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Sunday, November 27, 2011

FDI in retail: "Modern" solutions to "old" problems?

The government of India is patting its back as by the passing of the much awaited "FDI in multi-brand retail", some experts believe that the reforms are back on track. In this blog, I don’t intend to discuss the criticality of the reform rather my focus will be on the efficacy of this reform. With the issue increasingly being politicized across the nation, let’s try to see whether this reform really aims at solving issues esp. inflation, which a common man faces. Will the benefits percolate to aam aadmi or will, once again, the crème-de-la-crème in the metros only share the spoils?


Let me first enumerate the major aspects of the FDI in retail. The government of India earlier this week, approved FDI in retail thereby throwing  open its $450 billion retail market to global supermarket giants  like Wal-Mart, Carrefour, Tesco etc. Some major points are:
  • The Cabinet cleared 51 per cent foreign direct investment (FDI) in multi-brand retail and also cleared 100 per cent FDI in single-brand retail
  • The minimum investment would be $100 million and half of this would be invested in rural infrastructure and refrigerated transport and storage
  • The new rule would only apply in cities with more than one million people and 30 percent of products will be procured from small and medium enterprises (SMEs)

According to internal estimates by the FMCG firm, Hindustan Unilever (HUL), “modern retail" (e.g. Big Bazaar) accounted for 10% of the Indian retail landscape in 2010 against 5% in 2007. In major cities like Hyderabad, Gurgaon, Bangalore and Chennai, its share is as high as 30% of the total retail pie.

So, will the reform really provide solutions to the supply chain bottlenecks that have become a hallmark of India? Before we try to find the answers to these questions, let’s first see what those in favour have to say in support of this reform.

It would lead to heavy investment in the supply chain infrastructure as mandated in the reform (at least 50% to be infused into the backend infrastructure) thereby cutting down losses due to inefficiency in supply chain (the wastage of fruits and vegetables are estimated at 1 lakh crore annually in India). Also, the large retailers will directly source from the farmers thereby limiting the role of middlemen thus providing consumers “better products at lesser prices”.

My answer to the above assumptions is that it would be too much to expect from “FDI in retail”, if we consider it as a major step towards tackling inflation (which is the single biggest “aam aadmi” issue that the reform promises to address). I am focusing on food-items as they constitute more than half of the retail consumption in India. The reasons are:
  • More than 70 per cent of the Indian population resides in villages. To make matters worse, the rural population is a dis-aggregated lot so they won’t be a profitable lot for these modern retailers, who rely on high volumes, even in distant future so this section doesn't stand to benefit a great deal from this reform.
  • Coming to the issue of back-end infrastructure being set up by these retailers, the focus of the Wal-Marts and the Tescos will be on the 50 odd cities with at least one million populations each, so the infrastructure being set up would at best extend to satellite towns and the adjoining rural areas to these cities. So, if we expect to see rotting grains finding safe heavens in the godowns of Carrefour, it’s not going to happen. Thus the government can’t abdicate its responsibility of setting up its own infrastructure.
  • The focus of the large retailers aren't just volumes, rather they also focus on enhancing the value of your purchases. So, we may have more options (read costlier varieties of fruits, vegetables etc.) available to the customers at these supermarkets which could even displace the cheaper alternatives at the shelves. After all upselling is commonplace in retailing.
  • As far as enhancing the production of food materials, through better farming methods being adopted at farms contracted by these retailers is concerned, in my opinion this shouldn't be our immediate concern yet. We can instead focus first on providing basic facilities like  irrigation, credit, know-how etc. beyond the 2.5 “green revolution” states of Punjab, Haryana and Western UP and then by setting up storage facilities so unavailability doesn't lead to inflation.     
So, while modern retail may help “modern” India (read metro-based) satisfy its urge for “more” and “better” options, it may still fall short of providing “modern” solutions to “old” and pervasive issues of inflation. 

10 comments:

  1. The points well put forward but they are making the readers more confused when there is on going debate on the repercussions of FDI in retail. With the advent of FDI the food processing & agri product industry will get attention from foreign players. There will be a boost in contract farming and farming will be facilitated by access to credits, appropriate technology, reliable market & pricing structures by the players. PPP model can be followed to build the infrastructure sought.

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  2. @ Kunal, you have rightly pointed out that access to credits, appropriate technology, reliable market & pricing structures are needed for agriculture to flourish but why bring in PPP if you are relying on FDI to weave the magic wand and improve the agri scenario.
    I am not against "FDI in retail" if you propose it as solution to burgeoning demand of India for more options. I only oppose it if you propose it as solution to Indian problems of inflation and inefficiencies in agriculture.
    Even though 85% of US relies on modern retail but their agriculture still relies on subsidies to sustain itself. If you have come across examples where agriculture has become viable in the long term after FDI in retail, do let our readers know so that we can take our discussion further.

