The Indian Economy Blog

May 29, 2007

Protect The Chain, But At What Cost?

Filed under: Agriculture,Politics,Regulatory reforms — Karthik @ 9:18 am

Recently the West Bengal West Bengal State Marketing Board chairman Naren Chatterjee had to say this about Metro’s entry into the state, “have heard that they will sell directly to the trade then what will happen to the people in the chain, they will become jobless. We will not allow any one who disturbs the chain.” Similar protests have been on against organized retail, and competition in the agricultural supply chain in various parts of the country.

What I’m going to talk about is quite simple. The basic concept is that you can’t simultaneously ensure high profits for farmers, high margins for the supply chain and low prices of consumers. You could maybe choose two of these, and try to influence them – but that would happen only at the cost of the third. Given that the government has control over it by way of policy, it would be interesting as to who would get left out.

Now, given the amount of attention and newsprint dedicated to inflation, and the government’s supposed concern for the aam aadmi, it is imperative that the end consumer be protected from excessive price rise. Agricultural products form a fairly large part of the consumption basket, so keeping their prices under check would obviously help contain inflation.

So that leaves the farmers and the intermediaries, and the government’s stand on agricultural procurement policy effectively boils down to a choice between these two constituencies!

On one hand it is noble to side with the farmers, and be seen as the protector of the tiller of the soil. Moreover, farmers also constitute a large part of the country’s population. On the other, traders are more organized as a constituency and have much more political awareness and clout. Politically this might be a tough decision to make, but a little thinking will result in the government taking the farmers’ side. Among other things, no government would want to risk an ‘anti-farmer’ label?

There are a number of other factors too which would dictate that the government side with the farmer. Firstly, shortening the supply chain would among other things reduce transport and handling and transaction costs. It would also result in lesser spoilage which in effect also improves supplies – thus pushing down prices as well as reducing the needs for imports. Then there are “global” issues such as sustainability, and the importance of a strong farm sector in sustainable development. There are also issues like rural employment opportunities.

The central government has done its bit in this regard by framing a Model APMC amendment act. There is excellent documentation of this act here. To summarize, the amendment removes the monopoly status for the Agricultural Produce Marketing Committees with respect to agricultural procurement and distribution. The new act allows direct purchase and contract farming, and also lays down rules for the same, trying to ensure that farmers aren’t exploited. There are several other recommendations, related to things like IT and making warehouse receipts a negotiable instrument.

Several states have taken the center’s cue and acted on this amendment. It was no surprise that Reliance Fresh started its operations in Hyderabad – Andhra was one of the first states to usher in the amendment. A number of other states have also implemented it. Others including Bengal and Karnataka have been dilly dallying, mostly because of pressure from the trader’s lobby. You could check out where your state stands on this issue here.

Now, it would be interesting to see what the current supply chain could do in the changed scenario. It is very unlikely that they will sink without a trace. Food World and Big Bazaar and Nilgiris have been around for a long time now. That hasn’t led to local kirana stores have had to shut shop. They have taken advantage of the fact that they are superior when it comes to customer relationship management, and have used their carefully built customer base in order to thrive.

The same will happen to the general agricultural supply chain also. For example, retailers could source from Metro rather than from the mandis. The mandis themselves could become more efficient by streamlining themselves and offering services to the farmers that the big guys can’t offer. It is not actually the loss of livelihood that the traders are protesting against – it is the loss of the current source of livelihood.

One thing, however, is clear – that the demolition of the current monopoly will prove beneficial for everyone in the long run. It is now up to the governments to look ahead and do the needful.

There is some excellent material on this topic on the agmarket website. Do check it out if you are interested in this topic.

11 Comments »

  1. disintermediation (removing layers and layers of middlemen) of goods travelling from producer(farm owners) to consumer(you and me) is one of the primary goals of retail revolution. Direct FDI in retail in the next 5 yrs would eventually lead this economy to dsintermediated and effective chain mostly composed of producer, optional-trader and retail/wholesale groups.

    It serves many purposes:
    1) Keeps the CPI (consumer price index) and the inflation in constant check as consumer will have to spend less to get more as a result of world-class logistics/supplychains of these retail groups compete to get consumers into thier stores>

    2) Will for sure benefit the producer as retails attempt to cut all the layers and go direct to producers for procurement in several ways (a)contract farming where you’re ensured of risk-free returns for your harvest, (b)smart traders making use of commodity futures to hook up the aggregated produce to retail-procurers at very good rates that will eliminate layers,keep them some markup, but at the same time benefits farmers and retail/wholesale procurers.

