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Transcript of Policyen environment dairy
Food Processing Five Sectors Project
India Development Foundation 1
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.
Food Processing Five Sectors Project
India Development Foundation 2
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
world’s largest concentration of bovine population in the world. It has more than 40% of world’s total
buffaloes, and more than one sixth of world’s 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 world’s 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 2004-
05 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).
1 Source: National Dairy Development Board, India
Food Processing Five Sectors Project
India Development Foundation 3
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
2 Source: National Dairy Development Board Website: www.nddb.org
Food Processing Five Sectors Project
India Development Foundation 4
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 India’s 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). India’s 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.
3 Source: The Indian Dairy Industry Website: www.indiadairy.com
Food Processing Five Sectors Project
India Development Foundation 5
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. Over-
staffing, 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.
Food Processing Five Sectors Project
India Development Foundation 6
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
Food Processing Five Sectors Project
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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 value-
addition, 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.
Food Processing Five Sectors Project
India Development Foundation 8
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.
Food Processing Five Sectors Project
India Development Foundation 9
� 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.
4 Source: Centre for Monitoring Indian Economy (CMIE), Monthly Review (December 2003) 5 Source: Centre for Monitoring Indian Economy (CMIE), Monthly Review (December 2003)
Food Processing Five Sectors Project
India Development Foundation 10
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
6 Source: CII-McKinsey FAIDA Report – Realising the Potential 2001.
Food Processing Five Sectors Project
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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 world’s trade in
dairy products, despite just 2% of the world’s 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
Food Processing Five Sectors Project
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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 Zealand’s 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 Zealand’s 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 Zealand’s dairy industry, both in
domestic and export markets. For instance, a break-through project by Fonterra with researchers at
Massey University’s Riddet Centre aims to pioneer a novel food delivery system called POSIFoods or
“point-of-sale individualized foods”. Such fast, nutritious snacks, tailored to individual’s 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.
7 Source: www.marketnewzealand.com. This is New Zealand’s 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 tie-
up of dairy units with research institutions can give a fillip to market-oriented R&D, which is essential
in today’s 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 (de-
licensing), 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)
Food Processing Five Sectors Project
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Figure 1: Milk Production in Million Tonnes
Milk Production in Million Tonnes
0102030405060708090
India
United States
Russia
Pakistan
Brazil
New Zealand
Ukraine
Poland
Australia
Argentina
Countries
Milk Production
-15-10-505101520
Growth Rate
1999 2000 2001 2002
CAGR '00 CAGR '01 CAGR '02
Source: Food and Agriculture Organization (FAO), Analysis: IDF
Table 1, Figure 2: No. of Cows (2002)
Source: Food and Agriculture Organisation (FAO)
Country No. of Cows
India 35000
Brazil 15000
Russia 12000
United States
11000
Mexico 9000
Ukraine 7000
Germany 6000
France 5000
New Zealand
3000
Poland 3000
Argentina 2500
United Kingdom
2000
China 1500
0
5000
10000
15000
20000
25000
30000
35000
No.of Cows (in
'000)
India United
States
Germany Poland China
Countries
Total No. of Cows
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Table 2, Figure 3: Milk Production per Cattle Head (2002)
0
2
4
6
8
10
M ilk Per Cat t le
(M T )
Canada Australia New
Zealand
World
Average
Mexico
Count ry
Productivity of Milch Cattle (2002)
Source: Food and Agriculture Organisation (FAO), 2002
Figure 4: Per Capita Milk Availability in India
Per Capita Milk Availability
0
50
100
150
200
250
1955-56
1968-69
1979-80
1981-82
1983-84
1985-86
1987-88
1989-90
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
Years
Milk Availability Per Capita
(in grams)
Source: National Dairy Development Board (NDDB)
Country Productivity
United States 8.4
Canada 7.5
European Union
5.7
Australia 4.8
Poland 3.9
New Zealand 3.7
Argentina 3.6
World
Average
3.1
Russia 2.7
Mexico 1.4
India 1.0
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Figure 5: Anand Pattern of Dairy Development: Three-tier Structure
Analysis: IDF
Table 3, Figure 6: Dairy Export Destinations from India (2002)
Source: www.apeda.com
Table 4: Progress on Dairy Cooperatives
Particulars 1998-1999 1999-2000
2000-2001 2001- 2002 @
