ANALYSIS OF INDIAN FOOD INDUSTRY

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A CRITICAL ANALYSIS OF INDIAN FOOD INDUSTRY

KAMLESH KUMAR SINGH

Executive Summary

India is one of the world’s major food producers but accounts for less than 1.5 per cent of

international food trade. This indicates vast scope for both investors and exporters . Food

exports in 1998 stood at US$5.8 billion whereas the world total was US$438 billion.

The Indian food industry’s sales turnover is Rs 140,000 crore (1 crore = 10 million) annually

as at the start of year 2000.

The industry requires about Rs 29,000 crore in investment over the next five years to 2005 to

create necessary infrastructure, expand production facilities and state-of-the-art- technology to

match the international quality and standards.

The office of the Agricultural Affairs of the USDA / Foreign Agricultural Services in New

Delhi says that one of India’s proudest accomplishments has been achieving a tenuous self-

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sufficiency in food production and that the country produces a wide variety of agricultural

products at prices that are at or below world values in most cases.

The Indian palate is accustomed to traditional foods, mostly wheat and rice-based , rather than

potato and corn-based western palate. In marketing perspective, this is considered an

important factor for foreign marketers.

The USDA report says initially consumer-ready food products may have to be tailored to

include Indian spices and traditional ingredients. In addition to traditional tastes, there are

other social factors which affect consumption in India. Hindus account for approximately 80

per cent of India’s population, and while only 25 or 30 per cent are strict vegetarians, beef

slaughter is prohibited in all but two states (Kerala and West Bengal) and consumption of

other meats is limited. Incidentally, India is the only country where the US-based

MacDonalds sells its burgers without any beef content and even offers purely vegetarian

burgers.

India’s middle class segment will hold the key to success or failure of the processed food

market in India. Of the country’s total population of one billion, the middle class segments

account for about 350-370 million. Though a majority of families in this segment have non-

working housewives or can afford hired domestic help and thus prepare foods of their taste in

their own kitchens, the profile of the middle class is changing steadily and hired domestic

help is becoming costlier. This is conducive to an expansion in demand for ready-to-eat

Indian-style foods.

India’s food processing sector covers fruit and vegetables; meat and poultry; milk and milk

products, alcoholic beverages, fisheries, plantation, grain processing and other consumer

product groups like confectionery, chocolates and cocoa products, Soya-based products,

mineral water, high protein foods etc.

According to latest official statistics, India exported processed fruits and vegetables worth Rs

5240 million in 1997-98. The horticulture production is around 102 million tonnes. Foreign

investment since 1991, when economic liberalisation started, stood at Rs 8,800 crore.

Products that have growing demand , especially in the Middle East countries include pickles,

chutneys, fruit pulps, canned fruits, and vegetables, concentrated pulps and juices, dehydrated

vegetables and frozen fruits and vegetables.

Another potential processed food product is meat and poultry products. India ranks first in

world cattle population, 50 per cent of buffalo population and one-sixth of total goat

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population of the world. Buffalo meat is surplus in India. There is vast scope to set up modern

slaughter facilities and cold store chains in meat and poultry processing sector. India’s current

level of meat and meat-based exports is around Rs 8,000 million. In last six years foreign

investment in this segment stood at Rs 5,000 million which is more than 50 per cent of the

total investment made in this sector.

Compared with meat, poultry industry has registered significant growth. India ranks fifth in

the world with annual egg production of 1.61 million tones. Both poultry and egg processing

units have come in a very big way in the country. India is exporting egg powder, frozen egg

yolk and albumin powder to Europe, Japan and other countries. Poultry exports are mostly to

Maldives and Oman. Indian poultry meat products have good markets in Japan, Malaysia,

Indonesia and Singapore. While meat products registered a growth of 10 per cent, eggs and

broilers registered 16-20 per cent growth.

There are about 15 pure line and grand parent franchise projects in India. There are 115 layer

and 280 broiler hatcheries producing 1.3 million layer parents and 280 million broiler parents.

They in turn supply 95 million hybrid layer and 275 million broilers, day-old chick. Presently

there are only five egg powder plants in India which is considered insufficient in view of

growing export demand for different kind of powder - whole egg, yolk and albumen. The

scope of foreign investment and state-of-the-art technology in this field is therefore

tremendous.

Milk and milk products is rated as one of the most promising sectors which deserves foreign

investment in a big way. When the world milk production registered a negative growth of 2

per cent , India performed much better with 4 per cent growth. The total milk production is

around 72 million tonnes and the demand for milk is estimated at around 80 million tonnes.

By 2005, the value of Indian dairy produce is expected to be Rs 1,000,000 million. In last six

years foreign investment in this sector stood at Rs3600 million which is about one-forth of

total investment made in this sector. Manufacture of casein and lactose, largely being

imported presently, has good scope. Exports of milk products have been decanalised.

Grains could emerge as a major export earner for India in coming years. India’s food grains

production is now at around 225-230 million tones. These include rice, jawar, bajra, maize,

wheat, gram and pulses. Indian basmati rice enjoys command in the international market.

Besides growing Middle east market for basmati rive, many other countries are showing

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interest for this food grain. In 1998-99 export of basmati and non-basmati rice stood at

Rs62000 million. There is a total rice milling capacity of 186 million tones in the country.

Among plantation, tea emerged as major foreign exchange earner . India is the largest

producer and exporter of black tea . However, the most worrying factor for Indian tea industry

is that from early next year with the implementation of tea imports into the country, India tea

may face a stiff competition within the country as well, specially threat of Sri Lanka’s

presence in the Indian market is looming large.

The current year’s tea export prospect is not that very good in terms of forex earnings because

international prices has fallen significantly this year . India exports between 150-170 million

kilogram’s of tea per annum. Of course, the scope of foreign investment in this sector is good

and the multinational tea companies would either be trying for marketing joint ventures with

the Indian producers or acquire stakes in Indian tea companies. There is strong possibilities of

third country exports through such joint venture as quality wise still Indian teas are ruling the

international market.

Alcoholic beverages is another are where India witnessed substantial foreign investment.

Foreign investment in this sector stood at Rs 7000 million which about 70 percent of the total

investment made so far. The IMFL ( Indian Made Foreign Liquor) primarily comprises wine,

vodka, gin, whisky, rum and brandy. Draught beer is a comparatively recent introduction in

the Indian market. The Indian beer market is estimated at Rs7000 million a year. One of the

major advantages for any investor eyeing the Indian liquor market is that India offers enough

raw materials like molasses, barely, maize, potatoes, grapes, yeast and hops for the industry.

Yet another catchy investment sector is fisheries. There is growing canned and processed

fishes from India. The marine fish include prawns, shrimps, tuna, cuttlefish, squids, octopus,

red snappers, ribbon fish, mackerel, lobsters, cat fish etc. In last six years there was

substantial investment in fisheries to the tune of Rs30,000 million of which foreign

investments were of the order of Rs7000 million. The potential could be gauged by the fact

that against fish production potential in the Exclusive Economic Zone of 3.9 million tones,

actual catch is to the tune of 2.87 million tones. Harvesting from inland sources is around 2.7

million tones.

The biggest bottleneck in expanding the food processing sector, in terms of both investment

and exports, is lack of adequate infrastructure.

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Without a strong and dependable cold chain vital sector like food processing industry which is

based mostly on perishable products cannot survive and grow. Even at current level of

production, farm produce valued at Rs 70,000 million is being wasted every year only

because there is no adequate storage, transportation, cold chain facilities and other

infrastructure supports. Cold chain facilities are miserably inadequate to meet the increasing

production of various perishable products like milk, fruits, vegetables, poultry, fisheries etc.

Prevention of Food Adulteration laws is not only stringent one but time consuming also. It is

considered as an archaic and no industry friendly food law. It substantial varies from Codex standard.

Harmonization of multiple food laws is an urgent necessity.

Food Processing: Policy Initiatives

India is among the world’s major producer of food, producing over 600 million tons of food

products every year.

India ranks first in the world in production of cereals, livestock population and milk. It is the

second largest fruit and vegetable producer and is among the top five producers of Rice,

Wheat, Groundnuts, Tea, Coffee, Tobacco, Spices, Sugar, and Oilseeds.

And yet, India’s share in international food trade is a minuscule 1.5%. Value addition to foods

by processing is a mere 8% of total production.

Majority of the food units are occupied in primary processing. Production base of secondary

and tertiary processed foods is low, resulting in low value addition.

The Ministry of Food Processing estimates the size of the Processed Food Industry at

Rs1440bn. Unorganized, small players (processing less than 0.5tons per day) process more

than 75% of the industry output in volume terms and 50% in value terms.

The Processed Food Industry ranks 5th in size in the country representing 6.3% of GDP,

accounts for 13% of the country’s exports and involves 6% of total industrial investment in

the country.

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The industry employs 1.6mn workers, which constitute 18% of the country's industrial labor

force.

There are estimated 9000 organized units in the country, more than 5000 of which are in the

Fruit & vegetable-processing segment.

An estimated 30% of horticulture products are wasted every year due to inadequate storage

and transport infrastructure.

Processed food exports were Rs48.95bn (US$1.04bn) in 2000-01, registering a 23% decline

over the previous year.

There are very few large Indian Food Brands with an established global presence. Most

exports are in bulk form and branding is minimal.

Packaged Foods, consisting of semi-processed and ready-to-eat/ packaged food industry is

estimated to be close to Rs40bn, but is growing at a fast pace.

Liberalization of Food Sector commenced in 1991. Removal of price controls, dereservation

from small scale, reduction in import controls, fiscal incentives for encouraging investment in

the sector have been undertaken by the Government to spur growth.

Since liberalization in August '91 upto December 2000, 6427 proposals for projects of over

Rs.538bn (US$11.4bn) have been proposed in various segments of the food and agro-

processing industry. Besides this, the Government has also approved 1135 proposals for joint

ventures, foreign collaboration, industrial licenses and 100% export oriented units envisaging

an investment of Rs194bn. (US $4.1bn).

However implementation statistics have been extremely poor. Only 12% of the proposed

7500+ projects have been implemented so far. Total outlay to date on implemented projects

has been Rs117bn i.e. only 16% of the proposed Rs732bn. Only 13% of the proposed

employment has been generated.

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Foreign Investment in the sector has been comparatively more encouraging with a 24% of the

proposed projects implemented. Total foreign investment up to December 2000 in the Food

Processing sector has been Rs26bn.

A National Food Processing Policy has been been drafted for harmonization & simplification

of food laws. An appropriate enactment will cover all provisions relating to food products so

that the existing system of multiple laws is replaced. The new Act will also cover issues

concerning standards, Nutrition, Merit goods, genetically modified foods, futures marketing,

equalization fund etc. The New Food policy is expected to be implemented in 2001.

Intermediate food products

Market data (in US$ million)

Intermediate food products 1994-95 1995-96 1996-97

Total imports 5.0 7.0 9.0

Source: Independent studies. Year ending March 31.

Promising sub-sectors

Cheese powders

Flavourings

Mixes

Concentrates

Points to be noted:

Many of India's food-processing companies are known to be keen to import intermediate food

products. As can be seen in the top table, imports have rising.

As India's food-processing industry grows and becomes more sophisticated, there is no doubt

that the market for intermediate food products and ingredients will grow.

It is important that you, or your agents in India, ensure that intermediate food products are

considered by customs officials as industrial intermediates and not as consumer products to

minimise customs duty. Though law looks at intermediate food products as industrial

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intermediates, there have been reports that uninformed customs officials have treated them as

consumer products.

Pulses

Market data (in million tonnes or metric tons)

Pulses1994-95 1995-96 1996-97

Total market size14.7 14.8 15.1

Locally produced 14.1 14.3 14.5

Total exports nil nil nil



Points to be noted:

As the above table shows, there is a shortage in domestic production vis-a-vis demand. It is

unlikely this shortfall will be bridged.

Green peas, lentils and some dry beans should not be difficult to sell in India.

Pulses are on the Open General License for the purpose of imports which means that they

require no approval.

Branded food products are becoming popular especially in the cities and this will favourably

influence the market for imported pulses as well.

Corn (for poultry feed)

Market data (in million tonnes or million metric tons)

Corn (for poultry feed)1994-95 1995-96 1996-97


Locally produced 9.1 9.8 10

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Total exports 0.02 0.03 0.03

Total imports 0 0 0.5


Points to be noted:

The above statistics could seem bland to foreign companies, but a deeper look at the sector's

realities will show good prospects for imported corn.

Corn is a main input for poultry feed production. The poultry industry is growing at a rate of

10 per cent annually, but corn production is stagnating.

Import duty on corn is zero.

Vegetable oils


Vegetable oils1994-95 1995-96 1996-97


Locally produced 5.6 5.6 5.8

Total exports nil nil nil



Sub-sector prospects

Palm oil Excellent prospects

Soya bean oil Possibly good prospects

Sunflower oil Possibly good prospects

Cottonseed oil Possibly good prospects

Points to be noted:

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Most vegetable oils are on Open General License for the purpose of imports which means that

they can be imported without approval.

Though oilseed production has been growing, increasing domestic demand is unlikely to

bridge the demand-supply gap which is expected to widen.

Most palmolein is imported, while small quantities of soya bean, sunflower and cottonseed

oils have also been imported in recent years.

Oil market scenario

Summary

India accounts for 9.3 per cent of world oilseed production. It has the world's fourth largest

edible oil economy. Yet, about 43 per cent of edible oil available in India is imported. In

1999, India ranked as the world's largest importer of edible oils, displacing China. The bulk of

edible oil India imports under the Open General Licence (OGL) is RBD palmolein of

Malaysian and Indonesian origin.

India has approximately 300 crude edible oil refining units, 60-70 per cent of which are small.

Unlike the bigger refiners, the small ones are unable to import huge quantities of crude either

due to their low capacity or lack of financial resources, and may be forced to close down or

sell out to the bigger ones in the foreseeable future.

A major problem is the low capacity utilisation. The installed capacity of oil mills is around

36 million tonnes annually, but capacity utilisation is only 40 per cent. Solvent extraction

plants show only 33 per cent capacity utilisation and vegetable oil refineries show 40 per cent.

The total import of edible oils during the period from November 1998 to October 1999

totalled 4.4 million tonnes valued at more than Rs. 9,000 crores. That was against a demand-

supply gap of 1.4 million tonnes in 1998-99. Imports have therefore deluged the market.

The import of refined palm oil was put under OGL (open general licence) in March 1994.

Other edible oils were put under OGL in April 1995. (When an item is brought under OGL, it

means that the item can be imported without seeking any approval).

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Originally, there was no discrimination between refined and non-refined edible oil as far as

import duty was concerned. The duty on both was 65 per cent. Duty was then slashed to 30

per cent for both, then to 20 per cent in 1996 and 15 per cent in the 1999-2000 budget.

On December 30, 1999, a differential duty structure was introduced. Duty on refined oil was

fixed at 27.5 per cent (25 per cent plus 10 per cent surcharge), while that on crude was

retained at 16.5 per cent (15 per cent plus 10 per cent surcharge). But only actual users (as

opposed to traders) are allowed to avail of this reduced duty on crude oil. Traders are

nevertheless allowed to import crude at the reduced duty but only to sell to actual users on a

high seas basis. This requires that the actual user fills in the import documents (and pays the

reduced duty) but leaves the importing process to the trader.

In most parts of the world, import duty on oilseeds is lower than that on oils. But, in India, it

is higher: 40 per cent. That is why no import of oilseeds or oil-bearing material has taken

place in India. The industry wants the duty to be lowered from the present 40 per cent to 5 per

cent.

Edible oils prices in the Indian market have crashed due to large imports by multuinational

trading houses. See table.

The edible oils industry is one sector in India that will see considerable reform in the

foreseeable future.

Prices of edible oils in India's Mumbai market

(in Rs/tonne except for RBD Palmolein which is in FOB US dollars)

ProductDecember 1999

January 2000

Difference

1/12/99 to

19/1/20001st 8th 15th 22nd 30th Average 5th 13th 19th

RBD

Palmolein

(Local)

21,600 21,000 21,000 20,500 20,700 20,919 21,400 20,800 20,800 minus 700

RBD

Palmolein

382 360 367 367 367 361 347 352 347 minus 36

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(FOB US$)

Sunflower

Oil24,300 24,000 25,000 25,000 25,200 24,735 26,000 25,500 25,500 plus 1,200

Washed

Cottonseed

Oil

25,300 25,000 25,000 24,500 24,800 25,088 25,500 24,000 24,000minus

1,300

Groundnut

Oil38,000 38,500 39,000 38,000 38,600 38,527 39,500 39,000 38,000 nil

Soyabean

Oil21,500 21,200 21,500 20,800 20,900 21,181 22,000 21,300 21,200 minus 300

Rice Bran

Oil19,000 19,000 19,200 19,300 19,000 19,242 19,600 18,200 18,300 minus 700

Source: Solvent Extractors' Association

Nuts and dry fruits (excluding cashew)


Nuts and dry fruits (excluding cashew) 1994-95 1995-96 1996-97

Total local output 0.044 0.046 0.046

Total exports 0.006 0.007 0.007

Total imports 0.026 0.028 0.030


Sub-sector prospects

In-shell almonds Excellent prospects

Walnuts Good prospects, but seek advice

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Pistachios Good prospects, but seek advice

Raisins Good prospects, but seek advice

Prunes Seek advice

Points to be noted:

There are excellent prospects for exporting in-shell almonds to India. The US is the dominant

supplier with approximately a 90 per cent market share.

Exporting nuts and dry fruits in bulk and having them repackaged in consumer packs presents

an excellent opportunity. The packs can be sold locally or exported to other countries.

Relatively high import duties remain a barrier, but if the stated purpose is to repackage in

smaller units in free trade zones and export them out, the duties are inapplicable.

Locally produced dry fruits and nuts are not of the same quality as the imported ones. There is

thus room for biogenetic technology exports to India in the long term and export of products,

bulk as well as packaged, in the short-to-medium term

But in spite of its head start, the progress appears slow. Six years after the first genetically modified

crop entered the regulatory stream, no crop has been approved for commercial release.

Meanwhile, global area under transgenic crops has gone up from 2 million to 44 million hectares in

the past four years, a quarter of it in developing countries. China’s progress is especially impressive.

Detailed regulation was formulated only in 1996, but today, at least five crops have been approved

and half a million hectares are under Bt cotton.

SWOT Analysis:

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Strengths

Skilled human resource and a large Knowledge base

India is the second largest producers of food grains, milk, fruits and vegetables, 6th in fish, 5th

in egg and 22nd in broiler in the world.

