Food Industry – Overview and Trends

According to a study by McKinsey & Company, the Indian food market is poised to grow from US$ 155 billion in 2005 to US$ 310 billion by 2015 and US$ 344 billion in 2025 - at an approximate compounded annual growth rate of 4.1%.

The development of the food industry in India stems from the consistently increasing agricultural output. With the second largest global arable land area, India is one of the key food producing countries in the world, sec-ond only to China.

• Currently, India ranks second in fruit production and third in vegetable production in the world.
• In 2007-08, food grain production in India had registered a 4.6% growth with 227.32 million tonnes as against 217.28 million tonnes in 2006-07, according to estimates by the Ministry of Agriculture.
• The output of coarse cereals in 2007-08 was 39.67 million tonnes, 17% higher than the 33.92 million tonnes in the previous fiscal.
• The total output of oilseeds is estimated to have risen to a record 28.2 million tonnes, about 16% higher than the 24.29 million tonnes in 2006-07.
• The production of pulses has risen to 15.19 million tonnes, registering a year-on-year growth of 7% and touching a new high.

According to estimates by the agri-trade promotion body, the Agricultural and Processed Food Products Export Development Authority (APEDA), India's exports of agricultural and processed food products in 2007-08 has grown by 38%, which, in absolute value terms, is US$ 6.59 billion, against US$ 4.79 billion in 2006-07.

Food Processing

India’s food processing industry is one of the largest industries in the country - it is ranked fifth in terms of production, consumption, export and expected growth. India is one of the world’s major food producers but accounts for only 1.7% (valued at US$ 7.5 billion) of world trade in this sector – this share is slated to increase to 3% (US$ 20 billion) by 2015.

The Indian food processing industry is estimated at US$ 70 billion. According to the Ministry of Food Processing, this industry contributed 9% to India’s GDP and had a share of 6% in the total industrial production. The industry employs 1.6 million workers directly.

Sustained by high agricultural output, international demand and a strong domestic market, the Indian food industry offers ample scope for large investments in processing technologies, skills and equipment, packaging, refrigeration of frozen food and thermo processing.

Currently, only 6% of the country's fruit and vegetable produce is processed and India's share of the global market stands close to a dismal 0.03%. While the size of the global processed-food market is estimated at US$ 3.2 trillion and nearly 80% of agricultural products in the developed countries get processed and packaged (as suggested by 'India Food Report 2008', released at the Food Forum India, in Mumbai), there is huge scope for export-led growth in this particular sector. Recognising this, in the next few years India aims at raising the share of processed food to 20% in comparison to total agri-produce, on the one hand, and enhancing export of these items to 3% on the other.

The domestic food market, according to the 'India Food Report 2008' is estimated at over US$ 182 billion ac-counting for about 2/3rd of the total Indian retail market.

India’s Competitive Advantages in Food Processing

The steady economic growth is leading to a positive change in the lifestyle of the consumers and they are willing to pay a premium for both value-added private and branded products.

Interestingly, the fact is that while the country's GDP growth rate has increased from 3.5% in 2002-03 to 9% in 2006-07, the food processing sector has grown from 7% to 13.1% during the same period. However, market experts are of the opinion that in future, the food products is going to increasingly contribute towards India's GDP growth.

Sector trends:

Production:

• The food-processing industry in India has undergone big changes over the last six to seven years, in terms of types, variety, quality, and presentation of products, which is mainly a result of the liberalization that led to foreign direct investment (FDI) in the processed food sectors.
• Most food-processing sectors have been brought under the liberal, transparent, and investor-friendly FDI policy, which allows 100 percent FDI.
• However, the small-scale farming system in India, marketing problems, lack of grading and standards, poor distribution channels, and onerous government policies continue to pose problems for the processing industry to source the right type of raw materials and to discourage more investment in the sector.
• Nevertheless, the proportion of FDI in the food-processing sector to total FDI into India is low, constituting about 4 percent of total FDI inflow from 1991 to 2004.
• Several multinational companies, including US-based companies like Pepsi, Coca Cola, ConAgra, Cargill, Heinz, Kellogg’s, IFF, and Mars (pet food only) have entered the Indian food-processing industry with significant investments.
• Indian food and beverage companies are expanding their operations to neighboring countries like Bangladesh, Nepal, Sri Lanka, Commonwealth of Independent States countries, and the Middle East.
• Takeovers and mergers are beginning to occur in the Indian food-processing sector, leading to consolidation.
• The food-processing industry is beginning to focus on, and invest in, advertising and awareness campaigns about products and brands.
• Companies have added extras to their existing brands, including stylish packaging.
• The growth in the food-processing sector has generated increased interest in high quality food ingredients in order to produce high quality foods.
• The ready-to-eat food sector is growing at a high rate due to the changing lifestyles of the middle-class consumers (both partners working, etc.).
• Some previously unknown regional brands are gaining national acceptance because of consistent quality and product safety, thereby providing some competition to established companies.
• The GOI is in the process of enacting a Food Safety and Standards Bill, which if properly done and implemented, would provide increased transparency, better food safety management systems, and science-based standards.

Consumption:

The following factors influence the type and quality of inputs in processed foods:

• A large and an exceedingly wealthier middle class is creating growing demand for a wider variety of high quality processed foods.
• The changing age profile (sixty-five million people expected to enter 20-34 year age group by 2010) and increasing exposure to western-type products and lifestyles.
• The market entry of several multinational food-processing companies and ingredient suppliers.
• The increasing number of fast food chains.
• The recent trend toward a healthier lifestyle has generated a niche market for diet, healthy, low-calorie, and non-fat food products.
• The increasing urbanization and growing number of working women.
• A slow but steady transformation of the retail food sector in cities.

Competition:

India’s domestic industry is the primary competitor for FVG food-processing and ingredients suppliers in India. India, with diverse agro-climatic conditions, has a production advantage in many agricultural goods, with the potential to cultivate a large range of agricultural raw materials required by the food-processing industry. India is a major producer of spices, spice oils, essential oils, condiments, and fruit pulps. Significant variations in food habits and culinary traditions across the country translate into a competitive advantage for small and medium local players, who are familiar with local food habits and markets. Some Indian food-processing companies have increased market share by decreasing product prices. High import duties on processed food and food ingredients make imports relatively costly. Existing domestic food laws restrict the use of several ingredients, flavors, colors, and additives, thus posing an additional challenge to FVG exporters interested in the Indian market.

Foreign competition to the FVG is mostly from countries in closer geographic proximity to India, such as Australia and New Zealand. European suppliers are major competitors in the food ingredient sector. Several foreign firms, including some from the United States, have started operations in India.

Next: Structure and Composition

Indiabiznews, November 11, 2009