INDIAN CONGLOMERATE RELIANCE SUSPENDS ITS WEST BENGAL RETAIL

UNCLAS SECTION 01 OF 03 KOLKATA 000289

SIPDIS

SIPDIS

DEPT PLS PASS USTR, FAS

E.O. 12958: N/A
TAGS: BTIO EAGR ECON EINV PGOV IN
SUBJECT: INDIAN CONGLOMERATE RELIANCE SUSPENDS ITS WEST BENGAL RETAIL
PROJECT

REF: NEW DELHI 4076, KOLKATA 91

KOLKATA 00000289 001.2 OF 003



1. (U) SUMMARY. Faced with violence against its facilities and
growing political opposition to expansion of retail in India,
the Reliance Group on September 13 suspended its billion-dollar
agricultural retail project in West Bengal. The ruling
Communist Party of India-Marxist (CPM) and the W. Bengal Chief
Minister are in favor of allowing big retailers to operate, but
the opposition parties and some of the CPM's Left allies have
taken a hard-line against large investment in the agricultural
market that would disrupt the current inefficient and corrupt
system, which enriches the local politicians and the numerous
middlemen involved. As is often the case in India, the issue is
not really about the ideology or the policy, but about who
stands to benefit. In this case, the biggest loser may be W.
Bengal, as negative signals discourage investment, but the
"retail problem" is affecting many other states as well. END
SUMMARY.

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Reliance throws up its hands
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2. (U) The inauguration of Mukesh Ambani's Reliance Industry's
USD 1 billion retail project in West Bengal has been suspended
after a series of violent protests organized by Leftist
political parties (except the ruling Communist Party of
India-Marxist (CPM)) and opposition parties. These protests
started in mid-August in front of Reliance's department stores
around Kolkata. Reliance has now removed products from the
shelves of its stores. On September 13, a Reliance contact told
Post that although the company faced similar protests in other
states, a "lack of enthusiasm" in the W. Bengal government to
support Reliance contributed significantly to the company's
decision to put on hold its operations in the state.


3. (U) On September 14, at an event organized by the Federation
of Indian Chambers of Commerce (FICCI),W. Bengal Chief Minister
Buddhadeb Bhattacharjee explained his government's decision to
back off despite its earlier enthusiasm. He said, "We should
not and cannot stop big retailers. It is my opinion, but
unfortunately I am running a coalition government. And that is
my problem," placing the blame on his Left Front coalition
partners.

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CPM Wants Retail with Conditions, Smaller Parties Don't Want
Retail at All
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4. (U) Although Bhattacharjee is generally in favor of large
investment in retail, even his CPM party has specified certain
conditions for setting up retail department stores. The CPM
would like larger retailers to set up stores outside Kolkata's
city limits so as not to take away business from corner shops.
The party also does not want large retailers to sell grains, and
foreign investment in retail is still a no-go. The position
taken by Left Front member Forward Bloc, and the opposition
Trinamul Congress and the Bharatiya Janata Party (BJP) is more
strident. Senior Forward Bloc leaders told Post that their
party was opposed to organized retail per se (not just against
Reliance) as "it would destroy the traditional system of
marketing."


5. (U) The violence employed by the anti-retail elements has
been continual and significant. On August 18, activists of the
Forward Bloc ransacked a Reliance retail shop in Kolkata. BJP
activists ransacked the same shop again on August 26. On August
28, demonstrators "temporarily occupied" a Reliance store at a
North Kolkata suburb. On September 6, the students' wing of the
Forward Bloc blocked a road in Kolkata, protesting against the
company's retail venture. Forward Bloc leader Ashok Ghosh said
his party would not allow Reliance to jeopardize the interests
of small retailers. Ghosh also wrote a letter to Trinamul
Congress president Mamata Banerjee, seeking her support for a
joint action against Reliance.


6. (U) The West Bengal government's response to these violent
protests has been low key. Chief Secretary Amit Kiran Deb said
his government would provide protection to the retail chain and
complaints lodged in various cases would be "pursued."

KOLKATA 00000289 002.2 OF 003


Reliance's decision to stop its retail operations is an
indication that the company did not put much faith in these
assurances.

