Indian farmers and many other rural
producers are at the mercy of large and well-organized monopsony buyers who rig
the prices during the harvest season, pushing the farmer to sell at a price far
less than the cost price. Very often these traders dominate geographies and
account for nearly all procurement in their geographies. In many states, the
food ministry determines who it will buy from and this is usually a small
number of traders who in turn dominate direct procurement from farmers in their
geographies. These are economic fiefdoms that they dominate and exploit. When direct procurement
mechanisms where sophisticated procurement systems are put in place and
information about demand (prices, product varieties and quantities demanded)
becomes more easily available, it becomes more difficult for the middlemen to
dominate local geographies and restrict competition. The emergence of these
supply chains that drive transparency of information will bring significantly
more competition in sourcing and better prices for producers and farmers.
The CII-Boston Consulting Group study
found that an Indian tomato farmer earns about 30% or even less of the final
price paid by the consumer. In Kolar district, in Karnataka, Farmers, almost
every year, spill the harvested Tomato on the street out of frustration and in
protest of plummeting tomato prices. The prices offered by these monopsony
buyers would not recover the transportation cost; let alone making up for loans
borrowed, manure, yearlong labour and a living. In Economic Times, Captain Gopinath of erst-while Air Deccan, wrote on 15 years of his stint as a farmer after his retirement from Defence services, as how his fellow farmers in his neighborhood in Hassan Dist quietly abandoned their Onion and potato in trucks and escaped to their villages, after discovering that the prices for the onion and potato would not even fetch them freight to pay the truckers
In our economy tiny screws, nuts, bolts, are priced rationally based on the cost of production and necessary profit. Sometime back a liter of water was cleverly sold at a price more than a liter of milk! No free market force would bring their prices down irrespective of their supply-demand-gap. None of us remember having seen screws,nuts or bolts spilled on the streets for want of reasonable prices. The poor farmers are not organised and financially sound to dictate their prices. This is how over 3 lakh Farmers
over the years have committed suicide in India to save their Honour.
In Indian economy most of the sectors, barring the regulated ones, have the free will to price their produce, but the Agriculture sector. The
manure companies, the seed companies, the power supply companies religiously
rise their prices when cost of an ingredient of their produce rises. The farmer
has no free will to calculate and fix his price for his produce! Our
exploitative markets, dominated by the monopsony buyers, compel the farmer to
sell his produce for a price far less than the cost of production. What else a
farmer would do to honour his financial commitments when prices are rigged and
the poor fellow is pushed to sell below the cost price; he would surely kill
himself to save his honour. These are but Honour Killings by the exploitative
market forces. The agro markets are controlled by such exploitative fiefdoms
that our Governance has failed to curb them and do justice to farmers in all
these decades. Simply because the people engaged in agriculture, at large, are
not fairly educated and organized, these poor innocent farmers are exploited by
these monopsony buyers in the name of free market.
As with any other sector, the entry of foreign players introduces competition
that will benefit some and will work to the detriment of others. The
beneficiaries in this case are the Indian consumers, the lower middle class,
which will benefit from the well-paying jobs that will be created, and the
producers of goods -- including farmers -- that have been at the mercy of
middlemen and monopsony buyers and trader monopolies. As usual, the interests that
are threatened have sought to portray this move as detrimental to India.
The Indian Govt has recently announced
a slew of reforms, including allowing foreign direct investment (FDI) in
multi-brand retail up to a level of 51%. A policy requiring, single-brand
retail multinationals to source 30% of products and materials from small
businesses and craftsmen was changed to mandating that the same amount come
from Indian firms. Opening up FDI will not only lead to a greater variety of
products for sale and increased consumer choice, but also penetrate deep into
the hinterland of Indian economic activity and do much to improve the country's
"Shunned Sectors" agriculture produce procurement and supply chain,
infrastructure and logistics.
Foreign venture of large retail chains
takes place in three phases. In the first phase, foreign retail
chains, often set up a test pilot project, which is usually done through a
partnership with local chains, with risk and revenue sharing model, or a few
flagship stores that serve as brand broadcasters. The foreign chains employ
this initial-phase entry strategy to learn lessons about the local markets.
They assess demand, test merchandising strategies and set up
operational capabilities. In this phase, they bring in some investment to cover
their set-up costs and for establishing their sourcing (supply) footprint. This
usually takes 18-to-24 months.
In the second phase, firms expand their
demand footprint; they open more stores and increase both the scale of
operations (volume of products sourced) and scope of products that they
feature. There is considerable investment in this phase in the form of real
estate acquisition, putting in operational infrastructure, establishing
sourcing relationships, establishing supply chains and massive logistics
capabilities. This is volume-independent investment -- that is, investment
meant to gear up for volumes of business to come, but not calibrated to the
current volume of business.