There is Wide range climatic condition and soil.

One of the largest markets of food in the world.

Easy availability of labour at comparatively low cost

Weaknesses

High post harvest loss of crops particularly horticultural one.

Only 1.5% is converted into processed foods.

1% in world export

Illiterate farmers and subsistence farming

Opportunities

Increasing trend in demand of food.

Great export potential

Government helping attitude to farmers and food business personnel.

Threats

GM foods

High competition due to multinationals

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INDUSTRY ANALYSIS:

Entry Barrier: Low entry barrier, because investment is low for small-scale industry but for large-

scale industry it is high.

Bargaining power of buyer: It is high due presence of a no. of farmers and traderers.

Bargaining power of Customer: It is high because a no. of companies are in food business.

Substitutes: There are a no. of substitutes for food products like cold drinks, tea, coffee, beverages

etc.

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India is the world's second largest producer of food next to China, and has the potential of being the

biggest with the food and agricultural sector contributing around 26% of India’s GDP. The total food

production in India is likely to double in the next ten years and there is an opportunity for large

investments in food and food processing technologies, skills and equipment, especially in areas of

Canning, Dairy and Food Processing, Specialty Processing, Packaging, Frozen Food/Refrigeration

and Thermo Processing. Fruits & Vegetables, Fisheries, Milk & Milk Products, Meat & Poultry,

Packaged/Convenience Foods, Alcoholic Beverages & Soft Drinks and Grains are important sub-

sectors of the food processing industry. Health food and health food supplements is another rapidly

rising segment of this industry, which is gaining vast popularity amongst the health conscious.

The Food Processing Industry sector in India has been accorded high priority by the Government of

India, with a number of fiscal relief and incentives, to encourage commercialization and value

addition to agricultural produce. As per a recent study, the turnover of the total food market is

approximately Rs.250,000 crores (US $ 69.4 billion) out of which value-added food products

comprise Rs.80,000 crores (US $ 22.2 billion). Since the liberalization in August, up-till February

2000 proposals for projects of over Rs.53,800 crores (US.13.4 billion) have been proposed in various

segments of the food and agro-processing industry. Besides this, the Government has also approved

proposals for joint ventures, foreign collaboration, industrial licenses and 100%export oriented units

envisaging an investment of Rs.19,100 crores (US $ 4.80 billion) during the same period. Out of this,

foreign investment is over Rs. 9100 crores (US $ 18.2 billion).

The food processing industry in India is one of the

largest, both in terms of production and consumption. Presently

India’s total food market is estimated at used 70 billion.

Realizing the potential in this industry, the government of

India (GOI) has accorded high priority and announced various

monetary incentives to attract investment. Hence there is scope

for u.s. companies to invest in food processing and packaging

sector, which is growing annually at 15 to 20 percent.

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Government of India (goi) has announced a number of monetary

incentives and relief to encourage commercialization and value

additions to agricultural produce. India’s diverse agro

climatic conditions and also wide-ranging and large raw material

availability throughout the year are suitable factors for the

growth of food processing industry.

No industrial license is required for almost all of the food &

agro processing industries except some items. Use of foreign

brand names are now freely permitted. Capital goods can now be

freely imported, including the second hand machinery in the

food-processing sector. Moreover, excise as well as import duty

has been substantially reduced and export linked duty free

imports are also allowed. At present, value addition is made

only in small percentage of agri produces, especially in fruits

and vegetables. Even though India is the second largest

Producer of fruits and vegetables, wastage and value loss is

very high. Primary food industry is a major industry in India

with thousands of bakeries, traditional food units, and fruits,

vegetable & spice processing units.

India’s share in the world trade of processed foods and

vegetables is still insignificant, only 1 percent being

processed commercially. Handling of horticulture crops is

extremely inadequate in tropical countries like India.

Physiological as well as microbial damage is very quick. The

GOI is keen on maximum utilization of agri-produce and

restricting the wastage of vegetables like onions. They are in

demand throughout the year in most parts of the country, but

become scarce only due to perish ability and lack of storage and

handling facilities.

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Increased literacy, changing pattern of life-styles, mass media

promotion has all contributed to a change in demand for

processed food. India’s total food market is estimated at used

70 billion and value added food products would be worth used 22

billion. To minimize the pre/post harvest wastage, the goi is

encouraging investment in this sector and has approved proposals

for joint ventures/ foreign collaborations. Foreign investment

in this sector was about used 2.2 billion during august 91 to

december 98.

India’s 8,041 km of coastline, 28,000 km of rivers and millions

of hectares of reservoirs and brackish water has large marine

product base and variety of fish that can be processed. It also

has a large livestock population, 50 percent of buffaloes and 20

percent of cattle in the world. But meat production is only 1

percent.

Packaged food products are slowly penetrating the large Indian

market of growing segment of middle class. The size of this

semi-processed, ready-to-eat food segments of bread, biscuits,

bakery products, chocolates, soya based products, ready-to-eat

pasta products, etc. is worth over usd 22.2 million. Domestic

production of packaging machinery for these products is worth 23

million and import content is 10 percent at present.

Demand is also rising for hygienically packed milk product.

India is the second milk producing country. Apart from 100 large

dairy product units, a large number of units exist in small and

tiny sector and only 15 percent of the total milk production is

processed by them. The GOI is allowing foreign equity

participation up to 51 percent automatically, for full

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utilization of the available milk production and value addition.

India’s agricultural production is scattered all over the

country and equally scattered is the consumption market. Proper

packaging will enhance the shelf life of the food product.

Eighty-three percent of the agricultural produce is transported

through non-refrigerated mode using trucks, tractors,

bullock-carts etc. with traditional packaging. Tetra pack

(swedish), bosch, and hassi (german) and some italian

manufacturers dominate the indian market. Post harvest

technology including handling, processing and storage facility

and cold chain for preservation and free movement is gaining

importance and goi has announced a number of incentives to

encourage investment for establishing the cold chain.

Investment opportunity worth usd 30 billion will be available

across the food chain to strengthen the procurement, processing

and storage and distribution infrastructure. All these

condition in processing and handling various food commodities

offer excellent opportunities for u.s. firms in the food

processing and packaging equipment sector.

Comments: with liberalization, India has become one of the prime

areas for investment. The total local production in the food

processing sector in year 2000 is estimated to be usd 1,240

million. India’s total imports is estimated at usd 400 million

of which usd 120 million are the imports from the u.s. for the

following reasons, fcs mumbai feels that food processing sector

is lucrative for investment:

Industrial license is not required for most of the food and agro

processing industries except for few items like beer, potable

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alcohol & wines and items reserved for exclusive manufacture in

small scale sectorPermission to use foreign brand names freelyautomatic investment approval

(including foreign technology

agreements within specified norms) up to 51 percent foreign

equity is allowed for most of the food processing sector--except

malted food, alcoholic beverages including beer and those

reserved for small scale industries (s.s.i.)up to a maximum of 24 percent foreign equity is allowed

insmall-scale industries (s.s.i.)excise and import duties are reduced considerably

Furthermore FCP Mumbai finds great potential for american

companies to explore the possibilities of joint venture, agency,

liason and/or distribution in areas of:

vegetable and fruit processing equipment

food processing equipment

integrated post harvest technology

food preservation machinery

packaging

refrigeration

The president's waiver of sanctions against the use of

u.s. export-import bank (exim), the u.s. trade and development

agency (tda), and the overseas private investment corporation

(opic) facilities expired october 21, 1999. on october 27, 1999,

the president signed new legislation indefinitely extending the

waivers for tda, exim, and opic in india. These facilities now

continue to be available to support u.s. trade and investments

in india. the u.s. government has released an entities list that restricts 40 indian entities and 200 of

their subsidiaries from trade and business relations with the u.s. for details on the list.

On december 16, 1999, the u.s. government removed 51 entities

from this list originally sanctioned in 1998. for information on

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the 51 entities removed from the list, please refer to the imi

titled 51 indian organizations removed from the u.s. sanctions

list reported on 12/22/99.

Bakery:

Products And Applications

The 3mn ton bakery products industry can be categorized as follows,

Bread

Biscuits

Cake

Only 40% of the bakery industry is in the organized sector, while the balance 60% constitutes

unorganized/ small-scale local manufacturers. There are over 2mn manufacturing units in the

unorganized segment.

Unorganized sector manufactures several types of bread and organized sector primarily manufactures

western type of bread. Biscuits have been a popular snack for a long time and there is a large variety

available even today. By contrast, cakes are not popular in India and a limited range is available in

the local market.

Segmentation

Bread can be segmented as traditional bread (manufactured by unorganized sector) and western

bread. Traditional breads are of several types and differ from region to region. Western bread is

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primarily white and brown sliced bread. Other types of bread such as fruit bread etc have a negligible

share.

Biscuits can be segmented broadly into popular and specialty segments. Popular biscuits can further

be segmented as

· Glucose

· Milk biscuits

· Marie

· Arrowroot

Glucose biscuits are the largest selling biscuits accounting for about 35% of the total

biscuit market.

Specialty biscuits can be segmented as

· Cream

· Wafer cream

· Salt cracker

· Cookies

· Assorted/ others

Estimated relative share of various types of biscuits is as follows

Glucose 35

Milk Biscuits 17

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Arroe Root 18

Cream Biscuits 12

Marie 11

Others 7

On the basis of price, the biscuit market can be segmented into,

Low (less than Rs40 per kg)

Medium (Rs40-70 per kg)

High (over Rs70 per kg)

Consumer Awareness And Penetration

Bread and biscuits have been in the Indian market for a long time. The awareness is very high, close

to 100% in urban areas and around 90% in rural areas. Penetration of bread is estimated to be close to

60% in urban areas and around 15% in rural areas. Biscuit penetration is about 60% in urban areas

and 20% in rural areas. Penetration of Cake and other products is insignificant and restricted only to

large cities/ metros.

Consumer Habits And Practices

Bread is a popular snack food/ food supplement for lower-middle/ middle income people in

urban areas. They primarily consume low cost bread (known as pav) manufactured by

unorganized sector.

Premium range of bread manufactured by organized sector is popular as a breakfast item

among middle/ upper income group in urban area.

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A sizable volume of biscuits are consumed at small roadside tea shops/ stalls across the

country. A bulk of their requirement is met by unorganized sector and typical consumers are

truck drivers/ travelers. Biscuits are also available at the stalls in railway stations.

Premium (specialty) biscuits are more popular in urban areas and are consumed as breakfast

and also with tea in the afternoon.

Brand loyalties are relatively stronger in the popular segment whereas in the premium

segment, consumers look for novelty and change.

Cakes manufactured by organized sector have a very limited market. These are mainly sold in

the larger cities.

Consumption of cakes/pastries is mostly restricted to special occasions like Birthdays, parties,

weddings, etc. Only a small section of the population consumes it regularly as a snack food.

There are significant variations in consumption habits in different parts of the country.

Glucose biscuits, typically consumed with milk, are more popular in the West and the North

which incidentally are milk surplus regions. Milk biscuits (with proposition of milk as

ingredient) are more popular in the south and the east, which are milk deficit regions. Arrow

root are more popular in the East whereas Marie (low sugar) biscuits have a higher

penetration in the South.

Biscuits and bread are sold predominantly by grocery shops, general stores and other retail

outlets. However, relative share of impulse purchase in this category is not very significant.

In relative terms, penetration of biscuit is higher in rural markets as compared to bread. Rural market

with 75% of population, accounts for 40% of bread consumption and about 50% of biscuit

consumption.

Industry Structure

In 1977-78, the Government reserved the bread and biscuit manufacturing for small scale and

restricted entry of large producers. During the last 2 decades, small and unorganized players shared

the growth in the industry. Currently, there are an estimated 2 million bakeries across the country

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engaged in production of bread, biscuits and other products. Abid Hussain Committee recommended

dereservation of the sector as the unorganized sector has not been able to maintain quality and

hygiene standards, for want of capital and technology. The recommendation was implemented by the

Government in the 1996-97 budget and the sector was de-reserved. The major problem this industry

has been facing is the availability of cheap and quality raw material, wheat flour. Supply of wheat

flour is canalized through a government body, State Trading Corporation.

Market Size And Growth

As per the estimate made by the Ministry of Food Processing Industries (1998), the total market of

bread and biscuit is estimated at 1.5mn ton and 1.1mn ton respectively. The cake market is estimated

at 0.4mn ton. The organized segment of the biscuit market is estimated to be 0.44mn tons whereas the

unorganized sector accounts for the balance 0.66mn tons. Over 80% of bread is manufactured by the

unorganized sector.

In terms of value, bread market is estimated at Rs16bn (MRP Rs21bn) whereas biscuit market is

valued at Rs40bn (MRP Rs60bn).

Bread market is estimated to be growing at around 7% pa in volume terms, whereas the biscuit

market in the recent years has witnessed a little higher growth at around 8-10% pa. Within the biscuit

category, cream and speciality biscuits are growing at faster pace at 20% pa, while the popular

segment is growing at 6-7% pa. The Glucose segment recorded higher growth in 1998, driven by

strong growth in Britannia's Tiger brand.

Size of the bakery products market by 2005E (mn ton)

Biscuits 2.5

Bread 2.0

Cake 0.8

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Major Players And Market Shares

Bread

Modern Food Industries and Britannia are the two major players accounting for 10% and 5% of total

bread market respectively. In the organized segment, these two players account for 80% of the

market. During the last decade, Britannia consistently lost market share in bread as its major

competitor Modern Foods had an unfair advantage of getting wheat (key raw material) at subsidized

rate from the Government. The sector has now been de-reserved and the Government has withdrawn

supply of subsidized wheat to Modern Foods. Britannia has been increasing its focus on the premium

segment. Its strategy is not to grow in terms of volumes, but to maintain the margins. There have

been new entrants in the premium segment such as Gardenia, Whytekollar, etc.

Leading bread brands

Britannia

Kwality

Modern

Wibs

Whyte Kollar

Gardenia

Major producers of bread

Modern Foods Industries

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Britannia Industries

Bombay Bakery

Dalmia Biscuits Pvt Ltd

Elite Foods Pvt Ltd

Prime Bakery

Dey Bakery

Golden Bakery & Confectionery

Modern Bakery

Agrawal Food Products

Biscuits :

In the overall biscuit market, Britannia and Parle are two major players with 15% and 10% market

shares respectively. In the organized biscuit market, Britannia has close to 40% market share, while

Parle has around 30% share. Bakeman's has a market share of 10%, mainly with a larger share of the

cream biscuit segment. Smithkline Consumer has close to 8% market share with its Horlicks and

Boost brands. Other players like Nutriene (now acquired by Sara Lee), Kwality etc have about 3-4%

market shares each. Kwality Biscuits Pvt Ltd, a Bangalore based company has been expanding its

presence to other parts of the country.

The glucose segment accounts for 35 percent of the overall biscuit market.. Parle's Parle-G is the

leader in the Glucose segment, wherein it has an estimated 55% market share. Britannia relaunched

its Glucose -D and Circus brands of glucose biscuits under the Tiger brand. With attractive

packaging, low pricing, and heavy advertising, Britannia has achieved tremendous success with the

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Tiger brand. The brand has an estimated annual sale of close to Rs1.5bn and has garnered 20-25%

market share in the glucose biscuit segment. Britannia hopes to make Tiger the number one brand in

the glucose segment by 2001. Rural market accounts for majority of Tiger sales.

Salty biscuits (Parle 's Monaco and Britannia's Snax) and sweet-salty biscuits (Parle's Krackjack and

Britannia's 50-50) are the other two most popular segments in the biscuit market.

Other Parle brand in the popular segment is Super Milk. However, Parle has been unable to establish

its presence in the premium segment. It has recently launched Hide and Seek, chocolate chips biscuits

which will compete with Britannia's Bourbon.

Britannia's other main brands are Marie, Nice, Milkbikies, Good Day, Pure Magic, Little Hearts.

Other small scale producers are Ampro Food Products, Lucky Biscuit Company, Champion Biscuits,

Crown Bakery, Dalmia Biscuit Pvt Ltd, Dey Bakery, Indian Foods Pvt Ltd, J B Mangharam & Co,

etc. Doctor Biscuits Pvt Ltd, a Kerala based company has created a niche segment of Herbal Biscuits

containing herbs with medicinal properties which are beneficial for the body. After setting up a base

in the south, the Company is currently expanding its market to cover Maharashtra, UP Bihar and

Orissa. Doctor Biscuits Pvt Ltd has a network of 425 distributors and 75 stockists and has an annual

turnover of Rs360m.

Entry of Global Players

In the past, several major MNCs like Cadbury, Brooke Bond and Nestle tried to enter into the biscuit

segment but were not successful. These players found it difficult to compete with the unorganized

players in the lower/ popular segment of the market. In the upper end of the market, market size is

small and there are established players with strong brand equities and a well-entrenched distribution

network. Ultimately, they pulled out of the product category.

With the decontrol of the sector, several large global players have entered the category and more

players are expected to set up shop in the country over the next few years. The leading global players

who have entered the biscuit segment are.

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Nestle SA : Nestle is the largest producer of biscuits in the world. In India, Osem International of

Israel had set up a joint venture with Dabur for the manufacture of bakery products. The joint

venture, named Excelsia Foods, currently markets the Creamwich brand of cookies. With the global

acquisition of the Osem group, Nestle acquired 40% stake in Excelsia Foods. Nestle SA has increased

its stake in Excelsia to 60% by acquiring an additional 20% equity from Dabur A new biscuit brand

Kidz - animal shaped biscuits in chocolate and plain flavors, has been launched. Targeted at children,

the biscuits are positioned on the fun-platform and are packed in pouches.

United Biscuits, the $3.25 billion British-owned multinational food company, and the second largest

biscuit manufacturer in the world, is launching its popular McVitie's Digestive brand in India. It will

also launch other brands like Hob-nobs, BN pocket and Ginger Snaps. McVitie's Digestive is the

largest selling brand in the UK The biscuits will be directly imported by the Company and will be

available in nearly 12,000 retail shops in these major cities. The biscuits will be priced at a significant

premium as import duty is high at 60%.. UB has a market share of about 19 per cent in the European

biscuit market. It also has significant operations in other countries such as China, Malaysia, Japan,

Singapore, Russia and US.

Kelloggs has also entered the segment with the launch of its digestive Breakfast Cereal Biscuits

Sara Lee, another leading global player has acquired the biscuit business of Nutrine, a south based

confectionery firm.

