By Manish Sharma

In a discussion paper floated by the Department of Industrial Policy (DIPP) recently, the regulatory and administrative wing of the Commerce Ministry has made a strong appeal to allow foreign investment in multi-brand retail. While 51 per cent foreign direct investment (FDI) is allowed in single-brand retail format, the subject of foreign investment in multi-brand retail has been viewed with much suspicion and so FDI is still prohibited. The latest attempt by the DIPP is another step to form a political consensus to resolve a contentious issue.

The current macro economic environment has made the discussion paper a topical subject as it has made a strong case for the investment in the logistic chains of retail trade to improve market inefficiencies. The surging inflation rate in India is causing a lot of discomfiture for the central bank authorities, so much so that the RBI (Reserve Bank of India) hastened the hike of short-term lending and borrowing rates at the beginning of July, much ahead of the policy review. Some economists feel that the policy response of the RBI is borrowed from Milton Friedman who famously said: “Inflation, almost, everywhere is a monetary phenomenon”. Thus, they have criticized the apex bank for focusing on demand-targeted monetary policy instead of dealing with supply constraints underlying higher prices.

The criticism carries some weight if one looks at the sub-segments of the overall inflation rate, which is still hovering at around 10 per cent. The food component has been the driving force so far. Though food inflation softened to around 12.8 per cent this week, it was hovering at around 18 per cent level for most part of the past 4-5 months. Supply-side bottlenecks and poor crop due to last year’s inadequate rainfall have been pushing food inflation up. Additional factors like inadequate infrastructure to streamline supply chain have put pressure of supply crunch in the local markets.

Agriculture supply chain is quite fragmented in India. Intermediation cost between the farmers and consumers is too high. Local commission agents, wholesalers and retail vendors together add up to 50-60 per cent to the cost to the final product. Here, the intermediaries at wholesale and retail markets account for maximum cost. Then, lack of storage facilities is hampering the transportation and availability of perishable commodities. Though India is the second-largest producer of fruit and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure. There are only 5,386 stand-alone cold storages in the country, with a total capacity of 23.6 million MT. The government’s response to tackle food inflation has been less than successful.

Moreover, the government’s attempt to intervene time and again in the farm sector has resulted in market inefficiencies. Its decision to provide incentives to the farming community by raising market support prices (MSPs) of wheat and rice time and again has led to distortion of crop pattern and shortage of pulses and other essential commodities. The measures taken to boost farm incomes have not helped farmers much as most of them sell their produce at a small margin of around 5-6 per cent to the brokers better known as aadatiyas. However, subsequent attempts to hike MSPs have increased the subsidy burden for the government, apart from creating largescale inefficiencies in market chains.

Coming back to the discussion paper on retail FDI, there is little doubt that with inadequate storage India will have to persist with alarming level of food inflation. The need to invest in large-scale warehouses is greater than ever. The government has already allowed 100 per cent FDI in cash-and-carry retail that caters to wholesale trade and which is more suitable to build backend supply networks for retail outlets. So, to use supply bottlenecks is seen more as a ploy to build consensus to free the entry barrier of multi-brand retail. Of cold chains & cold shoulder