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LATEST NEWS UPDATES | FDI in Retail: Misplaced Expectations and Half-truths by Sukhpal Singh

FDI in Retail: Misplaced Expectations and Half-truths by Sukhpal Singh

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published Published on Dec 19, 2011   modified Modified on Dec 19, 2011

The central government claims that allowing foreign direct investment into India’s retail sector will benefit small farmers, expand employment and lower food inflation. What has been the experience in India with organised retail so far and what has been the global experience with FDI?

Sukhpal Singh (sukhpal@iegindia.org) is currently at the Institute of Economic Growth, Delhi.

After being under relentless attack for a week, the United Progressiv Alliance government was forced to “put on hold” its decision to allow 51% foreign direct investment (FDI) holding in multi-brand retail trade (MBRT) and raise the FDI ceiling from 51% to 100% in single brand retail trade (SBRT).

It was an executive decision taken by the union cabinet on 24 November without any discussion in Parliament or consultation with various stakeholders, despite the fact that the issue had been hanging fire for the last 15 years ever since 100% FDI in wholesale cash and carry trade was permitted in January 1997 on a case-by-case basis. After that, the N K Singh Committee on FDI in retail trade in 2002 suggested the ban be continued, which led to the Tenth Plan dropping the proposed recommendation on FDI in retail trade. Metro – a German supermarket chain – was the first one to enter India as cash and carry wholesaler in 2003 with a store in Bangalore. Then, in early 2006, 51% FDI in SBRT was allowed. Since 2007, all the major wholesale cash and carry players like Walmart, Metro and Carrefour have set up shop in India and have multiple outlets ranging from two in the case of Carrefour to as many as 14 in case of Bharti-Walmart (Mookerji 2011). Reliance Retail has also made an entry into wholesale sector with a store – Reliance Market – in Ahmedabad a couple of months ago. Global retail chains have also been present in India in retail through licensing/franchising arrangements like SPAR (a global supermarket with more than 12,000 stores in 33 countries) has a licensee and Max Hypermarkets of Dubai-based Landmark Group which operates 10 stores in India (Images Retail, December 2011). Under this arrangement, a domestic player buys a licence/franchising right for a fee from a global brand owner and there is no FDI involved.

The conditions for 51% FDI in MBRT include a minimum investment of $100 million by each player, 50% of it in back-end infrastructure, 30% procurement from micro, small and medium enterprises (MSMEs), and the government’s right to procure the farm produce first. But MBRT players are allowed to sell perishables such as fruits and vegetables as “unbranded”. Further, the permission for MBRT has been granted for cities with a population of one million or more, which brings in 53 cities.

In this context, it is important to understand the implications of FDI in food retail for various stakeholders as it is being permitted in the name of farmers, supply chain efficiency, and employment generation.

The more important questions to be asked on the issue of FDI in retail are: Does it really help farmers, especially small farmers who constitute 85% of all cultivators? Does it improve efficiency of food supply chains and help lower food inflation which India is presently grappling with? And, of course, how does it affect traditional food retailers’ livelihoods?

These questions are important to examine as two days after the announcement of the decision, the Ministry of Commerce and Industry placed full-page advertisements in all national newspapers to defend and justify the decision by highlighting the employment, farmer and consumer benefits. The advertisement claimed that one crore new jobs will be created in the farm sector. It said nothing about the impact on the traditional retail sector. The advertisement called this policy “Another Revolutionary Leap” after IT/computerisation and the liberalisation, privatisation and globalisation (LPG) policies pursued by the Rajiv Gandhi and Manmohan Singh governments in the past. The advertisement listed myths and realities but without any evidence.

This article discusses the three major dimensions of the policy on FDI in MBRT, i e, farmer benefit, the impact on the traditional retail sector in terms of employment as there are more than 1.2 crore of such outlets in India, and the role of FDI in MBRT in inflation containment. It suggests alternative policy measures to leverage FDI in MBRT for the benefit of farmers and the national economy. It builds on articles published earlier in this journal as well as other work.

