Impact On Farming Communities

Published Date: 02 Nov 2017

Introduction

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.

India being a signatory to World Trade Organization’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% ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51% investment in a single brand retail outlet was also permitted in 2006. FDI in Multi-Brand retailing is prohibited in India.

All Indian households have traditionally enjoyed the convenience of calling up the corner grocery "kirana" store, which is all too familiar with their brand preferences, offers credit, and applies flexible conditions for product returns and exchange. And while mall based shopping formats are gaining popularity in most cities today, the price-sensitive Indian shopper has reached out to stores such as Big Bazaar mainly for the steep discounts and bulk prices. Retail chains such as Reliance Fresh and More have reportedly closed down operations in some of their locations, because after the initial novelty faded off, most shoppers preferred the convenience and access offered by the local kirana store.

So how these Western multi-brand would stores such as Wal-Mart and Carrefour strategies their entry into the country and gain access to the average Indian household? Wal-Mart has already entered the market through its partnership with Bharti, and gained opportunity for some early observations. The company's entry into China will also have brought some understanding on catering to a large, diverse market, and perspectives on buying behaviour in Asian households. Carrefour on the other hand has launched its wholesale cash and carry operations in the country for professional businesses and retailers, and will now need to focus more on understanding the individual Indian customer.

As such, these retail giants will try to gain from some quick wins while reaching out to the Indian consumer. For one, they will effectively harness their expertise with cold storage technologies to lure customers with fresh and exotic vegetables, fruitsand organic produce. Secondly, they will also emphasise on the access that they can create for a range of inspirational global foods and household brands. Thirdly, by supporting domestic farmers will try ensuring supplies of essential raw materials to them.

Surely, these should engage shoppers' and farmers interest–but what needs to be

seen is whether they can effectively combine these benefits, with the familiarity,

convenience and personalised shopping experiences that the local "kirana" stores

have always offered.

2.3 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.[9]

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, [10] which contains the ForeignExchange 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.

2.4 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[11] 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)[12]

.

c) FDI is not permitted in Multi Brand Retailing in India.

2.5 Prospected Changes in FDI Policy for Retail Sector

in India

The government (led by Dr.Manmohan Singh, announced following prospective

reforms in Indian Retail Sector

1. India will allow FDI of up to 51% in ―multi-brand‖ sector.

2. Single brand retailers such as Apple and Ikea, can own 100% of their Indian

stores, up from previous cap of 51%.

3. The retailers (both single and multi-brand) will have to source at least 30% of

their goods from small and medium sized Indian suppliers.

4. All retail stores can open up their operations in population having over

1million.Out of approximately 7935 towns and cities in India, 55 suffice such

criteria.

9. Hemant Batra, Retailing Sector in India Pros Cons (Nov 30, 2010)http://www.legallyindia.com/1468-fdi-in-retailing-sector-inindia-pros-cons-by-hemant-batra

10. Notification No. FEMA 20/2000-RB dated May 3, 2000

11.FDI_Circular_02/2010, DIPP

12. http://siadipp.nic.in/policy/changes/pn3_2006.pdf11

5. Multi-brand retailers must bring minimum investment of US$ 100 million. Half

of this must be invested in back-end infrastructure facilities such as cold

chains, refrigeration, transportation, packaging etc. to reduce post-harvest

losses and provide remunerative prices to farmers.

6. The opening of retail competition (policy) will be within parameters of state

laws and regulations.

2.6 Single and Multi-Brand Retailing

2.6.1 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[13] 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, and 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.

2.6.2 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 [14] 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.

13.ibid 14.Discussion Paper on FDI in Multi Brand Retail Trading, http://dipp.nic.in/DiscussionPapers/DP_FDI_MultiBrandRetailTrading_06July2010.pdf12

4.2 SWOT Analysis of Retail Sector:

1. Strengths:

ï‚· Major contribution to GDP: the retail sector in India is hovering

around 33-35% of GDP as compared to around 20% in USA.

ï‚· High Growth Rate: the retail sector in India enjoys an extremely high

growth rate of approximately 46%.

ï‚· High Potential: since the organised portion of retail sector is only 2-3%,

thereby creating lot of potential for future players.

ï‚· High Employment Generator: the retail sector employs 7% of work

force in India, which is rite now limited to unorganised sector only.Once the

reforms get implemented this percentage is likely to increase substantially.

2. Weaknesses (limitation):

 Lack of Competitors: AT Kearney‘s study on global retailing trends

found that India is least competitive as well as least saturated markets of the

world.

