FDI in Multi Brand Retail: A Holdback or a Rollback?

Wed, Feb 1, 2012

Biz Arena

India, currently facing a governance of ambiguity, mixed signals and wooly- headed decision making, is now being poked by another addition to its long tail of ineffectual policies. The Union Cabinet had earlier met to approve Foreign Direct Investment (FDI) in multi brand retail, with a cap of 51 percent in foreign equity. But the retreat on retail and opposition from all corners thwarted the move and the audacious attempt had to be revoked until a ‘consensus’ was found. However, the cap on foreign equity investment in single brand retail was enhanced to 100 per cent.

Consider the arguments, beginning with the one that states that if the doors to the foreign investors are opened, it would provide an opportunity to retail giants like Walmart, Carrefour and Metro to earn a larger pie of the huge Indian market. Foreign sales have been an important source of revenue for many of them , amounting to 52 % for Carrefour in France, 22% for Tesco in UK and 20% for Walmart in U.S. The debate revolves around the rising market power of such giants. They are believed to possess deep pockets and immense outsourcing capabilities that pose a threat to the domestic intermediaries in the supply chain. They have the ability to exploit the economies in procurement, storage and distribution. Once the smaller middlemen are eliminated, few producers on one side and a mass of consumers on the other side are left. Structurally, this interaction provides the basis for an increased trade margin and the ‘giant middlemen’ appropriate these, which could otherwise be shared with the producers to increase the retail volumes and market shares.

ISSUES OF CONCERN:

Producer’s Plight:

One of the major issues of concern is the impact that the transformation would have on the small producers, especially in the farm sector. Union Minister of Commerce, Anand Sharma, who piloted the move, has accused the opposition of playing partisan politics over a “major policy initiative to transform India’s rural economy, help the poor, create an integrated infrastructure to address post- harvest loss, help consumers and generate employment, both in rural and urban areas.” But these claims are posed to various questions. Agriculture is not a homogenous sector, with farmers of different types and sizes engaged in production. The larger farmers with accumulated surpluses or easier access to official credit may gain, but they are by no means the majority and like the small ones, would be subject to competition for the cheapest global resources. They could be shut off from access to potential buyers unless they reduce the prices to a substantial level. Adverse effects on employment and earnings are, therefore a real possibility.

Trader’s Concern:

Organizations like Confederation of All India Traders (CAIT) have also objected to the move. Kirti Rana, president of the Maharashtra unit of the CAIT, stated that everyday supplies from 3500-odd trucks carrying fruits, vegetables , potatoes and spices were lifted from the mandis and delivered to the retailers.“The government calls them middlemen. What are these multinational retail companies then? They are also middlemen.” In short, though FDI may prove beneficial in short run, small farmers and producers would be forced to sell their produce at a lower rate in the long run, with buyers rejecting it due to inferior quality and farmers struggling to negotiate with the huge players.

Supply Chain:

According to the National Sample Survey Organization’s survey of employment and unemployment in 2009-10, the service category that includes the wholesale and retail trade provides jobs for 44 million in the total workforce of 459 million. Judging from this, we could easily deduce that a number of pre existing players , varying from street vendors and kirana stores to medium and large scale wholesalers, would be rendered irrelevant, the immediate and direct effect being loss of employment in the small and medium unorganized retail trade.

Rationale behind Allowing FDI in Retail Sector:

Despite the above issues, the Commerce Minister’s claim is that the policy has a ‘unique imprint’. FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity. By allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations.

FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 57 proposals have been approved. An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shopper’s Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchange’s key index rose by 0.99%.The figures very well reflect the tremendous benefits that can be derived out of this move if executed efficiently for multi brand retail as well.

Lastly, it is to be noted that the Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, has also come to conclusion that investment of ‘big’ money (large corporate and FDI) in the retail sector would in the long run not harm interests of small, traditional, retailers. Even the big corporate names like Tata Group chairman Ratan Tata and IT czar N R Narayana Murthy have expressed their support in welcoming FDI in retail, saying any initiative that brings new technologies and benefits consumers is welcome.

Conclusion:

In all, Karl Marx’s famous quotation that ‘ History repeats itself, first as tragedy and second as farce’ clearly fits the mess created by the United Progressive Alliance (UPA) government through its hasty announcement and the not-so calibrated suspension of the decision to bring FDI in multi brand retailing. The government went through a number of contradictory and farcical political and policy contortions in the 13 days between the Cabinet decision on November 24 and its suspension on December 7 and finally announcing a hold on decision again in January 2012.

The Industrial policy 1991 had crafted a trajectory of a revolution whereby each sector of Indian economy would be embraced by liberalization, privatization and globalization. This move is in that sense a steady progression of that trajectory. It would ask for more involved and informed aid from the government. It will get us one step closer to being a ‘developed nation’. But the government has by far cushioned the adverse impact of the change. One can always hope that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing , i.e. the socio economic equilibrium of the entire country.

References:

1) http://www.metrocorpcounsel.com/articles/17581/liberalization-india%E2%80%99s-foreign-direct-investment-policy-single-brand-retail.

2) http://articles.economictimes.indiatimes.com/2012-01-12/news/30619885_1_multi-brand-single-brand-single-brand.

3) http://www.thehindu.com/business/Industry/article2801712.ece.

4) http://www.frontlineonnet.com/fl2826/stories/20111230282602500.htm

Samreen Jamal

MBA Batch of 2013

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One Response to “FDI in Multi Brand Retail: A Holdback or a Rollback?”

  1. GAURAV SINGH Says:

    It is a good thing alright, but why it has taken eight years to bring
    this FDI reform? It is very obvious now that elections are round the
    corner UPA wants to make the right noises.


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