Panel says FDI in multi-brand retail will curb inflation

Panel says FDI in multi-brand retail will curb inflation

New Delhi: A high-level government committee on Friday recommended supply-side policy reforms, including the politically contentious opening up of multi-brand retail to direct foreign investment to rein in inflation.

The committee, headed by Kaushik Basu, chief economic adviser in the finance ministry, also recommended that India tweak the law governing the supply chain linking the farmer to the consumer to inject competition and help bring down intermediate costs and eventually final product prices.

Basu, who was asked by Prime Minister Manmohan Singh in February to head an inter-ministerial group (IMG) to debate anti-inflation measures, said it would be up to the government to take a call on the recommendations. It was set up in the backdrop of growing double-digit inflationary pressures; inflation, as measured by the Wholesale Price Index, was 8.66% in May.

Efforts to introduce foreign direct investment (FDI) in retail have been contentious. Earlier, Basu, in his capacity as the lead author of the finance ministry’s annual economic survey, had suggested opening up the retail sector to foreign investment.

The opening up needed to be balanced with tight regulation to keep the market competitive, Basu said. Zoning requirements for organized retail needed to be introduced to keep small traders in business and to keep competition alive from all kind of players.

“The gap between farm gate prices of agricultural produce and the retail prices (in India) are amongst the highest in the world as also amongst the emerging markets. China, which opened its retail sector to FDI in 2004, has shown the benefits of opening of the sector and having in more players," he said.

According to Basu, FDI in retail will also lead to other beneficial effects. Capital inflows into retail will improve the quality of overseas money used to bridge the current account deficit, the gap between imports and exports of goods and services. Also, as international retailers begin sourcing in India, eventually they could help some small producers export some of their produce and ease the pressure on the current account, he said.

Senior executives at Bharti Walmart Pvt. Ltd were not immediately available for comment.

In September 2008, economic think tank Indian Council for Research on International Economic Relations unveiled a study on the impact of organized retail. It found that small traders initially tended to lose out, but poorer consumers and farmers gained on account of efficiencies introduced by paring intermediaries.

Basu said recent research by the International Monetary Fund made him confident that FDI in retail would dampen inflationary pressures in the economy.

The supply chain linking farmers to consumers, the Agriculture Produce Markets Committee (APMC), was also flagged by IMG. “The APMC Act pertaining to 2003 is outdated, which needs to be revised to keep inflationary pressures low," said Basu.

Under APMC, the farmer can only sell to the middleman. This has contributed to helping cartelization and collusion among traders, an IMG statement said.

Agriculture economist Ashok Gulati, currently chairman of the Commission for Agricultural Costs and Prices, feels mere remodelling of the APMC Act will not help.

“Fruits and vegetables should be delisted from APMC so that a farmer can be approached by retailer, processor, etc., directly and not through intermediaries, which alone will help bring down prices by 25%. Today this is not allowed," he said.

Gulati suggests that the government should make these middlemen back-end aggregators with a fixed commission.

Biswajit Dhar, head of Delhi-based think tank Research and Information System for Developing Countries, agrees with Gulati on improving market conditions, but goes a step further.

“We have seen some bit of organized retail in fruits and vegetables happening by Indian corporates," he said. “They came in with a lot of fanfare, but what are they doing now?"

“There is no doubt that food prices are rising because of imperfections in the market," Dhar said. “But what is the guarantee that multinationals will come and change the scenario, uproot the entrenchment of middle-men and give more opportunities to farmers?"