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Resource centre on India's rural distress
 
 

Retail FDI: an imagined solution-VK Madhavan
-Live Mint

FDI or not, there are problems that plague Indian agriculture and will need to be fixed first 

With the parliamentary vote on foreign direct investment (FDI) in multi-brand retail out of the way, the government will proceed with the liberalization of this sector as it thinks it will improve the prospects of agriculture.
 
Should we be worried about our small neighbourhood stores shutting down? The fears are overblown. Organized large-format retail stores owned by Indian investors haven’t managed to do the ousting job and, if consumers do care about their neighbourhood stores, they should continue to use them and that will settle the issue. Will this set back organized retail businesses owned by Indian companies? That, too, is doubtful as Indian retail chains have had a head-start and have cornered the real estate market for stores. In fact they may end up as the biggest beneficiaries.

However, if we are to be lulled into believing that FDI in retail alone is going to usher in transformation in the agricultural sector then we need to pause and reconsider.

For farmers growing cash crops, such as the cultivators of fresh fruits and vegetables in parts of Nainital district, having multiple buyers can, theoretically, lead to better prices and terms. So far, the entry of large Indian corporations in agri-business has not translated into a net increase in the prices received by these farmers. Can FDI in retail lead to better prices for these farmers?

Without reforming the laws governing the agricultural produce marketing committees which run the mandis, or agricultural markets, direct procurement by big retail will remain a pipe dream. The absence of transparency in pricing that marks the functioning of these mandis and the information asymmetries that plague farmers in this country need to be addressed first.

Even if organized retail—Indian or foreign—is to buy directly from farmers it will have to contend with adatiyas or commission agents. These relationships are crucial for small and marginal farmers since the agents provide food, inputs and even cash to meet off-season needs. These commission agents are ATMs for small and marginal farmers. In mandis such as Azadpur in Delhi, agents supply big retailers with diverse produce throughout the year in large volumes, graded, sorted and packed. The inability to make these and other agents redundant leaves the supply chain long. Can FDI in retail alone fix this?
 
The costs of procurement from small and marginal farmers are high. These high transaction costs create disincentives for organized retail to venture into areas with no irrigation and small-scale decentralized production. Who will work with these farmers?

Production of most crops has stagnated or is declining in the hills. Poor soil health, poor seeds and planting material, wildlife and erratic weather are making agriculture even more vulnerable. Organized retail will have the greatest impact on the quality of planting material and seeds as it will promote varieties that will lead to standardized output. Will consumers benefit? No. They will receive standardized, attractive looking produce that tastes, well, rather poor.

The greatest benefits are supposedly expected to accrue in reducing post-harvest losses. Even before one considers the infrastructure, it is important to remember that these losses start to occur even before the produce gets to the road-head. Fixing this requires a change in agricultural practices and processes. FDI in retail can’t fix this.

No large-format organized retail venture in fresh fruits and vegetables in India is making money. Will FDI in retail break the jinx? The costs of organized retail are high, and in the current form, the only way they can provide consumers with better produce at cheaper prices is by importing or suppressing the prices offered to farmers. FDI or not, these are problems that plague Indian agriculture that will need to be fixed first.

V.K. Madhavan has worked in the not-for-profit sector for two decades and spent 15 years living and working in deserts and hills. He’s still on the fringe asking questions and looking for answers. He writes every fortnight.