Unravelling the growth puzzle in food SMEs
Mar 14 2012, 20:30 | By Infomedia18
Tasty taco salad sold by Lebmex
Image: SME Mentor
The food processing industry has emerged as one of the sunrise sectors in India where small and medium enterprises (SMEs) could play a vital role in fulfilling various socio-economic objectives, such as employment generation and export promotion, besides fostering entrepreneurship. Despite several factors ranging from unrealistic government approach to dearth of skilled manpower marring the growth prospects of SMEs, entrepreneurs are showing their mettle by changing their business strategies.
The sector serves the vital function of linking the agricultural and industrial segments of the economy. It has the potential to transform the rural landscape of India by improving the value of agricultural produce, ensuring better remuneration to farmers, and at the same time, creating favourable demand for Indian agri-products in the world market. Emergence of organised food retail, consistent export growth, along with growing urbanisation, increasing disposable income, and changing lifestyles, and food consumption patterns are key factors driving the growth of processed foods in India.
The industry is expected to move up the growth curve quickly, considering the nascent levels of processing at present, and investment in this sector has been on an upswing. Small and medium enterprises continue to constitute a major presence in the sector and will drive many of the changes, if few vital issues are addressed soon. Infrastructure hurdles, supply chain problems, financial assistance-related issues, unfavourable government policies, etc. are the major stumbling blocks hindering the growth of SMEs in food processing sector in India.
The prices of agricultural raw materials have increased manifold in the past two years, which is affecting the performance of food processing companies, especially SMEs. A conservative study on farm wastage indicates that close to 8-10 percent of the produce can be saved, if the farm produce is properly processed and transported, which will help the farm output to go up by 8 percent without any efforts towards improvement in productivity. This calls for a radically different approach in connecting the farm and factory.
There is a vast gap between farm gate and the factory gate when it comes to quality and cost. M Balasubramaniam, director of Garden Namkeens Pvt Ltd, opined, “In my view, the issue that needs to be addressed first is quality. The quality of agricultural raw materials, especially perishables, deteriorates due to various reasons and unhygienic handling of the same. The second and equally important issue is price. “For example, a farmer in Ujjain gets Rs 5 per kg for guava produced by him and the consumer in Mumbai pays Rs 70 for the same. “The gap is a little narrow in terms of non-perishables like cereals, pulses, spices and oil seeds, nevertheless still significant. Bridging this gap is a tedious task, as there are many bottlenecks in the chain,” he pointed out.
According to Anil Bhardwaj, secretary general of the Federation of Indian micro, small and medium enterprises (Fisme), there are two elements responsible for the current plight–infrastructure and policy-related issues. “As far as policy is concerned, it should provide access to adequate, efficient and affordable infrastructure,” he said. In addition to this, the agriculture sector has to change its archaic policy framework, which puts a huge burden on pricing, movement and storage of agri-produce. There are several other policy-related issues that need to be revisited and resolved like quality standards. These include technological domains such as genetically-modified (GM) food products, foreign investments and contract farming, etc.
It is also imperative to re-invigorate farm R&D and farm management support. “It has been more than 30 years since we had major R&D breakthroughs in new technologies and management practices,” lamented Balasubramaniam. This should be a national priority like the National Rural Employment Guarantee Act (NREGA). Citing an example, he said that employing unique techniques for cultivating rice instead of flooding the rice field can save 50 percent water usage and improve the yield by 20-25 percent. The huge amount of water saved could be used for other purposes. “We need a national mission, which should take up such major initiatives,” he exhorted. Besides this, farm insurance should be a reality and be easily available, which could help the farmer to recover the input costs and get a reasonable compensation in case of loss.
Strengthening supply chain
Land prices, high interest rates and import duty rates pose as deterrents in setting up industry. “The government should consider this seriously and allot land at preferential rates to entrepreneurs with proven track record. But while doing so, a special consideration should be given to SME sector to ensure a widespread growth, which will help develop the industry even more rapidly and bring in fresh ideas and products to the growing segment,” opined Rajiv Jaisinghani, managing director of Darsan Food Pvt Ltd.
Balasubramaniam strongly feels that adoption of ISO 22000 standards in the entire supply chain will help the SMEs emerge as a reliable source for consumers. Efficient usage of manufacturing resources like manpower, energy and water, etc, will make the sector really competitive. This measure is imperative, as the availability and costs of various products are increasing at an alarming rate. “We would be outpriced by cheaper sources soon, if we delay the implementation of such steps,” cautioned Balasubramaniam. Another important step in this direction is the promulgation of the Warehousing Development and Regulation Act, and the accompanying regulatory authority should give impetus to private investments in warehousing.
