Exploring the Pros and Cons of FDI in Retail
Post on 15-Oct-2014
FDI in Retail: More Bad than Good ? The Question of Foreign Direct Investment (FDI) in Retail:Given this backdrop, the recent clamor about opening up the retail sector to Foreign Direct Investment (FDI) becomes a very sensitive issue, with arguments to support both sides of the debate. It is widely acknowledged that FDI can have some positive results on the economy, triggering a series of reactions that in the long run can lead to greater efficiency and improvement of living standards, apart from greater integration into the global economy. Supporters of FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market. This in turn can lead to greater output and domestic consumption. But the most important factor against FDI driven modern retailing is that it is labor displacing to the extent that it can only expand by destroying the traditional retail sector. Till such time we are in a position to create jobs on a large scale in manufacturing, it would make eminent sense that any policy that results in the elimination of jobs in the unorganized retail sector should be kept on hold. Though most of the high decibel arguments in favor of FDI in the retail sector are not without some merit, it is not fully applicable to the retailing sector in India, or at least, not yet. This is because the primary task of government in India is still to provide livelihoods and not create so called efficiencies of scale by creating redundancies. As per present regulations, no FDI is permitted in retail trade in India. Allowing 49% or 26% FDI (which have been the proposed figures till date) will have immediate and dire consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy; will render millions of small retailers jobless by closing the small slit of opportunity available to them.
Imagine if Wal-Mart, the world s biggest retailer sets up operations in India at prime locations in the 35 large cities and towns that house more than 1 million people. The supermarket will typically sell everything, from vegetables to the latest electronic gadgets, at extremely low prices that will most likely undercut those in nearby local stores selling similar goods. WalMart would be more likely to source its raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at preordained quantities and specifications. This means a foreign company will buy big from India and abroad and be able to sell low severely undercutting the small retailers. Once a monopoly situation is created, this will then turn into buying low and selling high. (PLZ DO PUT THIS EXAMPLE.. IL SAY IT ON PPT ;) )Such re-orientation of sourcing of materials will completely disintegrate the already established supply chain. In time, the neighboring traditional outlets are also likely to fold and perish, given the predatory pricing power that a foreign player is able to exert. As Nick Robbins wrote in the context of the East India Company, By controlling both ends of the chain, the company could buy cheap and sell dear . The
producers and traders at the lowest level of operations will never find place in this sector, which would now have demand mostly only for fluent English-speaking helpers. Having been uprooted from their traditional form of business, these persons are unlikely to be suitable for other areas of work either. It is easy to visualize from the discussion above, how the entry of just one big retailer is capable of destroying a whole local economy and send it hurtling down a spiral. One must also not forget how countries like China, Malaysia and Thailand, who opened their retail sector to FDI in the recent past, have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets. Given their economies of scale and huge resources, a big domestic retailer or any new foreign player will be able to provide their merchandise at cheaper rates than a smaller retailer. But stopping an Indian retailer from growing bigger is something current public policy cannot do, whereas the State does have the prerogative in whether foreign entry in the retail sector should be stalled or not. It is true that it is in the consumer s best interest to obtain his goods and services at the lowest possible price. But this is a privilege for the individual consumer and it cannot, in any circumstance, override the responsibility of any society to provide economic security for its population. Clearly collective well-being must take precedence over individual benefits.
