TECHNO-ECONOMIC ASPECTS

OF SMEs
IN AGRO-PROCESSING SECTOR

DR N B SHETE

NATIONAL INSTITUTE OF BANK MANAGEMENT

TECHNO-ECONOMIC ASPECTS OF SMEs
IN AGRO-PROCESSING SECTOR

AGRO-INDUSTRY : FRAMEWORK
An Agro-industry is an enterprise that processes material of
Plant or Animal origin.
• Processing involves Transformation and Preservation
through Physical or Chemical Alteration, Storage,
Packaging and Distribution.
• Nature of Processing and Degree of Transformation vary -
ranging from the cleaning, grading, packaging for mango
to the milling of rice to the cooking mixing and chemical
alteration that creates a textured vegetable snack food.
In general, Capital Investment, Technological Complexity and
Managerial requirements increase as the degree of transformation
rises (As shown in Fig.1)
Fig. 1 : Categories of Agro-industry by the Level of
Transformation of Raw Materials
Level I Level II Level III Level IV
Selected Processing Activities
• Cleaning • Ginning • Cookies • Chemical
• Grading • Milling • Pasteruisation Alteration
• Storage • Cutting • Canning • Texturiz-ation
• Mixing • Dehydration
• Freezing
• Weaving
• Extraction
• Assembly
Illustrative Products
• Fresh Juice • Cereals • Dairy Products • Instant Foods
• Fresh • Meat • Canned • Textured
Vegetables • Spices • F-V Veg. Food
• Animal • Cooked Meals
Feeds • Textile and
• Cotton Garments
• Jute Flour • Refined Veg Oil
• Sugar
 UNIQUENESS OF
AGRO INDUSTRIAL PRODUCTS
(a) Seasonality
• Raw Material is biological, its supply is seasonal, available
at the end of the crop or livestock-reproduction cycle.
• Raw Material is available only during one or two brief
periods in a year, the demand for the finished products is
relatively constant throughout the year.
The food processing unit must see a Supply-and-Demand
• Seasonality can also lead to a shortage in the WC available
to handle the expenses and heavy financial cost of carrying
the investments
Such financial shortages can lead to shortfalls in raw materials
procurement, causing severe under utilisation of the processing
plant’s capacity
 UNIQUENESS OF
AGRO INDUSTRIAL PRODUCTS

(b) Perishability
• Biological manufacturing are perishable and often quite
fragile. Such products, must be handled and stored with
speed and care to preserve their physical characteristics
and, in case of food products, their nutritional quality.
• Perishability of raw food and fibre materials, and related
characteristics such as fragility (Eggs) and Bulkiness
(Livestock), often require special and sometimes more
costly transportation methods
 UNIQUENESS OF
AGRO INDUSTRIAL PRODUCTS

(b) Variability
• Changes in weather and damage to crops or livestock from
disease or pests make quantity uncertain
• Late or early monsoon, pest infestation at late stage of
crop,
• Variability exerts additional pressure on the plant’s
production scheduling and Quality Control Operations
 PUBLIC POLICY IMPACT CHAIN
Economic
Factors
Expres- Impl-
Political emen
Shape National sed in Policy
Factors Goals National
ted by
Instruments
Cultural & Policies &
Factors Strategies Institution
Demographic
Factors

That Affects
Agro
Industry
& Farms
 Factors Affected by Selected Macro
policy Instruments at Selected
Points in the Agro Industry System
Macro policy Points in Agro Industry System
Instruments
Farm Transportat Storage Processing Distribution Export
Production ion
Fiscal Policy
Taxes Land costs Operating Operating Cost, Choice Costs Costs
Costs Costs of
Technology
Investments Irrigation Rail, Road, Warehou- Power Transport, Transport,
Methods Port sing supplies Infrastructure Infrastruc-
Transport Costs ture Costs
Subsidies Input Costs Fuel Costs Operating Costs Costs Price
Costs Competi-
tions
Monetary
Policy
Interest Rates Input Costs Operating Carrying Choice of Carrying Costs
Costs Costs Technologies Costs
Credit Supply Investment Investment Investment Investment Investment Investment

