Policyen Environment Dairy

Food Processing Five Sectors Project
POLICY ENVIRONMENT FOR DEVELOPMENT OF DAIRY IN INDIA Harsh Vivek Introduction In spite of the unprecedented rise in milk production in the last two decades in India, the modern dairy industry has not really taken-off the way it was thought it would. Despite successes like the Operation Flood and the Cooperatives Movement and establishment of institutions like the National Dairy Development Board (NDDB), much of the dairy sector still remains in the hands of small, informal, unorganized players. This puts considerable constraints on promotion of high-value added dairy products, technological innovation and upgradation, and most importantly quality management. This paper is an attempt to take a look at some of the government policies over the last few decades, and assess the impacts of such policies on the growth and development of the dairy sector in the country. Starting from the Operation Flood in the 1970s, to the delicensing of the dairy sector in 1991, an effort has been made to map the major changes in the dairy sector to the policy changes that either fuelled or hindered such a change. It emerges from the study that the government had a bias in favour of small and cottage scale units in dairy processing due to the presumed contributions of such units in providing livelihoods to small and marginal farmers in the rural country-side. However, what has been the experience in the West and other developed dairy nations of the world is that scale is important in the development of the modern dairy industry. Only by operating at a large scale can a firm generate surpluses to invest in building a sustainable procurement base for procurement and processing of milk. In the absence of any concerted effort on part of the government to promote the development of large-scale dairy plants in India, the Indian dairy industry became cluttered with numerous sub-optimal plants, and a large informal sector. Faced with competition from the low-cost (and mostly untaxed) unorganized sector, and the inability to derive consumer premium in the price-sensitive consumer market, most organised dairy firms in India struggled with low-margins. While some large cooperatives have been able to ensure significant product diversification and market penetration, the overall scenario still remains considerably below the potential and expected performance.
India Development Foundation
Milk Production Over the last few years, India has emerged as one of the largest producer of milk in the world. The other major milk producing countries are the United States, the European Union, Australia and New Zealand. The total milk production in the world was 593 million tonnes in the year 2002. As shown in figure 1, India, United States and the European Union are the major players contributing to total global milk production. The growth rate of milk production in these nations has been fluctuating widely in the last few years. However, the global average growth rate for milk has hovered close to unity. The rise in milk production in India comes coupled with two important facts. First, India has the worlds largest concentration of bovine population in the world. It has more than 40% of worlds total buffaloes, and more than one sixth of worlds total cows1. This implies that though our aggregate milk production may be high, the productivity of milch cattle in the country remains abysmally low. Second, despite being the largest producer of milk in the world, India is also the largest consumer of milk. The per capita availability of milk in India, though increasing over the last 30 years, still falls below the worlds average of 485 grams of milk per person per day. Figure 4 shows the trends of per capita milk availability in India for the last two decades. Per capita milk availability for the year 200405 was 232 grams of milk per person per day. Policy Support for Development of Dairy Industry in India Operation Flood and the National Dairy Development Board (NDDB), 1970 to 1996 Post independence, India was a milk-stressed country with domestic demand far outstripping the domestic production of milk. Given the nutrition and hunger problems in the country, the government took upon itself the task of development of the domestic dairy industry. The two-pronged objectives for the government were first to augment the supply of milk for domestic consumption and second to increase the returns to dairy farmers by providing the infrastructure for producing value-added dairy products. As one of the biggest programmes for development of dairy came the Operation Flood in the year 1970-71. This was a rural development programme, which received liberal grants from the Government of India (NDDB), the World Bank and the European Economic Commission (EEC).
Source: National Dairy Development Board, India
Operation Flood worked to create an integrated national milk-market, and established institutions to cost-effectively procure, process and market the milk and milk products. It worked through setting-up of small milk producers cooperatives, which procured milk from farmers in the village, and provided them with inputs and services. Thus, there was a forward movement of milk from the village cooperative societies to the processing and pasteurizing plants (dairy unions), and a backward movement of inputs, technology and modern dairying practices from the unions to the local village cooperatives. The above has come to be recognized globally as the celebrated Anand pattern of dairy development as depicted in figure 5. A National Milk Grid was established linking more than 700 towns and cities. This helped to connect the producers and consumers of milk, and created an integrated milk market in the country. Operation Flood was implemented in three phases. Phase One (1970-80) linked the four metropolitan cities in India Delhi, Mumbai, Kolkata and Chennai with 18 major milk sheds in the country. National Dairy Development Board negotiated the details of the programme, and financed the operation through the sale of skimmed milk powder and butter oil gifted under the World Food Programme by the European Economic Commission. Phase Two (1981-85) expanded the outlets for sale of pasteurized milk in major cities of the country. Capacity for production of milk powder increased from 22,000 tonnes to 140,000 tonnes. Processing units were established for production of butter, ghee, whole milk powder, skimmed milk powder and baby foods. By the end of 1985, 43000 village cooperatives were established having more than 4.25 million dairy farmer members2. Phase Three (1985-1996) consolidated the cooperative movement in the country. It emphasized use of modern technology, better breed of cattle, hygienic and sanitary methods of production and HACCP and other certifications. It also enabled the cooperatives to be market-driven having sophisticated processing capacities for products like UHT milk, yogurt, processed cheese and ice creams. Phase three emphasized research and development in animal health and nutrition. Impacts of Operation Flood Operation Flood has had far reaching impacts on the development of modern dairying facilities in the country. It has not only impacted growth in production and distribution of milk and milk products, but also dominated the rural development scenario by providing sustainable livelihood options to millions of rural farmers. A World Bank audit showed that of the Rs. 200 crores invested in Operation Flood (II), the net return into the rural economy has Rs. 24000 crores per year over a period of ten years, or a
Source: National Dairy Development Board Website: www.nddb.org
total of Rs. 240,000 crores in all. No other major development programme in the world has matched this input-output ratio3. The impact of Operation Flood on Indias modern dairy sector has been paramount. From an insignificant 200,000 litres per day (lpd) of processed milk in 1950-51, the organised sector is presently handling more than 25 million lpd in more than 400 modern dairy plants setup in different milk sheds in the country. One of the largest liquid milk processing and pasteurizing plants has been established in Delhi handling over 800,000 lpd (Mother Dairy). Indias first automated dairy plant with handling capacity of 1,000,000 lpd has been established at Gandhinagar near Ahmedabad in Western India. Several domestic cooperatives have mushroomed, and many of them are now emerging as major players in the global market. The Gujarat Cooperative Milk Marketing Federation Limited, with its popular brand Amul, has become the one of the largest food companies in Asia, with annual turnover in excess of Rs. 30 billion. Operation Flood offers some very crucial lessons for policy-makers. The first lesson is inclusive growth. By establishing dairy cooperatives at the grassroots level, it brought the milk farmers into its ambit, and placed control in their hands to decide what and how much to produce and sell. This market-oriented, participatory approach to development led to many grassroot-level innovations in designing of the supply chain in dairy. Secondly, efficiency is the key to success in food processing industries such as dairy, and thus, streamlining and strengthening of the supply chain holds paramount importance. With setting up of a strong supply-chain network, leakage from the system to middlemen can be checked and more returns can be realized for the milk producers (who are the ultimate stakeholders of the system). Thirdly, for higher price realization, one needs to graduate from simple, low-value commodities to high-value added processed products. Marketing holds the key to ensuring that products are available at the right place, at the right time, at the right price. Brand building is an essential exercise for all dairy companies to exploit the full potential of the dairy value-chain. Finally, the most crucial lesson of Operation Flood to all policy makers is that growth and development should be market-oriented and market-led. By developing the market forces, and ensuring healthy competition among different players in the market, a robust and transparent system can be developed, which benefits both the producers and consumers by ensuring quality products at value-for-money prices. There are, however, many pitfalls in the Operation Flood.
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Source: The Indian Dairy Industry Website: www.indiadairy.com
Operation Flood Successful in Limited States Only: The success of dairy cooperatives has been largely confined to a few states in India such as Gujarat, Punjab, Andhra Pradesh and Rajasthan, where brands like Amul, Verka, Vijaya and Saras have become household names. However, a large number of dairy cooperatives, unions and federations are defunct and are not able to create value for their members. Cooperatives in Uttar Pradesh (Parag Dairy), Kerala (Milma), and Madhya Pradesh (Uttam Dairy) are largely loss-making. A lot needs to be done to strengthen such non-performing cooperatives. Excessive Government Interference in Decision-Making: Excessive government interventions in the cooperatives due to vested political interests have led to massive politicization of dairy cooperatives. These cooperatives have a very large rural base, with millions of farmers as members, and they could play a major role during political elections. With electoral forces, and not market forces guiding the decision-making of the cooperatives, most cooperatives have become agencies for implementing the populist policies of the government, and thus unprofitable and unviable business units. Limited Sources of Finance: Limited sources of finance available to these cooperatives also hinder the smooth functioning of many dairy cooperatives. The cooperatives cannot raise equity from the market, and have to depend either on their own retained earnings or on equity from member farmers. Both these sources are woefully inadequate for meeting the financial needs for technological upgradation and innovation, and thus the cooperatives have to resort to government loans and grants. This in turn makes them an easy prey for government interference in decision-making. Politicization of Cooperatives: Politicization of cooperatives has caused a plethora of problems. Overstaffing, low capacity utilization, weak market orientation and poor financial controls have become the norm rather than exception in case if most Indian dairy cooperatives. Appointment of bureaucrats as managers of the cooperatives has been the case in Madhya Pradesh, Orissa and Uttar Pradesh. These bureaucrats do not have the professional skills required to manage such producer cooperatives. Consequently, under such bureaucratic heads, the cooperatives fail to respond to neither the needs of the producer farmers, nor the needs of the industry. Government dictated input-output pricing: In case of most cooperatives the state government fixes the minimum producer price. For instance in Maharashtra and Punjab, the State Government fixes the selling price of milk to government dairies. The selling price is determined by the government through on the spot interventions in case of Andhra Pradesh and Karnataka. This has caused inevitable distortions in the pricing of processed dairy products, and has adversely affected the financial health of the cooperatives.
Inability to Meet the Stringent Sanitary and Phyto-Sanitary Standards for Exports: Indian dairy industry, on an average, falls short of meeting the Sanitary and Phyto-Sanitary (SPS) requirements of the WTO Agreements, and thus is not able to compete in the global markets. As a direct consequence of this, most of the Indian dairy exports are directed to the Middle East and the developing nations of Asia and Africa where the SPS and other export regulations are not all that stringent. However, in order to be able to compete in the more remunerative markets of the West such as Europe and the US, there has to be a more concerted effort to make our dairy plants truly of global standards. As shown in figure 6, Bangladesh and UAE account for around 45% of dairy exports from India. Indian exports to remunerative markets of USA, EU, Canada and Australia have been quite low. One reason for low exports of dairy products from India to these markets is that these developed nations are also the major milk producing nations of the world. Thus there does not exist much scope of meeting the unsatisfied demand in their economies. Also, these nations have very high and stringent SPS and FDA norms, which most Indian dairy manufacturers find difficult to comply with. The recent Clean Milk Production (CMP) campaign of the NDDB is a step in total quality management in dairy products. In other words, total quality management at every step from the cow to the consumer. This has been initiated keeping in mind the growing quality consciousness among consumers in domestic as well as in international markets. Steps to Revive Dairy Cooperatives Assistance to Cooperatives: Under the scheme of revitalizing sick dairy cooperative unions and federations, 12 milk unions in Madhya Pradesh, Uttar Pradesh, Karnataka, Kerala, Maharashtra and West Bengal have been proposed for rehabilitation with an estimated outlay of Rs. 87 crores approximately. The scheme is implemented on a 50:50 partnership between the state and the union government. Though such rehabilitation plans do provide these cooperatives with much-needed financial support in the form of grants, they on the flip-side bring with them more government interference in the management of these cooperatives. Thus, on the one hand such rehabilitation and revival packages for the cooperatives do provide short-term solutions to make the cooperatives function; they on the other hand do not address the long-term issues of bureaucratic interference in management of these cooperatives. What required are not more grants or loans from the government. Allowing the cooperatives to raise funds from the markets and other financial institutions at competitive rates, and more professional management of the cooperative are the structural solutions needed to make these cooperatives vibrant business entities. The Producers Companies Act (2002) is a pioneering step in the direction of
making the cooperatives less dependent on government sources of funding, and enabling them to restructure their debt-equity ratio on prudent financial lines. Dairy Development in Non Operation Flood, Hilly and Backward Areas: In continuation of the centrally sponsored scheme to promote dairy development, an outlay of Rs. 250 crores was made in the 9th Plan. Under this scheme dairy cooperatives are to be promoted and strengthened in hilly and backward districts of the country. The focus of the programme is two-pronged of not only giving a thrust to dairy in these regions, but also sustainable livelihoods to the poor. The Anand experience of dairy development has been of understanding the importance of valueaddition, marketing and branding for higher price realization. In the light of the above, the National Dairy Development Board has launched a Mnemonic Campaign to develop a common, umbrella brand, with standardization of logo, artwork and retail outlet design for faster brand recall for these cooperatives. The regional dairy cooperatives, upon paying a consideration to Mother Dairy, can use the Mother Dairy brand for selling their milk; however Mother Dairy shall ensure quality control and inspection of these regional cooperatives. This has been allowed to reap the mileage of the Mother Dairy brand by smaller, upcoming cooperatives which did not have the wherewithal to establish their own brands. De-licensing (1991) and Milk and Milk Products Order (MMPO), 1992 Post 1991, milk processing in large-scale plants was de-licensed and opened for domestic and private players to participate. The Indian Dairy sector, at the time of liberalisation, was replete with many inefficient, obsolete and sub-scale units, which faced direct threat from domestic and foreign competition. Keeping in mind the employment and livelihoods contribution of these small and cottage dairy processing units, the Government of India announced the Milk and Milk Products Order (MMPO) in 1992, under the provisions of the Essential Commodities Act, 1955. The operation of MMPO was largely limited to registration of dairy firms in the organised sector, though as a policy, it had three major objectives: Augment the supply of milk in milk deficient regions of the country, and ensure a certain minimum quality standard. Inspection and certification of dairy units for quality control, health and hygiene. Maintain a database on the status of the organised dairy sector in the country.
MMPO required that the large-scale processing units having capacity of more than 10,000 lpd or 500 tonnes milk solids a year could operate only after a license from the government. It is ironical that the government which liberalized the economy did not allow the dairy companies to operate without government licenses and permits! Licenses for milk processing capacities above 75000 lpd were only granted by the Central Government, while permission for capacities below 75000 lpd but more than 10000 lpd was granted by the state governments. For capacities below 10000 lpd no license was needed. The granting of government licenses was a political exercise, not in sync with the market demands but directed by the vested interests of the political power-groups and farmer unions. Government granted licenses based on its calculations of the difference between the marketable surpluses in different areas, while keeping in mind the processing capacity already installed. This did not permit healthy competition to develop the dairy sector, and many small, sub-optimal, sub-standard and inefficient dairy plants got indirect protection and respite from the growing competition. Rampant corruption also made the license system difficult to deal with for new start-up enterprises. Clearly, the MMPO was a disincentive to larger capacities, which could show greater economies of scale. Large-scale plants necessarily require backward integration and substantial extension work for ensuring stable procurement base of milk. As a result these large-scale units are most likely to help increase milk yields and, in turn the output of processed dairy products. MMPO encouraged companies to by-pass regulation, resort to sub-optimal units and poaching of milk from the cooperatives. However, keeping in mind the growing pressure of competition from global players in the dairy sector, the tightening of the WTO Agreements, and the anomalies in the license structure, the government made an amendment in the MMPO (1992). The amendment allowed the dairy players to setup dairy processing units wherever and whenever they felt like. In other words, licenses need not be taken now for setting up dairy units. However, these dairy plants have to still seek government registration for purposes of ensuring sanitary and hygienic conditions and quality of products. In order to check red-tapism and bureaucratic delays, the registration procedure has to be completed within 45 days by statute. In a nutshell, the salient amendments in the MMPO in 1999 are as follows: The provision of assigning milk sheds has been done away with, giving full flexibility and freedom of choice to private enterprises and dairy cooperatives to procure and market milk in any region of the country.
The registration under MMPO-92 will now not be for capacity installation, but only for sanitary and hygiene conditions, quality and food safety. The provision of inspection of dairy plants has been made more flexible. The provision to grant registration in 90 days has now been reduced to 45 days. Abolition of Quantitative Restrictions (QR) in Dairy Imports, 2001 Dairy imports became liberal after the Quantitative Restrictions on such imports were done away with in 2001. The Government of India, in an agreement with the Government of United States, removed QR from a plethora of dairy products. Table 5 highlights the trend in milk and milk products imports over the last few years, and a percentage of dairy imports in the total agriculture imports in the country. The dairy imports were particularly high in the year 2003-04. This was on account of dip in domestic milk production, and a subsequent dip in the production of milk powder. Milk powder production declined by 10.9% on a year-to-year basis in 2003-04.4 Total milk powder production during April to September 2003 dropped by 12.7%. The below-normal rainfall over the past three years had resulted in insufficient calving. Given this crisis, many cooperatives for instance, in Maharashtra sought help from the NDDB seeking around 1400 MT of skimmed milk powder. It was also reported that in Gujarat, procurement from 12 milk sheds declined by 9.6% to 4505.3 thousand kgs per day as against 4986 thousand kgs per day in the same period in the previous year5. In wake of the above crisis of fall in milk production and procurement from major milk sheds in the country, the Union Government allowed the NDDB to import 6000 tonnes of milk powder to ease the supply shortage. Many states had openly objected to this decision of the Central Government. For instance, Punjab one of the largest milk producing states had raised objections citing that such imports would reduce milk prices, adversely affect farmers interests and result in large-scale killing of unproductive animals! However, states like Maharashtra cleared a proposal by the State Cabinet to increase the procurement price of milk from dairy cooperatives by Re. 1 per litre in order to increase procurement from the village cooperatives. What comes as a surprise is that the cooperatives had to wait for a government clearance to increase procurement prices! Rather than politics, it should have been the market that should have decided when and by how much to increase the procurement price.
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Source: Centre for Monitoring Indian Economy (CMIE), Monthly Review (December 2003) Source: Centre for Monitoring Indian Economy (CMIE), Monthly Review (December 2003)
Industry Structure Liquid Milk and Milk Products A total of 45.7 million tonnes of milk was processed into milk products in the year 2000-01, out of which the share of the organised sector (including all cooperatives) was an abysmal 10%. On the other hand, 38.9 million tonnes of liquid milk was produced in India in 2000-01, out of which only 15.4% was processed, and the rest was sold unprocessed6. In both the above categories we clearly see that the industry is dominated by small, informal and unorganized dairy units. In the absence of adequate integration and economies of scale, most of the milk and milk products are either sold unprocessed, or processed locally into low value-added products. Such products in absence of hygiene, quality and safety are unable to command premium prices from the consumers. Few reasons why the informal sector is able to survive and compete in the market with organised dairy players are as follows. First, the informal milk vendors (colloquially referred to as dudhias) are able to work with very low levels of investments. Thus despite low volumes, they are able to compete with the organised players. They procure milk daily from the farmers, and supply within hours to the nearby consumption centres (urban areas), and thus do not have to invest heavily in chilling and pasteurizing units, unlike the case with organised players. Second, most of the small, informal milk vendors have very small operating cycles, and are able to turn their stocks daily and recover their money from the business. In such a scenario, they are in a position to pay higher prices to farmers than most cooperatives and are able to procure milk from the members of the cooperatives without making any significant investments in developing a procurement base. Third, the concept of pasteurized milk has not yet taken off well with most middle-class Indian households, which still feel that fresh milk from the local milk vendors (dudhias) is the best and the most nutritious. The misconception that pasteurization kills not only the germs, but also the nutritive value of milk has made the acceptance of pasteurized milk rather difficult in many small towns in the country. It is in these small towns that most informal milk vendors have a flourishing business as they are able to encash on the misconceptions of the consumers. Finally, in products like paneer (cottage cheese), the entire market is almost dominated by informal players as they are able to service the market far better than any organised player. Cost effectiveness and freshness are the two most important drivers in sale of cottage cheese. The informal milk vendors
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Source: CII-McKinsey FAIDA Report Realising the Potential 2001.
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with their small markets and fast operating cycles are clearly able to outsmart the organised players in the industry. The branded frozen cottage cheese hygienically tinned and canned is still not very popular primarily due to the notion of freshness that dawns heavy on the psyche of the buyers. It is only in product categories like table butter, milk powder and ghee that the organised players are able to gain a substantial market share because such products do not fall under the fresh food category. Dairy Industry in New Zealand: A Snapshot New Zealand has a vibrant dairy industry, and accounts for approximately 35% of the worlds trade in dairy products, despite just 2% of the worlds dairy production. The success of dairy in New Zealand has been attributed to efficient vertical integration by large-scale cooperatives upto the grassroot level dairy farmers; economies of scale in processing; research and development; quality control and aggressive yet creative marketing. Value addition has been at the very core of dairy industry in New Zealand. Most dairy cooperatives in New Zealand have invested heavily in expanding their product lines to launch newer and more innovative dairy products. There has been a growing trend among dairy firms in New Zealand towards production of high-value added functional foods like low fat, high calcium and protein milk, and biomedical foods like colostrums-based health supplements and products made from organic milk. The market in dairy in New Zealand is very well organised, as compared to the unorganized, informal dairy markets in India. About 96% of the milk production in New Zealand is handled by the cooperatives and the rest 4% by small private entrepreneurs that look at production of very specific niche varieties of dairy products especially cheese and yogurt. Mergers and acquisitions have been common in dairy industry in New Zealand, primarily to obtain economies of scale. In the past 20 years, there has been a large reduction in the number of independent dairy cooperatives from 36 in 1983 to only 3 large cooperatives in 2001. The largest dairy cooperative Fonterra was formed in 2001 following industry reform and legislative change to unite the once-fragmented dairy industry in New Zealand. This was done to provide the critical mass and efficiencies needed for competing in the global economy. The entire population of dairy farmers in New Zealand (around 14000) is vertically integrated with either the cooperative or the private dairy firms. The picture in India is much different than what exists in New Zealand. Given the sheer number of dairy farmers in India, it is not possible for any dairy cooperative or private firm to vertically integrate with all of them. Also, the in absence of the necessary financial
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wherewithal and other support services, most dairy firms in India have struggled to attain large volumes and scale economies. The Indian dairy market as a result has remained cluttered with large number of unorganized players with sub-optimal capacities, thereby putting considerable constraint on value addition. The MMPO (1992) had also put barriers to installing capacity or mergers and acquisitions in dairy industry, thus affecting the scale-economies of dairy units in the country. However, with the amendment in the MMPO in 1999, such restrictions on capacity or mergers and acquisitions have been removed, which is a positive step in the consolidation of dairy units in the country. New Zealand exports over $NZ5.7 billion worth of dairy products each year. Fonterra, the largest dairy company in New Zealand, represents more than 20% of total New Zealands exports and 7% of the country's GDP7. The major export markets for New Zealand are USA, UK, Japan, Singapore, Taiwan, Hong Kong and Belgium. It is important to note that not only New Zealand exports value-added dairy products, but also to nations which have high quality and SPS standards. Around 36% of New Zealands dairy exports are high value added, and there is an increasing trend on the same. India, on the other hand, finds it difficult to export its dairy products to the affluent nations of the West primarily on account of lack of adequate exportable surplus, and also its inability to meet the stringent quality norms of the importing nations. Thus, much of Indian dairy exports are confined to the Gulf and the SAARC nations, where quality norms are not very stringent. Cluster development has been the approach for dairy development in New Zealand. North Island accounts for 85% of dairy production in New Zealand. Within North Island, clusters for dairy have been developed in South Auckland region. Clusters have also been developed in Otago and Southland focusing on specialized areas like producing sheep milk for cheese plants, milk products for biotech applications and a dairy education and innovation centre at Manawatu. Invention and innovation are the major drivers of growth in New Zealands dairy industry, both in domestic and export markets. For instance, a break-through project by Fonterra with researchers at Massey Universitys Riddet Centre aims to pioneer a novel food delivery system called POSIFoods or point-of-sale individualized foods. Such fast, nutritious snacks, tailored to individuals dietary needs and taste preferences, all at the touch of a button, are going to be the convenience foods of the future. The only way in which any dairy unit could hope to compete is to invest in R&D and innovation, and come out with more customer-centric offerings.
Source: www.marketnewzealand.com. This is New Zealands official online trade development system.
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Despite there being a world of difference between the nature of dairy industry in India and New Zealand, there are a few lessons that Indian dairy firms, as well as the government, can learn from their counterparts in New Zealand. First of all, vertical integration is important for maintaining efficiency in the procurement supply chain, and this is best demonstrated by the cooperatives. Vertical integration also helps in reducing wastage, ensuring quality standards and attaining scale economies in dairy processing. Development of cooperatives has to be promoted, and reckless government intervention in management of cooperatives should be checked. Secondly, consolidation of dairy units is important to help these dairy plants attain economies of scale, reduce costs and become competitive. In this respect, cluster development can be looked at as an alternative for development of dairy processing in India. By cluster development, all dairy units shall be able to consolidate their procurement base and production structure, share the infrastructure costs among themselves (for instance power, cold storage, refrigerated rail transport etc.), and add value to the produce at lower costs. This shall put them in a position to compete with the informal players in the price sensitive market by offering higher quality at affordable prices. Thirdly, innovation and invention is the crux for surviving and competing in the market place. A tieup of dairy units with research institutions can give a fillip to market-oriented R&D, which is essential in todays competitive marketplace. Concluding Analysis To conclude the study on the impact of policies on the growth trajectory of dairy processing in India, a regression analysis was performed on the effect of the major policies in dairy on the growth of milk and milk products. The three major policies that had a land-mark effect on dairy, and have been included in this analysis are: Operation Flood (and establishment of dairy cooperatives) in 1970 Delicensing of dairy sector in 1991 MMPO (1992) and its Amendment (1999). In addition to the above three major policies, a fourth variable, namely the effect of milk production in (t-1) year on the growth of milk production in t-year has also been used in the analysis. The underlying reason being that milk production has a slight element of cyclical production, and this variable helps to capture the variance in growth rates due to such cyclicality of milk production. In absence of adequate data for all dairy products in all the years from 1952 to 2004, milk production data has been used, and the assumption made that more milk production leads to more milk processing.
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From the analysis shown in figure 9, we find that variables Flood (Operation Flood), DELIC (delicensing), AR (1) (Previous years growth rate of milk production) and the constant C are significant i.e. explain the maximum variance in growth of milk production over the years. Clearly, the Operation Flood and Delicensing have been the two most important policies in favour of dairy development in the country. Operation Flood, through setting-up of village dairy cooperative societies and development of milk sheds, and delicensing through encouraging large players to enter the dairy sector and operate at optimal scales, have contributed positively to the growth of dairy processing in this country. MMPO, to the contrary, had been a bottleneck, but given the short duration for which it was implemented (and later amended) it did not significantly impact (hinder) dairy development on the whole. SWOT Analysis STRENGTHS Large production base Large procurement base due to establishment of numerous village dairy cooperative societies (Operation Flood) Large domestic demand Large stock of milch cattle Cheap supply of labour Easy availability of fodder, and animal feed at affordable rates WEAKNESSES Lowest productivity of milch animals in the world Dairy sector dominated largely by informal, unorganized players Vertical integration (coordination) still not very robust in case of many dairy firms/cooperatives Most dairy brands are nascent and not very popular among consumers weak marketing for processed dairy products Risk management and insurance facilities are still not easily available
OPPORTUNITIES Liberalisation of the economy dairy sector open for investment by private and foreign players. Abolition of the Quantitative Restrictions on import of dairy products. Per capita consumption of milk products below international average scope of increasing consumption Amendment of the Milk and Milk Products Order (MMPO) no restrictions on capacity installation and expansion. Amendment in Cold Storage Act (No licenses needed for establishing refrigerated and cold chain units for dairy products)
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Figure 1: Milk Production in Million Tonnes
Milk Production in Million Tonnes

