Big-ticket reform

Allowing FDI in retail augurs well for the economy

Last week’s decision to allow 51 per cent foreign direct investment or FDI in multi-brand retail and 100 per cent in single-brand retail should easily count as one of the boldest economic reform measures initiated by the United Progressive Alliance (UPA) government in its second term. Confidence in the government’s ability to take a big decision, like the one on opening up the retail sector, was low. Within the government, there were dissenting voices from members of at least two of its alliance partners — the Trinamool Congress and the Dravida Munnetra Kazhagam. The Congress also had a powerful section that had expressed strong reservations about the proposed liberalisation. The Left parties and the Bharatiya Janata Party, too, were opposed to the idea, arguing that the move would destroy domestic small retail businesses and result in more job losses. If it took India more than a decade to open up the retail sector, blame it on the confluence of all these political factors. Add to it the UPA government’s largely self-created problems of policy paralysis in the past several months, and you will understand why there is a general surprise over the decision on retail FDI and why the government now deserves a pat on its back for having overcome these obstacles.

 

For those who may still complain about the fallout of the decision (think fears of wiping out small retail shops and kirana stores), comfort should come from the many conditions that have been attached to the entry of foreign capital into the sector. Retail multinational giants, keen on entering India with a 51 per cent equity, will be required to procure at least a third of their raw materials from small Indian companies, allocate a minimum of 50 per cent of their investments to create backend infrastructure and operate only in towns or cities with population of more than one million. These are tough conditions and should be able to address fears of job losses with the advent of big retail multinationals. Once these fears have been addressed, the government can consider phasing out the conditions.

On the positive side, the entry of big retail should result in a marked improvement in the efficiency of the retail chain. Large multinational retail firms will bring not only their capital but also more advanced technologies and processes that will bring down transaction costs and improve the retail delivery system. The government also expects that the presence of big retail chains and competition will have an impact on inflation, particularly in food items. Another likely associated benefit will be a reduction in wastage at all levels. Almost a fourth of India’s horticulture produce is wasted because the country lacks adequate capacity for storage and transportation to the consuming centres. The entry of big multinational retail firms will not only lead to capacity creation in these areas, but also help in higher exports of goods to different overseas markets. The share of organised retail in the total retail business in the country, estimated at around Rs 25 lakh crore, is still very low, at only seven per cent. China’s share of only the top 100 retail groups in its total retail business is over 11 per cent. Clearly, India has much to catch up on, and the decision to allow FDI in the retail sector should help start the process.