• Research & Analysis Services I Academic I Market & Industry I Government Policy I
Financial Aspect: Food Processing Industry in India

Financial Aspect: Food Processing Industry in India

The food processing sector in India ranks first in employment and output produced in manufacturing activity, however, it faces many challenges in its supply-chain infrastructure, for example inadequate primary processing, storage and distribution facilities, insufficient connection between production and processing, seasonality of operations, lack of research and development.

To understand how these issues can be tackled, it is important to view the sector from a finance perspective. In this article, we shall explore financial aspects like cost of production, domestic and foreign investments, and the availability of credit.

Cost of Production

With gaps in the supply-chain the sector suffers from a high cost of production. In this section, we shall understand the composition of the cost of production. The data used for the following analysis has been gathered from the Annual Survey of Industries from the year 2015-16 to 2019-20.

The survey uses National Industrial Classification Code (NIC) to provide certain economic estimates. For the purpose of limiting food processing to human consumption, the NIC 3-digit Group codes taken into consideration are 101 to 107 under Division 10 and Group 110 under Division 11.

Figure 1: Total Inputs and Output in the sector since 2015-16

The above figure shows the total output produced and total inputs required by the food processing industry. A rudimentary observation shows that approximately over 80% of total outputs are accounted for by the total inputs required. This argument can be backed by further analysis.

Author’s analysis has shown that on an average, between 2015-16 and 2019-20, Rs. 0.8909 lakhs was required to produce one unit of output. The figure below shows the input required per product from 2015-16 to 2019-20.

Figure 2: Input required per product

This implies that 89.09% of output is accounted for by total inputs. This can be further broken down into its constituents of fixed capital and physical working capital. Fixed capital includes land, building, plant and machinery, transport equipment, etc. Physical working capital is the capital that is used in the production process, like raw materials.

A correlational analysis between Input required per product (IRPP), fixed capital and physical working capital shows that IRPP shares a high correlation of 0.862 and 0.866 with Fixed capital and Physical working capital respectively. This implies that over 86% of the cost of production is accounted for by just fixed capital and physical working capital.

It shows just how expensive lack of adequate and appropriate infrastructure can prove to be in this sector. Add to this rising energy and fuel prices, further increasing the cost of production, thereby really squeezing profit margins.

This issue can, however, be resolved with massive targeted investments in infrastructure to create forward and backward linkages for the growth of the sector. Let us have a look at domestic and foreign investments in the sector to understand where these investments are made.

Domestic Investment

The quantum of domestic investments determine the basic development of a sector, which further paves way for foreign investments. However, there is a dearth of publicly available data on domestic investments in the food processing sector.

It has been observed that domestic investments in the food processing industry are done in core infrastructure necessary in the sector, for example creation of mega food parks, agri-processing centres (APCs) and cold chain units.

According to the investor portal, ‘Nivesh Bandhu’ created by the Ministry of Food Processing Industries (MoFPI), a cumulative of Rs. 2,367 crores has been leveraged for the creation of mega food parks by 37 manufacturing units. The least amount of investment is Rs. 17.39 crores by Manipur Food Industries Corporation Ltd., while the highest investment has been of Rs. 129.75 crores by the Haryana State Cooperative Supply and Marketing Federation Ltd.

Similarly, APCs have so far leveraged a cumulative investment of Rs. 1,393.001 by 67 manufacturing units. The least amount of investments have been made by Shree Shyam Snacks Food Private Ltd. of Rs. 7.23 crores, while the highest investment has been made by Pravin Masalewale of Rs. 54.69 crores.

Cold chains have attracted domestic investments worth Rs. 6,862.12 by 350 different manufacturing units. The highest investment has been made by Ahmedabad dist. Co-Operative Milk Producers Union Ltd., of Rs. 166.74 crores, while the least amount of investment has been made by Native Farm Food of Rs. 0.76 crores.  

Additionally, the PLI scheme for Food Processing Industries is said to leverage a cumulative additional investment of Rs. 6,057 crores during the course of its tenure.

While this data gives information on basic domestic investments done in the sector by registered manufacturing units, it contains many limitations, such as unavailability of a time frame. Additionally, this data excludes unregistered manufacturing units, which are more in number than registered units. Therefore, there is a need for complete, comprehensive documentation of data on domestic investments.

Foreign Investment

In early 2016, the Government of India (GOI) announced that it had approved the policy of 100% foreign direct investment (FDI) in the food processing industry. This approval was to provide impetus to foreign investment in the industry, benefit farmers immensely and create vast employment opportunities.

