Consumerism and demographic pluses will pull up all 25 sub-sectors of food processing to bounce back strongly
Food processing should have its own separate 5% quota in the overall 40% priority sector credit quota instead
Not just agriculture but all agribusiness is critical for our survival. Primary processing like dairy milk, bakery and vegetable oils are afloat, albeit with 20-25% hit. Since consumption has also declined there is an edgy balance struck. Secondary processing sectors like chocolates, sauces, cheese etc. have seen much worse hit as consumers have pruned their consumption to conserve cash.
However, consumerism and demographic pluses will pull up all 25 sub-sectors of food processing to bounce back strongly and can be the flag bearer for the economy. With its predictable growth trajectory, government should be “ready and willing" to support it fully recognizing that the “pay back" will be short due to:
I expect that primary processing sectors will grow at 5 to 7% q-on-q after the lockdown while secondary processing sectors will grow at 10-15% q-on-q for 12 months post lock down and thereafter with a stable CAGR levels of 7-10% and 15-20% respectively for next at least 5 years: The reasons for my optimism are 4-fold
(i) quick restoration of disposable incomes of the consuming (middle) class
(ii) reserved demand of consumers for processed foods
(iii) robust supply chains after Covid-19 experience and
(iv) re-opening of retail outlets and Malls.
For (i) an economic package should be hastened, and retail lending should be kick started with Government sharing the risk with Banks. Consumers can pull the entire value chain to life from morbidity. For (ii) lessons being learnt each day will help make chains robust for tomorrow. If there is no half measures and no red tape, the following should help:
Firstly, liquidity is badly squeezed as almost all food processing companies since (i) bank limits are fully drawn and (ii) collections are poor, thus incapacitating payments including to workers. Since the sector is very manpower intensive, there is a risk of social unrest. Banks should extend “soft" working capital for these companies literally overnight. As a thumb rule, Banks to extend adhoc increases of 25% of all working capital limits for all “standard" (not NPA) food processing companies, irrespective of their size across the Board for 12months on existing collaterals. Government can backstop losses from such adhoc increases upto 50%. Presently, RBI has directed Banks to extend a moratorium on interest for the quarter April-June. This will not be enough. Banks should:
(i) waive and not defer interest during this quarter
(ii) reduce rate of interest to 5% for all facilities for next 3 quarters to help sector cater to an expected steep demand
Secondly, insurance companies should (i) cover inventory losses in the definition of STFI (natural calamity) (ii) waive premium for the Covid-19 duration and then re-start premium on a graded basis over next 3 quarters (iii) accept value loss of inventories liberally in next 3 quarters to allow for uncertain demand forecast.
Thirdly, Utilities should subsidize power charges:
(i) Waive fixed load charge for next 12 months
(ii) Reduce tariff by 50% for 2 quarters post lockdown and by 25% for subsequent 2 quarters
Fourthly, production and productivity are key for which workers have to be satisfied. Their payments can be come from through Insurance companies like ESIC/LIC against a backstop of Government.
Next, consumer demand has to be fostered to pull up all supply chains for “greater good" of the country (i) GST reduction/deferment should be across companies in food processing (not just MSMEs) (ii) MOFPI should start granting 50% subsidy on frozen/chilled infrastructure (last mile) for traditional trade to handle the expected surge in demand for RTC/RTE/Frozen foods, boosted also by a humbled restaurant sector, whose revival is hinging on dissipation of “social distancing". Finally, RBI has to focus on the widening credit gap ( ₹2lac crores last count) in food processing and incentivize Banks to lend. For one, food processing should have its own separate 5% quota in the overall 40% priority sector credit quota instead of including it in overall 18% agriculture credit quota.
Not to miss, India is enviably poised to capitalize on:
1) Global food production is estimated to decline and global demand for processed (ready to eat, convenience and frozen) is poised to be transferred to India from Europe, Australia and UK to India; and
2) Global companies, especially from US, will either shift from China or replicate their manufacturing/production bases in India, thus bringing in FDI.
Like India, food processing sector is destined to grow!
Rajesh Srivastava is Executive Chairman, Rabo Equity Advisors. Views expressed above are personal and carry no attribution to Rabobank/Rabo Equity.