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Retail industry: More bang for the buck
The debate surrounding the opening of the large and growing Indian retail market to FDI is set to gather momentum. By releasing a discussion paper on the subject a few days ago, the ministry of commerce and industry has set the ball rolling for an early decision on this contentious issue. For long, foreign investors supported strongly by their governments, have not only pleaded for foreign capital to be allowed into this vast segment of the economy, but have also touted the huge benefits India is depriving itself of by remaining closed.
There are apprehensions that FDI-supported retail chains can have a significant adverse impact on traditional outlets dominated by family-run stores. In 2006, FDI up to 51 per cent of equity was allowed in retail of single brand manufactured products. Earlier in cash and carry, a version of wholesale trade, 100 per cent FDI was permitted. Most overseas investors consider these half-hearted measures and have continued to clamour for full retailing of all merchandise.
The Indian retail industry, already US $300 billion in size, is growing at over 9 per cent annually at a time when there is near stagnation in retail growth in industrialised countries. Coming into India through the wholesale cash and carry channel is not the preferred choice of most chains. The single-brand route is understandably considered appropriate only for upper-end or luxury products. The experience of the Wal-Marts, Tescos and Carrefours of the Western world is in multi-product marketing in different retail formats across countries. Their scale of operations and use of modern IT give them clear advantages in sourcing, inventory-building and cutting costs - which depending upon competition are passed on to consumers in part or full.
Operational efficiencies, combined with higher job opportunities, both at front and back ends, and the consumer getting better quality and variety are often cited in support of foreign investment in retail. Greater procurement from domestic producers by multinational retailers is another expectation. It is difficult to find loopholes in such arguments and on these grounds a positive view must be taken. But there are other possible ramifications and we cannot be oblivious to them.
Take, for instance, the impact modern trade, be it domestic or FDI funded, may have on the mom-and-pop stores that currently dot our urban and rural landscape. While some talk of business models that could promote coexistence of modern stores with traditional grocers and hawkers in practice, this does not happen on any significant scale. A recent study conducted at the behest of the government by ICRIER highlighted the damage large supermarkets like Big Bazaar, Reliance Fresh and Trent inflicted on the viability of other shopkeepers in their immediate vicinity. No wonder the opening of large outlets by Indian businesses has periodically met with violent resistance from local shopkeepers.
Upon the continued viability and perhaps proliferation of traditional retailing depends the livelihood of millions of illiterate and semi-literate, hired and family workers in India. These shops offer part and full-time work opportunities to more people than any other occupation outside of agriculture. In a country where organised employment is barely 15 per cent of the total work force, we can ill-afford loss of jobs. The promises of new jobs in modern retail are relevant primarily for school pass-outs who can ring the cash register, order refilling of shelves and converse knowledgeably with the urbane consumer. Such new employees are more likely to be young, whereas those put out of work would be older, less educated and less groomed.
The example of China - often given to support FDI - is not adequate to fully throw open retail in India. China permitted FDI gradually and in distinct phases starting 1992. Initially up to 50 per cent of equity could be held by foreign investors and their retail outlets were allowed only in Beijing and Shanghai. Six years later, China opened up the capital cities of its central and western regions. The gradual opening up in China ensured there was no large-scale displacement of traditional trade.
There is little evidence available in India of rural infrastructure and agriculture benefiting from the emergence of modern retail. Increases in productivity, quality and preservation techniques of vegetables have been largely confined to farms under various types of contract farming. Punjab, Haryana, western UP and Maharashtra, which have hitherto seen some agro-procurement, have in fact experienced a degree of consolidation of holdings. This might facilitate economies of scale but often works against marginal farmers. Also, there has been little visible development of roads, bridges, schools or health centres with the coming of modern trade.
All this is not to discourage the opening up of retail but rather to emphasise the need for a calibrated and gradual letting in of FDI. Let the procedures for FDI in retail be few and simple. On that count, the suggestion in the government's discussion paper that a certain proportion of foreign capital be invested by each retailer in back-end infrastructure may be difficult to monitor. Instead, perhaps we could insist that at least 50 per cent of the goods in value sold in each store be procured indigenously.
The writer is a former secretary of the ministry of commerce and industry
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