12/03/2018 – Country Focus / India / Food Processing
Hungry for Investment
Food processing has emerged as one of the fastest growing industries in India. According to a new report published for the Ministry of Food Processing Industries (MoFPI) by Ernst & Young LLP (EY) and the Confederation of Indian Industry (CII), the sector is expected to generate an output of US$958 billion by 2025, offering vast opportunities to players in the food processing value chain. Gemma Kent reveals the sector’s key growth drivers, major players and latest investments.
With a population of 1.3 billion people, a median age of 27.6 years, a birth rate more than double the death rate and a rapidly growing middle class that spends a high proportion of their disposable income on food, the Indian food and retail sectors may be poised to witness tremendous growth in the coming years. The food sector, in particular, has emerged as a high-growth and high-profit sector due to its immense potential for value addition – especially with regard to food processing, which covers fruit and vegetables, plantations, grain processing, spices, milk and dairy products, meat and poultry, fisheries, non-alcoholic and alcoholic beverages, and other consumer product groups such as confectionery, chocolates and cocoa products, soya-based products and high-protein foods.
Indeed, food processing is one of the focus sectors within the Make in India initiative and a priority for the Indian government, which has, in recent years, shown a clear intent to improve competitiveness and reduce wastage in the sector by attracting foreign investment and collaborations through various policy reforms and liberalisations. The landmark FDI liberalisation whereby 100 per cent FDI is now permitted for retail trading for food products manufactured and produced within the country was certainly a welcome move, and is expected to be the turning point in the Indian food processing story going forward.
A natural advantage
At more than 150 million hectares, India holds the world’s second-largest agricultural land area and is a major producer of a wide variety of foods – from milk, rice and wheat, to an array of fruits and vegetables. The food processing sector, however, remains relatively nascent by comparison, with much of the country’s produce being exported elsewhere for processing. This provides significant opportunity for various global food processing, retail and other related supply chain companies to invest and realise the business prospects that exist in India, which remains one of the fastest growing economies in the world.
According to the report ‘Food Processing: A ready reckoner for FDI in India’ by EY and CII for the MoFPI, the food processing industry currently accounts for 32 per cent of the country’s total food market, is one of the largest industries in India and is ranked fifth in terms of production, consumption, export and expected growth. Moreover, food processing is the 13th largest sector receiving FDI in the country, and has been growing rapidly in recent years.
India’s natural food processing advantage – coupled with increasing consumer expenditure and demand as a result of growing awareness, easier access and changing lifestyles – has created vast potential in the food retail segment. Rising affluence has been the biggest driver of India’s increasing consumption expenditures, states the report – particularly in emerging cities (those with populations under one million), where expenditures are growing by nearly 14 per cent annually. The rapid growth of Internet users, online shoppers and digitally influenced shoppers has also played a crucial role in the rise of Indian retail and e-commerce.
In light of these growth drivers, the division of the Indian demographic and positive outlook, numerous multinational food and retail conglomerates have already set up operations in the country and are looking to expand – among them, global food and drink behemoth Nestlé. The world’s largest food company has been a partner in India’s growth for more than a century, producing its well-known brands and developing market-specific products from eight manufacturing units across the country. Coca-Cola, meanwhile, has invested over US$2 billion in India since 1992 and is expected to take its total investment to US$7 billion by 2020, while Starbucks Corporation has been operating in the country through a joint venture with Tata Global Beverages since 2012, and now has more than 90 outlets in eight major cities.
Other major players include retail giants Tesco Plc, which formed a joint venture in 2014 with Trent Ltd (part of Tata Group) and also has plans to open 200 stores in Mumbai, Pune, Hyderabad and Bengaluru over the next two years; Wal-Mart Stores, Inc., which owns and operates more than 90 cash-and-carry stores across India; and Metro AG of Germany, which recently outlined plans to invest INR 16.9 billion (US$265 million) in the country by 2020.
Indeed, according to the MoFPI’s report, there is a steady flow of FDI into India’s food processing, retail and FMCG industries – both from new investors and those with an existing footprint in the country. In 2016 Mondelez International – which already commands a 60 per cent market share in India’s chocolate and confectionery segment, and operates seven production units – commissioned the first phase of its largest Asia-Pacific manufacturing facility in Andhra Pradesh’s Sri City, with an initial investment of US$190 million. Amazon Corporate Holdings, Grofers India and Super Market Groceries Supplies (Big Basket) recently received approval for investing a total of US$695 million in the Indian food retail sector, while US multi-level marketing company Amway plans to spend US$148.74 million opening 50 retail stores in India by the end of 2018.
Furthermore, India’s first sourcing-to-supermarket food company – Future Consumer Ltd – has formed a US$7.5 million JV with Booker Group, the UK’s largest wholesaler, with a view to setting up 60–70 cash-and-carry stores in India over the next three years. Elsewhere, Japanese brands such as Marubeni Corporation, Isle Foods, House Foods Group and Kagome are all planning to invest in India to source for raw materials, as well as investing in cold chains and other infrastructure.
The development of infrastructure will undoubtedly play a major role in the growth of the Indian food processing sector – as well as several other sectors – and the government has implemented various initiatives aimed at improving yield levels and integrating the country’s food processing supply chain. In addition to the five industrial corridors and other projects planned by the government, the MoFPI has launched the Pradhan Mantri Kisan Sampada Yojana (PMKSY), an umbrella scheme that incorporates the establishment of Mega Food Parks; a programme for the creation and expansion of cold chain, value addition, food processing and preservation capacities; infrastructure for agro-processing clusters; a scheme for creation of forward and backward linkages; food safety and quality assurance infrastructure; and human resources and institutions.
Indeed, India’s commitment to improving its infrastructure and related facilities was acknowledged by the World Bank in its 2016 Logistics Performance Index (LPI), wherein the country ranked 35th out of 160 countries – up from rank 54 in the 2014 LPI of 150 countries – and the MoFPI is confident that its continued efforts will be a catalyst for FDI. “The [PMKSY], coupled with the availability of skilled and low-cost labour, focus of research and development activities, and strong manufacturing capabilities, make India increasingly preferable as an attractive investment destination with tremendous potential by not only global food processing and food retail companies, but also by several global logistics and other related infrastructure companies,” claims the MoFPI’s Food Processing report.
Towards an unrestricted future
Promoting India’s attractiveness as an investment destination is certainly a key objective of Narendra Modi’s government, which recently approved a number of amendments to the country’s FDI policy. The changes – made ahead of the Prime Minister’s visit to the World Economic Forum Annual Meeting at Davos in January – are the latest of a number of amendments implemented over the past two decades’ progressive liberalisation of FDI policy. They follow the abolishment, in 2017, of the FIPB (Foreign Investment Promotion Board) by Finance Minister Arun Jaitley, which aims to facilitate ease of doing business in India by removing red tape and empowering individual government departments to clear FDI proposals in consultation with the DIPP (Department of Industrial Policy and Promotion).
In light of the ongoing liberalisations to FDI regulations in India, MNCs involved in food processing now have various options for establishing operations in the country. Together with the priority being placed on the sector by the Indian government and the rapidly growing focus on infrastructure, the future growth prospects for FDI in food processing – as well as the food retail and related supply chain sectors – are patently encouraging.