1. Prologue
2. Edible oil: Scope-Significance
   1. Edible oil: Location
   2. Upstream issues
      1. #1: Low supply of oilseed
      2. #2: Oil palm cultivation
      3. #3: Improve yields per hectare
      4. #4: Rice Bran
      5. #5: Tree borne oilseeds (TBO)
   3. @processing level
   4. Downstream issues
      1. #1: Tax Uncertainty
      2. #2: Health concerns
      3. #3: Adulteration
      4. #4: Unfair trade agreements
      5. #5: Soybean export
3. Onion Crisis
   1. #1: Low yields
   2. #2: Nuisance of Middleman
   3. #3: Lack of onion cooperatives
   4. Export policy
   5. Lack of Irradiation
   6. NAFED & Onion Crisis
   7. Solutions?
4. Basmati
5. Bread-Biscuit
6. Liquor Industry
7. Mock Questions

Prologue

UPSC GS MAINS SYLLABUS	TOPICS IN THIS ARTICLE
Government policies and interventions for development in various sectors and issues arising out of their design and implementation.	fodder point on how Government tax sops are hurting edible oil sector and how MSP for wheat-rice hurts oil seed cultivation. How Government’s SSI reservation has prevented growth of edible oil sector
cropping patterns in various parts of the country	for onion
storage, transport and marketing of agricultural produce	for onion
Food processing and related industries in India-	For edible oil.+Some passing reference to bread-butter and liquor industry (because they too use agriculture inputs!)

This article marks ‘the end’ of food processing series from my part but shouldn’t mark the end from your side because nothing prevent UPSC from asking any other topics not covered in these articles. Keep an eye on newspapers, you can never know when you’ll get lucky.

Edible oil: Scope-Significance

1. India is the world’s fourth largest vegetable oil economy after US, China and Brazil
2. India is blessed with many agro climatic zones- allows us to cultivate Groundnut, mustard/rapeseed, sesame, safflower, linseed, castor seed, coconut and oil palms.
3. Edible oil industry in India has made an investment of Rs 10,000 crore and employs around 5 lakh people.
4. Andhra and TN has good scope for oil palm cultivation.
5. Since India is the second largest producer of rice in the world next to China, there is good scope for rice-bran oil production.
6. Good scope for Tree Borne Oilseeds (TBO).(more details in middle part of this article)

Edible oil: Location

Oilseeds area and output is mainly concentrated in Central and southern parts of India.

oilseed	top 3 states (2011 data)
Groundnut	Gujarat, Tamil Nadu, Andhra Pradesh
Rapeseed & Mustard	Rajasthan, Madhya Pradesh, Haryana
Soyabean	Madhya Pradesh, Maharashtra, Rajasthan,
Sunflower	Karnataka, Andhra Pradesh, Maharashtra
Total Oilseeds	Madhya Pradesh, Rajasthan, Gujarat

REGIONAL PREFERENCE:

edible oil	Preferred in ____ India
mustard/rapeseed	North-east
Soybean	North
groundnut	west
Coconut oil	south

In terms of overall consumption: Palm oil (mainly imported) >>soybean >>mustard oil>>groundnut oil.

Upstream issues

#1: Low supply of oilseed

From late80s to mid90s, the oilseed production in India was good because

1. Government had launched Technology Mission on Oilseeds (TMO) program to boost oilseed production.
2. During that time, MSPs for grains were kept in check (now they’re quite higher oilseeds)
3. Government controlled imports = low imports of edible oil.

But in later years, oilseed cultivation declined because:

1. In ‘94, government liberalized edible oil imports=> consumers shifted to cheap varieties like Palm oil and Soybean oil.
2. In recent years, Government has raised the minimum support prices (MSP) for foodgrains more than MSP for oilseed. Farmers find it more lucrative to grow wheat/rice than oilseed. Although Government shouldnot Increase in the MSP of oilseeds, because it’ll lead to corresponding increase in the market price of such products=>both consumer and oil refiner will suffer.
3. Hardly any agri-research on developing new varieties + contentious issue of GM crops=> Indian oilseed yields are 50% of the global average and one-third of the world’s best.

