Food Processing in Bihar: Efficiency in Physical Costs

The central quest of this chapter is an investigation of the physical costs in the manufacture of processed food in any region. We use Bihar as an example to study the efficiency of manufacturing units in converting agri-inputs into final profits. We present a theory about potential inefficiency in managing physical costs for trajectories like Bihar. Of the two costs (operational and marketing costs), our theory predicts that it is the high cost of marketing own brands that affect the profitability of small entrants badly. The missing middle size of firms is central to the development of this framework. This prevents the expansion of small-sized units, exacerbates the missing middle problem and can explain the failure of government policy in developing this industry in this region. Small entrants either engage in own-brand retail or wholesale marketing of their manufactured product due to the absence of co-processing linkages with mid-sized firms in Bihar. Deep segmentation between the small and the large firms and the missing middle in firm size distribution is at the heart of this theory. We test this claim empirically using the non-parametric two-stage Network DEA (NDEA) analysis for dairy and grain milling, with a special focus on rice mills. This method decomposes the overall efficiency scores into operational and marketing stages. Marketing inefficiency is responsible for the low values of overall efficiency scores. This pattern holds across all the sub-sectors we study. Additional insight regarding the source of inefficiency comes from an in-depth study of rice mills in Bihar.