90 80 70 60 50 40 30 20 10 0 20 15 10 5 0 -5 -10 -15 Milk Production
U I ni te ndi a d S ta te s
B N ew raz Ze il al an d U kr ai ne
Countries 1999 CAGR '00 2000 CAGR '01 2001 CAGR '02 2002
Source: Food and Agriculture Organization (FAO), Analysis: IDF
Table 1, Figure 2: No. of Cows (2002) Country India Brazil Russia United States Mexico Ukraine Germany France New Zealand Poland Argentina United Kingdom China No. of Cows 35000 15000 12000 11000 9000 7000 6000 5000 3000 3000 2500 2000 1500 Source: Food and Agriculture Organisation (FAO)
Total No. of Cows

35000 30000 25000 No.of Cows (in 20000 '000) 15000 10000 5000 0 India United States Germany Countries Poland China
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P ol an d A us tra lia A rg en tin a
R us si a P ak is ta n
G rowth R ate
Table 2, Figure 3: Milk Production per Cattle Head (2002) Country United States Canada European Union Australia Poland New Zealand Argentina World Average Russia Mexico India Productivity 8.4 7.5 5.7 4.8 3.9 3.7 3.6 3.1 2.7 1.4 1.0 Source: Food and Agriculture Organisation (FAO), 2002
Productivity of Milch Cattle (2002)

10 8 M ilk Per Cattle 6 4 (M T) 2 0 Canada Australia New World Mexico Zealand Average Country
Figure 4: Per Capita Milk Availability in India

Per Capita Milk Availability Milk Availability Per Capita (in grams) 250 200 150 100 50 0
19 55 19 56 68 19 69 79 19 80 81 19 82 83 19 84 85 19 86 87 19 88 89 19 90 91 19 92 93 19 94 95 19 96 97 19 98 99 20 00 01 -0 2
Years
Source: National Dairy Development Board (NDDB)
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Figure 5: Anand Pattern of Dairy Development: Three-tier Structure Analysis: IDF
Village Level Dairy Cooperative Society
State Level Milk Marketing Federation
Procure Milk, Provide Inputs, Payments for milk
Chilling and Processing Facilities for milk and milk products
Marketing facilities for dairy unions, quality control, R&D
Table 3, Figure 6: Dairy Export Destinations from India (2002) Country Bangladesh UAE Germany Oman Egypt Saudi Arabia Madagascar USA South Korea Yemen Netherlands Others % Exports 23 22 6 5 4 4 3 3 3 3 2 22
Bangladesh Egypt South Korea UAE Saudi Arabia Yemen Germany Madagascar Netherlands Oman USA Others % Exports
Source: www.apeda.com Table 4: Progress on Dairy Cooperatives Particulars Societies Organized (000) (Anand Pattern) * Farmer members (lakh) * Average rural milk procurement (lakh kg/day) 1998-1999 81.0 101.4 135.8 19992000 83.7 105.2 157.4 2000-2001 98.0 108.3 165.5 20012002 @ 99.2 108.9 163.56
Liquid milk marketing (lakh 121.3 129.0 134.0 135.82 litres/day) * Cumulative @ till November, 2001 (provisional) Source: Department of Animal Husbandry, Ministry of Rural Development, 2001
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Table 5: Dairy Imports as a % of Total Agri-Imports 2002-03 Product Milk Products $ Mn 2 % agri imports 0.1 2003-04 $ Mn 19.5 % agri imports 0.5 2003-04 (Apr. to Sep) $ Mn % agri imports 1.36 0.1 2004-05 (Apr. to Sep) $ Mn % agri imports 1.48 0.1
Source: Economic Survey, www.indiabudget.nic.in
Figure 7: Share of Organised Sector in Milk and Milk Products (2001)

Milk Processing
15.40%
25.40%
59.10%
Self -Consumption (not processed) Organised (Processed)
Unorgansied Trade (not processed)
Source: CII-McKinsey FAIDA Report Realizing the Potential
Figure 8: Share of Organised Sector in Milk and Milk Products (2001)

Milk Products
10.10% 26.30%
63.70%
Self -Consumption (home made) Unorgansied Trade (locally processed) Organised (Processed)
Source: CII-McKinsey FAIDA Report Realizing the Potential
18
Table 6, Figure 9: Regression Curve for Policies on Growth of Milk Production 1. Dependent Variable: DIFPROD 2. Method: ML ARCH 3. Sample(adjusted): 1952 2004 4. Included observations: 53 after adjusting endpoints 5. Convergence achieved after 37 iterations 6. Bollerslev-Wooldrige robust standard errors & covariance Coefficient Std. Error z-Statistic C 1.148197 0.197210 5.822209 MMPO 0.614523 1.140534 0.538802 FLOOD 2.887937 0.580598 4.974072 DELIC 1.317485 0.602216 2.187728 AR(1) 0.405977 0.146401 2.773048
Prob. 0.0000 0.5900 0.0000 0.0287 0.0056