The market leader, Britannia has also in recent years revamped its corporate image and marketing

strategy and introduced a number of new biscuit brands to cater to various segments (including the

premium, snack and mass markets). Britannia has been expanding its distribution reach and plans to

double its network in the rural markets. Retail reach is expected to increase from the current 0.4mn

outlets to 0.8mn retail outlets in the next two years. .Its new logo incorporates the slogan "Eat

Healthy, Think Better", positioning the company's products as a source for healthy food. This is an

important strategy for promoting consumption of snack foods, which many families do not associate

with nutrition. Biscuits under the umbrella brand Nutri, positioned on the nutrition platform have

been launched recently.

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Over the long-term, the relative share of unorganized sector is expected to decline gradually. Existing

players with strong brands and established distribution networks will continue to expand their market.

New players will have the daunting task of setting up a distribution network besides adapting their

products to meet the taste preferences of local consumers. The new entrants are likely to enter into

distribution arrangements with established domestic food companies

Manufacturing Process And Economics

Bakery products are primarily made from flour or meal derived from grains. Wheat flour is popular in

India. Biscuit manufacturing involves mixing of wheat, flour, sugar, edible bakery fat etc. Depending

on specification of the product, ammonia is added. Leaving agents are added to give characteristic

appearance, texture and flavor to most bakery products.

Bread manufacturing requires fermentation, which results in lightening of the loaf structure and

development of appealing flavors. Bakery facilities can be set up in small cottage sector also, where

baking is done in an enclosed vessel. On a larger scale, baking requires ovens.

In case of bread, raw material accounts for about 80% of total cost. The key raw material is wheat

flour, which accounts for 70% of the total material cost.

Biscuits have a higher contribution margin of about 25-30%. Wheat flour and

hydrogenated/vegetable oil account for 30% and 35% of material costs respectively whereas sugar

accounts for about 15% of cost. Wheat flour cost is about Rs6-7 per kg whereas edible oil costs about

Rs40 per kg and sugar prices range around Rs13-14 per kg.

Parachute and Saffola brand transfers by Marico

The Parachute brand is synonymous with the hair oil market in India, and has been the market leader

in the category for several years. Marico's Saffola brand, was among the first edible oil positioned on

the low saturated fat content and has a strong brand equity in the health consious segment. Both these

brands together contributed to as much as 2/3rd of Marico Industries' turnover. While the listed

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company manufactured and marketed the brands, the ownership vested in a promoter owned

company Bombay Oil Industries.

Brand ownership and lease

Marico group’s history can be traced back to 1862 when Kanji Morarji, started a small trading

business in Mumbai. The family set up the Bombay Oil Industries Ltd (BOIL) in 1948 with

manufacturing facilities in Mumbai for coconut oil extraction plant, vegetable oil refinery and a

chemical plant. BOIL soon became one of the leading players in industrial chemicals. Over the years,

BOIL expanded and diversified through subsidiaries. In 1990, the marketing division was hived off

into a separate company in Marico Industries Ltd (MIL). This division was engaged in marketing of

coconut oil, edible oil, instant starch, fruit jams etc including the brands Saffola and Parachute.

BOIL licensed these brands to Marico Industries Limited. The user agreement was valid in

perpetuity, for a royalty payment of 0.75% of net ex-factory sales to BOIL, except in the event of

Mariwala group losing management control of the company. New brand extensions launched under

the umbrella Parachute and Saffola however belong to Marico Industries at no additional royalty

cost. Sweekar (refined sunflower oil), Revive (instant starch), Hair & Care (non-greasy hair oil) and

SIL (Food products such as Jams, Baked Beans, Mayonnaise, Chinese Soya/Chilli sauces etc ) brands

are owned by Marico.

The brand transfer

In June 1999, Marico in tune with its policy of brand acquisitions and increasing realisations through

increased brand equity, reached an understanding with Bombay Oil Industries Ltd to transfer

Parachute and Saffola to Marico Industries at a consideration of Rs 300mn. These two brands in

FY99, accounted for 60% of its Marico's total turnover. The consideration was arrived at by way of

capitalisation of the royalties payable in the future (0.75% of net ex-factory sales on specified

products). The transfer will be executed by the end of June 2000.

Marico has also in the last one year acquired two other brands

1. Mediker shampoo (from Procter & Gamble)

2. Oil of Malabar (from West Coast of India)

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Mediker : Anti-lice shampoo brand Mediker, owned by MNC FMCG major Procter & Gamble was

acquired by Marico in June '99. Mediker with an estimated annual sales of about Rs80mn was

acquired for a consideration of Rs100mn.

Oil of Malabar : Marico acquired the coconut oil brand, Oil of Malabar from West Coast of India

Ltd in October 1999. Oil of Malabar has an annual turnover of Rs120mn. The brand positioned in

the lower price segment has enabled Marico to gain market share in the Southern market. Oil of

Malabar has about 8% market share in the South. The brand has a national market share of 3%.

THE NATIONAL POLICY FOR FOOD PROCESSING

An Industry Perspective

From the stage of struggling to take care of basic food requirements of its burgeoning population during the independence, India has come a long way towards visualising the tremendous potential for commercial and export oriented Agri-business. Exploitation of this potential can bring about an era of prosperity with the right mix of employment generation and profits.

Further India’s geographical situation gives it the unique advantage of being at the centre of the most prosperous economies of the Eastern World that is, the Middle East in the West and the Far East in the East including countries Japan, Singapore, Thailand, Malaysia, Korea etc. This gives India the competitive edge for linking these markets as the third country export centre.

Further, it is well known that the food industry is one of the largest employment provider. The figures published in the Annual Survey of Industries (1994-95) reveal interesting facts. The Survey reports that Food products had the distinction of having maximum number of employees per factory (17.2%) and employing the maximum number of employees of about 1.2 million.

The Central Government has been trying to create a healthy atmosphere for development of the Food Processing Industries at the processing level. When it comes to setting up an industry, the proposition is well supported with this sector put under priority sector for both investment and credit, lots of incentives and financial assistance schemes being extended (by Department of Food Processing Industries, APEDA, MPEDA, Horticulture Board, etc), removal of certain industries from the reserved list for small scale sector, gradual liberalisation in the conditions for foreign investment and above all a very progressive, supportive and helpful Department in charge, which has unfortunately been demoted to a Department status from its previous Ministry status. But loose ends remain at the base level i.e. the raw material stage and also at the implementation stage. The major bottlenecks confronting this sector today include poor yields, lack of post harvest infrastructure, poor utilisation of land, low added value and poor quality of packaging and

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preservation and most importantly low demand led by high prices of processed food.

A closer look at the performance of the industry reveals that the ultimate objective of the policy should be to encourage the consumption of processed foods in urban India, which are safe, nutritious and hygienically prepared and packaged. This will allow the flow of money from cities to rural India and will help in bridging the gap between “Urban India” and “Rural India”. Rural economy will provide for more employment and will get the money to operate other necessary services. The most incisive issue, under which the industry is struggling today, is the lack of adequate demand for new, sophisticated processed food products mainly because of high price and partly because of the traditional food habits. Food habits are however changing fast with rising disposable income and exposures to foreign markets and electronic media. A new Consumer class is taking birth in India whose buying behaviour differs significantly from that of a decade ago. But, the industry is not being able to run in a cost effective way which is a must for them to survive in this competitive world. The costs are added on for a variety of reasons like:

Very low productivity of raw material leading to high unit price of the final product.

Lack of storage infrastructure leading to wastage, thus increasing unit price of the finally available amount

Lack of proper linkage between industry and farm forcing industry to procure raw material from the open market, a feature unique to Indian Food Processing Industry.

High cost of finance and non-availability. Financial institutions and banks consider the sector as high risk.

High operating cost due to multiplicity of laws and regulations that industry needs to comply with coupled with the broad based implementing system & excessive thrust on prosecution.

Last but the most important is high incidence of taxes and duties on final products.

The Policy should try to address each of these issues separately in order to usher in a conducive atmosphere for more and more investment. In the following paras we have tried to give few directions which industry feels should help in easing the situation.

GENERAL POLICY DIRECTION

There are as many as 12 different Ministries and Departments, which govern and administer the agriculture and agro-based sectors in India. Their tasks and responsibilities

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overlap in several key areas, leading to duplication in functioning. There is often great deal of confusion about the roles that they play. Developmental activity and innovation in them gets slowed down and often even gets stifled because of the conflicting clearances, requirements that are required by the central departments that counter each other.

There is also an overlap of responsibilities between Ministry of Food Processing and other departments of the Government of India in the matter of financial support. There are several agencies involved in joint appraisals, co funding concurrent monitoring and evaluation. The major one are the APEDA, MPEDA, Ministry of Commerce, Government of India, Cashew Promotion Development Council, National Cooperative Development Corporations and National Horticulture Board

Policy Recommendations

Ministry Status should be restored to the Department of Food Processing.

Ministry of Food Processing Industry should be made the Nodal Ministry for all sectors and issues related to Food Processing Industry including marine, animal husbandry, food laws etc.. This will help in faster development because existing fragmented approach and multiplicity of agencies are the main reasons for low actual investment flow in this sector and frustration among investors.

DEFINITE POLICY ISSUES

Low Productivity

Fed by 50 million hectares of irrigated land, India’s 182.7 million hectares for crop cultivation represents the largest acreage of cropland in the world. Notwithstanding the impressive gains in production, the country’s vast agricultural potential still remains grossly under realised. Moreover, there are serious gaps both in yield potential and technology transfer, as the national average yields of most of the commodities are low. FAO figures indicate that Indian has around 15% of the world’s land under agriculture. A comparative view of India’s productivity vis-à-vis the world is provided in the Table below.

World Average Yield

World Highest Yieldand Country

Yield in India

kg/ha

Cereals 2970 France 7355 2207

Pulses 837 Ireland 4524 584

Cabbages 24093 Uzbekistan 72083 18261

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Tomatoes 28343 Netherlands466667 15143

Cauliflower 18799 Armenia 50000 17241

Green Peas 8256 Lithunia 40000 10000

Grapes 7816 USA 19524 17500

Tea 1248 Bolivia8300 1852

kg/animal

Mutton & Lamb

15 Poland 33 12

Cow milk 2028 Israel 615 877

milk animals

In India, the average yield of wheat is 2420 per hectare, while in China average yield of wheat is 3318 Kgs per hectare. China is the biggest producer of rice with 178 million tonnes produced from 30 million hectares of land with an average yield of 5869 Kg. per hectare. In contrast, the Indian average yield is 2817 Kg. per hectare. Today we produce about 200 million tonnes of cereals, which is 10% of total world production. The productivity is 2207 kg/hectare as compared to the world average of 2970 kg/hectare and the highest achieved by France 7355 kg/hectare. We have more resources than many other countries, it is just the initiative for the drive towards better performance which is yet to take off. If today, we attain this productivity level of 7355 kg/hectare, our production of cereals will rise three fold and will be to 731 million tonnes, i.e. a straight jump to about 35% of today’s world production. It is surely worth the initiative. That this can be achieved with the right initiatives is thus established:

BETTER FARMING PRACTICES RESULT IN INCREASED INCOMES & YIELDS

Impact on farm incomes (percent)

Increase in farmer incomes

Yield increase

Pepsi Tomatoes 230 200-266

Cargill Sunflower 100 100

Tarai Potatoes 125 50

VST Gherkins 220 n.a.

Source : FAIDA Report, Mackinsey & CO.

Thus we have enough, it is only the right initiative and the right distribution that can lead

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us to the top most position in the global agriculture arena.

Why such low productivity?

Fragmentation of land holdings has led to lower economies of scale due to low allocative efficiency, low investment and mechanisation. In many cases this has led to subsistence farming

Of the total agricultural land in India only about 35% is under irrigation. Most of the agricultural production in India is therefore dependent on the monsoons

Lack of maintenance and upkeep of existing irrigation systems due to lack of funds

Although the number of tube wells and pump sets has increased, many of them remain idle due to non availability of power

Majority of the medium or major irrigation projects are lying incomplete leading to blockage of funds and escalation in project costs

Large amounts of land are rendered unusable for agriculture due to either land degradation, salination or water logging. There is no transparent procedure to make this land available for use by the agro industry

Low levels of farm mechanisation in agriculture. Benefits of mechanisation have so far been confined to the wheat based cropping system

The cropping pattern is heavily influenced by the farmers perception of risk and this is influenced by price expectations and the risk balance between crops. Currently support prices are for select crops only


Review policy governing land availability to Agro and Food Industry Directions could be issued to all Agricultural Universities to work on Processable

varieties of Fruit and Vegetable crops. This will reduce the cost of production and will boost Exports from the country and will improve the availability of food products in domestic markets round the year.

Allow use of wastelands for farming and use by Food and Agro Industry. The Agricultural Universities, Krishi Vigyan Kendras and the Extension services

need to be reoriented to aggressively promote and induct modern practices of farming in their respective areas. Funding to Agricultural Universities should be linked to success

Encourage regional specialisation in crops through specific efforts of Agricultural Universities to develop schedules for optimum levels of use of inputs

Lands in possession of the Agricultural Universities should be used to develop

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and run model farms

Infrastructure

Even at the existing level of production a substantial amount of farm produce estimated at around Rs 7000 Crores is being wasted every year due to lack of proper storage and processing facilities and low demand of processed foods due to high costs in comparison to the fresh produce. It has been estimated that, India wastes more grain than Australia produces.

Cold chain facilities are woefully inadequate to meet the growing production of ‘perishables’ such as ‘milk’, ‘fruits and vegetables’, ‘poultry’, ‘fisheries’ for domestic and export markets.

Limited incentives for investment Restrictions placed by State Government on cold storage orders Very high levels of wastage and value loss of horticultural produce Negligible level of private sector participation leading to inadequate investments

and low level of technology absorption With the increasing role of the private traders in the food grain sector of our

economy, and the need to penetrate international markets in the next five years, there is a strong and justifiable case to develop "commodity exchanges" (futures markets) for selected foodgrains like wheat and rice on an urgent basis

Poor infrastructure for handling export of food and agri exports and floriculture Limited cold storage and handling facilities and insufficient cargo space for

perishable commodities at the ports/ airports


Cold chains in the private/ public sector should be treated as a continuous process industry and be awarded priority sector status. This includes

o Ensuring that cold storages are supplied power continuously like hospitals as they are handling "perishables"

o Facilitating investment by providing fiscal incentives for encouraging the creation of cold chains, which are capital intensive and have long gestation periods. These include the following :

a. Credit by banks and financial institutions at prime lending rates b. Reducing excise duty on local freezer cabinet

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CFTRI should obtain and disseminate information on modern technology on cold chain storage equipment

Industrial training institutes should include "cold storage" technology courses in their curriculum

The low energy low cost cold chambers which can store agricultural perishables upto 90 days can be funded by the Department of Food Processing, Ministry of Agriculture

In the Agri Industry large investment would be needed for developing cold storages near "mandis". Limit for assistance to the private sector in form of loan should be raised to Rs one crore

Encourage direct marketing of products by the farmers to cold storage companies. Cold storage facilities should be developed at all international airports in the country

Set up of handling facilities for "perishables" at the International Airports and Ports.

Railways to initiate steps for building dedicated facilities and routes for handling exports of perishables

Introduce latest cargo handling systems at the airports by encouraging Private sector participation for developing cargo handling and storage facilities at the ports

Prioritise expenditure on rural infrastructure. At least 40 percent of the expenditure to be targeted to specific crop or produce. Address key items of agricultural produce, identify the three or four major centers of production and build links in terms of roads, power and storage capacity for these specific items

Sub contact warehousing to private trade. This will reduce losses in grain handling and operating costs.

Allow and promote setting up joint ventures with grain handling companies around the world

Identity and classify markets based on handling capacities. Markets handling more than 20,000 tonnes should be fully mechanised and automated and should have large storage capacities. Markets handling between 5000 and 20000 tonnes should concentrate on low cost efficient storage

Set up Commodity Exchange (Futures Market )

o This is a market or base where buyers and sellers can meet, agree on prices, quality, delivery schedules and other terms of sale

o The Commodity Exchange will help in concluding an obligation to supply or receive a commodity

o Provide facilities where trading can take place

An increasing emphasis on private trade necessitates that storage systems are developed at the farm level. Institutional credit will be required for this. The Agri industry will need to be encouraged to develop modern bulk handling facilities at the farm level. This initiative should be treated as an agricultural activity.

Create a task force to review and synergise all efforts by various Government Ministries and Departments involved in providing Rural Infrastructure. Task Force should align its process for development of arterial roads to take care of the

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rural needs for movement of goods from the farm to the market and wage goods to the farm sector

Encourage Linkage between Industry and Farm

Non-availability of good quality homogeneous raw material from the farm level due to extremely small & fragmented land ownership system originating from the strict Land Ceiling Act. In an effort to distribute wealth and protect smaller farmers, Indian policy makers have progressively lowered the ceiling on the amount of land that can be owned by any individual or singly entity.

The fragmentation of land holdings has led to lower economies of scale due to low allocative efficiency, low investment and mechanisation. In many cases this has led to subsistence farming resulting in domination by small employers at farm level making the management of supply chain very complex. As a result the farmers are not able to practice modern methods of farm management, resulting in low yields and poor quality of produce. If the food processing industry wants to succeed, they should secure the availability of an abundant supply of quality raw material. Companies capable of utilising technology to leverage economies of scale are prevented from doing so by the Land Ceiling Act, which has also resulted in the existence of vast tracts of uncultivated land.

In current supply chain system, the agriculture sector is characterised by the low level of mechanisation in harvesting. Poor harvesting techniques and an inadequate post-harvest infrastructure result in damage to and wastage of much of the raw produces.

Compounding the problem of post harvest infrastructure is the presence of several layers of intermediaries between the farmer and the factory, the large number of whom has an adverse effect on both the final prices and the quality of the product. The final selling price escalates as each intermediary feature in a profit margin. The extra handling, moreover, leads to damage produce while the extra time to reach retailers means more wastage.

The food grain market of our country has distortions which inhibits the Agri Industry from entering it in a big way. The support price of major cereals announced by the Ministry of Food & Consumer Affairs is high - this also discourages private trade in the domestic and for export markets.

While the Agri industry is allowed to trade in foodgrains, there are storage limits exercised by the State Governments under the Essential Commodities Act, 1955


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Developing marketing and post-harvest activities by extension workers depends on improved communication between existing production facilities, market operators and the marketing services of agriculture ministries. Wherever necessary, the development of an appropriate structure to ensure the necessary linkages between them should be developed. The establishment of a Marketing and Post-Harvest Extension Support Unit is suggested as the best means of bringing about these linkages.

