Foreign Direct Investment has slowly but surely made its way into the area of retail trade. There has been so much brouhaha about this in the mainstream media and for anyone who does not have a direct, grass roots experience and understanding of how the agricultural sector works, it is difficult to decide whether this decision is good or bad for people at large.
Edward Bono’s How to have a beautiful mind, has taught me to not take any one sided stand on any issue just like that; even if my gut clamored to support a particular side.
My instant reaction was therefore, to refer to as many of reports and analyses floating around on the issue, to make sense of it all. Sooner than I anticipated & maybe because of the sheer volume of (and kind of) data available on public domain, I realized (to my surprise) that I was riding the horse on the side of those who favored the FDI worm being in the area of Retail. I was almost conclusive about the insensibility of the clamor to roll back a measure like this. This was after all a master stroke, a magic wand. I was convinced about the stars and boon this Magic wand would bring. But hold on.
Going back to my childhood, I just loved the magic wands. My world was comic books and cartoon movies, where power of such magic wand was a great source of solace to me. It assured me that world and people around me were fine and I never had the need to probe anything deeper. Do not worry, Think less; world is doing great with the magic wand!
F.D.I. worm snuggling into the Retail area was such good news just like the Magic wand. The boons are undeniable:
- It would bring efficiency into the retail chain.
- It would benefit farmers as they would get better prices.
- It would benefit farmers and nation with more of farm storage and less of wastage.
- It would provide millions (and some said billions) of jobs.
- Consumer would get things cheaper.
That fellow Edward Bono spoilt it all. My vow overrode my childhood belief about the magic wand. I started to deconstruct the meaning and claims made in favor of the worm. It was as if Bono was whispering a warning; “Hold your horses; take out your magic lens. Maybe that could help”.
So I took out the magic lens this time and looked closely. And this close scrutiny was letting some unkind truths tumble out of the closet this time.
To begin with, I discovered the true meaning of “efficiency”. The word efficiency essentially means “ruthless cost cutting” in the world of organized retail giants. This cost cutting essentially comes from cutting people cost, procurement cost, transport cost and storage cost.
All this is meant to increase market share of the giants. The ruthlessness is not designed to help customers. It is basically designed to kill competition; so that lesser, inconsequential and foolhardy competitors are not able to woo any customers from them.
In a study carried over a time line of 10 years titled “Increasing Understanding of Public Problems and Policies – 1997 “ by Farm Foundation, Chicago, Illinois in U.S.A, it has been conclusively shown that the competitors of a retail giant like Wal-Mart are reduced to being inconsequential as time progressed. This in conclusion meant near obliteration of non Wal-Mart outlets.
In fact, not only the outlets suffer obliteration but complete economy and way of life of smaller towns takes a beating. The economic life of smaller town gravitates towards the larger town where companies like Wal-Mart wriggles in. For example, it has been shown that Food, Fun and Entertainment industry of smaller town suffers as people gravitate towards the cities where Wal-Mart wriggles in.
Lower prices achieved through cost cutting acts like morphine for consumers.
They make actual spending on fun, food and entertainment in cities where outlets like Wal-Mart’s wriggle themselves in while seeking the high of the morphine called low price.
Left behind are the dilapidated economy of small towns with shutters down on streets of restaurants, cinemas, and fun places. These businesses constitute a major portion of Service Industry of small town, where scores are employed. They are soon rendered unemployed.
Today in India, a grocery shop of even small size at least gives full time occupation for one member of a family. India is estimated to have 40 million people employed in 14 million outlets. This arithmetically actually comes out to be 3 persons per outlet. This is not to speak of dependents on a single shop.
One outlet carries burden of existence for 3 families. This would make 15 individual lives depending on a single outlet.
Wal-Mart deploys only 2.2 Million lives, that too, worldwide. Claim of millions of job being created by Retail giants falls on its face. More importantly while speaking of employment generation or rather degeneration becomes stark when we consider the dependence factor mentioned above.
Thinking on a broader scale, retail, contributes 15% of Indian G.D.P. whereas it contributes far lesser to the G.D.P. of developed countries like U.S. where its contribution is only 7-8%. Just by combining the dependency of a family on a single outlet and national dependency on the contribution of the sector, we can easily understand that this upheaval would bring tormenting times for the people and the nation. With a single swing of magic wand, comes peril for 40 million.
One also needs to consider the alternative sector available for employment in an economy. This is critical to absorb the resulting displacement from the outlets. As a less developed economy, India has limited avenues to absorb the displaced persons from their outlet.
Meanwhile, cost cutting also means squeezing out on person power deployed and the remuneration paid. Wal-Mart is known to pay extremely low wages in U.S., lesser than average remuneration.
Those who buy the idea of farmer’s benefit are in for greater shock.
Retail giants do not exist because they love farmers. They exist because they love to buy cheap. They love to buy cheap because they love to sell cheap. They love to sell cheap because they love to kill completion totally and absolutely.
Thus, retail giants would show interest in farm produce where we can supply cheap produce compared worldwide.
Our farmers do not make it to top grades when compared worldwide on farm production costs.
With distorted cropping systems, skewed infrastructure supporting farm production, and limp Agrarian policies followed for years, we would not be producing cheap farm produce for a long time to come.
Our farming sector suffers from structural problems starting from the field. 76-90% (Figures variably quoted around) of Indian farmers are small and marginal. They do not have access to farm loans, irrigation water never reaches them, farm extension worker avoids them, and government schemes never reach the last mile where marginal farmer resides. Farming cost goes up as the land holding goes down. Not to speak of social impediments and social sharks, very unfortunately unique to India.
Wal-Mart and likes would not and are not capable of addressing these structural issues.
Only those farmers, who have large landholdings, would be able to produce relatively cheap. Still they have to be world beater in terms of cost to hold their fort.
Developed countries with huge land holdings per farmer, astronomical subsidies, and cutting edge technology are the cheapest source of farm produce. If not in their own country, they are buying in, large tracts of fertile land in African countries, which have the least resistive power to such dominant forces.
You now know where Wal-Mart would buy from; don’t you, since we are talking about efficiencies here. Likes of Wal-Mart can conveniently look forward to import 70% of the stuff whereas we feel safe with the provision of 30% sourcing from domestic market.
Where would the smaller farmers go? One can recall the National Geographic pictures of smaller fishes travelling straight to the shark’s gut. They would be obliterated by competition and this time ruthless and unjust global competition.
Of course, these big corporations would run farmer training for small and marginal farmers and publish it in company newsletters, C.S.R reports and would garner gleaming trophies for the effort.
But before one applauds, one should look at number of farmers who have benefitted from these programs. In country like China, where Wal-Mart has been for longer duration, it is only 7 lakhs, a paltry figure. If one still feels that these are big numbers consider number of marginal farmers in India, it is near about 560 Million. That would put things in perspective. These programs are good P.R. & brand building exercises but not genuine stakeholder capacity building, which farmers in India can dependably look forward to.
Then whose magic wand is this and for whom would it bring stars and boons? At least not for the people it is being sold on.
I am bit selfish, so I desist from mentioning that we might see some greater choice of consumer items imported from cheapest sources like China. To let a secret out, I would no longer be visiting the neighboring Kirana store. They still carry Indian items which are much costlier than the Chinese stuff.
Well, I am selfish because I am a consumer and I am going to get things cheap. As I get ready to take morphine of low priced items, I must finish my work in the company where I am part of producing something. Whether what we produce is the cheapest or not is another matter!
This Foreign Devious Investment is good till a low cost import hits my job.
