FDI in Retail—VI
By Dr Ashwani Mahajan
Government had tried to boil down the debate on the need to permit FDI in retail with reference to farming community, stating that it would bring boon to farmers and farming in the country. Government borrows this argument from the pamphlets of multinational retail giants like Walmart, arguments put forth by officials of US government and other interested parties. It is obvious that those who have business interest in opening up of FDI in retail would advocate FDI at any cost. It is unfortunate that the government, who is supposed to be the protector of national interests, also buys the arguments of the stake holders. Pamphlets of Bharti Walmart say that they give 7 to 10 per cent higher price to farmers, then what they get from Mandi. They claim that farmers get expert advice on better crop planning and management. Because of the support from the company, farmers will have an opportunity to maximise and improve income by offering better quality. Officials of the USA government, who have been acting like agents for change in policy framework, also are trying to argue that FDI in retail would be in the interests of the farmers. They claim that large organised retail would not only benefit consumers, who would enjoy lower prices owing to cost efficiencies, but also farmers, as these companies would provide stable market and purchase their produce at reasonable prices.
The (borrowed) arguments of the government in this regard require verification in light of the experiences of the countries, where these multinational retail giants have been operating. If we look at the experience in the United States, we understand that USA is a country of large farmers, farming activity is operated on a large scale, and in a way, it is an industrial agriculture. On the other hand, retail trade is getting more and more concentrated in the hands of large retailers. Therefore as per the argument of the government and multinational retail giants, farmer would have got greater share on the sale of agricultural produce. However, experience tells a different story. In USA aggregate food expenditure increased from $833 billion in the year 2000 to $1,200 billion in 2009 (increase of nearly $370 billion). On the other hand, cash receipts at farm increased from nearly $197.6 billion to $282.2 billion (nearly $85 billion). Therefore, it is clear that over the years multinational retail giants have tried to fleece the farmers more and more. According to the Department of Agriculture, United States, estimates during the period 2000 to 2009, the farm share of the retail price fluctuated between 23 and 28 per cent in case of fresh vegetables and between 25 and 30 per cent in case of fresh fruits.
If we compare the experience in other countries where these retail giants are operating with that of India, there are some interesting observations. In 1950 US farmers were receiving over 40 per cent of consumer expenditure on food, today it is down to average 25 per cent. In USA, farmers get 45 per cent of retail price in case of milk, 41 per cent of eggs and 32 per cent of meat products. In India (where FDI in multi brand retail is yet to come), farmers get Rs. 26 out of Rs. 34 retail price of milk (Amul), which comes to 76.5 percent, Rs. 22 out of retail price of Rs. 35 per kg of sugar. Farmers do get a rough deal in case of vegetables and fruits, because of lack of infrastructure. Nevertheless, Indian model tends to give more benefit to farmers as compared to USA’s model.
Government argues that opening of the FDI in retail would wipe-off intermediaries and thus would benefit the consumer. Theoretically, it may be correct but practically it is not. International experience tells that there are hardly a few multinational giants that control majority of the food sales. These companies enjoy some degree of monopsonic power (a situation where each buyer has some monopoly over purchases). In Western Europe, there are 3.2 million farmers, selling over 160 million consumers but there are only few firms making purchases from these farmers, thereby enjoying monopsony over food purchases. In UK there are only 4 firms controlling about two third of food products purchase. Similar is the situation in the USA, where more than 60 per cent of the food sales are in the hands of only 5 companies. Even India has had the experience of procurement of food grains by big corporates and we find consumers paying Rs20-25 per kg as price of wheat flour, whereas farmers get meager Rs 11-13 per kg for wheat sold. About 10 years back, this was not the case. Difference between wholesale price/ procurement price of wheat and consumer price of wheat flour was never more than 20 per cent.
If the government claims that foreign retailers would provide rural infrastructure like warehousing and cold storages, it is grossly misleading, as FDI in warehousing and cold storages was allowed more than a decade back, but no foreign investment could be attracted in this sector. Therefore, any infrastructure they build would be for exploitation of farmers and not for their benefit. Provision of infrastructure is the responsibility of the government (both State and Center). Government even after more than 6 decades of independence has failed miserably in providing infrastructure in the form of warehouses and cold storages. Now to cover-up its own inefficiency in providing infrastructure in rural areas, the government is arguing for FDI in multi brand retail, stating that these multinational companies will provide infrastructure in the rural areas. As per government’s own admission, we need hardly Rs. 7,687 crore to build infrastructure in the rural areas. This is no big an amount to justify FDI in retail, destined to ruin crores of small traders and causing heavy loss to crores of farmers.
At an earlier occasion, in this series of articles, author has dealt in detail about how farmers are caused heavy loss by multinational retail giants in the name of quality and standards. According to a report of ‘Food and Agriculture Organisation’ (FAO) of UN, farmers lose is due to ‘rigorous quality standards’ and the marketing policies of the supermarkets. Building of big warehouses and cold storages infrastructure as a part of supply chain management by multinational retail giants neither is in the interest of farmers nor is in the interest of the people at large. This is so because farmers are forced to destroy their rejected products or use those as animal feed, which in case of small retailers would have been channelised for consumption of human beings and farmers would be paid for the same. This is the loss, which a country like India can hardly afford, as majority of population is reeling under severe hunger and malnutrition.
(The writer is Associate Professor, PGDAV College, University of Delhi, and can be contacted at ashwanimahajan@rediffmail.com)
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