FDI in retail – Can it really “uncomplicate” the Food Supply Chain in India ?

Unorganized retailing is by far the prevalent form of trade in India – constituting 95% of total trade, while organized trade accounts only for the remaining 5%. Out of this organized and unorganized retail almost 60% of the household expense consists of food and grocery expense thus forms the biggest share of retail business. Therefore, the biggest impact of FDI in retail as game changer can be safely assumed to be on how food supply chain operates in India.

Let us have a deeper dive in Indian food supply chain to analyze the impact. Food supply chain in India is largely very fragmented, unorganized and inefficient attributing to the high food prices. Major hurdles in development of the same can be segregated to four key factors – low productivity in Indian agriculture, regulatory restrictions, poor logistics infrastructure and lack of integration of back-end and front-end across supply chain.

Key reasons for low productivity in agriculture are primitive knowledge of modern agriculture practices in rural India and continuation of archaic technique by Indian Farmers. Though there has been commendable work done by Govt. agencies and NGOs in few areas, still there is a long distance which needs to be traveled and journey must be fast paced so as to support the growth. Therefore there is a strong case of investment by private players in empowering and educating farmers, ensuring availability of high tech farming instruments so as to attribute to higher yield supporting the higher demand leading to inclusive growth.

Regulatory restrictions such as APMC act and complex taxation structure remain one of the major constraints for “uncomplication” of food supply chain. The APMC Act in each state of India requires all agricultural products to be sold only in government regulated markets. These markets impose substantial taxes on buyers; facilitate commissions and fees for middlemen, but lack in key areas of price discovery and quality inspection. Multiplicity of taxes and multiple tax enforcement authorities across geography enforce the supply chain design on basis of taxation rather than efficiency across geography. Unfortunately, regulatory issues in India still remain agendas driven primarily driven by political motives and largely unaffected by keenness of private players to enter and expand in retail segment.

Logistics infrastructure in agriculture has been developing at a rapid pace over the past decade but still has a significant ground to cover. Poor warehousing and cold chain facilities managed by unorganized players, lead to high spoilage and shrinkage losses. It is imperative for retail to concentrate on developing a strong back-end support especially for perishable products to help reduce wastages which is estimated to be at 40 percent of national farm produce.

The final key hurdle is lack of integration of backend and front-end across supply chain. There is no transparency of prices, the farmer ends up selling to the middle men who actually may or may not be so transparent about pricing. There is no transparency of consumption thus there is no understanding of how demand is. This ecosystem is largely a push based system. To bring this transparency into the supply chain, there must exist a tighter integration in backend and retail front-end across supply chain. This will bring in the managing the geographical imbalance of supply and demand, less frequent gaps in supply and demand and thus will keep a tight check on demand driven price rise.

Interestingly, out of four key hurdles, three will have no major impact from FDI in retail as FDI in ‘cash and carry’ is already allowed. If existing players would have realized the value in these areas, we should have been looking at phenomenal change in farming practices and logistics infrastructure already. The lack of initiative can be attributed to regulatory restrictions as well, but it will still remain largely un-impacted even if FDI in retail is allowed. Therefore the key differentiator that FDI in retail might bring is the different outlook of new entrants or strong belief in unlocking the value in supply chain by building a tight channel of information flow between the end consumer and farmer. As for question of how big that differentiator can be, we will come to know the answer for sure, but with time.

[The article has been written by Yuvnish Dhamija. He is a 28 year old supply chain consultant from India. He is a mechanical engineer and MBA from SJMSOM IIT Bombay. He has worked with L&T, IBM and is presently working with ThinkLink SCS.]

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FDI in retail – Can it really “uncomplicate” the Food Supply Chain in India ?

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