To safeguard the interest of the farmer's community, a system of contract farming would be a viable option to implement. Several agribusiness producers and processors have attempted to work around the Land-Ceiling Act through large-scale contract farming. However, there is no national legislation to govern contract farming and there is no means whereby contractual agreements can be enforced. By implementing contract farming, small farmers will gain the advantage of scale, particularly in production efficiency and marketing. Food processors could set-up a network with farmers to achieve a more secure and stable supply of raw material.

Ideally repeal Land Ceiling Act. If it is not possible, we have to find a special mechanism suitable to the Indian paradigm to use farmland for better efficiency. There are several ways to do this :

o Contract Farming : Allow tripartite agreements involving farmers, producer ( agro industry) and government. This enables the contract to be enforceable

o In order to attract ‘biotechnology’ and ‘gene transfer' for high quality products, horticultural crops should be treated as plantation crops like in Karnataka which has no ceiling and Maharashtra which has a ceiling of 1000 hectares

o Allow consolidation of farming through the cooperatives of owners. Allow Cooperatives to enter into joint ventures with Agro Industry as a rule and not as an exception

o Recommend "Command Area" concept as exists in the Sugar industry. The State Agricultural agency can be made a major instrument to ensure enforceability of the contract

Furthermore, there is an abundant supply of arable land available, which are currently considered as wasteland and are affected by degradation, salination and water logging. Corporate farming could be made feasible on these abundant amounts of wasteland.

Committed focus on Research and Development: It is very clear that India has to become a global industry for which R&D is must to keep the industry ahead of others. Research in industry and it must be encouraged in the competitive environment where “Survival of the Fittest” is the only rule.

The laboratories infrastructure must be developed to support information need of

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the Industry and must have a trouble shooting cell to help small and medium enterprises. All Agriculture Universities should be encouraged & supported to upgrade their laboratories and use them for industrial testing and be made available for use by small companies.

Make Finance Easily Available

Other than NABARD, there is no national level finance institution to fund the Food and Agri processing sector. Its activities cover a wide spectrum of areas leading to a lack of focus on specific and specialised sectors within the food & agro industry

The current system of institutional credit to the farmer suffers from

o Farmer unfriendly procedures o Lack of adequate credit to the farmer at the appropriate rate of interest o Delay in credit delivery to the farmer o Imbalances in credit delivery which make the farmers resort to non-

institutional sources of credit at high effective rates of interest

The Food Processing sector is expected to face a fund shortfall of Rs 10000 crores in the current five year plan period. This business is inherently risky and funding agencies like NABARD, NHB, APEDA are typically funding only select ventures. Investment implementation is very poor at around 15%. (according to the Report of the Task Force on Agri Business Mangement set up under the Prime Minister's Council on Trade & Industry)

Credit from term lending financial institutions has rarely exceeded 6% of the total credit extended to the industry

The development financial institutions do not have capability of appraising hi-tech export-oriented projects being set-up

There are no suitable insurance schemes for hi-tech export-oriented projects most of which deal with export of perishables

In financing export-oriented hi-tech projects like high density farming, greenhouse floriculture, controlled environment livestock farming, bio-technology, tissue culture, embryo transfer technology, bio-pesticides and bio-fertilisers etc. banks face considerable risks like :

o credit risks in the face of new technology, the risks are greater than average

o technology risks the absorption of new technology has a likely chance of failure as it has not been tested in actual situations

o market risks o risk of rejection of the product by customer

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Set up an autonomous Food Development Bank of India (FDBI) along the lines of National Housing Bank/HDFC for funding all post harvest activities of the agro and food processing industry and the supporting infrastructure sectors like transportation, storage etc. The bank should have

o specialised techno-commercial skills for food & agro processing o project evaluation skills for funding specialised activities o equity funding by the Development Finance Institutions o Setup Agriculture Development Finance Corporations (ADFCs) in each

state as announced in the Budget’98, for developing the mechanism of credit delivery within each state. NABARD should focus its activities on re-financing and monitoring these ADFCs

Banks should be allowed to set interest rates for farmers with land holdings above two hectares.

Concessional finance at low interest should be offered for farmers who own less than two hectares

Simplify loan application and documentation procedure Allow crops to be surety for working capital loans Involve local NGOs and grass root organisations for educating the farmers, like

the "Grameen Bank" in Bangladesh Allow cooperatives to raise money in the market Announce special package for Horticulture, Floriculture and EOUs Appoint a Task force in Ministry of Food Processing to investigate reasons for

non-implementation of investment proposals and formulate and set-up "single table" approval system

Reduce Taxes and Duties

The main hindrance today to the development of food processing industries in the country is the high price of food products in the local market. In most of the developed and developing countries this price differential between raw material and finished goods is marginal which has helped in promoting consumption and exports of processed foods thus leading to increased farm income and technology upgradation.

Recognising this fact, excise duties were removed from most of the food products especially those using horticulture produce as raw materials since initiation of the liberalisation process since 1991. Such fiscal incentives had generated phenomenal growth in this sector. Along with other liberalised measures and delicensing of most of the industry, this industry has attracted more than Rs 61,000 crores of investment of which about Rs.7000 crores is foreign investment. This sector has succeeded in achieving a growth rate of 20-25 percent alongwith maintaining its position as a major export earner

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when overall manufacturing sector has recorded a slow growth. This sensible action taken in 1991 was reverted in 1996-97. After the tax imposition, the industry had recorded a negative growth rate. Inspite of repeated appeal, last year’s budget increased the tax burden further on this industry.

Taxation has the effect of arresting growth of any industry. In food processing sector, it can indeed make matters worse, because the sector is already highly taxed. CIFTI’s study show that the tax incidence on some basic and mass based food products like biscuits, jams jellies etc. is as high as 25 percent of the final consumer price.

Also, the recent price rise of fresh agricultural produce due to seasonal variations highlighted the neglected attitude towards post harvest management and agro-processing sector in the interest of common man. These crisis have underlined the need for strong post harvest management and handling systems including processing of perishable foods to feed the large population of the country round the year at the affordable price.

The budget for 1998-99, 1999-2000 & 2000-2001 has made the country non-competitive in the agri-business sector. Consumer Price of Food Products are going up day by day gradually taking them out of reach of common consumer due to gradual hikes in excise rates.

Moreover, taxing branded packaged foods has resulted in encouraging local outlets where sweetmeats and other food items are prepared and sold loose and micro biological qualities of these are far below the international standards and should be considered unfit for consumption. On the other hand, the organised modern industry which is still struggling to perform under the adverse situations and trying its best to improve the quality of food for the common man by the application of new technologies of international standards are being taxed heavily.

Most of the problems of adulteration and contamination can be solved with the promotion of sales of packaged foods. Thus, in the interest of public health and to reduce the expenditure and pressure on public health systems, we must promote hygienically packaged foods.

We should remember that processing of fruits and vegetables would help in reducing wastage. The major loss of fresh produce is in handling and transportation of produce to longer distances at very high temperatures (40-45 deg. C ). Reducing this wastage can be the single major factor in promoting rural development thus benefiting farmers and reducing poverty. Processing of fruits & vegetables also ensures round the year availability thus curbing inflation. With the expansion of domestic market, employment opportunities will also increase and industry will also have enough orders to run the factory at full capacity. Per unit cost of production will also go down making Indian products more competitive in international market, which would help in reducing imports and increasing exports.

Similarly excess production of cereals could also result in producing value added

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nutritious processed items only if domestic demand increases and that will be possible only if the retail price is brought down to the reach of the consumers. Lowering excise duty is thus the prerequisite.


Duty on all essential items like rice, flour, atta, pulses, packagaed /dehydrated/ frozen fruits and vegetables, edible oils, liquid milk in packaged form etc. should be totally exempt from any sort of levies.

As far as import duties on food processing machinery are concerned, Import duty on that machinery which are not manufactured in the country should be reduced to an average rate of 10-15% and also on packaging material and machinery.

Further, even premier products, which may not be for mass consumption, should not be subjected to a tax burden of more than 8%, i.e. the minimum rate proposed today. This is because the industry is still at a nascent stage and is only struggling to gain acceptance from the Indian Consumers who are still largely in favour of fresh and home prepared food. Indian companies also are not able to adopt the advanced technologies due to their high cost which increases with the high incidence of customs and other related duties.

A comparative study of the Government Taxes in some of the Asian and European countries clearly shows that the product attracts duty much less than 18% in other countries :

Philippines VAT 10% - No other taxes

Indonesia10%Consumption tax in organised large shops only

China 17% VAT - No other taxes

Netherlands All government levies =14%

Finland All government levies =14%

UK All government levies =15%

Ireland All government levies = 17%

IndiaAll government levies = over 25 %

Curb Multiplicity of Laws and Regulations

Multiplicity of Ministries, Departments and Regulations: There are as many as 12 different Ministries and Departments which govern and administer the agriculture

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and agro-based sectors in India.

An archaic and non industry friendly food law which does not encourage industry to cultivate it’s own product research and introduce new products suiting the tastes and likes of different strata of the society and different classes of consumers easily.

Technical barriers, such as differences in health and sanitary regulations, can complicate or restrict bilateral trade in agricultural products, food and beverages. For agriculture, the elimination of trade restraints means producers in various countries will have a larger market for their products and exporters will face less bureaucratic red tape.

The GATT proposal supports harmonisation based on food safety standards set by the Codex Alimentarius Commission, a United Nations (UN) organisation funded by the World Health Organisation and the Food and Agricultural Organisation.

Codex was established in 1962 to develop food safety and nutrition standards that are widely recognised and can be utilised by many countries, including those without the resources to develop their own. Codex standards are set by a consensus among 135 countries, represented by committees of independent scientists, technical experts, government regulators, consumers and industry representatives. In the GATT proposal, Codex standards are identified as the International standards of reference, but are not mandatory if countries consistently apply stricter standards.

Contrary to some reports, WTO does not require that all national standards be uniform. In fact, it specifies that countries may individually impose higher safety standards if they are based on sound scientific principles. To prevent the arbitrary use of standards to discriminate against trade, however, nations must apply such standards consistently.

In India the PFA and other food regulations vary substantially from the codex standards and are neither consistent nor always scientifically justified There is an immediate need by the government to align Indian food standards to international ones otherwise it might give rise to serious trade restrictions and loss of Indian brand equity in the near future.

Further, the continuos changes in the new guidelines and the standards of Codex which itself is a long but very scientific process calls for a full fledged dedicated cell with complete infrastructure and support systems. The Ministry of Health today has severe constraints on infrastructure, which perhaps results in longer lead times for decision making and checking the food products being made available to the consumer.

Currently there are more than twelve laws relating to quality of food. The responsibilities for framing and enforcement of food laws in India are divided between a large number of different Ministries & Departments, namely:

Department of Food Processing Industries, Ministry of Agriculture Department of Animal Husbandry and Dairying, Ministry of Agriculture

Ministry of Health & Family Welfare

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Department of Consumer Affairs, Ministry of Food & Consumer Affairs, Department of Women & Child Development, Ministry of Human Resources,

Department of Edible Oil & Vanaspati

o The multiplicity of laws and their respective governing bodies at the central and the state levels leads to multiple and varying standards for food products. Their complexity puts additional burden on the industry

o Multiple administering authorities at the central & state level like the state health authorities, the health inspectors in the states and the municipal corporations, over which the central government ministries have little or no system of monitoring lead to an inefficiently managed system and unnecessary harassment to the food industry in general.

o Further, under the PFA Act, 1954, if a manufacturer uses an innovative process or a new ingredient/additive for the manufacture of a non-standardised food article in order to reduce costs and/or deliver incremental product benefits to the consumers, like special or improved flavour, colour, stability, etc., such category innovation is not permitted by the existing law.This kind of an innovation would require the approval of the Central Committee of Food Standards (CCFS). The process of approval is highly time consuming and is also subjective as it is always not based on the recommendations of other International Scientific bodies like JECFA, US-FDA, CODEX, EEC Regulations etc., Also the CCFS is a large body comprising mainly of government representatives and a low representation of the industry & trade, thus leading to a less efficient and heavily burdened system.

o India’s representation on international forums is inadequate. This results in harming our long-term interest in food legislation

There is a obviously a strong need to simplify this cumbersome administrative structure. Most countries in the world have unified and highly focussed enforcement of food laws through one or two ministries and these ministries are completely responsible for food safety and quality standards.


The government needs to review all food legislation relating to the quality of all categories of food products and unify them into one legislation which would be governed by an independent and self sufficient body under the nodal ministry. The other product specific ministries and departments should only determine the policy and regulations relating to the developmental aspect in the sector. A Food Regulatory Authority (FRA) should be set up.

The objective of the centralised body would be to formulate and update the food standards for all food products for the domestic, export and imported products and

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to promote and monitor the enforcement of these standards

The Central and State Governments should strengthen the enforcement agencies and restructure their operations to manageable and more efficient levels. The performance of enforcement agencies could be monitored on the basis of convictions to prosecution ratio, to reduce frivolous prosecutions which burden the judicial system and hamper the efficient functioning of the industry

The PFA , 1954 needs to be updated to take care of the phenomenal changes in food technology, food habits and food composition to suit the needs of different classes of consumers. It should now be in conformity with international norms and standards.

Industry should be given full independence in innovation and research for producing new types and varieties of food. Consumers should be given full right to choose instead of PFA restricting this. Moreover, today, special categories of consumers are forced to consume food products which may not be good for them like a diabetic patient can not ask for sugar free ice cream or sugar free product or products using low calorie sweeteners from industry because PFA does not permit. Similarly, a heart patient is forced to consume high quantity of fat because PFA does not allow specific low fat food products which can be achieved by new technologies. Interestingly these technologies are being developed by Indian scientists and laboratories but can not be commercialised because PFA does not permit these products.

The composition and working of CCFS needs to be reviewed and rationalised in order to make it manageable and proactive. The CCFS needs to meet at least 3 times in a year. The approval process of new ingredients and additives etc. needs to be time bound and the objective criteria for approval of additives and new compositions within the time limit of approval should be specified by the CCFS. Whatever is adopted by international organisations like CODEX etc. should be considered as a special basis and approved with immediate effect.

In place of the CCFS Committee under the Health Ministry, a separate nodal agency be constituted under the Ministry of Food Processing Industries to exclusively govern the quality, safety and standardisation issues under the Food Law. Existing food laws are major bottleneck for new innovations, new product launches and investments at the same time contrary to the Spirit of WTO Agreements.

The Industry and the government should work together to ensure that India is represented and fully heard at international forums. Quality standards should be amended keeping in mind our nutritional needs and public health issues

In view of the complexities of laws and notifications issued by the Government from time-to-time, NICNET should be allowed to participate to set up an ‘ Food Laws Information System’ (FLIS) whereby the information is easily accessible in

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all the states of the country and also to the industry.

Boost Export

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

Compared to our production, the share of exports in this total production is abysmally low. Against an overall world trade of $438 billion in 1998, India’s contribution was just $5.8 billion, which is just 1.32 % of the world trade. Considering the fact that India is the third largest producer of food products in the world, its insignificant presence in the world trade scenario is truly alarming. Yet considering the huge domestic demand for food products in the country, it may be extremely difficult for India to achieve it’s target of doubling earnings from export in the near future. However, the amount in money terms is not also very difficult to attain if more focus is given on processed value added food products than primary ones.

While India is the largest producer of a number of commodities like cereals, Pulses, milk animals and milk, tea, Cauliflower etc. and very near to the highest in the other select items, export value of these very products when compared to the world figures doesn't cross the 1% mark.

What is of particular concern is that the situation has remained stagnant at this same level for last 30 years or so, during which we have made rapid strides and achieved growth rates in many other areas to make us proud enough. This sector has totally failed to respond to the positive policies and signals provided by the successive policies. Production has increased just leading to higher wastages. Neither did we reduce poverty nor did we achieve export growth.

The share of horticulture crops, plantation crops, meat and meat preparations and sugar in the country’s agri exports is much less than what the competitive potential warrants. Some concrete policy changes like reduction in duties, removal of restrictions, and delicensing of some agro exports will help in promotion of exports.

Some of the major constraints to exports are high freight rates, insufficient infrastructure and low quality standards

With the dismantling of qualitative restrictions under the WTO regime, a long term export strategy would need to be devised to improve our presence in world markets

Agricultural and processed food exports continue to be residual rather than a strategic part of the overall agriculture and processed food performance

India is viewed as an unpredictable and unreliable source of food and agro products despite having some world class production

Indian brands are yet to develop a good image in the international markets due to

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o poor efforts at international marketing o India’s image and identity as a low quality, unreliable producer of foods o poor awareness of Indian agri produce , except for certain products leading

to India not being the most preferred variety There is a multiplicity of export promotion agencies operated by the Central and

the State Governments leading to o duplication of promotion efforts o different approaches in addressing markets and product-mixes

Indian products also face consumer indifference due to perceived lack of quality Various types of clearances are required from different agencies at the Center and

State level to set up export-oriented projects


Similar to the Task Force on information technology, a National Task Force on Agri and Food Exports and Trade Strategy needs to be set up. This Task Force would

o Develop a long term Agri and Food export plan o Consider developing a short term export plan focusing on tea and coffee,

spices, fish and marine, rice and wheat, mango and grapes o Increase production and quality of the food products specific to the export

markets o Allow import of commodities as and when required to meet the domestic

demand o Develop market intelligence to build a country-product mix matrix o Aggressive marketing campaigns in the international markets to build

India’s image as a leading producer of a variety of foods on the basis of o Formulating a country-product matrix o proximity to cultural and consumer habits o Emphasize the superiority of Indian produce by creating the consumer

confidence in the product quality Generate quality consciousness in the agri production of India through

o production and grading of agri produce ensuring quality output for processing

o mobilise awareness of the quality parameters in the international markets by active participation in CODEX Committee meetings

o encourage packaging industry to develop world class packaging materials o set up international inspection agencies like SGS at ports to certify

shipments Mandate to all food processing units to obtain GMP/ HACCP in a time bound

manner like that being done by . Extend benefits to these units as extended to ISO 9000 certified units in EXIM policy

Devise a single window system for all the clearances co-ordinated through the National Agro Food Development and Export Promotion Council

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Encourage Setting up of Food Parks

A Food Park will encourage industrial concentration of the food processing industry. The concept is based on locating similar type processing activities i.e. FOOD PROCESSING in one location to create cost and infrastructure efficiencies for the businesses involved and located in food park. This will improve the viability and profitability of the units. A food park will reduce costs and increases efficiencies for the businesses who share such things as expensive processing equipment, packaging, storing, shipping and receiving facilities, product transportation, labour, facility management, infra-structure, effluent management systems and maintenance.

