"It was a commonly accepted practice for food companies to apply for a licence and simultaneously launch in the marketplace, assuming they would get it," says Nitin Mathur, an industry analyst for SG Corporate and Investment Banking. "But Nestlé was an eye-opener for everyone. What they thought was an accepted practice wasn't acceptable any more."
The voluntary withdrawal of products reflects mounting tension between global and domestic food companies — eyeing India's vast market potential — and the food safety regulator, seeking to assert its authority.
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Indians consume $63 billion worth of packaged food — including sweets, snacks and packaged drinks — each year, compared with $220 billion in China. But sales of packaged foods are poised to rise rapidly in India — to $88 billion by 2019, according to KPMG. This is being driven by a young, increasingly affluent and time-pressed population moving away from traditional cooking methods and eating habits.
Western companies are gearing up. Both Coca-Cola and rival PepsiCo are in the midst of $5 billion Indian expansions. Mondelez International, maker of Cadbury chocolate and Oreo biscuits, is building a $190 million, 54-hectare plant in India — its largest in Asia. Chocolate-maker Mars International is spending $160 million on its first plant in the country, while Kellogg, the US cereal maker, has invested $100 million in the past 18 months.
Large domestic food companies, such as ITC, Britannia Industries, and Dabur, are also expanding capacity and diversifying into new categories. Imports of premium processed food — including Italian pasta and European olive oil, meats and cheese — are growing fast too.
"All the big food manufacturing companies are looking at India as a high potential market because the penetration of categories is very, very low," says Rajat Wahi, a partner at KPMG, the professional services firm. "All the fast-moving consumer goods companies are looking at significant growth in the next 10 years."
But en route to Indian dining tables, food companies are wrestling with a murky, unstable regulatory environment, overseen by a young watchdog with a mission to ensure basic food safety and promote "healthy, wholesome food".
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In recent months, the FSSAI has rejected a number of Starbucks' syrups and sauces, one of its decaf coffees and a spiced tea. It has also banned Kellogg's Special K Red Berries, a General Mills Choco Lava Cake, and mayonnaise and salad dressings made by Field Fresh, Del Monte Foods' Indian joint venture. Imported foods, including perishables such as cheese, have often faced long delays in ports because of the regulator's objections over the food or its labelling.
The FSSAI defends its approach, however. "If industry is coming out with a product, it has to be safe food, and it has to be wholesome," says Yudhvir Singh Malik, chief executive. "My plea to industry is: whatever you are putting out, please think that your child is also eating it."
For decades, India had multiple government departments charged with preventing adulteration — which is rampant — of basic products such as milk and cooking oils. In 2006, India adopted a new food safety law with a broader agenda, including promoting healthy food.
But India has fixed standards for only roughly 370 food items, compared with the 5,000 to 10,000 items common in developed markets. All other food items — except traditional Indian food — have been subjected to a controversial approval process in which regulators decide case by case whether to allow a food product or supplement to be sold in India.
As part of the process, companies have been required to submit their exact recipes and formulations for official scrutiny. But industry has complained that the FSSAI decision-making process is both time-consuming and arbitrary, with products rejected on numerous whimsical grounds — including that they should be a different colour.
"There were no standards," says Dheeraj Nair, a lawyer who represented food supplement manufacturers in a court challenge to the FSSAI process. "It was left to the whims and fancies of whomever was sitting in the product approval committee. It was absurd."
Companies have also objected to the requirement that they reveal their exact recipes, which is not standard practice in most markets, except when foods are using novel ingredients not previously confirmed to be safe for human consumption.
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"The extent of unilateral condemnation of a sector regulator by the people whom it is meant to regulate has been unprecedented," Mr Malik wrote in a May note to industry. "Accepting the presence of a regulator in a hitherto unregulated sector is difficult."
Yet the regulatory system is now itself in flux. This month, the Supreme Court, acting on a complaint by food supplement makers, scrapped the product approval process, ruling that the FSSAI lacked the authority to establish such a framework unilaterally. Instead, the court said the government had to issue regulations for proprietary foods.
In a statement on Wednesday, the FSSAI confirmed it was scrapping the product approval system, and promised to "expedite" new regulations and standards for many more foods and additives. But the process — which involves public comments — could yet take many months.
But that still leaves many food companies in limbo, uncertain whether they can legally introduce new products in the interim — or if foods whose applications were previously rejected can now be sold.
"These are teething problems," says Debashish Mukherjee, a partner at AT Kearney. "India is at a different stage of evolution to developed markets. Companies obviously don't like it, but this debate will lead to a more stable environment for the future."