FDI in Retail – A deep look within

Quite a lot of speculation has been going around these days about the proposed govt plan for allowing FDI in multi brand retail sector. People from various sections of political and social classes, holding different ideologies, from the hard core socialists to neo liberals have voiced their options for or against the proposal. As a result, we have a rich and diverse set of opinions in public domain. Let us have a look at what it is all about.

The Cabinet recently agreed to allow foreign multi-brand retailers such as Wal-Mart Stores Inc. and Tesco PLC to own up to 51% of retail joint ventures and single-brand retailers to own 100% of their Indian operations, up from 51% now.

This proposal, which has come after at least five years of setting the stage for the creation of a modern retail industry by allowing 51% FDI in single brand retail, is being acknowledged as a step in the right direction towards economic liberalization by the Indian corporate sector and most economists.

The rationale for liberalization is based on a definite premise. It will create an opportunity to leverage foreign investment in the supply chain infrastructure, which suffers from certain inherent deficiencies due to the lack of investment flows into the sector. Inadequate storage facilities and limited cold chain infrastructure causes heavy losses in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular.

While allowing FDI in Multi brand retail will provide the much needed impetus to the crumbling infrastructure, it will also help in improving supply chain efficiency, with the better technology, management practices and decades of experience of foreign retail majors coming in to play.

The opening up of Multi Brand Retail will also aid in regulating food inflation in the long run as it would contribute to saving the food which perishes on account of inadequate infrastructure.

It will also help in securing remunerative prices for the farmers. In the present dispensation, there is a complex chain of procurement involving several middlemen. As a result, Indian farmers realize only 1/3rd of the total price paid by the final consumer as against 2/3rd with higher degree of retail. Also, the average price a farmer receives for horticulture produce is barely 12 to 15% of what is paid at the retail outlet. FDI in retail will create the enabling environment which can ensure direct procurement, at least of horticultural produce from farmers to enable them secure remunerative price.

Huge investments in the retail sector will see gainful employment opportunities in agro-processing, sorting, marketing, logistic management and the front-end retail business. About 1.5 million jobs will be created in the front-end alone in the next 5 years. Assuming that 10% extra people are required for the back-end, the direct employment generated by the organized retail sector in India over the coming 5 years will be close to 1.7 million jobs. Indirect employment generated on the supply chain to feed this retail business will add millions of jobs. Examples from other countries like Russia, China, Thailand and Indonesia also present figures of impressive growth in retail and wholesale trade along with growth in agro processing industry.

One of the counter arguments put forward against the proposal is that opening the retail sector will drive millions of small shopkeepers and kirana stores out of business, thus depriving them of their source of livelihood. Based on this argument there has been a stiff opposition against retail FDI from many political parties, some of which include the allies of the government.. This led to a stalemate in the proceedings of the parliament, and consequently government had to suspend the decision to allow FDI in retail for now.

Most of the economists are of the opinion that the government should be praised for finally taking a measure that should allow India to take advantage of 21st-century supply-chain management. Finally, it remains to be seen whether Indian consumers are ready, en masse, to abandon the model that has served them well for decades, that being a model that still elicits awe from the foreigners who come to India, hence posing a challenge for the foreign companies to get Indians to flock to their doors.