Societies Organized (‘000) (Anand Pattern) *
81.0 83.7 98.0 99.2
Farmer members (lakh) * 101.4 105.2 108.3 108.9
Average rural milk procurement (lakh kg/day)
135.8 157.4 165.5 163.56
Liquid milk marketing (lakh litres/day)
121.3 129.0 134.0 135.82
* Cumulative @ till November, 2001 (provisional) Source: Department of Animal Husbandry, Ministry of Rural Development, 2001
Country % Exports
Bangladesh 23
UAE 22
Germany 6
Oman 5
Egypt 4
Saudi Arabia
4
Madagascar 3
USA 3
South Korea
3
Yemen 3
Netherlands 2
Others 22
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
% Exports
Bangladesh UAE Germany Oman
Egypt Saudi Arabia Madagascar USA
South Korea Yemen Netherlands Others
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Table 5: Dairy Imports as a % of Total Agri-Imports
2002-03 2003-04 2003-04 (Apr. to Sep)
2004-05 (Apr. to Sep)
Product $ Mn
% agri imports
$ Mn % agri imports
$ Mn % agri imports
$ Mn % agri imports
Milk Products 2 0.1 19.5 0.5 1.36 0.1 1.48 0.1
Source: Economic Survey, www.indiabudget.nic.in
Figure 7: Share of Organised Sector in Milk and Milk Products (2001)
Source: CII-McKinsey FAIDA Report – Realizing the Potential
Figure 8: Share of Organised Sector in Milk and Milk Products (2001)
Milk Products
63.70%
26.30%
10.10%
Self-Consumption (home made)
Unorgansied Trade (locally processed)
Organised (Processed)
Source: CII-McKinsey FAIDA Report – Realizing the Potential
Milk Processing
25.40%
59.10%
15.40%
Self-Consumption (not processed) Unorgansied Trade (not processed)
Organised (Processed)
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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 Prob.
C 1.148197 0.197210 5.822209 0.0000
MMPO 0.614523 1.140534 0.538802 0.5900
FLOOD 2.887937 0.580598 4.974072 0.0000
DELIC 1.317485 0.602216 2.187728 0.0287
AR(1) 0.405977 0.146401 2.773048 0.0056
-6
-4
-2
0
2
4
6
-5
0
5
10
55 60 65 70 75 80 85 90 95 00
Residual Actual Fitted
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
world’s 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 India’s average falls short of the world’s 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 Source: Task Force on Agro-Food Processing (2001), Government of India. 9 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 world’s production. The other major mango growing nations
are Mexico, Pakistan, Brazil and Thailand. Despite large domestic production of mangoes, India’s
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, India’s share in this trade is only around
3800 tonnes, valued at US $18 million.
It must be noted that India’s major mango exports are in the “fresh” form; however, less than 1% of
world’s 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 India’s share in world’s 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.
Food Processing Five Sectors Project
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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.
India’s grape exports are small compared to the world’s 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 world’s 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 $385 per tonne in the
US. At these production prices, India is one of the most efficient and competitive banana growers in
the world. However, Indian firms are not able to compete in the global market place due to the
distorted tariff regimes of the major banana importing nations of the world.
d) Apple
India is not a major player in apple production and trade in the world. The total production of apple in
the country is approximately 1.2 million tonnes and the area under cultivation is about 0.24 million
hectares. Major apple producers in the world are USA, China, France, Germany and Italy and they
contribute a lion’s share to the world’s annual total apple production of 45 million tonnes.
India is a net importer of apples. In 2002-03, India exported around 15000 tonnes of apples, while it
imported around 18000 tonnes. India’s share in the global apple trade is also miniscule. France, Italy,
USA and China are the major exporters of apples. The volume of global trade in apples is around 5.6
million tonnes, valued at US$ 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. India’s 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. India’s 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 world’s 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 India’s 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 India’s 2%, the other major nations have a
Food Processing Five Sectors Project
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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. 12 Source: Food and Agriculture Integrated Development Action (FAIDA) Report, Confederation of Indian Industries (CII) and McKinsey and Company. 13 Source: Ministry of Food Processing Industries, Government of India, www.mofpi.nic.in 14 Source: Ministry of Food Processing Industries, Government of India, www.mofpi.nic.in
Food Processing Five Sectors Project
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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 Source: CII Report on Cold Storages and Foodgrains Handling (2002) 16 Source: CII Report on Cold Storages and Foodgrains Handling (2002)
Food Processing Five Sectors Project
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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 socio-
economic conditions of the farmers in hilly areas and the weak public infrastructure, the fruit-and-
vegetable 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-and-
post 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.
