The Food Industry in India and Its Logic :

In 2010, the links between the financial markets and agricultural trade flows have become both stronger and more visible. This has happened through (a) the growth of agricultural commodity markets, and (b) the expansion in size and reach of powerful transnational and national food conglomerates, which are investing heavily in deep forward and backward integration of the crop, food trade, storage, processing and retail businesses. These are the conditions that India faces, and which provide the background to steady inflation in our staple food baskets.

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The Food Industry in India and Its Logic	with the private sector food industry, whether global, regional or national. There is a new set of investors whose claims in the emerging food industry are
	being staked, and which are being encour
	aged by state governments eager to dis-
Rahul Goswami	play their foreign direct investment (FDI)-

In 2010, the links between the ﬁnancial markets and agricultural trade ﬂows have become both stronger and more visible. This has happened through (a) the growth of agricultural commodity markets, and (b) the expansion in size and reach of powerful transnational and national food conglomerates, which are investing heavily in deep forward and backward integration of the crop, food trade, storage, processing and retail businesses. These are the conditions that India faces, and which provide the background to steady inﬂation in our staple food baskets.

Rahul Goswami (makanaka@pobox.com) is an agriculture systems researcher based in Goa.

Economic & Political Weekly

october 9, 2010

he number of derivative contracts in commodities were estimated to have increased more than ﬁvefold between 2002 and mid-2008, and in the aftermath of the 2008 price spikes it came to be known that speculators had dominated long positions (in which the holder owns the contract, and therefore proﬁts from its price rising) in food commodities. At the time the United Nations Conference on Trade and Development (Unctad) concluded in a study: “Part of the commodity price boom between 2002 and mid-2008, as well as the subsequent decline in commodity prices, were due to the ﬁnancialisation of commodity markets” (Unctad 2009: 72). Unctad’s view was that ﬁnancial investors accelerated and a mpliﬁed price movements driven by fundamental supply and demand factors. These price movements turned into a set of opportunities in India for a fast-growing i ndustry (food production, processing and distribution) which is quickly gaining c entral and state governmental support. For 2010-11, therefore, the commoditiesplus-ﬁnancial speculation activity which is blamed for the 2007-08 food price spike is now part of a worryingly larger a rmoury being deployed by the global food merchants and their powerful regional operators. India's relatively low rate of food p rocessing, its low index of food logistics i nfrastructure and its apparently suitable economic growth rate have combined to provide ﬁnancial and commodities speculators real test beds in which to play out scenarios of consolidation and dominance. A government which supplies the regulations pipeline with enough businessfriendly legislation is the underwriting partner. The picture that emerges from this pattern is one that is vast in i ndustrial scale and scope, and in which India's smallholder farmer is further r educed to a negligible factor or to a disenfranchised migrant. On multiple fronts, the union government is proceeding to forge new compacts

vol xlv no 41

friendliness. These are investors, promoters, asset management professionals who have learnt the patterns of the 2007-08 commodities (food included) boom and who are now well equipped to take positions, both ﬁnancial and real, in the emerging food industry. An indication of the size and scale of the national market for food (production, collection, processing, distribution, retail) being envisaged can be gauged from a “discussion paper” circulated by the Department of Industrial Policy and Promotion (DIPP) in July 2010. The paper, “Foreign Direct Investment (FDI) in Multi-brand Retail Trading”, has been circulated to “generate informed discussion on the subject” which will “enable the Government to take an appropriate policy decision at the appropriate time”. As this article shows, these decisions have already been taken and investment in the direction revealed by the paper has been r olling out for months.

Supported by the Ministry of Agriculture, the top echelons of India's national agricultural research system and dedicated agricultural trade and investment bodies, the union government has tackled the arguments against FDI in retail by describing the “limitations” of current conditions in the Indian retail sector:

(1) That there has been a lack of investment in the logistics of the retail chain, leading to “an inefﬁcient market mechanism”. The point is made that India is the second largest producer of fruit and vegetables in the world (about 180 million tonnes or mt) but has “very limited integrated cold-chain infrastructure” with only 5,386 stand-alone cold storages which together have a capacity of 23.6 mt. It points out that post-harvest losses of farm produce – especially fruits, vegetables and other perishables – have been e stimated to be over Rs 1,00,000 crore per annum, 57% of which is due to “avoidable wastage and the rest due to avoidable costs of storage and commissions”.