10
6 4 2 0 -2 -4 -6 55 60 65 70 75 80 85 90 95 Fi tted 00
-5
Res i dual
A c tual
Analysis: IDF.
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POLICY ENVIRONMENT FOR DEVELOPMENT OF HORTICULTURE IN INDIA Harsh Vivek Introduction India is one of the largest producers of fruits and vegetables in the world. Out of the 370 metric tonnes of fruits produced in the world in 2001, India accounted for around 8% of the total production. In vegetables, India produced 71 million metric tonnes in 20018 and accounted for around 15% of the worlds total vegetable production. However, though it is an honour to be world leaders in production of fruits and vegetables, it is not much of a reason to rejoice in case of India. The volumes in India come due to the sheer size of the country and the amount of arable land put under fruits and vegetables cultivation. Despite large aggregate production of fruits and vegetables, the productivity per hectare of land remains quite low in India. The diverse agro-climatic zones available in India make it possible to grow a vast variety of fruits and vegetables. However, the competitiveness of horticulture sector in the global market shall largely depend on the productivity of the crop. Table 1 shows that though productivity in India for production of grapes, oranges and bananas is far greater than the world average, in most other fruits, India still lags behind other nations. Smaller nations like Cape Verde, Bahamas and Benin record higher per hectare productivity in mango, lemons and pineapples respectively than India. Table 2 shows productivity in India in vegetables in comparison to the world average. Here again, we find that Indias average falls short of the worlds average in most vegetables. To the contrary, many small nations have productivity several times higher than that of India such as Netherlands in brinjals and tomatoes; New Zealand in potatoes; and Kuwait in green beans. The per capita availability of fruits and vegetables in India is as low as 100 grams per day and 200 grams per day respectively. If we take into account the fact that around 20% of the produce is wasted due to handling and storage losses, the per capita availability of fruit further reduces to just 80 grams per person per day. Per capita availability for vegetables, after taking into account all the wastage and handling losses, comes to a mere 160 grams per day. This is well below the recommended minimum dietary requirements of 140 grams of fruits per day and 270 grams of vegetables per day9. However, despite the low per capita availability of fruits and vegetables in the country, rising per capita income shall ensure that the fruit-and-vegetable consumption shall grow over the next few
8 9
Source: Task Force on Agro-Food Processing (2001), Government of India. Source: Food and Agriculture Organisation (FAO)
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years. While the fruit-and-vegetable sector may remain dominated by the fresh market in the years to come, there may still be opportunities for development of successful processing and retailing businesses. This would require prudent vertical coordination among the different players in the value chain; reduction in wastage and improvements in quality of processed fruits and vegetables. Major Fruits and Vegetables in India: Production and Trade10 a) Mango Total area under mango cultivation in India is around 1.5 million hectares, with the annual production of 10.99 million tonnes. India accounts for more than 50% of the worlds production. The other major mango growing nations are Mexico, Pakistan, Brazil and Thailand. Despite large domestic production of mangoes, Indias share in the global trade in mangoes is not very significant. Out of the 0.65 million tonnes of mangoes traded internationally every year, valued at US $384 million, Indias share in this trade is only around 3800 tonnes, valued at US $18 million. It must be noted that Indias major mango exports are in the fresh form; however, less than 1% of worlds trade in mangoes is in fresh form. Bulk of the international trade is in the form of processed mangoes, especially mango pulp. The major importers of mango and mango pulp are North America, Middle East and Europe. The major destinations for Indian mango exports are Middle East and Europe. Our exports to the biggest importer of mangoes, i.e. North America, are almost negligible. Mango market in North America is heavily dominated by exports from Mexico and Brazil. The ratio of cost of production to farm-gate prices in mangoes is quite unfavourable for mango growers in India. This has adversely affected the price competitiveness of Indian mangoes in the global market. Subsidy, either domestic or export, is not a major factor in deciding mango trade in the world as none of the major producers and exporters of mangoes subsidize mango production on any significant scale. Two pronged strategy is needed to increase Indias share in worlds mango trade. Firstly, while strengthening our stronghold in the trade of fresh mangoes, impetus should be given to trade of processed mangoes as well. Secondly, mango growers, processors and exporters should be made aware of the SPS norms under the WTO and Codex, which are mandatory and stringent for exports. b) Grapes
10 Source: National Workshop on Enhancing Competitiveness of Indian Agriculture organised jointly by Confederation of Indian Industry (CII), Ministry of Agriculture (Government of India) and National Institute of Agricultural Marketing (NIAM) on April 7, 2005 at Scope Complex, Lodhi Estate, New Delhi.
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With around 40,000 hectares of land under grapes cultivation, India produces about 1.2 million tonnes of grapes per year. Grapes are the second most important fruit exported from India, after mangoes. Maharashtra, Gujarat and Karnataka are the major grape producing states in India. Plans are underway for starting grapes cultivation for producing wines in Uttaranchal and Pondicherry. The global trade in grapes is 2.7 million tonnes, valued at US$ 2.6 billion. The major producers of grapes are Italy, France, Spain, USA, Argentina and Chile. The North American and European nations are major importers of grapes, while Latin American nations are major exporters of grapes. Indias grape exports are small compared to the worlds trade. However, Indian export competitiveness in grapes continues to be high based on relatively lower prices of grapes cultivation in India compared to our Western counterparts. The issues of concern in grape exports are mainly conforming to SPS measures and the establishment of export-oriented infrastructure facilities. There are a few success stories in grapes in India. One such success story is MahaGrapes in Maharashtra which represent vertically coordinated grape production and marketing system. MahaGrapes has a sizeable share in grape exports from India. MahaGrapes has been briefly discussed later in the paper as a case let. c) Banana India is one of the largest banana producers in the world having approximately 0.45 million hectares of land under banana cultivation. The total banana cultivation in India is close to 16 million tonnes. Uttar Pradesh, Bihar, Maharashtra and West Bengal are few of the major banana producing states in India. The availability of banana all year round makes it one of the most widely consumed fruits in the country. Also, there is a preference among Indian consumers for fresh banana, and in presence of all-year round availability, processed banana finds difficulty in getting acceptance from the Indian consumers. Banana is among the worlds most widely traded fresh fruits, with annual world trade amounting to 14.58 million tonnes, valued at US$ 4.3 billion. The international trade in banana is distorted on account of the quotas and preferences used by the importing nations in favour of certain exporting nations. In Europe, the in-quota tariff on import of bananas from Caribbean countries is 0% and the in-quota tariff for certain Latin American nations is 75 euro per tonne. Further still, Out-of quota Most Favoured Nation (MFN) tariff is 750 euro per tonne.
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In 2003, the average price of banana in Europe was US $810 per tonne, and US $385 per tonne in the US. At these production prices, India is one of the most efficient and competitive banana growers in the world. However, Indian firms are not able to compete in the global market place due to the distorted tariff regimes of the major banana importing nations of the world. d) Apple India is not a major player in apple production and trade in the world. The total production of apple in the country is approximately 1.2 million tonnes and the area under cultivation is about 0.24 million hectares. Major apple producers in the world are USA, China, France, Germany and Italy and they contribute a lions share to the worlds annual total apple production of 45 million tonnes. India is a net importer of apples. In 2002-03, India exported around 15000 tonnes of apples, while it imported around 18000 tonnes. Indias share in the global apple trade is also miniscule. France, Italy, USA and China are the major exporters of apples. The volume of global trade in apples is around 5.6 million tonnes, valued at US$ 2.8 billion. The cost of production of apple in India is relatively higher than in other major producing nations. This is on account of apples being grown in hilly regions in India where accessibility is poor and infrastructure support is weak. The main handicap in apple exports is that of stagnation in upgradation of varieties of apples grown in India for last four decades. The tastes in the world have shifted away from traditional varieties to exotic varieties of apples. Also most Indian apple varieties are not very amenable to processing. e) Potato Potato is one of the major vegetables grown in India. The per hectare productivity of potatoes in India is higher than the international average. The total potato production in the country is approximately 24 million tonnes, and the area under cultivation is 1.2 million hectares. Indias share in the world potato production is around 6 to 7%. The total trade in potato amounts to 7.9 million tonnes, valued at US$ 1.6 billion. Indias share in potato exports is around 2.5%, with exports amounting to about 2 lac tonnes in 2002-03. Russia, Poland, China, USA and Germany are the major producers of potato in the world. The importers of potato are Russia, Netherlands, Belgium, France and Saudi Arabia. The export destinations of Indian potatoes are Sri Lanka, Nepal, UAE, Mauritius and Qatar. Once again, Indian exports are mostly to the Saarc and the Gulf nations primarily on account of Indian potatoes not being able to meet the stringent quality standards of the lucrative markets of the west.
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The international potato trade has some important insights to offer. We find that major European nations are both the major exporters and importers of potatoes. This is essentially on account of the seasonality of production of potatoes. Most European nations are net importers of potatoes in winters and net exporters of potatoes in summers. It is here where a good opportunity lies for Indian potato growers. The bulk of Indian potato production happens during the winter months, when Europe is a net potato importer. Thus, there are good opportunities for India for exports to Europe. What is unfortunate is that despite this opportunity, India is not a player in the European potato trade. A concerted, coordinated effort on improving the quality of Indian potatoes; making them compliant to the SPS standards of the European nations; and development of export-oriented infrastructure can help India play a more dominant role in the worlds potato trade. f) Onions Onion production presents a very interesting picture. While on the one hand, onion is regarded as a thrust vegetable (after the onion crisis in the 90s); on the other hand, per hectare productivity of onion is still far below the average per hectare productivity in most developing countries. Also, despite seasonality and cyclicality of production of onions and a growing domestic demand, the exports of onions from India are increasing at a fast pace and are expected to reach one million tonnes in 2005. The total production of onions in the country is approx. 5.7 million tonnes and the area under cultivation is 0.45 million hectares. India is the second largest producer of onions, second only to China. The other major onion producers are USA, Russia, Turkey, Japan, Nigeria and Spain. The global trade in onions in 2002 was 3.9 million tonnes, valued at US$ 1.06 billion. The share of Indian exports in world trade in onions has increased from around 9% in 1990 to 14% in 2002. However, despite the increase in Indias share in the export market, India has been unable to enter the European markets. This is because the red flesh onions grown in India are more pungent and unsuitable for the European palate. Government in collaboration with agriculture research institutions should develop other varieties of onions which are not only amenable to processing, but also have an export market. The major importers of onions are Germany, UK, USA, UAE, France and Malaysia. The major exporters are Netherlands, India, Spain, Poland and Mexico. However, the major export destinations for Indian exports are Malaysia, Sri Lanka, UAE, Bangladesh and Bahrain, where the red flesh onions find easy acceptance in local cuisines and dietary habits.
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Production and Productivity Statistics: Fruits and Vegetables From figure 1 and 2 we see that there has been a steady increase in the area under fruits production, from around 3 million hectares to over 4 million hectares in the last decade. Also despite minor fluctuations, the overall fruits production has increased from less than 30 million tonnes to well over 40 million tonnes in the last decade. Figure 3 shows that per hectare productivity in fruits was around 10 metric tonnes per hectare in 1991-92, and it remained more or less close to the same level even in 2001-02. Thus, there has been an overall stagnation in fruit productivity in the last decade. Clearly, the increase in fruits production in India has been an outcome of increase in area and not increase in productivity. In figures 4 and 5, we see that the area under vegetable cultivation has remained more or less static at close to 6 million hectares in the last decade. However, the production of vegetables, on the whole, has shown a substantial increase. Notwithstanding the year-wise fluctuations in production growth rates, vegetables production has shown a secular growth from around 60 million tonnes in 1991-92 to more than 80 million tonnes in 2001-02. There has been a sizeable increase in vegetable production in the year 1998-99 due to reasons like favourable monsoons; good market conditions in terms of farm-gate prices and consumer prices; and positive conditions in the exports market. It is important to note is that the agriculture sector in India has been able to not only sustain the increase in vegetable production that happened in 1998-99 and but also maintain production (and consumption) at higher levels even in the subsequent years. The productivity in vegetable production on the whole has increased in the last decade as shown in figure 6. From close to 10 metric tonnes of vegetables per hectare in 1991-92, the productivity has almost doubled in 2001-02 to around 20 metric tonnes per hectare. Thus, despite stagnation in increase in area under vegetable production, the increase in vegetable production happened due to increase in productivity. Fruit and Vegetable Processing: Present Status Fruit-and-vegetable processing, in its simplest forms like making pickles, chutneys, sun-drying of fruits and so on, has traditionally been practiced in India. However, in the present-day scenario, despite huge volumes of production of fruits and vegetables, the processed fruit-and-vegetable sector accounts for only 2% of the total produce. Compared to Indias 2%, the other major nations have a
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much higher percentage of fruits and vegetables getting processed such as Brazil 70%, USA 65%, Malaysia 83% and Israel 50%11. There have recently been some questions raised on the validity of the figure of 2%. As claimed by the government, this figure comes from the organised fruit-and-vegetable processing units in the country. But, then there is a large informal sector in the economy which is ignored while estimating the amount of fruits and vegetables processed in the country. There have been claims that should the informal processing units be taken into consideration the percentage of fruits and vegetables processed would go up. However, this is a contentious issue and a more in-depth, detailed assessment is required to establish the veracity of this argument. Another argument presented in most policy circles is that due to the presence of diverse agro-climatic conditions and long growing seasons, there is year round availability of fresh fruits and vegetables. Thus, processed fruits and vegetables are not preferred much by the average Indian consumer. The cost of processing, packaging and marketing further pushes up the cost of processed fruits and vegetables, and thus makes them out of the reach of the common man. While it is true that in the presence of affordable fresh varieties, the domestic fruit-and-vegetable sector would be dominated by fresh trade, the growing urbanization; rising disposable incomes and increasing demand for convenience foods should also provide enough scope for fruit-and-vegetable processors to do successful business.12 As per the Ministry of Food Processing Industry, at present there are a little over 5198 food processing units registered under the Food Products Order (1955). These units cover a whole spectrum of food processing activities like wheat and rice milling, dairying, poultry and marine foods. A recent survey by the Ministry showed that there are around 4000 registered units involved only in the processing of fruits and vegetables.13 Most of these units are in the small and cottage sector. The total installed capacity for fruit-and-vegetable processing was 11.08 lac tonnes in 1993, which increased to around 21 lac tonnes in 1999.14 A few modern units have established processing plants, and a few more are in the pipeline.
11 Source: National Workshop on Enhancing Competitiveness of Indian Agriculture organised jointly by Confederation of Indian Industry (CII), Ministry of Agriculture (Government of India) and National Institute of Agricultural Marketing (NIAM) on April 7, 2005 at Scope Complex, Lodhi Estate, New Delhi.
Source: Food and Agriculture Integrated Development Action (FAIDA) Report, Confederation of Indian Industries (CII) and McKinsey and Company.
13
12
Source: Ministry of Food Processing Industries, Government of India, www.mofpi.nic.in Source: Ministry of Food Processing Industries, Government of India, www.mofpi.nic.in
14
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In the year 1997-98 the exports of processed fruits and vegetables were in the order of 299 thousand tonnes, valued at Rs.761 crores or US$ 200 million. To further give a boost to exports of processed fruits and vegetables from India, the Government of India has approved 1120 proposals of 100% export oriented units in 1999-2000 in different Agri-Export Zones (AEZ) of the country. The important countries with which Joint Ventures have been signed are U.S.A., U.K., Netherlands, Switzerland, and Germany. The proposals include the fields like technology transfer, financial assistance and marketing tie-ups. These tie-ups include production of items like canned mushrooms; banana and mango puree; fruit concentrates; and dehydration of vegetables particularly onion. The past track record of projects planned in food processing (including fruits and vegetables) and their implementation has been presented in figures 8 and 9. If the statistics presented in those figures are anything to go by, the rate of implementation of projects planned in food processing (including fruits and vegetables) is rather abysmal. Therefore, one cannot really say how many of the proposals planned and approved shall materialize on the ground. The major reason for poor project implementation is that the fruit-and-vegetable value chain has very high levels of inefficiencies due to wastage and handling losses; poor infrastructure and post-harvest management techniques; inadequate transport systems and support services like integrated cold chains; and poor retailing conditions. Given the infrastructural bottlenecks, it is very difficult for any processor to profitably market his produce. To overcome these bottlenecks in the value chain, vertical integration could be a possible alternative, but it requires huge financial wherewithal, managerial expertise and legal support, all of which most Small and Medium Enterprises (SMEs) lack in our country. Backward integration through contract farming and forward integration through setting-up of proper retailing joints could help the fruit-and-vegetable processors develop sustainable businesses. This will also enable them to compete with the informal players by offering quality produce at affordable prices. Policy Support for Horticulture in India Cold Storage Act (1980) Among the infrastructure facilities needed to support fruit-and-vegetable processing, cold storages are of paramount importance. Most fruits and vegetables have seasonal production cycles while demand for such fruits and vegetables is all the year round. Even processing takes place throughout the year, and thus it is important for the raw materials to be available all the year round. Cold storages help break the seasonality in availability of fruits and vegetables both for consumption and processing purposes by performing a balancing act between the glut and deficit seasons.
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The number of cold storages (of more than 10 tonnes capacity) in the country has gone up from 2,930 at the end of 1990-91 to 3,253 at the end of 1995-96 and their aggregate capacities have gone up from 7.68 million tonnes to 8.73 million tonnes. The cold storages are being mostly used for the storage of agricultural commodities with potato being the largest stored commodity. About 88% of the total cold chain capacity is exclusively used for storage of potatoes only. Potatoes also account for about 50% of the multi-purpose storage capacity.15 At present setting up of cold storages in India is not a lucrative activity because of high investment and low rental charges prevailing in the country. In some of the states there are curbs on rental charges as they are fixed by the governments. The Cold Storage Act (1980) made it compulsory for any entrepreneur setting up a cold storage unit to take a license from the Central and the State Governments, depending upon the installed capacity of the cold storage. The Act also gave powers to the government to decide the cold storage rentals. The governments, on account of populist moves, never raised the rental charges for cold storages. This has had an adverse impact on growth of cold storages as low rents have made the business unviable and unprofitable. The Cold Storage Act was implemented by Directorate of Marketing and Inspection in the Ministry of Rural Development. Most cold storages in India were built in the 1980s for storing potato and potato seeds. Most of them are not very suitable for storing frozen peas, broccoli, mushrooms and other sensitive horticulture products as they are not able to meet the stringent temperature requirements. These do not have scientific humidity and temperature controls and are thus unsuitable for many horticulture produce. The spatial distribution (or concentration) of cold storages is also highly skewed as a result of the license regime of the government. Around 46% of the total cold storage capacity in India is concentrated in a single state only Uttar Pradesh16. Unreliable electricity forces cold storages to use diesel generating sets, which increases the chilling costs manifolds. As far as refrigerated transport of perishable horticulture produce from the farm to the processing unit or the cold storage is concerned, the demand far outstrips the supply. However, the rate of fleet expansion has been slow in the country despite rising demands for such refrigerated transports. Refrigerated trucks are expensive as they are refrigerated using generators, which add to the costs. Also, breaking down of such gensets during the transit spoils the stock. The Ministry of Railways has long been tossing with the idea of attaching refrigerated vans to super fast express trains; however there has been more rhetoric than action on this front.
15 16
Source: CII Report on Cold Storages and Foodgrains Handling (2002) Source: CII Report on Cold Storages and Foodgrains Handling (2002)
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In 1997, the union government repealed the Cold Storage Order, 1980. Since then, no license is required from the Union government for setting up a cold storage. However, the states are still to repeal or amend their respective cold storage acts for freeing the cold storage units from the license regime. Easy and concessional finance should be made available for setting up cold storages in rural and other agricultural areas. Finance is available for establishing cold storages from State Financial Corporations, Nationalised and Scheduled Banks, National Cooperative Development Corporation (NCDC) for cold storages under the cooperative sector, National Horticulture Boards, Ministry of Food Processing Industries, and Agriculture and Processed Food Products Export Development Authority (APEDA) for cold storage for export houses. The G.B. Pant University of Agricultural Sciences at Pantnagar in Udham Singh Nagar district of Uttaranchal vehemently believes that integrated cold storage management is the need of the hour for the development of horticulture industry in India, especially in the hilly regions. Given the poor socioeconomic conditions of the farmers in hilly areas and the weak public infrastructure, the fruit-andvegetable processors will have to ensure a bundle of services like procurement from the farm-gate; assistance in cultivation; storage and transport facilities; and prompt payments in order to maintain a stable supply of raw materials of considerable quality for processing and sale in the domestic as well as export markets. Case let (1): The Himachal Pradesh Fruit Processing and Marketing Corporation (HPMC): Bundling of Pre-and-Post Harvest Infrastructure Services for Fruit Farmers Established in 1974 as a State Public Undertaking, HPMC looks at development of fruit processing in the state of Himachal Pradesh. It provides all the services to the fruit growers that are needed for successful marketing of the produce in the domestic and export markets. HPMC provides pre-andpost harvest infrastructure facilities comprising of a network of mechanized pack houses; cold storages; trans-shipment centres and fruit processing plants even to the remotest corners of the state, besides a network of marketing services at major terminal markets. Several pre-and-post harvest management services are provided right at the doorsteps of the farmers. By doing so, the farmers are able to remove the farm-heat from the produce and increase the shelf-life of the produce. On the marketing front, HPMC has incorporated the latest technology for processing and packing of juices in tetra packs; introduction of juice dispensing machines at major commercial centres; preparation of apple and pear juice concentrates for export purposes and development of an umbrella brand (hpmc) for marketing of processed fruits from Himachal Pradesh.
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One of the major initiatives of HPMC is the introduction of mobile cold storage vans, which procure the produce from the farm-gate and transport them under refrigerated conditions to processing units located in distant places. This checks wastage of the perishable produce during transit; reduces handling and storage losses by the producer at his farm; and maintains the quality of the raw material right upto the time it is processed. Cold storages have also been setup in metropolitan towns in the country, where apples and apple concentrates from Himachal Pradesh are stored for sale in the offseason months. HPMC was once a fairly successful enterprise. However, there have been claims recently that it has not been able to sustain its success. There has been stagnation in HPMC in terms of procurement, and marketing outlets. It has been unable to attract enough farmer suppliers due to the fact that it has been unable to pay remunerative prices for the fruits procured. This inability to pay remunerative prices to farmers stems from its failure to successfully market its produce in consumer markets and earn higher profits. There has been stiff competition to HPMC from many private players which are able to establish better brands for their products. HPMC had the advantage of government ownership, which ensured public funds for infrastructure investments, but on the flipside, it brought bureaucratic interference in the management of the enterprise. With bureaucrats at the helm of the affairs in HPMC, the accountability shifted from farmers to superiors in the government and the ministries. This hampered the long-term growth of the organisation. Corporatisation of HPMC is required so that it functions like an autonomous business organisation. Just like cooperatives, even HPMC needs to look for market sources for funds, and not rely on the soft budgets of the government. Only then shall it be able to free itself from the bureaucratic interferences and be able to respond to the market opportunities and challenges. Agriculture Export Zones (AEZ) There has been a lot of talk on Indias comparative advantage in several horticulture products in the world market. However, despite the comparative advantage in terms of cheap labour, long growing seasons, diverse agro-climatic zones and vast bio-diversity, Indias presence in the global trade in most horticulture products (both fresh and processed) is much below the potential. It is in realization of the fact that to give an impetus to horticulture exports in the country, there has to be a package of infrastructure facilities, fiscal incentives and other support services. Agri Export Zones or AEZ is one of important policies of the Government of India that provides a bundle of services to producers and processors, especially for export purposes. The Ministry of Agriculture,
30
Ministry of Food Processing Industries, and Agriculture Produce Export Development Authority (APEDA) look into the growth and development of AEZs in the country. Agri Export Zones or AEZ were introduced in the national EXIM policy in the year 2001-2002. With the opening of the world trade under the WTO, the Government of India has put horticulture in its thrust list. There is a general understanding emerging in the government authorities that comprehensive assistance should be meted out to units involved in food processing (including fruits and vegetables) to be able to successfully compete in the world market. The AEZs are so designed that the entire value chain starting from the farm upto the final retailing unit can be strengthened. Provision for good quality inputs like modern seeds for exportable and processable varieties of fruits and vegetables; pre and post harvest technologies for farmers; storage and warehousing facilities; good transportation and communication networks; sources of finance; export-friendly infrastructures like ports, Inland Container Depots (ICD); and quality assurance laboratories all come as a package to units in an AEZ. Convergence is the modus operandi in an AEZ, where government authorities and private entrepreneurs converge to devise solutions and build synergies for boosting exports in agriculture. The major AEZs are as follows (an indicative list): i. Litchi Export Zone in Uttaranchal (Nanital, Udham Singh Nagar, Dehradun, Pithoragarh, Pauri and Almora), West Bengal (Malda, Murshidabad and 24 Pargana North and South), and Bihar (Muzaffarpur, Hajipur, Vaishali, Bhagalpur and Sitamarhi). ii. iii. Grape and Grapevine in Maharashtra (Nasik, Sangli, Sholapur, Satara and Ahmendnagar). Mango Export Zone in Maharashtra (Ratnagiri, Sindhudurg, Thane and Raigarh), Uttar Pradesh (Saharanpur, Muzaffarnagar, Bijnore, Meerut, Baghpat and Bulandshahar), Andhra Pradesh (Chittor and Krishna districts), West Bengal (Malda and Murshidabad) and Tamil Nadu (Madurai, Theni, Dindigul, Virudhunagar and Tiruneveli). iv. Apple and Walnut Export Zone in Jammu and Kashmir (Srinagar, Baramula, Anantnag, Kupwara, Udhampur and Pulwama), and Apple Export Zone in Himachal Pradesh (Shimla, Kullu, Chamba and Kinnaur). v. Potato Export Zone in Punjab (Singhpura, Patiala and satellite centres in Ludhiana and Jalandhar) and West Bengal (Hooghly, Burdhwan, Midnapore, Uday Narayanpur, and Howrah).
31
vi.
Gherkins Export Zone in Karnataka (Tumkur, Bangalore, Hassan, Kolar, Chitradurg, Dharwad and Bagalkot) and Andhra Pradesh (Mehboobnagar, Rangareddy, Karinagar, Medak, Warangal and Nalconda).
vii.
Medicinal and Aromatic Plants Export Zone in Uttaranchal (Uttarkashi, Chamoli, Pithoragarh, Dehradun and Nanital) and Kerala (Wayanad, Mallapuram, Palakkad, Kollam, Ernakulam, Idukki and Trivandrum).
viii.
Banana Export Zone in Maharashtra (Sholapur, Sangli, Pune, Nasik, Latur and Osmanabad).
Case-let (2): Lychee Export Zone in Uttaranchal With an objective of promoting cultivation and exports of Lychee in Uttaranchal, the Lychee Export Zone was established on 22nd September, 2001 in the districts of Dehradun, Nanital, Udham Singh Nagar, Pithoragarh, Pauri (Kotdwar) and Almora. The total planned investment was Rs. 8.70 crores, while the anticipated exports from the zone over a period of 5 years was Rs.38.20 crores17. The major objectives, activities of the Lychee Export Zone are as follows: Expansion of area under Lychee in Uttaranchal to the tune of 1000 hectares, and rejuvenation of old and unproductive Lychee orchards over an area of 450 hectares in a period of 3 years. To bridge the gap between advanced technologies and conventional methods of Lychee cultivation, and encourage plantation of processing-friendly varieties of Lychee. To coordinate with various state departments to get their commitment for financial and physical resources and implementation of designated activities, and to identify entrepreneurs and facilitate setting-up of units for post-harvest handling and processing. To facilitate exports of Lychee by ensuring compliance with Codex requirements (water, pesticide residue and other SPS standards) and improving access to international markets by making agreements with international buyers. The Lychee Export Zone is slightly behind schedule in meeting its area expansion and orchard rejuvenation targets. Till date, it has accomplished around 650 hectares of area expansion under Lychee cultivation, and 350 hectares of rejuvenation of unproductive Lychee orchards. Efforts are on to accelerate the growth in area under Lychee in this current fiscal year. Forward and backward linkages are being developed in the Lychee Export Zone (LEZ) through public-private entrepreneurship. Consistent endeavours have been made to encourage entrepreneurs to
17
Source: www.apeda.com
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come forward to develop infrastructure for post harvest handling. 7 MoU have been signed by the LEZ and private entrepreneurs for installing processing and export-oriented infrastructure in the state. Lychee Exports from Lychee Export Zones Indian Lychee due to its peculiar taste has become very popular, and has good potential to earn foreign exchange. The harvesting season in India starts earlier than China and Taiwan, which gives India an advantage for entering the Europe market. Developing export businesses require stability in production and consistency in quality and supply of the produce. Adverse weather conditions affect the flowering of the Lychee plant, and results in a drop in Lychee production. The unfavourable weather conditions like dense fog during winter months and rains during the flowering season disbalance the male-female flower ratio, and result in low fruit setting. However, LEZ in Uttaranchal is trying to tie-up with agriculture research organisations to develop resistant varieties to overcome this problem of disbalanced flowering. The G.B. Pant University at Pantnagar has offered support to the government in developing the aforesaid varieties of Lychee plants. Despite weather problems, 480 metric tonnes of Lychee was exported in 2003-04. Performance of Uttaranchal was good as exports from this state jumped from 9.25 metric tonnes in 2002-03 to 73 metric tonnes in 2003-04. This was primarily due to the high quality standards that the LEZ has ensured among the Lychee growers in Uttaranchal that Lychee from this state found easy acceptance in the world market. Case-let (3): MahaGrapes Major grape exporter from India Maharashtra is Indias leading producer and exporter of grapes. Favourable climate; the soil and humidity conditions; and the frequency of rainfall makes Maharashtra an ideal place in India for production of grapes, and also wines and other beverages. According to the Ministry of Food Processing Industries and APEDA, production of grapes for export markets is far more lucrative than production for domestic markets, as the export markets offer high premium prices for both table grapes and grapes for wines as compared to the prices offered by the domestic market. The economics of grapes production is presented in table 6. The figures were obtained during interviews with several grape growers, who had participated in different conferences and panel discussions on agriculture organised by either the industry associations or the government. a) Initial cost establishing a grape garden: Rs. 5 lacs to 6 lacs per hectare.
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b) Annual maintenance from second year onwards: Rs. 3.0 lacs per hectare. The annual maintenance costs include labour charges for several labour-intensive activities like pruning; weeding; spraying; harvesting; packing and loading; costs of manures and fertilizers; costs of pesticides and costs of transportation. When grown for export purposes, the maintenance cost goes up by Rs. 50,000 to Rs. 1 lacs per hectare as compared to costs when grapes are grown for sale in the domestic market only. This is on account of additional expenses on pre-cooling charges, slow/quick release guards (chemicals), cold storage and maintaining shipping temperatures at 2 deg C with 95% humidity. This is important for grapes to keep them fresh and help them withstand the transportation times to export markets. It has been widely noted that the yield per hectare goes down when grapes are grown for export markets, as compared to when they are grown for sale only in domestic markets. This is on account of wider spacing of grapevines in a grape garden meant exclusively for export purposes in order to meet the stringent quality standards. In order to facilitate grape exports from Maharashtra, MahaGrapes was establish to organise grape growers as producer cooperatives, and install facilities for pre-cooling; cold storage; packing and container transport facilities. Maharashtra State Agricultural Marketing Board and the National Cooperative Development Council provided the financial wherewithal for grape growers cooperatives to be established. The cooperative societies adopted MahaGrapes as the umbrella brand under which all grapes were sold in different export markets. Realising the importance of quality in export markets, MahaGrapes started focusing on the quality rather than the quantity of grapes exported. Consequently, its volumes fell from 1800 tonnes to 800 tonnes an annum. However, its price realization increased in the global market due to the premium quality of its exports. Thus despite declining volumes, MahaGrapes was able to generate surplus funds from its operations year after year. The extent of export rejections for MahaGrapes reduced drastically (around less than 10%), and this helped reduce losses to the cooperative. MahaGrapes has been able to establish the Indian brand in the grape markets of the West, especially Europe. Newer cooperative societies are getting established in Maharashtra for growing grapes, and selling in the export markets under the MahaGrapes brand. The share of cooperatives in total grape exports from India is around 30 to 35%, and India is now able to sell almost 60% of its produce in lucrative export markets of Europe and USA18.
18
Source: APEDA Data on Grape Exports from India.
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Emerging Challenges European Union now insists on EURO GAP registration of all the farms from where the produce is exported to its member countries. This is done to ensure complete traceability and quality compliance by all farmers involved in trade with the European nations. However, such a registration is expensive and costs upto Rs. 35000 per farm19. As this requirement becomes mandatory, the small and medium farmer would find it more and more difficult to trade in the world market. Thus, MahaGrapes has planned to intervene for making the farms of its member farmers EURO GAP registered. European Union has also been setting stringent standards on pesticide residues as per the SPS Agreements of the WTO, and wants pesticide residue certification on every grape export from India. Testing for each pesticide could cost upto Rs.7000 per sample and many small farmers are may not be able to bear the expenses of testing for all different samples of grapes, or types of pesticides used. MahaGrapes is working with several government and international organisations to tackle these issues to keep the grape industry competitive, cost-effective and remunerative. APEDA has developed a Pesticide Monitoring Programme, and the Government of Maharashtra has made arrangements for the farmers of different cooperatives and private firms to register and avail the certification. UNIDO Guidelines for Setting-Up Fruit-&-Vegetable Processing Units20 United Nations Industrial Development Organisation (UNIDO) has issued detailed guidelines for setting-up of fruit-and-vegetable processing units in developing countries. Presented below is a snapshot of the major guidelines mentioned by UNIDO. a) What fruits and vegetables can be processed? This is the first question that needs to be addressed while deciding to set-up a fruit-and-vegetable processing unit. The following important factors will have to be considered to arrive at an answer for the above question: the demand (explicit or latent) for a particular fruit or vegetable in processed form; the quality of raw material (whether it can withstand processing), and regular supplies of the raw materials.
19 20
Source: APEDA Data on Grapes Export from India. Source: www.unido.org
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b) Processing Planning While most fruits and vegetables have very seasonal production cycles, the processing plant should be operational for the full year for maximum efficiency and economy in resource use. This requires proper inventory planning for the processing unit. A typical processing unit should be able to process multiple fruits and vegetables and not be focused on one product only. Efforts should be made to manage processing units with lower initial investments so that the unit is able to function even in low volumes and is able to break-even faster. Maximum utilization of raw materials (at cheaper rates) during the crop season by additional manufacturing of semi-processed products, and transforming these into finished products in the offseason is an important strategy that most fruit-and-vegetable processors should adopt. Preservation methods like drying, dehydration, concentration, sugar concentrates and so on can be used to develop semi-processed products, and stored for further processing. c) Location The basic objective is to minimize the average cost of production including transport and handling. Adequate supply of water; skilled manpower; proximity to rail or road transport facilities, and adequate markets are other important requirements that need to be considered. d) Choice of Processing Technologies Fruit-and-vegetable processing systems can range from small, intermediate to large-scale systems depending upon the volume of raw materials; capital investments and quality of the produce required. Which technique for fruit-and-vegetable processing should be used in developing countries depends on a host of considerations as follows. Increasing farmers income by ensuring full utilisation of available indigenous raw materials and local manufacturing of all or part of the processing equipment. Cutting production costs to remain cost-effective by using local sources of energy. Generating and distributing income by decentralizing processing activities and involving different beneficiaries in processing activities. Maximizing national output by reducing capital expenditure and royalty payments; more effectively developing balance-of-payments by minimizing imports (equipment, packing materials, additives) and maximizing export-oriented production.
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Maximizing availability of consumer goods by maximizing high-quality processed produce for internal and export markets, reducing post-harvest losses, and giving value-addition to indigenous crops and agriculture produce. Choosing a technology solely for profit-maximising purposes may back-fire as it may work against equitable development. It may also require solid, long-term market opportunity to ensure viability, which many start-up food processing firms may find difficult to achieve in the initial years of operations. Thus, starting with intermediate technology and graduating to large-scale modern technology in developing areas may be a more sustainable course of action for fruit-and-vegetable processing firms. Excessive automation of processing equipment does not necessarily imply a good quality of the finished produce. e) Prioritisation of Output from Processing Centres The three main outputs from the processing centres have to be prioritized in the following fashion: Priority One: Quality Finished product quality in conformity with specifications and standards (national or international) and consumer preferences and requests should be given the topmost priority in a processing unit. Priority Two: Regular Supply Having ensured consistently high quality, continuous and reliable supply of finished products to the domestic and export markets all the year round (or marketing season of the specific product) should be the next priority. Priority Three: Reduction in Costs Within the stringent need to cover the first two priorities, the processing unit should strive to contain the manufacturing and transportation costs as low as possible. Concluding Remarks Fruit-and-vegetable sector (both fresh and processed) offer immense opportunities for the producers, processors, retailers and exporters for building successful businesses provided they are able to build competitive advantages from the high levels of inefficiencies in the system today. Reduction in postharvest losses; working in close interactions with the farmers; vertical integration in the value chain; and contract farming for fruits and vegetables are all important for growth and development of this sector. The efforts for development of fruits and vegetables industry in India shall have to encompass a whole multitude of activities starting from improvements in agriculture extension services;
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development of processing amenable varieties of fruits and vegetables and ensuring stringent quality standards both for domestic and export markets. Institution building shall also be an important component in the drive for modernizing and consolidating the fruits and vegetables industry. Organisations like MahaGrapes should be the norm rather than exception if we have to leverage our competitive advantage in horticulture. SWOT Analysis
STRENGHTS Large area under fruit-and-vegetable cultivation Long growing-season and diverse agro-climatic zones (favourable for cultivating vast variety of fruits and vegetables) Cheap supply of labour Large consumption market in the country ample demand for fruits and vegetables (fresh and processed) Good R&D support through numerous agriculture universities OPPORTUNITIES Amendment in the Cold Storage Act no license needed for setting-up cold storages for horticulture. Growing middle-class in the economy increasing demand for horticulture produce (fresh and processed). Active government support for fruit and vegetable processing units and export units. Agriculture Export Zones (AEZs) are being established to encourage horticulture exports. Income from cultivation of horticulture crops (fruits and vegetables) is tax-exempted. Low level of present per capita consumption possibilities of increasing consumption manifolds Indian grapes, mangoes and lychees have good export markets
WEAKNESSES Low productivity in cultivation of most fruits and vegetables Limited spread of irrigation facilities and infrastructure support to horticulture crops like cold storages Many indigenous varieties of fruits and vegetables are not very amenable to processing Heavy post-harvest and handling losses. Limited product handling, storage and warehouse capabilities at mandis in the terminal markets. THREATS Organised retail trade in fruits and vegetables still very nascent in India industry mostly dominated by informal players Domestic trade mostly dominated by fresh varieties due to year-long availability of fresh varieties of fruits and veg. Most AEZs not performing as expected due to excessive bureaucratic control, and absence of support infrastructure. Most of the Indian export trade in fruits is in fresh varieties, while bulk of international trade is in processed varieties. Quality control and awareness about international standards (SPS, FDA) low among Indian producers Fruit-and-vegetable sector largely dominated by small-scale units lack of adequate vertical coordination.
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Table 1: Productivity of fruits in India in comparison to the world (in MT/Hectare) Product World Average Apple Banana Cashew Nuts Grapes Mangoes Oranges Papayas Pineapples Lemons and Limes 13.24 14.70 1.02 7.75 9.10 11.00 17.60 19.00 11.00 Indian Average Country with Highest Productivity Times Greater Than India 9.00 2.10 9.40 6.70 1.50 7.30 3.50 2.50
5.53 Libya (50.0) 24.74 Guatemala (52.5) 0.63 Peru (5.93) 21.12 6.74 Cape Verde (45.0) 23.04 USA (34.3) 8.70 Indonesia (63.7) 14.58 Benin (51.4) 12.20 Bahamas (31.1)
Source: Food and Agriculture Organisation (FAO) Database, 2004 Table 2: Productivity of vegetables in India in comparison to the world (in MT/Hectare) Product World Average Indian Average Country with Highest Productivity Times Greater than India Green Beans Cabbage Cauliflower Chick Peas Brinjals Okra Green Peas Pigeon Peas Potatoes Onions (Dry) Tomatoes 7.70 20.71 18.70 0.79 17.68 6.36 7.95 0.71 16.96 17.57 27.26 2.80 Kuwait (22.95) 21.33 Uzbekistan (57.59) 17.47 New Zealand (45.25) 0.82 China (3.93) 16.15 Netherlands (370.0) 9.54 Cyprus (22.83) 8.36 Lithuania (18.89) 0.70 Trinidad & Tobago (2.63) 18.56 New Zealand (45.21) 10.35 Korean Republic (60.53) 14.79 Netherlands (458.01) 8.20 2.70 2.60 4.80 22.90 2.40 2.30 3.80 2.40 5.90 31.00
Source: Food and Agriculture Organisation (FAO) Database, 2004
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Figure 1: Trends in fruit production and production growth rates,
Production Growth Rate (Fruits)

