Food processing and related industries in India

TOPICS COVERED:

  • Food processing and related industries in India- scope and significance, location, upstream and downstream requirements.
  • Supply chain management.

 

2013:

India needs to strengthen measures to promote the pink revolution in food industry for better nutrition and health. Critically elucidate the statement.

2015:

What are the impediments in marketing and supply chain management in developing the food processing industry in India? Can e-commerce help in overcoming this bottleneck?

2017:

What are the reasons for poor acceptance of cost-effective small processing unit? How will the food processing unit be helpful to uplift the socio-economic status of poor farmers?

2018:

Examine the role of supermarkets in supply chain management of fruits, vegetables and food items. How do they eliminate the number of intermediaries?

2019:

Elaborate on the policy taken by the government of India to meet the challenges of the food processing sector.

 

Food processing and related industries in India

Food processing sector is indispensable for the overall development of an economy as it provides a vital linkage and synergy between the agriculture and industry.

The term ‘food processing’ is mainly defined as a process of value addition to the agricultural or horticultural produce by various methods like grading, sorting and packaging. In other words, it is a technique of manufacturing and preserving food substances in an effective manner with a view to enhance their shelf life; improve quality as well as make them functionally more useful. It covers spectrum of products from sub-sectors comprising agriculture, horticulture, plantation, animal husbandry and fisheries. Food processing industry is one of the largest industries in India and is ranked 5th in terms of production, consumption and export. Advantages of food processing industries is enumerated in the tabular figure below.

Earlier, food processing was largely confined to the food preservation, packaging and transportation, which mainly involved salting, curdling, drying, pickling, etc. However, over the years, with emerging new markets and technologies, the sector has widened its scope. It has started producing many new items like ready-to-eat food, beverages, processed and frozen fruit and vegetable products, marine and meat products, etc. It also includes establishment of post-harvest infrastructure for processing of various food items like cold storage facilities, food parks, packaging centres, value added centres, irradiation facilities and modernised abattoir. Value chain of the food processing industry is depicted below:

Trends in Food Processing Industry:

1. Changing consumer tastes:

  • Wide array of products, coupled with increasing global connectivity, has led to a change in the tastes and preference of domestic consumers
  • This trend has been bolstered by rising incomes, increasing urbanisation, a young population, and the emergence of nuclear families. Consumer preference is moving towards healthier snacks

2. Entry of international companies:

  • Liberalisation and growth of organised retail have made the Indian market more attractive for global players.
  • With a large agriculture sector, abundant livestock, and cost competitiveness, India is fast emerging as a sourcing hub of processed food. Danone, Nestle, Kraft Foods, Mondelez International, Heinz are the international players in food processing market in India Rising demand on Indian product in international market
  • Strategic geographic location and continuous increase in raw material production help India to supply cheaper products to other countries

3. Higher consumption of horticulture crop:

  • There is a surge in demand for fruits & vegetables as a result of a shift in
    consumption.
  • Accordingly, Indian farmers are also shifting production towards horticulture crops
    to cash in on the growing demand.

4. Emphasis on healthier ingredients:

  • Food processing companies are serving health and wellness as a new ingredient in processed food, given that health conscious consumers prefer food products with lower carbohydrate content and with low cholesterol edible oils. e.g. zero-percent trans-fat snacks and biscuits, slim milk, whole wheat products, etc
  • Food packaging has enabled today’s consumers to look for various options, and compare the value offerings thereof, before making a purchase.
  • Packaging has also helped enhance ‘carry ability’ of products and increase their shelf life.

5. A shift from usefulness in processing to usefulness to consumer:

  • Product innovation is always needed as consumers not only prefer safe ingredients and additives but also useful ones
  • This creates opportunities mainly in product innovation, specialised products, and product extensions for the various existing food processors as well as new entrants.
  • Consumers have become aggressive in demanding better, safer, and convenient food products and are willing to pay a higher price for health and convenience

6. Frozen and processed goodness:

  • Frozen processed foods offer both convenience and nutrition
  • The increase in spending capacities and the concurrent time-paucity has led to the continuous development of such frozen processed food products as frozen vegetables (e.g. peas, potato, corn, etc.) and such non-vegetarian products as chicken, fish, and meat products. Food processing market accounts for 32 percent of the total food market in India.