Trade Policy

Other
Instruments
 SELECTED INSTITUTIONAL ROLES
IN AN AGRO INDUSTRY SYSTEM

Economic Institutions
Role in MNC Fa rm e r Coope ra tiveMa rke ting Loca l Fina ncia l Industry Sta te
Production Inte rm e dia rie sFirm s Institutions Associa tionOw ne d
Cha in Ente rprise s
Input S upply  X   X X X 
Farm
Production   X X  - - 
Raw Material
Assembly X X    X X 
Processing  X  X  X X 
Distribution  X    X X 
Retailing  X X X  X X 
Supporting
Services  X X X    
Regulation X X X X X X X X

Note : A tick mark(  ) indicates performance of a particular role

 MARKETING ANALYSIS IN AGRO
INDUSTRY ANALYSIS

Consumer Analysis
• Market Research
• Needs
• Segments
Competition Analysis • Buying Process
• Market Structure Demand Analysis
• Basis of Competition • Data Needs
• Govt. Influence • Forecasting
Marketing Plan
•Product
•Pricing Processing Plan
Procurement Plan
•Promotion • Receiving
• Adequate quantity •Distribution • Storing
• Acceptable Quality • Separating
• Appropriate Timing • Mixing
• Reasonable Cost • Forming
• Organization • Stabilizing
• Packaging
 A GENERIC FLOW DIAGRAM INDICATING THE MOVEMENT OF
AGRICULTURE FROM FARMERS TO CONSUMERS

FARMER

AGRICULTURAL PRODUCE

SELF CONSUMPTION STORAGE PROCESSING

&MARKETING PROCESSING & TRADE

Primary (No change in Secondary (Transformed into Tertiary (Ready to

shape, size, form) more convenient form for use) utilize/consume)

•Cleaning •Paddy - Rice •Cooked Rice

•Grading •Oilseeds - Oil •Bread & Biscuits
•Package •Wheat - Flour •Cooked Meat
•Storage •Goat - Meat •Ketchup
•Fibre - Fabric •Garment
•Processed Products are packed, transported, stored and retailed to the consumers
•At every stage of processing value is added
 THE BACKGROUND
• INDIA IS AN AGRO BASED COUNTRY
• 231 million tons of foodgrains
• India’s fruits and vegetable production is around 180
million tons
• India’s milk production will reach 120 million tons.
• Others such as production of eggs, inland fish and spices,
India stands in very high order beating its own benchmark
every fear

R & D Institutions are playing a major role in post-harvest value

addition in the food chain.

The crux of the matter is to LINK the Informal Food Processing centres
to Organised Processing Centres with Involvement of Farmer, Growers &
Producers
 PROMOTING INDIAN FOOD
PROCESSING SECTOR
• The Growth and Development of Indian Food Processing Industries
will provide long-term economic stability to farmers, generate
employment opportunities in rural areas.
• Govt. has appreciated the need for food processing sector and has
identified it as one of the thrust areas.
• While there has been substantial growth in the food processing sector
over the last few years, there is a need to strengthen the infrastructure
for food processing sector with “Integrated supply chain, storage,
preservation and marketing facilities.

Need for value addition to agro-based raw materials is a must.

In informal, organised and unorganised sector,
the Balance between these are very vital.
 FOOD PROCESSING SECTOR IN INDIA
• Growth of food processing sector increased from 7 percent
(2002-03) to 13.4 per cent (2006-07) : GDP Growth Rate
8.7% and 2.6% for agricultural sector in 2007-08.
• Growth of investment in food processing industrial units
(Organised, SSI, medium and large scale) increased from 64
billion US $ (2003-04) to 85 billion US $ (2006-07)
• FDI in food processing sector increased from 37 million US
$ (2004-05) to 94 million US $ (2006-07)
• Number of SSI units in Food processing sector increased
from 1.65 million (2003-04) to 2.0 million (2006-07)
 FOOD PROCESSING SECTOR IN INDIA
(contd..)
• Turnover of organised food processing units (SMEs)
increased from 142 billion US $ (2002-03) to 223 billion US $
(2006-07)
• Employment in food processing sector is 13 million direct
and 35 million indirect
• Processing level was 6-7 percent in (2003-04) it is estimated
to be about 10 percent in (2006-07)
• India one of the Biggest consumer market ranked 12th in
world (2005) and expected to reach 5th position by 2025.
• Market size for food in India in 2005 estimated at $ 155
billion and expected to be $ 344 billion by 2025 (McKinsey
Report, Rabo Bank Report)
 MAJOR CONSTRAINTS:

