Conference on Food Processing Industry: Opportunities and Challenges
Towards Global Competitiveness in Agribusiness
Tuesday, September 27, 2005: Hotel Abad Plaza, Cochin

Conference report

India Development Foundation, in association with the Confederation of Indian Industry and the British High Commission organised a conference-cum-workshop on prospects and challenges in the agribusiness sector in India, with a special focus on the state of Kochi. The workshop was attended by around 100 representatives from the government, bureaucrats, food processing industrialists, exporters, local and regional industry associations, and academic and research institutions. The chief guest for the conference was Ms. Minnie Mathew, IAS, Chairperson Coconut Development Board.

The aim of the conference was two-pronged. One was to create awareness among the food processing industries in Kochi regarding food safety standards and quality management issues like health and hygiene in processed foods. Second was to discuss the prospects and challenges that exist in the Indian agribusiness sector, with a focus on Kerala especially the high-value segments like meat processing and marine products.

The conference began with a welcome address by Mr. M K Koshy, Chairman CII Kerala State Council. He reiterated the fact that food processing has tremendous potential in India, and especially in Kerala. Spices are synonymous with Kerala. Marine products too hold a dominant position in the processed food sector in Kerala, and accounts for around 22 per cent of total Indian marine exports. High-value crops like fruits and vegetables, vanilla, and freshwater and marine fishes etc. are other sunrise sectors in the state. There is a need for development of a modern, sophisticated food park - equipped with most scientific technologies and infrastructure facilities is the need of the hour for development of food processing in the state.

Dr. AmirUllahKhan from IDF introduced the theme for the conference, and highlighted the importance of holding sessions and workshops in different regions of the country. He highlighted that the Kochi conference is the sixth in the series of conferences held by India Development Foundation on food processing and agribusiness. He spoke about the need for the Indian food processing industries to face the challenges of stringent food safety standards.

Talking about the vision of IDF of promoting market-based development, he emphasized the fact that food processing sector has the potential of making agriculture 'demand-driven' rather than being 'supply-driven'. Dr. Khan briefed the participants about the work done by IDF in the area of food processing and food-safety standards. He highlighted the fact that awareness for and compliance to the SPS standards is important for becoming globally competitive in the food sector. He thanked the sponsors, the British High Commission, for their financial assistance and support, in making this conference possible.

In the conference, the chief guest, Ms. Minnie Mathew, released a volume compiled by IDF, titled "Food Processing Industry in India: Challenges and Opportunities in Investment and Trade".

Appreciating IDF's efforts, the chief guest Ms. Minnie Mathew expressed her satisfaction on being a part of this major capacity-building exercise. She reiterated the commitment of her Board to extend every possible support to this sunrise sector, and underlined the importance of food processing in value addition and employment generation in the farm sector. The goal of 8 per cent plus growth targeted in the Tenth Plan is contingent upon the growth in the farm sector. Investment in the farm-sector can be stepped up through food processing industries promoting value addition in the farm-produce.

There are numerous advantages to capitalise in the food sector. Growing incomes, changing lifestyles, vast biodiversity all work in tandem to create positive synergies for the growth of the food sector. Food industry today is caught in the vicious cycle of inefficiency, apathy of food processors to quality and safety issues, and ineffective regulatory mechanism. There is a need for a public-private partnership to develop to plug-in the glaring loopholes in the food supply-chain. The new amended APMC Act and the proposed introduction of FDI in retail sector shall augur well for the growth of the food sector.

The inaugural session concluded with a vote of thanks by Dr. Shubhashis Gangopadhyay.

The second session in the workshop started with a presentation by Dr. Shubhashis Gangopadhyay. The presentation was titled "Contracts and the Food Processing Industry". He talked about the mechanisms in which the food businesses (industry) can directly link with the primary producers (farmers) through contract farming. He cautioned against drawing conclusions on the effects of contract farming in other countries to decide the policy framework in Indiagiven the fact that the agriculture situation in India is vastly different from what exist in other nations of the world. The Indian food industry is characterised by 'smallness' of (both) the farmers as well as the processors, and thus through contracts the farmers and the processors diversify and manage risks. In all industries, firms organise their supply-chain especially in the input side, and it is imperative to do the same in the food processing sector. Contracts are an useful mechanism to organise the food supply-chain by establishing forward and backward linkages.

