Food retailing

Towards corporatocracy

Print edition : July 26, 2013

Spraying pesticide in a farm that supplies fresh produce to Walmart, in Narayangaon in Maharashtra. A file picture. Photo: VIVEK PRAKASH/REUTERS

The inherent danger of corporatisation of the farm sector is price volatility and the alignment of domestic food prices with international food and oil prices.

The United Progressive Alliance government allowed foreign direct investment (FDI) in multi-brand retail after “putting the survival of the government at risk”, said Union Commerce and Industry Minister Anand Sharma in a recent interview. After some political parties adopted different and often contradictory positions inside and outside Parliament, the policy was passed amid consistent opposition by a few parties and a range of stakeholders, especially traders’ organisations. The reactions of farmers’ organisations were varied. Raju Shetti, president of the Swabhimani Shetkari Sanghatana in Maharashtra, welcomed FDI in retail on the grounds that any system would be better than the present marketing system which was exploitative of farmers. But others opposed it on the basis of international experience and reports in the media.

The main argument advanced by the government and the Congress party in defence of the policy was “taming of inflation” and “extra price to the farmer” by the “shortening of food supply chain” through the “elimination of intermediaries” and the creation of “back-end infrastructure”. The entry of corporates into the agriculture trade has the potential to change the entire socio-economic relationship of different components of the food chain, that is, the producer, the supplier, the retailer and the consumer. Therefore, it is necessary to analyse the main plank of the policy—extra value to farmers through direct sourcing and the creation of back-end infrastructure.

The provision of direct sourcing, or “shortening of supply chain” through the elimination of intermediaries, will have serious implications for farmers and the rural economy. The mode of interaction between farmers and the organised retailer will either be through “direct purchase from farms” or through “contract farming”. Some food retailers and the “Bharti-Walmart cash-and-carry store” practised it in different locations, especially in the case of vegetables, but the price farmers got was the same as that in a wholesale mandi (market). The only advantage to the farmer was the money saved on transport as the company collected the produce from the farm gate. Another disadvantage was arbitrary rejection of the crop on the basis of quality, which fetched prices lower than the market price.

However, direct purchase is a less preferred alternative for the organised retail/corporate sector because the power of decision rests with the farmer. A study conducted by the National Bank for Agriculture and Rural Development (NABARD), “Organised food retailing in India—2011”, states that “direct sourcing by retailers from farmers is less prevalent though it is most desirable and in the interest of all stakeholders”. Various studies done in India and abroad indicate that the corporate system strongly prefers contract farming. But the experience of the contract farming system is not very encouraging in different parts of the country, mainly because of corporate tactics such as post-facto lowering of prices; delays in payments; defaults on contracts in a glut situation, as done by Pepsi in Punjab and wineries in Maharashtra; and improper legislation. The contract system has certain structural characteristics; for instance, the farmer bears the risk even when the decision regarding the choice of crop, input, quality and quantity of crop, and schedule of payment rests with the corporate. Moreover, contract farming has a strong bias towards large landowners as they have the surplus to invest and can supply the required quantity, a prerequisite for economies of scale.

Marginal farmers, the worst affected

Marginal farmers, who constitute 83 per cent of farm households in India, will be the worst affected by contract farming as they lack the surplus to invest and do not have risk-bearing capacity. The expansion of contract farming will also force marginal farmers to lease out their lands to corporates or big farmers at payments below the market price. In a district of Karnataka where rose is cultivated under corporate farming, Scheduled Caste and Scheduled Tribe farmers were forced to lease out their land at one-third of the market price (reported by S.P. Singh in 2005).

The government’s solution to the problem as offered in the draft of the Twelfth Five Year Plan reveals its corporate mindset. It reads: “Some large farms may lease in land and even employ the small owner on his own farm to grow specific crops under supervision.”