Production in '000 MT 50000 40000 30000 20000 10000 0 19 19 19 19 19 19 19 19 19 20 20 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- 0192 93 94 95 96 97 98 99 00 01 02 Year
Source: www.indiastats.com, Analysis: IDF
20 10 5 0 -5 -10 Growth Rate

Growth Rate
15
Figure 2: Trends in area under fruits cultivation and area growth rate
Area Growth Rate

4500 4000 3500 3000 2500 2000 1500 1000 500 0 19 9192 19 9293 19 9394 19 9495 19 9596 19 9697 Year 19 9798 19 9899 19 9900 20 0001 20 0102 14 12 10 8 6 4 2 0 -2 Area in '000 Hectares
40
Figure 3: Trends in fruits productivity and productivity growth rates
Growth in Fruits Productivity

Productivity in MT per Hectare 14 12 10 8 6 4 2 0 19 19 19 19 19 19 19 19 19 20 20 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- 0192 93 94 95 96 97 98 99 00 01 02 Year
15 Growth Rate (Productivity)

8 6 4 2 0 -2 -4 -6 -8 -10 -12 19 9192 19 9293 19 9394 19 9495 19 9596 19 9697 Year 19 9798 19 9899 19 9900 20 0001 20 0102 Growth Rate (Area)
10 5 0 -5 -10
Figure 4: Trends in area under vegetables cultivation and area growth rates
Area Under Vegetables Cultivation

7000 6000 5000 4000 3000 2000 1000 0 Area in '000 Hectares
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Figure 5: Trends in production of vegetables and production growth rates
Production Trends in Vegetables

Production in '000 MT 100000 80000 60000 40000 20000 0
19 91 19 9 2 92 19 9 3 93 19 9 4 94 19 9 5 95 19 9 6 96 19 9 7 97 19 9 8 98 19 9 9 99 20 0 0 00 20 0 1 01 -0 2
25 20 15 10 5 0 -5 -10
Year
Source: www.indiastats.com, Analysis: IDF Figure 6: Trends in productivity and productivity growth rates in vegetables
Productivity Trends in Vegetables

16 14 12 10 8 6 4 2 0 19 19 19 19 19 19 19 19 19 20 20 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- 0192 93 94 95 96 97 98 99 00 01 02 Year
25 20 15 10 5 0 -5 -10
Productivity in MT/Hectare
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Growth Rates (Productivity)
Growth Rate (Production)
Figure 7: Percentage of food processed in different countries

Percentage of food processed
80 70 60 50 % 40 30 20 10 0 Thailand Brazil Philippines Countries Malaysia India
Source: CII-McKinsey FAIDA Report Realising the Potential, 2003 Table 3: Installed Capacity and Production of Processed Fruits and Vegetables 1991 1992 1993 1994 1995 1996 1997 1998 4057 4132 4270 4368 4674 4932 5112 3925
F&V Processing Units Installed Capacity (lac tones) Production (lac tones)
9.50
11.08
12.60
14.02
17.50
19.10
20.40
20.80
3.60
4.69
5.59
6.78
8.50
9.60
9.10
9.40
Source: Central Food Technology Research Institute (CFTRI), 2001 Figures 8 and 9: Projects Planned vs. Implemented in Food Processing Industry.
Project Implementation Statistics in Food Processing (1991-01)
Total Outlay (1991-2001)
8000 6000 Number of 4000 Projects 2000 0 Planned Projects Actually Implemented
800 700 600 500 Rs. Billion 400 300 200 100 0 Planned Actually Implemented
Source: CMIE Data 2003, FAIDA Report: Realising the Potential (2003)
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Figure 10: Number of Cold Storage Units (1999)
Number of Cold Storage Units in 1999
Public Sector
Cooperative Sector
Private Sector 0 500 1000 1500 2000 2500 3000
Source: CII Report on Cold Chains and Foodgrains Storage (2002)
S. No
1.
2. 3. 4.
5. 6.
7. 8.
Table 4: Proposed Investments and Exports from AEZ AEZ Project State of AEZ Investment Exports Date (Planned) Anticipated (in of Signing in Rs. Crores next 5 years, MoU Rs. Cr) Lychee Uttaranchal 38.20 22.09.01 8.70 Bihar 154.00 05.04.02 12.13 West Bengal 27.85 23.03.02 10.44 Gherkins Karnataka 10.95 35.25 19.09.01 Grapes Maharashtra 3.50 68.47 07.01.02 Mangoes Uttar Pradesh 71.00 21.12.01 36.11 Maharashtra 145.59 12.02.02 35.12 Andhra Pradesh 48.59 27.09.02 17.89 Apples Jammu & Kashmir 85.35 292.74 18.03.02 Himachal Pradesh 57.07 170.00 17.09.02 Potatoes Punjab 393.75 20.12.01 10.41 Uttar Pradesh 555.50 07.11.01 10.42 West Bengal 381.00 18.06.02 36.65 Medicinal Uttaranchal 18.81 70.64 NA Plants Kerala 29.87 163.00 NA Walnuts Jammu & Kashmir 36.93 90.40 11.05.02 Source: www.apeda.com
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Table 5: Indias Lychee Export Performance State (LEZ) Fresh 2002 Qty. and Value Fresh 2003 Qty. and Value Processed 2002 (Both Qty. and Value) Processed 2003 (Both Qty. and Value) Total 2002 (Both Qty. and Value) Total 2003 (Both Qty. and Value) 12 MT Rs. 18 lacs 393 MT Rs.256.5 Lacs 73 MT Rs. 64.5 lacs
West Bengal Bihar Uttaranchal
6 MT 12 MT 6 MT Rs. 6 lacs Rs. 18 lacs Rs. 6 lacs 35 MT 41 MT 96 MT 325 MT 131 MT Rs. 35 lacs Rs. 61.50 lacs Rs. 72 lacs Rs. 195 lacs Rs. 107 lacs 3 MT 23 MT 6.25 MT 50 MT 9.25 MT Rs. 3 lacs Rs. 34.5 lacs Rs. 3.25 lacs Rs. 30 lacs Rs 6.25 lacs Source: Agri Export Zone Annual Report (Uttaranchal), 2003 Table 6: Economics of Grape Production: Local vs. Export Markets Yield (MT/Ha) Production Costs (Rs. / Ha) Prices (Rs./Kg) Returns over
Cost (Rs. / Ha) 12 30 170,000 425,000
Local Markets Export Markets
35 25
250,000 325,000
Source: MahaGrapes in Maharashtra. Figure 11: Grape Prices Realised by MahaGrapes,
Prices realised by MahaGrapes

