Column : Noise versus reforms

Written by Nilanjan Banik | Updated: Nov 2 2012, 07:00am hrs
Currently, there is a lot of noise about whether the recent spate of reforms undertaken by the government such as FDI in multi-brand retail, insurance and pension sectors will, in any way, hurt the common man. The Opposition is saying that the recent spate of economic reforms are certainly not in the best interest of the common man, whereas the ruling party feels otherwise. To understand the noise, we need to fit ourselves in the shoe of the affected parties.

Lets talk about FDI in retail. Here the affected parties are the farmers, local kiranas and the common man. To understand the veracity of the argument that farmers are going to get hurt, we will have to take note of what is happening currently. As of now, if the farmers are to sell their produce, they have two options. First is to sell directly to the central government outlets such as Food Corporation of India (FCI) and National Agricultural Cooperative Marketing Federation of India Limited (NAFED). Second is to sell to the state governments designated commissioned licensed agents operating in the mandis (markets).

The central government operates as a welfare-state by procuring items from the farmers at a price (also called minimum support price) which is higher than the market price, and, in return, selling these procured items to the consumers through the public distribution system (PDS, better known as ration shops) at a cheaper price. The basic assumption for the welfare state to function is a situation where the farmers can walk to any of the NAFED or FCI collection centres and can sell their produce at the minimum support price (MSP). Likewise, the poor people are able to procure items from the ration shops at a subsidised rate.

Typically, MSP is higher than the market price, and one would think that farmers would gain every time the government announces the MSP. In reality, however, things are different. First of all, every village does not have NAFED or FCI outlets. And, even if there is an NAFED or FCI outlet, the government may not procure if the farmers bring their produce before/after the dates of procurement. The government generally announces the dates of procurement, and many times the farmers do not have the information on these dates. Worse still, sometimes, the government announces procurement dates a month or two after the harvest time, making it impossible for the small farmers to sell their produce at the MSP. In India, as many as 80% of the farmers are small farmers with less than 1 hectare of landholding. These marginal farmers do not have access to cold storage (and hence waiting capacity), and have no option but to sell their produce to the middlemen or traders. It is interesting to note that in the state godowns that offer storage facilities, it is difficult to get space without any political connection.

What about the items such as fruits and vegetables that typically the central government does not procure Here the farmers have the option of taking these products to the nearby state governments designated mandis where, in front of the state officers, they can auction their produce to the commissioned licence agents (middlemen). The Agricultural Produce Market Committee (APMC) Act is a state subject, and was enacted to facilitate farmers selling their produce at a reasonable price. In reality, however, these middlemen form a cartel and at the time of auction offer a substantially lower price to the farmers. The marginal farmers, with no alternatives to hoarding the perishable vegetable and fruit items, accept the lower price offered by the middle men.

It is interesting to note that the states that are vehemently opposing FDI in multi-brand retail are yet to execute any reforms of their APMC Act. Reforming the APMC Act means farmers can sell their produce directly to the retailers and corporates, bypassing the middlemen. Given that most middlemen in the mandis are also full-time party workers, it is a no-brainer that any further reforms of the APMC Act will spell doomsday for them. West Bengal is one such state where, in fact, no reform has been initiated to amend the APMC Act. FDI in retail is going to hurt the already protected domain for the middlemen/party workers.

Those who have been arguing that the local kiranas and the marginal farmers may be hurtthe former losing out on business, and the latter not getting the right priceare not right. Currently, the local kiranas and Big Retail outlets such as Reliance Fresh, Tata-Tesco and Spencers, to name a few, are coexisting comfortably with each other.

Also, there is a clause saying that foreign multinationals can open FDI in retail only in cities with more than 1 million population. Going by this clause, there are only 52 such Indian cities. In West Bengalthe citadel of FDI in retail oppositionthere are only three such cities, namely Kolkata, Durgapur and Siliguri. Therefore, to assume the mom-and-pop stores will go bust is a serious misconception.

Marginal farmers also stand to gain. Recent evidence suggests that marginal farmers who have entered into contracts with Pepsi India have, on average, realised double the price in comparison with the local mandi and the local mahajan (in absence of the local mandi). This is an eye-opener for those suggesting that multinationals will squeeze the farmers by not offering them the right price.

In India, less than 1% of the population enjoys the benefit of pension. So, to say that allowing additional foreign investment from the existing 26% to 49% is going to hurt the interest of the common man is out-rightly wrong. People who are dependent on the agriculture sector and private sector do not get pension. In fact, those who have joined government jobs post-2004 are not going to get pension either. Even, for the sake of argument, if we agree that the money kept in pensions is going to lose value because it will now be linked with equities, this merits further discussions. Under the existing rule, not more than 15% of the total pension amount can be kept under equity. The rest 85% has to be allocated under the government and corporate bonds. Even with this kind of division, there are talks that the bare minimum amount of return from the pension fund will be kept in the neighbourhood of the current 8.5%. Hence, scientifically, there is no reason to believe that allowing additional foreign investment in the pension sector is going to hurt the common man.

In fact, if foreign capital comes in the pension sector, the government can actually use part of the money for investment in long-term projects such as infrastructure. The common man gains not only from better infrastructure but also by getting work opportunities in building infrastructure. Likewise, more competition because of foreign participation in the insurance sector is likely to bring down insurance premium and make insurance products covering health, automotive, fire, etc, more affordable.

Political leaders in the Opposition are opposing on principled ground and not on scientific ground.

The author is professor, Institute for Financial Management and Research, Chennai