Supply chain in Food Processing is the weak Link

 Bulk of production in small and marginal holdings
 Producers getting only 30% of produce value
 Trade intermediaries getting rest 70 percent without any value
addition
 High level of wastage – around 35 percent
 Supply line unreliable
 Lack of infrastructure at the production sites
 Absence of credible Instts. to streamline supply chain.
 Producers not linked to the processors.
 STRATEGIC INTERVENTIONS

 Vision 2015:
 Level of Processing from 6 to 20 percent
 Value addition from 20 to 35 percent
 Share of global food trade from 1.5 to 3.0 percent
 Integrated strategy and action plan
 Food safety and standard Act 2006 –
Food Authority Operational
 Eleventh Plan Allocation for the Food Processing
sector is 8.58 billion USD (as against 1.38 billion
USD during the Tenth Plan)
 STRATEGIC INTERVENTIONS (contd..)
• Establishment of Mega Food Parks
• Creation of Integrated Cold-chains
• Modernization of Abattoirs
• Quality Control Labs and R and D
• Human Resource Development and Capacity Building
• Upgradation of Quality and Hygiene of Street food /
food street
• Decentralization of setting up / upgradation scheme.
 MEGA FOOD PARKS
• Establishment of 30 Mega Food Parks in Identified
Clusters
• Demand Driven with strong focus on strong backward and
forward linkages
• Stakeholder participation with private led initiative
through special purpose vehicle
• Av. Project cost of Mega Food Park is about 37 million
USD.
• Financial Assistance up to 50% of the project cost (75% in
Difficult Areas) limited to 10.64 million USD for each Food
Park for common facilities
• About 30-35 processing unit will leverage 53.19 million
USD investment.
 MEGA FOOD PARKS .. (contd..)
• Annual estimated turnover of these units will be about 1.0 billion
USD
• Potential employment opportunities will be about 40,000
• On an average household size of 4, this employment generation will
provide livelihood to about one hundred thousand people in
catchment area of mega park.
• Under the new schemes, ten mega food parks in the first phase out of
30 during 11th FYP approved.

One Mega Food Park Need 100 Acres of Land

 CGD: Potential Processing Facilities of
Mega Food Parks
Sr. Description of the Project – Food Project Costs Turn Over
No. Processing Rs. Lakhs Rs. Lakhs

1 IQF Frozen Food Plant: 1000 2500

Fruits and Vegetables, Foods
2 Mango/Tomato/Pomegranate etc. 1500 36003
Processing – Pulp, Puree, concentrates

3 Bottling Plants Automated Juices, 600 2000

Necters, Drinks
4 Tetra pack Aseptic Packaging plant 2000 4500

5 Pickles, spices, marinades and sauces 250 500

 CGD: Potential Processing Facilities of
Mega Food Parks
Sr. Description of the Project – Food Project Costs Turn Over
No. Processing Rs. Lakhs Rs. Lakhs

6 Canning line 120 300

7 Sauces and ketch-ups, cooking aids 100 175

8 Vacuum Drying 300 500

9 Freeze Drying Aloe Vera/Amla, 600 1500
Vegetables
10 Papaya Candy and Papain Enzymes 500 1000

11 Instant Foods – Ready to cook, Vada, 90 180

Dosa, Idly, Cutlets, etc.
12 Oliresins Distillation Process 60 500
 CGD: Potential Processing Facilities of
Mega Food Parks
Sr. Description of the Project – Food Project Costs Turn Over
No. Processing Rs. Lakhs Rs. Lakhs

13 Speciality Foods – Energy Drinks Mix, 106 265

Wellness Foods
14 Spices / Tastemaker Development Unit 50 125
- seasonings
15 Blister Packing Unit: Pickles, sauces, 40 100
instant mixes
16 Citrus fruits and pectin processing 1000 2500
plant

17 Ready meals sterilized fruits, 700 1750

vegetables and cereals
 CGD: Potential Processing Facilities of
Mega Food Parks
Sr. Description of the Project – Food Project Costs Turn Over
No. Processing Rs. Lakhs Rs. Lakhs

