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chp-1.qxd 10/18/05 9:03 AM Page 1 CHAPTER 1 The Food Processing Sector in India An Overview

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The Food Processing Sector in India

An Overview

INTRODUCTION

T he food processing sector is critical to India’s development, for it estab- lishes a vital linkage and synergy between the two pillars of the econ-

omy—Industry and Agriculture. India is the world’s second largest producer of food and holds the potential to acquire the numero uno status with sus- tained efforts. The enormous growth potential of this sector can be understood from the fact that food production in the country is expected to double in the next 10 years, while the consumption of value-added food products will also correspondingly grow. The growth of this industry will bring immense bene- fits to the economy, raising agricultural yields, enhancing productivity, creat- ing employment and raising life-standards of a large number of people across the country, especially those in rural areas.

The liberalisation of the Indian economy and world trade and rising con- sumer prosperity has thrown up new opportunities for diversification in the food-processing sector and opened new vistas for growth. A recent study has revealed that there is tremendous potential in India to build a profitable business in the sector. This industry ranks fifth in the country and employs 16 lakh workers, comprising 19% of the country’s industrial labour force. It accounts for 14% of the total industry output with 5.5% of the GDP. Its turnover is estimated at Rs.1,44,000 crore, of which Rs.1,11,200 crore is in the unorganised sector. The industry has started producing many new items like ready-to-eat food, beverages, processed and frozen fruit and vegetable products, marine and meat products, IQF products, etc. The Indian consumer is being fast introduced to newer high quality food products made by using the latest state-of-the-art technology, that is also giving the industry a com- petitive edge.

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Table 1.1 Status of Food Processing Industry in India

 

Sr. No.

1.

Rank of Industry

5 th

2.

Employment in lakhs

16

3.

% of total Industrial Labour Force

19

4.

Total Industry Output in percentage

14

5.

Output as % of GDP

5.5

6.

Estimated Turnover (rupess in crores)

1,44,000

7.

Unorganised Sector (rupees in crores)

1,11,200

BROAD CATEGORISATION OF FOOD PROCESSING ENTERPRISES AND THEIR PRESENT STATUS

(i) Fruits and Vegetables

Horticultural crops in India are currently grown on 12 million hectares repre- senting 7% of the country’s total cropped area. Annual horticultural production is estimated at 100 million metric tonnes, which is over 18% of India’s gross agricultural output. India is the third largest producer of fruits after Brazil and the United States, while its vegetable production is exceeded only by China.

Mango, Banana, Citrus fruits, Guava and Apple account for 75–80% of fruit production, which was around 37 million metric tonnes in 1997–1998. Vegetable production was 65 m tonnes in the same period. India’s share of world trade in this sector is still around one per cent.

In 1997–1998, processed fruits and vegetables exported, valued Rs.5,240 mil- lion. India’s major exports are fruit pulp, pickles, chutneys, canned fruits and vegetables, concentrated pulps and juices, dehydrated vegetables and frozen fruits and vegetables. This sector has attracted a total investment of Rs.75,000 million in the last six years i.e. since the initiation of the liberali- sation process, including a rise in Foreign Investment from Rs.46.9 million to about Rs.102 million between 1993 and 1998.

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The following statistics presents the growth in the number of fruit and veg- etable processing units, their production and installed capacity.

Table 1.2 Fruit and Vegetable Processing Units

Year

1994

1995

1996

1997

1998

1999

F&VP Units

4270

4368

4674

4932

5112

5198

Installed Capacity (lakh tonnes)

12.60

14.02

17.50

19.10

20.40

21.00

Production (in million metric tonnes)

5.59

6.79

8.50

9.50

9.10

9.40

Out of the 5198 F&VP enterprises in 1999, 2002 (38%) were home-scale (household) units, 1083 (21%) cottage, 834 (16%) small-scale, 598 (12%) large-scale and the remaining 681 (13%) were only relabellers.

Distribution of Fruit and Vegetable Processing Enterprises by Scale of Industry

Cottage

21%

Home Scale

38%

Enterprises by Scale of Industry Cottage 21% Home Scale 38% Small Scale 16% Large Scale 12%

Small Scale

16%

Large Scale

12%

Relabellers

13%

Home Scale

: 2002 Units

Relabellers :

681

Units

Large Scale :

598

Units

Small Scale :

834

Units

Cottage :

1083 Units

Total

:

5198 Units

The growth trend from 1994 to 1997 remained upward, being 21.8% in the first year, 25.2% in the second and 11.76% in the third. During 1997–1998, this sector showed a negative trend of 4.2% over the preceding year and 1998–1999 registered a positive growth of 3.3%. Though the detailed reason for this trend could be ascertained by ground-level research, the factor respon- sible for negative growth in 1997–1998 was excise duty of 8% on processed (Fruit and Vegetables) F&V products, as against no duty in the preceding years.

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(ii) Meat and Poultry

Meat Processing: India has the world’s largest livestock population, account- ing for 50% of buffaloes and 1/6th of the goat population. Such a large popu- lation represents a challenge to retain existing productivity traits by applica- tion of modern science and technology. Rigorous efforts are being made to improve the condition of livestock by providing basic infrastructure and lat- est technology.

FAO has estimated the existing production of meat and poultry products at 4.42 million tonnes. Only 11% of the buffalo population, 6% of cattle, 33% of sheep and 38% of the goat population is culled for meat.

Source: Composition of Estimated Meat Production

Buffalo 11% Others 12% Buffalo Cattle Cattle 6% Sheep Goat Goat Sheep 38% Others 33%
Buffalo
11%
Others
12%
Buffalo
Cattle
Cattle
6%
Sheep
Goat
Goat
Sheep
38%
Others
33%

At present, only a small percentage of the meat produced is converted into value added products and most meat is purchased by consumers in the fresh/frozen form for conversion into products at home, restaurants, etc. Maximum conversion takes place in pork products.

With growing urbanisation and increasing quality consciousness, the market for scientifically produced meat products is expected to grow rapidly. Demand is growing for ready-to-eat and semi-processed meat products because of changing life styles and increase in exports to neighbouring countries, especially the Middle East. India exports meat products worth Rs.8,000 million mainly to countries in the Middle East and South East Asia.

Meat processing is the new thrust sector for Indian industry with many processing centres being set up with advanced technology. Animals render

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extremely useful service in out-transport system and agriculture. India needs technical cooperation to build up organised facilities for rearing meat producing animals, proper storage and refrigerated transport system. This sector has attracted an investment of Rs.9000 million, including foreign investment of Rs.5000 million, in the last six years since the initiation of the liberalisation process.

Poultry India ranks fifth in the world in egg production with a yield of 1.61 million tonnes a year. Yet the per capita availability is low. Now, with changing food habits and increasing availability of eggs, the demand is increasing and growing at 10% a year.

Egg production has grown during the last 30 years at an annual average of 16%, while that of broilers, by 27%. During this period, Indian poultry indus- try made spectacular progress transforming itself from backyard farming to a dynamic and sophisticated agri-based industry.

The increasing awareness about balanced nutrition has effected changes in eating habits with vegetarians accepting eggs as part of their diet. Simultaneously, purchasing power has increased and more money is allo- cated for food. Despite this, the egg industry experiences periodic slumps. There are five modern integrated poultry processing plants in the country, besides a good number of not-very-modern small plants. These plants produce dressed frozen chicken and cut parts. While poultry industry is gradually taking shape, poultry dressing and processing is still in its infancy in the country.

There are about 15 pure-line and grandparent franchise projects in India. There are 115 layer and 280 broiler hatcheries both in the private and public sector, producing 1.3 million layer parents and 2.6 million broiler parents, which, in turn, supply about 95 million hybrid layer and 275 million broiler, day-old chicks. Please refer to Table 1.3. In India, five egg powder plants have also been set up to produce whole egg, yolk and albumen powders. Demand for egg powder is increasing every year. Each project will process a million eggs daily. Only one egg powder plant has been in operation in Mumbai since the 1970’s. Other such plants will help boost egg production.

Table 1.3 Status of Pureline & Grandparent Franchise Projects in India

Sr. No.

Hatcheries

No. of

Parents (in

Supply (in

 

Hatcheries

Million)

Million)

1.

Layer

115

1.3

95

2.

Broiler

280

2.6

275

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(iii) Milk and Milk Products

India has the largest livestock population with milch cows and buffaloes being its main constituent. India is the world’s largest milk producer (72 million tonnes annually) and the dairy industry has been recognised the world over as its most successful development programme.

Going by FAO estimates, while world milk production fell by 2% in the last three years, the Indian production galloped by 4%. While consumption of liq- uid milk accounts for 46% of the total production, the rest is converted into milk products. Of this, the share of the organised sector is less than 10%. The products manufactured by the organised sector are ghee, butter, cheese, ice creams, milk powders, malted milk food, condensed milk, infant foods, etc. The products also include casein, lactose and dairy whiteners.

The value of Indian dairy produce is expected to rise from Rs.2,88,000 mil- lion in 1999 to Rs.10,00,000 million by 2005.(Please see the chart below). In the last six years, investment in this sector has been to the tune of Rs.16,000 million with foreign investment of Rs.3,600 million.

Value of Dairy Products

1200000 1000000 1000000 800000 600000 400000 288000 200000 1999 2005 (est.) Rs. Millions
1200000
1000000
1000000
800000
600000
400000
288000
200000
1999
2005 (est.)
Rs. Millions

Year

(iv) Consumer Products

This comprises product groups like confectionery, chocolates, cocoa products, soya-based products, ready-to-eat foods, mineral water, high protein foods

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etc. This sector has attracted a whopping investment of Rs. 1,28,000 million, including foreign investment of Rs.50,000 million, since liberalisation.

Soft drinks enjoy the biggest share in this. The Indian soft drinks’ market is worth Rs.22,000 million a year. Statistically, this implies three bottles per Indian. Cola, orange and lemon are some of the accepted tastes in India. It is estimated that 65% prefer non-carbonated drinks. Lemon drinks continue to be very popular in the country.

India produces a large range of cocoa and non-cocoa based confectionery items, besides other cocoa-based products. The production of confectioneries, except chocolates, is reserved for the small-scale sector. However, there are several large companies with an established market presence and brands in cocoa and non-cocoa confectionery markets.

Confectionery output grew at a compound rate of 6 to 7% in recent years. Chocolate production is growing at the rate of 10 to 15% a year.

Among the ready-to-eat products, the installed capacity in the organised sec- tor is 33,400 tonnes for manufacture of pasta products like noodles, macaroni, vermicelli, etc. Besides, there are 10 units with an annual capacity of 9,340 tonnes for corn flakes, oat flakes and pearl barley.

(v) Alcoholic Beverages

Liquor made in India is categorised as beer, country liquor and Indian Made Foreign Liquor (IMFL). Country liquor is made from a variety of raw mate- rials and has different names in different parts of the country.

IMFL production comprises wine, vodka, whisky, gin, rum, brandy, etc. Pre-mixed drinks like gin and lime, rum and cola are being introduced in India now. Draught beer is another recent introduction and has done well where introduced. Canned beer is also a recent introduction.

There are 36 breweries with a licensed capacity of 160 million litres per annum. Current production is over 300 million litres. In all, Rs. 11,000 million including Rs. 7,000 million of foreign investment, has been made in this sec- tor in the last six years.

The Indian beer market, currently at Rs.7,000 million a year, has been grow- ing by 15% and now all world famous brands of liquor are available in India. The country has 212 distilleries with a yearly installed capacity of 1,933 mil- lion litres. However, there are only 24 units producing IMFL and 31 making country liquor. Alcohol produced by the rest is either sold as industrial alcohol

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or in bulk as potable alcohol to other distilleries for bottling or for making bot- tled alcohol (estimated 927.82 million litres).

Raw material like Molasses, barley, maize, potatoes, grapes, yeast and hops for beer and alcoholic products’ industry are abundantly available in India.

(vi) Fisheries and Sea Food

India boasts of the seventh largest marine landing base in the world with an extensive 7,500 km coastline and an Exclusive Economic Zone (EEZ) of 2 million sq km, largely untapped, and a 29,000 km stretch of rivers and canals, 145 million hectares of reservoirs and 0.75 million hectares of tanks and ponds. Though India’s fish potential from the EEZ has been estimated at 3.9 million tonnes, the harvest is only of 2.87 million tonnes. This can be increased to 3.37 million tonnes by intense tapping in offshore and deep-sea grounds using modern technology. There is also a good scope to improve fish harvest from inland waters which, at present is 2.7 million tonnes. Besides, the fish potential in aquaculture and shrimp farming has also largely remained untapped.

Though, traditionally, only local fishermen have tapped the vast marine and inland water resources to meet domestic demand, the organised corporate sec- tor has become involved in preservation and export of coastal fish since the last decade.

Marine fish found in India include prawns, shrimps, tuna, cuttlefish, squids, octopus, red snappers, ribbon fish, mackerel, lobsters, cat fish and countless other varieties.

Domestic per capita consumption of fish is only 5 kg per annum against the world average of 12 kg. India’s per capita consumption is much lower than the Asian maritime countries (e.g. Japan–86 kg). India’s 60% fish production is from marine sources. However, coastal fishing i.e. from the continental shelf constitutes the bulk of the marine catch. It is estimated that only 10% of the marine catch is accounted by deep-sea resources. Processing of produce into canned and frozen form is done almost exclusively for the export market. Totally, there are 258 freezing units with a capacity of 2,170 tonnes, 23 canning units of 84.5 tonnes capacity, 131 ice-making units of 1820 tonnes, 24 fish meal units with a capacity of 419 tonnes and 297 cold storage units with a capacity of 2,03,448 tonnes.

This sector has attracted domestic and foreign investment to the tune of Rs.30,000 million in the last six years, of which the foreign component is around Rs.7,000 million.

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Please see Table 1.4 which compares the investment pattern in different sectors.

Table 1.4 Investment Pattern in Different Sectors

Sr, No.

Sector

Total

Foreign

 

Investment

Investment

(in Million)

(in Million)

1.

Milk & Milk Products

16,000

3,600

2.

Consumer Products

1,28,000

50,000

3.

Alcoholic Beverages

11,000

7,000

4.

Fisheries/Sea Food

30,000

7,000

(vii) Grain Processing

The country’s current foodgrain production (including rice, jowar, bajra, maize, ragi, wheat, barley, gram and pulses) has been put at 225 million tonnes a year. Food processing industries play a crucial role in reducing post-harvest losses. Since most operations of this industry are rural based, it has the potential to gen- erate high employment at low investment. Promotion of food processing also helps in energy conservation by reducing energy wastages in home cooking.

Grain processing, with a share of 40%, is the biggest component of the food sector. Its basic feature is pre-dominance of the primary processing sector, sharing 96% of the total value, with the secondary and tertiary sectors adding about 4%. This area needs to be viewed as a high growth potential area.