7. Sensible snacking:

  • Domestic consumers are now tuned in to the greater variety of foods available, thanks to both wider variety in offerings as well as their own international exposure. ITC and PepsiCo are shifting their focus on healthier snacks as the market for healthy snacks is growing with double speed

8. Product innovation as the key to expansion:

  • It is now the norm for food processing companies to offer value-addition; those who hitherto offered solely milk have now added other dairy products to their repertoire.
  • This helps the processors to not only reduce wastage, but also expand uses and realise higher returns.

9. Strengthening procurement vis direct farmer-firm linkages:

    • Contract farming has been operational in India for a long time now; however, the experience of the private sector players involved therein has been a mixed bag of successes and failures
    • Largely, it has helped both the processing companies, via increasing sales and therefore augmenting their incomes, as well as providing access to better technology and fetching better prices by securing an assured market for Indian farmers. Examples include Nestlé, PepsiCo, Venky’s, Milkfed, and Mahagrapes, among others.

Advantage India:

  • India is one of the largest food producers in the world.
  • India has diverse agro-climatic conditions and has a large and diverse raw material base suitable for food processing companies.
  • India is looking for investment in infrastructure, packaging and marketing.
  • India has huge scientific and research talent pool.
  • Well-developed infrastructure and distribution network.
  • Rapid urbanization, increased literacy, changing life style, increased number of women in workforce, rising per capita income leading to rapid growth and new opportunities in food and beverages sector.
  • 50 per cent of household expenditure by Indians is on food items.
  • Strategic geographic location (proximity of India to markets in Europe and Far East, South East and West Asia).

Food Safety and Standards Act, 2006:

Food Safety and Standards Act, 2006 is an integrated food law that lays down
standards and guidelines for consumer safety, protection of consumer health and regulation of the food sector .It seeks to harmonise Indian standards with the international standards like CODEX and facilitates international trade in food articles. The Act lays down general provisions for food additives and processing of articles as well.

Food Safety and Standards Act, 2006 is a comprehensive legislation for the sector and subsumes the then existing acts and standards like Prevention of Food Adulteration Act(PFA) of 1954, Fruit Products Order of 1955, Meat Food Products Order of 1973, Vegetable Oil Products (Control) Order of 1947, Edible Oils Packaging (Regulation)Order of 1988, Solvent Extracted Oil, De- Oiled Meal and Edible Flour (Control) Order of 1967, Milk and Milk Products Order of 1992 and also any order issued under the Essential Commodities Act, 1955 relating to food.

Food Safety and Standards Authority of India (FSSAI) has been created under the Act. FSSAI regulates the food sector by laying down guidelines and standards to be followed by food businesses. It also specifies procedures for accreditation of laboratories and provides advice to central and state government in matters relating to food safety. Ministry of Health and Family Welfare is responsible for implementation of the Act. The Act deals with administrative mechanism at the state level. It also provides for setting up of Food Safety Appellate tribunal for adjudication and trails under food standard offence.

The law is significant in ensuring quality food to the consumer. It protects consumer interest by prohibiting misleading advertisement and penalising adulteration. In other words, the Act seeks to enhance quality of food related information to consumers and also by setting standards which, when effectively enforced by Commissioners in the States would result in increased consumer welfare.

The law also addresses contemporary challenges facing the sector like provisions related to Genetically Modified (GM) crops, functional food, international trade in food items etc. Besides, it is a single reference point for food related matters.

Pradhan Mantri Kisan Sampada Yojana (PMKSY):

Pradhan Mantri Kisan Sampada Yojana (PMKSY) is a comprehensive package which will result in creation of modern infrastructure with efficient supply chain management from farm gate to retail outlet. It will not only provide a big boost to the growth of food processing sector in the country but also help in providing better returns to farmers and is a big step towards doubling of farmers income, creating huge employment opportunities especially in the rural areas, reducing wastage of agricultural produce, increasing the processing level and enhancing the export of the processed foods.

The following schemes will be implemented under PMKSY:

1. Mega Food Parks

2. Integrated Cold Chain and Value Addition Infrastructure

3. Creation/ Expansion of Food Processing/ Preservation Capacities (Unit Scheme)

4. Infrastructure for Agro-processing Clusters

5. Creation of Backward and Forward Linkages

6. Food Safety and Quality Assurance Infrastructure

7. Human Resources and Institutions

1. Mega Food Parks

The Scheme of Mega Food Park aims at providing a mechanism to link agricultural production to the market by bringing together farmers, processors and retailers so as to ensure maximizing value addition, minimizing wastage, increasing farmers income and creating employment opportunities particularly in rural sector.

