FDI in retail holds no terrors

The latest Economic Survey expressed optimism about the decision to allow foreign retailers in the multi-brand segment. In this context, it would be meaningful to discuss the rationale and the consequences of this decision alongside the success stories of countries which have opened doors to foreign retail much earlier.

Poor supply chain

The agricultural sector is rife with disguised unemployment and the entire agricultural supply chain is in want of efficiency. The Nabard 2011 retail study mentions that up to 7 per cent of food-grains and 30 per cent of vegetables never make it to the marketplace and are wasted. Indeed, the sector is looking for a major overhaul not seen since the Green Revolution.

Our dismal warehousing facilities have been a reason for distress sales by thousands of hapless farmers. If not a panacea, we can at least expect some sort of a start, aided by the investment in infrastructure that large foreign retailers are slated to make. In Brazil’s case, 30 million people have risen out of poverty since 2003 and created a new middle class. China has witnessed rapid urbanisation along with the growth of organised retail. We hope for a similar story in India.

Holding out promise

A burgeoning middle class, popularity of nuclear families, and increase in disposable income, aided by a drop in fertility rate (over 15 per cent in the last ten years) and increase in women workforce have created a $400 billion-plus retail industry with huge potential. The demographics indicate a low median age of 25, promising demand for a diverse basket of goods.

Other relative advantages over its peers, as outlined by the A.T. Kearney Global Retail study, are low market saturation and high income growth. It is well known that the performance of organised retail brands has not been very encouraging for prospective entrants into the market, but what is not apparent is that they lack the investment in the supply chain to reduce their costs.

Barring vegetables, organised retailers still source their stocks from wholesalers, thereby conceding up to 8 per cent of the final price of the product to the middlemen. The efficiency gains from increased backward linkages are corroborated by findings of a survey conducted by Korea Agro-Fisheries Trade Corporation in 2005 in which producers gained 13.1 per cent and consumers paid 8.8 per cent less. In India, too, there is great scope for extracting efficiency gains.

Addressing concerns

Why are the critics lamenting? That 12-million-plus kirana stores and local vendors will be displaced along with multitudes of middlemen? Indeed a recent study found that 1.4 workers were displaced for every job created as a result of growth of organised retail in the US.There are several points that will serve to alleviate these concerns in the Indian case. Firstly, the average Indian consumer will take some time to warm up before parting with the comfort of closely-located mandis, not to mention the perceived relative freshness of vegetables in local markets.

The Chinese experience has shown that organised and unorganised markets have coexisted, with the latter dominating in the fresh foods segment. Poland has seen a similar phenomenon where the deregulation of the economy in the 1990s led to the simultaneous growth of mom-and-pop stores as well as FDI-driven large retailers. Moreover, the Indian kirana store is unlikely to give up without a fight. There are several services which they can provide, that are not limited to doorstep delivery, credit and personal relationships.

A study by Tsinghua University, China, showed that the rapid urbanisation in China easily absorbed the displaced labour. Barely 30 per cent of India is urban, whereas, the figure is 50 per cent for China and nearly 85 per cent for Brazil. There is immense scope for India’s lagging Tier-2 and Tier-3 cities to grow.As for how the displaced labour will be employed, investments in supply chain will entail growth in the logistics sector, which will see job creation. Also, employment in the retail firms themselves cannot be neglected. About half the jobs set to be created will require the employees to have little or no education. This is indeed good news for many of the vendors, who have not received formal education.

If all else fails, the Thailand experience shows that the Government can take steps to mitigate adverse impacts on employment by implementing zoning laws. Similarly, the imposition of ‘invisible barriers’, as in China, that include regulating the location of retail stores and checking the sourcing of stocks can be considered as cards which the government can play.

Impact on stakeholders

For the Indian farmer, the predominant scenario is that he will stand to benefit. Farming is quite fragmented in India, and there is no perceived threat of consolidated production and emergence of ‘preferred producers’ as was the case in Malaysia and Thailand. Cooperative farming is still in its infancy. What the Government needs to do, though, is step in and revamp the Agricultural Produce Marketing Committee to further formalise the market facing the farmers. Streamlining this process will assist the retail sector in sourcing steady supply of good quality produce.

This, coupled with increased storage facilities, will help give farmers their due. The Indian consumer will definitely be better off, given the price reductions from economies of scale. Consolidation in retail will not necessarily come at the expense of the customer because retailing by its nature is a very low-margin industry and the German experience shows that as long as there are certain firms which operate using discount strategies like Every Day Low Price (EDPL), prices will remain in check.

The path ahead

The Government should bring in foreign retail expansion State-wise and, like China, regulate presence in areas that least threaten the existing unorganised set-up without compromising the firms’ profitability. A situation like Brazil with high market concentration of organised retailers could warrant precautionary enforcement of anti-trust policies.

It should necessitate investment in warehouses as part of the 30 per cent commitment to back-end infrastructure. The state of fragmentation of producers and poor grading facilities, as was the case with Korea, should push the government to increase farmer awareness in quality of produce to curtail the threat of import sourcing.

India, being one of the late movers in opening the doors to FDI in retail, can take many anticipatory measures to prevent any adverse impacts to the economy during the course of the structural transformation that is to follow. The markets will likely do the rest of the work.

(The author works with Nomura in Mumbai.)

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