Expert Speak
FDI in retail – the Indian farmers' perspective
A potent solution for several deficiencies of Indian agriculture
The Government of India's recent decision to permit FDI in the retail sector has raised a high
level of debate and a major political fallout. For a perspective from one of the key constituents
– farmers – we organized a concall with Mr P Chengal Reddy, Secretary General, Consortium of
Indian Farmers Association. We present the key takeaways.
Indian agriculture is plagued with lack of storage, investment and technology, low price
realization, appropriation by middlemen, and huge wastage to the extent of 30-40%. Indian
retailers have lacked the scale, technology, management vision and focus to change this.
FDI in retail would expand the outreach of Indian produce to the world market (e.g. access
to 350 Wal-Mart stores in China in one go). It could lead to multiple other benefits: (1)
uniformity in farming practices and scaling-up to suit global requirement, (2) enhanced
branding and visibility, (3) superior back-end infrastructure, (4) significantly lower wastage,
and perhaps most important, (5) integration of agricultural policies and implementation at
various levels of government.
The political differences in this regard are largely on the surface; more and more states are
expected to put in enabling provisions (like amending APMC Act) to introduce FDI in retail.
While contract farming would increase, fears of job loss are unfounded as FDI is justifiably
allowed only in bigger cities, and further, it would gain currency only among the upper class.
While the role of middlemen is likely to stay because of their superior reach, efficiency is
likely to be enhanced and exploitation reduced.
Finally, sugar sector liberalization is in the offing. This would provide major opportunity to
(1) increase yields and revenue, and (2) diversify sources of income.
27 September 2012
Sector: Economy / Retail
Mr P Chengal Reddy
Mr P Chengal Reddy is the
founder of India's
professional farmer
organization Consortium
of Indian Farmers
Associations (CIFA).
CIFA is an apolitical,
national level registered
society and has now active
participation from 14
states. Its main focus is
networking farmers at
different levels and
lobbying on policies with
Government of India. CIFA
actively supports farmers
partnering with industry.
Deficiencies of present state of Indian agriculture
Indian agriculture currently is beset by several deficiencies:
1. Policy discrimination against agriculture
2. Huge wastage
3. Farmers get a raw deal
4. Shortcomings of Indian retail players
,,
Indian agriculture has
hardly grown beyond
1-1.5%. In fact, in my
view, it is negative.
,,
Deficiency #1: Policy discrimination against agriculture
Post the liberalization beginning 1991, the Indian government has progressively freed
manufacturing and services sectors with special incentives and focus on exports;
however, agriculture was not included in this liberalization program. For example,
decontrol of sugar would be a critical factor in the sugar sector's growth in the current
environment.
Of course, in some areas of agriculture (like horticulture), there is no control. But in
key foodcrops such as rice, wheat and sugar, a complex set of rules apply (including
restrictions on storing beyond a level, selling outside the local area, ban on online
trading, technological constraints, low MSP sometimes even lower than production
cost, etc.). Besides, Indian agriculture suffers from lack of investment in irrigation,
cold storage, technology, and market access.
1
Dipankar Mitra
(Dipankar.Mitra@MotilalOswal.com); +91 22 3982 5405
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com) /
Sreekanth P V S
(Sreekanth.P@MotilalOswal.com)
Investors are advised to refer through disclosures made at the end of the Research Report.

