The white paper highlights several sustainable development issues, in addition to the economic aspects, arising out of a possible FDI in Indian retail sector. Public policy regarding the retail sector is crucial because it is the second employment provider in the economy after agriculture. Various purported benefits of FDI in retail and large scale organised retail have been contradicted by evidence found in Western countries. Employment generation from entry of foreign retailers seem to be largely exaggerated. On the other hand, a reduction in revenue and profits of small retailers is more likely to happen if not a loss of employment. Road infrastructure which is prerequisite for development of efficient supply-chain system is inadequate and will be big constraint even when foreign retailers invest in developing an integrated supply chain. Inadequate grid-connections would compel cold-storage providers to consume diesel which would increase green-house emissions and also drain the state exchequer’s money in the form of subsidies. Without adequate roads and grid connections, the country is hardly prepared for an inflow of FDI.
Contrary to common perception, supermarkets are found to be responsible for huge amount of food wastages due to their obsession with cosmetic appearance of food products. They are also responsible for increasing packaging waste which poses serious solid-waste management challenges to municipal authorities in cities. Farmers profits also tend to suffer when major retailers establish monopoly-like position in the market. Farmers are subjected to increased financial risks and unexpected costs due to several unfair practices of supermarkets. Supermarket’s criteria for rejecting products from suppliers on grounds of appearance of produce, promotes chemical-intensive farming among farmers which has adverse environmental and health effects in addition to being financially unattractive. Also, monoculture plantations encouraged by supermarkets cause a loss in bio-diversity, deplete fertility of soil and make crops more prone to pest attack.
Successful strategies to overhaul the agriculture system should have a bottom-up approach which engages people at grass-roots, rather than a top-down approach. In this context the idea of forming farmers’ cooperative societies is crucial. One possible way to reduce storage loss as well as increase farm income is to have on-farm micro food-processing facilities at cooperative level by the use of simple technologies such as solar dryers at community. The cooperative business model of Amul, for an extremely perishable item such as milk, presents a perfect case that vindicates the bottom-up approach. Similar cooperative models for farm produce such as fruits and vegetables can also be evolved. In case the government decides to go ahead with the proposed FDI, it should follow a more calibrated approach with social safeguards to protect the interests of small retailers.
The recent political fiasco of the government opening up doors to India’s retail sector for foreign investors only to slam it back in a space of few days , has hogged considerable attention in both national and international media. Several arguments have been presented by experts in both camps ─ the pro-FDI and anti-FDI. However, much of the discussion has hovered around the economic aspects of FDI in the retail segment. In contrast this short note, wherever relevant, tries to highlight some of the issues in sustainable development resulting from FDI in retail and more generally from wide-spread organised retail.
3. CURRENT SCENARIO
3.1 Overview of the Retail Sector in India
The retail sector contributes to around 8 percent of India’s GDP. It is the second largest provider of employment after agriculture, employing close to 40 million people. An important feature that distinguishes the Indian retail sector from those in the developed countries is the highly unorganised nature of the business and the presence of extremely small retailers. It is estimated that India has 15 million retail outlets which translates to density of 1 for 80 persons, the highest in the world. Only 4 percent of these outlets have an area of more than 500 sq. feet. Around 95 percent of the total retail trade is done through these marginal retailers; the remaining 5 percent can be attributed to the organised segment which has grown in the last decade or so.
3.2 Current FDI Rules in Indian Retail:
• Currently, FDI in Multi-Brand retailing is not permitted in India.
• FDI in Single-Brand retailing up to 51 percent is permitted with prior government approval.
• FDI in ‘cash and carry’ wholesale trading is permitted up to 100 percent under the automatic route.
• FDI in storage and warehousing services, including warehousing of agricultural products with refrigeration (cold storage) is permitted up to 100 percent under the automatic route.
