Sep 25, 2012 at 11:23am IST

FTN: What does FDI in retail actually mean?

Sagarika Ghose: Hi there, Yes, there is political sound and fury about the government's decision to allow 51 per cent Foreign Direct Investment in multi-brand retail. But amidst the heat we've decided to shed some light. What does FDI in retail actually mean? We're exploring that tonight by asking our panellists to respond to viewers questions. We've opened up the question, "Walmart boon or bane" on our website ibnlive.com and all through the day have received a huge number of questions, which we will put to our panellists. If you have a question, log on to ibnlive.com or tweet me @SagarikaGhose and I'll put it to our panelists. When the big organised retailers deal with the farmers they eliminate the intermediaries between farm and fork or between farm and the dining table so that the produce comes to the consumer fresh and the farmers get the higher price not the low price which is just forced on them by the intermediaries. For starters, what exactly is multi-brand retail? Multi-brand retail means shops that will sell items from branded goods to vegetables under one roof. They could be a mix of hypermarkets, smaller super markets and neighbourhood stores like 7 eleven. 100 per cent FDI already allowed in single brand retail, that is shops or chains selling single branded items like Adidas, Nike, Louis Vuitton. Multi-brand retailers means global chains may directly stock and sell produce from Indian farmers to scale up operations. Joining us tonight, Rajan Bharti Mittal, Vice-Chairman & Managing Director, Bharti Enterprises, Devinder Sharma, Agriculture Analyst, Vivian Fernandes, Senior Editor, CNBC-TV18.

Let me kick it off by asking you the first question that has come in Rajan Mittal, this has come to us from the viewers. This is a consolidated question that we have made from the various questions that has us. What are the benefits of FDI in retail in a country like India? And it also relates to a question that has been send to us on ibnlive.com from Srikantiah, Won't FDI in retail crush the small traders. So why so much eager on part of the government to encourage foreign traders? So respond to both the questions, how is it good for India? And won't it crush the small traders?

Rajan Bharti Mittal: Let me here respond to both the questions, is it good for India? The answer is clearly yes. It's good for both the stake holders who are involved in this trade including farmers, manufacturer, of course consumers that's a given with a young nation like India, consumer benefit like food quality, food security, pricing, availability of products and the linkages on farm to fork where we lose 35 per cent of our fresh produce vegetables. So can you imagine the impact even if you lose half of this in the coming years, how much benefit a farmer can take as well as the consumers. So it is good doing economy of scale, doing the cold chains, warehouses storage is the right way and of course as you saw the little clip in Hapur and we also doing this in Punjab slowly that how quickly we can bring it from the farmers to the distribution centre or the correction centre from where the cold chains take over and it is send to the stores. So clearly there is there is a benefit of the farmers, there is a benefit of the consumer, there is a benefit of the smaller manufacturers. If you see my stores, almost 20 per cent of the good are the branded good, which we do the private labelling, manufactured by small manufacturer but we manage the quality, we manage the products from their factories to our stores. So there is benefit across the stakeholders which you will see, so that will benefit the whole community around this stake. As far as the kirana stores will get hurt, India model is very unique, we have to realise if we look at Brazil, Mexico or China even after 15 to 20 years of opening retail FDI there is co-existence. Let's not forget in India the modern retail has been in play from 15 to 20 years, there are big business houses of India they have to been able to much impact, they have only grown 3 per cent to 6 per cent today. And the growth of the kirana store is happening simultaneously. So both will co-exist, our real estate structure is very different. If you look at a kirana stores it is about 500 square feet, if you look at the neighbourhood store which is about 3000-4000 square feet. We keep about 3000-4000 SKUs and they keep about 500-700 SKUs, so it is apples and oranges that they are comparing. So both will co-exist and the India model will work very unique.

Sagarika Ghose: Right, so there is win win according to Rajan Bharti Mittal the consumer, for the farmer and the kirana store can co-exist in retail. Let me get Devendra Sharma to respond to that and then we will put the next question to our panelist. Devendra Sharma respond to that.

