Food processing: The untapped growth opportunity

The food processing industry is of enormous significance as it provides vital linkages and synergies that it promotes between the two pillars of the economy, i.e. agriculture and industry

Food processing, food supply chain, global economy, india, organised sector, unorganised sector, global food processing, NITI Aayog
The shortage of refrigerated vehicles is reflected through losses occurring at the transport stage.

Ranveer Nagaich & Janak Priyani

Food processing has become an integral part of the food supply chain in the global economy, and India has also seen growth in this sector in the last few years. The sector contributes around 11% of agricultural value-added and 9% of manufacturing value-added. According to the ministry of food processing industries annual report, the sector employs 12.8% of the workforce in the organised sector (factories registered under Factories Act, 1948), and 13.7% of the workforce in the unorganised sector. Despite being one of the largest producers of agricultural and food products in the world, India ranks fairly low in the global food processing value chains. In fact, as with the rest of India (most other sectors), this sector is also largely unorganised and informal.

Processing can be further delineated into primary and secondary processing. Rice, sugar, edible oil and flour mills are examples of primary processing. Secondary processing includes the processing of fruits and vegetables, dairy, bakery, chocolates and other items. Most processing in India can be classified as primary processing, which has lower value-addition compared to secondary processing. There is a need to move up the value chain in processed food products to boost farmer incomes. For instance, horticulture products, such as fruits and vegetables, carry the potential for higher value-addition when compared to cereal crops.

Food processing to boost exports

At present, India’s agricultural exports predominantly consist of raw materials, which are then processed in other countries, again indicating the space to move up the value chain. Despite India being one of the largest producers of agricultural commodities in the world, agricultural exports as a share of GDP are fairly low in India relative to the rest of the world. The same proportion is around 4% for Brazil, 7% for Argentina, 9% for Thailand, while for India it is just 2%. Food processing provides an opportunity to utilise excess production efficiently. Not just from a growth perspective, food processing is also important from the point of reducing food waste. In fact, the United Nations estimates that 40% of production is wasted. Similarly, the NITI Aayog cited a study that estimated annual post-harvest losses of close to Rs 90,000 crore. With greater thrust on proper sorting and grading close to the farm gate, this wastage could also be reduced, leading to better price realisation for farmers.

Improving the supply chain
Gaps in the supply chain are perhaps the biggest challenge faced by this industry. Preprocessing losses occur due to lack of awareness and a dearth of storage and pack-house facilities close to the farm gate. The shortage of refrigerated vehicles is reflected through losses occurring at the transport stage. Losses occur at the storage level as well. While at an aggregate level, India’s cold storage capacity is at the required levels, the reality is that 60% of these cold storages are located in just four states—Uttar Pradesh, Punjab, West Bengal and Gujarat. Variation in quality is another impediment. Lack of avenues to adequately grade, sort and pack perishable produce is a major culprit in this regard. Therefore, pack-houses are of extreme importance.

The upgrading of 22,000 rural haats into Gramin Agriculture Markets (GrAMS) was announced in the 2018-19 Budget. These are largely informal markets, but are close to the farm gate. A preliminary survey has revealed that close to 70% of these rural haats are owned by local bodies—such as urban local bodies, rural local bodies or gram panchayats. Bringing in social entrepreneurs or the private sector to develop these markets into modern centres for aggregating and sorting produce may be considered, through appropriate public-private partnership (PPP) models.
Similarly, these local bodies could also explore partnerships with cooperatives and farmer producer organisations for the development of these markets. The NITI Aayog, in the Strategy for New India @ 75 document, recommended village-level procurement centres for perishables such as fruits, vegetables and dairy. These procurement centres could then be linked to these GrAMS.

Farmer training and extension

Although building infrastructure is a requisite for enhancing the processing capacity, what is also of immense importance is to have enough skills to be able to use that capacity. Backward linkages to farmers need to be made more robust. Contract farming is an attractive avenue in this regard. According to the Model Contract Farming Act, 2018, the contract will specify the quantity, quality and price of produce being supplied. This would shield farmers from price volatility, subject to quality commitments. The Strategy for New India @ 75 recommends that states take the lead in passing this enabling legislation.

Skilling is required at two levels. First at the farm gate in promoting agricultural best practices and in processing activities. Revamped extension services are critical at the farm gate, which have been written about in the past. Similarly, skill training in the food processing industry must be stepped up. The National Skill Development Corporation (NSDC) estimated the need to skill 17.8 million persons in the food processing industry by 2022.
The food processing industry is of enormous significance as it provides vital linkages and synergies that it promotes between the two pillars of the economy, i.e. agriculture and industry. Although still at a nascent stage, the sector has been growing at a robust pace and several steps have been taken in the past few years to accelerate this sector. The launch of the Pradhan Mantri Kisan Sampada Yojana is aimed at bridging the infrastructure gap. In fact, 100% foreign direct investment in food processing units has been allowed.

In order to ensure sustained growth in the sector, the priority for the new government is enhancing the cold-chain capacity, logistics infrastructure, proper ways of marketing commodities, farmer training and skilling of the workforce.

Authors are Young Professionals, NITI Aayog.

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