4. BENEFITS OF FDI IN RETAIL –CLAIMS VERSUS EVIDENCE
4.1 Large-Scale Employment Generation
Proponents of FDI in retail have declared that there will be large-scale job creation in the economy. Union Minister for Commerce and Industry Anand Sharma went one step further by quoting a figure of 10 million as the number of new jobs to be created, with bulk of that supposedly coming from the logistics sector. However, experts have expressed that this figure appears highly exaggerated given the western retailers’ preference for automation and mechanisation. For instance, the Walmart, whose global turnover is close to size of India’s entire retail industry, employs only 2.1 million people. Assuming that the Walmart and other retailer giants will extend their highly profitable model in the Indian retail sector as well, it is highly unlikely that 10 million jobs will be created. However, it is rational to think that considerable amount of jobs is likely to be created.
On the other hand, there is a possibility of loss of employment for several small retailers once foreign retailers establish themselves in the market, as seen in developed nations. Endowed with deep pockets, supermarkets resort to predatory pricing, often selling at below cost, to wipe out competition. A study by the British Retail Planning Forum found that every time a large supermarket opens, an average 276 jobs are lost .
In the Indian context, a study conducted by the Indian Council for Research on International Economic Relations in 2008 observed that unorganised retailers operating in and around organised retailers have witnessed a drop in business turnover and profits after the entry of large organised retailers . However, the study found no evidence of closure of unorganised players due to competition from organised players. The entry of foreign players into the Indian retail market may or may not result in huge loss of jobs, but income reduction of marginal retailers and intermediaries is highly likely.
4.2 Efficient Supply Chain Systems
The Government believes that FDI in retail is the silver bullet solution to all issues regarding the inefficient supply chain system in India. This belief rests on the premise that a component of the capital inflow into the retail sector will go into developing an extremely efficient and organised supply and logistic system that will take care of collection, storage and transportation of food produce, seamlessly. What the government seems to neglect is that the backbone of any efficient supply chain is the infrastructure for transportation, such as roads and rails. The government cannot expect the Walmarts and the Tescos to build good roads, without which the supply systems cannot be optimised. This is one of the constraints that Indian retail players are already struggling with. Globally, logistics account for around five percent of total cost retail players incur, while it is as high as ten percent in India, thus making a dent in its attractiveness. Before the government ushers in FDI, it should make sure that the supply-chain industry is ‘investment-ready’; however, with the current state of road infrastructure, it is far from being ready.
Another aspect of inadequate support structure for FDI in retail is the country’s long-time nemesis – power crunch. An efficient supply chain system would include end-to-end cold chain for storage and transportation of fresh produce. Warehouses with cold storage facilities need to be set up throughout rural India, at places accessible from the farms. Cold storage facilities are energy-intensive, especially in tropical countries such as India where summer temperatures can go up to 50 degree Celsius. A large chunk of villages still do not have access to electricity while many of those villages that do have electrification, either have it only on paper or have erratic supply. Unless the government performs a miracle overnight, it is expected that warehouses will be run on diesel generators. Similarly, the transportation system enabled with refrigeration facilities, would also consume additional fossil fuel. There are multiple problems with the increased consumption of fossil fuel.
First, the cost of unit power required for storage and transportation of produce will be much higher. Indian players in the cold-storage segment have already expressed the high cost of power as a significant challenge to growth. Given the increased cost, retailers would try to recover their margin from elsewhere, probably from the weakest link in the chain- the poor, hapless farmers.
Secondly, given the dependence on diesel, it would further increase the oil import bill of the country, widening the trade deficit. Assuming subsidies continue to be provided on diesel, it would result in transfer of tax-payers money to retailers.
Thirdly, diesel is a heavily polluting fuel with a high concentration of suspended particulate matter. Increased consumption of diesel will open up another front for widespread pollution, environmental damage and climate change. This would be quite a damaging development, especially at a time when policy makers worldwide are having protracted negotiations to broker a climate deal that seeks to put greater responsibility on countries such as India and China to reduce emissions.
