The union government has understandably been extremely cautious in its approach on the issue of allowing foreign direct investment (FDI) in multi-brand retailing. In fact, it has been quite a calibrated approach over the past 14 years. While the cash-and-carry sector was opened to 100% FDI in 1997, it took another nine years to open the single-brand retail sector to 51% FDI in 2006.
After widespread consultations between stakeholders over the past two years and a detailed Impact Assessment Study by ICRIER (Indian Council for Research and International Economic Relations), the government has finally been able to open the sector to FDI to the extent of 51%. To me, the present decision not only appears a logical extension of this process but a well-considered one. I also believe that this big-ticket reform measure can potentially have a transformational impact on Indian agriculture, besides making multi-brand retailing a powerful driver of employment in the country.
First, let us look at the linkage of the sector with agriculture. There is little doubt that the current fragmented retailing structure is utterly inefficient both in terms of cost economics, quality control and consumer interest. The fragmented supply chain, with numerous middlemen (handling points) between the farmer and the retailer, results in enormous wastage, poor quality and cost escalation.
Lack of efficient backend infrastructure (cold chain and related supply chain linkages) results in wastage of close to 40% of fruits and vegetables produced in the country. For every 100 kg of fruits and vegetables produced in the country, only 60 kg are actually consumed. Price realisation for the farmer also drops significantly. Similarly, inefficient sourcing and storage infrastructure also results in wastage of 5-7% of foodgrains produced in India. Both these factors translate into losses of more than Rs 1 trillion (Rs 1 lakh crore) annually.
Successive initiatives by governments to strengthen the storage infrastructure for perishables in the country have failed. Under the National Horticulture Mission, which extends investment subsidy to entrepreneurs in this area, just 453 cold stores (including controlled and modified atmosphere facilities) came up in the entire country between 2005-06 and 2010-2011. With just 5,300 cold stores with a cumulative capacity of 23 million tonnes in the entire country, we are woefully short of capacity to handle our perishable produce.
It's now fairly clear that more capacity at the backend can only be created by investments from the retailers themselves. But given the predominance of small stand-alone retailers in India, and the limited investment capacity of Indian retail chains, we are unlikely to witness any significant incremental investment by them. Allowing FDI in the multi-brand retail sector can ease the situation considerably. The provision that 50% of FDI will mandatorily go towards developing backend supply chain would come really handy for the agricultural sector.
An efficient backend can have a positive impact on the two key stakeholders standing at the two ends of the supply chain - the consumers and the farmers. With the advantage of scale, organised retailers are invariably better placed to save on supply chain costs and ensure better quality of products when they reach the consumer. Better quality control processes of these retailers can help restrict the scope of product adulteration as well.
Savings on supply chain costs can not only help ensure low price for the consumer but also have an overall anti-inflationary impact on the economy, besides easing the food security situation in the country considerably.
Alongside savings for consumers, organised retailing has the ability to make a distinctive difference to farmer incomes in the country, who currently realise less than one-third of the price that the consumer pays. In times of bumper harvests, the realisation can even be as low as one-sixth or one-seventh of the consumer price.
Middlemen who make no tangible contribution to the value chain are the real gainers of the current exploitative system of sourcing of farm produce. The entry of organised retailers can not only bring transparency into the agricultural marketing process but also add to the farmers' income significantly.
We already have some extremely relevant examples of this in India and other emerging markets. Under Bharti Walmart's Direct Farm Programme farmers' income has gone up by 7-10% over the past few years. Under a similar programme by Walmart in Central America, where more than 4,500 small and medium farmers are associated with the company, earnings have gone up by close to 15%. More than 2.75 lakh farmers have benefited from a similar programme in China.
The best part of the entry of organised retailing into the lives of farmers lies in the fact that retailers tend to develop a direct interest in promoting farm activities around their warehouses/cold chain to ensure a continuous supply of farm products. Retailers even go to the extent of associating themselves with activities such as soil testing for nutrient levels to capture deficiencies and mapping of agri-input requirements with the help of agronomists to ensure quality of produce. These initiatives not only impact productivity at the farms of the contracted farmers but also leave a "demonstration effect" on other farmers in the region.
Opponents of foreign chains in multi-brand retailing often argue about their adverse impact on the overall employment situation in the economy, assuming that employment in small neighbourhood stores goes down when big retailers enter the fray. On the contrary, experience across emerging markets such as China, Malaysia, Thailand, Mexico and Brazil shows that overall employment opportunities increases with the entry of foreign retailers.
The case in India is no different if you look at the experience of the big Indian retail chains. A typical Easyday store covering 3,000 sq ft of retail space employs 15-17 persons on an average. Given this employment intensity, according to government estimates, opening the sector to FDI can easily create nearly 10 million additional employment opportunities in the country in the next three years.
Four million new jobs can be created in the front-end stores alone. The back-end warehousing and logistics systems will be able to create another 5-6 million opportunities. I clearly see a transformational change in the employment potential of the sector with the entry of foreign retailers. The emerging formal job opportunities will be a huge plus for India's youth.
The debate today stands completely vitiated by a misinformation campaign. The fears are completely unwarranted. Since a large part of these apprehensions are created and sustained by ignorance, there is a clear need to educate the stakeholders on the potential impact of the decision on two critical areas of the economy - agriculture and employment generation. It's time political parties and pressure groups opposed to the move see reason to move beyond their usual political rhetoric and support this reform initiative.