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FPI Part 4: Opportunities & Initiatives

India presents several potential growth areas in the food processing sector. Based on potential growth opportunities and the enabling environment in terms of policy support, three key segments have been identified that indicate high attractiveness.

Mass Market Basic Foods

Fruits and Vegetables Segment

Several factors make the fruits and vegetables sector in India attractive from a market size and growth perspective. As mentioned, India is a significant producer of fruits in the world, contributing to 10% of global production. The fruits and vegetables sector is growing rapidly at a healthy rate of 20% per annum. It is, however, nascent with penetration level of about 10%. These factors indicate the high growth potential in the sector. This is also highly unorganised at present, with the unorganised sector at 48% share, indicating the scope for organised players to make an impact.

Several policy measures have been undertaken by the Government to create the right stimulus for growth in this sector. Some of the key initiatives include:

  • Foreign equity participation up to 51% allowed. Initiatives like post-harvest management, logistics given priority in attracting FDI
  • Complete exemption from excise duty
  • Income tax rebate of nearly 100% of profits for new industries in fruits and vegetables sector
  • Many fruits and vegetables processing industries eligible for automatic approval of technology upgradation

Meat, Poultry and Fisheries Segment

The meat, poultry and fisheries segment is another high potential area that has the advantage of several favourable factor conditions. In terms of raw material, India has the best supply of livestock in the world, accounting for 50% of buffaloes and 16% of the goat population. India also ranks third in the world in production of fisheries. As mentioned earlier, the bulk of the livestock is not bred for slaughter.

There is a large potential for setting up modern slaughter facilities and development of cold chains in meat and poultry processing sector. In the fisheries segment also, India’s long coastline and network of inland waterways and lakes, offers plentiful availability of different types of fishes. Fishery resources in India are seriously under-utilised.

The Government has also taken up several initiatives to encourage investment and growth in this segment. These include:

  • Foreign Equity participation allowed in the fisheries sector subject to approval. Foreign investment proposals on nearly US$ 210 million have been approved in this sector
  • Financial assistance given for setting up of processing infrastructure like IQF plants, refrigerating transport equipment, freezing plants
  • Excise duty on meat poultry and fisheries reduced from 16% to 8%.

Mass Market Value-Added Products- Dairy, Bakery

India is the world’s largest milk producer and dairy is the one of the most promising segments of food processing. Demand for dairy products is expected to grow at a healthy rate of 15% to 20% over the next five years. The segment offers a high potential for value addition – the level of processing value addition, at 37%, is amongst the highest in the food processing industry. At the same time the share of organised players is still small, at 15%, indicating the potential for growth for organised players.

Bakery products is a related segment that has also been growing strongly, at about 7.5%. The segment is still highly fragmented, though organised players have nearly 55% share of output. Both these segments, while indicating attractive growth potential, have also been focus areas for policy support by the Government.

  • Foreign equity participation permitted to the extent of 51% in dairy processing sector
  • De-reservation of many segments like ice-cream and ghee from small-scale industries
  • Excise duty of 16% on dairy processing machinery fully waived for promotion of dairy processing
  • Subsequent to decanalisation, exports of some milk based products are freely allowed provided these units comply with the compulsory inspection requirements of concerned agencies like the National Dairy Development Board, Export Inspection Council, etc.

Niche Market Foods - Snack Foods, Ready-to-Make Foods, Packaged Foods

This business is characterised by high volumes and low margins. Penetration levels are yet quite low in this segment, with product acceptance largely restricted to the urban population. Product innovation and branding play a key role in success of these products. As such, this segment could be an attractive option for multinational companies with established brands and strengths in innovation, to enter and get established in India.

The Government has been supporting this segment through policy initiatives such as:

Automatic approval of foreign equity participation up to 51%

  • Income tax rebate of 100% of profit for five years and 25% of profits for the next years for packaging of foods

    Government Initiatives

    The Government of India has declared food processing a priority by introducing a number of progressive measures to set up and modernize food processing units, create infrastructure, support research and development and human resource development.