80 70 Prices (Rs./Kg) 60 50 40 30 20 10 0 1990 1992 1994 1996 Year 1998 2000 2002 2004
Source: www.apeda.com
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POLICY ENVIRONMENT FOR DEVELOPMENT OF OILSEEDS SECTOR IN INDIA Shibalee Majumdar
Introduction India is one of the largest producers of oilseeds in the world. She is also the largest importer and consumer of edible vegetable oils. This in a way implies that India has not been able to keep pace with her rising domestic demand. in this paper, we intend to look at the potential of Indias Oilseeds and Edible Oils Industry in the global market. In particular, we take up the policy issues that affect the industry. Under policies, we look into three categories: the Regulations, the fiscal policies and the EXIM policies.
A Background to the Oilseeds Industry in India India is one of the largest producers of oilseeds in the world. She accounts for about 9.3 per cent of world oilseed production. Oilseeds are grown in all parts of the country, with main concentration in the southern and central parts. The largest producer of oilseeds in India is Madhya Pradesh, followed by Maharashtra, Rajasthan, Gujarat, Karnataka and Andhra Pradesh. According to the 2003-04 data, the total volume of oilseeds produced in India was Rs.50890 crore at current prices.
Groundnut, rapeseed and mustard, linseed, sesame, sunflower, safflower, soyabean, castor seed and niger seed are the nine major oilseeds that are grown in India. Coconut is the most important source of edible oil among the plantation crops, while among the non-conventional sources, rice-bran and cotton seed are the most important. The production value of groundnut is the highest followed by that of rapeseed and mustard, soybean and coconut.
In spite of being one of the largest producers of oilseeds in the world, India is also the largest importers of edible oils in the world. This implies that Indias production of edible oils is not enough to meet her domestic consumption. She is also the largest consumer of edible oils in the world. The fact that she is the largest importer of edible oils in spite of being one of the largest producers of oilseeds in the world may be attributed to the fact that either Indias oilseeds production is not enough to meet the countrys domestic demand, or that even though it produces enough oilseeds, the infrastructure for oil production is not adequate to provide edible oils at low cost on such a huge proportion. About 43 per cent of edible oil available in India is imported. In 1999, India ranked as the world's largest importer of edible oils, displacing China. The bulk of edible oil India imports under the Open General License (OGL) are RBD palmolein of Malaysian and Indonesian origin. It should also be mentioned here that India does not produce palm oil which forms
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the bulk of her oil imports. This offers the initiative that can be taken to develop an alternative market for other vegetable oils like groundnut, sunflower, mustard, and soyabean.
The Oilseed Sector in India Figure 1 helps us to estimate the share of the major oilseeds in the total oilseeds production in 200102. Groundnut, rapeseed and mustard, and soybean make up 83% of the total production. India is the largest producer of quite a few of the nine major oilseeds that are grown in the country. She is the largest producer of sesame seeds constituting about 30% of the world output. India is the chief producer of niger seeds and groundnut. India is the also the largest producer of castor seeds in the world, producing about 65% of the total world production. Historically, Brazil, China and India have been the key producing countries meeting global requirements. However, in the early 90's, Brazilian farmers moved away to more lucrative cash crops, and surge in domestic demand in China made them net importers, leaving India to meet the global demand.
Figure 2 gives the production and the rate of growth of oilseeds production in the period between 1985-86 and 2002-03. Though there has been a rising trend in the production figures till 1998-99, the growth has not been a smooth one. Also, the production of oilseeds has in fact declined since 199899. The rate of growth shows a fluctuating tendency. The rates of growth of all the nine major oilseeds have been highly unstable. The decadal rates of growth in oilseeds production reached a high at the end of the 1980s and a decline in the 1990s. While at the beginning of the 90s the decadal growth rate had been almost 0.08, by 2000-01, it had declined to less than 0.01.
One of the reasons for the fluctuating nature of the growth rates of production for almost all the major oilseeds may be the fact that since oilseeds are rain fed crops, irregular monsoons and inadequate irrigation facilities add to the low yield of oilseeds in India. The productivity is also restrained by the low levels of inputs used by small holders and marginal farmers. Average yield per hectare of major oilseeds of the country continue to be much less than the average world yield rate. The Government reasons that fragmented land-holding, rain fed cultivation and lack of genetic breakthrough in seeds have together contributed to low yields.
Table 1 shows figures for production, yield and the area under oilseeds cultivation, and Table 2 shows the Cumulative Aggregate Growth Rates of the area, production and yield of oilseeds production in India.
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Figure 3 shows the cumulative aggregate growth rates of the area, production and yield of oilseeds in India. In the beginning of the 1980s, it is observed that the growth rate of productivity was higher than the growth rate of area under oilseed cultivation. However, it is a well known fact that production increases came mainly from area expansion, rather than higher yield. Thus, the fact that the growth rate of yield is higher is due to the fact that they started from a very low base in the 1970s. During the 1990s, the growth rate of production has declined, owing to the decline in both the growth rates of area and yield. It is not surprising that the growth rate of area has declined owing to the fact that there has been an acute land area constraint with a major thrust on foodgrains production. However, it is quite disturbing that the decline in the growth rate in yield is more than that in area. This implies that whatever good was achieved through the technological innovations during the 1990s could not be sustained during the 1990s. Despite being one of world's major producers of cultivated oilseeds and having one of the largest areas under cultivation, India continues to remain in the low rung as far as yield is concerned, which is about 60% of the world average. 21 Some of the reasons that may explain the perpetually low productivity of the oilseeds production in India are as follows:
First, in spite of oilseeds being grown in rain fed areas, no major steps seem to have been taken to provide irrigation facilities to all the cultivated areas. As on 2000, area under oilseeds covered by irrigation was only 25.2% of the total area under oilseeds. For the individual oilseeds, rapeseed and mustard have the highest of 63.2% followed by sunflower (23.3%), groundnut (19.0%) and soybean (1.6%). For most of the oilseeds, the percentage of area under irrigation has decreased. This implies that the expansion in the irrigation facilities have not kept pace with the expansion in area.22 Second, there is limitation of land availability for crops other that food grains in the country primarily due to national priority to achieve self-sufficiency in production of food grains.
Third, lack of the High Yielding Variety seeds can be one of the reasons for the low productivity in the oilseeds sector. As per available information, the availability of this quality of seeds is hardly 10% of the requirement.
22
Agricultural Statistics at a Glance 2003
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Fourth, oilseeds have a high susceptibility to pests and diseases. Thus usage of chemical fertilizers and medicines to prevent diseases makes the cultivation of oilseeds a high-cost affair.
Fifth, oilseeds production is yet to receive the desired priority in the extension set up in the country. Oilseeds should be included in the thrust area which will encourage new investment in the oilseeds sector. Investments are required primarily to develop the infrastructure like irrigation, transport, grading, storage, etc.
The Vegetable Oil Industry in India Vegetable oils are the primary products of the nine major oilseeds that are produced in India. Besides these, coconut, rice bran and cotton seed are the largest non-conventional sources of edible vegetable oils. India has approximately 300 crude edible oil refining units, 60-70 per cent of which are small. Unlike the bigger refiners, the small ones are unable to import huge quantities of crude either due to their low capacity or lack of financial resources, and may be forced to close down or sell out to the bigger ones in the foreseeable future. This can be explained by the fact that the industries involved in processing of the major oilseeds are reserved under the S.S.I. category. While being in the S.S.I. category, the industries get certain incentives which they cannot enjoy once they move out of the category. Thus, the incentive to expand and move out of the S.S.I. category which will help in building economies of scale is not there for these industries. One problem very specific to the oil solvents extraction units in Uttaranchal are that while it has most of the processing units, a major part of the volume of oilseeds are produced in the parts that are now in Uttar Pradesh. As a result, oilseeds need to be imported from Uttar Pradesh which results in higher costs due to the inter-state sales tax that hikes the price and thus makes the whole process uncompetitive Among the major producers of oilseeds in the world, India has the lowest per capita consumption of edible oils. The low per capita oil consumption figures may also be attributed to the low purchasing power of the lower section of the economic strata. The low availability of edible vegetable oils leads to a rise in the oil price which the low income group cannot afford. As a result, the overall per capita consumption figures are pulled down further.
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There is no denying the fact that the net availability of edible vegetable oilseeds in India lies below the domestic demand. Though domestic production of oilseeds has risen over the period, it has not been able to keep pace with the rising domestic demand for edible oils. It can be observed from Figure 5 that there has been a persistent gap between the net availability of edible oils and the actual consumption in the domestic market, with the gap increasing over the years. This shows that the growth in production of edible oils has not been able to keep pace with the increasing demand for the same. We find that even though Indias per capita consumption of oil is lowest among the leading producers of oilseeds in the world, she is not self-sufficient in meeting her populations demand for edible vegetable oil. After cereals and pulses, edible oils are the most basic and important source of nutrition for the people. And, even when the economys per capita consumption is so low, the country has to depend on imports to meet the low demand. Thus, one solution to this problem could be to increase the yield and production of oilseeds; another could be to import oilseeds from abroad. The Technology Mission on Oilseeds India has been one of the largest importers of edible oils and the Indian government tried to counter the mounting imports of vegetable oils which represented a drain on the foreign exchange reserves by taking up the Technology Mission on Oilseeds (TMO) in 1986. Consequent to the setting up of Technology Mission on Oilseeds a major breakthrough in increasing oilseed production was achieved through an integrated approach by introducing new crop technologies, better supply of inputs and extension services support for marketing and post harvest technologies and excellent coordination/cooperation between various organizations/departments and Ministries. The TMO was somewhat similar in content and objective to the Green Revolution that had revolutionized the Indian foodgrains sector, especially wheat and rice production. The higher production figures during the latter half of the 1980s and the first half of the 1990s may be attributed to this programme. This was taken up with the aim of integrating all the facets and sectors of oilseeds under a common programme for breaking the stagnation in the oilseeds front. The launch of the TMO enabled the Indian oilseeds sector to attain about 97% self-sufficiency by 1990-91. However, it started declining after 1994-95. Due to heavy imports coupled with steep fall in international prices, industry's margins are vanishing and the viability of the industry has been eroding. Incentives are difficult for the farmers to come by and they often find it difficult to get the
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minimum support price. Also, due to the large scale of imports, about 35% of the capacity of the extracting units is utilized. 23
A co-operative movement, namely, Operation Golden Flow was taken up by NDDB at end of the1970s. Though it may not be appropriate to wholly attribute the increase in oil production and the rate of growth to the programme, but this movement, coupled with the TMO may have had some positive impact on the sector. The Government of India provides incentive to the growers of oilseeds by giving them the Minimum Support Price for their crops. In the early 90s, in order to encourage oilseeds cultivation, the MSP of food grains were kept in check relative to that of oilseeds. This resulted in sharp improvement in domestic oilseed prices. High prices in the oilseed prices led to the entry of new firms along with expansion of the oil extracting capacity. There was an unprecedented rise in oilseeds production, particularly in soyabean. However, with the hike in the MSP on foodgrains in the mid-nineties, oilseed cultivation was rendered less attractive to the farmers. Since then late nineties, there has been a more decisive rise in the MSP on oilseeds. Efforts are being made to in order to give incentives to the farmers and to promote diversification of the countrys agriculture.24
Exports and Imports in the Oilseeds and Edible Oils India is an exporter of groundnut, niger seeds, sesame seeds, oil meals and castor oil. In terms of the value, oilmeals contribute the most to the export receipts, followed by castor oil. Countries importing oilseeds and oilmeals from India are Germany, Turkey, the Netherlands, Greece, UK, USA, China, UAE and others. India imports oilseeds and vegetable oils. She is the largest importer of palm oil from Malaysia. India is the largest consumer of edible oils in the world and Indian consumers pay the highest price for edible vegetable oils in the world. 25% of the economys annual requirement for palm oil is met through imports. Palm oil and palmolein are imported both in the form of crude oil and refined oil. Since the import duty on crude oil (65%) is greater than that on refined oil (70%), the former constitutes the major portion of the palm oil import basket. Since volatility is the highest in case of palm oils, and it being the dominating constituent of the global trade in edible oils, the demand and supply of this particular oil determines the prices of other
23
http://www.dor-icar.org/html/tmo.htm MSP for oilseeds, pulses, Hindu
24
51
edible oils. This is true for India at a greater degree owing to her high dependence on the palm oil imports. Import duty on Edible Oils and Oilseeds India being the largest consumer of edible oils in the world (mainly from Malaysia, followed by Indonesia) is also the largest importer of palm oil from Malaysia and Indonesia, both in the crude and refined forms. Figure 6(a) helps us to compare the trends in the production and import of oilseeds. The obvious trend is that imports of oilseeds have risen in the years when the production has declined. The most recent data shows that there has been a decline in the production figures for the year March 2003 due to the drought that occurred in 2002. As a result, the import value of oilseeds shot up to 1.143 thousand tonnes from 121.75 thousand tonnes.
In the 1990s, under the policy of economic liberalization, the import duties on edible oil imports were gradually brought down. From 65% import duty on palmolein to 15% import duty in1998, the huge drop served as a catalyst for the Indian importers of edible oils. As a result, we find that there was a steep rise in the import volume and also the import value in 1998-99. However, there was a rise in the oilseed imports too after 1998. The import duty was then pegged at16.5% in 1n 1999. In 2000, there were three successive hikes in the import duty on edible oils, with the last change pegging import duties on crude and refined oil as 35%and 50.8% respectively. These changes in the duty structure seem to have had two purposes -- to deter cheap imports of palm oil and its variants by traders and to deter the imports of refined oils, thus encouraging value additions by domestic oilseed processors and refineries. However, with India buying 6% of the global output of vegetable oils and 25% of the global output of palm oils, each hike in import duty is generally accompanied by decline in the international price, thus absorbing the effect of the increased import duty. Also, the landed cost of the imported palmolein continued to be far lower than other soft oils, making imports of the former attractive.25 There has been a sharp rise in the imports of palm oil into the country during the post 1998 period. It was again brought down from 75% to 65% in 2001. This was done in response to the pressure from the top suppliers, Malaysia and Indonesia.26 Impact of low Import Duties on the Oilseed Industry
25 26
Business Lines Investment World, November 2000 India Infoline.com
52
There is a fear among the oilseed growers that the low import duty on edible oils affects the Indian growers adversely as this supposedly leads to the weakening of the domestic prices. Edible oils prices in the Indian market have crashed due to large imports by multinational trading houses.27 It is true that if the imported oils are available in market at affordable prices, there is less incentive for the farmers to grow edible oils since after undertaking the suitably expensive production, they very often fail to According to the manufacturers of edible oils, the domestic edible oil prices should be maintained at a reasonable level in order to provide incentive to the growers. A 15-percentage point duty difference between crude and refined imported oils is suggested that will ensure both raw material for the refining industry by way of crude edible oils and remunerative prices of oilseeds for the growers.28 According to the President, Solvent Extractors' Association of India (SEA), the high import duty on oilseeds prevents the imported oilseeds from being commercially viable. He feels that the import of oilseeds (raw material) will not hurt the farmers but will only help in substituting the edible oil imports (finished product) and thus use up the excess capacity of the extraction units in the process. In order to safeguard the farmers interests, the government can fix a price for the imported oilseeds higher than the MSP and encourage selected oilseeds during the lean season, from April to October. It would, on the other hand, help us utilize idle processing capacity, encourage value addition, generate employment in rural and raise revenue for the exchequer. It is a win-win situation for the farmer, consumer, industry and the Government.29 In order to address the issue of huge volumes of imports of edible oils while a substantial part of the domestic extracting capacity goes to waste, the India Government planned to import oilseeds in order to use up the unutilized capacity and produce edible oils domestically. However, the high import duty of 40% has deterred the import of oilseeds/oil bearing material since the duty is far greater than that on edible oils. It is extremely strange that in order to encourage production of edible oil in the economy, the government has imposed an import duty on oilseeds that is so much higher than that on crude or refined oil. Why would anyone import oilseeds and bear the extra cost of producing oil from that when the oil could be imported at a much lower rate? The people belonging to the oilseeds and edible oils industry have been asking for a cut in the import duty to 5%. Sales Tax on Oilseeds The uniform sales tax on oilseeds and its derivatives has been increased form 1-2% to 4% whereas the sales tax on the essential commodities like rice, wheat, etc has been put under the zero per cent
27 28
Solvent Extractors Association Business Line, September 2003 29 Business Line, September 2003
53
category. The current tax on oilseeds sector with its multiple effects at each stage of edible oil production has been acting as a discouragement for oilseeds farmers. For those producing refined oil, a cumulative sales tax of 12-16% has to be paid. On the other hand, the 4% import duty on refined edible oils gives a very strong competition to the domestic oil producers. However, it is also important for us to know whether it is really feasible for India to produce the edible oils domestically or whether the economy would gain by exporting oilseeds and importing the edible oils. In that case, the resources can be channeled to other sectors. However, it is also a valid point that the economy should not become wholly dependant on imports for something as basic and as essential as edible oils. Like food grains, would not self- sufficiency in edible oils be good to the economys health? Building up the Vertical Integration Model in the Oilseeds Sector The government should encourage the interdependence between different sectors in the industry. Especially among the small and medium scale enterprises (SMEs), it is important to develop a network between industries. For example, the bran obtained from rice and wheat milling units can be used by the solvent extraction units to produce bran oil, and the residue for the bran can then be made into cattle-feed and be used in the dairy and livestock industries. This network needs to be developed within a particular region which will also save the cost of transportation and storage for longer durations. This will also help minimize wastages. Government Policies to Promote the Edible Oil Industry In order to facilitate promotion of the edible oil industry, some of the following Government policies can be highlighted. We can then look into the government policies from the perspective of an oilseeds producer and edible oils producers.
The edible vegetable oil industry has been by far, de-licensed in order to encourage competition among the producers which will foster growth and efficiency, along with quality. The government has also included some new oils, like mango kernel fat, kokum fat in the edible oil list. This will result in the following -- it will lead to an expansion in the volume of the total edible oils available in the economy, will help in developing the regions where theses particular oils are produced, will provide new employment opportunities and will expand a more diversified basket for the consumer. The government now recognizes newer processes of production techniques which will help in modernization of the industry.
54
The government clearly encourages import of edible oils, primarily to meet the domestic demand. Imported edible oils have been granted exemption from stock limits under Pulses, Edible oilseeds and Edible Oil Storage Control Order, 1977. Fiscal incentives in the form of money credit scheme have been continued for usage of certain specified non-conventional oils in the manufacture of vanaspati. Liberal blending of any two edible oils has been allowed. This should lead to a more integrated domestic edible oil market. The private sector can import oilseeds and edible oils.
In the Uruguay Round Agreement on Agriculture (URAA), India agreed to bind agricultural tariffs at ceiling rates ranging from 0 to 100 percent for primary products, 150 percent for processed products, and 300 percent for edible oils. In 1997, after India lost the balance-of-payments waiver that allowed it to maintain restrictive trade policies, India accelerated the process of lifting quantitative import restrictions (QRs). In April 2001, India completed the removal of QRs on agricultural imports and nearly all items can now be imported subject to a tariff and to sanitary and phytosanitary standards. In fiscal year 2002/03, while the average bound tariff for agricultural goods was a relatively high 115 percent, the average applied rate was 33 percent. 30 Conclusion Thus, the overall picture in the oilseeds sector in India is that in spite of being one of the largest producers of oilseeds in the world, with the productivity being still much lower than the world average, India is unable to meet her domestic consumption needs. Thus, in order to meet her domestic demand, she is also the largest importer of edible oils in the world. The Government of India tried to meet the domestic demand by importing edible oils and on the other hand they also began to encourage technological innovations in the sector to improve the productivity. There was some success in this respect with the economy attaining 97% self-sufficiency by 1990-91. However, after that, the sector has not been able to keep pace with the huge domestic consumption demand. The oil extraction units in the economy operate at sub-optimal levels due to lack of raw material.
The government has tried to import oilseeds in order to make use of the domestic capacities. She has thus increased the import duty on edible oil so that there is an increased demand for the domestic edible oils. However, a very strange policy of the government has been to levy an import duty on oilseeds that is much higher than that on the processed edible oils. Thus, the Government needs to take some firm steps in order to increase the oilseeds production on hand and also to utilize the huge capacity to meet a part of the domestic demand for edible oils.
30
Economic Research Service, USDA
55
SWOT Analysis Oilseeds Sector in India Strengths: One of the largest producers of oilseeds in India groundnut seeds, castor seeds The Technology Mission in Oilseeds (TMO) in production MSP given to growers of oilseeds India is an exporter of groundnut, niger seeds, sesame seeds, oil meals and castor oil. In terms of the value, oilmeals contribute the most to the export receipts, followed by castor oil Being the largest importer of palm oil from Malaysia and Indonesia, India has a huge bargaining power Weaknesses Highly fluctuating rates of growth
Largest producer of sesame seeds, niger seeds, Very low average yield Most of the oilseeds are rain-fed crops Irregular monsoons
the mid-1980s led to a breakthrough in oilseeds Poor irrigational facilities available India does not produce palm oil which forms the bulk of her imports. Low availability of land for commercial crops Lack of HYV seeds 60-70% of the crude oil refining units are small Changing levels of the comparative MSP on oilseeds and foodgrains lead to destabilization among the farmers Import duty on oilseeds is very high compared to that on edible oils Sales tax of 1-4% oilseeds whereas that on rice, wheat has been exempted may act as a disincentive for the farmers. It sometimes goes up to 12% The multiple tax system in the oilseeds sector often act as a discouragement to the processors Opportunities: Largest Consumer of edible vegetable oils Huge opportunities in the non-conventional sources of edible oils like coconut oil, rice bran oil and cotton seed oil. Lowest per capita consumption of vegetable oils in the world; there is scope to expand in this sphere. Differential import duty on crude and refined oil, to enable the domestic refineries to use their unutilized capacities Threats Rate of growth of production declined during the 1990s Oilseeds are highly susceptible to diseases and pests Net availability of edible oils lie below the domestic demand Domestic production unable to keep up with the increasing demand for edible oils Affordable prices of imported edible oil in the domestic market often leaves the oilseed growers and refiners no incentives for investments
56
Figure 1 Share of Different Oilseeds in Total Oilseeds Production
Value of Production of the Major Oilseeds in India

linseed 1% 23% 1% 5% 34% 4% 1% 1% 4%
Source: www.indiastat.com
sesamum groundnut rapeseed & mustard castor niger seed safflower
26%
sunflower soyabean others
Figure 2 Annual Production and Annual Production Growth Rate in Oilseeds

Annual Production and Annual Growth rate of Oilseeds in India
Year 300 0.5
0.4 250 0.3 200 0.2 Growth rate
Production (lakh MT)
150
0.1
0 100 -0.1 50 -0.2
0 1985- 1986- 1987- 1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 200286 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03* Year Total Oilseeds Annual Growth rate
-0.3
57
Table 1: Area, Production and Yield in the Oilseeds Sector Oilseeds
Year
Area (lakh HA)
Production (lakh Tonne) 71.4 100.0 201.1 154.4
Yield (Kg/HA)
1972-72 1982-83 1992-93 2002-03
157.9 177.6 252.4 230.0
452.0 563.0 797.0 671.0
Source: (Business Line on net, March 2003)
Table 2: Cumulative Aggregate Growth Rates of Area, Production and Yield

Year CAGR of Area CAGR of Production CAGR of Yield
1972-73 to 1982-83
0.012
0.034
0.022
1982-83 to 1992-93
0.036
0.072
0.035
1992-93 to 2002-03
-0.009
-0.026
-0.017
Analysis: IDF
Figure 3: Cumulative Aggregate Growth Rates of Area, Production and Yield in India
CAGR of Area, Production and Yield of Oilseeds in India
0.08
0.06
0.04
A rea
0.02
0 1972-73 1982-83 1992-93 2002-03
-0.02
-0.04 Year CAGR of Area CAGR of Production CAGR of Yield
Analysis: IDF
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Figure 4(a): Value of Exports of Oilseeds and Products
Oil, Oilseeds and Oilmeal Exports from India