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The Real Issue is the Agricultural Model...
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7. (U) While Reliance's stores were coming under attack, it
was business as usual for other large retailers operating in
West Bengal. No demonstrations were staged in front of stores
such as Spencers, Westside, Big Bazaar and C3. Even Metro - a
German chain setting up its cash-and-carry operation in Kolkata
-- faced no problem. While Reliance is a new entrant in West
Bengal, all the other large retail shops are owned by industrial
conglomerates that have previously invested in the state.


8. (U) There are two factors driving the opposition against the
Reliance venture: First, the Forward Bloc does not want
Reliance to buy fruits and vegetables directly from farmers.
Moreover, they do not want the company to open retail outlets
that would compete with smaller businesses. Significantly, the
protests are directed against Reliance because its project
involves mostly agriculture retail and will have a direct impact
on West Bengal's existing farm marketing practices. The
Reliance business model, the Forward Bloc alleges, will
introduce a monopoly across the entire supply chain of
agricultural produce, disrupting the livelihood of at least 10
million people in their estimates. These people are employed in
vegetable wholesale and retail trade, including participants in
the approximately 4,500 weekly rural markets in the state.


9. (U) West Bengal's existing large retailers have a marginal
impact on agricultural trade as vegetables make up only 1-2
percent of their operations. Moreover, these retailers buy
their agricultural produce from existing wholesalers in bulk.
This model does not disrupt the existing agricultural supply
chain and means more business for wholesalers and intermediaries.

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...and Who Benefits
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10. (U) The current farm-to-plate supply chain of fresh
vegetables in West Bengal operates through a web of state
regulated rural markets that legally and illegally enrich a host
of participants in the system. Farmers sell their produce to
wholesalers in these markets at prices determined by local
Marketing Committees. To buy from farmers, the wholesalers must
have a license from the local Agricultural Produce Marketing
Committee (APMC). This license is mandated under the
Agricultural Marketing (Regulation) Act, 1972. The Marketing
Committees - with representatives from farmers, wholesalers and
the state agricultural department -- form an oversight mechanism
to protect the farmers and intermediaries from price and
quantity speculations. The Forward Bloc runs West Bengal's
agriculture ministry and has oversight of the entire
agricultural market network. Corruption and payoffs are rampant
and common within this system.


11. (U) The Reliance project would have set up a parallel
procurement network, bypassing the existing one. Reliance
planned six agri-distribution and procurement hubs across West
Bengal. These hubs were to be housed in 100-acre plots each.
Also on the Reliance supply chain were 80 Rural Business Hubs
(RBH) and 40 Reliance Town Centers (RTC),each set up on 10-acre
plots. The state government, keen to amend the Agricultural
Marketing Act to make the mandatory APMC license requirements a
mere formality, hoped that easier licenses would encourage
private investment in agricultural marketing, dismantle the
existing cartels, and reduce the number of intermediaries,
thereby releasing value for farmers and consumers. On August
30, around 400 farmers blocked a road near Ukhra (about 100
miles North of Kolkata) in Nadia district to protest against
attacks on Reliance shops. The farmers claimed that Reliance
paid them more for their produce than the middlemen.


12. (U) COMMENT: West Bengal prides itself on its agricultural
sector, which remains one of the most productive in India,
although nearly 40 percent of produce is wasted due to a lack of
adequate cold storage and infrastructure. Historically, the
Left parties have found their vote banks among small and local

KOLKATA 00000289 003.2 OF 003


farmers and among the various middlemen in the agricultural
market chain. Reliance's venture, however, would fracture the
Left coalition and its corresponding supporters because a large
investment in agricultural retail would result in a situation
where farmers (the CPM's constituents) stand to gain at the cost
of marketing intermediaries (the constituents of CPM's ally
Forward Bloc). Compounding the problem is the policy divergence
within the Left Front itself, with smaller parties opposing
retail outright. Ultimately, this dispute works against new
investment, encourages the status quo, and favors existing
interest groups in West Bengal. The "retail problem" is fast
becoming a national issue faced by many other states, including
Uttar Pradesh, Kerala, Punjab, Madhya Pradesh, and Gujarat.
JARDINE