The Indian food and agriculture industry has made significant strides in the past three decades, meeting the challenge of securing production of basic staples to feed India’s growing population.
In 2010, India was the world’s biggest producer of mango, banana, papaya, milk, spices, sesame, and castor oil-seed. Agricultural GDP increased at an annual rate of 3% between 1980 and 2012, making India the third largest agricultural producer by value (closely behind China and the United States). In the past decade, despite structural barriers, the Indian farmer has matched domestic demand growth with commensurate yield increases. However, the sector is yet to realise its full potential in terms of yield, processing and exports.
A new FAIDA report by the Confederation of Indian Industry (CII) and McKinsey & Company shows that the industry presently achieves only 50 to 60% of the potential yield for most crops due to poor technology adoption; weak links between farmers and industry; unexplored opportunities in branding, marketing and exports; lack of end-to-end infrastructure from farm to table; and a dearth of extension support, research and innovation, and entrepreneurship.
At the same time, Indians are now spending much more on high value foods, and consumption is shifting from plant-based to animal-based protein, thanks to increasing disposable incomes and rapidly evolving consumer needs. And while agricultural productivity grew over the last decade, there has been a qualitative shift from basic food grains to high value agriculture, especially fruits and vegetables.
Between 2000 and 2010, high value produce moved from forming 38% to 45% of total produce by weight. The increase in the production of certain high value foods such as soya bean, potato, mango, banana, and poultry has been up to four times faster than basic produce like rice and wheat.
“It is now imperative that India upgrade its agricultural practices and techniques, as well as well as accelerate growth in allied business fields such as food processing, in order to support the country’s consumption demand changes over the next 20 years,” says Adil Zainulbhai, Chairman of McKinsey & Company in India.
“Future success depends on how India responds by ensuring sustainable supply to create a win-win situation for consumers and farmers. Robust agricultural growth can not only translate into greater exports, but also ensure poverty levels decrease at a rate faster than most other approaches, making it a necessary component of India’s inclusive growth model.”
“If India is to realise its vision of becoming a global powerhouse in food and agriculture, it needs a second Green Revolution,” says Rakesh B. Mittal, Past Chairman, CII National Council on Agriculture & Chairman FAIDA 3.
“We believe that India must shift from a programmes and schemes approach to a mission mode, to create an enabling environment and right policies for greater partnerships on PPP basis, attract large scale private sector investments and be aligned with the 12th Five Year Plan. We must look at inclusive and sustainable growth to ensure higher productivity and increased incomes for farmers,” Mittal said.
The report takes a long-term view of the country’s agriculture and high-value food industries to ascertain how India can raise agricultural productivity and farmer incomes; enhance customer value delivery in food; scale-up existing food and agriculture businesses by 3 to 5 times their current size; and develop the required capacity and enabling infrastructure, as well as relevant policies to support inclusive and sustainable growth. It suggests a detailed 12-point program, which could act as a roadmap for the sector as it sets its aspirations for 2030.
Major demographic and socio-economic changes between 2000 and 2010, such as increasing population, increasing incomes, rural to urban migrations, and an increase in rural per capita productivity has resulted in major shifts in food consumption trends and production patterns.
Consumption demand is increasing, as India’s per capita GDP is expected to increase by 320% in the next 20 years, with a parallel increase in overall food consumption by 4% per annum from INR 11 lakh crore in 2010 to INR 22.5 lakh crore in 2030.
Given the expected rise in consumption, agricultural output (at farm-gate prices) could grow from INR 12.69 lakh crore in 2011 to INR 29.28 lakh crore by 2030.
At the same time, processing could grow from INR 1.1 lakh crore in 2011 to INR 5.65 lakh crore by 2030, while India’s food exports could grow from INR 1.4 lakh crore in 2011 to INR 7.72 lakh crore by 2030.
The last decade witnessed yield increase across most crop categories, with a large scale shift to high-value agriculture: Agricultural productivity grew 8% over the last decade.
There has been a qualitative shift from basic foodgrains to high value agriculture, especially fruits and vegetables.
In 2000, basic foodgrains formed 60% of the total produce by weight, while high value produce formed only 38%.
By 2010, there was a shift to high value crops, which formed 45% of total production. The increase in the production of certain high value foods such as soya bean, potato, mango, banana, and poultry has been up to four times faster than basic produce like rice and wheat.
A study of each of the different crops shows a distinct shift by farmers to the high value portfolio in “pockets of excellence”, where strong demand–supply links have been forged, and increased yields and quality of produce have allowed successful exports in addition to catering to domestic demand.
Increased policy focus and public funding: A renewed policy thrust since the mid-2000s helped reverse the decline in agricultural growth of the 1990s.
There was a 4.35 times increase in total agriculture outlay from the 10th Five Year Plan to the 11th Five Year Plan.
The percentage outlay for agriculture increased from 5.2% in the 10th FYP to 5.6% in the 11th FYP. This was the highest proportion allocated to agriculture in the last 20 years.
Several landmark schemes have been introduced by the government in the agriculture sector since 2000, for example, the Rashtriya Krishi Vikas Yojana (RKVY), the National Food Security Mission, the Pulses Development Programme and the interest subvention scheme on crop loans.
However, while the last decade saw these positive trends, Indian agriculture also missed several opportunities to bolster growth.
Yield increases across crops have slowed over the last 4 decades: While the overall yield continues to improve, there has been no scalable success story of substantial yield improvement.
The few successes have been small, sporadic and led by the private sector. In fact, yield increase has actually slowed down across crops over the past few decades, even though these crops have still not attained their optimum.
Several possible reasons exist for this. Inadequate research quality, insufficient technology, and ineffective extension services to farmers translated into a lack of awareness of farming best practices and low technology adoption.