A case in point is the use of diesel by telecom companies in India in order to power mobile towers. Faced with frequent power outages and inadequacies of electricity grid to meet their energy requirements, telecom companies have resorted to using diesel in a big way. Currently 60 percent of their energy demands are met through the use of diesel while power grids contribute to the remaining 40 percent. This has been a cause for massive environmental pollution especially in the country-side, resulting in an emission of 6 million tonnes of CO2 annually. Like all environmental hazards, this one also extracts a disproportionately higher cost from the economically backward segment of the society. Several Members of Parliament have recently highlighted the issue to the honourable Prime Minister but no action has been taken so far. Apart from the environmental repercussions, the issue has an economic aspect as well. Subsidies on petroleum products are provided by the government to support the middle and lower income groups in meeting their energy needs. However, in the absence of differential pricing, all consumers whether industrial or individual, are charged the same subsidised price. Telecom sector companies in India, the second largest consumer of diesel, have unfairly exploited the provision of this subsidy. According to environmental watchdog Greenpeace, telecom companies account for an estimated annual loss of over INR 2,600 crores of the tax-payer’s money annually in the form of diesel subsidy . It does not require too much effort for one to foresee a similar fate in the case of the development of supply chain sector. On this front as well, the government appears ill-prepared for the proposed foreign investments.
Climate change impact of integrated supply chain systems are difficult to ignore. As per estimates in the UK, the food chain supply could account for one-fifth of total green-house emissions in the country . On average, food travels through a much longer distance and is preserved for a longer time before being finally consumed both being energy-consuming activities. Also the design and layout of the supermarkets make them highly energy-inefficient; they emit three times more Carbon dioxide per-square-foot than the average small fruits and vegetables retailer.
Instead of blindly waving a green flag to retail giants to march into the country-side and start building warehouses which become smoke factories, the government should prepare a blueprint on how renewable energy sources can be employed to meet the energy challenges of the sector. The government can also reduce greenhouse gas emissions by encouraging people to eat locally produced, fresh and seasonal food.
4.3 Elimination of Food Wastage
Presently the highly unorganised and inadequate supply chain in India is considered responsible for the wastage of about a quarter of the total produce between the harvest and the consumption stages. In theory, development of an efficient end-to-end cold chain will make it possible to eliminate this wastage during the collection, storage and transportation of fresh produce from farms to supermarket shelves. The increase in supply base of food items due to elimination of waste will supposedly translate into higher income for farmers and lower prices for consumers.
However, data from countries where retail is highly organised convey a different story. In the US and UK, anywhere between 20 and 30 percent food is wasted by retail giants between the stages of production and consumption. A huge quantity of fresh produce is thrown away by the supermarkets during the sorting process since they have a policy of accepting products that conform to strict standards in shape, size and appearance. Hence, fresh fruits and vegetables which are otherwise edible are thrown away from supermarket shelves for their unappealing looks. The Environment Agency estimates that the total UK retail food waste is 1.6 million tonnes per year . An estimated 20 to 40% of fruits and vegetables in the UK are discarded by supermarkets annually, simply on cosmetic grounds . Similarly trends have been observed in nations with highly organised retail such as the US.
Some of the other reasons for loss of food by supermarkets include:
Inaccurate Stock Management: Supermarkets do not do a very good job in anticipating demand for products and as a result invariably resort to overstocking. Most supermarkets have a take-back provision in their contracts with suppliers wherein unsold stock with 75 percent residual shelf life can be returned back to suppliers. As a result there is little incentive for them to efficiently manage stocks. Also, intense competition among supermarkets to stock fresh products results in edible items being thrown out even before their expiry dates have reached.
Bargain Offers: Attractive discounts and deals often lure customers into buying more than what is required. This way, supermarkets are able to dispose of the ‘not-so-fresh’ or ‘nearing expiry date’ products which have short shelf lives. In such cases, food waste is effectively transferred from the retailers to the consumers since sufficient time to consume the products is not available.