    3) Will encourage farmers to start cultivation using up-to-date farming techniques for high-yields at low capital/operating costs as there is a clear danger of getting marginalized in this new context.

    4) will lessen/status-quo the subsidization burden on federal/state coffers as improved productivity in the chain would more than compensate for the costs of WTO-forced integration of indian economy to global market where a farmer in Idaho could dump his well-subsidized and high-yield produce to countries like india and china.

    5) Gradually helps to Scrap all these inefficient and corrupt state/federal agri. mktg agencies that barley accomplished thier stated objectives.

    6) Encourages cooperative movement amongst farming community to collectively share the burden of improvisation techniques to compete well on global level.

    Comment by Krishna Moturi — May 30, 2007 @ 9:04 am

  2. Seems like the government is just LOOKING for people to protect!

    Good article…

    Comment by Amogh — May 30, 2007 @ 11:35 pm

  3. You are making a big mistake in assuming that West Bengal government took a logical decision. Remember they are communists and a logical communist is always an oxymoron. Organized retail is a win-win for everybody – for customers (low prices), for government (high tax collection), for labor (better work environment), for farmers/industrialists (less wastage and deeper markets). The country as a whole will benefit with greater productivity and better supply-chain infrastructure along with spill-over effects in Finance, Transportation, etc.

    But, communists have a concentrated vote-bank – a small fraction of the population in the form of organized labor in industries and public sector companies, and as long as we as a consumer and producer are going to be silent in this injustice (loosing the opportunity to buy from cheap discount shops), they are going to have their way. If the development in organized retail that would help 600 million farmers, 200 million industrial workers and 1 billion consumers has to come over the loss of few thousand kiranas, so be it. But, my guess is that a lot of enterprizing of them can join big chains as franchisees and develop their business with greater agility.

    Comment by Balaji Viswanathan — June 2, 2007 @ 2:04 am

  4. I don’t know when our Comrades in the west bengal finally will understand the effectiveness of the price driven free market system.

    Comment by Jay — June 3, 2007 @ 6:36 am

  5. Exploitation of the poor is part of business and politics. Indian businessmen and politicians are doing an excellent job of that!

    Comment by Neeraj — June 21, 2007 @ 8:25 am

  6. The proliferation of corporate retail outlets is sure to lead to competition among them. And when corporates battle, its no holds barred. As a consumer, I’m eagerly waiting for that day!

    Comment by D N Nair — June 26, 2007 @ 8:10 am

  7. [...] IEB has a post shedding some light on the economics of organized retailing. If you boil it down here’s how organized retailing especially grocery retailing works: [...]

    Pingback by 6 AM Pacific » Blog Archive » Kerala Ban on Organized Retail - What’s the Logic — July 10, 2007 @ 10:42 am

  8. Hi Organized retail will lead to economic development. That is the key factor for each country. Organized retail will increase money flow as consumer will purchase more from Retail as local shop due to limited facility in local shops.
    Quality of product will increase as it is already proved that middle man in F & V are using chemical treatment that is harmful for Health.

    This is natural tendency of human to reject the change.
    Like initially when computer came in India. All who are involved in manual work rejected the Computer. But later on this is computer that increased the Indian economy developement.

    Comment by Vishnu garg — July 26, 2007 @ 6:23 pm

  9. [...] INDIA: Protect the chain: [...]

    Pingback by Agenda & Objectives: « Siva Moturi’s Economic Policy Critique Blog — August 1, 2007 @ 2:38 am

  10. [...] Earlier posts on India’s retail industry — Protect The Chain But At What Cost; Kirana Will Still Rule; The Better, Faster Road To Development; The Wrong Behind ; A Nation Of [...]

    Pingback by The Indian Economy Blog » India’s Retail Revolution: Question 1 — December 26, 2007 @ 8:04 am

  11. Organized retail makes both consumer as well as the producer a king here.Millions of poor people who are leaving rural areas from states like bengal and bihar to work for meagre incomes as unorganized labourers in metro ghettos. This new development will certainly help them to come back to their roots and become a stakeholder in new reformed agriculture industry.

    Comment by xam — January 20, 2008 @ 7:14 pm

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