The ongoing battle regarding FDI in retail is likely to intensify further in the coming months. The arguments put forth for and against the policy are equally valid.

However, people arguing against this policy need to take note that organised retail, whether domestic or multinational, presents equal risks.

The need of the hour is therefore to have a calibrated risk management approach. Let us take a look at what these risks are and how they can be managed.

TYPES OF RISKS

Employment: A key risk of organised trade is potential loss of jobs for those in the unorganised retail sector, or what one calls traditional trade.

While organised retail does create additional jobs, these usually favour a different set of people with different skills.

This will mean that a large number of people who currently work in the traditional trade supply chain face the risk of displacement.

Re-skilling these people and enabling them to work in organised retail is of prime importance.

Small manufacturers: Organised retail typically works in favour of large brands and manufacturers who have the financial strength to withstand the deep price reductions that large retail chains demand, and the ability to partner in centralised logistics initiatives.

Small manufacturers and brands neither have the financial strength nor the sales volumes that would excite the large chains.

Prudent risk management would suggest that these small brands look aggressively at a survival strategy, unless they have a strong niche franchise.

Store Brands: One of the biggest risks from organised retail is the concept of store brands.

These are products made and sold by the retailers under their own brands. These mimic market brands closely and are placed next to them on shelves, but sell at 20 per cent less.

Store brands have the potential of wiping out small brands and manufacturers, while preventing large brands from taking price hikes.

The retail FDI policy should consider having a moratorium on store brands for at least 5 years, so that Indian manufacturers are protected.

Imports: Large international retailers have a wide sourcing network across the globe.

They have the ability to source high volumes from global vendors at prices that make business sense for them despite import tariffs. Any policy on retail FDI would have to looking at a cap on imports.

Interests of farmers: It is true that organised retail will provide better prices to farmers with the avoidance of middlemen and setting up of a rural supply chain.

However, there is a risk that these benefits may flow to large farmers, with whom the retailers could enter into contract farming arrangements.

Marginal farmers may still run the risk of remaining marginalised, unless mechanisms are put in place to ensure a level playing field and transparency.

Carbon footprint: Last but not the least, organised retail invariably means a much higher carbon footprint and is the nightmare of every green campaigner.

Large air-conditioned stores, extended cold chains, the conversion of consumers from raw foods to packaged foods, and high consumer commuting all contribute to high green house gases.

In comparison, the ordinary kirana store is quite a carbon-friendly business model.

A requirement for retail chains to be carbon neutral as part of the policy would make immense sense. Modernisation of trade is an inescapable aspect of globalisation. Let us grasp this opportunity through good risk management.

(The author is a consultant in corporate governance and risk management. The views are personal.)

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