Impact on Small Farmers

The most glaring aspect of the decision to allow 100% FDI was that there was no provision for protection of farmer interest. The only protection granted was the mandatory 30% procurement from MSMEs though it is still not clear how this can be restricted to only Indian MSMEs when the World Trade Organisation (WTO) rules under the provisions of the Trade Related Investment Measures (TRIMs) may not permit this India-specific protection since it will violate the national treatment clause of the agreement.

One of the arguments made for bringing FDI into MBRT is that it will help reduce wastages in the farm produce sector. Here it is important to point out that this aspect of wastages is exaggerated as there is no absolute wastage. “Wastage” is value loss across the chain as finally all qualities/grades of produce sell in the market at some price though price realisation is lower for lower grade produce. In fact, one of the corporates in retail/agro-processing had planned to use a perishable produce like tomato for different uses, i e, fresh produce in supermarkets and local markets, and for processing into paste. Further, wastage in major vegetables like potatoes and onions, which account for a large proportion of the produce, is not more than 10% and it is only 10-12% in cabbages and cauliflowers. Thus, only 10-20% of vegetable production is lost due to poor post-harvest practices (Pulamte 2008) and some of it is inevitable as shown by the experience of domestic supermarkets.

Further, if the operations of domestic fresh food supermarkets in India and those of the global supermarkets are any indication, then unlike what many proponents of liberal FDI in MBRT policy claim, the entry of foreign retailers will not make any difference to the producer’s share in the consumer’s rupee. The only impact so far has been in lowering the producers’ cost of marketing, as supermarkets have collection centres in producing areas. The supermarkets procure from “contact” (not contract) farmers without any commitment to buy regularly as they do not want to share the risk of the growers. Thus, the involvement of supermarket chains with producers in India is low and there is no delivery of supply chain efficiency. So far, during the past decade, none of them – domestic retail players or wholesale cash and carry players – have made any significant back-end investments other than in setting up small collection centres in procurement regions and some distribution centres in cities/markets.

They have mostly focused more on opening stores in a drive to capture market share than on making supply chain improvements and operational efficiencies (Singh and Singla 2011; Dutta 2011). This may not change even with FDI in MBRT though 50% investments in back-end infrastructure is a reasonable condition.

Further, due to the sheer size and buying power of foreign supermarkets, producer prices may be depressed. In the United Kingdom (UK), there was a negative relation between the relative market share of a supermarket and the price paid to the suppliers in relation to the average price. The UK supermarket chain Tesco paid its suppliers 4% below the average price paid by retailers (Stichele et al 2006).

There have been a large number of supermarket malpractices across the globe which include payment to be on the supplier list (listing fees); threats of delisting if supplier price is not low enough; payment and discounts from suppliers for promotions/opening of new stores; rebate from producers as a percentage of their supermarket sales; minus margins under which suppliers are not allowed to supply at prices higher than the competitor price; delayed payments; lowering prices at the last minute when the supplier has no alternative; changing quantity/quality standards without notice; just-in-time systems to avoid storage/inventory costs; removing suppliers from list without good reason; charging high interest on credit, using tough contracts and penalties for failing to supply.

Supermarkets also resort to unfair and unethical practices. Carrefour was fined in South Korea for unfair business practices, ie, forcing suppliers over 10 months to cut prices to save 1.737 billion won in 2005. It was also fined $170,000 by the Indonesian Business Competition Authority in 2005 for not sourcing goods from a listed supplier who then went bankrupt, which was considered an unfair competition practice. It was asked to stop minus margin practices. Its agreement was found to include listing fees, fixed rebates, minus margins, regular discounts, common assortment costs, opening costs/new store, fees for bi-weekly advertisements and penalties. Its listing fee was significantly higher than that of competitors and was applied before the suppliers could sell in its supermarkets (Stichele et al 2006). Further, there is no assurance that farmers will receive higher prices, as prices are more about the relative bargaining power of the buyers and the suppliers. It is also known that the problems of Indian farming are not about market risk alone but also about production risk and structural factors like irrigation, technology, credit and so on which MBRT players may not address. The State needs to invest in these areas and cannot hand over responsibility to FDI in MBRT.

