FDI in retail: some unanswered questions

Tuesday 06 December 2011

Urban consumer may benefit, but what about marginal farmers and the environment?

Mahazareen DasturOver the past few weeks, Indian newspapers have been consistently giving prominent display to stories concerning FDI in retail. Naysayers and others were both quick to voice their opinions on the issue. Proponents of FDI in retail have backed down for now, giving in to popular sentiment. However, questions still abound—would FDI in retail have been a game-changer or would it have brought about the doom of many an Indian kirana store? To me, it is evident that the urban Indian consumer would have undoubtedly benefited—mainly in terms of buying better produce at lower prices, and who wouldn’t be happy with that? But what of the small-scale farmer at the other end of the line? Would he have stood to earn a better price for his produce, or would have lost his daily wage altogether? In India, where agriculture is the highest contributor to GDP and employs close to 50 per cent of the population, answering these questions correctly becomes crucial.

Price cut at whose cost?

As retailing markets have become saturated in most developed countries, such as the USA and the UK, supermarket chains have expanded with amazing speed across the rest of world, and continue to do so even today. Across the world, as supermarket chains have grown from strength to strength, they have acquired greater power over the entire supply chain—starting from agricultural production and processing to wholesale and retailing—at many times owning and running entire farms and plantations. This puts them in the unique position to bargain and continually press suppliers and farmers for terms more advantageous to them. This is possible given economies of scale typical of huge retailers—pile them high and sell them cheap. Indeed, supermarkets have become the ones calling the shots as far as prices are concerned.

Consider an example: in 2003, Asda, a subsidiary of Walmart in the UK, decreased its margin on bananas from 32 to 22 per cent in order to gain an advantage with a lower shop floor price, leading their competitors to respond in a likewise fashion. However, neither Asda nor its competitors were swallowing those cuts through reductions in their own margins; instead, these cuts were passed on to their suppliers, in this case, poor plantation workers in Costa Rica. Their daily wages reportedly fell from US $12-15 per day in 2000 to US $7-8 per day in 2003, due to such manoeuvres. In fact, as ActionAid International reports, in a perverse cycle, such actions help supermarkets earn higher margins and larger profits, thus giving them the upper hand to invest more and increase their dominance even further. So, the buy-one-get-one-free offer really means that the supplier has ended up paying for it.

Who benefits?

Furthermore, wide-ranging control over the supply chain has given supermarkets the power to choose who will supply them. Traditionally, they have preferred to buy from a small number of large farms, rather than a large number of small ones. Such transactions are not only easier to organise for the supermarkets, they are also highly helpful in capitalizing on the more intensive production methods which often require rigorous control. This also helps the large farms given that they, too, can benefit from economies of scale, which in itself is very important as prices of products may fall so low that any producer without such economies of scale may go out of business.

What then happens to the small farmer? According to a 2004 report by the Food and Agriculture Organization (FAO), Carrefour, France’s largest supermarket chain, switched to buying melons from just three growers in Brazil in order to supply all its Brazilian stores, and ship to distribution centres in as many as 21 countries. Another FAO report reveals that in less than five years, Thailand’s leading supermarket chain reduced its list of vegetable suppliers from 250 to a mere 10, and between 1997 and 2001, more than 75,000 small-scale dairy farmers lost their livelihoods due to this “centralisation or consolidation of supplier bases”.

Cost to environment

There are environmental consequences as well. There are huge (and unfortunately, mostly overlooked) implications for soil quality, water resource depletion and deforestation which large-scale, intensive agriculture brings with it. Globally known examples include the threat to orangutans in Indonesia on account of deforestation to grow ever larger oil palm plantations, the monoculture cropping of soya in Brazil, Paraguay and Argentina, and the prohibitively high usage of pesticides in banana plantations. These environmental abuses have become known mostly thanks to efforts of environmental groups such as Greenpeace.

