FDI in Multi Brand Retailing:Opening Floodgates

In Depth

FDI in Multi Brand Retailing:Opening Floodgates

Dr. Maurya Vijay Chandra | March 2012

The recent introduction of FDI in multi-brand retailing was met with strong protest from some quarters of Indian polity. What are the key issues in multibrand retailing that have created both furor and concern?

The decision of the Central government to open “floodgates” of multibrand retailing to foreign investors has created a big furor. The decision was taken after an extensive consultation process, and therefore this furor was slightly unexpected and entices one to delve into the possible causes. India is one of the few countries with restriction on foreign direct investment in the retail segment. Under the UN’s General Agreement on Trade in Services, India is obliged to liberalize its retail sector. Government of India has gone slow in liberalising this sector. It first allowed FDI in wholesale and cash and carry business. It then opened up the single brand retail services and is now seeking to open up the multibrand retail services. The key themes around which the debate around FDI in multi-brand retail has revolved are:

FDI WILL RESULT IN :

Saving of 40% of the raw stock wasted on its way from the “farm to the fork”
This saving is likely to be shared between the farmers, the vendors and the consumers. The only thing that we as a common man should worry is that this sharing is fair, just and equitable. This requires a strong regulatory regime. If we see things in perspective, FDI in retail has theability to create enough return to pay up for the investment that any investor would expect. The fears of misuse of dominant position can be best tackled by effective and efficient regulation. The question is do we have the regulatory mechanism in place? Have we been able to reign in the domestic dominant players effectively?

Is FDI in multi-brand retailing desirable in India? What is the rationale of doing so by the government?

We must understand that in the retail business, we need to have very long distribution chain and bring about disintermediation. We need to bring the gap between the prices obtained by producer and the prices that are paid by the final consumer. This is an issue of making trade more organised moving it from informal organised segment to formal organised segment. In the process the producer gains, the consumer gains, but because the margin of intermediation is brought down, anyone who is in the middle of the chain, or the intermediary gets to lose. This explains part of the resistance. But this is a big , big issue. And there are thirty different reforms that need to be taken to bring about organised link in the distribution chain. In this canvass, FDI is a very, very minor issue. We are unnecessarily getting fixated on FDI. Whether it is single brand or multibrand, FDI is a minor issue. There are all kinds of minor reforms that need to be done. They are not being done and therefore, every body is looking at FDI as if it is a magic wand that will solve every problem.

Having said that, I must say FDI is desirable as it offers competition and provides choice to producers as well as consumers. It offers efficiency, brings technology, it even brings money. And, once we have accepted that FDI is desirable I don’t think any segmentation makes any sense, be it in terms of multibrand or single brand or be it in terms of opening it up in billion plus cities. These are artificial segmentation which defies logic. and impossible to enforce.

There is always a fear that jobs will be lost. Jobs are not lost they get transformed and ICRIER has done a very good study on this a couple of years ago which documents the costs and the benefits. Let us not forget that it is not a zero sum game and every one is going to get benefited . The issue will have to weighed in balance and on balance we do gain. There is a question of transition period because the Kirana stores will take time to restructure themselves

What is your take on 30% compulsory sourcing from SME?

This 30% is not enforceable and meaningless. It violates WTO and it has been done for public posturing

Our manufacturing is not doing well, what happens to job losses?

There are two ways of looking at it. One is that those other reforms that are needed in the retail sector are not happening, and as I said, in the jigsaw, those are much more important than FDI. For politico- economic reasons we are unable to do those reforms and if someone says that FDI may end up being a trigger, I am prepared to buy it, but only up to a point. I don’t know if the beneficiaries are either going to be producers or consumers. All that is going to happen is Indian large retailers will sell off their equity stake and will be the real beneficiaries.

