FDI in retail and its effect on farmers

How FDI in retail will hurt farmers

With the government stating that its FDI policy on multi-brand retail will be on hold till after the UP elections, the publicity assault to prepare the ground for it to be brought back is palpable. The strategy employed is the classic “divide and rule”.

“If the trader groups are against FDI, then let farmer groups be set up to fight the trader groups” seems to be the ploy. We now see repeated stories in the media about how FDI in retail will benefit the farmers of India. We could have taken this seriously, but unfortunately the global evidence points in the other direction. Farmers in the West have paid a big price, with hundreds of thousands forced to shut down their farms, due to corporatisation of the farming sector, along with corporate concentration on the purchasing side among processors and retailers.

BIG RETAILERS' BIZ MODEL

Big retail in the West and elsewhere functions on a simple business model.

Grow bigger and bigger till the market becomes an “oligopsony” — a situation where a small number of buyers exert power over a large number of sellers. The UK food retailing industry, for example, is now dominated by just four supermarket chains who together account for over two-thirds of retail food sales.

Likewise, the top five chains in the US account for over 60 per cent of food sales.

This results in the retailer exercising enormous control over their suppliers, which includes the farmers. This is shown in the diagram above:

It is this structure that has reduced farm prices and has forced the closure of farms. Foreign retailers will replicate this structure in India over time, with disastrous consequences for the Indian farmer.

PUNJAB EXAMPLE IS WRONG

A prominent TV channel featured the story of a few farmers in Punjab highlighting how direct purchases of produce by a retailer had given them a higher yield. This is a type of faulty reasoning described in college textbooks as “the fallacy of composition”. The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole.

The channel had obviously hand-picked a few farmers who suited its conclusion. The only way to assess the impact on farmers is to look at countries where big retailers dominate the market, and see how the entire farming community has fared.

LOWER PRICES TO FARMERS

A good way to measure the effect of retail power on farmers and farm workers is to look at the portion of each dollar spent on food at the supermarket — referred to as the retail food dollar — that goes back to the farm.

By this measure, virtually all food producers in the US have seen their share of the retail food dollar decline over time, at points dropping so low that farmers have been forced out of business in droves. Here are just a few examples:

In 1970, hog producers (those who raise pigs) in the US derived 48 cents of the retail dollar spent on pork. Three decades later, they received only 12 cents out of every retail dollar, causing loss to the farmers. While this happened, consumers didn't benefit from the low farm prices at all: retail pork prices stayed stable. (Source: Agribusiness Accountability Initiative)

According to the US Department of Agriculture's Economic Research Service, in 1990, ranchers and farmers received 60 cents of the retail dollar spent on beef, retailers received 32.5 cents and meat companies 7.5 cents. In 2009, the numbers were reversed — retailers took 49 cents share of each dollar (up 16.5 cents) consumers spent on beef, while ranchers and farmers got 42.5 cents (reduction of 17.5 cents) and meat packers 8.5 cents.

The breed of the small rancher/farmer in the US is under threat as they go out of business in large numbers year on year. (Source: http://bloom.bg/et4eLU) In the UK, the Royal Association of British Dairy Farmers has complained vociferously that prices paid to farmers for fresh milk are simply unsustainable, with the average farmer losing money on each litre of milk produced.

This has happened even as the supermarkets' margin on fresh milk has increased steadily over the years.

While it costs the consumer £1.45 to buy four pints of milk at a supermarket such as Tesco, the farmer receives just 58 pence (40 per cent) of this, causing a loss of 3 pence for every four pints. Small farmers have closed their dairy operations as a result.

In India, dairy farmers receive as much as 75 per cent of what the consumer pays for a litre of milk. (Source:http://news.bbc.co.uk/2/hi/uk_news/magazine/8103119.stm)

SUBSIDIES PROP FARMING

If big foreign retailers are expected to shore up our farmers as claimed by the publicity reports, there is no evidence of this in the countries where these retailers have spread their wings the widest.

In the US, farmers received direct commodity subsidies of over $167 billion in the period 1995-2010 (Source: http://farm.ewg.org/region.php?fips=00000)

The European Union paid direct farmer subsidies of €39 billion ($51 billion) in 2010 alone. Why these subsidies if the big retailers are paying the best prices to the farmers as claimed?

