FDI in retail for Karnataka - I say NO! Can wait.

+1 SB.

While I do love the convinience of shopping at a well planned, diversely stocked store carrying genuine products (think IKEA), I'm not sure we are informed right. It is mostly FDI for the sake of FDI.

Typical twisted argument, right? We support it - as farmers get more out of it! OTOH, multi-Brand retail is what the name suggest - multi-brand. Includes  agri products, but that is not necessarily the only (or even the largest) component of retail business. Visit any big box global retailer, and you'll see first hand. Typical wallmart store in the US probaly has about a 5th of its shelf space filled with fresh produce and food articles.

Its not 100% foreign ownership for multi brand retail only 51%. So indian partner is definitely involved.

 In the case of multi-brand retail, fresh farm produce cannot be branded and 30% of the inputs have to be sourced from small enterprises, as per the agenda note. Multi-brand entities will have to bring in an investment of $100 million (Rs500 crore). States will, however, have the freedom to decide whether they should allow multi-brand retail chains with foreign partners to be located in their territory.Currently, 30-40% of fresh produce goes waste and more than half of this can be brought to the market if the proper farm-to-fork infrastructure is in place.  Source

Farm to fork requires significant monetary & expertise investments. Supply chain investments are only realized at the retail shelves if it has to be farm to fork so it is not sensible to assume the expertise will come as charity.

FDI is good for consumer but for farmer... here is the catch which has been swept under the table. The APMC act.

At present, agricultural produce can be moved out of an area only by agents who own licences issued under the APMC Act.

An inter-ministerial group headed by chief economic adviser Kaushik Basu had recommended that the APMC Act ought to be amended to enable farmers to bring their products to retail outlets and also allow retailers to directly purchase from farmers.

“The APMC system has abetted monopolistic behaviour and reduced the choices available to small farmers. Unwittingly, the well-intentioned APMC law has contributed to helping cartelisation and collusion among incumbent traders. The need, therefore, is to revisit the APMC Act with this in mind,” it said.

A model APMC Act was finalised in 2003 and was circulated to the state governments for implementation in 2007. Since then, a few states have amended the act and only a few such as Punjab, Haryana and Himachal Pradesh have relaxed their procurement laws.

Source

Success stories are also from the states which have amended APMC act. incidnetally this is already helping without FDI in retail which shows that for the farmers APMC is the bottleneck not FDI.

...based on Punjab’s successful experience with agri corporates. The entry of agri corporates like Bharti Wal-mart, Pepsi Co, Tata Khet Se and Metro Cash and Carry, has actually helped in strengthening the retail supply chain. Farmers in Haider Nagar locality of Malerkotla, who supply vegetables to Bharti Wal-Mart, have not just been able to improve the quality of the vegetables they produce, but they are also getting better prices. Potato growers in the Doaba region have also benefitted by selling their produce to Pepsi Co.

“Most of the agri businesses are sourcing 30- 40 per cent of their requirement from farmers within the state. As a result, farmers are assured of a buy back arrangement with these corporates and of higher returns.

Source

Sorry - I don't agree. FDI in retail was long pending & the arrival of the walmarts, tescos & the carrefours is only a matter of time.

As IDS mentions above, it is the APMC wallahs who had been posing obstacles, arguing that the farmers lives would be badly effected, when in fact, they worried about their own lucrative businesses that squeezed farmers.

When Metro Cash & Carry first entered, APMCs had caused havoc in the name of the farmer, but this is far from true. Eventually, they were admitted for "whole-sale" business, but not for retail. Even now, they face opposition in Kolkata & Mumbai.

Also, see this link.

Guess who is offended by the FDI... no, not the retailers... no, not even the farmers.. yes the APMC middlemen.. see here. In fact the farmers are asking for reforms in guess what? see here

Regarding Amul, here is the truth

"When Amul started procuring milk from villages, these very middlemen created ruckus but it was the will power of farmers in Gujarat that the entire chain was broken. Their economy improved and consumers now can get milk round the clock making the country self sufficient in milk"

There were no retail chains in those days who could pump in the money for the entire supply chain & backward integration so crowdsourcing was used in the form of co-operatives. We are better placed today than to resort to co-operatives for every commodity.