Result?

1. Domestic oilseed cultivation is insufficient to meet desi-demand of edible oil.
2. More than 40% of edible oil demand met through imports. Leads current account deficit = rupee depreciation.
3. In 2011 alone, we imported edible oil worth more than 45,000 crore rupees. (=~2% of import)

#2: Oil palm cultivation

Palm oil forms significant part among the imported edible oil. We need to become less dependent on imports. Solutions?

1. Focus on Andhra Pradesh, Karnataka and Tamil Nadu enhance local production.
2. Oil palm has long gestation period (4-5 years) =farmers are hesitant to shift to oil palm because of the fear “what will we earn during those 4-5 years?”=> Government should promote intercropping (Banana, Maize , Chilies and Vegetables in the first three years), to make oil palm plantation more sustainable and economically viable.
3. Government should declare Minimum support price for Oil Palm.

#3: Improve yields per hectare

Under the current MSP regime, economics are superior for wheat and rice than oilseeds. (from farmers’ point of view)=> it is difficult to get more area under oilseed cultivation.  Solutions?

1. For different agro climatic zones of the country, develop early maturing and disease resistant varieties of oilseeds with higher oil content.
2. Encourage private sector participation and direct farmer processor linkages.  This would ensure adoption of superior crop management practices.
3. Promote selective mechanization in farming e.g.  Groundnut digger and decorticator, sunflower harvester, scotching machine for linseed etc.)
4. Promote oilseed cultivation in areas with low-irrigation, salinity problems.
5. Develop warehouse receipt based financing. It’ll allow farmers to store the output and sell it at favorable prices.
6. Integrated nutrient management, bio-fertilizers, micronutrients, drip irrigation, farmers training etc.

#4: Rice Bran

• Rice Bran Oil is obtained from the outer brown layer of rice.
• Rice Bran oil is ‘Heart Friendly – Healthy Oil’.
• We’re the second largest producer of rice in the world next to China, with potential to produce about 1 million of Rice Bran Oil per annum.
• But rice-bran oil production hasn’t pickedup the momentum yet.
• There is need to modernize the huller rice mills => easy separation of husk and bran. Then bran can be used as raw material for rice-bran oil.

#5: Tree borne oilseeds (TBO)

Examples?

Sal Mango Kernel Mahua Neem

Karanja Jojoba Chura

Kokum Kusum Tung

TBO: significance?

1. Tree borne oils grown in forest, non-agricultural land= less harmful to ecology (Compared to fertilizer, pesticide based farming.)
2. generates employment in tribal areas
3. helps rural and cottage industries

TBO product	can be used as
Neem and karanja cakes	manure with pesticide properties.
De-oiled meals of sal and mahua	Cattle feed.
Vegetable fats from sal, mango kernel, kokum, dhupa etc	as cocoa butter in the chocolate industry
oils and fats from all of these TBO	soaps, lubricants, paints, varnishes, bio-diesel, hair oils, cosmetics and medicines

There is a growing trend among international chocolate manufacturers, to use TBOs fats from Western Africa/Indonesia. This highlights the export potential for Indian TBO. Following should be done to utilize this potential:

1. increase awareness among tribals about TBO
2. improve collection facilities
3. Improve marketing network, export linkages.

@processing level

Unnecessary tax exemptions

• Many state governments offer tax-exemptions to new oil processing units.
• Result=>Old units (which have outlived the tax-exemption period)= they become uncompetitive.
• Thus new units keep adding despite existing industry-wide surplus capacity.
• The average profit margins for oil-processing in edible industry are low (<5%).
• Therefore, the government should not provide any tax incentives, which create a non-level playing field for existing players vs new players

Economies of Scale

Edible Oil production involves three stages

1. crushing and expelling (separating oil from the solids),
2. solvent extraction (to chemically remove residual oil from the oilcake solids)
3. oil refining

In EU, US, China above three processing stages are done in one vertically integrated plant= shorter-compact supply chain=economies of scale.

But in India, the Crushing of groundnut, rapeseed/mustard , safflower and sunflower =reserved for the small scale sector. These small scale institutes make up more than 75% of edible oil industry.