The Mega Food Park Scheme is based on “Cluster” approach and envisages creation of state of art support infrastructure in a well-defined agri/horticultural zone for setting up of modern food processing units in the industrial plots provided in the park with the well-established supply chain.

Mega food park typically consists of supply chain infrastructure including collection centres, primary processing centres, central processing centres, cold chain and around 25-30 fully developed plots for entrepreneurs to set up food processing units.

The Mega Food Park project is implemented by a Special Purpose Vehicle (SPV) which is a Body Corporate registered under the Companies Act. State Government, State Government entities and Cooperatives are not required to form a separate SPV for implementation of Mega Food Park project. Subject to fulfilment of the conditions of the Scheme Guidelines, the funds are released to the SPVs.

2. Cold Chain

The objective of the Scheme of Cold Chain, Value Addition and Preservation Infrastructure is to provide integrated cold chain and preservation infrastructure facilities, without any break, from the farm gate to the consumer.

It covers creation of infrastructure facility along the entire supply chain viz. pre- cooling, weighing, sorting, grading, waxing facilities at farm level, multi product/ multi temperature cold storage, CA storage, packing facility, IQF, blast freezing in the distribution hub and reefer vans, mobile cooling units for facilitating distribution of horticulture, organic produce, marine, dairy, meat and poultry etc.

The scheme allows flexibility in project planning with special emphasis on creation of cold chain infrastructure at farm level. The integrated cold chain project is set up by Partnership / Proprietorship Firms, Companies, Corporations, Cooperatives, Self Help Groups (SHGs), Farmer Producer Organizations (FPOs), NGOs, Central / State PSUs, etc. subject to fulfilment of eligibility conditions of scheme guidelines.

3. Creation/ Expansion of Food Processing/ Preservation Capacities (Unit Scheme)

The main objective of the Scheme is creation of processing and preservation capacities and modernisation/ expansion of existing food processing units with a view to increasing the level of processing, value addition leading to reduction of wastage.

The processing activities undertaken by the individual units covers a wide range of post-harvest processes resulting in value addition and/or enhancing shelf life with specialized facilities required for preservation of perishables.

While expansion of processing capacity is necessary to increase the level of processing and reduce wastage, the induction of modern technology is intended to make a clear difference in terms of process efficiencies as well as improving the quality of the end product. The setting up of new units and modernization/ expansion of existing units are covered under the scheme.

Scheme is implemented through organizations such as Central & State PSUs/ Joint Ventures/ Farmer Producers Organization (FPOs)/ NGOs/ Cooperatives/ SHG’s/ Pvt. Ltd companies/ individuals proprietorship firms engaged in establishment/ upgradation/ modernization of food processing units.

4. Agro Processing Cluster

The scheme aims at development of modern infrastructure and common facilities to encourage group of entrepreneurs to set up food processing units based on cluster approach by linking groups of producers/ farmers to the processors and markets through well-equipped supply chain with modern infrastructure.

Each agro processing clusters under the scheme have two basic components i.e. Basic Enabling Infrastructure (roads, water supply, power supply, drainage, ETP etc.), Core Infrastructure/ Common facilities (ware houses, cold storages, IQF, tetra pack, sorting, grading etc) and at least 5 food processing units with a minimum investment of Rs. 25 crores.

The units are set up simultaneous along with creation of common infrastructure. At least 10 acres of land is required to be arranged either by purchase or on lease for at least 50 years for setting up of Agro Processing Cluster.

Agro processing clusters set up by Project Execution Agency (PEA)/ Organisation such as Govt./ PSUs/ Joint Ventures/ NGOs/ Cooperatives/ SHGs/ FPOs/ Private Sector/ individuals etc. and are eligible for financial assistance subject to terms and conditions under the scheme guidelines.

The Project Execution Agency (PEA) which is responsible for overall implementation of the projects undertakes various activities including formulation of the Detailed Project Report (DPR), procurement/ purchase of land, arranging finance, creating infrastructure, ensuring external infrastructure linkages for the project etc. PEA may sell/ lease plots in agro-processing cluster to other food processing units but the common facilities in the cluster cannot be sold or leased out.