The core issues
Some of the issues that need to be addressed on a priority basis so that SMEs could emerge stronger are:
· Upgradation of food processing facilities to GMP levels
· Adequate and timely working capital & term loan availability through banks
· Vocational training in food processing sector to make available manpower for SMEs
· The banking sector needs to have training programmes to understand & appreciate the business dynamics of food processing industry
Significance of government support
It has been often said that the SME sector is not able to avail of government’s help (financial assistance, term loan, etc) to the maximum extent. The reasons are many, first of all government procedures are dilatory and time-consuming. Second, when an applicant approaches sanctioning authorities, they raise all sorts of objections that ultimately lead to denial of assistance to the applicant. “Procedures should be simplified and routed through private agencies having expertise and right attitude/ mindset to find solutions for every problem – not vice versa,” opined M A Tejani, managing director of Gits Food Products Pvt Ltd.
The current system is so cumbersome that entrepreneurs feel dejected and leave the process midway. The help is too little and comes in too late, i.e. when the project has already been set up. Jaisinghani strongly feels that it is necessary to have a single window/channel at the state/local level itself where the project can be assessed and help is provided immediately. “Safeguards pertaining to judicious usage of subsidy could be put in place to ensure that genuine projects are established,” he asserted.
In the food processing sector, almost 70 percent of production in terms of volume and 50 percent in terms of value are contributed by the unorganised sector. Given that the sector is highly unorganised and small-scale in nature, the risks associated with the loans provided to these enterprises tend to be high. “SMEs are generally regarded as high risk enterprises as they operate in highly uncertain and competitive environment, and tend to have more variable rates of return compared to the large companies,” points out Dr Arun Singh, senior economist, Dun & Bradstreet India.
One of the major impediments faced by financial institutions to provide funds to the SMEs is lack of adequate information regarding their business. Informational asymmetries dampen the lenders’ or investors’ confidence, as it becomes difficult to gauge the risks associated with the projects, thereby making it difficult to price the loan. “In many instances, there is no transparency in utilisation of funds after the loan is sanctioned. This makes the portfolio of the lender risky, making them wary of lending to the SME sector,” said Dr Singh. Lack of awareness is another serious issue for which many schemes, though good in intention, remained highly restrictive in implementation.
Perceptible changes in SME sector
A few important changes have been observed in the recent past like technology upgradation, new entrants in micro- and small-scale industrial segments including self-help groups, availability of wide varieties of processed food, etc. However, most important among this is technology upgradation by different units. Reportedly, companies are investing substantial amount in expansion. “We could have a cue from the disbursements under Credit Linked Subsidy Scheme (CLSS) for technology upgradation. There has been a 60 percent jump in subsidy disbursals: from Rs 63 crore in 2007- 08 to Rs 105 crore in 2009-10,” said Bhardwaj.
In most cases, technological improvements are also undertaken as legacy technologies are becoming obsolete and incompatible with mandatory quality requirements, especially in the food sector. Packaging and labelling is a case in point. Today, the SME sector is more confident in implementing technologies, which are appropriate to the business requirements. “In the food industry, around 30 percent of the resources are spent on new technologies and technology upgradation,” said Balasubramaniam. Another important trend is, MSME segment by and large is on an expansion mode, which clearly indicates the potential it holds. The organised retail is also infusing the growth of the sector.
A closer look at the entire value chain will reveal that restaurants are mushrooming in India, which will also drive the demand for processed food. According to Ritesh Dwivedy, CEO of Hungry Zone, SMEs in restaurant sector can be broadly divided into two categories. The first category comprises restaurants (like Pizzeria Romano) that intend to compete with bigger brands (like Papa John’s Pizzas) and are based on a proven business model of authentic Andhra cuisine. The second category includes stand-alone unique business models like LebMex, which serves a unique flavour of Lebanese and Mexican vegetarian delight. “The willingness to try new options and not replicate the proven business model is the favourable change observed. The fact that customers now prefer quality over price has induced the importance in the quality of food served,” he observed.
No doubt all the changes augur well for the growth of SMEs and the segment has already witnessed few interesting developments. However, few pragmatic steps from the government will take the food SMEs to a new height.
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