Tuesday, May 29, 2018

Amazon vs Walmart: Take advantage of the coming battle of giants by freeing India's farmers


In the uproar surrounding last week’s acquisition of Flipkart by Walmart, the true significance of the world’s largest e-commerce deal escaped everyone. Headlines screamed about the coming battle in India between two American giants, Amazon and Walmart. News channels narrated a Cinderella story of two youngsters who started selling a few books from their two bedroom flat in Bengaluru and created a company that was worth $21 billion ten years later, making a hundred of its employees dollar millionaires.

Nationalists moaned about the takeover of an Indian by a foreign company. Economists saw it as a coming of age of India: following China’s example, India too would now join up with one of the most powerful global supply chains, giving a major impetus to our exports, accelerating foreign investment and jobs in the country.

India’s young start-up community was excited that the deal was a role model of how an Indian entrepreneur could be handsomely rewarded for the hard work in building a company. And our tax department was salivating over the bonanza in capital gains from the deal.

All this is true but none of it captures the full story. Yes, May 10, 2018 was a historic milestone in India’s economic history when Walmart, the world’s largest retailer announced a $16 billion acquisition for a 77% stake in Flipkart, India’s largest online marketplace. It was a lot of money to pay for a company that was losing money and not expected to break even in the next five years; some had even predicted the demise of Flipkart. When the deal was announced, the price of Walmart shares fell in its home country and investors lost $10 billion.

What most observers failed to grasp are the true benefits to India, which emanate from Walmart’s competitive advantage over Amazon. It is able to deliver fresh, high quality vegetables, fruits and other farm produce via a legendary cold chain which it has perfected in 28 countries. Neither Amazon, nor Flipkart has this.

Reliance also tried to do a Walmart in India in its foray into ‘Reliance Fresh’ but it failed. It is also good news for kirana stores. Walmart has been operating a chain of 21 Best Price wholesale stores, supplying to over a million retailers in India. It now plans to convert many of them into ‘partners’ for its last mile delivery to the Indian home.

It will upgrade the kirana store’s skills in inventory management, digital payments, and logistics technology. Thus, it has neutralised the earlier hostility from the trade. The real story in the emerging e-commerce battle is the potential transformation of India’s agriculture and kirana store.

A respected management consultancy firm has estimated that the Walmart-Flipkart venture will require infusion of significantly more capital – Walmart has already announced $5 billion – and this could create roughly a crore new jobs over time. It has already made a strong start by sourcing 97% of its goods from Indian medium and small enterprises, exporting $4-5 billion each year.

This trend will accelerate. In line with its global practice, the new Walmart operation will source 95% of its goods locally. Plus, the jobs it will create in logistics, cold chain, warehousing, distribution and delivery, add up to 10 million jobs.

I sometimes wonder why i pay Rs 20 per kilo for potatoes when the farmer receives only Rs 5. My potatoes travel some distance, i realise, from the farm to the mandi to my kirana shop, and each person in the chain takes his cut. Still, the Rs 15 gap seems excessive. Analysis shows that in countries where large supermarkets operate, the gap is smaller because farmers have long term contracts with large retailers and they invariably receive higher returns because of eliminating middlemen.

Yes, it is arthiyas and wholesalers in the mandi who will lose. But i refuse to shed tears for them since they operate a corrupt cartel which exploits the farmer. A typical farmer harvests his crop, loads it on a bullock cart, travels 30 km to the mandi, where he is often forced to sell at distress prices fixed by the cartel. The arthiya knows that the crop is perishable.

Aware of this corrupt system, the central government has created a model reform act, scrapping the ‘agricultural produce marketing committees’ (APMC). But only a few states (like Maharashtra and Bihar) have implemented it. The reason is that the corrupt APMCs provide black money to politicians to fight elections. The e-NAM portal was supposed to provide online information to farmers in surrounding mandis, but like most government programmes it has been a flop.

In contrast, global retailers like Walmart invest in cold storages, airconditioned trucks and grading facilities, and connect the farmer to food processors; this saves post-harvest losses and increases farmer income. Given the pervasive APMC cartels, the benefits of Walmart’s entry will thus only be confined to a handful of states. This is a great pity since a third to half of India’s food crop rots.

If he is serious about doubling farmer incomes, Prime Minister Narendra Modi faces a choice. Will he pick up the phone and tell chief ministers of BJP ruled states to abolish APMCs, or will he accept the corrupt cartels that finance his, and other parties? If he is true to his election promises to end corruption and double farm incomes, he will free farmers to sell their produce to anyone they choose, freeing them from the clutches of the ‘APMC Raj’. Only in this way will India take the full advantage of the coming battle of the giants.

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