5. Scheme for Creation of Backward and Forward Linkages

The objective of the scheme is to provide effective and seamless backward and forward integration for processed food industry by plugging the gaps in supply chain in terms of availability of raw material and linkages with the market.

Under the scheme, financial assistance is provided for setting up of primary processing centres/ collection centres at farm gate and modern retail outlets at the front end along with connectivity through insulated/refrigerated transport.

The Scheme is applicable to perishable horticulture and non-horticulture produce. The Scheme would enable linking of farmers to processors and the market for ensuring remunerative prices for Agri produce.

Ministry has engaged Technical Agencies (TAs) for assisting farmer/ producer groups including Farmer Producer Companies, Farmer Producer Organization, Self Help Groups to facilitate their participation under the Scheme.

6. Food Safety & Quality Assurance Infrastructure

Quality and Food Safety have become competitive edge in the global market for food products. For the all-round development of the food processing sector in the country, various aspect of Total Quality Management (TQM) such as quality control, quality system and quality assurance should operate in a horizontal fashion.

Apart from this, in the interest of consumer safety and public health, there is a need to ensure that the quality food products manufactured and sold in the market meet the stringent parameters prescribed by the food safety regulator. Keeping in view the aforesaid objectives, government has been extending financial assistance under the scheme under the following components:

  • Setting Up/Up-gradation of Quality Control/Food Testing Laboratories
  • HACCP/ ISO Standards/Food Safety/Quality Management Systems

Policy Initiatives:

Apart from the measures above, several policy initiatives have been taken from time to time by Government to promote growth of the food processing sector in the country. Some of these are:

i. Exempting all the processed food items from the purview of licensing under the Industries (Development and Regulation) Act, 1951.

ii. 100% Foreign Direct Investment (FDI) permitted through automatic route for food processing sector subject to sectoral regulations.

iii. 100% Foreign Direct Investment, under government approval route, for trading, including through e-commerce, in respect of food products manufactured or produced in India

iv. Lower GST for raw and processed product; nearby 80% food products are covered in lower tax slab of 0%, 5% and 12%.

v. Provision of profit linked tax holiday under section 80IB and investment linked deduction under section 35 AD of Income Tax Act, 1961.

vi. Classifying loan to food & agro-based processing units and Cold Chain under agriculture activities for Priority Sector Lending.

vii. Cold Chain and Food Parks covered under Harmonised Master List of Infrastructure Sub-sector.

viii. Incentivizing creation of infrastructure, expansion of Processing Capacity and developing technology to convert raw produce into value added products.

ix. Setting up of a Special Fund of Rs. 2000 crore in National Bank for Agriculture and Rural Development (NABARD) to provide affordable credit for designated Food Parks and agro- processing units.

x. Simplifying Application Forms of all the schemes and minimizing requirement of
documents.

xi. Assisting creation of skill Infrastructure in Food Processing sector and skill development initiatives through the Sector Skill Council [i.e. Food Industry Capacity and Skill Initiatives (FICSI)].

xiii. An Investor Portal “Nivesh Bandhu” has been developed by the Ministry for disseminating information on the state-specific resource potential, policy support and fiscal incentives offered to investors in food processing sector.

Challenges:

1. India’s highly fragmented farming landscape with low average farm sizes is a major challenge in quantum improvements in farm-level productivity. India has among the lowest average farm sizes globally. Low farm size leads to an inability to invest in improving productivity.

2. The challenge in India lies in the limited implementation of better farming techniques.

3. Agricultural extension services in India while able to cover the larger farms, are unable to provide support to the numerous small landholdings, due to the sheer scale needed.

4. While India does have one of the largest public agricultural research systems, the spending is lower than levels seen in other countries.

5. Farmer access to credit is also a challenge, with total credit growth showing a declining trend from 2006-2007 onwards.

6. Livestock farming is suffering from a specific gap in the area of sufficient feed and fodder supply. However, improving feed availability will be difficult with competing pressures on land from cash crops and food grains.

7. Limited alignment and clarity on production incentives: While government involvement in procurement and distribution of non perishable foods including staple food grains and oilseeds is critical for food security in India, it is also a major source of demand-supply mismatches in food value-chains The high level of government procurement (estimated to be around 30 to 40 percent of total food grain production currently) drove increasingly favorable returns from food grains and resulted in diversion of land away from oilseeds.