(Kalyan Satpathy is Senior Manager, Fund Raising. The views expressed here are personal and do not necessarily reflect the views of the organisation. You can email him to Kalyan.Satpathy@actionaid.org)
“Increasing Understanding of Public Problems and Policies – 1997 “ by Farm Foundation, Chicago, Illinois ( source web)
How to have beautiful mind: Edward De Bono.
http://www.walmartfacts.com/FactSheets/7… ( Number of people it employees)
www.indiafdiwatch.org/fileadmin/India…/10-FDI-Retail-more-bad.p…( Retail contribution to Indian GDP)
http://www.countercurrents.org/shiva300407.htm ( Small and Marginal farmers)
http://www.chinadaily.com.cn/business/2010-06/30/content_10042008.htm (Chinese paper quotation)
Organised retail with foreign direct investment is proposed as a solution to farm sector problems. Does retail trade in India really need FDI? How can the state engage with new domestic and foreign market players?
THE changing consumer trends and rising consumer incomes, especially in the non-farm sector and in the urban areas, are leading to a higher demand for high-value crops such as fruits and vegetables in India which can help primary producers diversify their production away from cereals. Nearly 16% of small and marginal farmers grow vegetables compared with 14.8% and 10.5% of medium and large farmers, respectively. Fruits and vegetables (F&V) are more suitable for small land-holders than grain crops as they are more labour intensive, provide recurring income, have high value markets (domestic and export), offer value addition possibilities and are a mechanism of risk management against the field crop failure risk.
Therefore, the major challenge is to include marginal and small farmers in the retail growth. But F&V crops are input intensive, require more post-harvest handling, are more perishable and their profitability is dependent on market (i.e. quality/standards which are changing rapidly). They also suffer from high wastage/rejection, there is no Minimum Support Price (MSP) or protection against price risk, and local markets are thin. Thus, it is a high-risk business and requires good market linkages for viability.
Enter Indian retailers
Retailing contributes about 15% of India’s gross domestic product (GDP) and 8% of employment. But only 4% of the 15 million retail outlets are bigger than 500 sq. ft. and almost all are family owned, and in 2011, modern retail had 7% share in the total retail sales. During the last decade, there have been many corporate entries in the fresh produce retail sector, notable being Reliance Fresh, Spencer’s, Aditya Birla Retail Limited’s More, Namdhari Fresh, Food World, and Heritage Fresh. The large majority (around 75%) of modern private retail came in from 2006 to 2010. Food and grocery market sales accounted for a 73.2% share of the hypermarket, supermarket, and discount formats in 2009. The nature of modern retailing has changed over time in terms of store formats. It shows that supermarket chains have moved more towards hyper and neighbourhood formats, leaving supermarket and department store formats. Further, in most cases, fruits and vegetables accounted for only about 20% of their sales turnover.
The issue of FDI in retail trade has been hanging fire for the last 15 years ever since 100% FDI in wholesale cash ‘n’ 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 to be continued, which led to the 10th Plan dropping the proposed recommendation on FDI in retail trade. Then, in early 2006, 51% FDI in single brand retail trade (SBRT) was allowed. Since 2007, all the major wholesale cash ‘n’ carry players like Wal-Mart, Metro and Carrefour have set up shop in India and have multiple outlets ranging from two to as many as 14.
Reliance Retail, an Indian corporate, made an entry into the wholesale sector with a store ‘Reliance Market’ in Ahmedabad in 2011. Global retail chains have also been present in India in retail through licensing/franchising arrangements like SPAR (global supermarket with more than 12,000 stores in 33 countries) has a licensee -Max Hypermarkets of Dubai-based Landmark group with 10 stores in India.
Stores closing down
On the other hand, domestic corporate players have been present in supermarket retail since the early 2000s with hundreds of stores each, especially in southern and northern Indian cities, though most have shut shop in western Indian cities. The Government of India in November 2011 allowed a majority (51%) FDI share in multi-brand retail trade enterprises and up to 100% in SBRT entities. The conditions included 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 right to procure the farm produce first. This was protested by different stakeholders in the sector and the government had to withdraw the Cabinet decision on MBRT.
It is important to understand implications of FDI in food retail for small farmers as it is being permitted in the name of farmers, supply chain efficiency and employment generation. The procurement practices of supermarkets have a huge impact on farmers and present them with an important opportunity as well as a challenge. Through their coordinating institutions and mechanisms such as contracts, private standards, sourcing networks and distribution centres, they are reformulating the rules of the game for farmers. There is also supplier farmer rationalisation due to the larger supplier preference of big retailers.
The most glaring aspect of the policy of FDI in retail trade in India is that there is no protection of farmer interest in any way. Unlike the protection granted to MSMEs in terms of 30% procurement being mandatory from such enterprises, it is a case of gross neglect that simply because small farmers’ agency could not represent them like MSME associations, they could not get sourcing quota for themselves. Otherwise, how is not a quota for them justified when better-placed SMEs can get one? In fact, there are not even any incentives to encourage small farmers’ inclusion. Small-holder exclusion has been a reality in supermarket chains globally, and more so in the developing world, be it India, Kenya, China or Latin America. Further, there was no provision for formal registered contract farming being mandatory in the decision. After many years of presence of wholesale cash ‘n’ carry players and that of domestic supermarkets in India, 60-70% of their procurement is still from wholesale markets, not directly from farmers. All this indicate that FDI in MBRT as proposed might produce no benefit to small farmers.
Risk of the growers
Further, if the operations of domestic fresh food supermarkets in India and those of the global supermarkets are any indication, they will not make any difference to the producer’s share in consumer’s rupee as claimed by many proponents of liberal FDI in MBRT policy, other than lowering the cost of marketing of producers, as supermarkets have collection centres (CCs) in producing areas, in contrast to the traditional Agricultural Produce Market Committee (APMC) markets (mandis)which are in distant cities.
The Indian supermarkets procured from large and medium ‘contact’ farmers without any commitment to buy regularly as they did not want to share the risk of the growers and excluded small growers. They offered market price based procurement prices and procured only a limited proportion of the grower’s crop without any firm commitment and more on a day-to-day basis. They made no provision for any input or other services like extension. The rejected produce was left for the farmer to dispose of elsewhere as the chains procured only ‘A’ grade produce.
The poor performance of food supermarkets in India over the years and eventual shutdown of most of them in Gujarat shows that they could not create a competitive advantage in their operations where back-end (procurement) and front-end (retailing and marketing) should have reinforced each other. Thus, the involvement of supermarket chains with producers in India is low and there is no delivery of supply chain efficiency. None of them — domestic retail players as well as whole cash ‘n’ carry players — have made any significant back-end investments so far other than setting up small collection centres in procurement regions and some distribution centres in cities/markets. They have mostly focussed on opening stores as a drive to capture the market share, rather than on supply chain improvements and operational efficiencies.
There have been a large number of supermarket malpractices
Due to the sheer size and buying power of foreign supermarkets, the producer prices may be depressed;
Threats of delisting if the supplier price is not low enough;
Payment and discounts from suppliers for promotions/opening of new stores;
Rebate from producers as a percentage of supermarket sales;
Suppliers not allowed to supply at prices higher than the competitor price;
Inadequate institutions and ineffective governance mechanisms to regulate and monitor the operations of global retailers to ensure fair prices for farmers
Norms are flouted openly at the store level as is indicated by a recent PIL against Bharti-Walmart.
Strengthen competition laws
There is need to limit buying power of supermarkets by strengthening the competition laws like the legal protection given under the Delayed Payments Prevention Law, 1956, to subcontracting industries in Japan in their relations with large firms, which cannot
Refuse to receive the delivery of commissioned goods
Delay payments beyond the agreed period
Return delivered goods without good reason
Force price reduction, compulsory purchase of the parent firm’s goods by subcontractor, and discounting payment after prices have been agreed to.
An independent authority like a retail commission can supervise and regulate supermarkets and can ban the buying of products below cost, make contract farming a must, improve local traditional markets for small growers, establish multi-stakeholder initiatives in the chains and provide support to small producers.
There is need to strengthen small farmers’ organisations for cost competitive production, improving quality of produce, and more active participation of small farmers in the marketing of their produce in order to capture value added in the chain.
