Farm incomes in India can double if organised retail enhances farmer realisations on food items from the current low levels of 30-35 per cent of retail price to international norms of over 50 percent of retail price.
This could come from cost savings that will result from improving the presently underdeveloped supply chain for unprocessed food items, according to a study by CRISIL Research. Higher farm incomes could benefit a majority of the nation's population that is dependent on agricultural income.
Food and grocery (F&G) retail accounts for more than 70 per cent of all retail sales, which is estimated at Rs 10 trillion or a third of the country's GDP. But the penetration of organised retail in the F&G segment is negligible (1 per cent).
F&G retail consists of fresh fruits and vegetables, milk and milk products, fast moving consumer goods and food grains. Things like food grains, unprocessed fruits and vegetable, which account for half the sales, are bought from farmers.
CRISIL estimates the retail value of these unprocessed items at approximately Rs.3.8 trillion. But the supply chain for these items is underdeveloped in India and has many layers leading to high wastages and a high cost of distribution.
Increasing penetration of organised retail into the F&G segment can bring about improvements to the supply chain for unprocessed food items. "This can result in substantial cost savings which can be passed on to farmers as better prices paid for produce," said Sudhir Nair, head, CRISIL Research.
The current farm realisations for unprocessed items are estimated at around Rs 1.2 trillion. Consider a scenario where this business shifts to organised retailing and farmers are paid as much as they get in developed countries (around 60-65 per cent of retail price); associated farm incomes could double to Rs 2.5 trillion.
The only problem is that CRISIL assumes that savings from improving the supply chain will be passed onto farmers. The retailers could decide to keep the savings to increase their margins or cover their losses till they start making money.
"In order to lure farmers into selling the produce to the retailers, they will have to pay them higher-than mandi prices. This also assures full off take of produce for the farmer," said Ruchi Jaju, analyst with CRISIL Research.
Indeed, this is already happening: retailers are paying higher prices and sourcing directly from farmers, through contracts and relationships. "Retailers anyways earn a higher margin as they save on intermediate costs," added Jaju.
Higher farm incomes can boost the purchasing power of 60 per cent of the population, who are employed in agriculture. If income levels within this group increase, it can add significantly to economic activity.
For instance, if the farmers spend 80 per cent (given the lower propensity to save at low income levels) of their incremental income, the economy will witness an incremental spending of around Rs 1 trillion. This is equivalent to nearly 3 per cent of India's GDP, even if the economic multiplier effect is excluded.