FDI in retail: Are commission agents really that bad?

A few days before the government stopped foreign investment in retail dead in its tracks, ET on Sunday caught up with A Mohammad, a commission agent or arthiya at the fruit and vegetable mandi in Okhla in south Delhi.

Such agents are essentially dealers, who buy produce from the farmers and then supply them to everyone, from hotels to the neighbourhood vegetable seller. An executive in an agribusiness company who deals with Mohammad described him as one of the two biggest dealers of carrots in the mandi. "Together, these two arthiyas dominate the trade in carrots," said the executive.

Okhla mandi is much smaller than the giant Azadpur mandi situated in north of Delhi, but it still handles thousands of kilos of vegetables and fruits per day, which pour in by trucks from all parts of India. But to look at him, you wouldn't think Mohammad (everyone in the business calls him Pappu) dominates much of anything. He's the kind of person who you would pass by on any street without a second glance.

When ET on Sunday asked him about his thoughts on the new policy on FDI in retail (still undead at the time), Mohammad said: "I am illiterate. I don't know much about these things." When prodded he did confess to being worried about the new FDI policy, but he actually seemed barely concerned.

Squeezing Both Sides

It is Mohammad, and his fellow arthiyas in Okhla, Azadpur and hundreds of other agricultural markets in the country who are the poster boys for much that is wrong with the trade in agricultural produce, and the reason why foreign investment in retail, or organised retail is needed.

They are accused of contributing to an enormous wastage of produce, and underinvesting in critical market infrastructure such as cold chains which prolong the life of otherwise perishable commodities. They are also seen as squeezing both sides, paying farmers a low price for their produce, holding onto a fat margin, and forcing consumers to pay high prices (officially, the arthiyas in Delhi take a 5% commission on what they buy, with a further 1% being paid as tax to the mandi).

By reaching out and procuring directly from the farmer, by investing in the necessary infrastructure, and by the ability to process large volumes, the big retail chains, whether a Reliance Fresh or a Walmart, would be able to cut out the many intermediaries (anywhere between four and seven) in the current flow of food from farm to a consumer's plate. Farmers would get a higher price and consumers would still be charged lower prices for the goods they buy.

If there is one aspect of the retail trade where this vision of the future will probably be most tested, it will be in the marketing of fruits and vegetables. It is here that the problems of the agricultural trade are starkest, sharp price spikes in one year (or even over a few months), followed by sharp price falls, and high levels of perishability and wastage of produce.