FDI in retail: Whom are you kidding, Mr PM?

Prime Minister Manmohan Singh projects FDI in retail as a boon for the agricultural sector. Unfortunately, if you examine the realities, it will spell a death knell for farming. It will be the beginning of an end for Indian farmers.

It has happened in the United States. Ever since big retail - dominated by multi-brand retailers like Wal-Mart - entered the market, farmers have disappeared, and poverty has increased. So has hunger. Today, not more than 700,000 farmers remain on the farm in America. Poverty has grown, and hunger has broken past 14-years record.

In Europe, despite the dominance of the big retail, every minute one farmer quits agriculture. This is because farmer’s income across US/EU is on a downslide.

According to a report, farmer’s income in France has come down by 39% in 2009, having already slumped by 20% in 2008. More recently, in Scotland, low supermarket prices are being cited as the reason for the exodus of dairy farmers. Low supermarket prices in Scotland have forced irate farmers to form a coalition called ‘Fair Deal Food’ to seek better price for their farm produce.

Studies have shown that Tesco has paid producers 4 per cent less price than the average prevailing in the open market. It is therefore futile to expect the supermarkets rescuing farmers in India.

Despite the destruction of farming globally by the supermarkets, the Ministry for Commerce & Industry is gung-ho about the virtues of foreign direct investment in multi-brand retailing, which means allowing the big players like Wal-Mart & Tesco to swamp the Indian market.

“The agriculture sector needs well functioning markets to drive growth, employment and economic prosperity in rural areas,” says a discussion paper drafted by the Department of Industrial Policy and Promotion.

I find a number of economists and researchers singing chorus of praise for the role the supermarkets can play. But the entire hypothesis is based on a deliberately prepared flawed basis.

Do the supermarkets really benefit? Since 2006, India has allowed a partial opening up of the retail sector. Has these retail units benefited the Indian farmers and for that the consumers? The answer is no. The argument is that the supermarket chains will squeeze out the middlemen thereby providing higher prices to farmers and at the same time provide large investments for the development of post-harvest and cold chain infrastructure.

All these claims are untrue, and the big retail has not helped farmers anywhere in the world.

Even in Latin American countries, including Brazil, Argentina, Uruguay and Colombia, where supermarkets, most of them owned by multinational giants, now control 65 to 95 per cent of supermarket sales, farmers have been forced to quit agriculture.

If the supermarkets were so efficient and provided dynamism, I would like to know why the US is providing a massive subsidy for agriculture.

After all, the world biggest retail giant Wal-Mart is based in America and it should have helped American farmers to become economically viable.

But it did not. American farmers have instead been bailed out by the government, providing a subsidy of Rs 12.50 lakh-crore between 1995 and 2009, and this includes direct income support.

And that is why the American farmers are being supported in the form of direct income support by the American government.

It is the massive farm subsidy that supports agriculture in the US. If this subsidy, classified under Green Box for WTO calculations, is withdrawn (as analysed by UNCTAD-India), US agriculture collapses.

A latest 2010 report by the Organisation for Economic Cooperation and Development (OECD), a group comprising the richest 30 countries in the world, states explicitly that farm subsidies rose by 22 per cent in 2009, up from 21 per cent in 2008.

In just one year in 2009, these industrialised countries provided a subsidy of Rs 12.60 lakh crore to agriculture. And it is primarily for this reason that the farm incomes appear lucrative.

Left to big retail alone, European farmers would have packed up by now.

In India, it is markets that sustain the farmers and not subsidies. We are therefore importing a failed model from America.
Regarding farm incomes, let me illustrate. Till 1950, a farmer in America used to receive about 70 per cent of every dollar spent on food. In 2005, it had come down to not more than 3 to 4 per cent. If the middlemen have been squeezed out, as is being made out, farmer’s income should be increased.

Why it has instead gone down drastically is because farmers’ income is being devoured by the new battery of middlemen swamping on him like a vulture.

That is why the US/EU governments are providing subsidy support to keep farmers alive.

Big fish is known to eat the smaller ones. Supermarkets exactly perform that function. They replace the plethora of small middle-men.

The arhtiya (commission agent) clad in a dhoti-curta, is replaced by a smartly dressed up middlemen. An illusion is therefore created as if the supermarkets have removed the middlemen from trading.

But in reality, the big boys now share the commission between them. The new battery of middle-men, who replaces the traditional middle-men, are the quality controller, certification agencies, packaging industry, processors, wholesalers etc.
Do supermarkets help remove poverty? Based on biased studies by the consultancy firms and some institutes, the government believes that supermarkets will create employment and therefore help in ameliorating poverty.

This too is flawed assumption. Lessons need to be drawn from a 2004 study done by Stephen J Goetz and Hema Swaminathan of the Department of Agricultural Economics and Rural Sociology, at Pennsylvania State University in the United States.

The authors measured the impact of Wal-Mart’s massive retail boom on poverty in various American states.

In the past two years, Tesco had promised to create 11,000 jobs and Sainsbury another 13,000.

Tesco had created only 726 jobs, while Sainsbury actually terminated the services of 1600 of its existing employees, leaving 874 people unemployed.

How do we expect Tesco/Sainsbury to create additional employment in India when they have failed to stand up to their commitment back home?

Big retail does not create additional employment but actually destroys the existing employment. Here is a comparison which should help remove the wool from your eyes. The Indian retail market is estimated to be around $ 400 billion with more than 120 million retailers and employing over 400 million people.

On the contrary, the US-based giant Wal-Mart, a global leader in big retail, also has a turnover of US $400 billion and employs only 2.1 million people. Which one of these retail systems provides employment is crystal clear.

If you think Wal-mart is here to create employment opportunities you must be living in a fool’s paradise. Simply put, they are investing in India to make money.

I don’t know how therefore economist, policy makers and the ministers can think that big retail will provide employment while the evidence from across the world shows that big retail has displaced millions who are already employed.

Are we not deceiving the nation by presenting wrong facts?

At stake is the livelihood security of tens of millions of hawkers, small traders and farmers.

How can any sensible government that claims to work for the aam aadmi actually bring in massive destruction of livelihoods in the name of foreign direct investment?

Why is our government so keen to pull out the US/EU economy from recession and in turn push India into a headlong depression?