Last few weeks we have seen a lot of discussions around FDI
in multi brand retail. I also did some reading on the subject through material
available on the net and newspapers. My understanding of the subject was that
things are not in plain black and white on FDI and a lot more discussion would
have helped to understand the subject. There are arguments in favor and
arguments against it, I have tried to list down the arguments in favor of FDI
and then have tried to identify the gaps in those arguments by doing some
reading and research.
1.
For e.g. one of the strong arguments in favor of
FDI is that currently in India a whopping 33-40 of agricultural product gets wasted due to lack of facilities in
supply chain and that FDI will reduce that gap to say a lower figure (for e.g.
it is only 1 % in Australia). However a report by Natural Resources Defense
Council, an international nonprofit environmental organization, released a
research paper written by staffer Dana Gunders titled `Wasted:
How America Is Losing Up to 40 Percent of Its Food from Farm to Fork to
Landfill’, a paper that was reviewed before publication by
several peers including a faculty of the Harvard Business School. Gunders uses
data from a 2011 study by the United Nations’ Food and Agriculture Organization
to show that the US, Canada, Australia and New Zealand lose around 40% of the
farm products at different level (e.g. production losses , harvest losses etc)
which is quite the same figure as of India. This therefore starts to make the
argument around FDI a little weaker.
2.
Second
point which is little unclear is the question that whether the local kirana and foreign retailers can
co-exist .Here the answer seems that there will be job loses (without the
huge savings on the farm produce as calculated on point number 1).An article by
outlookindia
takes us to the same conclusion for a case study done on UK. “Independent
retailers of food have nearly gone extinct. Butchers, fishmongers, greengrocers
and independent bakeries have seen a 90 per cent decline in their numbers since
the 1950s. There are fewer than 4,000 greengrocers left in the whole of Britain
“How will it be different for India needs to be debated well. While initially
the FDI will be only for cities with a population above 1 million how do we
define a policy that does not routes out the local kirana store in these
cities.
3.
Third point was the farmers will get a higher amount for the products they produce.
However there also it looks like that the current system is offering higher
amount to the farmers rather than the other way. To understand this is actually
going to be true we need to understand the business of cold storage units.
Based on an article
we can see that it is the cold
storage owner who is in control of the decision of when to sell or release the
agricultural product into the market. When the farmer enters the market at
harvest time, prices typically are low - a few rupees a kg. It is based on this
rate that advances are given to farmers, though again, it also depends on how
much leverage the owners have at that time. But as prices creep up during the
course of the year, it is owners, looking to recover their dues and make a
profit, who determine when to sell, thus affecting the price faced by the
end-consumer. "But there have certainly been reductions in the
post-harvest losses of potatoes/etc [from the growth in cold storages in the
area]," Ironically, if it is indeed storage owners who are in control,
then we are back to the situation prevalent earlier, when farmers exited the
market at the worst possible time - when prices were low.
The
above points bring us to the question of that if it does not saves food wastage
, does not provide higher sale price to the farmer does it helps the ordinary consumer with a cheaper price tag. To
question this we need to understand the business model of the retail chains,
quoting
from article “These stores typically operate out of better buildings along the bigger
roads, unlike kirana stores that operate out of older buildings on small
streets. Second is the cost of people. There’s a constant churn of store staff
because of difficult timings, long hours, weekend work. And new hires will
always come at higher costs. The kirana stores are run typically by family folk
who do not mind the difficulties. The third reason is that 60-70 per cent of
the items in a store are packaged, branded items that have to be sold at MRP
(or below that during promotions), and where the margins are low. Most of the
remaining 30-40 per cent consists of fruits, vegetables and dry groceries
(grains, dals, etc). “Internationally, that’s where big grocery chains make money”.
Therefore we come to the understanding that these stores will start making a
profit in the long term when they can price the vegetables and fruits to a
premium pricing. As of now they are unable to do that because of competition
from local vendors but with their super deep pockets, these foreign brands can
possibly keep their operations going long enough to ensure the extinction of
much of their kirana and pushcart competition, and then price fruits,
vegetables and dry groceries at levels that make the stores profitable. So in
the long run it seems that the customer will have to pay higher amount to make
these stores keep running.
Is there any benefit out of FDI in retail?
Some
of the rules laid down by govt are as following
Ø
Minimum Investment to be done is $100 million.
Ø
50% of the investment should be done in
improving the back end infrastructure.
Ø
30% of all raw materials have to be procured
from the small and medium enterprises.
Ø
Permission to set retail stores only in cities
with a minimum population of 10 lakhs.
Ø
Govt has the first right to procure material
from the farmers.
·
India has roughly 5,300 cold storages with a
capacity of 23 million metric tonnes, over 90 percent of which are suitable
just for storing potatoes only. Therefore an FDI in the sector expecting to
bring about a good amount of investment (around 50 million dollar for every
investment to be put in infrastructure) would help to exponentially increase
the cold storage facilities in the country. Govt. rule of 50% of the investment
should be done in improving the back end infrastructure will definitely
generate huge infrastructure projects and will in turn generate huge jobs.
·
Also setting up of retail stores will require IT
infrastructure which will in turn create jobs in IT software and hardware. This
will definitely create more jobs and more storage. How far will this will help
farmers is debatable as in the points mentioned above , also in long term it
does not looks to benefit the consumers a lot however it will definitely help
improve supply chain issues creating mass storage facilities.
Conclusion - Some questions to
answer
·
It around these points where govt and opposition
should be working to improve the policy of FDI. Some of the other places we
should be looking to improve this policy is once FDI is in what about the
market of cold storage where small scale industry will now compete with large
investors for setting up of cold storage units, how can we provide a level playing
field to all.
·
Second while there are examples across the globe
e.g. in Indonesia where both the local kirana shops and large retailers have
co-existed how do we ensure that for India also it happens the same way? One of
the good steps is allowing setting up the store only at the outskirts of the
city however how will that we well implemented since cities tend to grow very
fast in India. Is there some change in the policy the govt can bring which will
reduce the impact on small retailers and still provide a market to the foreign multinationals?
Can small retailers be looked to re-habituated or retrained so that they can in
turn get into the business of setting cold chain stores using a co-operative model?
The govt should look to work with people at grassroots who could provide a
valuable insight into this question as how to improve this policy to make it
more inclusive.
·
Another point where the policy can be improved
is local outsourcing clause , as of now it is 30 percent however a higher
percentage of local outsourcing clause will not hurt the prospect of foreign
multinationals in multi brand retail.
·
In order to correct these anomalies, India need
to have strong regulator for the sector. And at the same time strengthen the
Competition Commission of India before these Big Retailers prowls into the
Indian Territory.
·
During my discussions with people around me I
felt there is a strong desire in middle class to for reforms. Middle class had
earlier seen the benefits of these reforms which have resulted in huge jobs and
growth, therefore the question on FDI in retail needs to be carefully thought
through. We need to have an economic policy as desired by the people keeping in
mind the benefit for all the segments of the society (the general middle class
as well as the local retailers).How do we achieve that balance in policy is
something we can look forward from open debates and discussions.
Author:
Saurabh Sinha