Defects in Packaging: Some of the products are discarded because of defects in packaging even though the food is fit for consumption.
Apart from the food waste, considerable amount of waste is also generated from the food packaging used by supermarkets. In contrast shopping at cooperative stores can reduce waste from packaging by up to 75 percent as observed by as study in Austria . A study conducted by the Waste & Resources Action Programme estimates that the food and drinks supply chain in the UK generates 5.3 million tonnes of waste in the form of packaging materials only. The total amount of waste generated when both rejected food and packaging materials are considered is a colossal amount and is responsible for serious environmental problems. In UK, an estimated emission of 10 million tonnes of CO2 equivalent greenhouse gases can be attributed to the waste generated by the food and drinks supply chain .
In case of wide-spread organised retail, disposal of waste of such high volumes would pose serious solid-waste management challenges to the various municipal bodies in Indian cities. There may be difficulty in finding adequate landfill sites especially in densely populated cities such as Mumbai. Open dumping of waste in cities has already contributed to emission of greenhouse gases and contamination of water bodies, thus degenerating quality of life for citizens.
4.4 Higher Profits for Farmers
The section in the Indian Government that supports foreign investments in retail, believes that such a move has the potential to uplift the lives of our farmers. The underlying rationale is that with the giant retailers setting up shops and investing in fully-integrated supply chain from farm gates to supermarket shelves, middlemen in the chain will be cut out. Without the middlemen, food producers would get higher prices for their produce. This does make economic sense at a superficial level, but there are strong evidences that contradict the hypothesis.
A study conducted by the UK Competition Commission in 2000 found out that major retail chains such as Sainsbury, Tesco and Marks and Spencer had a poor track record in their dealings with suppliers . The study specifically noted that the retailers were increasingly passing on a disproportionately higher component of cost increase in the supply chain to their small suppliers i.e. farmers. A similar study conducted in 2008 concluded that major retailers exercised their bargaining power to transfer “excessive risks and unexpected costs” to their suppliers and that such behaviour of the retailers was a characteristic feature of the market which “prevents, restricts or distorts competition in connection with the acquisition of groceries by large grocery retailers” . Further, the study noted that the near-monopoly of supermarket chains, which procure over 70 percent of food products in the UK, enables them to “dictate prices and force farmers into trading for less and less.” For instance, Tesco has introduced international ‘reverse’ auctions for its suppliers – food suppliers from all over the world are asked to bid to undercut each other until Tesco gets the lowest price. Farmers and other suppliers are put under enormous pressure to cut their prices, even blow the break-even point.
Another major problem is that farmers are left without a redressal mechanism if supermarkets pull out of procurement deals in the last minute, thus exploiting the lack of binding contractual agreements between them. On the other hand, farmers are penalised heavily by supermarkets if there are shipping delays. Supermarkets also use resort to unethical practices such as delay in paying invoices and passing on unexpected costs back to suppliers for transport, packaging and food wasted at the stores.
In the Indian context, studies conducted by Indian Council for Research on International Economic Relations in 2008, has noted that farmers selling products directly to Indian organised retail players have realised significantly higher income. The reason behind this is that Indian retail players are far from establishing a near-monopolistic position in the market to be able to create pricing pressure of the kind that exists in Western countries. Pricing pressures are passed on to suppliers only after the stage when retail players control both ends of the supply chain and literally have a monopoly in the market. Hence, increase in income of Indian farmers from Indian organised players is only a temporary trend and will subside once the major retailers are well entrenched in the market.
Another often-repeated argument in the favour of foreign retailers in India is that retailers can effectively link-up India’s food market to the global food market by serving as export hubs. This supposedly will translate into higher income for farmers. In reality however, supermarkets pass on very little of the increased margins from their export business to the farmers. For instance, Table 1 gives an overview of how income from exporting apples from South Africa to UK is staggered across different stakeholders in the value chain. As evident, supermarkets grab on to the largest share of income, accounting for 42 percent.
