GS Notes

6. Economics Notes 36

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Elaborate Notes

Introduction to the Food Processing Sector

The Food Processing Industry (FPI) in India is a crucial segment of the economy, acting as a vital link between the agriculture and industrial sectors. It involves any process that transforms raw agricultural, horticultural, livestock, or marine products into food that is suitable for consumption, cooking, or storage. This sector is globally recognized for its potential to spur economic growth, create employment, and enhance agricultural returns.

  • Contribution to the Economy:
    • The food processing sector contributed 1.69% to India’s total Gross Value Added (GVA) at 2011-12 prices in FY 2020-21. This highlights its growing, yet still modest, share in the overall economic output.
    • Within the industrial sector, its role is more pronounced. The GVA of the food processing sector accounts for approximately 9.87% of the GVA in the manufacturing sector (FY 2020-21, Ministry of Statistics and Programme Implementation data). This signifies its importance as a major component of Indian manufacturing.

Drivers of the Food Processing Sector in India

The rapid growth of the food processing sector is propelled by a confluence of socio-economic and demographic factors.

  • Shift in Consumption Patterns: There is a discernible shift from staple, unprocessed foods to high-value, processed, and packaged foods. This is part of a broader “nutrition transition” observed in developing economies, a concept analyzed by scholars like Barry Popkin. Consumers, particularly in urban areas, are increasingly health-conscious and value-seeking.
    • Example: The demand for functional foods like low-cholesterol edible oils (e.g., rice bran oil, canola oil), skimmed milk, fortified flour, and organic products has surged. This reflects a move towards preventive healthcare through diet.
  • Increase in Per Capita Income: As incomes rise, the proportion of income spent on basic food staples declines, while expenditure on processed, diverse, and convenient food items increases, a phenomenon consistent with Engel’s Law. The World Bank data shows a consistent rise in India’s per capita income, directly fueling this demand.
  • Demographic Shifts: The rise of nuclear families and an increasing number of working women has reduced the time available for elaborate cooking, thereby driving demand for ready-to-eat (RTE) and ready-to-cook (RTC) meals.
  • Abundant Agricultural Base: India’s diverse agro-climatic zones allow for the cultivation of a wide variety of crops, fruits, vegetables, and livestock, providing a massive raw material base for the industry. This potential was highlighted in the Report of the Committee on Doubling Farmers’ Income (Chairman: Ashok Dalwai, 2018), which identified food processing as a key avenue for demand generation for farm produce.
  • Informed Consumers: The proliferation of the internet and smartphones has empowered consumers. They can now easily compare products, prices, nutritional information, and reviews online, compelling companies to improve value offerings and maintain quality standards.

Evolution of the Food Processing Sector in India

The policy focus on food processing is a relatively recent phenomenon, evolving from an initial emphasis on heavy industry and subsequent concerns about food security.

  • Pre-1960s Policy Environment: Post-independence, India’s economic strategy, heavily influenced by the Mahalanobis Model during the Second Five-Year Plan (1956-61), prioritized the development of capital goods and heavy industries. Agriculture, despite contributing nearly 50% of the GDP, received less policy focus. The overarching strategy was Import Substitution Industrialization (ISI), aimed at achieving self-reliance by producing goods domestically rather than importing them.
  • The Food Crisis of the 1960s: This period was a watershed moment. GDP growth stagnated at around 3% (often termed the “Hindu rate of growth” by economist Raj Krishna), while population growth was a high 2.3%. This demographic-economic imbalance, coupled with severe droughts in 1965-66, led to an acute food crisis. India became heavily dependent on food aid, particularly wheat imports from the USA under the PL-480 (Public Law 480) program, with cereal imports consuming a staggering 28% of its export earnings. This precarious situation forced a fundamental policy rethink.
  • Booster Phase (1960s to 1990s):
    • Green Revolution: The government shifted its focus to achieving self-sufficiency in food grains. Led by scientists like M.S. Swaminathan in India and building on the work of Norman Borlaug, the Green Revolution introduced High Yielding Variety (HYV) seeds, chemical fertilizers, pesticides, and irrigation, particularly for wheat and rice.
    • Institutional Support: To manage the increased production, the Food Corporation of India (FCI) was established in 1965 for procurement, and the Public Distribution System (PDS) was institutionalized to ensure distribution.
    • Export Restrictions: To bolster domestic availability and control prices, stringent restrictions were placed on the export of agricultural commodities.
    • Land Reforms: The Land Ceiling Act of 1972 was enacted to redistribute surplus land to the landless, though its implementation and success were highly variable across states.
  • Focus on Food Processing (Post-1991): The economic reforms of 1991 marked a paradigm shift.
    • Liberalization: The government identified food and agro-processing as a ‘sunrise sector’ with immense potential. Industrial licensing requirements were abolished for most food processing activities, except for alcoholic beverages and items reserved for the small-scale sector.
    • Foreign Investment: 100% Foreign Direct Investment (FDI) was permitted under the automatic route for the food processing sector, attracting global players and technology.
    • Export Promotion: Schemes promoting Mega Food Parks and Agri-Export Zones (AEZs) were introduced, offering incentives like duty-free import of capital goods and tax holidays to encourage investment and exports.

