Summary

Economics Class 36

FOOD PROCESSING (1:00 PM)

The food processing sector is contributing to 1.69% of the total GVA
And the GVA of the food processing sector is around 9.87% of the GVA in manufacturing
Drivers of the food processing sector
Shift in consumption pattern
Help and value-seeking urban consumers looking for nutritious and convenient solutions in packaged food
For example, low cholesterol oil, skimmed milk
Increase in per capita income
Increase in the nuclear family
Huge potential for the agricultural sector due to diverse climatic conditions
Consumers are able to compare the value offerings and choose the best option before buying
Evolution of the food processing sector in India
The food crisis in India during the 1960s forced the government to adopt the green revolution that helped in increasing self-sufficiency with respect to food
Policies before the 1960s were more focused on the industrial sector especially capital goods, though around 50% of GDP was from agriculture
Import substitution was also adopted as a strategy to promote the industrial sector
By the early 1960s, GDP growth was around 3% against the expected 5%, but population growth was around 2.3% against the expected 1.4%, thus, creating an issue of food security in India as India imported cereals worth 28% of its export earnings
Booster between 1960s to 1990s
Focus on agriculture
Introduction of Green Revolution along with institutionalization of PDS
Restriction on agricultural exports
Land Ceiling Act 1972 to provide land to the landless
Focus on food processing after 1991
100% FDI into food processing industries
The government has identified food and agro-processing industries as one of the sunrise sectors that have a high potential for domestic demand and export markets
Export promotion incentives and other schemes to attract investments
No industrial license is required to start the industry except for alcohol, beer, etc.
Export promotion - Food parks and export zone were promoted by the government through duty-free import and exemptions to corporate taxes
Functions of Food Processing
To make processed food safe, microbiologically and chemically (toxin removal)
Increase in quality (flavor, color, texture, etc.)
Functional benefits i.e. fortified food and food supplied to people suffering from critical illness
Potential for food processing industries
In spite of a large production base, the level of processing is low (less than 10%)
Approximately 2% of fruits and vegetables, 8% marine, 35% milk, and 6% poultry are processed
India's livestock population is the largest in the world with 50% of the world's buffaloes, but only about 1% of the total milk production is converted to value-added products
At present, India's agricultural exports predominantly consist of raw materials which are then processed in other countries indicating the space to move up the value chain
India is the world's second-largest producer of food and vegetables, but hardly 2% of the produce is processed
Rapid growth in organized retail acts as a catalyst for FDI
The global shift toward outsourcing
Problems of Food Processing Industries in India
More than 75% of the processing industry is operating in the unorganized sector, and unorganized sectors cannot compete with MNCs, due to issues like economies of scale, branding and advertisement, etc.
Indian companies are less price competitive in comparison to MNCs
Supply chain deterrence- Long and fragmented supply chain leading to high wastage and high cost, especially due to seasonality, perishability, and variability of produce (improper backward and forward integration)
Price sensitivity (Indian public is price sensitive)
Lack of export quality
Higher-income elasticity with respect to expenditure
Preference for fresh food
Agriculture related issue
Fragmented land holdings, APMC issue, low yield, infrastructure problems
The private sector is unwilling to invest in logistics and warehouses
Credit-related issues or financing problems
Low-value addition in processing
Problems related to manpower i.e. lack of skilled manpower and entrepreneurship
Limited ability to control polity and safety
Low consumer awareness
There is a major fragmentation of food processing capacity with a largely unorganized sector and widespread use of primitive processing
Significance of food processing
Doubling farmers' income- With the rise in demand for agricultural products, there will be an increase in the price paid to the farmers, thereby increasing farmers' income
To reduce food wastage- The UN estimates that 40% of the production is wasted
Similarly, NITI Aayog estimates annual post-harvest losses close to 90000 Crores
With proper focus on sorting and grading and diverting produce to FPI, this wastage can be reduced leading to better price realization for farmers
Reduce malnutrition- Processed foods when fortified with vitamins and minerals can reduce the nutritional gaps in the population
Food processing can increase crop diversification along with an increase in agricultural exports through value addition
The food processing sector is a sunrise industry that can help in the appropriate transition of the Indian economy, thereby increasing jobs and labor productivity
Curbing food inflation- Processing increases the self-life of the food, thus keeping supplies in line with the demand, thereby controlling inflation
Supply Chain of the Food Processing Sector (2:16 PM)
A supply chain is a network between suppliers of raw materials (farmers), companies (food processors), and distribution networks to market the finished products
The supply chain represents the step it takes to get the product or service to the end consumers
Inputs- They are farm inputs e.g. National Seed Corporation Limited
Production- Farmers and Cooperatives like Amul
Procurement and storage- Warehouses, cold storage facilities, entities like FCI, etc.
Processing- It involves grading, sorting, packaging, etc.
Sales or retailing- Malls, cash and carry shops (small shops), etc.
Backward and forward linkages
Backward Linkage:
Connectivity of FPIs with the sources of raw material, e.g. supply of raw materials like potatoes to the chip's manufacturer
Forward linkages- It means connectivity of FPIs with markets through distribution networks, comprising of physical infrastructure like storage, road and rail networks, etc.
Significance of linkages
It ensures the timely delivery of food products to the consumer market
Enables farmers to grow products of appropriate quality
It ensures appropriate and remunerative returns to small farmers
Reduce food wastage, especially perishable products like fruits, vegetables, dairy products, etc.
