“Govt needs to focus on reefer infrastructure”
Sateesh Kulkarni, Director, Corporate Catalyst India feels efforts need to be made in order to introduce the concept of green technology, as also the use of renewable energy for the cold chain sector in an interaction with Supriya Oundhakar...
ICAR study has estimated that annual value of harvest and post-harvest losses of major agricultural produces at national level was of the order of Rs. 92,651 crore calculated using production data of 2012-13 at 2014 wholesale prices. Looking at this scenario, where is Indian cold chain industry lacking? Do you think that Indian cold chain infrastructure is upto the mark to arrest these losses?
India is among the world leaders in horticulture. Even though production of fruits, vegetables, milk, poultry, fish and meat is on the rise, prices have always been ruling high. One reason for this is the inadequate and at times absence of proper supply chain management - logistics infrastructure, cold chain in particular, and warehousing and storage facilities. The farm to fork concept, which needs an integrated and holistic system in place is still very much on paper only.
The cold chain sector is an approximately USD 3.5 billion industry. Around 90% of market is controlled by the Temperature Controlled Warehouses. The balance 10% comprises of Temperature Controlled Vehicles.
Given the fact that around 70% of the warehousing capacity is taken up by one product i.e. potatoes, the balance 25% is not adequate for the other commodities that need cold storage and cold transport facilities.
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.
Standardisation of cold chain infrastructure, logistics, handling and operations is still at a nascent stage. Technical standards followed in India are mostly unsuitable for Indian conditions, which results in lower performance of standard refrigerated systems.
Lack of proper training: Low awareness of labour in handling temperature-sensitive products: Most workers handling such products 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 developed countries. Uninterrupted power supply is a basic pre-requisite for cold storages. This is not always available everywhere and therefore, cold storage operators have to rely on power backups. This results in escalation of capital cost.
What is current market scenario of India?
Inspite of growing demand, warehousing continues to see little investment. Current spending on organized warehousing in India constitutes nine percent of total logistics spending, as against 25 percent in the US and the developed world. Logistics costs account for around 6-10 percent of average retail prices in India as against the global average of 4-5 percent. Therefore, there is a clear scope to improve margins by 3-5 percent by improving the efficiency of the supply chain and logistics processes. Developing an integrated supply chain, including cold chain can save up to Rs 300 billion annually and at the same time reduce the wastage of perishable horticulture products.
What are the regulatory initiatives takes by the government to promote Indian Cold Chain industry?
The government is taking steps for the sector, such as schemes for capital investment subsidy from the National Horticulture Board, the National Horticulture Mission and the Ministry of Food Processing Industries for the agri-investors to set up cold chain infrastructure. Government has set up National Centre for Cold Chain Development (NCCCD) which would help in establishing building standards through international benchmarking and to promote research and development activity in the cold chain sector. The government has also established partnership with Indian Railways to set up cold chain infrastructure.
The government’s initiatives like rollout of GST, ‘Make in India’ will help Indian cold chain industry to make progress?
Introduction of GST is likely to benefit warehousing. Warehousing companies can consolidate stock at their warehouses. Demand variation at a particular warehouse can also be reduced. This in turn improves demand planning and improved inventory management. Under the GST regime, instead of maintaining smaller warehouses in each and every state, the companies can go in for bigger warehouses at a few select places and can follow hub and spoke model for freight movement from warehouses to manufacturing plants, distributors and retailers. Therefore, this is a big opportunity for 3PL service providers and logistics providers who can manage these longer routes and effect deliveries efficiently.
The economies of scale achieved through this consolidation will reduce variable costs, enable automation and improve operational efficiency. Connectivity of these warehouses to consumption centres will improve with the development of multi-modal transportation systems.
What are the major gaps that need to be fulfilled and the infrastructural developments that the cold storage facilities in India need to go through in order to keep a check on inflation and to maintain a smooth relationship with the economy?
Market is highly fragmented. In India, the supply chain of most products is long and fragmented. A product changes many hands from source to delivery point.
Capital intensive sector - Most of the companies operating in the cold chain industry are capital intensive (cost of real estate and refrigeration equipment). Major part of the funding in the cold chain industry is done through debt funding and this has resulted in heavy interest expenses.
High operational costs - Power (electricity charges) and fuel forms one of the major components of the cold chain industry along with labour and repair & maintenance cost. Small land holdings pose a major logistical challenge.
Other factors – seasonality of demand, single product focus
High cost of borrowing has led to squeezing of the net profit margin.
High Energy Costs: Energy expenses alone make up about 30 percent of the total expenses for the cold storage industry in India compared to 10 percent in the West. These factors pose as a high entry barriers to potential players in the business.
Rising Real Estate Costs: With the rising real estate price, the cost of setting up a cold storage units is also rising. It constitutes approximately 10-12 percent of the project cost. Being a capital-intensive project, it requires heavy investment in fixed assets like plant and machinery, building, insulation and panels
Technical standards followed in India are mostly unsuitable for Indian conditions, which results in lower performance of standard refrigerated systems.
What is your outlook for the sector in 2017-18?
Besides optimising the production and distribution of goods and services, the GST Bill will also help speed up cargo movement. The stoppage expense (average expense incurred due to the stops along the way such as check-posts and customs) per tonne-km has increased from Rs 0.16 per tonne-km to Rs 0.28, a 75 per cent increase between 2011-12 and 2014-15.
Opportunities exist in the following segments of the cold chain sector:
• Requirement of training establishments
• Need for energy efficient technology
• Efficient logistics network to be a key differentiator
• Controlled atmosphere/modified atmosphere storage for extension of storage life of perishables
• New technologies for storage of processing grade potato
• Low cost solutions for pre-cooling at farm
• Modern pack houses and ripening chambers
• Innovation, cost-effectiveness and service support in reefer technology
• Low cost technology for automation of operations in a cold store
• Space and energy saving solutions in cold storage.
What government measures would you expect for the growth of the sector?
India needs a more effective, efficient and well-thought-out cold storage infrastructure. Special focus and emphasis needs to be laid on development of reefer infrastructure in view of India’s exports thrust and potential.
Energy-efficient practices like energy recovery systems, energy-efficient designs of refrigeration equipment and automation are some of the innovative features. Efforts need to be made in order to introduce the concept of green technology, as also the use of renewable energy for the cold chain sector
Financial institutions should play a major role to encourage the investment in cold chain industry in terms of term loan sanctioning, nominal interest rates and disbursement. This will boost investment.
State government must make a step towards subsidising the electrical tariffs, encouraging use of renewable energies.
If you want to share thoughts or feedback on this article, please leave a comment below.