No need to fear FDI in retail

With the government's conditional nod to FDI (foreign direct investment) in multi-brand retail seemingly around the corner, the question arises: does organised retail really require FDI? The unequivocal answer: ‘Yes'.

Although Indian retailers have made steady progress in the past decade, their efforts fall short in matching global norms in a sector estimated to be worth more than $450 billion. Consequently, organised retail has barely more than 4 per cent market share in India. Indian retailers simply lack the deep pockets and in-depth domain expertise required to be on a par with global models. The presence of foreign retailers through joint ventures and other means could certainly speed up the process of transforming India's retail trade.

Multiple intermediaries

There's a broad consensus on the need to enhance efficiencies in the domestic trade of consumer goods. Efficient management practices and economies of scale, coupled with the adoption of global best practices and modern technology, could vastly improve systemic efficiency.

Presently, retail trade is disorganised and largely inefficient. As in other economic activities, minimising costs and maximising efficiency are imperative in retail trade. Like their foreign counterparts, Indian consumers too are entitled to receive quality products, produced, processed and handled under hygienic conditions via professionally-managed outlets. Unfounded apprehensions that small retailers will be adversely affected are not reason enough to deny millions of consumers access to world-class products.

Moreover, today's intermediaries between producers and consumers add no value to the products, but add immensely to final costs. By the time the products travel from the farm-gate to the marketplace via various intermediaries reduces, they lose freshness and quality resulting in huge wastage. Nevertheless, intermediaries reap huge profits by spreading wastage losses between producers and consumers. This is achieved by buying products at low prices from producers, but selling at highly marked-up prices to consumers. In an unsound system with multiple intermediaries simply for logistics, only intermediaries benefit.

With organised retail, every intermediate stage – procurement, processing, transport and delivery – adds value to the product. This happens because it uses global best practices and modern technology, ensuring optimum efficiency and minimum wastage. Organised retail enables on-site processing of produce, scientific handling and quick transport through cold storage chains to the final consumer. Once modern retailers introduce an organised model, other vendors, including small retailers, would automatically copy this model to improve efficiencies, boost margins and stay in business. Organised retail would thereby bring more stability to prices, unlike the present system where hoarding and artificial shortages by profiteering intermediaries push up product prices.

Convenience of kiranas

Concerns about kiranas closing down after the advent of organised retail are not based upon facts. Given the huge population and large number of cities and towns , it's erroneous to conclude that organised retailers would drive small stores out of business. Small stores offer customers the convenience of quick doorstep delivery, even extending a month's credit. No organised retailer can match such convenience.

This is one reason why FDI in retail in other nations, including China, did not lead to closure of Mom-and-Pop stores. China's experience indicates that both organised retail as well as Mom-and-Pop stores can co-exist. China first allowed FDI in retail in 1992, capping it at 26 per cent, while India capped FDI in single-brand retail at 26 per cent. Only in 2004 did China permit 100 per cent FDI. Since then, Chinese Mom-and-Pop stores have grown from 1.9 million to more than 2.5 million. Conversely, organised retail has just 20 per cent penetration , despite operating there for almost 20 years.

More jobs

Some stakeholders speculate that millions of jobs would be lost due to FDI in retail. Actually, it will be the other way around. With the entry of modern retailers, the market will expand, creating millions of additional jobs in retail and other tertiary sectors. Given their professional approach, organised retailers will allocate some amount of resources towards the training of people they hire.

This has already happened with the Bharti-Walmart joint venture, which has joined hands with some State Governments in opening training centres in Amritsar, Delhi and Bangalore to train local youth for jobs in retail. Training is totally free and more than 5,600 local youth have already been trained . Retail jobs don't require higher education or highly specialised skills.

Finally, considering the conditions incumbent for the opening of multi-brand retail, it should be clear that this will be a win-win situation for all parties. One of the crucial norms in the formal proposal for permitting FDI is that 50 per cent investment will be mandatory in back-end infrastructure, which includes cold storage chains and warehousing.

The minimum FDI investment would have to be $100 million. Retail stores would only be allowed in cities with more than one million people. Front-end operations would be allowed only in States that agree to permit FDI in multi-brand retail. It will also be mandatory for retailers to source minimum 30 per cent of the value of manufactured goods, barring food products, from small and medium enterprises.

Such stipulations will serve as sufficient safeguards for small retailers. Ultimately, farmers and small producers will benefit from better prices for their products and produce, while consumers will receive quality products at lower prices along with better service.

(The author is Director, Indian Institute of Foreign Trade. The views are personal.)

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