AGRICULTURE and retail are the world’s largest industries. They are increasingly being controlled by a few giant corporations based in the developed countries. Transnational retailers have by and large saturated their home country markets and are now entering India at an alarming pace. Driven by the huge opportunities for profit, Indian corporations too are aggressively expanding into the agriculture and retail sector. The cause for concern is because this is happening without a proper regulatory framework and lack of a comprehensive understanding of the likely impact on agriculture in general and the retail sector in particular, the two largest sources of livelihood in India. Agriculture, land use, real estate, tax and labour policies and laws are being changed to facilitate the entry and growth of big corporate agencies into agriculture and retail.
Research on the impact of organized retailing on the unorganized sector by the Indian Council for Research on International Economic Relations (ICRIER) finds the growth rate of corporate retail at 45-50 per cent per annum in India. The Nielsen study conducted in eight Indian cities found that retailing through branded stores increased by 90 per cent during November 2006 to November 2007. According to ICRIER, for the country as a whole, the retail business is estimated to grow at 13 per cent per annum from US$ 322 billion in 2006-07 to US$ 590 billion in 2011-12. According to Crisil Research, food and grocery (F&G) items account for 74 per cent of total retail sales, which it places at Rs 12,800 billion in 2006.
Realizing the key link with agriculture, foreign and domestic chain retailers are investing big in the supply chain. Bharti Enterprises launched FieldFresh Foods in collaboration with UK-based ELRo Holdings, an investment arm of the Rothschild family, and expects a turnover of Rs 41 billion in the next five years. It has put over 4,000 acres of cropland under cultivation in Punjab and is exploring partnerships in Rajasthan, Uttaranchal and Maharashtra. The company plans to bring a total of 20,000 acres under cultivation in the near future by contracting with farmers. Tata Chemicals agri-business named Khet-se Agri Produce India is expanding into bio-diesel, fresh fruit and vegetable production and distribution with plans to invest more than one billion dollar in the next couple of years. It has already set up jatropha cultivation in five regions of the country for production of bio-diesel. It also plans to cultivate sorghum for making ethanol.
Reliance Retail Limited (RRL) is investing Rs 250 billion for its ‘farm to fork’ strategy. Its supply chains would trade in the open market as well as serve its Reliance Fresh outlets. RRL has also formed four companies: Reliance Food Solutions that will handle central processing centres and procurement and collection centres, Reliance Agri Product Distribution that will look after collection centres, Reliance Agri Projects that will take care of contract farming and its own farming, and Reliance Integrated Agri Solutions that will set up rural business hubs. It already operates under the Ranger’s Farm banner wholesale Cash and Carry stores in Andhra Pradesh, Rajasthan and Punjab. Reliance Retail had taken close to 3,000 acres of orchards on lease from Himachal Pradesh Horticultural Produce Marketing and Processing Corporation (HPMC).
Even Bharti Wal-Mart has entered into a deal for bulk procurement of apples from Reliance. RRL plans for a presence in 784 towns and 6,000 wholesale markets with 1,600 rural business hubs. Reliance is targeting a turnover of Rs 400 billion in the next few years. Mahindra Shubhlabh is already working on 100,000 acres of farmland, which includes contract farming. Godrej Agrovet has opened what it calls advice centres named ‘Aadhar’ in rural areas across India. In other words, corporate retail chains, both foreign and domestic, will control and drive every aspect of what has come to define the retail industry, from production to distribution to land acquisition to final sale. As these corporations seek low costs and grow in monopoly and market power the impact will be two-fold – a downward pressure on prices and wages that will be felt by farmers and workers at every stage of the process, and the elimination of competition.
The proactive fast-tracking strategies of agro-industrialization are a prerequisite in order to grow the front-end retail operations. Corporatizing agriculture supply chains and procurement systems is characterized by vertical integration and control of corporate retailers through intangible assets. Corporate retailers command the procurement systems by consolidating procurement, eliminated existing wholesalers and distributors, focusing on the supply-base and partnering with newly emerged middlemen corporations. These middlemen corporations would transport the farm products to a store or become ‘aggregators’ of farm produce. A retailer leases out a portion of the store space to the aggregator and shares the profit. Agro-industrialization will shift competitive advantage and value-addition from raw and staple foods to processed foods and other horticulture products. It would change the consumption patterns and saving capacity by pushing consumerism.