SORRY EXAMPLE OF MEXICO

Mexico (population 112 million) signed the North American Free Trade Agreement in 1994. It has since witnessed a virtual takeover by Walmart which has gained nearly a 50 per cent share of the country's retail market.

Mexico can now be described economically as a vassal state. A combination of big retail and imports under NAFTA has driven over 1.25 million small Mexican farmers — 25 per cent of the country's farmers — off their farms. Consequently, the illegal immigration to the US, which was to have been reduced because of NAFTA, has more than doubled to nearly 6 million Mexicans.

Even a fraction of such a displacement in India, arising out of misguided policies, will cause social disruption on a vast scale. (Source:http://www.yesmagazine.org/issues/reclaiming-corn-and-culture)

India has more than 58 million small farmers, 12 million small retailers and 26 million small and micro enterprises representing over 450 million people.

The 300 MPs of the parties who opposed FDI in retail are right. Disturbing this mass of people is not politically sustainable.

Real story behind politicians comments on FDI in retail affecting kirana shops..

Most of the politicians who appeared on various TV channels on 24th November - the day that the union cabinet took a decision to allow 51% FDI in mulibrand retail and 100% in single brand retail - said that India had 1.2 crore (12 million) kirana shops. By the next week, the number had moved up to 40 million kirana stores and by the 3rd of December, it had shot up to 50 million kiranas. 

If one was to believe this incredible claim that there are 50 million kirana stores, does it mean that there is one kirana shop for every 24 Indians? And if an average kirana shop employs four people, does it mean that 200 million of the 635 million Indians of employable age (31.5% of all employable Indians) are employed by kirana shops? Does any politician actually expect any educated Indian voter to believe this nonesense? 

Since West Bengal's Chief Minister and Trinamool Congress party chief Mamta Bannerjee, as well as the lest parties who ruled the state for the last 34 years, are the most vocal critics of FDI, let me take the state of West Bengal as an example. 

If there is a kirana shop for every 24 Indians, West Bengal (population 91.348 million) should have 3.81 million kirana shops. Since the state has an estimated consumption of Rs.553 billion in food, grocery & FMCG products (products sold at kirana stores), of which Rs.542 billion (98%) is sold by the unorganized sector , these 3.81 million kirana shops should be doing an average business of only Rs.142,257 per year or just Rs.390 per day. Obviously, this does not make any sense. 

It is much more likely that there are only 180,000 kirana stores in West Bengal (1 shop for every 507 persons ), and the average business per kirana shop is Rs.3.011 million per year or Rs.8250 per day. This is not hard to believe, considering that West Bengal had 217,595 registered dealers as per the 2010-11 Administrative Report of the West Bengal Directorate of Commercial Taxes. If there are as many as 3.81 million kirana shops, then both the Left parties, as well as Trinamool Congress, need to answer why there are only 217,595 registered dealers in the state. 

So how many kirana shop owners will get out of business if Walmart, Carrefour, Tesco and other foreign retailers are allowed to set up hypermarkets in West Bengal? Since Kolkata is the only city in West Bengal with a population of more than one million, "foreign " hypermarkets can only be set up in Kolkata. By any measure, Greater Kolkata can only have a maximum of 20 more hypermarkets. 

These 20 hypermarkets cannot displace more than 1400 kirana stores (@ 70 kirana stores per hypermarket ). There will be absolutely no change in employment as about 7800 people will get employed by the "foreign " hypermarkets. Certainly, the 1400 kirana shops are not employing more than 7800 people. So, no one will lose jobs, period. 

On the contrary, the 7800 employees of the "foreign " hypermarkets will have benefits such as PF, ESI and insurance. They will have far better training in personality development and selling skills, thus making them far more marketable. Does the kirana provide them all of this? 

So is Mamta Bannerjee opposing FDI only for the purpose of saving the livelihoood of 1400 small traders (many of them non-Bengali ), at the cost of a better life for 7,800 Bengalis? Is this what the hoo haa is all about? Is this why the Indian parliament has got disrupted for nine days? 

West Bengal's retail sector is estimated to have annual sales of Rs.1754 billion (at an average per capita retail expenditure of Rs.1600 per month). The state's sales tax (VAT) revenues in 2010-11 were only about Rs.74 billion (excluding fuel & LPG, aluminium , cement, chemicals, engineering goods, fertilizer, iron & steel and other items not sold through retail trade), or only 4.4% of the pre-VAT retail sales of Rs.1680 billion, whereas the most common VAT rate was 12.5%.