There has been a great thrust on food processing in the past few years. Food processing, by virtue of its contribution to the food value chain, plays a critical role in the food ecosystem and can directly affect the habits and health of its source and target segments. The Ministry of Food Processing Industries is at the helm of affairs in this sphere, running schemes that foster development of cold chains, food parks, modern abattoirs, food testing labs and so on.
Development of the food processing industry is expected to aid raising farm incomes as it creates demand for farm produce. Food processing companies can potentially cut losses in the supply chain by introducing innovations and best practices in procurement, transport and storage. Organizations involved in secondary processing, packaging and exports can stimulate new avenues for semi-skilled and skilled employment generation. Given the diversity of Indian farm production – from staples to perishables, from spices to animal products – there is a huge scope for boosting exports of food products. There is a growing segment of domestic population that likes to eat out, and try different and exotic cuisines. Taste, time, convenience and health are some of the aspects that people look for in packaged foods on the supermarket shelves. Food processing industry is the conduit which helps deliver these values.
Prominent multinational companies engaged in food processing have evolved over the years, from being mere processors to vertically integrated or vertically coordinated entities. They may be engaged in activities ranging from farming to retailing or even providing experiential services to consumers. These corporations have evolved business models on some very fundamental economic principles, one such being economies of scale. Basics of operations management indicate that when the underlying raw material is standardized, the setup time is reduced, which lowers costs and generates scale economies in manufacturing. Therefore, it won’t be surprising to realize that most food processors produce a wide variety of foods using a limited set of commodities wherein economies of scale can be achieved in procurement, trading, quality assessment, storage, primary processing and other such activities. In fact, if one were to examine closely, most food processors rely on a limited number of commodities – wheat, corn, soybean, potato and sugar. Variants of the basic manufactured food product are created by differences in tastes, flavours, colours, and a minor modification of the ingredients.
Processing industry of this kind may not be suitable to Indian conditions, nor should it be used as a template by the policymakers. The back-end conditions that helped the processing industry flourish in developed countries do not exist in India. The Indian farm sector is dominated by millions of small and marginal farmers, a huge chunk of whom are in the rain-fed drylands. Being risk averse, these farmers typically employ income diversification strategies at the farm level, and hence grow multiple crops or deal in different farm enterprises. Thus, there is great diversity in farm output; the list of commodities on the website of agmarknet is a mirror to this diversity. Under such conditions the processor can find it difficult to achieve economies of scale, as the transaction costs are very high while dealing with hundreds of farmers, producing different kinds of commodities of varying quality.
Often, adopting market-led production is cited as a solution to overcome the mismatch between supply and demand. Market-led production also implies producing for the food processing industry. The problem with pure market-led production is that it leads to mono-cropping, which is not sustainable. The havoc wreaked by rice-wheat cropping system in the north-west of India on soil and groundwater is a direct outcome of responding to “market” created by public procurement. Additionally, farm enterprise diversification is a kind of risk and income diversification. Hence, it is in the larger interests that diversity is maintained on the farm. Therefore, food processing in Indian conditions should be aimed at exploiting the diversity than pushing for homogeneity. Processors need to identify a basic denominator in this diversity to develop a unique business model. Amul is a classic example that built a global brand on the foundations of millions of small producers.
The food processing policy seems to have borrowed ideas from industrial policy and special economic zones, which has translated into schemes such as mega food parks. This replication may not be apt. Unlike industrial raw material, food is bulky and perishable, and hence processors are typically located closer to the source of raw material than markets. A mega food park goes contrary to this principle. An orange pulp manufacturer may prefer being located closer to orange growing areas to lower costs and ease sourcing than in a distant location where other infrastructure may be wastefully subsidized. Incentives may be provided to the investors or processors at the location of their choice than creating unnecessary infrastructure at politically influenced locations.
Finally, the consumer side seems to have been taken for granted in the whole picture. The impact of consumption of processed food on consumer health is a hot topic in developed as well as developing countries. Obesity, cardio-vascular diseases, renal and other disorders have become commonplace and are often attributed to excessive use of processed foods. Various chemicals that go into “manufactured foods” may have adverse effects on consumer health in the long run. India faces a double whammy with food. We have a segment of population which is prone to obesity, diabetes and hypertension, while there are millions who are undernourished, weak and anemic. Lifestyle diseases are as common as diseases arising out of deficiency of essential nutrients. At the same time, the general population at large often faces issues of temporary scarcity and peak prices of certain food commodities due to supply side inefficiencies. Food processing can be used as an effective tool to address many issues on the consumer side with some innovative policy measures. To give an example, importing and distributing onion in times of scarcity can be an expensive affair. Instead, it would be better if dehydrated onion is made available in fair price shops in episodes of short supply of onion. Can locally produced grains, millets and vegetables be similarly processed to make wholesome foods or food mixes that can be supplied to vulnerable population segments? It is such practices that need to be encouraged by the food processing policy than promoting carbohydrate-dense foods that lead to lifestyle diseases.
Food processing is definitely an important economic function, but it has social and cultural ramifications too. It is an important connecting link between the agricultural system and the larger food and health system. Therefore, the food processing policy should aim for a much broader systemic efficiency gain than providing incentives to one particular stakeholder. The processing industry should be visualized and encouraged to meet the needs of India’s farmers and consumers, than the other way round. Entrepreneurs and corporations may have to look at business models that exploit the existing diversity than scale economies alone. The food processing industry should envisage itself as an enabler for both the farmer and the consumer, than seeing itself in isolation.