Indian Basmati rice commands a premium in the international market. The export of Basmati and non-Basmati rice has been steadily increasing. From Rs.3538.3 million in 1988–1989, the exports increased to Rs.62,000 million in 1998–1999. The country has a total paddy milling capacity of 186 million tonnes, of which 85 m tonnes is of traditional mills and 101 of modern mills.

(viii) Plantation

Tea, coffee, cashew, cocoa, etc. are the country’s major plantation crops, which are grown in different parts for they require specific agro-climatic conditions.

India’s principal plantation crops account for around 5 to 6% of the country’s aggregate export earnings. Production and domestic consumption of major plantation crops have increased considerably during the last three decades.

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India continues to be the world’s largest producer, consumer and exporter of black tea. Cashew is also an important crop and earns foreign exchange worth Rs.16,000 million. India is the world’s leading producer and exporter of cashew kernels (75,000 tonnes annually) and shares 31% of the world’s pro- duction of raw cashew and nearly 48% of the world’s cashew kernel export.

Coffee is the oldest plantation crop of India.

POLICY INITIATIVES THUS FAR

The food processing sector has been identified as a thrust area for develop- ment. This industry has been included in the priority lending sector. Most food processing enterprises have been exempted from industrial licensing under the Industries (Development and Regulation) Act, 1951, with the exception of beer and alcoholic drinks and items reserved for Small Scale Sector. For for- eign investment, automatic approval is given even to 100% equity for major- ity of the processed foods. Since economic liberalisation in 1991, 5875 Industrial Entrepreneur Memoranda (IEMs), involving an investment of Rs.53,736 crore and envisaging employment for 10.23 lakh persons, were filed between July 1991 and December 1999. Of these, 673 IEMs with invest- ment of Rs.7,517 crore and jobs for 0.87 lakh persons have been imple- mented. Moreover, 1,120 approvals for investment of Rs.19,100 crore and employment of 2.75 lakh have been given. From these, 248 proposals with investment of Rs.4,225 crore and 0.95 lakh jobs have been implemented.

The kind of units, which have come up, include:

Fruit and Vegetable – Beverages, Juices, Concentrates, Pulps, Slices, Frozen & Dehydrated products, Wine, Potato wafers/chips etc.

Fisheries – Frozen and canned products mainly in fresh form

Meat and Poultry – Frozen and packed mainly in fresh form, egg powder (only a couple of units)

Milk and Dairy –Whole milk powder, Skimmed milk powder, Condensed milk, Ice cream, Butter and Ghee

Grain and Cereals – Flour, Bakeries, Biscuits, Starch, Glucose, Cornflakes, Malted foods, Vermicelli, Pasta foods, Beer and Malt extracts, Grain-based Alcohol

Consumer Industry – Chocolates, Confectionary, Soft/Aerated Beverages/ Drinks

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The policy initiatives of the government also include automatic approvals for Foreign Technology Agreements, sale of 50% in domestic tariff area of agro-based 100% EOUs, zero duty EPCG scheme extended to Food Processing sector with a reduced threshold limit of Rs.1 crore in the Exim Policy, declaration of the industry for priority lending by banks, the Plan schemes envisaging grant of loans at a very low rate of 4% and grant-in-aid to select cooperatives and NGOs, assistance for upgrading standards to inter- national level and assistance for R&D activities.

CHALLENGES, CONSTRAINTS AND CONCERNS

Despite policy initiatives, growth potential and significant achievements, there are several disturbing trends as delineated here:

In India, the value addition to food fortification is only 7% com- pared to as much as 23% in China, 45% in Phillipines and 188% in the UK. Further, there are few large or medium sized compa- nies in the organised sector against many small ones. The small-scale and unorganised sectors account for 75% of the total indus- try.

Despite its importance to India’s well-being, the food industry has in the past been neglected. Food is usually the first industry to develop and has importance in most economies. In India, it is still relatively small and not regarded attractive.

External liberalisation opens up new export avenues and seeks to inte- grate the economy with the global market. But it also poses threats of stiffer competition under a new world trade order with WTO agreements relaxing quantitative restrictions and non-tariff/sanitary barriers on importing countries. This exposes the Indian farmer to world market forces. Strategies to convert the potential disadvantage, on account of the new import regime, into advantage are needed. The inherent strength of high raw material production and large domestic market base has to be buttressed and energised by evolv- ing the right international-level infrastructure and growing suitable raw material. This, coupled with operating processing units at optimum capacity levels as per economies of scale, would enable achieving a competitive edge over imported products. The food sector will be confronted by challenges of trade related Intellectual Property Rights, comprising patent laws, copyrights, trade links, etc.

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Advances in bio-technology have enabled production of Genetically Modified (GM) foods. These have already appeared in some countries. GM foods need be critically examined on their good and adverse impacts on human health.

India is the second largest producer of food in the world but its share in world’s exports is very low despite its inherent strength in tea, spices and rice. The share of agricultural exports in the country’s total export basket has been fluctuating, from 27% in 1985–1986 to 16% in 1994–1995 and to 20% in 1996–1997. In 1996–1997, India exported Rs.24,618 crore worth of agro products. During 1997–1998, marine products, rice, coffee, oil and spices were major export items. The share of horticulture crops, plantation crops, meat and meat prepara- tions and sugar in the country’s agri exports is much less than its competitive potential.

Taxes on processed food in India are among the highest in the world. No other country imposes excise duty on processed food. No country distinguishes between branded and unbranded food sectors for taxation. There is excise duty of 16% in the form of CENVAT levied on food products and then there is sales tax, octroi, mandi samiti, entry tax and customs duty on material, levied by the Central/State/Local bodies. The net effect ranges from 21% to 30% on various food items. India is the only country to have levied excise duty on machinery and equipment for processed foods. Indian consumers are very price-sensitive and cost reductions are imperative to raise demand and consumption of food products. Since the net effect of var- ious taxes falls directly on the price, the off-take of processed food items remains low. Consider the Food and Vegetable sector, where against the installed capacity of 21 lakh tonnes (of the units registered under FPO), present production is only 9.4 lakh tonnes or about 45%. Assuming a value of Rs.10 per kg, the receipts on account of 16% CENVAT would be around Rs.150 crore in the first year, and looking at past experience of negative growth, the receipts will reduce by 5 to 10% in every succeeding year. Reduction of excise duty by say 5% might result in less receipts in the first year but would more than make up in the subsequent years i.e. at 100% capacity utilisation, the first year receipt would be Rs.100 crore, but with annual growth rate of 25%, the receipts would Rs.125 crore in the second year, Rs.156 crore in third and after five years, it would cross Rs.200 crore at the present price index. Moreover, the National Savings because of reduction in wastage would run into thousands of crores (the present level because of 30% wastage in Fruit and Vegetable Sector alone results in an estimated wastage of Rs.25,000 to Rs.30,000 crore).

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India is viewed as an unpredictable and unreliable source of food and agro products despite its world class production measures for ensuring supply to the international markets and increased production and qual- ity of food products specific to exports.

Food processing enterprises in organised and unorganised sectors are in private hands. Though there has been certain growth in the food industry because of domestic demand, the demand itself remained low due to policies pursued earlier. Majority of the food units are in primary processing and since production base of secondary and tertiary processed foods is low, there is lower value addition.

Commercial R&D activities in the food industry have remained con- fined to only a few areas. R&D activities have scarcely emerged from the laboratory to be extensively adopted on the field.

Indian brands have yet to acquire an image in the international markets because of poor global marketing. Poor awareness of most of Indian agri produce, seed constraints and India’s image and identity of a low quality, unreachable producer of food items ensure that Indian food items are not the most preferred ones.

Financial institutions do not have the capacity to appraise hi-tech export-oriented projects. There are no suitable insurance schemes for such projects, most of which deal in export of perishables. In financing projects like high density farming, greenhouse floriculture, controlled environment livestock farming, bio-technology, tissue culture, embryo transfer technology, bio-pesticides and bio-fertil- izer, etc., the banks face considerable risk like credit risks. With new technology, the risk perception is higher than the existing one. Since it has not been tested in actual situations, the chances of failure of new technology are higher. For risk of rejection by consumer or by sovereign intervention foreign exchange risks, ECGC cover is available only in cases of insolvency/default of importers.

Branded food items attract higher sales tax and excise duty as against the unbranded ones. It is reasonable to expect that any meaningful investment in this sector will necessitate branding of products. It is noteworthy that no country treats branded food differently for levying duties. The exemption to unbranded and unorganised sector from excise and sales tax leads to low quality consciousness among manu- facturers and consumers.

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There is a growing disparity between the actual and potential results in the food industry, exposing the gulf between research and extension agencies.

There have been instances of ban imposed by the European Union on all seafood exports originating from India. This was after detection of salmonella in some EU-bound consignments and of V Cholera in con- signments to Denmark. These consignments mostly had fish, prawns and frozen squids.

The sector is capital starved. Investments in infrastructure and research have been far from adequate.

The sector has been characterised by poor marketing, transport and communication infrastructure. The market density of fruits and vegetables is low and facilities for storage and cold chains in the hinterlands are woefully inadequate. Erratic and inadequate power sup- ply, lack of roads, education and health facilities and no or low rural industrialisation accentuate the problems. There is lack of integration of local markets with national and global ones to support faster and more diversified growth. Lack of maintenance of infrastructure because of limited and declining public resources and the absence of community involvement in the protection of community assets and poor cargo facilities at airports and ports are other bottlenecks. Infrastructure for extension of food technology is hampered. Moreover, there is lack of organised marketing system in meat and poultry products. The system is obsolete, with primitive methods of sale of live birds or unhygienic slaughtered birds. A similar poor system exists in towns and small cities in the case of pork and pork products.

Cooperatives and other semi-government organisations are weak and people’s participation, either through Panchayat Raj institutions, NGOs, farmer organisations or industries’ associations in food sector remains extremely inadequate.

Multiple and complicated tax regimes have rendered the food industry uncompetitive. Regulations on the entry operations of private sector in trade, post-harvest facilities and food processing have restricted private sector investment in the agricultural sector. Then, the current land ten- ancy regulations have frozen the land-lease market and discouraged tenant farmers and share-croppers from investing in the land they till. With the signing of the GATT and the coming up of World Trade Organisation, this sector is facing internal and external pressures stem- ming from policies of economic liberalisation.

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NEED FOR A COMPREHENSIVE PAN-INDIAN INITIATIVE

The present scenario has resulted from the lack of cohesive and integrated planning of the industry, keeping in mind specific needs of various regions, their produce and special industries, which could be energised to work at opti- mum capacity. The policy initiatives thus far have gone by the assumption that this industry has high risk and low return and that seasonalities of pro- duce dictates the levels of capacity utilisation; that any multi-line projects will become unviable, for there is paucity of marketing outlets and lack of other infrastructural facilities. These problems cannot be viewed in isolation nor can they be tackled by a single department/ministry. It is important to adopt a holistic approach in formulating any viable policy for this nascent sector. The planning should be bottom up and not top down, for in India, the initiative has to come from the rural sector constituting 70% of the population. This is where tapping of Panchayat Raj institutions and networking of cottage, small and medium industries can viably provide the primary and secondary pro- cessing for take-off by large-scale industries. What is envisaged is an inte- grated model wherein cottage, small and medium enterprises act as input fac- tors for further development of products by larger enterprises, by creating pri- mary/secondary processing facility centres within a radius of 15 to 25 km from the farm. These centres will provide appropriate packing techniques for farmers. Other facilities that could be envisaged at these centres include treatment, washing, sorting and grading, packaging and cold storage. Adequate system will be evolved to transport these processed products for use by larger industries as well as for sale in wholesale markets. This process will ensure backward and forward links between farmers, markets (domestic and international) and larger industries.

This way, each unit would be viable and independent and at the same time, be linked with higher players in the market. The sectoral deficiencies and advantages in each spatial segment will be attended to since investment will not be higher. Thus, imbalances, which were a built-in variable, could either be corrected or converted into an advantageous variable. This is possible only if all Panchayat institutions in the country are networked with leading market outlets, including the top players in the industry. Such a synergy cannot evolve in a short time unless the government initiates many Centrally-spon- sored direct assistance to Panchayat institutions, including allocations for infrastructure like roads and transport. This way, the WTO restriction on sub- sidies could be overcome and within a couple of years the entire gamut of functioning of these industries could be re-oriented. This will also wean away the thinking process of planners to view the food processing industry only as a means to reduce wastages. In fact, this Pan-Indian Model will ensure a pro- active industry-oriented approach enabling the industry’s growth in a modern,

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scientific and planned manner. This will increase productivity at minimum costs improving the product’s competitiveness in any economy. On a larger scale, this will make the economy vibrant and prevent unnecessary migration of population and unplanned urbanisation.

STRATEGIES AND INITIATIVES PROPOSED IN THE NEW POLICY

There are various strategies and initiatives proposed in the new policy.

These are discussed below:

Creating an Enabling Environment

a. The Central and State Governments will work closely and evolve joint efforts to provide an enabling environment to entrepreneurs to set up food processing enterprises.

b. Fiscal initiatives/interventions like rationalisation of tax structure on fresh food as also processed foods and machinery are a must. This is necessary to provide processed food at reasonable prices as well as to stimulate domes- tic demand. The aims of the National Policy on food enterprises are sought to be achieved by adopting initiatives and practices congenial to industrial development in the processed food sector. A concentrated promotion cam- paign is vital to create market for processed foods. Multinational companies can take care of their products for they have large funds for promotional campaigns. The Department will continue to provide financial assistance to industry associations, NGOs/Cooperatives, private sector units, state gov- ernment organisation for market promotion and brand formation.

c. Going by projections of the Working Group on Food Processing Industries for the 9th Plan, investment requirement of Rs.24,315 crore from the pri- vate sector, Rs.2,275 crore from the Central Government, Rs.1,660 crore from the State Government, totalling upto Rs.28,250 crore, have been identified for the entire food processing sector in a five-year plan period.

d. Efforts will be made to expand the availability of raw material and improve their quality for agro-based processing activities round the year by increas- ing production, improving productivity and yield.

e. The information/database for the industry will be strengthened to ensure greater reliability and thus help in planning and policy making. This is

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proposed to be achieved through studies and surveys in various states. The information will be vital for the industry to plan investments in appropri- ate sector matching availability of resources and market conditions.

Intensive and Extensive Awareness

a. Extensive training will be provided to farmers and cooperatives in post- harvest management of agro-produce to encourage creating pre-processing facilities near farms. Facilities may include provision for washing, fumi- gation, packaging, etc. Efforts will be made to encourage the setting up of agro-processing facilities as close to the area of production as possible to avoid wastages in transporting raw materials to far away places and to ensure increased value addition, specially for horticultural produce.

b. Efforts will be made to improve general awareness about the advantages of consuming processed foods to stimulate domestic demand. Unfounded apprehensions about consuming processed food will also be removed.

