Column : Attitude, not FDI in retail, will bring reforms

Written by SL Rao | Updated: Nov 22 2012, 06:44am hrs
No one seems to object to FDI in single-brand retail (Ikea, Louis Vuitton, etc). But many object to FDI in multi-brand retail. The obtuse commerce minister has confused everyone by linking FDI in multi-brand retail to better agricultural development. Its principal achievement is to enable large retail chains to negotiate better prices for manufactured goods. The traditional small retailers who will be hurt will be those located near these stores. Now the commerce minister proposes another regulator to ensure fair competition between the old and new retailers. He has forgotten the existence of the Competition Commission of India (CCI).

Packaged manufactured consumer products are branded, but not fresh products like fruits and vegetables. For consumers to get lower prices for fresh fruits and vegetables, a total transformation of agricultural and rural infrastructure is required. No private retail chain, and that too a foreign one, is going to do this. Multi-brand retail is about selling branded packaged products, almost invariably manufactured, to strict standards so that every brand offers the same product.

Other fresh products like breads, cakes, pastries, etc, are also sold in such stores. They are usually unbranded, but sometimes have brand names (Britannia, Modern, etc). Fruits and vegetables might be sorted for quality and pre-packed but are not branded. They are placed at the far end of the store so that the customer has to pass the shelves of packaged products, and might be tempted on impulse to buy them.

Manufacturers of packaged goods are happy to have large retail chains as customers because they buy large quantities. The chains negotiate especially low prices, credit and on-time delivery so that the chain has to lock up less money in inventory.

The old-style retail stores are staffed by the owner family. They have no bargaining power and get no special prices. Their hold on customers is because of convenient location near residences, free delivery, credit, etc. In competition, most old-style retailers will lose many customers for manufactured packaged goods to the new neighbouring retail chains which can cut prices. The new retail chain stores are convenient. They will take much business away from neighbouring small family-run retail stores. Old loyal customers and others out to make small purchases might remain but business will decline. In our huge country, with over five million shops and establishments, most shops will not die. Further, the new retail chains will be confined to a few states and some large cities.

Meanwhile, the old retailers will modernise themselves, form cooperative chains to derive the purchasing clout that they will get from combined volumes, and compete effectively with the new stores. If governments want to help them, they must simplify and speed up the formation of such retail cooperatives. The CCI must watch out for unfair competition by large retail chains. Over time, the familys young will become educated and move to better-paying employment opportunities. There may not be any large-scale sudden disruption.

FDI will thus not be of much consequence for most Indian retailers. I have worked in many Indian markets and have studied them. The Indian retailer runs a tight operation, holding a wide range of products and pack sizes and, in many cases, gives credit, free delivery and procures unavailable products at short notice. Retailers make low margins. They provide low-level employment to the family. Fresh fruits and vegetables require long supply chains to urban markets. Retailers purchase afresh every day. Mobile retailers vend fresh vegetables and fruits door-to-door. Others take a permanent place in a street. Some large shops specialise in selling fresh vegetables and fruits.

To earn better prices, farmers need a transformed environment. Poor storage and transport must improve. From the farmer to the consumer, there must be streamlining and consistency in pre- and post-harvest operations, assembling, grading, storage (in many cases cold storage), transportation and distribution, forward linkages to more distant markets through transportation, storage, processing, packaging and retailing to the consumers. Regulation of agricultural operations must work in farmers interests.

The chain of trade intermediaries between the farmer and the consumer is longpre-harvest contractor, commission agents, primary and secondary wholesalers, retailers. They leave little for the farmerbetween 40-60% of consumer prices. Speculation in times of shortage is often conducted by these intermediaries rather than the farmers. Farmers sell to contractors or intermediaries. Rarely is there an open auction. There is no transparency in price determination. Prices are decided on a one-on-one basis, to the farmers detriment.

To improve the return to the farmer, there must be institutional mechanisms, laws and more investments. Markets must be more strictly regulated. Open auctions must be made the norm. Better roads, storage, cold stores and lorry transport on a regular basis will bring more buyers with more produce to the markets. Market infrastructure must improve, with loading and weighing facilities in good condition, adequate and protected storage, and better information to neighbouring villages on market arrivals each day, with ruling auction prices. With less damaged products and fewer intermediaries, the farmer will have means to pay for these services of information, cold and normal storage, etc. The government has shown it is unable to provide these facilities. It is unable to plan, implement and operate such services efficiently and honestly. Conditions must be created to enable private investment in them. This will happen if markets are better regulated and are transparent in price determination. Chains that have come up in the last few years (Reliance, Spencers, the now-closed Subhiksha, etc) have not created these facilities. Policies must encourage and stimulate many private investors to invest in agricultural supply chains through infrastructure and information systems. This does not need FDI, but needs an enabling environment.

The absurd proposal of creating a regulator for multi-brand retail must instead let the CCI regulate competition in retail. The government should encourage cooperatives of retailers who can bargain with manufacturers and let the CCI regulate for competition. FDI in retail is not deserving of the pivotal position given to it in reform. We must have a change in attitudes, and conditions that enable private investment, with transparent market-determined prices.

The author is former director general, NCAER, and was the first chairman of CERC