Dear Dr Basu
I read with interest interviews in the media in which you have recommended opening up foreign direct investment (FDI) in retail. I could discover two macro-benefits that seem to be at the core of the case you make. The first that in the long-term this would reduce food inflation. The other that it would generate a significant number of jobs, particularly for the relatively unskilled millions that India will add to its workforce. On the face of it, these reasons alone should make the need to open up FDI in retail an open-and-shut case.
I am neither an economist nor claim access to privileged information that you or others may have had in arriving at these conclusions. I have a few questions and postulates on these two suggested macro-benefits.
Let’s consider the proposition that FDI in retail will reduce food inflation in the long-term by drastically reducing wastage and creating an efficient farm-to-fork supply chain.
We have been having high food inflation for the past 12 to 15 months. From what one reads in international magazines like The Economist, during this period many developed countries with a significant presence of organised retail have also seen high food inflation (relative to their markets). Is it that in recommending FDI in retail we are prescribing the wrong medicine?
A very large section of the masses (70 per cent) buy much of their foodgrain through the subsidised public distribution system and not at private retail outlets. That leaves pulses, fruit and vegetables, which is what seems to be primarily considered in reference to food inflation mentioned in the articles. Within this, there are two distinct issues of wastage and price inflation that are not necessarily the cause and effect of each other. Most of the pulses do not require specialised storage, so it can be nobody’s case that there is abnormal wastage with the movement of pulses from its source to the consumer.
The current price inflation in pulses seems to have its genesis in climatic factors affecting production and an increase in consumption due to higher incomes. There is unlikely to be much that one can expect to be done by international retail to address these imbalances.
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So is it, then, that the wastage being spoken of in the context of FDI and as contributing significantly to food inflation mostly that of fruit and vegetables?
In the past 16 years that various Indian business houses have forayed into organised retail, there is no data to show that this has happened. The large percentage of fruit and vegetables being said to be wasted (over 40 per cent) due to improper transport and storage seems grossly exaggerated.
One has to only visit the large mandis to see that actual wastage is far lower. Sure, there is some “second grade” and damaged output that arrives. There is also some loss before this in the chain but the cumulative impact is possibly way lower than the figures mentioned. Also, in the unique kaleidoscope of India there are consumers for this too in the “darshinis”, dhabas and so on and the poor to whom these are sold at significantly lower price points.
There is also mention of the large number of intermediaries between farm and fork and the resultant inefficiency. The integrated supply chain infrastructure large multinational retailers are expected to set up is likely to squeeze out the inefficiency, passing on the price benefit to the consumer. The intermediaries in the supply chain today give rise to operational inefficiency and not necessarily to large financial inefficiency that can provide significant savings to the consumer.
Most of the current intermediaries work on margins that are abysmal by world standards; some of those in the grains and pulses chain make Rs 1 to Rs 2 on a quintal bag of grain, which is a decimal-point margin on the value of the item.
Many of the other countries being mentioned as successes have food supply chain margins that are much higher than that available in India. There is no mention in the various articles about the estimated level of investment required in cold chains and infrastructure to replace this “inefficient” chain. Has any independent study been done to evaluate this? A back-of-the-envelope calculation could show that in providing a reasonable rate of return to the private players making these billion-dollar investments, we may actually end up with operating costs higher than that of the inefficient chain it proposes to replace.
One visible example of this is the experience of most business houses that have forayed into food retail in India. Over the past many years they have cumulatively lost billions of dollars and not one of them has consistently (that is, through the year and not loss-leader promotions) been able to deliver produce at costs lower than that procured from the local mandi. Is it that many of these Indian companies, fatigued by losses, are actually looking to cash out with the opening up of FDI and hence adding to the clamour?
Over 80 to 85 per cent of the Indian farmers have sub-optimal agrarian land holdings of less than 2 hectares. These do not lend themselves to large-scale contract farming and many of them are also consumers of their produce, bringing small quantities to the market. Most organised retailers today have not found commercial benefits in building a farm-to-fork chain.
The great Walmart effect at lowering prices in other countries misses one key point. The major price reduction Walmart has produced in other countries is mostly in the “non-food” category. The key to this is the great China factory that Walmart leverages.
My humble submission is that the linkage being sought to be established between food inflation and the arrival of FDI in organised retail is tenuous. Examples of other countries miss out on what the ground realities, supply chain commercials and other factors were then prevalent in those countries to make these comparisons meaningful.
History also points us in the opposite direction to the effects of globalisation in sectors that have core inelastic demand and where existing arrangements have worked on low margins. Take our own experience with the arrival of insurance and managed healthcare on the western model. Slowly but surely the total cost of healthcare over the past few years has only gone up.
We are told of 50 to 60 million retail jobs (net of those lost) created in China over 20 years since the arrival of FDI in retail. The Indian experience portends a far more pessimistic picture. Today, Indian retailers engaged in organised food retail have an annual turnover of $3.5 billion to $4 billion. Together they provide 90,000 to 110,000 direct food retail jobs. Assuming even a 1:1 ratio for indirect employment by this sector, today it potentially provides 180,000 to 220,000 jobs. A crude extrapolation would suggest that we need at least $16 billion to $18 billion of food retail turnover to create one million jobs. This suggests that the creation of even 10 million jobs by this sector would need organised food retail business in the region of $180 billion! It would be interesting to ask the multinational retailers espousing the cause of FDI how many years they estimate it will take for organised food retail in India to reach that figure, let alone one required to generate 40 to 50 million jobs.
I believe foreign capital should be welcome even in retail if it brings significant benefits to our country, solves issues that face the business and its ecosystem. But in the debate on FDI in retail there is little clarity on what problem we are trying to solve by getting FDI.
It makes me wonder if this is but another attempt to justify a pre-decided end. After all, many American luminaries from President Obama to the Walmart CEO have stated that opening FDI in retail is a major item on the Indo-US economic agenda!
I cannot help but recollect a statement by the director of an iconic US retailer a few years back when queried on their interest in the Indian retail market. He said, “Dilip, India is the last frontier left for the global retail industry; you know, kind of what the Wild West was in the gold rush era.” The profits they would want to make in the long term are unlikely on the canvass of reducing food prices. The socio-economic benefits they claim to bring are also possibly exaggerated to justify their gaining access.
I believe opening FDI in food retail is a significant policy issue facing us and will have a long-term impact on society. The government would be well-served by bringing into the public domain the basis and data behind its planned policy change and creating an effective platform for consultation with various stakeholders before crying “Open Sesame” and letting the Walmart mega-liner berth!
Sincerely,
Dilip James
The author is a Bangalore-based independent advisor with a long association with Indian retail