Tuesday, July 21, 2009


It is the cherished goal of every country under the WTO regime to attain high value addition to their raw materials, the assumption being that such a policy will generate employment and increase GDP. In the process the interest of the vast consumer community seems to have been short circuited. Value addition (VA) does generate an array of economic activities considered to be desirable from a national perspective but uncontrolled escalation of prices of consumer goods can backfire as is happening in India. While GOI 'figures' claim that inflation is on the negative mode, the prices of practically every consumer good, except probably electronic industry products, have risen sharply. In some cases the MRP values have been raised by as much as 50%. Food materials that provide life substance to the billion plus population in the country are no exception to this price spurt. Can this be true value addition or consumer exploitation?

According to classical definition, 'value added' refers to difference between the cost of raw material inputs procured by the processor plus the cost of labor to make the product and the price at which the end product is sold. In pharmaceutical industry GOI used to compute the production cost of some of the vital drugs for arriving at a selling price under the price control policy and if food industry can adopt a transparent policy regarding costing, consumers may not cringe paying a higher price to ensure decent profit for the entrepreneurial efforts of the industry. Vast sums spent on commercial promotion of the products, the final price to the consumer reaches some time 2000% of the cost of raw material used which makes the product exorbitantly costly.

In a free market economy price control is not generally done trusting the industry to exercise moderation in product pricing. Whether industry behaves responsibly is another matter. While price manipulation by the traders is rampant in the country, GOI attempts to restrain them through policy measures, though commendable, are not effective as can be seen by the recent spurt in prices of sugar, rice, wheat, pulses, etc. The import liberalization of edible oils helped in checking their prices to some extent. The tragedy is that not even a fraction of the rise in consumer prices goes to the real 'hero' in this picture-the grower or the producer, the full beneficiary being the intermediaries like whole salers and retail traders. When Amul created history by organizing the milk producers into viable cooperatives, leading to the white revolution, there was hope that farmers of this country have found a route to prosperity by getting decent returns to their produce. Unfortunately this success eluded the producers of other items like fruits and vegetables, cereals, pulses and oil seeds. Politicization of cooperative movement is best manifested in the sugar sector which has to bear some responsibility for the 100% rise in price of this commodity.

As for value addition by the processing industry, the vast difference between raw material price and the MRP defies any logic and reasoning. Take the case of potato chips. There are thousands of 'hot chips' units in the informal sector which sell the product around Rs 100 per kg but the so called organized sector offers the same product at more than Rs 300 per kg. True, the branded product has some extra attributes like attractive packing, marginally better eating qualities and slightly longer shelf life but does it justify the exorbitant MRP demanded? Same is true about many products manufactured and marketed by the organized sector of food industry, be it corn flakes, chocolates, sugar candies, fruit juices, soft drinks or any other consumer foods. In advanced countries the buying power of the consumer is substantial and such loading on the final price could be borne by them. But in a poor country like India, consumer price must be reasonable if the benefit of technology has to percolate down.

According to the MFPI, GOI, current level of value addition in the food processing sector is about 20% which is targeted to increase to 35% in 5 years. Qualitatively the target is reasonable but the quantitative addition is some thing on which neither the governments nor the consumers have any control. In a free economy this is supposed to be controlled by the marketing forces and the ground reality is that market forces are greatly influenced by large Indian and multinational companies dealing with potato chips, soft drinks, break fast cereals, infant foods, weaning foods, bakery products, chocolate products etc with the informal sector playing a minor role. Unless and until we go back to the proactive policy of encouraging and supporting micro enterprises and small scale processors, the consumer will continue to pay unreasonably high prices to buy packed foods which after all offers convenience and savings in time for hard pressed middle class families of this country. Let a billion such enterprises bloom and let the real and reasonable value addition zoom to 100% through their efforts!


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