18 Ready meals (frozen) fruits, vegetables, 900 2250

cereals
19 Supercritical, CO2 Extraction- spices, 1000 2500
herbals, condiments
20 Microbial cultures and Tissue culture R 800 2000
and D multiplication
21 Bakery Products – Biscuits – Bread – 250 625
Frozen Daugh
22 Continuous hot air drying plant – onion, 440 1100
garlic/vegetables
 CGD: Potential Processing Facilities of
Mega Food Parks
Sr. Description of the Project – Food Project Costs Turn Over
No. Processing Rs. Lakhs Rs. Lakhs

23 Confactionery plant – chocolates – cocoa 150 375

processing
24 Extruded snack foods plants 550 1375
25 Milk and Derivative plant 2106 5265
26 Citric Acid submersed process 1180 2950
27 Spirula Algae fermentation protein plant 1400 3500

28 Edible oils and protein isolates 1500 3750

29 Natural colour extracts 600 1500
30 Mushroom production and processing plants 1600 4000

Total 22392 55435

 BROAD FEATURES OF GUIDELINES FOR
ESTABLISHING MFP
• Responsibility of Development, Ownership and Management
of MFP with a “Special Purpose Vehicle” (SPV).
• SPV can be constituted by all stakeholders like Financial
Institutions/Banks, Organised Retailers, Processors, Service
Providers, Producers, Farmers Organizations and other
related stakeholders
• SPV to be a “Body Corporate” Registered under the
Companies Act.
• SPV should have wide Dispersal of Equity holding.
• Each SPV to have Five Entrepreneurs/Business Units of
which at least one should be from the Food Processing sector.
 BROAD FEATURES OF GUIDELINES FOR
ESTABLISHING MEP .. (contd..)

• The SPV need to bring in at least 20 percent of the project cost,

including the cost of land as their contribution.
• The combined networth of the stakeholders of the SPV should
not be less than 10.64 million USD.
• Government agencies may also become shareholders in SPV
with less than 26% of share capital, so as to ensure private
sector character of the SPV.
• Govt. Grant cannot be utilized for “Land Procurement”.
 COLD CHAIN INFRASTRUCTURE

• Lack of Adequate storage facilities and refrigerated

transport add to the problems of wastages of all perishable
produce before reaching the end consumers.
• India has about 5000 cold storage units with a capacity of
about 21.6 million MT of this “POTATO” occupies 80
percent, Fruits and vegetable about 0.1 percent, meat and
fish 1 per cent, milk 0.1 percent.
• Cooling/Post Harvest Handling facilities at `Farm Gate
Level’
 COLD CHAIN INFRASTRUCTURE
(Contd..)
The scheme has THREE components:
1. Minimal Processing Centers
For Dairy sector this center can have Bulk
chilling unit at village level.
2. Refrigerated / Cold Transport
For Dairy sector milk tankers may be eligible
3. Distribution Centers
• Investors to be Eligible only if proposal covers any two of the
above three categories.
• In addition stand alone “Irradication Centers” with the
packaging facilities also eligible.
• The Scale of Assistance is 50 percent in General Areas and 75
percent in “Difficult Areas” with ceiling of 2.13 million USD.
 IRRADICATION CENTERS
FOOD IRRADICATION:
 Eliminates Disease-causing microorganisms from foods
 Reduces spoilage bacteria, insects and parasites, and in certain fruits and
vegetables in inhibits sprouting and delays ripening
 Enhances:
o The shelf-Life of food products
o Does not affect their colour, flavour, texture and nutritional values
• Irradicated food safe for human consumption.
• A Typical Food Eradication plant cost between 17-43 million USD.
• The Ministry of Food Processing Industries has approved five such
facilities so far
Two in Maharashtra
One in Haryana
One in Andhra Pradesh
One in West Bengal
 MODERNISATION OF ABATTOIR
• Develop Modern Infrastructure for Meat Industry:
Better Technology to ensure Hygienic and Scientific slaughtering
Backward Linkage with farmers in vicinity of 80-100 kms.
Forward Linkages with Mkts.
• Modern Abattoirs to have:
• Lairage
• Scientific modern slaughtering
• Chilling
• Processing
• Packaging
• By-product utilization with rendering
• Effluent treatment plant, drainages.
• Reefer Vans
• Water and power with required sanitary/phyto-sanitary conditions for
modernization
• Modern outlets.
 MODERNISATION OF ABATTOIR
(contd…)