From offical site: The exploitative trade practices followed by the local trade cartel triggered off the cooperative movement.  Angered by unfair and manipulative practices followed by the trade, the farmers of the district approached the great Indian patriot Sardar Vallabhbhai Patel for a solution.  He advised them to get rid of middlemen and form their own co-operative, which would have procurement, processing and marketing under their control.  

Amending Act 43 of 1976.-  ...It is also proposed to provide that wholesale trade in notified agricultural produces can be conducted only in the market yards and sub-market yards so as to have effective regulation of trade and to afford on the spot processing and packaging facilities to the traders as well. 

 (Published in the Karnataka Gazette (Extraordinary) Part IV-2A dated 7-4-1976 as No. 1858 at page 4.)

Amending Act 29 of 1987.-  It is considered necessary to amend the Karnataka Agricultural Produce Marketing (Regulation) Act, 1966.-   (i) to restrict the sale and purchase of notified agricultural produce to a market yard, market subyard or sub-market yard except in cases of certain cooperative societies, and sale by a retail trader; 

Regarding price fixing

76. Sale of agricultural produce.- The sale price of notified agricultural produce sold in the market area shall be determined either by tender system or by public auction or by open agreement or  by sample or by reference to a known standard or in such other manner as may from time to time be directed, with the previous approval of the [Director of Agricultural Marketing]

This is amended by a toothless amendment in 1986 which admits to armtwisting by middlemen  

Amending Act 35 of 1986.- ... even though statute restricts the commission charge  at 2%, the Commission Agents in practice collect more from the agriculturists as most of the producers/sellers are illiterate.  It is also felt necessary to define commission sales and to provide penal provisions

From Karnataka APMC act of 1966 full text

Also one will notice going thru this whole act how much bureaucracy has gotten built into it. 

SB,

The title of your posts is an interesting one ".....I SAY NO...". Seems very powerful and with lot of convictions.

Question on FDI is not a single question. It is basically a 2 part question. Seems you are looking more closely at the 1st part fo the question - Why is that the farmer gets only a pittance? Second part is do we need FDI at all?

One biggest reason for farmer's not getting his due share is introduction of  a regulator where it was not needed, AMC. What was needed was enforcement of no nefarious design in Prices going up/dn due to hoarding and artificial scarcity in the market.

Let me give you some of my experiences while I grew up closely observing my maternal Uncles in oil seeds business. This is in 70s and 80s. Until late 80s there was no regulation on Oil seeds like Groundnuts. A vast areas of Andhra Pradesh, Karnataka, Tamil Nadu, Mahrashtra and Gujarat used to cultivate ground nuts as the major agriculture product. Almost 90% of groundnuts were used up in extracting the groundnut oil. The price used to be determine by the market forces. In majority of times it worked fine except for in instances of Jacked/Lowering of prices. Basically price reflected the market and it used to be reasonable correct. Believe me all the farmer's used to recover the cost and some profit in most seasons except for where the crop failed due to Monsoon failure or other natural calamities.

The season used to run for about 4-5 months after every harvest. This is how my uncles used to do business, like many others. Everyday they will find out the market rate in Bombay.Using that as baseline, they will fix up the purchase price. Farmer's or small traders would come and negotiate the sell price. The price negotiations is fixed around the ultimate market price. Obviously farmers would not  get the market price that is of Bombay. But somewhere close by, not like Rs 20 against Rs. 450. If the Bombay rate was Rs. 1500/- for 240 Kgs of Groundnuts, Farmers would get around 1200-1300. My uncle would buy them at 1200-1300, then transport to Bangalore/Hyderabad and may be sell it at 1400-1450.

This is not to say that people always made profits, there are times they incurred huge losses. That is part of the business.

The whole supply chain worked like a well oiled machine, even in absence of a modern day infrastructure like storage godowns, Cold Storage, good roads and communication channels.

ICRIER study on "Impact of Organized Retailing on the Unorganized Sector" instituted by NDA govt in 2004, has done some interesting facts.

According to ICRIER study, impact on Agriculture/Farmers by Organized Retailing:

• Farmers benefit significantly from the option of direct sales to organized retailers.
• Average price realization for cauliflower farmers selling directly to organized retail is about 25 per cent higher than their proceeds from sale to regulated government mandi.
• Profit realization for farmers selling directly to organized retailers is about 60  per cent higher than that received from selling in the mandi.
• The difference is even larger when the amount charged by the commission agent (usually 10 per cent of sale price) in the mandi is taken into account.

