Real Reasons behind FDI in Retail in India

A couple of years ago India as a country, was facing a huge divide. The government of India had passed a new legislation which would allow foreign direct investment into the retail sector. This meant that global economic giants like Wal-Mart, Tesco and Sears were on their way to open up stores in India. Needless to say, the result was complete pandemonium as incumbent retailers felt their interests were being jeopardized. The resulting mayhem witnessed allegations being hurled towards all the parties involved and the parliament came to a standstill, unable to decide what to do about FDI in retail.

Retail is amongst the largest employers in the country. The neighborhood grocery shops have been providing steady sources of income to many Indian families. The presence of these global giants would change all this. Hence, there were protests in some parts of the country which even escalated to rioting.

In this article, we will have a look at the nitty-gritty’s of the decision to introduce FDI in retail.

The Pretext

The government of India stated that they were allowing global giants like Wal-Mart to set foot in the country only because they had the technology to help India’s supply chain issues. India had been suffering from a warehousing problem as millions of tons of food grains were simply rotting away. At the same time, India was experiencing astronomical food inflation.

Therefore, the absence of a world-class supply chain was cited as the biggest reason behind the co-existence of these contradictory problems. As a result, creation of a world class supply chain in the remote rural areas of India was the top priority of the government. Wal-Mart seemed to have the capability and the track record to help the government accomplish this task. Hence, the government was willing to crack a deal with Wal-Mart allowing it to set up stores in the country if it was willing to assist in the creation of the supply chain that would end the wastage of food.

The Real Problem

The government of India seemed to forget the fact that the real problem was not the absence of cold storages and other elements of the supply chain. Indian companies had the technology which was required to create this infrastructure. There was nothing new that Wal-Mart was bringing to the table. If Indian companies have the capabilities to build software that power the world, they certainly do have the technical knowhow required to build some cold storages!

However, even if Wal-Mart helped build this infrastructure, India did not have the electricity to keep these cold storages running. Obviously there was very little that giant retailers like Wal-Mart could do if India simply did not have the power to keep the cold storages running! The government of India was either completely misreading the problem or else there were some hidden agendas which were being pushed forward.

The APMC Act: Legalized Cartels

The real story begins with the Agricultural Produce and Marketing Committee (APMC) Act which is a draconian statute governing the marketing of agricultural produce in India. This law was created during the British imperialist regime in order to exploit the local people and enrich the British Empire. It is indeed strange that close to seven decades after India’s independence, this act in yet to be repealed.

The law makes it illegal for farmers to sell directly to the retailer. Any famer who sells more than 400 kg of their crop directly to anyone other than the authorized agents appointed by the government can be penalized and/or jailed. The basic principle of “freedom of choice” is being denied to the farmers. They are forced to sell to a small group of people who, with the blessings of the governments, have formed a powerful cartel!

This draconian law is the real problem behind the food shortage, lack of infrastructure and rising food prices in India. The APMC act creates a class of licensed middlemen. The farmers have no option but to sell to these middlemen. Selling to anyone else is illegal! Therefore, these middlemen have no real reason to be competitive and hence cold storage and other supply chain infrastructure is not being built in the nation.

However, it is surprising to see how little media attention is given to this draconian act. The state created chain of middlemen is raking in billions even though they add no value at all. At the same time, both the producer and the farmer suffer. The well informed media persons who try to unravel complex details of every celebrity scandal somehow turn a blind eye to this colossal injustice.

The Model APMC Act

When big corporations entered the retail foray in India, they were obviously not willing to buy these vegetables from these middlemen at inflated prices. They wanted to be able to purchase directly from the producers thus breaking the chain of middlemen. That is what the rioting was all about! The interests of the public were not important at all. The battle was about who will be provided the right to fleece the public, state appointed middlemen or mega corporations.

As it so happened, a truce was reached. The newly created act extends the monopoly. Farmers are now allowed to sell their produced either to state appointed middlemen or to mega corporations! They still do not have “freedom of choice” and neither does the consumer! All this is being done while the government is supposedly trying to curb food inflation!

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