Food Processing Five Sectors Project
India Development Foundation 30
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 off-
season 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 India’s 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, India’s 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,
Food Processing Five Sectors Project
India Development Foundation 31
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. Grape and Grapevine in Maharashtra (Nasik, Sangli, Sholapur, Satara and Ahmendnagar).
iii. 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).
Food Processing Five Sectors Project
India Development Foundation 32
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
Food Processing Five Sectors Project
India Development Foundation 33
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 India’s 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.
Food Processing Five Sectors Project
India Development Foundation 34
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.
Food Processing Five Sectors Project
India Development Foundation 35
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 Source: APEDA Data on Grapes Export from India. 20 Source: www.unido.org
Food Processing Five Sectors Project
India Development Foundation 36
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 off-
season 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.
Food Processing Five Sectors Project
India Development Foundation 37
� 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 post-
harvest 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;
Food Processing Five Sectors Project
India Development Foundation 38
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
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.
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
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.
Food Processing Five Sectors Project
India Development Foundation 39
Table 1: Productivity of fruits in India in comparison to the world (in MT/Hectare)
Product World
Average
Indian
Average
Country with
Highest Productivity
Times Greater
Than India
Apple 13.24 5.53 Libya (50.0) 9.00
Banana 14.70 24.74 Guatemala (52.5) 2.10
Cashew Nuts 1.02 0.63 Peru (5.93) 9.40
Grapes 7.75 21.12 - -
Mangoes 9.10 6.74 Cape Verde (45.0) 6.70
Oranges 11.00 23.04 USA (34.3) 1.50
Papayas 17.60 8.70 Indonesia (63.7) 7.30
Pineapples 19.00 14.58 Benin (51.4) 3.50
Lemons and Limes 11.00 12.20 Bahamas (31.1) 2.50
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 7.70 2.80 Kuwait (22.95) 8.20
Cabbage 20.71 21.33 Uzbekistan (57.59) 2.70
Cauliflower 18.70 17.47 New Zealand (45.25) 2.60
Chick Peas 0.79 0.82 China (3.93) 4.80
Brinjals 17.68 16.15 Netherlands (370.0) 22.90
Okra 6.36 9.54 Cyprus (22.83) 2.40
Green Peas 7.95 8.36 Lithuania (18.89) 2.30
Pigeon Peas 0.71 0.70 Trinidad & Tobago (2.63) 3.80
Potatoes 16.96 18.56 New Zealand (45.21) 2.40
Onions (Dry) 17.57 10.35 Korean Republic (60.53) 5.90
Tomatoes 27.26 14.79 Netherlands (458.01) 31.00
Source: Food and Agriculture Organisation (FAO) Database, 2004
Food Processing Five Sectors Project
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Figure 1: Trends in fruit production and production growth rates,
Source: www.indiastats.com, Analysis: IDF
Figure 2: Trends in area under fruits cultivation and area growth rate
Source: www.indiastats.com, Analysis: IDF
Production Growth Rate (Fruits)
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Food Processing Five Sectors Project
India Development Foundation 41
Figure 3: Trends in fruits productivity and productivity growth rates
Source: www.indiastats.com, Analysis: IDF
Figure 4: Trends in area under vegetables cultivation and area growth rates
Source: www.indiastats.com, Analysis: IDF
Growth in Fruits Productivity
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Food Processing Five Sectors Project
India Development Foundation 42
Figure 5: Trends in production of vegetables and production growth rates
Production Trends in Vegetables
0
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Source: www.indiastats.com, Analysis: IDF
Figure 6: Trends in productivity and productivity growth rates in vegetables
Productivity Trends in Vegetables
0246810121416
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Source: www.indiastats.com, Analysis: IDF
Food Processing Five Sectors Project
India Development Foundation 43
Figure 7: Percentage of food processed in different countries
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
F&V
Processing
Units
3925 4057 4132 4270 4368 4674 4932 5112
Installed
Capacity
(lac tones)
9.50 11.08 12.60 14.02 17.50 19.10 20.40 20.80
Production
(lac tones)
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.
