Business Standard / New Delhi Jul 09, 2010, 00:31 IST
The Opposition challenge to the government over the fuel price hike may now be followed up by the opening of another front. Both the BJP and the Left will react strongly to the government’s move to argue (in a discussion paper) in favour of allowing foreign direct investment (FDI) into organised, multi-brand retailing. Such retailing is already there, the contentious issue is whether to allow foreign investment or not, the potential danger being to the corner or kirana stores that now account for the bulk of retailing. An Icrier study found recently that 4.2 per cent of the unorganised retail outlets closed in a year, a rate lower than the global one for closure of small businesses. What is more, only 1.7 per cent of the closures were on account of inability to face competition from the organised sub-sector.
Against this, the likely gains from permitting FDI in organised retailing are well known. India’s logistical and supply chain capabilities are poor. Almost 30 per cent of the fruit and vegetables that are produced go to waste because of virtually non-existent cold chains. The Indian farmer typically gets only a third of what the final consumer pays, instead of the two-thirds that his counterparts do in countries that have organised retailing. If the farm-to-fork price differential could be bridged by home-grown retailers who set up successful cold chains and retail store chains, there would be no strong argument in favour of FDI (though none against, either). However, the experience of the past five years has been that organised retailing has simply not taken off. Groups like Reliance, RPG and others have tried hard but had limited success, and quite a lot of failure. Bharti tried its hand at farm-produce exports, and has admitted failure. There is, therefore, a strong argument for bringing in the global players who understand the business, and who can hopefully make it work in such a manner that domestic wannabes learn the ropes.
The country already has examples like PepsiCo, which has been a boon to potato growers in Punjab and West Bengal. Wal-Mart, meanwhile, promises to bring down sharply the cost of (for example) shirts that it supplies to customers — a definite plus to millions with limited budgets. Local sourcing for overseas retail networks will be a by-product.
The downside remains the potentially negative effects on existing retail outlets — and retailing is one of the largest non-agricultural sectors when it comes to employment generation. The government has, therefore, been careful enough to propose safeguards in its discussion paper. It is also clear that many of the larger players will try to use the existing corner stores as their front-end for personalised customer contact, thereby getting the best of both worlds.
I don't understand this fetish for FDI in multi-brand retail. Have we learnt anything from FDI in insurance or other sectors? Did foreign insurance companies inculcate best practices for consumer welfare in their Indian arms? Did the effective insurance costs go down in spite of continuously improving mortality rates? And SEBI-IRDA spat is still fresh in our memory.
If there are failures such as Reliance, RPG etc, there are also reasonable successes such as Big Bazaar. It is simply that Indian companies with deep pockets do not have the conviction to get into detailed planning and roll-out of end-to-end infrastructure. Otherwise, what is there to learn that they don't know already. The large distribution networks of FMCG companies are already an example on which the cold-chain networks could be built. The Govt has already been offering incentives for this type of work. And, India is not short on IT competence and infrastructure that is so critical in this area.
FDI in retail is not good for the economy. MNCs are long term players. During the initial period they keep the prices very low/attractive. Then they kill the competition and dictate terms / exploit the situation. Look at soft drink market in India. More than 90% market share is controlled by two mighty American companies. That is the story where ever they are allowed to operate.
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