Result?

1. poor economies of scale.
2. Lack of significant investments in large, integrated processing plants.
3. lower oil recoveries from oil seeds (because outdated equipment technology)

Solution?= Dereservation would allow for crushing of seed and solvent extraction of cake to be carried out in the same complex. This will increase oil recovery. As per industry sources, due to economies of scale, the cost price for the final oil produced would be lower by 2%.

PLAYER TYPES:

Ghanis	Ghanis are small traditional (cottage industry) crushers, mainly in rural areas.Covered by SSI policies.
Small scale expellers	relatively modern facilities than Ghanis.
Solvent extractors	They crush and process “hard” oilseeds with low-oil content such as soybeans and extractors cotton seed as well as chemically extract residual oil from the oilcake processed by above SSI players
Oil Refiners	These plants refine solvent-extracted oil. However, oil refiners are usually not integrated because of the SSI problem.

NOTABLE PLAYERS

Edible Oils	National Dairy Development Board (Anand), ITC Agro- Tech (Secunderabad), Marico Industries (Mumbai), Ahmed Mills (Mumbai)
Vanaspathi	HindustanLever (Mumbai), Wipro (Bangalore), Rasoi (Calcutta), Avi Industries (Mumbai)
Oil brands	Sundrop, Dhara, Saffola, Sweekar, Postman

1. Wilmar, the largest palm oil conglomerate in the region, already owns one of India’s largest oil refineries in collaboration with the Adani group.
2. Bunge Agribusiness India, bought Dalda Vanaspati from Hindustan Lever Ltd

Entry of foreign players

100% Foreign Direct Investment ( FDI)is allowed in Indian vegetable oils and vanaspati in industry through the automatic route.

Past few years, foreign players have setup port-based edible oil refinaries in India. Location factor?

RAW MATERIAL	MNC players source oils/oilseeds from other countries where they have a sizeable presence.This reduces the cost of raw materials and improves their competitiveness.
TRANSPORT	Port location= can import crude edible oil/oilseeds, refine and distribute it.Refined oil is then transported by rail.
TAX	duty differential between crude and refined oils makes it advantageous to import crudeoil and refine it in India. Port-based refineries also enjoy tax concessions for a few years in certain states.

Downstream issues

#1: Tax Uncertainty

• 2001: import duty on both sunflower oil and safflower oil increased from 35% to 75%,
• Result: MRP of those two oils increase and consumers started shifting to cheaper varieties e.g. soybean oil.  =this type of quick shifts are bad for desi oil producers.
• Thus Frequent change in import duties increases operational complexity and uncertainty for the domestic oil processing industry.
• we Need stable taxation policy for edible oils @both union and state level. Lahiri Committee Report on Edible Oils said the same thing.

Price

Indian consumers are very sensitive to prices. Price of edible oils is the biggest driver for consumption.  We can see it from following evidences:

1. Only a small percentage of edible oils are sold in branded form. (Because branded oil attracts more taxes=>more expensive)
2. The penetration of branded oil is barely ~30% in Urban areas and ~10% in rural areas.
3. Soybean oil, Palm oil => cheaper than other varieties. In recent years, their import+consumption has increase significantly.
4. Consumption of olive oil (mainly imported) = negligible, due to high prices. Olive oil mainly used by high income families and premium hotel/restaurants only.

#2: Health concerns

Exports get rejected because:

1. Aflatoxin in groundnut and cottonseed,
2. glucosinolate in rapeseed / mustard

Because Local oil businessmen lobby (and their election funding) => most state Governments are not stringent about edible oil quality.

Recent innovations by edible oil companies:

INNOVATION	how
PACKAGING	Branded players have improved the packaging for customer convenience e.g. Tetra packs, easy-to-pour pouches, taps on 15-litre containers
BLENDED OIL	Companies are launching blended oils, combining the health benefits of two types of oils. e.g.  a blend of Sunflower oil and Ricebran oil in the ratio 20:80 Some of the leading blended oils include: Soybean + Sunflower, Ricebran + Sunflower, Ricebran + Safflower , Corn + Safflower etc

#3: Adulteration

• Crude palm oil=>refine=> Palm oil + by-product Stearin
• Stearin is non-edible fat, and used for soap manufacturing. Can also be imported at a very low custom duty.
• Thus, some bogus players use (imported) stearin for making fake vanaspati oil. This is bad for both
  • consumer health
  • other businessmen that manufacture real vanaspati oil.

