Friday, 6 January 2012


- FDI in retail cannot stand in for government action
Commentarao: S.L. Rao
We will not discuss this government’s poor political management of the proposal for foreign direct investment in retail, compelling its suspension. However, the arguments for it that were put forth by the minister for commerce need critical examination. This was to be the first of the ‘big ticket’ reform of policy paralysis for two years. It was to bring in five billion dollars of FDI and create 10 million new jobs. It was expected to ease the two years of inflation in food product prices, reduce, if not eliminate, the wastage of fruits and vegetables (estimated at 40 per cent) caused by rotting owing to inadequate and improper storage, drastically reduce the appropriation of large margins by low service providing wholesalers, and improve the prices earned by farmers. We examine the pros and cons of this major policy initiative.
This was to be the first of the ‘big ticket’ reforms. How this interpretation came about and was attributed to foreign investment instead of government actions is not explained.
The expected flood of investment by foreign retail chains would introduce modern supply chain management, particularly in farm produce, investments in cold stores, cold transport, cold warehouses in cities to sort and grade produce, careful grading and sorting, pre-packed retail supplies — all because of the foreign retailers who would bring in their proven expertise. In practice, the Indian retail chains have not, in the last few years, made any significant difference to the agricultural supply chain. Further, the expected five billion dollars of FDI in retail will flow over a few years, making little difference to our deteriorating current account balance of foreign exchange reserves.
Fruits and vegetables may account, at best, for around 20 per cent of the turnover of organized retail chains. The rest will be made up of provisions (cereals, pulses, sugar and so on); breads and meats; the bulk is likely to be packaged consumer goods. In the early 1960s, I was in the United Kingdom and working for a packaged goods company in the middle of reorganizing its sales forces to cope with the evolving retail revolution. The advent of national chain stores, supermarket chains, self-service instead of personal service, merchandising and display as sales aids versus personal selling required matching responses by the company. The large chains were able to negotiate special prices and credit terms with the company, a facility not available to the old mom-and-pop stores. This has started happening in India as well with the Indian chain stores able to drive hard bargains with supplier companies for lower prices and credit terms that are not available to kirana stores, making them less competitive. Foreign chains will accelerate this process.
Even the claim that 40 per cent of fruits and vegetables is rotting because of lack of cold storage has been challenged in a recent article in the Economic and Political Weeklythat lowers the figure to 10 per cent.
While wanting technological advancement in retail trade we must not dismiss the contribution of the 15 million or so retail merchants to society, with the services they provide to rich and poor customers, of credit, delivery, range of products and so on. They earn little, and over time many of them must find more remunerative employment in organized retail or elsewhere. But they are not parasites of the system.
One course open to the kirana stores is to organize themselves into cooperatives with centralized buying so that they can use the clout of their combined purchases. They will, however, remain disadvantaged in relation to the chain stores. A similar situation will develop with perishables like breads and meats. The large chains can enter into more profitable purchase contracts than the small retailers. To the extent that there are bakeries and meat markets, these can compete by becoming cooperatives and engaging in joint purchasing.
Thus the argument that organized retail will not affect kirana stores is specious and wrong. It will, over time. Indian retail and wholesale trade has evolved over centuries and has reached products to remote corners of the country, as has the Burrabazar in Calcutta, or the wholesale market in Cuttack or Naya Bans in Delhi, like so many wholesale markets in India supplying vast hinterlands, offering credit and even delivery.
That commission agents swallow much of the margin between consumer prices and farmer realizations for fruits and vegetables is certainly true. But it must be noted that they offer services that no one else does. The farmer gets credit for seeds, fertilizer and other inputs, ready cash for his produce, a price for good and bad produce, and there are commission agents who specialize in different produce. The present agricultural marketing committees are government-sponsored bureaucratic creations. An inter-ministerial task force on agricultural marketing reforms was recommended in 2002 (accepted by all states) to promote competitive agricultural markets in private and cooperative sectors, direct marketing and contract farming programmes, progressively dismantle controls and regulations under the Essential Commodities Act, 1955 to remove all restrictions on production, supply, storage, movement of and trade and commerce in all agricultural commodities, substantially step up the inflow of institutional credit to farmers for marketing of crops (pledge financing) to enhance their holding capacity and their obtaining of remunerative prices, expand availability of warehousing services in rural areas by introducing a negotiable warehousing receipt system for agricultural commodities, and allow futures trading in all agricultural commodities to improve price risk management and facilitate price discovery by amending the Forward Contracts (Regulation) Act, 1952. Most of the steps are pending and need government action, not FDI.
Government investment in agriculture has been lagging since 1991. Rural roads, storage and cold storage, transportation including cold transport, more market-oriented agricultural marketing, dams, irrigation canals, check dams, improved access to credit for the poor small farmer, guaranteed quality of seeds, pesticides, fertilizers and other inputs have been known to be urgent needs of farmers. They have happened selectively and spasmodically. Foreign investment in retail can only touch small pockets of the country. Government investment and reform are essential precursors and cannot be replaced by FDI in retail.
However, agricultural investment in gross domestic product and as a share of total investment has been falling since the 1980s, despite a spurt in aggregate national investment since 1999. But subsidies (which do not build any assets) for agriculture, favoured by all political parties, have risen sharply. Indian agricultural policy is neither efficient nor equitable. The World Bank said in 2008: “Current agricultural practices are neither economically nor environmentally sustainable and India’s yields for many agricultural commodities are low. Poorly maintained irrigation systems and almost universal lack of good extension services are among the factors responsible. Farmers’ access to markets is hampered by poor roads, rudimentary market infrastructure, and excessive regulation.” These are for the government to correct and cannot be done by foreign investors.
Foreign direct investment in retail is not a panacea for “policy paralysis” or for India’s agricultural development. Over time, it will certainly hurt the small kirana stores whose owners will have to find other employment. In the immediate future, FDI in retail will marginally benefit the consumer and farmers in some locations. It is not a transformatory reform but one among many elements in reform, and not the fundamental one. Reforms will not be brought in by external agents. Government policies, investments and their effective implementation lie at the heart of our development agenda. It is high time that the government acted on this realization.
(The author is former director general, National Council for Applied Economic Research)