India takes pride in producing surplus food-grains, oilseeds, spices, milk, fruits and vegetables.
Many a time, due to a large supply of agricultural produce, market prices crash, leaving the farmers out in the cold. Low bargaining power, lack of storage infrastructure and inadequate cold storage facilities in the designated APMC mandis or nearby make it challenging for the farmers to receive a fair return for their produce.
There appears to be structural imbalances on the supply side, which have to be addressed keeping in view the demand side of the food system. The food habits of people, especially in urban areas, have been changing fast towards more diversified and processed foods due to rising income levels, changing lifestyles and growing urbanisation.
In this context, there is an urgent need for each state to make a regional plan on the cropping pattern that farmers should adopt in view of the changing food preferences of people, availability of natural resources and movement of prices.
Farmers residing in districts that are in close proximity to the urban areas have the advantage to cater to the demands of urban consumers with higher purchasing power. For instance, there are reports of farmers in Gurugram and Sonepat in Haryana steadily diversifying to strawberry, broccoli and flax seeds, etc., due to their better prices and easy market in Delhi.
Changes in the consumption pattern
The National Sample Survey (NSS) on Consumer Expenditure is the main source of evaluating the trends in consumption patterns in rural and urban households along with their nutritional standards and the distribution of households and persons over the monthly per capita expenditure (MPCE) classes. The survey holds significance as a forecasting tool and is also used by the Central Statistical Office in rebasing the gross domestic product and other macro-economic indicators in the country.
The survey is undertaken every five years. Business Standard published some findings of the survey in November 2018. This survey titled “Key Indicators: Household Consumer Expenditure in India” found that there was a decline in real terms in the MPCE from Rs 1,501 to Rs 1,446 between 2011-2012 and 2017-2018. Business Standard also reported that in rural areas, the bottom 10% of income earners spent only Rs 500 per month in 2017-18, which was 1% less than that in 2011-12. The government, however, termed the findings of the survey conducted between July 2017 and June 2018 as a draft and decided not to release it due to “data quality” issues.
The next survey will be conducted from April 1, 2021 to March 31, 2022. It means that the results will be released only in 2023. So, there may be a gap of about 11 years from the last survey.
A perceptible shift towards processed food?
Going by the three surveys from 1993-94 to 2011-12, we find the share of food in the average total household consumption expenditures to have come down from 60% in 1993-94 to 47% in 2004-05 and then to 41% in 2011-12. It is still significant in terms of MPCE. However, as shown in the tabular form below, the real MPCE on food in absolute terms has grown at the rate of 4% per year between 2004-05 and 2011-12.
The NSS notes from consumers their details on consumption of nearly 120 food products. For simplicity, we have grouped food consumption items into five categories based on the level of processing of agriculture products.
The first category includes eggs, fruits and vegetables, and the second has food grains, other cereals and pulses, which fall under primary processing. Categories 3 to 5 contain processed products, also called secondary or tertiary.
We have taken in the third category low secondary processed products, milk and milk products, chicken, meat, edible oils, tea leaf, coffee powder, honey, sugar. The fourth category relates to medium secondary processing and includes baby food, bread, bakery products, fruit juice and other beverages, cookies, ice cream, pickle, jam. The fifth category includes highly processed products like prepared tea, prepared coffee and prepared/cooked meals.
Clearly, the consumption patterns have shifted away from low-value food grains or other primary commodities to high-value foods, and increasingly towards food with higher value addition. The share of expenditures spent on unprocessed and primarily high-value produce (eggs, fruits, vegetables) has remained relatively stable over the past 20 years at about 15%, implying that the consumption of these foods has grown in line with the rapidly rising overall expenditures.
The shares of foods with primary processing (wheat, rice, gram, bajra, pulses, millets, oilseeds), mainly low-value cereals or staples have declined significantly, with real absolute expenditures also declining over the long run from 43.9% to 32.9%.
Table 1: Changes in food consumption patterns and the annual rate of growth in India
|% share of total monthly per capita expenditures (MPCE)||Annual rate of growth
|1.Unprocessed (eggs, fruits, vegetables)||13.7||15.6||14.8||0.48||3.28||1.6|
|2. Primary Processed (cereals, pulses, oilseeds)||43.9||38.8||32.9||-1.77||1.58||-0.5|
|3. Low secondary processed (milk products, edible oils, sugar, meat)||34.2||35.8||37.8||-0.26||4.84||1.7|
|4. Medium secondary processed (baby food, bread, bakery, juices, pickle)||4.44||6.04||5.59||2.14||2.89||2.4|
|5. High secondary processed (prepared tea/coffee and meals)||3.72||3.71||8.87||-0.72||17.83||6.1|
|Total MPCE on food (Rs.)