0
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Total Outlay (1991-2001)
Source: CMIE Data 2003, FAIDA Report: Realising the Potential (2003)
0 10 20 30 40 50 60 70 80
%
Thailand Brazil Philippines Malaysia India
Countries
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Planned Projects Actually Implemented
Project Implementation Statistics in Food
Processing (1991-01)
Food Processing Five Sectors Project
India Development Foundation 44
Figure 10: Number of Cold Storage Units (1999)
Source: CII Report on Cold Chains and Foodgrains Storage (2002)
Table 4: Proposed Investments and Exports from AEZ
S. No AEZ Project State of AEZ Investment
(Planned)
in Rs. Crores
Exports
Anticipated (in
next 5 years,
Rs. Cr)
Date
of Signing
MoU
1. Lychee Uttaranchal Bihar West Bengal
8.70 12.13 10.44
38.20 154.00 27.85
22.09.01 05.04.02 23.03.02
2. Gherkins Karnataka 10.95 35.25 19.09.01
3. Grapes Maharashtra 3.50 68.47 07.01.02
4. Mangoes Uttar Pradesh Maharashtra Andhra Pradesh
36.11 35.12 17.89
71.00 145.59 48.59
21.12.01 12.02.02 27.09.02
5. Apples Jammu & Kashmir Himachal Pradesh
85.35 57.07
292.74 170.00
18.03.02 17.09.02
6. Potatoes Punjab Uttar Pradesh West Bengal
10.41 10.42 36.65
393.75 555.50 381.00
20.12.01 07.11.01 18.06.02
7. Medicinal Plants
Uttaranchal Kerala
18.81 29.87
70.64 163.00
NA NA
8. Walnuts Jammu & Kashmir 36.93 90.40 11.05.02
Source: www.apeda.com
0 500 1000 1500 2000 2500 3000
Private Sector
Cooperative Sector
Public Sector
Number of Cold Storage Units in 1999
Food Processing Five Sectors Project
India Development Foundation 45
Table 5: India’s 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)
West Bengal
6 MT Rs. 6 lacs
12 MT Rs. 18 lacs
- - 6 MT Rs. 6 lacs
12 MT Rs. 18 lacs
Bihar 35 MT Rs. 35 lacs
41 MT Rs. 61.50 lacs
96 MT Rs. 72 lacs
325 MT Rs. 195 lacs
131 MT Rs. 107 lacs
393 MT Rs.256.5 Lacs
Uttaranchal 3 MT Rs. 3 lacs
23 MT Rs. 34.5 lacs
6.25 MT Rs. 3.25 lacs
50 MT Rs. 30 lacs
9.25 MT Rs 6.25 lacs
73 MT Rs. 64.5 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)
Local Markets 35 250,000 12 170,000
Export Markets 25 325,000 30 425,000
Source: MahaGrapes in Maharashtra.
Figure 11: Grape Prices Realised by MahaGrapes,
Prices realised by MahaGrapes
0
10
20
30
40
50
60
70
80
1990 1992 1994 1996 1998 2000 2002 2004
Year
Prices (Rs./Kg)
Source: www.apeda.com
Food Processing Five Sectors Project
India Development Foundation 46
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 India’s 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 India’s 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 India’s oilseeds production is not enough
to meet the country’s 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
Food Processing Five Sectors Project
India Development Foundation 47
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 2001-
02. 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 1998-
99. 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.
Food Processing Five Sectors Project
India Development Foundation 48
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
Food Processing Five Sectors Project
India Development Foundation 49
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.
Food Processing Five Sectors Project
India Development Foundation 50
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 India’s per capita consumption of
oil is lowest among the leading producers of oilseeds in the world, she is not self-sufficient in
meeting her population’s 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 economy’s 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/co-
operation 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
Food Processing Five Sectors Project
India Development Foundation 51
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 country’s 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 economy’s 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 24 MSP for oilseeds, pulses, Hindu
Food Processing Five Sectors Project
India Development Foundation 52
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 Business Line’s Investment World, November 2000 26 India Infoline.com
Food Processing Five Sectors Project
India Development Foundation 53
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 Solvent Extractor’s Association 28 Business Line, September 2003 29 Business Line, September 2003
Food Processing Five Sectors Project
India Development Foundation 54
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
economy’s 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.