• Financial Assistance upto 50 percent (75% in Difficult Areas)

with a ceiling of 3.20 million USD.
• To be preferably implemented under “PPP mode” with
involvement of Local Bodies with flexibility for Involving
private investors/exporters/FDI.
• In the first phase of 10 Abattoirs, one is already approved for
Maharashtra (Ahmednagar District: Goat Rearing
Federation) with a grant of 2.06 million USD.
 QUALITY CONTROL/FOOD TESTING
LABORATORIES
• Food products have to adhere to food safety and quality
standards set for domestic and foreign markets
• Food testing laboratories are required to maintain quality
of food products at every level of production chain.
• Assistance Level for Lab Equipments:
100% for Govt. organizations/universities, 50% for other
implementing agencies.
For technical civil works, 25% of cost in general areas and
33% in Difficult areas.
74 Labs at National, State and District levels to be set
up/upgraded.
 UPGRADING QUALITY OF
STREET FOOD VENDOR
• A New / Innovative scheme which aims at:
Improving Hygienic standards and quality of street food
Providing identity to downtrodden street food vendors and bringing them
to the National mainstream.
Providing them economic sustainability
• MOFP is promoting this scheme to encourage hygiene standards and
capacity building of street food vendors through NGOs/Industry
Associations, etc. to ensure quality and hygienic street food.
• About 1000 street vendors in each city (total 50) to be covered during 11
FY Plan.
• 25% Grant towards costs of scientifically designed safe, cheap and hygienic
food cart (Av. Cost 745 USD)
 UPGRADING QUALITY OF FOOD VENDORS
“Selecting One Existing street as a Food street in
25 selected cities in XI FYP”

“Selecting One Existing street as a Food street in 25

selected cities in XI FYP”

• Proposed Interventions
• Upgradation / Installation and maintenance of “Common civic Infrastructure
Facilities”
• Train personnel in food establishments on hygienic practices
• Provision of identity cards
• Health checks for vendors
• Monitoring of hygiene standards
• Coordinate Inspection, Testing, Certification and Accreditation process.
• Financial assistance to local authorities for establishing “FOOD STREETS” to
the tune of 75 percent of project cost limited to 1.06 million USD per food street.
 MAJOR FISCAL INCENTIVES (MOFPI)

• 100% Foreign Direct Investment allowed

• Repatriation of Profits is freely permitted
• Most processed food items exempt from excise duty
• Excise duty exempted on specific cold chain equipments
• Custom duty rates have been substantially reduced on plant
and equipments/raw materials/intermediates esp. for export
production.
• No licence/permission for import of most capital goods.
• Income-tax rebate allowed (100% of profits for 5 years and
25% of profits for the next 5 years) for new industries in
fruits and vegetables.
 MARKET SNAPSHOT OF FOOD
PROCESSING SECTOR
• India consumes about $200 billion worth of food products p.a. 53 per
cent of this is processed food – mostly primary processing
• The food processing industry is expected to grow at 12 percent
• Value addition of food products is expected to increase from the
“current 8 percent to 35 percent by the end of 2015”
• Bakery industry in India is one of the largest among the processed
food industries, production.
• Primary food processing (packed fruit and vegetables, milk, bakery,
milled flour and rice, tea, spices etc.) constitutes around 60 percent of
processed foods.
• Processing of perishables is only about 6 percent of the total output.
• Only 2 percent of fruits and vegetables is processed compared to upto
80% in many developing countries.
SEGMENTATION OF DIFFERENT SECTORS IN
FOOD PROCESSING INDUSTRY
SECTORS PRODUCTS
Dairy Whole milk, skimmed milk, powder,
condensed milk, ice cream, butter
and ghee, cheese
Fruits and Beverages, juices, concentrates,
Vegetables pulps, slices, frozen and dehydrated
products, potato wafers, chips etc.
Grains and Flour, bakeries, starch glucose,
Cereals cornflakes, malted foods, vermicelli,
beer and malt, extract grain based alcohol.
Fisheries Frozen and canned products viz., in fresh
form
Meat & Poultry Frozen and packed-mainly in fresh form, egg
powder
Consumer Food Snack food, namkeens, biscuits, ready to eat
food alcoholic and non-alcoholic beverages.
 DISTRIBUTION : FOOD PROCESSING
UNITS IN ORGANISED SECTOR (2004)
Food Processing Units Number
Flour mills 516
Fish Processing units 568 (+ 482 cold storage units)
Fruits and Veg. Pro. Units 5293
Meat Processing Units 171
Sweetened and aerated water units 656
Milk product units 266
Sugar mills 429
Solvent extract units 725
Rice mills 139208
Modernised rice mills 35088
MARKET POTENTIAL: CONSUMER CLASS BOOM
HOUSEHOLD INCOME DISTRIBUTION

