Thursday, July 12, 2012
Agro-processing sector needs govt's push
MV Sasidharan/ New Delhi
Centre should step in and leverage investments to boost food production
Sixty year since independence, India continues to be an agriculture-based economy, where around 45 per cent of its people are engaged in agricultural and allied activities. Agriculture, along with other related fields like forestry and logging, provides employment to an estimate 60 per cent of India's population and accounts for nearly 20 per cent of the Gross Domestic Product and close to ten per cent of the country's total exports.
Benefiting from its varied agro-climatic conditions and rich natural resource base, India is one of the world's largest producers as well as consumers of food products. It is among the biggest producers of rice, wheat, sugar, cotton, fruits and vegetables in the world. It is also the largest producer of a range of commodities, such as coconut, mango, banana, milk and dairy products, cashew nuts, pulses, ginger, turmeric and black pepper. With access to a large natural resource base of 161 million hectares of arable land, 15 million hectares of fresh water reservoirs, the largest livestock population in the globe and diverse agro-climatic conditions, India is a favourable destination for growth in the food industry.
Despite this, population pressure and rising disposable incomes are steadily putting a strain on the food management front, prompting the urgent need to leverage the available production capability for economic gains and being self sufficient to meet the domestic consumption. The vagaries in climatic patterns, as was evident in the deficient and uneven south-west monsoon last year and its disastrous effect on the summer crop, is another reason why a clear roadmap for the agro industries and the agro processing sector needs to be charted out. Even as the government pins its hopes on a good rabi crop and a good monsoon next year to contain food price inflation, the huge wastage of fruits and vegetables worth Rs 30,000 crore annually due to a highly fragmented supply chain and cold chain infrastructure, stares it in the face.
Going forward, the agro industries and food processing sectors are going to play an increasingly important role in the Indian economy. Food is the biggest consumption category in India with 31 per cent of the consumer's wallet expenditure and by the year 2015, the Indian food industry is expected to reach $258 billion from the current level of $181 billion, according to estimates firmed up by the FICCI- E&Y report of 2009.
To stimulate the growth of the food processing sector and minimise waste, industry body FICCI (Federation of Indian Chambers of Commerce and Industry) had recently suggested immediate policy interventions by way of a 16-point package of measures to streamline and augment the entire agri supply chain, clogged as it is with several intermediaries including farm processors, distributors, and retailers. Apart from initiating steps to make it easier for corporates to enter into contract farming, agri-product distribution, post-harvest management, warehousing and development of cold chains, FICCI has made a pitch for sustained development in agriculture and large investments in technology and infrastructure development.
The following are the FICCI recommendations to stimulate the growth of the food processing sector through policy interventions for beefing up supply and cold chain infrastructure:
n So far there is not enough private investment in the development of agri-focused infrastructure such as creation of pre-cooling facilities at farm gates, warehousing and storage infrastructure facilities including cold storage, wholesale/terminal agriculture markets, because of inherent viability gaps. The government needs to ensure funding of viability gap, for existing food processing units or other entities having cold storage facilities for food products, up to 5 crore for five years. Such tax incentives should be viewed as investments, which will have enormous positive multiplier effects on the agriculture and food processing sectors and the national economy in general.
n The incentives provided for establishing cold chain infrastructure under section 80-IB (11) and (11A) have not proved attractive enough. FICCI has, therefore, suggested that the establishment of cold chain and other modernised technology for upgradation of storage handling and transportation etc. should be granted infrastructure status and the tax benefit thereto provided under section 80 - IA of the Income Tax Act.
n Priority sector lending norms for the banks should be appropriately changed to include investments made by corporates in agri infrastructure concerning supply chain and cold chain in the direct finance category of priority lending.
n Private sector investment in agri infrastructure impacting supply chain and cold chain infrastructure should be eligible for 150 per cent weighted deduction as is the case of investment in R&D.
n Research and development in the area of agri business supply chains should also be eligible for 150 per cent weighted deduction to promote innovation and cost effective solutions.
n Grant fiscal incentives by way of 100 per cent depreciation on all investments in physical assets like infrastructure development by the private sector in agriculture and the entire agri-value chain. They should be given 100per cent tax holiday in respect of the profits of the undertaking for a period of at least 10 years and further giving the assessee an option to claim this tax holiday for any 10 consecutive years out of 15.
n Banks and other financial institutions should offer term loans for all supply chain and cold chain projects at lower interest rate of 6per cent. NABARD under a new window of direct financing should provide direct loans at this rate of interest to the private sector for warehousing, integrated supply / cold chain and allied infrastructure development activities in the rural areas, under RIDF funds.
n Incentivise Green cold chain projects which have eco-friendly design, energy efficient thermal insulation & plant and machinery, water recycling, renewable energy systems etc.
Another major policy boost that could potentially invigorate the agro processing sector is the Agri Export Zones. With a view to promoting agriculture in the country and to fetch remunerative returns to the farmers, the concept of the Agri Export Zones (AEZs) was initially mooted. Corporate sector players with proven credentials are encouraged to sponsor new zone or to takeover already notified AEZs or part of such zones for boosting agri-exports. The government's agri-trade promotion body, Agricultural and Processed Food Products Export Development Authority (APEDA), has been nominated as the Nodal Agency to coordinate the efforts on the part of Central Government negotiations. Potential crops that can be tapped where India has a geographical and resource advantages are tea, coffee, spices and cotton.
For investors at large, the demand-supply imbalance in food articles provides an opportunity to invest in companies operating in the agriculture value chain. According to a study by the UN Food and Agriculture Organisation (FAO), the world population is expected to reach to 9.1 billion by 2050 as compared to about 6.8 billion currently. This would also lead to demand for food almost doubling led by higher consumption and rising incomes in developing countries, especially India and China. The UN estimates also suggest that about 25 per cent of the food production will be lost by 2050 due to the impact of climate change, land degradation, water scarcity and so on.
On one hand, while demand is growing, arable land is also shrinking. Land, which is already scarce, will become scarcer even as the world will need to double food production in order to meet the increasing demand for food. Estimates indicate that the availability of arable land is reducing by 10 million hectare annually as more and more land is being used for the residential and industrial purposes. Globally, too, water consumption is doubling every 20 years, which is twice the growth in population. According to the estimates of the UN Food and Agriculture Organisation (FAO), availability of the arable land will decline to 0.6 acres per person by 2030 from 1.1 acres in 1960. All this only indicates that food prices remaining firm, if not move up, in the long run.
It is only recently that the supply side issues have been highlighted as a major reason for the surge in food prices. Ways to improve agriculture production and crop yields are seen as the key answers to this problem. However, agri experts believe that the problem may not be solved overnight and will require substantial investment and sustainable policies. In any case, there's light at the end of the tunnel. Companies operating in the food value-chain could be major beneficiaries of the evolving scenario along with the advantage of higher agriculture output prices. This includes players directly engaged in the agriculture business, food processing industry or ones that provide agri-inputs.
With food remaining the most pressing of the basic necessities that form the 'roti, kapada aur makaan' trio, it is for the Government to step in and stem the rot and leverage private sector investments to boost food production to feed the millions going hungry day in and day out.