Processed food helps curb inflation as less gets wasted

Written by Banikinkar Pattanayak | New Delhi | Updated: Oct 17 2013, 09:58am hrs
Indias average wholesale price inflation in food articles was 12.24% in the first half of FY14, far higher than the inflation rate of 4.65% for food products, a paradox because the latter additionally includes the margins of food processing units.

The obvious reason for this is the subdued prices of edible oils and sugar, which have a combined weightage of 48% in the manufactured food products basket. But whats kept processed food prices in check is also the increasing trend of processors directly sourcing raw food items from the farmer, which not only helps to eliminate the middleman but also reduce wastages.

Processed food items can lower inflation further if greater synergy is achieved between industry and farmers. Despite being one of the top two producers of fruits and vegetables, Indias processing of these items stands at 2.2% against 65% in the US and 23% in China, says a KPMG report. India accounts for only 2% of the global trade in processed food items.

Reflecting the reduced pricing power at the retail level, the CPI food and beverage inflation in H1 rose slower than the WPI food inflation.

That processing keeps prices low is evident. For instance, while cereal prices have risen at an average of 15.74% in the first half, the price rise in biscuits and bakery products have remained around 2%. Also, even when the price of oilseed prices in the domestic market rose 18.20% in April, inflation in the edible oil segment was 2.01%, thanks to low prices overseas.

Industry executives said one reason for the low increase in processed food prices is that companies tend to stock up significantly from time to time when prices in the open market are relatively low to beat a price rise later.

"Inflation in (primary) food articles this year is pushed up by an exorbitant increase in the prices of vegetables and protein articles like eggs, meat and fish. But the inflation in manufactured food products is contained primarily due to edible oil prices, which are heavily influenced by imported palm oil prices. Palm oil prices globally are coming down and India is getting the benefit of that," Ashok Gulati, chairman of the Commission For Agricultural Costs and Prices, told FE. "Sugar prices being down also impact food products inflation. And this, too, is influenced by global prices of sugar." The country imports roughly 10 million tonnes of edible oil a year, while its consumption stands at 17.5 million tonnes.

In fact, in a recent paper with Shweta Saini on food inflation, Gulati said: "Building efficient supply lines for agri-products...requires massive investments in logistics, agro-processing, and organised retailing, all of which can be leveraged through the private sector. Viewed from this perspective, a special mission on food processing and the FDI in organised retailing are steps in the right direction."

"They can be made much more inclusive if organised retailing has a window for franchise for kirana stores and even vendors, who can act as extension counters of organised retailers. This will create fusion between the organised players and unorganised sector, bringing synergy, and reining in food inflation," Gulati said in the paper.

DH Pai Panandikar, president of the RPG Foundation, said the government must promote food processing to cut down on wastages and make farming more remunerative for farmers a step that will have a salutary effect on food inflation. Moreover, in the manufactured food segment, if there is an increased demand, the response to cater for it is more nuanced and requires less time than in the raw food segment, thanks to the involvement of the industry, he said. "Contract farming is a right step in this direction, although the agreement between the seller and the buyer must be strictly adhered to for the sustenance of such contract farming," he said.

According to a survey by Global AgriSystem a noted consultancy firm specialising in agricultural market systems farmers in India get only 25-40% of the price paid by consumers for a commodity as the mark-up in the supply chain adds up to 60% and can even go up to 75%, while wastages in multiple handling by different intermediaries result in an erosion of value by 15-25%. More than one-third of fruits and vegetable go waste each year due to inadequate infrastructure, it said.

This has significantly raised the stake for private sector participation, which means food processing sector needs to get a leg-up.

Moreover, to improve supplies of milk, egg and meat, the government needs to focus mainly on the adoption of better technology as well as improved breed and control of diseases in them, said R Venkataramanan, the joint director at the state-run Indian Veterinary Research Institute. Venkataramanan, who is spearheading efforts to control animal diseases, said the foot and mouth disease alone drags down the animals milk output by 25% and hurts its breeding as well as work capacity.