Functions and Potential of Food Processing

Food processing serves multiple functions beyond basic preservation.

  • Functions:
    • Safety: Processing methods like pasteurization, sterilization, and canning eliminate harmful pathogens, making food safe for consumption. It also helps in the removal of natural toxins (e.g., processing cassava to remove cyanide).
    • Quality Enhancement: Processing can improve sensory attributes like flavor (e.g., roasting coffee beans), color (e.g., adding natural colorants), and texture (e.g., emulsification in mayonnaise).
    • Functional Benefits: This includes food fortification, where essential micronutrients like iron, iodine, and Vitamin A are added to staple foods to combat widespread deficiencies (e.g., iodized salt). It also involves developing specialized medical foods for individuals with critical illnesses.
  • Untapped Potential:
    • Despite being a major agricultural producer, India’s level of processing is extremely low (less than 10%) compared to developed nations (USA: 65%, China: 23%) and even other developing countries like the Philippines (78%).
    • Specifics: Only about 2% of fruits and vegetables, 8% of marine products, 35% of milk, and 6% of poultry are processed.
    • Livestock: India has the world’s largest livestock population, including 50% of the world’s buffaloes, yet a minuscule 1% of milk production is converted into value-added products like cheese, yogurt, or butter on a commercial scale. Most processing is limited to pasteurization and packaging.
    • Export Composition: A significant portion of India’s agricultural exports consists of raw or semi-processed materials, which are then processed into high-value products in other countries. This indicates a massive opportunity for India to move up the value chain.

Problems of Food Processing Industries in India

Despite its potential, the sector is beset by numerous challenges.

  • Structural Issues:
    • Dominance of Unorganized Sector: Over 75% of the FPI sector is unorganized, comprising small-scale and cottage industries. These units lack economies of scale, branding power, access to modern technology, and formal credit, making it difficult for them to compete with large Multinational Corporations (MNCs).
    • Low-Value Addition: Processing is often limited to primary stages (e.g., milling rice, grinding spices) rather than high-value secondary or tertiary processing (e.g., producing ready-to-eat meals, nutraceuticals).
  • Supply Chain Deterrents:
    • Fragmented Supply Chain: The link between the farm and the factory is weak. Long and fragmented chains involving multiple intermediaries lead to high wastage, price escalations, and reduced farmer share in the consumer’s rupee. The NITI Aayog has estimated annual post-harvest losses at approximately ₹90,000 crores.
    • Lack of Infrastructure: There is a severe deficit of cold storage, warehouses, refrigerated transport, and pack-houses, which is critical for perishable goods. The private sector has been hesitant to invest due to high capital costs and long gestation periods.
  • Agricultural Issues:
    • Fragmented Land Holdings: Small and marginal landholdings make aggregation of produce difficult and economically unviable for processors.
    • APMC Act Issues: The Agricultural Produce Market Committee (APMC) Acts in many states have created monopolies, restricting direct sourcing from farmers and adding layers of commissions.
    • Low Yield and Quality: Inconsistent quality and low productivity of raw materials pose challenges for processors who require standardized inputs.
  • Demand-Side and Manpower Issues:
    • Price Sensitivity: A large segment of the Indian population remains highly price-sensitive, limiting the market for high-value processed foods.
    • Preference for Fresh Food: Cultural preferences for freshly cooked meals over packaged or frozen foods persist, especially in rural and semi-urban areas.
    • Lack of Skilled Manpower: There is a shortage of trained personnel in food technology, quality control, and supply chain management.
  • Regulatory and Financial Hurdles:
    • Credit Issues: Small and unorganized players face significant difficulties in accessing affordable credit from formal financial institutions.
    • Safety and Quality Control: The ability to enforce food safety standards, as laid down by the Food Safety and Standards Authority of India (FSSAI), is limited, especially in the unorganized sector.
    • Low Consumer Awareness: Limited awareness about the nutritional benefits and safety of processed foods can hinder demand.