Solution

• Increase custom duty on cheap stearin import + Increase vigilance.

#5: Unfair trade agreements

1. Under the current free trade agreements with Sri Lanka / Bangladesh / Malaysia / Indonesia, crude palm oil is imported @0% duty. Then used for making palm oil. Result=>desi palm farmers don’t get good prices.
2. Malaysia and Indonesia-the two biggest exporters of palm oil- give subsidy to their refiners.
3. On the other hand, Indian government has moved in the opposite direction- imposing more and more duty on desi refiners.
4. Already one refinery has shut down while many others are struggling- leading NPA problems for banks.
5. When edible oil refineries shuts down=>negative impact on soap industry as well, because Stearin is keyinput for soap making. Stearing is generated as a by-product during the edible oil refining process.
6. To counter this, and to protect its own refining industry, the Indian Government should levy higher import duty on Refined Palm Oil/Palmolein coming from Malaysia, Indonesia.

#6: Soybean export

Because of the concerns over genetically modified food, many customers in Europe, Japan prefer non-GMO soybean products. Indian Soybean is non-GMO= we’ve good export potential. But following needs to be done:

1. Government + industrial associations need to make focused promotion campaigns in US/EU to highlight that Indian Soybean is non-GMO.
2. Government should provide transport subsidy for soy meal exports because most of the processing units are located in the hinterland.
3. Soybean Meal needs to be classified and included in the “Vishesh Krishi Upaj Yojana” (Special Agricultural Produce Scheme) to boost exports. By the way, this scheme was started to promote export of fruits, vegetables, flowers, minor forest produce and their value-added products. Exporters of such products shall be entitled for duty credit scrip.

Onion Crisis

Onion crisis is too clichéd-blow-out-proportion topic, hence the chances of getting a UPSC Mains question=very low. But still here it goes:

India produces all three varieties of onion – red, yellow and white.

REGION	ONION GROWN DURING ___ SEASON
North India	winter (Rabi)
South and Western India	both winter (rabi) and rainy (kharif) seasons.

TOP PRODUCERS OF ONION (2010 DATA)

World	India
China India USA Egypt Iran	Maharashtra Karnataka Gujarat Bihar MP

#1: Low yields

Although India is second largest onion producer, our per/hectare yield is significantly lower than other countries such as Korea, USA, Spain and Netherlands. Why?

1. Poor irrigation facilities, irregular monsoon.
2. use of local variety seeds,
3. small land holding and poor economic background of farmers,
4. lack of use of improved method of cultivation,

#2: Nuisance of Middleman

FINANCIAL DISTRESS	Small and marginal farmers are compelled to sell their produce immediately after the harvest because They needs instant cash repaying earlier loans, family expenses, purchase of inputs for next season. Cannot afford the transport cost to bring their onions directly to markets in metropolitan areas, nor they can afford the storage costs in warehouses.
ASYMMETRY OF INFORMATION	Farmers generally take reference of the local markets’ rates before selling their onions. But traders compare rates of all markets, including major distant and export market and then decide where to send their produce or just hoard it until prices rise up.
OLIGOPOLY	Commission agents and wholesalers have huge turnovers. This creates oligopoly like situation in the market, and restricting entry for new entrants. Even during APMC-auctioning they collude together and keep the bidding price low.
Middlemen	Onion Traders wear many hats by bending (not breaking) the APMC rules. Same individual simultaneously works as commission agent cum wholesalers order suppliers, forwarders cum store owners some are even transport or railway agent too! They have different firms with or without licenses to handle same function! Result? =They make lot of money through commission, control the supply of onion, and thus the retail prices.
STRIKES	Whenever government tries to reform APMC mandi, these agents and Market functionaries often resort to a strike which finally ends up in market closure. Farmer from distant part has to go empty handed / his produce gets wastage because of such strikes
Storage	For historical and financial reasons, large storage capacities for onion have remained with private traders and that too in Nasik belt= they can hoard the onions and create artificial scarcity to increase prices.