Must read case study on sale of Cauliflowers by Farmers in Hosakote.

Page # 57, Fig 5.1 for Cauliflower Supply Chain

Page #60, Table 5.3 for Farmer's profit for Cauliflower

Page # 61, Chart 5.2 for Profit share by Farmers, Intermediary and Retailer.

I am sure Praja members have heard and read about Prof. Sebastian Morris of IIM. He has penned an article that appeared in Hindustan Times

The government’s decision to introduce majority ownership in multi-brand retailing must be seen in the present situation of declining foreign direct investment (FDI) and negative foreign institutional investments (FII). Hopefully, retailing investments by global firms will revive FDI and FII.This will pull along FDI and portfolio investments in general. In the long run, foreign firms with access to cheap capital abroad will do the job that should have been done long ago: provide competition to the stranglehold of agriculture produce market committees (APMC) — thereby resulting in the high retail prices of agricultural products to be passed on to the farmer.

He also makes an interesting remark about disconnect between transport planning and housing in urban areas

Will consumers gain?..........But even here the gains are likely to be smaller than what’s possible, as they, too, would be constrained to find large parcels of land that are well connected with major cities and towns. The disjunction between transport planning and housing in Indian cities could deny advantage to large retail (as has been the experience so far) and continue to sustain petty retail in spaces outside their natural comparative advantage.

We dont have to hold FDI to ransom for not being able to do other reforms, if anything FDI might put pressure on the govt to reform other policies.

Current Indian big chain retailers were given a head start to make things happen, but as usual they chose the easy way out instead of reforming the system. Most large chains have ignored the perishables & have gone into safer durables where they dont have to change the APMC. It took a Metro from Germany to fight.  We need external entities which are not used to working in this system to change it. There are no garuntees.

We heard in 1995 how KFC will kill poultry & darshinis, we pelted stones & prevented them from opening. Did we ask for garuntees that they will not kill small stores when we allowed them in? They have created a bigger market for poultry than we ever had. In fact today darshinis are more popular than the KFC's & survive along side. Why are we afraid of competition? 

Almost two decades after China opened up retail fully, starting with allowing 26 per cent FDI in 1992, the sector has seen rapid growth, against the backdrop of increased market consolidation, higher production efficiency enabled by rising investments in rural infrastructure, and booming exports made possible by the setting up of new supply chains.

Many of these changes, according to Chinese analysts, were made possible by the entry of foreign retail giants such as Walmart and Carrefour, who changed the way Chinese companies managed their businesses, from farm procurement to logistics. Yet, 20 years on, it is Chinese local retailers — and not their foreign competitors — who dominate the retail market, with initial fears of a foreign invasion ultimately appearing unfounded as local companies learned quickly to out-compete their foreign rivals.

Source

PA, SB, and others,

There is no dearth of 'doomsday' forecasting in everything and anything. We have heard this before. When Govt of the day in 84 announced it will go for 'Computerization', traditional unions and their political masters were on streets and left no stone unturned to convince us that it will take away the jobs. Did we loose more jobs or we were able to add more jobs since then?

Isn't it a fashion to see conspiracies in every thing a govt does? Isn't a trend to be cynical for everything that govt does, based on our prejudices and bias against it? Purely based on our liking and disliking a party? Dom'n if it does something and Dam'n if it doesn't.

Whenever such arguments in favor of policy is made, a cry goes for empirical data, studies etc. Then what do we have to say about the conclusions drawn in the report by ICREIR? Mind it this is the study commissioned by the NDA govt when they were in power in 2002. Isn't enough or this is manufactured by govt? Let the states  who want to take risks go for it. Why me, you and others from Karnataka who are skeptics and not convinced, stop Punjabis, who wants to experiment? Will know the truth about its impact and doomsday scenario reality?

In all this we are somewhere striking at the roots of very foundation of our laws and constitution. In democracy, the majority rules. Now, thanks to coalition politics, opposition rules and dictates to what govt can do and it can not do.

Do you need examples? Read politics done on VAT implementation.