Food Processing Five Sectors Project
India Development Foundation 55
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
Food Processing Five Sectors Project
India Development Foundation 56
SWOT Analysis – Oilseeds Sector in India
Strengths:
• One of the largest producers of oilseeds in India
• Largest producer of sesame seeds, niger seeds,
groundnut seeds, castor seeds
• The Technology Mission in Oilseeds (TMO) in
the mid-1980s led to a breakthrough in oilseeds
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
• Very low average yield
• Most of the oilseeds are rain-fed crops
• Irregular monsoons
• 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
Food Processing Five Sectors Project
India Development Foundation 57
Figure 1
Share of Different Oilseeds in Total Oilseeds Production
Source: www.indiastat.com
Figure 2
Annual Production and Annual Production Growth Rate in Oilseeds
Annual Production and Annual Growth rate of Oilseeds in India
0
50
100
150
200
250
300
1985-
86
1986-
87
1987-
88
1988-
89
1989-
90
1990-
91
1991-
92
1992-
93
1993-
94
1994-
95
1995-
96
1996-
97
1997-
98
1998-
99
1999-
00
2000-
01
2001-
02
2002-
03*
Year
Production (lakh MT)
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
Year
Growth rate
Total Oilseeds Annual Growth rate
Source: www.indiastat.com
Value of Production of the Major Oilseeds
in India
1% 5%
34%
26%
4%
1%
1%
4%
23%
1%
linseed
sesamum
groundnut
rapeseed & mustard
castor
niger seed
safflower
sunflower
soyabean
others
Food Processing Five Sectors Project
India Development Foundation 58
Table 1: Area, Production and Yield in the Oilseeds Sector
Source: (Business Line on net, March 2003)
Table 2: Cumulative Aggregate Growth Rates of Area, Production and Yield
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
-0.04
-0.02
0
0.02
0.04
0.06
0.08
1972-73 1982-83 1992-93 2002-03
Year
Area
CAGR of Area CAGR of Production CAGR of Yield Analysis: IDF
Oilseeds
Year
Area (lakh
HA)
Production
(lakh Tonne)
Yield (Kg/HA)
1972-72 157.9 71.4 452.0
1982-83 177.6 100.0 563.0
1992-93 252.4 201.1 797.0
2002-03 230.0 154.4 671.0
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
Food Processing Five Sectors Project
India Development Foundation 59
Figure 4(a): Value of Exports of Oilseeds and Products
Source: www.indiatrades.com
Figure 4(b): Value of Imports of Oilseeds and Products
Import Values of Oilseeds and Fats
0
500
1000
1500
2000
2500
3000
3500
4000
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Year
Import Values of Oilseeds and Veg. and
An. Fats (Rs.Lakh)
Total Oilseeds
Total Vegetable and
Animal Fats
Source: www.indiatrades.com
Oil, Oilseeds and Oilmeal Exports from India
0
100000
200000
300000
400000
500000
600000
700000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Export Value (Rs.Lakh)
Total Castor Oil
Total Groundnut
Total Niger Seeds
Total Oilmeals
Total Oilseeds
Total Sesame Seeds
Food Processing Five Sectors Project
India Development Foundation 60
Figure 5: Net Domestic Availability and Actual Consumption of Edible Vegetable Oils
Net Domestic Availability and Actual Consumption of Edible Vegetable Oils
0
2
4
6
8
10
12
1996-97 1997-98 1998-99 1999-00 2000-01
Year
Net Domestic Availability and Actual Consumption (Million Tonne)
Net DomesticAvailability
ActualConsumption
Source: www.indiastat.com
Figure 6 (a): Production and Import of Oilseeds in India
Production and Import of Oilseeds in India
0
5000
10000
15000
20000
25000
30000
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
Production ('000 Tonnes)
0
500
1000
1500
2000
2500
3000
3500
4000
Import (Rs.Lakh)
Total Production('000 Tonnes) Total Oilseeds Imports(Rs.Lakh)
Source: www.indiastat.com
Food Processing Five Sectors Project
India Development Foundation 61
Figure 6(b): Import Values of Edible Oils in India
Import of Edible Oils
0100002000030000400005000060000700008000090000100000
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
Year
Import Value (in Rs. Million)
Source: www.indiastat.com
Food Processing Five Sectors Project
India Development Foundation 62
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. India’s location can be used to
her advantage to capture these big markets for wheat. In this paper we aim to analyze India’s 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 www.fao.org 32 www.peclimited.com 33 National Workshop on Enhancing Competitiveness of Indian Agriculture; April 7 2005, New Delhi
Food Processing Five Sectors Project
India Development Foundation 63
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.
