Retail FDI myths

There is no evidence that global retail chains ensure better prices for farmers or help bring down inflation

By Latha Jishnu
Last Updated: Sunday 07 June 2015

Retail FDI myths

imageForeign direct investment or FDI in retail has been sold to the country as a panacea for many ills. It is supposed to create jobs on a large scale, fight inflation by providing food at reasonable rates to urban consumers and also ensure better prices for farmers and other suppliers. But given the experience elsewhere, the Cabinet’s decision to allow 51 per cent FDI in multi-brand retail has raised the political temperature, divided economists and others like few other issues have.

At the heart of the controversy are two issues: will the entry of global retail chains lead to the closure of the neighbourhood grocery or kirana stores and, thus, lead to a decline in employment in a sector which provides work to 44 million people? This has been the primary concern of opposition parties (BJP and the Left) although the UPA government contends the entry of global retail giants will create as many as 10 million jobs in three years. And according to a study by the Indian Council for Research on International Economic Relations (ICRIER), the entry of organised retail did not entail major displacement; the rate of closure of small stores would be 1.7 per cent per annum. The 2008 report is the only large-scale study conducted on the likely impact of foreign retailers on all segments of the economy.

Down To Earth (DTE), however, is looking at the issue from another perspective that will impact millions more: whether farmers would, indeed, benefit from the opening up and if it would help bring down the inflation rate.

Kaushik Basu “Our research shows that the benefit from FDI in multi-product retail will be enormous in terms of lowering inflation and enabling small Indian producers to export their products to retail outlets in industrialised nations.”
Kaushik Basu, Chief Economic Advisor to the Finance Ministry

Chief economic adviser to the finance ministry Kaushik Basu has been the most persuasive salesman of FDI in retail, portraying it as the answer to a variety of problems that have been plaguing the country, inflation in particular. In a consistent defence of FDI as inflation-busting measure, the former Cornell University professor has been claiming that millions of the poorest people in India would be forced to pay more for staple items such as rice and vegetables if foreign supermarkets are refused permission to open in India. Referring to the government’s decision to allow 100 per cent FDI in single-brand retail and up to 51 per cent in multi-brand chains, Basu warns that without such investment “Indians will just have to get used to paying higher prices for food”.

In an earlier interview to a Delhi newspaper, Basu had said: “Our research shows that the benefit from FDI in multi-product retail will be enormous in terms of lowering inflation and enabling small Indian producers to export their products to retail outlets in industrialised nations.”

Jayati Ghosh It is quite ridiculous. Food inflation was relatively low in our country until 2006 despite high GDP growth. How come our traditional supply chains in food did not create such massive food price spikes earlier? We had the same faulty and inefficient system of distribution then, too”
Jayati Ghosh, Professor of economics, JNU, Delhi

But to Jayati Ghosh, professor of Economics at Delhi’s Jawaharlal Nehru University (JNU), this is “a ridiculous argument”. In an interview to DTE, she points out: “Food inflation was relatively low in our country until 2006 despite high GDP growth (see graph). How come our traditional supply chains in food did not create such massive food price spikes earlier? We had the same faulty and inefficient system of distribution then, too.” There is no disagreement, though, among economists on the fact that reform of the Agriculture Produce Market Committees (APMC) Act and setting up of adequate storage and transport infrastructure for farmers to ferry their products to consumer centres would work far better.

imageIf organised retail is the dampener for inflation then it follows that countries such as the UK, Brazil, Thailand and Malaysia among others where the penetration of organised retail is high should have had minimal or very low rates of inflation. In the US where retail stores account for 83 per cent of the market share, inflation has not been so easy to control. Data from the Organisation for Economic Co-operation and Development (OECD) for the first quarter of 2011 reported food price inflation in the UK at 5.5 per cent and rising to 6.3 per cent in the third quarter of 2011.