The government should play an enabling role through legal provisions and institutional mechanisms like helping farmer co-operatives, producer companies and producer groups, to facilitate a smooth functioning of the supermarket linkages and avoid ill-effects.
Aubretia Edick has worked at a Walmart store in upstate New York for 11 years, but she won’t buy fresh food there. Bagged salads, she claims, are often past their sell-by dates and, in the summer, fruit is sometimes kept on shelves until it rots. “They say, ‘We’ll take care of it,’ but they don’t. As a cashier, you hear a lot of people complain,” she said.
Edick blames the problems on the store’s chronic understaffing and Walmart’s lack of respect for the skilled labor needed to handle the nation’s food supply. At her store, a former maintenance person was made produce manager. He’s often diverted to other tasks. “If the toilets get backed up, they call him,” she said.
Tracie McMillan, who did a stint working in the produce section of a Walmart store while researching her forthcoming book, The American Way of Eating, reports much the same. “They put a 20-year-old from electronics in charge of the produce department. He didn’t know anything about food,” she said. “We had a leak in the cooler that didn’t get fixed for a month and all this moldy food was going out on the floor.” Walmart doesn’t accept the idea that “a supermarket takes any skill to run,” she said. “They treated the produce like any other kind of merchandise.”
That’s plenty to give a shopper pause, but it’s just the tip of the iceberg when it comes to reasons to be concerned about Walmart’s explosive expansion into the grocery sector.
Growth of a giant
In just a few short years, Walmart has become the most powerful force in our food system, more dominant than Monsanto, Kraft, or Tyson.
It was only 23 years ago that Walmart opened its first supercenter, a store with a full supermarket inside. By 1998, it was still a relatively modest player with 441 supercenters and about 6 percent of U.S. grocery sales. Last year, as its supercenter count climbed above 3,000, Walmart captured 25 percent of the $550 billion Americans spent on groceries.
As astonishing as Walmart’s national market share is, in many parts of the country the chain is even more dominant. In 29 metro markets, it accounts for more than 50 percent of grocery sales.
Seeking an even bigger piece of the pie, Walmart is campaigning to blanket New York, Chicago, Washington, D.C., and other big cities with its stores. It has made food the centerpiece of its public relations strategy. In a series of announcements over the last year, Walmart has deftly commandeered high-profile food issues, presenting itself as a solution to food deserts, a force for healthier eating, and a supporter of local farming.
It is a remarkably brazen tactic. On every one of these fronts, Walmart is very much part of the problem. Its expansion is making our food system more concentrated and industrialized than ever before. Its growth in cities will likely exacerbate poverty, the root cause of constrained choices and poor diet. And the more dominant Walmart becomes, the fewer opportunities there will be for farmers markets, food co-ops, neighborhood grocery stores, and a host of other enterprises that are beginning to fashion a better food system — one organized not to enrich corporate middlemen, but to the benefit of producers and eaters.
The big squeeze
Walmart’s rise as a grocer triggered two massive waves of industry consolidation in the late 1990s and early 2000s. One occurred among supermarkets, as regional titans like Kroger and Fred Meyer combined to form national chains that stood a better chance of surviving Walmart’s push into groceries. Today, the top five food retailers capture half of all grocery sales, double the share they held in 1997.
Go big or go out of business.Photo: Walmart StoresThe second wave of consolidation came as meatpackers, dairy companies, and other food processors merged in an effort to be large enough to supply Walmart without getting crushed in the process. The takeover of IBP, the nation’s largest beef processor, by Tyson Fresh Meats is a prime example. “When Tyson bought IBP in 2001, they said they had to do that in order to supply Walmart. We saw horizontal integration in the meat business because of worries about access to the retail market,” explained Mary Hendrickson, a food systems expert at the University of Missouri. Four firms now slaughter more than 80 percent of cattle. A similar dynamic has played out in nearly every segment of food manufacturing.
“The consolidation of the last two decades has created a food chain that’s shaped like an hourglass,” noted Wenonah Hauter, executive director of Food & Water Watch, explaining that a handful of middlemen now stand between 2 million farmers and 300 million eaters.
Their tight grip on our food supply has, rather predictably, come at the expense of both ends of the hourglass. Grocery prices have been rising faster than inflation and, while there are multiple factors driving up consumer costs, some economic research points to concentration in both food manufacturing and retailing as a leading culprit.
Farmers, meanwhile, are getting paid less and less. Take pork, for example. Between 1990 and 2009, the farmers’ share of each dollar consumers spent on pork fell from 45 to 25 cents, according to the USDA Economic Research Service. Pork processors picked up some of the difference, but the bulk of the gains went to Walmart and other supermarket chains, which are now pocketing 61 cents of each pork dollar, up from 45 cents in 1990.
Another USDA analysis found that big retailers have used their market power to shortchange farmers who grow apples, lettuce, and other types of produce, paying them less than what they would get in a competitive market, while also charging consumers inflated prices. In this way, Walmart has actually helped drive overall food prices up.
What Walmart means when it says “local”
Last year, Walmart announced that it would double the share of local produce it sells, from 4.5 to 9 percent, over six years.
Come and get your Georgia peaches.Photo: Walmart StoresThis doesn’t necessarily mean shoppers will soon find a variety of local produce at their nearest Walmart, however. Walmart counts fruits and vegetables as local if they come from within the same state. It can achieve much of its promise by buying more of each state’s major commodity crops, such as peaches in Georgia and apples in Washington, and by using big states like California, Texas, and Florida, where both supercenters and large-scale farming are prevalent, to pump up its national average.
“It speaks to the weakness that we’ve all known about, which is that ‘local’ is an inadequate descriptor of what we want,” said Andy Fisher, former executive director of the Community Food Security Coalition. “It’s not just geography; it’s scale and ownership and how you treat your workers. Walmart is doing industrial local.”
Walmart’s sourcing is becoming somewhat more regional, but the change has more to do with rising diesel prices than a shift in favor of small farms. It’s a sign that Walmart’s Achilles heel — the fossil-fuel intensity of its far-flung distribution system — might be catching up with it. According toThe Wall Street Journal, trucking produce like jalapeños across the country from California or Mexico has become so expensive that the retailer is now seeking growers within 450 miles of its distribution centers.
“They see the writing on the wall. They know the cost of shipping from California back to Georgia and Mississippi is high now,” said Ben Burkett, a Mississippi farmer who noted that Walmart is now meeting with producers in his region. He’s hoping to sell the chain okra through a cooperative of 35 farmers. “We’ll see. My experience in the past with Walmart is they want to pay as little as possible.”
That skepticism is shared by Anthony Flaccavento, a Virginia farmer and sustainable food advocate. “If multimillion-dollar companies like Rubbermaid and Vlasic can be brought to their knees by the retail behemoth, how should we expect small farmers to fare?” he asks.
Local is the new organic — and Walmart does both the corporate, industrial way.Photo: Walmart StoresWalmart’s promise to increase local sourcing is reminiscent of its pledge five years ago to expand its organic food offerings. “They held true to their corporate model and tried to do organics the same way,” said Mark Kastel of the Cornucopia Institute. For its store-brand organic milk, for example, Walmart turned to Aurora Organic Dairy, which runs several giant industrial milking operations in Texas and Colorado, each with as many as 10,000 cows. In 2007, the USDA sanctioned Aurora for multiple violations of organic standards. Earlier this year, the agency stepped in again, this time revoking the organic certification for Promiseland Livestock, which had been supplying supposedly organically raised cows to Aurora.
These days, Walmart’s interest in organic food seems to have ebbed. “Our observation is that they sell fewer organic products and produce now than four years ago,” said Kastel. Ronnie Cummins of the Organic Consumers Association agrees. Today, he says, “the proportion of their sales that is organic is the lowest of any major supermarket chain.”
Leveraging food deserts
Walmart has renewed its push to get into big cities, after trying and failing a few years ago. This time the company has honed a fresh strategy that goes right to the soft underbelly of urban concerns. In July, Walmart officials, standing alongside First Lady Michelle Obama, pledged to open or expand as many as 300 stores “in or near” food deserts.
