The food processing industry, currently the fifth largest sector in India's economy, is showing potential for massive expansion, particularly in the export market, an industry source said Friday.

Quoting a report by chamber body and Bain & Co, he said costs of processing and packaging food can be up to 40 percent lower in India, than parts of Europe, making it an attractive venue for investment in the world.

Several multinational players are bringing in new products to capitalize on the growing demand for packaged goods. The report pegged the packaged food industry at 100,000 billion rupees ($1.818 billion), the majority of which is accounted for by dairy and biscuits.

Analysts predict growth rates for the packaged food sector anywhere from 9 to percent 13 percent for the next 5 to 6 years. The past few years have also seen increases in investment, through joint ventures, foreign institutional investment and private equity (PE). Between 2008 and 2011, PE investment in the food and agriculture sector totaled $650 million.

In the coming years, the Indian government has set an investment target of $20 billion in food-related infrastructure from the private sector. By 2017, 50 Food Parks are expected to be built across the country, providing accessible transport and processing facilities to even small farmers.

Growth is expected to be faster in relatively newer categories such as flavored milk and instant noodles, as compared with categories like bread and spices that are large today. Across segments consumers are increasingly willing to try new brands, rather than remaining loyal to one.

The report cheers reforms by the government in retail, expecting it to "greatly transform the industry, opening up new possibilities of partnership and bringing increased investment."