State Of The Economy 2016

Business as usual

Rising demand and profitability have improved matters for Pune's food processing units 

It took a lot of trials for BS Thube to find his niche. From working in a tailor’s shop to accounting to reviving a tutti-frutti factory that had gone bust, venturing into tomato sauces, custards, baking powder, Thube finally hit it off with jams. Today, his venture Quality Foods Products supplies jams to all bakeries in Pune. Based in Pune’s food processing cluster, with revenues of Rs.50 lakh, the company also manufactures pickles and squashes. But, Thube says, it hasn’t been an easy ride with the myriad issues facing the industry. He flags quality labour as the most pressing one. “Locals throw tantrums, don’t want to work, don’t have the skills and demand higher wages compared to outsiders. I had to shut down a plant for a year-and-a-half due to labour issues,” he adds. 

Labour costs here have doubled in the last four years due to absence of skilled labour. Companies also complain of having to train workers, besides antiquated laws like the Labour Act, Factories Act etc. To circumvent these issues, most SMEs in the food belt start off with five to six manual workers and then automate manufacturing. 

Onkar Singh, founder of Jaypee Instants, which manufactures wet flours – wet idli, dosa and uthappa batter, fully automated the process after facing labour issues in 2008. Jaypee has grown from an output of 1 kg/day in 1982 to 4.5 tonne/day now. It supplies products to Mumbai, Pune, Nagpur, Ahmedabad and Delhi. While automation has worked to stem labour issues, SMEs also complain of land hassles, water and power supply, tax wrangles and increased competition. 

Infrastructure hang-ups
Land availability is a big issue for food units in Pune. While the Ministry of Food Processing doesn’t stipulate any non-agricultural land requirement for food units, RBI says such land is earmarked for NHAI. “We had to wait years to set up our second factory,” says Singh. 

Water and electricity are other pain points. While there are no issues within the city, companies on the outskirts battle with both. “Electricity goes off every Thursday for a couple of hours,” shares Thube. For an industry like food processing, this means the production process is interrupted. And opting for alternative supply such as diesel generators means rising costs, says Chetan Pal, owner of Chetran’s Foods, a leading supplier of tofu in Pune. To tackle water woes, companies are forced to opt for borewells or tankers.  

For those dealing with frozen products cold chains are an issue. “Frozen food products segment is underpenetrated in India at 4-6% of the addressable market whereas in developed nations it is much higher. Apart from Amul, no large company is investing heavily in cold chain infrastructure. While demand for frozen products will increase in a decade, the infrastructure is sadly lagging,” says Singh.

Transportation is another problem. As there is no alternative to road transport, late deliveries are common. “If I want to send six tons of idli batter to Delhi, the actual rate is Rs.5,000 per ton but I’m asked for Rs.40,000. Similarly, if I have to hire a Duronto, they ask me to hire the entire bogey for a month where the cost is Rs. 36,000 per day. So business tends to grind to a halt,” laments Singh. To counter this issue, the company is keeping more stocks with its distributors.

Issues galore
From just supplying tofu 15 years back, Chetran’s has diversified into soya milk, soya breadspreads, soya shrikhand, soya mithai and soya dahi. It has a turnover of above Rs.1 crore. But it is now facing cash flow issues as institutional buyers are delaying payments. “Institutional sales outside Pune have seen delayed payments for prolonged periods of time so we have exited our tie ups with them,” says Pal. The debtor days of food units in Pune has shot up to three months.  

But the biggest stumbling block, Singh says, is competition from the unorganised sector. “The roadside vendor does not pay taxes, does not maintain quality standards, procures cheaper raw material and sells at a much cheaper rate. Organised food units simply can’t compete as they have to comply with a lot of rules. Also, hawkers are able to procure FSSAI (Food Safety and Standards Authority of India) licences in the grey market without meeting any requirements whatsoever as there is no auditing of such hawkers by food officials,” he rues. Rising raw material costs have thrown another spanner in the works. “Urad Dal that was Rs.70 a year ago, is now Rs.170. Yet, we have to give a stable price to the customer,” says Singh. 

For Pal, too, raw material costs have been a headache. “Soya costs Rs.40 per kilo in India while it is Rs.20 per kilo in the US.  Most manufacturers in Pune are paying Rs.50 per kilo,” he adds. 

The absence of a food park to market their products is another stumbling block. Entering the industry is no cakewalk either. Neelkanth Shende of Safpro Foods, which sells canned food, condiments, ketchups, soup bases and sauces largely to institutional buyers, says there are significant entry barriers. “In the food business, if you don’t have any USP or an established brand then you need a sales channel to survive. And if you get into organised branded products you will face competition from big guns like HUL, which can kill your product,” says Shende. Exports too are an issue. While export units in Pune are exempted from paying excise and VAT and exports to neighbouring Sri Lanka are good, consignments often get rejected due to poor quality and for not adhering to international standards. 

Red tapism
While the state government has come out with several incentives for the industry, especially in cold storage, owners say implementation is poor and procedure cumbersome. Even after going through the whole rigmarole, Thube says that more often than not the subsidy remains elusive. “There should be a portal where you can upload documents and get subsidy directly into your bank account. Why should I constantly approach middlemen?” demands Singh.

Getting licenses are also difficult. “When I applied for a MSEB meter connection, I had to pay Rs.30,000 when the actual price was Rs.14,000. I also had to produce my Shopex license and sales tax documents along with a whole lot of other documents,” says Thube. Earlier, filling a single form and paying cash could acquire a Shopex license, but now they have complicated the whole process online, he adds. 

Criticising food laws, Pal says laws today stipulate that only food sourced from animal fat can be termed as paneer, milk, shrikhand and dahi. “Milk is not taxed but Chetran’s has to pay 5% tax on every product,” he says, adding that better policy is needed from FSSAI and the government.

Yet another thorn is taxation, with companies saying there is no clarity and rules keep changing from time to time. While tax has reduced from 14% to 5% under VAT, companies want this to be brought down to 2%. Shinde complains of high taxes in Mumbai, where with octroi, tax comes to 10%.

 “What is required is a common platform for marketing produce which is absent, a body to represent our interests and leaders be it either industrialists or government to foster entrepreneurship,” says Shende.

While GST is being looked at as a boon for the economy, Pal doesn’t see it as good news for small-scale units. “The grey market doesn’t have to comply with GST but organised SMEs such as ours will have to pay 16% tax. While caterers don’t care about the final price, institutional buyers are very touchy about it. So unless GST can rope in the grey market, it is going to completely destroy small-scale units,” he says. Most SMEs today need to pay 5% tax, both sales and excise. This will shoot up to 16% post implementation of GST. 

Demand saviour
With new restaurants coming up and changing eating habits, consumer demand for food products is rising. Consequently, sales and profits have also been rising for food firms in Pune, says Shende. But margins are restricted in categories where there is competition from big MSMEs.  

Pal says that consumption has been increasing but so are the number of firms. Despite the spate of issues, food units are doing well in terms of demand, profitability and competition. Ultimately the food industry is a play on domestic consumption, which is likely to grow with rising disposable incomes and changing food habits of the Indian consumer.