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Government of India
Knowledge Partner
Message
Food processing industry in India is increasingly seen as a potential source
for driving the rural economy as it brings about synergy between the
consumer, industry and agriculture. A well developed food processing
industry is expected to increase farm gate prices, reduce wastages, ensure
value addition, promote crop diversification, generate employment
opportunities as well as export earnings. This sector is also capable of
addressing critical issues of food security and providing wholesome,
nutritious food to our people.
However we still have some way to go before we are able to grab these
opportunities. Even today we are grappling with issues of quality and
quantity of raw produce, supply chain and wastage related problems, low
levels of value addition and a very small portion of the global trade. This
requires all of us, at the Center and at the State level to work as one single
cohesive unit.
I am confident that this joint effort by FICCI & KPMG will be instrumental in
further strengthening the global ties between India and global food
business, by highlighting the business potential in the agri-food business
sector.
The Indian Food Sector is estimated to be INR 10,360 billion in 2009-10 and is expected
grow at a compounded annual growth rate of 8.1% for the next 5 years, throwing up hug
opportunities for investment across the entire value
. With
chain
a population of more than
one billion individuals and food constituting a major part of the consumer's budget, this
sector has a prominence next to no other businesses in the country. the Moreover
importance of this sector to India's economy becomes all the more relevant, considering
the fact that this sector continued to perform well, despite fall in GDP number and poo
performance by many other industries, during recession in 2008-09.
The government on its part has initiated extensive reforms to remove legislative barriers
and introduce facilitatory measures to catalyse private sector activity in food and
agribusiness sector. To promote private sector activity and invite foreign investments in
the sector the Government allows 100% FDI in the food processing & cold chain
infrastructure.
This joint effort by FICCI & KPMG will be helpful in further strengthening the business ties
by highlighting the opportunities for private investments and Public-Private-Partnerships
in the agri-food business sector.
Shrijeet Mishra
Chairman, FICCI Food Processing Committee
d
to
uge
or
s,
This study analyses the inadequacy of infrastructure investments across
India's food value chain.
Executive Summary
1500 1210.9
979.1 1036.2
880.0 927.3
1000
500
0
2006-07 2007-08 2008-09 (E) 2009-10 (E) 2010-11 (P) 2014-15 (P)
Source: Ministry of Food Processing of India, KPMG Analysis
1
Key Statistics – Ministry of Food Processing of India, KPMG Analysis
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iv
The food sector is expected to retain its growth momentum, aided by a few factors that can be
summarized as:
Rising disposable
income
Export Opportunity
However, the inadequacies in infrastructure present across the entire value chain can hamper
growth. These inadequacies are a result of the insufficient investments made by both private
and public sector participants.
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v
The impact of this poor infrastructure has been the low levels of productivity in the sector, high
levels of wastages and high cost structures across the value chain. For instance, an
approximate break-up of wastages in the food sector is as depicted below:
Farmer’s production
18%
18% of
of total
total 6%
6% of
of total
total 6%
6% of
of total
total
30%
30% of
of the
the total
total produce
produce wasted
wasted
These inadequacies,
Some key
Some keyopportunities
opportunitiesforfor
private andand
private foreign players
foreign players however, present exciting
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vi
The opportunities for participation from the public and private sector across the value chain of
the food sector has been summarized below:
Agricultural Sector Food Processing and Distribution
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vii
Contents
Opportunities 29
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1
1210.9
1036.2 to 2007, in which the
927.3 979.1
1000 880.0
industry recorded a
compounded annual
500
growth rate of 6.8%
0 from INR 7700 billion
2006-07 2007-08 2008-09 (E) 2009-10 (E) 2010-11 (P) 2014-15 (P)
to INR 8800 billion.
