Research Project: India’s Lack of Food Processing

This post is the seventh in a series sharing findings from a research project Sam Kornstein and Paul Artiuch are working on throughout the month of January. Paul Artiuch and Samuel Kornstein are graduate students at the MIT Sloan School of Management. Throughout the month of January they are in India researching market-oriented approaches to reducing agricultural food waste.

Part VI can be accessed here: India’s Grain Storage Problem

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By Samuel Kornstein and Paul Artiuch

Note: This post was originally published on the MIT Public Service Center website and subsequently reproduced on Sam Kornstein’s personal blog somethingsbrewing.com. We are greatful to Sam and Paul for sharing their experience and research project with InPEC. All photographs included in these series are courtesy of Sam Kornstein.

January 21, 2012

Fresh produce, such as fruits and vegetables, generally spoils quickly. As we’ve previously discussed, cold storage is an effective method of extending shelf life. In most cases, however, the cost of such storage is prohibitively expensive in India, stifling investment. Another way to preserve food is to process it into products, including juice, sauce, dried fruit, and jarred/canned vegetables. Processing can extend shelf life from days to years, and in many cases can add value to the product.

Countries such as the United States process as much as 70% of grown food, which is then sold under a variety of brand names in stores and supermarkets. India; however, currently processes less than 2%. This means that the vast majority of crops must be eaten by consumers within days or weeks of harvesting, and if there’s a supply and demand mismatch, prices become volatile and food goes to waste.

We met with International Development Enterprises India (IDE), a non-government organization that works on development projects throughout India. A number of years ago they completed a post-harvest processing project with tribal pineapple farmers in East India. These farmers work in remote areas, and twice each week would haul their pineapples by foot as far as ten kilometers to the nearest road where they would sell their yield to traders.

Given the circumstances, the farmers didn’t have much bargaining power. If they didn’t sell their pineapples on the spot, they’d have to carry them back home, with the fruits likely spoiling a short time afterwards. The traders knew this, and would collude to offer only below-market prices. As a result, the farmers were barely getting by. We’ve heard that this problem is common across a variety of crops grown in remote regions throughout India.

IDE worked with the farmers for over a year to, among other things, train them to process the fresh pineapples into dried slices and juice. They also helped connect them with organizations that would purchase these items, therefore reducing their reliance on traders. The initiative was effective, but the project’s limited scope demonstrates just how much training and outreach would be required to replicate this success across other product categories.

On a much larger scale, the Indian government has also stepped in to increase the country’s food processing capacity. It operates a network of markets under the name Mother Dairy, selling both produce and processed items at affordable prices in many communities throughout the country. We visited a Mother Dairy processing plant in North Delhi.

Unfortunately, the head of security wouldn’t let us inside (apparently the process to get a visitor pass involves sending a letter to the Ministry of Food Processing and then, in all likelihood, waiting a few years for a response), but we were able to speak with a senior staff member who met us at the gate.

We learned that the government procures produce from all over the country. They then grade it when it arrives: undamaged goods get processed then sold under the Safal brand, lower quality items are rerouted to other markets, and spoiled food is dumped right into a bio-digester maintained on site which converts the waste to gas and compost.

This all sounds reasonably efficient, but obviously still doesn’t amount to much processing capacity when compared with large processing operations run by food companies such as Kraft or Dole. Scaling these government run organizations may also be an issue as they compete with other government programs for capital, and have less of an incentive than private firms to run efficiently and profitably.

For this reason, among others, the government has recently been considering allowing large international firms to increase their presence in India. These firms have logistics and processing expertise, and would in all likelihood improve India’s supply chain efficiency and food processing capacity. However, the government is worried that such changes could cause disruptions to stakeholders across the supply chain.

India needs to find its own balance between processing and supplying fresh produce. While processing can extend shelf life and therefore help farmers, it seems that only with an injection of foreign capital and expertise will processing capacity increase in a reasonable timeframe. The process may get slowed down by politics as well as the Indian preference for fresh food; however, it’s apparent that processing could go a long way in eliminating some of the waste that currently occurs in Indian supply chains.

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2 thoughts on “Research Project: India’s Lack of Food Processing

  1. Pardon my ignorance but,
    when we talk about FDI in retail, is it the retailers who invest directly in food processing ?
    Also what prevents domestic firms from stepping in and filling the gap ?
    I mean, If the markets sense a need for food processing why don’t Indian firms get into the business, are they stopped by the costs of technology ? I’m not sure but food processing doesn’t seem too high up in the technological scale to be unachievable by Indian firms.
    I am guessing the public sentiments against processed foods are pretty deep seated for the moment, maybe under a foreign brand even Indian processed food would suddenly seem consumable to the public.

    • Hi.

      1. FDI in retail doesn’t necessarily imply investment into food processing. At the moment, FDI in back end and food processing is already permitted by the Indian government. However, when FDI in multi-brand retail (such as Walmart) is permitted, the likelihood of investment into food processing increases manifold, because the highest revenues are with multi-brand retail outlets.

      2. Simply put, the domestic firms do not have the capital that can match international giants such as Walmart or Tesco.

      3. Indian firms are already into food processing, but international firms will increase the scale of involvement several times over. While food processing technology isn’t too high up the “scale”, the economies of scale in this field are significant.

      Having said all this, it is important to note that FDI in retail is not the panacea for the food and agriculture sector in India. Government interference is vital because of the need for public infrastructure, incentives to private enterprises and individual farmers, and the presence of technological spillovers.

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