700000 Export Value (Rs.Lakh) 600000 Total Castor Oil 500000 400000 300000 200000 100000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Total Groundnut Total Niger Seeds Total Oilmeals Total Oilseeds Total Sesame Seeds
Year
Source: www.indiatrades.com Figure 4(b): Value of Imports of Oilseeds and Products
Import Values of Oilseeds and Fats

4000 Import Values of Oilseeds and Veg. and An. Fats (Rs.Lakh) 3500 3000 2500 2000 1500 1000 500 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Total Oilseeds
Total Vegetable and Animal Fats
Year
Source: www.indiatrades.com
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Figure 5: Net Domestic Availability and Actual Consumption of Edible Vegetable Oils
Net Domestic Availability and Actual Consumption of Edible Vegetable Oils
12 Net Domestic Availability and Actual Consumption (Million Tonne)
10
Net Domestic Availability
Actual Consumption
0 1996-97 1997-98 1998-99 Year 1999-00 2000-01
Source: www.indiastat.com Figure 6 (a): Production and Import of Oilseeds in India

Production and Import of Oilseeds in India
30000 4000
3500 25000 3000 Production ('000 Tonnes) 20000 Import (Rs.Lakh) 2500
15000
2000
1500 10000 1000 5000 500
0 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Year Total Production('000 Tonnes) Total Oilseeds Imports(Rs.Lakh)
60
Figure 6(b): Import Values of Edible Oils in India
Import Value (in Rs. Million)
Import of Edible Oils

100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0
19 80 19 81 82 19 -83 84 19 85 86 19 87 88 19 89 90 19 -91 92 19 -93 94 19 95 96 19 -97 98 20 99 00 20 -01 02 -0 3

Year
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POLICY ENVIRONMENT FOR DEVELOPMENT OF WHEAT MILLING IN INDIA Shibalee Majumdar Introduction There has been a distinct shift in the consumption pattern from rice and other coarse cereals to wheat and corn in India. With decreasing availability of land for cultivation and increasing demand for consumption, there is an increasing pull on the resources dedicated to wheat. India is the second largest producer of wheat in the world31, producing about 12% of the global output per year. Being such a populous country, India is also the second largest consumer of wheat, next to China.32 India ranks ninth in the world as an exporter of wheat. A bulk of the world wheat trade is directed towards North Africa, the Middle East and South East Asia. Indias location can be used to her advantage to capture these big markets for wheat. In this paper we aim to analyze Indias potential as an exporter of wheat and wheat products. We also aim to look into the policy issues that affect the wheat and the wheat milling sector in the economy. But before we do that, let us take account of some of the basic indicators in this sector. The Indian Wheat Sector: A Background Figure 1 shows the production figures in the Indian wheat sector over the last 50 years. It is evident that the production of wheat in terms of its volume has shot up after the mid 1960s. Wheat production increased from nearly 6.5 million tonnes in FY 1951 to more than 55 million tonnes in FY 1991 to 72 million tons in FY 2001. Most of this greater production was the result of an increase in yields that went from 663 kg per hectare in FY 1950 to 2,274 kg in FY 1990. Along with the excellent performance in yields, improved wheat production resulted from an increase in the area planted from nearly 9.8 million hectares in FY 1950 to 24.0 million hectares in FY 1990. These figures are comparable to the yield in major wheat exporting economies like Argentina, Canada and USA. Thus, with regards to productivity, India has competitiveness in the international market. However, with regards to her prices, India is extremely uncompetitive, primarily owing to her high domestic prices. 33 The growth rate of overall foodgrains production was 3.22 per cent during the 50s mainly because of the expansion of cultivated area and the growth rate declined to 1.72 per cent during the 60s, which necessitated large scale imports of foodgrains. Annual growth rate was recorded as 2.08 during the 70s which seems to be an outcome of the Green Revolution. Green Revolution constituted introduction of High Yield Variety (HYV) seeds, use of chemical fertilizers, increased mechanization
31 32
www.fao.org www.peclimited.com 33 National Workshop on Enhancing Competitiveness of Indian Agriculture; April 7 2005, New Delhi
62
and improved irrigation facilities led to a sustainable growth in food grain production. This movement not only made India self sufficient in foodgrains production but she also became a marginal exporter. While the momentum of higher growth rate continued into the 80s, the decade of the 90s could not maintain this pace and annual growth rate was reduced to 1.7 per cent, which was almost equal to the annual growth rate of the population. Governments role in the Pricing Policy After independence, India's initial price policy which was a part of the Essential Commodities Act could be characterized as serving the interests of the consumers by keeping the prices of certain commodities, including the food grains and oilseeds, low. Food prices were kept low to provide cheap food to urban consumers under the theory that a cheap and easy supply of wage goods, of which food grains formed the main component, would inhibit inflationary pressures on the economy. This policy, buttressed with imports under the United States Public Law 480 Food for Peace Program, kept prices at a low level during the late 1950s and early 1960s but did not provide incentives for Indian farmers to invest or increase production. Till 1959 the terms of trade for agriculture were favourable compared to that of manufacturing, but as the manufacturing prices went up faster than agricultural prices as a result of the government policy, the term of trade turned against the agriculture sector. His change led to the food crisis in the mid-60s when agricultural production fell.34 In order to guarantee remunerative prices to farmers and also to maintain a stable national stock of food grains, the Government of India introduced the system of procuring food grains from the farmers at a pre-determined Minimum Support Price. Propelled by the lobby of rich farmers, the MSP has been on an increasing trend, subsequently resulting in food grain surpluses. Consequently despite the deceleration in food grains output, procurement has been increasing over the years. Attractive MSPs and open-ended procurement encouraged farmers to sell their produce to the government rather than in the open market. Also, with the government planning to cut down on its expenditure by cutting down the food subsidy, the burden of high MSPs were shifted to the issue prices, that is, the prices at which food grains were sold at the ration shops. As a result, off-take of food grains fell leading to an excessive build-up of public stocks much above the buffer stock. Thus, this further led to higher maintenance costs and raised the subsidy burden. The cost of Food Corporation of India, which is reimbursed by the government, has been increasing. In addition to this, the high statutory levies, including the mandi charges, cesses and fees to the commissioning agents on grain purchases at the state level discourages private trade and increases FCIs costs, thus increasing the pressure on the food subsidy bill. It has been suggested in the
34
Economic Research Service, USDA
63
Economic Survey 2003-04 that the procurement price be announced by the Central Government with the State Governments deciding on how to share the procurement price between themselves and the farmers. India and the World In terms of the production figures, India is ranked second in the world, below China. Though she started off behind the United States of America in the 1980s, she finally succeeded to the second position in 1999. Figure 2 shows the position of India with respect to China, USA and Argentina, the other major producers of wheat in the world. In terms of her yield, India was ranked below both China and USA. However, the gap between India and USA is not much, while yield of wheat production in China is very high in comparison to them. Figure 3 gives an account of Indias position with regards to the yield of wheat production in the world. Trade in Wheat India has been described as a marginal or minor exporter of wheat. She exports to South East Asia, Africa, and Middle East along with many others. India imports wheat from USA, Bangladesh, Singapore, European Union and Australia. Figure 4 gives an account of the value of wheat export and import between 1992 and 2003. During the early 1990s, India had to import wheat to meet her domestic needs and the same phenomenon was repeated during the period between 1997 and 2000. This is quite surprising considering the fact that India was supposed to have attained self sufficiency in wheat production by the late 1970s. The fact that India had to import wheat in such huge proportions during the period between 1998 and 2000 may be explained by the fact that she experienced low production of wheat at the beginning of this period. With 1996 being a normal monsoon year, the wheat output shot over the target mark of 65 million tonnes to more than 69 million tonnes. However, abnormally cool and wet weather in November/December 1997 in particular, disrupted the normal schedule of wheat sowing and production of wheat declined to 66 million tonnes. There was a drop of about 3 million tonnes in wheat output. This called for import of wheat in 1997-98. Both wheat and rice production reached a plateau at the end of the 1990s with regards to new land for expansion and also the HYV seeds techniques. However, wheat exports picked up from 2000.
64
Constraints in the Indian Wheat Exports There are certain constraints that the Indian agricultural exports face. The unwillingness to decide on the minimum quantity for export makes India an unreliable source. In addition, higher domestic prices of the agricultural products make India less competitive in the international market. Also, India has been losing her competitiveness in the international market with regards to wheat exports due to increased domestic consumption leaving lesser and lesser volumes for exports. The export surplus is of a transitory nature; a small export surplus in one year leads to large scale imports in the next year to meet the domestic demand.35 From time to time, wheat and wheat products have been subjected to quantitative ceilings and other restriction imposed by the government. Till 2000, restrictions were imposed on some commodities including wheat and wheat products due to Balance of Payment reasons. India committed to bind its primary agricultural products at 100%; processed foods at 150% and edible oils at 300%, while for some agricultural products like skimmed milk powder, maize, rice, spelt wheat, millets etc. which had been bound at zero or at low bound rates till 1999 under GATT have been raised substantially. Government Policies for the Wheat Sector As already mentioned, the government provides the price support system in the form of the Minimum Support Price as an incentive to the growers of wheat. In fact, the MSP has been rising so steeply that many farmers are in the business of growing wheat in order to avail the benefits of the MSP. Thus, irrespective of the domestic requirement of the economy, farmers go on producing and procuring huge quantities of wheat. Moreover, exports in wheat and wheat products from India have not been a thrust area and till 2002, there had been quantitative restrictions on wheat and wheat products exports. This further led to the huge piling up of food grains in the FCI godowns. The Government removed the quantitative restrictions on wheat and wheat products in 2001. Though the quantitative restrictions on trade in wheat and wheat exports were removed in 2002, various state trading agencies are designated as canalizing agencies. Import of all these products continues to remain canalized through state trading enterprises like STC, MMTC, and PEC. Also, the custom duty on wheat has been marked at 50% under the Open General License in order to protect the domestic wheat market.
35
National Workshop on Enhancing Competitiveness of Indian Agriculture; April 7 2005, New Delhi
65
Export restrictions such as registration and packaging requirement were also removed in 2001 from wheat and wheat products under the Rupee Debt Repayment Scheme. In order to design the system according to the WTO norms, the Government decided to sell foodgrains to the exporters at open market price from the FCI and then reimburse the post-delivery expenses. However, the government decided to revert back to the system of selling rice and wheat to the exporters at the subsidized rate since the difference with the market rate can be shown as subsidies permissible under the WTO norms. It may be mentioned here that in addition to the huge domestic subsidies to their farmers, developed countries also provide massive export subsidies to their agri-business corporations which enable them to dump agricultural surpluses (generated thanks to the huge domestic subsidies) in developing countries at less than cost of production. Only 25 of the 134 WTO members have a right to subsidize their exports while India and most other developing countries cannot do so as per their commitments to the WTO. Three exporters account for 93% of subsidized wheat exports, two for 80% of subsidized beef exports and two for 94% of subsidized butter exports. So, a rationalization of the process is extremely essential to safeguard the interest of the economy. Indias Potential in Exporting The major importers in the world wheat trade are South East Asia, Africa, Latin America and the Middle-East. The volumes of imports by each of these regions are most likely to expand in the near future. As a whole, the volume of the world wheat trade is predicted to expand to 115 million tonnes in another six to seven years. The major exporters of wheat in the world are USA, Australia and Canada. 36 Being the second largest producer of wheat in the world with billions of tonnes of wheat grains rotting in the store-houses, India should try to take advantage of her location. She is located near the big wheat markets like South East Asia and the Middle East. Ocean freight traditionally represents a modest portion of the cost of imported wheat; the major exporters have tended to compete with one another in all markets. But with ocean freight costs having risen significantly in recent years, the international wheat market may become increasingly regionalized if current freight rates are sustained. Herein lies the advantage of India since it lies in such close proximity to the largest importers of wheat in the world. In fact, Indian wheat has given Australian and US wheat exporters a run for their money by exporting a bulk of their total wheat exports to South East Asia. In this regard,
36
MA Long-term forecast to 2012 - March, 2003, CWB grain production and trade forecast to 2011-12
66
it is extremely important that the government gives special attention to the wheat milling industry too. Instead of concentrating only on wheat exports, India should also try to capture the market for wheat products. Besides catering to the lucrative export markets, India also has an increasing demand in the domestic scene where the flour milling industry caters for bakers, bread manufacturers, and pasta and noodle manufacturers market. With increasing per capita incomes and diversified tastes, there is an increasing demand for these types of food materials in the country. The Wheat Milling Industry in India Wheat is used in the manufacture of products like suji, atta and maida. India has one of the biggest consumption markets for wheat products, owing to the dietary habits of her population. Besides these major products, the wheat milling industry has a few important by-products. The bran that is obtained from the grains of wheat are used to extract bran oil and the residue is used in making oilcakes that are used in manufacturing cattle feed. Also, oil is obtained from the wheat germs which have very high calorie content. In order to gauge the picture of wheat milling industry in India, we first have to take an account of the present status of the roller flour mill in India. Figure 6 gives as status of the roller flour mills in India. The number of roller flour mills increased from 560 in 1990 to 820 in 2001, the capacity increasing from 11.25 million tonnes to 19.5 million tonnes.37 The wheat required by the wheat milling rollers mills is usually procured from the FCI godowns. Especially the mills located in South India, they procure wheat form the FCI godowns because the buying wheat in the open market and transportation of the same to the mills are not economically viable. Until 1998, the mills had the option of import wheat. It was beneficial to import quality wheat and the landed price was lower than that of domestic wheat. But the custom duty was raised to 50% since the cheap imports were hurting domestic wheat prices. This again acts as an impediment to the domestic flour millers since their source of obtaining wheat at cheap rates was closed. While on one hand it is true that it is essential for the wheat millers to obtain wheat at cheap rates, it is also true that importing huge quantities of wheat at very cheap rates while there are thousands of tonnes of the food grains lying in the domestic warehouses is also not a very rational action.
37
Source : Annual Report 2001-2002, Ministry of Food Processing Industries
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Thus, with unavailability of raw material at affordable rates and also with too much supply into the market, the capacity utilisation of wheat mills have declined. Till 1998, when imports began slowing down, the capacity utilisation was 75,000-80,000 tonnes, which has become 50,000 tonnes now. The Confederation of Flour Millers demanded for a zero per cent import duty to help them tide above the crisis of lack of raw material. This demand was made in 2003 when with the drought situation, FCI stocks were earmarked for relief and the Public Distribution System (PDS), with all the less grains available for the milling industry. One important step that could be taken in this respect would be to make the food grains lying in the warehouses to the millers. However, they FCI cannot charge a higher issue price in order to cover the high MSP given to the farmers. Though it is true that the price support system is extremely important for the farmers, it is also true that the benefits should not go the rich farmers who can lobby for their own benefits while the smaller and poor farmers are left tin the lurch. The burden of the high MSP gets shifted to the issue prices; ultimately the relative prices of the basic foodgrains and pulses become too costly for the poorer farmers. Another example of the low growth facing the wheat millers can be observed from the plight of the wheat millers at Uttaranchal. With most of the wheat growing in Uttar Pradesh leaving Uttaranchal with the wheat mills, the latter has to depend heavily on importing the raw material from other states. This increases their cost of production, due to the extra inter-state sales tax on the raw material and also the transportation cost. Some issues with regards to the Wheat and Wheat Milling Industry in India Storage and Handling Till some years back, buying the wheat grains and obtaining flour out of it at the local millers shop was a very common practice among the ordinary Indians. But then people started buying processed flour from the shops. However, branded flour is still not a very common commodity in an Indian consumers basket. Also, it has been only a few years that branded flour has become available in the markets. The sheer size of the Indian population and the role wheat plays in the diet of an average Indian indicates the huge demand for wheat and its products in the Indian market. A very important argument for the wheat milling industry is that developing the industry with large scale producers and millers will perhaps help in decreasing the huge losses that are so much a part of any Indian industry. Table 1 shows the post harvest losses in India.
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The Indian wheat milling industry has to overcome some challenges in order to realize its immense potential. With a highly fragmented Indian wheat sector with thousands of small farmers selling their produce to the commissioning agents from whom the raw material are bought by the wheat millers results in a complicated network. Each stage of the wheat sector is underdeveloped, the inefficiencies in turn leading to a high degree of losses that is shown in Table 1. Improvement in efficiency will benefit all those who are a part of the value chain which can be achieved through large investments.38 This will result in higher quality and lower priced products. Table1 indicates that the total losses during the post harvest activities including threshing winnowing and storage by the producer is more with the small farmers than in the case of a large farmer. This can well be explained by the fact that since the large farmers have the resources and opportunities to ensure better handling and thus lower losses which builds up a strong case for large farmers. Thus, a large cooperative system for the small farmers wherein they can pull in their resources to provide for better post harvest conditions for the grains will enable the economy to prevent the huge losses that run into thousands of rupees. Contract Farming Contract farming can be considered as an important instrument in increasing efficiencies in the value chain and thus reducing wastage. However, some deliberation reveals the fact that a contract system will be beneficial between the processors and the owners of the ware-houses where wheat is stored. In that way, the wheat miller will be assured of a constant supply of wheat all the year round. Vertical Integration Besides contract farming, another method to ensure an efficient system with minimum wastage can be vertical integration of the value chain. Figure 4 gives a pictorial representation of all the products that are obtainable from wheat. Besides flour, wheat has several other by-products. The wheat bran and wheat germ-cells can be used to obtain oil. The residue of the wheat bran can be processed into oilcakes for cattle feed. The germ cells have a very high percentage of carbohydrates. However, this process has not evolved in the Indian wheat industry since the transformation ratio is very low for germ cells and also, the technique expensive. Even if it is not feasible for a wheat miller to convert all the parts of the wheat grain into flour, bran oil and other products, since his scale of operation and resources may not permit that, but if a coordination can be worked out between the wheat millers along with the oil solvent extraction enterprises and the livestock industries needing cattle feed, the a perfect network of dependence can be built up that will ensure minimum wastage and total usage of the products.
38
Food and Agriculture Integrated Development Action, CII & Mc Kinsey
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Another important issue in the Indian wheat sector is the interstate transportation of the raw material. For example, if wheat is imported from one state to the other, very often the cost price of the raw material is much higher than if it was bought from the same state. This in turn increases the cost of production and makes the process inefficient. The Government of India introduced a uniform sales tax in 2000 according to which all the states would be having a uniform floor rates of sales tax. Infrastructure In the Indian wheat and wheat milling sector, the major challenge lies in the availability and accessibility of adequate and quality infrastructure. Transport and storage facilities are the two major components of the infrastructure facilities essential for proper functioning of the sector. Another important requirement of the food grain millers for ICDs or the dry ports that are essential for smoother transactions of the consignments marked for exports needs to be addressed. In India, the producers have to depend primarily on road transport since the railways have certain lower limits for the carriage. However, the road transport is highly unorganized and there is no uniform rate or procedure for the nationwide system. Everything is done on the basis of personal contacts. The transportation has to be systemized in order to ensure an efficient system. Also, the storage facilities lie below the international standards. Lack of adequate space and temperature-controls along with improper handling techniques often lead to huge wastages. The high MSP that has led to the procurement of food grains in huge quantities has led to overflowing of the buffer stocks in the FCI warehouses. In spite of being government warehouses, the facilities available at the FCI godowns are not adequate besides the fact that the network of FCI godowns are haphazard and they are not set up according to the needs of the farmers. To ensure a high quality in the wheat milling industry it is extremely essential that a proper grading system based on the physical and functional characteristics of the wheat. In India, the largest buyer of wheat, the government, has no grading system and procures for the Public Distribution System based on Fair Average Quality (FAQ)- a minimum threshold that does not give an incentive to the farmer to produce better quality products.39 Wheat export policy The government is working on a three pronged long-term policy for wheat export which includes first, a more durable price regime, and second, quality control including measures for segregating and grading wheat before storage so that the better quality segment could fetch a premium in the international market; setting up of a large-scale cleaning facilities mostly in the private sector; close
39
Food and Agriculture Integrated Development Programme, CII & McKinsey
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cooperation between the Ministries of Commerce and Agriculture and the Department of Biotechnology. Management of demand and supply: The new agricultural policy aims at encouraging the private sector investment in agriculture, particularly in research, human resources development, post-harvest management and marketing. The new Agricultural Policy aims to devise a strategy to double the agricultural exports. It also lays emphasis on the convergence of all the existing schemes under one umbrella. A coordinated partnership between the central and the state governments, along with the private sector will enable better and more efficient functioning of the agro-commodity production and processing sector. Recently 10 new agri-export zones have been created across the country. Conclusion Thus, in spite of India being a large producer of wheat and also being self-sufficient in the crop, wheat milling is not in the thrust area for development. Only recently some attention is being given to the processing of branded wheat. Large corporate companies are coming into wheat milling and selling their products under brand names. Also, with the increasing per capita incomes and diversifying tastes, there is a huge demand for breads and noodles in the food industry. Thus, a huge potential market lies in this area. The Government of India has to treat the wheat milling sector as a priority sector. It is true that with such a huge market for wheat and wheat products, an efficient system of flour manufacturing needs to be developed in which raw materials are available easily at cheap rates and also that the infrastructure provided for transportation and storage are of good standards. The government needs to fix a quota of the wheat production for the wheat milling industry to ensure a stable and efficient supply of raw material to the wheat millers. Also, the rest of the demand for the wheat milling industry can be met through imports at a low import duty. However, the quantity for exports should not be so large to threaten the domestic wheat market. Thus, self sufficiency and efficiency in the wheat milling industry are the virtues that need to be built up to reap the benefits of the huge domestic demand for the products.
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SWOT Analysis Wheat Milling Sector in India Strengths: Second largest producer of wheat in the world Ninth largest exporter of wheat in the world Yield comparable to other leading producers in the world MSP provided to the farmers acts as a strong incentive Weaknesses: Uncompetitive in the international market owing to her high domestic prices Unreliable source of wheat exports in the global market Inadequate supply of wheat to the processing units In many areas, the processing units have huge excess capacity Huge post-harvest losses owing to inadequate storage and improper handling of the grains Requirement of more ICDs (dry ports) Unorganized transport system Import of wheat is canalized which restrict free trade
Opportunities: Distinct shift from consumption of rice to wheat and corn Increasing per capita income along with changing food habits and lifestyles offer a huge opportunity for processed wheat products Second largest consumer of wheat in the world The excess in the buffer stock can be channelised to the processing industry The post-harvest losses can be curbed by siphoning off the grains to the processing units The wheat bran and wheat germ cells can be used by the oil processing units
Threats: The high MSP leads to distortion of cropping patterns High MSP often dictated by the rich farmers lobby Excess production of wheat leads to overshooting of the buffer stock which in turn leads to wastage High mandi charges discourages private trade Storage spaces lack adequate spaces and proper temperature control techniques Wheat milling is not a thrust area for development
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Figure 1: Wheat Production in India
Wheat Production in India