Infrastructural Development

a. Establishment of cold chain and provision of low cost pre-cooling facili- ties for farmers, entrepreneurs, traders and consumers would be encour- aged and they will be trained to bring about attitude changes. Efforts will be made to disseminate market intelligence to enable farmers to fetch higher value for their produce.

b. Efforts will be made to motivate farmers/industries to use insulated/refrig- erated vehicles for transporting raw materials from the place of produc- tion/harvest to the point of consumption, to avoid wastage and quality deterioration.

c. Establishment of cold storages and cold chain facilities would be encour- aged.

d. The interactive mesh between technology, economy, environment and society will be promoted for quicker development of agro-processing industries and to build up a substantial base for production of value-added products for domestic and export market with special emphasis on food safety and quality, taking into account all aspects of Total Quality Management (TQM) and Hazard Analysis and Critical Control Points (HACCP) to achieve international standards. Sustained R&D activities will be encouraged through recognised institutions having expertise in respective fields.

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e. Application of bio-technology, remote sensing technology, pre and post harvest technologies, energy saving and environmental protection tech- nologies through National Research System or any other mode will be encouraged.

Backward Linkage—Raw Material Supply

a. The concept of backward linkage between farmers and industry would be pro- moted to encourage and enable farmers to grow products of appropriate qual- ity. This will help the poorest of the poor farmers as well as marginal and medium farmers fetch appropriate and remunerative return for their produce. The scheme for providing assistance under the 9th Plan is already in opera- tion and will be strengthened further to cover majority of farmers/producers. It would be ideal to dovetail this scheme with similar schemes offered by local bodies like Panchayats to provide the required fillip to this significant pro- gramme in the best interests of farmers and processors.

b. The existing institutions like local bodies, cooperatives and self-help groups, which have been in operation for over four decades in different contexts, would be utilised to strengthen the backward linkage. This way the skill and expertise acquired by these institutions would be constructively used, while this mechanism would help quickly create the bridge of trust between farm- ers and processors. This would ensure smooth supply of raw material to the processors and help the farmers (poor, marginal and big) in getting remu- nerative prices for their products. Thus, a complete network of farmers and processors will be created cutting across their status.

Forward Linkage—Marketing

a. There is an urgent need to develop forward linkages for fresh and processed food. Presently, there are a large number of intermediaries oper- ating between the farmers/processors and the consumers, resulting in high cost to the latter and low return to the former. The efforts to cut intermedi- aries would be made in such a way that the special skill and expertise required to operate the intermediate links in the system like transportation and market distribution are not jeopardized. To achieve this, attempts will be made to provide appropriate tax incentives and holidays for setting up food processing industries, taking care of expenses on market promotion and ancillary activities.

b. The North Eastern Region, the Hilly States (J&K, HP and Western UP), the Islands (A&N, Lakshadweep) and the Integrated Tribal Development

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Projects (ITDP) areas in the country need to be given special considera- tion. Fiscal incentives like excise duty/sales tax concessions and tax holi- days should be given not only to the units being established here, but also to those set up outside but processing the produce from these areas. This is because the high cost involved in transporting raw material and packaging material makes the product expensive, and thus uncompetitive, in the mar- kets outside. Providing fiscal incentives to units located outside but oper- ating as a part of the primary processing unit in one of these areas would facilitate cutting down the double transportation cost and help the products from these areas become marketable at competitive rates. The consumer would also have the advantage of buying quality products from these areas at affordable prices.

c. Special attention is to be laid towards setting up regulated markets with the primary objective to improve market efficiency and achieve equitable dis- tribution of benefits between producers, traders and consumers. This will be possible by evolving strategies to strengthen regulated market yields and equipping them with grading, cleaning and packaging facilities, along with market information systems.

d. Efforts are to be made to develop packaging technologies for individual products to increase their shelf life and improve consumer acceptance, both in the domestic and international markets.

e. Efforts are to be made to harmonise food laws to encourage production of high quality products with minimum intervention from regulatory authori- ties. The complexity of multiple administering authorities for food processing enterprises is also required to be simplified by developing an integrated and unified system.

to be simplified by developing an integrated and unified system. The Food Processing Sector in India:

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chp-2.qxd 10/18/05 9:02 AM Page 21 CHAPTER 2 The Impact of Policy on Enterprises F RUIT

2

The Impact of Policy on Enterprises

FRUIT AND VEGETABLE PROCESSING SECTOR:

AN ELABORATE PROFILE IN TERMS OF GENERIC AND INTERNAIONAL MARKETING

A lthough India is the largest producer of fruit and vegetables, their process- ing has largely remained in primary forms like pickling, sun drying and/or

making preserves. Commercial processing is rather poor. Indians largely prefer fresh fruit and vegetables over processed foods because of economic reasons and food habits. High packaging costs make them expensive. Therefore, the Ministry has offered specific support for the marketing and generic promotion of processed food. Since India has varied agro-climatic conditions, some prod- ucts are available throughout the year. Fruits and vegetables like banana are non-seasonal, while apples, oranges, potatoes, etc. are put in the cold storages and made available in the off-season as well. Fruits like guavas and oranges have two seasons and so are available fresh almost half the year.

Units registered under the Fruit Products Order, 1955, are distributed across the country and most are in cottage and small-scale sector. Liberalisation of the country’s economic policies has attracted a few modern processing plants to pro- duce mango pulp and tomato paste in aseptic packing and freeze drying of fruit and vegetables including mushroom. Joint ventures with USA, UK, Netherlands, Switzerland and Germany are on, focussing on technology transfer, financial and marketing tie-ups. Such projects focus on production of canned mushrooms, banana and mango puree, fruit concentrates, dehydration of vegetables and frozen fruits/vegetables. The policy has been supporting such options.

Items already being produced in the country include, pulps, particularly of tomatoes and mangoes, ready-to-serve juices, canned fruits, jam, squashes etc, while carbonated fruit drinks, dehydrated and freeze-dried fruits, fruit juice con- centrate are poised to pick up. There is varied potential for the demand of processed food. The markets for mango pulp are Saudi Arabia, Kuwait, UAE, Netherlands and Hong Kong, while pickles and chutneys go to the USA, UK and Germany, besides Saudi Arabia and UAE. Products like tomato paste, jams, jellies and juices are exported to the USA, Russia, UK, UAE and Netherlands.

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The Ministry of Commerce and the Ministry of Food Processing Industries have been giving specific support to international marketing initiatives.

Policy to bridge the gap between resource base and value addition

India is among the world’s major producers of food products. It ranks first in the production of cereals, livestock population and milk; is the second largest fruit and vegetable producer; and among the top five producers of rice, wheat, groundnut, tea, coffee, tobacco, spices, sugar and oilseeds. And yet, India’s share in international food trade is less than two per cent. Value addition to food by processing is poor.

This has encouraged a policy thrust on the sector and enlarged the Food Processing Industry Ministry’s scope to promote it. It includes developing fruit/vegetable processing, food grain milling, dairy products and processing of poultry, eggs and meat products and fish, including canning and freezing. This is in addition to developing enterprises in bread, oilseeds, breakfast food, biscuits, confectionary, non-alcoholic beer and aerated drinks.

While the Ministry supports investment in R&D and product development, the Agricultural and Processed Food Products Export Development Authority (APEDA) offers subsidy to upgrade laboratory facilities. The Development Commissioner of Small Scale Industries (DCSSI) offers subsidy for imple- mentation of ISO systems in business. The production quality as also hygienic and sanitary improvement in manufacture are accorded priority.

Simultaneously, the production base is being enlarged by modern methods of cultivation to improve yield and productivity. A cold chain is also being developed to reduce post-harvest losses and maintain freshness. With new hybrid varieties being added, the production season is getting extended. Thrust is being given to enhance productivity with better raw material.

Since liberalisation, several policy measures have come for regulation and control, fiscal changes, export and import, taxation, exchange and interest rate control, export promotion and several incentives to high priority indus- try, including food processing.

Deregulation and Decontrol

The policy initiatives include an important incentive that industrial license is not required for most food processing enterprises, except for products like

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beer, potable alcohol and wines, cane sugar, hydrogenated animal fat and oils, etc, and some items reserved for exclusive manufacture in the SSI sector, like pickles, chutneys, bread, confectionary, mustard, sesame and groundnut oil, ground and processed spices, other than spice oil and oleoresin, sweetened cashew nut products and tapioca flour. Price controls have been removed. Automatic investment approval up to a certain percentage of foreign equity or cent per cent NRI equity is allowed for most of the sector, except in the case of malted food, alcoholic beverages, etc. Use of foreign brand names is freely permitted. Most items can be freely imported and exported. Capital goods may also be freely imported, including second-hand ones. These initiatives are likely to encourage entrepreneurship in the field.

Fiscal Incentives with Additional Encouragement for Export

Under this, excise and import duty rates have been reduced. Many processed food items are exempted from excise duty. There are limited-period tax incen- tives for new manufacturing units, except for beer, wine, aerated water using flavouring concentrates, confectionery, chocolate, etc. A high capital investment subsidy is available for new processing units. Food processing is one of the thrust areas identified for exports. Free Trade Zones (FTZs) and Export Promotion Zones (EPZs) have been set up with necessary infrastructure. Capital goods, including spares, can be imported at concessional customs duty, subject to export obligations under the Export Promotion Capital Goods (EPCG). Export-linked duty-free imports are also allowed. Enterprises in EPZs and FTZs may retain a percentage of foreign exchange receipts in foreign currency accounts and a per- centage of output is saleable domestically. Profit from export sales are, however, being progressively brought under the corporate tax bracket. Effective capital structuring of projects has therefore become more critical.

The WTO Agreement and the Sector

Trade liberalisation under the World Trade Organisation (WTO) is expected to improve scope for exports for the Indian food processing industry, while smoothening import barriers on inputs and making enterprises cost competi- tive. Enterprises will, however, need to improve safety and quality standards to reap the benefits of the new world order and avoid being penalised for non- tariff barriers. They will have to progressively follow a food quality manage- ment system called Hazard Analysis and Critical Control Points (HACCP). Many developed countries have already made this mandatory. The seafood processing enterprises have already faced the brunt of related bans from importing countries asking them to implement the costly requirements. Be it

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with regard to the aflatoxin content in groundnut, lead in milk or sulphur in sugar, it is safer to meet the more stringent international norms. Quality, safety and health are the buzzwords for the food enterprise of tomorrow.

IMPACT OF POLICY IN TERMS OF INTEREST RATES AND INCOME TAX ON THE STRUCTURING OF A PROJECT

Policy incentives in terms of investment subsidies and duty relief have an obvi- ous impact on project viability. Policy-related variables, such as interest rates on term loans and the working capital, also affect project viability. Similarly do variables, such as income tax on profit or net earnings of an enterprise. These variables have serious implications on the structuring of a project in terms of debt or loan and equity (promoters’ contribution or investment) in either ‘fixed assets’ such as equipment, land, and buildings or with regard to ‘current assets’ or working capital (or money required for operating a business). The latter may imply cash, stock and receivables for credit sale. The structuring of a business in terms of capital basically involves decisions on the debt and equity mix. Policy variables also have implications on the structuring of costs.

Implication of policy variables on the structure of capital of an enterprise

Consider a mixed fruit jam project ‘Manjunath Enterprises’ that is to be sanc- tioned in Mysore, Karnataka. The enterprise requires an investment (project cost) of Rs.50 lakh. The project expects to earn a Return On Investment (ROI) of about 24 per cent every year. The enterprise plans to manufacture juice con- centrates and jams. The interest rate on loan (debt) is about 15 per cent. If the project were structured in terms of wholly equity investment by the promoter, it would yield a much lower return on equity. For illustration, assume the tax on earnings is 50 per cent. An ROI of 24 per cent implies a net profit of Rs.6 lakh after tax. In the case of an alternative option assume that half the invest- ment is financed by equity and one half (Rs.25 lakh) by debt. In this case it will be observed that net profit after payment of interest on loan and tax will be Rs.4,12,500. By investing an equity of Rs.50 lakh on this project, the net profit works out to Rs.6 lakh and alternatively, investing equity of only Rs.25 lakh net profit works out to Rs.4.125 lakh. In terms of return on money invested by the entrepreneur, return on the second case is about 33 per cent higher! This benefit is due to the tax shield on interest paid on debt. Therefore, the structure of investment is dependent on tax rates. If they

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are low or negligible or not `declared’, it does not make a difference if the

business is financed by high debt or high equity. Similarly, the structuring of

a project should be based on interest rates on debt. If interest rates are higher than the ROI, going in for debt will kill an enterprise, as repayment will not be possible. It is, therefore, necessary to understand past trends and make a judgement on future trends on these two parameters before taking a decision on the structuring of a business in terms of capital.

In fact, there is yet another critical impact on debt-equity mix on a business. Consider Tables 2.1 and 2.2 below. The Tables consider profit after taxes for

a given increase in the ROI in two circumstances. A project that entails an

investment of Rs.50 lakh is considered. Table 2.1 considers an option of 25 per cent equity in capital structure while Table 2.2 considers 100 per cent equity investment. The Tables indicate the impact of the structure of capital of the enterprise on Profit before Tax (PBT) and Profit after Tax (PAT).

Table 2.1 Capital Structure of Manjunath Enterprises:

(75% debt, 25% equity)

(Rs.in lakhs)

ROI

8% (Rs.4 lakhs)

12% (Rs.6 lakhs)

Interest

3

3

PBT

1

3

Taxes

0.5

1.5

PAT

0.5

1.5

Table 2.2 Structure of Capital of Manjunath Enterprises:

 

(100% equity)

 

(Rs.in lakhs)

ROI

8%

12%

PDBIT

4

6

Interest

-

-

PBT

4

6

Taxes

2

3

PAT

2

3

The Impact of Policy on Enterprises

25

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The tables above illustrate a similar benefit with regard to the rate of increase in profit with similar increase in return on investment. The ROI increases by 50 per cent in both cases but profit after taxes increases by the same amount in a self-financed project (Table 2.2) but by 200 per cent if highly debt financed (Table 2.1). Therefore the rate of increase in profit is much higher for a unit increase in the ROI, if the project is highly debt financed.

