Economy
FDI in retail - 1: A View from the Farmgate

FDI in retail will really benefit us, if it helps the farmers. Today, farmers are starved of infrastructure, logistics and investment. Even the investment schemes are hard to implement. A first-hand view of the reality on the ground

Foreign Direct Investment (FDI) in retail has become a hit topic of debate and discussion. It is interesting to note that all the noises are coming from people who have no stake in either side. People are more worried about which perceived lobby they can incite and whip up passions. And of course, our media is all for it. But what is the reality on the ground?
 

Over the last three years, I have been fortunate enough to be a part of a horticulture venture (vegetables and fruits) that has brought me in touch with the farmer as well as the consumer. Let me first give you my first-hand views on the issues. Farmers want a better share of the price that the customer can pay. Today, the price difference between what a farmer gets at the wholesale mandi and what the customer pays is approximately 100% or so, on a good day. The big issue we have seen is one of wastages in the output from the harvest to reaching the shelf due to time lapse, improper storage, primitive packing and total absence of post-harvest management. Moreover, the farmer also does not have any infrastructure and has to sell off his produce immediately. When there is oversupply in one locality, the price at the mandi drops disproportionately. The farmer has no flexibility to hold on or even to transport the produce back to his field. Apart from this, farmers suffer from tiny land holdings. This means higher costs of production, transportation and very low financial flexibility. The present format of retail supermarkets does nothing to make the farmer any better off.
 

To solve the plight of the farmer, infrastructure is required, which includes processing centres, refrigerated trucks, cold storage at the destination and proper storage at the retail outlets.  As one of the first players in this field, we have been trying to address the issues, one by one. We buy from the farmer and sell to the supermarket—directly. We pay top mandi price without charging any commission. Since we pick up the produce, the farmer also saves on transport.
 

Ideally, we should form a farmer cooperative and do something like Amul. That is perhaps the best way. And if a cooperative is well funded, there could be a retail chain that will sell directly to the customer. This would be real reform.
 

Today, most department stores or supermarkets keep a mark up of around 30% in order to provide for ‘dump’ or unsold stock. Obviously, customers do not want to pick up ‘broken’ vegetables. Proper packaging would help to virtually eliminate store losses and they can reduce the mark ups. Proper handling and infrastructure will not add much to the final prices prevailing today. The farmer will get a higher price and the customer will get better quality, perhaps at the same price.
 

There is room to drop prices further, if we can succeed in investing in secondary processing. This means that we invest in making concentrates out of broken or mis-shapen vegetables or fruits that do not get sold—make jams, dehydrated produce, etc. Of course, all of this calls for high investment.
 

It is heartening to see that the government has announced so many schemes for subsidies in this sector. However, obtaining them is a nightmare. The funny thing is that, to get hold of these subsidies, one needs a bank loan sanction first. Forms and project reports are required to be given to the agency doling out the subsidy. In about three to six months a Letter of Intent is issued. Before this is obtained, one cannot start any work on the project.  

Banks are shy to lend to the farmer and prefer ‘personal’ guarantees and/or ‘urban’ collateral. Farm land is not considered to be an ‘enforceable’ security. Banks have lost a lot of money lending to the farmer at the behest of the government and have been continually writing off loans. More importantly, the agricultural loans department in public sector banks have never seen a balance sheet. They have merely lent against land, gold or real estate.
 

Tomorrow: The impact of FDI in retail at the other end of the supply chain—the actual retailers—will be discussed.
 

(The author can be reached at [email protected].)

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COMMENTS

Dr Anantha K Ramdas

4 years ago

Thank you mr Balakrishnan for your first hand report on the subject. Like you, my experience is practical in a metropolis like Bangalore.

When I go to main market, kind of secondary whole sale market, I get the best rates in town; for weekly purchases I have tried Big bazaar, tatas, reliance and Hopcoms besides Spar, all of which are supermarkets, not in the same size as not in the same league as Wallmart, Shoppers, Grand Supermarket or the Korean market in Washington, which was last posting before I came back.

Yet, what I find is that today's rates (wednesday) of Big bazaar are cheaper than the rest; Spencers (goenkas) sold tomatoes at Rs 7.50 a kg on 7th whereas I paid Rs 9.50 to Reliance today (10/10). Like this, price varies widely, while the veg cart vendor still sells at Rs 19/20 per kg when he knocks our door at home.