ï‚· Highly Unorganised: The unorganised portion of retail sector is only

97% as compared to US, which is only 20%.

ï‚· Low Productivity: Mckinsey study claims retail productivity in India is

very low as compared to its international peers.

ï‚· Shortage of Talented Professionals: the retail trade business in

India is not considered as reputed profession and is mostly carried out by the

family members (self-employment and captive business). Such people are not

academically and professionally qualified.

 No ‗Industry‘ status, hence creating financial issues for

retailers: the retail sector in India does not enjoy industry status in India,

thereby making difficult for retailers to raise funds.26

3. Opportunities (benefits):

ï‚· There will be more organization in the sector: Organized retail

will need more workers. According to findings of KPMG , in China, the

employment in both retail and wholesale trade increased from 4% in 1992 to

about 7% in 2001, post reforms and innovative competition in retail sector in

that country.

ï‚· Healthy Competition will be boosted and there will be a

check on the prices (inflation):Retail giants such as Walmart,

Carrefour, Tesco, Target and other global retail companies already have

operations in other countries for over 30 years. Until now, they have not at all

become monopolies rather they have managed to keep a check on the food

inflation through their healthy competitive practices.

ï‚· Create transparency in the system: the intermediaries operating

as per mandi norms do not have transparency in their pricing. According to

some of the reports, an average Indian farmer realises only one-third of the

price, which the final consumer pays.

ï‚· Intermediaries and mandi system will be evicted, hence

directly benefiting the farmers and producers: the prices of

commodities will automatically be checked. For example, according to

Business Standard, Walmart has introduced ―Direct Farm Project‖ at Haider

Nagar in Punjab, where 110 farmers have been connected with Bharti

Walmart for sourcing fresh vegetables directly.

ï‚· Quality Control and Control over Leakage and Wastage:

due to organisation of the sector, 40% of the production does not reach the

ultimate consumer. According to the news in Times of India, 42% of the

children below the age group of 5 are malnourished and Prime Minister

Dr.Manmohan Singh has termed it as ―national shame‖. Food often gets rot in

farm, in transit and in state-run warehouses. Cost conscious and highly

competitive retailers will try to avoid these wastages and losses and it will be

their endeavour to make quality products available at lowest prices, hence

making food available to weakest and poorest segment of Indian society.

ï‚· Heavy flow of capital will help in building up the

infrastructure for the growing population: India is already

operating in budgetary deficit. Neither the government of India nor domestic

investors are capable of satisfying the growing needs (school, hospitals,

transport etc.) of the ever growing Indian population. Hence foreign capital

inflow will enable us to create a heavy capital base.

ï‚· There will be sustainable development and many other

economic issues will be focussed upon:many Indian small shop 27

owners employ workers, who are not under any contract and also under aged

workers giving rise to child-labour. It also boosts corruption and black money.

4. Threats:

ï‚· Current Independent Stores will be compelled to close:

This will lead to massive job loss as most of the operations in big stores like

Walmart are highly automated requiring less work force.

ï‚· Big players can knock-out competition: they can afford to lower

prices in initial stages, become monopoly and then raise prise later.

ï‚· India does not need foreign retailers: as they can satisfy the

whole domestic demand.

ï‚· Remember East India Company it entered India as trader

and then took over politically.

 The government hasn‘t able to build consensus.

In view of the above analysis, if we try to balance opportunities and prospects

attached to the given economic reforms, it will definitely cause good to Indian

economy and consequently to public at large, if once implemented. Thus the period

for which we delay these reforms will be loss for government only, since majority of

the public is in favour of reforms. All the above mentioned drawbacks are mostly

politically created. With the implementation of this policy all stakeholders will benefit

whether it is consumer through quality products at low price, farmers through more

transparency in trading or Indian corporates with 49% profit share remaining with

Indian companies only.28

CHAPTER-5

Effects of FDI on various Stakeholders

5.1 Impact on Farming Communities

A supermarket revolution‖ has been underway in developing countries since the

early 1990s. Supermarkets (here referring to all modern retail, which includes

chain stores of various formats such as supermarkets, hypermarkets, and

convenience and neighbourhood stores) have now gone well beyond the initial

upper- and middle-class clientele in many countries to reach the mass market.

Within the food system, the effects of this trend touch not only traditional retailers,

but also the wholesale, processing, and farm sectors.

When supermarkets modernize their procurement systems, they require more

from suppliers with respect to volume, consistency, quality, costs, and commercial

practices.

