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Feature
Processed Food Industry In India: A Mega Growth
Opportunity
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Thursday, 31 December, 2009, 08 : 00 AM [IST]
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By Pankaj Gupta
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 The Indian processed food industry’s growth drivers are robust and indicate that the sector holds strong potential to improve on its current growth in the future, provided affordability is further improved and a consistent export policy is adopted, say Pankaj Gupta, Practice Head – Consumer & Retail and Indervir Singh, Project Leader at Tata Strategic Management Group.
Growth drivers
Rapid increase in disposable income in India coupled with changed attitudes towards health and hygiene is driving the growth of processed food in India. Today, there is higher affordability and greater willingness amongst consumers to pay for various needs originating from modern living.
Increasing urbanisation, hectic lifestyles, rising number of nuclear families and increasing proportion of working women is leading to an increased demand for convenience. Indian consumers in larger numbers are opting for greater brought-into-home food consumption.
Simultaneously, growing brand consciousness, exposure to Western products, introduction of food categories that are new to the Indian palate and new product variants catering to diversified tastes are ensuring higher acceptability of processed food products. All these factors create a strong case for the accelerated growth of processed foods.
Challenges
While demand drivers remain strong, supply side issues still pose many challenges. Inflation in food prices in recent months has brought out the fragility of India’s demand-supply balance. Increasing incomes will only fuel higher demand for processed food while further straining the supply.
Additionally, processed food manufacturers often face problems in procuring quality produce. Players need to proactively work alongside farmers to educate them on improved farming practices and encourage the use of high yield seeds.
India will continue to remain a price sensitive market. Affordability of several processed food products will need to be further improved through relevant processing and packaging technology interventions.
Government Role
The current taxation structure does not provide any leeway for a major tax led reduction in prices. However, the Government can take steps to boost R&D led innovation for both, processing and packaging of food products and increase access to affordable and effective automation machinery. This will provide manufacturers with the ability to compress prices and target lower income segments.
Initiatives to increase the availability of skilled manpower and boost the number of qualified food-technologists and micro-biologists will be required. The government should permit seasonal employment and allow manufacturers flexibility in handling the industry’s natural cyclicality.
Completion of amendments to the APMC Act in the remaining 9 states allowing direct procurement from the farmer should be done quickly.
Much more needs to be done to ensure India is able to realise its dream of becoming a major processed food exporter. The frequent government flip-flops on food exports decreases investor confidence in the sustainability of an export led business model. For example, the ban on export of wheat and non-basmati rice has hit volumes significantly. Non basmati rice exports that amounted close to Rs 7400 crore in FY08 will shrink to zero. Wheat exports of over Rs 2390 crore in FY04 have already shrunk to negligible levels in FY08. The dairy industry experienced a similar issue due to the export ban in FY09 which has since been lifted.
The growth of primary processed food exports can continue once the government ban is lifted, provided challenges in maintaining traceability are addressed and adherence to international quality and safety standards is improved. Rising protectionism and various non-tariff barriers enforced by developed nations will continue to pose market access issues.
Impact of FDI
The real impact of FDI in the sector would be the associated technologies that large global brands would usher into the Indian market. Increased FDI would also reduce hindrances to market access as global food players look to India as an export hub, provided concrete action is taken to address the issues mentioned earlier.
Conclusion
Growth drivers indicate that value-added food products hold the potential to grow at 25% p.a over the next 5 years with the share of value addition poised to exceed the 35% envisioned in the GoI Vision for 2015. If affordability is improved and the government takes proactive steps to addresses the issues outlined, then the sector could improve on its current growth. The likely scenario is that future growth would be primarily driven by the domestic market with India unlikely to achieve its target in world trade.
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