With both the Prime Minister and the Congress party general secretary Rahul Gandhi now committing themselves to usher in FDI in multi-brand retail, the stage is set for inaugurating a completely new phase in the country?s economic development. The history of the growth of organised retail reveals that it integrates the supply chain, reducing the number of intermediaries, thereby cutting costs and achieving economies of scale, which ultimately benefits both producers and consumers. This is especially true in the case of agricultural produce, which requires sophisticated infrastructure to preserve food from the farm to the consumer?s dining table. However, merely allowing FDI in retail will not lead to the outcomes listed above. Several follow-up measures will have to be quickly put into place to leverage this historic decision.
The primary concern among policymakers leading up to the decision to allow the entry of foreign players in the retail sector has been the likely (negative) impact on farmers as well as small traders who dominate the production and supply systems. While a number of safeguards have been mentioned in the policy announcement, translating this opportunity into a win-win situation for farmers, traders and consumers alike will require smart strategy and action.
At the heart of leveraging the FDI challenge lies the question of how farmers, especially small producers, can be integrated into a modern supply chain. I believe that viable value chains for agricultural produce can only be created by foreign and domestic retail players if the millions of small producers are embedded from the start as an integral part of such systems. The primary condition to achieve this vision is the aggregation of producers into efficient producer groups at the village level. Given the fragmented nature of holdings in India (over 83% are now classified as small or marginal), it is only with a strong intervention to aggregate producers at the bottom of the value chain can the true potential of modern retail be realised. The successful examples of the National Dairy Development Board in creating a white revolution by integrating small dairy producers and El Tejar in Argentina in bringing together small farmers is a strong positive testimony to this approach.
This is where state governments or better still private operators working under clearly stated and strongly enforced regulation will have to come in to proactively promote the formation of farmer producer groups, cooperatives, federations, producer companies etc. Once retail players can connect to groups of producers instead of individual farmers, they will be incentivised to develop long-term crop planning, quality benchmarks as well as cost-effective technologies. Institution building and a favourable environment for facilitating contract farming are pre-requisites for converting the FDI in retail decision into a new deal for farmers.
The state governments must now also move quickly to address two long-standing hurdles in the path of an efficient value chain for agricultural produce. The first is to reform the outdated APMC Act, which is preventing efficiencies and investments in developing backend infrastructure. Its abolition will allow competition and give complete freedom for the movement of farm produce. The government and FCI will continue to have a strong presence in non-perishables such as rice, wheat, pulses and oilseeds in view of the proposed Food Security Act. The private sector would, by and large, be confined to business of perishables such as fruits and vegetables. Hence, it is logical that at least fruits and vegetables are de-listed from schedule-1 of all state APMC Acts. This is a vital requirement if the potential of organised retail is to be leveraged in favour of farmers. Hence, the government of India should prevail upon UPA-administrated states for fruits and vegetables to be de-listed from the APMC Act.
The second area requiring urgent attention is the various storage control orders under the Essential Commodities Act, which are too draconian for a liberal, open economy and need to be done away with altogether or at least substantially diminished in their scope. Modern warehousing and storage facilities for agricultural produce will not be created by private players unless they are assured of stability in policies governing this sector. This is true for both domestic and foreign companies.
Now that the government is moving forward with the implementation of FDI in multi-brand retail, the task is cut out for both domestic and foreign private players. The companies would have to focus on developing producer organisations/aggregators to overcome the issue of transaction costs involved in dealing with small, fragmented farmers. They will have to build capacity of all the stakeholders such as farmers, aggregators, transporters, etc, on scientific ways of handling perishables and minimising pre- and post-harvest losses.
Gaining the trust of farmers would be vital for companies to ensure regular procurement of needed supplies. The companies would have to make an extra effort in providing inputs, facilitating credit and insurance, and imparting technical know-how through extension services. They will have to source best available low-cost technologies in cold storages, refrigerated transport, grading and sorting, etc. The only route to success for retail chains would be by sourcing directly from farmers and using technologies for raising yields and reducing wastages. The companies would have to constantly innovate at every stage in the value chain to be efficient, reduce costs and be in the business. This will pave the way for the much-needed second Green Revolution.
The author is secretary general, Ficci