FDI in retail: pros and cons

What the reform measure means for Indian economy

shubhang

Shubhang Arora | October 28, 2012



India has been ranked as the fourth most attractive nation for retail investment among 30 emerging markets by the US-based global management consulting firm, AT Kearney, in its Global Retail Development Index (GRDI) 2011.

The Cabinet Committee has approved 51 percent foreign direct investment (FDI) in multi-brand retail, a decision that will allow global mega chains like Wal-Mart, Tesco and Carrefour to open outlets in India. The decision will be a game-changer for the estimated $590 billion (Rs 29.50 lakh crore) retail market.

The Cabinet also increased the FDI ceiling to 100 percent from the 51 percent in single-brand retail format under which companies in food, lifestyle and sports business run stores. Owners of brands like Adidas, Gucci, Hermes, LVMH and Costa Coffee can have full ownership of business in India.

In the wake of apprehensions among some political parties, including UPA ally Trinamool Congress (which quit the alliance over this issue), over the impact of the decision on farmers and kirana shops, tough riders have been imposed on the entry of multi-national companies. They should bring in a minimum investment of $100 million, of which half should be in the back-end infrastructure like cold chains, processing and packaging. The retailers will have to source at least 30 percent of manufactured and processed products from small-scale units.

Battling near double-digit inflation, the government had been trying to build a consensus on the issue since early last year, contending the entry of MNCs in retail would contain inflation.

Considering space constraints in big cities, stores can come up within 10 km of 53 cities with one million population. Besides, agri produce like fruits, vegetables, grains, pulses, poultry, fishery and meat products will have to be sold without branding. Also, the government and its agencies will have the first right on procurement.

As much as 95 percent India’s retail market is driven by kirana stores. The organised trade with players like Future group, Reliance and the Tatas have captured only a small share in the big retail market.

The nod for FDI in multi-brand retail can bring in Rs. 450 crores in the sector, but with stringent conditions like mandatory investment of at least 50% in the back-end infrastructure, minimum sales of 30% to come from small traders, and 30% mandatory sourcing from small and medium enterprises.

Therefore, firstly, with 50% investment in back-end infrastructure, it will not improve our country’s infrastructure but also generate the employment to the country. So, it is a valid point.

Second, as minimum sales of 30% will have to come from small traders, it will create an opportunity for small traders and they will competitive enough. To this we can say, that the 30% sales for the small traders is good because it is going to create a great impact on the market. It will provide an incentive for better performance to maintain the position.
Third, 30% mandatory sourcing from small and medium enterprises will give an opportunity to small and medium enterprises to be competitive and improve their quality because whoever will come in India they will be very quality conscious.

The question here arises of how do the domestic players react to it. The answer to this is FDI in retail sector is a very good sign for consumers because they will get lots of varieties in a reasonable price, employment generation for 2nd largest populated country, and competition increase.

We can very well say that with companies like Wal-Mart or Tesco, the largest private employers of the world at our doorsteps, there is more chance of employment rather than job losses. According to estimates, at least 10 million jobs will be created in the next three years in the retail sector. Thus there seems to be scope of advancement in terms of modernisation and globlisation as there would be handful of foreign investments in various parts of the market.

Thus foreign retail majors will ensure supply chain efficiencies as well, as they will include cold chains, refrigeration, transportation, packing, sorting and processing. This will lead to lower prices of products, benefiting consumers at large, minimum wastage of food resources due to current poor infrastructure, less inflation rate due to the efficiency in the supply chain and hence a step towards the speedy growth of the country.

With 50% of the Indian workforce reaping profits and the common man dodging the weight of inflation, the policy promises a sound future and better living for people.

Notwithstanding the above advantages, some experts argue against the move as well. Their main arguments are:

- It will lead to the closure of tens of thousands of small kirana shops across the country and endanger livelihood of 40 million people

- It may bring down prices initially, but fuel inflation once multinational companies get a stronghold in the retail market

- Farmers may be given remunerative prices initially, but eventually they will be at the mercy of big retailers

- Small and medium enterprises will become victims of predatory pricing policies of multinational retailers

- It will disintegrate established supply chains by encouraging monopolies of global retailers

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