Explosive potential for food processing industry in India

A major initiative in the 2016 Union Budget pertains to the food processing industry. The new initiative allows 100% FDI in the marketing of processed food products made in India. This will pave the way for substantial value addition in agriculture and huge employment generation in the agro-processing industry. 

Inspite of India’s rapid strides in the services sector and modest gains in industrialization post liberalization of 1991, India’s economic fortunes are still closely linked to the agricultural sector. Indian agriculture suffers from a structural problem—it employs 52% of India’s workforce, but contributes only 17% of India’s GDP. Solution to this structural problem requires reducing wastage and adding value to the agricultural produce, while transferring the excess labor force from agriculture to industry and services.

India is the second largest producer of vegetables and fruits in the world. In fruits like mango, papaya and bananas, India is the largest producer. But in processed fruit drinks and processed fruit products, India is way down the ladder. Again, India is the largest producer of milk in the world, but not in milk chocolates. Therefore, there is huge potential for the food processing industry. It has been estimated that around 35% of the production of vegetables and fruits are lost due to poor post-harvest management and lack of cold storage and refrigeration facilities. There is scope for substantial value addition in food processing industry, which in turn, can generate large number of jobs and raise incomes.

The present policy

Presently, India allows 100% FDI in food processing industry. The same percentage of FDI has also been allowed in single brand retail and ‘cash and carry whole sale trade’ also. The UPA government had allowed 51% FDI in multi-brand retail, with conditions such as 30% mandatory local sourcing and $100 million upfront investment with 50% in back-end infrastructure. Even though the BJP opposed this policy while in opposition, even now this policy stays. Therefore, in theory, the policy is liberal.

The new initiative

The new initiative of 100% FDI in the marketing of food products made in India is an improvement over the existing policies. It is well known that in the processed food business, packaging, branding and marketing are crucial. The large MNC players have a clear edge in these areas. The aseptic packaging developed by the world’s leading food processing company Tetra Pak was a break-through innovation that substantially improved the shelf life of packaged fruit drinks and helped develop the industry manifold. MNCs are investing hugely in this kind of break-through innovation, and are constantly coming out with newer technology and better products.

Therefore, if the large foreign players are allowed to procure food produce from the farmers, they are likely to process, package and brand and market these products on a large scale. The new policy is likely to pave the way for 100% FDI in food multi-brand retail. This will benefit the farmers, give a fillip to the food processing industry and create vast employment opportunities.

Indian food processing industry may be broadly divided into four—agri-products, milk and milk products, meat and poultry and marine products. Because of the agro-based nature of the industry, it is highly labor intensive. The abundant availability of these agro-produce and the labor-intensive nature of the industry have the potential to make this industry globally competitive.

Big business is already into this industry in a big way. Corporates like ITC, Godrej, Marico, Venky’s, Haldirams, Surya among others, have already invested in the food processing industry. Big players like Reliance, Future group, Aditya Birla Group and Bharti are already active in organized food retail. Companies like Snowman Logistics are venturing into refrigeration and cold storage logistics, which are necessary for the growth of the food processing industry.

Sunrise industry

Food processing is a sunrise industry, with double-digit growth rate globally. In emerging markets like India the growth potential is explosive. Urbanization, the high growth rate of the middle and aspirational class, the rising trend of women entering workforce and global exposure have combined to create huge demand for ready to cook and ready to eat food. The abundant availability of raw materials and cheap labor combined with the technology and expertise of foreign players has the potential to transform the Indian food processing industry. The benefits to the farmers in particular and the economy in general would be substantial.

(The author is an Investment Strategist at Geojit BNP Paribas)