Government’s 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
FCI’s costs, thus increasing the pressure on the food subsidy bill. It has been suggested in the
34 Economic Research Service, USDA
Food Processing Five Sectors Project
India Development Foundation 64
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 India’s 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.
Food Processing Five Sectors Project
India Development Foundation 65
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
Food Processing Five Sectors Project
India Development Foundation 66
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.
India’s 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
Food Processing Five Sectors Project
India Development Foundation 67
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
Food Processing Five Sectors Project
India Development Foundation 68
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 miller’s 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
consumer’s 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.
Food Processing Five Sectors Project
India Development Foundation 69
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
Food Processing Five Sectors Project
India Development Foundation 70
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
Food Processing Five Sectors Project
India Development Foundation 71
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.
Food Processing Five Sectors Project
India Development Foundation 72
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
Food Processing Five Sectors Project
India Development Foundation 73
Figure 1: Wheat Production in India
Wheat Production in India
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
1950-51
1952-53
1954-55
1956-57
1958-59
1960-61
1962-63
1964-65
1966-67
1968-69
1970-71
1972-73
1974-75
1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89*
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
Year
Production ('000 Tonnes)
Source: www.indiastat.com
Figure 2: Wheat Production
Wheat Production
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Production
Argentina China India United States of America
Source: www.fao.com
Food Processing Five Sectors Project
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Figure 3: Yield of Wheat Production
Yield of Wheat
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Yield(Hg/HA)
Argentina China India United States of America
Source: www.fao.com
Figure 4: Export and Import Values of Wheat of India
Export and Import Values of Wheat
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Export and Imprt Values (Rs. Lakh)
Export (Rs. Lakh)
Import(Rs. Lakh)
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
0.05
0.1
0.15
0.2
0.25
0.3
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
CAGR
CAGR (Mills) CAGR(Capacity)
Source: www.indiastat.com
Table 1: Post Harvest Losses in India (Percentage of Production)
Nature of Post-harvest Physical Losses Small
Farmers
Medium
Farmers
Large
Farmers
Transport from the field to the threshing field 0.5 0.4 0.5
Threshing 1.0 0.8 0.5
Winnowing 0.7 0.6 0.4
Transport from threshing field to storage 0.7 0.5 0.4
Storage at producer’s level 7.1 1.6 0.3
Total 10.0 3.9 2.1
Source: CII Report on Cold Chains and Foodgrains Handling (2002)
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Figure 5: Processed Products from Wheat
Analysis: IDF
Flour (Atta or Maida)
Wheat Grain
Wheat Bran
Bran Oil Oil cakes for
Cattle Feed
Wheat germ cells
Wheat germ cell oil
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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 industry’s 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 National Workshop on Enhancing Competitiveness of Indian Agriculture 41 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 India—A 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 well-
known 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 43 United States Department of Agriculture (USDA) / Poultry sector outlook: Rabobank International
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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 re-
structuring 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 India’s 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
India’s 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 India’s
population is vegetarian, changing food habits and more and more people shifting to the non-
vegetarian 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 chain’s 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.
India’s 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 India’s 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.
India’s 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
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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
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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 State’s 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 low-
income 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
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Government, as a third party to the contract, will make sure that the farmer’s 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 economy’s
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
India’s 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.
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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, India’s poultry sector could also capture a significant share of the exports
market currently dominated by large exporters such as the US and Thailand.