Outdated practices and inputs are another reason: outdated chemicals for fertilisers and pesticides, low investment in seed technology, and a heavy dependence on the monsoon season for irrigation.
Only 35 to 40% of cultivated land in India is irrigated and there is minimal penetration of new water saving technologies like drip irrigation.
Less than 10% of agricultural produce underwent processing in India: Valued at INR 66,000 crore in 2010 (at constant 2004 prices), the food and processing industry GDP in India is just 10% of the agricultural GDP.
Developed countries such as the United States consume over 60% of food across categories in the processed form.
The first FAIDA report envisaged that the processing sector would likely become an INR 215,000 crore to INR 225,000 crore sector in 2005 (at 2004 prices).
However, India has only partially realized the opportunity, mainly due lower demand for processed food and poor investment in infrastructure.
Low involvement of organised sector: Despite shifting consumer preferences, the organised sector is hardly present in high value categories.
The few instances of corporate participation have shown their ability to create win-win solutions for all stakeholders by transforming value chains, improving yields and reducing wastage.
However, these successful pilots have failed to achieve scale. The lack of scale is primarily due to structural barriers in farm gate access and the lack of infrastructure to link the benefits of value addition to the consumer.
Systemic difficulties in farm gate access stem from three reasons—lack of adequate farm gate infrastructure (such as storage centres and primary processing centres), fragmented land holdings which make it difficult for companies to source consistent quality and quantity, and restrictive policies that limit farm gate access.
Unfulfilled export potential: India has made good progress in exports, going from INR 90,000 crore from 2006 to 2010 to INR 1.35 lakh crore in 2012.
However, import dependency on critical items such as pulses and edible oil remains high. This is despite the fact that India is the third largest producer of food globally, and has a sizable presence in several crops that are relevant to both the export market and industry.
The share of exports is about 12 to 14% of production. Low yields and poor infrastructure limit competitiveness, particularly from farm gate to markets and ports. Poor infrastructure for primary processing, packing, grading and inadequate cold chain storage have further held back Indian exports.
With improvements, the country could aspire to improve farmer income by over four times (in real terms) to keep pace and reduce the gap with national average income in 20 years.
Consumers could also benefit from the increase in supply to match per capita consumption, and access to safe and healthy food at affordable prices.
The report lays out 12 interventions that could transform the sector’s performance. Four of these are already aligned with the missions and projects announced in India’s 12th Five Year Plan (12th FYP):
A “National Agricultural Technology Mission” to create high yielding, disease-resistant seed varieties; set up targeted “farmer education” and distribution programmes; and promote mechanisation, technology and modern irrigation best practices.
A “National Agricultural Sustainability Mission” to map and test soil health, ensure integrated nutrient management and sustainable cropping practices, encourage crop diversification and train the extension engine to focus on soil and water sustainability
Scalable farmer–industry partnerships to encourage various emerging models of successful interactions such as Farmer Producer Organisations (FPO) and Farmer Producer Companies (FPC), local aggregators to help farmers with extension services and yield improvement, organised agri-input retail to deliver suitable technologies and inputs to farmers, open PPP models and corporate farming for high-value agriculture for exports.
A favourable policy regime, which improves agricultural marketing mechanisms should enable farmers to decide to whom and where they can sell their produce and ensure incentives for strategic industry initiatives. The effectiveness of the current policy framework could be reviewed.
Food processing growth through an emphasis on branding to deliver customers a value proposition and brand promise for food delivered through a set of norms to assure freshness, healthiness, quality, traceability.
A “National Agriculture and Food Export Mission” in select categories to actively promote the export of select crops.
Currently, India loses out on exports with other producers due to the failure to be cost competitive, the lack of a powerful “Indian” brand in food, weak adherence to quality and safety standards and poor infrastructural linkages. In high-value agriculture categories particularly in several fruits and vegetables, India could aspire to be a top 5 global exporter
Private capital and world class expertise would ensure adoption of the latest technologies and practices in all parts of the agriculture and food value chain.
A “National Farm Gate to Market Infrastructure Authority” (NFMIA) could improve and better integrate the current farm gate infrastructure in terms of sorting, harvesting, packaging, storage and transportation through an integrated national master-plan. There are many bodies currently involved in building and managing different parts of this infrastructure. However, there is fragmentation and insufficient accountability for an integrated solution.
Mega demand servicing and export hubs will allow companies to procure, store, process and export from a single location. Such hubs will help put in place the necessary forward and backward linkages with consumption markets and agriculture production zones, along with the storage infrastructure and provide for comprehensive facilities across the value chain.
Agricultural extension services and new infrastructure creation are imperative to integrate technology into the farming system. The government could consider PPP models in extension services where possible, enforce performance standards at farmer training centres at the district level and improve quality of public extension services, and encourage scaling up of farmers cooperatives, as well as encourage agricultural institutes to participate actively in extension services.
Four to five world class food and agricultural universities and research laboratories to enable research and innovation, with commercialisation through private investment and market linkages.
This could be creation of new institutes and upgradation of existing agricultural universites
Agri-business focused angel and venture capital funds as a PPP initiative between central and state governments and private capital providers to lead the next wave of growth.
The central and state governments and private sector could contribute to a professionally managed fund to finance innovative entrepreneurship ideas, as well as set up “business incubation centres” to help farmers shape their business ideas and train them on aspects like financial management, marketing and commercialisation, and establishing networks with industries.
“These 12 interventions could meaningfully transform India’s food and agriculture sector and improve the welfare of all its stakeholders,” says Barnik Maitra, Partner, McKinsey & Company. “However, there must be strong collaboration between the centre, state, and industry for this to occur. Current governance and implementation mechanisms need to be significantly strengthened and new ones introduced to drive implementation.”
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