Food-processing industry and supermarkets

Promising sub-sectorsSoft-drink bottlingConfectionery manufactureFishing, aquaculture, fish-processingGrain-milling and grain-based productsMeat and poultry processingAlcoholic beveragesMilk processingTomato pasteSnack foodFast-foodReady-to-eat breakfast cerealsIce-creamsFood additives, flavors etc.Food packaging

Refrigerated food handling

Points to be noted:

Foreign direct investment of around US$1 billion has already been approved in India's food processing industry since 1991.

Changing lifestyles, breakdown of the joint-family system, increasing number of working wives and Western influence (via TV channels) in the urban areas are fuelling a demand for packaged foods.

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India already has all the requirements for a head-start in the food-processing industry. Basic materials such as foodgrains, pulses, vegetables and meats (non-beef) can be sourced locally or easily imported if local availability is inadequate.

Foreign investors can own 100 per cent equity in plants they set up. However, it is advisable to take a local partner.

Many Indian firms are eagerly seeking foreign partners for joint-ventures to avail of their technological advantage.

Supermarkets are just beginning to appear in India's big cities and this is the time for international chains to set a foothold. Competition will only increase with time.

There has been some civilised resistance from ultra-nationalistic quarters of opinion to foreign food products. This resistance will be less if a local partner is involved.

India's liberal intelligentsia is gradually building the opinion that foreign investments in the processed food sector will benefit rural agriculture, thus beating the nationalists with their own slogans. The liberal intelligentsia is gradually prevailing.

Points to be noted:

Many of India's food-processing companies are known to be keen to import intermediate food products. As can be seen in the top table, imports have rising.

As India's food-processing industry grows and becomes more sophisticated, there is no doubt that the market for intermediate food products and ingredients will grow.

It is important that you, or your agents in India, ensure that intermediate food products are considered by customs officials as industrial intermediates and not as consumer products to minimize customs duty. Though law looks at intermediate food products as industrial intermediates, there have been reports that uninformed customs officials have treated them as consumer products. As the above table shows, there is a shortage in domestic production vis-a-vis demand. It is unlikely this shortfall will be bridged.

Green peas, lentils and some dry beans should not be difficult to sell in India. Pulses are on the Open General License for the purpose of imports which means that they

require no approval. Branded food products are becoming popular especially in the cities and this will favourably

influence the market for imported pulses as well. Most vegetable oils are on Open General License for the purpose of imports which means that

they can be imported without approval.

Though oilseed production has been growing, increasing domestic demand is unlikely to bridge the demand-supply gap that is expected to widen.

Most palmolein is imported, while small quantities of soya bean, sunflower and cottonseed oils have also been imported in recent years.

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The above statistics could seem bland to foreign companies, but a deeper look at the sector's realities will show good prospects for imported corn.

Corn is a main input for poultry feed production. The poultry industry is growing at a rate of 10 per cent annually, but corn production is stagnating.

Import duty on corn is zero.

Major Food Laws in Effect

Though there are other laws that govern food products, the following seven are the most important

for importers. A copy of each law can be obtained from the contact listed.

The Prevention of Food Adulteration Act (PFA), 1954, protects consumers against

adulterated food and is comparable to the Federal Food, Drug and Cosmetic Act of the United

States. PFA applies to domestic and imported food commodities, encompassing food color

and preservatives, pesticide residues, packaging, labeling and regulation of sales.

PFA lacks standards for many imported foods.

The Standards of Weights and Measures Act, 1976, and The Standards of Weights and Measures

(Packaged Commodities) Rules, 1977, regulate goods sold or distributed by weight, measure or

number and their labeling

The Essential Commodities Act, 1955, aimed at preventing hoarding, controls production, supply,

distribution and trade in certain commodities including cereals, pulses, vegetable oils, cotton, various

food items, soaps, oil meals and cotton

The Fruit Products Order, 1955, regulates production and distribution of all fruit and vegetable

products, sweetened aerated waters, vinegar and synthetic syrups.

The Milk and Milk Product Order, 1992, sets up an advisory board to advise the government on

the production, sale, purchase and distribution of milk and milk products in the private sector

The Pulses, Edible Oilseeds and Edible Oils (Storage Control) Order, 1977, maintains supplies

and equitable distribution and availability at fair prices of pulses, edible oilseeds and edible oils

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The Destructive Insects and Pests Act, 1914, and Plant Quarantine Rules and Plants, Fruits and

Seeds (Regulation of Import into India) Order, 1989, prevent the introduction of exotic pests,

diseases and weeds via imported products

Other laws that may have an effect on food and food processing:

The Prevention of Black-Marketing and Maintenance of Supplies of Essential Commodities

Act, 1980.

The Monopolies and Restrictive Trade Practices Act, 1969.

Consumer Protection Act, 1986.

The Trade and Merchandise Marks Act, 1958.

(The Indian) Standard Institution (Certification Marks) Act, 1952.

The Agricultural Produce (Grading and Marketing) Act, 1937.

The Environment (Protection) Act, 1986, and The Environment (Protection) Rules, 1986

ASSOCHAM strategy for giving a boost Agro and Food Processing Sector:

To give a fillip to the agro and food processing sector, The Associated Chambers of Commerce and

Industry of India (ASSOCHAM) has suggested promotion of contract farming, training on pre-

harvest and post-harvest management practices, provision of required physical and marketing

infrastructure such as cold-chain facilities, cargo facilities at airports/ports, and access to institutional

finance for requirements of term loans and working capital.

The agro and food processing sector ranks fifth in terms of its contribution to India's GDP and

employs around 18% of the country's industrial force. Exports from the sector have gone up from Rs

2,821 crores in 1991-92 to an estimated Rs 10,770 crores in 2000-01.

The sector holds significant potential for India's future development as it forms the vital link between

agriculture and Industry and can inject growth impulses in both the sectors.

India's strength in the agro and processed foods sector include round-the year supply of raw material,

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trained and cheap manpower, largest producer of milk in the world, largest livestock population in the

world, second largest producer of food and fruits and vegetables in the world, and fifth largest

producer of eggs and sixth largest producer of fish. Besides, the strategic geographic location of

being close to the Middle-East and South-East Asian countries is also India's strength in so far as

these countries are important destinations for a number of Indian agro and processed food products.

Despite these strengths, however, certain weaknesses have continued to plague the sector with the

result that India has not been able to achieve its true potential in the global trading arena.

Some of these weaknesses include high wastage levels leading to low processing levels, high

seasonality and perishability leading to low profit margins, lack of post-harvest infrastructure,

inadequate capital flow to the sector, multiple and complex tax structure, multiplicity of food laws,

lack of requisite packaging quality and presentability required for global markets, and lack of ready

acceptance in international markets.

There is also need to adhere to quality standards like ISO 9000 to boost exports, rationalising the tax

structure and the Food Laws so as to encourage innovation, and analyse the success achieved by other

countries like Thailand, Israel, Chile and Brazil to hone our export marketing strategy. Further,

removal of product-specific and sector specific constraints, the study points out, would confer much

needed competitive ability to exports of Indian processed foods sector.

FAO WORKING WITH AGRICULTURE MINISTRY TO REVAMP PHYTOSANITARY

STANDARDS

An exercise has been started by the Department of Food Processing Industries to look into existing

Indian provisions on Technical Barriers to Trade and Sanitary & Phytosanitary Measures, said Mr.

P.S. Bhatnagar, Secretary, Department of Food Processing Industries, at a Seminar on "Trade

Regulations in Indian Food Industry - Challenges Under WTO" jointly organised by CII and the

Department of Food Processing Industries today. Mr. Bhatnagar said that a sub-group, comprised of

representatives of the Department and food processing associations, has been formed to see if the

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existing standards are adequate for protecting the Indian food industry, and what additional measures

needed to be taken.

Harmonisation of food standards across countries was an important step in meeting the challenges

thrown up by the WTO-defined world trade order, said Mr. Bhatnagar. Under WTO standards, all

food standards imposed would have to be justified on socio-economic and scientific grounds, he

added, so harmonising India's food standards would reduce costs, while also improving export

competitiveness.

A study has already been commissioned by the government to the Indian Institute of Management,

Ahmedabad for identifying the opportunities and challenges arising from WTO agreements relating

to agriculture, and the necessary actions that were needed to be taken by industry and government to

meet these challenges, said Mr. Bhatnagar.

The key to India attaining success in agricultural exports was quality, said Mr. Bhatnagar. Genuine

and psuedo quality issues will be brought up as a challenge to India's exports, he pointed out. In fact,

psuedo quality issues would become relatively more important as countries raise quality issues as

non-tariff barriers to replace trade barriers dismantled by the Uruguay Round. However, Indian food

processing industries must understand that the poor quality assurance of Indian exports was actually a

problem, stressed Mr. Bhatnagar. In the food industry, quality management originated at the first

stage of production of food products, not at manufacturing, and many processed foods were of low

quality because of poor quality agricultural produce, he added.

Even though Agreement on Sanitary and Phytosanitary Measures had been framed in order to provide

more transparency and market access in the system, the present system was actually extremely

complicated, and the best of scientists, equipment etc were needed to operate, said Mr. Peter

Rosenegger, Representative (India & Bhutan), Food & Agriculture Organisation (FAO). India needed

to bring its standards in line with international norms, and thus the FAO was thus working with the

Ministry of Agriculture in order to revamp the existing phytosanitary standards, he said. A new legal

framework was being evolved, and five monitoring centres were being set up in Amritsar, Mumbai,

Delhi, Calcutta and Chennai, he added.

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A proposal was also awaited from FAO headquarters in order to strengthen Indian representation on

Codex committees, said Mr. Rosenegger. It was a recognised fact that developed countries were able

to get better appointments on Codex committees because they had more resources and could thus

represent themselves better, he said. So the FAO was trying to find ways to extend resources to India,

both monetary and otherwise, that would help India achieve a better representation in the Codex, he

added.

The most important objective of the next set of negotiations on agriculture should to be improve

market access all around, said Mr. Anil Sharma, Principal Economist, NCAER. In this stead, he made

the following suggestions:

Significant reductions in tariff bindings

Disallowing of bilateral agreements that allowed more access to certain countries, particularly

because they have shut out developing country access in the past.

Inclusion of direct payments to farmers, a support mechanism often employed by developed

countries, in the calculation for the Aggregate Measure of Support (AMS). These payments

gave developed countries an edge over developing countries, who could generally not afford

to make such payments.

Discontinuation of special agreements that allowed certain countries to not bind specific

commodities.

Discontinuation of Blue Box subsidies (a certain group of non-distorting subsidies that are

allowed under the Agreement on Agriculture). Developing countries just cannot afford to

extend such subsidies, and developed countries were able to extend this kind of support and

gain an edge.

Domestic support reduction commitments at the commodity level, not at the aggregate level.

These reductions have so far been specified at the aggregate level. Thus developed countries

have only reduced support for commodities that developing countries were not competitive in.

On the domestic front, India has to specify standards under the Agreement of Sanitary &

Phytosanitary Measures, said Mr. Sharma. Further, the issue of poor agricultural infrastructure that

adversely affects the competitiveness of Indian exports must also be addressed.

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Mr. Gokul Patnaik, President, All India Food Processors Association, suggested a cap on

agriculture subsidies (similar to that in the case of industrial goods) instead of reduction at the next

negotiations. This was because developed countries tended to extend very high subsidies to

agriculture, so unless the reduction was very large, there would not be much benefit to developing

countries. The most important device used for protection would be sanitary and phytosanitary

measures, he pointed out, and here the lack of awareness among Indian industry and government was

a major problem. Food laws were archaic, and they must be modernised immediately. Further, small-

scale industry reservation in the food industry must be done away with, or Indian exports could not

be competitive.

HIGHLIGHTS:

Automatic approval is granted for foreign investment upto 51% in high priority industries which

include all food processing industries (except milk food, malted foods and flour) and all items of

packaging for food processing industries.

Investors need to file an application with the Reserve Bank of India (RBI) in the prescribed

format and approval is ordinarily granted within 15 days.

For foreign investment higher than 51% and for investments in industries outside the high

priority industries, clearance has to be obtained from SIA. Applications are processed on a

case by case basis on merit and usually SIA takes about 2 months for the process.

Applications for setting up a 100% Export Oriented Unit are also required to be filed with the

SIA.

For setting up an unit in an Export Processing Zone (EPZ), application has to be filed with the

Development Commissioner of the concerned EPZ.

Foreign equity of upto 24% of the total shareholding is also being permitted in the small scale

sector.

Under automatic procedures, foreign technology agreements are being permitted in respect of

industries that are designated as high priority industries.

The use of foreign brand names and / or trade mark of goods is also now being permitted

freely.

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To provide access to international markets, majority foreign equity holding upto 51% equity

is being permitted for international trading companies that are primarily engaged in export

activities.

OPERATING ENVIRONMENT AND TAXATION POLICIES:

FDI can be in the form of cash or capital goods and there is no minimum cash requirement, Branch

organisations are permitted only in a few specified service industries such as banking, shipping,

airlines etc., or export-oriented ventures.

Certain industries, as mentioned in the industrial policy, require licence by their nature, while

others require such a licence only if located in the proximity of a large city.

This licensing applies uniformly to domestic and foreign investment.

Also certain products are reserved for the small scale sector and large undertakings are

ordinarily permitted equity participation up to 24 percent of total shareholding in these.

There is no restrictions regarding access to domestic markets or user of foreign brand names.

A work-permit as such is not required for expatriate employees, but permission to stay is

required from the Government where the period of stay is more than three months.

RBI permission is also required to employ expatriates where remittance of salary in foreign

exchange is envisaged.

FDI - APPROVAL METHODOLOGY APPROVAL PROCEDURES

The highlight of the policy is the promoted products category(Annex. III) where approval for up to

51% equity investment proposals is automatic and where only an application to the Reserve Bank of

India is required. This procedure is also applicable to investment proposals involving trading

companies and hotels and the tourism

POLICY INTIATIVES:

Since liberalisation several policy measures have been taken with regard to regulation & control,

fiscal policy, export & import, taxation, exchange & interest rate control, export promotion and

incentives to high priority industries. Food processing and agro industries have been accorded high

priority with a number of important relieves and incentives. Some of the important policy changes are

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as follows

REGULATION & CONTROL :

No industrial license is required for almost all of the food & agro processing industries except

for some items like: beer, potable alcohol & wines, cane sugar, hydrogenated animal fats &

oils etc. and items reserved for exclusive manufacture in the small scale sector. Items reserved

for S.S.I. include pickles & chutneys, bread, confectionery (excluding chocolate, toffees and

chewing-gum etc.), rapeseed, mustard, sesame & groundnut oils (except solvent extracted),

ground and processed spices other than spice oil and olioresins, sweetened cashew nut

products, tapioca sago and tapioca flour.

Automatic investment approval (including foreign technology agreements within specified

norms) upto 51% foreign equity or 100% NRI (including Overseas Corporate Bodies (OCBs))

equity is allowed for most of food processing sector, except malted food, alcoholic beverages

including beer and those reserved for S.S.I. For some industries dividend balancing with net

foreign exchange earnings is necessary for automatic clearance.

Upto a maximum of 24% foreign equity is allowed in SSI sector

Use of foreign brand names are now freely permitted.

MRTP (Monopolies & Restrictive Trade Practices Act) rules and FERA (Foreign Exchange

Regulation Act) regulations have been relaxed to encourage investment and expansion by

large corporates.

Most of the items can be freely imported and exported except for items in the negative lists

for imports & exports.. Capital goods are also freely importable, including second hand ones

in the food processing sector.

FISCAL POLICY & TAXATION :

Wide ranging fiscal policy changes have been introduced progressively. Excise & Import duty

rates have been reduced substantially. Many processed food items are totally exempt from

excise duty.

Custom duty rates have been substantially reduced on plant & equipments, as well as on raw

materials and intermediates, especially for export production.

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Corporate taxes have been reduced and there is a shift towards market related interest rates.

There are tax incentives for new manufacturing units for certain years, except for industries

like : beer, wine , aerated water using flavouring concentrates, confectionery & chocolates etc.

Indian currency (rupee) is now fully convertible on current account and convertibility on

capital account with unified exchange rate mechanism is foreseen in coming years.

Repatriation of profits is freely permitted in many industries except for some, where there is

an additional requirement of balancing the dividend payments through export earnings.

EXPORT PROMOTION :

Food processing industry is one of the thrust areas identified for exports. Free trade zones

(FTZ) and export processing zones (EPZ) have been set up with all infrastructures. Also,

setting up of 100% Export oriented units (EOU) is encouraged in other areas. They may

import free of duty all types of goods, including capital foods.

Capital goods, including spares upto 20% of the CIF value of the Capital goods may be

imported at a concessional rate of Customs duty subject to certain export obligations under

the EPCG scheme. Export linked duty free imports are also allowed.

Units in EPZ/FTZ and 100% Export oriented units can retain 50% of foreign exchange

receipts in foreign currency accounts.

50% of the production of EPZ/FTZ and 100% EOU units is saleable in domestic tariff area.

All profits from export sales are completely free from corporate taxes. Profits from such

exports are also exempt from Minimum Alternate Tax (MAT).

GENERAL

All goods may be freely imported or exported save for two 'Negative Lists'. The Negative List

of Imports and Negative List of Exports place restriction on imports or exports of certain

goods on the ground of public policy.

Capital goods are freely importable without any restriction. Import of second-hand capital

goods, except for few specified sectors (which include food processing industry, seafood and

packaging/packaging material) requires a license.

Second-hand capital goods imported should not be more than 7 years old and should have a

minimum residual life of 5 years.

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As mentioned earlier, foreign exchange for import of goods would have to be obtained from

the market at market at market-determined rates.

Effective import duties currently range between 0 and 65 per cent.

Lower duty rates are generally applicable to raw materials and intermediate goods in

comparison with finished products. General machinery and project imports currently attract

duty at the rate of 25%. The Government has announced its intention to progressively reduce

duty rates over the next few years.

Imports of raw materials and intermediates required for export production do not attract any

import duties. Capital goods imported for export production are importable at concessional

duties ranging between 15% and 25% of CIF value. Units located in free trade zones or 100%

export-oriented units are exempted from all import duties. Certain sales to domestic units

where the buyers earn or save foreign exchange for the country are termed as 'deemed exports'

and such production/sales qualify for export- related incentives.

