FDI in retail
There are a lot of discussions in the media and parliament about allowing 51% in retail and how it will affect the following classes of people.
1. The farmer
2. Small kirana store
3. Consumer
Who are going to be the gainers and who are the losers?
Let us consider the following facts about India’s agricultural production
i. 60% of our population is dependent upon agriculture for their livelihood.
ii. Land holdings are very small compared to the rest of the world. The average size of each farm is less than 5 Acres.
iii. The policy of having minimum support price for rice and wheat has skewed cultivation towards food grains
iv. Post harvest losses are around 30-40% for fruits and vegetables because of poor infrastructure at the gate of the farm.
v. Lack of technical knowhow and poor availability of input materials for growing vegetables and fruits.
vi. The APMC (Agricultural Produce Market Committees) act forces the farmer to sell only to certain mandis. These are usually controlled by politicians with a vested interest.
vii. There are at least six layers of middle man between the farmer and the consumer.
viii. It is well known fact that prices of vegetables and fruits at the retail point are six times the price paid to the farmer.
Let us now examine the salient features of FDI in retail as proposed by the government of India.
a. A minimum investment of 100 million dollars by the foreign investors, which means that the equity base of the entity would be around 200 million dollars.
b. 50% of the money is to be invested in creating infrastructure at the farm gate.
c. 30% to be sourced from the micro sector.
d. Retailing to be allowed only in 53 Indian cities with the population of over 10 million.
e. Permissions to be sought from local state government under the relevant applicable acts such as the shops and establishment act.
f. Provision for local kirana stores to source material from these companies at discounted whole sale rates.
Bharathi Wall Mart and Metro AG are already running whole sale outlets from which local retailers and bulk consumers are sourcing.
Even a layman can understand that the government is trying to reduce the layers of middle men and cut post harvest losses. The stake holders are going to be affected in the following ways.
1. Consumers gain through better pricing, availability of choice in brands as well as products. The experience of shopping will also undergo a transformation.
2. The farmer benefits from raising income, better yields and more diversified crops. There is scope for contract farming as in the case of Pepsi and McDonalds. This reduces the uncertainty in income of the small and the marginal farmers.
3. The kirana store owner has the following innate advantages over a large chain. A personal relationship with the consumer which results in credit sales and specialized services such as free home delivery. It will also force the kirana store owner to innovate and create a better shopping experience. The proximity to the consumer will result in impulse purchases and just in time purchases of the consumer. Organize retail after being around for one decade has managed to garner a market share of only 1.7%.
The only losers are the six layers of the middle men between the farmer and the consumer. TESCO one of the largest retailers in Great Britain, employs 2,08,000 people in a small country like England.
Should 650 million Indians involved in low skilled agricultural labour suffer because we are afraid of change?