Table 1: Break-up of income from export of apples South Africa to U.K. supermarkets
Stakeholders in the Value Chain Share of income (%)
Farm labour 5
Farm income 4
Importer’s commission and duty 7
U.K. handling 7
Transport and customs 6
Farm inputs and packaging 17
4.5 Improved Farming Technology
Experts have been talking about how foreign retailers will aid farmers in adopting ‘advanced farming techniques’. However, the term ‘advanced farming techniques’ in the West has come to mean capital and energy-intensive farming along with the use of lab-produced seeds and chemical farm inputs. Chemical-intensive farming may be suitable to climatic and soil conditions in the West but it has proved to be a financial disaster for farmers in India. Expenses on fertilisers, pesticides and farm equipments such as tractors make synthetic farming financially unattractive and have led to debt traps for farmers.
The fact that supermarkets strictly accept produce conforming to certain standards of size, shape and appearance only, exposes the farmers to the risk of their produce getting rejected if they do not meet these standards. This in turn pressurises the farmer to ‘factory-produce’ fruits and vegetables by resorting to chemicals such as fertilisers, insecticides, ripening agents, growth hormones and artificial colours. Prominent among them is the use of a hormone, Oxytocin which is used to make fruits and vegetables appear fresh and shiny. A survey conducted by the group ‘Friends of Earth’ in the UK found out that more than 50 percent of farmers disclosed that they have to apply more pesticides to meet the cosmetic standards of the supermarkets and another 50 percent said that they have to apply more pesticides for pest control and disease control due to supermarket requirements .
Clearly, supermarkets’ focus on appearance of fruits and vegetables rather than nutritional value is a big loss for consumers. The health and environmental impacts of chemicals used in farming is well documented and one does not need to mention their contribution to disorders such as cancer. It is not that these practices are not underway now, but wide-spread organised retailing will only provide an impetus to them. This assumes special importance at a time when organic and natural farming practices are witnessing a resurgence of sorts. Several farmers, tired of the adverse effects of synthetic farming such as declining soil fertility and contamination of ground water, are shifting to other sustainable farming methods. Similarly, consumers off-late have become more aware of their food choices and thus demand for natural and organic products have grown. However, given the current low supply of organic products, the prices are considerable higher. If sustainable farming methods were successfully propagated to the country’s farmers, the supply base of organic and natural products would increase and make it affordable for all. This may also cut-down on our health bills. But alas, the spirit of organised retail is against the spirit of sustainable farming, and could potentially reverse the recent trend of farmers adopting organic and natural farming methods. This of course will ensure that consumers do intake their daily dose of toxins as well as pills at discounted prices in supermarkets!
Another problem with retailers getting into contractual agreements with farmers to procure pre-decided amounts of specific fruits and vegetables is that they encourage monoculture plantations or single-crop farming. Traditionally farmers have relied on growing multiple crops in the same field as this diversifies the risk of crop failure due to factors such as adverse weather conditions, infestation of pest, etc. Practices such as growing multiple crops and crop-rotation retain the fertility of the soil and generally consume lower amount of external farm inputs. However, monoculture plantations deplete the fertility of the soil, reduce bio-diversity and are more prone to pests and diseases. To produce a given amount of crop each year requires an increasingly greater amount of external farm inputs such as fertilisers and pesticides. This in turn translates into high cost of production and thus lower profit margins for the farmers. Several incidents of farmer suicide in the past have highlighted the financially unsustainable nature of single-crop farming.
5. PROPOSED SOLUTION
Based on the various points discussed in the previous section, it appears that at this moment the Indian economy may not be ready to embrace large-scale FDI in the retail sector. However, a dramatic improvement in the supply-chain system is imperative to avoid the huge wastage of food products as well as increase the income of farmers. One of the lessons that several companies, NGO and government agencies have learnt about India is that to create sustainable solutions to issues concerning the rural people, the solution should seek to greater involvement and engagement of people at the grass-roots. The issue of developing an efficient supply-chain and reduction of food wastage is no different. This is vindicated by a recent MIT paper which points out that the solution to food storage in India needs to have a bottom-up approach rather than a top-down approach . It further says that communities need to be identified who will take charge of the issues in food storage, farm cooperatives being potential candidates. Top-down approaches such as those employed by the Walmarts and the Tescos may not work in India since they are misaligned to the farmers’ incentives.
