Cushioning the impact of FDI in retail

The Government’s recent decision to allow 100 per cent foreign direct investment (FDI) in single-brand retail on the automatic route has generated unseemly criticism from some quarters. It is not an earth-shaking policy shift, but a matter of pushing the process of liberalisation further. The investment door that was partially open is now fully open.

Many believe that the next step would be opening up of multi-brand retail to foreign investment. That policy decision is something the present government will have to be careful about. It can be a potential landmine; and a policy decision not carefully crafted can go frightfully wrong and wreak more damage than one can imagine.

No wonder, even the previous government was rather cagey about FDI in multi-brand retail. In 2011, the then Union finance minister had called for a “larger consensus” on the “complex” issue, especially when related to the food market. For building a larger consensus the Centre will have to rope in State governments and other stakeholders. Rather than hastily announce a decision, the present government would be well advised to tread with caution and do its homework thoroughly before eventually opening up.

It is usually argued that opening up the retail trade, especially food retail, for infusion of foreign capital would contribute to supply-chain efficiencies, improve growers’ incomes and help contain volatile or spiralling prices of essential food products.

One can advance many arguments about the likely benefits of large-scale organised food retail, but these may turn out to be theoretical. The situation on the ground is really complex. It may not permit full realisation of what theory suggests.

In addition to State governments, stakeholders in the food chain include farmers, aggregators, processors, distributors, large and small traders, as well as trade intermediaries such as commission agents, apart from retailers themselves and consumers.

On their part, corporate retailers with domestic funds have clearly seized the business opportunity by pouring huge investments into accelerating the pace of the retail revolution. The target consumers are obviously those with higher disposable incomes demanding an “international shopping experience”.

Currently, domestic retailers meet the burgeoning demand by investing in malls and supermarkets. These investments create employment, improve the supply chain, improve the marketability of growers’ crops and in general contribute to heightened economic activity. Logically, growers should be happy with the advent of organised retail because of the perceived benefit of a ready market. This is where theory ends.

We must be fully cognisant of the fact that organised retail is prone to be ruthless when it comes to quality and delivery schedule. Generally, there is no compromise on this as retailers have too much stake in the form of investment, turnover, customer satisfaction and so on. Surely, farmers defaulting on their commitment for whatever reason will not be treated with kid gloves.

Importantly, we need greater scrutiny of the key question whether organised food retail — with FDI or without — will deliver more remunerative returns to growers. There is suspicion, not about the intent of large retailers, but about their ability. Cost is a critical consideration in the business plan of any organised retail. Setting up large-format stores is capital-intensive, especially given the high real estate costs. Operational costs are high too because of the relatively high wages, high cost of power, and so on.

On the other hand, customers are, more often than not, cost and quality conscious. So, organised retail will strive to retain customers by ensuring competitive pricing and quality, by lowering the profit margin if need be.

Simply put, as uncompetitive prices would drive customers away but friendly prices retain them, the retailers’ degrees of freedom are limited at the front-end, which is the customer-end. If capital and operational costs are high and trade margins thin, where will the retailer capture value to stay and grow in the business?

It will have to be, more often than not, at the back-end of the supply chain; and at the farthest end is the grower.

While organised retail would provide a large and ready marketing outlet for growers, there is simply no guarantee that farmers will obtain remunerative prices. They would obtain market-determined prices; and they have little control over the way the market price is determined. Creation of total dependency has its associated risks to which growers will be subjected. The cat-and-mouse game between organised retail and small farmers is often an unequal fight, given the known vulnerabilities of the latter.

At the risk of sounding boorish, I may mention that free markets have many votaries, but often those propagating free markets may never have been subjected to the market’s cruelty. Given the unequal nature of transaction (between large retailers and vulnerable growers) and potential for exploitation, it is necessary for the Government to step in. The state can actually play a catalytic and protective role. For instance, it can encourage contract farming which will bring hitherto disparate farmers into one collective.

A three-way partnership among organised retail, farmer groups and the Government will accelerate production of crops that are market-driven and of standardised quality. Farmers should be able to obtain quality-related prices, something they seldom enjoyed. The three-way partnership will ensure farmers are not shortchanged while retailers will receive requisite product delivery from growers.

Given this, regulating the organised retail — with or without FDI — appears imperative. It is necessary to lay down regulatory guidelines and set up a regulatory authority with requisite powers to advance the interests of all stakeholders.

Small traders and shopkeepers are sure to be hit by organised retail and their interest should not be compromised. Ironically, in our country, in terms of sheer numbers, the traditional ‘mom-and-pop’ shops will cumulatively have customers far more than all organised large-format retailers put together.

Location is of course an important criterion. Small street-corner shops may be less favoured in areas with a concentration of high-income groups or upmarket customers. There may be cases of relocation of small retailers under such circumstances.

But the state can step in. It can help small retail or street-corner shops stay in business and generate an income. Imparting training to stay in competition with organised retail is necessary.

For instance, small shopkeepers can adopt innovative customer care methods like taking orders on the telephone, home delivery of goods, offer credit and so on.

Importantly, the state can help small shopkeepers access finance at concessional terms for scaling up operations, improve product display and so on. The state’s affirmative action will go a long way in enabling and empowering growers and shopkeepers.

It is only a matter of time before FDI in multi-brand retail is allowed.

But it is important that an enabling environment is created for farmers and shopkeepers to participate productively in the retail revolution. Policymakers have to think through issues and come up with a policy that is equitable.

The writer is a policy commentator and global agribusiness specialist

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