Bibek De Broy

Professor, Centre for Policy Research, New Delhi

Implementation of global best practices in supply chain management
FDI in retail is likely to bring in technology and know-how and create the correct market condition for the supply chain to bebuilt and toned up. The loose conglomerate of small unorganized retailers neither has the wherewithal nor the necessary motivation to invest in logistics management. The government itself could do it, but, for various reasons the efforts of the government in the past 65 years have failed to establish this infrastructure. One must be careful to discern that the know how could come through the technical assistance route or hiring of people who lead such businesses abroad. In exchange for the retail opportunity, what India craves more is the knowledge to build the supply chain. FDI in multi brand retail is being bundled with development of infrastructure and the key assumption is that the multi brand retail entities will necessarily go for backward integration. The front-ending of the investment in infrastructure ought to be an integral and enforceable part of the policy. By doing so, FDI in retail will exploit the capacity of private sector to deliver the public good of an efficient supply chain to the Indian economy. However, in the worst case scenario, if this does not happen, does the polity have enough capacity to make the investorsaccountable or monitor the progress of the desired results?

A good supply chain goes a long way in contributing to a better customer shopping experience and value for money for the consumer. Due to the structural malaise in the distribution system, an average Indian’s shopping/ procurement experience could well be a horror story. That the large capital inflows are likely to create huge buying powers as well as deep market penetration, of the organised multi brands retailers in India. This in turn have the potential to provide fertile grounds for unfair trade practices or monopolistic trade practices. Can we avoid the suppression of the weak this time around? Has the government been able to reign in the existing retailers? Can a failing consumer forum, a dilatory civil justice system and competition commission that has barely started functioning provide the protective ring around the feeble common man?

“In today’s world Indian corporate has access to foreign market, therefore, I don’t see any reasons why foreigners should not be allowed to invest in multibrand retailing in India. We have allowed 100% equity in cash and carry business and in single brand retail. There are sound economic reasons for doing so in multi-brand as well. Therefore, the government brought out this. But there are some political opposition in bringing it forward.”

Shourya Mandal

Partner, Fox Mandal, Calcutta

Jobs
While FDI in retail is likely to create a lot of jobs, it is feared that at the same time it will nibble away more jobs in the sector than it would create. This sector is the second biggest source of employment in India contributing about 8% of the GDP (Gross Domestic Product), so concerns are natural. On the other hand, it is possible that FDI is going to merely bring a structural change in the nature of employment rather than the total numbers. This is likely to transform the social landscape. However, one must note that this transformation is happening any way in India with all major corporate giants having opened up retailing arms. Is it not that only the pace of change that will change?
Enhancing revenues of the producers of goods, especially, farmers
Eliminating the predatory middlemen or replacing them with a predatory retailer?
Providing value for money to the end consumer.

The real risk is of dumping sub-standard goods and prices getting higher than the international prices for comparable quality stuff. The real solution is consumer awareness and governmental regulation especially in ensuring minimum standards of goods being sold. This will cost the government. Has the government provided for these expenses. Retails are only a conduit for such goods. The problem needs to be addressed at source. Manufacturers’ liability enforcement needs to be strengthened.

It will be alright to say that every time foreign investments are discussed, the element of xenophobia is whipped up in the popular debate. The xenophobic arguments, in its various shapes, are sprung on us and fear of the others” is whipped up “The foreigners will come and seize us. Let us grow and consolidate before we let them in…” is the standard line. The consultative process preceding the announcement of the policy betrays both. It has neither given a rational basis for combating the individual fears of those who might be affected nor has it made the micro-level impact transparent. It appears that the consultation has been more or the macro level economic modeling. Micro-modeling, appeared to have been ignored in this consultation process, could have given some more comfort to the apprehensive lot. Further, since the family run store Vs. big retailer controversy is not alien to western economy, evidence based policy making could have lent better credence to the government’s policy initiative in question. In any event, to credibly monitor whether the country is gaining as much as it signed up for, micro-modeling needs to be done. If the Government has the necessary will there should be enough data to accomplish the same from existing retailers. Any regulator of tomorrow will have to grapple with such micro level data, so why not begin early. But, will the government bell itself?

About Author

Dr. Maurya Vijay Chandra

Dr. Maurya Vijay Chandra is a practicing Advocate at the Supreme Court. Maurya holds a Masters from the London School of Economics and PhD from the University of London. He has also taught at University of London; NUJS (Kolkata); and UGC Academic Staff College (Ranchi).