Is FDI in food retail govt’s response to farmer agitation?

Shishir Asthana
Moneycontrol Research

In a move that can have a far-reaching impact on the agriculture sector, government has cleared global e-commerce major Amazon to sell food products in India. Through clearing the foreign direct investment (FDI) proposal to set up fully owned brick-and-mortar stores, the government has opened the door for similar licences from other companies like Grofers and Big Basket to be considered.

Reports say that Amazon is likely to pump in USD 515 million in the food retail business over a period of five years. The other two players are likely to raise investments up to USD 695 million.

While foreign money is being welcomed in the country in food retail, these companies will have to ensure that food products have to be produced, processed or manufactured in the country.

Farm Crisis: Why Bumper Harvests Are Becoming Painful For Indian Farmers

This is the missing link that the agriculture sector and, more importantly, farmers were looking for. One of the main reasons for the distress in farming community in India is the volatility in the price of the farmer’s produce when the crop has been harvested. A bumper crop means there is a price crash and the farmer is unable to benefit from a good monsoon, as was the case in the current year.

On the other hand, the farmer is affected if the crop fails either on account of a pest attack or a monsoon failure. The farmer is the only member in the entire chain who has to bear the brunt of the vagaries and uncertainties of the sector. At the same time they are the ones who benefit the least even when prices are good as a chunk of the price gain is absorbed by the traders.

Allowing FDI in food stores changes the equation in favour of the farmers to some extent. A food store would generally prefer to have a tie-up with a group of farmers to pick up their produce as it ensures them steady and quality supply while ensuring they have control on the prices.

While they also have a choice of picking up the goods from traders directly, bigger stores who have their logistical setup in place, ensure that they deal directly with the farmer.

Another bigger advantage that the farmer gets is that they become bankable if they have a firm tie-up with the company. As the food store would be ensuring that they pick up goods at a particular price, banks would not have to worry about defaults since they can ensure that the cash flow from food store passes through their banks.

Further, the food stores would also ensure logistics and storage facility that would not only prevent wastage but also increase employment in rural and semi-rural areas.

FDI inflow would help bring strategic money which comes with the latest technologies, products and processes.

Existing e-commerce companies like Grofers, Big Basket, Reliance Fresh and Amazon Now (Amazon venture in grocery space) have been changing the way food is bought and sold in cities. Their prices and quality of goods have been widely accepted in the market.

While the benefits of food store are clearly visible to the farmers and the consumers, the companies operating the store have been resistant to the proposal initially. Their logic was that opening a ‘food only’ store is not viable and the government should allow sale of non-food items like home care through such stores. After initial reluctance by the Commerce Ministry, a compromise package seems to be agreed upon. It is reported that some companies have already selected space for stores and worked out the number of employees they would need.

For e-commerce companies like Amazon, setting up food stores is different from their existing line of business. Presently. Amazon offers a platform for buyers and sellers through their website. But it would now get into a brick-and-mortar store where they would themselves be the seller with a complete control on the supply chain.

For the government the move offers a chance to enhance farmer’s income at a time when farmer agitations are picking up in many parts of the country. For the markets a strong rural economy would mean increased consumption -- in short, another reason to justify the current rally.