FICCI

‘FOOD AND
BEVERAGES SURVEY’

FEBRUARY 2006

FEDERATION HOUSE, 1, TANSEN MARG, NEW DELHI

 EXECUTIVE SUMMARY
A FICCI survey of Food and Beverages Industry has shown positive growth trends
during April-March 2004-05.

The Survey also confirms higher growth during 2005-06 in almost all the products
belonging to Food and Beverage segment over the corresponding previous period.

The improvement has been reflected both in volume terms and in terms of value
for most of the products. The overall industry has achieved a growth rate of about 8
% in terms of value during 2004-05.

The survey confirms that the Rs 3584 bn Indian Food and Beverages industry have
shown buoyancy due to some positive factors :

¾ Government’s high priority for development of food processing industry to

encourage commercialization and value addition to agricultural produce.
¾ Liberal reform measures and various tax benefits

¾ Policy Initiatives taken by the Government in the Food Processing Sector

which include :

ƒ Food processing industry declared a priority area.

ƒ Entire sector is de-licensed.
ƒ Automatic approvals for foreign investment up to 100 percent, except some
products like alcoholic beverages and also technology transfer.
ƒ Zero duty import of capital goods and raw material for100 percent export oriented
units.
ƒ Agro based l00 percent export oriented units allowed sale up to 50 per cent in
ƒ domestic tariff area.
ƒ Export earnings are exempted from corporate tax
ƒ All processed fruits and vegetables products exempted from Central Excise Duty.
ƒ Government grant given for setting up of common facilities in Agro Food Park.
ƒ Full duty exemption on all imports for units in Export Processing Zones.
ƒ Use of foreign brand name is freely permitted

The Federation of Indian Chambers of Commerce and Industry (FICCI) has

recently conducted the survey of industries in the Food and Beverages sector through
extensive interactions with representatives of industry, allied industry organizations,
associations, government and public sector undertakings.

¾ With the changing life styles of the consumers and rising disposable income of
the growing middle-income group, Branded Food , Health food and
1
 Convenient Food are rapidly rising segments of this industry which are
gaining vast popularity. The market for branded foods is growing at a healthy
10%-15%.
¾ The next sunrise industry for India is going to be food. In terms of total
output addition, food has surpassed IT and pharma

¾ India’s middle class segment will continue to hold the key to success of the
processed food market in India. The profile of the middle class is changing
steadily as hired domestic help is becoming costlier. This is conducive to an
expansion in demand for ready to eat Indian-style foods.

¾ Indian food and beverage companies are making a beeline for regional
overseas markets like Bangladesh, Pakistan, Nepal, Middle East and CIS
countries because of similar lifestyles and consumption habits . Godrej
Consumer, Marico, Dabur are among the companies

¾ Some companies have achieved growth in the key processed food segment by
reaching lower price points to make the products more affordable to a bigger
consumer class

¾ The Unorganized, small players account for more than 70 per cent of the
industry output in volume terms and 50 per cent in value terms.

¾ Lower overheads due to limited local area, family management, focused

product lines and less expenditure on marketing help the unorganized sector to
grow.

¾ The Food and beverages sector is witnessing recently large-scale

transformation, huge advertisement spending, ,awareness campaign about
the products and brands, distribution of free samples with the focus on
improving the distribution network to make strong presence in the Indian market.

¾ Key factors to success are distribution (in rural markets) and advertising (in
urban markets Innovation and launching of new brands are being adopted by
the companies to grab the market.

¾ Big companies have started sourcing their products from local

manufacturers as cost saving measures and to enter the mass consumer
segment..

¾ The market is seeing players like Heinz, Mars, Marico, Conagra, Pepsi, ITC,
Dabur, Britannia, Cadbury, HLL, Pillsbery, Nestle and Amul, Smithkline
Beecham, The Surya Food and Agro Private Ltd etc and a host of local
manufacturers offering competition with their established brands on national
level. Every player is busy in the race by expanding their product range.

2
¾ The companies have added new variants into their existing brands including
stylish packaging

¾ Many food and beverage companies have targeted the schools spread
throughout the country for brand promotion and sale of their products

¾ The focus on urban markets have also contributed significantly to the growth
of the biscuit industry.

¾ Semi-processed foods/ Cooked/ Ready to eat foods sector is growing by 20

per cent due to rising demand .

¾ Milk and milk products is rated as one of the most promising sectors in the
Food Processing Industry though traditional dairy products are India’s largest
selling and profitable segment and accounts for more than 50 per cent of milk
and dairy products

¾ Cashing on brand value and encouraged by the growing market, select dairy
companies are planning major expansion plans in various cities with new
brands of products including those suited to local taste and preferences and
realizing higher price with higher sales volume

¾ Some national brands like Haldiram, Bikanervala, K C Das, Chitales,

Ganguram, Brijwasi, Agarwal Sweets etc are getting wide acceptance
because of consistent quality and product safety

¾ Local manufacturers with numerous local brands cater to populous segment

and contribute considerably in the bread segment.

¾ Biscuits' packaging has undergone a swift transformation. Major players are

now trying to differentiate their brands to reflect their superior quality
through superior packaging.

¾ Both public and private players operate in the market. Large MNCs, such as
Hindustan Lever, Nestle and Pepsi Foods, compete with public sector giants
such as NDDB, NAFED and MAFED in the fruit juice market

¾ Some market leaders have introduced age-specific market segmentation with

a new sub-brand, Real Junior targeted at Children below 6 years, claimed to be a
first of its kind initiative in the country.

¾ Street corner vendors are still very popular. Fruit juices in the unorganized
segment are considered cheaper and fresher by the consumers, even though
they are often relatively unhygienic.

3
 ¾ Standard grocers are the leading distribution channel, with one third of the
Indian confectionery market, by value. Traditional grocers are the only other
channel to take a double-digit share.

¾ Malted beverages with nutritional attributes control around 70% of the total
market and energy drinks (brown beverages) account for the rest.

¾ The emergence of new players at the lower end of the packet tea market
with marketing support from the retailers has affected the industry and
particularly, the value added segment badly.

¾ There has been a trend towards consolidation of the existing tea plantations.
Smaller players are being bought over by larger estates or global consumer
goods majors.

¾ Strong beer, which has 5 percent of alcohol content, outsells mild beer in India
and accounts for more than 68 % of the total sales..

¾ Beer is losing ground to hard liquor in India. Amidst beers, the current trend is
that lager beer is giving way to strong beer.

¾ Brewers in India are gearing up for the consolidation wave sweeping the
global beer industry.

¾ The price stability throughout the year has contributed to the increase in
domestic liquor sales.
¾ The Northern region has contributed significantly as Rajasthan has
regularized sales in the state with the formation of a distribution corporation
similar to Karnataka.

¾ Flavoured low alcohol beverage with new variants like the 330 ml beer
pack have driven sales growth across the country.

¾ Several Indian brands have made inroads into the foreign markets
including British market

¾ Branded products are preferred in the Edible oil segment as the urban
consumers are increasingly becoming health conscious and looking out for low-
cholesterol cooking medium.

Growth Highlights

4
The FICCI survey confirms higher growth rates for some sectors belonging to Food
and Beverages segment as compared to the previous year based on the estimates made
by the industry and interaction with the concerned representatives in the industry. The
industry is estimated to have achieved higher growth of 8 per cent in 2004-05 with an
estimated figure of Rs. 3584 billion. The overall industry has achieved a growth rate
of 8 % in value terms during 2004-05.

The sectors that have recorded an excellent growth of 20% and above are –Semi-
Pocessed/Cooked Ready to Eat(20%),and Ice-Cream (25%), Wine (20%).