The Confederation of Indian Industry, too, has demanded the legal provision for long-term lease so as to benefit corporates. The fragmentation of land, capital-intensive agriculture, and contraction of the market will force small farmers to lease out their land to big farmers/corporates and be agricultural labourers in their own fields. The Working Group on Agriculture XI Plan (2007) made the following recommendation for the integration of small and marginal farmers in the corporate system: “Instead of leaving to the retail companies to evolve sourcing models, government should proactively prepare the farmer groups to interact and establish linkage with retailers.” However, the formation of farmer producer groups is still in the initial stages even as the government has allowed the entry of corporates into agriculture. Some provisions have been made for farmer producer societies in the Union Budget (2013-14), but they have failed to evoke any interest for various reasons.

Other implications of corporate farming include a shift towards mechanisation and high-value crops such as fruits, vegetables and flowers. There are studies that clearly indicate that such a shift adversely affects the need of the locally available/produced labour-intensive goods and services, a major source of the rural non-farm economy (RNFE). Another feature of the contract system is cartelisation, where farmers are forced to use seeds, fertilizers, insecticides and credit of a particular company. This decreases the autonomy of farmers.

The proposition that farmers will get extra price in contract/corporate farming lacks conclusive evidence. International experience of corporate farming shows that in the initial phases some margin is transferred to the farmer so as to establish a monopsony. Once it is established, the corporates exert downward pressure on the producer and on labour. A study conducted in 1999 by the Competition Commission, United Kingdom, for the Director General of Fair Trading concluded that practices adopted by organised retailers exerted downward pressure on the incomes of farmers and workers involved in the supply of goods to the retail chain.

Studies in India

Extensive studies were made on almost all agriculture marketing systems prevalent in different parts of India by the working group of the Eleventh Five Year Plan (2007). The findings on the farmers’ share in the final consumer price found in different marketing systems may be summarised as follows:

(a) The share of farmers in the final consumer price varies between 24 and 58 per cent.

(b) The share of farmers is highest in the markets controlled by farmers’ organisations such as HOPCOM (Horticultural Producers Cooperative Marketing and Processing Society Limited) and Gadat Agricultural Marketing Cooperative Society. Here the share of vegetable and fruit growers is as high as 75 per cent of the stall price.

(c) The most efficient market system for farmers and consumers is farmers’ markets such as Apni Mandi, Rythu Bazaar, Uzhavar Sandhai and Krushak Bazaar.

The farmers’ share in the final produce in the government-controlled sugar sector in Uttar Pradesh is almost 80 per cent, while in Amul in the cooperative sector, it is more than 80 per cent.

The provision of Rs.380 crore for the development of the agriculture market reflected the government’s seriousness in the matter. Against a target of 1,152, only 51 Apni Mandis were set up. Only one wholesale mandi was set up against a target of 75. No terminal market became functional against the target of 35 during the Eleventh Plan. So it is a myth that the farmer may get a higher price only in corporate market formats. The malpractices of intermediaries may be corrected through administrative measures and the use of modern technology such as e-trading.

The second argument is that the creation of back-end infrastructure facilities such as warehouses, cold chain, grading and processing will reduce wastage and increase the profit margin of farmers. The exaggerated figure of 35-40 per cent wastage in fruits and vegetables was put in the public domain by the government to justify the entry of corporates into storage. But now, after scientific study, it is corrected in the draft of the Twelfth Plan that “the extent of wastage is not easily ascertainable and new research suggests that some of the older statement were quite likely exaggerated”.

Cold storages set up in various States in the private and public sectors have been abandoned because of high running costs on account of high electricity bills and low profitability. The 50 per cent investment in back-end infrastructure is attached as a conditionality in FDI in multi-brand retail, but how it will benefit farmers is not clear. These are post-aggregation logistics and add value to the produce after purchase from the farmer.

The farmer may get the benefit of pre-aggregation logistics and that too in the public sector, as outlined in the report of Working Group on Agriculture XI Plan. It states that “the infrastructure for primary handling needs to be created in every village or group of villages in the form of primary value addition and multipurpose service centres directly in the public domain or through public-private partnership. These centres could be managed by cooperatives, SHGs [self-help groups], farmers’ clubs and producer-groups and linked to wholesale or retail markets.”