Implication of policy variables on structur- ing project costs

Compare the proposed cost structure of Arundhati Enterprises in Ahmedabad with another proposed enterprise ABC Food Products. The latter plans to focus on largely outsourced ‘manufacture’ of pickles, while Arundhati Enterprises plans on largely in-house processing of pickles. In the case of Arundhati Enterprises fixed costs are higher while in the case of ABC Food Products, variable costs are higher. The fixed cost in operation includes costs such as rent that do not vary with output, while variable costs such as raw-material purchase costs do. As the table below indicates, Arundhati Enterprises could make more profit than the outsourcing ‘packager’ (ABC Enterprises). This indicates that scale economies operate on the manu- facturing front. Nevertheless, in the case of Arundhati Enterprises, the extent

Table 2.3 Cost Structure of Enterprises

 

ABC Enterprises

Arundhati Enterprises

Production (Jars)

80,000

80,000

Selling price (per jar)

Rs.40

Rs.40

Variable price (per jar)

Rs.30

Rs.10

Contribution (per jar)

Rs.10

Rs.30

Sales revenue (Total)

Rs.32,00,000

Rs.32,00,000

Variable cost (Total)

Rs.24,00,000

Rs.8,00,000

Contribution (Total)

Rs.8,00,000

Rs.24,00,000

Fixed cost (Total)

Rs.1,60,000

Rs.10,00,000

Profit (Total)

Rs.6,40,000

Rs.14,00,000

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of fall in profits with fall in sales or sales margins is likely to be higher. The interest cost on term loan is a fixed cost, while the interest cost on the work- ing capital is a variable cost. Arundhati Enterprises is likely to operate with a substantial term loan while ABC enterprises is likely to be operating more with mere working capital. It may be estimated that a 20 per cent fall in sales will lead to about 25 per cent fall in profit in the case of ABC Enterprises. There is a much greater fall (about 34 per cent) in the case of Arundhati Enterprises. The reverse operates in the case of an increase in sales. Therefore, studying potential for interest rate change on the working capital and term loans and market demand which in turn may be affected by policy variables such as customs duties on finished products (market protec- tion) remains critical either in terms of reducing business risk or enhancing profitability.

Therefore, particularly for those who declare profit ‘realistically’ such as exporters, interest rates and income tax rates critically determine the extent of debt finance to be sought for a project. This benefit occurs due to the tax shield on interest on loan or debt finance. Similarly the trend falls in interest rates as indicated by fall in the Prime Lending Rate (PLR) of lending institu- tions as also increased implementation of income tax rules may encourage going in for debt finance.

The cost structure in a business, which in effect helps decide on the ‘size’ of an enterprise in terms of fixed investment, is affected by interest rates and cus- toms duties, among other variables. Further, customs duties on inputs used by food processing manufacturers, for instance, may initially help on deciding on the structuring of a project. For instance, customs duties on oranges as raw material may be rather stagnant at 35 per cent, while customs duties on squashes as finished product may be progressively reducing at a higher rate. In this case, the manufacture of a standard product (with little scope for dif- ferentiation) like a ‘squash’ may warrant export orientation as to import inputs sans duty (as per the export-import policy) and remain competitive.

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THE IMPORTANCE OF POLICY:

THE CASES OF PURSHOTTAM ENTERPRISES AND MAHILA UDHYAM SANSTHA

The case of Purshottam Enterprises in Patna exemplifies the importance of sourcing and production management, including purchase decisions and channel motivation, to serve as critical success determinants of projects in the

sector. Purshottam Enterprises was launched in 1985. It initially started off as

a flourmill, which set up a retail outlet. The enterprise has graduated from a

turnover of about Rs.40 lakh to about Rs.3 crore. The enterprise, which started off as a tiny unit, has now become a flourishing small-scale enterprise. This has happened without its availing support in the form of any incentive or schemes. In fact, the promoter has been ‘blissfully’ ignorant of such schemes. Investment in equipment over the years has been done by the pro- moter out of the surplus generated by the business. Further, the enterprise uses formal finance of only about Rs.10 lakh in the form of a cash credit facility from a bank. It uses about Rs.60 lakh of own funds as the working capital.

The enterprise is involved in the manufacture of spices, viz. chilly powder and various types of spices. The enterprise operates through 183 distribu- tors. Raw material is sourced from various parts of India directly viz. chill- ies from Andhra Pradesh, for instance. The working capital is largely locked up in credit sales. About 25 per cent of output is sold on cash basis and 75 per cent on credit sales of 2 months. A cash discount of 3 per cent

is offered for cash purchase. The enterprise has not availed itself of any bills

discounting facility from agencies such as the National Small Industries Corporation (NSIC) or commercial banks. As a matter of fact, blocking on own funds on equipment and fixed assets and on the working capital has affected potential growth prospects of the enterprise. Policy and support system incentives have not been effectively availed of. There is a virtual dearth of information on support schemes. Policy and support seems to have hardly played any role in the current success of this enterprise. The enterprise proposes to attempt at exporting its spices-based ‘masalas’ to tar- get NRIs viz. ethnic Biharis in particular. However, information on the Market Development Assistance Schemes of the Ministry of Commerce or the Development Commissioner–Small Scale Industry (DCSSI) is not known. The enterprise would like to go in for ISO implementation but is ignorant of sources such as the Indian Statistical Institute and the Small Industries Service Institute. The enterprise, therefore, plans its growth as it had operated since inception—absolutely ‘self-driven’ and not policy or support driven. Though, a costly proposition, the case of Purshottam

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Enterprises highlights that effective management of a business is the key to performance. Policy support may be required to augment and not substitute this requirement.

Handholding needs to be coupled with business acumen and drive: Policy and support alone will hardly suffice.

Consider the enterprises established by the support system in the 1990s. These include enterprises established by the Khadi and

Village Industry Board in different states. The cottage industries’ department in Tamil Nadu had established a self-help group of 200 women under the leadership of Neelavalli who acts as the President

of ‘Mahila Udhyam Sanstha’. The enterprise had secured about Rs.1

lakh for equipment with a significant amount of subsidy and reaps interest subsidy as to secure C.C. facility at the rate of only about 9 per cent. Support agencies such as the State Export Promotion Corporation have helped them ‘indirectly’ export their ‘papads’ to Europe. Support in the form of entrepreneurship and management skill development training has been received and financial support in terms of soft loans and marketing support offered. But since the beginning the enterprise’s turnover has remained stagnant. Despite support right from the conception stage, the enterprise has hardly even taken off despite a decade of operation.

Policy with Regard to Sales Tax and Customs Duties

A

‘masala’ manufacturer in Guwahati makes chilli powder and sells

it

in an average lot size of 1 kg. He gives his distributor a margin

of 15 per cent and his retailer a margin of 30 per cent on the MRP. He also offers various schemes for retailers such as a one kg pack for every 10 kg of material paid for. He essentially uses retailer or chan- nel motivation at the point of sale as a tool to push his products. Bigger ‘masala’ manufacturers and suppliers are believed to offer a margin of only 7 per cent to distributors and 5 per cent to retailers. The net margin on chillies is believed to be about 10 per cent. His own costing of the product is as follows: for one kg. of chilli—raw material cost works out to Rs.4, labour about Rs.1.5, packaging about Rs.2.5, marketing (advertising/hoardings) Rs.3 and transport (raw material and finished products) Rs.2. The product is offered to distributors at Rs.19, viz. he believes he makes a net profit of about Rs.6. He does not consider interest or opportunity on own cost of capital under which circumstance margins may vary. Large Indian

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business houses are believed to enjoy economy of scale advantages (in terms of lower per unit cost) of even 15-20 per cent on various products. It is their marketing expenses in terms of TV commercials, etc., that are believed to be high. It is believed that larger enterprises focus on a ‘consumer-pull’ strategy, while smaller enterprises lay emphasis on a ‘customer-push’ strategy. The latter seems to work better! It is believed that ‘masalas’ and chilli powders, for instance, have to be blended to suit the palate of different communities in India. Hence, large enterprises do not manufacture many ‘masala’ varieties; cottage and small units do well. It is, therefore, efficient marketing that serves as a critical success determinant.

Yashwant Bakery in Patna has a turnover of Rs.1.25 crore. The equipment utilised include semi-automatic mixers. The promoter had taken an NSIC loan of Rs.25 lakh. Equipment was sourced from an Indian agent of the machinery manufacturer. The enter- prise’s main competitor is a medium-sized manufacturer. The com- petitor, who has a turnover of over Rs.10 crore and a market share of about 50 per cent in the region, uses fully automatic equipment. Yashwant Bakery seems to have not realised the value of using the push strategy to enhance market reach. Perhaps, this is why both enterprises, which started at about the same time with similar investment, have different performances. For instance, in the 400 gm. ‘sandwich bread’ that he manufactures, the retailer is offered a margin of Rs.2 and distributor a margin of 80 paise. He sells at Rs.7.20 to distributors. He makes a net margin of about 8 per cent on sale price. Price has been about the same for over a 3 year period. Unlike his competitor, he gives exclusive agency or distrib- utorships and low ‘customer’ or middleman margins.

The larger enterprise, which has the bulk of the market share in the region, offers 50 per cent higher margins to dealers (whole- salers) and retailers. No wonder Yashwant Bakery has a 5 per cent market share of Patna city, while his competitor is believed to have an over 50 per cent market share. What is also obvious is that mar- ket growth in the case of chilli powder and bread, for instance, is more likely to be merely related to population growth. Setting up new projects in such relatively saturated markets could only affect the performance of existing enterprises, while affecting the sustain- ability of new enterprises. Existing enterprises in the sector would, in fact, have to look for options such as technology upgradation to further reduce costs and enhance performance. Further, with regard to new projects, a focus on value added and newer products such as bread with soya etc. would benefit. New value added products may

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be considered by new projects and technology upgradation options may be pursued by existing enterprises as to reduce costs and increase margins in new markets. Technology upgradation may be in terms of incorporating high-speed mixers and kneading machinery.

Policy is often skewed towards protecting raw material providers. For example, in 400 gms. of sandwich bread offered at Rs.7.20, raw material cost (maida, wheat flour, yeast) is about 65 per cent, labour 10 per cent, electricity 5 per cent and chemicals and salt and oil about 12 per cent. Raw material costs in India are skewed towards the higher side in the international perspective due to lower productivity in agriculture. With regard to surviving even in the context of high domestic raw material costs, enterprises may do well if they focus on ethnic and traditional products. South East Asian competitors cannot afford to focus on ‘masala’ powders tar- geted at the region specific taste and preference segments! Sickness in the industry is believed to be largely due to problems in credit realisation and inefficient speculation in raw material prices, both of which affect performance. Efficient management is the key.

A ‘masala’ powder and confectionery manufacturer in Chennai has the ‘Agmark’ label and is also involved in intra-state trade. He believes that while bread has no sales tax, items like masala and cakes and pastries have tax fixed at 2 per cent on ‘Masalas’ and 12 per cent on cakes and pastries. Supplying beyond a state could imply payment of local sales tax in a state plus octroi at the rate of, say, 2 per cent for entry into different regions as also sales tax in the target state. This effectively keeps away efficient competition from other states, a sort of tariff barrier to protect local manufacturers in a state. Further, food inspectors in other states are believed to be a source of ‘harassment’ in terms of pulling up intra-state suppliers under the Weights and Measures Act, ingredient content and mix, labelling norms, etc. While the various acts are necessary, filing cases in local courts by authorities proves to be expensive for entrepreneurs. This entrepre- neur in Chennai has been going to court in Andhra Pradesh for the last 25 years to resolve a relevant dispute. A promoter needs to under- stand such aspects before planning and implementing a business.

The margins secured by entrepreneurs in some sectors are believed to be phenomenal. In the manufacture of confectionery products such as ‘pedas’, for instance, for the manufacturing enter- prises in Pune, which are integrated into own retail outlets, returns on cost of production are expected to be 200 per cent. Cottage and

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smaller enterprises do well if they operate in fragmented markets. Markets may be fragmented either due to the perishable nature of the product with low shelf life such as bread or due to regional variations in preferred taste or choice. Pickles and certain spices are all examples. Further, in some products such as ‘rotis’, which are convenience products that are tending towards becoming necessi- ties, pricing has to be low. MNCs are not likely to enter into such products, as it is difficult to charge premium prices for their brand image. Hence, small enterprises have their own opportunities in the sector, while larger enterprises have theirs.

Regional characteristics of demand are also critical. In cities like Mumbai and Pune, the fast pace of life and palate of local con- sumers have encouraged a wide range of processed enterprises to be established. In a city like Ahmedabad, however, convenience foods have not made as much an entry. Hence, such aspects also play a critical role in determining the success of a project. An example of regional variation is that of chilli preferred in Gujarat which is less pungent than in other states. Consumers stress more on colour, i.e. in terms of ‘dark red’. Bigger enterprises may find it difficult to enter into such fragmented markets by reaping scale economies in manufacturing or purchase as their production run may not be opti- mised, particularly if such fragmented markets are relatively small as also price conscious. Exchange rates are critical policy related factors for price competitiveness. ‘Basmati’ rice from Pakistan has an advantage over that from India, currently, given their lower rupee–dollar rates.

The cases of different enterprises presented in this section indicate the impor- tance of management along with the need for incorporating possible policy trends such as regulatory norms, sales tax, customs duties, etc., while plan- ning a project and implementing it.

such as regulatory norms, sales tax, customs duties, etc., while plan- ning a project and implementing

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3

Who is an Entrepreneur?

W ithout entrepreneurship and growing number of entrepreneurs, an econ- omy is certain to become sluggish in growth. Entrepreneurial

dynamism forms the cornerstone of a progressive society as it is a purposeful activity that attempts to create value through recognition of business opportu- nity, management of risk appropriate to opportunity and through communica-

tive and management skills to mobilise human, financial and material resources necessary to bring a project to fruition.

This gives a definite upsurge to the economic growth of a nation. Economic growth is an upward change whereby the per capita income increases over a long period of time. If economic growth is the effect, entrepreneur is the cause. Entrepreneurs are the ones who explore opportunities, scan the envi- ronment, mobilize resources, convert ideas into viable business proposition and provide new products and services to the society by bringing together and combining various factors of production. An entrepreneurial individual has a distinct concept, vision and a dream, which he/she is able to convert into prod- ucts. Such individuals are driven by task, challenge and opportunity with very high achievement orientation.

If you wish to start and succeed in your enterprise, you need to play different roles at different stages. Some essential qualities of entrepreneurs are:

1. A strong desire to win. (NEED FOR ACHIEVEMENT)

Most people dream of success, but seldom do anything to imple- ment it. In contrast, entrepreneurs have a strong desire to continu- ously hit new goals and do not rest till they win.

2. An approach of never-say-die. (PERSEVERANCE)

Once committed to a goal and a course of action, entrepreneurs never retract. Difficulties do not deter them and they work hard till the entire project is successfully accomplished.

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3. Entrepreneurs prefer a middle-of-the-road strategy while handling tricky situations. (MODERATE RISK BEARING)

They don’t take high risks; they are not gamblers. They prefer a moderate risk to a wild gamble, high enough to be exciting and con- taining a reasonable winning chance.

4. Alert to opportunities and seizing them to their advantage. (ABIL- ITY TO FIND AND EXPLORE OPPORTUNITY)

Entrepreneurs are innovative and can convert crises into opportuni- ties. But they are realistic enough to ensure that the opportunity suit- ably dovetails into realising their goals.