Supermarkets‘ impact on suppliers is biggest and earliest for food processing and

food-manufacturing enterprises, given that some 80% of what supermarkets sell

consists of processed, staple, or semi-processed products. But by affecting

processors, supermarkets indirectly affect farmers, because processors tend to

pass on the demands placed on them by their retail clients. Supermarket chains

prefer, if they are able, to source from medium and large processing enterprises,

which are usually better positioned than small enterprises to meet supermarkets‘

requirements. The rise of supermarkets thus poses an early challenge to

processed food microenterprises in urban areas.

By contrast, as supermarkets modernize the procurement of fresh produce (some

10–15% of supermarkets‘ food sales in developing countries), they increasingly

source from farmers through ―specialized and dedicated wholesalers‖ (specialized

in product lines and dedicated to modern segments) and occasionally through

their own collection centers.

Where supermarkets source from small farmers, they tend to buy from farmers

who have the most non-land assets (like equipment and irrigation), the greatest

access to infrastructure (like roads and cold chain facilities), and the upper size

treacle of land (among small farmers). Where supermarkets cannot source from

medium- or large-scale farmers, and small farmers lack the needed assets,

supermarket chains (or their agents such as the specialized and dedicated

wholesalers) sometimes help farmers with training, credit, equipment, and other

needs. Such assistance is not likely to become generalized, however, and so

overtime asset-poor small farmers will face increasing challenges surviving in the

market as it modernizes.

When farmers enter supermarket channels, they tend to earn from 20 to 50%

more in net terms. Among tomato farmers in Indonesia, for example, net profit

(including the value of own labour as imputed cost) is 33–39% higher among

supermarket channel participants than among participants in traditional markets.

Farm labour also gains. But supplying supermarket chains requires farmers to29

make more up-front investments and meet greater demands for quality,

consistency, and volume compared with marketing to traditional markets.

Support for retail reforms

In a pan-Indian survey conducted over the weekend of 3 December 2011,

overwhelming majority of consumers and farmers in and around ten major cities

across the country support the retail reforms. Over 90 per cent of consumers said

FDI in retail will bring down prices and offer a wider choice of goods. Nearly 78

per cent of farmers said they will get better prices for their produce from multiformat stores. Over 75 per cent of the traders claimed their marketing resources

will continue to be needed to push sales through multiple channels, but they may

have to accept lower margins for greater volumes.[37]

.

Farmer groups

Various farmer associations in India have announced their support for the retail

reforms. For example:

ï‚· Shriram Gadhve of All India Vegetable Growers Association (AIVGA) claims

his organization supports retail reform. He claimed that currently, it is the

middlemen commission agents who benefit at the cost of farmers. He urged

that the retail reform must focus on rural areas and that farmers receive

benefits. Gadhve claimed, "A better cold storage would help since this could

help prevent the existing loss of 34% of fruits and vegetables due to inefficient

systems in place." AIVGA operates in nine states including Maharashtra,

Andhra Pradesh, West Bengal, Bihar, Chattisgarh, Punjab and Haryana with

2,200 farmer outfits as its members.[38]

ï‚· Bharat Krishak Samaj, a farmer association with more than 75,000 members

says it supports retail reform. Ajay Vir Jakhar, the chairman of Bharat Krishak

Samaj, claimed a monopoly exists between the private guilds of middlemen,

commission agents at the sabzi mandis (India's wholesale markets for

vegetables and farm produce) and the small shopkeepers in the unorganized

retail market. Given the perishable nature of food like fruit and vegetables,

without the option of safe and reliable cold storage, the farmer is compelled to

sell his crop at whatever price he can get. He cannot wait for a better price

and is thus exploited by the current monopoly of middlemen. Jakhar asked

that the government make it mandatory for organized retailers to buy 75% of

their produce directly from farmers, bypassing the middlemen monopoly and

India's sabzi mandi auction system.[38]

37."India government puts foreign supermarkets "on pause"". Reuters. 4 December 2011

38."Farmer Organisations back retail FDI". The Financial Express. 2 December 2011.30

ï‚· Consortium of Indian Farmers Associations (CIFA) announced its support for

retail reform. Chengal Reddy, secretary general of CIFA claimed retail reform

could do lots for Indian farmers. Reddy commented, ―India has 600 million

farmers, 1,200 million consumers and 5 million traders. I fail to understand

why political parties are taking an anti-farmer stand and worried about half a

million brokers and small shopkeepers.‖ CIFA mainly operates in Andhra

Pradesh, Karnataka and Tamil Nadu; but has a growing member from rest of

India, including Shetkari Sanghatana in Maharashtra, Rajasthan Kisan Union

and Himachal Farmer Organisations.

