Is FDI in retail the answer to food inflation?

Last Updated: Jan 26, 2011, 12:00 PM IST

Anil Kumar Satapathy

The onion tears are refusing to dry out. Adding to the concern is the all round price-rise, be it food or consumer loans or cars. The list goes on and on. It is not only causing a headache for the common people, even the leaders of ruling party are having their share of nightmares. A respected magazine the other day conducted a poll, predicting the downfall of Congress regime due to the significant rise in prices.

P Chidambaram, the predecessor of current Finance Minister Pranab Mukherjee, outlining government’s inflation recently said that government has “not all the tools to control food inflation”.

True.

RBI, through its fiscal policies, tries to curb the demand side pull by manipulating interest rates. The theory behind this is that if people have less money than they will buy less. Hence inflation will go down. This is more of a reactionary or ad-hoc arrangement.

A more advisable approach is to boost the supply side. But it’s a long term plan – a good example of this is the first Green Revolution.

However, the current problem is more fundamental in nature. Many observers have identified this long ago – the middle-man syndrome.

From ages, Indian consumers have been haunted by this phenomenon.

India has mostly small and marginal farmers. It does make it difficult for them who are also mostly ignorant about suitable markets for their produce. Even if they know, it is not practical for them to take the risk of investing a large sum to transport their produce to the nearest mandi to sell it.

Mostly they sell it locally, if a suitable market is available, or sell it to the middle man. Food Corporation of India does buy wheat, rice etc. But it’s the middleman who gets to take away major part of the farm produce.

So any rise in prices is simply consumed by the middlemen, who usually resort to hoarding to maximize their profits. Recent price rise in onion and sugar may be attributed to this phenomenon.

If we can reduce the role of middleman in the food industry, not only will it benefit the end consumers like you and I, but it will also help farmers to get the right price of their produce.

A debate over allowing foreign direct investment in retail industry could do some good at least in the present scenario.

Consider this: according to a recent finding by a leading financial newspaper of India, Future Group’s Food Bazaar, Safal and Reliance Fresh are selling fruit and vegetables up to 40% cheaper than local vendors!

It attributed the reason to direct sourcing of these products by the said companies from farmers. Also, local vendors buy vegetables from wholesalers. But they do not have enough storage capacity, meaning a lot of wastage – contributing to price rise.

But if large retailers come into the fray, they can buy the products from farmers or wholesalers and can store it. Allowing 100 percent FDI in retail is more competition.

So, more players will come to the market and there will be more investment in agriculture and the food processing business. This will increase investment in agri sector and increase productivity. Farmers need not look at the government all the time – neither will the consumers.

A common worry is that it may affect small retail mom-and-pop shops. But that seems to be unfounded.

Competition does not always lead to erosion of marginal players instead, it encourages innovation and productivity. Increased FDI in retail can also lead to mass employment generation that big industries failed in.

The government keeps on blaming the rain gods, the hoarders etc.; everyone but themselves. It is time for them to take a decision.

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