Friday, December 09, 2011

FDI in Retail: Neither Boon Nor Bane

The deadlock in Parliament for a week over allowing 51% Foreign Direct Investment (FDI) in multi-brand retail was over, with Manmohan’s government withdrawing  the proposal “ for now”.  For the past week, we have heard and read Giga Bytes of information with Aye sayers proclaiming  FDI will bring in better prices for farmers and increase employment and Nay sayers  predicting it will wipe out the small kirana stores thereby increasing unemployment in the unorganized sector.                                              
To me, both are wrong.  For different reasons.

In the heat of arguments, everyone forgot that retail giants that will come in are giant transcontinental corporations  which empathize only with one thing. Profits and more profits.  It is a myth and naivety to even optimistically think these corporations will pay a better price for farmers than that is existent in the market. They will just replace the existing middlemen by they themselves becoming the middlemen and hoarders. Neither will they generate employment to the large extent being projected. In large retail chains, very few are employed in the store compared to the volumes. Even contract farming or captive farming where agreements are drawn beforehand  by the retail chain with farmers for purchase of entire produce has not worked to the advantage of the farmers as is evident from the basmati growers of Punjab, potato framers in Northern India with Pepsi and Subabul, eucalyptus growers in Andhra Pradesh with ITC paper mills. On the other hand, they impose extra burden on the farmer to bring in gloss for the produce like wax coating for apples and protective sponge net for pears.
The argument that these retail conglomerates will wipe out the corner store Kirana Wala is also unfounded. Already, India has retail giants for the last several years like More, Reliance, Metro, Subhiksha and a host of others but the mom and pop kirana stores never perished. They have a unique business model of extending credit, home delivery and personal relationship with the consumer. It is a common practice for these stores to give goods on credit even when the order is placed through the house maid or on telephone. In fact, it was Subhiksha that got wiped out and not the kirana stores.

India Inc. too stepped in crying hoarse that withdrawal of the proposal will be a blow to economic reforms and a great loss to farmers. Obviously, the tycoons were salivating at the prospect of  investing in the rest of the 49% equity and riding on the train of super profits. It was hilarious listening to these Armani suite wallahs glibly espousing the cause of farmers. None of the existing retail conglomerates paid a single rupee extra to the farmers than the market price.  With their clout and money power, they have become the biggest hoarders buying up huge stocks at distress price, hoarding them against all laws and selling them for windfall profits.

Rotting Food Grains at Govt. Storage Depots
The government should have announced a slew of measures for the benefit of farmers before the decision to allow Foreign Investment or Indian Investment in retail. It should have come out with plans for massive network of storage houses for grains and cold storages for perishable produce across the country.  All the produce should be bought by the government at a price fixed every two years giving farmers an opportunity to make a decent profit and impose a limit on the percentage of profit the retailers can sell the same. Also a pre-condition should have been imposed that 80% of all farm produce and manufactured goods that are displayed ( not sold ) in retail chains should be procured from within the country. This would have addressed the three most important issues that are plaguing the country, - rotting farm produce due to lack of storage facilities, distress sales by farmers leading to farmer suicides and dramatic rise in food inflation hitting hard the consumers. Instead of addressing the issue holistically, all the politicians without exception took hard stands benefitting none of the three stakeholders-  producer, seller and consumer.
Alas,  What a loss !!