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FDI in retail: War-mart
It was billed as one of the most big-ticket reforms the government had rolled out in years. But even before the foreign retail giants could walk down the aisle, a bitter political brawl erupted between the government and Opposition. Parliament was stalled and small traders protested while the middle class didn't know whether to say hello Walmart or goodbye Walmart. So what does the decision mean for the aam aadmi and will it usher in the golden age for the Indian consumer and provide relief from stinging food prices? The jury is still out on the issue, but experts believe the move will definitely benefit the $1. 6-trillion economy, help create the logistics, farm infrastructure and jobs that India desperately needs. "This is a game changer. The economy and the consumer will get a fillip. This will be like the telecom revolution, " says Rajiv Kumar, secretary-general of the Federation of Indian Chambers of Commerce and Industry. The farmer stands to probably gain the most. Lack of storage facilities causes heavy losses to farmers in terms of wastage, particularly when it comes to fruits and vegetables. Estimates peg the post-harvest losses of farm produce at over Rs 1 trillion a year and 57 per cent of this is due to avoidable wastage and the rest due to other costs and commissions. Nearly 35-40 per cent of fruits and vegetables and nearly 10 per cent of food grains are wasted in India. Lack of poor farm infrastructure translates into high prices. The government says that an Indian farmer realises one-third of the total price paid by the consumer as against two-thirds with modern retail. A 2007 World Bank study showed that the average price an Indian farmer gets for horticultural produce is barely 12 to 15 per cent of what is paid at the retail outlet.
Consider this. India is the second largest producer of fruits and vegetables but the storage capacity is limited with only 5, 386 stand-alone cold storages mainly used for storing potatoes. " Opening up FDI in multi-brand retail will bring in much needed investments, technologies and efficiencies to unlock the true potential of the agricultural value chain, " says Commerce and Industry Minister Anand Sharma. A study by the Confederation of Indian Industry (CII) and Boston Consulting Group (BCG) showed that farmers in India earn only 30 per cent of the consumer price while in some developed countries this varies between 50 and 70 per cent. Losses in the fruits and vegetable supply chains arise due to multiple intermediaries, handling points and poor technology and supply chain management. "This means that for every rupee spent by the consumer on tomatoes, only 54 paise is accounted for by the farmer's realisation and value addition along the way. The rest is divided between profit margins of the intermediaries as well as leakages along different steps of the supply chain, " the study showed. In fact, Bharti-Walmart has already started a direct farm programme which is aimed at developing a strong supply chain, linking farmers directly to consumers and introducing them to best practices. The company says the direct farm programme began with 65 farmers in Malerkotla near Ludhiana and has expanded to include 3, 000 farmers - mainly small and marginal - across UP, NCR, Haryana, Karnataka and Maharashtra.
NO GRAND ENTRY SOON
But despite the excitement created by the cabinet decision, experts say it will take a while before the global retail giants, some of whom who are already present in the wholesale segment in joint ventures with Indian companies, descend on Indian shores. Consumers may have to wait for some time to shop in chains such as Aldi, Delhaize, Safeway, Kmart, SuperValue, Sainsbury, TESCO, Costcutter, Londis, Fairway, Waitrose and Carrway.
Hemant Kalbag, head of consumer retail practice, Asia, at consulting firm AT Kearney, cautions that more clarity is needed regarding the rules. He says that foreign retailers will not jump in too soon but will come over the next few years due to the size of the Indian market. The government's decision to fully open up the single-brand retail sector has already seen luxury brands such as Vertu, Christian Loubotin, Armani Junior and others making plans to open showrooms. Robust economic growth of 7 to 8 per cent is expected to drive the Indian retail market and according to the CII-BCG study, the current size of the organised retail market is about $28 billion and it is expected to grow to $260 billion by 2020. Some others peg that number at $390- $400 billion. Some estimates say the industry is growing at 13-15 per cent annually and has the potential to expand at a much faster clip.
