Is FDI in retail akin to opening up the Indian agri-sector?

Foreign Direct Investment (FDI) in organised multi-brand retailing may have many points in its favour:

1. Organised retailing would benefit farmers by giving them better prices

2. Organised retailing would benefit consumers by giving them best rates

3. Organised retailing would help in infrastructure development in the form of logistic support and warehouses.

4. Organised retailing can tame inflation

No wonder, there has been demand from various sides to permit FDI in organised multi-brand retailing.

But let’s consider this fact: Organised retailing is facing severe restrictions in developed countries to prevent retailers from monopolising the trade:

An excerpt from a 2008 ICRIER study “Impact of Organized Retailing on the Unorganized Sector”, says:

“It is interesting to note that regulatory restrictions on the growth in modern retail is more stringent in developed rather than in developing countries.

For example, in most West European countries, setting up of hypermarkets has become very difficult since the late 1990s and early 2000s as governments became alive to the demands of traditional small retailers and non-mobile consumers in these countries.

Merger and acquisition plans are now looked at more critically by the national and European competition authorities. While in most countries opening hours are liberalized including holiday trading, the very small number of countries where opening on Sundays are prohibited include developed countries such as Germany and Austria.”

Another excerpt from a 2005 study carried out together by IFPRI, SIWI, IWMI, IUCN has something to add:

“The small producer generally does not have the capacity to deliver the volume of food items that the large supermarket chains demand. Nor are they able to meet the quality standards and other requirements that are a common condition in the wholesale trade, especially in branded items.

Moreover, some supermarket chains and food processing industries operate on a global basis. In the report “Power Hungry” that was presented in Porto Allegro in January 2005 figures are presented which illustrate the enourmous concentration of food processing, trade and markets for inputs in food production, to a few corporations.

For instance, six companies control about 75% of the world trade in cereals, three companies take care of 85% of the trade in tea. As part of the new situation, local producers have to compete with food producers elsewhere. Variations in subsidies and other support, within and between countries, systematically place the small and poorly organised food producers at a disadvantage.”

Sticking the pieces together, FDI in organised multi-brand retailing can be instrumental in spelling doom to farmers and also to over 12 crore kirana shops in the country.

If FDI is allowed for in the business of organised multi-brand retailing, it would invariably result in two or more global companies calling shots.

The companies, in a bid to assume profitability, would opt for backward integration, wherein they would buy agriculture produce directly from farmers. And that means farmers, unless they are able to give the best prices, would be sidelined. Remember, Indian farmers, despite being protected from corporate agriculture and FDI in agriculture, will have to compete with technologically advanced farmers from developed countries.

Is this not akin to a situation where agriculture is opened-up for foreign players?

And the poor farmers, in a bid to stay afloat, may opt for credit, and buy high-yielding seeds and pesticides and would toil more in the fields. (Just as Mexican farmers did: Raj Patel; “Stuffed and Starved”)

Very often, the credit would be disbursed by these very retail chains, given the difficulty farmers have in procuring credit.

And mortgaging comes in!

If the crops fail, farmers would invariably have to sell their lands to these very retailers to whom they used to sell their produce.

Remember, when the crops fail, it would affect all the farmers in a vast area of land and swathes of territory would come under the control of these retailers who have opted for backward integration.

Subsequently, the farmers would be offered jobs in these agriculture fields which they once owned, as a part of corporate agriculture.

Given the fact that they only know the failed art of agriculture, the farmers would opt for the ‘agriculture jobs’ as acquiring new skill sets and migrating to cities would not be feasible for them.

In short this business of organised retailing would lead to farmers getting alienated from their own land.

Parting words

Of course, I have written the analysis on the assumption that many factors remain the same.

A farmer uprising, exerting pressure on the policy community as one of these events unfold, which in turn may prompt for a regulatory frame work (just as we are already having in developed countries) has not been factored in.

The point is: prevention is better than cure. Allowing FDI in retail should be widely debated. And if allowed, should come with necessary policy rigidity.

Backward integration should not be at the cost of farmers getting alienated from their lands and importantly, should not place the farming community under the risk of getting swallowed by foreign competition.

As published in: http://www.commodityonline.com/news/Is-FDI-in-retail-akin-to-opening-up-the-Indian-agri-sector-36450-3-1.html