Jul 13, 2010

FDI in retail: Importing a failed model

The Department of Industrial Policy and Promotion  (DIPP) has come out with a discussion paper in on multi-brand FDI in retail. It has spurred a debate on whether there is a need for opening up for multi-brand retail, and if yes, on what conditions. This follows an earlier study by the Indian Council for Research on International Economic Relations (ICRIER) on FDI in retail.

The discussion paper was expected. After all, the G-20 mandates its member countries to open up to FDI in retail. It is therefore amusing to hear economists and market experts sing virtues of FDI in retail in excitement. The reality is that we are under an international obligation to open up for FDI in retail. You just have to read the last few paras of the G-20 Toronto declaration, and it becomes clear as to why the government has launched this exercise now to build up on public opinion.

Having said that, I find the pink dailies and the Business TV channels jumping into the debate with obviously industry-backed speakers being invited to tell us about the great potential FDI in retail has for consumers, farmers, and for generating employment. For the sake of maintaining a 'balance' they will invite one critical voice and then at the end say that you are the lone voice against FDI on this show. Not even one TV channel has in fact cared to ask as to what happened with the 2006 approval for 100 per cent FDI in cash and carry and 51 per cent stake in FDI in single-brand retail. Did it benefit farmers and the end consumer?

The answer is NO. At a time when food inflation was at its peak, the big retail maliciously fleeced the consumers. It continues to do so merrily.

No one has cared to ask this embarrassing question to all those who backed the entry of selective FDI in retail earlier. No one will later question the economics of centres like ICRIER, which is now building up a case for a green light for multi-brand FDI in retail. The DIPP should be first made to explain as to why it has failed to stop the loot that the big retail is indulging in? As G Ganapathy Subramaniam writes in the Economic Times today (Put the consumer first: FDI in retail's back on radar but lowering prices must be priority): "Supermarket chains also get their supply of fresh produce from the same mandis that feed hawkers and efforts to procure directly from farmers largely remain on paper."

He goes on to say: "Nothing prevents foreign investment from flowing into the back-end logistics business which is vital for the wholesale. the ground reality, however, is that not much overseas investment has flown into warehouse facilities or cold chains ... What is preventing more investment flowing into wholesale and back-end? What should be done to encourage investment in this important segment?"

For the last few days I am repeatedly asked whether the multi-brand retail will help farmers as claimed. I would like to share a few of my thoughts and concerns with you.

1. Increasing corporate control over food and agriculture has meant that the profits are being shared among the traders, processors, wholesalers and retailers. This is not only limited to the developing countries where policy makers tend to blindly ape the farm model from the industrialised countries. In the US till 1990, a farmer used to receive about 70 per cent of every dollar spent on food. Today, it is no more than 3 to 4 per cent. (Source: Sharma 2005; Trade liberalisation in agriculture: Lessons from the first 10 years of WTO, Aprodev, Brussels)

2. If big retail was so good for farmers, there is no reason why the US/EU should be providing direct income support to farmers. Farmers in US/EU survive not because of big retail/commodity trading but because they receive direct income support. Take the Netherlands, for example, the average farm family income is 275 per cent of average household income, and so on . (Source: OECD 2002). This is because of the farm subsidies. Please also see my article 'Entitled to subsidies' http://indiatogether.org/2004/oct/dsh-entitle.htm

In the US, the situation is no better. I had recently written a piece on this on my blog: US farmers are bailed out, Indian farmers are left to die http://devinder-sharma.blogspot.com/2010/05/us-farmers-are-bailed-out-indian.html

We are therefore importing a failed model from the US/EU.

3. Regarding employment, big retail does not squeeze out middle-men from the food chain. Middle-men by definition means someone who is between the producer and the consumer. Wal-Mart claims that it removes middle-men. In fact, it only replaces the plethora of small middle-men. Wal-Mart itself is a middle-man. The drop in the farmer income is therefore shared by the new battery of middle-men who come under the same retail hub. The new battery of middle-men, who replaces the traditional middle-men, are the quality controller, certification agencies, packaging industry, processors, wholesalers etc etc.

In Latin America, the biggest retail chains, most of them owned by multinational giants, now control 65 to 95 per cent of supermarket sales (Source: FAO 2004). Can anyone tell me if the income of Latin American farmers has increased? Are the Latin American farmers well-off today? The answer is a big NO. Their condition has in fact worsened.

It is now the turn of Indian farmers to be squeezed out by big retail.


Ashwini Kumar said...

An even bigger question is why do you need FDI in retail?

FDI is desired on two counts
a) It brings in new investments.. This is a valid logic if you are living in a capital scarce country. India has a reasonably high Investement/GDP ratio. Domestic capital scarcity is not a plausible argument in this case clearly.

b) FDI will bring in new technology. But the question is in retail sector what is that novel technology that FDI will bring to India? I have failed to understand.

Anonymous said...

Look at this completely biased ICRIER report, which says: "there was no evidence of a decline in overall employment in the organised sector as a result of the entry of organised retil."

ICRIER is an industry organisation, and its reports/studies should always be taken with a tonne of salt.

Anonymous said...

FDI in Muti-brand Retail will be a disaster for India and its entrepreneurialship.We are a nation with very large and diverse population. No Government or a few MNCs can feed this population. I left my professional job and entered entreneurship as a manufacturer of a single fmcg category product. Since I had just one product and had no background in business, neither individually or family wise, my best bet was/ is the organized retail. My product was / is the best in it category, in terms of performance and value rendered to the consumer. This I can say because this single product brings food to our table for the past 6 years now and i have no marketing or sales team ! The product sells on its ability and performance. i have been vendors to the two biggest retail chains in India, and that too from the earliest days of their establishment. My experience with them have been no less than horrendous. I am still their vendor. I faced so many problems with them, and being a well versed person could interact via email etc , but still always on the verge of being thrown out by them. Not because of my bad performance but the mind set of the executives working with them.The mindset developed by being Colgate or Dabur executives for a long long time. My arguement is that if a forceful , literate vendor like me , who can communicate at the highest level, has and is facing so much problem to get a foothold with them, even after being with them for more than 3 years, how would less literate, less 'sophisticated' individual entrepreneurs ever succeed with them...its next to impossible. They will just work with the established international brands and we will get ruined, we will lose our spirit of being our own bosses, eventually. My case is a true example of the dangers that FDI in Retail could pose to us all in the future.

My experience with the Big retail Chain from America, is well documented with me. They all should be allowed to concentrate on the wholesale and supply chain...which they will never like. They are not here to help India or Indians...they are just to pick the low hanging fruits ...while the sun shines !! They did not care about their own populations in their own countries...how can u expect better from them for us !! We should suit or change laws to make a model that works best for us by removing the problems that exist in the present model.

God bless.

Anil Dogra

at Delhi, India.