According to a September 13 bulletin put out by the UK Office for National Statistics, the most significant upward contributions to the commodity price index came from food items such as meat, bread and cereals where there was a 7.1 per cent rise and much higher for processed foods. In India meanwhile, inflation is showing a downward spiral with food inflation down to 6.6 per cent from a high of 20 per cent, and Finance Minister Pranab Mukherjee predicts that if the trend continues, “we may perhaps have the year-end inflation at 6 per cent-7 per cent.” Food inflation has over 14 per cent weight in the Wholesale Price Index or WPI.


Modern retail chains invariably squeeze farmers’ margins and the cartelisation of purchases by the biggest chains has come under scrutiny in the EU and in the US. In the EU, retail chains have become “gatekeepers” controlling the only access that farmers have to consumers (see ‘Abuse of power by EU, US retailers’ p39). The trend in Asia is unlikely to be any different. A report of the Food and Agriculture Organisation (FAO) on the opportunities and risks posed by Asia’s supermarket revolution warns that the squeeze on farmers’ profit margins is likely to tighten as retail chains “become as concerned with safety and quality as they now are with cost”. It cautions that fierce competition among supermarket chains forces them to seek ever lower product and transaction costs and to minimise risk. This means the chains will not contribute to the kind of farm-level investments needed if small farmers are to participate in new markets.

imageAnd what of the impact of global retail majors on Indian farmers? Already, Amul, widely considered India’s most valuable farm brand, has raised a red alert. It says the dairy farmers will suffer greatly. The Gujarat Co-operative Milk Marketing Federation and its managing director R S Sodhi point out that farmers’ price is beaten down by the efficiency rationale of modern chains.

Quoting figures from International Farm Comparison Network (IFCN) data, Sodhi says milk producers in the US received just 38 per cent of the consumer’s dollar spent on milk in 2009, down from 52 per cent in 1996, while in the UK it has dropped from 56 per cent to 38 per cent. In India, though, milk producers earn an average of 70 per cent of every consumer rupee, while those affiliated to cooperatives get as much as 80 per cent. It is unlikely that retail chains will be able to operate at 2 per cent distributor margin and 3 per cent retail margin as Indian milk companies do. Analysts also point out that the control that global chains wield over the supply chain allows them to dictate the terms to producers. This leads to a consolidation in farming operations, with chains buying from fewer large producers than from a vast number of small players. In India, where the average size of most farm holdings is a mere 1-1.5 hectares, the impact could be pretty grave on millions of farmers.

FAO says modern food retailing brings with it “fierce competition, reduced profit margins, demanding quality standards and procurement systems that focus increasingly on an elite group of ‘preferred suppliers’. In this sink-or-swim environment, many traditional fruit and vegetable wholesalers—and millions of small-scale producers—must either adapt or face exclusion from the market.”

The analysis prepared by FAO’s agricultural management, marketing and finance service (AGSF) finds that while most Asian consumers still prefer traditional outlets when shopping for fresh food, modern retailing is already altering the structure of fruit and vegetable supply chains in many parts of the region. “There is growing concern that modern supermarket procurement arrangements might result in unfavourable terms of trade for small-scale farmers,” says FAO marketing economist Andrew Shepherd. The worst part is that very little large-scale research has been done on the impact of supermarket development on Asian farmers’ incomes, and many policymakers are “ill-equipped to help farmers make informed decisions about their eventual fate in the marketplace.”

Walmart, symbol of the power of global retail chains with sales of $422 billion in 2010, has plans to aggressively expand its India operations. There is reason to worry: a Bloomberg analysis says developing countries offer faster growth for such chains. Walmart’s international sales grew 20 per cent in the quarter ended October, compared with 3.8 per cent in its home base, the US.

Abuse of power by EU, US retailers

In the wake of sharp spikes in food prices across the European Union, EU Parliament issued severe strictures on major retail chains operating in the 27-nation bloc in a resolution it passed in March 2009. The resolution, which followed its Declaration of February 19, 2008, on investigating and remedying the abuse of power by large supermarkets operating in the EU, said the effects on agriculture had been disparate. While a few farms and the food processing companies had benefitted, the large number was incurring much greater costs.