8. Government also plays a role in other incentive signals that impact production. For example, the reduced import duty on edible oil imports negatively impacts the incentive for farmers to increase local oilseed production due to the cost- competitiveness of imports.

9. Access to organized procurement can be an important enabler to improving food production and food availability, by providing farmers a better guarantee of volumes and better price realization per unit sale.

10.In segments, such as fruits and vegetables, which is regulated by a variety of APMC acts across states, the result of limited organized procurement is a long and inefficient supply chain.

11. Presence of multiple intermediaries between farm and fork leads to high supply- chain wastages, price-build-up from non-value-adding activities and deterioration in quality. Farmers also tend to get lower realizations from unorganized procurement due to a lack of competition and product spoilage.

12.In addition, a large share of commissioning agents also finances farmers’ production through short-term loans indebting farmers and leading to lower sale prices for farm produce.

13.The current wholesale market format suffers from a major challenge on the issue of transparency. With no data on volumes, prevailing prices or inventory levels, there is little information for either buyers or sellers to make informed decisions. This information gap is a major barrier to the entry of new players and hence increased competition and better price discovery. Improved transparency is crucial to more efficient markets within the current framework.

14. Poor procurement and supply chain infrastructure: Various factors contribute to the poor infrastructure levels in the food supply chain. Primarily these include the high consumer demand for fresh or live-cut produce, the large share of unorganized players in the supply chain and operating commercial viability challenges. As a result, regional imbalances in food production and demand become difficult to address.

15. Similarly, the absence of farm-level infrastructure for measurement, testing, immediate chilling and storage results in a high level of self-consumption or sale in local markets which reduces marketable surpluses.

16.Convincing consumers to pay premiums for better quality products will be crucial to improving consumer demand, a lack of which is the fundamental challenge underlying current commercial unviability of infrastructure investment.

17.Low value-added in processing: There is major fragmentation of food processing capacity, with a large unorganized segment and widespread use of primitive processing. This results in lower value-added at the processing stage, especially from a nutritional point of view.

18.Over-regulation of larger processing players is also a challenge to increased processing value addition. For example, the harmonization of Indian regulations with global standards such as Codex, would enable greater flexibility for food processors – such as enabling cost reduction – thereby ensuring consumers don’t discount higher quality, safer options purely due to prohibitive costs.

19.Limited ability to control quality and safety: While India does have strong food safety laws and an organization tasked with ensuring food safety and quality, there are major gaps in the actual implementation.

20.In addition, poor pre- and post-inspection practices due to the absence of veterinary staff also impact quality. As a result, microbial contamination and contamination from dung and soil pose significant health risks to domestic consumers.

21.Limited availability of skilled resources: A severe shortage of skilled manpower
across the food value-chain is a major challenge. At the food processing stage, resource skills and knowledge are also a major challenge, with lack of awareness of food regulations resulting in high downstream rejection rates, especially with unorganized suppliers.

22.Low consumer awareness: Consumer awareness is a critical aspect of an improved nutritional situation in the country. Consumers currently lack awareness of several nutritional and food safety and quality aspects, most notably insistence on primarily fresh produce resulting in exposure to health risks and low-quality foods.

Way Forward:

1. Many food chains in India suffer due to lack of adequate scale in production which in turn creates limited ability of farmer to invest in new technology as well as ability to enhance productivity. Alternate models like contract farming, corporate farming and co-operative farming can help address these issues with availability of new technologies, production practices and greater access to finance.

2. Success of contract farming requires greater enforceability of contracts which is a crucial bottleneck in this area. Government and private players will need to work together to identify and implement contract farming at a large scale. Government will need to ensure an effective mechanism for contract enforcement and grievance redressal for all stakeholders. Protection of rights for small farmers is another area where Government needs to play an active role.

3. Government today plays a key role in several food chains like perishables through its farm extension services to farmers. While this has resulted in benefits in many areas, there are key gaps in quality and availability of farm services. It will need to develop administrative and monitoring mechanism to track performance of private players and NGOs that provide extension services.

4. The need for increased R&D and adoption of modern technologies is most critical at the production and processing stages.

