Demographics, rising incomes and a low existing base all point towards a paradigm shift in the fortunes of India's still fledgling food retail sector.

It can potentially become the largest recipient of foreign direct investment (FDI) and will definitely play a major role in realising the Prime Minister's goal of doubling farm incomes by 2022. Food retail, the largest component of India's more than $500-billion retail sector, is standing at the cusp of greatness.

How its fortunes play out over the next five to 10 years could well decide the success of the government's ambitious Make in India initiative as well as the direction of politics by influencing how the critical farm lobby votes in future elections.

Budget push

Realising that food retail could be a game changer for the government's growth and employment push, Finance Minister Arun Jaitley inserted a provision in Budget 2016-17 to allow 100 per cent FDI in multi-brand retail for food products, which will reduce wastage of fruit and vegetables, help diversification of farming, provide an alternative market for farmers and facilitate the entry of global food retail giants into India's food processing sector and enable the much desired farm-to-fork linkage.

Earlier, Harsimrat Kaur Badal, Union Minister for Food Processing Industries, had written to Prime Minister Modi requesting a “relook at our FDI policy in multi-brand retail in food processing as a part of the Make in India initiative so that both farmers and consumers are benefitted and which will result in creation of critical infrastructure”.

Till then, rules allowed up to 51 per cent FDI in all multi-band retail, including in food retail.

Huge investor interest

This Diwali, Indian consumers are set to get a taste of Amazon food products as the US internet giant has decided to roll out a private grocery label in India as it has done in its home market.

Amazon will invest Rs 3,500 crore ($550 million) on this venture over the next five years and has received permission for selling and storing food items in online and offline stories. It will sell locally produced and third-party products besides products made under its private label at these stores.

Besides Amazon, online grocery firms Grofers and BigBasket have also been permitted to receive FDI for retailing food products made in India. These three companies together plan to invest close to $700 million in India's food retail and processing sector. Another company, Supermarket Grocery has also proposed to bring in FDI of Rs 800-1,000 crore ($50-60 million) in this sector.

Meanwhile, WalMart, the world's largest retail company, is also eyeing this sector following the easing of rules for 100 per cent FDI in multi-brand food retail. Walmart India operates in the wholesale segment in India and has 21 cash-and-carry stores across nine states. It plans to increase this to 50 stores by 2021.

Food plus

To further ease FDI rules in the food retail and food processing sector, the government is considering relaxing the norms to allow food retailers to sell a given amount of locally-made non-food products.

According to sources, the government is thinking of permitting an FDI-back retailer to sell non-food products made in India up to a threshold of 20-25 per cent of its investments at the farm gate level. A second school of thought holds that the limit should be fixed as a percentage of FDI as farm gate level investments may be difficult to calculate and pave the way for disputes and litigation.

Many large global chains such as Metro Cash and Carry, Tesco, Auchan Group and WalMart have expressed their willingness to set up shop in India provided the government relaxed rules to allow them to sell more non-food items.

The government is considering the matter very carefully as these retailers have made it clear that a food-only retail model will yield very small margins and make achieving profitability very difficult. And since they don't follow a food-only model anywhere else in the world, they will have to change their business model for India unless the government makes the concession, they argue. Left unsaid but conveyed clearly is the point that a food-only model would not be attractive enough for them to pour mega-bucks into India.

Huge market size

The Indian food market, which was estimated at about $360 billion in 2014, will grow exponentially to about $630 billion over the next three years, a Boston Consulting Group study has said. This makes India the sixth largest food and grocery market in the world. The retail sector contributes 70 per cent of these sales. And the food processing industry, which contributes heavily to the retail trade, accounts for almost a third of the Indian food market.

The Indian food retail market is currently dominated by local mom-and-pop kirana stores and organised retail, represented by the likes of Reliance Fresh, Big Bazaar and a host of other players account for a very small share of the market.

But this market is growing very rapidly. The online food market, especially, is undergoing rapid change as it grows at a frenzied pace. Apart from online grocers like Amazon, BigBasket, Grofers and others, food delivery companies such as Zomato, Swiggy, FoodPanda and a few others have brought order to a scattered and disorganised market, which is growing at 150 per cent a year with an estimated gross merchandise value of $300 million in 2016.

There are no figures available for the likely FDI inflow into this sector if the government relaxes norms as stated above, but unofficial figures place the figure at $5-10 billion.

Why food retail is important

India is the largest producer of fruits and the second largest producer of vegetables in the world. But because of a lack of sufficient cold storage capacity about 25-30 per cent of this production, valued at about $16 billion, perishes before it reaches the market.

Result: the farmer is deprived of additional income.

To achieve the goal set by the Prime Minister of doubling farmers' incomes by 2022, reducing and eliminating this wastage is sine qua non. Badal has called for infrastructure at the farm gate level, as elaborated in the exclusive interview published alongside this article.

In order to mitigate and ultimately resolve the issue of post-harvest losses of agricultural and horticultural produce, her ministry has cleared the setting up of 42 mega food parks and 236 integrated cold storage chains that can preserve and add value to farm produce and facilitate an increase in farm incomes.

The supply chain

The food processing industry plays a critical role in feeding the supply chain and the retail store with a continuous supply of food products the consumers want. But despite recent strides, food processing levels remain abysmally low - at less than 5 per cent of all food and vegetables grown compared to 30-70 per cent in developed countries.

To expedite the rollout of the food processing industry, the government has launched the National Food Processing Mission to address these problems, facilitate a large increase in farm incomes and generate additional jobs.

This mission envisages developing food clusters, food parks, agricultural SEZs, contract farming, cold chains and other physical infrastructure required for the sector as well as tax breaks to encourage investments.

Poised for growth

Despite the challenges, Indian food retail - and its feeder industry, the Indian food processing sector - is poised for exponential growth in the years to come.

Given the rise in disposable incomes and changing lifestyles - with ever rising numbers of women joining the workforce -Indian society is expected to follow the trajectory of its counterparts in the West and in South East Asia and increasingly take to packaged foods.

As mentioned above, the BCG estimates that the Indian food market will touch $630 billion by 2020 on the back of a three-fold increase in household incomes over the preceding five-six years.

The dollars are flowing in. During April-January 2016-17, FDI worth $663 flowed into the country compared to $506 for the entire preceding year. And according to executives at India Invest, the government's investment promotion and facilitation agency, a disproportionately large number of foreign investment proposals are in the food processing and food retail sector.

Most experts, therefore, agree that the sector could be at an inflexion point.