The furore over foreign direct investment in retail ignores the fact that farmers will get a big boost. Also, MNCs will not take over the sector, if the experience of China is a guide.
K P PRABHAKARAN NAIR
A political storm is brewing on the decision of UPA-II, notified on September 20, to allow 51 per cent foreign equity into the multi-brand retail market in India. Compared to the infrastructure push or restructuring labour laws, this is relatively a minor policy measure. Yet it has precipitated a political crisis. West Bengal chief minister and Trinamool Congress chief Mamata Banerjee has left the coalition. The BJP is taking a stubborn stand against it. And most Indians are concerned where India is headed. The intention of this article is not to analyse the political fallout, but look at the policy decision against the background of the current state of Indian agriculture.
Will the US$500 billion Indian retail market—open to all retailers both foreign and Indian—be completely taken over by MNCs like Walmart? Political posturing notwithstanding, my clear answer is, it is just impossible on Indian soil. If New Zealand farmers can sell their apples in Hong Kong, what stops the world famous Kashmiri apples from reaching the supermarkets of Britain?
Critically look at this scenario: India is the world’s second largest producer (next to China) of fruits and vegetables. Annual production is more than 200 million tonnes. But what happens to this colossal amount? As of now, cold storage capacity in India is not enough to store even 50 million tonnes. Potatoes take almost 75 per cent of this space, leaving almost no space for fruits and other perishable items.
As a result, 25-30 per cent (compared to just one per cent in Australia) of fruits and vegetables rot and go waste. Think of the colossal amounts of investment gone down the drain. If there were good cold storage facilities, this money would have gone into the pockets of Indian farmers.
If so much money can be saved by building cold storage facilities and helping farmers get better returns, what prevents the government from doing it in the rural areas? Building cold storage is not rocket science. And we do not need Walmart (US), Carrefour (French) or Metro (German) to come to India and build them and store our fruits. The determination to do it is the most important factor. That has been missing in New Delhi for decades.
One of the greatest benefits of FDI in multi-brand retailing is that it will greatly minimise the stranglehold of intermediaries, who currently corner a huge margin in the price the consumer pays for the farmer’s products, but denying him a proper price. The “mandi” system is the root cause of this injustice. Average price realisation for cauliflower farmers selling directly to an organised retail outlet is about 25 per cent higher than their proceeds from sale to the regulated government mandi.
The Bharti Telecom group already has a tie-up with Walmart and sells produce under the brand name “Best Price” in some cities of north India, especially in Punjab, and it purchases directly from farmers. The farmer’s realisation averages 7-10 per cent more than when sold to the local mandi.
FDI in retail will strengthen rural-urban linkage, encourage agro-processing and significantly check post-harvest losses, as the one described above in this article in fruits and vegetables. Eventually, this could also be an effective instrument for managing food inflation.
To consider FDI in multi-brand retail a solution for all the ills of the farm sector could be a misplaced judgment. To succeed, it must be accompanied by policy actions aimed at unshackling the farm sector from excessive control, in particular, archaic regulations like the Agricultural Produce Market Committee (APMC), and ensuring free movement of farm produce across the states to allow farmers to benefit from growing consumerism and the retail boom.
As of now, free movement of agricultural goods within the length and breadth of India is impossible. Each state has its own tax system under which consumers are denied the benefit of competitive prices. This is the prime reason for the huge variation in prices from one state to another. For instance, oranges which are widely grown in Punjab and Maharashtra (Nagpur belt), cost as much as 500 per cent more in Kerala during the same crop season (winter). On the other hand, coconuts, grown round the year, are as much as 350 per cent more in Assam than Kerala.
It is not merely a question of production in these states. Oranges will grow in the cooler parts of Waynad district in Kerala, as in Punjab, and coconut will grow both in Kerala and Assam. The examples could be multiplied. This denies the grower in a particular state the monetary advantage, while at the same time it severely taxes the consumer in another state.
This does not happen in Europe. In a particular crop season, if grapes cost €2 a kg in Germany, it will be almost the same in Italy. Europe has a common agricultural market, and farmers and consumers would greatly benefit if we had an “Indian Common Market”. This simply has not happened, and vitiated politics, with entrenched corruption, is at the root of our distorted agricultural system.
In a state like Kerala, whose economic mainstay is spice, on account of very poor or almost totally absent value addition, farmers suffer a great disadvantage. Black pepper and cardamom in primary form are imported to the US, Europe and Japan. Value addition takes place there. Often, it returns to India in modified form and consumers pay a lot more for the end product.
Thus, the price advantage a pepper farmer ought to get in Wayanad district—or a cardamom farmer in Idukki district—simply does not materialise. At the same time, the consumer ends up paying a lot more for the end product. FDI in retail will be of great help in removing these bottlenecks to the advantage of both the farmer and urban/local consumer.
Multi-brand retail is not only about the farmer. It is also about the consumer. Some 40 per cent of India’s gross domestic product (GDP) comprises household consumption. Just think of the benefit to the consumer if we had the policy and practice in place within India itself to redefine our marketing system.
When we look closely at the success of the MNCs, we see that it is not superior technology that makes them better than us, but, their efficient marketing strategy. An Indian MNC like Tata has much better marketing strategies. We have monoliths like the Indian Council of Agricultural Research (ICAR), Central Food Technological Research Institute (CFTRI) in Mysore, which get thousands of crores of government money, for “research” and “application”, but, do not have a sound marketing strategy. In the end, it is the consumer whose pocket is drained. In the following paragraphs, I shall cite the Chinese example.