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(2) That “intermediaries dominate the value chain”, often ﬂouting mandi norms and their pricing lacks transparency. According to the union government, wholesale regulated markets governed by state Agricultural Produce Marketing Committee (APMC) Acts “have developed a m ono polistic and non-transparent character”. Indian farmers are said to realise only one-third of the total price paid by the ﬁnal consumer, as against two-thirds by farmers in nations with a higher share of organised retail.

(3) That “there is a big question mark on the efﬁcacy of the public procurement and PDS set-up and the bill on food subsidies is rising”. The DIPP has said that despite heavy subsidies, “overall food-based inﬂation has been a matter of great concern”. It blames the “absence of a ‘farm-to-fork’ r etail supply system” as being responsible for forcing consumers to “pay a premium for shortages and a charge for wastage”.

From 2009, the Ministry of Agriculture’s approach to its subject has shifted perceptibly – from its stated protection of the interests of the farming household and the rural and urban consumer – towards the food industry. Employing the reasons listed above, all of which contain some reflection of actual conditions, the massive apparatus of the ministry and its a ppurtenant research system is now ushering in private participation and control of areas that were hitherto in the public domain. When read with the rapid movement of ﬁnance between the money markets and the commodity markets, with the extension of infrastructure and property conglomerates into the processed food “value chain” domain, and with new alliances between agricultural research institutes and market entrepreneurs, the outlook for India's small and marginal farming households is bleak.

The concentration of funds, food handling and transport systems and growing corporate control from farm to fork can clearly be seen in an address by the Union Agriculture Minister, Sharad Pawar, at the Indian Council of Agricultural Research (ICAR) – Industry Meet on 28-29 July 2010.

The meet focused on four theme areas: seed and planting material; diagnostics, vaccines and biotechnological products; farm implements and machinery; and postharvest engineering and value addition.

Pawar said that the ministry recognises the role of the private sector in critical a reas of agricultural research and human resource development. The conventional approach of public sector agricultural R&D has been to take responsibility for priority setting, resource mobilisation, research, development and dissemination. He then explained that agricultural extension, which has been neglected for several years now, is “no longer appropriate”. It is here that the impact of the Indo-US Agricultural Knowledge Initiative, now in its ﬁfth year, can be recognised. The alternative, Pawar advised, is public-private partnerships through which public sector institutes (such as those in the ICAR network) can “leverage valuable private resources, expertise, or marketing networks that they otherwise lack”. This is the undisguised merchant reasoning behind the creation of “Business Planning and Development units” in ﬁve ICAR institutes (Indian Agricultural Research Institute, Indian Veterinary Research Institute, Central Institute for Research on Cotton Technology, N ational Institute of Research on Jute and Allied Fibre Technology, Central Institute of Fisheries Technology). These units will tackle intellectual property management, commercialisation of research, ﬁnd investors and begin businesses. India’s national agricultural research system, therefore,

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october 9, 2010 vol xlv no 41

Economic Political Weekly

has decided to now become a broker of its own output (publicly funded) and a speculator seeking proﬁts from the country's agricultural and food price crises.

Modern Terminal Markets

To better judge the extent of activity in the food processing sector and its linkages with consumer retail and regional trade, this is an indicative but in no way exhaustive list of current and recently completed projects:

(1) The Government of Rajasthan is developing a “Modern Terminal Market” (MTM) in Jaipur, it has also conducted an assessment of infrastructure of existing APMCs to plan their “modernisation”; (2) the Government of Orissa has selected a raft of companies to build and operate the MTM in Sambalpur, it has also planned MTMs in Cuttack and Berhampur; (3) the Government of Gujarat is building a “modern” fruit and vegetable market (MTM) in Surat, it has also framed guidelines for the building and operation of an “integrated agrofood park on PPP basis”; (4) the Government of Punjab is selecting companies to build and operate an MTM; (5) the Government of Maharashtra is selecting companies to build and operate an MTM for Greater Mumbai; (6) Chandigarh is selecting companies to build and operate an MTM; (7) the Government of Andhra