ï‚· Prakash Thakur, the chairman of the People for Environment Horticulture &

Livelihood of Himachal Pradesh, announcing his support for retail reforms

claimed FDI is expected to roll out produce storage centers that will increase

market access, reduce the number of middlemen and enhance returns to

farmers.[39] Highly perishable fruits like cherry, apricot, peaches and plums

have a huge demand but are unable to tap the market fully because of lack of

cold storage and transport infrastructure. Sales will boost with the opening up

of retail. Even though India is the second-largest producer of fruits and

vegetables in the world, its storage infrastructure is grossly inadequate,

claimed Thakur.

 Sharad Joshi, founder of Shetkari Sangathana (farmers‘ association), has

announced his support for retail reforms.[40]

Joshi claims FDI will help the farm

sector improve critical infrastructure and integrate farmer-consumer

relationship. Today, the existing retail has not been able to supply fresh

vegetables to the consumers because they have not invested in the backward

integration. When the farmers' produce reaches the end consumer directly,

the farmers will naturally be benefited. Joshi feels retail reform is just a first

step of needed agricultural reforms in India, and that the government should

pursue additional reforms.

Suryamurthy, in an article in The Telegraph, claims farmer groups across

India do not support status quo and seek retail reforms, because with the

current retail system the farmer is being exploited. For example, the article

claims: [41]

ï‚· Indian farmers get only one third of the price consumers pay for food staples,

the rest is taken as commissions and mark-ups by middlemen and

shopkeepers.

ï‚· For perishable horticulture produce, average price farmers receive is barely

12 to 15% of the final price consumer pays.

ï‚· Indian potato farmers sell their crop for Rs.2 to 3 a kilogram, while the Indian

consumer buys the same potato for Rs.12 to 20 a kilogram.[42]

39.Suryamurthy, R. (2 December 2011). "Enter, farmer with an FDI in retail query". Calcutta, India: The

Telegraph

.40. "Enter, farmer with an FDI in retail query". Calcutta, India: The

Telegraph.

41."FDI in retail is first major step towards reforms in agriculture, feels Sharad Joshi". TheEconomic Times. 2

December 2011.

42."Major Benefits of FDI in Retail". The Reformist India. 30 November 201131

5.1.1 Case Studies of how various MNC‘s are helping

Farmers [43]

CASE 1.PepsiCo India HELPING FARMERS IMPROVE

YIELD AND INCOME

The company‘s vision is to create a cost-effective, localized agro-supply chain for its

business by:

 Building PepsiCo‘s stature as a development partner by helping farmers grow

more and earn more.

ï‚· Introducing new high-yielding varieties of potato and other edibles.

ï‚· Introducing sustainable farming methods and practising contact farming.

ï‚· Making world-class agricultural practices available to farmers and helping

them raise farm productivity.

ï‚· Working closely with farmers and state governments to improve agrosustainability and crop diversification.

ï‚· Providing customized solutions to suit specific geographies and locations.

ï‚· Facilitating financial and insurance services in order to de-risk farming.

THE JOURNEY SO FAR

Where stand today, at a glimpse

 Today PepsiCo India‘s potato farming programme reaches out to more than

12,000 farmer families across six states. We provide farmers with superior

seeds, timely agricultural inputs and supply of agricultural implements free of

charge.

ï‚· We have an assured buy-back mechanism at a prefixed rate with farmers.

This insulates them from market price fluctuations.

ï‚· Through our tie-up with State Bank of India, we help farmers get credit at a

lower rate of interest.

ï‚· We have arranged weather insurance for farmers through our tie-up with ICICI

Lombard.

ï‚· We have a retention ratio of over 90%, which reveals the depth and success

of our partnership.

ï‚· In 2010, our contract farmers in West Bengal registered a phenomenal 100%

growth in crop output, creating in a huge increase in farm income.

ï‚· The remarkable growth has resulted in farmers receiving a profit between

Rs.20, 000– 40,000 per acre, as compared to Rs.10000–20,000 per acre in

2009.

43.http://pepsicoindia.co.in/purpose/environmental-sustainability/partnership-with-farmers.html32

Case 2. Bharti Walmart initiative through Direct Farm

Project

Corporate Social Responsibility (CSR) initiatives in Bharti Walmart are aimed at

empowerment of the community thereby fostering inclusive growth. Through our

philanthropic programs and partnerships, we support initiatives focused on

enhancing opportunities in the areas of education, skills training and generating local

employment, women empowerment and community development.