  • At the production stage, this is critical to counter the challenges of plateauing yield growth, increasingly scarce resources such as land and water, rapidly deteriorating quality of soil among others. Investments in R&D and technology will be essential to drive the much needed second green revolution in India.
  • At the processing stage, small scale and unorganized sectors, which account for a substantial portion of the food processing industry, need targeted programs to improve productivity, access to technology, credit and downstream markets. This will enable reduced wastage and nutrition losses in processing

5. This is most relevant for foods sold through the government regulated Mandi route – primarily fruits and vegetables. The key improvement needed is in transparency of transactions, enabling effective and efficient demand-supply matching. Technology can be a useful aid in this scenario. For example, in Thailand’s Phitsanulok Agricultural Central Market, weighbridges are linked to computers. This enables immediate invoicing for tolls, automatic generation of sales records and ensures reliability of volume data.

6. The regulatory complexity of the food value chain in India needs to be addressed on priority. There should be focus on two key areas including standardizing legislation across states and ensuring alignment with globally accepted standards.

  • Standardization of regulations such as APMC Acts across states should be accelerated. Lack of standardization leads to higher costs and longer timelines for companies that operate across states. Standardization of food regulations across states is thus critical to improve efficiency of the food value chain.
  • Variation of India’s food safety regulations from global standards such as Codex is a major challenge both to multi-national processing companies in India and food exporters. The difference in standards leads to higher costs and longer timelines for players looking to import ingredients into India, and high rejection rates for export-focused businesses.

7. Supply chain infrastructure is currently inadequate for many categories like Fruits and Vegetables that can lead to loss of nutrient value of food produce. Even though, there are government incentives to support new investments, there is limited business case for third party logistics players in areas like cold chain.

8. Private players also have an important role in driving consumer demand for certain types of foods to make back-end infrastructure investments viable. For example, increasing consumer awareness of the quality and safety issues of fresh fruits and vegetables or live cut meat can spur demand for frozen / chilled produce and increase the viability of cold storage infrastructure.

9. The need for food products with higher nutrition levels is being increasingly recognized as an important solution to micronutrient deficiency in the country. However, challenges around unorganized nature of milling activity that may not have adequate resources for grain fortification as well as commercial unviability due to higher costs. Success of fortification initiatives would hence require Government as well private sectors to develop innovative models that can be implemented at a large scale at low costs.

10.Revamp food safety laws focusing on enforcement – The food safety challenge in India is driven by the large share of unorganized processing in areas like meat and poultry, milk; the large share of food processing undertaken outside industry. Any food safety initiative thus needs to encompass all these areas for effective implementation so that enforcement of the FSSAI act is across the food value chain.

11.Focus on Effective Implementation of Skill Development Programs and in incentivizing entrepreneurship through local training.

12.Create market demand through higher awareness of quality and – A private- public partnership model can be more effective to improve awareness where government ties-up with relevant stakeholders in each food chain to disseminate information on food safety and nutrition.

13.A Consolidated Policy for Food and Food Processing Sector -The entire food value chain in India is controlled by multiple ministries, departments and laws. A comprehensive policy will ensure that various initiatives across the departments are aligned to the overall goal of ensuring availability, awareness, affordability,access, quality and safety of food. The integrated national plan adopted by Bangladesh is a good example of this.

SUPPLY CHAIN MANAGEMENT

Supply Chain Management (SCM) in simple words can be described as a network of facilities and distribution options. Wherein SCM involves functions such as material procurement, transformation of the material into intermediate and finished products, and then distribution of the finished product to consumer. Supply chains are found to exist in both service and manufacturing sectors, although the complexity of the supply chain may vary vastly from industry to industry and firm to firm, however it represents a logical advance in our evolving understanding of business performance.

A very simple example of supply chain can be explained involving a single product. The chain involves procurement of raw material from vendors, transformed into finished goods in a single step, then transported to distribution centres and ultimately to consumer.

Realistically supply chains are always very complex having multiple end products with shared components, facilities and capacities. The flow of materials is not always along a simple network, various modes of transportation gets involved and the cost of material for the end items may become exorbitant. The SCM integrates manufacturing operations, purchasing, transportation, and physical distribution into a unified program.