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Pradesh is assessing the infrastructure of existing APMCs, also to plan their “modernisation”; (8) the Government of West Bengal has prepared an “Agricultural Marketing Vision 2011” document; (9) the Government of Uttaranchal is studying the development of ﬂoriculture “on PPP basis”; (10) the Ministry of Agriculture has developed a “framework for selection of private enterprises for setting up of MTMs”, it is also with the World Bank studying the “role of centre and state systems in agriculture” under the National Agriculture Innovation Programme (NAIP);

(11) the National Institute of Agricultural Marketing has developed an “optimal operational and ownership model of MTMs”;

(12) the Agricultural and Processed Food Products Export Development Authority (APEDA) has “streamlined existing procedures and documentation for agricultural produce exports”, it is also pursuing the “fast track development of agricultural e xport zones (AEZs) through PPP (public private partnership) in India”; (13) the IFFCO-Greenport joint venture is building an “integrated agro food park” in Nellore, Andhra Pradesh; and more.

If the Ministry of Agriculture has its way, rural India will be a patchwork not of villages and hamlets but of “intelligent agrologistic networks combining consolidation centres, agroparks (agroproduction and processing park) and rural transformation centres”, which is how the MTMs and their typical built-up footprints have been described by one enthusiastic bank. The techno-industrial idiom cannot conceal the union government's intention to encourage a dangerous new dimension to urbanisation, by provisioning infrastructure to support an internal trade in agricultural products, and doing so by a llocating a greater share of scarce funds to support favoured business and trading constituents rather than to the rural constituents who need it most, the smallholder farmer and local agro-ecosystems. Supported by the vast and powerful machinery of the Ministry of Agriculture, emboldened by the global trading successes of commodity cartels which learned their tactics in the Multi Commodity Exchange of India (Mumbai), the National Commodity and Derivatives Exchange (Mumbai), and the National Multi Commodity Exchange of

Economic Political Weekly

october 9, 2010

India (Ahmedabad), the new entrepre

neurs in India’s agribusiness sector are

promoting MTMs as potentially attracting

“leading foreign retail chains to anchor

and plan their supply chain at and through

the agrofood parks” and exploiting the

MTMs’ “township model approach to at

tract Indian MNCs and foreign food pro

cessing companies”.

Such a typical “modern terminal

m arket” is the one designed for Sam

balpur, Orissa, which was estimated to

cost Rs 80 crore in October 2008, with a

handling capacity of 1.03 million tonnes a

year. The 110-acre market is to feature an

auction centre, wholesale section for per

ishables (fruit and vegetables), one for

non-perishables (cereals) which includes a

warehouse, food processing units, weigh

ing facilities, a cleaning sorting and grad

ing centre, and a cold storage. The project

assumes a ﬁrst year income of Rs 10.04

crore and gross proﬁt of Rs 5.48 crore

(Rs 12.93 crore and Rs 6.86 crore in the

third year; Rs 26.15 crore and Rs 17.39

crore in the ﬁfth year). A terminal market

of this size is said by the promoters to

need 20 collection centres in the “catch

ment area” – Sambalpur and 10 surround

ing blocks of Orissa – ranging from 40 to

290 km away. The model for such a termi

nal market has been bluntly described as

requiring the formation of a shell company

to obtain the statutory approvals from the

state government to set up the market and

collection centres after the private pro

moter is selected; the shell company then

outsourcing the operations and mainte

nance of all activities and utilities to a sin

gle ﬁrm or a cluster of companies. There is

no mention of the inhabitants of the

“catchment area” having any role to play

in the MTM other than contributing to the

throughput of the collection centres.

Why and how has such an approach

been allowed to take root? India’s food

processing sector was growing at about 6%

four years ago and is now expanding at

nearly 15% annually, according to the Min

istry of Food Processing Industries. Union

Minister Subodh Kant Sahay has repeated

a packaged set of ﬁgures at various fora in

India and abroad in order to broadcast the

potential: the country processes about 10%

of the total food produced and by 2015 this

portion is expected to rise to 20% and to

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bring about this difference in processed food percentage will require an investment of Rs 1,00,000 crore. Fortuitously for this ministry, an Eleventh Plan working group has estimated that agricultural infrastructure to support retail d evelopment will need an investment of over Rs 64,000 crore, and the Ministry of Agriculture has added that since the major portion of this investment is expected to come from the private sector, an appro priate regulatory and policy environment is necessary.

