There has been a lot of controversy surrounding the topic of whether FDI should be allowed in retail. The likes of Walmart and Tesco support it while some vehemently oppose it. We sure do have some idea about the same but a greater understanding requires a study of the minutiae of the whole thing.
Definition: FDI or Foreign Direct Investment is a self explanatory term well sort of. In a layman’s language it refers to any monetary investment that is made by an entity in business if any kind on foreign shores. This is an important indicator of economic prosperity as in many cases the amount of FDI is directly proportional to the development in the region.
India being a signatory to World Trade Organization’s General Agreement on Trade in Services, which includes wholesale and retailing services had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of the retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment (“FDI”). In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51 percent investment in a single brand retail outlet was also permitted in 2006. FDI in Multi-Brand retailing is prohibited in India.
But this might soon change. The Indian government recently allowed overseas companies to own as much as 51% of retailers selling more than one brand, paving the way for global companies to set their foot on the Indian soil by owning retail stores here. But because of the stringent opposition to the move, the government had to affect a rollback and put a stop on the same for the moment. This move that has the potential to have serious effects on the Indian Business. The supposed move to allows had a number of host of conditions attached to it that would have been allowed to the same.
Clauses for FDI in Retail
One such condition is the minimum investment of $100 million, half of which has to be spent of developing back-end infrastructure. Now this has led to some serious debate about the efficacy of the step. Sourcing of a minimum of 30% from Indian micro and small industry is mandatory. This will provide the scales to encourage domestic value addition and manufacturing, thereby creating a multiplier effect for employment, technology up-gradation and income generation.
If the government is to be believed there are many benefits of allowing FDI in multi-brand retail in India. Some of those can be briefly summarized as:
Huge investments in the retail sector will see gainful employment opportunities in agro-processing, sorting, marketing, logistics management and front-end retail.
At least 10 million jobs will be created in the next three years in the retail sector.
FDI in retail will help farmers secure remunerative prices by eliminating exploitative middlemen.
Policy mandates a minimum investment of $100 million with at least half the amount to be invested in back-end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing. This is expected to considerably reduce post-harvest losses.
*This will have a salutary impact on food inflation from efficiencies in supply chain. This is also because food which perishes due to inadequate infrastructure will not be wasted. Sourcing of a minimum of 30% from Indian micro and small industry is mandatory.
As is the case with any big reform this one too is plagued with a host of arguments against it. The opposition has been vehement, leaving no stone unturned in its effort to undo the move. Some of the arguments put forward by the opposition include:
Move will lead to large-scale job losses. International experience shows supermarkets invariably displace small retailers. Small retail has virtually been wiped out in developed countries like the US and in Europe. South East Asian countries had to impose stringent zoning and licensing regulations to restrict growth of supermarkets after small retailers were getting displaced. India has the highest shopping density in the world with 11 shops per 1,000 people. It has 1.2 crore shops employing over 4 crore people; 95% of these are small shops run by self-employed people
Global retail giants will resort to predatory pricing to create monopoly/oligopoly. This can result in essentials, including food supplies, being controlled by foreign organizations.
Fragmented markets give larger options to consumers. Consolidated markets make the consumer captive. Allowing foreign players with deep pockets leads to consolidation. International retail does not create additional markets, it merely displaces existing markets.
Jobs in the manufacturing sector will be lost because structured international retail makes purchases internationally and not from domestic sources. This has been the experience of most countries which have allowed FDI in retail.
To sum it up:
Now even though the arguments at the first instance might seem effective, it takes a deep analysis to prove or disprove an argument and hence establish its worth. Some can easily be refuted with common sense, but many require significant knowledge of the working of the retail sector in India and understanding of the possible changes the step would lead to. A brief analysis of some of the arguments can be summarized as follows:
A major argument given by opponents of FDI in retail is that there will be major job losses. Frankly, the jury is out on whether this is the case or not, with different studies claiming different findings. Big retail chains are actually going to hire a lot of people. So, in the short run, there will be a spurt in jobs. Eventually, there’s likely to be a redistribution of jobs with some drying up (like that of middlemen) and some new ones sprouting up. If anything, the entry of retail big boys is likely to hot up competition, giving consumers a better deal, both in prices and choices. Mega retail chains need to keep price points low and attractive – that’s the USP of their business. This is done by smart procurement and inventory management: Good practices from which Indian retail can also learn.
So all in all the idea of having FDI in multi brand retail has its pros and cons, but one thing is definitely guaranteed, that with the advent of foreign market in the Indian retail sector, at the end of the day it’s the consumer who wins considering the low prices that come with the passing of such a move.