Draft Report of the High Level Group on Services Sector

7.2.5 Supply Chains
The world over food and grocery items including fresh fruits and vegetables constitute the largest segment of retail trade. In India retail operations are handicapped by the presence of multiple levels of intermediaries in distribution of these items. The Agricultural Produce Marketing Committee (APMC) Act, which was originally enacted to assist the farmers in getting the best price for their produce became an impediment in achieving this objective as it trapped them in the stranglehold of arhatias (wholesalers). Further one of the advantages of modern retail industry is that the farmers supplying the produce are provided with technology to improve their farming practices as a result of which the retailers have better produce on their shelves and the farmers increase their incomes. For this to become possible the farmers have to undertake contract farming and sell their products directly to the retail chains. The APMC Act bars such an arrangement, as the farm produce must be sold in the designated markets. While many States have amended their laws and eliminated the obstacle in the way of contract farming the process is still hampered in the absence of a specific law on contract farming affording speedy relief against violations of contract farming.
For efficient operations the retail chains need logistic service providers, to whom a company’s entire logistic operations can be outsourced. The logistics industry in India is highly fragmented with each of the segments, road transportation, freight forwarding, warehousing, and management of information service dominated by small operators. Few of the service providers have the capability of providing service in more than one segment and Third Party Logistics (3PL) companies with the capability of providing multiple tactical logistics services are uncommon in the country. The lack of a well -developed logistics industry in the country increases the need for retail chain companies to make investments in supply chain infrastructure. However, they are severely constrained by the unwillingness of commercial banks and financial institutions to lend for retailing, which is not an industry. External commercial borrowings are also barred even for the machinery and refrigeration equipment needed by the retail sector.
In this connection the Group was informed about the plans of the Ministry of Food Processing Industries to implement the Mega Food Park Scheme, which aims to provide a mechanism to bring together farmers, processors and retailers and link agricultural production to the market so as to maximize value addition, minimize wastage, increase farmers’ income and create employment opportunities in the rural sector. In the XI Five Year Plan an outlay of Rs 1500 crore has been earmarked for the development of 30 Mega Parks in the country. Although the programme is aimed at stimulating the food processing industry the Group took the view that its successful implementation will strengthen the supply chain in the country and increase efficiency in the operations of retail chains. The Group supports the speedy implementation of the Mega Food Parks Programme.
On contract farming also there has been progress in that several States have amended their laws to make contract farming possible. The success of contract farming for the food processing industry has been demonstrated in Punjab by Pespi Foods Ltd. Organized retail can similarly benefit from contract farming and at the same time the farmers can gain if the retail companies invest in training the farmers, and in imparting skills in improved farming techniques as well as communication skills. However, for successful contract farming operations regulations are needed to ensure quick remedy against contract violations and speedy resolution of disputes. Many States have not framed the Rules under the Acts for dealing with these problems. A commonly voiced concern is also that the farmers should not lose their land and become bonded labourers.
The Group recommends that the States should move forward to frame rules and regulations under the APMC Act to provide for quick remedy against contract violations and speedy settlement of disputes as this will stimulate resort to contract farming. Widespread use of contract farming will be a boon to the farmers and will also improve the efficiency of retail chain operations.