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| Is FDI in retail a good idea? |
| Business Standard / New Delhi Jul 14, 2010, 00:57 IST |
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This will make organised retail more efficient and help farmers. Kiranas have natural advantages that will protect them to an extent, but if they are not modernised, the employment impact could be large.
 Govind Shrikhande
CEO, Shoppers Stop
Large investments in infrastructure will help farmers and will boost exports in a big way. It is unlikely organised retail will get more than 15% of the market even after a decade
Foreign direct investment (FDI) in the retail sector is currently a hot topic of debate. It is also a sensitive topic considering that the stakeholders in this case are consumers, local retailers and global retailers.
The recent announcement by the Department of Industrial Policy and Promotion (DIPP) to discuss various issues related to FDI is a welcome move. It has set the tone for inviting all the stakeholders to comment on various aspects of the move.
Let’s examine the key aspects related to this decision. To start with, why bring FDI in any sector? Clearly, FDI benefits customers, economy and infrastructure. Our experience in telecom, automobile and insurance sectors clearly shows the success of the FDI policy. With large-scale investments in each of these sectors, customers are getting the best of services and products, and the resultant competition is spurring the players to improve further. Even today, after the sector was opened up, the largest car brand continues to be an Indian one.
The retail sector in India has a pretty unique structure. It started with rationing and grew through retail in textile and footwear. Today, India has 15 million-plus retailers who account for $350-plus billion of annual sales.
The retail space is dominated by the unorganised sector that contributes to 94 per cent of the sales. During the last decade, many new formats — right from departmental stores to hypermarkets and speciality stores — were launched in the country. Many global biggies are already present in India. Malls have now become popular among middle-class families in various cities and towns. As the economy keeps on growing, the retail market will continue to make progress. Customers will demand better products and services in line with their growing income and aspirations. This will require large-scale investments in manufacturing, retail space, technology, food logistics, processing, etc.
FDI in retail will have a far-reaching impact on various aspects of the economy. If rolled out in phases and with proper checks and balances, it will give a boost to the economy. Customers will get a wide assortment of quality goods at reasonable prices. They will be able to buy the best brands across various categories.
Large investments in infrastructure would lead to a rise in farm productivity, manufacturing and food processing as well as cold storage facilities. This would cut down wastage and spur growth in employment, exports and GDP. It can also help revive the textile and handicrafts sector. With appropriate controls in place, our exports can double in three years.
The introduction of technology and good management practices will improve product availability, reduce wastage, improve quality and customer satisfaction.
China is an example of successful execution of FDI in retail in a phased manner. After FDI in retail, Chinese retailers still hold a majority of retail share. The number of small retailers has doubled. Also, exports and GDP growth has continued unabated in that country. China continues to dominate global trade through large-scale FDI investment in the country.
The biggest argument against FDI is centred on its negative impact on small, unorganised retailers. We believe that the unique model of retail in the country will not only survive FDI but also prosper once it’s allowed.
Indian consumers are very particular about value and quality. They love to buy and cook fresh. Hence, they will continue visiting the regular kirana stores and grocers for their daily needs. The large format players will cater to the monthly needs for products and services.
Moreover, there isn’t much space available for large retailers to enter the most crowded areas within most of the big cities. Therefore, large-scale retail stores will always remain a destination for big buys. Customers will have to make an effort to reach them. And with difficult road connectivity and infrastructure in cities, this will always remain a challenge.
Also, the ingenuity of Indian entrepreneurs has no match. Big retailers will find it difficult to measure up to services like free home delivery, monthly khata and the personalised approach of kirana stores. Even 10 years after FDI is allowed, unorganised retail will dominate the Indian market with more than 85 per cent share.
FDI should bring in investments in technology, infrastructure, cold storage facilities, distribution and manufacturing. If the top two retailers, who are already in India, commit to buy 5 per cent of their global purchases, this will translate into exports of $25 billion! — a game-changer for the Indian economy. '
In addition to this, India can also become a shopping destination for the world, leading to further boost to the economy.
 Praveen Khandelwal
General Secretary, Confederation of All India Traders
Given their outsourcing skills, resources and facilitation from the government, global players will be able to crush competition and charge monopolistic prices
The recently released discussion paper by the government on foreign direct investment (FDI) in multi-brand retail is nothing but an attempt to convert the domestic retail trade into crony capitalism. The trading community is prepared to fight it tooth and nail as this involves the question of the survival of their trade. It will adversely affect not only traders but also farmers, transporters, workers and several other sections that are associated with the retail trade.
If multi-brand retail is allowed in the country, the sole aim of global retailers will be to dominate the markets they enter into with the objective of capturing the maximum share, as they will be entering the trade for business and not for charity. Given their outsourcing skills, resources and facilitation from the government, they will be able to crush competition and, ultimately, dominate the market by charging monopolistic prices.
One reason that has been stated in the discussion paper is domination of value chain by intermediaries — as a result, it is said, farmers get only one-third of the total price paid by the consumers. It is necessary to understand who the present intermediaries are. They are the bullock cart men, transporters, agents and small traders. On the other hand, in the case of global players, the intermediaries are the brand ambassadors who are paid crores of rupees, high consumption of power, high cost of warehousing and transportation. The present intermediaries have contributed not only to the economy but also to the substantial social development of the country. Further, small retailers are charged with keeping two-thirds of the margin with themselves, which is factually incorrect. Since 2005, big corporate houses have been engaged in retail operations and their prices are either higher than, on a par with, market prices. This establishes that the two-thirds of the total margin is kept by these big retailers and they are not going to sell their products at lower prices. Therefore, charging the retailers with keeping huge margin is only an attempt to malign the trading community in order to find ways to allow MNCs in the retail sector.
After Independence, no efforts were made by the government to develop the existing retail trade into structured, organised retailing. Hence, instead of allowing multi-brand retail, the government should evolve a policy to upgrade the existing retailers, and on the pattern of the Micro, Small and Medium Enterprises Act, we can have an Act to protect and promote small and medium retailers under separate ministries with innovative schemes, such as a cluster approach to convert our unorganised retailers into organised, modern retailers. They should be provided with credit facilities at low interest rates. This will facilitate retail units coming together and transforming themselves into chain shops that will allow bargaining in purchase, hence benefitting the consumer.
It is said that multi-brand retail will prove to be a boon to the farmers. Again, this is wrong. The global players will initially buy products directly from farmers at attractive prices through their procurement centres on contract basis or otherwise. Once the agricultural mandis and regulated market yards are closed, they will radically reduce the procurement prices. As the big retailers possess tremendous bargaining power, farmers will be forced to sell their produce at cut-throat prices, and will even be forced to part with their agricultural land, which will render them as being mere employees of retail houses.
After agriculture, retail is the largest employment-generating sector in the country. Due to lack of a level playing field, small retail stores as well as mid-sized departmental and chain shops would be severely hit, thereby depriving millions of people of their jobs and livelihood. Does the government have any plan to provide an alternative source of income to them and arrange for their rehabilitation? While the government has provided many concessions and implemented assistance schemes for the protection and growth of SSI sector, it has done nothing to safeguard the interest and nurture the progress of small- and medium-sized retail units in the country. Prudence demands that the government should not disturb our traditional retail trade, which is running without causing any financial strain to the government.
It is suggested that an independent, in-depth study of the retail trade should be carried out by a task force comprising officials, experts and stakeholders to understand the ground realities of the retail trade. Efforts must be made to modernise and organise the existing retail trade instead of inviting MNCs to conquer the country once again.
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