Food markets, the world over, are characterised by uncertainty in demand and price. In most contracts, the decision to buy 'how much to buy' rests with the processors, given the fact that the processor operators in an uncertain processed food markets. The price of the stock of the crop to be bought is often pre-determined, and this creates value for the farmers by allowing them to exercise an 'option' to hold on to such a contract. MSP offers the farmers the option of 'pre-determined price', and if MSP has to be withdrawn, the option of contract farming should be made available to the farmers.

Contracting farming is not 'vertical integration'; however most literature tends to use the two interchangeably. Contract farming shall be effective only if the cost of enforcing and managing contracts is low. There should be a positive policy and legal framework supporting contract farming in the agriculture sector.

Next to address the audience was Dr. AmirUllahKhan, Fellow India Development Foundation. He spoke on the issue of 'Agriculture and Trade Liberalisation'. In most policy, there is a focus on protecting the producers, however in agriculture the focus has always been on protecting the consumers. This dichotomy partly explains the reason behind the below-average performance of the agriculture sector in India.

The freight rates in India are significantly higher (upto 70 per cent) as compared to almost every major country of the world - developing or developed. This boils down high costs for both the producers and the consumers. This problem is compounded by fragile infrastructure, long-supply chains with many intermediaries, uncertain farm-produce and often suspect quality.

India's Aggregate Measure of Subsidies (AMS) stands at about 7 per cent, and thus all fears of reduction in agriculture subsidy due to WTO are quite unfounded. The export subsidies for agriculture sector are also not very significant, and need not be a cause of worry under trade liberalisation. Agriculture export in India was around USD 7 billion in 2004-05, as compared to agriculture import of around USD 2.8 billion. Thus, there also should be no fear of deluge of agriculture imports due to trade liberalisation. Rice is one of the largest agriculture export items from India. In aggregate terms, though agriculture exports have increased in value terms, it has decreased in terms of proportion. This is because bulk of Indian agriculture exports is in the form of primary products.

Small farm-holdings are not an issue, as there are quite a few ways of consolidating the farm-sector through contract farming, cooperatives, vertical coordination and so on. What is a critical cause of concern is the absence of rural infrastructure. Rural roads, accessibility to markets, power, communication and transportation facilities play an important role in enhancing farm incomes, and rural prosperity.

Dr. Khan talked about trade policies prior to the WTO in the context of agriculture trade, and the differential impacts they had on the agriculture economy of developing countries. Agriculture trade was distorted under a slew of tariff and non-tariff barriers. WTO took explicit note of trade distortions in agriculture trade, and tried to address it through the Agreement on Agriculture in the Uruguay Round. However, even under the WTO, agriculture has become a 'bone of contention' as there are challenges like dirty tariffication in agriculture.

The next speaker KajliBakshi, addressed the issue of tariff pattern in the domestic market. She highlighted the tariff patterns in terms of trade-barriers (both tariff and non-tariff barriers). However India's value addition is to the extent of 7% of total agricultural output compared to more than 80% for most developed countries, including countries such as Philippines.

The issue that is fast becoming a matter of concern is non tariff barriers. The first of these are TBTsor technical barriers to trade.  Rules of origin too are increasingly being used to curtail trade. These rules are often complex and protectionist. However the major issue is that of testing and certification arrangements. These requirements call for higher levels of technology requiring higher costs on testing. Traceability is important for India, as like in other developing economies, a large number of small farmers are not quite equipped to maintain records of the processes involved, leading to problems in traceability. What is also required is a large investment in laboratories.

Kajlialso talked of quality issues and the SPS agreement that seeks to protect plant, human and animal health. The SPS agreement allows countries to set minimum standards that are scientifically justified, on food imports. Sometimes these are unreasonably high, but often the problem arises because of the technology and investment required. A large number of countries have gone beyond CODEX standards. Yet another challenge in the form of non tariff barriers comes by way o import licensing procedures, custom valuation rules and pre shipment inspection. Solutions to these problems come by way of adopting better standards; improve domestic standards, raising issues at the WTO and by approaching the dispute resolution body with adequate preparation and arguments for reasonable and justifiable standards.

