FDI in retail no remedy to inflation, say economists

Many tout it as a measure to dampen inflation. But a further opening up the retail sector to foreign direct investment (FDI) need not necessarily work that way, according to economists.

Nonetheless, they agree the proposed move will help improve the capital inflow in the country. Also, experts note that the Cabinet’s decision to open multi-brand retail to 51 per cent FDI and raise it to 100 per cent in single brand retail will help finance the current account deficit at a time when portfolio inflows are modest.

CARE Ratings’s Madan Sabnavis notes it will only be theoretically sound to predict a certain ease developing in the country’s back-end infrastructure and supply bottlenecks. Practically, it may not be so easy, he adds. “These firms may face lot of agitation from different sections; not many will be interested in coming to India. But even if they do, solving of agricultural and supply problems will be a long and gradual process,” he maintains.

Ramesh Chand, director, National Centre for Agricultural Economics and Policy Research, believes there are “too many reasons” for inflation. That way, FDI “may only reduce” marketing costs and margins. “We will not see any impact in the first one or two years. After that, the increased costs in packaging and grading will bring the situation back to square one, adding new cost”, he says.

Wholesale price inflation in India has been above nine per cent mark for 11 months in a row till October, 2011. Within that, for months now, food inflation hovers around 8-11 per cent.

An inter-ministerial group on inflation, headed by chief economist Kaushik Basu, had said FDI in retail will help fight inflation. On Friday, Commerce and Industry Minister Anand Sharma, too, said more competition in retail space should bring down prices. FDI is generally preferred over investment by foreign institutional investors (FIIs) because of its permanent nature, unlike portfolio investments. So, when FIIs inflows dry up and current account deficit widens, an improvement in FDI will help India finance this deficit in a better way, feel economists.