The Sectors that have recorded a high growth rate between 10%-20% are – Branded
Flour (Atta) ( 12%), Bakery items including Bread ,Cakes, Pastry (10%-Organised
Sector(11%) , Biscuits (12%), Biscuits Organised / Packaged sector(14%), Processed
Fruits and Vegetable Juices, Pulp sauces, Ketch ups (18%), Milk Products
(10%),Traditional/ Unorganised milk products (10%), Organised Branded milk products
(15%),Khoa/chhana based sweets (10%), Butter(10%) , Curds and curd products (12%),),
Health beverages/Malted food (11%), Spirits/Country Liquor (10%), Alcoholic
beverages-IMFL (10%) , Beer (10%).

Some sectors which have recorded Moderate and single digit growth are – Food &
Beverage (8%) , Bread (7.5%), Bread/ Organised (8%) , Culinary products/Snack
food(8%),Fruits and vegetables(5%) , Milk and Dairy products (4.5%), Milk (4.5) , Milk
liquid /packaged(5%), Milk Products(8%), Milk powder including infant milk(7%),
Ghee(5.5%),Cheese/ Panner(8%) , Chocolates (8%), Sugar Confectionary/Gums(4%) ,
Health Beverages/Malted Food(8%) , Tea (7%) .

Liberal policy measures of the government and sector specific concessions have helped
growth.

A package of fiscal incentives provided by various State governments like Himachal

Pradesh, Uttranchal, have encouraged companies to set up manufacturing facilities in
these regions. The excise exemption for 10 years and income tax exemption for 5 years
for units located in backward regions under section 80IA have encouraged many
companies to set up new units and helped growth

BASIC ISSUES AND CONSTRAINTS

¾ The foremost setback in expanding the food-processing sector, in terms of both
investment and exports, is lack of adequate infrastructure.

¾ There is an absence of a strong and dependable cold chain system which is

very vital and essential for food processing industry based mostly on perishable
products. Farm produce of about 30 per is being wasted every year only

5
 because there is no adequate storage, transportation, cold chain facilities and
other infrastructure supports.

¾ Harmonization of multiple food laws is an urgent necessity. It has been

observed that there are 13 laws enforced by 9 Ministries. There is a need for
integrating into one common food law.

¾ Prevention of Food Adulteration laws is not only stringent one but time
consuming also. It is considered as an archaic and needs review.

¾ Food standards should not be overlapping, contradictory and highly

prescriptive but should be made simple to be complied with and industry
friendly. The proposed Food Safety and standard Bill, 2005 with penal
provisions requires a review as the same gives huge powers to the Inspecting
Officers to seize the food articles without authorization and may create
unwanted confusion to the detriment of the industry.

¾ There is a need for a review of the Agricultural Produce and Marketing Act
to ensure freedom to farmers to sell agricultural produce to sellers of his
choice at remunerative prices rather than selling them through regulated market
committees or authorized agents.

¾ The Essential Commodities Act (ECA) puts a lot of hindrances including

easy inter-state movement of food grains and essential food items . Commodity
traders should not be regulated and free movement of agricultural produce should
be permitted between states. This is very essential for food processing where
the processing units are located in different states.

¾ There is multiplicity of taxes, local taxes and levies charged on different

commodities belonging to food and beverages industries. Different states have
different sales tax rates. Different Mandi taxes charged by local market
committees in different states, inter-state charges and levies like Chungi tax and
procedural complexities add pressure on margins and put hurdles to sound
growth and development of the food processing sector.

¾ Higher cost of raw materials and packing materials put pressure on margins

¾ Some commodities in one segment are used as inputs in another segment of

the food processing industry, e.g, skimmed milk powder (SMP) used as raw
material for chocolate, ice cream etc sugar, edible oil used as raw materials for a
number of items, molasses for alcohol etc. There has been a rise in the prices
of all such commodities which have impacted the overall cost of production
in the food processing industry sectors. There is a need for review of all such
cases involving the users and the producers.

6
 ¾ The higher railway freight has pushed up cost of raw materials and inputs such
as sugar, edible oil and all these add to cost of production.

¾ Besides different commodities are subject to different rules and system of

regulations and licensing, e.g, dual taxation system for tea, dual licensing for
sugar, different labeling rules for some food and beverages items like
alcoholic beverages. These are mentioned in the detailed segmentation section.

¾ FICCI has highlighted some areas of concern impacting the overall Food and
Beverage Industry and some sector specific issues through its Pre-Budget
Memorandum for the year 2005-06 to the Government for consideration as under :

ƒ The exemption on Milk and Milk products, fruits and vegetable products,
edible oils etc that already exists at the zero rate, should continue.

ƒ The Excise Duty on all Value Added food products like Nutritional and
health foods, confectionary, innovative Indian ethnic products, high value
Ready to Cook/serve products to be brought down to a maximum of 8%
from 16 %.

ƒ Excise on all Machineries used for the processed food industry should be
lowered to a maximum of 8%.

ƒ Ice –creams and Non-alcoholic beverages dispensed by vending machines

are exempt from excise duty , while other beverages like chocolate drinks ,
health drinks which are dispensed by vending machines attract 16%.

ƒ The excise duty on packaging materials and packaging machineries used

for the processed food industry should come down to 8%. Packaging material
for match sticks is exempted from excise duty.

ƒ The Sales Tax or VAT rates for all machinery used should be lowered to the
concessional rate of 4% ..

ƒ CST @ 4% is a big obstacle in creating one single Indian Market and it is

suggested that the CST be phased out urgently.

OPPORTUNITIES AND PROJECTION

The survey confirms that the Food and Beverages sector is poised for further
growth because of the emerging opportunities and strong fundamentals developing
in the economy.

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The Food and Beverage Industry is projected to have overall growth between 8% -
8.5 % in 2005-06.

The sectors which are projected to achieve excellent growth of 20% and above in
2005-06 are –Semi Processed/Cooked Ready to eat (22%), Ice-Cream(20%),
Edible/Vegetable oil (20%),Wine(22%) .

The sectors that are projected to achieve high growth between 10%-20% are:
Branded Flour Atta (13%), Bakery Items including bread, cakes, pastry (11%),organized
sector (12%),Bread/ organized (10%),Biscuits (13%), Biscuits Organized /Packaged
sector (14%), Culinary products/snack food) (10%),Fruit juices,pulp,and concentrates
(18%), Sauces/ketups (17%), Milk Products(11%),Traditional/unorganized (12%),
Organized/branded (15%),Khoa/ chhana based sweets (11%),Butter(12%),Curd & curd
products(12%), Chocolates(10%),Beer (10%), Spirits/liquors (11%), Edible Oil (20%),

Some sectors projected to record moderate and single digit growth are: processed
Food products (8.5%), Food products (8%), Flour/atta (7.5%), Bread(9%), Milk and
Dairy products(6%), Milk (6%), Milk Powder including infant milk (6%),Ghee (6.5%),
Cheese/paneer (8%), Sugar confectionary/gums (5%), Health beverages /Malted food
(9%),Tea (8.5%), IMFL (10%), Sugar (8-10%)

The recent policy packages announced by the government for farmers for raising
rural income is bound to stimulate growth further .

¾ The Union Budgets 2004-05 and 2005-06 have given some incentives for
boosting the food processing industry sector including tax exemption on agro-
processing units and full exemption of excise duty on dairy machines.
¾ The government has recently outlined some measures for growth and
development of the primary sector .The measures include strengthening the
means to increase the yield in agriculture and dairy sectors, improving farm credit
and doubling agricultural credit over the next three years, raising horticultural
output to 300 million tons by 2011 and removing all controls that hamper increase
of farm income.
¾ The National Policy aims to increase the level of food processing from 2 per
cent to 10 per cent by 2010 and 25 per cent by 2025

¾ The proposal to enhance the level of institutional credit to be provided by

banks and financial institutions from Rs. 80000 crore during 2003- 04 to about
Rs 105000 crore and to bring l00 new farmers in a district in the yearly loan
scheme would accelerate rural income and rural demand.

