From the responses to last Thursday’s post, it is quite apparent that there are a lot of apprehensions about the benefits of FDI in multi-brand retail among educated citizens. The big show of opposition by the BJP was expected – not because they are concerned about the ‘kirana’ stores becoming defunct, but because small traders and businessmen form a big part of their vote bank. The Marxists opposed it because that gave them some thing to do. They have become irrelevant otherwise.
The timing of announcing the much-expected policy reform could have been better. With some important state elections round the corner, even ruling party stalwarts voiced their doubts. But objections from allies in the ruling coalition forced the government to back-track and postpone implementation of 51% FDI in multi-brand retail. The policy flip-flop got wide coverage in the international press and hasn’t gone down well with FIIs, who headed for the exit doors.
What got lost in the brouhaha was that there was no opposition to the announcement of 100% FDI in single-brand retail. Why? Because 51% FDI in single-brand retail was already a fait accompli. That means good news for IKEA, Rolex, Tommy Hilfiger but bad news for Tesco, Carrefour, Walmart. Instead of getting into the pros and cons of 51% FDI in multi-brand retail, let me relate what is happening to 6500 farmers of West Bengal. It was front page news in The Telegraph two days back.
There is a potato crisis in Bengal. The crop is harvested during Feb-March and kept in cold storages for selling through the year. While a third of last year’s crop is yet to be sold, bumper harvest in Punjab has led to a flood of potatoes into the state. Farmer’s prices have dropped to 90 paisa per Kg against the usual Rs 3.50 per Kg. Middlemen, who ‘buy’ from the farmers and store the crop, pay the farmers only after they sell. With prices crashing lower, they are refusing to pay the farmers at the higher rate.
But 6500 farmers in Howrah and five neighbouring districts have cocked a snook at the antics of the middlemen. All of them supply their produce to the potato-chips factory of PepsiCo in Sankrail, Howrah. This is how the system works. PepsiCo, a multinational giant, has appointed 150 registered ‘vendors’ and help them to get loans to enable them to buy seeds, pesticide and sacks for the farmers. The farmers produce special chip-grade potatoes with less sugar and water content than the local variety, for which the vendors were paid Rs 6.10 per Kg by PepsiCo in Mar ‘11. The vendors pay the farmers promptly.
The vendors’ job is to coax more farmers to join the scheme because PepsiCo plans to increase their procurement by 50% from the current 40,000 tonnes. Due to the higher rates paid by PepsiCo and the prompt payment from vendors, these 6500 farmers hope to make a profit upwards of Rs 20,000 per acre as opposed to the likely loss of Rs 10,000 per acre that farmers of local variety of potatoes may face if they get paid at 90 paisa a Kg.
The prosperity that is spreading down the chain is remarkable. Some of the farmers who joined the scheme a few years back have replaced their hutments with ‘pucca’ structures, have bought more land and are sending their children to schools. Some of the top vendors, who have several hundred farmers under contract, make Rs 5 Lakhs per year.
Most multi-brand retailers overseas sell branded products as well as ‘house’ products, i.e. products manufactured by local vendors which they sell under their own brand name. These products are sold at a slightly lower price than competing branded products, but earn better margins. Even local multi-brand retailers have adopted the practice. For example, Spencers sells Kellogg's cereals as well as their own branded cereals. If and when the Tescos and Walmarts are permitted to open retail stores, they will find it profitable to engage local vendors in their procurements. Some are already doing it for their overseas stores.
A champion of small farmers has argued that initially the foreign retailers may pay top prices for local produce, but over the long term they will squeeze the small farmers for lower prices. The example of such a practice in the UK has been cited. The learned gentleman needs a lesson in geography. The entire UK will probably fit inside the state of UP in terms of size. India is a vast country in comparison. To reach the stage where all the small farmers get contracted to foreign retailers and then get squeezed in the long term is unlikely to happen even in the distant future.