Walmart sees underserved neighborhoods as a way to edge its camel’s nose under the tent and then do what it’s done in the rest of the country: open dozens of stores situated to take market share from local grocers and unionized supermarkets. Stephen Colbert dubbed the strategy Walmart’s “Trojan cantaloupe.” For example, an analysis by Manhattan Borough President Scott Stringer’s office estimates that if Walmart opens in Harlem, at least 30 supermarkets, green grocers, and bodegas selling fresh produce would close.
For neighborhoods that are truly underserved, it seems hard to argue with the notion that having a Walmart nearby is better than relying on 7-11 and McDonald’s for meals. But poor diet, limited access to fresh food, and diet-related health issues are a cluster of symptoms that all stem from a deeper problem that Walmart is likely to make worse: poverty. Poverty has a strong negative effect on diet quality, a 15-year study recently concluded, and access to a supermarket makes almost no difference.
Neighborhoods that gain Walmart stores end up with more poverty and food-stamp usage than communities where the retailer does not open, a study published in Social Science Quarterly found. This increase in poverty may owe to the fact that Walmart’s arrival leads to a net loss of jobs and lowers wages, according to research [PDF] by economists at the University of California-Irvine and Cornell.
Walmart has also been linked to rising obesity. “An additional supercenter per 100,000 residents increases … the obesity rate by 2.3 percentage points,” a recent study concluded. “These results imply that the proliferation of Walmart supercenters explains 10.5 percent of the rise in obesity since the late 1980s.”
The bottom line for poor families is that processed food is cheaper than fresh vegetables — and that’s especially true if you shop at Walmart. The retailer beats its competitors on prices for packaged foods, but not produce. An Iowa study found that Walmart charges less than competing grocery stores for cereals, canned vegetables, and meats, but has higher prices on most fresh vegetables and high-volume dairy foods, including milk.
Local? I don’t think that word means what you think it means.Photo: Walmart StoresThe future of food?
We stand to lose a lot if Walmart keeps tightening its grip on the grocery sector. Signs of a revitalized food system have been springing up all over — farmers markets, urban gardeners, neighborhood grocers, consumer co-ops, CSAs — but their growth may well be cut short if Walmart has its way.
“People need to keep an eye on the values that are at the root of what is driving so much of this activity around the food system,” said Kathy Mulvey, policy director for the Community Food Security Coalition.
Walmart is pushing us toward a future where food production is increasingly industrialized, farmers and workers are squeezed, and the promise of fresh produce is used to conceal an economic model that leaves neighborhoods more impoverished. Are we going to let it happen, or are we going to demand better food and a better world?
NOVEMBER 30, 2011
The vociferous supporters of corporate retail in India seem to believe, or would like us to believe, that there is no previous experience of corporate retail anywhere in the world to learn lessons from. In this guest post, SHANKAR GOPALAKRISHNAN analyses available data on the experience of the entry of corporate retail globally, to outline the disastrous consequences it has had everywhere it has been introduced. On the basis of extensive research, he concludes: “The growth of corporate retail not only will not address the key problems plaguing India’s economy today – it will greatly exacerbate many of them. In particular, the crisis in agriculture, environmental destruction, declines in land productivity, urban unemployment, price volatility and unequal access to resources would all be worsened by unchecked growth of corporate retail.” Shankar’s article follows.
In the flood of rhetoric following the government’s decision to permit FDI in retail, the actual reality of what this will mean is being lost. For that it is necessary to look at international data and what it shows about the claims being made. Commerce Minister Anand Sharma’s letter offers a good place to start. His claims can be summarised as follows:
Corporate retail fueled by FDI will result in investment in cold chains and therefore in lower prices by “eliminating middlemen.”
Corporate retail will not threaten small retailers, who find “innovative ways to coexist”, and will generate employment
Corporate retail will benefit farmers and producers by ensuring a “remunerative price.”
Corporate retailers will remain restricted to some areas and some sectors.
There are already corporate retailers in India and there is therefore no problem in permitting FDI.
Not one of these claims is justified by the available data.
Lower Prices and Investment in Cold Chains
In the sector that requires cold chain infrastructure most – fruits and vegetables – data from developing countries often shows that prices in supermarkets are generally higher than from existing retailers. Certainly, there is no data that shows consistently lower prices from corporate reatilers.
In Thailand, they are estimated to be 10% higher (1).
In Argentina, data showed consistently higher prices for fruits and vegetables in supermarkets (the difference being about 14% through the 1990′s), though this difference was falling (2).
In 2000, in Mexican supermarkets, prices of lemons, tomatoes and oranges were significantly higher than in traditional markets, while in all other fruits and vegetables they were identical or slightly higher (3).
In Vietnam, in 2002, it was found that prices in supermarkets across all categories were around 10% higher(4).
The concentration of power in the hands of a few companies by no means leads to lower prices. In the US, supermarkets raised tomato prices by 46% between 1994 and 2004 while real prices paid to producers fell by 25% (5).
In the Indian experience, the entry of corporate chains into wheat and grain procurement has coincided with increased speculation and increased prices.
Regarding investment in cold chains and reduction in wastage, it should be remembered that the international food industry – controlled by the same chains currently advertised as sources for FDI – wastes almost half of the food it procures (6).
No Effect on Small Retailers or Employment in Retail
The Minister and the government here is playing a simple verbal trick. The fact that some retailers “continue to coexist” does not in any way mean that most small retailers will not be pushed out of business.
Indeed, the data is exactly opposite to the claim that there is no evidence of harm to small retailers. Here are citations and figures:
In Brazil, share of street markets in fruits and vegetables declined by 27.8% between 1987 and 1996; in dairy sales, share of dairy stores fell by 27.8% and open air markets by 53.3% (7).
Argentina: Number of small stores dropped by 64,198 between 1984 and 1993 – 30% of the shops in the country. Employment in retail sector dropped by 26% in the same period (8).
Chile: between 1991 and 1995, ‘traditional’ food and beverage retailers declined by approximately 20% in all segments (9).
Indonesia: between 2002 and 2003 – just one year – number of ‘traditional’ grocery stores fell by 154,148 stores, or 9% (10)
Latin America: supermarkets now control 60% of food retail (11).
East Asia other than China: 63% of processed / packaged foods controlled by supermarkets, estimated 30% of fresh foods (12)
The oft-cited example of China is irrelevant, as Chinese food retail is entirely different as shown below:
From 1959 till late 1980′s, private retail trade essentially banned in cities, all retail was taken over by public state owned enterprises
In 1992 (rise of supermarkets just beginning), state owned large networks accounted for 41.3%, cooperatives / collectives 27.9% and private enterprises (i.e. Small retailers mostly) 20% of market – hence completely incomparable to Indian situation (13).
In all situations big retailers begin with rich population but do not remain confined to them – always attempt to expand into smaller towns, reaching poorer segments etc. In Latin America, Asia and Africa in general: “there has been a trend from supermarkets occupying only a small niche in capital cities serving only the rich and middle class to spread well beyond the middle class in order to penetrate deeply into the food markets of the poor.” (14)
Benefits to Farmers
Most purchase for corporate retailers occurs through contract farming. This actually has negative impacts on most farmers.
All studies of contract farming and corporate food retail show that small and marginal farmers are unable to access the supply chain (15)
More than 90% of India’s rural population has less than 2 hectares of land and 79% are either landless or own less than 1 hectare. Practically all of these people will be excluded from the corporate supply chain.
Those left out of corporate sourcing may find themselves competing for a much smaller market and essentially being driven out of existence. Thus, in Argentina, the number of dairy farms fell from 40,000 in 1983 – around the time when corporate transformation of the supply chain began – to 15,000 in 2001 (16) .