Recommendations: ( I DIDN T READ IT FULL.. JUST WENT THROUGH BUT =) )1. The retail sector in India is severely constrained by limited availability of bank finance. The Government and RBI need to evolve suitable lending policies that will enable retailers in the organised and unorganized sectors to expand and improve efficiencies. Policies that encourage unorganised sector retailers to migrate to the organized sector by investing in space and equipment should be encouraged. 2. A National Commission must be established to study the problems of the retail sector and to evolve policies that will enable it to cope with FDI as and when it comes. 3. The proposed National Commission should evolve a clear set of conditionality s on giant foreign retailers on the procurement of farm produce, domestically manufactured merchandise and imported goods. These conditionality s must be aimed at encouraging the purchase of goods in the domestic market, state the minimum space, size and specify details like, construction and storage standards, the ratio of floor space to parking space etc. Giant shopping centers must not add to our existing urban snarl. 4. Entry of foreign players must be gradual and with social safeguards so that the effects of the labour dislocation can be analysed & policy fine-tuned. Initially allow them to set up supermarkets only in metros. Make the costs of entry high and according to specific norms and regulations so that the retailer cannot immediately indulge in predatory pricing. 5. In order to address the dislocation issue, it becomes imperative to develop and improve the manufacturing sector in India. There has been a substantial fall in employment by the manufacturing sector, to the extent of 4.06 lakhs over the period 1998 to 2001, while its contribution to the GDP has grown at an average rate of only 3.7%. If this sector is given due attention, and allowed to take wings, then it could be a source of great compensation to the displaced workforce from the retail industry. 6. Set up an Agricultural Perishable Produce Commission (APPC), to ensure that procurement prices for perishable commodities are fair to farmers and that they are not distorted with relation to market prices.
Recommendations for the Food Retail Sector:With 3.6 million shops retailing food and employing 4% of total workforce and contributing 10.9% to GDP, the food-retailing segment presents a focused opportunity to the Government to catalyze growth & employment.
1. Provision of training in handling, storing, transporting, grading, sorting, maintaining hygiene standards, upkeep of refrigeration equipment, packing, etc. is an area where ITI s and SISI s can play a proactive role. 2. Creation of infrastructure for retailing at mandis, community welfare centers, government and private colonies with a thrust on easier logistics and hygiene will enable greater employment and higher hygiene consciousness, and faster turnaround of transport and higher rollover of produce. 3. Quality regulation, certification & price administration bodies can be created at district and lower levels for upgrading the technical and human interface in the rural to urban supply chain. 4. Credit availability for retail traders must be encouraged with a view to enhancing employment and higher utilization of fixed assets. This would lead to less wastage (India has currently the highest wastage in the world) of perishables, enhance nutritional status of producers and increase caloric availability. 5. Several successful models of integrating very long food supply chains in dairy, vegetable, fish and fruit have been evolved in India. These one off interventions can be replicated in all states, segments and areas. Cross integrations of this unique food supply chains will provide new products in new markets increasing consumer choice, economic activity and employment. 6. Government intervention in food retail segment is necessitated by: a) The lack of any other body at remote/grassroots level. b) Need to provide market for casual and distant self-employed growers and gatherers. c) Maintain regulatory standards in hygiene. d) Seek markets in India and abroad (provide charter aircrafts, freeze frying, vacuuming, dehydrating, packing facilities for small producers at nodal points). e) Provide scope and opportunity for productive self-employment (since Govt. Can t provide employment). At a subsequent stage, these interventions can be integrated into the supply chains of the foreign retailers in India and abroad, creating synergy between national priorities, market realities, globalization, and private-public cooperation. In this fashion, the Government can try to ensure that the domestic and foreign players are approximately on an equal footing and that the domestic traders are not at an especial disadvantage. The small retailers must be given ample opportunity to be able to provide more
personalized service, so that their higher costs are not duly nullified by the presence of big supermarkets and hypermarkets
Exploring the pros and cons of FDI in retailDec 2, 2011, 07.28am IST
FDI in retail