5. They have a dispassionate approach to problems. (ANALYTICAL ABILITY)

Entrepreneurs will not let personal likes or dislikes come in the way of their taking a business decision. They seek out experts for assistance rather than friends and relatives. Their decisions are objective and not emotional or impulsive.

6. It is important for them to know how they are faring when they work on their goals. (USING FEEDBACK)

Entrepreneurs take immediate feedback on performance and prefer prompt and accurate data, irrespective of whether these are favourable or not. Unfavourable news spurs them into making amends to attain their goals.

7. Entrepreneurs do not get deterred by unfamiliar situations. (FACING UNCERTAINTY)

Achievement-driven people are optimistic even in unfamiliar situations. Even if they find the odds daunting, they see no reason why they can’t succeed with their treasure of abilities. They march undeterred, making the best of fine opportunities that come their way, even without guidelines. They quickly come to grips with the new environment and present a picture of boldness and prudence. They apply their special insight and skill to quickly understand the environment and adapt to it.

8. They dislike working for others. (INDEPENDENCE)

Entrepreneurs do not like to work for others and therefore start off on their own. They wish to be their own masters and be responsible for their own decisions.

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9. They are flexible. (FLEXIBILITY)

Successful entrepreneurs have an open mind and do not hesitate to change their decisions.

10. Entrepreneurs think ahead of others and plan for the future. (PLANNING)

Most successful people set goals for themselves and plan to realise them in a time frame.

11. Entrepreneurs can deal with people at all levels. (INTERPER- SONAL SKILLS)

An entrepreneur comes across all kinds of people. He has to make them work for him and with him to help realise his objectives. He likes working with people and has skills to deal with them.

12. They can influence others. (MOTIVATION)

Successful entrepreneurs can influence others and motivate them to think and act in their way.

13. They can work for long hours and simultaneously tackle different problems. (WITHSTANDING STRESS)

As a key figure in his enterprise, the entrepreneur has to cope with several situations simultaneously and take the right decisions, even if it involves physical and emotional stress. This is only possible if one has the capacity to work long hours and still keep cool.

14. They know themselves. (POSITIVE SELF-CONCEPT)

An achiever channelises his fantasies into worthwhile, achievable goals and sets standards for excellence. He can do this for he knows his strengths and weaknesses, and so adopts a positive approach. He is seldom negative.

15. Entrepreneurs think ahead. (ORIENTATION FOR FUTURE)

They have the ability to look into the future. They won’t allow the past to bother them and think only of the present and the future. “Bygones are bygones, what of now?” This is their usual response.

An individual may not have all these qualities, but most will have many. The first step for a person aspiring to become an entrepreneur is to make an inventory of his traits. This self-awareness and analy- sis will help him define his strengths and overcome weaknesses.

Who is an Entreprenuer?

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4

Soft Skills for Entrepreneurs

C OMMUNICATION SKILLS

C ommunication is the process of exchanging ideas, facts or opinions by two or more persons. For communicating, we use different modes, like

oral, written or non-verbal. The process is explained by using this diagram:

Who?

Communicator

Who? Communicator

Say what?

Message

Through

which

channel?

Medium

Major vehicles for communication:

To whom?

Receiver

Impact

Effect

Speech – Face to face (oral)

Writing Formal – long (reports, documents, etc)

Non-verbal – Facial expression, body language

In life, we use several methods to communicate effectively (i.e. gestures/ watch for response/ words/ pictures). Successful communication depends on correct receipt of the message and receiving is an active element. Communication vehicles will be effective only if both parties are involved in the process. Good communicators listen and observe. They are alert receivers of response signals while they are also communicating. This helps them tailor their communication style to make it easier for the receiver to absorb or accept the message.

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There are certain rules for communication:

i. Fitness of purpose:

Will it achieve the objective?

What, why, when, where, how?

Select the most effective way to achieve the objective.

ii. Quality of the message:

Always maintain clarity, accuracy and simplicity.

Don’t leave the important part of the message merely implied.

We all transmit personal, non-verbal signals continuously, mostly reflecting our attitudes and responses to communication systems. By observing and responding to signals appropriately, we can build on the positives and weed out the negatives. To some extent, most people respond to non-verbal com- munication, but often only to the obvious, well-known signals. The table below gives examples of such signals and their implications:

Sr. No. Behaviour

Reason

Circumstances

Responses

1 Leaning

Concentration

Important meeting

Make points clearly

Forward

Increased

emphasis

Negotiation

State your own case

2 Leaning

Taking time to think Inviting expansion Looking for conclusion

After a proposi- tion/explanation Towards end of meeting

Allow silence thought Wait for others to speak first

Back

3 Clasping both

Extreme con- fidence Relaxation

Non-threatening situations In charge of situations

Maintain openness of situatiuon Be positive about your own case

hands behind

neck

4 Straight gaze

Failing attention Dislike what is communicated Lack of co- operation

Disputed occasions

Ask for reactions/ feelings Ask for suggestions

No head

 

movement

Unwelcome

 

instructions

5 Narrowing

Disapproval

Expects to challenge Patience may be short

Allows expression of opinion Shows that you acknowledge difference Give your reasons

eyes

Disbelief

Dislike

Source: Adapted from Communication Skills, 1996 by Carter Wendy

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C REATIVITY AND PROBLEM SOLVING

An entrepreneur has to be creative. He has to arouse and enhance creativity and experience competition not only with others but also the standards of excellence set for himself. Certain pre-conceived ideas create barriers in the growth of creative thinking. The barriers are:

1. Self-imposed

2. Restricted mindset

3. Nature of compliance

4. Backtracking to obvious challenge

5. Jumping to conclusion

6. Fear of being ridiculed

It calls for a positive attitude, an open mind, insight and right perception to remove these barriers and arouse and enhance creativity. Everyone faces problems of different nature and magnitude. Sometimes in daily life, we encounter problems so often that we don’t even notice them and this is because of our monotonous experience in dealing with them and hence the spontaneous reactions result in solutions. But we do get stuck when faced with unusual and difficult problems, as our routine reactions fail to produce solutions. In such cases, different approaches and ways have to be tried out.

Similarly, as an entrepreneur you may face several problems while managing your small-scale enterprise. If you develop an appropriate system, approach and methodology to solve problems, it will prepare you to manage your affairs and problems smoothly and without tension.

There are several qualitative and quantitative approaches evolved in manage- ment science to help solve problems. The right strategy would be to under- stand your own environment, resources, capacities, limitations, strengths and weaknesses in order to design the right approach. This approach will help you, initially, in working on problems and, later, in formulating your own strategy to solve them. These steps help you have a problem-solving attitude and mechanism:

Create a desire to solve problems

Recognise the problem

Formulate the possible causes

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Specify the problem

Test each cause

Explain each cause with minimum assumptions

Verify your explanation and determine the cause

Establish objectives about the resources to be produced and resources used

Classify objectives into ‘MUST’, ‘DESIRABLE’ and ‘CAN BE IGNORED’ categories

Generate alternative solutions

Choose one solution

Compare each solution in terms of positive and adverse consequences

Make a decision to implement

Internalise the process

in terms of positive and adverse consequences Make a decision to implement Internalise the process 40

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5

Planning a Small-Scale Unit:

Whom to Approach for What

T he speed with which you implement your project is critical during these days of competition. If you have planned in advance and evaluated

resources required, your project will be implemented in the shortest possible time. The first step to initiate planning is to identify a suitable project.

PROJECT IDENTIFICATION

There are no set rules to identify a suitable project, though this is one decision on which the success of your entire venture hinges. So, don’t take hasty deci- sions. Most prospective entrepreneurs tend to display the herd tendency and go for a project, which people have already ventured into. This is not a healthy attitude as success of one in a particular field does not guarantee success of the other. While identifying a suitable project, you should make a SWOT analysis of your own strengths and weaknesses. There are more details in a separate chapter.

The next step, after you have selected your project, is to collect all infor- mation about it. The most important information is about the potential market of the items you selected. There are several ways for this. You may go for a basic desk survey, a snap survey or a detailed market survey. A separate chap- ter provides guidelines to assess the market potential.

PROJECT REPORT: A FORECAST PLAN

Now, you will need to prepare a feasibility report about your project. A feasi- bility report will broadly contain:

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a. Background of the entrepreneur and constitution of the business

b. Market potential and marketing strategy

c. Selection of location

d. Requirements of land and building

e. Manufacturing process

f. Requirements of plant and machinery

g. Requirement of utilities

h. Requirement of raw material

i. Estimated cost of the project

j. Proposed means of finance

k. Cost of production and profitability

l. Break-even point

m. Cash flow statement

n. Internal rate of return

REQUIREMENTS TO START A BUSINESS

Selection of Location: A Vital Decision

This is extremely important. Usually, small-scale entrepreneurs are found to have a predetermined location. The location should be decided according to the proximity to sources of raw materials, consumption centers, availability of infrastructure, necessary skills in surrounding areas and availability of incentives. Sometimes the requirements conflict with one another and a par- ticular location may not match all. Such situations want you to balance out the requirements, while also ensuring that they do not affect the viability of the project. Experience shows most entrepreneurs attaching more impor- tance to available financial incentives and ignoring other important aspects guiding the selection of the location. Such misplaced emphasis may run the project into unviability in the long run. Your decision on the location,

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therefore, should not just be based on incentives, but more on availability of infrastructure and skills.

Land and Building: Make Correct Assessment

Before assessing land requirements, you must draw up a plant layout based on the type of facilities proposed to be installed. Normally, the land should not exceed five to six times the built-up area; but it all finally depends upon the project. Land in excess of the requirement will block up funds, which could otherwise be utilised for productive purposes. The land should be free from any encumbrances and should be non-agricultural.

Select the Right Manufacturing Process

Suitable manufacturing processes have to be identified for production. Some products may need a particular process depending upon raw material avail- ability, the prices and the quality requirement of the end product. A detailed flow chart may also be drawn with all operating parameters.

Government Formalities and Procedures

The process of planning also includes planning for execution of various gov- ernment formalities. Though the government in the post-liberalisation era intends to reduce permissions/clearances to free the industry from bureau- cratic controls, you need to clear specific formalities to avail certain benefits. The following formalities need to be considered for small-scale units:

i) SSI Registration: Required for the Records

Though SSI registration is not mandatory according to recent changes in the rules, it is advisable that you register your small-scale unit with the District Industries Centre (DIC) of the district where your project will be located. The government requires this registration to plan for future needs of the industry and it is in your interest to register your unit.

ii) Acquisition of Infrastructure Facilities

If you plan to locate your project in an industrial estate promoted by a gov- ernment agency, you may apply for a built-up shed or a plot of land. You can start your activities once the shed/plot is offered. If you have been allotted a

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plot, you can start construction after your building plans are approved. In either case, you have to apply for power connection to the State Electricity Board and for water to the authorities concerned.

iii) Pollution Control Clearance: Obtain NOC or Consent

You should also apply for obtaining an NOC from the State Pollution Control Board (PCB). If your unit is likely to be a pollution hazard or may discharge effluents, the PCB first issues an NOC with certain conditions to install facil- ities to check air or water pollution to specific levels. After you have installed the necessary facilities and they are satisfied, the PCB gives its consent to start operations.

iv) Constitution of the Business

You should decide on the organisational form of your business, viz. if it should be a proprietorship, partnership or a private limited company, according to the size of its operations and the degree of risk involved. In proprietorship, the gains and losses of the business rest with the proprietor, while in partnership, all the partners share the gains and the losses except the minor partners, who are exempt from bearing the losses. In a private limited company, the members take the gain or losses as per their holding in the company, for it is considered to be a separate legal entity. Once the business constitution is decided, you may undertake necessary formalities for registering the firm accordingly.

v) Arrangement of Finance for Fixed Assets and Current Assets

After taking these clearances, you may apply for a term loan either to a state- level financial institution or a commercial bank, with a techno-economic fea- sibility report, including market survey, and all documentary evidence justify- ing your claim for the project being feasible. Once the loan is sanctioned, you may have to execute necessary legal documents mortgaging your assets. The disbursement of the term loan usually starts after you have fulfilled all the con- ditions and also after 50 per cent of your own capital is raised and invested in the project. The institutions generally disburse 75 per cent of the loan sanc- tioned on a matching basis. Thereafter, you should raise and invest the rest of your contribution to stake your claim for disbursal of the balance term loan. Simultaneously, you can also negotiate with your bankers to sanction the working capital requirements. The bankers would, however, consider the working

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capital loan only after the term loan is sanctioned. If you propose to locate your project in developing areas eligible for state incentives, you will need to apply for registration and sanction with the state authority to avail the incentives. Only after you get the sanctions can you start implementing your project.

vi) Government Formalities Need to be Viewed in Proper Perspective

Experience shows that many people do not give adequate weightage to com- plying with various government formalities. Utmost care should be taken in this connection during the planning stage itself, as in the case of ignorance the project implementation gets delayed and incurs cost overruns, and sometimes derails the entire project.

You must also be aware of the sequence of steps to be followed while plan- ning a small-scale unit. There are no rigid rules, but experience reveals that nothing important will be missed if you follow the sequence. Some activities can be handled simultaneously. The sequence may vary according to the needs and size of your project. You may decide basing on ground realities. The steps above will help you develop an insight into project planning. Fine- tuning project implementation activities at the planning stage will help you coordinate resources appropriately in keeping with the project needs and avoid slippage in implementation and cost overruns.

Whom to Approach for What?

New entrepreneurs must know where to go for a particular piece of informa- tion as this knowledge will help them avoid a lot of running around. For this, they must know clearly what they are looking for.

Some may be completely ignorant, a few may know about marketing or production or finance, etc. The completely ignorant will require initial desk work and discussions with knowledgeable persons like the EDP trainer, exten- sion officers, businessmen, small-scale industrialists, etc. This will help you accelerate the process of enterprise establishment.

Those with some knowledge will require specific information. It will be useful for them to list the various things to be completed to set up their enter- prise. This desk work will give them a clear idea about the assistance they need to fulfill their activities.

Various development agencies assist entrepreneurs:

a. Some agencies provide only general information and you yourself have to collect specific information.

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b. Some provide technical/marketing expertise in specialised areas.

c. Some provide guidance in technical and financial matters, besides taking up turnkey responsibility (implementation assistance).

But government formalities will have to be completed by the entrepre- neurs themselves. They can contact the concerned departments/offices for information.

You should only retain the relevant information/data while collecting infor- mation. You must keep important information at a proper place to find them when needed. The compilation and segregation of information will need table work and it should be compared with the checklist prepared earlier to ensure all data has been collected before actual commencement of work.

Expert guidance will help in decision-making process. It will be useful to acquire first-hand information from institutions to get a clear picture of the entire exercise.

A table below shows various sources of information for a new entrepreneur. They need not contact all agencies except the relevant ones. However, they must contact at least the following agencies to have knowledge about small- scale industries and the procedures:

District Industries Centre

Directorate/Commissioner of Industries Office

State Financial Corporation

Technical Consultancy Organisation and

Agencies Conducting Entrepreneurship Development Programmes

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Whom to contact and for what information

Sr. No.

