The original rider for the opening up of FDI in multi-brand retail mandated that 30 per cent of the value of procurement or products sourced must be from Indian small and medium scale enterprises and also cover anything sourced from cottage industries, artisans and so on.

While the recent relaxation of the stipulation that this needs to be reached over a period of five years sounds reasonable, it is actually not so.

Retail is about aggregating volumes. Any vendor who aspires to be a business partner for a retailer needs to be able to scale up production. Prima facie, it might seem like mass merchandisers such as supermarkets and hypermarkets should be able to source 30 per cent of their requirements from such suppliers, but the reality is quite different.

Grocery and staples would contribute approximately 20-30 per cent of any food retailer’s sale and this does not qualify for the 30 per cent clause.

Of the rest, fruits and vegetable, dairy and other perishable food might add on another 10 odd percentage points. So, the retailer is left with approximately 60 per cent of sales from the other categories and products. In order to comply with the 30 per cent clause, they need to actually source half of this 60 per cent from the SME sector. Is that even practical?

First, are there enough suppliers to cater to this demand both in terms of range and volume? Next, consider the reality of shopper behaviour. Will shoppers switch over to regional products or brands instead of national brands? So in effect, this clause will make the large format multi-brand store invest in stocks which might never get sold.

Next, multi-brand retail is not limited to supermarkets and hypermarkets. Furniture and home décor are the first entrants in the form of IKEA. There are so many retail formats which have potential in the Indian market, such as toys, home improvement and so on.

Which group of SMEs would the multi-brand toy retailer source 30 per cent of their toys from?

Lastly, there is a simple contradiction of logic. Small industries are those whose total investment in plant and machinery should be approximately Rs 5 crore. Imagine that a retailer partners with a small industry and grows the latter’s business. By default this business will no longer be a small industry.

So in effect, the retailer is expected to stop sourcing from this business and scout around for a new small industry simply because the products sourced from such a business would no longer be considered under the 30 per cent clause.

There are far better ways to ensure that FDI in multi-brand retail ensures inclusive growth.

(The author is a retail expert who consults and conducts training programmes.)

Read also: FDI in retail: Is 30% local sourcing feasible? - YES

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