60

50

40
2003
Per cent

30
2015
20

10

0 Very Rich Coming class Climers Aspirants Destitutes

 MARKET POTENTIAL .. (Contd…)
• Factors that are likely to fuel rapid growth in Demand for
processed foods are:
 Changing life styles and growth in dispensable income
 Rising double-income families and proportion of women in the work
force
 Decreasing prices of processed foods making them affordable thereby
accessing a much larger market
 Rapid growth in organised retail (> 20 percent p.a.) with a variety of
retail formats being developed.
 Estimated investment of about $ 22 billion in the next 10 years.
 Major investment opportunities lies in processing milk, sugar, fruits,
vegetables and marine products. An estimated 30% of new capacity
could be for the export market.
 INDIAN CONSUMER PROFILE
• Customer Behaviour is changing based on:
 Rapid urbanization
 Increased Literacy
 Rising Per Capita Income
 Rapid Growth and change demand patterns, leading to an explosion
of new opportunities
 This demand supply gap indicates an untapped opportunity in areas
such as “Packaged form, convenience food and drinks, milk products
etc.
 Low penetration rate of processed food in both the rural and urban
areas indicates a market potential
 INDIAN CONSUMER PROFILE
(contd..)
Around 45% of the population in India is below 20 years of age
and young population is set to rise further. Aspiration levels in this
age group have been fuelled by greater media exposure,
unleashing a latent demand with more money and a new mindset
Particulars 1999 2001 2006

Population (million) 846 1012 1087

Population < 25 years 480 546 565
of age
Urbanization (%) 26 28 31
 OUTLOOK OF FOOD PROCESSING
INDUSTRY
 The Democratic Processed Food market is expected to TRIPLE in the next
10 years from about $ 100 billion in FY 2004 to $ 310 billion in FY 2015
 This aims to increased its share of world trade in this sector from 1.7%
currently (87.5 billion) to 3.0% by 2015 ($ 20 billion)
Targets for Food Processed Foods (% of total production)

Item 2004 2010 E 2015 E

Fruits & Vegetables 1 4 8

Dairy 15 20 30
Marine products 11 15 20
Meat 21 28 35
Poultry 6 10 15
 SUCCESSFUL ENTREPRENEURS IN
FOOD SECTOR
 Haldiram started his business with Bhujya
 Bekaji is also one of the successful entrepreneurs
 Anita Khabia, Pune housewife, started Kolhapur Thecha, a
traditional, fiery garlic chutney
 Pradeep Chordia, a promoter of the 120-acre Chordia Food Park,
50 km from Pune (Satara Dist.) Maharashtra
 Distant Enterprises Milind Rane deal in Gulab Jamun mix, and
custard and milkshake powders
 Vishnu Kumar Agarwal and Vikas supply moulded plastic jars to
be units in the Chordia Food Park.
 BASIC NEEDS OF NEW FOOD
ENTREPRENEURS COULD BE:

• Business Planning = Quality control

• Marketing of food products = Equipments sources
• Contracting with suppliers = Mkt Plan
• Food Regulations
• Food safety
• Packaging
 DELIVERY MECHANISM

Igniting Linkages through F-I-R-E

FIRE => PQRS

F = Farmer P = Productivity

I = Industry Q = Quality

R = Research R = Returnability

E = Extension S = Sustainability
 OUR MISSION

Field Crops
Economic
Horticulture Viability

Livestock
Doubling
Diversified Farmers
Agriculture Income
Dairy

Fisheries
Sustainability
CREDIT ASSESSMENT PARAMETERS

Promoter’s Qualifications
and Experiences

Financial and Operational

Credibility

Collateral Offered