FDI in Retailing in India – Supply Chain

Last week, perhaps spurred by a series of raps on the knuckles by the western media (TIME, Washington Post), the Prime Minister of India, Dr. Manmohan Singh decided to sit up and act. As a result, among other sectors, FDI in retail was opened up to the tune of 51% for multi-brand retail.

Retail is a crucial sector and one that touches all, bar none in the country. Clearly, that is why it is a luscious opportunity for some fear-mongering by vote-hungry politicians.

Through a series of posts, beginning with reasons relating to supply chain, we shall examine why India would do well to get those FDI dollars soon.

India is the world’s second largest producer of fruits and vegetables. It is also a known fact that a huge quantity of the produce is wasted. As per government estimates, the wastage ranges from 18% to an eye-popping 72% depending on who you ask. Even if we take a very conservative average, undeniably, more than a third of our produce certainly goes waste. This wastage is due to poor logistic and retail facilities.

Also, 11% of our foodgrains rot, and 50% of them are eaten by rodents every year, again due to lack of adequate storage systems. As a result of these inefficiencies, we have a piquant situation – on the one hand India is among the largest producer or foodgrains, and on the other, people are unable to afford food.

One of the biggest gains of foreign investment in retail would be an upgradation of our supply chains. One oft-overlooked aspect of the entry of foreign players is that along with their money, they also bring in skills and best practices refined over decades – inventory management, supply chain management, inventory storage systems, logistics, and so on. As a result, more food would be available for sale. The enhanced supply would reduce the prices and make food more affordable for the common man.

Questions have been asked if supply chain knowledge is indeed a “rocket science” to warrant opting for FDI. The answer is – yes! The Indian modern retail chains did not have access to the science of inventory management and evolved their own indigenous methods and ‘best practices’ that are actually far from being the best.

Perhaps the cold chain is not really a rocket science and perhaps we could indeed have managed it well ourselves. If we were a little less corrupt. During the early 1990s, the government offered a subsidy of Rs 50 lakhs for every cold chain project. Reportedly, some 300 projects were signed up. Later, all of the projects showed a loss and the subsidy money had been siphoned off into other businesses.
Not only do the wastages and spoilages take their toll on the food products, the many hands that the goods change from the farm to the market, adds up the costs. According to a report in The Economic Times, agricultural produce lands up on the consumer’s plate, often with a price increase of nearly 2000%. The report goes on to mention: “Lobsters are hand-picked on the Orissa-Bengal sea coast and sold for Rs 5 a kilo to the money lender. The same lobsters reach the consumer in New Delhi for Rs 1,600 a kilo.”

Large retailers bring significant scale of operations to the market. In order to drive costs lower, they integrate backward and forge contracts all the way back to the producers. The goods are then transported to the retailers’ warehouses, and later to the stores, by a fleet of modern trucks owned by the retailers themselves. The players in the chain are all employees of the retailer and are trained to be most efficient in their job.

As a result of the backward integration, the retailer buys from the producer at a good price, and then sells it at a price lower than the market prices. The retailer reaps profits out of the efficiency in the system. The producers and the consumers both benefit in such a scenario. Also, even without any more increase in agricultural production, we would have more food brought in to the market.

There have been concerns about opening up the supply chains to foreign players and the associated risks of diversion of food creating artificial shortages in our country. It is important to understand that there are a number of checks and balances within the system to prevent these. Every retailer would have a 49% ownership by an Indian participant. The government anyway monitors the domestic market and curbs exports from time to time if there is a need to bolster domestic supplies. Most importantly, the corporations we are talking about in the FDI context are responsible multinationals. They are conscious of the implications of their actions on the immediate societies as well as on the larger world economy itself. Even in the worst case, it seems hard to imagine a diversion quantum greater than what our granaries already divert towards the diet of rodents.

There is one question that remains – if supply chain optimization is indeed such a sweet panacea for many ills, why are governments often opposed to it? The government loves to keep power with the middlemen and often, many politicians have business interests in the market intermediaries. Also, there is an acute need to keep power at the district level with local authorities. Bringing in private players would take away the local power and bring in something that is absolutely dreaded by the politicians – efficiency of free markets!