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Day 32 – Q 1. With the help of suitable examples, explain the concepts of backward and forward integration in the food processing industry. 

  • IASbaba
  • July 16, 2020
  • 0
GS 3, Infrastructure, TLP-UPSC Mains Answer Writing
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1. With the help of suitable examples, explain the concepts of backward and forward integration in the food processing industry.  

उपयुक्त उदाहरणों की मदद से, खाद्य प्रसंस्करण उद्योग में अग्रिम और पश्चवर्ती एकीकरण की अवधारणाओं की व्याख्या करें।

Demand of the question:

It expects students to gives a clear account of the concepts of backward and forward integration in the food processing industry. It also expects students  to clarify with relevant examples.

Introduction:

The food processing industry is one of the sunrise (emerging) sectors in India considering its linkage to agriculture and food consumption. It employs 13 million people directly and about 35 million people indirectly. The Indian food processing market was worth INR 24,665 Billion in 2018. Looking forward, the market is projected to reach INR 50,571 Billion by 2024, exhibiting a CAGR of 12.4% during 2019-2024.

Body:

For any industry, backward linkages are directed towards suppliers; while the forward linkages are directed towards consumers. With respect to food processing industry, a Food Processing Unit sets up strong backward linkages with the farmers, farmer producer organizations, farmer’s groups etc. Further, to be able to sell its processed food, it develops strong forward linkages with wholesalers, retailers, exporters etc.

Concepts of backward and forward integration in the food processing industry:

  • In food processing industry, the inputs such as fruits, vegetables, dairy products, meat, poultry and fish are so much perishable that lack of transportation and backward links would result in their waste. 
  • Further, for industry players, effective links add value to the brand by ensuring high quality end to end and better control over the factors of production resulting in cost saving and enhanced efficiency.
  • Backward Integration refers to that integration where Company expands its activities to upstream areas. Company aims to get raw material at cheap rates, uniform quality, steady supply and eliminate any middlemen. e.g. Starbucks (chain of coffee bars) buys coffee plantations in Central America.
  • Forward Integration refers to that integration where Company expands its activities to downstream areas. Company aims to get more control over sales, consumer-contact and eliminate any middlemen, wholesaler, retailer. e.g. Amul has its own pizza outlets and ice cream parlours.
  • For a broader understanding one more large scale example can be cited  of Mega food parks promote the backward linkages while Rythu bazar scheme of Andhra Pradesh which helps farmers to directly sell their produce to customers promotes forward linkages.

Effective and seamless backward and forward integration in food processing industry plug gaps in supply chain in terms of availability of raw material and linkages with the market. Hence, It benefits the economy in following ways:

  • Food processing industry drives rural economy by increasing consumption due to increased income, essential for sustaining economic growth. Decrease in post-harvest wastage losses due to better technologies and improved logistics.
  • Better compliance to food quality standards and thus expand market base.
  • Stabilize food prices in the economy (food inflation). Consumers will be benefited with access to larger variety of products at reasonable prices.
  • However various challenges still remain owing to Lack of infrastructure, large no. Of intermediaries, lack of testing and grading facility and land reform issues.
  • Food processing firms, particularly Small and Medium Enterprises (SMEs), have difficulties in accessing finance.

Government Policy around Forward and Backward Integration in Food Processing Industry:

  • Currently, the government is running a scheme called Scheme for Creation of Backward and Forward Linkages to provide effective and seamless backward and forward integration for processed food industry.
  • At the same time, NITI Aayog has consistently pushed for contract farming, opening of multi brand retail for 100% FDI through automatic route etc.
  • Recently promulgated “The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020.” is likely to strengthen the Food  processing Industry by strengthening its forward and backward linkages.

Conclusion:

Rising per-capita income, changing life style and  food habits provide significant opportunities for the growth of Food processing industry. Recently promulgated ordinances and the schemes such as SAMPADA, Mega food park etc. are likely to strengthen backward and forward linkages in turn help the  Food processing industries to grow from present 2% of GDP to optimise high output of farming sector.

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