The government has argued that foreign direct investment (FDI) in the multi-brand retail segment will create a win-win situation for all the stakeholders. Despite such hopes, observers of the micro, small and medium enterprise (MSME) sector appear to be quite perplexed as to exactly what opening up the retail sector holds in store for them, and remain unsure if it will help or hurt.
Everyone agrees that a basket of opportunities will accompany the inflow of FDI in retail, scale and distribution network being the most significant of those. Currently, small players do not have sufficient scale or a distribution network that covers the market. With the entry of organised retail, SMEs will be able to go in for bulk production with guaranteed absorption of their product. Also, SMEs supplying competitive products and services with greater potential for forward and backward linkages will have the opportunity to contribute substantially to exports. These are no small prospects — obtaining access to profitable markets is crucial to fostering SME growth and productivity. Opening up of multi-brand retail segment is expected to bring this much-needed opportunity.
Why, then, the concern? It arises from certain lurking fears: the central question being, whether our otherwise weak SMEs will be able to gainfully exploit the opportunities ushered in through the opening of the multi-brand retail segment.
Admittedly, to take advantage of the various opportunities, SMEs will primarily need knowledge and access to new technology, adequate financial aid, high levels of R&D, and adaptability to the changing trends in their respective industries. Pessimism sets in when one looks at the report of United Nations Conference on Trade and Development (Unctad) of 2004 which, on page five, observes, “Trade liberalization… makes it significantly difficult for small and medium enterprises to survive and maintain in the local and, if applicable, in the global market”. This observation in the Unctad report may serve as a good warning for us, sending a reminder that there can be a danger in bringing in a post-industrial profile without having been industrialised.
The prime minister’s task force has noted (January 2010) that the MSME sector in India is highly heterogeneous in terms of size of enterprise, variety of product and service produced, and level of technology employed. More than 94 per cent of MSMEs are unregistered, with a large number established in the informal or unorganised sector. To prepare this diverse group for a new situation is certainly not going to be easy. Differentiated efforts would be required ensuring comprehensive coverage, with a clear understanding that one size will not fit all. The task is huge and will concern several institutions and departments of the government.
There is, therefore, a need for an SME perspective in the functioning of such institutions and departments, so that every action of theirs is born out of their full knowledge of the bottlenecks impeding the growth of the MSME sector. Currently MSMEs face problems even in supply to government departments and agencies, as a majority of government tenders prescribe high eligibility criteria such as annual turnover, high experience, etc. These are not going to go away with the entry of multinationals. In all probability, the criteria will become stiffer, creating higher entry barriers.
Studies have established that opening up not just brings in competition, but creates one of a rather fierce kind. To cope with the new realities Indian SMEs will have to develop the necessary competitive muscles. Additionally, competition will gradually create higher and higher entry barriers, setting increasingly stringent standards with regard to quality, price, timely delivery and flexibility. These will make things difficult for our SMEs to establish effective value chain connections at various levels. They will be confronted with the challenge to continuously incorporate the latest technology into their production process as well as in their marketing and management functions to cut costs, gain efficiency and consistency. SMEs seeking to establish partnerships in regional and global value chains will have to understand the governance of specific value chain process and structures.
Therefore, making FDI in multi-brand retail work to the benefit of SMEs necessitates a certain level of commitment, transparency, honesty and sincerity in implementation. What has been witnessed so far is that, while a public procurement policy was announced with much fanfare, its actual implementation remains shrouded in doubts. Urgent attention and well-judged action will be required on the following key areas to equip the sector adequately:
- Enabling policy and regulatory environment
- Supporting infrastructure for business
- Entrepreneurship, including management skills and human resources
- Access to finance
- Technology capability — building and adaptation.
The major need therefore is to match the level of governance with the level of the challenge. Bigger the challenge, the bigger are the rewards of meeting the challenge. Surely, a country of India’s ability and talent can meet the challenge. As we all know, actions speak louder than words. Therefore, concerted action should begin now. If that happens soon enough it will not only comfort MSMEs but may also ease, at least partially, the current political divisions on the subject.
The writer is a former dean of IIM Lucknow and a former director of Jaipuria Institute of Management, Lucknow