The Hindu Business Line : Let gradualism guide FDI in retail

The debate on Foreign Direct Investments in retail is deadlocked between extreme perceptions. The proponents argue that FDI in retail would lead to increased efficiencies in value-chain, employment creation and exports. The opponents, however, voice their concerns about loss of jobs, increased concentration, etc. The country has embarked on the process of opening up the retail sector by allowing up to 51per centforeign equity in single-brand retail in February.

Indian Retail Industry

Retailing is the world's largest private industry, with annual sales of over $6 trillion. There are different estimates on the size of the Indian retail industry. The Economist Intelligence Unit puts the annual retail sales at $394 billion. An ICRIER study has found that retailing ($180 billion) contributes to 10 per cent of GDP and employs 7 per cent (21 million) of the workforce. The Table gives the picture of India's retail trade vis-à-vis the US' and China's.

The Benefits

On the flip side, the retail trade, with around 12 million grocery shops in India, is fragmented, unorganised, and small, with little capital for either expansion or to extend credit to consumers. It is argued that FDI in retail with influx of better managerial practices and IT-friendly techniques would synergise these stores. This would facilitate lowering of prices and offering benefits to consumers, apart from providing jobs. The optimism is because information technology helped Wal-Mart reduce its distribution costs to 3 per cent of sales compared to 4.5 per cent for others.Expected reduced wastage due to setting up of integrated supply chain is another factor favouring FDI. McKinsey estimates that India wastes nearly Rs 50,000 crore in the food chain. Retail giants such as Wal-Mart or Carrefour can help develop the food processing industry by providing a cold chain. It is argued that linking up retailers will confer biggest benefits in terms of higher exports, as is happening in China.

The global retailers annually buy nearly $60 billion worth of goods from China for exports against less than $1 billion from India. By being closer to local suppliers and customers, retailers will be in a better position to monitor the supply-chain.

The Concerns

Monopsony power, or buyer's monopoly: A major concern of allowing FDI in retail would be increased buyer concentration- termed as monopsony power. Many factors would contribute to this consolidation: economies of scale, ability to buy in bulk, reduction in distribution costs, implementation of efficiency-enhancing innovations (for instance, bar-code technology), etc.

These factors are reinforced by an evolution in consumer purchasing behaviour whereby consumers (mainly the growing middle-class) now prefer shopping at a single location for convenience. The concerns are not unfounded. For instance, in Germany 25 years ago, around 700 retail companies were purchasing directly from the food industry; by 1999, it fell to 115. In 2005, five largest retail companies together had a market share of 75 per cent.

OECD's study found that in seven European countries, five top grocers accounted for over 60 per cent retail sales in 1999. Similarly, in Canada, one single retailer, Wal-Mart, controls 52 per cent of the retail market.

Labour: Another concern being raised is the likely impact on wages and labour welfare. The employment may increase but at what cost? Many retail chains, such as Wal-Mart, could attract customers by extreme cost-cutting measures including labour costs.

There is apparently evidence that, at the company's behest, the Canadian government amended its labour laws denying workers the right to form trade unions. This had a detrimental impact on their wages.

A US House of Representatives Committee's 2004 report concluded that Wal-Mart's success has put downward pressures on wages and benefits, rampant violations of basic workers' rights and threats to the standard of living in communities across the country. Such squeezing of wages and violation of worker rights cannot be ruled out in India.

Infrastructure and traffic: A concern, largely ignored, is the impact on infrastructure and traffic. Finding adequate space for such stores with requisite parking for shoppers is not easy in metropolitan cities such as Delhi, Bangalore and Mumbai. Real-estate prices are soaring because of increased pressure on land. Moreover, malls in Gurgaon or Bangalore have brought with them traffic bottlenecks.

To address infrastructure and parking problems, many of these superstores in developed countries such as Germany and Sweden have been set up where there is open space or along the highways to avoid congestion in the cities. How feasible this would be in India's case?

The roadmap

The process of opening the retail sector to FDI has begun. The proponents often cite examples of the developed countries. Are the institutions same in India as in the US, the UK, Japan or Italy etc, where opening of the retail market has not stifled small and medium retailers?

Given the size and the skill level of our population, even Thai, and Korean examples are not very relevant, where the labour was first retrenched, and then retooled and made more productive. Any optimism may not reflect true reality.

Last, FDI is often assumed to increase competition. If increased FDI leads to monopsony power, the end result could be worse.

Such issues as predatory pricing and consumer welfare will be immediately addressed if producers indicate minimum retail prices. Despite policy pronouncements, we are yet to make this a law. Some issues may require a detailed analysis, which implies that the sector should not be completely opened immediately.

In fact, India can follow the Chinese model, which took 12 years to open and provided infant-industry-protection to domestic retailers.

The foreign chains were initially permitted to set up stores only in some select cities and local retailers were encouraged to become big by mergers so that they could compete with the international groups. India can also devise a roadmap, whereby FDI entry happens in a phased manner, the process getting completed in 8-10 years.

(The author, an Associate Professor at Madras School of Economics, can be contacted at vinish@mse.ac.in.)

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