Organic and bio food market faces large growth potential in India

14 September 2016 5 min. read

Global demand for organic food, seen as healthier and better for the well-being of people and the environment, is creating a boom for small producers. In India, where the middle class is rapidly expanding, demand for organics is on the rise as well. For producers, however, a number of barriers remain, which are inhibiting the potential from the demand side.

The use of pesticides and herbicides on grown food, as well as the use of preservatives and other additives, has, for decades, been seen as contentious by a growing minority. The implicated, and in some instances already proven, negative effect of pesticides on the natural environment and human beings have led to some substances being outrightly banned for use in farming. These substances include those such as DDT as well as others such as Neonicotinoids, which are currently under intense scrutiny and moratorium in some jurisdictions.

Consumer sentiment in developed countries has been growing steadily in favour of naturally grown foods, which eschews the use of synthetic growth agents as well as preservatives. The organic market In the UK grew by 4.9% to £1.95 billion last year according to the main certifying body: The Soil Association. The US market for organic food is well above $80 billion, up from $1 billion in 1990.

In a new report from OC&C Strategy Consultants, titled ‘Ripe for the Picking? Organic food might be the next big food wave in India’, the consultancy explores how changes in Indian consumer sentiments are shifting appetites in favour of organic food products. The report also examines the barriers impeding wider spread adoption.

Growth in organic food market

Organic demand

The Indian economy has enjoyed rapid expansion in recent years and, according to new research from McKinsey, will continue to see average growth of around 7.3% to 2020. The rapid growth has seen a surge in the number of Indian people considered ‘seekers’ and ‘strivers’, whose household income stands between $4,000 and $20,000 per year.

The seekers and strivers, who are considered to be India’s middle class, are seeking healthier ways of living, for which they pay a premium as their respective income opens up new opportunities. Organic food, with its synthetic chemical free production and preservation, is in increasing demand – domestic demand has enjoyed CAGR of 36% from 2011 until last year, up from $80 million to an expected $207 million.

 Farmer Economics for Organics & POS-wise split

Growing organics

While organic food is, in principal, relatively easy to cultivate in India due to their age old agrarian production methods, abundance of natural fertilisers and plentiful land,, a number of barriers are withholding farmers, in many instances, from switching back to organic farming.

One barrier is that the price margins between organic and non-organic food remains too small to offset the investment costs; once land has been contaminated, it takes three years of lower yields before product can be labelled certified organic. In the interim period, farmers lose between 10% - 15% of their produce with the only benefit – lower production costs that result from not having to fork out for synthetic chemical products. More stable, higher premiums, on certified organic goods are – according to the report – needed to incentivise farmers to transform their land.

One way to improve margins, according to the study, is to develop e-commerce proposition for organic produce. Selling directly to customers provides a way to offset the higher costs related to the logistics of supply chains for organic produce – as it stands, around 8% of organic food is sold through e-commerce merchants whereas supermarkets make up the lion’s share of 45%.

Product-wise split of organic food market value

While India is a large exporter of organic food products, production remains relatively limited to items such as tea (25%), pulses (21%), oil & ghee (15%), wheat & flour (9%) and Spices (8%), while the organic consumables that are in demand in western countries – predominantly fruit and vegetables – remain relatively uncommonly produced within organic contexts in India. According to the report, this is partly due to the variability of production on small Indian farms, which hedge their bets by producing a small amount of a number of ‘safe’ crops. This creates erratic supply. According to the report, investment in the sector may be able to support a more diverse offering of organic foods.

The certification of organic food remains, even in western countries, a concern for consumers. Given the extra expense involved in organic foods, and the opacity of the value chain to the average consumer, audit and checks of suppliers are often expected by customers. In developed countries, labels as well as policy controls the classification of food as genuinely organic. In India, a clear labelling and checks system are yet to be put in place, meaning that consumer trust is more limited – potentially inhibiting people to pay more for something that, even with different intents and purposes, looks pretty much the same.