A political storm is brewing on the decision of UPA-II, notified on September 20, to allow 51% foreign equity into the multi-brand retail market in India. Compared to the infrastructure push or restructuring labour laws, this is relatively a minor economic policy measure. Yet, it has precipitated a political crisis. Ms Mamata Banerjee has left the coalition. The BJP is taking a stubborn stand against it. And most Indians are concerned where India is headed to. This article is not about the political fallout, but to take a critical look at this policy decision against the background of the current state of affairs in Indian agriculture.

Will the US $500 billion Indian retail market opened to all retailers – both foreign and Indian – be completely taken over by MNCs like Walmart? Political posturing notwithstanding, my clear answer is that this is just impossible on Indian soil. If New Zealand farmers can sell their apples in Hong Kong, the saying goes, what prevents the world famous Kashmiri apples reaching the super markets of Britain?

Critically examine this scenario: India is the world’s second largest producer (next to China) of fruits and vegetables, with an annual production of more than 200 million metric tonnes. But, what happens to this colossal production level? As of now, the cold storage capacity in India is not enough to store even 50 million tonnes. Potatoes take almost 75% of this space, leaving almost no space for other perishable products like fruits and other perishables. As a result, 25-30% (compared to just 1% in Australia) of fruits and vegetables get rotted and are wasted.  Think of the colossal amount of money that went into the production of more than 70% of these perishable items going down the drain, which, if there were good cold storage facilities, would have gone into the pockets of Indian farmers! 

If so much of money can be saved by building cold storages and helping farmers get much better returns, what prevents the Government of India from doing it in the rural areas? Building cold storage is not rocket science. And we do not need a Walmart (USA), Carrefour (French) or Metro (German) MNC to come to India and build cold storages to store our fruits. The determination to do this is the most important factor. And that has been missing in New Delhi for decades!

One of the greatest benefits of FDI in multi-brand retail, it is said, is that it will greatly minimise the stranglehold of intermediaries who currently corner a huge margin of the price the consumer pays for farm products, denying farmers a substantial margin. The “Mandi” system is the root cause for this. Average price realization for cauliflower farmers selling directly to the organized retail outlet is about 25% higher than their proceeds from sale to the regulated government Mandi. The Indian-owned Bharti Telecom group already has a tie-up with Wal-Mart and sells the produce under the brand name “Best Price” in some cities of north India, especially Punjab State, and purchases directly from farmers; the farmers’ realization averages 7-10% more than when sold to the local Mandi.  

FDI in retail will strengthen rural-urban linkages, encourage agro-processing and check greatly post harvest losses in fruits and vegetables. Eventually, this would also be an effective instrument for managing food inflation.

To consider FDI in multi-brand retail as a solution for all the ills of the farm sector could be misplaced optimism. To succeed, it must be accompanied by policy measures to unshackle the farm sector from excessive control, in particular archaic regulations like the Agricultural Produce Market Committee (APMC), and ensure free movement of farm produce across States to allow farmers to benefit from growing consumerism and the retail boom. 

As of now, free movement of agricultural goods within the length and breadth of India is impossible. Each State has its own tax system whereby consumers are denied the benefit of competitive prices. This is the prime reason for huge variation in prices between farm products from one State to another. For instance, oranges which are widely grown in Punjab and Maharashtra (Nagpur belt) cost as much as 500% more in Kerala during the same crop season (winter). On the other hand, coconuts, grown round the year, are as much as 350% more costly in Assam compared to Kerala.

This is not merely a question of production in these States. Oranges will grow in the cooler parts in Waynad district in Kerala, like in Punjab, the same way coconuts will grow both in Kerala and Assam. Examples could be multiplied. This results in denying the grower in a particular state the monetary advantage while at the same time hugely taxing the consumer in another State.

This does not happen in Europe. In a particular crop season, if grapes cost 2 Euro a kilo in Germany, it will be almost the same price in Italy. Europe has a common agricultural market, while Indian farmers and consumers will stand to greatly benefit if India had an “Indian Common Market”. This simply does not happen and bad and vitiated politics is at the centre of this distorted agricultural system in the country.

Further, in a State like Kerala, where the economic mainstay is the spices, on account of very poor or almost totally absent good value addition, the farmers suffer great disadvantage. Black pepper and Cardamom are imported into USA, Europe and Japan, and value addition takes place there. Often it comes back to India in a modified form, and consumers here pay a lot more for the end product. Thus, the price advantage which should accrue to Pepper farmer in Waynad district or a Cardamom farmer in Idukki district simply does not materialize, while at the same time the consumer ends up paying a lot more for the end product. FDI in retail will help in removing these bottlenecks to the advantage of both the local farmer and urban/local consumer.  

Multi-brand retail is not only about the farmer. It is also about the consumer. Forty per cent of India’s gross domestic product (GDP) is made of household consumption. Just think, how much the consumer would benefit if redefined our marketing system.

When we critically look at the success of the MNCs, we see that it is not their superior technology that makes them better than us, but their very efficient marketing strategy. Even an Indian MNC like Tata has much better marketing strategies. We have monoliths like the Indian Council of Agricultural Research (ICAR), Central Food Technological Research Institute (CFTRI) in Mysore, which get thousands of crores of government money for “research” and “application”, but do not have a sound marketing strategy. In the end, it is the consumer whose pocket is drained. I shall now cite the Chinese example.

During a visit to Beijing to deliver the keynote address at the first global conference on liquid fertilizers, in July 2011, at the invitation of the Chinese Government, the author observed that every morning dozens of residents (mostly elderly persons, both men and women), made their way to the east gate of Tuanjiehu Park, a sprawling oasis of trees and ponds in the heart of Beijing. Here, the streets were clogged with vegetable vendors, fruit sellers and farmers from villages of nearby Hebei province, haggling on price with the vendors and buying their ware. China opened up FDI for 26% in 1992 and increased it to 51% only in 2004, 12 years later, while India at one go gave 51% now.

For the past two decades, these street markets have co-existed with the MNC marts, and have also thrived remarkably. What prevents Indians also doing this and succeeding? We must learn from the Chinese experience. The Chinese government has set up “invisible barriers” to foreign entry in the retail markets. Foreign firms were only allowed to operate first in three major cities, and given land only in places where local retail firms did not have a presence.  

One noted that the entry of both Wal-Mart and Carrefour in China had made China’s retail sector more efficient, modernizing the sector, and increasing investment in supply chains. In China, the “foreign invasion” that many feared would harm the local sector and dominate the maket simply did not materialize. Today, China’s biggest retail chains are all Chinese, such as the Bailian, Sunning and Gome groups. Wal-Mart which has more than 350 stores in China, even with 15000 Chinese suppliers, controls only 5.5% market share, according to China Market Research Group. The sector is diversified enough to ensure that prices are kept low. But the interesting fact is that the merchandise Wal-Mart sells in China is Chinese products and not imported from USA. A lot of these are exported to USA.

In conclusion, I would consider the UPA-II decision on FDI as not just a “hurdle”, but a challenge which has a tremendous hidden opportunity for Indian enterprise. If Tata can build a totally Indian small car like Nano and succeed in exporting it as well, there is no reason why India cannot have its own efficient “Indian Retail”. New Delhi should market the idea efficiently and with a clear “national” spirit and not let Indians by and large that it is an American idea. China approached the idea from that angle, and it succeeded so well. Why can’t we?

The author is former Professor, National Science Foundation, The Royal Society, Belgium and Senior Fellow, Alexander von Humboldt Foundation, The Federal Republic of Germany and Chairman, Independent Expert Committee on Bt brinjal; he can be reached at drkppnair@gmail.com