On the flip side, the retail giant Walmart (its fiscal year 2010 sales was US $405 billion) unveiled what it refers to as its 'Global Sustainable Agriculture Goals' in late 2010. In it, the retailer pledges to “buy more from small and mid-sized farmers around the world; reduce food wastage; and sustainably source key agricultural products”. As a country-specific commitment for India, Walmart has promised to source 50 per cent of its fresh produce through its Direct Farm Program. As an example of the latter, there are reports of Walmart having set up 36 direct purchase bases in over 14 Chinese provinces and municipalities, benefiting 393,000 farmers to date.

The key definition would probably pertain to whom Walmart will identify as “small-sized farmers” in the Indian context.

Whatever decision the Indian government finalises for FDI in retail in the future (the question will no doubt be brought up again), it must do so keeping in mind the implications for the real common man.

Mahazareen Dastur is an environmental researcher and writer based in Mumbai

Comments are moderated and will be published only after the site moderator’s approval. Please use a genuine email ID and provide your name. Selected comments may also be used in the ‘Letters’ section of the Down To Earth print edition.

  • Its a long drawn strategy.

    Its a long drawn strategy. FDI will bring in GM technology in agriculture. In fact it will ensure GM-tech stays here for as long as foreign retailers are here ie., forever. Then they will systematically target non-GM farmers and wipe them out with artificially reducing the cost of production of GM crops, so that others can switch to GM. Once that is done and they control more than 60-70% of agriculture they will increase the seed costs. Then they control the food we eat, what we eat and at what price we eat. Thats the way it is in the US. The way out is if GOI supports farmers, promotes organic farming and co-operative farming and then restricts GM technology. Let the retailers invest in the supply chain and make money by selling goods only, they cannot play with food technology and make us guinea pigs.

    Posted by: Anonymous | 7 years ago | Reply
  • The unanswered question in

    The unanswered question in fact should be rooted in the APMC model act that is under implementation since 2003. The Essential commodities act (ECA)was made ineffective in 2002 February so was the Prevention of blackmarketing act 1980. So there is a free play of collusive and conniving stakeholders to acquire all space in the operating field. The marketing strategy under the model APMC act has three streams, namely contract farming, direct marketing and private marketing. What has been the experience since 2003 should not remains in the field of conjectures alone. Then quality considerations will impose a heavy burden on the producers as const of compliance following the good agricultural practices (GAP)will mount. Then one has to see the trade off between the organic recycled waste in the farmers' fiiedls vis-a-vis the plastic and other iorganic waste in the supply chainlike packaging etc. The sum total will be manifold increases in societal costs. While the promoters of FDI will be under full control not to reduce this cost burden but increase their own profit. The promised back end investment is a ruse to get their head into the door like the proverbial camel. The consultation process needs to come clear on many more such issues.

    Posted by: Anonymous | 7 years ago | Reply
  • Well written well researched

    Well written well researched article by Ms Mahazareen Dastur.

    I feel that the purchase of all agri produce should be thru a Govt regulated Authority like APEDA or The Horticultural Departments or a separate body who will take care of sorting packing etc and fix fair pro-rata price for both Purchase from Farmer and Sale to Buyers. I remember an incident - in the late 60's/ early 70's when I used to visit my uncle who had a 200 acre farm in the periphery of Bangalore. We had taken a full Jeep of Tomatoes to the market at Lalbaugh and found a few large trucks with Tomatoes. My uncle refused to sell at the ridiculous price asked by the brokers and we took it back home where my Aunt made Jams and juices for us....it was sad...as they couldn't even recover the price of the petrol it had cost to & fro.

    Sometime back when I had visited the Horticultural show I noticed that all vegetables had a purchase price fixed by the Horticultural authorities depending on Variety / Size / Weight etc. If the market was regulated like this, and the authorities would have had the forethought then, my uncle [ and probably many people like him] would not have sold their land - which today has probably become a concrete jungle......

