COVID-19 Crisis Offers an Urgent and Much Needed Reset Point for India’s Food Processing Industry

The Wire, April 06, 2020

By Pradeep Mehta and Sarthak Shukla

The COVID-19 pandemic and subsequent lockdown has brought the country to a standstill. With factories shutting down in almost every economic area, there is a pressing demand from almost every industry for immediate relief measures from the government.

The food processing sector in India is no different.

The ministry of food processing recently announced the setting up of a task force to address some of the pressing concerns faced by the units. A closer look at some of these challenges highlights the need to understand the structural nature of the issues affecting the sector. These issues, although exposed and magnified by the lockdown, have much deeper roots.

Before looking at the structural problems, it is important to note that the food processing sector is recognised as a sunrise sector in India. The $600 billion industry currently employs close to 70 lakh workers, including around 15 lakh women. Furthermore, it has a massive potential to unlock the economic value of agricultural produce, thus facilitating the national agenda of doubling farmers’ income by 2022.

What is keeping it from realising this potential though?

Firstly, the financial costs of interest on loans, working capital, and return on investments for shareholders have a significant impact on the viability of food processing enterprises. This puts smaller players, particularly new entrepreneurs and MSMEs, at a disadvantage because of the higher cost of capital for a given output capacity of the enterprise.

In other words, a large enterprise can offset the financial costs effectively by manufacturing on a large scale, putting the smaller market players at a competitive disadvantage. The recent demands of waiving off the interest costs of enterprises in the wake of the COVID-19 pandemic requires a deeper thinking so as to ensure that the structural problem of universal access to affordable finance is addressed.

Secondly, the issue of raw material procurement and quality assumes significance for food processing enterprises. Even though India is a leading producer of many of the agricultural products, the levels of value addition are still suboptimal as compared to other countries. A key structural issue faced by the sector is the dominance of traders or middlemen who control the supply-demand equilibrium of the agricultural produce from the farm gate to the factory floor.

These traders, in exchange of providing the missing market linkage, impose a cost burden on the farmers and the enterprises, finally affecting the market price of the final processed food item for consumers. In some cases, where the agricultural produce is regulated under the MSP regime of the government like rice, wheat or sugarcane, administrative hurdles and time-delays pose a financial burden on the raw material prices for the processing enterprises.

Apart from procurement issues, the Indian food processing sector faces a problem of lack of ‘processeable’ variety of raw materials grown. Here, the role of agricultural universities and extension services becomes crucial in informing the farmers about such high-return varieties of agricultural commodities.

Thirdly, the challenges in supporting the infrastructure ecosystem meant for facilitating the food processing sector are a major structural bottleneck for this sector. These include the cost of warehousing and cold storages, both of which are highly capital intensive ventures.

As per analysis done by CUTS, such capital intensive ventures might take up to 15 years for achieving net profitability, if the current input costs persist. Major input costs include financial costs and the power tariffs. Given the criticality of having a robust support infrastructure, innovative operational models like the plug and play model could be thought of, instead of the current approach of providing interest and capital subsidies on new investments.

Fourthly, the issue of seasonality of operations of many food processing enterprises needs a carefully drawn approach. Reasonable concessions are required to ensure the economic viability of such seasonal enterprises including mango pulping, jaggery making, cashew processing, amongst others. An example of reasonable concession is of power tariffs. Although seasonal enterprises pay the variable costs (energy charges) on the basis of the actual power consumption, the fixed charges are paid throughout the year, irrespective of whether the plant was operating or not. This could be done away with by waiving off the fixed charges for the period for which the enterprise is not operating.

Finally, the much hyped issue of availability of labour needs a careful review and understanding. Although enterprises complain of high cost of labour as being a major barrier impacting their profitability, rarely any efforts are taken up at the enterprise level to understand the issue in depth. With the advent of modern machines, the perceived role of labour in an enterprise is fast changing. Instead of being a critical asset that can add value, labour is usually seen as an input having a cost burden on the enterprise.

The fact is that many of these labour are migrants, having negligible social security and political capital in their work location. Without proper skill enhancement initiatives in place, such a scenario makes potential assets work like a liability in a regime where their concerns are often neglected by the authorities.

What seems to be missing is a compact, between industry, government and workers (community), in which the terms of this compact are carefully drawn and adhered to by all the respective stakeholders.

The food processing sector is a ripe example whereby, with effective skill training and capacity enhancement programmes, the value for a worker can be enhanced. At the same time, focus should also be on ensuring ease of running a business for the enterprises involved in food processing activities. In order to achieve a thriving and resilient food processing sector, structural solutions are the need of the hour.

Pradeep Mehta and Sarthak Shukla work for CUTS International, a global public policy research and advocacy group.

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