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Shreekant Sambrani: Modern retail and fresh produce - cui bono?

Will consumers really get lower prices if India's supply chain is modernised?

Shreekant Sambrani 

You take a conjecture, turn it into a half-truth, tom-tom it a million times and it becomes gospel truth.” This was the pithy comment of a reader on my narration of how my guess (educated, but a guess nevertheless) of the possible post-harvest value loss of about a third in case of fresh fruit and vegetables has now become an etched-in-stone estimate of physical loss of the commodities (“High noon or last stand”, Business Standard, September 23, 2012). Pronab Sen, principal advisor to the Planning Commission, also said that the figure being batted around was a guesstimate not based on any hard survey (Business Standard, October 1, 2012). Yet a myth repeated umpteen times appears more convincing than unadorned fact.

This Goebbelsian phenomenon is evident in another aspect of the current debate on foreign direct investment (FDI) in retail trade. The proponents of FDI, including Anand Sharma and Manmohan Singh, repeatedly say that a more efficient and less wasteful distribution used by modern retail would improve farmer realisations while consumers would benefit from lower prices. This is considered to clinch the argument in favour of FDI. Rahul Gandhi, too, has echoed this belief when he was on the stump in Himachal Pradesh.

Professors Jagdish Bhagwati and Rajeev Kohli have recently averred that “Our research indicates that Indian farmers earn typically a third — instead of the international norm of two-thirds — of the final price of their produce because of the greater waste and less efficient distribution” (“Untenable critiques of retail liberalisation,” The Economic Times, October 15, 2012; BK for short hereafter). They do not explicitly say that both farmers and consumers would benefit, but the implication is clear. Given the reputation of the principal author, this oft-repeated argument gains academic gravitas. This calls for a dispassionate examination.

The accompanying table compares Indian mandi prices to those in the United States supermarkets. I have regularly visited semi-wholesale vegetable markets for over 40 years and kept records which form the basis of the year-round average Indian prices. My own continuing research for the National Horticulture Board and the Government of Maharashtra among others over the same period shows that the farm-gate vegetable price is only about 20 per cent of the final consumer or 25 per cent of the semi-wholesale price. This is the basis of the next two on farmer price and margins. A well-known research engineer long settled in Chicago provided detailed supermarket price ranges according to quality and season. I have used the lowest of these figures. The exchange rate used is Rs 50 to the dollar. The farmers’ share in the US is as per the norm BK claim. The US margin thus is the cost of modern retail. I have added this to the Indian farm-gate price to obtain what could be price of produce in Indian modern retail, even without providing the farmer any additional income.

The Indian investment in modern retailing is likely to be higher than in the US due to higher cost of real estate and equipment for grading, sorting, vehicles and the cold chain. Our operating cost would also be higher due to higher costs of interest, operation of the cold chain and transport. This will be partly offset by reduced perishability and lower manpower costs. But on the whole, the cost of a unit of fresh produce delivered through modern retail in India is extremely unlikely to be lower than that in the US.

COMPARISON OF FRESH PRODUCE RETAIL IN INDIA AND THE US
Rs/kg
Vegetable

Indian price

Indian
margin

US price

US
margin
Indian
modern
retail
price
Modern
retail/
Mandi,
%
Mandi
average
Farmgate Supermarket
lowest
Farmgate
  1 2, 0.25x1 3, 1-2 4 5, 0.67x4 6, 4-5 7, 2+6 8, 7/1
Onion 7.00 1.75 5.25 44.00 29.00 15.00 16.75 239
Potato 6.00 1.50 4.50 44.00 29.00 15.00 16.50 275
Tomato 15.00 3.75 11.75 77.00 50.00 27.00 30.75 205
Cucumber 15.00 3.75 11.75 66.00 44.00 22.00 25.75 172
Cabbage 6.00 1.50 4.50 33.00 22.00 11.00 12.50 208
Cauliflower 20.00 5.00 15.00 66.00 44.00 22.00 27.75 139

Reliance FreshOne observation before the obvious conclusion: the assertion that internationally, farmers get two-thirds of the retail price does not quite seem to bear out. The cost of production (not including harvesting) of each of the commodities in the US is not likely to be higher than that in India. Even after allowing for a substantially higher cost of harvesting in the US, the much higher farmer realisation there, at times by orders-of-magnitude, seems to be a case of overstatement. This would in turn imply that the cost of distribution through modern retail is even higher than that shown in column 6.

Thus we see that the much-maligned Indian supply chain does deliver the produce far cheaper. The margin must be seen in light of the fact that the trade, no saint by any stretch of the imagination, incurs the cost of transport, sorting and spoilage and bears all the risks. The margin appears extortionate only in percentage terms and that too, because of the low base price. Most analysts do not realise that even when only overnight transport is involved, it adds substantially to the price mark-up. Our research suggests that this is the single largest constituent of the final price, accounting for 35-40 per cent of it. And farmers are better off even at the low farmgate realisations for vegetables because of the short growing season and high yields as compared to other field crops.

Even if the Indian farmer were to get the same prices as he does now, the consumer would end up paying much higher prices through modern retail, often twice as high as the mandi prices. This is already evident even with the in-name-only modern retailing practiced by Food Bazaar, Reliance Fresh, Spencer, et al. A senior manager of one of these chains shared with me his calculations that showed the price would rise between five- and nine-fold if a full cold chain from farm to fork were to be maintained. So the question remains, as stated in the title of this column: who benefits?

For the record, this writer fully supports FDI in retail as a logical, integral part of an open economy. That should not, however, make us ascribe any and every benefit to it. We drink tea because we like to drink tea, not because the Tea Board told us in the 1950s that it kept us cool in the summer and warm in the winter!


 

The writer taught at the Indian Institute of Management, Ahmedabad, and helped set up the Institute of Rural Management, Anand

First Published: Sun, November 04 2012. 00:22 IST
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