¾ Development of rural infrastructure, rural extension services, agro-based and food

processing industries have been given high priority in the budget for generating

8
 employment, reducing poverty and raising the income level of the farmers and
rural masses by the Government.

¾ The process of setting up of Food Parks in various key locations of the

country with the involvement of the various state governments and other
allied institutions is on.. The Minister of Food Processing Industries has
announced the setting up of 500 such parks within the 10th Five-year plan across
each parliamentary constituency. This will give a boost to growth and
development of food processing industries.

The FICCI survey highlights the need for pro-active government action for helping
the industry to achieve lower cost, improved quality and better performance in the
competitive environment. For tapping the opportunities and potentials, some initiatives
and steps are required to be taken for technology improvement, automation and
computerization in the manufacturing processes, quality control, improvement of
packaging to improve shelf life of products, investment in R & D to develop new
products and for establishing an efficient cold chain system.

¾ There is the need for ensuring adequate land for large scale farming/
contract farming by introducing necessary amendment in the existing laws
and in the Land ceiling Acts

¾ Harmonization of multiple food laws by integrating into one common food law
is an urgent necessity.

The expert committee set up by Ministry of Agriculture has estimated that an

investment of the order of about Rs. 11200 crores in the next 10 years would be required
for establishing infrastructure in agriculture marketing. There is need for developing
market yards /auctioning centres to handle perishable commodities including flowers .

Commodity exchanges in India are now being encouraged while covering a large
number of commodities .Commercial banks in India with a wide network of branches in
the rural areas may act as intermediaries between the exchanges (aggregators)and farmers
to make available the benefits of price risk insurance to large sections of the farmers.

FOOD AND BEVERAGES INDUSTRY SURVEY

The size of the Food and Beverages Industry is estimated to be Rs 3584 billion. India is
among the world's major producer of food and produces over 600 million tonnes of food
products every year and has huge potentials with the food and agricultural sector which
contributes to around 22% of India’s GDP.

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While food accounts for only 9.7% of the total private consumption expenditure for an
average American person,15% for the Japanese and 15% for the British, for the Indian it
is the single largest component of their total consumption expenditure, accounting for as
much as 53%.

India’s food consumption market is expanding rapidly to attract global food and drink
giants. Rising per capita incomes, changing life styles, and a growing younger
population with preference for convenience food have driven growth.

Experts suggest that the next sunrise industry for India is going to be food. In terms
of total output addition, food has already surpassed IT and pharma. While the total
output addition in information technology and pharmaceuticals is of the order of
Rs.30,000 crore and Rs. 15,000 crore, respectively, between 1993 and 2000, food
manufacturing recorded an output addition of Rs.90,000 crore, which is the double of the
two industries put together.

India is the second largest producer of rice and wheat and the largest producer of pulses.
The total production of food grains is estimated to reach 213 million tones in 2003-04
after a setback in 2002-03 recording 174.2 million tonnes of production. Table 1 gives
product wise current performance in production and growth rates.

The Food Processing Industry sector in India has been accorded high priority by the
Government of India, with a number of fiscal relief and incentives, to encourage
commercialization and value addition to agricultural produce.

Indian food processing industry is poised for further growth in view of the liberal policy
measures and government’s commitment for reforms and development of food and agro-
processing industries.

This opens up huge opportunities for large investments in food and food processing
industries in different fields including up gradation of technologies and
improvement of skills with installation of modern machinery and equipment,
especially in areas of canning, dairy plants, specialty processing. The opportunities of
investment lie in various stages like packaging, preservation of food with suitable
refrigeration and thermo processing, quality control and also in creating a good marketing
and distribution infrastructure and an efficient network of cold chain management
system.

Health food, health food supplements, Convenient Food and Branded Food are
rapidly rising segments of this industry which is gaining vast popularity with the
changing life styles of the consumers.

Development of rural infrastructure, rural extension services, agro-based and food

processing industries have been given enough priority for generating employment and
reducing poverty and raising the income level of the farmers and rural masses by the

10
Government. The present Government also plans to continue the process further with a
package of incentives for rapid progress and development of rural India.

Of the total estimated food market of approximately Rs.3584 billion, value-added food
products comprise about Rs.920 billion.

The unorganized, small players account for more than 75% of the industry output in
volume terms and 50% in value terms

There are very few large Indian Food Brands with global presence.

Although India is among the world's largest producers of many food items, only about
20% of India's fruit and vegetable output is processed in the country, compared to 30% in
Thailand, 80% in Brazil and 60-70% in countries like the UK and US.

There is strong preference for raw and semi-processed foods in most parts of the country.

The tremendous potential for growth of the industry is also reflected in the number
of foreign investment proposals received for the various sub-sectors of the industry.
Since the liberalization in 1991 till January 2004 proposals for projects of over Rs.87715
crores have been proposed in various segments of the food and agro-processing industry
including Rs 33574 crore for food processing, Rs 33818 for sugar and Rs 20323 crore for
vegetable oil and vanaspati. Besides, the Government has also approved proposals for
joint ventures, foreign collaboration, industrial licenses and 100%export oriented units
envisaging an investment of about Rs.20,000 crores. Out of this, foreign investment is of
Rs 9620 crore which is 3.3 of total Foreign Direct Investment.

Liberalization of Food Sector started since 1991, removal of price controls, de reservation
of small scale industry, reduction in import tariffs, fiscal incentives for encouraging
investment in the sector under the liberalized policy environment of the Government have
spurred growth in this sector.

The Government has provided many liberal incentives to encourage the Food
Processing industry.

Policy Initiatives in the Food Processing Sector

ƒ Food processing industry declared a priority area.

ƒ Almost entire sector is de-licensed.
ƒ Automatic approvals for foreign investment up to 100 percent, except some products
like alcoholic beverages and also technology transfer.
ƒ Zero duty import of capital goods and raw material for100 percent export oriented
units.
ƒ Tax exemption on agro-processing units and full exemption of excise duty on
dairy machines

11
ƒ Agro based l00 percent export oriented units allowed sale up to 50 per cent in
domestic tariff area.
ƒ Export earnings are exempted from corporate tax
ƒ All processed fruits and vegetables products exempted from Central Excise Duty.
ƒ Government grant given for setting up of common facilities in Agro Food Park.
ƒ Full duty exemption on all imports for units in Export Processing Zones.
ƒ Use of foreign brand name is now freely permitted

ƒ Income Tax exemption for 5 years for new units only in fruits and vegetable
processing industry etc.

¾ Sector specific concessions have been extended to different products of the Food
Processing Industry which among others include :

- Exemption for all the milk products but not condensed milk
- Reduction for biscuits,cakes and pastries to 8%
- Sugar based confectionary exempted
- Reduction for meat and poultry products to 8%

India’s middle class segment will continue to hold the key to success of the processed
food market in India. Of the countries total population of one billion, the middle class
segment account for about 350-370 million. Though a majority of families in this
segment have non-working housewives or cannot afford hired domestic help they prefer
to prepare food of their taste in their own kitchens. But the profile of the middle class is
changing steadily as hired domestic help is becoming costlier. This is conducive to an
expansion in demand for ready to eat Indian-style foods.

As about 10% of output is processed and consumed in packaged form, there is huge
potential for expansion of the food processing industry.

In view of the tremendous growth potential of this segment many MNCs as well as
domestic players have made an aggressive entry in the sector, betting large amounts of
money.

Companies like Nestle after achieving growth in the key processed food segment are
now reaching lower price points to make the products more affordable to a bigger
consumer class.

With changes in eating habits and the increased affordability of the growing middle-
income group of Indian population, the market for branded foods is growing at a
healthy 10%-15%.

