Retail needs more than FDI

Amid strong protest from opposition parties, the UPA-II Government has notified the opening up of FDI in multi-brand retail. Now, with all speculation put to rest and the roughly $500-billion Indian retail market opened to all retailers — indigenous or foreign — it would be pertinent to analyse the opportunities and challenges arising out of the latest move.

Will organised retail benefit India’s farm sector and improve the condition of its farmers? How will it affect manufacturing and services? Will the India ride of foreign retailers be a smooth one? What it would mean for local kirana shops? Will they lose out to competition from organised players with access to cheaper finance and technical knowhow?

Farm Sector problems

India is the world’s second largest producer of fruit and vegetables with annual production of more than 200 million tonnes.

However, the total cold storage capacity is not even 50 million tonnes. Potatoes take up three-fourth of this, leaving almost no space for other perishable items. As a result, 25-30 per cent ( compared to 1 per cent in Australia) of fruit and vegetables are wasted.

Further, farmers have to sell at the time of harvest when the price of their produce is low. So, they get one-third to one sixth of what the consumers pay.

Though India allows 100 per cent FDI in cold storage, this has not evoked much of a response in the absence of FDI in multi-brand retailing. Proponents of the policy claim that organised retail, facilitated by FDI, will bring capital and technology, improve quality consciousness and back-end infrastructure.

It will minimise the role of intermediaries and link the farmers directly to consumers. It will strengthen rural-urban linkages, encourage agro-processing and check post-harvest losses. This will improve net realisation from agriculture. Besides, it can also be an effective instrument for managing food inflation.

However, considering FDI in multi-brand retail as a panacea for all the ills of the farm sector will be naive. It must be accompanied by policy actions aimed at unshackling the farm sector from excessive control --- in particular, dismantling archaic regulations like Agricultural Produce Market Committee (APMC) and ensuring seamless movement of farm produce across States — to allow the farmers to benefit from the growing consumerism and retail boom. FDI in retail will not solve the existing supply bottlenecks in the food chain, which are the main cause of food inflation.

Manufacturing woes

Organised retail can be an opportunity for domestic manufacturers, if they can supply the right quality at the right price. However, India’s manufacturing sector is constrained by high capital cost, stifling regulations, poor infrastructure (and, of late, slowing demand).

Unless these concerns are addressed, opening up multi-brand retail to foreign players will lead to flood of imported goods from low-cost countries such as China or Bangladesh that may hurt vulnerable sectors like textile and garments.

Organised retail, being a volumes game, requires sourcing at lowest price. India’s high-cost manufacturing must turn cost-efficient to benefit from local sourcing by these multinational retailers.

Domestic sourcing requirement (though it may be contested at WTO) can be an opportunity for the small manufacturers if backed by suitable follow-up action.

The service sector has more to gain (than lose) from opening up of retail to organised operators. It will create new jobs for skilled and unskilled workers, not only in retail but also in related areas such as banking and finance, logistics and transport.

This will somewhat compensate for the expected job losses arising out of allowing organised players (indigenous or foreigners) in retail, if we can address the problems of skill shortage and skill upgradation.

Safeguards in place

To be fair to our policymakers, enough provisions have been made to safeguard the interests of kirana shops, farmers and small manufacturers by imposing conditions (on foreigner retailers) such as domestic sourcing norms, entry at the discretion of States and permission to operate in cities with a population of one million or more. Investment has to be made to create back-end infrastructure.

If that is not enough, Competition Commission of India can take care of likely collusion and predatory pricing. Moreover, retail being a Mode 3 service under GATS, India has enough legroom to tweak its policies on FDI in multi-brand retail without inviting WTO sanctions to suit its local peculiarities.

Evidence from China shows that even after two decades of opening up its retail sector to organised players, it accounts for not more than 20 per cent of the market. Permitting foreign players in retail sector of Indonesia, Malaysia, the Philippines, Brazil and Mexico has not resulted in large-scale displacement of local retail stores. It is naive to presume that Walmart or Tesco could do what Big Bazaar, Reliance Fresh or Spencer could not do, despite being around for almost a decade.

India’s retail sector is already opened for indigenous (organised) operators. There is no logic in keeping foreigners out. Entry of foreign players means more competition, improved supply chain efficiencies and better offerings for consumers and, most likely, better prices for farmers.

Attracting FDI

Given the high current account deficit and imminent threat of downgrading, India has no option but to do what all it can to attract FDI to tame the decline in rupee.

The declining rupee will cause increased fuel subsidy that will, in turn, lead to inflation, rise in interest rates and crowding out of private investment.

In all probability, it will not be a smooth ride for foreign retailers in India. Dealing with fragmented small suppliers to comply with 30 per cent domestic sourcing norms will not be easy. To be competitive, retailers will need to remain in close proximity to their buyers and, yet not pay high rentals. Given the prohibitive cost of retail space in Indian cities, this is easier said than done. Foreign retailers will also have to cope with the complexities of State taxation, especially taxes on moving goods out of or into a State.

FDI liberalisation in multi-brand retail is, thus, both an opportunity and a challenge. Whether India will benefit from it will depend upon whether it is supported by policy actions aimed at unleashing the animal spirits of India’s productive capacities; how the government addresses the problem of infrastructural bottlenecks and business-unfriendly regulatory environment is also an important factor.

That will decide whether opening up India’s retail sector was a prudent policy decision or not.

(Singh is Group Economist of a corporate house. Sharma is a research analyst - agri. commodities. The views are personal.)

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