Retail boom can double farm income

Farm incomes in India can double if organised retail enhances farmer realisations on food items from the currently low level of 30-35 per cent of retail price to the international norm of over 50 per cent of retail price, says a study by Crisil Research.

This enhancement would come from cost savings that will result from improving the underdeveloped supply chain for unprocessed food items. Higher farm incomes will benefit the vast majority of the nation’s population that is dependent on agricultural income.

Moreover, this additional purchasing power in the hands of farmers can add more than three percentage points to the nation’s annual GDP growth rate.

More than 70 per cent of retailing in India comes from the largely unorganised food and grocery segment. At an estimated Rs 10 trillion in 2006, India’s retail industry is almost one-third the country’s GDP.

Food and grocery (F&G) items account for more than 70 per cent of all retail sales. However, the penetration of organised retail in the F&G segment is negligible at around 1 per cent. About half of the total F&G retail comes from food grains and unprocessed fruits & vegetables- items that are purchased from farmers. CRISIL Research estimates the retail value of these unprocessed items at approximately Rs 3.8 trillion.

The supply chain for unprocessed food items is fairly underdeveloped in India and has many layers leading to high wastages and a high cost of distribution. Increased penetration of organised retail into the F&G segment can improve the supply chain and boost farm incomes.

The increasing penetration of organised retail into the F&G segment can bring about improvements to the supply chain for unprocessed food items. According to Sudhir Nair, “This can result in substantial cost savings which can be passed on to farmers as better prices paid for produce”.

The current farm realisations for unprocessed items are estimated at around Rs 1.2 trillion. If this segment shifts entirely to organised retailing and the realisations of farmers are at levels comparable to developed countries (around 60-65 per cent), associated farm incomes could double to Rs 2.5 trillion.

Higher farm incomes boost the purchasing power of 60 per cent of the population adding to GDP growth. Around 60 per cent of the Indian population is employed in agriculture. If income levels within this group increase, it can add significantly to economic activity.

For instance, if the farmers spend 80 per cent (given the lower propensity to save at low income levels) of their incremental income, the economy will witness an incremental spending of around Rs 1 trillion. This is equivalent to nearly 3 per cent of India’s GDP, even if the economic multiplier effect is excluded.

Source : Business Standard