    Walmart is here to benefit from the demand that's there is India (and I don't blame them for that) but don't expect them to do what the government should be doing i.e. investing in agri infrastructure beyond the 2.5 green revolution states or carrying out APMC reform (this time I blame the government for that as they just aim to pass the buck or buckle under US lobby).

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  3. Your concern is valid. This is a prominent question that in case of farm produce what percentage of the money paid by the consumer will go in farmer's hand. At present there are min 6-7 intermediaries between farmer & the end consumer. Farmers are bearing the burden of the supply chain inefficiencies. They are always exploited by avaricious middlemen and suffer due to lack of transparency of APMC mandis. At present there is no fairplay in terms of price fixation. The government can include clauses that maintain interest of farmers like what is done in the form of minimum support price.
    As we are not replicating the same FDI model of developed countries, comparing results will not give the right picture.

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  4. Kunal, you are right that supply chain inefficiency has been responsible for farmer's plight but do you really feel that FDI in retail will straight away remove the middlemen? With majority of Indian farm holdings being very small in size, there will always be room for middlemen read aggregators as Walmarts won't directly deal with so many farmers.
    Coming to the scenario of less middlemen, I agree that the number will come down with FDI but less middlemen would also mean concentration of power thus supply of food commodities will be controlled by a few large middlemen and retailers with massive clout thereby leading to possibilities of lobbying and manipulation. As you have mentioned MSP like protection in this scenario as well, then how does FDI help as government still has to intervene directly to regulate prices as the market forces still aren't self sustaining.
    I still feel that the major problem is lack of will-power on the part of government as far as investing in agri-infra is concerned as well as ability to take tough decisions like APMC act reform or taxation of agri produce(mainly held back by agri lobby of rich farmers and middlemen). The new scenario will only create a new power center which could be large global retailers.

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  5. The number of member in a particular level may remain same (as given by your logic) but the number of levels of intermediaries will be removed. I do not agree that the bargaining power of middlemen will increase.
    100% FDI is already allowed in Cash & Carry format. If we study its effect on farmers & middlemen, we may get a glimpse of the true picture. (Study of the supply chain of Metro cash & carry can be done to understand this, I have not done it so not in a position to comment).

    The story of exploitation of farmers are not new and if government would have the will-power the agri-infra investment would have been done long back. Their excuses are the awkward constraints they are always in!

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  6. Thanks to sharing nice information through your blog I think, it would help to complete study from
    distance learning
    .

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  7. The allowing of FDI in multi-brand retail might have limited benefits to limited number of people. Nevertheless, it is action in the right direction. At least some farmers will be benefitted, some inefficacies in the supply chain will be eliminated, some customers in the metros will have better products to choose from, some SMEs will benefit. It will only harm the middlemen who are the reason for substantial price difference in village wholesale markets and city markets. These middlemen make a whole lot of money which will no longer be possible.

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  8. Avik, you are right that there would at least be some limited benefits. But given the existing scenario that's prevalent in the country, there are more important issues that should have got a fast-track treatment like GST.
    Coming to the impact on middlemen, in a country full of small landholdings (avg. less < 1.5 acres), there will always be a need for aggregators or middlemen (even e-choupal imbibed them) though the modern retailer too would extract its share of pie and in the long run the ultimate loser will be farmer (the weakest in the chain).
    Despite, all these issues, my major concern is government abdicating its responsibilities by presenting this FDI as the panacea for these evils that plague this sector.
    To me, its another way of helping out the struggling debt-laden Indian modern retailers and have the Indian corporates by its side before the elections. In fact, it exposes India to global commodity price fluctuations and given the minimum $100mn cap, only big boys will come and make no mistake about it, they can seriously impact our policies and processes in coming years.
    Thanks once again for your comments.

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  9. good article dear i agree and want to know your views on following points

    These big retailers are here to make profits and are not Non profit organizations .They will focus on those areas where there ROI is guaranteed so Major cities with already well established infrastructure with mall culture now part of life will get benefited and will end MOM & POP kirana stores . Their immediate involvement to come as a saviour for farmers will be a distant possibility as to cut cost they will rely more on middlemens who will act as supply chain partners between farmers and company .
    If we put an excuse of america we should note that farmers in america get more subsidy compared to indian farmers. The decision will help influx of FDI which will act as a oxygen in current economy but if basics are not put in place in the beigning things will become more complicated and beyond repair . It is well said that " Reforms are not bad it is the maturity of reform implementer which makes good bad and bad good "

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  10. Sagar Sir, I agree with most of your points. After all the success of auto sector has shown that "FDI" per-se is not bad.
    But for this "FDI in modern retail", do we have checks and balances in place?
    Does this govt., with history of crony capitalism, have the will-power to enforce these norms or punish deviations esp. when confronted by these behemoths?
    Does the country have enabling factors like GST in place which should be far above in the priority given its impact?
    Thanks for your views, really appreciate them.

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