Expert Speak
,,
,,
Deficiency #2: Huge wastage
On the one hand, India has huge foodgrain buffer stock of 70-80m tons (a lot of it
rotting!), and on the other hand, wastage in fruits and vegetables is high at 30-40%. In
the Indian context, it is possible that sometimes the nearest real market is actually
1,000km away from where the output is sold. However, the scale of wastage is not
uniform across the country. Thus wastage for mango producers in Maharashtra near
Mumbai could be very low; but it is as high as 50% in the north-east where there is
nearly no infrastructure.
Such high level of wastage is a result of multiple reasons:
i) lack of implements to cut, store and package at farmers' end
ii) long lag in transportation (24-36 hours) and reaching at odd hours resulting in
further delay in unloading
iii) loading and unloading of same basket three to four times
iv) lack of care and sometimes knowledge in handling perishable items like fruits.
Even simple solutions can drastically reduce wastage e.g. simple machines for (1)
cutting mango/banana, etc, (2) paper wrapping, (3) grading, etc.
Our farmers use the
most modern so-called
seeds, fertilizer,
pesticides, but then
the problem comes,
it is all done at the
advice of the local
businessmen or
traders who give us
the supplies, because
we have no way of
knowing.
The government is
supposed to give
technical advice.
They rarely do.
,,
Deficiency #3: Farmers get a raw deal
Nearly 128m farmer households with dependent population of 600-700m are required
to sell their produce, mostly perishable, within a radius of barely 15km. A flat 10%
deduction is applied on price in the name of quality. Another 8-10% is deducted by
the trader as his commission. Another 2-3% goes as incidental charges. Thus payment
is made for only 80% of the produce and most of the deductions are unofficial cuts.
Besides there are some very, very strong powerful business interests in India who
control the entire trading of certain essential commodities (like oils, sugar), and
manipulate the prices.
Deficiency #4: Shortcomings of Indian retail players
Unlike sectors like power, infrastructure, meals, etc, Indian companies in terms of
retail in agriculture have not been very innovative or dynamic. They lack the scale,
technology, management and vision to improve the situation at backend. Indian retail
has limited itself to select areas, mainly branded consumer goods. Now, with the
advent of FDI, they are likely to start focusing again on the fresh produce opportunity.
Indian companies have developed a foothold in organized retail but have a long way to go
Name of the Co.
Pantaloon Retail
Shoppers Stop
Spencer's Retail
Lifestyle Retail
Bharti Retail
Reliance Retail
Aditya Birla 'More'
Tata Trent
Details
Over 2m sq ft of retail space spread over 35 cities with 65 stores and
21 factory outlets
Over 3.2m sq ft of retail space spread over 23 cities with 51 stores
~1m sq ft across 45 cities with 200 stores
Approximately 15 Lifestyle and 8 Home Centre stores
74 Easyday stores with plans to invest ~ USD2.5b over the next five
years to add about 10m sq ft of retail space in the country
700 stores with a revenue of INR76b
575 stores with approximate revenue of INR20b. Recently, it
purchased stake in Pantaloon Retail
59 Westside stores, 13 Starbazaar hypermarkets and 26 Landmark
bookstores
2
There are some very,
very strong powerful
business interests in
India who control the
entire trading of
certain essential
commodities like oils,
even sugar, leading to
price manipulation.
,,
27 September 2012

Expert Speak
,,
,,
How advent of FDI can change the scenario
The advent of FDI in retail holds the potential to address many shortcomings of Indian
agriculture:
#1 Opening up superior outreach for Indian produce
#2 Increasing awareness, and harmonizing Center, state, local government policy
#3 Branding improvement and
#4 Tapping of product- specific opportunities.
Now that the FDI has
been allowed by
Government of India,
farmers are really
looking forward to
huge investments
and technologies
in agriculture.
,,
FDI benefit #1: Opening up superior outreach for Indian produce
With FDI, the same Indian mango, chilli, wheat or rice that is marketed throughout
India could reach virtually anywhere in the world -from China (where there are 350
Wal-marts), to Singapore, Hong Kong, Abu Dhabi, Cairo, Paris, London, etc.
FDI benefit #2: Increasing awareness, and harmonizing centre, state, local
govt policy
Awareness among Indian farmers have increased in the last 10 years because of mobile
(70% outreach) and TV (80-90% outreach). They have already adopted small family
norms and are giving priority to education and health care. However, communications
related to agricultural activity is still low. This has three dimensions -
1. The first is productivity linked covering issues such as extension, fertilizer, water,
electricity; they are all basically dealt at the lower level functionaries of the
government departments.
2. The second dimension is state-level policies, viz, issues of agricultural credit,
insurance, etc.
3. Third is the national level, concerning policies of price fixation, export/import
incentives, etc.
FDI is basically a national issue but many states have come forward for implementation
including Maharashtra, Andhra, Haryana, and Delhi among others. It is highly likely
that other states will follow suit, realizing the importance of technology and other
benefits.
FDI benefit #3: Branding is a major area of improvement
As an example, a high quality wheat called "Durum" produced in Madhya Pradesh has
8-10% protein content. However, it lacks branding and outreach. In sharp contrast, in
Netherlands, even goat cheese made by a family has a brand name, has a slogan, and
has traceability.
Tomato used by
Indians for Indian
dishes is totally
different from the
tomato used in salad.
The table tomato used
in European countries,
produced in Israel.
We can develop
such products.
FDI benefit #4: Specific opportunities that can be tapped
This is illustrated by the following examples.
At present, numerous Indian farmers adopt their own practices for seeds,
fertilizers, pesticides, watering, etc, resulting in heterogeneous quality of produce.
In fact, they use the most modern seeds, fertilizers, pesticides, etc, but the problem
is that all of this is done on the advice of local traders. To prevent this, India is
increasingly moving towards a system called "Producer Groups" or "Commodity
Interest Groups". There are 80,000 such groups already throughout the country,
and the government is going for it in a big way. Once there is a guarantee of large-
3
,,
27 September 2012