The Indian food industry can be broadly segmented into the following:
Segment Examples
Staple Food Rice, wheat, bread, flour, sugar, salt
Fruits and Vegetables Raw fruits and vegetables, pulps,
Staples and Other Food
juices, jams, spreads
40.8% Dairy Milk and milk products including
butter, cheese, milk powder
Beer and Wine
1.3%
Fruits and Vegetables Meat and Poultry Cattle, sheep, pigs and poultry
23.7%
Packaged Food Fisheries Marine fisheries, processed and
3.0% Dairy canned fisheries products
24.0%
Meat and Poultry
Ready to eat food Noodles, jam, soups, pre-cooked
3.1%
food items
Fish and Marine
4.2% Beverages Alcoholic and Non Alcoholic drinks
2
Key Statistics – Ministry of Food Processing of India, KPMG Analysis
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2
3
Ministry of Food Processing of India
4
Ministry of Food Processing of India and KPMG Analysis
5
http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/food-process.htm
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3
Dairy
Dairy is one of the
key contributors to
Growth projections: Dairy Segment
the Indian Food
400 366.0
Industry, next only
INR '000 Crores
6
KPMG Analysis
7
http://economictimes.indiatimes.com/markets/commodities/Indias-milk-production-rose-to-112-mn-tonnes-last-
fiscal/articleshow/6223863.cms
8
Ministry of Food Processing of India Estimates
9
Ministry of Food Processing of India and KPMG Analysis
10
Ministry of Food Processing of India
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4
11
Ministry of Food Processing of India
12
KPMG Analysis
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5
39.6 41.4
38.0
40 enormous
30
20 opportunities for
10
fisheries. The market
0
2006-07 2007-08 2008-09 (E) 2009-10 (E) 2010-11 (P) 2014-15 (P) size of the fish and
marine products
segment is estimated to be INR 430 billion in 2009-10 and contributes
around 4% to the Indian food industry. Fish and marine products
market is expected to grow at a compounded annual growth rate of
around 4% over the next 5 years from the base of 2009-1014. Major
marine products exported from India includes frozen shrimps,
Individually Quick Frozen (IQF) shrimps, canned shrimps/prawns, dried
shrimps/ prawns, lobsters, cuttle fish, squid tubes, fresh fishes, canned
fish, dried fish, crab, clam, mussel, aquarium fishes, dried shark fins,
dried cuttle fish bones, dried fish maws, etc.
13
Ministry of Food Processing of India
14
KPMG Analysis
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6
Packaged Foods
With changing
lifestyles and
Growth projections: Packaged Food Segment
increasingly busy
100 91.0
schedule of
INR '000 Crores
80
60 individuals, packaged
43.0
40 30.6
21.7 foods are increasingly
11.0 15.5
20
gaining acceptance
0
2006-07 2007-08 2008-09 (E) 2009-10 (E) 2010-11 (P) 2014-15 (P) amongst the urban
population. This is
expected to be the fastest growing segment in the food sector, and
could triple in size in the next 5 years15. Packaged foods consist of
ready-to-eat and ready-to-cook products, chips, salted snacks, pasta
products, cocoa based products, bakery products, biscuits, soft drinks,
etc. Positive aspects associated with packaged foods are the fact that
they are easy to prepare, have longer shelf life and are affordable.
Packaged foods tend to be under criticism for their high calorific conte
nt, reduced nutritional value and usage of preservatives. The market
size of the packaged foods segment is estimated to be INR 310 billion
in 2009-10 and contributes around 2.9% to the Indian food industry.
Given the growth rate of about 25% per year, this share can be
expected to reach 7% by 201516.
Beverages
Aerated drinks constitute the third largest packaged foods regularly
consumed after packed tea and packed biscuits. India is the third
largest market for alcoholic beverages in the world. The market size of
alcoholic beverages is estimated to be INR 140 billion in 2009-10 and
contributes around 1.3% to the Indian food industry. Beverages market
15
KPMG Analysis
16
KPMG Analysis
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30 a compounded annual
24.0
25
INR '000 Crores
17
KPMG Analysis
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8
Rising disposable
income
Export Opportunity
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Export opportunity
18
Technopak Consumer Outlook, Jan 09 Volume 1
19
Indiastat, Euromonitor, KPMG Analysis
20
Indian Retail Industry, Cygnus Research, October 2010
21
India Food & Drink Report, Business Monitor International, November 2009
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the Food Sector. These include several initiatives to improve the level
of food processing, increased FDI levels across the food sector, export
promotion policies, mega food parks, etc. which are all driving the
growth in the sector.
22
“Fact Sheet on Foreign Direct Investment (FDI)”, Department of Industrial Policy and Promotion
23
Planning commission
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Trends
Challenges
One key challenges for the food sector has been the increasing volatility of prices. The global
demand-supply scenario has been in an unstable equilibrium and there have been many supply
shocks in the food sector in the last few years. This coupled with the fast growing economies
in world’s two most populous countries (India and China) has resulted in large scale volatility in
prices for many food products. Managing this volatility will be a key challenge for the players.
