Anurag Mathur, Sr.Lecturer, Rai Business School New
I think it
is only fair to place all my cards on the table before you right
at the beginning. If any of you have come here to hear from
me whether or not the Government is about to announce FDI in
the retail sector, you are going to be disappointed.
The nature of the retail
sector in India is too complex for a hasty decision to be taken
in this regard.
The volume of retail turnover
is estimated at 4 lakh crore rupees a year, constituting 10%
of our GDP. After agriculture, the retail sector is estimated
to be the largest single sector, both in terms of turnover as
well as employment.
Only 2% of the retail sector
is in the organized segment concentrated exclusively in the
larger urban conglomerations.
In fact, only 4% of Indian
retail outlets occupy an area of more than 500 sq ft.
The importance of the retail
sector in the national economy is not in dispute. All economists
have agreed that giving the retail sector a thrust will not
only result in boosting the economy, but also that the retail
sector has the potential to be leveraged in order to rejuvenate
specific targeted sectors, including the rural economy.
This whole fixation of permitting
or not permitting FDI in the retail sector is, in my opinion,
misplaced. FDI is not an end in itself but a means towards an
end. FDI is a tool to be used in order to fully achieve our
policy objectives. So what is more important is to acquire understanding
of what our objectives are, what the full potential of the retail
sector is, and then work towards achieving those objectives.
As I said earlier, only 2%
of the Indian retail sector is organized. Let us not compare
our situation to that of developed countries, because our realities
are fundamentally different. But if we look at other Asian developing
countries this is the picture that we see:
In China 20% of the retail is organized, in the ASEAN countries
it is more than 40%
The benefits of a larger
organized retail segment are several. The most obvious is to
the consumer who gets a better product at a cheaper price and
thus the standard of living of people improves. The Indian consumer
being highly price conscious, an organized sector is better
able to respond in terms of offering better value for money.
But the greater benefit is
the expanded reach and increased volumes that organized retail
can tap. Increased volumes translate into more manufacturing,
more jobs in industry, more prosperity.
Increasing the share of the organized sector in retail is therefore
a desirable policy objective.
There is another aspect too.
International experience has demonstrated that the only way
that farmers can get better prices for their products is through
improvement of the value added food chain The agricultural sector
in India is characterized by poverty. If there is one segment
of our society that toils to provide basic needs, and yet languishes
on a pittance it is the agricultural segment. In spite of the
fact that farmers are responsible for putting food on our plates
the typical Indian farmer is a poor man. It is only when food
processing and packaging takes off in a big way that we can
hope to give the agriculturist his due.
It is only a organized retail
sector which can provide the forward linkages for mass-marketing
of processed and packaged goods. So when we speak of the retail
sector an important policy objective is also the agricultural
Organised retailing would
generate employment, both direct and indirect, as notwithstanding
the capital intensity of modern retail business, it continues
to be labour intensive as well. It would also lead to creation
of indirect employment in support activities throughout the
supply chain, starting from producers to packaging, storage,
transport and other logistic services.
The question that may legitimately
be asked is whether expansion of organization within the retail
sector will not affect the small kirana dukans - what the Americans
call mom-and-pop stores? I am told that there is no empirical
evidence of any adverse impact of the growth of organized retailing
on small retailers. Small retailers have a `niche position'
particularly in urban areas, as corner-side shops. With personalized
services and convenient walking distance they are able to provide
a special kind of service, which will always be in demand.
Let me draw a comparison
between the food and beverage sector and the retail sector.
The existence of hotels, restaurants and food malls has in no
measure taken away the clientele of roadside dhabas and thelawallahs.
Both continue to co-exist and flourish.
The position is also to be
looked at from a macro-economic point of view. So long as the
total job opportunities increase due to a policy intervention,
there is no harm in jobs moving from one sub-segment to another
It is not as though organized
retailing would be functioning by robots. The organized retail
sector is capital intensive but it is also labour intensive.
While the 'mom-and-pop' may experience some reduction in clientele,
'son-and daughter' as well as 'nephew-and-niece' would be finding
jobs in the more organized stores - and hopefully `cousins-and-grandchildren'
would be finding jobs in the expanded manufacturing sector!
In the light of this perspective,
it would appear that everything should be done in order to garner
capital to push forward the policy objectives mentioned. However,
legitimate concerns have been expressed that permitting FDI
in the retail sector - along with the 'deep pockets' of the
mega global players - without providing a level playing field
to our own retail industry could result in more harm than good.
It is therefore imperative to immediately identify and implement
those policy initiatives, which are required to give a boost
to our own domestic fledgling organized retail industry by providing
them the desired level playing field.