In the basic food segment there is dominance of the regional unorganized sector. This
is to some extent due to government policies of the past, wherein, many segments were
reserved for the small-scale industry.

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However, the segments, which are dominated by the unorganized sector, have the
potential to grow faster in the years to come. For example, products like 'atta' are
already poised for hectic competition between players like HLL, Pillsbury, Conagra and
ITC, because of changing lifestyles and preference for brands.

Pizza hut outlets, the MNC food chains are operating in the big cities and expanding
their network in cities and small towns with variety of cooked, ready to eat food and
drinks.

The process of setting up of Food Parks in various key locations of the country with
the involvement of the various state governments and other allied institutions has been
initiated. The minister of Food Processing Industries has announced the setting up of 500
such parks within the 10th Five year plan across each parliamentary constituency.

¾ The market is seeing players like Heinz, Mars, Marico, Conagra, Pepsi, ITC,
Dabur, Britannia, Cadbury, HLL, Pillsbery, Nestle and Amul, Smithkline
Beecham, The Surya Food and Agro Private Ltd, MTR Ltd etc and a host of other
regional and local manufacturers offering competition with their established
brands on national level. Every player is busy in the race by expanding their
product range.

HLL has entered the ready to eat segment through Indus Valley rice meals in seven
flavours. Satnam Overseas has also entered this growing market with its Kohinoor brands
of rice meals and curries. ITC ‘s more than 50 packaged branded food products under
Kitchens of India and Aashirvaad brands with different varieties of ready to eat/ cooked
food is gaining popularity in the market.

The sector is witnessing large-scale transformation, huge advertisement spending,

focus on improving the distribution network to make strong presence in the Indian
market.

BASIC ISSUES AND CONSTRAINTS

¾ The foremost setback in expanding the food-processing sector, in terms of both

investment and exports, is lack of adequate infrastructure.

¾ There is an absence of a strong and dependable cold chain system. Without a

strong and dependable cold chain vital sector like food processing industry which
is based mostly on perishable products cannot survive and grow. Cold chain
facilities are miserably inadequate to meet the increasing production of various
perishable products like milk, fruits, vegetables, poultry, fisheries etc.

13
¾ Farm produce of about 30 per is being wasted every year only because there
is no adequate storage, transportation, cold chain facilities and other
infrastructure supports. Provision should be made for sufficient accommodation
in various modes of transport, particularly in trains for transport of perishable
fruits and vegetables in cool condition on priority basis

¾ Harmonization of multiple food laws is an urgent necessity. It has been

observed that there are 13 laws enforced by 9 Ministries. There is a need for
integrating into one common food law.

¾ Prevention of Food Adulteration laws is not only stringent one but time
consuming also. It is considered as an archaic and needs review.

¾ Food standards should not be overlapping, contradictory and highly

prescriptive but should be made simple to be complied with and industry
friendly. The proposed Food Safety and standard Bill, 2005 with penal
provisions requires a review as the same gives huge powers to the Inspecting
Officers to seize the food articles without authorization and may create
unwanted confusion to the detriment of the industry.

¾ There is a need for a review of the Agricultural Produce and Marketing Act
to ensure freedom to farmers to sell agricultural produce to sellers of his
choice at remunerative prices rather than selling them through regulated market
committees or authorized agents.

¾ There is the need for ensuring adequate land for large-scale farming/ contract
farming by introducing necessary amendment in the existing laws and in the
Land ceiling Acts.

¾ The Essential Commodities Act (ECA) puts a lot of hindrances including

easy inter-state movement of food grains and essential food items. Commodity
traders should not be regulated and free movement of agricultural produce should
be permitted between states. This is very essential for food processing where the
processing units are located in different states.

¾ There is multiplicity of taxes, local taxes and levies charged on different

commodities belonging to food and beverages industries. Different states have
different sales tax rates. Different Mandi taxes charged by local market
committees in different states, inter-state charges and levies like Chungi tax and
procedural complexities add pressure on margins and put hurdles to sound
growth and development of the food processing sector.

¾ Higher cost of raw materials and packing materials put pressure on margins

¾ Some commodities in one segment are used as inputs in another segment of

the food processing industry, e.g, skimmed milk powder (SMP) used as raw

14
 material for chocolate, ice cream etc sugar, edible oil used as raw materials for a
number of items, molasses for alcohol etc. There has been a rise in the prices
of all such commodities which have impacted the overall cost of production
in the food processing industry sectors. There is a need for review of all such
cases involving the users and the producers.

¾ The higher railway freight has pushed up cost of raw materials and inputs
such as sugar, edible oil and all these add to cost of production.

¾ Besides different commodities are subject to different rules and system of

regulations and licensing, e.g, dual taxation system for tea, dual licensing for
sugar, different labeling rules for some food and beverages items like
alcoholic beverages. These are mentioned in the detailed segmentation section.

FICCIs TAX PROPOSALS FOR 2006-07

¾ The exemption on Milk and Milk products, fruits and vegetable products, edible oils
etc that already exists at the zero rate, should continue.

¾ The Excise Duty on all Value Added food products like Nutritional and health
foods, confectionary, innovative Indian ethnic products, high value Ready to
Cook/serve products to be brought down to a maximum of 8% from 16 %.

¾ Excise on all Machineries used for the processed food industry should be lowered to a
maximum of 8%.

¾ Ice –creams and Non-alcoholic beverages dispensed by vending machines are

exempt from excise duty , while other beverages like chocolate drinks , health
drinks which are dispensed by vending machines attract 16%.

¾ The packaging cost component in the food products is very high amounting to
almost 40%-60% of the cost depending on the size of the product .The excise duty
on packaging materials and packaging machineries used for the processed food
industry should come down to 8%. Packaging material for match sticks is exempted
from excise duty.

¾ The Sales Tax or VAT rates for all machinery used should be lowered to the
concessional rate of 4% ..

¾ CST @ 4% is a big obstacle in creating one single Indian Market and its suggested
that the CST be phased out urgently.

15
OPPORTUNITIES AND PROJECTION

The Food and Beverages sector is poised for further growth because of the emerging
opportunities and strong fundamentals developing in the economy.

With the growing awareness about health products in the minds of consumers, increasing
urbanization, rising standards of living and popularity of convenience foods, the industry
is expected to witness further growth. Table 2 gives product wise growth projection.

The recent policy packages announced by the new government for farmers for raising
rural income is bound to stimulate growth further .

The present Government with a human face in reforms process strongly favors the idea of
raising the level of living of rural masses through innovative reforms and packages for
farmers.

¾ The Union Budget 2004-05 and 2005-06 have given some incentives for
boosting the food processing industry sector including tax exemption on agro-
processing units and full exemption of excise duty on dairy machines.

¾ Development of rural infrastructure, rural extension services, agro-based and food

processing industries have been given high priority in the budget for generating
employment, reducing poverty and raising the income level of the farmers and
rural masses by the Government.

¾ A package of fiscal incentives provided by various State governments like

Himachal Pradesh, Uttranchal, have encouraged companies to set up
manufacturing facilities in these regions. The excise exemption for 10 years and
income tax exemption for 5 years for units located in backward regions under
section 80IA have encouraged many companies to set up new units.

¾ The government has recently outlined some measures for growth and
development of the primary sector which include among others strengthening
the means to increase the yield in agriculture and dairy sectors, raising
horticultural output to 300 million tons by 2011.

¾ The proposal to enhance the level of institutional credit to be provided by

banks and financial institutions from Rs. 80000 crore during 2003- 04 to about
Rs 105000 crore and to bring l00 new farmers in a district in the yearly loan
scheme would accelerate rural income and rural demand and speedy monetization
in rural area. This would provide untapped commercial opportunities for banks to
lend and earn reasonable profits.

