Strong pitch for FDI in organised retail

In the chapter Micro-foundations of Macroeconomic Development, while discussing ways and means of fighting food inflation, the Economic Survey 2010-11 has made out a case for allowing foreign direct investment (FDI) into the country in multi-product retail.

The context clearly is unabated food inflation and government's inability to rein in high food prices that hurt the poor the most. In addition to invoking the Competition Act, the Survey argues that a quick method to curtail the margin between farm-gate and retail prices is to bring in modern supply chain management systems and retail sellers into the picture. This will involve a lot of new know-how, asserts the Survey and adds that a quick way to get at it is to allow overseas investment. Do organised multi-product retail stores need regulation? “We will certainly need to have a regulatory structure within which such foreign companies will be required to function,” the Survey urges and adds, albeit with a tone that betrays both assumed flippancy and apology, that such regulation would be necessary ‘even if it were argued that large organised-sector firms would be more wary of violating the nation's antitrust laws'.

Phased rollout suggested

Asserting that the country is at a juncture where FDI in multi-product retail is worth considering, the Survey goes on to point out that it could enable farmers to get higher prices and consumers to have to pay less. As a palliative to possible opposition of the recommendation, it has been suggested that as a first step, we could consider limiting international multi-product retailers to a few outlets in each major city. This will prevent them from getting full control of the market and, at the same time, set an upper bound on the prices that other retailers will be able to charge for the products. Further opening up can follow depending on the success with this, it is argued.

The concerted attempt to generate public opinion about the benefits of FDI in food retail is becoming increasingly clear. Whether the government has succumbed to lobby pressure or there is genuine, however misplaced, belief about the efficacy of FDI is unclear. But it is important to recognise that there are risks associated with high expectations that FDI in food retail would benefit growers and consumers. Organised food retail involves huge initial investment and high recurring costs. Given that consumers are reasonably price-conscious, large-format retailers will not be able to capture value at the front-end. Again, uncertainties along the supply chain and high costs of logistics do not permit any great value capture.

Farthest at the back-end is the humble grower who is susceptible to arm-twisting. Eventually this is where the organised retail will be forced to capture value. FDI in organised retail should be preceded by a nationwide program of capacity building among growers, a vast majority of them small and vulnerable. We need to improve the ability of the farmers to become savvy traders. FDI in organised retail is most unlikely to do this. Non-trade initiatives alone will help.

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