter substitutes, cocoa based malted milk foods with an annual production of approximately 34,000 tonnes.

Soft drinks

This segment is the 3rd largest in the packaged foods industry, after packed tea and packed biscuits. The aerated soft drinks industry in India comprises over 100 plants and provides direct and indirect employment to over 125,000 employees. It has attracted one of the highest foreign direct investments in the country. Its position is strengthened by strong forward and backward linkages with glass, plastic, refrigeration, sugar and the transportation industry.

Penetration levels of aerated soft drinks in India are quite low compared to other developing and developed markets, which is indicative of the potential the segment holds for further growth.

Exports of Consumer Foods
(Quantity in MT, Value in Rs Mn)


Source: Ministry of Food Processing Industries, Annual Report 2005-06

Constraints & Drivers of Growth

Growing urbanization, increasing disposable income, emergence of organised food retail, changing lifestyles and food consumption patterns are the key factors driving growth for processed foods in India. These are post-liberalisation trends that have given an impetus to the sector.

Consumption patterns in India have been undergoing a visible shift. Earlier, the share of cereal products was the highest, followed by milk & milk products, vegetables, edible oil and meat products. However, in recent years, the growth rates for fruits, vegetables, meat and dairy products have been higher than cereals and pulses. This shift in turn implies that there is also a need to diversify the food production base to match the changing consumption preferences.

This shift in consumption follows the pattern observed in developed countries in the evolution of the global food demand. There is a shift from carbohydrate staples to animal sources and sugar. Going by this pattern, in future, there will be increasing demand for prepared meals, snack foods and convenience foods and further on the demand would shift towards functional, organic and diet foods.

Some of the key constraints identified by the industry include:

Highest priority has been accorded by the Government for the development of infrastructure. The Government has already taken several initiatives on this front which include developing of food parks, packaging centres, modernised abattoirs, integrated cold chain facilities, irradiation facilities and value added centres.

The initiative to develop food parks was taken primarily in order to assist the small and medium enterprises which are unable to invest in capital intensive activities. So far, 22 food parks have come into operation which provide common facilities like cold storage, food testing and analysis laboratories, packaging centres, etc

In terms of policy support, the ministry of food processing has taken the following initiatives:

Apart from these initiatives, the Centre has requested state Governments to undertake the following reforms:

Investments

The total inflow of foreign direct investment in the food processing sector has been around Rs 52.7 bn (US$ 1.2 bn) between 1991 to November 2006. During the last five years, FDI witnessed an inflow of over Rs 24 bn of foreign investment. The highest investment in a single year was in 2001-02 amounting to Rs 10 bn.

Maharashtra was among the front-runners to receive the highest share of FDI in food processing during the last five years. The dairy and consumer industrise received FDI worth Rs 2.7 bn each as foreign investment. Nearly 30 per cent of FDI in the food processing sector comes from EU countries such as Netherlands, Germany, Italy and France. Perfetti, Cadbury, Godrej-Pilsbury, Nutricia International, Manjini Comaco are some of the successful ventures from EU countries.

Major Food Processing Companies in India

The entry of multinational companies has increased competition in the food processing industry. At the same time, these companies are facing tough competition from strong Indian brands. This level of competition has increased innovations, facilitating a sustained growth of the sector and also improve global competitiveness. The emerging new growth phase of the sector is just in its initial stages with the potential for India to emerge as a leading food supplier to the world.

SWOT Analysis of Food–Processing Industry

Strengths

Weaknesses

Opportunities

Threats