¾ The process of setting up of Food Parks in various key locations of the

country with the involvement of the various state governments and other

16
 allied institutions is on.. The Minister of Food Processing Industries has recently
announced the setting up of 500 such parks within the 10th Five-year plan across
each parliamentary constituency. This will give a boost to growth and
development of food processing industries.

¾ The proposed measures also include some vital changes in the Agricultural
Produce Marketing (APMC) Act by incorporating contract farming, land
leasing and privatization of food grain storages over time.

¾ There is the need for ensuring adequate land for large scale farming/
contract farming by introducing necessary amendment in the existing laws
and in the Land ceiling Acts

¾ The proposals also include removal of restrictions facing farming community

including cross border movement of food grains, doing away with local level
rules and restrictions that prevent easy movement and marketing of food grains
and improving marketing structure.

¾ The National Policy aims to increase the level of food processing from 2 per cent
to 10 per cent by 2010 and 25 per cent by 2025.

There is a need for pro-active government action for helping the industry to achieve
lower cost, improved quality and better performance in the competitive environment. For
tapping the opportunities and potentials, some initiatives and steps are required to be
taken for technology improvement, automation and computerization in the manufacturing
processes, quality control, improvement of packaging to improve shelf life of products,
investment in R & D to develop new products and for establishing an efficient cold chain
system.

The expert committee set up by Ministry of Agriculture has estimated that an investment
of the order of about Rs. 11200 crores in the next 10 years would be required for
establishing infrastructure in agriculture marketing. There is need for developing
market yards /auctioning centres that can handle perishable commodities including
flowers .

Commodity exchanges in India are now being encouraged while covering a large
number of commodities .Commercial banks in India with a wide network of branches in
the rural areas may act as intermediaries between the exchanges (aggregators)and farmers
to make available the benefits of price risk insurance to large sections of the farmers.

DETAILED SEGMENTWISE ANALYSIS

MILLING INDUSTRY

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BRANDED FLOUR (ATTA)

The milling industry comprises rice milling, wheat-flour milling and pulse milling. It
includes a wide range of products, from basic ground wheat (atta) to flakes of wheat, rice
or corn. Over the years, there has been a steady process of technology upgradation and
modernization in the traditional milling industry. The grain-processing sector is largely
un-organized, although there are a few large players in the market.

Since the packaged flour market was explored first at a national level by the Mumbai-
based DCW group in 1994, with "Captain Cook" atta, some large players, like Hindustan
Lever (with its Annapurna brand) and Godrej Pillsbury (Pillsbury), Agro Tech (Healthy
World), Nature Fresh and ITC (Aashirvaad) entered the market. Traditional brands like
'Shakti Bhog' have also consolidated their position.

Increased competitive activity is spurring market growth. The segment, which had been
growing with excellent rate of 40-50% till 2000 is now growing by 12% in 2004-05.

The market has huge potential as in urban areas (with market size of about 42 mn tons),
branded atta accounts for 2-3% of consumption and is getting increasing acceptance.

BAKERY INDUSTRY

The annual production of bakery products which includes bread, biscuits, pastries,
cakes, buns, rusk etc is estimated to be 50 lakh tones in 2004-05 with estimated value of
Rs 69 billion. The two major bakery industries, viz., bread and biscuit account for about
82% of the total bakery products. The organized sector has a market share of 45 per
cent and the balance 55 per cent is with the unorganized sector in the baked
products..

BREAD INDUSTRY

The bread industry with estimated production of 27 lakh tons in 2004-05 and having
7.5 % growth is represented by both the organized and unorganized sectors with 55
per cent and 45 per cent contribution to production.

The large organized sector players who are prominent in the high- and medium-price
segments include Britannia, Modern Industries Ltd. Brands like Modem and Britannia are
major players in the bread market and together they account for 90% of the organized
bread market.

Local manufacturers with numerous local brands cater to populous segment and
contribute considerably in the bread segment.

Low margins, high level of fragmentation are the main features in the bakery industry.
Volumes, brand loyalty and strong distribution networks are the main drivers of growth.

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Organized bread industry is recently facing problems due to low margins of profit
due to escalating prices of major raw materials, particularly wheat flour, vegetable oil,
sugar, milk.
According to All India Bread Manufacturers Association, bread should be included
as a food item in the Mid-Day Meals Scheme and thus making a very nutritious and
hygienic food available to the children and the poorer sections of the community.

BISCUIT INDUSTRY

The large organized sector players who are prominent in the high- and medium-price
segments include Britannia, Parle and Bakeman. The major brands of biscuits are –
Britannia, Parle, Bakeman, Priya Gold, Elite, Cremica, Dukes, Anupam, Horlicks.

Within the sector, Britannia has become aggressive with its Tiger brand with variants to
compete with Parle's Parle-G in the glucose biscuits category. Britannia and Parle
dominate in branded biscuit segment.

The Surya Food and Agro Private Ltd with its Priya Gold Brand has come out of the local
fold.

ITC Foods Ltd has expanded network and is promoting its Sunfeast biscuits across 1000
schools in the country.

Foreign players like United Biscuits and McVities have also entered the fray. However,
these players have concentrated themselves in the super-premium and premium
segments.

The companies have added new variants into the existing brands as done by Britannia in
Good Day brand. Parle G in Hide & Seek with addition of flavors like butter, badam,
pista and cashew, HLL in Kisan Grudy biscuit brand.

The focus on urban markets have also contributed significantly to the growth of the
biscuit industry.

Focused advertising and new launches helped the biscuit industry to grow.

The World Food Programme procuring about 25,000 tonnes of biscuit through a
tendering process from Priya Gold , Cremica and Anmol for school children in Pakistan ,
Iraq and Afganistan has opened opportunities for the Indian companies. The top 5
manufacturers – Britannia , Parle , Priya Gold ,Cremica and Anmol have competed with
each other over prices and quantities.

Britannia, which is a market leader in the top end, has been trying to make a dent into the
mass market segment with the Tiger Brand with more emphasis to tap the rural market.
Parle is doing the opposite, trying to break into Britannia's strong hold with its popular
Parle-G brand.

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The per capita consumption of biscuits in our country is about 1.52 kg as compared to
more than 12 kg in developed countries

Besides the two major players, Parle and Britannia, the State-level markets show the
presence of strong regional players such as Bakeman, Priya Gold, Shalimar, Windsor and
Champion - brands present in almost all markets.

Biscuits' packaging has undergone a swift transformation. From Britannia's functional

protective blister wraps, which prevent breakage, to Parle's stylish offering packaging has
been completely transformed.

The excise duty cut on biscuits from 16% to 8% has given a boost to biscuit industry.
But there are some basic issues confronting the industry.

Various States have increased Sales Tax on Biscuits ranging from 16 per cent in Andhra
Pradesh and 8 per cent in Uttar Pradesh, Karnataka, Delhi and Haryana.

The Federation of Biscuits Manufacturers of India (FBMI) wants the Central

government to reconsider its decision to include biscuits in the category of Revenue
Neutral Rate (RNR), and levy 12.5% VAT . Biscuits should be recognized as a mass
consumption item.

SEMI-PROCESSED/ COOKED/ READY TO EAT

The market for semi-processed/cooked and ready to eat foods is estimated to be of

around Rs 82.9 billion in 2004-05 and is rising rapidly with a growth rate of 20 per
cent.

With the changing life styles of the Indian middle class and the busy schedules of both
the husband and wife in the family the demand for semi-processed cooked/ready to eat
food will rise steadily as hired domestic help is also becoming costlier.

HLL has entered the ready to eat segment through Indus Valley rice meals in seven
flavours. MTR Foods has also launched a whole range of rice meals and other curries.
Satnam Overseas has also entered this growing market with its Kohinoor brands of rice
meals and curries. ITC ‘s more than 50 packaged branded food products under Kitchens
of India and Aaashirvaad brands with different varieties of ready to eat/ cooked food is
gaining popularity in the market.