In the third phase, the investment
keeps pace with the rate of expansion. As volumes grow and urban and semi-urban
retail locations get saturated, companies look for new locations and bring in
investment that is calibrated to growth in volumes. It is in the second phase
and the third phase -- which come after the initial the 18 to 24 months
operation -- that large investments manifest themselves.
The arrival of foreign retail chains
has two-fold impact on current unstructured markets. First, these companies
would set up supply chains and logistical capabilities, spurring significant
improvements in the infrastructure needed to source, ship, store and deliver
products, covering all aspects of value chain and supply chain activities,
including storage, warehousing, and information-intensive operations. Second,
their entry and expansion induce domestic competitors to invest in infrastructure
and logistics, as well as greatly speed up the emergence of product standards
especially in perishables and personal consumables, and begin the process of
bypassing monopsony buyers and traders, especially those who have been
dominating and rigging the prices of agriculture produce in procurement, and
others as well in many product categories in current unstructured
markets.
Impact on Mom-and-Pop Retailers: FDI is often opposed on the grounds that it will put mom-and-pop
stores out of business. This is very unlikely for several reasons. The big-box
retailers, when they venture into developing markets, do not use the same
business model as they do in the U.S. Wal-Mart -- the most iconic of these
companies and the one most often cited as a threat to Indian mom-and-pop stores
-- is by no means the lowest-price retailer in China. Wal-Mart U.S. is based on
"everyday low prices." The firm has an activity system that is meant
to help Walmart compete as a cost leader. The company began by locating in
rural areas and then moved to suburban and semi-urban areas in the U.S. In
China, the rural areas and semi-urban areas are not where the money is.
Consumers in China -- unlike their American counterparts living in suburbia -
do not drive miles and do bulk purchasing, nor do they have massive storage
facilities at home. In India, China, Brazil, Indonesia, Thailand and Mexico,
the vast majority of educated middle and upper classes live in the cities (and
not in semi-urban and rural areas) where real estate is very expensive and
population density is high. The foreign retail chains will need to make very
expensive real estate investments. They will have a very high variable cost of
operation. Their fixed, volume-independent costs are also likely to be much
higher than the mom-and-pop convenience stores. These chains will operate with
price points that are much higher than those featured by the mom-and-pop shops.
These firms' real competition will be the domestic
multi-brand retailers. A recent study by the CII and Boston Consulting Group
estimated the size of organized retail of US$28 billion in 2010 to be 6% to 7%
of the total retail market in India. The study predicted that the size of
retail -- total retail sector size, not just organized retail -- would grow to
US$1.25 trillion by 2020 if the efficiencies that typically come from greater
competition and modernization of retail supply systems were to be unleashed.
Under this scenario, the study predicts that the size of organized retail could
grow to US$260 billion or about 20.8% of the total market. So even under this
scenario, the idea that a fractional segment that accounts for 20.8% of the
total economic activity of a sector can drive the remaining 79% of that sector
out of business does not stand the scrutiny of reason.
The CII/BCG study also estimates that if the
organized retail sector is not modernized -- the "as is" economic
scenario, as the study calls it -- the size of the sector will be about US$170
billion. This under-performs the earlier scenario by about 35% or so.
That difference could be a job creation deficit of about 1.4 million jobs with
an even higher potential loss of economic product since organized retail pays
better than local, scale-deprived mom-and-pop establishments. This is without
taking into consideration other jobs that would not be created in economic
activities that span infrastructure and logistics.
Supply Footprint: Traders
-- Not Farmers -- Beware. The foreign retail chains will have a more
significant impact on traders that dominate procurement of commodities and
perishables, including grains and cereals. It is not surprising that these
traders are the most virulent opponents of FDI in retail
On the other hand in developed countries, the farmers and producers get as much as 70% of the price paid by the consumer. For this reason alone, farmers and producers should welcome this development; and for this reason alone, traders are opposing it. Indeed, the Indian Farmer and Industrial Alliance (IFIA), a joint venture of the Consortium of Indian Farmers Associations (CIFA), recognized the potential benefits of eliminating middlemen and has expressed its support for opening the retail sector to foreign investment.
This brings us to the understanding, that, foreign investment in retail has an impact that goes beyond its direct investment impact. It is a force multiplier that induces even more investment from competitors.
The Govt ought to device policies and
put such regulatory mechanisms in place so that better systems of supply
chains, logistical capabilities, infrastructure needed to source, ship, store
and deliver products, covering all aspects of value chain and supply chain
activities, including storage, warehousing, and information-intensive
operations, evolve over the years. It is time that India re-examined its
dogmatic, beliefs and practices and Think-Out-of-The Box.
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