Why Bihar must support FDI in Retail?

It is very unfortunate that the Nitish Kumar government is against FDI in retail sector. Let me first reproduce what Mr. Kumar has said in his recent interview on this: "If FDI comes in infrastructure, it's okay, but not in agriculture. They want our markets. Shiny markets won't help farmers. We won't allow this in Bihar. FDI will make the farmer a slave in the end."

On the contrary, in a state like Bihar, which is mainly dependent on agriculture, if the FDI in retail is opened up, it will bring the much needed capital (not only foreign, but also the private Indian capital), technology, efficient management practices and tight supply chain. They will also entail efficiency in the movement of farm produce from farm to market and thus reduce wastage en route. In fact, Bihar at the moment should not look at it only from the consumer market point of view since average per capita disposable income in Bihar is still low (only Rs. 16, 500) and may not attract many except in big cities like Patna, Muzaffarpur etc.. There is no denying the fact that the FDI in retail is much more attractive in states like Maharashtra, Gujarat etc. as far as the consumer market is concerned  as they already have the necessary infrastructure  and the consumers there already have enough disposable income for packaged items. Once the brands like Walmart, Ikea etc. go to these states, they will definitely try to develop backward supply chains in India, in order to have a constant supply of products on their selves. Bihar, being a predominantly agricultural  state and with enough labour supply (a.k.a. Lewis model), will be the ideal choice for these big Brands to develop their supply chain in Bihar and could be one of the major sourcing hubs in India. [The only problem that I see here is power. I am sure once these Brands realize these huge benefits in Bihar, of course positively supported by the state government, they will try first to develop an effective power system themselves, either through the existing grids in the state or through their own captive plants there and then to link these non-farm activities closer to farms to the selves in Maharashtra,  Gujarat etc. by developing an effective logistics and other necessary back-end infrastructure.]  

According to one conservative estimate, more than one-third of farm produce in India goes waste because of lack of cold chains and other bad management practices. I am sure the wastage in Bihar is much larger, given the state of electricity supply, back-end infrastructure and prevalent practice of consumption directly from farms in the state. Moreover, as per a government of Bihar report, the agricultural productivity in the state, which was much higher than that in other states in 50's, is now much low. The same report also mentions that the average yield of rice (1.45 t/ha), wheat (2.19 t/ha) and maize (2.3 t/ha) is much below the potential of 5 t/ha. It is ironical that a state, rich in soil and water resources, has such a low productivity. Moreover, agriculture is the backbone of the Bihar economy. Not only it generates 42% of the state's GDP, but also employs close to 81% of its workforce. I am sure if the state welcomes the FDI in retail, the unrealized productive forces in agriculture will be unleashed and crops such as paddy, wheat, pulses, maize, potato, sugarcane, oil seeds, jute, horticulture and floriculture will get the necessary boost. The back-end infrastructure in agriculture too, such as in local level water management, may also get support from this capital. 

As far as the investment proposals in the state approved by State Investment Promotion Board is concerned, it appears that most of the investment proposals in the state are coming into educational institutions ( establishment of engineering, medical  or dental colleges), hospital and sugarcane. Good as they are, they are not touching agriculture except in sugarcane and sugarcane-based ethanol. All other crops are untouched by investment proposals. The question is how to get the other crops reach their potential in productivity. The policies since independence have definitely not worked so far. Now is the time to try newer things in these areas. The experience of foreign capital worldwide has shown that establishing an efficient supply chain that links farmers and small manufacturers directly with retailers will maximize value for farmers and minimize wastage of foods and vegetables, encourage best practices in crop management and improve food safety and hygiene. So this may lead to much needed productivity growth in Bihar's agriculture. 

In my view, Kirana stores will continue to exist and may develop different business models for feeding into these big brands. Moreover, the worldwide experience has also shown that  the modern retailers are tax-compliant and are large tax payers while Kirana stores avoid taxes. In state like Bihar where there is a need to generate more tax revenues since the state of state finances is not very good at the moment. In Bihar, the commercial tax collection is merely Rs. 6700 crores (1 crore is equivalent to 10 million), while the total expenditure by state is a huge Rs. 78, 700 crores. Despite meeting the requirements through other state tax measures  (including excise), non-tax revenue, share of state in central taxes and central grants, there is still a need of borrowing for the state to the tune of Rs. 10000 crores per anum. The government must think how to increase the tax net from the state, by including those activities which have been avoiding taxation so that deficit is manged well and debts are kept under control. One way is to make the retail in state more organized. FDI in retail could be that way.  

From the arguments above, I see the following happening in Bihar if we adopt FDI in retail sector:

1. Agriculture will get a boost; productivity across crops will rise;
2. Adoption of best farm practices in the state;

3. Non-farm sector in rural areas will develop; food processing industries will mushroom;

4. Efficiency in movement of farm produce from farms to markets;

5.Farmers' disposable income will increase; More income will mean more investment in agriculture;

6. Electricity supply in state may get an alternative source (private sector initiative);

7. State revenue will see a quantum jump;

8.Back-end infrastructure for both agriculture (better water management) and retail (cold chains) will improve;

9. The rural-urban migration will be discouraged and cities like Patna and Muzaffarpur will have some respite;
10. Logistics such as multi-modal transport system, roads (roads are already getting better in Bihar) will improve; 
11. Un-employment and underemployment will reduce; and
12. The consumers will get more choices in and better quality skin care, hair care, apparel and other consumer items at their doorsteps.

I hope this blog encourages the like-minded people in my state to convince the state government to at least look at the benefits that the foreign capital may bring to a state like Bihar. We may have more to gain than lose from this initiative. So, let us build the consensus!

Any comments (positive or negative) from the readers will be appreciated.

Thanks for reading this!