These are the days of post Wikileaks.

and the sooner the way we look at information changes the better for all of us 

Wikileaks this time last year mentioned how the FM of India ws chosen and the lobbies backing him? the statement was in a communique from the Secretary of state, US. It seems like the lobbies were clear now. And if there were not any then there certainly are now. They have already stood up to be counted

2 press statements from the White House during last  week on FDI in retail in India.

Why would the farmer sell to me if it is lower than the minimum prcurement price.

This seems to be a clear case of licence permit raj.

I agree with Silkboard, first internal reforms before you get in FDI. There is much we can do to improve the case for farmers in any case

The need of APMC should be also understood before blaming it. What was the market available before APMC was introduced, say 30 years ago? Before APMC, a single buyer would approach the farmer, and give a price, and as the farmer does not know about the market prices, they had to sell at whatever price that was quoted. Earlier, there  also may have been lack of knowledge about storage, etc. When they come to the APMC, there are many sellers and buyers, and a fairer price becomes available to the farmer. This may not be the case now with all the information available. Now, I think farmer may not be able to sell outside the APMC, but any one could buy in APMC. Whatever, I read does not answer that directly who can buy in APMC. I hope somebody with experience can answer that.

PA,

Should wikileaks be treated as gospel truth? If so then greatest hypocrisy can be attributed to the party with difference - http://www.dnaindia.com/india/report_bjp-leader-arun-jaitley-hit-by-wikileaks_1524552

It was BJP's turn yet again to be hit by Wikileaks cables with a US diplomat reporting that its senior leader Arun Jaitley had remarked to him that Hindu nationalism is an 'opportunistic issue' for his party.

Not to say that other are less hypocrites.

CRZ/ Coastal Zone Management

Forest Rights act

Special component plan for SC / STs all of these in the guies of governance, equity etc effect huge populations

Similarly NREGA also while it is a stop gap meausre and more needs to be done. The BRGF is another

anyway this involves evictions, disruption of livelihoods of the rural poor and governance refoms reach them very unevenly

on the other hand we have large eastern and western frieght corrdiors, Industrial corrdors (DMIC) and also chennai- bangalore- mumbai both funded by the Japanese, follwed by highspeed rail can you say what is the polictial economy of these decisions? how come no issue of transparency corruption and political reconomy are raised here while so called pro urban pro industrial " reforms" are being pushed. these are virtually huge enclaves where golf courses malls, resorts new cities etc will grow outside electorates

on FDI in retail if political parties like the TMC have put it in their poltical election manifestos and therefore strongly oppose the policy it is because they are committed to their electorate as a democracy what is the question here ? maybe the BJP similarlyhas a manifesto and they are in power in many states do you think they should also betray their electorate

many links of FDI in retail like GM foods, processed foods, food factories, biotech you remember the BT brinjal debates and rejection just last year. and the moratorium reached.

this was the bitter pill for all the scientists, industrialists, pro-GM and pro BT advocates and the world ended for them and they thought it was the end of reforms.

I think ICRIER, NCAER, CII, FICCI  ASSOCHAM, AMCHAM, USIBC and also the US govt feel they have been fed the bitter pill of political manifestos and electorates today.

in a democracy this should be strenghtened and the economic decision makers   need to learn that politiczl consensus is at least as important

wikileaks has changed the way people look at information and yet most governments always look a sting operation in the eye but the one paper which supported the anti FDI struggle upfront ( the Hindu edit) also ran the India cables on front page anchor column for many weeks,

on the other hand many of the proFDi and pro reform pink papers and corporate funded TV channels supported the "bold policy decision" to break the "policy paralysis",

SB,

Am ambivalent myself.   Reliance Retail e.g. pumped in a lot of money into retail but have not been an unqualified success.  Not sure how a dollar converted to a rupee vs. a normal rupee changes things but here is my two cents.  There is also a likely a lot of pressure from the US to open up Indian retail (maybe as a quid pro quo) .  I don't agree with the statement made by Arun Jaitley that India will become a nation of salesmen.  Isn't it better than having a nation of unemployed young men and women.

Retail is a low margin business and depends very very heavily on operational efficiency.  Which is why most Indian retailers don't make money and then it is no more a viable business.  Walmart is known for their efficiency.  They are also know for their very aggressive contracts with suppliers.  If the high price differential between consumer and farmer is because of inefficiency then you can expect it to come down even if in fits and starts.  But if it is because of some other political reasons then Walmart is going to struggle. 

