Indian Cold Chain – An Emerging Industry
Contrary to the popular belief, cold chain is not merely refrigeration of perishable commodities. Cold chain is a logistics system that provides a series of facilities to maintain ideal storage conditions for perishables from the point of origin to the point of consumption in the food supply chain...
India is one of the world’s largest consumers of food and the third largest producer of agriculture, according to 2015 Top Markets Report on Cold Chain by International Trade Administration. India also holds the distinction of being the largest producer of milk in the world and boats of having the largest livestock population. Food processing refers to value addition to agricultural or horticultural produce. The food processing sector comprises two segments- Primary (packaged fruits and vegetables, milk, etc., constituting around 62% in value) and Value added (processed fruits and vegetables, juices, jam & jelly etc constituting around 38% share in the total processed food).
According to Indian Brand Equity Foundation (IBEF), the food processing industry accounts for 32% of India’s total food industry and 13% of Indian exports. The industry ranks fifth in terms of exports, production and consumption. Whereas the food processing industry looks promising for India, however, it must be considered that the local markets or farmers often have to rely on inefficient supply chain or middlemen. The farmers, at times, do not have the requisite infrastructure, technical know-how or capital investment to channelize into cold storage and supply chain development.
Add to that, the fragmented infrastructure of cold warehouses, transportation and associated services. This is a major reason why we require integrated logistical support, and in particular, cold chain solutions to enable easy accessibility and smooth flow of produce from farms to table, fresh and safe. It would also enable farmers to extend the life cycle of perishable products, traverse long distances, reach wider market segments and larger consumer base.
Around 40% of our produce is wasted due to inadequate cold chain infrastructure, and one third of losses incur during storage and transit leading experts to opine that India has less than half the capacity to meet its current cold chain needs.
Growth rising Indian population, mounting consumer incomes and changing preferences have led to increased focus on food security and health services. The demand for processed food has also risen sharply necessitating the support from efficient cold chain logistics of the country. Often termed as the sunrise sector, cold chain logistics hold immense growth potential in India and there is a great need to respond to the high growth opportunities in the cold chain logistics sector, which identifies cold chain sector as a promising & lucrative investment option.
Industries like organized food retail and QSR (Quick Service Restaurants) owe much of their growth to the cold chain sector. An effective cold chain infrastructure forms the very backbone of the food industry in India. In the view of rising population and appalling healthcare status, ensuring food security to every Indian and easy availability of medicines has scored as a top priority in government agenda. The sector has effervescent future with the much revered government backing, apparent growth in user industries and favorable demographics of the country. Indian market is evolving with changing lifestyles, rising urbanization and growing disposable incomes which will be the key benefactors of growth in cold chain user industries like food service industry, processed food industry and organized retail industry. Additionally, mounting government endeavours towards reducing food wastage and penetrating healthcare in deep corners of the country will help in strengthening cold chain infrastructure in India. The cold chain sector in India is still in the nascent stage with enormous growth potential on the back of climatic diversification and geographically vast size of the country. Indian cold chain sector was estimated to be at INR 245 billion in 2013, and iw was anticipated to cross INR 600 billion mark in the next 4 years.
Present status and future prospects
Temperature-controlled storage and distribution in supply chain management or cold chain management has two main segments, namely, refrigerated transport and surface storage. Whereas the former uses refrigerated trucks, containers and cars for transport of perishable products, the latter comprises temperature-controlled warehouses for storage. Both the segments require technical and quality standards to ensure longer shelf life and selling value of products – and are important for the growth of cold chain management solutions.
Cold chain involves the transportation of temperature-sensitive products along a supply chain through thermal and refrigerated packaging methods to protect the integrity of these shipments. There are several means in which cold chain products can be transported: Refrigerated trucks and railcars; Refrigerated cargo ships; and Air cargo. India’s cold chain sector is a combination of surface storage and refrigerated transport. The industry has been growing at a CAGR of 20% for the last three years. Cold stores are the major revenue contributors of the Indian cold chain industry.
India has seen a dramatic increase in the production of perishable products including fruits, vegetables, meat, poultry and dairy. It ranks first in global milk production with an annual rate of 138 million tons – and hosts more than 50% of milk product processing. With vegetable production of 280.4 million tons, it ranks second globally and only hosts 6% of total processing.