Area of Assistance

Sources

1

For Selection of a Project

SISI, DIC, TCOs, SFCs

2

Registration

DIC

3

Finance

Banks, SFCs, NSIC

4

Technical

DIC, TCOs, CFTRI, SISI, NSIC, DFRI

Guidance

5

Training

ED Inst., SISI, TCOs, DICs, CFTRI, NGOs

6

Infrastructure

DIC, IDCs, LA

7

Raw Materials

DIC

8

Plant & Machinery

DIC, NSIC, SISI

9

Marketing

DIC, TCOs, EPC (APEDA, MPEDA)

Information

DIC = District Industries Centre SISI = Small Industries Service Institute TCOs = Technical Consultancy Organisations SFCs = State Financial Corporations NSIC = National Small Industries Corporation DFRI = Defence Food Research Laboratory ED Inst. = Entrepreneurship Development Organisations CFTRI = Central Food Technology Research Institute IDCs = Infrastructure Development Corporations LA = Local Authorities like Municipalities

EPC (APEDA, MPEDA) = Export Promotion Council (Agriculture and Processed Food Export Development Authority, Marine Products Export Development Authority)

Authority, Marine Products Export Development Authority) Planning a Small-scale Unit: Whom to Approach for What 47

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6

Business Opportunity Identification

A good business opportunity is that which is a techno-economically and commercially viable and feasible and environmentally sustainable

proposition. Every entrepreneur needs to identify a sound opportunity. To identify an opportunity, one needs to:

i. Collect basic information on local resource base, e.g. agriculture, forest and mines

ii. Collect information on Opportunity Identification (OI) exercise done earlier (if any), by DIC, banks, other financial institutions, etc.

iii. Discuss the potential business opportunities with existing entre- preneurs

iv. Discuss with octroi and sales tax officials about the inflow of goods

v. Collect information on new major investment going to materialise in the area

vi. Collect negative list of banned items for financing

vii. List out poor performing industries

viii. Collect information on skill base—especially on handicrafts, etc.

ix. Collect information on availability of infrastructure like power, water and transport, etc.

The opportunities in the food-processing sector may be classified on the basis of the following parameters:

1. Natural Resource-Based Opportunities: such as the ones based on cereals, cash crops, fruits and vegetables, agro-wastes, animals, marine-based, processing of food products like cereals and pulses,

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fruit preservation, pickles, honey, etc.

2. Local Industry Based: those dealing in supply of intermediary raw material, ancillarisation, job-work, recycling of industrial wastes, by-products, etc.

3. Local Demand Based: which may include products like bread, bis- cuits, flour, spices, etc.

4. Export Based: any local product, which is being exported; or resources available locally to manufacture the items, which have good export potential

Following the above method, will offer a large number of business opportu- nities. However, please remember, these opportunities are location and time specific. An opportunity today may not remain an opportunity tomorrow. Or an opportunity in a forest area may not hold good in the deserts of Rajasthan, as the resource base will change. Moreover, one would also need to assess the viability and feasibility of the opportunities before pronouncing them as busi- ness opportunities.

An opportunity may be absolutely viable but may not be feasible if it is mismatched. For example, although setting up a large flourmill may be a per- fectly viable proposition, it may not be feasible to set up one in Sunderbans for an illiterate rural or tribal man. Therefore, one needs to consider the fol- lowing facts before deciding upon an opportunity:

One’s Education

Experience

Economic Background

Investment Capacity

Family Background

Managerial Capabilities

Market Competition with other Producers/Size of Market

Location of the Unit

Availability of Technology and Process Know-how

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Availability of Raw Material

Availability of Skilled Workforce

Availability of Required Infrastructure

Project Cost

Export Potential

Life-cycle of the Product and Future Growth of the Product

Shelf-life of the Product (highly perishable like milk or long-term like capital goods or consumer durables, etc,)

Profitability of the Product

Degree of Risk

Gestation Period

Government Policy

After ascertaining these factors, a SWOT analysis of the entrepreneur vis-à- vis the identified opportunity should be conducted. If both match, one can proceed for a preliminary feasibility study through market survey. It is advis- able to zero in two to three opportunities to finalise one.

A set of introspective questions while deciding upon an opportunity:

How comfortable are you with the technology? Will you be able to handle it?

What is the situation of competition? How will you withstand the competition?

Will you be able to muster enough resources (especially finance)? Will you be able to manage investment from your own resources? If not, how do you plan to get funds?

How critical is the government support for your product?

Is raw material easily available? If not, how will you manage regu- lar supply of raw material?

Will you get adequate skilled manpower? If not, how will you manage?

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chp-7.qxd 10/18/05 9:23 AM Page 53 CHAPTER 7 Market Survey Tools, Preparation of Schedule and Techniques

7

Market Survey Tools, Preparation of Schedule and Techniques of Data Collection

M arket survey is a valuable tool to help minimise risks and increase the

probability of success. However, that doesn’t mean it is a sure-shot way

to eliminate risk and guarantee complete success. You should undertake mar-

ket assessment with a survey before you finalise marketing plans for your product or service. This chapter aims to explain what a market survey is and how to conduct it.

Markets are changing rapidly, becoming complex and competitive. It is dif- ficult to keep pace with the rapidly changing demand and supply patterns as an entrepreneur is unable to respond quickly to a new environment. He needs better market understanding and a market survey puts him in contact with the market. A systematic use of this tool can reduce risks in decision-making.

WHAT IS A MARKET SURVEY?

A market survey is an objective and systematic collection, recording, analysis

and interpretation of data about existing or potential markets for a product/service. This definition will be better understood by looking at the objectives of a market survey. During a market survey, one needs to focus on:

Size of the market and the anticipated market share in terms of vol- ume and value

Pattern of demand—seasonal or fluctuating in time (in a month, day, etc)

Market structure

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Buying habits and motives of buyers

Unique selling proposition of certain products/services

Past and present trends affecting the selected product or similar product

PROCESS OF CONDUCTING A MARKET SURVEY

A systematic 5-point process is involved in a market survey:

1. Defining objectives and specific information needed:

Identifying source to obtain information

Assessing time and cost for the study

Working methodology and action plan

2. Selecting a sample size by determining whom to contact and when

3. Preparing questionnaires for the survey

4. Collecting data and analysing it

5. Preparing a report, based on analysed data

PRIMARY AND SECONDARY SOURCES OF INFORMATION

Conducting a market survey does not always mean contacting people directly. There may be information in the form of reports, published material or documents of trade/industry associations. Data may be collected from two sources:

Primary data sources: Information coming straight from those in the specified market, e.g. in the toy market, information obtained from toy manufacturers and traders.

Secondary data sources: Data existing in reports or in a published form and may not have been collected for specific purpose. Such information can also be had from census office, banks, traders and manufacturers’ association or published anywhere.

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SCHEDULE FOR MARKET SURVEY

A market survey is not restricted to collecting information on the market for a product, but also about marketing infrastructure and existing market conditions.

Designing a market survey schedule could fetch a lot of data. Questions may be designed on these areas:

Existence of competitors, their products and marketing strategies

Information on all consumer groups

Information on competing products/ similar products

Attitude of existing/potential consumers, including buying prefer- ences, behaviour etc.

DON'TS OF CONDUCTING A MARKET SURVEY

Do not be prejudiced. As an entrepreneur, you must be open-minded and confident.

Do not be impatient or argumentative. Your objective is to get infor- mation.

Do not reveal privileged information to others, for you may lose the trust of your sources.

Avoid taking notes while discussing. Make notes immediately after an interview. People are not comfortable if one writes while talking.

Don’t interview without preparation and sequencing of questions. Ensure that the interviewee has time for you.

Don’t approach competitors as “likely competitors” but meet them as “potential clients” to get best results.

MARKET RESEARCH: 10 TIPS TO BE MORE EFFECTIVE

1. Clearly identify the issue/problem that needs to be investigated. See if any published/secondary sources of information are available for this problem.

Market Survey Tools, Preparation of Schedule and Technique of Data Collection

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2. Based on existing information, check if the problem can be defined or narrowed down. Further, with this as your basis, write down “terms of reference” for any subsequent study.

3. Try to look at the problems from different angles:

your own point of view as producer or seller

customers/consumers’ viewpoint as buyer and end users of prod- ucts/services

competitors’ viewpoint for they may have addressed similar prob- lems

4. Try to remain objective throughout the market research process and check impulses/gut feeling from totally influencing the research.

5. Prepare schedule in as simple and clear a form as possible.

6. Maintain a tight control on the subject. If other subjects surface dur- ing the research, give them the attention they deserve.

7. Complete the research promptly and maintain confidentiality lest the competitors hear of it and forge ahead in the market.

8. Be prepared to take necessary action, which the research identifies.

9. Use the research immediately for the good of the enterprise.

10. Review all market research exercise and processes—the lessons learnt and areas to improve next time.

MODEL QUESTIONNAIRE FOR MARKET SURVEY

For Market Potential

Collect data about sources of market information like consumers, suppliers and manufacturers.

A. Consumers

What is their annual consumption and requirement?

What is their present source of supply?

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What is the customer’s brand loyalty and preferences about price, quality, payment terms, etc?

Are they satisfied with the present product and supply?

What is their purchasing criteria and purchasing power?

What is the consumption pattern? (basis to calculate their require- ments)

What could be the future consumption pattern, in quantity and qual- ity due to technological changes, etc?

What is the size of the average order, specifications and time and fre- quency of their placement?

Will any government institutions/departments or any company/indus- try buy the products? Is it possible to establish linkages with them, and how?

What is the life of your potential buyer?

Their age group, sex?

What geographical area they live in? Urban, village and which part of the country?

B. Suppliers (Traders)

Who are the principal traders in the item, their range of products and business terms/commissions, etc?

What are the possibility to trade with them and on what business terms?

What is the normal stock level maintained and problems in stocking?

What are future predictions on business conditions?

C. Manufacturers and Competitors

What are their products range, installed capacity, selling price?

What are their normal business terms about payment, price, etc?

What are their salient features, like technical skill, finance, other resources, etc.?

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What are their strengths and weaknesses? (Try to do their SWOT analysis)

Where do they get information regarding market and consumer pro- files from?

For Information on Raw Materials

Who are the major manufacturers/suppliers?

What is the time required to get raw material after order placement? Supply terms (tax structure, price, packing, payment, etc)? Cost of transportation?

What is the standard or minimum order quantity?

Is raw material freely available or is there a quota system?

Will any decision/policy affect its availability or price?

For Information on Machinery and Equipment

Who are the manufacturers/suppliers?

What capacity, specifications and brands are available in market?

What is the price of the machine? (Consider all costs—taxes, trans- port, accessories, etc.)

Which electrical equipments, like motors, starters, switches, are needed?

What performance guarantees/warranties are given? Is the sup- plier/manufacturer reputed and reliable?

What is the normal repair/maintenance cost per year?

What spare parts would be frequently required?

What quality and maximum output (production) a machine can give?

Does the supplier train you/staff to acquire skills to operate machinery?

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Suggested Sources of Technology and List of Machinery Manufacturers and Suppliers

A K G FOOD PRODUCTS

168 B B Chatterjee Road KOLKATA – 700 042 Pr: Food Processing Equipments

A M B AGROTECH

Ashvini Layout Nr. Sahakar Nagar AKOLA – 444 004 Pr: Mini Dal Mill

A V ENGINEERING WORKS

12-A, Adj.Hira Automobile Factory Area PATIALA – 147 001 Pr: Automatic Biscuit making plant

ADVANCE EQUIPMENT CO. Navjivan Society Building No.3/2/7 Bombay Central MUMBAI - 400 008 Pr: Bakery Equipments, Meat/Fish, Poultry Processing/Packaging plant

AERO THERM SYSTEMS PVT.LTD. Plot No.1517, Phase – III GIDC (Vatva) AHMEDABAD – 380 445 Pr: Hot Water Generators, Steam Boilers, Fluid Bed Dryers, Tray Dryers

AGARAM INDUSTRIES 126, Nelson Road Aminjikarai CHENNAI – 600 029 Pr: Milk Analytical Instruments, Pasta Making Machines, Food Analytical Instruments

AGRITECH INDIA FOODS 8, Manilaxmi Apts. Daxini Society – Maninagar AHMEDABAD – 380 008 Pr: Processed Food Machinery, Beverage Processing Machinery

AGRO THERMODYNE CO. 8/4, Shamanna Layout B/h. Mangaram Factory Gorugunte Palya BANGALORE – 560 002 Pr: Bakery/Biscuit making Equipments

BAHUBALI ENGINEERING 5, Parekh Nagar, S.V. Road Kandivali (W) MUMBAI – 400 067 Pr: S S Food Processing Equipments

BAJAJ MECHANICALS C-582, New Friends Colony NEW DELHI – 110 065 Pr: Food Processing Equipments

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BAKER ENTERPRISES 23, Bhera Enclave Nr. Peera Garhi NEW DELHI – 110 087 Pr: Bakery Machines, Machines for Buns, Hotdogs, Cookies, Rusk & Cakes

BANSAL FLOUR MILL ENGINEERS 4/5-B, Asaf Ali Road – Gr. Floor NEW DELHI – 110 002 Pr:Grading/Sizing/Cleaning Machinery, Spices Cleaning Machines

CENTRAL ENGINEERING WORKS 380, Patel Roadways COIMBATORE – 641 009 Pr: Commercial Kitchen Grinders

CHALLENGER PRODUCTS 12, Devaki Niketan 396,402 Kitchen Garden Lane B/h. Lohar Chawl MUMBAI – 400 002 Pr: Pizza Ovens, Sandwich Grillers, Idli Steamers

CHEMICAL CONSTRUCTION CO. PVT.LTD. Br: 956/57 T.H.Road CHENNAI – 600 019 Pr: Poultry Feed Plant, Coconut Processings, Oil Refinining Plant, Solvent Extraction Plant, Vanaspati Plant, Veg. Oil Refining Plant

CONGAS FOOD SERVICES EQUIPMENTS (PVT.) LTD. 4, Krishanapur Road, Dum Dum KOLKATA – 700 028

Pr: Bakery Equipments, Commercial Kitchen Equipments Refrigeration Equipments

DAIRY DEN LTD. A-29, GIDC Electronic Estate Sector – 25 GANDHINAGAR – 382 044 Pr: Soft Ice-cream Machines, Juice Dispensing Machines, Fast Food Vans

DANDEKAR BROTHERS Factory Area, Shivajinagar (N) Sangli – 416 416 MAHARASHTRA Pr: Knit Grinding Machines, Groundnut Decorators, Grinding Mills, Chaffcutters, Sugarcane Crushers