Devendra Sharma: Well first of all you showed this clip about farmers in Uttar Pradesh but if you look at Punjab studies have been done by the Punjab Agricultural University and other universities also, PAU study clearly say 65 per cent of the farmers who went into contract farming they say they'll never do it again, they have burned their fingers once for all. So that is another story which I think nobody wants to talk about. Having said that let me make it very clear, Pepsi-Cola came into Punjab saying that they will bring second horticulture revolution. I remember the same kind of debate, the same kind of excitement, the same kind of euphemism, where is the second horticulture? Nobody talks about it now and nobody has penalised Pepsi-Cola for not delivering. Now the question is Walmart will benefit the farmer? Walmart haven't benefited the farmers in America. If it has benefited farmers in America, there would be no reason that the American government provide massive agricultural subsidy including direct income support to the farmers. This is happening despite our claims that the middle-man goes away. Let me make it very clear, the intermediary that you talked about, Walmart itself is a intermediary, except it is a big fish among the small fish. There are studies in America which shows that in the first half of the 20th century the farmer would 70 per cent when he sell his produce as the net income and that income has come down to four per cent, this is happening in the US, that is why the government is bailing out the farmers. Their companies when they come to India we are thinking that it will benefit the farmers, they are not going to benefit. In Europe, there is one farmer that quits agriculture every minute. There is Tesco, there is Sainsbury, there is Carrefour, there is Walmart and still one farmer quits agriculture every minutes and don't forget Sagarika, Europe is the biggest provider of agricultural subsidies and direct income support. So this is a myth and I am so sad that even the intellectuals are trying to buy that argument. FDI in retail do it but not in the name of the farmers.

Sagarika Ghose: Not in the name of the farmers. It has not help the cause of the farmers in the United States and Europe, it is not going to help here?

Vivian Fernandes: The US is a different matter, the reason because the farmers are subsidies over there is because of the high cost of labour. That's a different model altogether, that's not even comparable. I have not heard whatever Devendra Sharma has said before and I think it is the drains report that Devendra Sharma is peddling over here. And I have met the farmers who are in contract with food processors and they are very happy. In Punjab I saw for myself and the farmers told that they are very happy and it is a fact that the cultivation of tomatoes has manifold in Punjab because of Pepsi-Cola. Now Pepsi has dis-banned its tomato processing unit over there and it is sold to Heinz. Heinz has got out of it. But the fact is that I have personally seen such examples. Secondly, you know I have been to Bharti-Walmart farms in Ludhiana and I have seen myself how the produce is taken out right after the harvest and is kept in a constant temperature maintaining system so the farmers were benefited in multiple way.

Sagarika Ghose: But Vivian you were making the point to me earlier that the fact that the conditions may not be there is India, the kind of supply site constrains that are in India are not in the west. Let me just put that to Rajan Bharti Mittal, the fact is Rajan Bharti Mittal there are constrains like the APMC law which does not allow the farmers not go to private mandis and chose where to sell. There is lack of electricity in the rural areas, where are you going to find the electricity for cold storage? There are no roads, there is very few roads, there is not good infrastructure. So where are you going to find the large supply of the products that are going to be sourced by the giant retailers? The fact is that there are very serious supply side constrain is the Indian countryside.

Rajan Bharti Mittal: No, if that be the case, definitely there are constraints on the supply side. But the good part for the food product and the goods is that you are only using it for the localised places. If it is getting produced from Punjab it is mainly used for Punjab, Haryana, Delhi, it is what we call the circle of 250 kilometers. I am not going to take the produce from Punjab to Andhra Pradesh, because the taste buds are different and vice-versa. Similarly you will create your own distribution centre like we have done. Things will happen slowly, it is not a magic wand that the FDI is allowed in some states and suddenly you'll start seeing progress. But there has to be some start somewhere. And honestly speaking, Indian model is very different from the US. Look at the wastage itself that can make a huge impact. So if there is road problem, if there is a supply problem, so there are tough conditions. So despite tough condition there are companies who are willing to do, Indian and foreign companies who are willing to do this. We must give them fair opportunity.

Sagarika Ghose: We must give them fair opportunity and you are saying that it will spur those kind of reforms that are not there at the moment but let me put the other question that we have that has come up on the web and Twitter, we have made a consolidated question of it, isn't is true that the Walmart model has not succeeded in many part of the world? Then the economist has written that the further the Walmart goes away from America, the further it's performance falls. It failed in Germany, it failed in Korea, the kind of condition that is required is large scale infrastructure a culture, a car for long distance shopping, that culture is not there outside America. Respond to that and then I will get other panelist to respond to that.