There has also been steady growth in the fish and meat industries due to export potential. Current cold storage capacity in India totals 31.8 million tons. Growth has averaged 3 to 4% over the past 10 years, and 10.5 mil- lion tons of space was created in the last seven years. Ownership is mainly in the private sector, with the public and cooperative sectors only comprising 10% of capacity. The sector’s value is estimated at $6.5 billion (USD) and market growth has averaged between 15 to 20%. This pace is expected to be consistent over the next five years.
Currently, India has 6,300 cold storage facilities unevenly spread across the country, with an installed capacity of 30.11 million metric ton. These are mostly used for storing potatoes. However, the market is gradually getting organized and focus towards multi-purpose cold storages is rising. More than 50% of the cold storage facilities in India are currently concentrated in Uttar Pradesh and West Bengal, while other states still face a challenge with investments from the government and private operators. Some facts about Indian cold chain industry:
• Organized players contribute only ~8 to 10% of the cold chain industry market
• 36% of these cold storages in India have capacity below 1,000 MT
• 65% of India’s cold chain storage capacity is contributed by the states of Uttar Pradesh and West Bengal
• At the current capacity only less than 11% of what is produced can be stored.
India is one of the largest producers of agricultural products and one of the global leaders in the pharmaceutical sector. Yet, it is known to have a fledgling cold chain, which results in supply chain losses of food and other resources. These losses have been stated to be as high as US$8 to 15 billion per annum from the agriculture sector alone. To address this concern, the government had earlier constituted a National Task Force on Cold Chain in 2008. The agriculture and food processing sectors in India have been developing and today India is a net exporter of food grains.
This is a dramatic transformation from the 70s and 80s when India used to import food grains to feed its population. This has largely been a result of the higher yields achieved as a result of the Green Revolution. Alongside this, there have been significant strides in the production of fruits and vegetables. However, lack of proper and adequate food storage, processing and cold chain logistics remains a serious challenge. The Government of India is one of the driving forces in developing the cold chain industry and supports private participation through various subsidy schemes and grants. Investment in cold chain in India was also opened under the automatic route for 100% FDI participation. The existing cold chain in India largely comprised comparatively small private companies with a regional or local footprint.
During last 2 decades, India has been developing at a fast pace and an increasing demand for high value foods with a shift towards horticultural crops has been documented. This, with rapid urbanization, resulted in multi-fold changes to the spending and consumption pattern of India's population. The existing food supply chains were unable to cope with these fast changing demographic trends and the lack of efficient and effective supply chains is understood to lead to a variety of losses in the perishable food segment.
In 2012, Indian farmers produced 240 million metric ton of horticultural produce, almost equal to its grain and cereals production. Various studies indicate that 18 to 40% of this produce was lost due to supply chain inefficiencies, concluding that a focused effort was required to promote the development of the cold chain in the country. The Indian government and its Planning Commission spelt out clear intention that cold chain has to be supported. Amongst the core identified development areas are the base infrastructure, environmentally-friendly technologies, standards and protocols, enabling policies and specialized skills. The Indian government is taking steps to improve the cold chain infrastructure, by recognizing the cold chain industry as a sub-sector of infrastructure in the previous Union Budget and creating an additional Budget to construct new cold storage facilities.
The private sector is being encouraged to develop the cold chain industry further by implementing the latest and most effective refrigeration technology solutions available today. For private players the high level of initial capital required to construct a cold chain unit continues to be the biggest challenge. But if the government pitches in with a clear plan and promotes more PPP initiatives in this field, we could see a momentum growth in the cold chain industry in India. Initiatives to boost the cold chain infrastructure:
• 100% FDI through government route
• Since 2011-12 cold chain has been given infrastructure status
• Viability gap funding up to 40% of the cost
• 5% concession on import duty, service tax exemption, excise duty exemption on several items
• Subsidy of over 25 to 33.3% on the cold storage project cost
• Establishment of National Centre for Cold Chain Development
• Proposed financial outplay for cold chain infrastructure & food parks of US$335 million and US$650 million respectively
• Over 50 to 70% capital grant on projects.
Towards a modern cold chain
A modern cold chain uses climate control technology and modern packaging and handling, from the time of harvest of the produce to the point of sale. In such a supply chain, the produce is maintained in a controlled climate environment from the stage of harvest till the point of purchase (read retail stores).