There is no reason that purchases by a small number of companies is going to lead to higher prices for producers. An Oxfam study (17) shows that real export prices for South African apples fell by 33% from 1994 – 2004, and Florida tomato growers found their real prices falling by 25% over same period – while consumer prices in the US rose by 46% at the same time. Data currently says that four or five companies control 40% of the international trade in several types of produce, including grains, edible oils, coffee, cocoa and bananas.
The same study by Oxfam shows that conditions for agricultural workers in supermarket suppliers is very bad, because of the intense pressure placed on farmers to reduce prices, guarantee ‘quality standards’, handle last minute changes in contracts and absorb discounts, promotions, etc. passed on to them.
Abuses of power by corporate retailers include:
delayed payments (example from Argentina here (17)
arbitrary quality standards (Oxfam 2004 study cited above has very good examples including, for instance, sudden demands that apples should be exactly 65 mm rather than 63 mm),
passing on of costs for discounts and promotions to producers (Vietnam for instance (18)
and simple default on contracts, as has happened in India (several studies, some with a lot of data; a summary reference is Jayati Ghosh and CP Chandrasekhar here (19)
Global sourcing of fruits and vegetables puts intense pressure on producers to reduce prices to compete and to satisfy the requirements of the corporate retailers (FAO 2005 study)
Corporate Retailers Already Exist, So FDI Will Not Cause Additional Damage
This is simply an irrelevant argument. The small presence of corporate retailers in India’s markets today is a reflection of the fact that in themselves, corporate retailers offer nothing in the sense of retailers that allows them to out-compete the existing system. This is why the entry of FDI has been shown to be the single determining factor that permits large-scale expansion of corporate retail in developing countries.
The large quantities of money that FDI provides permit retailers to displace existing suppliers and establish monopolies or oligopolies when purchasing produce; to absorb losses and hence fix lower prices until the competition is wiped out, whereupon prices will be raised (i.e. predatory pricing); and to pressurise governments into bending regulations and subsidising their activities (the latter is already visible among existing corporate retailers).
The simple reality is that, if corporate retailers were simply going to grow alongside the existing system without displacing anyone and purely because of their better results, they would have done so already to a great extent. Why have they failed?
Most of the debate ignores the structural requirements of corporate retail and what this will mean. Inherently, in order to make profits, corporate retailers need massive economies of scale in order to offset their very high overhead costs (in contrast to the low overhead, decentralised existing system). Some of the resulting impacts include:
Privileging good looks and long durability over taste and nutritional value, so as to permit price hunting and delayed sale of produce: The result is that, as is widely known, fruits and vegetables in supermarkets tend to have less taste, are lower in nutritional value, and are often picked when unripe. This is one reason for rapid growth of the “organic food” market in the industrial countries.
Massive increase in use of energy and water for processing, packaging, and transport: The international food industry is now recognised as a major contributor to climate change. Better storage is certainly necessary, but the requirements of corporate retailers far outstrip the actual need. They are not interested merely in storing of food but in being able to source from very long distances and in storing as long as necessary (in order to speculate on prices). The result is that the energy spent on production and sale of one kilogram of rice in the US is 80 times the energy spent by a farmer in the Phillippines. One fifth of all energy spent on transport in the US is spent on transport of food (20). Can India afford this kind of expenditure of energy and water?
Sharp rise in use of pesticides, additives, preservatives and other chemical agents to increase the shelf life of food, with attendant health consequences: For much the same reason as above. Contract farming in particular usually involves a sharp rise in total inputs, destroying the fertility of the land and leading to increased pollution and other problems.
The growth of corporate retail not only will not address the key problems plaguing India’s economy today – it will greatly exacerbate many of them. In particular, the crisis in agriculture, environmental destruction, declines in land productivity, urban unemployment, price volatility and unequal access to resources would all be worsened by unchecked growth of corporate retail.
[This is a summary of an earlier article: “Corporate Retail: Dangerous Implications for India’s Economy”, published in Economic and Political Weekly on August 8, 2009.]
1 Shepherd, Andrew W. (2005). “The implications of supermarket development for horticultural farmers and traditional marketing systems in Asia”, Paper presented to FAO Regional Workshop, Kuala Lumpur.
2 Ghezan, Graciela; Mateos, Monica; Viteri, Laura (2002). “Impact of Supermarkets and Fast Food Chains on Horticultural Supply Chains in Argentina”, Development Policy Review. Oxford: Blackwell Publishing, Vol 20:4.
3 Schwentesius, Rita and Gomez, Manuel Angel (2002). “Supermarkets in Mexico: Impacts on Horticulture Systems”, Development Policy Review. Oxford: Blackwell Publishing, Vol 20:4.
4 Hagen, James M. (2002). “Causes and Consequences of Food Retail Innovation in Developing Countries: Supermarkets in Vietnam”, Working Paper. Ithaca, New York: Cornell University, August. Available online at www.cornell.edu.
5 Oxfam (2004). Trading Away Our Rights: Women in Global Supply Chains. Oxford: Oxfam.
6 “The International Food System and the Climate Crisis”, Seedling, GRAIN, October 2009.
7 Farina, Elizabeth M.M.Q (2002). “Consolidation, Multinationalisation and Competition in Brazil: Impacts on Horticulture and Dairy Products Systems”, Development Policy Review. Oxford:Blackwell Publishing, Vol 20:4.
8 Gutman, Graciela (2002). “Impact of the Rapid Rise of the Supermarket System on Dairy Products Systems in Argentina”, Development Policy Review. Oxford: Blackwell Publishing, Vol. 20:4.
9 Faiguenbaum, Sergio; Berdegue, Julio A.; Reardon, Thomas (2002). “The Rapid Rise of Supermarkets in Chile: Effects on Dairy, Vegetable and Beef Chains”, Development Policy Review. Oxford: Blackwell Publishing, Vol 20:4.
10 A.C. Nielsen (2004). “Small Grocers in Asia Surviving Onslaught of Retail Chains”, Press Release. New York: ACNielsen, June 16.
11 Reardon, Thomas and Berdegue, Julio A. (2002). “The Rapid Rise of Supermarkets in Latin America: Challenges and Opportunities for Development”, Development Policy Review. Oxford: Blackwell Publishing, Vol. 20:4.
12 Reardon, Thomas; Timmer, C. Peter; Barrett, Christopher B.; Berdegue, Julio (2003). “The Rise of Supermarkets in Africa, Asia and Latin America”, American Journal of Agricultural Economics. Oxford: Blackwell Publishing, Vol. 85:5.
13 Hu, Dinghuan; Reardon, Thomas; Rozelle, Scott; Timmer, Peter; and Wang, Honglin (2004). “The Emergence of Supermarkets With Chinese Characteristics: Challenges and Opportunities for China’s Agricultural Development”, Development Policy Review. Oxford: Blackwell Publishing, Vol 22:5.
14 Reardon, Thomas; Timmer, C. Peter; Barrett, Christopher B.; Berdegue, Julio (2003). “The Rise of Supermarkets in Africa, Asia and Latin America”, American Journal of Agricultural Economics. Oxford: Blackwell Publishing, Vol. 85:5.
15 For Vietnam Cadilhon, Jean-Joseph; Moustier, Paule; Poole, Nigel D.; Tam, Phan Thi Giac; Feame, Andrew P. (2006) “Traditional vs. Modern Food Systems? Insights from Vegetable Supply Chains to Ho Chi Minh City (Vietnam)”, Development Policy Review. Oxford: Blackwell Publishing, 24:1.
For Chile, Faiguenbaum, Sergio; Berdegue, Julio A.; Reardon, Thomas (2002). “The Rapid Rise of Supermarkets in Chile: Effects on Dairy, Vegetable and Beef Chains”, Development Policy Review. Oxford: Blackwell Publishing, Vol 20:4.