In conjunction with the farmers‘ development program in Punjab, community-building

activities have been implemented in village, Haider Nagar. Due to lack of sanitation

facilities, households tend to use the farm fields, thereby affecting yields and

impacting the produce that is being supplied to stores. In order to improve the yields

and the community‘s way of life, we are working on the issues of Sanitation and

Biogas, Education, Awareness Building and Health and Hygiene.

ï‚· Education: 100% children enrolled in formal education program.

Children‘s group had been formed to discuss children issues. All the nonschool going children had been given non-formal basic education required to

mainstream them in the government schools. A sanitation block has been

constructed, hand pump has been installed and school uniforms have been

donated to create a better learning environment for children. Fifteen students

have been mainstreamed back in school.

ï‚· Health and Hygiene: A dispensary has been started in Haider Nagar

to help people avail medical facilities in the village itself. Nearly 2000 patients

have availed the dispensary facilities. Twenty Community Dustbins have also

been installed in the village to bring about a change in the living conditions of

the people and to provide them garbage free environment.

ï‚· Sanitation and Biogas: Ensured that 100% households have toilets

in the village. Eighty Bio Gas plants have been installed to help people

conserve gas energy and utilize the waste generated from their cattle and

toilets; thus making the environment healthier.

ï‚· Waste Management: twenty Community Dustbins have been installed

in the village to bring about a change in the living conditions of the people and

to provide them garbage free environment thus ensuring a healthier living.

This and many other cases suggest that opening of Indian retail sector to FDI is a

win-win situation for farmers. Farmers would benefit significantly from the option

of direct sales to organized retailers. For instance, the profit realization for

farmers selling directly to the organized retailers is expected to be much higher

than that received from selling in the mandis. Also Rise in the organized retail

whether domestic or through entry of foreign players will lead to an increase in

investments in both forward and backward infrastructure such as cold chain and

storage infrastructure, warehousing and distribution channels thereby leading to

improvement in the supply chain infrastructure in the long run. Global majors

such as Wal-mart, Carrefour and Tesco are expected to bring a global scale in

their negotiations with the

Source:http://bharti-walmart.in/Community.aspx?id=6433

MNCs such as Unilever, Nestlé, P&G, Pepsi, Coke, etc. The improved cold chain

and storage infrastructure will no doubt lead to a reduction in losses of agriculture

produce. It may also lead to removal of intermediaries in the retail value chain

and curtail other inefficiencies. And this may, result in higher income for a farmer.

5.2 Impact on Traditional Mom and Pop Stores

The main question being raised is whether the traditional mom and pop stores will

survive and co-exist or leave the field for major organized retail players?

The answer could be a co-existence. The major advantage for the smaller players

is the size, complexity and diversity of our Indian Markets. If we look at the

organized retail players, most of them have opened shop in the Metros, Tier 1 and

Tier 2 towns. Very rarely do we find organized players in the rural areas and we

have more than 70% of the population living in the rural areas.

There are a multitude of reasons being floated around to prevent the liberalisation

of the FDI norms for Indian retail:

ï‚· Primary among these is the concern regarding the kirana stores as well other

locally operated Mom and Pop stores being adversely affected by the entry of

global retail giants such as Walmart, Carrefour and Tesco. As these brands

would come with advanced capabilities of scale and infrastructure in addition

to having deep pockets, it is argued that this would result in the loss of jobs for

lakhs of people absorbed in the unorganised sector.

ï‚· Fears have also been raised over the lowering of prices of products owing to

better operational efficiencies of the organised players that would affect the

profit margins of the unorganised players.

ï‚· Instability surrounding the political arena with a number of scams of varying

magnitudes doing the rounds has also led to a sense of uncertainty among

foreign investors.

Many Industry experts though, feel that the reservations against the introduction of

Multi-Brand retail are mostly misplaced. The successful deployment of 100%FDI in

China is a case in point. Partial FDI in retail was introduced in 1992 in China.

Subsequently, in December 2004, the Chinese retail market was fully opened up to

utilise the enormous manpower and wide customer base available that has led to a

rapid growth of the sector. Today, its retail sector is the second largest (in value) in

the world with global retailers such as Walmart, 7-Eleven and Carrefour comprising

10% of the total merchandise.