Shopping in India has undergone a massive transformation. The entry of Indian retail chains such as Big Baazar, Spencer's, Trent Ltd, ITC, Pantaloon and single-brand foreign retailers has led to a boom. Glass and chrome malls have sprung up across the country to house these glitzy chains. Add movies and large food courts and shopping has never been such a heady experience in India.
"Consumers need a change, suppliers and farmers need a change and the infrastructure needs a change, " says Kishore Biyani, founder and Group CEO of Future Group, which largely scripted the Indian retail story. "It's a win-win situation for all. The consumer wins, the retailer wins and the supplier wins. The government has made sure that only serious people with money come into the sector. If through this move, $10- $20 billion of investments come in, it's good. "
Analysts also say that Indian retailers too would benefit from foreign capital in the sector. "It's too premature to talk about mergers and acquisition in the retail sector. But there are several established retail players and I would say some FDI will go in many of these retail chains, " said Mukesh Butani, partner at BMR advisors.
The real estate sector too is expected to get a boost as demand for commercial properties is expected to rise. The economic slowdown has seen a decline in interest for commercial property and experts say the sector may see some activity soon. Already there are signs that major global players are making their moves. Arun Agarwal, a mall manager in east Delhi, is excited about the entry of global retail chains. Metro has already booked nearly 90, 000 square feet in his east Delhi mall. "This is a good move and will help create jobs. Demand for commercial space will definitely go up, " says Agarwal. The government estimates that opening up the sector will create 10 million jobs in the next three years. Experts and industry participants agree. "No other industry today has as much potential for massive employment. We are a four-year-old company and we employ 11, 000 people and we have plans to recruit 4, 000 more, " said Thomas Varghese, chairman, CII National Committee on Retail.
Others such as C P Chandrasekhar, professor of economics at the Jawaharlal Nehru University in New Delhi, say that the entry of large global retail chains will lead to some displacement of jobs in the existing framework. But the CII-BCG study says organised retail provides better overall remuneration, particularly to people who have limited alternatives. It provides benefits such as medical and life insurance, retirement and provident funds, sick and personal leave. It cites an example - in a major city suburb, an organised retail employee earns Rs 6, 000, which is higher than what any other job would offer a '10th standard pass'.
Bharti-Walmart, which has several wholesale stores in the country, has started training centres in Punjab, Delhi and Amritsar for vocational training to students. Nearly 1, 200 - almost a quarter of these women - have found jobs with Bharti-Walmart, Best Price and Modern wholesale stores. Experts argue that the opening up of the sector benefits the consumer in the long run as she is able to get better products at cheaper prices. According to the CII-BCG study, by 2020, organised retail would help consumers save 5-10 per cent in specific categories and this would lead to an aggregate $25- $30 billion, which is equal to 0. 5 per cent of the gross domestic product.
Policy makers say that allowing foreign retailers will also help soften inflation which is hovering near double-digit levels. Food inflation has emerged as a major policy headache for the government and experts say there is no short term solution to this. They have called for raising productivity and improving the supply chain. But some commentators differ. AT Kearney's Kalbag says the government will have to take other steps to boost supplies. "Entry of retail by itself will not be able to tackle the problem of inflation. There are many other things that the government needs to do, " he says.
Retail chains will boost government revenues. The CII-BCG report says by 2020 the government is likely to receive additional income of $25- $30 billion. "Institutionalising of the retail chain will bring the cash economy into accounted economy. There will be greater use of credit cards and accountability, " says Butani.
Foreign giants face many obstacles ahead...
Already, a BJP leader has threatened to set Walmart stores alight. Even Reliance was forced out of Uttar Pradesh in 2007 when it attempted to open a chain of supermarkets
RED TAPE |
Foreign firms will need permissions of all sorts, including approval, on a case-by-base basis, from the Foreign Investment Promotion Board
Water shortages, power cuts and the lack of a cold chain
They will have to be prepared to navigate India's murky business environment.
INDIAN CONSUMERS |
Most middle class Indians like to phone their local kirana store which delivers promptly at home free of charge. Veggies come to the doorstep on handcarts. It will be tough to change shopping habits.
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