The point is that the farmer does not even get Rs 3 per kg which is where I feel bad and sad, but I am helplessly placed liked 1000s who want a fair deal for the farmer.

What we need, as a start, apart from what you have mentioned, is the starting of a "Farmers weekly market" when we must encourage the farmers to bring the produce and sell, so that they can get good return.

If FDI-Retail can ensure a direct and better payment to farmer, and, as a starting point for the goodwill, they must actually buy the produce at the production point, pay a better price than the blood sucking intermediaries and bring the goods to the cities.

They must also build large warehouses, have cold storage facilities and truck materials down to cities. Besides, as a service to the farmer, they must also stock fertilizers, seeds and agricultural implements and give them on credit to farmers, or even arrange for a sort of barter for settlement by buying their produce. These may look Utopian, but this sort of thing is bound to happen soon.

Please do write on the subject
in greater detail of your first hand experience.

REPLY

R Balakrishnan

In Reply to Dr Anantha K Ramdas 4 years ago

Dear Dr Ramdas,
Many thanks for your observations.
Price difference between malls is a normal phenomenon. Some malls sell quality and some focus on price. When they focus on quality, they pay a higher price. Higher price because from what the farmer gives to the wholesaler, a portion is not accepted by the mall. This can be 20 to 30 percent. This rejects are sold in bulk at ridiculous rates to caterers or left to rot. The other issue is one of what the stores call as “dump”. Each customer picks and chooses and some part of it is unsalable or ‘dump’. The store has to price this in also.
The solution to this is retail packaging (half to one kg packs) and cold storage at every leg, right from harvest to the shop shelves. This is the big gap in infrastructure that I am talking about. All of this costs big money. A refrigerated truck can cost between Rs. 40 and Rs.50 per km of transport. Then there is the question of rejects that cannot go in to the package. A kg of vegetables from, say Kodai or Ooty would cost upwards of five to eight rupees a kg merely to get it in good shape to the customer.
For use of wastage or rejects, there are only two solutions. One is to set up downstream units for producing juices, concentrates or jams etc. Again a very high investment is called for. The second is to sell cut vegetables. However, the average Indian will not buy cut vegetables. The other thing is that if a vegetable is broken or mis-shapen, the customer does not buy. Same vegetable, same quality but no buyer will buy it.
As regards the farmer, his problem is one of the uneconomic size of his land holding. On half to one acre, a single harvest failure will kill him. Also, he does not know what he will get till he actually sells the harvest. The way forward is that large organised processors come in and engage them in contract farming and move to a uniform pricing through the year. That will give some stability of revenue to the farmer. In a community farming enterprise, the farmer will be given inputs the price of which could be adjusted from his harvest. The other issue with small farmers is their reluctance to adapt to new methods of farming. It is a long process and not easy. Also, the land holding of many farmers is as low as a tenth of an acre!
However, it is still possible that on an acre of land in horticulture, a farmer could earn around twenty to thirty thousand rupees per month.
The major reform needed is in land. Consolidation of land holdings could happen either through a cooperative movement or by giving the land on contract farming. Contract farming does not mean that the farmer will have no work. He will continue as before, with inputs coming his way and a selling price assurance.
Buying produce at production point is a massive task. The buyer needs his infrastructure near the farmer. Harvest has to be loaded directly to cold vans, taken for cleaning, sorting, grading and packing. A full cold chain is required to ensure that the shelf life is better and quality is not spoilt.
The key to farmers getting better price is to avoid the present system of the mandi operator, who manipulates prices, takes commissions from buyer and seller and has no storage or transport infrastructure. The APMC Act is another monster. State governments use it only to collect a fee on the produce sold through their yards, which do not provide any infrastructure. This system has not worked and there is no point in keeping this law.
FDI with foreign names will help in bringing in the infrastructure. More than the money part, they are needed to ensure that they bring in the processes.
More important, the government has to give the infrastructure. A cold chain needs uninterrupted power. We need good roads and no stoppages in movement of goods between borders. So, unless the government gets its act together, we cannot really bank on the hope of FDI bailing out the farmer and the customer.
Regards
Balakrishnan

MOHAN

In Reply to Dr Anantha K Ramdas 4 years ago

Marketing produce through self help groups

http://www.agriculturesnetwork.org/magaz...

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