The price of vegetables increased by 18 per cent; pulses by 14 per cent; milk by 10 per cent; and eggs, meat and fish by 12 per cent. Fruit and cereal prices also increased, albeit by a smaller margin of 5 per cent and 3 per cent, respectively.

These price escalations are largely due to an inefficient supply chain in agriculture. Some factors which affect agricultural supply and help raise food prices include poor agricultural productivity, a lack of corporate involvement in agriculture, ceilings on landholding size, the existence of middlemen, hoarding, and, more importantly, insufficient cold storage facilities and transportation infrastructure. Around 50 per cent of fresh produce in India rots and goes to waste between the farm gate and the market because of inadequate cold storage facilities and a poor distribution network.

Controlling food price inflation has become an urgent policy objective for the Indian government because of the regressive tax that inflation imposes on Indian consumers. Moreover, persistent and spiralling food inflation threatens the country’s macroeconomic stability and its potential for high and sustained economic growth in the future. Consequently, the Indian Cabinet approved 51 per cent FDI in multi-brand retail on 24 November after intense deliberations at different levels that extended over a year, although these reforms have since stalled. With the clear objective of curbing inflation, the policy came with some riders to protect the interests of neighbourhood stores, farmers, and small- and medium-sized enterprises.

If effectively implemented, allowing FDI has the potential to streamline and modernise the sector through a number of ways. First, the development would bring in foreign capital, technology and the managerial expertise of big international retailers. Second, it would‬ develop an efficient linkage between the back-end supply chain and the front-end via capital investment and technological inputs,‬ creating a proper farm-to-fork infrastructure through direct purchase from farmers and the resultant control of intermediaries. This will also ‬bring about efficient movement of produce through the reduction of transit costs. Third, it would ‬minimise the prevailing wastage of fresh produce by improving upon the country’s existing cold-storage facilities, transport infrastructure, warehousing technology and food-processing facilities. Fourth, FDI should‬ help raise farm productivity through the application of contract farming, increase agricultural production, reduce intermediate costs, render remunerative prices to farmers for their produce and eventually lower final ‬food prices to consumers, thus integrating retailers into the value chain. And fifth, it would create employment in small- and medium-sized industries and back-end infrastructure.

Despite regulatory provisions to ensure domestic competition and protect the domestic retail industry and farmers, the policy received stiff opposition. Concerns included the possibility of foreign entrants’ monopoly power over both farmers and consumers; predatory pricing strategies by the new entrants; manipulation of prices for the entrants’ own benefit and a fall in income, employment and the eventual destruction of the unorganised indigenous retail sector, which is dominated by small family-run outlets.

But it is important to remember that other countries like Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, Singapore and Thailand have allowed 100 per cent FDI in multi-brand retail since the 1990s, with encouraging experiences. China, for one, permitted FDI in retail as early as 1992. It has since attracted huge investments in the retail sector without affecting either small retailers or domestic retail chains. Since 2004, the number of small outlets has increased from 1.9 million to over 2.5 million in China. Employment in the retail and wholesale sectors also increased from 28 million to 54 million from 1992 to 2001. And in Indonesia, even after 10 years of opening up to FDI in multi-brand retail, 90 per cent of business remains with small traders.

The favourable experiences of other emerging markets suggest the appropriate implementation of FDI in multi-brand food retailing, with effective checks designed to protect indigenous small- and medium-sized enterprises, will eventually alleviate the supply-side impediments to agricultural production. It will transform the way perishable agricultural produce is acquired, stored, preserved and marketed — and thus help control India’s persistent food inflation.

Nandita Dasgupta teaches economics at the University of Maryland, Baltimore County. She is also Visiting Faculty at Johns Hopkins University. A version of this article was first published here in Columbia FDI Perspectives.