Export oriented development of agriculture being advocated by the Planning Commission would have to identify a product specific, regionally focused export strategy and embrace corporations to build backward and forward linkages. The eleventh five year plan explicitly identifies retail corporations to develop the backward linkages. Such a model of development would further aggravate regional imbalance and also be highly taxing on land, natural resources and farm workers. It would alter agriculture by changing the pattern of crops, moving from sustainable agriculture to exploiting land’s production capacity to the extent of making it non-productive, from subsistence agriculture to export driven agriculture using technologies that aggravate environmental problems. What is of concern is that corporations are footloose and they will easily shift their production base from contracted land after exploiting their production capabilities, to new farmlands.
The Government of India has liberalized every sector to facilitate corporate retailers’ entry into agriculture – wholesale cash-n-carry, export trade, warehousing, construction, real estate, agriculture, food processing, horticulture, cold chains, and food parks. The Ministry of Food Processing Industries has laid out a plan to develop 30 mega food parks within the next five years, hugely subsidized by the government and privately developed by corporations and their organizations. These mega food parks would function as sourcing hubs for corporate retailers. They would also function as processing zones and act as a link between corporate retailers, farmers and food processors.
The eleventh five year plan also identifies diversification towards horticulture as a major element. The National Horticulture Mission (NHM), the single largest project funded by the Ministry of Agriculture, accounts for one-third of its budget. As the food processing sector is regarded as a ‘sunrise sector’ by the government, both the NHM and Ministry of Food Processing Industries are acting as nodal agencies to facilitate entry of corporate retailers into agriculture through investments and partnering to corporatize the agriculture sector. Terminal market complexes are being built with private partnership as an alternative to the state regulated Agricultural Produce Marketing Committee (APMC) markets.
The amendment of the APMC Act has paved the way for contract farming in a numbers of states although there is a restriction on the lease period. Under the model law, a farmer can lease out his land for a minimum of 11 months and a maximum of 30 months. Corporate retailers are demanding an amendment in the Revenue Act so that they can lease land for up to 10 years. It is to be noted that under contract farming the farmer is supplied seeds and other ingredients by the company and the contractor buys the entire farm produce at a pre-fixed price. The model of contact farming can also be adopted by corporations. Under contact farming, a farmer takes the land on lease from other farmers and is generally paid a fixed amount per acre every year, while the marginal farmer is employed to work on his land for which he is paid a monthly salary.
Contract, contact and corporate farming have the potential of development of monopsonistic purchasing power for corporations. Due to the increased specialization in the global process of production, monopsonic conditions have already developed in the manufacturing goods sector of India. This has led to a circumstance where there is a single supplier to a large producer who obtains the goods at a ransom. The larger the amount of any commodity that a large retailer can purchase, the greater the concession on price, delivery and credit it can extract. The higher the quantity chain-retailers purchase in bulk, the lower is the price farmers receive. Therefore, the corporate retailer would equally affect all farmers who depend on these corporations to sell their produce.
Besides amendments to the APMC Act, the government has changed a number of policies to allow for corporate investment in agriculture and contract farming. These include amendments in the Essential Commodities Act to allow corporations to control production, supply and distribution of essential commodities; the introduction of the Food Safety and Standards Act 2006 to enforce that manufacturing, storage, distribution, sale, and import of all food meet Codex compliant science based standards; and the introduction of the Warehousing Development Bill 2007.
No wonder, two US based giants corporations of retail and agriculture, namely Wal-Mart and Monsanto, are on the board of the US-India Agriculture Knowledge Initiative.
The current global economic downturn is, however, forcing a reality check for corporate retailers. To be a long-term player one needs to have a deep pocket with capabilities of running the business at a loss, not only for months but for years. Year 2009 will thus be a year of consolidation in the Indian retail sector. Fresh mergers and acquisitions are on the table as many Indian corporations with not so deep pockets, who sensing an opportunity had entered into retail in a big way, may now have to sell out to giant corporations.
India’s largest chain of discount supermarkets, Subhiksha, which expanded tenfold to 1,655 stores in just two years has for some time been in deep trouble. Foodland Fresh, a Mumbai-based retail chain, has announced the closure of 39 of its 42 stores across the city. Vishal Retail too is reviewing economic viability of its stores. Even the likes of Reliance Retail, Aditya Birla Retail and Pantaloon Retail are rethinking their retail strategy, revising expansion plans and trying hard for consolidation. Reliance Retail is even believed to have decided to withdraw from wholesale business. Possibly, this may now force a much needed rethink on the part of our policy-planners.
India FDI Watch