Curious practices

In Punjab, the Reliance network could shrink the supply chains of vendors and leave them with access to only low-quality produce.

AMAN SETHI in Jalandhar

WELL before the break of dawn, Jalandhar's largest fruit and vegetable market comes to life. Trucks stream into the large market compound at 4.30 a.m. bringing farm-fresh stocks from across north India - green peas from Kullu, cauliflowers from Shimla, mangoes from Saharanpur, and onions and potatoes from Reliance Industries.

The arrival of India's largest private company at Jalandhar's wholesale market has caused some surprise. "We had heard of the Reliance Fresh stores in Jalandhar city," says Romi Singh, a fruit wholesaler. "But we didn't expect them here at the mandi."

In spite of the high-profile launch of its north India operations in January 2007, no one quite knows where to expect Reliance. A series of attacks by anxious vegetable sellers on Reliance Fresh stores in Ranchi, Indore and Delhi have seen the company lapse into silence about its future plans.

However, information gleaned from a mixture of off-record conversations and press conferences suggests that the Mukesh Ambani-owned company plans to continue expanding operations across north India; it will set up at least 12 collection centres across various cities in Punjab to service Haryana, Delhi and the National Capital Region. At present, the company has a fully operational distribution centre in Jalandhar where fruits and vegetables sourced from collection centres across Punjab and north India are graded, put into cold storage and shipped out to their retail outfits. Company officials refused to quantify the capacity of their distribution centre, but revealed that it was currently catering to 11 stores in Jalandhar, Ludhiana and Amritsar, and had the capacity to cater to an additional nine.

Initial press statements suggested that Reliance would source directly from the farmer. But the sale and purchase of agricultural produce in Punjab is governed by the Punjab Agricultural Produce Markets Act of 1961, which clearly gives the Punjab State Agricultural Board the power to designate certain areas as "notified markets". The Act further states that "all agricultural produce brought into the market for sale shall be sold by open auction in the principal or sub-market yard", and also that no private markets can be opened near government ones. To source directly from the farmer, Reliance would have to apply for permission under the "bilateral transaction" clause of the Act. Whether Reliance has received this permission is still unclear.

"Procurement from farmers has begun in line with the provisions of the Agricultural Produce Act," a well-placed Reliance official told Frontline, adding that about 50 per cent of produce in the Jalandhar distribution centre was bought directly from farmers. However, officials at the Jalandhar Mandi Board were unable to provide an unequivocal statement on the position of Reliance's licence.

Reliance's entry into the groceries and fresh fruits sector raises a fundamental question about the existing system of supply, procurement and storage in the agricultural sector. Known for its poor infrastructure in terms of transport and storage facilities and infamous for delays, wastage and loss, the existing system of procurement is far from perfect. Reliance's model follows the company's famed expertise in supply-chain formulation and backward integration. By going directly to the farmer, Reliance hopes to minimise transaction costs while simultaneously encouraging farmers to grow high-investment, high-grade produce by ensuring them an assured market. In the process, Reliance shall, wittingly or unwittingly, dismantle a robust semi-formal network that is responsible for putting food on millions of Indian tables every day.

The New Sabzi Mandi at Jalandhar provides an illustration of this network. Every day hundreds of trucks bring quintals of fruits and vegetables to the mandi from farms across the country. This produce is then handed over to commissioning agents or arthis, who sell it to buyers. Buyers assess the produce on the basis of quality and freshness, and arrive at a price that is passed back to the farmer. The arthi charges the buyer a commission of between 2.5 and 5 per cent depending on the produce.

The nature of the relationships between farmers, arthis and purchasers imply that actual money very rarely changes hands; the value of the produce is adjusted against complex lines of credit along the supply chain. "Farmers often approach us for credit which we forward at zero interest," claims an arthi. "This is then adjusted against the commission when the farmer brings his produce." Similarly, buyers often function on limited cash liquidity and pay the arthi only after the next sales are realised. Thus, the arthis see themselves as middlemen who serve as an interface between sellers and buyers, and help distribute risk along the system.

But not everyone sees them in that light. Arthis have been known to be rather corrupt; in several instances, they have been accused of colluding with the buyer to the detriment of the farmer, which often explains why farmers run into debt. Arthis will be the most affected once companies go directly to the farmer.

Reliance's current procurement strategy, however, has strengthened the hand of the arthi. At present, Reliance is procuring its stocks from local wholesale markets in a massive way - a fact Reliance officials readily admit. Thus, the fruits and vegetables available in Reliance Fresh stores are in no way different from those available at the local vegetable sellers. Market documents made available to Frontline state that Reliance bought nearly 40,000 kilograms of fruit and vegetables at a total cost of Rs.5,22,790 between May 13 and 17, making it the biggest single purchaser in the market. And as per mandi rules, all these purchases went through the commissioning agents. Reliance is, apparently also selling its own stock back at the mandi.

"Initially, we simply couldn't understand it," says Gopal Das, a wholesaler of onions and potatoes. "The company officials would come on Mondays and purchase produce in huge quantities; they would then return on Wednesdays and try and sell the same produce back to the mandi at a discounted price."

It took them a few days to figure out that it was the manifestation of the grading system practised at Reliance. Farm produce is often categorised on the basis of quality into grade A, B, C or D - depending on size, freshness, appearance and so on. While markets across the country have always practised informal grading based on the assessment of the purchaser, Reliance has moved towards a more quantitative assessment of quality. Thus onions and potatoes are mechanically graded on the basis of their diameter, skin thickness and region of procurement; fragile fruits such as mangoes are graded by hand using similar schema. Only Grade A fruits are sent to its stores. However, a weaker-than-expected consumer demand and the limited shelf life of fresh foods seem to have forced the company to channel unsold stock and, along with it, lower-grade produce back into the mandi.

"We bought these onions for Rs.10 a kg," rued a Reliance representative at the Jalandhar mandi, "but we are selling them back here for between Rs.6 and Rs.8." Termed "waste reduction", this re-sale system has had an impact on prices of fresh stock as well. Far from raising prices in the mandi to the benefit of the farmer, Reliance is seen to be bringing down wholesale prices by flooding the market with lower grade produce. This principally affects the small vegetable vendors, or rediwallahs.

While most large shopkeepers have ignored Reliance's lower-grade produce, the rediwallahs are finding it harder to avoid them. Reliance's emphasis on grading has pushed up the prices of high-grade produce, but it has meant that the prices of lower-grade produce have hit rock bottom. Thus, only lower-grade vegetables are available with the small roadside vendors.

Contrary to popular belief, a network of Reliance stores will not affect the client base of vendors as much as it will shrink their supply chains. But if vendors continue to have access to only low-quality produce, customers will shift to the Reliance stores in search of better-quality produce, even if the prices are higher. Reliance, meanwhile, has sought to dispel such fears by claiming that it will incorporate commissioning agents and vendors into its supply chains, and offering farmers a better deal.