Those in favour of FDI, point
out that FDI in retail trade would contribute to a multiplier
impact on the economy not only in the retail sector but also
in many other activities such as manufacturing, food processing,
packaging and logistic services. They further point out that
far from leading to an influx of imported goods, foreign companies
would source most of their items domestically and would in fact,
use quality Indian products to stock thousands of their outlets
in foreign countries, thus giving a fillip to our manufacturing
as well as export.
It is further pointed out
by the proponents of FDI that sourcing of goods produced in
India would involve transfer of technology to ventures to ensure
adherence of quality standard, good marketing production techniques
and introduction of global best practices in management. This
would result in integration of Indian manufacturing with the
global supply chain.
Opponents of FDI, on the
other hand, argue that FDI driving modern retailing can only
expand by destroying the traditional retail sector.
There are apprehensions in certain quarters that FDI in retailing
would lead to unfair competition and ultimately result in large
scale exit of domestic retailers, especially small family managed
There is also the fear that
a global retail chains would use India as a dumping ground for
sub-standard or outdated products.
There are some who suggest that we should permit FDI only in
high-end retail, or branded or luxury goods, since this would
not displace Mom-and-Pop stores.
The counter-argument that is given to this is that such FDI
would only encourage imports without the benefit of local manufacturing,
or the backward linkages to the agricultural sector.
Strong arguments are being
advanced both for and against FDI in retail trade. The government
would like to encourage this debate in the media as well as
in the public, between economists as well as stakeholders.
The Government has an open
mind, and would like to do what is the best for the country.
We are very
clear that if at all FDI is permitted in retail trade it should
lead to incremental economic benefits and not substitute on-going
activities. There is no question of replacing or displacing
what we have, it must add to economic activity. Any strategy
in the direction of FDI should ensure that domestic players
are not unduly displaced and sufficient opportunities are available
for the growth of domestic players. Constructive suggestions
and inputs from all stakeholders would be extremely valuable
in shaping our policy.
in retail must be allowed
A t present, foreign direct
investment (FDI) in pure retailing is not permitted under Indian
In 1993, the then finance
minister Dr Manmohan Singh had changed the law to permit FDI
in retail trade. Dairy Farm, a multinational corporation entered
India on that opening. But, the next finance minister, P Chidambaram,
to curry favors with the Communists in the then United Front
government, changed the law again in 1996 to ban FDI in retail
trade, but as with every Indian law there is a loophole by which
foreign retailers can (and some do) operate in India through
Now, in 2005, the new United
Progressive Alliance government is grappling with same question
whether or not to permit FDI in retail trade, but with the same
ministerial personnel in a Congress party musical chair circus!
What is then the answer to
the question: should FDI in retail trade continue to be banned?
The answer is obviously 'no,'
especially, after the World Trade Organisation's Doha Round
of talks. The WTO mandate now requires that India lift the ban
or face WTO's 'cross-retaliation' measures, such as withdrawal
of tariff and trade privileges that are available to India under
the new General Agreement on Tariffs and Trade.
The cost of continuing with
the ban is therefore prohibitive and, in any case, much more
than what the Leftist and bogus Swadeshites claim as the consequences
of lifting the ban. A cost-benefit analysis clearly points to
saying 'yes' to FDI in retail trade.
The Leftists and Swadeshites
in India have been continuously crying wolf about foreign goods
and funds. They are however ready to accept that foreigners
can guide their ideology (e g, Karl Marx) or that foreign doctors
may do their heart by-pass or knee replacements.
Some of them do not even
mind if foreign-born guide the Indian political destiny. But
to allow foreigners as shopkeepers in India ? Never, they say!
The track record of crying
wolf of these Leftists and Swadeshites is pathetic. In December
1990, I had as Union commerce minister led the Indian delegation
to participate in final Uruguay Round to consider the new GATT
I had announced then that
India would sign the new GATT agreement after the Dunkel draft
was adopted. There was howl of protest in Parliament from the
Left and those with Socialist or Swadeshi pretensions. India
would become a colony again, agriculture would be laid barren
and industry wiped out, they warned.
Moreover, the 'yellow peril'
would sweep the nation through cheap batteries and electronics.
The scare created in the media was stupendous.
But in the end did the worst
happen? On the contrary, during the ten years since the signing
of the new GATT, thanks to private initiative, India has become
an IT superpower. This was made possible because of foreign
funds seeking research on the Y2K problem.
The Indian pharmaceutical
industry is on the way to dominating the world and our biotechnology
is blooming. Moreover, Indian youth manning telephones have
outsourced out of the Untied States so much that it is the American
who is now worried about globalisation.
If instead of shooting ourselves
in the foot in pathetic self-pity as we did during the last
ten years, if instead the Union governments that have come and
gone had spent money on R&D, and concentrated on providing
world-class infrastructure and modernisation of food processing
and textile industry, India could have become a developed country
by 2010, instead of having to wait now till 2025 or later.