Source: NSS consumption expenditure surveys, CSO.
A notable shift is a rapid growth in the share of foods with secondary levels of processing. The combined (low, medium, and high) secondary processed foods accounted for the majority share (at 52%) of the consumer basket in 2011-12.
But the bulk of this demand was still concentrated in the lower end of the secondary processing scale, with expenditure levels growing at a brisk 4.84% per year between 2004-05 and 2011-12. The share of highly processed foods (prepared food, juices, bakery products) is also still relatively low, but the demand for these foods was growing the fastest – their share more than doubled between 2004-05 and 2011-12, with expenditures levels growing at a spectacular rate of 17.83% a year.
The demand for certain primary commodities such as eggs and horticultural products (category 1) was growing twice as fast as compared to the demand for cereals and cereal products (category 2). The demand for processed foods was rising even faster, and rapidly shifting towards highly processed and prepared foods (categories 3 to 5).
Long term trends (growth rates from 1993 to 2011) show a similar pattern: a distinct shift away from primary processing towards, firstly, fresh fruits and vegetables – necessitating both crop diversification by farmers and investment in post-harvest infrastructure, creation and better management of value chains for fresh produce (including pre-cooling) by the government. The government also has to ensure that food safety standards are met.
Going forward, processed foods, with both low and high levels of secondary processing, offers significant potential for non-farm jobs and growth in income due to its spiral effect in rural areas.
These patterns are consistent with the growth of more nutrient and unprocessed horticulture products. Similarly, the demand for livestock products showed a higher level of growth.
It is clear that agriculture needed diversification and suitable policies are needed to connect farmers with markets so that they are protected from the very high volatility of their produce, especially observed in case of fruits and vegetables.
Stimulating growth in food processing
To cater to a growing demand for processed food, the number of food processing units and investment therein has been increasing. In 2017-18, there were 40,160 registered food processing units, out of which 34,562 were operational. We do find an increase in the rate of growth in labour productivity as well as capital deepening in the organised food industry.
But, underlying these trends is a rapid decline in labour intensity (labour/capital) and capital productivity (output/capital). A negative rate of growth in capital productivity signifies a lower capacity utilisation in this segment of manufacturing. It is important to identify the constraints that the industry faces. The reasons for the higher prices of processed food products in comparison to other countries also need to be understood and addressed.
In 2014-15, National Bank for Agriculture and Rural Development (NABARD) created a fund of Rs 2,000 crore for credit to the food processing sector but a condition was imposed that credit will only be made available for units in the mega food parks, other notified food parks and agro-processing clusters, etc. As of March 2020, NABARD had sanctioned a term loan of Rs. 490.69 crore to 12 mega food park projects and Rs. 44.71 crore to four individual processing units in the food parks. Clearly, the progress has been slower than expected.
It seems that despite an increasing market for processed food, the investors do not see mega food parks and processing clusters as attractive enough. It could be due to much larger investments required to be made in setting up units in mega food parks vis-a-vis the current returns. The difficulty in procuring raw material directly from farmers as laid down in the guidelines of mega food parks could also be a reason.
The slowing down of the economy from 2018-19 onwards and the loss of employment as a result of the COVID-19 lockdown may also have an impact on the food processing sector.
The unorganised food processing enterprises, though increasing in number, lack adequate technology and finance to raise their productivity levels. Their market is limited to a small geographical area.
In November 2020, the government announced a production-linked incentive (PLI) scheme for 10 key sectors. For the food processing sector, an outlay of Rs 10,900 crore has been proposed over the next five years. If demand is restored, the food processing sector may find it attractive to invest in the sector.
It is expected that if the government’s initiative in controlling the spread of COVID-19 and effectively vaccinating people succeeds, economic growth will bounce back. Food processing will surely be a beneficiary from the return of growth to positive territory.
Seema Bathla is a professor at the Centre for the Study of Regional Development, Jawaharlal Nehru University. Siraj Hussain, former Union Secretary of the Ministry of Food Processing Industries, is currently a visiting senior fellow at Indian Council for Research on International Economic Relations (ICRIER), New Delhi.