2. FDI in Retail
There is whole lot of mayhem about FDI in retail ever since
it knocked the doors of Indian Economy. The mere word
“FDI” has haunted the corridors of parliament, big retail
outlets, mom n pop store owners, the middle men and even
the end consumers. The arguments citing the advantages
of FDI in retail mostly revolve around the following:
Improvement in Retail capability building
Improvement in management of supply chain
Push to productivity
With the recent development in this context, it is essential
to analyse the impact of FDI in retail without any bias. To
cut the long story short:
3. FDI in Retail
What is FDI in Retail?
Single Brand Retail: FDI investment till now was 0.03 % (INR 204 Cr) of total FDI
investment from April 2000 to September 2011. This relaxation will increase FDI in
retail sector through the entrance of new players (Foreign or Domestic), increase or
buy outs in stake, M&A amongst existing single brand retailers, Joint ventures with
foreign and existing players.
There will be sourcing norm of only 30% from local sources. This will lead to lower
procurement locally. So MSME sector will lose but the luxury retail market will
witness growth. This will surely lead to outflow of money from India. Growth in
luxury retail market and low or no growth in MSME sector will lead to negligible
employment generation.
Possibly, there will be changes in existing licensing/ distributor/ franchise
arrangements being converted into joint ventures or complete buy out by foreign
entrants.
4. FDI in Retail
Multi brand Retail: FDI here will lead to increased
investments and growth in Indian retail sector. In this case
too, new JV’s and M&A will be seen. Tactics of buying
stakes or complete buyout will be played. This should
provide options for existing Indian retail companies to raise
long term capital for expansion.
This financial inflow will lead to development of retail
infrastructure and value addition to the existing supply
chain. The sector will see investment in setting up supply
chain mechanism, transport infrastructure, cold storage,
technology etc. This will directly enhance the operational
efficiency of the entire supply chain.
5. FDI in Retail
Agriculture: The farmers/producers will be benefitted as they
will get better price for their produce. Although the buy will be
completely based on bulk buy i.e. entire stock based on quality.
This means if the company decides to purchase only the quality
produce then the not so good produce will find its way to local
market (if it exists) or in garbage. Either way the
farmer/producer will get paid for the quality produce. This in
turn will encourage farmers/producer to improve their existing
ways of farming/production. Again this will require investment
in technology.
Companies may go for contract farming and this again will lead
to improvement in the method of farming by introduction of
better seeds, better fertilizers, new farming equipment etc.
provided by the companies.
6. FDI in Retail
FDI in retail to benefit the farmers &
consumers
Middlemen: Another very visible impact will be the eradication of
middlemen from the supply chain. It is usually believed that this would
lead to lesser exploitation of the farmers/ producers and at the same
time competitive process for the end consumers. But at the same time,
the big retail brings in new breed of middlemen- quality controller,
standardiser, certification agency, processor, packaging consultants etc.
It is these middlemen who would now take their share from the
farmers’ profits and the consumers’ savings.
Thus, it is premature to comment on how much the farmers and end
consumers will gain out of this elimination of traditional middlemen
and introduction of the new middlemen.
7. FDI in Retail
Employment: the Indian retail market is estimated to be around $ 400
billion with more than 12 million retailers employing 40 million
people. A contrasting picture will be seen as the small retailers, “Kirana
shops”, departmental stores etc. will find a tough time to compete or
even exist in such scenario. In such scenario, the landless farmers or
labours that turned into small time retailers will be worst hit.
Government will have to face the question of how to compensate for
their loss. This problem will further get intense considering the very
low employability of such landless farmers/laborers.
Another viewpoint is that the damage will not be so extensive as the big
retailers will operate in the outskirts or in a very few locations in any
city or town and the “Kirana shops” will co-exist in the interiors. In any
of the cases, the sheer magnitude of impact to society will be
intolerable.
11. FDI in Retail
What Retailers Think
Role of State government: As clarified by the central government, it will be
on the state governments whether or not to allow multi-brand FDI in the
respective state. But India, being a signatory to Bilateral Investment promotion
and Protection Agreements (BIPAs), has to provide national treatment to the
foreign investors. The fact that such agreements have been signed with more
than 70 countries will certainly force the state governments to open up for big
retailers.
It will be interesting to see the regulation norms set by the state governments
as it will clearly guide the extent of FDI in their respective states. One thing is
for sure that State government will be able to get more revenues by keeping FDI
in place. But how that increased revenue will justify the lost livelihood of
millions of people or what steps will the government take to minimize this loss.