Forward and Backward Linkages in Food Processing Industry

Not only food processing industry but for any kind of business, there are two different kinds of linkages between the economic activities viz. backward linkages and forward linkages.

For an industry, backward linkages are directed towards suppliers; while the forward linkages are directed towards consumers.

We take an example of a steel mill here. To perform its economic activity, the mill needs inputs from coal mining and iron ore mining. These constitute its backward linkages. When the steel mill sells its produce, it needs to develop links with metal fabrication industry, construction companies, wholesalers and retailers of steel etc. These constitute the forward linkages of the steel mill.

We note here that infrastructure such as Railways, Roads and service providers such as transporters work as both forward as well as backward linkages.

Backward and Forward Links in Food Processing Industry

In context with Food Processing Industry, a Food Processing Unit needs to have strong backward linkages with the farmers, farmer producer organizations, self help groups, farmer’s groups etc. Further, to be able to sell its processed food, it needs to develop strong forward linkages with wholesalers, retailers, exporters etc.

Key advantages and criticism Backward and Forward Linkages

Effective and seamless backward and forward linkages are crucial for success of any business. In food processing industry, the input as well as output products are perishable. In fact, inputs such as fruits, vegetables, dairy products, meat, poultry and fish are so much perishable that lack of transportation and backward links would result in their waste.

Further, for industry players, effective links add value to the brand by ensuring high quality end to end and better control over the factors of production resulting in cost saving and enhanced efficiency. These links provide the industry players better hold over the market and aid in facing competition.

However, such links may also lead to monopolization thus may curtail the freedom for producer and consumer in the long run. The forward and backward integration favors large businesses and MNCs thus it may adversely impact the small ventures and start ups due to centralization. It may result in diverged attention and may hinder the specialization process which may result in decreased efficiency.

Government Policy around Forward and Backward Integration in Food Processing Industry

More than 50% of the food processing industries are located in the informal sector thus a forward and backward integration is a distant dream for them at present. But as the result of interventions by the government the sector is under growing a formalization thus opening avenues for forward and backward integration. Currently, the government is running a scheme called Scheme for Creation of Backward and Forward Linkages to provide effective and seamless backward and forward integration for processed food industry. At the same time, NITI Aayog has consistently pushed for contract farming, opening of multi brand retail for 100% FDI through automatic route etc. which according to them will enhance the opportunities for forward and backward integration. This would provide for enhanced income for farmers and low cost for consumers.

Scheme for Creation of Backward and Forward Linkages

This scheme aims to provide effective and seamless backward and forward integration for processed food industry by plugging the gaps in supply chain in terms of availability of raw material and linkages with the market. Under the scheme, financial assistance is provided for setting up of primary processing centers/ collection centers at farm gate and modern retail outlets at the front end along with connectivity through insulated/ refrigerated transport.

The Scheme is applicable to perishable horticulture and non-horticulture produce such as fruits, vegetables, dairy products, meat, poultry, fish, Ready to Cook Food Products, Honey, Coconut, Spices, Mushroom, Retails Shops for Perishable Food Products etc.