There is a fierce debate going on right now in India about a new piece of legislation that that will allow multi-national corporations to operate as joint ventures in the country, owning up to 51%. And a week ago, the Indian government backtracked and announced that it would not pass the legislation after all. It is worth examining the potential pros and cons.
There has been no shortage of voices from the left and right commenting about whether or not this is a good thing.
On the one hand, there is no question that everything, from food to clothing, will be cheaper as a result of companies like Wal-Mart entering the country. Huge multi-nationals have the economies of scale and capital to invest in efficient end-to-end supply chains that ensure that the crops don’t rot on their way to point-of-sale. In the existing system, middlemen – also called traders, “market ladies,” or aggregators – insert themselves into the inefficient supply chains and take a piece of the margin, which is ultimately passed onto the consumer. So the advent of a retail giant like Wal-Mart, which has the scale to develop large-scale commercial farms and negotiate with farmers’ cooperatives to fund the harvest in exchange for the yield will be a good thing.
Productivity will undoubtedly increase as farmers invest in fertilizer, irrigation, and good agricultural practices (GAPs). The cost of food will decline across the country and fewer people will go hungry. Inefficient farmers may end up going under as larger farms become more dominant, but they – along with everyone else in the country – will be paying less for food as a result of this increased productivity.
The American Enterprise Institute details other advantages to farmers:
Farmers, who comprise 60% of India’s workforce, could be one of the biggest beneficiaries of Wal-Mart and other large retail chains entering India. Currently, farmers depend on the traders at the local warehouses to sell their produce. Adding an additional competitor, particularly one that will value quality and will have the ability to pay more in the absence of middlemen, will help farmers get better deals.
While farmers get only a fraction of what their produce sells for on the market, consumers end up paying unnecessarily high prices and have limited choice because of the middleman’s cut and the fact that 40% of India’s fruits and vegetables are lost each year to wastage. Retailers like Wal-Mart will cut out middlemen and create modern cold storage systems and supply chains for produce that will help check India’s double-digit inflation.
Critics of the legislation feel that the introduction of massive big-box retailers will eliminate a source of employment for the millions small business-owners who sell fruits and vegetables at independent shops called Kiranas. But Rupa Subramanya of the Wall Street Journal explains why this fear may actually be unjustified:
The principal fear in India regarding the potential entry of Wal-Mart is that it will wipe out the “kirana” stores, the Indian equivalent of “mom-and-pop” stores in the U.S. An estimated 33 million people or 7.3% of India’s workforce is employed in the unorganized retail sector, which includes the kirana stores, and only 5% of the retail sector is organized.
So are these fears well-founded? Research suggests, probably not.
A much cited study by the Delhi-based Indian Council for Research on International Economic Relations looks at the effect organized retailing has on the unorganized retail sector. It shows that, on average, when an organized retailer opens, the kirana stores nearby generally lose about 23% of their sales in the first year, but are back at their original sales figures within five years. About 1.7% close down every year, but, even in the medium to long run, traditional retailers will still control 85% of the market, according to the study.
This is a difficult question, but I find myself siding with the laissez-faire crowd on this one. I have seen firsthand the inefficiencies of a highly distributed agriculture sector that lacks large retailers. I have seen the lack of investment in productivity and the crops rotting in the markets. Consolidation, within reason, is a good thing because it creates economies of scale where there are none. And, in the end, most of the country ends up ahead.
Unfortunately, the Indian government caved to popular sentiment and backtracked. In an article titled “Wal-Mart’s India Delay Means Politics ‘Killing Farmers'”, the impact is discussed:
The global chains were likely to invest in trucking and distribution systems in India, where government estimates show 40 percent of fruit and vegetables rot before being sold because of the lack of cold-storage facilities and poor transport infrastructure. Farmers will have “assured business” if foreign companies were allowed to invest in multibrand retail, said Pratichee Kapoor, associate director for retail at Technopak Advisors Pvt.
India reversed its decision amid protests by the opposition and its allies that had forced repeated adjournments of parliament. Opposition parties argued that the move would wipe out the jobs of small shopkeepers, who dominate the country’s retail sector.
Rajan Bharti Mittal, managing director of Wal-Mart’s wholesale partner Bharti Enterprises, in a statement yesterday called the government’s reversal an “unfortunate” decision. The policy change would have brought “farmers better realization for their produce as well as better prices for the consumer,” he said.
It is a shame. But I suspect we will see this change sometime in 2012. If India is to truly be a global power, it needs to not only modernize its food production and distribution, but also provide a modicum of confidence for foreign investors. But we will see.
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