Erratic climate is another challenge that the food sector in India has come to face of late.Many
of the last few monsoon seasons had been erratic and floods and draughts have become
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common. Untimely rain has lead to crop destruction in many instances, adding to the food price
volatility.
The tightly regulated nature of the sector is another challenge faced by the companies in the
sector. Hurdles of taxes and licenses still remain large in the sector.
However, the biggest challenge has remained the lack of adequate infrastrcure in most parts of
the food value chain. This report will look in detail the inadequacy of infrastructure across the
food sector and explore the opportunities that the private sector has in bridging this gap, which
is, no doubt, crippling the sector and hamepering the potential growth prospects.
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The share of public and private spending on food and agricultural infrastructure has remained
low in relation to this critical role that it plays in the economy. The share of agricultural and
allied sector has remained 6-7% of the public investments and 7-10% of the private
investments as depicted in Table 1.
24
Bottlenecks in Indian Food Processing Industry – FICCI Survey 2010
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Agricultural Services
1.3%
Fermentation Industries
0.7%
Issues concerning infrastructure in the food sector are one of the most
prominent challenges that need to be addressed with immediate
affect. Multiple factors that include a lack of proper irrigation and water
management, environmental concerns related to poor soil
management, inadequate and poor fertilizer & pesticide requirements
etc. in the agricultural sector, coupled with scanty post-harvest
infrastructure including shortage of proper warehouses and storage
facilities, poor grading, sorting and packaging of yield are hurting the
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Farming
Inferior Farm Inputs
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Despite having the highest amount of land under irrigation in the world,
India’s agriculture output remains volatile and a hostage to the
monsoons. The growth in irrigation coverage has slowed markedly
after the Green Revolution and 60 percent of the gross sown area still
remains primarily rain-fed. A survey by the Ministry of Agriculture also
found that half of the total farmer holdings in India are not irrigated,
with another 20 percent being only partly irrigated. The quality of
irrigation facilities and regular availability of water are also major
concerns.
Inadequate Mechanization
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Also, the sales practice usually prevalent at farm level in India includes
the sale of heaps of all qualities of produce in one common lot. Thus,
the farmer producing better quality is deprived of a higher price,
thereby resulting in no incentive to use superior quality inputs for
producing enhanced varieties.
25
Planning Commission
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India accounts for less than 1.5% of the global food trade, despite
being the world’s leading producer of milk, live stock and cereals, and
ranked second in terms of fruit and vegetables. The following table
shows the level of processing across segments and the relative global
levels for the segment.
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Retail
Despite the fast growth over the last few years, the organized retail
penetration in the food sector has remained low in India. Organized
sales account for just about 1% of the total food and grocery spend.
Organized retailing can consolidate the supply chain across the value
chain and bring in efficiencies by consolidating the supply chain and
rationalizing the intermediaries. This will help in reducing wastages and
reducing the consumer prices, at the same time increasing the farmer
realizations. India also compares poorly in terms of the penetration of
organized food retail in comparison with other countries.
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Poor packaging
In India, rural road connectivity has often been ignored. Only a small
number of villages are joined by railways and pucca roads. Rural roads
play a crucial part of bringing the produce from the field to the transport
point and then to the mandis. Small and marginal farmers often use
slow moving transport vehicles like tractors and bullock carts to carry
their produce to the market. Such means of transport do not facilitate
transport of goods to far-off market places; forcing the farmer to dump
his produce in nearby markets even if the price obtained there is
considerably low. Many small farmers have turned reluctant to market
their produce to distant markets considering the high cost and poor
quality of transport infrastructure, especially for perishable products.
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Poor transport infrastructure not only affects the quality of produce but
also leads to extensive wastage. Development of rural roads can
contribute up to 36-68 percent reduction in transport expenses.26
One of the major challenges that remain in the Indian agriculture supply
Nearly 20 million tonnes of
chain is extensive wastage. Wastage occurs at different levels of the
wheat, rice and lentils; the
equivalent of Canada’s supply chain due to improper handling, poor packaging, improper
annual wheat crop, is either storage and uncontrolled temperature. Nearly 30 percent of the
eaten by rats and birds or agriculture produce is stored under open condition, leading to wastage
gets spoilt and distress sales.27 In most of the rural areas, food grains are typically
stored in rooms, bamboo structures, wooden or mud bins and
underground structures that are prone to damage by rats and insects.
