Panel says yes to FDI in multibrand retail, advises caution

A Prime Minister-appointed panel on inflation has pitched for opening FDI in multibrand retail in a "properly regulated fashion", cautioning that the global corporations can also become monopolistic and hike prices.

The Inter-ministerial Group (IMG) headed by Chief Economic Advisor Kaushik Basu has called for allowing FDI in the sector at the earliest to check price rise.

"It is important to allow the entry of FDI into this sector in a properly regulated fashion. We must guard against the risk of these new corporations becoming monopolistic and charging high prices," a working paper of the panel said.

The IMG was constituted by Prime Minister Manmohan Singh in February to suggest ways to check inflation.

RBI, even at the cost of economic growth, has been hiking interest rates since March 2010 to tame inflation still hovering over 9%.

"The IMG deems that it is time for India to allow FDI in multi product retail and proposes that the government consider this at the earliest, (it) believes that reform in this sector can be an effective inflation busting measure," it said.

The paper said that because of the outdated technology and managerial methods used in moving products, there is excessive value erosion all the way.

"This, in turn, raises the price that consumers have to pay," it said, adding that there is scope for change and modernisation on this front, especially in the case of fruits and vegetables.

In India, the gap between farm gate price and retail price is exceedingly high.

The share of organised retail in India is just over 4%. The sector, employing millions of people, is dominated by small, local shops.

For government to try to achieve modernisation in retail through "hands-on intervention at every stage and for every product is to court failure".

The paper, first in the series, said that one way of playing an enabling role is to allow FDI in multi-brand retail which could provide remunerative prices for farmers and fair prices for consumers -- especially during the peak marketing season.

However, it is important to allow the entry of FDI into this sector in a properly regulated fashion, the paper added.

"We must guard against the risk of these new corporations becoming monopolistic and charging high prices," it said.

The paper further said that to promote competition at the local level and prevent cartelisation, action needs to be taken on multiple fronts such as reforming APMC into an enabling Act and a facilitator of efficient markets.