Parliamentarians were particularly upset to find that the fall in the prices of agricultural products, which is not matched by a fall in production costs, “is putting farmers in an unsustainable financial situation, and many of them are abandoning production because it is unprofitable”. It must be noted that this was happening despite the huge subsidies given by the EU under its Common Agriculture Policy or CAP. Indian farmers have no such cushion to fall back upon when such a trend occurs here.

In recent years there had been significant changes in the competitive structure of the food supply chain and increases in the degree of concentration among both food producers and wholesalers and retailers, a significant reason being that “big supermarkets use their buying power to force down prices paid to suppliers to unsustainable levels and impose unfair conditions upon them.” It said large retailers across the EU are fast becoming “gatekeepers”, controlling farmers’ and other suppliers’ access to consumers.

Although consumer prices on average were up to five times the farm gate price, farmers were seeing a dramatic drop in the percentage they were getting, much lower than the 50 per cent they were getting a few decades ago.

Squeezes on suppliers have had negative knock-on effects on both quality of employment and environmental protection, while consumers were facing a loss in diversity of products, cultural heritage and retail outlets, it found. Similarly in the US last year, the Department of Justice began a series of meetings on the impacts of market concentration and consolidation on farmers and ranchers around the country. Several dairy farmers testified about their rapidly decreasing profit margins. Since 2008, when milk prices tumbled thousands of farmers have faced bankruptcy and foreclosure.



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  • Yes, FDI has become ht topic

    Yes, FDI has become ht topic at all levels to decide ACCEPT or REJECT. In this connection, i have already expressed my concern and reflections form the stakeholders. It has to seen from two angles as:

    1. The non producers, creamy urbanites who comes under the category of "DEPENDABLE" whose percentage is very less may get the benefits as there is no alternative.

    2. The producers, non creamy layer who comes under the category of "INDEPENDENT" whose percentage is very high will be the looser as they have got other options.

    In view of these two opinions or groups, the decision to be taken on FDI is very clear to the one who has take the decision.

    If the business is in the model of Business to People (B2P) rather than Business to Business (B2B), certainly people will accept as they are going to be the beneficiary.

    Coming to the conclusion, there exist several myths in respect of FDI like who is the gainer and looser. In any case the farmers or the producers who comes in the second category of INDEPENDENT certainly are not going to be the beneficiary.

    Today's media brings an innovative concept like:

    " Alu (potato) costs Rs.1 per Kg but the chips which using only half a kg costs Rs.10. This is what exactly the FDI is going t give the befit".

    Can it be understood that water is freely available and one liter of water comes to Rs.12 which is possible through FDI.

    The question is who is taking the cream or the waste.

    Once again it can be put forward the concept of Rythu Bazar initiated in the state of Andhra Pradesh as the best innovative and creative platform for the producers to get better price for their time, energy, inputs and product.

    The choice should be given to the producers and the non creamy layer with better participation to decide what they want.

    Posted by: Anonymous | 8 years ago | Reply
  • The way to pay more to

    The way to pay more to producer that is the farmer is to removal of many layers of middle men - starting from farm level commissionagent/broker upawrs the warehouse where the produce is stocked by the super market (say Reliance or Wal;mart etc) for marketing by their outlets, be it vegetables/fruits/grains / cereals/ spices so on and so forth. This is likely to give scope to Retailer market to pay more to the producer nthat otherwise would have got distributed among several layers. But the question is will removal of these layers allow the retailer have a comfortable markup of say 20% or so?

    Posted by: Anonymous | 8 years ago | Reply
  • Allowing FDI in retail, will

    Allowing FDI in retail, will give positive results in short term. Both farmers and consumers may feel happy for some time. But in long time both will become losers.
    Here, I would like to quote PEPSI example. At the time of introducing They offerd less prices, but now rates grown up. Wall Mart recently opened its store (not retail) in Vijayawada (A.P) as per my information farmers are now feeling happy, because they are getting reasonable prices, similarly consumers (whole salers) also. Wall mart is purchasing directly from farmers, and selling to wholesalers. Once it took upper hand, then definately situation will change. Farmers may face lot of conditions, whole salers thrown out on roads finally prices of goods are determined by the wallmart.
    Rytu Bazars are really good. But this depends on Govt.s commitment.

