The Hindu Business Line : Makes sense, wholesale

ALLOWING FOREIGN DIRECT Investment in retailing has been vexatious even at the best of times (read: strong coalition at the Centre), and now with the Left calling the political shots, the issue is becoming increasingly intractable. No wonder the Commerce Minister, Mr Kamal Nath, rued the fact that a clear model that would promote investment but not displace existing small retailers was elusive.

Robust economic growth is driving the retail boom. With the addition of nearly 2.5 crore middle-class consumers, the annual growth of retail trade is a whopping 20 per cent plus. The existing retail system is clearly unequal to servicing the burgeoning consumer demand, especially in major cities, because of scale diseconomies and logistics hurdles, among others. The `demonstration effect' caused by TV sets in most living rooms puts further pressure on an already strained distribution system. Nor are producers able to really benefit from the retail boom primarily because of the fragmented trade. Scale economies, supply chain management, contract production, standardised products, quality assurance, and convenience of shopping `under one roof' — all these should drive home the point forcefully.

Yet, concerns remain. There is apprehension that small retailers would be forced to shut shop, unable to compete with hyper- and super-markets. While this fear is not entirely misplaced, there is another angle too. Consumer purchasing power is the key to success in retail trade. The income disparities are wide, not only among States, but also within each; and not just between rural and urban, but even within cities. These disparities cannot be wished away, whatever the rate of economic growth. There are two Indias and, if anything, the distinction is getting accentuated. There is, and will be, demand for goods and services of every description at every price point. Neither small retailers nor hyper-markets will be able to meet all this demand. Given the growth potential of the economy, and the retail trade, both big and small retailers can coexist. Consumer buying habits do not transform overnight; but, surely, cost and convenience are known to induce change. The benefits of allowing FDI in retail trade are well known. Size can confer economies of scale, enable offer of standardised products, provide quality assurance and generally lead to consumer welfare.

An ideal sector to open up for FDI is food retail. Large investments would improve considerably the supply chain and enhance produce value. A new breed of entrepreneurs — aggregators or consolidators — would not only bring primary producers together but also network with them to deliver what the market wants. FDI in food retail can create a win-win situation for both producers and consumers. A word of caution, though. While FDI in food retail would bring scale economies and efficiency in supply chain, to expect the entire agricultural scene to transfor would be illusory. This is because such super-markets are going to cater to only a section of the population, mostly, affluent city folk. The `mom-and-pop' street corner shops will survive because their customer base is different. FDI in food retail makes economic sense.

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