90000
80000
70000
Production ('000 Tonnes)
60000
50000
40000
30000
20000
10000
Production
19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
19 50 -5 19 1 52 -5 19 3 54 -5 19 5 56 -5 19 7 58 -5 19 9 60 -6 19 1 62 -6 19 3 64 -6 19 5 66 -6 19 7 68 -6 19 9 70 -7 19 1 72 -7 19 3 74 -7 19 5 76 -7 19 7 78 -7 19 9 80 -8 19 1 82 -8 19 3 84 -8 19 5 86 19 87 88 -8 9* 19 90 -9 19 1 92 -9 19 3 94 -9 19 5 96 -9 19 7 98 -9 20 9 00 -0 1
Year
Source: www.indiastat.com Figure 2: Wheat Production

Wheat Production
140,000,000
120,000,000
100,000,000
80,000,000
60,000,000
40,000,000
20,000,000
Year
Argentina
China
India
United States of America
Source: www.fao.com
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Figure 3: Yield of Wheat Production

Yield of Wheat
45,000
40,000
35,000
30,000 Yield(Hg/HA)
25,000
20,000
15,000
10,000
5,000
200000
180000
160000 Export and Imprt Values (Rs. Lakh)
140000
120000 Export (Rs. Lakh) Import(Rs. Lakh)
100000
80000
60000
40000
20000
0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year
19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
Year
Argentina
China
India
Source: www.fao.com Figure 4: Export and Import Values of Wheat of India

Export and Import Values of Wheat
Source: www.fao.org
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Figure 5: Growth rate of the Number and Capacity of Roller Flour Mills in India
Growth Rate of the Number and Capacity of Roller Flour Mills in India
0.3
0.25
0.2
C G A R
0.15
0.1
0.05
0 1990 1991 1992 1993 1994 1995 Year CAGR (Mills) CAGR(Capacity) 1996 1997 1998 1999 2000 2001
Table 1: Post Harvest Losses in India (Percentage of Production) Nature of Post-harvest Physical Losses Small Medium Large Farmers Farmers Farmers 0.5 0.4 0.5 Transport from the field to the threshing field 1.0 0.8 0.5 Threshing 0.7 0.6 0.4 Winnowing 0.7 0.5 0.4 Transport from threshing field to storage 7.1 1.6 0.3 Storage at producers level 10.0 3.9 2.1 Total Source: CII Report on Cold Chains and Foodgrains Handling (2002)
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Figure 5: Processed Products from Wheat
Wheat Grain
Flour (Atta or Maida)
Wheat Bran
Bran Oil
Oil cakes for Cattle Feed
Wheat germ cells
Wheat germ cell oil Analysis: IDF
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POLICY ENVIRONMENT FOR DEVELOPMENT OF POULTRY IN INDIA Shibalee Majumdar Introduction By the year 2010, global output of poultry meat is predicted to rise by about 27% over the 1998-2000 base periods, with nearly three-fourths of these gains concentrated in the developing countries. In the developing countries, meat production is supposed to grow annually at 3% while that in the developed countries will be 1.2%. It is also predicted that about 76% of the animals in the global poultry market will be reared in the developing countries.40 Considering this setting, India has quite a rosy picture as far as the poultry industry is concerned. Both with regards to the climatic requirements and economic feasibility, India provides an excellent environment for the poultry industry. However, there also certain constraints that needs to be addressed. The following paper thus discusses the opportunities and challenges of the poultry industry in India, and gives special emphasis on the policies that facilitate or detain the growth of this particular industry. Poultry is one of the fastest growing segments of the agricultural sector in India today. While the production of agricultural crops has been rising at a rate of 1.5 to 2 % per annum, the annual rate of growth of production of eggs and broilers has been 8 to 10 %41. It has been the fastest growing industry in the animal product industry in India. Both with regards production and consumption, poultry emerges as the leader. The main factors driving the industrys expansion are increasing per capita income, a young and increasingly young population and a steady decline in the real prices of poultry products. India is the fourth largest producer of hen eggs in the world and she ranks eighteenth as a producer of broilers. Characteristics of the Indian Poultry sector Since poultry demand in highly price-sensitive among the middle and lower income groups, protection of the domestic poultry market may lead to higher prices which will in turn slow down consumption demand and, thus production. A limited demand for frozen foods, poor infrastructure in the form of inadequate cold storage facilities and a poor and high-cost transport system are impediment on the path of expansion of the Indian poultry industry.
40 41
National Workshop on Enhancing Competitiveness of Indian Agriculture www.fao.org
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Vertical Integration can promote growth by enhancing production and marketing efficiency, and thus lowering consumer prices. Since prices of the feed are one of the key parameter in the growth of the industry, government policies that intend to protect the domestic feed sector may lead to a higher cost of production for the poultry industry, thus resulting in slow growth and imposing losses on the producers.42 However, before we discuss the opportunities and the constraints in the Indian poultry industry along with the policies affecting trade and investment in this sector, let us first take an account of the nature of the poultry industry in India. The Poultry Industry in IndiaA Background The Indian poultry industry output is pegged at Rs. 120 billion (USD 2.5 billion) with production of 1.4MT43 in boiler meat and over 39 billion eggs annually (2002). In South India especially in Andhra Pradesh and Tamil Nadu, integration is lending the much needed efficiency required to compete in the global markets. North India is the least organized and it is quite evident in the high prices of chicken meat and egg prevalent in the northern market. Figure 1 shows that Andhra Pradesh is the largest producer of total poultry products in India. The four southern states - Andhra Pradesh, Karnataka, Kerala and Tamil Nadu - account for about 45 percent of the country's egg production, with a per capita consumption of 57 eggs and 0.5 kg. of broiler meat. The eastern and central regions of India account for about 20 percent of egg production, with a per capita consumption of 18 eggs and 0.13 kg. of broiler meat. The northern and western regions of the country record much higher figures than the eastern and central regions with respect to per capita availability of eggs and broiler meat. The structure of India's poultry industry varies from region to region. While independent and relatively small-scale producers account for the bulk of production, integrated large-scale producers do account for a growing share of output in some regions. Integrators include large regional firms that incorporate all aspects of production, including the raising of grandparent and parent flocks, rearing DOCs, contracting production, compounding feed, providing veterinary services, and wholesaling. The integrated large-scale farms are most common in the southern part of the country, the most wellknown of them all being the Venkateshwara Hatcheries. Even in East India, Arambagh Hatcheries has come up with a well-integrated poultry farm.
42
www.thepoultrysite.com/USDA United States Department of Agriculture (USDA) / Poultry sector outlook: Rabobank International
43
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Regional disparities notwithstanding, the industry have something to cheer about as consumption pattern is a good sign. Poultry meat remains the fastest growing animal protein consumed in India. It grew at a CAGR of 13 per cent through the nineties. The industry has grown largely due to the initiative of private enterprise, minimal government intervention, and considerable indigenous poultry genetics capabilities, and considerable support from the complementary veterinary health, poultry feed, poultry equipment, and poultry processing sectors. There are about 15 pure line and grand parent franchise projects in India. There are 115 layer and 280 broiler hatcheries producing 1.3 million layer parents and 280 million broiler parents. They in turn supply 95 million hybrid layer and 275 million broilers, day-old chick. In the processing sector, there are presently only five egg powder plants in India which is considered insufficient in view of the growing export demand for different kind of powder - whole egg, yolk and albumen. The scope of foreign investment and state-of-the-art technology in this field is therefore tremendous. Figure 2 gives an account of the production of chicken meat and the annual rate of growth in chicken meat production in India. It is observed that while the production figures have undoubtedly risen almost uniformly over the last 20 years, the growth rate has been highly fluctuating. The growth rate has even become negative in some instances. The trend-line of the annual growth rate shows a downward bias in the last five years. Since 2001, there has been a decline in the growth rate of chicken meat production (with a slight increase in 2003). This was accompanied by an increase in the import of poultry meat in 2001. The declining trend line of poultry meat production is not a good sign, considering the fact that Indian climate and resources are very conducive to poultry farming and also that domestic market for consumption of poultry products is very big, the Indian industry should have reaped benefits on demand and supply advantages. The reason for this downward bias can be several. Inadequate infrastructure, along with expensive and inadequate supply of poultry feed are attributable for this trend. Figure 3 gives an account of the production figures and the annual rate of growth of hen eggs production in India. There has been a drop in the production in 2004. The rate of growth is highly fluctuating; though there seems to have been a uniform rise in the late 1990s. In 2004, the growth rate plummeted to -0.l from 0.07 in 2002. However, more importantly, what is necessary is the proper restructuring and functioning of the whole industry.
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Poultry Industry: India and the World The extent of development that the Indian poultry industry has made during the last 3 decades is something to be proud of. From backyard poultry to small, medium, big and very big farms, breeding farms and hatcheries catering to the needs of the farmers, the level of integration in the poultry sector has been commendable. However, in spite of the achievement in scale and cost, it still remains that the per capita consumption of the poultry products is very low in India, and still a lot have to be achieved in terms of price and quality to explore the full potential that India has in this sector. The Indian poultry industry has been able to develop on scientific and latest technological lines, with all the required medicines and vaccines made available. Also, genetic research centres have been set up to generate the high yielding variety of chicken. In addition to this, there are training and research institutes both in the public and private sectors (IVRI and CARI being the pioneer institutions) which work towards providing training to the workforce in the technicalities of the industry. FAO estimates reveal that India alone will have to provide food for about 16% of the people and an equal percentage of livestock units living in the world.44 Looking at Indias position in the global production of poultry products, it is very obvious that she is one of the leading producers of hen eggs in the world with a very high, lying second only to USA. Figure 4 shows India ranked fourth in terms of hen eggs production. Figure 5 shows that India has a low rank with regards to the production figures in poultry meat when compared to the leading producers in the world. Also in terms of its yield, India is not ranked very highly among the global producers. The cost of production of poultry meat can be extremely high since it incorporates huge number of technical specialties and supervision. Thus, a way has to be found out by which even the expensive production process can be made cost effective and it should also to be ensured that the end-prices do not reflect the high cost production. In addition to this, the frequency of diseases among the poultry animals can be quite high and this leads to low productivity and a very high unit cost. This issue needs to be addressed. Though there are quite a few modern schools of research and training in the poultry industry, it seems that India has a long way to go before she can master the task of producing poultry at a low cost. Moreover, the resources required to provide the modern techniques for the poultry industry can be provided only on a large scale. In terms of yield, India is ranked below Netherlands in production of hen eggs, but is ranked above Thailand, which is still one of the leading producers of poultry products in the world. The yield of hen eggs production has been more or less stable over the years. Figure 6 shows are presentation of Indias position in hen eggs yield with regards to Netherlands and Thailand.
44
www.ikisan.com
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In terms of productivity in the production of poultry meat, India started off quite low below Netherlands and Thailand, but it has shot up above both the countries and has a very high measure in the world. Figure 7 shows the position of India with regards to Netherlands and Thailand. According to the Food and Agriculture Organization, while per unit profitability does not depend upon the scale of production, the efficiency of the process definitely does. Small poultry farmers are relatively less efficient owing to the fact that they end up paying more on per unit output of poultry product in collecting, drying and transporting poultry manure. Figure 8 shows that in terms of consumption demand for poultry meat, India lies among the top five countries in the world. Thus, in spite of being eighteenth as a producer of poultry meat, the huge domestic demand for the commodity calls for a refurbishing of the system that will enable it to take advantage of the climate and resources that the economy possesses. Figure 9 shows that while the growth curve of production of eggs has a downward trend that of the net availability has been rising in the recent years. Both the growth curves are observed to be highly fluctuating. The fact that the net availability is fluctuating can be explained by the fact that the demand for poultry products is highly price elastic, and even a small rise in price can lead to a decline in demand. The current per capita consumption of poultry products in India is very low. One of the reasons could be that the demand for poultry products is highly income sensitive. Also, the demand for fresh poultry products rather than the frozen/chilled products also indicates that the wet market for poultry is much more important in India than the processed food market. The Opportunities and Challenges in Poultry Sector in India India is the second most populated country in India and within a period of 15 years, she will overtake China as the most populated nation. The huge population base with a significant growth rate and an ever-increasing proportion of people in the age group of 20-50 in the country is an extremely good indicator of the huge potential that the poultry industry has in terms of the potential demand. Though it is true that a significant portion of Indias population is vegetarian, changing food habits and more and more people shifting to the nonvegetarian diet, the demand for poultry products, especially in their fresh form, can only increase. Integrating the poultry supply chain will help in reducing the end prices and this will make poultry products affordable, inducing growth in the per capita consumption of poultry.
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With a GDP growth rate of 6-7%, rising purchasing power will act as a major pull in creating a huge demand in the already big domestic market for poultry products. Poultry meat consumption has been increasing allover the world basically because it is considered healthier compared to other kinds of meat like beef and pork. Moreover, the chicken meat is one meat item that unlike beef and pork has no religious preferences; thus the market for chicken meat is wider than that for beef and pork.45 However, the Indian poultry industry does face certain constraints and challenges. Some of them have been listed below: Low Availability of Feed Grains: Maize or corn constitutes about 50-55% of the broiler feed that is used in the poultry industry. Production of wheat and rice get priority in India in terms of the area for cultivation and also with regards to the support they get form the Indian Government. As a result, like many other crops, maize has remained a marginal crop in India. Moreover, because it is a rain-fed crop, in times of poor monsoons, inadequate irrigation facilities further aggravates the poor conditions. The broiler industry is growing at a rate of 15% and the demand for corn is likely to increase in the coming years. Currently, the total production of maize is quite low of which less than 50% is used as feed in the poultry industry. It will be extremely difficult to maintain a smooth supply for the feed unless the maize sector does not expand. High Tariffs on Maize Imports: Moreover, the tariffs on the maize imports are quite high which in turn leads to a higher production cost for the poultry farmer, thus lowering the efficiency of production and adding to the end cost. Inconsistent End Prices: As already mentioned, Indian consumers, especially those belonging to the middle and lower income groups are quite sensitive to the price changes. However, better integrations and a stronger hold of the producers over the supply chains retail end has resulted in lower prices in the Southern states of India than that in the other parts of the country. Poor Infrastructure: Also, the poor transport and storage infrastructure with regards to the Indian poultry industry is one of the most denigrating factors, which further lowers the efficiency of the industry as well as leads to more wastage and higher prices. Preference for Products in the Fresh Form: Indian consumers still prefer fresh poultry products in the wet market than frozen or chilled products. Thus, while many foreign poultry firms, lured by the potential of the huge market, tried to import their products into India, there has not been much demand for the processed poultry products.
45
www.rabobank.com
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The SPS Standards: With regards to exporting poultry products, India faces some hardships due to the poorly defined phyto-sanitary requirements in the domestic market which in turn puts the export products in trouble. Since the stake-holders in the Indian poultry industry are not very well aware of the international standards for hygienic and sanitation, even if they do not face any problem in the domestic market, their consignments may get rejected in the foreign markets. Large Number of Intermediaries: Another constraint in the Indian poultry industry is the presence of too many intermediaries in the supply chain along with a poor marketing system. Trade in poultry products India is presently exporting poultry products to a large number of countries among which the Middle East, the European Union and the Japan are the largest buyers. She also exports in small quantities to the South-East Asian countries and also to Africa and Canada. Netherlands is the largest exporter of eggs in the world. Her share in global egg export was highest during the late 1990s and it has declined since. In 2003, her share plummeted to below 20%. USA and China are the closest competitors of India in terms of egg exports. However, in spite of being the fourth largest producer of eggs in the world, her export earnings from poultry are very meager. Her miniscule exports are limited to hatching/table eggs to neighbouring SAARC (South Asian Association for Regional Co-operation) countries and West Asia. Egg powder exports, mostly to the European Union (EU) and Japan, also constitute a significant chunk of total poultry exports. Indias share has been less than 1% till 1994 which rose to a little above 4% in 2003. India is presently exporting, mainly to UAE (62.5%), Oman, Maldives and Bahrain. Export of poultry meat from India commenced recently. The major destinations are Oman (30%), Maldives, and Bahrain. Live poultry export during 1992-93 was 41 lakh and the major destinations are Bangladesh (39%), UAE and Oman.46 Figure 10 gives an account of the major importers of Indian poultry products. Figure 11 shows the share of exports of some of the key players in the world trade in poultry meat. It shows that Indias export figure in poultry meat are almost negligible compared to the other big producers and exporters of poultry meat. Figure 12 shows the values of exports and imports of chicken in India.
46
www.indiaagronet.com
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The major share of broiler export is in favour of USA, with China and Netherlands being two other major exporters of poultry meat. Indias share in poultry meat exports is absolutely miniscule. It was only 0.6% in 2003. India does not import a huge quantity of poultry meat, though one major deviation was the import of 65MT of poultry meat in 2001. The quantity decreased to 18 MT in 2003. Figure 13 shows the quantities of poultry eggs imported by India between 2000 and 2003. Eggs are imported in various forms, like eggs in shell, eggs liquid (dried) and eggs liquid (hen), and eggs dry whole yolks (hen). India imports poultry products in very small volumes, and that too in spurts. The Indian poultry has successfully blocked the entry of highly subsidized chicken products from entering the country; attempts at securing a bridgehead in offshore markets have become increasingly difficult due to the availability of cheaper, subsidized products from developed countries. And in cases where Indian companies have managed to get a foot into the door of foreign markets, the host countries, especially the EU, have unleashed a series of debilitating impediments, using the clauses of the SPS agreement as a smokescreen. Indian export-orientated egg powder processors have been at the receiving end ever since they started operations just about a decade ago. Processing in the Indian Poultry Industry Processed poultry products, including chilled or frozen poultry, as well as further processed items, currently account for a small share of urban household consumption and a negligible share of rural consumption. Chilled whole birds and parts can be found in markets and higher end shops in major cities and are also consumed in institutional settings, including restaurants and hotels. Frozen birds and parts are more difficult to find at the retail level but can be found in shops in major cities, and are also marketed by processors directly to hotels and restaurants. Frozen, further processed items, such as heat-and-serve dishes, can be found in high-end shops in the major cities. Traditional manual poultry processing still accounts for roughly 98 percent of all consumption in India. The modern poultry processing sector consists of 10- 12 firms that, altogether, process about 12,000 tons of poultry, or 1-2 percent of consumption, annually. The plants are all operated by poultry integrators and are located in or near major urban areas, including Mumbai, Calcutta, Hyderabad, Bangalore, and Coimbatore. These firms operate semi- or fully automatic plants mostly using imported equipment. Without a strong and dependable cold chain vital sector like food processing industry which is based mostly on perishable products cannot survive and grow. Even at current level of production, farm
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produce valued at Rs 70,000 million is being wasted every year only because there is no adequate storage, transportation, cold chain facilities and other infrastructure supports. Cold chain facilities are miserably inadequate to meet the increasing production of various perishable products like poultry, etc. Government Policies and Reforms The major thrust of policies and legislations of the government relating to livestock and fisheries is in the areas of rapid genetic up gradation of milch animals, improvement in the delivery mechanism of the breeding inputs, control of animal diseases, creation of disease free zones, improved availability of nutritious feed and fodder, development of dairy activities and backyard poultry, development of processing and marketing facilities, and enhancement of profitability of livestock and fisheries enterprise.47 Livestock production is an integral part of crop farming and contributes substantially to household nutritional security and poverty alleviation through increased household income. The returns from livestock, especially dairying and mixed farming in small and medium holdings, are larger and highly sustainable. Poultry Development in India has made impressive progress during the last three decades evolving from backyard ventures to a full-fledged commercial agro industrial business mainly due to comprehensive research and development initiated by the Government and subsequently taken up by the organized private sector. Poultry development in the country has shown steady progress over the years, primarily due to research and development schemes of Government and effective management and marketing by organized private sector. While in the 1950s poultries were a part of the cottage/rural enterprise, the government helped the industry by supplying exotic cocks to the massive grading programme. In the 1960s, the government established commercial farms through the launching of the Integrated Poultry Development Projects. The programme got support through the supply of grains from the world food programmes. It was during this time that private sector hatcheries began to emerge. However, it cannot be denied that the government has helped in setting up various institutes for breeding and maintaining the hens and the cocks. In the 1970s and the 80s, poultry farms were set up as a part of the Small Scale Industries. During the Tenth Plan, the Centrally Sponsored Scheme Assistance to state poultry farms was launched in all the States and Union Territories to strengthen existing poultry farms including other
47
Economic Survey of India 2003-04
85
species like ducks, turkey, quails, guinea fowl etc. The pattern of assistance is 100% for North Eastern States and 80:20 for other States. The scheme will also apply to the farms of the State Governments who may run in collaboration with cooperatives/private sector/NGOs etc. One time assistance is provided to suitably strengthen hatching, brooding and rearing operations with feed mill, quality monitoring and in-house disease diagnoses provisions. Breeding stock to be maintained is stipulated to be strictly of low input technology. Target group should be as far as possible, marginal farmers, landless labourers, women in groups only and from other socially backward sections of the society. A provision of Rs.15.00 lakh as revolving fund for making the Scheme self-sustainable is also made. During 2003-04, 30 farms were assisted for strengthening and total sanctions worth Rs.14.37 crore were released for the same.48 During the 10th Plan it was also decided that all the existing 13 Central Poultry Development Organizations would be region-wise clubbed into 4 Centres so as to convert the poultry developmental activities in a single window system. Their major mandate now is only to encourage backyard/rural poultry. The Central Poultry Development Organizations have decided to diversify the programme by breeding ducks and turkeys. With regards to one of the most important inputs in the poultry industry, maize, till 2000-01, the government made certain changes in the import details to ensure an inexpensive flow of feed for the poultry industry. In 2000-01, up to 4 lakh tonnes of maize could be imported at a basic custom duty of 15%. Any quantity imported above this would face a duty of 50%. However, in 20001-02, the upper limit for the 15% TRQ was hiked up to 4.5 lakh tonnes. Poultry feed manufacturers could avail this TRQ under their actual user condition. The TRQ regime is a trading mechanism that provides for the application of a customs duty at a certain rate to imports of a particular good up to a specified quantity (the `in-quota' quantity) and at a different rate to imports of the same good beyond the specified quantity The poultry industry has also become very jittery owing to the lowering of import duty on the poultry products. Following the removal of quantitative restrictions in the post-WTO regime the Indian poultry farmers have become apprehensive that the lowered tariff rates will result in lowering the prices of all the imported poultry products. The price of all other imported poultry products except table eggs, are lower than the domestic rates. Here it should be mentioned that the huge agricultural subsidies given to the farmers in USA enable them to keep their costs of production at a very low level. Thus, they can afford to export their products to India and other such developing countries at prices lower than the domestic prices in the respective countries. Moreover, these countries are giving huge subsidies to their exporters in the form of export enhancement scheme in US and restitution refund money scheme in EU whereas there is no subsidy on exports or otherwise in India. The developed countries therefore are able to export their products at throwaway prices because the
48
http://dahd.nic.in/poultry.htm
86
products they export are either surplus production or they are by-products or they have the advantage of huge subsidy they get from their respective governments in different garbs. The low-priced imports to the developing countries like India have the potential to under-cut the higher priced domestically produced poultry products. The issue of Uniform Sales Tax With the Government of India issuing a Uniform Sales Tax as a precursor to the VAT System, Andhra Pradesh, the largest egg-producing state in the country, faced problems due to the 4% tax that was levied on the sales. With most of the poultry farms owned by the small and marginal farmers, this extra 4% tax above the States 2% sales tax on the feed grains. However, with the introduction of the Uniform Sales Tax, cumulative sales tax burden of the double sales tax is wiping out whatever small profits the farmers used to earn till the new system came into force. The Road Ahead The poultry industry in India played a major role in providing alternate sources of income to the lowincome earning population, especially, in the rural sector. However, the standards that are to be maintained to ensure hygiene and sanitation are difficult to follow by the small, individual farmers. As a result, the industry evolved into a private enterprise which engaged in contract farming to ensure good quality supply by providing good quality inputs to the farmers. There is still a lot to be done by the government, especially in the field of feed and the SPS standards. To boost the development of the poultry sector, the Government of India will need to formulate policies that will attract large investors. This will include simplifying procedures, providing policies to enable large players to work closely with farmers, and ensuring policies that facilitate exports. Key initiatives will include enabling contract farming, simplifying land acquisition and export procedures, and rationalizing sales tax on processed food. Contract farming: Contract farming will oblige a farmer to sell a contracted quantity of his produce to a particular buyer and, in turn, oblige the buyer to buy from that particular farmer at the contracted price. Such an arrangement will allow companies to work closely with farmers for an assured supply of low-cost, high quality feed inputs. In turn, farmers will get an assured market, technical advice and financial assistance. Informal contract farming relationships already exist in India (for example in the sugar sector). However, they often suffer from the low enforceability of such contracts. Therefore, the State will consider formulating a legal framework for contract farming that clearly defines a tripartite contract farming relationship between the farmer, the corporate institution and the government. The
87
Government, as a third party to the contract, will make sure that the farmers interests are protected. Enforcement mechanisms including one for quick resolution of disputes will also be provided. Simplifying the land acquisition/leasing process: Breeding farms, hatcheries, etc., require large tracts of land. Today, however, it is extremely difficult for a corporation to acquire/lease land, particularly agricultural land. Therefore, to attract large investors, the Government will need to simplify the land identification and acquisition process. This will entail setting up accurate land records as well as rationalizing the various taxes and stamp duties and speeding up the acquisition process. Facilitating exports: In order to facilitate customs procedures, the Government should introduce a system of single window customs clearances, quarantine tests, etc. this will also enable to simplify the export documentation procedures. Removing/Reducing sales tax on processed foods: To increase value addition in the sector, the processing industry must be developed. However, the sales tax makes processed chicken more expensive than live or wet chicken. This has curbed demand and made the sector relatively unattractive for processing companies. Reduction in then sales tax on processed food is essential so that processed poultry becomes comparable in cost to unprocessed chicken, thus boosting production of and demand for the product. Providing specialized infrastructure: Large-scale efforts are needed to provide basic and specialized infrastructure through Government or private vestment. Private investors can be expected to build specialized infrastructure such as cold storage facilities. Active promotion of the sector: Providing good infrastructure as well as facilitating policy will be crucial to generate serious interest from private investors. The Government will actively seek out large Indian and foreign companies that could be potential investors and market the economys potential, its advantages and the facilities it offers to them. This will involve building relationships, establishing a continual dialogue with a target set of companies, and facilitating the process of investment. The entry of large companies raises concerns of exploitation and profiteering at the farmers or Indias expense. In India, the discussion of these issues has tended to obscure the fact that the entry of large companies usually benefits the sector. The Government will, therefore, take steps to make farmers aware of how they will benefit when large companies invest in developing the poultry chain. This will ensure that negative publicity and reaction is not generated.
88
Conclusion With her supportive environment and resources matching the requirements of the poultry industry, India has a very bright potential to become one of the key players in this sector, both in terms of her raw materials and the processed food. With her yield figures comparable to any of the leading producers of poultry products along with a huge domestic market, there is a huge potential for expansion domestically. However, it is true that the demand for poultry products are more in the wet market that in the processed form. On the other hand, India can give more stress on developing her export market in processed poultry products. This kind of diversification will then enable the economy to reap benefits of her resources and also satisfy the tastes of a particular and building up strong bases. Special attention needs also be given to the SPS standards which are often the Achilles heel of the exported products from developing countries like India. It is a very common ground on which importers from the developed countries can behave in a high-handed manner, more so, if the exporters are not aware of the existing standards. Also, in terms of the organization, Government of India would do well to promote the system of contract farming in the poultry industry which would make the production and processing by using latest technologies of production cost-effective and modern. Thus, by developing the Indian poultry industry, by making the quality and cost of eggs and poultry products competitive, Indias poultry sector could also capture a significant share of the exports market currently dominated by large exporters such as the US and Thailand.
89
SWOT Analysis Poultry Industry in India Strengths Indias climatic conditions are conducive to poultry rearing 4th largest producer of hen eggs in the world Ranked 18th as the producer of broiler meat Steady decline in the real prices of poultry products Yield of hen eggs production very high by the international standards; second only to USA The integrated poultry firms, especially in South India have been very successful The poultry industry has been developed on scientific and latest technological lines Weaknesses Poultry demand is highly price-sensitive, especially among the middle and low income earning groups A limited demand for frozen poultry products Limited production of maize for poultry feed Very few egg powder processing plants in India, in spite of there being a huge export demand Large number of intermediaries lead to additional value add-ons in the supply chain Sales tax on processed chicken make it more expensive to the chicken in the wet market, thus lowering its demand Opportunities About 76% of the poultry animals I the global market will be reared in the developing countries in the near future Increasing per capita income and changing food habits offer huge opportunity for the poultry sector, especially in the domestic market To develop the integrated firm structure in other parts of the country Poultry meat is the fastest growing animal protein consumed in India The transition from backyard poultry to huge integrated farms has been commendable Integrating the poultry supply chain will help in reducing the end prices and this will make poultry products affordable, inducing growth in the per capita consumption of poultry Wider market for chicken (than beef or pork) due to lack of religious sentiments attached to chicken and eggs. Threats The rate of growth of production have had a downward trend High import duty on maize imports Inadequate infrastructure with proper temperature controlled warehouses may act as an impediment to process frozen poultry products Abolition of the quantitative restrictions along with lowering of import duties on poultry products offer stiff competition to the domestic poultry industry The poorly defined Sanitary and Phytosanitary (SPS) requirements in the domestic market create trouble and misunderstandings for the exporters
90
Figure 1 Poultry Production in India