#3: Lack of onion cooperatives

In the dairy article, we saw how dairy cooperatives saved the farmers from exploitation and empowered the women and weaker sections of the society. Then why can’t same story repeat with Onion cooperatives?

1. Due to various agro-climatic reasons, onion belt is in actually a scattered chunk of large number of smaller sub belts. This prevented liaison and coordination among farmers of various tehsils.
2. Farmers don’t have the trading expertise, market knowledge and risk bearing capacity- hence their cooperatives haven’t been successful in onion business
3. Onion traders with deep pockets, can maintain yearlong expenses even in lean season- farmers’ cooperatives can’t.
4. Consumers in different regions of India have different requirements of Onion

REGION	Consumers PREFER
eastern India / Bangladesh	small sized onion
North and West Indian	bigger sized onion

• Traders buy onions small lots from the market yards and pool the produce for sorting / grading
• Then, they send different grades to different markets all over India.
• But Individual farmers/ farmers’ cooperatives lack the training and resources to do this.

Export policy

1. Government’s export policy on onion has been unpredictable.
2. Unseasonable rains in late Sept and Oct 2010 destroyed the onion crop. Yet the government agencies allowed traders to export more than 1 lakh tonnes of onion in October 2010.
3. Nowadays, whenever onion prices begin to increase, government bans the export (without fixing he fundamental problems) still exporters manage to sell onions though fake documents.
4. As a result, Indian traders and farmers lost their credibility in the export markets as unreliable suppliers.  Foreign buyers prefer onions from other countries over India.

Lack of Irradiation

• Food irradiation= foods are exposed briefly to a radiant energy source such as gamma rays or electron beams. This kills harmful bacteria and increases the shelf life of the crop.
• food irradiation increases onion shelf life by stopping sprouting which causes the crop to spoil.
• BARC had setup a food irradiation unit in Lasalgaon in Nasik district of Maharashtra.
• This Lasalgaon plant can irradiate 10 tonnes of onion per hour.
• But In the last four years, not a single onion has been irradiated here. Irony is many of the farmers in this area are not even aware of this facility-. “I do not know what happens inside. But my friends tell me that it is a facility used to make and test bombs,” says Nandu Kor, an onion farmer from nearby village!

Current Onion crisis  (Sep’13) is blamed on following:

1. Much of the stored onions of last year’s crop are exhausted= hence shortage.
2. Onion districts of Maharashtra were facing severe drought. Farmers had to hire water tankers and brought water from 30 and 40 kilometers to their onions. Thus, cost of input increased=>MRP also increased.
3. The ongoing rains have also stopped the arrival of fresh crop from Rajasthan, Madhya Pradesh, Andhra Pradesh and Tamil Nadu because of transport and logistic problems.
4. New crop from South India is yet to arrive in the Northern cities of India. (most probably in October)
5. From Sept 7 to 15: Lasalgaon market (Asia’s largest wholesale market for onion) was closed for five days due to holidays and weekends. This led to decline in onion supply in the market =Price rise.
6. Traders with political affiliation are hoarding onions to raise prices and create an issue before state assembly elections

NAFED & Onion Crisis

NAFED functions:

1. National Horticultural Research and Development Foundation
2. Was setup under the Multi State Co-operative Societies Act.
3. To promote Co-operative marketing of Agricultural Produce to benefit the farmers
4. To undertake import, export , wholesale or retail of agricultural, horticultural, forest and animal husbandry produce.
5. manufacture of agricultural machinery and implements
6. Marketing of manure, seeds, fertiliser, agricultural machinery etc.
7. Act as warehouseman under the Warehousing Act.
8. Construct its own godowns and cold storages.
9. marketing research-analysis, International collaboration, PPP, HRD, R&D and other fancy things.