Pizza Corner ,has also expanded its outlets rapidly this year . Global Franchise
Architects (GFA) currently has 37 Pizza Corner outlets across India .

20
 CULINARY PRODUCTS & SNACK FOOD

The total production of culinary products and snack food is estimated to be around Rs
1750 crore in 2004-05 and is growing at a moderate rate of 8 per cent.

The culinary products including mainly wheat based products comprising of noodles,
vermicelli, macaroni and spaghetti is gaining popularity.

HLL (Kissan and Knorr range) and Nestle (Maggi) dominate this segment, as both have
large product portfolios. Heinz and Top Ramen are also knocking at the door.

Indian snack food market has reached a value of Rs 1530 crore. It is one of the
largest snack markets in the world. Potato chips are by far the largest product category
within snacks, with 85% of the total market share. Snack nuts and savory snacks also add
to the market. At present, popcorn has yet to break into the Indian market.

Frito Lay's India, Pepsico’s Snack Food Division having snack foods plants in Channa
(Punjab) and Pune (Maharashtra) , and going for another in (Sakrail) West Bengal with
investment of Rs 75 Crores as the state of West Bengal has immense opportunities for
agro-based industries. The company has carried out backward integration to source
potatoes and other crops with farmers across the states

The world’s largest producer of French fries and potato specialties McChain Foods
with McChain Smiles and NP Foods have entered in India’s potato snack industry in
2005.

FRUIT JUICES / PULP & CONCENTRATES/ SAUCES/ KETCH UPS

India is the second largest producer of both fruits and vegetables in the world.
Different Agro- climatic conditions ensure availability of a wide range of fruits and
vegetables in large quantities throughout the year. India produces about 148.6 million
tones of fresh fruits and vegetables of which fruits contribute to about 48.5 million tons
and vegetables account for the rest 100 million tons.

The potential of the sector has, however, not been fully tapped. India produces about 11
mn tonnes of processed fruits and vegetables, fruit juices, pulp and concentrates . The
production / market for Indian fruit juice/pulp concentrate, sauces/ketch ups is estimated to
be more than Rs 2800 crore in 2004-05 with growth rate of 18 per cent.

The market has immense potentialities provided some infrastructural facilities for
efficient transportation and marketing of fruits and vegetables are created. Provision
should be made for creation of an efficient cold chain system subsequently.

About 89% of the processing units are in the small and medium sectors.

21
Street comer vendors are still popular. Fruit juices in the unorganized segment are
considered cheaper and fresher by the consumers, even though they are often unhygienic.

Pepsi with its brand Tropicana and Dabur Foods through Real brand compete in the
market. Coca Cola India its only juice brand –Maaza is further is talking to multi-
packaging to attract customers. Mother dairy is also in the line to access the market
effectively through Safal brand.

Dabur Foods not only leads with innovation in its product offerings but also has now
taken the lead in redefining traditional marketing dynamics in the segment.

The Awareness about health and more sophisticated cocktail culture has driven
growth in packaged fruit juice segment.

CONFECTIONARY INDUSTRY

The Indian confectionary market can be segmented into sugar boiled confectionary,
chocolates, mints and chewing gums. Organized market for sugar confectionary/gums is
estimated to be 183216 tons in volume and around 19.2 bn in value.

The entire market can be divided into 7 major categories, namely Hard Boiled Candies
(HBC), Toffees, Eclairs, Chewing gums, Bubble gum, mints and Lozenges. The
confectionary market is highly fragmented with several players with strong regional
presence. Leading players are Cadbury India, Nestle, Nutrine, Parry's Confectionary,
Parle, Ravalgon, Candico etc.

The chocolate market in India is estimated to be around 30800 tonnes. It is dominated by

2 major players, Cadbury India Ltd and Nestle India Ltd, which together account for
about 90% of the total chocolate market.

Cadbury India is the market leader with 65- 70% share in chocolates, but Nestle is
also growing faster. ITC and HLL are also operating in the confectionery segment.

Parle is trying to revive popular Poppins melody. It plans to give the brand a new
packaging and a makeover for Mango Bite. It is also concentrating on newer brands such
as Smoothies (lacto), Chox (chocobar) and Cafechino (coffee toffee).

Players like Cadbury and Nestlé have also introduced chocolates in smaller packs,
costing less than the regular packs to have larger penetration in the market

New product launches including— a brown and white chocolate combination ‘Dairy
Milk Two-in-One’ , ‘Bytes’ choclate wafer snacks by Cadbury India are driving growth.

22
Standard grocers are the leading distribution channel, with one third of the Indian
confectionery market, by value. Traditional grocers are the only other channel to take a
double-digit share. The remainder of the market shows a high degree of fragmentation.

Low margins, high volumes, price sensitivity and high advertising expenses
characterize the Chocolate industry.

The perishable nature of the product and the fact that India lacks a cold chain
distribution network are among the major problems that inhibit market expansion.

The chocolate companies are facing problems due to scarcity of milk and rising prices.
The private dairies have raised the prices including the prices of Skimmed Milk Powder
(SMP), the essential ingredient for manufacturing milk chocolates and ice cream mixes in
addition to biscuits and confectionery products.

The proposed Food Safety and standard Bill, 2005 with penal provisions requires a
review as the same gives huge powers to the Inspecting Officers to seize food articles
without authorization and may create unwanted confusion to the detriment of the
industry.

According to the Indian Confectionary Manufacturers’ Association, hard boiled

candies should be brought out of the list reserved for SSI and also there should be
reduction of excise duty on gums.

MILK AND DAIRY PRODUCTS / HEALTH BEVERAGES

Milk and milk products is rated as one of the most promising sectors in the Food
Processing Industry.

India is the largest milk producing country with production of more than 92 million
tonnes.

With increased production of liquid milk, there has been a simultaneous growth in the
production of processed milk products, including milk powder, infant milk food,
condensed milk, butter, cheese, ice-cream, ghee, curd and khoa and khoa based sweets.

The traditional dairy products are India’s largest selling and profitable segment and
accounts for more than 50 per cent of milk and dairy products. The production of
traditional dairy products is estimated to reach Rs 1089 billion in 2004-05 against the
total estimated production of milk and dairy products of the amount of Rs 1747 bilion.

The organized sector sector accounts for Rs 264 billion. It has been observed that
efficient production and marketing can bring about more than 200 per cent value addition
in the Indian dairy segment.

23
With liberalisation, the import of technology and machinery has effected modernization
and technological breakthrough in production of traditional milk products and this has
encouraged the growth of the organized sector in the Dairy segment.

The dairy industry is dominated by the co-operative sector. About 60% of the
installed processing capacity is in the co-operative sector.

The National Dairy Development Board (NDDB) is a major player in the market with its
major brand, Amul. Leading brands like Amul, Nestle, Mother Dairy and Britannia are in
the race to tap the growing market.

SmithKline Beecham Consumer Healthcare, Nestlé India and Heinz India are amongst
the large MNCs that dominate the high-value milk products market. Other players
include Indiana Dairy Specialties, Jagatjit Industries Ltd and various other state co-
operatives.

Some dairy plants have production of mithais on a commercial scale. Some national
brands like Haldiram, Bikanervala, K C Das, Chitales, Ganguram, Brijwasi,
Agarwal Sweets etc are getting wide acceptance because of consistent quality and
product safety.

Encouraged by the growing market and cashing on brand value select dairy
companies are planning major expansion plans in various cities with new brands
suited to local taste and preferences and realizing higher prices with higher sales
volumes.