By: Bibek Debroy (Professor, Centre For Policy Research) Policy paralysis has an alliterative tone to it. There is no ready antonym with quite that characteristic. However, policy paralysis is defined, malaise is internal and domestic, no matter how much we blame the external world for our travails Therefore, it is odd that the decision to open FDI in retail is being described as symptomatic of government climbing out of the rut it has dug itself into. FDI in retail isn't going to be manna. It won't lead to deluge in FDI inflows. It won't stem rupee depreciation. It won't dampen food inflation. It won't lead to a revolution in retail trade and make it organised. But nor will be it be a bane that will drive kirana stores into oblivion. Outside TV studio debates, truth is never in black-and-white. As a shade of grey, the present decision is no more than the thin edge of liberalisation. All liberalisation is good for consumers. The colour of competition (national versus foreign) doesn't matter. There is choice, better quality and better service. There is downward pressure on prices. Post-1991, this elementary proposition of economics has been empirically vindicated whenever competition has been allowed to seep in. There is no reason for consumers to be exploited by kirana stores, just as there is no reason for consumers to be exploited by the Future Group, Shoppers Stop or Vishal Retail. Having said this, there is also another elementary proposition. Perfect competition is a figment of imagination. It doesn't exist. The world is one of unfair and restrictive business practices. Hence, we need competition policy instruments. So far, thrust of competition policy intervention has been on manufacturing and some services. Retail trade hasn't figured prominently. While that focus has to change, this isn't an argument against opening up. Acrossthe-board opening up is infinitely preferable to selective and segmented opening up. Selective liberalisation distorts markets and allows opportunities for arbitrage. Take this business of opening up wholesale cash-andcarry. Who has this benefited? It hasn't helped consumers, at least not directly. It has helped hotels and so-called kirana stores, anyone who obtained a licence or got access to one. Why did we first allow 51% FDI in single-brand retail and why are we now opting for 100%? Who has benefited from this transition in policy between 2006 and 2011? There are foreign single-brand retailers who will now rework their joint ventures and jack up foreign equity to 100%. There are Indian joint venture partners who are cash-starved. The beneficiaries will thus be Indian joint-venture partners who will sell off 49% equity. Single-brand or multi-brand, wholesale (cashand-carry) or retail are artificial distinctions. We should simply have had 100% across-the-board. At some future date, Indian jointventure partners will benefit again when FDI multi-brand equity is jacked up to 100%. Other than this, geographical segmentation remains. Why should liberalisation be restricted to one-million-plus cities? Do consumers
elsewhere not deserve choice? As it is, as public subsidies go, there are pronounced pro-urban biases. We will pamper them more through this new policy. Real-estate costs being what they are, big-bang benefits for retail should actually be outside one-millionplus cities. It gets worse if you read the Constitution. Delhi provides a framework policy. Implementation is up to states. While Seventh Schedule doesn't quite use the expression retail, production, supply and distribution of goods is Entry 27 in the State List. To the best of my understanding, this means a state may choose not to open up retail trade. It gets worse in Sixth Schedule, since no person, "who is not a member of the Scheduled Tribes resident in the district shall carry on wholesale or retail business in any commodity except under a licence issued in that behalf by the District Council". In general, deprived and backward states and regions are reluctant to open up. That's the reason they aren't mainstreamed and continue to remain deprived and backward. Stores will be in one-million-plus locations and consumers there will benefit. I have no problems with minimum threshold levels of foreign investment, or requirements that 50% has to be in back-end infrastructure. Retail today straddles assorted segments. Food is a small component, less than 10%. It doesn't have to be that way.
FDI in retail: The pros and cons (bsness today)BT Online Bureau November 26, 2011
Paving way for the global mega chains like WalMart, Tesco and Carrefour to open outlets in India, the Cabinet on Thursday approved 51 per cent FDI in multi-brand retail. It also increased the foreign investment (FDI) ceiling to 100 per cent from the present 51 per cent in single-brand retail. It generated a mixed response from the people. The supporters felt that it will cut intermediaries between farmers and the retailers, thereby helping them get more money for their produce. It will also help in bringing down prices at retail level and calm inflation. Those were against felt that it will lead to closure of tens of thousands of mom-and-pop shops across the country and endanger livelihood of 40 million people. Also, it may bring down prices initially, but fuel inflation once multinational companies get a stronghold in the retail market
DECEMBER 12, 2011, 9:00 AM IST
Economics Journal: Why Did Indian Retailers U-Turn on FDI? ( I havent read this except the first few and the heading :P)
BJP supporters protested against FDI in New Delhi, Nov. 28.