Food Processing Five Sectors Project
India Development Foundation 90
SWOT Analysis – Poultry Industry in India
Strengths
• India’s 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 Phyto-
sanitary (SPS) requirements in the domestic
market create trouble and misunderstandings
for the exporters
Food Processing Five Sectors Project
India Development Foundation 91
Figure 1
Poultry Production in India
West Bengal15%
Tamil Nadu9%Maharashtra
9%
Karnataka6%
Assam4%
Orissa4%
Kerala
4%
Haryana3%
Uttar Pradesh3%
Punjab
3%
Madhya Pradesh3%
Others11%
Andhra Pradesh26%
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
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Production (MT)
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
Annual Rate of Growth
Production (Mt) Annual Rate of Growth of Chicken Meat Production Poly. (Annual Rate of Growth of Chicken Meat Production)
Source: www.fao.org
Food Processing Five Sectors Project
India Development Foundation 92
Figure 3
Production and Annual Growth Rate of Hen Eggs in India
Production and Annual Growth Rate of Hen Eggs in India
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Production (Mt)
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
Annual Growth Rate
India Annual Growth Rate
Source: www.fao.org
Figure 4
India’s Rank in the Global Production of Hen Eggs
Production of Hen Eggs
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Production (Laying (1000))
Brazil China India Thailand United States of America European Union (25)
Source: www.fao.org
Food Processing Five Sectors Project
India Development Foundation 93
Figure 5
India’s Rank in the Global Production of Poultry Meat
Country-wise production of Poultry Meat
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1981 1981 1981 1981 1981 1981
Year
Production ('000 MT)
Brazil China India Thailand France USA
Source: www.fao.org
Figure 6
Yield of Hen Eggs
Yield of Hen Eggs
0
50,000
100,000
150,000
200,000
250,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Yield (100 Mg)
India Netherlands Thailand
Source: www.fao.org
Food Processing Five Sectors Project
India Development Foundation 94
Figure 7
Yield of Poultry Meat
Measure of Productivity in Poultry Meat
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Slaughtered/Prod Animals(1000)
India Netherlands Thailand
Source: www.fao.org
Figure 8
Major Country-wise Consumption of Poultry Meat
0
2
4
6
8
10
12
14
16
Indonesia
Germany
USA
Bangladesh
Rep. of Korea
France
Malaysia
Denmark
Canada
Pakistan
Australia
New Zealand
Brazil
Sri Lanka
India
China
Others
Annual Compound Growth Rates
0
2
4
6
8
10
12
1981-1991 1991-2001
Source: Occasional Paper, National Bank for Agriculture and Rural Development.
Food Processing Five Sectors Project
India Development Foundation 95
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 1980-
81
-0.0500
0.0000
0.0500
0.1000
0.1500
0.2000
0.2500
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05 (Provisional)
Year
Annual Growth Rates
CAGR(production) CAGR(per capita availability) Poly. (CAGR(production))
Poly. (CAGR(production)) Poly. (CAGR(per capita availability))
Source: www.indiastat.com
Figure 10
Major Importers of Indian Poultry Products
Major Importers of Indian Poultry Products
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
2000 2001 2002 2003
Year
Value of India's Poultry Export
Middle East Asia (excl. Middle East) Japan European Union
Source: www.indiatrades.com
Food Processing Five Sectors Project
India Development Foundation 96
Figure 11
Share of India’s Exports in Global Poultry Meat Trade
0.0000
5.0000
10.0000
15.0000
20.0000
25.0000
30.0000
35.0000
40.0000
Share of Poultry Meat Exports
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 in Global Poultry Meat Trade
% Share of India in Poultry Meat Exports % Share of USA in Poultry Meat Exports
% Share of China 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
0
100
200
300
400
500
1965 1975 1985 1995 1997 1999 2001 2003
Years
Import Values ($1000) Export Values ($1000)
Source: www.indiatrades.com
Food Processing Five Sectors Project
India Development Foundation 97
Figure 13
Share of India’s Exports in Global Trade in Eggs
Share of Exports in the World Trade in Eggs
0.0000
10.0000
20.0000
30.0000
40.0000
50.0000
60.0000
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 in World Exports
%Share of Exports of India %Share of Exports of USA
%Share of Exports of China %Share of Exports of Netherlands
Source: www.fao.org
Food Processing Five Sectors Project
India Development Foundation 98
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