Importance of Food Processing

Here lies an important expectation; that food processing and the accompanying value addition is central to the growth desired in the agricultural sector. It is a view and a position that is being supported by policy output such as an August 2010 brieﬁng by Ganesh Kumar et al r eleased by the International Food Policy Research Institute (Ifpri) entitled “Liberalising Foodgrains Markets: Experiences, Impact, and Lessons from South Asia”. This too advocates “spatially integrated markets” to ensure that local shortages in “certain food items do not translate into a sharp rise in food prices”. The brieﬁng criticises government policies in India for regulating the movement of goods across states and worsening a lack of spatial integration; adding that “large-scale gains in efﬁciency” arose with the removal of zoning restrictions because then private trade could occur between neighbouring states “driven by arbitrage possibilities rather than their deﬁcit-surplus status”.

It is unclear how a “second Green Revolution” and MTMs or “spatially integrated markets” will be brought about. In a comprehensive paper the chief economic adviser to the Government of India, Basu (2010), said that especially for a big country like ours “it is politically risky to rely entirely on private traders and international trade to iron out excessive price ﬂuctuations”, adding that “nations can be held to

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ransom and at this early stage of India’s development we do not want that to happen at least for a few vital food items”. The chief economic a dviser explained that what the Indian government does in practice is to try to sell some grain at above the minimum support price (MSP) and also releases some foodgrains below the market price to BPL households and other vulnerable segments of the population. “The net e ffect of this kind of government action is to give an upward push to the price of foodgrains that prevail in the open market. So for people who buy foodgrains at the market price, the price they face is above the price they would have had to pay in case there was no government intervention”, said Basu. This may not hold true in several situations, but it is indeed true that people who buy foodgrains at market price in India include millions of rural poor who either do not have BPL cards or who live in areas without easy a ccess to PDS outlets. Basu’s suggestion is that if the government’s aim (in times of drought or climate extremes) is to lower the price of foodgrains, it is not enough to release a large quantity of foodgrains. In addition, this should be released in small batches to many traders or directly to consumers, rather than being stocked at very much above the buffer norms. The important related point is that the central government, as the largest stockist of food grains in India, ought to vary the way it buys foodgrains (which may also satisfy ﬁscal accounting objectives) and the way it releases foodgrains (which will satisfy the needs of the BPL, AAY, poor APL population but not

necessarily FCI and not n ecessarily traders).

However, the widening cycle of investment in infrastructure for the retail food industry is apparently following the n ational, spatially integrated model, which is designed more for growing c entres of urban consumption (further burdening the urban poor) rather than satisfying the nutritional needs of those who have depended on both the PDS and open markets for their needs. This investment is e mployed to extend contract farming, being used to build new processing centres, set up food transport networks, expand road transport infrastructure (and multimodal transport systems), and to create and ﬁll retail spaces in India's cities and towns. Investors in this range of activities include new entities that have been spawned by corporations in different s ectors, which have quickly merged and consolidated. One common element is the ﬁnance industry, a relative newcomer in the food system both in India and globally

– represented by banks and investment funds, asset management ﬁrms and institutional investors. They are being partnered by relatively young businesses in the real estate and property development sector, the transport and logistics sector, the infrastructure and telecoms industries.

references

Basu, Kaushik (2010): “The Economics of Foodgrain Management in India”, Working Paper, Ministry of Finance, Government of India, September.

Kumar, A Ganesh, Devesh Roy and Ashok Gulati (2010): “Liberalising Foodgrains Markets: Experiences,

Impact and Lessons from South Asia”, International Food Policy Research Institute (IFPRI), IFPRI Issue Brief 64 (www.ifpri.org), August.

UNCTAD (2009): Trade and Development Report 2009, Department of Industrial Policy and Promotion (Ministry of Commerce and Industry, Government of India), “Discussion Paper on Foreign Direct Investment (FDI) in Multi-Brand Retial Trading”, July, http://dipp.nic.in/discussionPapers/DP_FDI_ Multi-BrandRetailTrading_ 06July2010.pdf

october 9, 2010 vol xlv no 41 EPW Economic Political Weekly