ROLE IN ONION CRISIS

1. NAFED is responsible for fixing the minimum export price (MEP) of onion in collaboration with DGFT (Director General of Foreign Trade).
2. When there is shortage of onion in desi market, NAFED will increase the Minimum export price (MEP) to reduce the export of onions.
3. Example: In August-2013: the MEP for onion was $650 a tonne. Meaning as an export you cannot send onion abroad for a price cheaper than $650 (although many exports fake documents and send onions anyways)
4. NAFED intervenes in the domestic marketing whenever there is glut in the market and prices reach uneconomical levels. In such situation, NAFED procures onions from farmers and traders.
5. In extreme case, it also imports onions from abroad. E.g. during current September crisis, NAFED floated a global tender to import onions from Pakistan, Iran, China and Egypt to boost domestic supply and curb prices.

Solutions?

PANCHAYATI RAJ	Under 11th Schedule of constitution: the markets and fairs fall under the purview of Panchayats. State governments should empower the Panchayats to carry out this function efficiently. (rather than relying on the APMC mechanism)
DESTROY OLIGOPOLY	Encourage free entry of new commission agents and traders (including private companies). Mandate NAFED to procure onions directly from farmers. Promote direct sales of farmers to retail chains. Weed out market intermediaries that are engaging in unfair practices (like low price bidding; collusion; hoarding to create artificial scarcity etc. Cancel their licenses, put fines and penalties, Since APMCs seem to be largely dominated by traders lobbies, APMCs need to be reformed and strengthened to avoid collusions and hoardings in the markets.
EXPORT	Discouraging export ban on onion and arbitrary fixation of MEP as these will have long run effect on market functionaries as also farmers
INFRA	Encourage farmers to use the food irradiation facilities. Improve the weather forecasting system in the major onion producing area. This would help in taking appropriate decisions about onion export. R&D, new farm technology irrigation etc.

Basmati

just some fodder points

1. India is the largest producer and exporter of Basmati rice in the world.
2. At present, Haryana accounts for over 50% of total basmati rice production in India, Punjab accounts for 15% and the balance is cultivated in Uttaranchal and UP.
3. Key export markets for Indian basmati are the Middle East, Europe and the United States.
4. Middle East accounts for bulk of basmati exports because of the large South Asian expatriate population.
5. Small players account for a significant proportion of India’s rice exports, some of whom do not adhere to the requisite quality requirements. This creates a negative perception, not only about specific players, but also about the country of source i.e.  India.
6. Negligible focus on identity preservation. (Indian basmati rice or India durum wheat). In US/EU the marketing focus must be on how Indian varieties are “non-GMO”.
7. Therefore, it is essential that the Government via APEDA, undertakes necessary steps to educate exporters and ensures compliance with norms.

Bread-Biscuit

Just some fodder points.

BREAD

The bread industry is expected to register rapid growth driven by consumers’ need for convenient food options for breakfast as well as increased propensity to ‘snack’ Bread-based foods such as burgers, sandwiches and pizzas, are becoming the key food offerings of most restaurants. White bread dominates market but brown bread demand growing due to ‘health’ benefits.

BISCUIT

For long, the biscuit industry was reserved for the SSI sector=hampered the growth and economies of scale. But after de-reservation, the biscuit industry has picked up the growth momentum, SSI units have joined as franchisees of large biscuit manufacturers. Factors contributing to growth Aggressive TV marketing Product differentiation through convenient packaging, (smaller packs at affordable price points of Rs.5, 10) Product innovation (such as ‘Little Hearts’, and ‘Good-day’ brands of Britannia and ‘Hide and seek’ brand of Parle) has resulted in increased sales and superior price to manufacturers Growing income levels and increased consumer spending on high value food items.

Two types of wheat

Bread Wheat	Durum Wheat
Grown North India	Central And South India
largest area under cultivation	less
soft to medium	very hard
less	high protein and high gluten strength
less	Indian durum varieties have a high level of resistance to leaf rust and other diseases
not much	Middle East, South Africa and Mediterranean countries are the potential clients for Indian durum wheat.