    • The National Policy aims to increase the level of food processing from 2% to 10% in 2010 and to 25% in 2025
    • The level of institutional credit to be provided by banks and financial institutions has been increased from US$ 17.41 billion during 2003-04 to about US$ 23.76 billion in 2005-06
    • Full repatriation of profits and capital is allowed
    • Automatic approvals for foreign investment up to 100%, except in few cases, and also technology transfer
    • The government has decided to give a boost to research and development in this sector with its decision to set up the National Institute for Food Technology and Management in collaboration with Cornell University of the US.
    • Zero import duty on capital goods and raw material for 100 per cent export-oriented units. Custom duty on packaging machines reduced. Central excise duty on meat, poultry and fish reduced to 8%
    • Income tax rebate allowed (100% of profits for 5 years and 25% of profits for the next 5 years) for new industries in fruits and vegetables besides institutional and credit support.
    • The government would also set up abattoirs and dairies and will give a grant of US$ 3.1 million per abattoir and US$ 2.08 million per dairy.

    On the Government side, there is also a renewed enthusiasm to popularise organic food cultivation since ex-ports of organic food have grown to US$ 75.16 million over the past one year from US$ 25.05 million just two years ago.

    In a bid to boost the food sector, the Government is also developing 30 mega food parks which would cover the entire food processing cycle 'from the farm gate to the retail outlet'. While the Government would provide a grant of US$ 12.53 million for each one, private investment to the tune of US$ 75.21 million would be encouraged in these parks. The first five such parks would be set up in Punjab, Maharashtra, Andhra Pradesh, Jharkhand and the North-East region in the first phases.

    According to the estimates of the Ministry of Food Processing Industry, currently, the food processing sector contributes nine per cent of the GDP and there is immense scope for further growth. In a bid to give a boost to the sector, the government is considering a proposal to allow foreign direct investment (FDI) in the food retail sector. While 100% FDI is already allowed in food processing and 51% FDI in single-brand food retailing, the next step will be allowing FDI in select food items, fresh and processed fruit and vegetables, which may include retailing of farm and dairy produce, marine and poultry products. The initiative would underline inclusive growth in the food sector through marketing-driven farming, disciplined procuring from the farms, state of the art processing, and organised retailing.

    Some of the main key drivers of the Indian food industry are:

    • Food, beverages and tobacco industry dominates the Indian retail industry and is anticipated to grow at a CAGR of nearly 8% during 2008-2012.
    • Soft drinks market is anticipated to grow at a CAGR of nearly 12% from 2008 to 2012, and major demand will be seen in health & energy drinks, bottled water and fruit juices.
    • Snack food market is estimated to grow at an annual rate of 18% to 20% in coming few years, albeit from a small base of consumers.
    • With growing health awareness and concern, the functional food & drinks market is set to grow rapidly in India.
    • Changing lifestyle, coupled with growing middle class population and changing eating habits, is anticipated to fuel 7%-10% growth in the Indian food service sector annually.
    • Low per capita consumption of alcoholic drinks makes the country highly lucrative to expand, with wine consumption projected to grow at a CAGR of nearly 23% in volume terms.

    In combination with the potential boom in the organised retailing sector, there is bound to be an increase in private labels, also in the food sector, which will provide a further thrust to the Indian food and food processing industries.

    Conclusion: The Indian food industry is widely recognised as a "Sunrise Industry" in India having huge potential for uplifting agricultural economy, creation of large scale processed food manufacturing and food chain facilities, resultant generation of employment and export earnings. India has enormous growth potentials from its current status of being the world’s second largest food producer to be a world's number one producer. The Indian food processing industry has the highest number of plants approved by the US Food and Drug Administration (FDA) outside the USA.

    India requires an investment of US$ 28 billion to bring the level of processing to 10% - 12% by 2012. It is expected that in future bulk investments and modern food processing technologies are going to turn the fortune for Indian food processing industry. Some of the most promising sub-sectors in the Indian food industry, as identified by the Ministry of Food Processing, include: Soft-drink bottling, Confectionery manufacture, Fishing and aquaculture, Grain-milling and grain-based products, Milk processing , Tomato paste, Ready-to-eat breakfast cereals, Mega food parks, Agri-infrastructure and supply chain integration, Logistics and cold chain infrastructure and Packaging machinery etc.

    Indiabiznews, January 18, 2010

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