‘Foreign investments in retail will help farmers'

The Indian economy is in the penultimate year of the Eleventh Five-Year Plan; the middle years of the current Plan saw global financial tsunami hitting the Indian shores too. The relentless spike in oil and commodity prices apart, food inflation has been the bane of the UPA-II.

Despite several skeletons tumbling out of the cupboard to embarrass the ruling coalition, the growth story has regained its lost or fading sheen in recent time. In order to get a perspective on the economy in critical areas,

Business Line caught up with the supreme policy-setting machinery's spot-on man, the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia. Always candid and lucid, Mr Ahluwalia detailed different facets of macro-economy. Excerpts from the interview:

On rising current account deficit: It is clear that the deficit has shot up. The latest available data for third quarter of 2010-11 suggests a narrowing — earlier people feared that the CAD would be more than 3 per cent of GDP. But it will be definitely less than 3 per cent.

The Reserve Bank of India has said 2.5 per cent and it could be 2.8 per cent.

Traditionally we have been comfortable with 2.5 per cent and that is on an average and in any given year, it can go a little below or a little above. Looking five years ahead, India can finance CAD even of 3 per cent a year with long-term capital flows, including foreign direct investment (FDI) provided our investment environment is seen attractive and supportive. That should be our objective because otherwise we can't get the growth rate that we want.

On fears of investment famine: You have to recognise that global economy is recovering —when it was low, a lot of things got postponed and decisions got shifted forward and there was probably a slowing down of investment in the last two years.

But this will now pick up and the extent to which it picks up for India will depend on whether we continue to be seen as a strong and well-performing economy.

This includes a combination of underlying potential, macroeconomic policy, and government initiatives in critical areas. The most important area to focus on, if we want revival of investment, is really infrastructure. We know what to do and the initiatives are there on the ground.

There are some operational problems such as land acquisition, environmental clearances and they have to be streamlined.

On high food inflation: In 2010-11, inflation continued to be a problem as we began the year with very high cereal inflation because of a bad drought in 2009-10. Actually we were successful in controlling that, but because of unseasonal rains, prices of vegetables, fruits and meat shot up.

I am glad that inflation has come down now. But I don't regard 9.5 per cent food inflation as something to feel comfortable as this must come down more. What we have seen is a shift in relative prices. Agriculture is diversifying, so the demand for cereals is not going to rise that much. It is the demand for other perishables such as milk, eggs and poultry that would expand.

Until their supply catches up, there will have to be some price shift. To some extent, a shift in prices in favour of agriculture as far as the farmer is concerned is actually a desirable thing because a lot of studies show that farm activity is not economical — the real problem is a lot of increase in consumer price may not be benefiting the farmers. This is pointing to the inefficiency in the intermediation chain where the high price paid by the consumer is not being passed on to the farmers. We need to modernise that and we have been writing very strongly to State governments to modernise the Agriculture Produce Marketing Committee Act (APMCA) and vegetables and horticulture should be exempt from APMCA that will enable farmers to establish direct connection with the markets..

Will retail marketing reform and foreign direct investment (FDI) to retail help farmers? It is a two-stage operation. Modernisation of marketing linkage between farmers and consumers is absolutely vital. The present system is not modern as it leads to cartelisation by a few agents. It has not given the farmers the benefit of direct linkage with transparent pricing.

Hence there is a need to bring in modern retail which means a lot of private sector activities. Second is why not allow FDI in these areas?

Sometime, there is opposition to modern corporate marketing. Do we want modern marketing and the answer is unambiguously yes. Should you keep FDI out and allow only the Indian private sector?

I think the fear that FDI in retail will swamp the system is greatly exaggerated.

If the economy grows at 8-9 per cent, retail will grow a little faster than that. Retail would double every 8-9 years. When retail doubles, nobody expects that the traditional shop-keepers will contract. Modern corporates take a lot of time to expand.

If you open up FDI to retail today, it is very unlikely that more than 10 stores can be put up within three years. It is unlikely more than 50 stores can come at the end of the five-year period. At the end of 7 years, these would have doubled. There is room for traditional retail to expand, there is a lot of room for domestic corporate retail to expand and some might go in for joint venture with foreign retail.

This will greatly improve the linkages with farmers and we must make it competitive. The only way the consumer is going to be protected is having several modern retail operators.

Would this reduce inflation? Technically, two things will happen. It will reduce the margin between the producer and the consumer in the first two or three years and it looks like smaller rate of inflation, but the underlying inflation will depend on overall demand management. But it will create greater efficiency and improve realisation for the farmers.

In the traditional retail, the loss to the consumer by way of damaged apple or banana in a crater could not be ruled out but if you find somebody who can sell it without this loss, farmers would be able to get the benefit.Modern corporates would provide a better quality of employment than the the local shopkeepers . As they do that, local shopkeepers will upgrade the quality of employees simply to stay competitive. The Planning Commission is supportive of the Ministry of Commerce & Industry on this that the retail sector should be opened up for FDI.

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