DELHI INDUSTRIES 4, Paharganj Lane NEW DELHI – 110 055 Pr: Fruit & Vegetable Processing, Canning/Bottling Equipments and Machinery

DELTA CORPORATION 201, Wadala Udyog Bhavan Naigaum Cross Road Wadala – MUMBAI 400 031 Pr: Internal Gear S.S. Pumps for Food Processing

EASTEND ENGINEERING CO. 173/1, Gopal Lal Thakur Road KOLKATA – 700 035 Pr: Fruits & Vegetables Processing Machinery & Equipments

ELMEC INDIA P B No.7624,

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No.37/38, Goodshet Road BANGALORE – 560 053 Pr: Packaging Machines, Heat Sealing Shrink Packaging, Seal Machines, Bottling Machines, Bag Closures

EMERGE SYSTEMS & SERVICES PVT.LTD. A-2/4, Arjun Towers Satellite Road AHMEDABAD – 380 015 Pr:Waste Food Disposers

EMERSION ENGG. ENTERPRISES Nr. Gate Station SURENDRANAGAR – 363 001 Pr: Cookers, Vacuum Batch, Packaging Machinery, Break/Biscuits Machinery, Cutting & Wrapping Machines, Bubble Gum

ESS EMM CORPORATION 205-H, Vivekanand Road Ramnagar COIMBATORE – 641 009 Pr: Baking Equipments, Ovens, Deep Fat Fryers, Bread Slicers,

Meat Mixers, Juicers, Coffee Grinders, Vegetable Cutters, Cutter/Mixers, Veg. Processing Machines

EUROTECH FOOD & PACKAGING MACHINES K-17, Ghirongi, Malanpur Ind. Area Dist. Bhind, GWALIOR, M.P. Pr: Nut Roasting Plant, Form-Fill- Seal Packaging Machines, Namkeen Frying Plant

FLORA ENGINEERING CO. A-4, Laghu Udyog Kendra I.B. Patel, Goregaon (E) MUMBAI – 400 063 Pr: Industrial Ovens (for Dehydrating Roasting, Drying of Food Products)

FOOD TECH ENGINEERS 31/A, Ghanshyam Ind. Estate Veera Desai Rd., Andheri (W) MUMBAI – 400 058 Pr: Machinery for Fish/Meat, Veg. Fruits, Frozen, Pulps, Juices

FOODMAC ENGINEERS (PVT.) LTD. Bassi Road Sirhind 140 406 PUNJAB Pr: Automatic Machinery for Biscuits Cookie/Crackers Cream Sandwiching

FORAM FOODS PVT.LTD. 397, Swami Vivekanand Road Vile Parle (W) MUMBAI – 400 056 Pr: Lug Cap Sealing Machines, RTE Snack Food Plant, Pickle/Jam making plant, Packaging Machines

GADEKAR & ASSOCIATES PVT.LTD. 304, Sector 21A FARIDABAD – 121 001 Pr: URSCHEL Food Cutting machinery, Snack Food Fryers

GAYATRI FABRICATION WORKS Tarun Plastic Ind. Estate Gali No.10, Mogra Road,

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Andheri (E) MUMBAI – 400 069 Pr: Kitchen Equipments – Pizza Ovens, Potato Peelers, Bulk Cookers, Deep Fat Fryers, Griddle Plates

GENERAL MECHANICAL INDUSTRIES National Tankiwala Ind. Estate Steelmade Compound Marol Maroshi road Andheri (E) MUMBAI – 400 059 Pr: Confectionery Equipments

GOLDEN ENGINEERING INDUSTRIES A-87, Naraina Ind. Area Phase – I NEW DELHI – 110 028 Pr: Sealing & Cutting machinery, Pouch/Bag Making Machinery, Veg. Oil Refining Plant

H P INDUSTRIES 2, Hoaquim Cottage, Vazir Glass Works Rd. J B Nagar, Opp. Tata Infotech Ltd. Andheri (E) MUMBAI – 400 059 Pr: Conveyors, Automatic Pickle/Chutney/ Jam Filling & Capping Machines

HARI OM INDUSTRIES Dhebar Road (South) Atika Ind. Area Str.No.3, Nr. Jaydev Foundry RAJKOT – 360 002 Pr: Potato Cutting Machines, Dry Fruit Cutting Machines, Banana Wafer Machines, Other Food Processing Machines

HEATRAN SERVICES 180-A/131, NSP Complex (Opp Royal Agencies) Dr. Nanjappa Road COIMBATORE – 641 108 Pr: Pizza Ovens, Bread Baking Ovens, Heaters for Steam Boilers

INDIAN DAIRY EQUIPMENTS CO. 364, Azad Market DELHI – 110 006 Pr: Milk Testing equipments, Cream Separators

INDO STAINLESS FABTECH PVT.LTD. 439, Sidco Ind. Estate Ambatur CHENNAI – 600 098 Pr: Milk Coolers, Milk Chillers, Cooling Tanks, Milking Machines

INDUSES FOOD PRODUCTS & EQUIPMENTS LTD. 238/B, Acharya J.C. Bose Road KOLKATTA – 700 020 Pr: Paddy Processing, Parboiling, Drying equipments

INDUSTRIAL AIDERS BD-135/1, Tagore Gardens NEW DELHI – 110 027 Pr: Dairy/Food Chemical Equipments

INTERNATIONAL FOOD MACHINERY A-13, Kailash Colony NEW DELHI – 110 048 Pr: Blanches, Groundnut, Hammer Mill Dehydration Machinery for Onion & Garlic

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J K ENGINEERING WORKS Bus Stand Road RAJPURA – PUNJAB Pr: Bread/Biscuits Machinery Bakery machinery

JWALA ENGINEERING COMPANY 12, Survey Industrial Estate Sonawala Cross Road No.1 Goregaon (E) MUMBAI – 400 063

Pr: Fruit & Vegetable Processing

& Packing Machinery such as

Fruit & Vegetable Preparatory, Fruit Juice Concentration

Equipments, Mushroom Processing

& Canning line, Peas Preparatory

& processing line Potato Chips Line, Pulp Concentration Plant

K.S. ENGINEERING WORKS Factory Area, Nr. Ranjit Press Patiala – 147 001 PUNJAB Pr: Biscuit Plant, Papad Plant & Bread Plant

KAG FABRICARES PVT. LTD. A-26N, Gali No.4 Anand Parbat Ind. Area NEW DELHI – 110 005 Pr: Bread/Bakery Plant

LARSEN & TOUBRO LIMITED Plot No.101, GIDC Ranoli DIST. BARODA Pr: Food Processing Machinery

GIDC Ranoli DIST. BARODA Pr: Food Processing Machinery Market Survey Tools, Preparation of Schedule and Technique

Market Survey Tools, Preparation of Schedule and Technique of Data Collection

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8

Production Programme, Plant Capacity, Manpower Requirements and Layout

PRODUCTION PROGRAMME

P roduction programme of a food processing unit is based on several param- eters—local conditions, market access and technology. Your programme should be justified in relation to:

Market requirement and marketing strategy, e.g. fruits/vegetables are perishable.

Input requirements and supply schedule—seasonal nature.

Technology and economy of scale—low BE, cottage, small and medi- um scale in food processing.

Minimum economic size and equipment constraints.

Resource and input constraints.

Performance of staff/labour.

PLANT CAPACITY

Consider these to determine the plant capacity:

Project cost corresponding to various sizes and whether one has finan- cial resources to meet the cost and whether one is prepared to run a risk commensurate with the project cost

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Minimum economically viable size of plant

Popular plant size of existing small-scale enterprises making similar products

Comparative capital cost of major plant sizes, within the maximum of the project cost one has estimated, offered by machinery producers and their operating income/expenditure implications. A comparison of net financial impact of individual plant sizes.

Market size and growth prospects (biscuit market in India is growing rapidly and a well-organised promoter may find himself unable to meet the demand, if he chooses too small a market size)

SSI in India gets benefit in excise duty and interest rate concessions. But there is a legal ceiling on the investments in plant and machinery to avail these concessions. No wonder, most plants are priced just around that ceiling. You may choose a size matching the ceiling, for exceeding it will deprive you of excise/interest benefits.

The cost of expanding the plant capacity vis-à-vis setting up a larger plant must be considered for it might be cheaper to establish a larger plant of 5 MT per day than to expand capacity from 2 MT to 5 MT.

MANPOWER REQUIREMENT

You will need manpower for:

Production (Workers)

Supervision (Technicians)

Administration, sales, miscellaneous work (Staff)

In a small unit, it is possible that the entrepreneur handles administration, sales and technical supervision, and thus have limited manpower needs. It is, how- ever, important to analyse workload and arrive at a gross manpower need.

Manpower requirements will be decided by manufacturing operations, material handling and packing jobs. It is useful to classify your manpower- need in three categories—skilled, semi-skilled and unskilled. The wage rate for each category varies. Special attention should be paid for hiring and retaining skilled workers.

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Look at the availability of skills at the selected location and plan for their recruitment. It may be, for instance, difficult for a biscuit manufacturing unit in Himachal Pradesh being established at Parwanoo to source biscuit machine operators locally. They may have to be brought from Delhi/Chandigarh. It is dif- ficult to find skilled people in industrially backward areas and may have to be scouted for in nearby towns. Arrangements will have to be made for technical and other staff also. Such employees expect better living conditions or compen- sation and won’t move in otherwise.

SELECTION OF LOCATION

Ideally one may want to locate the project in one’s home town or native place, but there may be a problem of high land price if that place is a large city. Usually, the government offers investment subsidy and tax concessions to enterprises in specified areas. One must be aware of various physical and commercial facili- ties to run an enterprise. The hometown or native place may not be an ideal choice. Various parameters need to be considered while deciding a location.

One will then have to select a site—a specific piece of land in a given town where the enterprise will be located. Sometimes, one may also have to drop a location for want of a good site.

How should one go about location/site selection? We recommend a two- stage procedure. Practically, only a few locations will merit consideration. In the first stage, identify two-three such locations. Identify one or two sites at each location. In the second stage, examine each location/site according to a six-dimension selection checklist:

Basic consideration (development status of the town and its location vis-à-vis enterprise needs)

Status of physical infrastructure (power, water, etc.)

Status of commercial infrastructure (telecom, banking, etc.)

Status of social infrastructure (housing, health, etc.)

Financial incentive position (investment subsidy, tax concessions etc.)

Site-specific considerations (land price, contours, etc.)

The findings of each parameter will help decide a location.

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Sources of Information on Location

How do we get answers to the checklist? We try to tap the right sources of information:

Industrial Estate Officials

Local Authorities

Revenue Department

State Electricity Board

Public Works Department

Office-bearers of Local Industry Associations

Local knowledgeable Persons/Businessmen

Banks/State Financial Corporations

District Industries Centre

Landowners, Residents of Nearby Villages/Towns, Local Opinion Leaders, etc.

It is important to visit the location, armed with the checklist and to put down answers to each point. One may also get water and soil tests done. One must review the data objectively and then decide.

PLANT LAYOUT PLAN

One needs to develop a factory layout plan to decide on location of each facility like raw material, storage, individual machines, packaging, finished goods stor- age and quality control unit and work out the space for each. The distance between one facility and another or one machine and another should meet tech- nical requirements. Usually, the flows of production process and space require- ments for material handling and manpower determine the layout. It calls for con- siderable technical knowledge. Without the layout plan, it is not possible to decide the gross built-up area of the enterprise. For a food processing industry, statutory requirements like FPO and by-laws of the local authority issuing food production license have to be fulfilled in the layout plan. Where HACCP or GMP is required, additional care must be taken as per the rules and regulations.

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Following is a model layout plan for a jelly and jam manufacturing unit:

A Preliminary Layout Plan

20

MT

BOILER ROOM QC LAB OFFICE RAW MATERIAL & OTHER STORE PACKING 12 MT 2 1
BOILER ROOM
QC LAB
OFFICE
RAW MATERIAL
& OTHER STORE
PACKING
12
MT
2
1
FRUIT JUICE
EXTRACTION
JUICE EVAPORATION &
JAMS/JELLY MAKING
(Note: Layout is not to scale)

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Business Plan Format for Tiny and Small Enterprises

A business plan helps the entrepreneur set out objectives, targets and benchmarks. It is also a prerequisite to get credit from lending agencies

like banks and State Financial Corporations, etc. It is a blueprint or a road map for your business.

The purpose of a business plan is:

to arrange thoughts logically

to highlight resource needs and their sources

to raise funds from a bank or other source

to demonstrate viability of the business proposition and potential to repay credit

to stimulate reality and anticipate pitfalls before they occur

The business plan must answer these questions:

What do you intend to do/how do you intend to do it/when do you intend to do it?

How much do you wish to borrow?

When will you repay it?

Will you be able to pay the interest?

Can your business survive a setback in its plans?

What is the security available for lending?

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How many jobs will be created?

Is the business proposal commercially viable?

Will the business be profitable?

Can the business cope with inflation?

The business plan must include the following in sequential order:

Summary of the Project/ Project at a Glance

(The purpose of the business plan, location, resource needs, volume of business, brief note on market, customers, promoters and financial highlights)

General Information

(About the business and promoter’s qualification, training and rele- vant experience)

Details of the Proposed Project

(Requirement of fixed and working capital, project cost and means of finance)

Market Potential

(A note on marketing strategy, potential customers, competition, market size and future prospects)

Manufacturing Process

(Step-by-step description of the manufacturing process, plant capac- ity, expansion plans and quality control procedures, etc.)

Production Programme/Sales Revenue

(Plant capacity, capacity utilisation, quantity produced/sold and sale realisation)

Cost of Manufacturing

(Cost of raw material, utilities, manpower, repairs and maintenance, selling and distribution expenses, administrative overheads, interest on loans availed, depreciation and any other expenses)

Profitability Projects

(Sales, cost of manufacturing, tax liabilities, repayments, retained profit/loss)

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The Financials of a Project Report

A SCAN OF FACTORS PRIOR TO PREPARATION OF A PLAN

B efore preparing a business plan, one must analyse various factors and related actors. This manual stresses this aspect repeatedly. This chap-

ter analyses factors existing in a district, including other enterprises, particu- larly relating to institution-information-enterprise gaps and problems. The

findings about raw material stocking and market issues are to be incorporated in the financials of a business plan in the context of dehydrated vegetable unit and a grain processing enterprise. Consider Patna district in Bihar, where the crops grown are vegetables, grains and grams. A study of enterprises in the region shows that the food processing sector is less developed than the agricultural sector. There are several rice and flourmills. The agricultural resources are vital raw material for such enterprises. Milling activities include paddy milling. The by-products are rice, bran and husk. Several dal mills are also there. Their main activity is green and bengal gram milling.