It is surprising that with 85% of India’s farmers being small or marginal land operators, no restrictions on procurement of farm/allied produce were included to protect the primary producer or smallholder interest. In fact, there are no incentives even to encourage small farmer inclusion. The supermarkets are known to prefer large suppliers of farm produce. Further, there was no provision in the decision for formal registered contract farming being mandatory. Even after so many years of domestic supermarkets operating in India, 60-70% of their procurement is from wholesale markets, and not directly from farmers (Singh and Singla 2011). Thus, the last mile which is a must for farmer benefit may not be reached.

On Traditional Retail and Employment

It is being claimed that one crore new jobs will be created. But, it is not clear where these jobs will be created as farmers supplying to these supermarkets are already doing some work and are not unemployed.

This claim by the government is similar to the argument made when Pepsi was brought to Punjab in 1989 when it was claimed that 50,000 new jobs would be created by its various projects. But later it was found that to make its claim Pepsi was also including in that number the potential supplying farmers! In fact, the supermarket expansion leads to a phenomenon of “retail Darwinism” in which only the fittest survive (Bijoor 2011). Thus, there is employment loss in the value chain. For example, as compared to 18 jobs created by a street vendor, 10 by a traditional retailer and eight by a shop vendor in Vietnam, a supermarket like Big C needed just four persons for the same volume of produce handled (Wiggerthale 2007). Metro’s cash and carry employed 1.2 workers per tonne of tomatoes sold in Vietnam compared with the 2.9 persons employed by traditional wholesale channels for the same quantity sold. The spread of supermarkets led to a 14% reduction in the share of “mom and pop” stores in Thailand within four years of FDI permission (Stichele et al 2006).

In India, 33-60% of the traditional fruit and vegetable retailers reported a 15-30% decline in footfalls, 10-30% decline in sales and 20-30% decline in incomes across the cities of Bangalore, Ahmedabad and Chandigarh, the largest impact being in Bangalore, which is one of the most supermarket penetrated cities in India (Singh and Singla 2011).

Therefore, it is important to include the potential employment loss in the traditional retail sector when calculating the employment benefits from modern retail and the net employment effect should be considered in policy decisions. Further, as supermarkets use modern technology, not many jobs may be forthcoming from their operations even with 50% investment in back-end operations.

Impact on Food Inflation

As far as the role of FDI driven food supermarkets in containing food inflation is concerned, the evidence from Latin American (Mexico, Nicaragua, Argentina), African (Kenya, Madagascar) and Asian countries (Thailand, Vietnam, India) shows that the supermarket prices for fruits and vegetables and other basic foods were higher than those in traditional markets (Singh 2011). In fact, in China, where large global retailers like Walmart, Tesco and Carrefour have hundreds of stores, since 2004 food inflation has been an issue and this year some local governments have offered a subsidy to lessen its effect on consumers (Mei and Shao 2011).

Even if it is accepted that supermarkets are able to offer lower prices, the low income households may face higher food prices because they live far from supermarkets and because of the higher prices charged by supermarkets in low-income areas. Thus, there is no direct correspondence between modern retail and lower food prices and, therefore, with better food security of the poor consumers. Therefore, the inflation containment logic for FDI in food retail does not stand ground, given the empirical evidence from across the globe (Singh 2011). Supermarkets would instead lead to concentration of market power, with upstream suppliers facing buyer power in terms of lower prices and consumers (buyers) facing higher prices due to lower competition.

Policy Issues and Mechanisms

The biggest fear in India for farmers is not that FDI in MBRT per se is worse than domestic corporate investment; it is that there may not be adequate institutions and effective governance mechanisms to regulate and monitor the operations of the global retailers and leverage them for benefits like better prices for farmers, more employment generation and lower prices. If the monitoring of wholesale cash and carry stores so far is anything to go by, there is no regulation and the norms are being flouted openly at the store level by the existing players. They are found to do retail sales in the garb of wholesale as the size of a single purchase (minimum ticket size) is just Rs 500 or Rs 1,000 which does not seem to be governed by any regulation.