The milk and dairy products segment is set for up gradation of cold-storage chains
for expansion. Mother Dairy, a wholly owned subsidiary of National Dairy Development
Board plans to make strong presence in the market of milk and milk products under the
Mother Dairy brand through retail outlets across the country in addition to its own 300
outlets with provision of cold storage and cold chains.

North India is one of the most important markets for ghee since it accounts for 45 per
cent of the country's ghee market.

There are different taxes and duties by both the Central and State Governments.

Some procedural issues including amendment of Milk & Milk Products Order
(MMPO) of the Government of India need to be reviewed for bringing viability in the
production of milk and milk products.

For tapping the opportunities and potentials, some initiatives and steps are required to be
taken for technology improvement, automation and computerization in the manufacturing
processes, quality control, improvement of packaging to improve shelf life of products,

24
investment in R & D to develop new products and for establishing an efficient cold chain
system.

With the growing awareness about health products in the minds of consumers, increasing
urbanization, rising standards of living and popularity of convenience foods, the industry
is expected to witness strong long-term demand growth potential.

BEVERAGES/ NON-ALCOHOLIC

MALTED FOOD & HEALTH BEVERAGE

The Rs. 14.4 bn malted foods market is composed of two segments - brown and white.
While the brown drinks are held to be as energy boosters, the white drinks are regarded
as milk substitutes.

Malted beverages with nutritional attributes control around 70% of the total
market and energy drinks (brown beverages) account for the rest.

The malted food drink industry is dominated by few players. These include brands such
as ' Horlicks, 'Complan' and 'Viva', which are mainly known as white beverages. 'Boost',
'Bournvita', 'Milo' and 'Maltova' on the other hand are classified as brown drink.

Smithkline Beecham's 'Horlicks' and 'Boost' dominate the segment with around 65 % of
the market share. Cadbury's Bournvita, Nestle's 'Milo', Hienz's 'Complan' and Amul's
'Nutramul' are the other famous brands of the respective players.

The consumption pattern of malted beverages differs according to usage patterns across
geographic zones. In the southern and eastern regions white beverages are preferred as
substitute for milk. The people in the east prefer for sweetness of taste, the southern
region prefers more cocoa based beverages.

TEA INDUSTRY

The Rs 86 bn Indian tea industry's leaders have launched a number of instant tea drinks
for the new-generation consumers.

Tea has managed to remain on top despite repeated onslaughts by other beverage
segments largely because of its price advantages.

India has a vast domestic market. The Industry is estimated to have achieved a production
of 878 million kg in 2005 from 820.5 million Kg in 2004 with a growth of about 7 per
cent.

25
About 88 per cent of tea grown in India belongs to CTC variety.

India generally produces black tea. Black tea can be classified into two groups-Orthodox
tea and Crush, Tear and Curl (CTC), a cheaper variety depending on the system of
processing the green leaves.

Tea plantations in India are concentrated in the North-East (Upper Assam, West Bengal)
and the South (Kerala, Tamil Nadu). The North-Eastern region with 82% of area
accounts for 76% of total tea production. In the North East, the yield is lower but quality
of tea is superior.

Consumers in different parts of the country have heterogeneous taste. Dust tea is
very popular in the south and in central India. In the western states, good quality loose tea
is preferred in Gujarat, whereas in Maharashtra, consumers provide a large market to
packet as well as unbranded tea. The eastern states of West Bengal and Orissa and
northern states consume CTC.

Tea trading in the domestic market is done in two ways-auction and private selling. Bulk
trading is done by auction. There are six major auction centers in India

The main players in the tea industry are Hindustan Lever, Tata Tea, Williamson Magors,
George Williamson, Harrisons Malayalam, Mcleod Russel, Bishnauth Tea, Dhunseri Tea,
Warren tea, AFT Industries. These ten companies together account for approximately 75
per cent of the turnover

In the packet / branded tea segment Hindustan lever is the leader. The other
important players in this segment are Tata tea, Duncans, Goodricks and Jay Shree.The
major segment of the market is dominated by the unorganized players.

Besides, many local brands have entered the packaged tea segment. There are about
1000 brands of tea in the country and out of which more than 90 % brands are
represented by the regional players. Regional brands have increased their market share
from about 37 per cent to around 50 per cent.

The industry is faced with multi-pronged problems. On the one hand it is plagued by
low productivity and lower price realizations and on the other hand the changes in
demand due to changing consumer profiles and the threat of imports put pressure on the
margins. Some of the basic issues and constraints are:

¾ The higher age of tea plants in India compared to tea plants in other tea producing
countries has affected the quality and yield.
¾ All tea factories are not capable of manufacturing both CTC and Orthodox tea.
Huge investment is required for installation of machinery and equipment to
enable the factories to have the facility of dual manufacturing.

26
 ¾ Another issue confronting the industry is that of differential import duty on bulk
and branded tea. The differential duty has led to surge in imports of foreign tea as
well as lower quality tea in bulk form.
¾ Income tax liability for tea companies is calculated differently. It is deemed that
60% of the pre-tax profits is agricultural income, which is taxable by the states.
The remaining 40% is taxable as corporate income by the Centre. This Dual
taxation system is hurting the industry badly.
¾ Tea Marketing Control Order requires all the manufacturers to sell 75% of
tea (excluding exports and packet sales) through auction houses.
¾ This industry is very labor intensive. Labor cost is generally fixed and therefore
lower production would result in higher unit cost of production.

In India, large capital investment, long gestation, stringent labor laws and restrictive land
ownership laws prevent Indian entrepreneurs from expanding tea production and
business.

The Government has also taken some policy measures and incentives for the growth and
development of the tea industry.

The Government has extended benefit under Section 33 AB of Income Tax Act, whereby
profit up to 40 per cent can be ploughed back for these purposes.

100 per cent foreign direct investment (FDI) has been allowed in the tea plantation
sector with 26 per cent divestment over 5 years

Replanting and modernization are very essential for maintaining the quality and
productivity of tea bushes.

There has been a trend towards consolidation of the existing tea plantations. Smaller
players are being bought over by larger estates or global consumer goods majors, as in
the case of Unilever Plc. buying over Rossell Industries . The purchase by Tata Tea of
UK-based Tetley's tea is a move towards consolidation among the global tea majors.

The industry plans to access the market with innovative beverages such as "herbal
tea" and "iced tea" for the modern consumer combined with an advertisement
orientation. The Pepsi-Lipton alliance to launch iced tea and cold coffee is an initiative in
this direction.. Apart from improving realizations the tea companies are also making
strategies to attract new consumers (especially the younger generation)

ALCOHOLIC BEVERAGES

Alcoholic beverages is growing industry in India . The alcoholic beverages industry in

India is generally divided into two main categories-Industrial Alcohol and Potable
Alcohol. Potable Alcohol segment comprises some categories as Beer, Country Liquor,

27
Indian Made Foreign Liquor (IMFL) and wine. IFML primarily comprises wine, vodka,
gin, whisky, rum and brandy.

The Indian beer market has reached about 94 million cases or 7.3 lakh kilolitre (one case
is 12 bottles each of 650 ml) in the financial year, 2004-05 and is expected to reach 100
million cases in 2005-06.

The price stability throughout the year has contributed to the increase in domestic
liquor sales. The Northern region has contributed significantly as Rajasthan has
regularized sales in the state with the formation of a distribution corporation similar to
Karnataka.

Flavoured low alcohol beverage with new variants like the 330 ml beer pack have
driven sales growth across the country.

United Breweries Ltd, Shaw Wallace, MC Dowell & Co Ltd (part of the UB Group)
Radico Khaitan, Mohan Meakins, Sula Vineyards, Mount Shivalik, Seagram India Ltd
are among the familiar names in the alcoholic beverage industry in the country.