Globally Boselie, David; Henson, Spencer; and Weatherspoon, David (2003)“Supermarket Procurement Practices in Developing Countries: Redefining the Roles of the Public and Private Sectors”, American Journal of Agricultural Economics. Oxford: Blackwell Publishing, 85:5; Reardon, Thomas; Timmer, C. Peter; Barrett, Christopher B.; Berdegue, Julio (2003). “The Rise of Supermarkets in Africa, Asia and Latin America”, American Journal of Agricultural Economics. Oxford: Blackwell Publishing, Vol. 85:5.
FAO Study Shepherd, Andrew W. (2005). “The implications of supermarket development for horticultural farmers and traditional marketing systems in Asia”, Paper presented to FAO Regional Workshop, Kuala Lumpur.
16 Gutman, Graciela (2002). “Impact of the Rapid Rise of the Supermarket System on Dairy Products Systems in Argentina”, Development Policy Review. Oxford: Blackwell Publishing, Vol. 20:4.
17 Oxfam (2004). Trading Away Our Rights: Women in Global Supply Chains. Oxford: Oxfam.
18 Cadilhon, Jean-Joseph; Moustier, Paule; Poole, Nigel D.; Tam, Phan Thi Giac; Feame, Andrew P. (2006) “Traditional vs. Modern Food Systems? Insights from Vegetable Supply Chains to Ho Chi Minh City (Vietnam)”, Development Policy Review. Oxford: Blackwell Publishing, 24:1.
19 Chandrasekhar, C.P., and Ghosh, Jayati (2003). “Is Corporate Farming Really the Solution for Indian Agriculture?”, Business Line. Chennai: Kasturi and Sons, December 16.
20 “The International Food System and the Climate Crisis”, Seedling, GRAIN, October 2009.
Here’s the wonderful thing about the FDI-in-retail debate: never have struggling Indian farmers found so many champions. They’ve been crawling out of the woodwork.
Foreign direct investment in retail may be on hold, but Hillary Clinton can stop worrying about Anand Sharma and Pranab Mukherjee.
“How does (Commerce Minister) Sharma view India’s current Foreign Direct Investment guidelines? Which sectors does he plan to open further? Why is he reluctant to open multi-brand retail?” Those were among the questions U.S. Secretary of State Clinton posed in a cable to her embassy in New Delhi in September 2009, some months after Prime Minister Manmohan Singh began his second term. (See: Hillary checks out Pranab, and the competition, from The Hindu-Wikileaks India Cables series: March 18, 2011).
Note her pointed query on opening up ‘multi-brand retail.’ She had other worries, too. “Why was (Pranab) Mukherjee chosen for the finance portfolio over Montek Singh Ahluwalia? How do Mukherjee and Ahluwalia get along?” And “does Sharma get along with Mukherjee and Prime Minister Singh?” They get along fine, Hillary, and they’re all in it together, as a team.
Hillary has reason to be concerned about FDI in retail. There’s the tens of thousands of dollars she earned from serving as a director on Walmart’s board. And the other thousands of dollars contributed to her 2007-08 campaign by Walmart executives and lobbyists. An ABC News report on that in 2008 also observed that as a director, Hillary Clinton remained “a loyal company woman” (Clinton remained silent as Wal-Mart fought unions: ABC News, January 31, 2008).
And she surely knows the UPA’s FDI retreat is tactical. Pranab Mukherjee put it with disarming candour: we don’t want mid-term polls. Hillary too had flip-flopped during her election campaign, going by the ABC News report. (While on its Board of Directors, she had said: “I’m always proud of Walmart and what we do and the way we do it better than anybody else” — June 1990.)
Yet, Hillary’s campaign website of 2007-08, points out the ABC News report, omitted “any reference to her role at Walmart in its detailed biography of her.” As the race heated up, she recanted: “Now I know that Walmart’s policies do not reflect the best way of doing business and the values that I think are important in America.”
Perhaps Hillary’s FDI concerns are loftier. She must be worried about the poor Indian farmer. The wonderful thing about the FDI-in-retail debate is the explosion of concern for agriculturists. Never have struggling Indian farmers found so many champions. They’ve been crawling out of the woodwork ever since the FDI announcement. From Deepak Parekh to Ratan Tata, they’ve suffered sleepless nights, agonising over the small farmer.
They might want to take a look at the American farm population. At their family farms, especially smaller ones, wrecked by corporate monopolies at every level, from giant agri-businesses to mammoth retail chains. Presently less than one million Americans claim farming as their occupation. That figure was over 25 million in the 1950s.
With what credibility does our regime, on whose watch farm suicides crossed the quarter-of-a-million mark, speak of helping farmers? Who knows what windfalls the deals struck with retail giants have brought to individuals in this most corrupt government in our history? We need to embrace that old journalistic principle: Follow the money. (Hillary does, though in a very different way.) Meanwhile, look at our government’s claims.
Who it affects
Doing away with the ‘middleman’: The first to be devastated will be that poor ‘middlewoman’ — the vendor who daily provides our towns and cities with fresh produce. She did not push up the prices and has her modest margin squeezed each time they rise. That woman carrying that huge basket to your doorstep, on her feet 14-16 hours a day to feed her family. She’s the first ‘middleman’ target.
The more exploitative middlemen in the chain will be co-opted by giant retail which needs collectors and contractors, though not so many. It will slash their numbers after a while. This is The Mob taking over from the little guys on the block. You’re looking at massive displacement in the agricultural supply chain. Only, the new ‘middlemen’ will be Cardin-clad and Gucci-shod, with better access to government than the farmers everyone’s dying to save.
That poor woman vendor, whose life we need to improve, not destroy, brings you fresh produce. She has to, or she can’t sell it. (Tip: big retail operators pasting the words ‘natural’ or ‘fresh’ against their names are selling you stuff that could have been refrigerated, even frozen, for days).
Ten million jobs: Try not to die laughing. This comes from a school of economics that has gifted the world jobless growth for three decades now. We worked hard for two of those, making a big expansion of jobs impossible within our policy framework.
From the early 1990s, fantastic claims have been made of small farmers gaining from neo-liberal globalisation. For instance: farm incomes would rise 25 per cent if Indian prices were aligned to global prices; purchasing power would shoot up.
Many steps were taken on such claims, including 100 per cent FDI in sectors like seed. All achieved the opposite. These moves helped double the indebtedness of the peasantry and further spurred the worst-ever recorded wave of suicides. Apart from which we’ve seen seven-and-a-half million people abandon agriculture in a decade, many driven out by policies to ‘benefit the farmer.’ Now we should believe that FDI in retail will undo all the damage that these policies — from the very same authors — caused? And these guys predict 10 million jobs within a year?
The UPA wants to open up a sector that for all its awful flaws and hardships presently employs 44 million people and has total sales of close to $400 billion. (That’s about 20 times the number Walmart employs on roughly the same turnover.) And gives some sustenance to many millions more if you think families. Small shops and ‘big box retail’ can co-exist, so croons the corporate choir. Sure, after wiping out countless thousands of tiny shops, the survivors can ‘co-exist’ with the big guys, who might even have minor errands for them to run. India’s powerful will run the more important errands. That was clear from 2005 when then Walmart International Division chief John Menzer told his company’s annual meeting: “In our six government meetings, we created a very positive image [of Wal-Mart]…” And: “We’ve energized the FDI lobby and preempted the anti-FDI lobby in India.” (Wal-Mart’s Hot in India, CNNMONEY.COM, June 6, 2005)
Efficiency: The giant chains can never match the efficiency of farmers’ markets selling food produced locally or nearby. Their sourcing of produce from all over the world, central warehousing systems, giant transport operations — all these are hugely energy intensive. Which means a lot of what you get is old and much-refrigerated or frozen. Know the other costs of what you pay for.
Benefitting farmers: Here’s a paradox. Just when we march determinedly towards super markets, people in the homeland of Big Retail are buying more and more from “farmers’ markets.” That is, the oldest form of direct marketing by small producers. More and more Americans seek decent produce not drowned in chemicals, pesticides and preservatives. Growing numbers of that nation’s small and family farms are selling through farmers’ markets each year. In India, every market was once a farmers’ market. Over time, farmers have lost control of such markets to traders and moneylenders. Now comes the coup de grace.
