With big retail, farmers lose, traders and retailers lose, and consumers lose

Perils of state-aided FDI

Shekar Swamy

Make no mistake about it. Our counrty is about to be economically invaded in the name of foreign direct investment (FDI) in multi brand retail, and the consequences are going to be profound. Only this time the guardians of the gate are the ones throwing it open, much to the glee of the few who will benefit from it and to the dismay of the millions whose future is being taken away from them. All of this goes under the name of liberalisation and reform — the euphemism for giving away our markets, perhaps the nation’s most sustainable long term asset.

The state has made it clear that it will go to any length to extend support to the biggest multinationals and aid the entry of big capital into the country. It does not matter if this is detrimental to the indigenous mass of small capital entrepreneurs, farmers and producers of all hues. In making its case, the state has chosen to overlook all evidence available around the world about the continuing negative impact of Big Box retailers.

As this invasion unfolds, it will result in large scale displacement of the small people in favour of big foreign capital. As invaders are wont to do, they will divert the income flows from the local people to large foreign capital. It is deeply regrettable that the state is aiding this through a stream of misleading information and arguments that don’t stand scrutiny.

There is a new master in the house and it’s called ‘foreign investors’. Whatever we do as a nation, the government’s first filter appears to be ‘How will it affect the sentiment of foreign investors? Will they be displeased? What can we do to keep the foreign investor smiling at us?’ The reality is that we should not be devising policies to please this mistress, but doing what is right by our people. By its very nature, foreign capital will frequently threaten to go elsewhere or not come in. It will always demand that conditions should be perfectly suited for it to exploit the local market, never mind how it affects the people. The remarkable point is that even as we have opened the retail markets, the state has not even bargained for any beneficial reciprocal arrangements (like how about increasing the US H1B visas so that a major constraint is removed for our IT industry). This shows how much the state is willing to bend to please the mistress.

How much foreign direct investment has been coming in? It was only $47 bn or 7.7 per cent of total investments in the country in 2011-‘12 (refer graphic see the graphic below). Compare this to non-resident Indian (NRI) remittance inflows of $66 bn (Source: Reserve Bank of India) in the same period, which comes in on its own with no strings attached. If the government wants to, it can significantly boost the inflow of NRI funds, with a little bit of stimulus and a well thought-out programme. While there are good answers like this to get funds into the country, it is inexplicable why the government has chosen to follow anti-people measures, like FDI in the retail sector.

Having decided to aid multinationals, the government has exaggerated and presented erroneous information to support its position. Out of the many such examples, here are two important ones.

Take the figures of losses of agricultural produce. Government officials have repeatedly said that 40 per cent of fruits and vegetables are wasted post-harvest. Therefore FDI in retail is required to develop the back-end infrastructure. This is grossly incorrect. As per a detailed study commissioned by the government and conducted by the Central Institute of Post-Harvest Engineering and Technology (CIPHET), Punjab, the wastage of fruits is only between 6 to 18 per cent and vegetables is between 6 to 12.5 per cent. Completed in 2010, CIPHET’s nationwide quantitative assessment of harvest and post-harvest losses covered 46 agricultural produce in 106 randomly selected districts. The summary of the study of post-harvest loss is available on the website of Ministry of Food Processing Industries (http://www.mofpi.nic.in/ContentPage.aspx?CategoryId=1314).

CIPHET’s post-harvest loss estimates in India compare favourably with western countries. The Food and Agriculture Organisation has estimated 36 per cent loss of fruits and vegetables (refer graphic) in America, Canada, Australia and New Zealand, the countries where big retail is most developed. While the methodologies may differ, these figures are nevertheless indicative. If big retail cannot prevent such losses in these countries — or they are responsible for a chunk of it — surely they cannot address this issue in India.

The second example of misrepresentation is the alleged benefits to farmers. The argument goes that since middlemen will be eliminated from the supply chain, farmers will be paid more by the big retailers who will procure directly. While this is elegant in theory, the global experience is the opposite. Procurement of big retailers will hardly touch the small farmers, which is the largest constituent in our country. Big retailers will deal with large contract farms, which become their captive farms. Prices paid to farmers get hammered down consistently. As an example, look at the United Kingdom experience (refer graphic). As the share of the top four retailers increased from 54 per cent in 1996 to 65 per cent in 2006, the farmers’ share of consumer prices has gone down dramatically for milk, fruits and meat & pork.

People argue that this is the way ‘progress’ happens, defined as copying what has happened in the West. However, western retail is a deeply flawed structure. It holds farmers and suppliers captive through its monopsony (a market situation where there are only a few buyers for everything) bargaining power, and has systematically reduced the price paid to them. When compared to India, consumer prices are higher in the West, where big retail rules with its cosy oligopolies, for just about everything.

The global experience is clear. With big retail, farmers lose, traders and retailers lose, and consumers lose. Only the big multinational companies win. How does one explain the state aiding this invasion? The answer is simple. Big capital is the mistress, and mistresses have their ways of winning, and it is seldom the fair path.

Shekar Swamy  is Group CEO, R K SWAMY HANSA and Visiting Faculty, Northwestern University, USA. E-mail: shekar.swamy@rksbbdo.com