The Hindu Business Line : FDI in retailing: India as a supermarket

EVEN 50 years after Independence, policy-makers continue to be xenophobic. Fears of foreign imperialism have not yet receded and continue to be a barrier for the entry of foreign enterprises. Since 1991, a number of breakthroughs were made in liberalising the policies for foreign investment, every policy decision has been influenced by foreign imperialism.

India has opened almost the entire manufacturing sector to FDI, including the most sensitive Defence equipment manufacturing.

Furthermore, the recently constituted expert committee on FDI (N. K. Singh panel) has recommended further opening up of such areas as real-estate to FDI. But, ironically, a less sensitive and significant contributor to economic growth — retail trade — has been excluded from the liberalised list.

The panel's plea is that foreign funds may affect the small firms' existence, jeopardising employment opportunities. It looks as if there is a disconnect between policy-makers' perceptions and the global FDI trends as also the structural changes in the economy.

Accounting for over 8 per cent of the GDP in the West, retail business is the largest private industry, ahead even of finance and engineering. Over 50 of the Fortune 500 and about 25 of the Asian Top 200 companies are retailers. Thailand and Indonesia, which were affected by the currency turmoil, pepped up the deregulatory measures to attract more FDI in retail business. Japan, under a prolonged recession and protracted downfall in domestic investment, abolished its Large Scale Retail Store Law to attract FDI.

Today, in some developed countries, retail businesses have shares as large as 40 per cent of the market. For instance, in Thailand and Brazil the organised retail business has been growing rapidly.

In contrast, the organised retail business in India is very small. This is despite the fact that India is one of the biggest markets. Retail business contributes around 10-11 per cent of GDP. It amounts to about $180 billion market and is six times bigger than Thailand and four-five times bigger than that in South Korea and Taiwan. India also has the largest number of retailers, about 12 million, though they are mostly small.

The significance of the retail business has increased with the fast growth in the service sector. There has been a dramatic change in the economy's structure post-liberalisation. While agriculture continues to be the main springboard for the economy, the manufacturing sector has slumped on demand recession and liberalised imports.

As a result, while the shares of manufacturing and industry in GDP increased marginally from 25 per cent before 1991 to 27 per cent in 2000-01, that of service sector spurted to 44 per cent in 2000-01 from 37 per cent before 1990-91.

It is ironic that while FDI has become an important instrument to revive sluggish economies, India opens up sectors with little potential for such flows. It must realise that FDI is a very competitive market.

Much of the rapid growth in organised retail business in the developing countries is due to the entry of global retailers. In Thailand, seven of the world's top 10 retailers have made significant investments — Carrefour, Casino, Makro, Royal Ahold, Jusco have set up shop in Thailand. In China, three of the top 10 global retailers, have made investments, such as Carrefour, Wal Mart, 7-Eleven; and in Brazil, three top global retailers share about 30 per cent of the retail market.

Due to India's restrictive policy, which has constrained the flow of funds and technology, the retail sector remains fragmented, unorganised and small in size.

Most retail outlets are family-owned and offering limited products and finance facilities. Even banks are reluctant to provide finance facilities to the retail sector, which is considered non-viable due to its small size. Change is happening, but only in the metros and big cities.

Competition is growing in the retail business and super stores are being set up, in the rural areas, customers are entirely at the mercy of retailers.

Things had begun to look up since the late 1990s, with a boom in the consumer durable industry, and improved services. With rising income and changes in life style, demand for better products became insistent.

Big industrial houses, such as the Tatas, the RPG group, ITC, HLL, realising the potential of the retail business, are now scrambling for a place in this segment.

Over the last five years, these groups have set up a number of chain stores. For instance, West Side by Tatas, Foodworld by RPG, Shoppers' Stop (Rahejas), and so on.

Organised retailing is also emerging as an important gateway for the sale of food products. In Chennai, about 17 per cent of food sales flows through supermarkets. In the metros, most women have shifted to supermarkets from strretcorner grocers.

India offers vast potential in retail business and this potential must be fully realised by exploited by making the country an attractive destination for FDI.

(The author is a Senior Researcher in a New Delhi-based Japanese MNC.)

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