The coming of Big Retail is not simply about shops in the towns of over one million. It brings a radical restructuring of the entire agri-supply chain. The kind of investments — above $100 million — will obviously not go towards labour-intensive operations. The new structures that will confront farmers are stronger than any they have ever known. As a paper on the “U.S. Farm Crisis” from the Kerr Center for Sustainable Agriculture, Oklahoma, puts it: “large corporations have in recent years moved to curtail farmer independence through production contracts and other forms of vertical integration. These moves have included establishment of huge corporate-owned Confined Animal Feeding Operations, where animals are raised without farmers.”
The new middlemen the government welcomes have no regard for village and community. Maximising their own profit is their sole concern. As the number of buyers shrinks to a handful of corporations, farmers will have fewer places to sell their produce. What kind of bargaining power will they have against these mega-middlemen, some of whose worth would place them, if treated as nations, amongst the top ten economies in the world? The “contracts” in the new dispensation will reflect that power equation. The National Commission for Farmers headed by Dr. M.S. Swaminathan had observed that rushing into contract farming without ensuring the needs, safety and bargaining power of the farmer would result in major displacement in the sector. But not to worry, Hillary, your team is still out there batting. Only retired hurt for the moment.
Just back from first frenzied shopping experience in the UK, a four year old ever-inquisitive daughter asked to her father, “Why do we not have a Harrods in Delhi? Shopping there is so much fun!” Simple question for a four-year-old, but not so simple for her father to explain.
As per the current regulatory regime, retail trading (except under single-brand product retailing — FDI up to 51 per cent, under the Government route) is prohibited in India. Simply put, for a company to be able to get foreign funding, products sold by it to the general public should only be of a ‘single-brand’; this condition being in addition to a few other conditions to be adhered to. That explains why we do not have a Harrods in Delhi.
India being a signatory to World Trade Organisation’s General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment (“FDI”). In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51 percent investment in a single brand retail outlet was also permitted in 2006. FDI in Multi-Brand retailing is prohibited in India.
Definition of Retail
In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.
Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customersRetailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.
Division of Retail Industry – Organised and Unorganised Retailing
The retail industry is mainly divided into:- 1) Organised and 2) Unorganised Retailing
Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.
Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.
The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India’s GDP.
FDI Policy in India
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a notification, which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.
The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).
The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be required.
FDI Policy with Regard to Retailing in India
It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.
a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.
b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‘Single Brand’ products, subject to Press Note 3 (2006 Series).
c) FDI is not permitted in Multi Brand Retailing in India.
Entry Options For Foreign Players prior to FDI Policy
Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players ha\d been operating in the country. Some of entrance routes used by them have been discussed in sum as below:-
1. Franchise Agreements
It is an easiest track to come in the Indian market. In franchising and commission agents’ services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world. Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.
2. Cash And Carry Wholesale Trading
100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.
3. Strategic Licensing Agreements
Some foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd
4. Manufacturing and Wholly Owned Subsidiaries.
The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.
FDI in Single Brand Retail
The Government has not categorically defined the meaning of “Single Brand” anywhere neither in any of its circulars nor any notifications.
In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions mentioned in Press Note 3 that (a) only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed), (b) products should be sold under the same brand internationally, (c) single-brand product retail would only cover products which are branded during manufacturing and (d) any addition to product categories to be sold under “single-brand” would require fresh approval from the government.
While the phrase ‘single brand’ has not been defined, it implies that foreign companies would be allowed to sell goods sold internationally under a ‘single brand’, viz., Reebok, Nokia, Adidas. Retailing of goods of multiple brands, even if such products were produced by the same manufacturer, would not be allowed.
Going a step further, we examine the concept of ‘single brand’ and the associated conditions:
FDI in ‘Single brand’ retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for which separate permission is required. If granted permission, Adidas could sell products under the Reebok brand in separate outlets.
But, what is a ‘brand’?
Brands could be classified as products and multiple products, or could be manufacturer brands and own-label brands. Assume that a company owns two leading international brands in the footwear industry – say ‘A’ and ‘R’. If the corporate were to obtain permission to retail its brand in India with a local partner, it would need to specify which of the brands it would sell. A reading of the government release indicates that A and R would need separate approvals, separate legal entities, and may be even separate stores in which to operate in India. However, it should be noted that the retailers would be able to sell multiple products under the same brand, e.g., a product range under brand ‘A’ Further, it appears that the same joint venture partners could operate various brands, but under separate legal entities.
Now, taking an example of a large departmental grocery chain, prima facie it appears that it would not be able to enter India. These chains would, typically, source products and, thereafter, brand it under their private labels. Since the regulations require the products to be branded at the manufacturing stage, this model may not work. The regulations appear to discourage own-label products and appear to be tilted heavily towards the foreign manufacturer brands.
There is ambiguity in the interpretation of the term ‘single brand’. The existing policy does not clearly codify whether retailing of goods with sub-brands bunched under a major parent brand can be considered as single-brand retailing and, accordingly, eligible for 51 per cent FDI. Additionally, the question on whether co-branded goods (specifically branded as such at the time of manufacturing) would qualify as single brand retail trading remains unanswered.
FDI in Multi Brand Retail
The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof.
In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper on allowing FDI in multi-brand retail. The paper doesn’t suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous ’kirana’ store.
Foreign Investor’s Concern Regarding FDI Policy in India
For those brands which adopt the franchising route as a matter of policy, the current FDI Policy will not make any difference. They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred route right away.
For those companies which choose to adopt the route of 51% partnership, they must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer. Currently, the organized retail sector is dominated by the likes of large business groups which decided to diversify into retail to cash in on the boom in the sector – corporates such as Tata through its brand Westside, RPG Group through Foodworld, Pantaloon of the Raheja Group and Shopper’s Stop. Do foreign investors look to tie up with an existing retailer or look to others not necessarily in the business but looking to diversify, as many business groups are doing?
An arrangement in the short to medium term may work wonders but what happens if the Government decides to further liberalize the regulations as it is currently contemplating? Will the foreign investor terminate the agreement with Indian partner and trade in market without him? Either way, the foreign investor must negotiate its joint venture agreements carefully, with an option for a buy-out of the Indian partner’s share if and when regulations so permit. They must also be aware of the regulation which states that once a foreign company enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint venture with another Indian company or set up its own subsidiary in the ‘same’ field’ without the first partner’s consent if the joint venture agreement does not provide for a ‘conflict of interest’ clause. In effect, it means that foreign brand owners must be extremely careful whom they choose as partners and the brand they introduce in India. The first brand could also be their last if they do not negotiate the strategic arrangement diligently.
Concerns for the Government for only Partially Allowing FDI in Retail Sector
A number of concerns were expressed with regard to partial opening of the retail sector for FDI. The Hon’ble Department Related Parliamentary Standing Committee on Commerce, in its 90th Report, on ‘Foreign and Domestic Investment in Retail Sector’, laid in the Lok Sabha and the Rajya Sabha on 8 June, 2009, had made an in-depth study on the subject and identified a number of issues related to FDI in the retail sector. These included:
It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.
Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors.
Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector; secondly that the global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up.
LIMITATIONS OF THE PRESENT SETUP
There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant.
Intermediaries dominate the value chain
Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail.
Improper Public Distribution System (“PDS”)
There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a ‘farm-to-fork’ retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.
No Global Reach
The Micro Small & Medium Enterprises (“MSME”) sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets. While India has continued to provide emphasis on the development of MSME sector, the share of unorganised sector in overall manufacturing has declined from 34.5% in 1999-2000 to 30.3% in 2007-08. This has largely been due to the inability of this sector to access latest technology and improve its marketing interface.
Rationale behind Allowing FDI in Retail Sector
FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity.