India can become a giant
in a short time span in food processing and textiles, for which
we have the potential because Indian agricultural production
is the lowest cost in the world, and textile labour is the cheapest
Allowing FDI in retail trade,
especially in groceries and garments marketing, is one sure
way of doing it. Food processing and textiles will grow very
substantially from the linkage effects of a modernized, globalised
retail trade that only FDI can ensure. The employment generation
for Indian youth would also be enormous.
Indian retail trade is of
enormous size ($180 billion), nearly 10 per cent of GDP, employing
21 million persons, which is about 7 per cent of the labour
force. It is six times bigger than Thailand and five times larger
than South Korea and Taiwan . China 's retail trade is 8 per
cent of GDP and 6 per cent of employment.
But the trade in India is
fragmented, unorganized, unnetworked, and individually small.
The 12-million kirana shops are mostly family or 'ma-pa' owned,
with little capital for expansion or credit to receive or to
extend to consumers.
About 96 per cent of these
shops have 500 sq ft or less of space with limited stock or
choice to offer. During all these years, instead of shedding
tears for indigenous trade and resisting FDI, had the government
declared it an industry, it would done the trade a world of
good. Now it is being said that allowing FDI in retail trade
would destroy this commerce! Will it?
A study by the Associated
Chambers of Commerce of Industry of India, New Delhi, concluded
that at least for the next ten years that will not happen. Thereafter,
the present fragmented system may get phased out or evolved
into more integrated networked units.
This is already happening
without FDI. For example, ready-made garments have displaced
the family tailor (but not tailoring), horse buggies or tongas
have made way for the automobiles (but not reduced travel),
and dharamshalas have been replaced by hotels (but not the cuisine).
Labour has been retrenched,
but re-tooled and made more productive. That is what happened
with development in Thailand, South Korea and now in China.
Thus we cannot allow the
way we do things to remain frozen just because of the paranoia
of the Left and Swadeshites. We need a rational approach toward
FDI in India's retail trade; in particular, how after it is
permitted free access, it is subject to regulatory supervision.
Modern retailing is designed
not only to provide consumers with a wide variety of products
under one roof, but also of assured home delivery and information
feedback between consumers and producers. A modern retail outlet
will also make it easy to buy on credit and provide for servicing
and repair of products sold.
With IT application, the
modern retail store can cut transaction costs such as due to
inventory, delivery and handling. That is precisely how the
US based Wal-Mart grew to be a giant because it reduced its
distribution costs to 3 per cent of sales compared to 4.5 per
cent of others.
Wal-Mart had entered the
Chinese market a few years ago (in 1996). Now it wants to enter
India and bring FDI to set itself up to network in India. As
usual, the UPA is dithering on how to react because it is a
coalition placed between a rock and quicksand. The WTO mandate
is the rock, while the Left Front is the quicksand.
India is today the only major
economy that still does not permit FDI in retail trade. In China,
35 of the world's top 70 retailers have already entered and
set up business. They have helped boost exports. Wal-Mart alone
exported in 2002 about $12 billion worth of goods. These retailers
source their goods from inside China.
India is targeting for its
GDP to grow by 8 to 10 per cent per year. This requires raising
the rate of investment as well as generating demand for the
increased goods and services produced. Exports is one way of
generating that demand. Encouraging private consumption expenditure
is another way.
Both allowing market-savvy,
market-intelligent can facilitate these and best management
practices, through corporations such as Wal-Mart, Carrefour,
Ahold, JC Penny, et cetera to enter India.
These retail giant houses
can bring their better managerial practices and IT-friendly
techniques to cut wastage and set up integrated supply chains
to gradually replace the presented disorganised and fragmented
retail market. According to McKinsey, India wastes nearly Rs
50,000 crore in the food chain itself. These international retail
outlets can help develop the food processing industry, which
requires $28 billion of modern technology and infrastructure.
As India's urbanisation grows,
these modern food delivery systems are required. Foreign companies
want to come in, and we need their money and techniques to prepare
our transition to the inevitable globalised market of the future.
FDI in retail sector has
been a key driver of productivity growth in Brazil, Poland and
Thailand. This has resulted in lower prices to the consumer,
more consumption and higher profit for the producer.
FDI in retail trade has forced
the wholesalers and food processors to improve, raised exports,
and triggered growth by outsourcing supplies domestically. The
availability of standardised products has also boosted tourism
in these countries.
Hence, time is now for us
to shake off the last vestiges of Soviet-style socialism and
comply happily with the WTO mandate to permit FDI in retail
trade. The Indian consumer and the poor farmer will be the two
biggest gainers from it.