Cutting the knot

Using court directives to set policy directions is not an ideal solution. But when policy is caught in a logjam of legacy issues and past political compromises, the courts can offer a way out. The Delhi High Court has done just that, by asking the Centre to consider a plea for FDI parity in the online and brick-and-mortar space. It was hearing a petition moved by the Retailers’ Association of India (RAI)— representing Indian big box retail players — which is seeking a level playing field with e-retail on the issue of foreign direct investment (FDI). While e-commerce ventures such as Flipkart and Snapdeal have managed to secure billions of dollars in foreign funds which have helped finance deep discounts to lure customers, their brick-and-mortar counterparts have struggled to grow, with rising real estate operations and people costs precipitating the need for funds infusion that is beyond their capacity to raise from domestic sources. This has already led to consolidation with two of the largest players, the Future Group and Bharti Retail, having announced a merger recently.

The current policy on retail is irrational and confused. The ruling BJP is against any FDI in retail, but has not moved to repeal the UPA government’s decision to allow 51 per cent FDI in multi-brand retail, which itself had so many strings attached that the RAI says it’s unworkable. No FDI is allowed in online multi-brand retail, but players have managed to work around that by changing their business model to a “managed marketplace” one where the goods are nominally sold by Indian retailers, but through their websites, for a fee. The Centre has done nothing to stem the infusion of funds into online retail, which physical retailers say is unfair. The end result of all these policy flip-flops is that the full potential of India’s retail sector is yet to be realised. The share of organised retail is just 8 per cent, whereas it is over 80 per cent in developed markets such as the US and the UK, and over 50 per cent even in Malaysia.

The argument against foreign owned multi-brand retail is that they will drive millions of small stores out of business. This is specious. Indian-owned big box retail — which is behaviourally indistinguishable from a foreign-owned one — has not dented the kirana store market, which has grown in tandem with GDP. Harvard Business School’s Rajiv Lal has argued that given their cost structure, organised retail will never be able to replace kirana stores in a subcontinental market such as India. A PWC study estimated that even if physical retail grew at 24 per cent a year for a decade, the share of organised retail would still be only 30 per cent. The Centre should utilise the window provided by the Court to rethink a policy which is stifling a sector capable of creating millions of jobs and can give millions of domestic vendors and consumers the benefits of better markets and better prices.

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