Challenges:

• There is negligible on-farm cleaning
• no permanent storage structures available at the field level.
• The grain is handled manually. Impurities and moisture levels translate into higher losses along the chain.

Supply Chain Britannia

UPSTREAM	EDIBLE OIL	Crude palm oil from Malaysia and Indonesia=> Kandla port ->refined ->sent to Britannia plants.
	SUGAR	Sugarmills in Maharashtra and Bangalore- prepare specialized syrup and sucrose for biscuits.
	WHEAT	From UP, Punjab, Haryana, Raj.,MP, Gujarat and Bihar=>goes to organized flour mills such as Krishna floormill in Bangalore. These mills make flour for Britannia as per the requirements of bread and biscuits.
PROCESSING		Has units in WB, Delhi, Uttaranchal and TN. Almost 1/5th of its output is generated by factories in Tamilnadu.
DOWNSTREAM (RETAIL)	GENERAL	Distributors=> Kirana, Provision stores, shopping malls
	INSTITUTIONAL	via hotels, airlines, canteens, hospitals.

MSP problem

(Although highly debatable if you don’t believe in free market economy.)

From Government’s point of view:

FARMERS	Announce high MSP (minimum support price) for them Procure wheat/rice from them via FCI and distribute it to poors via PDS shops.
POORS	Give them cheap / free rice and wheat via PDS.
MIDDLECLASS AND RICH PEOPLE	Collect taxes from them to run this MSP-PDS structure.

This MSP-PDS structure is bad, because:

1. FCI is becoming the first and often “the only” buyer of wheat. But FCI godowns= small-scale, low-quality structures=> grain rotting. Food Corporation of India should be the buyer of last resort.
2. Farmers shifting to wheat. Cultivation of sugarcane, oilseeds, and pulses declined. Sugar and edible oil prices increased=food inflation=middleclass suffers.
3. In global commodity business, the wheat prices go up and down significantly but Indian wheat price remains always high (because of high MSP). Hence, price-wise India wheat is not competitive in exports (compared to Americans and Canadians.)
4. Desi Bread-Biscuit industry also suffers because outdated APMC act=they have to procure wheat through APMC mandis=nuisance of middleman=high cost of raw material.

Therefore, MSP-PDS system should be removed. Instead government should do following:

1. Instead of MSP, give Income support system to farmer through Kisan Credit Cards.
2. Remove APMC middleman. Encourage direct linkage between farmers and food entrepreneurs.
3. Remove PDS shops. Just give them direct cash transfer to poor families so they can buy from normal shops.

Taxation

• Bread-Biscuit Industry subjected to variety of indirect taxes.
• Via GST, there is need to streamline all indirect taxes (Centre as well as State) across the supply chain for grain and grain based products.=benefit to both consumer and producer.
• Essential Commodities Act (ECA) leads to several hindrances including easy inter-state movement of food grains and essential food items.
• 90s: central government announced its policy to treat the entire country as a single food zone. However, there is ambiguity with respect to the government policies as State Governments continue to impose restrictions on movement and storage of agricultural produce.

Need for innovation

• Most companies in India produce bread or biscuits of a single variety; such as white bread and sweet glucose biscuits respectively.
• But a variety of products can be made by changing the shape, recipe, and by incorporating other ingredients or processing conditions.
• In countries such as West Germany as many as 200 varieties of breads are made, both in large and small scale bakeries.
• Similar product innovation is necessary in India, to become export competitive.

Liquor Industry

Although this is not really a food processing industry and there is low chance UPSC will ask something about liquor industry ‘supply chain management’ given its taboo nature. But just for timepass and “educational” purpose, here it goes:

Upstream issues

BEER

Beer is made from malt. But good quality malt not available easily. Need APFC reforms to promote direct purchase arrangements with farmers growing barley vs beer manufacturer.

WINE

All wine manufacturers have faced capacity constraints, largely on account of lack of availability of raw material (grapes) For every lakh liter of wine produced 35 acres of vineyard is required. Although 75,000 acres of land is under grape cultivation, wine grapes account for under 2000 acres currently. Maharashtra is the largest producer of wine grapes in India, and Karnataka second. Need to have direct farmer vs wine processor linkages be facilitated through amendment of the APMC Act, to encourage farmers to cultivate wine grapes.

