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Retail therapy

Enough case studies show that FDI in retail, with effective checks in place, has actually benefited small retailers and farmers, writes Nandita Dasgupta.

india Updated: Dec 06, 2011 21:27 IST
Nandita Dasgupta
Nandita Dasgupta
Nandita Dasgupta,FDI,inflation

India’s food price inflation is a major driving factor behind the country’s overall accelerating inflation over the past few years. Agricultural food prices in particular have risen recently. Over the past year, vegetables have become costlier by 18%, pulses by 14%, milk by 10%, and eggs, meat and fish by 12%. The rise in fruit prices was, however, relatively smaller (5%), as it was for cereals (3%).

This price escalation is largely due to an inefficient supply chain in agriculture. Some of the supply side constraints have been identified: poor agricultural productivity, lack of corporate involvement in agriculture, ceilings on landholding size, existence of middlemen, hoarding, and, more importantly, insufficient cold storage facilities and transportation infrastructure. Around 50% of fresh produce in India rots and goes to waste between the farm gate and the market because of inadequate cold storage facilities and a poor distribution network. These factors unfavourably affect agricultural supply, create a supply-demand gap and help raise food prices.

Controlling food price inflation has become an urgent policy objective for India because of the regressive tax that inflation imposes, since food occupies a massive share in the consumption basket of a significant section of the Indian population. Moreover, persistent and spiralling food inflation also threatens the macro-economic stability of the country and the potential for high and sustained economic growth in the future. With the clear objective of curbing inflation, the Cabinet approved 51% foreign direct investment (FDI) in multi-brand retail on November 24, after intense deliberations at different levels that extended over a year. The policy comes with some riders to protect the interests of neighbourhood stores, farmers and small and medium-sized enterprises. If effectively implemented, such FDI has the potential to:

Bring in foreign capital, technology and the managerial expertise of big international retailers;

Develop an efficient linkage between the back-end supply chain and the front-end via capital investment and technological inputs;

Create a proper farm-to-fork infrastructure through direct purchase from farmers and the resultant control of intermediaries;

Bring about efficient movement of produce through the reduction of transit costs;

Minimise the prevailing wastage of fresh produce through improving and adding upon the existing cold storage facilities, transport infrastructure, warehousing technology and food processing facilities;

Help raise farm productivity through the application of contract farming;

Increase agricultural production, reduce intermediate costs, render remunerative prices to farmers for their produce and eventually lower final food prices to consumers, thus integrating retailers into the value chain;

Create employment in small and medium-size industries and back-end infrastructure.

Despite the regulatory provisions to ensure domestic competition and protect the domestic retail industry and farmers, the policy has met with stiff opposition. Concerns include the possibility of monopoly power of foreign entrants over both farmers and consumers, predatory pricing strategies of the entrants, manipulation of prices for the entrants’ own benefit and a fall in income, employment and the eventual destruction of the unorganised indigenous retail sector dominated by small family-run outlets.

But it is important to remember that other countries like Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, Singapore and Thailand have allowed 100% FDI in multi-brand retail since the 1990s and many of them have had encouraging experiences. China, for one, permitted FDI in retail as early as 1992. It has since attracted huge investments in the retail sector without affecting either small retailers or domestic retail chains. Since 2004, the number of small outlets rose from 1.9 million to over 2.5 million in China. Employment in the retail and wholesale sectors increased from 28 million to 54 million from 1992 to 2001. In Indonesia, even after 10 years of opening FDI in multi-brand retail, 90% of the business remains with small traders.

Favourable experiences of other emerging markets suggest that the appropriate implementation of FDI in multi-brand food retailing, with effective checks designed to protect indigenous small and medium-size enterprises, will eventually alleviate the supply-side impediments to agricultural production. It will transform the way perishable agricultural produce is acquired, stored, preserved and marketed — and thus help control India’s persistent food inflation.

( Nandita Dasgupta teaches economics at the University of Maryland, Baltimore, United States )

This article is based on an essay published in Columbia FDI Perspectives on December 5 by the Vale Columbia Center on Sustainable International Investment, Columbia University, New York, a joint centre of Columbia Law School and The Earth Institute, Columbia University

The views expressed by the author are personal

First Published: Dec 06, 2011 21:23 IST