There?s news that the government may allow FDI of up to 51% in multi-brand retailing other than primary goods (food, groceries and vegetables). This is good news but access to better furniture or toys doesn?t really help the common man too much. What he needs is food that?s cheaper and of good quality. Of course, newspaper reports do talk of the government being keen to permit FDI in the retail of foodgrain as well as other essential commodities to create a network that is parallel to the public distribution system. In his Budget speech, the FM referred to a statement made by the Prime Minister, who said: ?We need greater competition and therefore, need to take a firm view on opening up of the retail trade.?
Taking a cue from that, the FM observed that it would help bring down the considerable differences between farm gate prices, wholesale prices and retail prices. ?This is certainly a step in the right direction and I would like to see the concrete measures that the government intends to take in this regard,? he said, elaborating that this is a key element of propelling agricultural growth related to the reduction in wastages as well as in the operations of existing food supply chains in the country.
The minister is spot on; FDI needs to be allowed into the food and grocery space. But, simply allowing FDI into retail will not do the trick. Organised retailers must be allowed to buy from the farm gate and not be compelled to pick up their stocks from the mandis where price discovery is not really scientific.
While retailers will benefit when buying directly from the farmer as they can buy fruits and vegetables at costs that are lower by about 10%, they also need to fork out money to store and transport these perishables across the country to their outlets. But buyers will have greater control over the quality of the crop and that means the product will have a longer shelf life and therefore, less will be wasted. It?s a win-win situation because farmers too can realise good prices if they deliver the right quality, and once they are assured of regular orders, their incomes will become secure. Also, better cold storage facilities will result in lower wastage, so prices could actually fall. The less the wastage, the easier it will be for the government to maintain the buffer crop that it understandably wants to.
What foreign retailers, who team up with Indian companies, can bring to the table is expertise in the area of supply chain management, and of course, much-needed capital. Already, retailers like the Aditya Birla Group are buying about a fourth of their requirements in Maharashtra directly from the farmers. But in many other states, it has been far more difficult for the retailers to reach the farmer; for obvious reasons, the middlemen have made it difficult for them to get to the farm gate. That?s where the central government will need to step in and ensure that all states implement their respective APMC (agricultural produce marketing committee) Acts. A study by Icrier in 2008 found that farmers are much better off selling directly to organised retailers rather than to intermediaries or to the mandis?because their profits are as much as 60% higher. That?s a big number in itself.
While Icrier found no evidence of a decline in ?overall employment in the unorganised sector as a result of the entry of organised retailers?, it?s fine if the government wants to restrict the outlets of these joint ventures to cities with a minimum population of one million. However, the government needs to be reasonable when it comes to laying down the rules for the minimum built-up area that stores should occupy. With real estate costs being what they are, the stores cannot be profitable if they are very large. That?s one reason organised retailers in the country haven?t exactly been raking it in and even the biggest of them all is believed to have written off large sums. Smaller players are struggling to get their act together; Subhiksha has been wound up while Vishal Retail is struggling to survive. The Future Group?s chain of KB Fair Price shops will become Ebitda-positive only after restructuring the business. Even those with a headstart, like Shoppers Stop or the Future Group, don?t really make much money yet. Some of them experimented with too many formats simultaneously and have been forced to exit some of them. In a business with wafer-thin margins, it?s hard to be profitable without scale. The cost of rolling out a store can be anywhere between Rs 1,000-2,000 per sq ft, depending on the location and the format. Although backed by big business houses, organised retail could do with more capital and that?s where FDI will help. Consulting firm McKinsey has said organised retail could create 1.6 million jobs in the next five years. So the money will be well worth it.
shobhana.subramanian@expressindia.com