FDI: Just the facts, please

The debate over the entry of Foreign Direct Investment (FDI) in the retail sector is often coloured with nuggets of wisdom on the desperate need to bring in expertise to feed the hungry millions of the country. Different reasons are cited for the need to bring in FDI. The primary one is of course that there are too many intermediaries in India and bringing in FDI can help shorten the chain and therefore reduce the costs to the customer. Recently, advocating the case for FDI, Rahul Gandhi recently made a claim that nearly 60-70 per cent of the fruits and vegetables produced in this country is wasted.

Opponents of FDI on the other hand opine that it will destroy livelihoods and millions of people are likely to become unemployed. It is also likely to lead to a complete destruction of the fruits and vegetable chain as we know it. This article aims to examine both sides of the debate, in order to better understand the case for FDI in retail in India.

How much is wasted, really?

The figures quoted on the levels of wastage in India vary wildly. From around 5 per cent (estimated by the Central Institute for Post-Harvest Engineering and Technologoy) to 70 per cent (used by the Department of Agriculture), wastage is a figure that no one can seem to agree upon. The 70 per cent figure seemed to come originally through a statement by the then Secretary in the Department of Agriculture, P K Mishra that that 72 per cent of the fruits and vegetables in India are wasted in the absence of proper retailing. The figures of between 40-50 per cent seem to have entered popular imagination so long ago that it is actually difficult to trace what the source of the data point is.

In order to examine the 'fact' that 72 per cent of fruits and vegetables are wasted, we can estimate it using tools that are commonly used in the consulting industry. India's total fruit and vegetable production according to the Minister of Agriculture was 775.25 lakh tonnes and 1,496.07 lakh tonnes respectively in 2011-12, for a total of 227 billion kilograms of fruits and vegetables. If as according to the former Secretary, 72 per cent of this produce is wasted, what is available for consumption is just 63 billion kilos.

Of this, 2.8 billion kilograms is exported leaving 60.7 billion kilograms for local consumption. All of this is probably not going to be consumed at the kitchen table directly. Some of it goes into the production of jams, pickles, squashes and other preserved products. Let's say that 20 per cent of the remaining fruits and vegetables is preserved, leaving 48.6 billion kilos for domestic consumption.

If we estimate India's population at 1.2 billion people, it leaves a per capita consumption of 111 g of fruits and vegetables. Even given India's grinding poverty and lack of money, this figure is too low to be correct. Said in another way, people in India eat one banana a day (and NO other fruits and vegetables). No onions, potato, tomato or anything else. The one banana will probably exhaust the quota of food that is available for a person.

If we assume that 50 per cent of the total fruits and vegetable production is wasted, then we can eat at most two small bananas per person per day. Again, this figure seems to be far removed from the reality. At a wastage figure of 20 per cent, we seem to arrive at a figure that is more likely to be accurate. Just over 300g of fruits and vegetables per day seems more realistic and accurate given that we eat a range of fruits and vegetables through the year. The reality is close to 20 per cent than 70 per cent, based on the estimnates we have made.

Questions can be raised regarding this method of estimation including the fact that we do not account for import of fruits and vegetables. Fortunately, India is almost self-sufficient on that front, even though we import pulses, oils etc, so imports will constitute a very small part of the total produce. At the same time, preserved foods and vegetables that are exported either in the form of squashes, jams or pickles are not accounted for in this calculation. This is likely to further decrease the per capita availability of fruits and vegetables. Therefore the net impact on this figure is unlikely to be significant.

More recently, the Central Institute for Post Harvest Engineering and Technology at Ludhiana estimated that the post-harvest wastage of fruits in India is between 5.8 per cent for sapota to 18 per cent for guava. For vegetables the range is between 6.8 and 12.4 per cent. When we use the data of CIPHET and compare it with per-capita consumption, the reality is that post-harvest losses are nowhere close to the outlandish figures that are quoted by various actors in the political and economic system.

The other argument is that FDI will bring in best practices and supply chains that are the best in the world and therefore, it is likely to have a positive impact for the consumer over the long term. Firstly, bringing in cold chains can help reduce wastage for sure. But the link to price is far more tenuous. In an era where fuel prices are going up, storing fruits and vegetables in cold storage need not always reduce price to the consumer.

As the costs of fuel go up, the cost of storage will also rise, therefore the price advantage could be very small. In such cases, it might actually be cost-efficient for fruits and vegetables to be 'wasted'. And in many cases in India, fruits and vegetables that are wasted are eaten by cattle and other animals and birds. What is not consumed by livestock then goes into the production of organic manure. Though it is not priced and it is outside of the human food chain, wastage also helps to keep many animals alive that depend on fruit and vegetable wastage for survival.

A new kind of market?

The other argument given by many is that there are a large number of middlemen in the supply chain in India, and bringing in FDI will shorten the chain. This will result in lower prices for consumers. The picture painted by this argument is almost as if there are a line of intermediaries sitting and demanding their pound of flesh in the chain and then magically, all of them go away and are replaced by a single one. This simplistic vision seems to suggest that the single intermediary (maybe a Tesco or a Walmart) is a completely homogenous entity, and the only function of these multiple intermediaries in the present chain is to claim a cut in the chain.

The reality is anything but. Each of the intermediaries perform a specific task from extending finance, to storage, to transport, to loading and unloading and various other tasks that keep the chain going. This is similar to the multiple departments that exists in retail chains like supply chain, warehousing, trade and finance that perform the functions of these various intermediaries that presently exist as a disaggregated entity. Will a single entity be cheaper and more efficient? It well could be, but that is by no means certain, given the costs of supervision and the salary structures that exists in these chains.

Even if a single entity chain is more efficient, does that mean a better price for consumers? The greater efficiency in the chain can translate into better prices, but only if the benefits are passed on to the consumers. There is no certainty that a large corporate entity is necessarily going to do this. More often, companies steer this benefit to their primary stakeholders - the shareholders - and choose to boost profitability and not lower prices.

On the other hand, there are those who suggest that FDI in retail is going to completely destroy the livelihoods of people dependent on the sector. The reality is that some livelihoods will certainly be destroyed. However, it is unlikely to make the kind of impact that many people claim it will. The local vendor is certainly at risk, and many of them will disappear. These will be replaced by more jobs for checkout clerks and shelf stockers in super markets. The nature of these livelihoods will change with the entrepreneurial local vendor being replaced by jobs that are paid by the hour or by the day. Whether this is necessarily better or worse depends on one's views regarding the kind of employment that people would prefer to have.

Ultimately, there is no certainty on the nature of the benefit or loss to the consumer and other stakeholders. Much of the benefits to a particular group will depend on the market power that they are able to muster in an era of large corporates. Aggregation of consumer demand by cooperatives at the consumer end, will be able to provide a better price for consumers. At the same time, the aggregation of producer products will enable a cooperative or any other player to get a greater share in the value chain.

In any event, the least one should expect is a reasoned debate on the issue based on facts, not hyperbole and exaggeration that has dominated the debate so far.