Dr. Sukhpal Singh, Associate Professor, Center for Management in Agriculture, IIM Ahmedabad, talks to Deputy Editor Sanjay Choudhry about why the new retail FDI policy of the government is facing so much opposition.
Q. Do you support the government’s decision to allow FDI in multi-brand retail?
I am not against FDI in retail. Such a decision was expected. It is nothing new because FDI is already permitted in wholesale cash’n’ carry and foreign players are present in the Indian retail sector through single-brand stores.
The problem is with the content of the FDI policy and the way it has been brought in. A lot of political interests have not liked this decision of the government announced without reaching any consensus with all the stakeholders. The FDI in retail is being debated for the last few years. In July 2010, the Department of Industrial Policy and Promotions had asked people to give their views on the topic. It has been reported that around 60 percent of the submissions it received from various groups and associations were against introducing FDI in retail. However, the government never got back to the people until this decision to allow FDI was abruptly announced.
Q. What is the main issue in the FDI debate?
The main issue is that if FDI in retail is going to be allowed, then how can we leverage it for the development of the Indian economy especially agriculture sector in terms of benefits to farmers, supply chain efficiency, wastage reduction and so on. The second issue involves the front-end i.e. retail – how traditional retailers are going to cope with the competition which is much larger in scale and backed with financial muscle. The third issue is inflation. We have to see if price inflation can be contained with the arrival of the new foreign players which can sell things at a cheaper rate due to their bulk-buying capacity. To judge the merit of the retail FDI policy, we have to evaluate it on these three dimensions.
Q. How do you see the new FDI policy from the point of view of farmers?
As far as the farmer interest is concerned, one doesn’t see as much attention to the farmers as one would have liked. Farmers would benefit if the government lays down mandatory guidelines or restrictions on procurement by modern foreign retail chains. The FDI announcement mentions that 30 percent of procurement of foreign players has to be from the SME segment. However it is not clear if these SMEs would belong only to India or anywhere in the world because restricting the procurement to India would fall foul of the WTO agreement. No such condition has been placed on farm produce procurement.
About 85 percent of Indian farmers are small or marginal. The issue is how to benefit them by providing new marketing channel to be set up by foreign retailers. What are the mechanisms, policies and institutions we have that will ensure this objective is met? The problem is that there is nothing in the retail FDI policy that is tailored specifically to the requirements of the Indian farm sector which is dominated by smallholdings.
The policy has a provision that 50 percent of the investment by the foreign players in Indian retail has to go toward the backend infrastructure. But this backend has not been defined in the policy. Are cold stores backend? Is transport backend? What about a processing plant? Or is working with the farmers and setting up a collection center considered backend? This is a grey area. Critics are even asking, how is the government going to monitor that 50 percent of the investment actually gets spent in the back-end operations by foreign retailers? How can someone supervise if a particular foreign chain has spent 50 percent investment in the backend?
Q. What about small retailers? Does the new policy take care of their interests?
There is nothing in the policy to protect the front-end. We understand that once these bigger players enter the country, the kirana stores are going to lose sales because everybody will be taking a chunk of the same market. The new policy mandates that foreign players can open shop only in 53 Indian cities with a population of more than a million each. But these cities together account for 42 percent of the total urban population! So, half of the urban market is opened to these players. Infact, the intensity of traditional retail is higher in such cities.
Secondly, there is no provision in the policy specifying the locations in a city where foreign retailers can open stores. Many countries have imposed restrictions on FDI retail. Big retailers are often prevented from setting up stores within the municipal limits of a city. Sometimes, these can only be located a particular distance away. There are different types of stores – hypermarkets, supermarkets, discount stores, etc. There is no mention in the new policy about what kind of a store a foreign player can open and where. Small retailers are understandably worried that some big-box store of a foreign retailer will open in their neighborhood and cut into their sales.
Q. Will entry of foreign chains ease inflation?
As far as inflation is concerned, the global evidence from countries in Africa, Latin America and Asia is that food prices at the big retail stores are not lower than traditional stores. They are either higher or the same. In the case of India, even if the prices are lower at big stores, the quality of produce is not as good as in traditional retail. So there is uncertainty on whether the retail FDI will mitigate the problem of food inflation.
There is also a possibility that foreign retail chains can monopolize the distribution of agricultural produce over the longer term. For example, in some European countries – where supermarket retail has been in existence for 50 years – just three or four supermarket chains account for around 80 percent of all food sales.
Q. What do you suggest should be done?
It is fine if FDI in retail comes to India since food sector needs investment. But the question is: how do we leverage this opportunity for the benefit of all the stakeholders, from the foreign retailers and customers to traditional sellers and small farmers? That is the only thing those protesting against the policy are asking. The government, therefore, has to put certain policy mechanisms in place to ensure that retailers and farmers too benefit from the FDI, along with those who work in partnership with them.
Q. How can the government protect the farmers?
For the benefit of the farmers, the government should provide for linking farmers with big retailers through formal contract farming. What is currently happening in Indian domestic retail is that the organized modern retailers do not have any formal commitment to buy the produce from the farmer, while the latter is under no obligation to sell. The retailers merely open a collection center and call up the farmers every day to ask if they are willing to sell the product for a particular price. This price is nothing but the local APMC market price, plus a few percentage points more. And we all know how wildly the APMC price fluctuates.
This kind of “contact farming” does nothing to reduce the market risk and the production risk of a farmer. Only formal contract farming, where the retailer becomes a stakeholder in the produce, can give the farmer an assured customer at an assured price. The government should go all out to encourage and incentivize the practice of formal contract farming which can also be monitored under the APMC Act.
Q. How can the interests of small retailers be protected in a liberal retail FDI regime?
Let us see the example of other countries. To protect small retailers, countries such as Indonesia and Malaysia have placed restrictions on the location of big stores. They have demarcated zones in cities which are meant exclusively for small retailers and in which no big-box store can be set up. Other countries push hypermarkets outside the city limits. There are special “wet” markets or special farmers’ markets in Europe where no supermarket retail chain is allowed to operate. Strangely, these types of restrictions and provisions are not found in Indian government’s FDI announcement. This is agitating small retailers.
Q. How valid is this concern that foreign retailers will not be good for the kiranas?
Well, traditional retailers will definitely be impacted by the entry of foreign retail chains. We did some studies in 2009-2010 in Bangalore, Ahmedabad and Chandigarh. The traditional retailers in these cities operating within one km of modern stores reported 10 to 30 percent decline in sales. The figure was the highest for Bangalore, which is the most penetrated market by supermarket retail. So the government has to carefully consider if it can provide any protection or support mechanism for small retailers to move on or better bear the impact of big international chains setting up stores in their area. Small sellers have to be give space in the wider scheme of things.
A lot of people are involved in retail in India. We have to see if we are going to damage the already existing employment capability in our quest for generating new jobs through FDI in retail. Definitely the new FDI-driven retail system will generate some employment, but we have to carefully consider if it will displace the existing employment such as push-cart vendors, roadside stalls, small shops, etc.
Q. How many foreign retailers do you see entering India after FDI in retail is allowed?
Some people are arguing that not many foreign retailers will come rushing to India because of infrastructure bottlenecks, supply chain problems and so on. They say that unless something is done by the government to remove these barriers to trade, retailers from abroad may not like to invest a huge amount in India. But I don’t agree. I believe the foreign retailers will come. They will not be here for the short term but for the long term.