SrideviTandleyspoke about the marine sector where India stands 21^st in the world in terms of production. The volume of marine exports has gone up but value has not gone up at the same level. Except from Tuticorinand Haldia, all ports have actually registered a decline in marine exports. Kochi exports 18% of India's marine products second only to Chennai which is responsible for 24 per cent. Shrimp exports, which have the largest share in marine exports, show a disturbing trend. After a fast phase of growth in the early nineties, there is a clear decline in exports starting 2003 - 04. Anti dumping duties levied by the US in Feb 2004 adversely affected Indian shrimp exports. Muddy and mouldy smell was the reason for Europe and Japan rejecting Indian consignments. At the firm level, a few simple steps taken can solve some of the problems faced by exporters. Hygienic conditions at the work place, checking residue levels, and systematic checks on shrimp seeds and feeds, soil and water reformers and antibiotics are essential and can be easily implemented. Sridevifurther discussed the ITC Aqua Choupal model which has proved to be successful in coastal Andhra Pradesh. ITC provides extension services and inputs to nearly 10000 farmers in seven districts in AP. ITC processes and packs the produce it consolidates and then exports its product from the Vishakhapatnam port. ITCslabs check quality and the village representative takes stock of farm procedures. Sharing transportation costs, making prompt payments and discounted inputs at the farm gate make farmers loyal suppliers.

Harsh Vivek spoke on the policy environment for the food processing sector. The Essential Commodities Act in 1955 is the mother act that regulates the sector and under this act came the Fruits products order, 1955 and others that regulated the food industry. The new food bill tries to integrate the various laws and constituencies that work at cross purposes. Therefore the need for a central regulatory authority. The authority is envisaged as an 11 member body not including the Chairman. Six central government ministries, one industry member and one consumer group member, one technologist and two representatives from the states comprise the body. A central advisory committees and a scientific committee help the regulatory body whose functions have been detailed.

The major clauses in the bill look at the entire food value chain all over India. The bill also takes into consideration recent litigation against industry on residues in packaged drinking water. The bill talks of food labs but does not talk of capacity building issues there. It seeks to establish referral labs and calls for public private partnership in this regard. The bill does not take into account SPS issues and while it mentions traceability, it ignores farm level traceability and puts the onus on intermediaries and food businesses. It details strict traceability measures in case of dairy, meat and poultry products and makes labelling compulsory for all food operators. Genetically modified foods will be subject to regulation, Nutraceuticals will be treated as food items, all fortification should be published and will be regulated and all food businesses including hawkers and petty vendors will need registration. Penalties have gone up to Rs 5 million and compensation to victims can go up to Rs 0.5 million. Harsh conclude saying that while the bill has a several pluses, it also suffers from a few flaws particularly by way of enforcement.

The next to address the audience was Mr. Raghulal, Co-Chairman, Agri Business Sub-Committee, CII Southern region and Managing Director Elite Foods Pvt. Ltd. He said that demand for processed food has gone up in India. This is indicated by the increase in per capita increase in food expenditure. There are a few fundamental shifts that are indicative of the potential the sector has. Organised retail has gone up in the food sector. Higher income levels, a large young population and changes in life patterns imply that demand for processed is high. In order to be globally competitive the industry must address some issues. These include investment in infrastructure, alternative energy sources, focus on quality and labelling standard within the country, production of a product mix that is conducive for international markets and promotion of Indian brands.

N Anandavally, Managing Partner, BAMS Global Impex (Mohanlal's Taste buds) spoke on 'Strategies for Global Competence of Kerala's Food Sector'. Giving various example from the ground level situation in industry, she emphasised the need of improving quality levels. She said that we can not target export markets unless we improve quality levels in the domestic economy. Indian consumer also has a right to good quality standards. Also there is a need of improving the certification procedure.

Dr. Santhakumar, Centre for Development Studies, Trivandrum summed-up the proceedings of the conference. He reiterated the need for value addition in the farm-sector, and food processing sector has the potential for adding value to the farm-sector. Food safety standards are important for the growth and development of the processed food sector.