During a visit to Beijing to deliver the keynote address in the first global conference on liquid fertilisers, in July, 2011, at the invitation of the government, I observed every morning dozens of residents (mostly elderly men and women), make their way to the east gate of Tuanjiehu park, a sprawling oasis of trees and ponds in the heart of Beijing. There the streets are clogged with vegetable vendors, fruit sellers and farmers, from the villages of nearby Hebei province, and I saw them haggling for the best bargains and buying their wares.
China opened up FDI to the extent of 26 per cent, in 1992 and increased it to 51 per cent in 2004, 12 years later. India, at one go, has given 51 per cent. Since the last two decades these street markets have co-existed with the MNC marts, and have also thrived. What prevents Indians from doing this?
I am sure we are capable of doing it and also succeeding. We must learn from the Chinese experience.
China has set up “invisible barriers” to foreign entry in the retail markets. Foreign firms were initially allowed to operate only in three major cities and given land only in places where local retail firms did not have a presence.
I noted that the entry of both Walmart and Carrefour in China had made China’s retail sector more efficient, more modern and led to an increase of investment in supply chains.
In China, the “foreign invasion” that many feared would harm the local sector simply did not happen. Today, China’s biggest retail chains are the Bailian, Sunning and Gome groups, all Chinese. Walmart, which has more than 350 stores in China, and 15,000 suppliers, controls only 5.5 per cent market share, according to the China Market Research Group. The sector is diversified enough to ensure that prices stay low.
But the interesting fact is that the merchandise Walmart sells in China is Chinese, not imported from the US. A lot of this is exported to the US.
There is another important question and that is the legal angle. This is exemplified by what transpired recently in the Supreme Court.
This is the question the Supreme Court asked the Attorney General: “Have you got any Foreign Direct Investment or is it just a political gimmick? Has the FDI policy in multi-brand retail sector announced by the Centre in October 2012 brought some fruits?”
The position of the judiciary was stated in the following words by Justices S. J. Mukhopadyay and R. M. Lodha : “We don’t want to interfere and substitute government policy decisions with judicial decisions but the policy has to meet the constitutional requirement. Our exercise is limited to see whether the policy meets the constitutional principle”.
As per the gazette notification amending the Foreign Exchange Management (Transfer or Issue of Security by a Person, Resident outside India) Regulations, 2000, 100 per cent FDI is permitted in single brand product retailing and a 51 per cent cap has been imposed on equity in multi-brand retail.
The Bench was hearing a (PIL) Public Interest Litigation filed by advocate Manohar Lal Sharma, who challenged the Centre’s notification allowing FDI in retail. He pointed out that the amendments would have to be placed before Parliament for its approval as per Sections 47 and 48 of FEMA (Foreign Exchange Management Act).
During the resumed hearing, Attorney-General Vahanvati told the Bench that Parliament had rejected two negative resolutions on FDI in the last session and nothing survived in the petition. At this juncture, Justice Mukhopadaya asked whether FDI would have an impact on the small trader, and whether it would affect free trade.
The AG said: ”FDI is a policy decision and every aspect has been gone into by Parliament, where the issue was discussed in detail and put to vote.”
Further, Justice Lodha asked “What are the checks you have put in place to ensure that there are no restrictions on free trade?”
Justice Mukhopadaya told the AG: “There are serious apprehensions in the minds of small traders that FDI will affect their trade. They feel FDI is a serious threat to their business. Policy is one thing. Apprehension is another issue. We have seen [that] when big traders reduce prices, small traders are eliminated from market.
“[But] after some time they increase the prices. If big companies adopt unfair trade practices and bring down prices, what will happen to small traders? What has the government done to protect the interests of the small traders?”
Further, Justice Lodha asked: “You announced the policy in October 2012. Have you got any FDI? Have you brought FDI as a political gimmick or has it brought some fruits?”
The AG replied that “It is not a political gimmick, but part of serious reforms, It is a matter of government policy and now applications are coming for investment.”
Justice Mukhopadya then told the AG: “Reforms should not close the door to small traders. Consumers should have a choice and you (government) must ensure that. The apprehension is (that) their right will be taken away. If the retailers are there, consumers will have a choice; if they are out, consumers don’t have a choice.”
Justice Lodha further added: “Your policy cannot be sacrosanct. Reforms can go on, but that does that should not close the door to small traders. We are not policy makers, but a policy has to be within the constitutional parameters.”
FDI can itself create hundreds and thousands of jobs in retail and the Government has rightly made it mandatory for all investors, Indian or foreign, to source 30 per cent of their products within India. But, whether this mandate will be effected efficiently or will be subject to the usual corruption is another matter.
In conclusion, the UPA-II decision on FDI is not just a “hurdle”, but a challenge, which also has a tremendous hidden opportunity for Indian enterprise.
If Tata can build a totally Indian small car like the Nano, and succeed in exporting it as well, there is no reason why India cannot have its own efficient “Indian Retail”.
New Delhi should market the idea efficiently and with a clear “national” spirit and not let Indians think that it is an American idea. As things stand, this is reflected in the legal angle of the learned Bench. China approached the idea from that angle and it succeeded so well. Why can’t we?
(K P Prabhakaran Nair is an agricultural scientist, based in Kerala, with more than three decades of experience in research, teaching and development in Europe, Africa, Asia. )
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