Expert Speak
,,
,,
If FDI comes, the same
Indian mango or chilli
or wheat or rice that is
marketed in India, will
also be marketed in
China where there are
350 Wal-Marts, they
will go to Singapore,
Abu Dhabi, Cairo, Paris,
London. This is the
advantage of a
transnational
organization.
,,
scale offtake, say, output of 1,000 hectares, such Producer Groups can bring all the
farmers under a common banner, leading to what is known as "Uniformic
Development".
Tomato produced in India is totally different from the table tomato used in
European countries that is produced in Israel.
There are 1,000 varieties of mangoes produced in the country; but lack of pre-
cooling infrastructure and transport network result in deterioration of quality
and wastage by the time they reach the metro market. In contrast, as Alphonso is
produced around Mumbai, the finest quality of the same is exported with little
logistical hindrance (i.e. proximity to both sea and air port).
'Ponni or BPT' rice which is liked very much by south Indians and Indians settled in
Gulf has a potential to grow up to 20m tons.
India offers a huge domestic market opportunity for processed and semi-processed
foods.
India has one of the lowest share of organized retail among major countries
India could be a potential big market for MNC retail
Whatever
Mr (Narendra) Modi
may say today, I can
assure you that in next
three months' time,
Gujarat is going to
approve FDI because
Gujarat is one of the
most progressive
states, they will
approve. And you can
also be sure so will
Lucknow.
India is a USD1 trillion market growing at double digit
,,
Source: CSO, Companies
4
27 September 2012

Expert Speak
Share of food is coming down in consumption basket in favor of services
Source: CSO
Other viewpoints & issues
,,
The role of middlemen
is not going to be
totally replaced by
FDI. It will never
replace the
middlemen. Total? No.
Definitely, a certain
percentage of produce
will go from the
farmers direct to
the retailers.
On political problems
These are part of democracy as everyone wants to show their power. The political
difference on retail FDI is only on the surface and more a game of one-upmanship
blown up by the media. FDI in retail can make us globally competitive. While there
are some issues raised by local governments, officials at the district, state and national
level realize the importance of FDI and are cooperating.
On APMC and FDI
In several states, the government processes have been streamlined well in advance
for approval of FDI including Maharashtra, Haryana, Andhra Pradesh, etc. Expect FDI
to also be rolled out in Gujarat, Punjab, Rajasthan, Odisha, Karnataka and Tamil Nadu.
On contract farming and FDI
Contract farming is a must for large-scale FDI, as large retailers would need continuous
supply of agro products. To some extent, this transformation has already taken place
in various parts of country for various products including sugarcane, milk, tobacco,
apple, banana, etc.
On FDI and employment
FDI in retail would not have any employment implications for smaller cities and towns
as the condition of FDI being permitted only in cities with 1m population is in place.
On FDI and middlemen
Post entry of large retail, 20-30% of farm output could move directly from farmer to
retailer. However, the role of middlemen can never be fully done away with e.g. their
outreach to the smallest and remotest of areas is unmatched. However, efficiency
would go up and exploitation of farmers by middlemen would come down. FDI would
set in a chain reaction whereby farmers not engaged in contract-farming would see
the benefit of logistics and preservation improving their bargaining position vis-à-vis
middlemen.
,,
27 September 2012
5

Expert Speak
Expect big policy booster for the sugar sector
A committee under Dr Rangarajan is expected to come up with its report by end-
September, recommending liberalization of the sugar sector. Sugar may well become
the most prospective sector because India is a home for sugarcane and it has huge
natural advantage. Besides, wide research has already been done in this area, and
yields and recoveries have gone up. Scope for diversification exists including
production of ethanol, co-gen power, etc.
APMC reforms and implementation is uneven across states
Stage of reforms
States/ UTs where reforms to APMC Act have been done for
direct marketing, contract farming and markets in private/
cooperative sectors
States/ UTs where reforms to APMC Act have been done
partially
Name of State/ Union territory
Madhya Pradesh, Himachal Pradesh, Punjab, Sikkim,
Nagaland, Andhra Pradesh
Direct Marketing:
Haryana, Karnataka, Delhi, Chandigarh,
Maharashtra, UP
b) Contract Farming:
Haryana, Gujarat
c) Markets in pvt/co-op sectors:
Maharashtra, Karnataka (only
National Dairy Development Board)
Kerala, Manipur, Andaman & Nicobar Islands, Dadra & Nagar
Haveli, Daman & Diu and Lakshadweep
Tamil Nadu
Orissa, Assam, Mizoram, Arunachal Pradesh, Tripura,
Meghalaya, J&K, Uttaranchal, Goa, West Bengal, Pondicherry
Bihar, Jharkhand
a)
States/ UTs where there is no APMC Act and hence not
requiring reforms
States/ UTs where APMC Act already provides for the reforms
States/UTs where administrative action is initiated for the
reforms
States/UTs where there is no progress
27 September 2012
6

Expert Speak
N O T E S
27 September 2012
7

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