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Our Bureau

Will facilitate better supply chain management, create efficiencies

Chennai June 13 If organised retailing manages a deep and widespread penetration of the food and grocery sector, farm incomes could increase even as consumers pay lower prices, according to a latest study by Crisil Research. The study suggests that the resultant rise in farm incomes and in rural spending could boost GDP.

Only one per cent of the Indian food-retailing sector is currently organised as against countries such as the US where the penetration is 80 per cent.

Crisil estimates the total avoidable supply chain costs in the food and grocery chain at Rs 1,00,000 crore. About 57 per cent of this is due to avoidable wastage, the rest due to costs arising out of multiple storage points and multi-layer commissions. Farm realisations are, as a result of this wastage, only 35-40 per cent of the final retail price as against 60-65 per cent in countries such as the US. Inefficiencies push the final price paid by the consumer to 2.6 times that paid to the farmer.

Organised retail practices, however, invest in better supply chain management and could create efficiencies by way of disintermediation and enhancement of transportation and storage facilities, which could in turn lead to reduction in commissions and lower wastage of produce, says the study.

According to Mr Sudhir Nair, Head, Crisil Research, if one-third of these savings (Rs 33,500 crore ) are passed on to the consumer in the form of lower costs, it amounts to 3.5 per cent of the country's spend on food items (Rs 9,51,000 crore ). "This can play a significant role in lowering food inflation," it says. Food inflation was 8 per cent in 2006-07, while overall inflation was at 5.4 per cent.

Mr Nair goes on to argue that if two-thirds of the savings from supply chain efficiencies are passed on to the farmer, farm incomes can grow by more than 37 per cent to Rs 2,50,000 crore.

Crisil estimates that if farmers then spend 80 per cent of this incremental income, an additional spending of Rs 53,600 crore — nearly 1.7 per cent of India's GDP— would get added to the economy.

In a teleconference with the media, Mr Nair admitted that the savings equation could be more biased towards the consumer, as against their own estimate of two-third of the savings going to the farmer, depending upon the way consumer preferences and retailing practices evolve. However, he maintained that the findings made a strong case for providing an impetus to organised retail of food and grocery.

Do modern retailers in India really generate supply chain efficiencies? Mr Nair told Business Line that such players were, indeed, better in managing the supply chain. Wastages for such players were found to be about 3-5 per cent of retail price as against 15 per cent otherwise.

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