Processing

BEER

Through merger acquisitions, small players are gone, and the top 2 beer players in India account for about 75% of beer sales=>economies of scale achieved.

WINE

The cost of wine-production in India is comparatively high since economies of scale have not been achieved yet Wine bottles, corks and shrink caps are usually imported, either because of non-availability or cost. Therefore, the cost of bulk wine of average quality from India works is much higher than Australia, Chile, Italy and France. There are no institutes which offer training/educational programmes for wine manufacturing

Taxation

• The duty structure on beer is complex and varies across states
• Beer is subjected to excise duty, interstate transportation: Import taxes, charged by the destination state and export tax (levies) charged by the producing state.
• Mahrashtra and UP= all these taxes raise beer MRP by 40% =>leads to smuggling, illegal sales, mafia-police-politician nexus to evade taxes.
• SOLUTION: need to rationalize taxation structure for wine and beer. Experiences from other countries reveal that lower taxes can result in greater compliance and therefore higher tax revenues

Downstream: Liquor Retail- 3 models

(Common for wine and beer)

Open Market / Free Market	State Government decides on the number of wholesalers and retailers and gives licenses for a pre-defined price and time period. Liquor companies can appoint their distributors and retailers. Pricing is market-determined Excise is payable when the goods leave the manufacturing unit or warehouse. Example: U.P., Maharashtra, Goa, J & K, Madhya Pradesh, Assam, West Bengal
AUCTION MARKET	Private distributors participate in an auction to win license. Distributors establish their own retail network and source products directly from liquor companies. (Notice the difference: in first model, Liquor Company can appoint its distributors, here distributors have freedom to pick companies.) Pricing is determined by syndicates. This model leads to a high degree of cartelization and liquor-mafia elements. Example: Punjab, Rajasthan, Bihar, H.P., Haryana
GOVERNMENT CONTROLLED (“Communist” model? lolz)	State Government controls the wholesale segment, through its agencies. In certain states, even retail segment is also controlled by the Government. State agencies purchase directly from liquor companies. Excise is paid either by the manufacturer or the State agency Pricing is fixed by the state. This model restricts entry of new brands. Example: Tamil Nadu, Andhra Pradesh, Kerala, Delhi, Chandigarh, Karnataka, Orissa.

Export: Beer

• Chinese beer market has about 400 brewers, of which the top 10 account for only 45% of the market.  This has resulted in low profit margins for Chinese beer companies.
• In contrast, the top 2 beer players in India account for about 75% of beer sales in India and the industry will undergo further merger-acquisition in the near future=economies of scale for Indian beer makers.
• Thus, there is an opportunity to capture Chinese market though cheap Indian beer.

Export: Wine

PREFERENCE	Wine is mainly consumed in urban India, with a high proportion being in the large metros. Red wine is the single largest type of wine consumed, followed by white wine Goa, being a favorite tourist destination, also account for a significant proportion
EXPORT	The willingness of western aficionados to try out different types of wine is likely to be the major driver. The success of New World wine makers in Chile and South Africa should be an excellent example to the Indian industry.

Mock Questions

5marks

1. NAFED
2. Tree borne oilseeds
3. Rice bran oil

15marks

1. The recent Onion crisis is the result of market inefficiencies, weak supply chains and monopolies in the market. Examine this statement and suggest remedies
2. The hike in minimum support prices of certain crops is blamed for the food inflation and declining area under cultivation of pulses and oilseeds. Should government do away with MSP-regime? Yes/No/Why?
3. Despite favorable agro-climatic factors, a significant demand of edible oil is met through imports. Examine the upstream factors responsible and suggest remedies.
4. (GS4) Article 47 of the constitution says: “The state shall endeavor to bring about prohibition of the use except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health.” then is it unethical for the state agencies to sell liquor? Yes/No/Why?

Essay

1. A politician thinks of the next election. A statesman, of the next generation.
2. Democracy is a form of government that substitutes election by the incompetent many for appointment by the corrupt few.