The so-called freedom being given to states on the FDI decision is not a good step as it may fragment the market and the benefits of FDI will be undermined. This is evident from the experience of freedom given to states to amend the Agricultural Produce Market Committees (APMC) Act. Even eight years later there are still some states which have not amended the Act, many others have done it in their own way and this has become a thorny issue in agribusiness policy and practice. Further, given that FDI is an important global issue in terms of TRIMs and WTO negotiations and involves foreign relations, it is important to treat it as a national, and not a regional issue.

Regarding the protection of traditional retail interest, if there could be the Milk and Milk Products Order (MMPO) in the dairy sector to protect dairy cooperatives from private and multinational onslaught in the post-1991 phase, why cannot there be protection of the traditional retail sector for some time to give it breathing space?

Given the global and the Indian experiences of supermarkets so far, it was important to slow down supermarket expansion using mechanisms like zoning within cities, business licences, and trading restrictions. Further, there is a need to limit the buying power of the supermarkets by strengthening competition laws as in the legal protection given in Japan to subcontracting industries in their relations with large firms. These provisions are monitored by the Fair Trade Commission. If contract farming is only another name for subcontracting prevalent in industry, then it is only logical to extend such legal provisions with necessary modifications to farming contracts.

The example of China is quoted to justify the FDI permission. China took over 12 years to liberalise its FDI regime, and in stages. It first allowed only 26% FDI in retail in 1992, took another 10 years to raise the limit to 49%, and allowed full foreign ownership in 2004, but only in certain cities. It even revoked some previously granted approvals, in order to reduce the foreign retailers’ footprint (Mei and Shao 2011; Dutta 2011).

Also, provisions for legally binding and clearly worded rules for fair treatment of suppliers, and the establishment of an independent authority like a retail commission to supervise and regulate supermarkets on supplier, consumer, and labour issues and to support local retailers are required. The authority should ban buying of products and selling below cost, make contract farming a must, improve local traditional markets for small growers, slow the pace of supermarket expansion, establish multi-stakeholder initiatives in the chains and provide support to small producers and traditional food retailers. Producer organisations and the NGOs need to monitor and negotiate more equitable contracts with the supermarkets. The government should play an enabling role with legal provisions and institutional mechanisms for helping farmer cooperatives, producer companies and producer groups in a smooth functioning of the supermarket linkage and to avoid its ill-effects.

References

Bijoor, H (2011): “Small Is Beautiful, But Big Is Cheaper”, The Hindu Business Line, 1 December, Brand Line, p 4.

Dutta, D (2011): “FDI in Retail: More Heat Than Light”, Financial Express, FE Reflect, 26 November.

Mei, L and D Shao (2011): “Too Cheap Hurts Farmers, too Expensive Hurts Customers: The Changing Impacts of Supermarkets on Chinese Agro-food Markets”, Millennial Asia, 2(1), 43-64.

Mookerji, N (2011): “A Whole New Opportunity”, Business Standard, the Strategist, 28 November, pp 1-3.

Pulamte, L (2008): “Key Issues in Post Harvest Management of Fruits and Vegetables in India”, downloaded from, on 13/09/11.

Singh, S (2011): “Controlling Food Inflation: Do Supermarkets Have a Role?”, Economic & Political Weekly, 46(18), 19-22.

Singh, S and N Singla (2011): Fresh Food Retail Chains in India: Organisation and Impacts(New Delhi: Allied).

Stichele, M V, Sanne van der Wal and J Oldenzeil (2006): Who Reaps the Fruit? Critical Issues in the Fresh Fruit and Vegetable Chain (Amsterdam: Center for Research in Multinational Corporations (SOMO)), June.

Economic and Political Weekly, Vol XLVI, No.51, 17 December, 2011, http://beta.epw.in/newsItem/comment/190769/

Tagged with: FDI Retail



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