In general what we need is competition.  Then there is great incentive to eliminate losses and inefficiencies.  Think about it - a Santro that cost Rs.345000 13 years back probably costs the same even today.  STD call prices are lower than 15 years back in absolute terms and in terms of monthly salaries a fraction of what they used to be. 

What will work against players like Walmart is their basic business model which revolves around scale - large stores located outside town.  A trip to a place say like Nelamangala from Bangalore will take 3 hours travel (up and down) and Rs. 350 of petrol.  Which means you need to load up Rs. 7500-10000 worth stuff to make it worth it.   How many people can afford that sort of outlay.  The BJP is being mendacious about the impact of MR on small retailers.  Even today MR will not be more than 5-6% of an FMCG's business.  

I think both the benefits and the dangers have been overstated.

Srivathsa

As a consumer I say yes to FDI in retail. I believe it can be allowed with relevant safegaurds for small retail. I get choice to buy the same crap I always buy... maybe some new crap on the shelves of the foreign guys.

Having said that I as a consumer dont really need  walmart/tesco to survive. Whoever needs them can campaign for them. I need freakin trains & cycle lanes to travel to places & I cant get it, I will ask for that instead.

15,000 containers and a crew of just 13 men. Too wide for the Panama or Suez Canals, it is strictly trans-Pacific.

What's the relevance of this with FDI?

As being discussed, the FDI in retail will bring in not only additional investments but, also the  knowhow.  one of the most important knowhow would be in farming which is contract farming.  if you see the farming practices of india for the last 50 years, you can say not much has changed and farmers continue in the most inefficient way.  infact, it has detoriated over the years as in say 3 generations, a farmer family with 50 acres of land would become 50 farmers with 1 acre of land each.  there is a need to cooperate and produce efficiently which can only happen with large tracts of land. the likes of walmarts have that capacity to integrate the farmers and streamline the supply chain which would increase the operational efficiency and reduce the overall cost.

the waste in the supply chain which is more than 30 % is what is up for grabs for all the stake holders.  farmers may get more, consumers get benefit of better quality and some cost benefit and the retail store makes rest

@ Syedbhai - Such huge container-ships returning empty means large trade imbalnces between the countries involved, and adverse consequences thereof, about which even a basic student of economics will be able to write an essay on.

@ Ashfaq - When a Walmart (or even a Reliance) gets into contract farming, it will invariably lead to mono-culture, as also other unhealthy practices, essentially to boost productivity. As such, to address the land-fragmentation issue, that you correctly pointed out, I would have preferred the farmers coming together to pursue a co-operative model, perhaps on the lines of AMUL. What the country's farming sector needs badly perhaps is its own Dr Verghese Kurien.

@ SB - yes, I too believe that, more than the impact that FDI will have on the farning sector, it will lead to the government moving simultaneously on many other fronts too - like improved power supply to meet the cold chain needs (perhaps through privatisation - Mr Manivannan - look out :))) ); better and more scientific irrigation projects/ schemes; better rural connectivity (again, privatisation of bus services?), etc etc - in essence, a quantum leap in the way we look at finding solutions for our infrastructure problems. In that, it would be welcome, though we would certainly be faced with new challenges too. But, quoting the late Sri C Subramaniam, like I have been doing many times before, I will venture to add that it would be better than when, for over fifty years, we could not find solutions approaching them through conventional ways.

Prosperity is created by rising productivity, which by definition means producing more from less labour and capital. Rising productivity surely causes some job losses, but creates jobs elsewhere.

To understand this fully, consider the following. To protect jobs, should we ban computers, which have displaced millions of clerical jobs? Why not ban cellphones which have killed the camera industry? Why not ban washing machines, which have hugely reduced jobs in washing? Why not abolish vacuum cleaners which substitute poor sweepers? Why not abolish luggage with wheels, which deprives coolies of jobs? Why not abolish tractors and harvest combines , which take jobs away from agricultural workers , the poorest of the poor? Why not abolish cars and motorcycles, which have displaced labour-intensive horse carts and bullock carts?

For the full text of the essay by S A Aiyer in the ToI, click here.

Interesting perspective