core sector communique

FDI in retail will benefit all

Parliamentarians should take a reasoned view of FDI in retail in this monsoon session.

An uproar over FDI in multi-brand retail trading (MBRT) can be expected in the monsoon session of Parliament.On the one hand, the Union Government appears determined to notify its Cabinet decision of November 29, 2011, allowing 51 per cent FDI in MBRT. On the other hand, several political parties, including UPA supporters, have pre-emptively reacted against such a move.

The Union Government is likely to stand by its move, saying the final decision — whether or not to allow foreign retail establishments — lies with the State Governments. However, the opposing parties would try to make it an election issue in the upcoming Vidhan Sabha and Lok Sabha elections. There are various myths which pervade the arguments against allowing FDI in retail. Let us address five of them.

Myth 1: Organised retail will crowd out small retailers. Reality: Domestic multi-brand retail outlets have been operating in India for some time, and there is no evidence that small retailers have been snuffed out.

In many European countries and Japan, which are densely populated with high real-estate costs, the small-store format has thrived and flourished even in the face of big retail outlets.In China, the number of small outlets increased from 1.9 million to over 2.5 million since liberalisation of the retail sector in 1992, doubling employment in both wholesale and retail. In Malaysia, small retailers in the vicinity of big retail chains, doing complementary businesses, were found to have benefited.In Brazil and Indonesia, around 50-70 per cent of trade in groceries, fruits and vegetables continues to take place through traditional small stores, even after FDI in retail was allowed. In India, kirana stores (and street hawkers) provide various unique advantages to consumers, such as proximity, credit availability, home delivery and personal touch.

Negligible crowding-out has been observed due to big domestic multi-brand retailers. Although consumers have largely benefited from retail chains, the expected benefits have not reached farmers. This is mainly because domestic players (or governments) have failed to create adequate back-end infrastructure to provide for seamless flow of produce from farm to fork. Multinational retail chains are equipped with experience, skills and technology, and have built good supply chains.

Myth 2: Will have adverse impacts on intermediaries. Reality: Yes, rent-seeking middlemen, particularly those dealing in agriculture produce, are likely to be displaced, because global retailers procure directly from producers.

While these displaced traders are likely to be absorbed by a rise in food-processing activities — a logical outcome of the presence of big retail chains — the streamlining of the long chain of middlemen is necessary to curb food inflation.It is widely believed that these middlemen enjoy political patronage, aided by the APMC Act.

Myth 3: Will not benefit domestic manufacturers. Reality: As international retailers operate on the principle of buying internationally at the cheapest cost, there is a genuine fear that most of the items will be sourced from competitive economies such as China, impacting domestic manufacturing.

China is now losing its advantage due to rising labour costs. In any event, we need to improve on our infrastructure, utilities, interest rates, transaction costs and trade facilitation. Once these reforms bring down the cost of our manufactured goods, we can expect global retailers to source domestically and export to their chains outside India. Irrespective of FDI in retail, domestic manufacturers would have to pull up their socks to compete with countries such as China.

Myth 4: Will not really help small farmers. Reality: The rationale behind this policy shift is to benefit both farmers and consumers. The present structure of agriculture markets is not working in favour of farmers, and the need for new opportunities for an assured and remunerative market cannot be denied.

Permitting FDI in retail is likely to open new opportunities for farmers, particularly for those dealing in fruits and vegetables. Studies show that profit realisation by farmers can increase up to 60 per cent when the produce is sold directly to organised retailers, as compared with selling through mandis.However, most Indian farmers, by virtue of being small, ignorant and cash-strapped, are vulnerable to exploitation by buyers, and there is no guarantee that they would not be exploited by corporate retailers, domestic or foreign.

This can be dealt by developing a comprehensive, equitable and farmer-centric model procurement agreement with special attention to clauses dealing with quality standards, withdrawal conditions, pricing standards, paying arrangements, force majeure and arbitration mechanism.Farmers should form cooperatives and/or ‘producer companies’ to enhance economies of scale and negotiate better prices.

Myth 5: Will harm consumers due to anti-competitive practices. Reality: Whether foreign or domestic retailers, all may indulge in anti-competitive practices of predatory pricing, abuse of dominance, monopsonistic practices, etc. This concern over anti-competitive practices seems unfounded because of low entry barriers for unorganised retail. If at all such practices are adopted, the Competition Commission of India can deal with them.

Reducing wastage

In addition, FDI in retail and subsequent creation of back-end infrastructure would reduce wastage in perishable food items like fruits and vegetables, estimated to be 25-30 per cent. Consumers would benefit for not effectively footing the wastage bill. With the elimination of middlemen, food inflation would be brought under control, thus benefiting consumers.

Let us not forget three important adjunct factors. First, by not allowing FDI in retail we are sending out a wrong message to all FDI, and not just retail. We need huge investment in infrastructure which will also assist retailing, such as power, roads and supply chains.Second, when Indian enterprises are faced with domestic competition they improve. Indian organised retail chains need to face better competition, and grow to become global chains themselves. Thirdly, States have been given the option to allow FDI in retail, so why the resistance?

It is expected that Parliamentarians will cooperate with the government in view of these facts.  

- Umesh Shanmugam