Well that only time will tell because I have seen the model in Brazil, Mexico, Argentina and other small Latin American countries, in China, in Japan, yes there have been one or two failures that you have eluded to but with time they start working how the country wants, how the uniqueness of the country is. This is where the learning has come into last year, this is where the partners have in to play there role too. It is cut what is required here so that you don't do the cookie cut approach that what is done in the US will be done here. So clearly you'll have to build an Indian model keeping the supply chain, the logistics, the infrastructure, there are issue around and you will have to fit it into the Indian model and we are working on that Indian model.

Sagarika Ghose: Devendra Sharma doesn't that give you hope? The fact is that the Indian shopping culture is very different from the United States. We do rely on kirana stores, we do rely on them that the credit they can give us, we do rely on their home delivery. Majority of Indians will not like to go 20 kilometers for shopping, majority of Indians don't have those huge cars to go outside the city to buy just the vegetables, that culture will not come to India. So the organised retail will have to adjust to the Indian culture.

Devendra Sharma: Well Sagarika if all that you have mentioned is true then why do we need to bring the Walmart in India? I think the fascination that we have that everything should be western, I think that has to go.

Sagarika Ghose: But that's an ideological question.

Devendra Sharma: Let me answer that the support for Walmart is also ideological, it is easy to say that my argument is ideological and Rajan's argument is not ideological. The point that I am trying to make is that we say that the 40 per cent of the wastage of food will be control, what is the wastage of food in America? It is also 40 per cent, thy have Walmart and it has not been able to take care of that. The point I am trying to make is that if we need a supply chain why do we need to go outside, why can't we have it from here? I mean look at Amul, it Is a very good...

Sagarika Ghose: It is a very good point.

Devendra Sharma: It is a perishable commodity, we are helping the farmers, we have helped women in getting jobs, and in cities it is the number one producer of milk in the world. Why can't we follow that model, why can't we learn from that why can't we always have to look at the west?

Sagarika Ghose: Let me get Vivian to answer that.

Vivian Fernandes: With Walmart there are many different model, the very fact that Walmart has not succeeded in Germany should make us feel like a bug bear. In China Walamrt is number one, there are government owned retail stores which is called Shanghai-Pellian it is number one. So it is not going to be a giant beast that is going to kill all the kirana stroes. In fact there is study by the International Food Research Institute showed that the kirana stores that were in the vicinity of the organised retailers for a while they were affected and with time they were able to adapt. So it is not to say that it will result in the death of the kirana stroes, of course there is a lot of employment in the kirana stores and the people manning them barely recover the labour cost. So this kind of employment must go.

Sagarika Ghose: That's a good point surely those kirana stores need some competition to clean up their act.

Vivian Fernandes: I want to make one more point why do you require foreign money? For example the Ambanis are sitting on Rs 75,000 crore of cash reserves they are also in retailing, but why do we require foreign money is because something called patience reserve. For example when Pepsi came into the country they did contract farming for potatoes. Manu Anand who is the CEO of the Pepsi India told me that they are buying 300,000 tonnes of potatoes and they cannot do this from a mandi for this they need a organised farmer. For a food processor you got to bring down the cost per kilogram while increase the income for the farmer per acre. And how do you do that? By increasing productivity. Productivity is the key.

Sagarika Ghose: Productivity is the key. But let me just end this segment by putting the last question in this segment to Rajan, Rajan Jyothiswaroop_1960 asks why are industry captains not going all out campaigning for FDI in retail? Is there a communication deficit, why are you not communicating? Why the politicians are talking and the captains of the industry are not communicating?

Rajan Bharti Mittal: No, it's not correct. The captains of the industry have been talking. So we will demonstrate state by state. Even in state like Punjab where I come from if you go down and ask people how much improvement have happen, how much employment we have generated on the ground, And people who are school drop-outs, school pass out have trained in our camps for three weeks. So there is a sea chain. So we have done seminars so the modern retailing will co-exist with kirana stores.

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