The much-talked-about defence on allowing foreign direct investment (FDI) in multi-brand retail on the ground that it will curb the soaring food inflation has left economists divided.
Pronab Sen, principal advisor to the Planning Commission, does not think food inflation would see downward pressure if transnationals enter this space. “Opening the retail sector (to foreign investment) is unlikely to bring down food inflation, as the conditions in India are very different from what people are expecting,” he told Business Standard. On bigger players in multi-brand retail augmenting food supply chain, he said building back-end infrastructure would take time and would not happen anytime soon.
Crisil chief economist D K Joshi said, “FDI will address only some aspects of the problem of food inflation. Augmentation of the supply chain will address the problem of food inflation to an extent.” An inter-ministerial group on inflation, headed by Chief Economic Advisor Kaushik Basu, had recommended FDI in multi-brand retail to curb inflation. It had said since the dated technology and managerial methods lead to value erosion, increasing the prices for consumers, the foreign investment would tackle this issue.
RBI Governor D Subbarao had also said FDI in multi-brand retail would bring down inflation, but he expressed readiness to discuss any contrary views on the issue. Other analysts also said the multi-brand retail chains would not directly procure food items from farmers in India, unlike in the United States. As such, it will not be able to pull down food inflation.
As the size of land holdings by farmers in India is shrinking, the scattered farms make direct procurement from farmers an onerous task, they said.
As these chains would procure items from ‘mandis’, they would only add another intermediary in the food items business, the analysts said. Last week, former finance minister Yashwant Sinha had said in Parliament that the argument that FDI in multi-brand retail would bring down prices was bogus.
“There is no empirical evidence to prove it,” Sinha had said, recalling how global retail chains ruined the Mexican economy. Last month, a committee of secretaries had given an in-principle approval to 51 per cent FDI in multi-brand retail. The proposal will now go to the Cabinet.
Some other analysts, however, felt the proposed policy would help manage food inflation. Chief Statistician T C A Anant said the retail sector had high trade margins, and it’s the FDI that would bring down these margins reducing inflationary pressures on food items.
“Opening the sector would increase competition and technology, which would ultimately lead to easing of food inflation,” he said.
An official from the finance ministry echoed similar lines, and said the primary function of FDI in multi-brand retail was to increase efficiency in the market. “Under competitive conditions, it will have an impact on bringing down (food) inflation,” he added.
The difference between farm-gate prices and what a consumer pays in India is twice that of any other country in the world, the official said, adding that multi-brand retail was a very important channel for bridging this gap. However, he called for the need of regulation.
Rajiv Kumar, general secretary of industry chamber Ficci, said these large retailers would manage to get small farmers together, the way Reliance Fresh has done in some parts of India. “It would remove several layers of intermediaries and help in cutting down margins,” he said.
Economic think-tank Icrier, in a report, had favoured opening up multi-brand retail, when Kumar was its head.
Food inflation bounced back to over eight per cent for the week ended July 23, from the 29-month low of 7.33 per cent the week before. The overall inflation also remained high, hovering at over 9 per cent, despite 11 rate hikes by the central bank since March 2010.