Multi-brand retail, if allowed, is expected to transform the retail landscape in a

significant way:

ï‚· Firstly, the organised players would bring in the much needed investment that

would spur the further growth of the sector. This would be particularly

important for sustenance of some of the domestic retailers that don‘t have the

resources to ride out the storm during an economic slump such as the case

with Vishal, Subhiksha and Koutons, which couldn‘t arrange for funds to

sustain their growth.

ï‚· The technical know-how, global best practices, quality standards and cost

competitiveness brought forth through FDI would augur well for the domestic

players to garner the necessary support to sustain their growth.34

ï‚· Indian has also been crippled by rising inflation rates that have refused to

come within accepted levels. A key reason for this has been attributed to the

vastly avoidable supply chain costs in the Indian food and grocery sales which

has been estimated to be a whopping US$ 24 Bn. The infrastructure support

extended to improve the backend processes of the supply chain would enable

to eliminate such wastages and enhance the operational efficiency.

ï‚· FDI in multi-brand retail would in no way endanger the jobs of people

employed in the unorganised retail sector. On the contrary, it would lead to

the creation of millions of jobs as massive infrastructure capabilities would be

needed to cater to the changing lifestyle needs of the urban Indian who is

keen on allocating the disposable income towards organised retailing in

addition to the local kirana stores. These stores would be able to retain their

importance owing to their unique characteristics of convenience, proximity

and skills in retaining customers. Also, these would be more prominent in the

Tier-II and Tier-III cities where the organised supermarkets would find it

harder to establish themselves.

FDI in multi-brand retail is therefore a necessary step that needs to be taken to

propel further growth in the sector. This would not only prove to be fruitful for the

economy as a whole but will also integrate the Indian retail sector with the global

retail market. It is not a question of ‗how‘ it will be done but ‗when‘.

Contrary to the above view,

Traditional retailing has been established in India for many centuries, and is

characterized by small, family-owned operations.

Because of this, such businesses are usually very low-margin, are owneroperated, and have mostly negligible real estate and labour costs. Moreover, they

also pay little by way of taxes. Consumer familiarity that runs from generation to

generation is one big advantage for the traditional retailing sector. It is often said

that the mom-and-pop store in India is more like a father-and-son enterprise.

Such small shops develop strong networks with local neighbourhoods. The

informal system of credit adds to their attractiveness, with many houses ‗running

up a tab‘ with their neighbourhood kirana store, paying it off every fortnight or

month. Moreover, low labour costs also allow shops to employ delivery boys, such

that consumers may order their grocery list directly on the phone. These

advantages are significant, though hard to quantify. In contrast, players in the

organized sector have to cover big fixed costs, and yet have to keep prices low

enough to be able to compete with the traditional sector. Getting customers to

switch their purchasing away from small neighbourhood shops and towards largescale retailers may be a major challenge. The experience of large Indian retailers

such as Big Bazaar shows that it is indeed possible. Anecdotal evidence of

consumers who return from such shops suggests that the wholesale model

provides for major bargains – something Indian consumers are always on the

lookout for.

The other major challenge for retailers in India, as opposed to the US, is the

storage setup of households. For the large-scale retail model to work, consumers

visit such large stores and return with supplies likely to last them for a few weeks.

Having such easy access to neighbourhood stores with whom, as discussed

above, it is possible to have a line of credit and easy delivery service, congested35

urban living conditions imply that few Indian households might be equipped with

adequate storage facilities.

In urban settings, real estate rents are also very high. Thus opportunities in this

sector are limited to those retailers with deep pockets, and puts pressure on their

margins. Conversely for retailers looking to set up large stores at a distance from

residential neighbourhoods may struggle to attract consumers away from their

traditional sources of groceries and other products.

CHAPTER-7

7.1Following are the few recommendations for

formulation of policies by government:

Much of the Indian retail trade (particularly grocery) still has traditional features:

small family-run shops and street hawkers dominate the situation in most of the

country. However, the retail trade in India is now undergoing an intensive structural

change which could cause irreversible damage to local commodity supply chains

and competition. The existing regulations are not adequate to fulfil the new 49

requirements. India can learn (and perhaps forestall loss of genuine competition and

product variety) from the experience of south-east Asian countries which are

improving regulatory frameworks and some advanced retailing economies like

Germany which are already considered more successful regulators in this sector.

German competition policies in content and implementation are significant for India

to the extent that they are different from other advanced retailing countries like the

US and Great Britain. German policy now proactively aims to preserve small and

medium competitors in retail sector.

Policies for ―Competitiveness with Inclusiveness‖ in the Supermarket Revolution.

