Every year, farmers are forced to sell their produce especially perishable items viz. fruits and vegetables at throwaway price [quite often even destroy as the realization is not enough to cover even the cost of transporting to the mandi/market]. A major bottleneck is absence of infrastructure for handling and storage which apart from denying farmers their due also causes loss of output worth about Rs 100,000 crores annually.
The problem has been festering for generations despite both the union government and states recognizing the dire need for setting up the infrastructure and umpteen committees making recommendations in this regard. Even the domestic private corporate has hardly taken any initiative in this regard. This is despite their being allowed entry in organized retail which gives ample opportunities for investing in back-end infrastructure.
Foreign direct investment [FDI] could help in filling the void but the policy environment and regulatory architecture is far from conducive to incentivizing foreign investors. This has been the case even with the Modi – dispensation which has taken a pro-active stance towards FDI and substantially relaxed norms in various sectors such as insurance, defense, real estate etc.
Prior to 2012, FDI in multi-brand retail MBR [food accounts for a major slice of this] was prohibited. In 2012, the then UPA government allowed FDI up to 51% in MBR subject to a plethora of conditions. These included 30% local sourcing, minimum investment of US$ 100 million [at least half of this had to be in the back-end support infrastructure] and prior approval of the concerned state.
This was as bad as not allowing FDI. First, restricting shareholding of foreigner investor to 51% meant that he would need to find a domestic partner to chip in the balance 49%. Together with minimum investment of US$ 100 million in back-end infrastructure, this would be a big deterrent to latter’s participation. Second, 30% local sourcing requirement was a major irritant to foreign investor. Third, approval of the concerned state added salt to the injury.
The proof of pudding is in eating. During last 5 years since, the policy was approved, except Tesco which has a joint venture with Tata’s Trent, there has not been any FDI in MBR. In fact, there were some exits. Bharti-Walmart venture split in 2013 and Carrefour exited in the following year.
Meanwhile, in 2015, Modi – government allowed 100% FDI in ‘market-place’ – an IT platform which provides support services viz. warehousing, logistics, order fulfillment, payment collection etc to sellers and buyers. But, this was subject to cap of 25% sale by a single vendor, no advertisement and no discounts by e-commerce company. In ‘inventory’ based model however, where the company also owns inventory of goods and services, FDI is prohibited.
The above stipulation amounted to backdoor entry of FDI in MBR in on-line segment. Thus, online companies owning inventory of goods, do everything that a seller does to execute the transaction and yet manage to get 100% FDI. They do so by camouflaging their activities under market-place model through clever documentation [all that they need show is that stock is held by someone else].
This was a sore point with MBR players in offline/physical segment who felt discriminated vis-à-vis online players. The former have even petitioned the court challenging the extant policy environment whereby they were virtually denied foreign investment even as the latter got unfettered access to FDI.
In budget for 2016-17, the finance minister, Arun Jaitely announced 100% FDI in food retail subject to retailer selling only the food procured from farmers in India and processed locally. After wait for more than a year, the government has now approved an application of Amazon.in for 100% FDI in food retail chain – both online sales [e-commerce] and offline [brick-and-mortar].
This may have enthused Amazon for now but the riders continue to haunt it. The requirement to sell ‘locally’ produced food forecloses the import option. A further condition that foreign retailer cannot sell any item other than food takes away the flexibility to improve margin which in food business per se are limited. Yet another obligation to invest in back-end infrastructure in agriculture – as desired by food processing minister – makes matters worse.
Reportedly, the government is considering to allow foreign investor to sell non-food items say, in grocery or personal care segment [in addition to food] up to a certain percentage of the investment in agri-infrastructure. Assuming latter to be 20% of total investment and the company getting to sell 25% of this as non-food quota, it will get a leeway of only 5%. This will hardly add to its capability to improve overall profitability of operations.
Assuming that despite all these riders, MNCs come in, who will do the monitoring to ensure compliance? In a scenario of the bureaucracy being riddled with corruption and nepotism, where from the government will get honest officials to do the job? Will this not tantamount to return of inspector raj? What happens to Modi’s vision for a policy driven state in which there is no room for discretion?
Modi’s intent to allow 100% FDI in food retail is laudable. It is also good to see the policy being applied uniformly to both online and offline segments. But, for it to be effective, the government should lift all curbs viz. local sourcing, investment limits etc. It should be abundantly clear to our policy makers that investors cannot be coerced in to taking a given course. The former should only focus on putting in place a congenial environment and the rest left to the latter.
Once such an environment is in place, MNCs will come in droves and also invest substantially in handling, storage and transportation as they see opportunities for growth. Giving them a free hand should be seen in the larger perspective of stemming Rs 100,000 crores loss annually [due to wastage alone] and giving a better deal to millions of farmers and help in achieving avowed goal of doubling their income.
Team Modi also needs to think through allowing 100% FDI in MBR in general and not limit it only to food.