List Prohibited/Restricted for Imports in Food Sector

The list of goods in this sector prohibited/restricted for import are as follows:

AB-PROHIBITED

Tallow, fats and oils of animal origin

Animal rennet

AB-RESTRICTED

Concentrate of alcoholic beverages

Wines

Saffron, Cloves, Cinnamon and Cassia

Seeds, Plants and animals

Insecticides and Pesticides

Flavouring essences

Perfumery compounds/Synthetic essential oils.

AB-CANALISED (imports only through Government Agencies)

Oils and seeds and all other material from which oil can be extracted.

Fatty acids and acid oils

Cereals

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List Prohibited/Restricted for Exports in Food Sector

All items can be exported freely except for few prohibited / restricted items. The list of prohibited /

restricted items, in this sector, are as follows: ~ABPROHIBITED~

Beef

Fats and oils of animal origin excluding fish oil

AB-RESTRICTED

Cattle

Coconut and Copra excluding some coconut products

De-oiled groundnut cake containing more than 1% oil

Expeller cake of all varieties except cotton seed expeller cakes

Fish meal with less than 50% protein content

Silver pomfrets, subject to certain conditions

Wild orchids

Mulberry pierced cocoon

Milk, baby milk and sterilised liquid milk pulses.

Processed pulses (other than those made of pulses imported for re-export)

Paddy

Rice bran

Seeds and Planting Materials

Seaweeds

Uncrushed bones other than fish bones

Vegetable oils

Brown sea-weeds subject to certain conditions

Cotton-seed expeller cakes

Culled live sheep and goat (Adult)

Wheat Straw

Saffla seed

AB-CANALISED EXPORTS (only through Government Agencies)

Butter

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Gum resia

Niger seeds

Onions

EXPORTS DOCUMENTATION STEPS INVOLVED

The following steps need to be followed to execute an export order:

Parties, Acts and important publications:

Among the most important Acts/publications which should be consulted by an exporter in connection

with the processing of an export order, its execution and its fulfillment are the:

Customs Act

Carriage of Goods by Sea Act ;

Foreign Exchange Regulation Act ;

Schedule of Charges of Goods in respect of the port of shipment;

Handbook of Export Promotion; Import-Export Policy Volumes I and II; and Handbook of

Import-Export Procedures. The main parties involved in processing are the exporter, the

foreign buyer, the negotiating bank, the shipping company, the insurance company, the

Reserve Bank of India, the Chief Controller of Imports & Exports, the Collector of Customs,

the Port Commissioners and the clearing and forwarding agents. Before processing the export

order, a businessman/firm has to undertake certain activities which will enable him/it to

accomplish his export obligation. These are as follows: 1) Obtaining the Reserve Bank Code

Number:

This is a requirement under the Foreign Exchange Regulation Act. For getting this code

number, a firm has to apply to divisional office of the RBI having jurisdiction over the area

where it is located. The prescribed form for the purpose is called 'CNX' which has the current

account of the firm in question. Besides giving details about the organisation and items to be

exported, the exporting party has to furnish its permanent Income Tax account number. 2)

Registration with Export Promotion Councils:

Registering is an essential requirement if an exporter wishes to avail of the benefits granted by

the Government under its Import policy. Among the important registering authorities are

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various Export Promotion Councils or Commodity Boards such as the Marine Products

Export Development Authority, the Agricultural and Processed Food Products Export

Development Authority, the Tea Board, the Coffee Board, the office of the Jute

Commissioner, the Khadi and Village Industries Commission, Directors of Industries of state

governments, Development Commissioners of Free Trade Zones/Export Processing Zones

and the Federation of Indian Export Organisations. 3) Obtaining an Import-Export Code

Number:

This number has to be obtained from the Joint Chief Controller of Import and Exports

(JCCI&E)/the licensing authority or else the Customs authorities will not permit the clearance

of goods to an importer. Steps that need to be followed to process an export order: ~ABStep

1~ ~AIScrutinise the order with reference to the terms and conditions of the contract.~ The

export order must specify the mode of payment in unmistakable terms such as the Letter of

Credit, Documents, on Payment, Documents against Acceptance. The most important

documents required by an importer are : a) Bill of Exchange b) Commercial Invoice c) On

Board Clean Bill of Lading d) Marine Insurance Policy e) Packing list and f) Certificate of

Origin. These should be given to the negotiating bank. ~ABStep 2~ ~AIFor a manufacture-

exporter, after the export order has been confirmed, a `delivery note' should be sent to the

works manager.~ This note should contain all relevant details pertaining to the

specifications/requirements of the importer. Nothing should be left at the discretion of the

works/factory manager. A merchant-exporter, who purchases the required goods from the

market or gets them produced by other manufacturers, also has to provide the necessary

specifications/requirements/instructions to the supplier of the goods to be exported. ~ABStep

3~ ~AIAfter the goods have been manufactured/procured, the following is to be done:~

Clearance from the Central Excise authorities by obtaining the Gate Pass (GP)-1 form if

goods are to be

removed under claim for rebate of duty, GP-2 form if goods are to be removed under a bond

i.e. as per the terms and conditions of the Collector of Customs or AR-4/AR-4A form if the

exporter wishes to avail the services of the Central Excise Officer for the purpose of having a

physical verification at the factory and thereafter sealing of packages;

The concerned Export Inspection; c) A Railway Receipt has to be obtained if the goods are

despatched by train to the port of shipment. ~ABStep 4~ Once the goods have been

despatched to the port, the Works/Factory manager is supposed to send a `despatch advice' to

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the firm's Export Department. Then marine insurance cover is solicited. At this stage,

formalities regarding floor price regulations, canalisation, certificate of origin, ECGC (Export

Credit Guarantee Commission) cover need to be completed. Thereafter, the Export

Department sends the following documents to its Clearing & Forwarding agent (henceforth

called the agent):

Commercial Invoice

Original Export order

Original Letter of Credit

GR from showing RBI Code Number of the exporter

AR_4A/AR-4form

Excise gate pass

Packing & Weight Lists

Certificate of Inspection

Declaration form

Invoice

Export License where necessary

Purchase Memo

Railway receipt.

~ABStep 5~ ~AIAfter the agent has taken control of the consignment, a shipping bill is

prepared by him.~ Three kinds of shipping bills are to be prepared depending on the category

of export goods. These are Free, Dutiable and Drawback shipping bills. ~ABStep 6~ Once the

shipping bill has been cleared by Customs, the agent forwards a copy of the shipping bill to

the Shed Superintendent of the concerned Port Trust and therafter a Dock Challan is made,

which is then released to the agent after debiting the exporter's account with the concerned

Port Commissioners. ~ABStep 7~ A Mate's Receipt is prepared by the ship's export clerk and

is given to the agent once port charges have been paid. The agent then forwards the relevant

documents to the exporter. ~ABStep 8~

After receiving the above documents from the agent, the exporter files a claim with the Maritime

Collector of Central Excise forbade of excise duty.~ In the meantime, a shipment advice should be

sent to the importer. Documents are then presented to the negotiating bank. Thereafter the documents

are transmitted to the banker of the importer, after which the importer would take custody of the

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consignment once the goods reach their destination and other relevant formalities are completed are

completed at that end.

PROCEDURES for IMPORT

All licenses for imports and exports are valid for a specific period during which the import of export

of the goods should be completed. If the license does not specify any specific period, the imports

should be completely by 31st March of the licensing year. Every individual or firm or company

importing goods, whether against an import license or otherwise, or exporting goods, is required to

obtain Importer-Exporter Code(IEC) No. from the concerned licensing authority unless specifically

exempted by the Directorate General of Foreign Trade (DGFT). The customs authorities do not allow

clearance of goods to an importer who does not process a valid IEC number. This applies also to a

person importing or exporting goods as an agent or as a holder of letter of authority, or as a transfer

of an import license. The IEC No. is required to be quoted in the relevant bill of entry. The code

number is valid only for the individual/organisation for whom it has been allotted. An import license

for raw materials, components and goods other than capital goods is normally endorsed with a

validity of 12 months and that for capital goods for a validity of 24 months. The Indian importer in

case of processed food industry can make an application to the Directorate General of Technical

Development, India, for the use of import certificate, in prescribed form: The validity of imports of

plant and machinery allowed to be imported freely is for new machinery only. However, their import

in second hand condition is also allowed by the Government but only against an import license. The

import of second-hand capital goods for the manufacture/processing sea food is permitted without

license. Goods which are allowed to be imported without any restriction can be sold or transferred by

the importer without permission from any authorities. Transfer of imported goods subject to 'Actual

User' condition and in surplus requires prior permission from the licensing authority. A license holder

can appoint another person as his agent for arranging the imports permitted against the license. The

functions of the agent, who is acting on the behalf of the license holder, may be limited to placing

orders, opening letters of credit, making remittance for importing the goods, arranging movement of

goods to be imported and clearing the same through the customs, etc. For the import of certain

restricted items of raw materials, components, parts, consumable, etc for which there is no specific

policy, the applicant can make an application to the Directorate General of Foreign Trade, New Delhi

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in duplicate in prescribed form along with following documents: Bank receipt/Demand draft for

payment of the application fee.

A certificate from a chartered accountant or cost accountant or company secretary, who is not

a director or employee of the applicant firm or its associates, showing consumption of all the

items proposed to be imported during the preceding two licensing years (irrespective of

whether they were imported or indigeneously procured by the applicant).

Justification for imports and copy of orders for the execution of which imports are sought.

Copy of industrial license, registration certificate or any other relevant certificate, in the name

of the applicant. i.e. value of direct exports by the applicant during the preceding two

licensing years. In cases where the goods have been found short-shipped, short-landed or lost

in transit prior to actual import anM/or detected as such at the time of clearance through the

customs, replacement imports are permitted on the strength of the certificates issued by the

Customs authorities and no license is required.

The agreed sale price, less the capital gain tax, can be remitted fully only if the Reserve Bank

considers the sale price to be reasonable.

EXPORT PROCESSING ZONES

Certain areas have been designated as free trade or export processing zones.

These zones provide basic infrastructural facilities like developed land, standard design

factory buildings, built-up sheds, roads, assured power and water supply

Customs clearance facilities are offered within the zone at no extra charge while facilities of

banking, post offices and clearing agents are also available in the Service Centres attached to

each zone.

Currently there are six such zones in operation, located at Kandla (Gujarat), Santa Cruz

(Bombay), Cochin (Kerala), Madras, Falta (Calcutta) and NOIDA (Delhi) and a seventh zone

at Vishakapatnam (Andhra Pradesh) is under implementation.

All export processing zones except the one at Santa Cruz are open to the food processing

sector.

Rules Governing EPZs

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Units located in export processing zones or elsewhere as 100%. In general, the minimum value

addition for such units should be 20%, however for fish and shrimp culture and feed production units

the specified minimum local value addition is 30%. The Government reserves the right to specify

higher minimum value addition in specific cases.

Benefits offered to Units in EPZ

The main advantages in setting up an unit in an Export Processing Zone or as an 100% export

oriented units are

Full duty exemption on all imports;

Tax holiday for any 5 consecutive years within 8 years from the commencement of

production;

Full exemption from sales tax and excise duty on all local purchases;

Permission to convert all foreign exchange earnings at market determined rate; and

Permission to have upto 100% foreign equity.

Additional Benefits

Units located in Export Processing Zones and 100% export oriented units are permitted to sell

a certain specified percentage of their production in the domestic market.

Food Processing Units having an indigenous input content of 30% are allowed to sell upto

50% of their

production in the local market.

Applying for Setting up Units in the EPZ/FTZs

For setting up units in the above mentioned 6 EPZs in India, on has to contact the following and get

the prescribed application formats and send them to the same after duly filling them with the

prescribed application fee: (Source-Economic Survey 1997-98)

India follows the classical system of corporate taxation and companies are taxed at flat rates. The

basic corporate tax rates for both Widely held and closely held Indian companies is at 40%

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implemented by the 1994-95 budget reforms. In addition, there is currently a surcharge of 15% of

income tax liability (if taxable income exceeds Rs. 75.000).

Other Considerations

The effective tax rate on profits as per the financial accounts is often lower due to differences in

treatment of certain items in the books and for tax purposes and certain incentives/exemptions. A

review of annual reports of various companies shows that the effective tax rate for most companies is

between 30% and 45% on book profits, with a few companies even showing zero tax despite high

profits. A resident company is taxed on its worldwide income. A non-resident company is taxed only

on income that is received in India or that arises or is deemed to arise in India. A non-resident

company is not subject to tax in respect of operations that are confined to purchase of goods in India

for export purposes. The general tax rates for non-resident companies is currently 65% of their

taxable profits, though lower rates of 25% and 30% on gross income have been prescribed for

dividend/interest income and royalties/technical service fees respectively. Lower tax rates exist under

double tax avoidance agreements. Under the Indian Companies Act, accounting has to be on an

accrual basis and this is adopted for tax purposes. The tax year ends on 31st March. Business losses

are allowed to be carried forward for eight years and unabsorbed depreciation can be carried forward

indefinitely. No carry back is permitted. Depreciation rates for tax purposes are as below using the

Written Down Value (WDV) method. General Machinery 25% Industrial Buildings 10%

Depreciation is calculated on the opening written-down value of the block of assets plus the additions

to the block less the sale proceeds/scrap value of the deletions from the block. Tax depreciation is not

required to conform to book depreciation. New manufacturing enterprises are allowed a 30%

deduction in taxable income for a period of 10 years from the commencement of production. This tax

incentive is available for all manufacturing enterprises except in few specified industries which

include

Beer, wine and alcoholic spirits

Aerated waters in the manufacture of which blended flavouring concentrates in any from are

used

Confectionery and chocolates.

As mentioned earlier, export profits are full exempted from tax. Units located in free trade

zones or 100% export oriented units are eligible for a 5 year tax-holiday. This tax holiday can

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be availed in any five consecutive years within 8 years from the commencement of

production.

Other Taxes

Apart from income tax, two major indirect taxes are i) Excise duty and ii) Sales tax. Excise duty is

levied on production and a modified value added tax system is in operation which allows credits for

excise duty paid on inputs. Many items of processed foods are exempted from excise duty on account

of the high priority accorded to this sector. However, certain products such as Beer, Alcohol and

Carbonated Beverages are subject to high excise duties.

COMPULSORY LEGISLATION

Prevention of Food Adulteration Act, 1954

The Act is the basic statute intended to protect the common consumer against supply of adulterated

food and specifies different standards on various articles of food. The standards are of minimum

quality level intended for ensuring safety in the consumption of these food items and for safeguarding

against harmful impurities, adulteration etc. The Central Committee for Food Standards under the

Directorate General of Health Services, Ministry of Health and Family Welfare is responsible for

operation of this Act. Provisions of the Act are mandatory and contravention of the Rules can lead to

both fine and imprisonment.

Essential Commodities Act, 1954

A number of Control Orders have been formulated under the provisions of this Act, main objectives

of which are to regulate manufacture, commerce and distribution of essential commodities including

food. These orders includeB2(a) Fruit Products Order, 1955

This order regulates manufacture and distribution of all fruit and vegetable products,

sweetened aerated waters, vinegar and synthetic syrups.

Manufacture or relabelling of these products can be carried out only after obtaining a valid

license from the Ministry of Food Processing Industries.

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The license is issued only after the licensing officer is satisfied with regard to the quality of

product, sanitation, personnel, machinery and equipment and work area standards.B2(b)

Solvent Extracted Oils, De-oiled meal and Edible Flour Control Order, 1967 and Vegetable

Products Control Order, 1976

These Orders control the production and distribution of solvent extracted oils, deoiled meal,

edible flours and hydrogenated vegetable oils (Vanaspati).

Both the Orders are operated by the Directorate of Vanaspati, Vegetable Oils and Fast under

the Department of Civil Supplies in the Ministry of Food and Civil Supplies

For production and distribution of the above products, a license is necessary from the

Directorate which is granted if the product conforms to the specification laid down in the

Schedules. The Directorate also regulates the price of vanaspati under the Order. B2(c) Meat

Products Control order, 1973

This Order regulates manufacture, quality and sale of all meat products and is operated by the

Directorage of Marketing and Inspection. B2(d) Milk and Milk Product Order, 1992

This Order provides for setting up an advisory board to advise the Government on the

production, sale, purchase and distribution of milk powder. Units with an installed capacity

for handling milk of over 10,000 litres per day or milk products containing milk solids excess

of 500 tonnes per years are required to obtain registration under this order from the

Department of Animal Husbandry.

Standards on Weights and Measures (Packaged Commodities) Rules, 1977

These Rules lay down certain obligatory conditions for all commodities in the packed from

with respect to their quantity declaration. These Rules are operated by the Directorate of

Weights and Measures under the Ministry of Food and Civil Supplies.

Export (Quality Control and Inspection) Act, 1963

The Export Inspection Council is responsible for operation of this Act under which a large

number of exportable commodities have been notified for compulsory pre-shipment

inspection.

The quality control and inspection of various export products is administered through a

network of more than fifty offices located around the important production centers and ports

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of shipment. In addition, organizations may be recognized as agencies for inspection anM/or

quality control.

Recently, Government have exempted agriculture and food products, fruit products, fruit

products, fish and fishery products from compulsory pre-shipment inspection, provided the

exporter has a firm letter from the overseas buyer stating that the overseas buyer does not

want pre-shipment inspection from any official Indian Inspection Agencies.

100% EXPORT ORIENTED UNITS

100% EXPORT ORIENTED UNITS (EOUs)

Companies can be setup anywhere in the country, including the Domestic Tariff Areas (DTAs), but

declared as a 100% Export Oriented Unit, which means the total production from the company would

be exported to customers abroad. Such companies enjoy special benefits largely similar to the units

setup in the Export Processing Zones.

Rules Governing EOUs

Units located in export processing zones or elsewhere as 100%. In general, the minimum value

addition for such units should be 20%, however for fish and shrimp culture and feed production units

the specified minimum local value addition is 30%. The Government reserves the right to specify

higher minimum value addition in specific cases.

Benefits offered to 100% EOUs

The main advantages in setting up a unit as an 100% export oriented unit are

Full duty exemption on all imports;

Tax holiday for any 5 consecutive years within 8 years from the commencement of

production;

Full exemption from sales tax and excise duty on all local purchases;

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Permission to convert all foreign exchange earnings at market determined rate; and

Permission to have upto 100% foreign equity;

EOUs/EPZ units can raise foreign currency loans, subject to certain conditions;

Industrial plots and standard design factories are available to EOUs/EPZ units at concessional

rates. For plots

the concession will be 75% for the first year, 50% for the second year, and 25% for the third

year, if and only if production had commenced in the first year or the second year not

otherwise. For SDF buildings sheds the concession will be 50% for the first year and 40% for

the second year if production had commenced in the first year. The concession will be 25%

for the third year. These concessions are also only if production had commenced by the end of

the first year, not otherwise.

