Ambani needs to learn from Deveshwar

The skills of Reliance Industries in \”managing\” the investment climate are legendary. Why, then, has it grossly mismanaged the political economy of its retail foray?

Traditional agricultural markets have several layers of intermediaries, who prosper at the expense of the farmer and consumer. Eliminating intermediaries and linking the farmer directly to retail means the farmer can earn much more, while leaving a profit for the retailer.

Reliance has adopted this \’farm-to-fork\’ strategy. It wants to be world No 1 in all fields it enters. So, it aims to invest Rs 25,000 crore by 2011 in retail, with sales of possibly Rs 100,000 crore. This includes Reliance Fresh stores to sell agricultural produce. Reliance plans to create half a million jobs directly and one million indirectly in retail. It trumpets this as a win-win strategy for farmers and consumers.

Reliance Fresh started rolling out stores from November 2006 on an unprecedented scale. But this has been halted by agitations by traders, shopkeepers and NGOs in several states. Reliance Fresh has been forced to close its shops in UP after violent agitations. It also faced protests in Jharkhand and Orissa, but so far the state governments have kept the peace. Marxist governments in West Bengal and Kerala have vetoed Reliance\’s entry.

The company is operating in Hyderabad, Chennai, Bangalore and Delhi. But its big bang has sputtered. A massive \’Quit Retail\’ rally is planned in Mumbai on October 10 to protest against all big retail, meaning Reliance and foreign chains like Wal-Mart.

The anti-retail movement began as the ideological opposition of Marxists and NGOs to big multinationals, especially Wal-Mart. Reliance could have posed as a swadeshi champion to foil foreigners. Instead, it is now lumped with Wal-Mart.

Reliance should have known the lobbying power of traders – they had sabotaged the introduction of VAT in Uttar Pradesh for years. The \’farm-to-fork\’ strategy threatened rural intermediaries and others connected with government-run mandis. Why did Reliance not find ways of splitting opponents, co-opting some factions, and offering sops to potential losers?

Because, Reliance has long prospered in capital-intensive industries requiring contact with bankers, investors, politicians and bureaucrats. It has become expert in managing these. But it has little contact with rural folk or conditions. It failed to understand the political economy of the farm supply chain, and thought that managing politicians and bureaucrats would suffice in this field too. What a blunder!

An object lesson in handling the rural political economy comes from Yogi Deveshwar of ITC, who pioneered rural electronic kiosks or e-choupals. ITC saw that by cutting out intermediaries, it could give farmers a higher price while reducing its procurement costs for soyabeans, shrimp and coffee. But it also saw that it would face stiff opposition from local vested interests with political clout. So, ITC decided that every e-choupal would be run by a sanchalak, a local large farmer. Sanchalaks were trained to run kiosks on a commission basis, providing information to farmers on market prices, weather, and inputs, and certifying the quality of produce. Thus, ITC won over an influential section of large farmers.

E-choupals threatened mandis and the accompanying interests – traders, mandi labour, bazaars around mandis. As part of its strategy, ITC continued buying soyabeans at mandis, to soften the blow created by its own procurement hubs. To win over part of the trading community, ITC hired some intermediaries as samyojaks, to provide logistical links from farms to its hubs, and to manage labour, bagging and storage. By hiring samyojaks, ITC split the trading community and ensured that some factions would be on its side. ITC also hired mandi labourers for its own operations, reducing tensions there.

So, when an agitation was launched by opponents of e-choupals in Madhya Pradesh, ITC had enough rural factions on its side to contain the problem. This was a triumph. From the start, ITC worked with farmers to understand their needs. It knew how suspicious they were of big companies. Instead of behaving as a big trader, it adopted the position of a rural development agency with a commercial twist. Each sanchalak had to take an oath to serve the community, positioning e-choupals as not just a business but a public service too. Feedback from farmers has shaped the evolution of the business. This approach gradually overcame rural suspicions and built trust. ITC started small in 2000, and has gradually expanded to 6,500 kiosks today.

The contrast with Reliance\’s big-bang approach is stark. \’Farm-to-fork\’ benefits farmers, so Reliance should have been able to organise farmers on its side. Instead, some farmers\’ organisations are joining the \’Quit Retail\’ rally in Mumbai! Instead of cultivating the grassroots, like ITC, Reliance thought that cultivating politicians was enough.

It promised gigantic operations, not realising that this would automatically draw from Marxists and NGOs. These opponents do not object to smaller chains like Subhiksha and Spencer\’s. Reliance has brought trouble on itself by boasting about size.

The same could be said of its forays into Special Economic Zones. Mukesh Ambani needs to learn some lessons in political economy from Deveshwar.

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