The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods in India. FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 94 proposals have been received. Of these, 57 proposals have been approved. An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shopper’s Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchange’s key index rose 173.04 points, or 0.99%, to 17,614.48. But this is very less as compared to what it would have been had FDI upto 100% been allowed in India for single brand.
The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian partner – foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow. By partially opening this sector, the government was able to reduce the pressure from its trading partners in bilateral/ multilateral negotiations and could demonstrate India’s intentions in liberalising this sector in a phased manner.
Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. It would also help bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices inflation.
Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only permit but encourage FDI in retail trade.
Lastly, it is to be noted that the Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, which was appointed to look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion that investment of ‘big’ money (large corporates and FDI) in the retail sector would in the long run not harm interests of small, traditional, retailers.
In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector would not only lead to a substantial surge in the country’s GDP and overall economic development, but would inter alia also help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them.
Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the American Chamber of Commerce in India, The Retail Association of India (RAI) and Shopping Centers Association of India (a 44 member association of Indian multi-brand retailers and shopping malls) favour a phased approach toward liberalising FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51 per cent to start with.
The international retail players such as Walmart, Carrefour, Metro, IKEA, and TESCO share the same view and insist on a clear path towards 100 per cent opening up in near future. Large multinational retailers such as US-based Walmart, Germany’s Metro AG and Woolworths Ltd, the largest Australian retailer that operates in wholesale cash-and-carry ventures in India, have been demanding liberalisation of FDI rules on multi-brand retail for some time.
Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but per contra should be significantly encouraged. Allowing FDI in multi brand retail can bring about Supply Chain Improvement, Investment in Technology, Manpower and Skill development,Tourism Development, Greater Sourcing From India, Upgradation in Agriculture,Efficient Small and Medium Scale Industries, Growth in market size and Benefits to govemment through greater GDP, tax income and employment generation.
Prerequisites before allowing FDI in Multi Brand Retail and Lifting Cap of Single Brand Retail
FDI in multi-brand retailing must be dealt cautiously as it has direct impact on a large chunk of population. Left alone foreign capital will seek ways through which it can only multiply itself, and unthinking application of capital for profit, given our peculiar socio-economic conditions, may spell doom and deepen the gap between the rich and the poor. Thus the proliferation of foreign capital into multi-brand retailing needs to be anchored in such a way that it results in a win-win situation for India. This can be done by integrating into the rules and regulations for FDI in multi-brand retailing certain inbuilt safety valves. For example FDI in multi –brand retailing can be allowed in a calibrated manner with social safeguards so that the effect of possible labor dislocation can be analyzed and policy fine tuned accordingly. To ensure that the foreign investors make a genuine contribution to the development of infrastructure and logistics, it can be stipulated that a percentage of FDI should be spent towards building up of back end infrastructure, logistics or agro processing units. Reconstituting the poverty stricken and stagnating rural sphere into a forward moving and prosperous rural sphere can be one of the justifications for introducing FDI in multi-brand retailing. To actualize this goal it can be stipulated that at least 50% of the jobs in the retail outlet should be reserved for rural youth and that a certain amount of farm produce be procured from the poor farmers. Similarly to develop our small and medium enterprise (SME), it can also be stipulated that a minimum percentage of manufactured products be sourced from the SME sector in India. PDS is still in many ways the life line of the people living below the poverty line. To ensure that the system is not weakened the government may reserve the right to procure a certain amount of food grains for replenishing the buffer. To protect the interest of small retailers the government may also put in place an exclusive regulatory framework. It will ensure that the retailing giants do resort to predatory pricing or acquire monopolistic tendencies. Besides, the government and RBI need to evolve suitable policies to enable the retailers in the unorganized sector to expand and improve their efficiencies. If Government is allowing FDI, it must do it in a calibrated fashion because it is politically sensitive and link it (with) up some caveat from creating some back-end infrastructure.
Further, To take care of the concerns of the Government before allowing 100% FDI in Single Brand Retail and Multi- Brand Retail, the following recommendations are being proposed :-
- Preparation of a legal and regulatory framework and enforcement mechanism to ensure that large retailers are not able to dislocate small retailers by unfair means.
- Extension of institutional credit, at lower rates, by public sector banks, to help improve efficiencies of small retailers; undertaking of proactive programme for assisting small retailers to upgrade themselves.
- Enactment of a National Shopping Mall Regulation Act to regulate the fiscal and social aspects of the entire retail sector.
- Formulation of a Model Central Law regarding FDI of Retail Sector.
A Start Has Been Made
Walmart has a joint venture with Bharti Enterprises for cash-and-carry (wholesale) business, which runs the ‘Best Price’ stores. It plans to have 15 stores by March and enter new states like Andhra Pradesh , Rajasthan, Madhya Pradesh and Karnataka.
Duke, Wallmart’s CEO opined that FDI in retail would contain inflation by reducing wastage of farm output as 30% to 40% of the produce does not reach the end-consumer. “In India, there is an opportunity to work all the way up to farmers in the back-end chain. Part of inflation is due to the fact that produces do not reach the end-consumer,” Duke said, adding, that a similar trend was noticed when organized retail became popular in the US.
Many of the foreign brands would come to India if FDI in multi brand retail is permitted which can be a blessing in disguise for the economy.
Back-end logistics must for FDI in multi-brand retail
The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing.
It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China; where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their country’s GDP.
Moreover, in the fierce battle between the advocators and antagonist of unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of the arguments which inevitably needs to be considered and addressed while deliberating upon the captioned issue is the interests of consumers at large in relation to the interests of retailers.
It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience.
The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at one point of time or the other would be embraced by liberalization, privatization and globalization.FDI in multi-brand retailing and lifting the current cap of 51% on single brand retail is in that sense a steady progression of that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of the entire country.
Reports/ Research Papers
- A.T. Kearney’s Report on Indian Retail, 2008
- FDI Consolidated Policy
- Dr.R.KBalyan “FDI in Indian Retail- Beneficial or Detrimental-research paper
- Damayanthi/S.Pradeekumar-FDI is it the Need of he Hour? Google search
- Dipakumar Dey-Aspects of Indian Economy-Google search
- The Economic Times
- The Business Standard
Association of Traders of Maharashtra v. Union of India, 2005 (79) DRJ 426
 India’s Retail Sector (Dec 21, 2010) http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf
Hemant Batra, Retailing Sector In India Pros Cons (Nov 30, 2010)http://www.legallyindia.com/1468-fdi-in-retailing-sector-in-india-pros-cons-by-hemant-batra
 Notification No. FEMA 20/2000-RB dated May 3, 2000
 Supra Note 4
 Mohan Guruswamy, Implications of FDI in Retail, (Dec 16 2010) http://www.scribd.com/doc/36888679
 Discussion Paper on FDI in Multi Brand Retail Trading, http://dipp.nic.in/DiscussionPapers/DP_FDI_Multi-BrandRetailTrading_06July2010.pdf
 National Accounts Statistics, 2009
 Nabael Mancheri, India’s FDI policies: Paradigm shift, http://www.eastasiaforum.org/2010/12/24/indias-fdi-policies-paradigm-shift/-
 Discussion Paper on FDI in Multi Brand Retail Trading, http://dipp.nic.in/DiscussionPapers/DP_FDI_Multi-BrandRetailTrading_06July2010.pdf
Sarthak Sarin, (Nov 23, 2010) Foreign Direct Investment in Retail Sector http://www.legalindia.in/foreign-direct-investment-in-retail-sector-others-surmounting-india-napping
 Nabael Mancheri, India’s FDI policies: Paradigm shift, http://www.eastasiaforum.org/2010/12/24/indias-fdi-policies-paradigm-shift/-
 Supra Note 11
Economic Times Retail News, FDI in retail to contain inflation (Dec 31, 2010) walmart http://retail-guru.com/allow-100-fdi-in-retail-to-contain-inflation-walmart
 Supra note 17