UB accounts for nearly 40 per cent of total domestic beer sales and controls close to 50
per cent of the brewing capacity. United Breweries (UB) Ltd, and Millennium Alcobev
Ltd (MABL), a three-way joint venture with UK's Scottish & Newcastle (S&N) and UB
group, now manage almost half of the beer sales in the world's second most populous
market.

Strong beer, which has 5 percent of alcohol content, outsells mild beer in India and
accounts for more than 68 % of the total sales.

Indian Made Foreign Liquor Market is estimated to be 105 million cases in 2004-05.
Country Liquor Market is estimated to be 175 million cases.

Mount Shivalik Group, has pioneered the concept of the Super Strong segment in
India.

UB group has its eye open on entering the branded country liquor business. Radico
Khaitan has established its presence significantly.The UB Group Spirits Division also
controls about 35% market share. It has developed about 66 brands with different
flavours (Whisky, Rum, Brandy, Gin, Vodka, Wines).

Another significant player in the domestic spirits market is Seagram India which has
launched a premium Vodka brand.

The Indian wine market, estimated at 5 lakh cases annually, has witnessed robust
30% growth over the past few years. This includes about 3 lakh cases of quality wine
produced by emerging domestic wine companies like Indage, Sula and Grover’s .The
domestic production is having a growth of about 20 per cent

28
Champagne Indage Ltd., Asia's biggest wine producer and the largest indigenous wine
maker in India , is in the process of taking its niche red and white wine to mass market by
breaking price barrier besides entering into beer market and acquiring a vineyard in
Maharashtra.

Brewers in India are gearing up for the consolidation wave sweeping the global beer
industry.

Several Indian brands have made inroads into the foreign markets including British
market.

The domestic alcoholic beverages industry is plagued with some basic issues and
constraints. The basic issues relate to distribution, mobility, labeling laws and duty
structure.

¾ Distribution schemes vary between states. Free market system practiced in Mumbai
while Government operated system is followed in Delhi. The auction system is
operational in Haryana and Madhya Pradesh.
¾ Lack of uniformity in sales tax rates and other charges by different state governments
is an important deterrent. Each state has a different tax structure and levies and other
regulations regarding licensing fees and sales of new brands.
¾ Different states have different labeling laws that leads to wastage, delay and
higher cost of production.
¾ Besides heavy financial implications on them, they cannot transport their products
from a market that has excess capacity to one where there is a short supply.
¾ Treating beer to the same level of taxing as on hard liquor is unjustified since the
alcohol content in beer is very low. Beer should be delinked from IMFL.
¾ The liquor output should be brought under the purview of the value added tax (V AT)
in all States. However, the V AT should comply with the principle of revenue
neutrality rather than a revenue enhancing measures.
¾ According to All India Distillers’ Association, there is the need for a review of
the ban imposed in the year 1975 on the expansion of capacity for production of
alcoholic beverages As the quantitative restrictions on the import of alcoholic
beverages has been removed on 1st April 2001, there is no justification for the ban on
expansion of domestic capacity by the domestic industry.
¾ Increase in the price of molasses, essential raw materials for production of
alcoholic beverages due to shortage and inadequate availability, has affected
production adversely.

The Indian Liquor market is expected to grow at about 10 per cent in volume terms. The
premium segment is expected to grow by 20 % and the cheap segment is expected to
grow by 7-8 percent.
.

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Edible Oil

The growth of the Rs. 250 bn edible oil industry in India has been somewhat stagnant at
around 5% per annum. The market for edible/vegetable oils is estimated to be 10.4
million tones in 2004-05 including domestic production of about 6 million tons. Nine
major oilseeds contribute three-fourths of the total oil availability in the country,
including those for industrial use.

The country resorts to sizable amount of import to bridge the gap between domestic
availability and to stabilise prices of edible oil, an essential commodity. Oilseeds have
support price mechanisms to help the farmers.

NDDB has emerged as a major player in the sector with its "Dhara" brand of edible oil.

Even small growers and co-operatives having crushing units or solvent extraction units
have started branding their products.

As the urban consumers are increasingly becoming health conscious and looking out
for low-cholesterol cooking medium, branded products have come to play a major role.

Players like ITC, Marico, Hindustan Lever, etc., in the private sector, and NDDB, in
the co-operative sector, have made strongholds the urban market in various oil
segments.

In Edible oils, National Dairy Development Board (Anand), ITC Agro-Tech

(Secunderabad) , Marico Industries (Mumbai), Ahmed Mills, (Mumbai) are the major
players.

In vanaspati, Hindustan Lever (Mumbai), Wipro (Bangalore) ,Rasoi (Calcutta), Avi

Industries (Mumbai are the major players.

The major oil brands are Sundrop, Dhara, Saffola, Sweekar and Postman. The major
vanaspati brands are Dalda, Rath.

The main issues in the edible oil segment is the rising cost of raw materials. Raw material
cost account for 70 per cent of sale price. Free imports, low import duties and slump
in global prices lead to `dumping’ .

Indian Sugar Industry

India’s sugar industry is amongst the largest agro-processing industries of the country
with an annual turnover of Rs 200 billion.

But the industry is recently facing a setback in production. Because of devastating

drought, delayed payments to farmers, inadequate availability of cane and some other

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reasons production came down to 13.5 million tones in 2003-04 and 12.7 million tons in
2004-05.

The production of sugarcane is cyclical in nature. Hence the sugar production is also
cyclical as it depends on the sugarcane production in the country.

As Indian sugar industry uses sugar cane as the only input, the sugar industries have
sprung up in large sugar cane growing states like Uttar Pradesh, Maharashtra, Tamil
Nadu, Karnataka, Punjab, Gujarat, Andhra Pradesh, West Bengal. Uttar Pradesh and
Maharashtra are the leading sugar producing states of the country.

Of the total 564 sugar mills across the country, more than 144 are remaining closed
during the season bringing down sugar production. Indian sugar industry is highly
fragmented with organized and unorganized players.

The farmers co-operatives own and operate the bulk of sugar industry’s total
capacity. Of the total 450 mills operating in the country, about 252 are in the
cooperative sector.

The leading players in Indian sugar industry are Balrampur Chini Mills Ltd, Bajaj
Hindustan Ltd, Andhra Sugars Ltd, Thiru Arooran Sugars Ltd and, Dhampur Sugar Ltd.

The players are consolidating their position to increase their market share either by
acquiring smaller mills or by going for green field capacity additions. Besides the Indian
urban market is slowly moving towards branded sugar.

The Indian sugar industry is faced with some problems.

¾ Sugar is a controlled commodity in India under the Essential commodities Act,
1955. The Government controls sugar capacity additions through industrial
licensing, determines the price of the major input sugarcane, decides the quantity
that can be sold in the open market, fixes the prices of the levy quota sugar and
determines maximum stock levels for wholesalers etc.

¾ Dual Pricing System is adopted in the Indian sugar industry, which includes
sugar price in Public distribution system and the free sale sugar price.

¾ As represented by Indian Sugar Mills Association (ISMA), the industry

suffers from lack of a uniform pricing system.

¾ Inadequate sugar cane availability, uneconomical size, old age, bad condition of
plant and machinery are some of the reasons responsible for closure of many mills
in the country,

¾ There is a shortfall in cash credit limit for sugar industry by banks to the extent of
40% of requirement, according to Indian Sugar Mills Association (ISMA).

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The Central and state governments have announced measures for the development
of the industry. Central Government has also provided inland transport subsidy for sugar
export. Maharashtra state government has provided subsidy of Rs 1000/- for every ton
exported from the state. Government has outlined some measures involving banks and
state governments to hike cash credit limit for the sugar factories.

The measures also include special attention to sugar by expediting special relief package
for the sugar industry and reshaping the terms of credit by including either a one year
moratorium on loan repayment or soft loan package for state governments meant to clear
arrears to cane farmers.

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