Additional Benefits

100% export oriented units are permitted to sell a certain specified percentage of their production in

the domestic market. Units having an indigenous input content of 30% are allowed to sell upto 25%

of their production in the local market, if indigenous input content is less than 30% the domestic sales

can be upto 15% of the total production.

Requirements for Approval

100% Export Oriented Units Scheme~

Such approvals will be subject to the conditions given below:~

The entire production and operation of 100% Export Oriented shall be in a customs bonded factory

unless otherwise specifically the Collector of Customs/Central Excise concerned will provide the

bonding facilities for the factory premises on payment. The normal procedure that is applicable for

Customs bonding will be followed including transit bond for the purpose of goods being taken from

the port of importation to the factory

.

Import of capital goods permitted is to be effected within two years from the date of issue of

the Letter of Intent/Permission. In case where the capital goods have not been imported by the

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unit within the said period of two years, the unit will have to apply afresh to the

Administrative Department concerned.

The Administrative Department, if satisfied with the reasons for failure to import Capital Goods with

the stipulated period, will obtain the approval of the Board. In case any additional import of Capital

Goods over and above the value permitted initially is required, the unit will have to apply afresh to

Board of Approvals, through the Administrative Ministry concerned along with relevant details.

100% Export Oriented Units will be eligible for replenishment benefits in accordance with the

provision laid down in the Import & Export Policy of Government of India.

The entire production shall be exported except Rejects upto 5% or such percentage as may be

fixed by the Board; Supplies effected in the Domestic Tariff Area as per the provisions of

Policy and Effected the Domestic Tariff Area under global tender conditions.

The items permitted for import under Open General License and the conditions applicable

thereto are

contained in the relevant Open General License given in Vol. II. For their other import

requirements, if any, not covered under Open General License, the unit concerned will have to

obtain import license from the Chief Controller of Imports and Exports, New Delhi.

Applications will be considered on merits, having regard to indigenous angle and other

conditions.

The unit will have to show a minimum value addition of 20% or such percentage as

mentioned in the Letter of Intent/Permission. For this purpose, all foreign exchange out-go as

well as supplies procured from the Domestic Tariff Area of raw materials, components and

consumables shall be taken into account. Units desirous of setting up projects under the 100%

Export Oriented Units Scheme will, henceforth, have to submit detailed techno-economic

feasibility reports, including marketing arrangements along with their application so that

Government is able to satisfy itself on the basis of viability of the proposed project. With a

view to ensuring viability of projects, it has been decided to approve, under the scheme, only

such projects as offer a reasonable annual turnover, depending on the nature of the venture.

The guidelines decided by Government from time to time:

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While applying for approval, the applicant unit should also furnish the list of items including

capital goods, it

will need to import. In respect of raw materials, components, consumables and spares, etc. the

requirements (imported and indigenous both) covering a period of five years in respect of

each item should be given. The quantity and value should also be mentioned in respect of

each item. The list of items should also include items, which have been placed under Open

General License under the normal Import Policy.

A unit approved under this Scheme shall execute a Bond or legal agreement in the prescribed

format with the licensing authority concerned undertaking to fulfill the export obligation

prescribed.

Failure to discharge the export obligation will render the unit liable to payment of Customs

duty on the material imported at the value and at the rate as applicable at the time of import

without prejudice to any other actions that may be taken under the Custom Act, 1962 and the

Imports and Exports (Control) Act, 1947 and the orders issued there under. Exemption from

Customs duty on imports by 100% Export Oriented Units will be subject to such other orders

as may be issued separately by the Department of Revenue, Ministry of Finance, New Delhi.

Within a month of the close of each financial year, the unit concerned shall furnish an annual

account to the concerned licensing authority in regard to Quantity and value (c.i.f. or the price

paid, as the case may be) of items directly imported or supplies obtained domestic tariff area;

The quantity and FOB value of items exported outside the country; Sales of rejects permitted;

Sales permitted to domestic tariff area; and Supplies to domestic tariff area under the global

tender condition.

Units shall also furnish quarterly progress/performance reports prescribed Performa to the

Export Production Section (100% Export Oriented Units Cell), Ministry of Commerce.

Failure to do so will involve deter penal action.

Wherever an existing industrial unit is operating both as domestic unit as well as an approved

100% Export Oriented Unit, it should have two distinctly different names for the two units.

It is clarified that it is not necessary for the approved 100% Export Oriented Unit to have a

separate legal entity. However, it should be possible to distinguish the import and export or

supplies effected by the 100% Export Oriented Units made by the other unit/units of the same

firm/company. The 100% Export Oriented Unit, though not having separate legal entity,

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would not be eligible to be considered for the benefits of any provisions under this policy

other than those provided for 100% Export Oriented Units.

(Source-Economic Survey 1997-98)

NATIONAL FOOD PROCESSING POLICY

Ministry OF FOOD PROCESSING INDUSTRIES

[MINISTRY OF AGRICULTURE]

VISION: - To motivate farmers and food processors, and to provide an interactive coupling between technology, economy, environment and society for speedy development of food processing industries to build up a substantial base for production of value added agro food products for domestic and export markets with a strong emphasis on food safety and quality enabling the farmers especially to realize direct benefits of new technology and marketing network and to ensure adequate availability of quality food products for the consumer at economic prices.

MISSION: - To fulfill the VISION so as to contribute to all round economic and social development of India through generation of employment opportunities especially in rural areas.

1. INTRODUCTORY

Food Processing Industry is of enormous significance for India’s development because of the vital linkages and synergies that it promotes between the two pillars of the economy, namely Industry and Agriculture. India is world’s second

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largest producer of food and has the potential to become number one in due course of time with sustained efforts. The growth potential of this sector is enormous and it is expected that the food production will double in the next 10 years and the consumption of value added food products will grow at a fast pace. This growth of the Food Processing Industry will bring immense benefits to the economy, raising agricultural yields, meeting productivity, creating employment and raising the standard of very large number of people through out the country, specially, in the rural areas. Economic liberalization and rising consumer prosperity is opening up new opportunities for diversification in Food Processing Sector. Liberalization of world trade will open up new vistas for growth.

The Food Processing Industry has been identified as a thrust area for development. This industry is included in the priority lending sector. Most of the Food processing Industries have been exempted from the provisions of industrial licensing under Industries (Development and Regulation) Act, 1951 with the exception of beer and alcoholic drinks and items reserved for Small Scale Sector, like vinegar, bread, bakery, . As far as foreign investment is concerned automatic approval for even 100% equity is available for majority of the processed food items.

The Food Processing Sector

Food processing involves any type of value addition to the agricultural produce starting at the post harvest level. It includes even primary processing like grading, sorting, cutting, seeding, shelling packaging etc.

The sector comprises of the following major areas:

Fruit & Vegetable

Major Products

Beverages, Juices, Concentrates, Pulps, Slices, Frozen & Dehydrated products, Wine Potato Wafers/Chips etc.

Fisheries-

Major Products

Frozen & Canned products mainly in fresh form.

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Meat & Poultry-

Major Products

Frozen and packed mainly in fresh form, Egg Powder (only a couple of units).

Milk & Dairy-.

Major Products

Whole Milk Powder, Skimmed milk powder, Condensed milk, Ice cream, Butter and Ghee

Grain and Cereals-

Major Products

Flour, Bakeries, Biscuits, Starch Glucose, Cornflakes, Malted Foods, Vermicelli, Pasta Foods, Beer and Malt extracts, Grain based Alcohol.

Consumer Industry-

Major Products

Chocolates, Confectionery, Soft/Aerated Beverages/Drinks.

Plantation

Major Products

Tea, coffee, cashew, cocoa, coconut etc.

2. CHALLENGES, CONSTRAINTS AND CONCERNS

India is already a major producer of food (first in cereals, livestock population, milk and second in fruits and vegetables), producing over 600 million tons of food products, and in case the immense untapped potential of growth is achieved the country can emerge as the largest producer of major food items.

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Processing level presently being extremely low, the wastage levels are very high resulting in colossal wastage of national wealth running in thousands of crores.

Value addition to the raw produce in the country is only seven per cent, compared to as much as 23% in china, 45% in the Philippines and 188 in the U.K.

The small scale and unorganized sectors today account for 75% of the total industry having only local presence without much access to knowledge, technology and marketing network.

The differential between the farmer’s realization and the final consumer price is very high in our country even in the fresh produce. In processed food products the high price on account of cumulative effect of low productivity, high cost of raw material, spoilage due to poor infrastructure, inefficient and costly transportation, high cost of finance an high incidence of taxes and duties, leads to the vicious cycle of low demand low capacity utilization high per unit cost low demand.

Despite the existence of a strong and wide network of R&D institutions (CSIR labs, ICAR institutions, ICMR Establishments, Universities and Private institutions), their linkage with the users like farmers and industry, is not well established resulting in lack of technology flow, pure & academic research rather than applied and commercial, lack of involvement of industry in research work, and resource crunch.

The unattractive nature and the high risk profile of food processing industry has impeded required flow of credit from financial institutions who are yet to acquire the proper understanding of this sector to attain the requisite levels of appraising skills.

Low margins, seasonality and high perishability being the distinct features of this industry, the access to seed capital and working capital is not easy. Despite having been declared a priority-lending sector, there is hardly any growth in capital flow to this industry.

Despite vast domestic market size, the present level of processed food marketability is very low but by doing massive awareness and educational campaigns this market could grow higher enough to consume substantial part of any quantum of our processed foods.

Indian brands are yet to establish in the international markets calling for a concerted effort to capture world market share in tune with our standing in the production front.

With the coming in of WTO regime the country has to prepare for meeting the

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requisite quality standards in order to compete with imported goods in the domestic market itself. This calls for adoption of high tech machine and technologies as also development of entire chain of the infrastructure.

Weak database and lack of market intelligence are the prevailing features of this sector.

Poor infrastructure of not only processing but even transportation, ports, airports, storage and handling etc.

The backward linkage between the farmer and the processor is yet to take proper shape to tide over the impediments which exist on account of fragmented & small land holdings, erratic production due to natural factors, non uniformity & inconsistent supply of raw material and longer chain of intermediaries.

Multiplicity of laws and regulatory authorities throttle the industry in its further growth calling for harmonization of laws, development and administration of standards in consonance with international standards like Codex through a single authority.

Prevailing packaging system lacks requisite quality and presentability parameters creating handicap as compared to the imported products.

Cooperative institutions and other parastatal organizations are weak and peoples participation, either through Panchayat Raj Institutions or NGOs or farmers organizations, industries association in food sector remains far from adequate.

THE POLICY

I. CREATING ENABLING ENVIRONMENT

The Policy will seek to create an appropriate environment for entrepreneurs to set up Food Processing Industries through:

a. Fiscal initiatives/interventions like rationalization of tax structure on fresh foods as well as processed foods and machinery used for the production of processed foods.

b. Harmonization & Simplification of food laws by an appropriate enactment to cover all provisions relating to food products so that the existing system of multiple laws is replaced and also covering

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issues concerning standards Nutrition, Merit goods, futures marketing, equalisation fund etc.

c. A concerted promotion campaign to create market for processed foods by providing financial assistance to Industry Associations, NGOs/Cooperatives, Private Sector Units, State Government Organization for undertaking generic market promotion.

d. Efforts to expand the availability of the right kind and quality of raw material round the year by increasing production, improving productivity.

e. Strengthening of database and market intelligence system through studies and surveys to be conducted in various States to enable planned investment in the appropriate sector matching with the availability of raw material and marketability of processed products.

f. Strengthening extension services and to the farmers and co-operatives in the areas of post harvest management of agro-produce to encourage creation of pre-processing facilities near the farms like washing, fumigation, packaging etc.

g. Efforts to encourage setting up of agro-processing facilities as close to the area of production as possible to avoid wastage and reduce transportation cost.

h. Promotion of investments, both foreign and domestic. i. Simplification of documentation and procedures under taxation laws

to avoid unnecessary harassment arising out of mere technicalities.

I. INFRASTRUCTURAL DEVELOPMENT

The Policy will facilitate: a. Establishment of cold chain, low cost pre-cooling facilities near

farms, cold stores and grading, sorting, packing facilities to reduce wastage, improve quality and shelf life of products.

b. Application of biotechnology, remote sensing technology, energy saving technologies and technologies for environmental protection.

c. Building up a strong infrastructural base for production of value added products with special emphasis on food safety and quality matching international standards.

d. Development of Packaging Technologies for individual products, especially cut-fruits & vegetables, so as to increase their shelf life and improve consumer acceptance both in the domestic and international markets.

e. Development of new technologies in Food Processing & Packaging and also to provide for the mechanism to facilitate quick transfer of technologies to field through a net work of R&D Institutions having a

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Central Institute at the national level with satellite institutions located strategically in various regions to cover up the whole Country and to make available the required testing facilities. This could be done by establishing a new institution or strengthening an existing one.

f. Development of area-specific Agro Food Parks dedicated to processing of the predominant produce of the area e.g., apple in J&K, pineapple in North East, Lichi in Bihar, Mango in Maharashtra & Andhra Pradesh etc. etc.

g. Development of Anchor Industrial Centre and/or linkage with Anchor Industrial Units having net work of small processing units.

h. Development of Agro-industrial multi-products units capable of processing a cluster of trans-seasonal produces.

I. BACKWARD LINKAGE

The Policy will promote:

a. Establishment of a sustained and lasting linkage between the farmers and the processors based on mutual trust and benefits by utilizing the existing infrastructure of cooperative, village panchayats and such other institutions.

b. Development of Futures Market in the best interest of both the farmers and the processors ensuring a minimum price stability to the farmer and a sustained supply of raw material to the processor.

c. Mechanism to reduce the gap between the farm gate price of agro-produce and the final price paid by the consumer.

d. Setting up of an Equalisation Fund to ensure sustained supply of raw material at a particular price level and at the same time to plough back the savings occurring in the eventuality of lower price to make the Fund self-regenerative.

I. FORWARD LINKAGE

The policy will promote

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a. Establishment of a strong linkage between the processor and the market to effect cost economies by elimination of avoidable intermediaries.

b. Establishment of marketing network with an apex body to ensure proper marketing of processed products.

c. Development of marketing capabilities both with regard to infrastructure and quality in order to promote competitive capabilities to face not only the WTO challenge but to undertake exports in a big way.

STILL UTTERLY DELICIOUS

The thumb-sized girl in her little polka-dotted dress, as always, is raring to go. Gujarat Co-operative

Milk Marketing Federation (GCMMF), owner of the Amul brand of dairy products, is all set to face

the challenges posed by multi-national corporations that are entering as a result of the government's

liberal import policy.

The milk and dairy products market in India is worth over Rs 5,000 crore. Multinationals are now

seeking a share of this market in the wake of WTO agreement. There are apprehensions that the entry

of multinationals may affect the Indian agriculture and dairy products sector adversely.

Multinationals have deep pockets. Moreover, their governments provide them with several subsidies.

These factors will put them at an advantage as compared to Indian companies.

With India having opened its doors to imports from western countries, the dynamics of the Indian

dairy industry are now increasingly linked to the global dairy industry. Amul is all set to face the

global challenge posed by the new world trend on the international scenario.

The entire credit for the creation of a market network, quality, customer-friendly policies, modern

management, innovative product, value for money, cohesive and integrated co-operative participation

and export goes to Amul and GCMMF.

Today, Amul has achieved a unique position in marketing branded food products on two strengths –

superior product quality and a distribution network serving more than five lakh retail outlets.

In spite of an adverse market position, Amul has increased its share of the market in terms of both

volume and value in 2000-2001. Amul's sales were worth over Rs 2,258 crore, a rise of two per cent.

Amul achieved record sales, ice-cream registering a growth of 33 per cent in its turnover in terms of

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value. Dairy products turnover registered a growth of three per cent over the previous year. While the

sale of Amul milk in pouches increased by 12 per cent, Amul and Sagar ghee registered a growth of

19 per cent. Despite intense competition, the sales of Amul butter and milk powder were not affected

at all.

The sales of Amul's range of cheese increased by six per cent in spite of stiff competition from

multinationals. Sales of Amul chocolates grew by seven per cent, while the sales of ‘Nutramul’ grew

by nine per cent.

New products like paneer, Mithaimate, sweetened condensed milk and fresh curd also received good

response. Despite the import of edible oil, Amul’s Dhara

brand of oil maintained its sales position. Amul's pizza also

got a good response in the market.

Today, about 15 per cent of GCMMF's revenues come from

value-added offering like long life milk, ice-cream, curd, and

gulab jamuns. The co-operative wants to see this increase to

35 per cent in the next five years.

The export turnover registered a 93 per cent increase in 2000-

2001. The federation exported packed dairy products to the

United States, the Persian Gulf and the Far East markets. New

markets like Russia, Madagascar and Saudi Arabia are presently being developed.

The secret behind Amul's success is good management to cope with new market trends, quality of goods,

staying a step ahead. To keep ahead of competition, Amul has stepped up its marketing efforts. In the pizza

market, it first tested the demand for unbranded mozzarella cheese pizza. Satisfied that there is a market for

frozen pizza, it has come out with the Utterly Delicious brand. Amul says it hopes to sell 1,00,000 pizzas

per day by March 31, 2002. With 3,000 outlets and one mid-size pizza at Rs 20, that target is well within

the realm of the possible. Similarly, Snowcap is GCMMF’s test-brand in the ice-cream mixes category.

And as a part of its expansion plan, Amul is said to be scouting for an ice-cream plant in West Bengal and

for manufacturing facilities in the South too.

Percentage Increase in sales of Amul

Products (2000-2001)

ProductIncrease in sales in

percentage

Ice-Cream 33

Amul and Sagar

Ghee19

Milk in pouches 12

Cheese 6

Chocolates 7

Nutramul 9

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With 40 product categories, 300 stock keeping units, 1,00,000 retailers with refrigerators, an 18,000-strong

cold chain, and 5,00,000 non-refrigerated retail outlets, GCMMF is now flexing its distribution muscle to

throw stiff competition to new entrants or push its new offerings into the market.