Consider the following quotes on opening India s retail sector to foreign direct investment: Why do we need foreign direct investment in retail? Contrary to what foreign management consultants say, we have one of the best supply chains in the world. It is a win-win situation for everyone. With the amount of money to be invested in back-end, supply chain and farm sector will benefit. Believe it or not, all three quotes are by Future Group Chief Executive Kishore Biyani, the man often called the king of retail in India (Future Group is India s largest multi-brand retailer.) In 2005, Mr. Biyani and other top Indian retailers vociferously argued against allowing FDI in the sector, while in the run up to the current impasse, he and his industry colleagues have been its most vehement supporters. What changed in the last six years?
A crucial but less discussed aspect of the FDI in retail debate has been the 180 degree about-face by the domestic industry and its lobby groups. Their opposition six years ago helped doom the liberalization then, and their strong support this time around was surely a key driver in the government s decision to open up the sector, although obviously not enough to get it through. The irony doesn t stop there. Six years ago, Sanjiv Goenka, vice-chairman of RPG Enterprises, a large Indian conglomerate, argued that the small mom-and-pop shops known as kirana stores would be swamped by FDI in multi-brand retail. In the current debate however, the large retailers have ditched the kiranawallahs (the owners of the kirana stores) and are making their case based on the large gains that consumers would enjoy from lower prices. To be fair to them, the large retailers did suggest back in 2005 that, given time, their sector would be receptive to FDI. A principal demand at that time was a five-year window to allow the domestic industry to generate economies of scale and be ready to withstand foreign competition. There s a valid economic argument to support this claim. The infant industry theory, originated by John Stuart Mill in the 19th century, is the oldest and still widely accepted defense of protecting an economy from foreign competition. Mill argued that an immature industry could be deluged by mature foreign competitors. Given time behind the sheltered market, the domestic industry would grow up and then be able to compete on an equal footing with foreign rivals. So, one possibility is that domestic Indian retail has indeed come of age and now feels confident about engaging in head-to-head competition with the likes of Wal-Mart. One important caveat is that the government s proposal only allows 51% ownership by foreign firms in multi-brand retail, leaving the rest in the hands of domestic joint venture partners, who would presumably wield a fair amount of influence. Moving from a model of direct competition to joint ventures has clearly succeeded in coopting the support of the big players in the domestic industry, such as Mr. Biyani. But there s another possibility. Perhaps in the intervening years, the domestic players figured that without FDI they cannot achieve the sorts of economies of scale, supply chains and cold storage solutions that they were talking about. In other words, they ve realized that FDI will be an indispensable component for expanding their share of the market and therefore their profitability. If so, this would be an instance of a phenomenon well understood by economists who study the political economy of reform. In an influential academic paper, economists Raquel Fernandez and Dani Rodrik argued that a lot of the opposition to economic reform stems from uncertainty about the identities of potential winners and losers in advance of the reform being enacted. Such uncertainty tends to create opposition to reform which subsequently is confirmed as being beneficial for the economy as a whole. In line with this reasoning, it might well be that Future Group and other big Indian retailers have calculated that rather than being potential losers, they re now potential winners from the opening up of FDI in retail. While it s impossible to prove, it would be fair to assume that industry support, manifested
by a drumbeat of pronouncements on FDI over the last year or so, played an important role in driving government policy. Has the support of Indian industry for FDI in retail come too late? One can only speculate, but it s certainly possible that their initial strong opposition to FDI followed by their conversion in favor of it provided a window of opportunity for other interest groups to solidify opposition to the FDI move. The position of the kiranawallahs for instance has remained consistent, and their reason for opposing FDI remains the same: that their livelihoods would be wiped out. The switch by industry certainly casts a less sympathetic light on their possible motivations. The perception, accurate or not, that the government s reform agenda has been driven by big business has surely been harmful. If the government had made the case that the principal beneficiaries of FDI in retail would have been poor consumers and poor farmers, the outcome might have been different.