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Analysis

FDI, combined with agri reforms, is the way to fix Indian supply chain

By RJ Whitehead , 16-Apr-2014
Last updated on 17-Apr-2014 at 07:47 GMT

FDI, combined with agri reforms, is the way to fix Indian supply chain

Everybody goes on about India’s vexing issue of food storage, FoodNavigator-Asia included. The trouble is nobody has done much about the problem in generations, and there’s little in the way of improvement on the horizon.

Earlier this week, we reported on a study by the Associated Chambers of Commerce and Industry of India (Assocham) that claimed almost one-third of grain was wasted in storage. Moreover, it warned that the country needs additional warehousing to accommodate a further 43m tonnes to begin to put this wastage in check.

From where we stand, we can’t see much happening to address this. A landmark private warehouse project here or an upgrade there, in between there is little change in the storage landscape besides the continuing decay of countless facilities.

While consumer habits have changed, India’s storage infrastructure has not. Originally designed for a smaller population with greater dependence on rice and wheat, its designers had no idea of how diets would move on towards greater middle-class consumption of vegetables, meat and dairy. 

As incomes have grown, both in the cities and in the heartland, demand has started to quickly exceed supply. At the same time, industry segments have been reluctant to invest in their supply chains even though this would likely be to the good of their business. As a result, dairies rely on food storage facilities when they should be using chilling plants with fleets of refrigerated trucks to get their products to market.

Protein suppliers should have done similar by building supply chain investment into their business models, thereby leaving consumers to reap the benefits of fresher food at lower prices.

The fashionable argument is that by encouraging foreign direct investment in multi-brand retail, cash-rich multinationals will enter the market with their fancy new fleets of refrigerated trucks and degree-educated logistics experts, and spend crores on enhancing the supply end of their business.

The reality is that there isn't such a lengthy queue of newcomers keen to enter India’s market, but they will still come over time. When they do, they will chip away at India’s warehousing woes, but this won’t be in the short-term.

The next government must do something for the first time in decades about this crumbling infrastructure and push the industry into getting the supply chain moving.

The Bharatiya Janata Party (BJP), has got it wrong by pledging to disallow foreign direct investment in supermarkets in its election manifesto. As has always been the case, its position is based on the concerns of the powerful voter bloc that is local retailers, and not the unheard farmers who would stand to benefit from FDI.

It is tough being a farmer in India. Their supply chain is controlled by powerful middlemen and politically influential local groups who monopolise wholesale markets, leading to a sizeable price gap between the markets and retailers.

Then there is the Agricultural Produce and Marketing Committee (APMC) Act, which has prevented farmers from selling their produce at worthwhile prices by barring competitive bidding. 

By dwelling on the FDI fears of unorganised retailers, the BJP policy is missing out on the support of a sizeable mass of agricultural voters. They want nothing more than an end of the APMC Act and an improvement in storage for their produce that will gradually come from FDI. 

By allowing FDI in retail, and complementing it with an end to the APMC Act, the government would serve to open up the market for wholesale procurement and help farmers command better prices. This alone is likely to lead to better farming returns, less corruption and wastage, and lower prices for customers.

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