FDI in Retail: Examining Some Issues in Agricultural Products

A lot of passion has been generated in the debate on FDI in Retail on the issue of impact on agriculture. One side takes the position that this is precisely what the farmer always needed. He will get a better price for his produce, cut out the middlemen and rural prosperity will be advanced. The other side takes the stance that the MNCs will bring goods at extremely low pries from abroad undercutting the Indian farmer and throwing him out of business. Alternatively the MNCs will control the supply chain and in a monopolistic situation, offer extremely low prices to the farmer. Without any options the farmer will end up selling at a loss and eventually give up agriculture as a means to live. End result will be death of Indian agriculture.

Actually such arguments on both sides are generic in nature. By themselves they are not wrong and things could very well pan out that way (i.e. both ways). However for this to happen there are many prerequisites. Let us briefly examine some parts of this reality.

First let us remember that we are concerned with food produce. Thus cotton and jute may be agricultural produce but will not fall within the supply chain of a Retail Chain. Second, for an MNC to make any kind of impact on the source end, it will need to account for a significant share of the market. It is of course difficult to determine this share exactly. Suffice to say that – a) this will be commodity specific and b) as long as the farmer has a viable alternative to sell to, there will be no monopolistic effect.

 Let us examine some of the hurdles a player MNC (or for that matter a local player) needs to cross before it can reach this level:

1. Policy Environment: Any business in the country – local or MNC will need to follow local law, rules and regulations. Thus permission for FDI cannot supersede other provisions in the country. The MNC will need to follow import regulations, pay import duty, and fulfil all statutory requirements. To list just a few:

a. Import duties – for food items are quite high. For instance for cheese, butter and ghee it is 40% Honey attracts 60% duty.

b. APMC rules – restrict the ability of any player to deal directly with a farmer.

c. Storage may be subject to Essential Commodities Act.

d. Government control on sales (releases into market) as in Sugar

All these constraints need to be dealt with by the Governments (State and Central) before any impact can be made. Here there can be no discrimination between a local player and a company with FDI.

2. Shopper Habits: The mass retail format requires purchasing behaviour which may not fit with existing Shopper Habit. For instance in (most of?) Urban India, milk is delivered at the doorstep early in the morning. How many of us will be willing to break this habit and a) go to a supermarket after 9 in the morning, or b) stock up for the following day(s)? In poultry products, 95 % of chicken are sold ‘live’ – slaughtering and butchering is at the retailer end. To dominate or even get an ‘influencable’ share in these categories, the Shopper habit must change or the retailer will need to offer a superior value to make the shopper switch.

3. Uniqueness of Food Basket: To use an example, India is the world’s largest producer of pulses accounting for 27-28 % of world production. But it is also the world’s largest Consumer, and the largest importer! Indeed Shortfalls are imported, but the uniqueness and variety consumed by Indians means there are simply not that many sources. For example Canada produces chana but not tur. Burma is a major supplier. An international retailer seeking to dominate pulses economy cannot simply plug in to their sourcing system and undercut Indian farmers. It will need to develop new sourcing infrastructure and may end up doing most of it from within India.

4. Competitiveness of local production: In many agricultural products India is a significant as well as competitive producer. India is the no 1 producer of Pulses and Milk, no 2 in Wheat, Rice, Groundnuts, Potatoes, Onion and Sugarcane. It is also the third largest producer of Eggs (Source: Ministry of Agriculture). In many of these it is also competitive. Other than edible oils where India is quite dependent on imported palm oil, in no major item of daily consumption India can be easily undercut with imports. A retailer seeking to bypass the Indian farmer will need to develop and use sources that can ‘beat’ him in price!

5. Cost of current supply chain: Many commentators have used the argument of multiple layers in the current system increasing total cost of the channel. This is certainly true for some product categories but is not universal. Using two of the examples covered earlier – 1) Processed milk is delivered by the manufacturer to kiosks and street-corner redistribution centres in a single operation. From there it is delivered to homes. Currently we in Chennai pay Re. 1.00 per litre for this last mile service or a mark-up of 4.3%! In the case of unprocessed milk, there is often no middleman! 2) Margin between the farm gate price for broilers and the price paid by the consumer is estimated at about 20 to 25 percent. To reach the position of controlling the supply chain, a retailer needs to achieve lower cost or add value through other means – commodity-wise, as we saw that the dynamics in each commodity can be different

As long as the buying organisation is unable to cross these hurdles, it will be difficult for it to make a monopolistic impact on the supplying system. Just as it may be difficult for them to replace current systems easily, they may well end up playing too marginal a role to have an impact on the wellbeing of the farmer! Unless of course there are significant, lasting systemic changes!