    We r now living in a rural environment,since 3 years, surrounded by exquisite scenery of hills and lovely green agricultural fields. During my morning & evening walks with my neighbours & colleagues we often have gup-shup with the locals. I have noticed quite a few changes taking place with could be detrimental to society at large, and reminds me of my uncle who had to sell his land.
    1. Farmers's children do not want to share their parents burden of work, and, enamoured by the city life, they would rather work and bring or send monthly salary. This is rural-semi-rural migration happening. From small town periphery to uptown.
    2. Farmers are dependent on outside labour who charge very heavily, or are not available.
    3. Many of them have stopped traditional produce, and shifted to less labour-intensive products like Coconut Palm, Arecanut etc.
    4. Some are just waiting for their fertile land to become dead so that they can sell it off at the exorbitant price that they can get..and live a happily sedentary life.

    During this interim waiting-to-be-sold period these marginal farmers have a few cattle which graze around his & his neighbours fields and the milk is sold to the distributing TVS-Scooty "Milkman" from whom we buy. The sad part is the farmer has been getting the same amount since three years and the price of milk to us has gone up double. Why ?...coz the distributor "Milkman's" expenses have gone up drastically due to petrol prices cost of living and his ambition of improving his standard of life, what with marriage and having to take care of a family. The so called middle-man syndrome we r referring to. While the farmer is still happy with his small field and earnings - having no ambition except await the day he sells his land to become a Crorepathi !!!!

    Posted by: Anonymous | 7 years ago | Reply
  • Well-written and knowledge

    Well-written and knowledge based. The standard of literacy in villages should go up. This may help the lower end- farmer to understand his needs in a better way

    Posted by: Anonymous | 7 years ago | Reply
  • @Prof. J. George: Your point

    @Prof. J. George: Your point about GAP is very valid indeed. Over the years, they have more and more stringent and what most consumers abroad fail to understand is that the figures are not tenable. The costs of establishing and maintaining such systems are massive. Interestingly, these standards originated in the EU, where 30 members control 85% of fresh produce sales. Since 2007, they have been called the *GlobalGAP* standards, which just goes to show their overarching global dominance.

    Posted by: Anonymous | 7 years ago | Reply
  • @RAJESH Narayanan: The

    @RAJESH Narayanan: The middle-man syndrome you are referring to is spot-on! With FDI in the food retail business, the middle-man will be sidelined (or should I say "dethroned") by the foreign supermarkets, but the marginal farmer will still not benefit.

    Posted by: Anonymous | 7 years ago | Reply
  • FDI in Retail Market should

    FDI in Retail Market should be seen in two ways as:

    @ One section of URBAN will get the benefit as they comes under dependable groups &

    @ Other section of RURAL who are the producers and supposed to be the marketers will be affected.

    These are the facts and known by everyone. Now the question is which option is better for whom???

    The policy makers and creamy layer will certainly prefer the first one as they FDI as business for Business (B2B) and other non creamy layer of urban and the whole rural will prefer the second option as they look for the business to people (B2P).

    It is certain that the concept of FDI is not the need of the majority of the people in India but they only need better marketing facilities to sell their products.

    The concept of Rytu Bazaar (Farmers's Market) in Andhra Pradesh is the better option for the farmers / producers to sell their products directly to the consumers both at rural and urban areas.

    It is the natural and right law to allow the farmers / producers to sell their products to the consumers leaving no scope to none to come in between.

    The ongoing reflections of the people should be taken as their concern and commitment for the benefit of consumers and should be accepted while making the need based strategies and policies.

    Posted by: Anonymous | 7 years ago | Reply
  • So, do you think the small

    So, do you think the small farmer is doing very good right now without the FDI in retail ? They are suffering.

    Its like saying ...........Oh the Investment bank like JP Morgan is eating away business of the small garage broker in the lane next to my home.

    If you are the prime minister of the nation when faced with a decision to keep 100 million people hungry and make 10000 small farmers suffer, what would you choose ? The food inflation around the world is rising. These big retailers have the power and money to keep the prices down and feed millions, then why not should they be awarded with higher profit margins ?

    There are some self motivated small farmers who find the way out, the others try to curse the govt. for their poverty. You become what you choose to become. Find your own way out. You can take the horse to water but you cannot make it drink water.

    Posted by: Anonymous | 7 years ago | Reply
Scroll To Top