FDI IN RETAIL

Mr. Anurag Mathur, Sr.Lecturer, Rai Business School New Delhi

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 sector.

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 sub-segment.

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 outlets.

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.

 

FDI in retail must be allowed

A t present, foreign direct investment (FDI) in pure retailing is not permitted under Indian law.

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 local franchises.

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 draft.

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 internationally.

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.