The controlled climate environment reduces the rate of metabolism in harvested Fruits & Vegetables, hence extending the shelf life of the produce. Whilst the degree of life extension due to controlled environment varies from one fruit/vegetable to another, the impact is significant across. Any break in the environment across the chain accelerates the rate of decay. Thus, modern cold chains are designed to start right from the farms. The produce is pre-cooled within an hour of harvest to suck out the farm heat from the produce and retard decay. Transportation is in reefer trucks, storage is in controlled climate warehouses, and retailing is through refrigerated shelves. Such a supply chain not only reduces value loss and damages across the chain it also enhances the life of the produce. Life extension allows the stakeholders a couple of significant arbitrage opportunities – temporal arbitrage and geographic arbitrage. Temporal arbitrage is the buying of the produce when the prices are low, and selling when the prices are high. Geographic arbitrage, however, is buying the produce where the prices are low and selling where the prices are high. With short shelf lives, both the opportunities cannot be tapped - however life extension opens windows to these opportunities.
With a large number of global food and retail chains targeting the India markets, FDI in retail is just around the corner and is likely to be implemented soon. Then government is also promoting the food safety and security bill that would further demand storage and cold chain facilities in order to reduce the amount of food wastage.
With the expected future development in road and rail infrastructure, along with the changing lifestyle of the Indian consumer – Indian cold chain industry is expected to grow at a CAGR of 28% over the next three years and reach a market size of $13 billion in 2017, although it is largely unorganized in nature. Thereby, presenting a great opportunity for foreign players. But for this to happen, the government will have to play a very important catalyst role.
Globally cold chains have now become an integral part of supply chain management for the storage and transportation of temperature-sensitive goods. The focus has now shifted from increasing production to better cold storages and transportation of food produce. The utilization of cold chain logistics includes both cold storages and refrigerated transportation and is used to increase the shelf life of food produce. With 35 to 40% of agricultural produce in India being wasted due to lack of proper cold storage facilities, it is immensely important that a focused effort is required on part of the government to encourage the use of cold chain among market participants. Some of the likely steps that the government could take are mentioned below:
• Provide requisite support like lower cost of funding for setting up cold chain infrastructure facilities.
• Promote awareness campaign and educate market participant about the importance of cold chain facilities.
• State governments can encourage setting up of cold storage facilities by providing subsidized power tariff as power forms a significant proportion of the operating cost.
• Encourage better and more efficient refrigeration technologies to improve the shelf life of perishable products.
Lack of quality cold warehousing infrastructure: There is a severe shortage of cold chain warehousing capacity as only 25% of the capacity is available for fruits, vegetables, processed foods and pharmaceuticals, whereas 75% of the capacity is dedicated to potatoes.
Lack of standards and protocols in construction and operation of facilities: Technical standards followed in India are mostly unsuitable for Indian conditions, which results in lower performance of standard refrigerated systems.
Low awareness of labour in handling temperature-sensitive products: In India, the supply chain of most products is long and fragmented. A product changes many hands from source to delivery point. Most workers involved in this are not properly trained in handling temperature-sensitive products resulting in deterioration of product quality before reaching the consumer.
High fuel cost and power cuts: Fuel costs in India constitute around 30% of operating expenses of cold storage in India as compared to 10% in the West. Further, cold storages are dependent on steady supply of power. Most Indian regions face power cuts. Hence, these companies have to invest in power back-ups, which push up the capital investment requirement.
Cold chain which is supposed to be the fulcrum of an effective supply chain infrastructure in dealing with fruits and vegetables remains a grossly ignored area in India. What could have turned out to be a huge asset for national economy keeps on lingering as a serious weak spot. We not only have issue with Cold Storage, other functional modalities such as facilitating seamless movement of goods via refrigerated vehicles which has done wonders in countries like China is presently best considered to be a farfetched idea in the country.
Cold Chain Management deals with efficient control and organization of production and logistic regarding temperature. It comprises planning and implementation of single processes and process steps as well as implementation of instruments and methods of process monitoring and control. The principal aims of Cold Chain Management are optimization of product quality and product safety and minimization of wastage.
In a practical way cold chain management often means temperature monitoring at each step within the production, storage and transportation chain on inner- and inter-operation levels.
Contrary to the popular belief, cold chain is not merely refrigeration of perishable commodities. Cold chain is a logistics system that provides a series of facilities to maintain ideal storage conditions for perishables from the point of origin to the point of consumption in the food supply chain. The chain needs to start at the farm level – post harvest, pre-cooling, etc. – and reaches to the consumer or at least to the retail outlets. A well organized and efficient cold chain reduces spoilage, retains the quality of the harvested products and guarantees a cost efficient delivery to the consumer. A significant aspect of the system is that if any of the links is missing or weak, the whole system might fail.
AUTHORS CREDIT & PHOTOGRAPH
Dr S S Verma
Department of Physics