Multinational corporations are exerting pressure on the government to ease the conditions attached to FDI in multi-brand retail, especially to make an entry into cities that have a population of less than one million, because it suits their economies of scale, and for the inclusion of agri-produce in small and medium enterprises (SME). There are signals that the government will concede their demands. The pro-corporate attitude of the government is reflected in the draft of the Twelfth Five Year Plan. Corporate entrants have not fared well in the competition with incumbent traders since existing trading margins, although high, are in fact much less than, for example, in the United States.

The inherent danger of corporatisation of the farm sector is price volatility and the alignment of domestic food prices with international food and oil prices. The prices will be decided in futures markets rather than in physical markets after corporate takeover of the purchase and storage of foodgrain. There was a 13 per cent price rise in wheat after a 1 per cent reduction in its production in 2007. During this season (2013), the Uttar Pradesh government could purchase only 10 per cent of the targeted wheat.

In this overall context, it will not be out of place to surmise that we are heading towards “corporatocracy”, the term coined by John Perkins to denote a system that is dictated by the nexus between corporations, banks and the government. The ultimate goal of this triumvirate is to integrate all national economies in the world into a single global free market system through the modern financial system controlled by the World Bank, the International Monetary Fund and the World Trade Organisation. The need of our economy is to take steps to protect, enhance and defend the livelihood of small and marginal farmers and not adopt policies that “take care and promote the profits of super-rich corporates”. If the government feels so concerned about the exploitation of retail by the intermediaries, it should form cooperatives up to the retail level.

History of food retailing

The transformation of agriculture into agribusiness in a liberal economic regime attracted major domestic and foreign corporates to the agricultural trade. The Indian retail market (worth Rs.17,497 billion in 2008-09) occupied top position in A.T. Kearney’s annual global retail development index (GRDI) for three consecutive years (2005-08). The importance of farm produce in retail is evident from the National Sample Survey Organisation (NSSO) data, which say that the private final consumption expenditure (PFCE) of 40 per cent of the urban population and 52 per cent of the rural population is on food items. The size of food retail in 2008-09 was estimated at Rs.10,700 billion, 61 per cent of the total retail value. Besides value, food retailing means regular customer footfalls.

Before economic liberalisation, state intervention in the agriculture market was considered an important instrument of development policy. The state generally controls the agriculture markets through (1) fixing of minimum price, (2) maintenance of the minimum price through purchase operations by state and cooperative agencies, and (3) formulation of market regulating Acts generally known as the APMC Act and the establishment of necessary infrastructure.

The thrust of the different Five Year Plans was to establish regulated markets and to create storage capacity in the form of warehouses and cold storages, grading facilities, processing units and market intelligence, mainly in the cooperative sector. The private sector was accorded equal status in agriculture marketing in the Tenth Plan (2002-07) as private and cooperative sector participation in the marketing of agriculture produce would break the monopolistic/oligopolistic supply structure. Also, it favoured forward trading in agriculture commodities.

The APMC Act was amended into the Model APMC Act in 2003 to provide a bigger role for the private sector. It includes provisions for setting up private mandis and for contract farming. So far, 16 States have adopted different provisions of this Act, but none of them has adopted them fully because of local compulsions.

Major Indian corporates entered agribusiness in different formats during 2000-10. The Bharti group, along with Walmart, opened the first cash-and-carry store in 2006 as a joint venture. The rationale of the government in allowing them was to remove the “intermediaries” to create a “farm-to-fork” model and create infrastructure in the interest of farmers and consumers. But no impact studies were made. The only study made, by the Indian Council for Research on International Economic Relations (sponsored by the Government of India) in 2008, concluded that farmers realised 25 per cent higher price of their produce in the organised retail format. But this study suffered from several weaknesses, starting with its small sample size. It was based merely on interactions with 197 farmers of a single locality of Hoskote, Bangalore, and growers of a single commodity, cauliflower. Clearly, there is no attention to detail, either by design or by default, while the larger agenda of “corporatocracy” is being pushed forward through different political and administrative manoeuvres.

Sudhir Panwar teaches at Lucknow University and is the president of the Kisan Jagriti Manch.

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