One potentially successful approach could be ‘on-farm’ or ‘near-farm’ processing of fresh produce using technology that is not energy-intensive and is simple to use. A case in point is the pilot-project conducted by the All India Women’s Conference using solar drying technology. Using solar dryers, self-help groups of women were able to produce export quality value-added products from fruits and vegetables such as tomato powder, curry leaf powder, black pepper, rice wafers, mango bars, tapioca wafers etc. under clean and hygienic conditions, in their own backyards. Selling value-added products instead of raw food substantially increased the income of women groups . The dryers are simple to use and are completely run on solar energy which is abundant in India. By making the food last for a longer time, solar dryers reduce the need for complex storage systems. Another useful innovation is the use of metal silos which has been found to be successful in reducing food wastage and retaining the quality of food. These equipments can be expensive for individual farmers to invest in but ownership at the level of cooperatives is cost-effective.
Another interesting and promising technology is being developed by the company ‘Promethean Power Systems’ which has explored solar power to refrigerate milk, fruits and vegetables in rural India. It is reported to be cost-effective and replaces the use of diesel.
Talking about cooperatives, it is difficult to ignore the successful business model of Amul which has managed to create a complex yet efficient supply chain for a highly perishable item such as milk. It is noteworthy that these successes were achieved within the framework of a network of cooperatives organized in a hierarchical manner. More than 2 million milk producers are organised in more than 10,000 independent milk collection cooperatives known as Village Societies. Village Societies in turn supply milk to independent dairy cooperatives known as Unions. Products from the Unions are marketed under a single umbrella marketing organisation. Such a complex system involving numerous independent legal entities has worked because all of their objectives are perfectly aligned. The operation of the model has also overcome the constraints of the absence of professionally managed logistic providers; the Unions have developed a number of mechanisms to retain control and assure quality of the products. These and several such best practices ensure that consumers have access to quality products at reasonable price points and at the same time milk suppliers receive good prices for their products.
If a complex network of suppliers and supply-chain can be managed for an extremely perishable item such as milk, the same can be replicated for farm produce such as fruits and vegetables as well. However, this would require considerable investment of time and effort in creating linkages for simultaneous development of suppliers and customers. Developing cooperatives and creating a hierarchical system would require the Government to have a long-term vision. Cooperatives could also develop a standardised set of organic and natural farming techniques that would ensure the availability of food with high nutritional value to end-consumers.
Even if the government goes ahead with the decision of opening up FDI channel in retail markets, entry of foreign players should be regulated with adequate social safeguards so that the concerned policies can be fine tuned with time. Policies also need to have in-built mechanism to provide employment to people whose livelihoods are lost due to entry of supermarkets. If the government can curb on unfair practices of the retailers such as predatory pricing and pressurising farmers, consumers can benefit from the lower prices without farmers and marginal retailers being subjected to hardships. Entry of foreign retailers may result in government prioritising spending on road and power infrastructure in case retailers lobby hard. It may also spur the development of energy-efficient refrigeration technology or novel technology powered by renewable energy sources to suit Indian conditions.
It is unlikely that agricultural system could be overhauled by using only one strategy across the entire country. India being a highly diverse nation, each region has its own set of unique challenges. An approach that combines multiple strategies such as formation of farmers’ cooperative societies, modernisation of mandis, small-scale food-processing units near farms and investment in refrigeration facilities, etc based on local conditions may be required to be followed. The strategies may or may not include the entry of foreign retail players but should definitely involve the people at the grassroots to make it successful in the long run.