SCM today:

The logistics or the SCM industry in India has been receiving greater attention in the last few years. In-spite of its huge potential the growth of the sector has not kept pace with India’s wider economy, thereby being a threat to our future competitiveness. The acceleration in industrial production and changes in consumption patterns have resulted in a high demand for basic and specialized logistics management, both at the local and cross-border levels. A recent study report suggests that the Indian logistics industry is likely to grow at 10-15 per cent per annum

There are two major reasons for this growth.

Firstly, the demand has been fuelled by the growth in industries that tend to outsource such as automobiles, consumer packaged goods, hi-tech, telecom and retail, among others.

The movement of basic commodities domestically and globally, has also led to an increase in so-called ‘multinodal’ and bulk transportation due to the emergence of many new ports and port-related service providers. A gradual opening up of key sectors such as retail, aviation, defense, etc, will also help drive expansion.

Secondly the entry of Multinational Companies (MNCs) in sourcing, manufacturing and distributing can be attributed as the other growth driver.

Hurdles:

Challenges persist that threaten this growth trajectory. However, it is estimated that
India currently spends around 12 per cent of its GDP on logistics despite the huge scale of industrial base that has been built up.

The SCM industry as a whole is very fragmented and disorganized. The inefficiency of Indian logistics acts as another challenge versus its international peers.

Presently approximately 57 per cent of the freight in India still moves on the road network. The main reason for this heavy dependence on a mode which is in many ways inefficient and has high carbon intensity is the lack of a railway system capable of responding to the needs of the industry. This puts a real strain on our infrastructure as national highways account for only two per cent of the road network but transports around 40 per cent of freight tonnage.

The capacity and turnaround times in the ports are well below global benchmarks and logistics parks, warehousing and other support infrastructure are also at an primitive development stage.

Policy Priorities:

To ensure development of Indian logistics system into a modern and of world-class standard though, will be tough but by no means an impossible task.

In India there are three policy priorities:

(a) Firstly, the government needs to draw up a comprehensive national logistics policy. Currently various components of logistics (surface transport, railways, shipping, air, commerce, finance) are all separate entities. There is a need to drive the policy in a synchronized manner.

(b) Second national priority should be focused on investment in logistics infrastructure. This means direct investment into alternative traffic modes to road,particularly rail and coastal shipping in order to ease traffic congestion, bring down costs and minimize carbon emission.

(c) Thirdly there is a need to invest more in our people with the growing complexity of supply chains; we need more skilled people to manage supply chains. There is a clear need for both the government and private entities to create well focused and sustained skills and training programmes.

(d) There are several other areas, such as technology adoption and policy simplification for trade facilitation that are also worthy of attention and focus. Getting this right, too, will put our country firmly on the right track. It’s time for all stakeholders to pull in the same direction.

Challenges in SCM:

The world has become like a global village with barriers falling apart because of global movement of goods and labour. In today’s global economy a computer chip may be designed in America, fabricated in Europe, and finally assembled and packaged in Asia, to be sold again in America. Currently the various components of logistics such as surface transport, railways, shipping, air, commerce, finance are all separate entities.

The Indian consumer today has access to fruit grown in Australia and China, which was unheard off even two decades ago. Even within individual countries there is far more extensive movement of goods and labor than before.

The modern food supply industry also has a global “Supply Chain,” which brings along a new set of challenges, particularly in India. For example, every day, a food supply company operating here has to deal with volatile fuel prices, increasing raw material costs, and mounting price pressure, and ensuring that materials are delivered to the factory for production and then products are sent to the customers on time.

Ensuring with prompt and economical delivery of products is a challenge in India. Unlike European or other Asian countries, we have limited number of cost-effective and quick alternatives. The challenges in the supply chain are to achieve global optimization for conflicting objectives in the complex network of facilities and to minimize the system variations over time.

Transportation generally refers to the movement of practically everything from raw material to finished goods between different facilities in a supply chain. In transportation the trade-off between responsiveness and efficiency is manifested in the choice of transport mode. Since transportation costs can be as much as a third of the operating cost of a supply chain, decisions made with respect to transport are very important.

One of the important issues in SCM is the coordination between manufacturers and multi-buyer. A single manufacturer supplying a product to single buyer is rare to be found in today’s business environment. Present day business environment is increasingly becoming aware that the opportunity to have a competitive edge in business can come through efficient and effective supply chain. In the case of companies operating on global scale, supply chain strategies drive operational efficiencies and affect the bottom line. Unlike technology or other core areas affecting business, Supply chain is always in a dynamic mode.