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India should allow foreign direct investment (FDI) in multi-product retail and such a move can be an “effective inflation busting measure”, the inter-ministerial group (IMG) on inflation has recommended.
Noting that the potential benefit of this move could be enormous, the IMG headed by Dr Kaushik Basu, Chief Economic Advisor to the Finance Ministry, has, however, called for allowing the entry of FDI into this sector in a properly regulated fashion.
“If this is done in an appropriately regulated framework, we believe that the benefits to ordinary consumers in terms of relief on retail prices front can be immense. A proper regulatory framework is needed as we must guard against the risk of these new corporations becoming monopolistic and charging high prices,” Dr Basu said.
Currently, FDI is not permitted in multi-product retail. “By recommending that FDI be allowed in multi-product retail, the inter-ministerial group is taking a clear position on this. We have done lot of research on this,” Dr Basu said.
He highlighted that India's retail sector continues to be primitive and that there was evidence of large losses that occur as products pass through the supply chain from farm to the retail customer. Dr Basu pointed out that share of organised retail in India to the total retail trade is just over 4 per cent. This compares unfavourably with 66 per cent for Japan, 20 per cent for China, 55 per cent for Malaysia and 30 per cent for Indonesia.
China allowed FDI in multi-product retail since 2004 and the benefits have been palpable, according to the IMG.
While recommending FDI in multi-product retail to help tackle inflation, the IMG has made it clear that any such move was not going to solve the problem of inflation for all time to come. But it can have a sharp desirable effect in the short run of bringing inflation down in food and increase the efficiency of food markets. This can be of great value to Indian farmers as well as to Indian consumers.
Moreover, once the large corporations begin to source their products from Indian outlets it is very likely that they will gradually take these products to sell in their outlets in other countries. This can have the beneficial effect of opening up the world of exports to lots of small Indian producers, the IMG has said.
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