Significance of Food Processing

A well-developed food processing sector can be transformative for the Indian economy and society.

  • Doubling Farmers’ Income: By creating a stable and year-round demand for agricultural produce, FPIs can ensure better price realization for farmers. Contract farming models can further guarantee prices and reduce market risks. This aligns with the recommendations of the Ashok Dalwai Committee.
  • Reducing Food Wastage: The United Nations (UN) estimates that nearly 40% of food produced in India is wasted. Processing can increase the shelf-life of perishable products, allowing them to be stored and used later. Sorting and grading facilities can divert lower-quality produce, which would otherwise be wasted, to processing units.
  • Curbing Malnutrition: Fortification of processed foods with micronutrients is a cost-effective strategy to address widespread nutritional deficiencies, such as anemia and Vitamin A deficiency, which are major public health concerns in India.
  • Promoting Crop Diversification & Exports: FPIs can create demand for a wider variety of crops beyond staples, encouraging farmers to diversify. Value addition through processing can significantly boost the value of agricultural exports.
  • Employment Generation: As a labor-intensive sector, FPI has the potential to generate significant employment, particularly in rural areas, thus aiding the transition of surplus labor from agriculture to industry.
  • Controlling Food Inflation: By increasing the shelf-life of products and maintaining a steady supply throughout the year, the processing industry can help moderate seasonal price spikes, especially in perishable commodities like fruits and vegetables. ‘Operation Greens’, launched for Tomato, Onion, and Potato (TOP), is a policy that leverages this principle.

Supply Chain of the Food Processing Sector

An efficient supply chain is the backbone of the FPI.

  • Definition: A supply chain is a network connecting raw material suppliers (farmers), processing companies, and distribution networks to deliver the final product to the consumer.
  • Key Stages:
    1. Inputs: Provision of farm inputs like seeds, fertilizers, and credit. Example: National Seeds Corporation Limited.
    2. Production: Farming and cultivation by individual farmers, Farmer Producer Organisations (FPOs), or cooperatives. Example: AMUL cooperative.
    3. Procurement and Storage: Aggregation of produce and storage in warehouses or cold storage. Example: Food Corporation of India (FCI), Central Warehousing Corporation (CWC).
    4. Processing: Transformation of raw material through grading, sorting, packaging, and manufacturing.
    5. Distribution and Retailing: Movement of finished goods to consumers via wholesalers, malls, and local ‘kirana’ (cash and carry) shops.
  • Backward and Forward Linkages:
    • Backward Linkage: This refers to the integration of the processing unit with the source of raw materials. It involves establishing reliable procurement channels. Example: A potato chips manufacturer entering into a contract farming agreement with potato growers to ensure a steady supply of a specific variety.
    • Forward Linkage: This refers to the connection of the processing unit to the market. It includes the entire distribution network, logistics, and retail infrastructure needed to reach the end consumer. Example: A dairy processing company setting up its own cold chain logistics and network of retail parlours.
  • Significance of Strong Linkages:
    • Ensures remunerative returns for farmers and timely delivery to consumers.
    • Reduces wastage of perishable products.
    • Enhances efficiency and reduces costs.
    • Improves food safety and hygiene standards, boosting domestic and export market acceptability.
  • Challenges in Establishing Linkages:
    • Seasonality of Raw Materials: Creates idle capacity in processing units during the off-season.
    • Poor Infrastructure: Inadequate roads, erratic power supply, and lack of cold chains.
    • Fragmented and Unorganized Industry: Difficult to establish large-scale, organized linkages.
    • Information Asymmetry: Farmers often lack information about market demand and quality requirements.
    • Complex Regulatory Environment: A multiplicity of laws and standards at the central and state levels can create confusion and compliance burdens.

Policy Initiatives and Government Measures

The Government of India has launched several initiatives to promote the FPI sector.

  • Regulatory and Financial Support:
    • Inclusion in Priority Sector Lending (PSL) to improve credit flow.
    • De-licensing under the Industries (Development and Regulation) Act, 1951, for most products.
    • Permitting 100% FDI under the automatic route.
    • Budget 2016-17 proposed 100% FDI in the marketing of food products produced and manufactured in India, including through e-commerce.
    • Union Budget 2017-18 established a Dairy Processing and Infrastructure Development Fund with a corpus of ₹8,000 crores with NABARD.
    • Union Budget 2018-19 announced a Fisheries and Aquaculture Infrastructure Development Fund (FIDF) and an Animal Husbandry Infrastructure Development Fund (AHIDF) with a combined corpus of ₹10,000 crores.
  • Infrastructure and Quality Enhancement:
    • FSSAI’s initiative to invest ₹482 crores to strengthen the food testing infrastructure by upgrading 59 existing labs and setting up 62 new mobile labs.
    • Mega Food Park Scheme: A flagship program to create modern food processing infrastructure.