The total covered storage capacity available with the Food Corporation
of India (FCI) and the Central and State Warehousing Corporation is 50
million tonnes28 compared to food grain production of nearly 600
million tonnes which very well indicates lack of adequate storage. Out
of this capacity, 13 million tonnes in covered and plinth (CAP) and
plinth-only form which are just open dummy depots, difficult to be
considered as proper storage facility. While the farmer is forced to sell
his produce at a lower price immediately post harvest as a result of this
problem, this issue can be addressed through investment in silos for
storage.
Vertical silos are less capital intensive, clean, safe and economical in
the long term as compared to conventional horizontal warehouses
which require vast amount of land area, allows for malpractice and
prone to high infestation. However, not enough investments have been
made in this area. The total storage capacity of silos modern silo
26
Planning Commission
27
Planning Commission Report, January 2007
28
Economic Times, 26 August 2010
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system is just around 0.6 million tonnes29. The country needs to invest
more in creation of silo storage and create facilities for bulk handling of
food grain along with post-harvest operations that are consistent for
bulk handling. Use of latest grain processing technology for generating
higher yields and journey towards integrated grain processing units will
help India achieve long term food security.
Marketing Infrastructure
29
Economic Times, 26 August 2010
30
ICRIER Working Paper 197
31
Planning Commission
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23
32
R K Swamy BBDO guide to Market Planning, Volume II, 2007
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Soft Infrastructure
Research and Development
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25
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Paddy Yields Paddy yields are a third of best-in-class Wheat yields also similarly low
Paddy (kg/ha) Wheat yields (kg/ha)
10000 10000
8000 8000
6000
6000
4000
4000
2000
2000
0
0
Egypt US China World India
Egypt China India World US
Food wastage
! According to the Ministry of Food Processing Industries, the annual
physical and value loss to farmers due to lack of post harvest
infrastructure is estimated to be around INR 500 billion
! The extent of losses of fruits and vegetables in India is estimated
at about INR 100 billion to 120 billion per annum.34
! Overall, 1/3rd of all food produced is estimated to be wasted due to
issues on poor storage and supply chain deficiencies
33
Planning Commission
34
ICRIER Working Paper 197
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Farmer’s production
18%
18% of
of total
total 6%
6% of
of total
total 6%
6% of
of total
total
30%
30% of
of the
the total
total produce
produce wasted
wasted
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28
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29
Opportunities
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30
35
Report on Indian Agri Business, CLSA, 29 May 2006
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Production infrastructure
Contract farming
Eighty percent of India’s 115 million farms are situated on plots of less
than 2 hectare. A little over 1 percent of all farms are larger than 10
hectares and these constitute 15 percent of the cultivated land. With
organised retail penetration increasing and government’s proposed
mega food parks obviating the need for an intermediary, contract
farming is an opportunity for the processors to enable better handling,
better price realisation and minimise wastage. In order to bridge the
gap between farmer and processor, some of the private players such
as McCain, PepsiCo, Reliance Life Sciences and McDonalds have
modified their sourcing channels to include contract farming. Typically,
the farmer agrees to provide certain quantities of a specific agricultural
product which should meet the quality standards of the purchaser and
be supplied at the time determined by the purchaser. In turn, the buyer
commits to purchase the product and, in some cases, to support
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33
Source: Company Website, From field to fries, Business Today, April 2009
Farm level post harvest facilities such as cool chambers, grading and
sorting facilties, pack houses for backend support, field depots as part
of modern silo systems etc. can significantly reduce wastage and help
farmers achieve better realizations. These can also help in retaining the
quality for longer period and minize damage. The level of investment in
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34
this area in India has been absolutely insignifcant, and offers huge
potential going forw ard.
For the sector to realize its potential growth, it will be critical to have an
efficient supply chain in place. This will help in higher realizations for
the produce at the farmers’ e nd and lower price levels and price
volatility for the consumers. This presents an attractive opportunity for
the foreign players to invest in storage infrastructure such as silos,
third party food logistics infrastructure, etc. to fill the existing gaps,
thereby providing an efficient supply chain connecting the different
parts of the value chain and removing the intermediaries.