As the supermarket revolution proceeds in developing countries, governments have

several options for helping small farmers participate in supermarket channels (or

gain access to viable alternatives) and traditional retailers coexist or compete with

the modern retail sector.

Option 1:Regulate Modern Retail? To the extent developing countries

have regulated modern retail; their goal has been to reduce the speed and scope of

its spread. The regulations have mainly limited the location and hours of modern

retail. On balance, these regulations have done little to limit supermarket spread,

partly because although regulations tend to target large-format stores (and thus not

limit small traditional stores), modern retail comes in a wide variety of formats,

including neighbourhood stores and convenience stores.

Few developing countries have a pro-traditional or pro–small retail policy. Instead

they usually take a laissez-faire approach to small shops and hawkers and make

minimum initial public investments in open and covered municipal markets. A

number of developing countries even have policies that encourage the development

of supermarkets and regulate wet-markets in order to modernize commerce, lower

food prices and congestion, and increase public hygiene and economic

competitiveness.

Finally, in the early stages of supermarket spread, the supermarket sector is

relatively fragmented (weakly concentrated), and farmers and processors thus have

a wide range of potential buyers among supermarket chains and between the

modern and traditional sectors. In the advanced stage of supermarket spread,

however, the sector becomes concentrated— for example, in Latin America four to

five chains typically control about 75percent of a sector that in turn controls an

average of 55percent of food retail. At that stage it is important for governments and

the private sector to enforce competition policies.

Option 2: Upgrade Traditional Retail. A number of good examples of

programs to upgrade traditional retail exist. Of particular interest are those of East

and Southeast Asia, such as in China, Hong Kong, the Philippines, Singapore, and

Taiwan. In most of these countries, the programs in question are municipal,

sometimes under a national umbrella policy. The programs have several elements in

common:50

• Governments involved in these programs have a ―broad tent‖ approach—that is,

they allow development of supermarkets as well as traditional retailers.

• They are proactive: the Hong Kong Consumer Council‘s dictum of ―managing and

facilitating change‖ rather than leaving wet-markets to flounder and collapse,

characterizes all the East and Southeast Asian approaches studied.

• They promote traditional retailer modernization and competitiveness. Singapore‘s

approach is to ―cherish but upgrade and modernize.‖ Hong Kong‘s policy is to ―retain

but modernize.‖

• They accept the social and market role of wet-markets, hawkers, and small

traditional shops but encourage them to locate in non-congested areas and on fixed

sites (to increase hygiene and tax payment) and to improve their physical

infrastructure. They also train the operators in business skills, food safety, and

hygiene.

• They experiment with privatizing wet-market management in some cases (such as

in China and Hong Kong).

Option 3: Upgrade Wholesale Markets to Serve Retailers

and Farmers Better. Small shops and wet-market stall operators typically

source food products from wholesale markets, which typically buy from small

farmers. Upgrading wholesale markets‘ infrastructure and services is thus important

to the whole traditional supply chain. Private-sector actors are helping traditional

retailers (and supermarket independents and chains) obtain the services and

products they need.

Examples are modern cash-and-carry chains that act as wholesalers, like

Bharti/Wal-mart in India, Metro in China, and Makro in Pakistan. But governments

and wholesaler associations also need to invest in upgrading wholesale markets in

order to maximize access by farmers and retailers. Such programs have been

undertaken in China and Mexico.

Option 4: Help Farmers Become Competitive Suppliers to

Supermarkets. Private-sector programs are emerging to help small farmers

get the assets and services they need to supply supermarket channels. Metro, for

example, has direct procurement links to fish and vegetable farmers in China. Agrifood businesses in India, like ITC, Tata, Godrej, Reliance, and DSCL Hariyali , have

rural business hubs that offer consumables, farm inputs, and technical assistance

and procure output from farmers.

Governments need to supplement private efforts with public investments in

improving farmers‘ access to assets, services, training, and information. Some of

these assets are public goods, such as regulations on retailer-supplier relations to

promote fair commercial practices, wholesale market upgrading, market information,

and physical infrastructure such as cold chains and roads. Other assets are semi-51

public or private goods, such as assistance with market linkages between small

farmer cooperatives and supermarket chains; training in postharvest handling; and

credit facilities for making on-farm investments in assets needed to meet quality and

volume requirements, such as irrigation and greenhouses.