Better infrastructure results in cost savings and enhance efficiency
It helps in improving hygiene and food safety standards leading to greater acceptability of processed food domestically and internationally
Challenges in establishing linkages
High seasonality of raw materials
Poor infrastructural facility
A highly fragmented industry that is dominated by an unorganized sector
Substandard level of processing industry
Inadequacy of information with farmers and small processors
Underdeveloped food testing network
A multiplicity of legislation leading to a contradiction
Challenges in domestic food laws, in comparison to international food safety standards
Policy initiatives and measures taken by the government to support the sector (3:06 PM)
Food processing industries were included in the priority sector for bank-lending
Most of the processed items have been exempted from the purview of licensing under the Industries Development and Regulation Act, except items reserved for the small-scale sectors and alcoholic beverages
Automatic approval of foreign equity upto 100%
Zero-percent duty on import of capital goods and raw materials for 100% export-oriented units
In the union budget 2017-18, the government has set up a dairy processing infrastructure fund worth 8000 Crores
Union Budget 2016-17, proposed 100% FDI in the marketing of food products produced and manufactured in India
Food Safet Standards Authority of India (FSSAI) plans to invest around 482 Crores to strengthen food testing infrastructure in India by upgrading 59 existing food testing labs and setting up 62 new mobile testing labs across the country
Setting up of Mega Food Parks in the states of Bihar, Maharashtra, Himachal, and Chattisgarh
Government plans to set up 42 such Mega Food Parks in the next 3-4 years
Mega Food Park (3:13 PM)
The scheme of Mega Food Parks aims at providing a mechanism to link agricultural production to the market, by bringing together farmers, processors, and retailers so as to maximize value addition, minimizing wastage, increasing farmers' income, and creating employment opportunities, particularly in the rural sector
The scheme is aimed at providing modern infrastructure facilities along the value chain from the farm gate to the market, through backward and forward linkage
The scheme has a cluster-based approach, based on a hub and spoke model
Collection Centers (CC)
CC works as a point of aggregation of produce from individual farmers, farmer groups, and self-help groups
CCs supply raw materials to PPC (Primary Processing Center)
The CCs are managed by local entrepreneurs and they serve as farm-level aggregation points for adjoining areas within a radius of 10 Km
Primary Processing Center (PPC)
The PPCs act as a link between the producers and processors for the supply of raw materials to the central processing centers
PPCs also work as primary work-handling centers and some PPCs have in-house facilities for pulping, grading, sorting, etc.
Central Processing Center (CPC)
It is an industrial park in an area of around 50 acres and houses a number of processing units owned by different business houses
The Park provides common facilities like electricity, water, cold storage facility, warehousing, logistics, and backward integration through a network of PPCs and CCs
The scheme is demand-driven and would facilitate food processing units to meet safety standards
Implementation and financial assistance
Mega Food Parks Project is implemented by a Special Purpose Vehicle (SPV) which is a body corporate registered under the Companies Act
The financial assistance for Mega Food Parks Project is in the form of grants at a rate of 50% of the eligible project cost in general areas and 75% of the eligible project cost in the northeastern regions, subject to a maximum of 50 Crores per project
Benefits of Mega Food Parks
Reduction of post-harvest losses
Maintenance of supply chains in a sustainable manner
Additional income generation for farmers
shifting the farmer to more market-driven and profitable farming activities
It will be a one-stop shop where everything will be available in a single location
As per experts, it will directly employ around ten thousand people
Wastage across the food value chain will also reduce and the quality and hygiene will be improved
Role of state government
Assisting SPV in the procurement of suitable land
Creating a single window clearance
Tax exemptions
Providing a flexible and conducive labor environment
Issues with respect to Mega Food Parks
Problems of land acquisition especially in small and hilly areas
SPVs are unable to attract PPCs and CCs
Cooperatives are not integrated into the food parks
A special food processing fund of Rs 2000 Crores was set up with NABARD to provide affordable credit for investment in setting up Mega Food Parks as well as processing units in the Mega Food Parks
Pradhan Mantri Kishan Sampada Yojana (PMKSY) has been launched for agro0marine processing and the development of agro-marine clusters, with Rs 6000 Crores allocated for the period 2016-20
This scheme integrated other schemes like Mega Food Park scheme, integrated cold chain and value addition infrastructure, food safety and quality assurance infrastructure, infrastructure for agro-processing clusters, focus on human resources and institutions, creation of backward and forward linkages
Under the Union Budget 2018-19, the government has increased the allocation for PMKSY
100% income tax exemption from the profit derived on activities such as post-harvest value addition to agriculture
Setting up of Fisheries and Aquaculture Infrastructure Fund for the fishery sector and Animal Husbandry Infrastructure Fund for financing infrastructure requirement
The total corpus of both these funds combined is ten thousand crores
The Ministry of Food Processing has established a dedicated grievance cell and a task force during the initial phase of the outbreak of covid-19 pandemic (580 industry-related issues were resolved)
The government has come up with the PM-Formalization of Micro Food Processing Enterprises Scheme for providing financial, technical, and business support for setting up of two-lakh micro-food processing enterprises across the country within five years based on One District One Product Approach, with an outlay of ten thousand crores

INDUSTRY (3:46 PM)

Topics to be covered
Challenges of informalization in globalization
The transition of the economy from primary to secondary and then to tertiary
Different Industrial policy from 1948 to the New Industrial Policy of 1991
MSMEs

The topic for the next class: Industry