India wastes more fruits and vegetables than it consumes. About 30%
of the fruits and vegetables grown in India (40 million tons amounting
to US$ 13 billion) get wasted annually due to gaps in the cold chain
such as poor infrastructure, insufficient cold storage capacity,
unavailability of cold storages in close proximity to farms, poor
transportation infrastructure, etc. This results in instability in prices,
farmers not getting remunerative prices and rural impoverishment.
Government plans to encourage setting up of Integrated Cold Chain
facilities to improve storage and reduce waste by not missing any link
in the value chain from the farmer to the consumer/retailer. 100% FDI
is now allowed in the cold chain industry and it is expected to grow at
20-25% per annum for the next few years.
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Food Processing
Many State governments have taken the policy directive from the
centre and have planned Mega Food parks with associated fiscal
incentives. The proposed food parks aim to bring together all players in
the value chain together so as to minimise waste and improve value
addition in the industry. This move will also help farmers realise better
prices by removing intermediaries. The processors also will be
benefited by a better inventory management and production planning.
The proposed mega-food parks will be between 10 and 100 hectares in
size and 30 locations across India had already been identified. The
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Each mega food park will have a minimum catchment area of five
districts. With a chain developing from the farm gate to the retail
shelves with collection and distribution centres and central processing
centres in between, where functions like sorting, grading and
packaging along with irradiation, food incubation-cum-development will
take place, the food processing ministry hopes this initiative to be a
commercial success.
Food & groceries form the major category in retail pie but retail pene
tration for this is only 1%. The organized retail is growing at 20% per
annum. This momentum is expected to continue with the aid of
favourable demographic factors such as growing middle class,
increasing income levsls, changing consumption patterns, consumer
preferences, etc. By 2020, India is expected to be the fourth largest
food retail market in the world. Food services segment comprising of
food chains and restaurants is another fast growing area in the food
sector. The market is expected to grow at a rate of 7% in future to
reach Rs. 4,169 Bn in 2013.
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The quality of food infrastructure available from the farm gate to the
food plate is the key determinant for both the quality and price of the
delivered product to the end consumer. PPPs could be a useful tool to
accelerate development in vari ous areas of food sector. Currently
there are PPPs in the areas of contract farming, drip irrigation projects
and terminal markets among others. However the scope of these
projects is still limited and they serve as examples or models rather
than be the norm. Industry bodies such as ASSOCHAM, CII, FICCI and
IBEF (itself a PPP) could help facilitate interactions with both domestic
and international companies and agencies to ensure widespread use of
best practices and expand the scale of private participation to result in
performance improvement of the food sector.
© 2010 KPMG Advisory Services Private Limited, an Indian limited liability company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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successful PPP initiative, like QCI, will help improve infrastructure and
hence low level of wastage in the food value chain.
© 2010 KPMG Advisory Services Private Limited, an Indian limited liability company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
India would do well to learn from international examples such as
National Service for Rural Apprenticeship (SENAR), Brazil. Partnerships
such asIBSA could be leveraged on setting up a similar scheme. That
would have the useful by-product of improving inclusion while
furthering the cause of Indian agriculture. In addition to government
setting up more facilities for R&D in the country, private sector should
be incentivised for investments in R&D. The government can provide
tax exemptions for investment in R&D for the companies that set up
research laboratories and can ask the companies to help projects of
Small Scale Industries or make the companies spend money in
imparting training to a certain number of people. This will promote
innovation in the Food Processing sector and bridge skill gaps.
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About FICCI
Established in 1927, FICCI is the largest and oldest apex business
organisation in India. Its history is closely interwoven with India's struggle
for independence and its subsequent emergence as one of the most rapidly
growing economies globally. FICCI plays a leading role in policy debates that
are at the forefront of social, economic and political change. Through its 400
professionals, FICCI is active in 52 sectors of the economy. FICCI's stand on
policy issues is sought out by think tanks, governments and academia. Its
publications are widely read for their in-depth research and policy
prescriptions. FICCI has joint business councils with about 100 countries
around the world.
It has branch offices in major Indian cities and key regions in the world such
as US, UK, Italy, France, Malaysia, China, Singapore, Thailand and
Kazakhstan.