The Mega Food Park Scheme

  • Objective: To provide a mechanism to link agricultural production to the market by bringing together farmers, processors, and retailers to maximize value addition, minimize wastage, increase farmer incomes, and create rural employment.
  • Model: It is based on a cluster-based ‘Hub and Spoke’ model.
    • Collection Centers (CCs): These are at the village level, serving as aggregation points for produce from individual farmers within a 10 km radius. They are managed by local entrepreneurs.
    • Primary Processing Centers (PPCs): Located at the block level, they act as a link between CCs and the central park. They have facilities for sorting, grading, pulping, and cold storage.
    • Central Processing Center (CPC): This is the ‘Hub’, an industrial park spread over about 50 acres, housing multiple processing units. It provides common infrastructure like developed plots, power, water, effluent treatment plants, cold storage, warehouses, and logistics support.
  • Implementation: The project is implemented by a Special Purpose Vehicle (SPV), a corporate body registered under the Companies Act.
  • Financial Assistance: The government provides a grant-in-aid at 50% of the eligible project cost in general areas and 75% in North-Eastern & Hilly regions, capped at ₹50 crores per project.
  • Benefits: Reduces post-harvest losses, creates a sustainable supply chain, enhances farmer income, and is expected to generate significant direct and indirect employment.
  • Role of State Governments: Facilitating land acquisition, providing single-window clearance, and ensuring a conducive labor and tax environment.
  • Issues:
    • Challenges in land acquisition.
    • Difficulty for SPVs in attracting an adequate number of processing units to the CPC and in establishing the network of PPCs and CCs.
    • Lack of integration with farmer cooperatives and FPOs.

Recent Schemes and Initiatives

  • Pradhan Mantri Kisan Sampada Yojana (PMKSY): Launched in 2016, this is an umbrella scheme that integrates ongoing schemes like Mega Food Parks, Integrated Cold Chain, and creation of backward and forward linkages. It had an allocation of ₹6,000 crores for the period 2016-20.
  • PM Formalization of Micro Food Processing Enterprises (PM-FME) Scheme: Launched under the Atmanirbhar Bharat Abhiyan with an outlay of ₹10,000 crores. It aims to support 2 lakh micro-food processing enterprises over five years. It adopts a ‘One District One Product’ (ODOP) approach to leverage local specialization.
  • COVID-19 Response: The Ministry of Food Processing Industries established a dedicated grievance cell and task force to resolve industry issues during the pandemic, successfully addressing over 580 concerns.

Prelims Pointers

  • Food processing sector’s contribution to total GVA: 1.69% (FY 2020-21).
  • Food processing sector’s share in manufacturing GVA: 9.87% (FY 2020-21).
  • India’s level of food processing is less than 10%.
  • Processing levels: Fruits & Vegetables (~2%), Marine (~8%), Milk (~35%), Poultry (~6%).
  • Estimated annual post-harvest losses by NITI Aayog: Approx. ₹90,000 Crores.
  • UN estimate of food wastage in India: 40% of production.
  • FDI limit in food processing: 100% under the automatic route.
  • FDI in marketing of food products produced in India: 100% (proposed in Budget 2016-17).
  • Dairy Processing Infrastructure Fund: Corpus of ₹8,000 Crores.
  • Fisheries and Aquaculture Infrastructure Fund (FIDF) & Animal Husbandry Infrastructure Fund (AHIDF): Combined corpus of ₹10,000 Crores.
  • Pradhan Mantri Kisan Sampada Yojana (PMKSY): An umbrella scheme for agro-marine processing and agro-processing clusters. Allocation (2016-20) was ₹6,000 Crores.
  • PM-FME Scheme: Outlay of ₹10,000 Crores for micro-food processing enterprises, based on the ‘One District One Product’ (ODOP) approach.
  • Mega Food Park Scheme:
    1. Model: Hub and Spoke (Cluster-based).
    2. Components: Central Processing Center (CPC), Primary Processing Centers (PPCs), and Collection Centers (CCs).
    3. Implementation: By a Special Purpose Vehicle (SPV).
    4. Financial Assistance: Grant of 50% of project cost (75% for NE & Hilly areas), capped at ₹50 crores.
  • Key Institutions: FSSAI (Food Safety and Standards Authority of India), NABARD (National Bank for Agriculture and Rural Development), FCI (Food Corporation of India).
  • Historical Facts: Green Revolution (1960s), Economic Reforms (1991), Land Ceiling Act (1972).
  • Key Committees: Ashok Dalwai Committee (On Doubling Farmers’ Income).