This was said to create “Swadeshi infrastructure with Videshi money”. It was to help farmers attain remunerative prices for their produce, allow technology transfer and adopt modern agricultural prices for producing agricultural produce on a large scale to meet the requirements of organised marketing.  This move was said to bring in higher efficiencies in the sector and trade, and make our products more competitive in the global markets.

After having gathered data on FDI from the MoFPI, it has been observed that between 2000-01 and 2015-16, the FDI in the sector in the country was recorded at $6,815.70 million. While, FDI received by the sector from 2016-17 to 2021-22, that is, after the announcement of 100% FDI, was recorded at $4,268.19 million. This implies that in just six years, the sector was able to garner 62.62% of the total FDI garnered over 16 years, that is between 2000-01 and 2015-16.

Some examples for FDI include investments from food and beverage companies like Nestle, Cargill, McCain, Mondelez, Pepsi, Coca Cola, retail giants like Amazon and Walmart, among others. It was noted that in 2018, Mondelez International invested $15 million in India for research after investing $190 million in a greenfield project in Andhra Pradesh. Furthermore, Cargill, an American agro-food company invested in various supply chain nodes like cold storage facility in Karnataka and aqua feed project in Andhra Pradesh.  

The above numbers indicate investor confidence in India. It also indicates that the policies undertaken by the government are working in favour of the sector, however there is always room for improvement. With continued investments, both domestic and foreign, the sector has the potential to bridge the gaps in its supply-chain to emerge as a manufacturing hub for processed foods. FDI will prove to be crucial in the coming years as it will help fast-track the sector to reach its estimated output of $535 billion by 2025-26.

Credit Availability in the Industry

Apart from investments, availability of and access to credit too play an important role in the growth of an industry. The food processing industry has been termed as a priority sector.

A priority sector is the one which the GOI and the Reserve Bank of India (RBI) consider as important for the development of the basic needs of the country and is given priority over other sectors. Thus, for the growth of such sectors, availability of and access to credit is of extreme importance. 

For Priority Sector Lending, loans to food and agro-based processing units and Cold Chain have been classified under agriculture activities. A special food processing fund of Rs. 2,000 crore has been set up in National Bank for Agriculture And Rural Development for providing affordable credit to Mega Food Parks and units to be set up under them. The objective of the fund is to provide impetus to development of the food processing sector on a cluster basis in the country.

The loans provided from this fund can lead to development and establishment of all infrastructure required in the industry, including but not limited to modernisation of existing processing units resulting in process technology upgradation, automation, increased efficiency, improvement in product quality, cost reductions, etc. While such initiatives are welcome, it is important to know the amount of credit that has been availed by the sector. Data from MoFPI has shown that between 2015-16 and 2020-21, the sector has availed credit of approximately Rs. 1.65 lakh crores on average, with an average growth rate of 10%. The following graph shows credit availed by the industry between 2015-16 and 2020-21.

Figure 3: Credit availed by the Industry

The graph shows consistent rise in availing of credit by the sector. In 2020-21, however, a fall in credit is seen. This was a result of the COVID-19 induced lockdowns, which hampered manufacturing and productivity. It is to be noticed that the fall is only 8%, from Rs. 2.07 lakh crore in 2019-20 to Rs. 1.92 lakh crore in 2020-21. This is because the sector is crucial for human sustenance. The following data backs this argument. In 2019-20, the gross value added in the sector was Rs. 2.24 lakh crore. The same was Rs. 2.37 lakh crore in 2020-21. Not only was the sector actively manufacturing, it also recorded an increase of 5.80%. 

As discussed above, for the sector to truly flourish, important issues like inadequate infrastructure, seasonality in manufacturing activity must be addressed. These issues require massive and targeted investments, not only in infrastructure but also in research and development. Research and development can help address the issue of seasonality in manufacturing processes. Such investments can help solve further issues related to shelf-life of processed foods and will help in maintaining food security. 

This will help bridge the gap between supply and demand mismatch. Irrespective of economic status, every person consumes food and related products. Therefore, the demand for this sector will always be maintained, even during global crises like a recession or a pandemic. Thus, it becomes important to address these issues so as to not cause any delay in meeting demand for processed foods.

Purvi Patil

Ms. Purvi Patil is a Research Assistant at Tatvita. She has pursued her graduation from the Liberal Arts Department of Savitribai Phule Pune University. Her areas of interest include International Relations, Data Protection and Privacy, and Sustainability. 

Leave a Reply

Your email address will not be published.