    Posted by: Anonymous | 8 years ago | Reply
  • Allowing 51%FDI in retail

    Allowing 51%FDI in retail sector, we directly talk about Wall Mart world giant in retail whose sales was $422 billion in 2010 and its growth was 20% outside of US & 3.8% in US in last quarter,2011. This shows it will wipe out small retailers within a year.

    Despite of this,increasing jobs may be a reason to allure the people and decision's makers. But price cut, i don't think it will work effectively. As we consider the example of potato and chips. chips are made of potato. it is produced by others not retailers. Then how much they can reduce the price of any items which are prepared by main source, directly available from farmers, INDEPENDENT or non creamy layers. Price cut of food may be due to reduction of wastes. But in other sectors how much it will work effectively in lowering the price, is to think of, not only for food. But we can not deny that food consumption is maximum than other consumable things.

    Posted by: Anonymous | 8 years ago | Reply
  • Reading through the article,

    Reading through the article, it shows how decision on "FDI in retail" will raise more quetions than the answers the farming community has long been seeking to cast off distress, stangant growth and social respect to every one: the policy makers, the researchers and ,of course, the mass media. More and more indepth countrywide analysis are needed to be done by the public funded research orgainsations so that the farmers could become able to guage good and bad effects of this giant step of the goverment. The farming community should have their own voices, though some organisations have been raising their concerns.

    Posted by: Anonymous | 8 years ago | Reply
  • Yes get ready for OLIGARCHIC

    Yes get ready for OLIGARCHIC CONGLOMERATES to rule your lives dear Indians.

    Posted by: Anonymous | 7 years ago | Reply
  • no doubt fdi will give

    no doubt fdi will give oppurtunity to choose oftheir choice
    since india is developing country smallmanufacturers like toys, plastic items, specially garments will hit
    there are number of workers in india in garment industry our rates comparitivesly normal
    how ever if garments are imported from taiwan bangadesh. china etc which are glitering with no quality inian garment industry which is feding lot of
    workers wil hit
    governent should should make clear that sourcing should be from india tomaximum extent

    Posted by: Anonymous | 7 years ago | Reply
  • Retailing in India is one of

    Retailing in India is one of the pillars of its economy and accounts for 14 to 15 percent of its GDP. The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world by economic value. India is one of the fastest growing retail market in the world, with 1.2 billion people.
    India's retailing industry is essentially owner manned small shops. In 2010, larger format convenience stores and supermarkets accounted for about 4 percent of the industry, and these were present only in large urban centers. India's retail and logistics industry employs about 40 million Indians (3.3% of Indian population).
    Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets. Even single-brand retail was limited to 51% ownership and a bureaucratic process.
    In November 2011, India's central government announced retail reforms for both multi-brand stores and single-brand stores. These market reforms paved the way for retail innovation and competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike, and Apple. The announcement sparked intense activism, both in opposition and in support of the reforms. In December 2011, under pressure from the opposition, Indian government placed the retail reforms on hold till it reaches a consensus.
    In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership, but imposed the requirement that the single brand retailer source 30 percent of its goods from India. Indian government continues the hold on retail reforms for multi-brand stores.

    In a pan-Indian survey conducted over the weekend of 3 December 2011, overwhelming majority of consumers and farmers in and around ten major cities across the country support the retail reforms. Over 90 per cent of consumers said FDI in retail will bring down prices and offer a wider choice of goods. Nearly 78 per cent of farmers said they will get better prices for their produce from multi-format stores. Over 75 per cent of the traders claimed their marketing resources will continue to be needed to push sales through multiple channels, but they may have to accept lower margins for greater volumes.

    Dr.A.Jagadeesh Nellore(AP),India

    Posted by: Anonymous | 7 years ago | Reply