The State Government encourages self-help groups to set up small food processing units making pickles, spice powder, papads etc. and these enter- prises and others dominate the local market. Institutions/associations at local level include industry associations, District Rural Development Agency (DRDA) and financial institutions. According to Government of India’s cap- ital investment criteria, units with investment up to Rs.1 crore in plant and machinery are small-scale units. Tiny units have investment below Rs.25 lakh, while cottage or household enterprises are those operating largely out of households.

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Lacunae in Information and Support System Linkages

The main activity of the units here is processing of jams, pickles, papads, spices and rice and dal milling. Within similar product mix, medium and smaller units cater to the brand and quality conscious affluent sections. Packaging quality is better and prices are higher. In the lower end, tiny and cottage units vie with each other for their market share through lower price and margins. Their market comprises low income group consumers, who buy non- branded and low priced products. Units without their own marketing outlets undertake distribution through local outlets. The State Government is encour- aging Self Help Groups (SHGs) to sell their products through exhibitions. Most products have simple packing material with the manufacturer’s name on the pack. ‘Unorganised’ enterprises are hardly aware of food related norms.

Rice and dal mills procure raw material through commission agents. Rice millers used to sell rice to the Food Corporation of India (FCI) and in the open market through commission agents. In the processing sector, rice millers face problems like high percentage of brokens and need upgraded technology. The milling and polishing of paddy require electricity. Consumption of electricity is high in this case. The reason is use of rewound and higher HP motors.

Most milling units face problems with institutional finance. Local suppli- ers largely meet the machine and equipment needs of the units. Also, the main weakness of enterprises here is the lack of testing facilities and access to information on advanced technology, quality and food-related norms. Few SSI units are aware of the Mysore-based CFTRI, which has excellent infra- structure to provide consultancy on technology, equipment design etc. Yet, options like value-added products or reducing ‘brokens’ by involving agen- cies like CFTRI are unexplored. There is a dearth of information on packag- ing to improve shelf life with the support of agencies like DRDA, while the latter has backed such initiatives in other regions.

Can Policy Incentives Substitute for such Gaps?

The Bihar Government offers several special fiscal concessions like sales tax relief/exemption on purchase of raw material/exemption in excise duty. Fiscal incentives include investment subsidy upto 25 % of fixed investment, subsidy between 20% and 25% on cost of installing captive power generators, subsidy on cost of preparing feasibility/project reports, subsidy on technical know- how, etc. The Bihar State Industrial Development Corporation offers equity participation in ventures.

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The State Government’s five-year policy, effective from 1.1.90, had, in fact decided to continue capital investment subsidy to all new units set up in all districts at a rate of 15% of the equity (maximum Rs.1.5 million). This facil- ity is also available for expansion programmes of existing units, provided the capacity is raised by atleast 50% of the installed capacity. Additional 5% (limited to Rs.5 lakh) capital investment subsidy is given to units located in notified growth centers, units promoted by NRIs and cent percent export–ori- ented units. Additional 10% subsidy (maximum Rs.1 million) is for invest- ment on energy saving schemes based on energy audit reports or otherwise for small and medium units. Subsidy on power, water and such utilities is also available.

However, although incentives are important, there are other aspects also which are crucial. Be it Bihar or Assam, other critical parameters like raw material availability and their prices/quality/domestic market potential/labour availability need to be considered before structuring the project costs, means of finance and working capital requirements. On this basis, financial state- ments may be developed with profitability analysis. Such structuring is pre- sented in the form of a pulse processing enterprise in Patna in sub-section 5 of this chapter. First, two cases of grain processing units are given here to help understand how not to structure your project costs/means of finance.

INTERNAL FACTORS KILL AN ENTERPRISE:

SINHA RICE MILLS, PATNA, BIHAR

Established in 1997 near Patna, the mill was engaged in dehusking paddy and rice shelling with an installed capacity of 2,400 MT paddy per annum. The target market was Patna city. A term loan was provided by the SFC and working capital by a commercial bank. But by 2001, the unit became unviable.

Depressed Project Cost and Working Capital Finance and hence Means of Finance: The Culprit

The enterprise was doomed since inception due to underfinance. It faced a problem in the first two years because of poor monsoon with the failure of paddy crop. The paddy prices in other regions were high, while payments were getting delayed. This resulted in a cash crunch. Then, the bank discontinued its

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cash credit. Written assurances by the promoter to liquidate overdrawal of CC limit in monthly instalments and application for relief were not entertained. The bankers later froze the account and the unit was tied for working capital. As a cumulative effect of delayed payments and high input costs, the unit worked at a very low capacity and incurred huge losses. With no institutional support for working capital, poor capacity utilisation contributed to the tragedy.

The enterprise closed for three months. But later, bumper harvests of paddy made purchase easier and cheaper. The promoter borrowed money from friends in the form of unsecured loans and re-started operations. The main problems were the failure of paddy crop for two years and subsequent increase in input costs. The problem seems external and not internal. In fact, even during a ‘good’ year input prices fluctuate up to 200 per cent depending on the ‘season’ or ‘non-season’ timing of purchase. In his project report, the promoter simply took the average of purchase price trends of previous years. Had he taken the weighted average purchase price of the months when a price level prevails, he would have projected a purchase price and working capital double than what he had asked. It was his fault that he did not project his working capital needs and margin higher. Besides, he had also misjudged the importance of a credit strategy to push sales. In other grain milling enterprises in the region, 70% sales were on two-month credit. His was only 50%, but he had not even considered credit sale necessary while projecting working capi- tal nor had included the relevant margin in his report submitted to and sanc- tioned by the term lender and banker.

Infuse Funds as Working Capital and Focus on the Procurement front to Revive

Manufacturing facilities of the enterprise were good, while the main raw mate- rial, paddy, was available locally. But, resources and equipment do not make an enterprise. He would need, in future, to reinvest all surplus earnings in business as working capital to enable him to procure and stock raw material when prices are low and use it over a period of time. Sustainable management is all about taking timely decisions and procuring adequate raw material inputs.

At 60% capacity utilisation, sales of basmati, husk, rice barn etc. and paddy milling could have touched Rs.150 lakh. At this level of operation, the enter- prise could earn Rs.20 lakh profit by incurring Rs.130 lakh expenditure. These expenses also cover the liabilities on term loan and working capital. In two years, it could have earned Return on Investment (RoI) of 29%.

For a few months, the enterprise could mobilise funds from friends and rel- atives and regularise repayment of dues of term loan and working capital.

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Over two years, the surpluses generated could replace such support. The irregularity in existing term loan and interest since its disbursement could be corrected during this period. With additional doses of working capital, the unit could have become viable. Offering cash discount for cash purchase and iden- tifying alternative sources of procurement to avoid adverse input problems in the region are other options the enterprise could have pursued for revival.

INGTY DAL MILLS, ASSAM: EXTERNAL FACTORS LIKE BAD DEBTS COULD ALSO AFFECT PERFORMANCE

Ingty Dal Mills, a sole proprietory firm, was promoted by Ingty to manufacture dal, besan and flour with an installed capacity of 12 MT/day for dal, 4 MT for besan and 8 MT for flour. This capacity is based on 300 working days in one shift of 8 hours. The Department of Industries and Commerce (DIC) granted permis- sion to the unit to grind wheat in 1997. There are other Roller flour mills in the district for wheat milling. All are operational. This is the only unit engaged in processing of grams and other gram prod- ucts i.e. dal and besan. The enterprise had potential for the local market and was doing well till 2000 and could repay interest and principal obligations to institutions in time. Later, payments were blocked owing to recessionary conditions and the enterprise had to be closed down due to non-recovery of receivables.

An Analysis of the Enterprise’s Performance: Indicators of Unsustainability

The financial statements of the enterprise for the last two-three years showed that in 2001–2002 and 2002–2003 it made ‘cash’ losses. An analysis of the struc- tural strength and liquidity viz. ability to meet short-term liabilities, profitability and performance of the enterprise is revealing. (Annexure II to this chapter elab- orates on definitions of various management and accounting terms and ratios).

Structural strength: The unit had promoter’s fund of Rs.10 lakh in 2001–2002. However, the accumulated losses by 2002–2003 were Rs.6.62 lakh. Total out- side liabilities had been rising because of non-payment of interest liabilities.

Liquidity: The current ratio viz. current assets over current liabilities was 0.76 in 2001–2002 and it declined to 0.52 in 2002–2003, showing that current

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assets were insufficient to meet current liabilities. Current assets largely included stock and debtors while current liabilities were creditors. Though the promoters infused Rs.8 lakh into the business in the last three years, the lia- bilities of creditors remained high.

Turnover: Stock of finished goods and receivables for credit sales were high in 2001–2002 and 2002–2003.

Profitability: Since the unit was near Guwahati and the local market had good potential, the unit did well initially and the dues were regularly paid upto 2000. Performance deteriorated rapidly due to repayment problems from two major traders (debtors). A revival plan could have been evolved based on analysis of past performance and future projections on various parameters. Evolving cost of project and means of finance for revival was possible in the past when financial institutions were not finicky about reducing their Non-Performing Asset (NPA) portfolio. Today, most institutions prefer one-time settlement of dues. The only option for evolving, implementing and managing a sustainable project is to struc- ture the cost of project and means of finance by properly estimating the cost of raw material procurement, working capital etc, as well as income, and deciding on the optimal means of finance through a capital structure analysis.

FINANCIAL VIABILITY OF PREPARATION AND ANALYSIS

The analysis of financial feasibility of a project or business plan helps study

a project’s potential from financial angle. It also helps understand invest- ment requirements and its sources. Some major components of financial viability are:

Cost of establishing a project

Means of finance or sources contributing to project cost

Capacity utilisation and income and expenditure estimates on an annual basis

Profitability projections on an annual basis

Income, expenditure and profit projections are made till the period of repayment

to financial institutions. An eight-year period could be ideal. Projections may be

made in such a manner that capacity utilisation improves over the years. Parameters such as, selling price and cost of raw material may be changed every year. It is obviously difficult to project the direction or extent of such change. It

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is normally assumed that increase in costs over time will be matched with increase in selling price. And so, they can be assumed constant over the years.

The following sub-sections introduce major components of financial viability preparations and assessment.

Project Cost

Project cost comprises investment for establishing an enterprise. The signifi- cant elements of project cost are land and site development, building, machin- ery, other fixed assets, technical know-how expenses, preliminary and pre- operative expenses, including interest during construction period, working capital margin and contingency costs.

Certain administrative and financial expenses are incurred before produc- tion starts. These are Preliminary and Pre-operative (P&P) expenses. They include rent, interest during construction, Pollution Board licence, collateral related expenses like stamp duty, trial production expenses, deposits for utili- ties and processing fees of financial institutions.

Contingency is a provision made for escalation of cost of equipment, for instance, in the lag between plan preparation and project implementation.

These are the key components of project cost:

1. LAND AND SITE DEVELOPMENT: Cost of land, legal charges, levelling and developing charges, fencing etc.

2. CIVIL WORKS: Factory building, office, warehouse, drainage facilities, etc.

3. PLANT AND MACHINERY: Price of machinery/equipment and excise duty, sales tax, freight, octroi and installation costs.

4. OTHER FIXED ASSETS: Furniture, office equipment like fax machines, vehicles, laboratory and pollution control equipment, diesel generating sets, etc.

Comparative quotations from several suppliers may be invited to convince lending institutions about cost of plant and machinery. Institutions, sometimes, specify ‘acceptable’ suppliers. For valuation of land and building, lender offers loan against the ‘book price’ as per documents and not ‘market price.’ A pro- moter should know these aspects and work closely with lending institutions.

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Means of Finance

The common means of finance are term loan, subsidy or equity. State finan- cial or industrial development corporation and even commercial banks offer term loan against project cost. Repayment terms vary with institutions and with schemes. The MoFPI offers subsidy on a proportion of the cost of fixed assets. Equity capital is promoters’ contribution or monetary contribution by others in terms of deposits and unsecured loans. The minimum amount of pro- moter contribution, irrespective of such private participation, could be speci- fied at a minimum 17.5 per cent of project costs by lending institutions.

Working Capital, Relevant Margin and its Assessment

Funds required to operate an enterprise is Working Capital. A certain minimum amount of working capital is permanently invested in business. The entrepre- neur will have to contribute this fund initially. Working capital margin, which is included in the project cost, is estimated on the basis of the year when the enterprise breaks even. The estimation of this margin depends on projections of working capital needs:

Projecting output over different years of operation.

Projecting raw material input needed and unit price of each input required to produce output and the amount of material an enterprise must carry, given first year production targets. For the latter, the ‘lead’ time between order placement and receipt should be consid- ered. Enterprises in the food processing sector need to carry high raw material inventory, given the seasonality of production. Price of inputs vary drastically and enterprises need to stock up to reap advan- tage of favourable prices. The value of raw material, to be stocked, should be ascertained, as also that of other consumables and packing material to be stocked up.

Projecting value of goods under production. This will depend on the length of the manufacturing cycle. For such valuation, direct costs of raw material, wages and utilities should be considered. You may ignore depreciation, administrative and marketing expenses.

Projecting the level of stock of finished goods. An enterprise produc- ing in anticipation of demand, as do most processing enterprises, may carry substantial stock of processed/semi-processed finished goods. The quantity of such stock should be valued at cost, viz. direct and indirect, sans depreciation.

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Projecting total sales on credit in terms of duration or amount of out- standing receivables. Only production cost of sales is considered.

Projecting the monthly wages and salary expenses, power/fuel, other utility related costs, administrative expenses, selling, repair/mainte- nance expenses.

The sum total of the value of investment forecasted for each of the components of raw materials as indicated in the second bullet point for one operating cycle, should be considered while projecting the requirement.

Working Capital Requirement for Priya Foods, Chennai

1. Even at 30% utilisation of its capacity, the enterprise should be gen- erating profits. As per product-mix annual capacity amounts to 745.4 tonnes.

2. Annual raw material stock in the first year of carrots, onion, potato, garlic and ginger amounts to 223.6 tonnes. Raw material stocking period is projected at two months. This is valued at Rs.5.41 lakh (viz. Rs.32.43 lakh divided by 12 months and the resultant estimate multiplied by 2).

3. Value of Consumables and / Packing Material Stock in terms of one month stocking period:

Consumables: Rs.5,000

Packing material: Rs.19,000

4. Value of Stock of Goods in Process in the first year

a) Manufacturing cycle

= 1 day

b) Quantity of goods in process in the first year

= 0.745 tonnes

c) Price of Goods in Process

d) Working capital on account of Goods in Process equals approxi- mately Rs.13,000

= Rs.17000 per tonne

5. Value of stock of Finished Goods in the first year:

a) Carrying of Finished Goods

= 1/2 month

b) Price of Finished Goods

= Rs.26000/-

c) Quantity of Finished Goods to be carried = 9.32 tonnes

d) Price of Finished Goods

= Rs.24,000 per tonne

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e) Working capital on account of finished Goods

= Rs.2.24 lakh

6. No Working Capital is required on account of credit sale as all sales are assumed to be on cash basis.