Mains Insights

GS Paper I: Social Issues

  • Tackling Malnutrition: Food processing, through fortification of staples (e.g., rice, flour, milk) with micronutrients, is a direct intervention to combat hidden hunger and improve public health outcomes, especially among women and children. This can be a key strategy in achieving the goals of the POSHAN Abhiyaan.
  • Women Empowerment: The unorganized food processing sector, with activities like making pickles, papads, and jams, is a significant employer of women, often through Self-Help Groups (SHGs). Example: The success of Lijjat Papad, a women’s cooperative, demonstrates this potential. Formalizing and supporting this segment can lead to enhanced female labor force participation and financial independence.
  • Changing Lifestyles: The growth of FPI is both a cause and effect of changing social structures in India, including urbanization, nuclear families, and more women in the workforce. This has implications for traditional food cultures and dietary habits.

GS Paper II: Governance and Policy

  • Policy Effectiveness: While schemes like Mega Food Parks are conceptually sound, their implementation has been slow due to governance bottlenecks like land acquisition delays, lack of inter-ministerial coordination, and issues in credit mobilization by SPVs. A critical analysis of why these schemes have not achieved their full potential is required.
  • Center-State Relations: Agriculture and related markets are state subjects. The success of national-level FPI policies depends heavily on the cooperation of state governments in reforming APMC Acts, providing infrastructure, and creating a business-friendly environment. The controversy over the now-repealed farm laws highlighted these federal tensions.
  • Role of Regulation: FSSAI’s role is critical but challenging. It needs to balance promoting the industry with ensuring stringent food safety standards. The challenge lies in extending its regulatory oversight to the vast unorganized sector. The Maggi noodles controversy (2015) was a watershed moment that highlighted the complexities of food safety regulation in a globalized market.

GS Paper III: Economy and Agriculture

  • Doubling Farmers’ Income: This is the most significant potential impact. The analysis should focus on how strengthening backward linkages (contract farming, FPOs) is the cornerstone for achieving this goal. FPIs can transform farmers from mere producers to partners in a value chain.
  • Supply Chain Management as a Bottleneck: The primary hurdle for India’s FPI is its inefficient supply chain. The cause-effect relationship is clear: weak infrastructure leads to high wastage, which reduces farmers’ profits and increases consumer prices. Solutions must be holistic, focusing on creating integrated cold chains (‘farm to fork’), warehousing, and logistics networks. ‘Operation Greens’ is a step in this direction but needs wider application.
  • Organized vs. Unorganized Sector Debate: While MNCs and large domestic players bring capital, technology, and access to global markets, the unorganized sector provides widespread, low-skill employment. The policy challenge is to help the unorganized sector scale up and become more competitive (as aimed by the PM-FME scheme) without being displaced by large corporations.
  • Job Creation: The transition of labor from agriculture to manufacturing has been slow in India. FPI, being labor-intensive and rurally-located, can be a “natural” pathway for this structural transformation, absorbing surplus agricultural labor and boosting rural non-farm incomes.

GS Paper IV: Ethics and Integrity

  • Food Safety and Consumer Trust: Companies in the food processing sector have an ethical responsibility to ensure their products are safe. Issues like misleading advertising (e.g., health claims), use of harmful preservatives, and poor hygiene standards in production facilities raise ethical questions. Regulators must maintain integrity and enforce standards without fear or favor.
  • Fair Price to Farmers: Processors have a moral obligation to ensure that farmers, the primary producers, receive a fair and remunerative price. Models of contract farming or farmer-owned processing units (like cooperatives) are ethically superior as they prevent the exploitation of small and marginal farmers by large corporate buyers.
  • Processed Foods and Public Health: There is an ethical debate regarding the promotion of processed foods, which are often high in salt, sugar, and fat, contributing to a rise in non-communicable diseases (NCDs). The industry and government share a responsibility to promote healthier processed options and ensure transparent nutritional labeling to allow for informed consumer choices.

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