A quarter of consumer food products import in India is conducted illegally, adversely affecting legitimate importers in the country, according to a US government report.

"A significant quantity (25-30 per cent) of imported food enters India through illegal channels like smuggling and leakages from duty-free outlets and ships at docks," US Department of Agriculture said in a report published in Washington.

Legitimate importers, who pay high import duties, face stiff competition from this illegal grey market, even though smuggling is gradually diminishing with trade liberalisation and declining tariffs, according to the report issued by the USDA's Foreign Agricultural Service.

Most of the imported food products, including those coming from the US, are trans-shipped through regional trading hubs such as Dubai and Singapore, due to their liberal trade policies and efficient handling capabilities, it said.

The USDA-FSA report noted that the US firms are facing challenges in exporting food and beverages to India because of complicated and non-science based food laws, difficult custom clearance system and restrictive domestic marketing and distribution policy.

While noting that opportunities for the US firms in India's food service market is small but growing, the report said that imported food and beverages procured by hotels and restaurants are mostly branded products or the products that are not available locally or are of inferior quality.

It said that Indian hotel industry is shying away from direct imports due to high costs and non-tariff barriers and prefer to source their requirements from local importers and distributors, who have the ability to handle import clearance procedures efficiently.

In the hotels, restaurants and institutional service sector of India, the consumption of imported food and beverage products is restricted to budget (3-4 star), premium (5 star and above), heritage hotels, western-style multi-unit fast food restaurants, and non-ethnic cuisine restaurants.

Besides the HRI food service sector in the country is highly fragmented. Approximately 2,100 hotels and seven lakh restaurants are in the organised sector, while there are innumerable roadside eateries and tea-snack shops in the unorganised sector.

Interestingly, the western-style fast food restaurants like McDonald's, Domino's and Pizza Hut, which have grown at an impressive annual growth rate of 12-15 per cent in recent years, also procure most of their products locally.

However, several products such as french fries, specialty cheese, flavours, condiments, and other ingredients are also imported.

The biggest competition for US food and beverage products in India's HRI market is from the local food industry. Leading multinational food companies have food processing operations in India, which offer a range of western-style products at reasonable prices.

However, the quality of these domestically produced products may be inferior to imported ones due to poor quality of the raw materials, the USDA report pointed out.