Study of the food processing sector in Bihar

• The food processing sector has long been seen as a promising route to economic transformation in Bihar. Though the sector has been the target of successive industrial policies from the state government, the industry still suffers significant shortcomings.
• In this project, researchers conducted a survey of food processing firms in Bihar and analysed secondary data to construct a detailed picture of the sector and its continued difficulties.
• Researchers found that the vast majority of firms are of a relatively small size. This is attributed to a lack of shared 'industrial culture' in the sector across the state – small firms have tended to take advantage of support schemes put in place by the government whilst not necessarily utilising them to grow their enterprises.
• Based on the project’s findings, the Government of Bihar has since enacted policies that seek to encourage more entrepreneurial activities amongst smaller firms for them to fill in the ‘missing middle’ of productive middle-sized firms who can provide employment opportunities and more industrial linkages across the state.

Food processing has been targeted by successive policies of the Government of Bihar as the lead sector for industrialisation in a state with a very low industrial base. Three important industrial incentive schemes (2006, 2011, and 2016), with varying degrees of pecuniary (front-loaded capital subsidies, interest subsidies, tax exemptions) as well as non-pecuniary incentives (such as training assistance) have been enacted to date, and yet the objective of achieving a thriving industrial landscape with food parks has, so far, bypassed Bihar.

On the face of it, fostering the development of the food processing industry seems to be an intelligent policy thrust for Bihar, since the state has a strong agricultural base and accessible water sources. As an industry, food processing not only has the potential to create non-farm employment opportunities in low-skilled labour, it can also have significant backward linkages that increase production amongst farmers in the state too.

In this project, researchers aimed to better understand the nature of the food processing sector in Bihar and its continued difficulties by conducting a survey of formally registered firms in the state. This survey was complemented by secondary data to craft a detailed picture of the structure of the sector, and how firms have interacted with state government policies.

Researchers found that there is a significant skew in the size of food processing firms in Bihar. The majority of firms are of a very small size (less than one acre of land), with only a few over 50 acres of land.

Researchers believe this skewed structure of Bihar’s food processing industry can be explained by the dynamics created by the incentives the state government had previously provided, and the ‘industrial culture’ throughout the state. The primary survey indicates that small firms have a high risk perception of growing their businesses, and somewhat expect subsidies and incentives from the government to continue on as a means to keep their business surviving, rather than growing. Previous incentive schemes have been moderately successful at encouraging large units to grow further, but not for micro units to grow into productive middle-sized firms.

Based on these findings, researchers recommend focusing government policies on supporting honest entrepreneurs. This could be done by improving brand awareness for products from Bihar, formally recognising and rewarding successful entrepreneurs, and ensuring effective information and training programmes.

These recommendations were communicated to the Industries Department of the Government of Bihar. Based on these findings, the state government’s Bihar Startup Policy of 2017 included enacting local contests to reward small firms who have sought to scale up their activities. The government has also made publicly available the list of honoured entrepreneurs, which too was something that the study had pointed out in the initial phases.