“The commitment behind the co-operative movement called Amul is to such an extent that it can take any

multinational head-on in its core area of business that is dairy,” says R S Sodhi, GM, GCMMF. In fact, in

order to leverage its distribution network strengths, optimise market supervision expenditures, and achieve

increasing efficiency while keeping the distribution infrastructure lean, focused and productive, the

federation has amalgamated its different distribution networks. Today, it operates an efficient distribution

infrastructure consisting of 46 sales offices, catering to 3,000 distributors and five lakh retailers.

The federation has been awarded the top national award in quality management initiative, the Rajiv Gandhi

National Quality Award for 1999-2000. According to V Kurien, chairman of the federation, Amul's basic

philosophy has been to be customer-driven, to adapt to changing environment, and anticipate change and

act accordingly.

“These are the principles that Amul has followed and will continue to follow,” says Kurien. Almost every

Federation stockist has visited Anand to participate in a unique programme called 'Amul Yatra'. During

this programme, stockists are exposed to operational systems and processes.

For distributors, the TQM movement is evident in Amul Quality Circles. The entire field sales force is

trained in the required strategic facilitation skills equipping them with a sharper business perspective.

Technology has also been a major thrust. The federation is among the Top 100 IT users in the country. It

has more than 3,000 computers installed in its village societies.

CO-OPS NEED A LEVEL-PLAYING FIELD

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R. S. Sodhi, GM, GCMMF (Amul), tells Madhu Barbhaya that since Indian dairy industry is one of the

least subsidised in the world, it should use this as a strength and negotiate for a total phase-out of export

subsidies. Excerpts...

How much is dairy product market in India and what is Amul's share in it?

The Indian dairy product market is estimated to be Rs 8,000 crore with GCMMF having a 25 per cent share

in it. However, we are leaders in most of the value-added categories. We have an 85 per cent market share

in butter, 68 per cent in baby-food, 48 per cent in dairy whiteners, and 65 per cent in processed cheese.

What are the effects of WTO agriculture agreement on Indian farmers and dairy industry?

Indian farmers and the dairy industry have not gained much from the WTO Agreement on Agriculture

(AoA). This, despite being highly competitive in skimmed milk powder (SMP), whole milk powder

(WMP) and butter at distortion free international prices as indicated by estimates of the nominal protection

coefficient (NPC).

Europe and the US have a high level of support and export subsidies coupled with limited market access

provision for farmers and dairy entrepreneurs. Thus, even when domestic prices of dairy products rule

higher in these developed countries than the international market, high support and export subsidies help in

maintaining the domestic price level plus encourage disposal of surplus in outside markets.

What should be the import policy of the government of India?

The Indian Government should keep an effective custom duty on imports till the time the developed

nations of US and Europe continue liberal support to their dairy industry especially in the form of export

subsidies. This is important to keep the cost-effective Indian dairy industry at level playing field to the

subsidized dairying of developed countries.

What should India do to remove the trade distortions and other barriers imposed by European and

North American countries?

The Indian dairy industry is one of the least subsidised in the world. India should use this as strength and

negotiate for total phasing out of export subsidies and elimination of all hidden subsidies for domestic

production by year 2005 when the next round of WTO negotiations is scheduled. India should also

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negotiate for equality – common maximum ceiling for import duty and similar usage of 'special clauses' by

all countries. One strategy could be to negotiate for clubbing of all kinds of support in one category and

seek reduction in total support. Negotiations at WTO should ensure that quality standards are based on

scientific justifications. Exempted measures should be re-classified to create a new category which would

address legitimate non-trade concerns of countries.

How far do you think Amul will be able to withstand the aggression of multinationals and private

players in the dairy market?

Amul has been historically known to stand against the might of multinationals. We have entered a lot of

product categories to ensure that it does not come under the monopolistic regimes of a multinational. Our

entry to any such category, be it ice-cream or sweetened condensed milk, has always brought the prices

down, thereby benefiting the customers.

The commitment behind the co-operative movement called Amul is to such an extent that it can take any

multinational head-on in its core area of business that is dairy. However, all state-level milk co-operatives

might not be in a position to do the same as they may not have the deep pockets and the long profit-

gestation periods of the multinationals.

What reforms are required in Co-operative Act of the union government for betterment of the dairy

sector?

Co-operatives only need a level-playing field with the private corporations. If given autonomy from state

control, co-operatives too can have the same response and flexibility in decision-making as their

competitors.

- Madhu Barbhaya

RISING TO THE CHALLENGE

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(Processed food is becoming popular because of the emancipation of women and

higher literacy)

Why is the popularity of packaged food items surging in a traditional society like

India?

The middle class in India is growing. As a result, the social pattern is also changing.

The middle class accounts for over 220 million of the population of one billion. The

disintegration of joint families, the increase in the number of working couples, the

emancipation of women and the increasing literacy among them are some of the

reasons for the increasing acceptance of processed food in society. The domestic

demand for processed food remains insatiate. This is a challenge as well as an

opportunity for our domestic manufacturers.

Do you feel our domestic industry has access to sufficient funds to upgrade its

technology base swiftly, and in time to stop the flooding of the local markets with

imported foodstuff? What is the percentage of food and vegetable processed in

the country as compared to total production?

The industry should not depend on government funding alone. India is the second

largest producer of food products in the world, but that does not necessarily mean that

our productivity is high. We produce almost 132 million tonnes of fruits and

vegetables per annum. But we process only 2 per cent of this huge quantity. In most

developed countries, the processing level is above 60 per cent. Even in Thailand it is

33 per cent and higher in the Philippines and Malaysia.

According to a study conducted by CII and McKinsey, if the food processing level

gradually increases from 2 per cent to 10 per cent in the next ten years, the investment

required will be as much as Rs 1,30,000 crore. Obviously, the government cannot

provide such a huge quantum of funding. Private investment is absolutely essential. It

is interesting to note that several of the top 40 companies in the list of Fortune 500 are

in the food processing sector.

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The cottage industry constitutes the largest chunk of food processors in India.

How can the Indian food processing sector make its presence felt in the global

market without equipping the cottage industry with the latest technology?

Almost 75 per cent of India's food processing units are in the small-scale sector. We

must ensure proper sanitary conditions and supply of clean water to this sector.

Currently, cottage industries do not have proper access to the market. They don't have

the proper infrastructure. The environment should be conducive if we want to ensure

an investment to the tune of Rs 1,50,000 crore in the next ten years. The government

should function as a facilitator. For this there should be close coordination between the

department of food processing and all the state governments, as well as among the

states themselves.

The creation of an extensive network of all-weather roads is absolutely essential for swift transportation of produce to the processors. Rural electrification projects should be implemented

earnestly. Unless roads and electricity are available, there is no point in creating specific infrastructure like cold storage chains, refrigerated-vans and related facilities.

FOOD PROCESSING INDUSTRIES - A SUNRISE SECTOR

Food has a very wide connotation but it can be summed up as any plant or animal material, which

is consumed for nutrition and sustenance. The collection, preparation and distribution of food

constitute the very basis of civilization, culture and home. Humanity has always recognized that

preservation of food to ensure availability according to need is central to its concerns. Pickling,

salting, drying and other methods of food processing are almost as old as mankind itself. Food

processing is a multi-faceted endeavor and its further complexity lies in terms of the enabling

environment, the status of the production of the basic plant and animal material, the industry and then

consumer or the market.

Significance

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Food processing industry is of enormous significance for India's development because of the vital

linkages and synergies that it promotes between the two pillars of our economy, industry and

agriculture. Fast growth in the food processing sector and progressive improvement in the value

addition chain are also of great importance for achieving favourable terms of trade for Indian

agriculture both in the domestic and international markets. Even more important is the crucial

contribution that an efficient food processing industry could make in the nation's food security. The

simple fact that the post-harvest losses are about 25 to 30 per cent in our country should serve as an

eye opener for all of us. Even marginal reductions in these losses are bound to give us great relief on

the food security front as well as improve the income levels of the farmers.

It is in this context that the Government of India has given utmost priority to developing the food

processing sector. The Government has taken a number of initiatives. The entire sector has been

deregulated and no licence is required except in the case of alcoholic beverages. Automatic approval

for foreign investment up to 51 per cent is allowed. Even where investment is more than 51 per cent,

approval is given on a case-to-case basis by the Foreign Investment Promotion Board (FIPB). Cent

per cent export-oriented units are permitted to import raw materials and capital goods free of duty.

Zero duty import is also permitted, for capital goods. Export earnings are exempted from corporate

tax. A number of State Governments have also announced liberal fiscal benefits for the food

processing industries.

In line with this policy the Department of Food Processing Industries has launched concessional

finance schemes. The schemes cover the entire spectrum of activities involved with food processing

such as post-harvest infrastructure including cold chain, food quality and safety, packaging, research

and development and promotion of processed food. During the 8th Plan (1992-97), the Department

provided an assistance of Rs.177 crore for various food processing projects. During the first two

years of the 9th Plan (1997-2002) the amount of assistance provided is Rs.48 crore. These figures

may seem small. But what is important is that this seed money has generated projects of the value of

an estimated Rs.1100 crore.

Investments

The various initiatives taken by the government have attracted large investments in the food

processing sector. From July 1991 when the liberalisation process started, until September 1999,

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1,111 approvals (which include 100 per cent joint ventures, foreign collaborations and industrial

approvals) involving a total investment of Rs.19086 crore. This is an investment of Rs.9125 crore

which had already been approved. As many as 5,718 industrial entrepreneurs, memoranda involving

an investment of Rs.53,697 crore were filed during this period.

The environment for this industry has substantially changed since 1991. As a result of these steps,

the cumulative investment by the financial institutions in the food industry sector increased from

about Rs.6500 crore in 92-93 to Rs.18500 crore at the end of 97-98, an increase of almost 200 per

cent. Further, foreign investments of Rs.8886 crore have been approved of which Rs.2032 crore has

been implemented. However, the share of the food industry in the total sanctions by the financial

institutions has decreased from about 4 per cent to about 2.5 per cent.

In line with the market orientation of the financial market, there has been a significant relaxation in

the regulatory regime. The Cold Storage Regulatory Order and the Rice Milling Regulations have

been abolished. The Government is committed to the removal of quantitative restrictions on imports.

Export Potential

The Indian processed food industry has shown a tremendous potential for exports. During 1998-99

the total export from the country was with Rs. 1,41,603 crore which included Rs.25224 crore of

agricultural, plantation and processed food products. This was 18 per cent of the total exports. The

export of processed foods, viz., processed fruits and vegetables, animal products, rice, marine

products and other processed foods was valued at Rs.12915 crore during 1998-99 which was 9.2 per

cent of the total exports. Globalization has led to an increase in trade across the borders of different

countries and annually about 460 million tons of food valued at US $3 billion is traded. India has,

thus, a great potential for global trade in agricultural and processed food products.

Food processing has the largest employment generation potential. It generates 54,000 persons per

Rs.1000 crore investment whereas in textiles and in paper industries it is 45,000 and 25,000 persons

respectively. Altogether 12.73 lakh job opportunities are likely to arise in the food processing sector

with the implementation of the approvals given and industrial entrepreneurial memoranda filed so far.

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Despite these initiatives and advantages, the processing of raw material for value addition is still at

a very low level - less than 2 per cent as compared to 25-60 per cent in the developed countries. To

boost the growth, the Government and the industry have to work in close unison.

The industry needs to adopt the latest technologies to inject greater efficiency which could provide

economies of scale and cost effectiveness. We need to introduce technologies that can add value at a

reasonable cost as the premium of processed foods over fresh fruits and vegetables cannot be very

high if a large demand is to be generated. Some of the new technologies in cold storage system

include changing the cooling system, use of prefab sandwich insulated panels, spraying potatoes with

sprout suppressants and then storing them to save power and use vapor absorption refrigeration,

based on solar and bio-gas energy which has been adopted in the advanced countries. Similar

inovations have already been applied in several other areas.

The other issue is the absence of linkages between the industry and the farmers for the raw

materials. Currently, most agro industries depend on the normal trade channel for their raw material

which often results in the industry getting only the left overs of the market. This is very acute in the

horticulture-based industry. In order to ensure that the industry gets the right quality and quantity of

raw material at the appropriate time, the most suitable method in the Indian context appears is to

procure raw material directly from the farmers through contract product. Experiments made by some

leading companies in this regard have been eminently successful.

India has large prospects for exports of agro-products. The key to India's success, however, shall

be quality. In our endeavor to boost exports, India may been confronted with two issues, viz., genuine

quality issues and pseudo quality issues. We need to gear up to meet both the challenges. The concept

of quality assurance has been alluded to the Indian exporters so far. Total quality management begins

not only from the first stage of manufacturing of the end product but from stage one of production of

the raw material. Most of the processed food manufactured in the country is not of a very good

quality, largely because of the use of poor raw material. Therefore, the processors need to enter into

contracted arrangements with the farmers for providing processable varieties of raw materials and

also help them to improve productivity by using the latest agricultural technologies.

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The growth potential of India's food industry is enormous. With food being a national priority and

food habits changing rapidly towards value-added foods, the Indian food processing industry is on the

brink of a revolution that will modernize the entire food chain.

* Secretary, Department of Food Processing Industries, Government of India.

FOOD PROCESSING

The Facts

India is one of the world’s leading food producers.

US$ 70 billion industry including US$ 22 billion of value added products.

Existence of over 820 flour mills, 418 fish processing units, 5,198 fruit/ vegetable processing

units, 171 meat processing units, 609 sweetened and aerated water (soft drinks) units, 266

milk product units, and several other food processing factories in the organised sector.

Processed food exports approx. Rs 120 billion per annum and constitute approx. 18 percent of

total exports.

Size of the semi-processed and ready to eat packaged food industry is over US$ 1 billion and

is growing at over 20 percent.

Primary food processing is a major industry with a large number of rice mills, flour mills,

pulse mills and oil-seed mills.

Second largest producer of fruit and vegetables, with only 2 percent of the produce being

processed.

Over 25 percent of world spice production, worth greater than US$ 900 million.

Large marine product and processing potential with varied fish resources along the 8,041 Km

long coastline, 28,000 Km of rivers and millions of hectares of reservoirs and brackish water.

Largest livestock population in the world, with only 1 percent of the total meat production

being converted to value added products.

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Largest milk producer in the world with over 15 percent of the total milk production being

processed through the organised sector.

Investment Policy

Key initiatives undertaken to encourage foreign investment in the food processing sector, include:

No industrial license needed for almost all food and agro processing industries.

Automatic approval (including foreign technology agreements as per specified norms) is now

permitted for FDI upto 100 percent equity of Indian companies, for most products in the food

sectors. Exceptions being alcoholic beverages such as beer and items reserved exclusively for

manufacture by the small scale sector.

Foreign equity ownership upto 24 percent is allowed in case of units manufacturing items

reserved for small scale sector.

As a result of various policy initiatives undertaken by the Government of India, several

multinational companies have committed foreign investment of nearly Rs 87.5 billion (as of

December 2000).

Investment Incentives

The Government has given high priority to the food processing sector with a number of fiscal reliefs

and incentives to encourage commercialisation and increase value addition in agricultural production.

These include:

Processed foods and vegetables totally exempt from payment of excise duty.

Free import and export of most items in accordance with the EXIM policy for Financial Year

2001-2002.

Capital goods are freely importable.

Low import duties

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Tax incentives for new manufacturing units except for certain industries.

Provision of soft loans for industries in food processing sector.

Subsidies to manufacturing units engaged in processing fruits, vegetables and cereals.

Assistance for establishment of Food Processing Parks in different parts of the country.

All controls on Export of foodgrains etc. dismantled to a large extent.

100 per cent export oriented units permitted 50 per cent sale in domestic tariff area. All imported

inputs are allowed at zero duty.

Institutional Framework

Department of Food Processing Industries (the Department), under the aegis of Ministry of

Agriculture, is the central agency of the Government, responsible for developing a strong and vibrant

food processing sector. The strategic role and functions of the Department fall under three categories

– developmental and promotional, technical and advisory and regulatory.

The Department acts as a catalyst and facilitator for attracting domestic and foreign investments

towards developing large integrated processing capabilities, for creating conducive policy

environment, including rationalisation of taxes and duties. The Department processes applications for

foreign collaborations, export oriented units etc. and assists/ guides prospective entrepreneurs in their

endeavours.

Food Safety & Quality Regulations

The following regulations are in place for ensuring food safety and quality standards:

Prevention of Food Adulteration Act, 1954

This is the Central Act and provides the basic statute intended to protect the common

consumer against supply of adulterated/ sub standard food and specifies different standards on

various articles of food.

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Food Products Order, 1955

This Order requires all manufacturers of fruit and vegetable products to obtain a

licence to ensure good quality products, manufactured under hygienic conditions.

Meat Food Products Order, 1992

This Order essentially administers the quantity of heavy metals, preservations, insecticides, residues

etc. for meat products.

Draft Processed Food Development Act

In order to bring all provisions relating to Food Processing Sector under a single authority and to

remove existing impediments on account of multiple laws and authorities, the Department has

prepared an approach paper on the proposed Processed Food Development Act.

Apart from providing for rationalisation of existing food laws and availability of a single window

clearance procedure, the proposed Act will also consolidate and define the standards, define the merit

goods for extending promotional incentives, make provisions for setting up a Development Fund and

provide enabling provisions in the field of biotechnology.

The Opportunities

The Country offers significant opportunities in the food sector owing to:

The diverse agro-climatic conditions and a wide ranging and large raw material base is

suitable for food processing industries. Presently, a miniscule percentage of these products are

processed into value added products.

Rapid urbanisation, increased literacy and rising per capita income have all caused rapid

growth and changes in the demand pattern, leading to several new opportunities for exploiting

the large latent market. An average Indian spends about 50 percent of household expenditure

on food items. One of the biggest emerging markets, with over a billion population and a 300

million strong middle class.

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Expenditure on mass-based, high volume, low margin basic foods such as wheat, wheat flour

and homogenised milk is expected to increase substantially over the next few years.

Popular foods like wheat flour and biscuits, packaged milk, fresh poultry and soft drinks are

other areas where a strong growth is forecasted.

While certain processed foods have been exempted from payment of excise duty, there has been a

substantial reduction of excise duty on others.

Estimates of existing production details

Sectors Figures in (‘000 tonnes)

Mutton 675

Pork 420

Poultry 600

Cattle Meat 1,295

Buffalo Meat 1,210

Total Meat 4,500

Fish Production & Processing 5,26,000

Milk 81,000

Milk Products 307

Fruit and Vegetable products 990

Soft Drinks (FY 2000-2001) 6,540 Million Bottles

Source: Annual Report 2000-2001, Dept. of Food Processing, Ministry of Agriculture

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