FDI in multi-brand retail evokes much emotion, as a result of which there is more heat than light at the end of each debate, be it in the media, Parliament or policy circles.

Like the cash transfer initiative of the UPA Government, the policy on FDI in retail needs to be tweaked. If the former needs to be tweaked to make it foolproof; the latter needs to be tweaked in enlightened self-interest of the nation.

To be sure, FDI in retail has its downside; but on balance, the benefit to farmers in the form of remunerative prices and lesser wastage, and lower prices for consumers on account of elimination of too many middlemen outweighs the disadvantages — including loss of self-employment to shop-keepers.

At the same time, it would be naïve on the part of the Centre to smugly shrug off the issue essentially as one involving the discretion of the State governments, on the ground that it comes under their ambit — in other words, viewing the entry of foreign multinational chains in the States as a matter involving the Shops and Establishments Act.

The Centre cannot be blasé about an issue which it knows pretty well goes beyond shops and shopkeepers. Foreign direct investment (FDI) is in the Union List, and hence the issue comes very much under the Centre’s remit. The retail chains started by foreign investors would be no ordinary shops because they would be bankrolled by FDI and sustained by imports to a large extent. It could thus impact our already fragile foreign exchange position, with imports gaining ascendancy, given the fact that the foreign retail chains view the world as their oyster.

Import intensity

Garments may be sourced for India from Bangladesh or China. The success of these chains is largely due to their efficient supply-chain management, and this chain travels far and wide across the globe. Even if the FDI policy prescribes a minimum local procurement content, that would not be enough to apply the brakes on the inevitable surge in imports, because foreign chains sell both branded and unbranded items.

Perishables such as fruits, vegetables and dairy products are, by and large, sourced locally out of necessity and these may comfortably bail them out as far as domestic procurement norms, if any, are concerned. While they cannot be faulted for setting store by their USP — efficient supply-chain management — one has to worry about the fortunes of those in India affected by the inroads made by these chains.

Domestic garment, leather and electrical appliances industries, among others, may have to close shop that would set off a chain of apocalyptic events — loss of employment, beggary, thieving and social unrest. They must be rehabilitated and their skills updated.

More safeguards

While the Government needs to be complimented for insisting on a minimum FDI of $100 million, out of which 50 per cent would have to be invested in backend operations like cold storage, food processing industries and rural roads, a few more safeguards are needed in the national interest.

Foreign chains must be mandated to set up their backend infrastructure first before they set up front-end shops. With their legendary deep pockets, this should not be an undue burden on them. In any case, the concept of gestation period and its pangs are well known to any businessman, and there is no reason foreign investors should be spared of it.

On the forex front, there must be some counterbalancing. The foreign chains can be mandated to make up for the burden they impose on the country’s forex reserves through heightened imports. In other words, they must meet the foreign exchange needs for imports either through exports, like Reliance Industries, or beef up their working capital with more capital infusion from abroad. Accent on exports would not only offset the depletion of forex reserves due to heightened imports but also provide employment opportunities to those engaged in manufacturing products.

China does not mind the intrusive presence of Wal-Mart because it is benefiting immensely from domestic procurement. India, too, should have no objection if Wal-Mart, for example, uses its considerable expertise in supply-chain management and foreign trade to find a market for Indian wares.

Last but not the least, the Indian Government should empower Indian farmers by encouraging them to form producers’ cooperative a la AMUL to take on the might of monopsonies and oligarchies.

Incidentally, the subject of FDI in retail invariably evokes images of cold chains. To be sure, cold storages can minimise rot and wastages, but to operate them, one needs power, in which India is deficient. It is here that the ingenuity and business acumen of foreign chains would be really tested — especially if they are mandated to start with the back-end operations — or do the disagreeable part of the deal — first.

(The author is a New Delhi-based chartered accountant.)

(This article was published on December 10, 2012)
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