Tuesday, 25 September 2012

Retail FDI will transform agriculture by integrating Indian farmers in the global supply chain

Compared to power sector reforms, an infrastructure push or restructuring labour laws, the change in rules to allow 51% FDI in multi-brand retail may seem a relatively minor economic policy measure. However, the debate surrounding the retail decision - the government notified the new FDI rules on September 20 - is telling. It has regurgitated many of the shibboleths of Indian economic orthodoxy.

The fear of the foreigner; the disinclination to permit a modern market economy in Indian agriculture; the obsession with small-scale enterprise; and the dogged refusal to recognise the benefits of an economy of scale: all of these have been apparent in the past few days. It is crucial to interrogate these concerns and ask what the arrival of international retail chains can mean for India's farmers as well as consumers and for the economy generally.

As is well known some 33% of fruit and vegetables in India is wasted and perishes in the journey from the farm to the fridge. The comparative figure for Australia, which has the world's best record in this area, is less than 1%. There is a logistics experience here that India needs to tap. India has only 5,300 cold storages, a figure that sits uneasily when placed against the 12 million small and medium retail outlets in the country.

It can be argued building cold storages is not rocket science and can be done by domestic companies and businesses as well. Well, to be fair local companies can also make cars - and there is no real need for a Suzuki or a Nissan to be here. Where these MNCs score is not just in the technology available to them - which can be sourced, to be fair - but in their distribution and marketing muscle, which will take years and decades to replicate.

Why is this distribution and marketing muscle - which translates to deep supply chains in the case of giant retail companies - important? It is necessary if the Indian farmer is to get a better deal and ultimately become part of the global economy, and not remain a marginal economic actor confined to his district. Today, an Indian farmer gets only a third of what the end-consumer pays for his produce. In times of bumper harvests and distress selling, he gets just a sixth. The windfall gains are for a series of intermediaries.

Organised retail provides the farmer greater security. As a 2008 ICRIER study of the impact of organised (but Indian-owned) retail found, "Average price realisation for cauliflower farmers selling directly to organised retail is about 25% higher than their proceeds from sale to [the] regulated government mandi". Bharti Walmart's direct purchase from farmers in Punjab is also believed to have augmented incomes by 7 to 10%.

Admittedly, there is the other side of the story. Again, take an Australian example. Woolworths and Coles are the two biggest retail chains down under. Together, they sell 60% of the wine consumed by Australians. Essentially, this means they determine the price and type of wine that producers will find useful to bring to the market. Admittedly, this has wine farmers complaining. The stranglehold of big retail will ensure farmers cannot dictate prices and tastes. However, the certainty of purchase by the big retail chains also protects farmers (and consumers) from shocks.

In the end, when they build their long-term relationships with farmers and set up a network of warehouses and cold chains, international retail companies will begin to look beyond selling to merely Indian consumers. They will have to integrate the Indian farmer with their global supply lines. India's comparative advantage in the world economic system is cheap labour. This results in Indian car manufacturers making vehicles at a cost lower than that in, say, Detroit or Turin. India's IT-enabled services industry has benefited from a similar principle. The question is: Can this wage arbitrage advantage be used in Indian agriculture?

Original Article Here

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