Others 11% Punjab 3% Madhya Pradesh 3%
Andhra Pradesh 26%
Uttar Pradesh 3% Haryana 3%
Kerala 4%
Orissa 4% West Bengal 15% Assam 4%
Karnataka 6% Maharashtra 9%
Tamil Nadu 9%
Source: www.indiastat.com , Analysis: IDF
Figure 2 Production and Annual Rate of Growth of Chicken Meat in India

Production and Annual Rate of Growth of Chicken Meat in India
1,800,000 0.5
1,600,000 0.4 1,400,000
1,200,000
1,000,000
0.2
800,000
0.1
600,000 0 400,000 -0.1 200,000
0
19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
-0.2
Year
Production (Mt) Annual Rate of Growth of Chicken Meat Production Poly. (Annual Rate of Growth of Chicken Meat Production)
Source: www.fao.org
91
Annual Rate of Growth
0.3
Production (MT)
Figure 3 Production and Annual Growth Rate of Hen Eggs in India

Production and Annual Growth Rate of Hen Eggs in India
2,500,000 0.15
0.1 2,000,000
1,500,000 0 1,000,000 -0.05
500,000 -0.1
0
19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
-0.15
Year India Annual Growth Rate
Source: www.fao.org
Figure 4 Indias Rank in the Global Production of Hen Eggs

Production of Hen Eggs
2,500,000
2,000,000
Production (Laying (1000))
1,500,000
1,000,000
500,000
0
19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
Year
Brazil
China
India
Thailand
European Union (25)
Source: www.fao.org
92
Annual Growth Rate
0.05 Production (Mt)
Figure 5 Indias Rank in the Global Production of Poultry Meat

Country-wise production of Poultry Meat 20000 18000 16000 14000 Po u tio ( 0 M ) r d c n '0 0 T 12000 10000 8000 6000 4000 2000 0 1981 1981
Brazil China
1981 Year
India Thailand
1981
France USA
1981
1981
Source: www.fao.org
Figure 6 Yield of Hen Eggs

Yield of Hen Eggs
250,000
200,000
Yield (100 Mg)
150,000
100,000
50,000
19 89
19 92
19 99
20 00
20 03
19 80
19 81
19 84
19 90
19 91
19 93
19 94
19 95
Year
India
Netherlands
Thailand
Source: www.fao.org
93
20 04
19 88
19 98
20 02
19 82
19 83
19 85
19 86
19 87
19 96
19 97
20 01
Figure 7 Yield of Poultry Meat

Measure of Productivity in Poultry Meat
2,000,000 1,800,000 1,600,000 Slaughtered/Prod Animals(1000) 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0
19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
Year
India
Netherlands
Thailand
Source: www.fao.org Figure 8 Major Country-wise Consumption of Poultry Meat
16
12
14 10
Annual Com pound G th Rates row
12 8 10
6 4 4 2 2
U B an SA gl ad R es ep h .o fK or ea
Fr an ce M al ay si a D en m ar k C an ad a P ak is ta n A us tra N ew lia Ze al an d
In do ne si a G er m an y
B ra zi S l ri La nk a
1981-1991
1991-2001
Source: Occasional Paper, National Bank for Agriculture and Rural Development.
94
O th er s
C hi na
In di a
Figure 9 Comparison of the Growth Curves of Production and Per Capita Availability of Eggs
Comparison of the growth curves of production and per capita availability of eggs since 198081 0.2500
0.2000 A n a G w R te n u l ro th a s
0.1500
0.1000
0.0500
0.0000
-0.0500
CAGR(production) Poly. (CAGR(production))
10000 9000 8000 V lu o In ia P u r E p r a e f d 's o lt y x o t 7000 6000 5000 4000 3000 2000 1000 0 2000 2001 Year Middle East Asia (excl. Middle East) Japan European Union 2002 2003
19 80 -8 1 19 81 -8 2 19 82 -8 3 19 83 -8 4 19 84 -8 5 19 85 -8 6 19 86 -8 7 19 87 -8 8 19 88 -8 9 19 89 -9 0 19 90 -9 1 19 91 -9 2 19 92 -9 3 19 93 -9 4 19 94 -9 5 19 95 -9 6 19 96 -9 7 19 97 -9 8 19 98 -9 9 19 99 -0 0 20 00 -0 1 20 01 -0 20 2 20 04 02 -0 -0 5 3 (P20 ro 03 vi -0 si 4 on al )
Year CAGR(per capita availability) Poly. (CAGR(per capita availability)) Poly. (CAGR(production))
Source: www.indiastat.com Figure 10 Major Importers of Indian Poultry Products

Major Importers of Indian Poultry Products
95
Figure 11 Share of Indias Exports in Global Poultry Meat Trade

Share of Exports in Global Poultry Meat Trade
40.0000
35.0000
30.0000
S are o P u h f o ltry M a E p rts et xo
25.0000
20.0000
15.0000
10.0000
5.0000
0.0000
20 03 19 87 19 88 19 91 19 92 19 95 19 96 19 98 19 99 20 01 20 02 19 82 19 85 19 86 19 89 20 00 19 80 19 81 19 83 19 84 19 90 19 93 19 94 19 97
Year
% Share of India in Poultry Meat Exports % Share of China in Poultry Meat Exports
% Share of USA in Poultry Meat Exports % Share of Netherlands in Poultry Meat Exports
Source: www.fao.org Figure 12 Value of Major Export and Import Values of Chicken Meat in India
500
400
300
200
100
1965
1975
1985
1995
Years
1997
1999
2001
2003
Import Values ($1000)
Export Values ($1000)
96
Figure 13 Share of Indias Exports in Global Trade in Eggs

Share of Exports in the World Trade in Eggs
60.0000
50.0000
S a inW r E p r h re o ld x o ts
40.0000
30.0000
20.0000
10.0000
0.0000 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
%Share of Exports of India %Share of Exports of China %Share of Exports of USA %Share of Exports of Netherlands
Source: www.fao.org
97
SELECTED BIBLIOGRAPHY Centre for Monitoring Indian Economy Pvt. Ltd. (CMIE), Economic Intelligence Service, Agriculture, December 2002. Food and Agriculture Integrated Development Action (FAIDA) Report: Modernising the Indian Food Chain, Confederation of Indian Industries (CII) and McKinsey and Company (1997). FAIDA Revisited: Realising Potential, Confederation of Indian Industry (CII) and McKinsey and Company (2003). Gandhi Vasant P and N V Namboodiri (2002), Marketing of Fruits and Vegetables in India: A Study of the Wholesale Markets in Gujarat, Centre for Management in Agriculture, Indian Institute of Management, Ahmedabad. Goel A.K., Indian Agriculture from Independence to the 21st Century, MANAGE Gulati Ashok, Sharma Anil, Sharma Kailash, Das Shipra, and Chhabra Vandana, Export Competitiveness of Selected Agricultural Commodities, NCAER, Global Business Press, 1996 Hanumantha Rao C.H., Agriculture Growth and Stagnation in India in Readings in Agriculture Development, edited by A. M. Khusro Hicks Alastair (2001), Issues and Strategies in Development of Rural-Based Small and Medium Food Industry in Asia and the Pacific, Asian Productivity Organisation, Tokyo Japan. Huang Sophia Wu, Global Trade Patterns in Fruits and Vegetables, Economic Research Service, U.S. Department of Agriculture Kaul G.L (1997), Horticulture in India: Production, Processing and Marketing, Indian Journal of Agriculture Economics Mulky and Nargundkar (2003), Modernisation in Indian Retailing: Managerial and Policy Perspectives, Udyog Pragati, Vol. 27, No. 2. Naik Gopal (2004), Bridging the Knowledge Gap for Building Competitive Agriculture: The Case of Grapes in India, Centre for Public Policy, Indian Institute of Management, Ahmedabad. Ramaswamy Bharat, Birthal Singh Pratap, Joshi P.K. (2005), Efficiency and Distribution in Contract Farming: The Case of Indian Poultry Growers, Indian Statistical Institute, Delhi. Sharma Rita (2004), Challenges of Agriculture Support Services in Asia and the Pacific, Asian Productivity Organisation, Tokyo, Japan. USDA (2004), Indias Poultry Sector: Development and Prospects, Agriculture and Trade Reports, Economic Research Service.
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Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

Source: National Dairy Development Board, India

India Development Foundation

Food Processing Five Sectors Project

Source: National Dairy Development Board Website: www.nddb.org

India Development Foundation

Food Processing Five Sectors Project

Source: The Indian Dairy Industry Website: www.indiadairy.com

India Development Foundation

Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

Source: CII-McKinsey FAIDA Report Realising the Potential 2001.

India Development Foundation

Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

India Development Foundation

Food Processing Five Sectors Project

Figure 1: Milk Production in Million Tonnes

Milk Production in Million Tonnes

Source: Food and Agriculture Organization (FAO), Analysis: IDF

Total No. of Cows

P ol an d A us tra lia A rg en tin a

India Development Foundation

Food Processing Five Sectors Project

Productivity of Milch Cattle (2002)

Figure 4: Per Capita Milk Availability in India

Source: National Dairy Development Board (NDDB)

India Development Foundation

Food Processing Five Sectors Project

Figure 5: Anand Pattern of Dairy Development: Three-tier Structure Analysis: IDF

Village Level Dairy Cooperative Society

State Level Milk Marketing Federation

Procure Milk, Provide Inputs, Payments for milk

Chilling and Processing Facilities for milk and milk products

Marketing facilities for dairy unions, quality control, R&D

India Development Foundation

Food Processing Five Sectors Project

Source: Economic Survey, www.indiabudget.nic.in

Figure 7: Share of Organised Sector in Milk and Milk Products (2001)

Self -Consumption (not processed) Organised (Processed)

Unorgansied Trade (not processed)

Source: CII-McKinsey FAIDA Report Realizing the Potential

Figure 8: Share of Organised Sector in Milk and Milk Products (2001)

Source: CII-McKinsey FAIDA Report Realizing the Potential

India Development Foundation

Food Processing Five Sectors Project