Option 5: Urban Planning Laws. The state of urban planning in India is

such that there is as yet no ceiling on the size or number of retail outlets that may be

started in a designated commercial zone. The ministry of urban development at the

central level has no jurisdiction over urban area planning in the states except in the

case of exceptional laws pertaining to the coastal regions, forests, the Delhi region

and union territories. It is clear that land use laws/zoning laws are not the most

commonly used regulatory devices against large format retailing and at present the

land use laws in urban centres are in the most pliant condition since the local

governments implement them and they are most susceptible to omission and

commission on behalf of real estate developers who, in turn, share a common

interest with corporate retailers. What is needed is to include regulations for the

establishment of big retail projects in States Regional Planning documents. When

municipalities allow big retail projects, they are scrutinised to ensure that they meet

the requirements of regional planning.

The position of the neighbouring municipalities thus needs to be strengthened by a

new law (that has been introduced to adjust German building law with European

regulation). New big retail projects are now checked to assess their influence on the

local supply. Investors in retail have to prove that their project will not end up

affecting retail shops in the same or neighbouring municipality, and smaller shops in

the neighbouring municipalities will not close down due to the new competition. The

proposal of not allowing FDI in retail initially to major cities, SEZs as well as certain

sectors; and also not allowing in cities with population of less than 1million is move in

right direction.

Option 6: Regulation of misleading statements and

advertisements. The law against dishonest competition (referred to as unfair

trade practices in India) forbids a number of marketing practices which are regarded

as dishonest.

These include misleading statements or advertisements about business

circumstances, especially the nature, origin, manner of manufacture or the pricing of

goods or commercial services or the size of the available stock. In a recently

reported case in India a leading corporate retailer, Subhiksha claimed in

advertisements that its prices were the lowest compared to rivals like Big Bazar, DMART, and Apana Bazar, etc. Big Bazar filed a case against the advertisements and

the Advertising and Standards Council of India is understood to have given its verdict

in April 2007. However, the verdict has not been made public as yet.52

Option 7: Regulatory Framework to avoid monopolistic

practices. The possible monopolistic/ monopsonistic tendencies of the large

retailers (fears of ‗predatory behaviour‘ and ‗abuse of dominance‘) would have to be

proactively dealt to ensure competition in the market. Appropriate policy formulation

can also aide this cause, as was done during the telecom sector liberalisation with

the National Telecom Policy mandating that each circle should have at least 4-6

players. It is to be understood that free and fair competition in procurement of farm

produce is the key to farmers‘ enhanced remuneration.

Conclusion

The discussion above highlights:

(1) Small retailers will not be crowded out, but would strengthen market positions by

turning innovative/contemporary.

(2) Growing economy and increasing purchasing power would more than

compensate for the loss of market share of the unorganised sector retailers.

(3) There will be initial and desirable displacement of middlemen involved in the

supply chain of farm produce, but they are likely to be absorbed by increase in the

food processing sector induced by organised retailing.53

(4) Innovative government measures could further mitigate adverse effects on small

retailers and traders.

(5) Farmers will get another window of direct marketing and hence get better

remuneration, but this would require affirmative action and creation of adequate

safety nets.

(6) Consumers would certainly gain from enhanced competition, better quality,

assured weights and cash memos.

(7) The government revenues will rise on account of larger business as well as

recorded sales.

(8) The Competition Commission of India would need to play a proactive role.

Thus from developed countries experience retailing can be thought of as developing

through two stages. In the first stage, modern retailing is necessary in order to

achieve major efficiencies in distribution. The dilemma is that when this happens it

inevitably moves to stage two, a situation where an oligopoly, and quite possibly a

duopoly, emerges. In turn this implies substantial seller and buyer power, which may

operate against the public interest.

The lesson for developing countries is that effective competition policy needs to be in

place well before the second stage is reached, both to deter anticompetitive

behaviour and to evaluate the extent to which retail power is being used to unfairly

disadvantage smaller retailers and their customers. The sources of retail power need

to be understood to ensure that abuses of power are curbed before they occur. The

more important debate lies in the parameters of competition policy. The benefits

brought by modern retailers must be acknowledged and not unduly hindered. While it

is true that some dislocation of traditional retailers will be felt, time will prove that the

hardship brought will not be substantial. Competition law is being created and

adopted across Asia but in the immediate future its impact is not expected to be

large. Competition laws only become vital as time passes and retail becomes

concentrated in the hands of a few powerful companies, whether or not these

companies are foreign or domestic.

In conclusion, the issue that India must grapple with now is the impact of reduced

competition brought about by retailer concentration will have on various stakeholders

and the ways in which competition laws and policy can deal with this growth of power

before it is too late. The new Competition Act, 2002 has all the required provisions. It

would, anyhow, depend on how it is implemented.

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