FDI in Multi brand - Gain or Pain for traditional retailers?

FDI in Multi-Brand retailing is prohibited in India. FDI in single-brand retailing was permitted in 2006 to the extent of 51%. After the change in policy from April 2006 India received US$194.69 million till March 2010 which is 0.21% of total FDI inflows during that period. Single brand retail outlets with FDI generally pertain to high end products and cater to the needs of a brand conscious segment of the population. This segment is different from the one that is catered by small retailers/kirana shops. Indias organized retail industry is one of the sunrise sectors with huge growth potential. Indias young demographic profile, growing middle class incomes and improving demand from rural markets are the key agents of growth of retail industry. Foreign retailers are eyeing to enter and tap this vast and profitable market. However the government remains cautious in allowing the foreign players to enter the Indian market. In India, retail is the second largest employer after agriculture. The policy makers are apprehensive that allowing foreign companies would lead to unfair competition and could lead to large scale exit of domestic retailers, especially the small family managed outlets. This could lead to large scale unemployment. Also Indian retail sector, particularly organized retail, is still under-developed, so it is important that the domestic retail sector is allowed to grow before opening this sector to foreign investors. In India there has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables but due to very limited integrated cold chain infrastructure farmers have to incur heavy losses in terms of wastage in quality and quantity of produce. This loss is quite substantial. Allowing FDI in retail would create better storage facilities and necessary logistics for preventing the wastage. Thus the bottlenecks in supply chain could be removed. The farmers and the consumers have been at the receiving ends. Intermediates dominate the value chain. It has been found that farmers receive only one-third of the consumer price of their produce. FDI in retail would not only bring the consumer prices down but also help in overcoming the vast difference between prices. Owing to economies of scale adopted by big retailers farmers can expect a better pricing of their produce. Thus it would be a win win situation for both the consumers and the farmers. Also the food inflation could be controlled; the government can expect better revenues, more employment and so overall greater GDP. Ever since the opening up of the markets foreign investments have been integrating developing countries into the global economy benefiting both the developing country as well as the global economy as a whole. FDI can be a strong catalyst to increase competition in industries characterized by low competition and poor productivity. So why should retail be an exception. It makes better sense to allow FDI in multi brand retail. Countries like Brazil, China and Mexico have benefited by allowing FDI in retail sector without any limits on equity participation. Keeping in mind the Indian socioeconomic factors certain safeguards need to be kept before bringing about the necessary policy change. First and foremost the opening up of the sector should be gradual i.e. a window of 3-5 years would give enough time to the domestic players to

be able to face the international challenge competitively. The government should ensure a balance is so that both the organized and unorganized retail sector coexists. Also the government should maintained such that the FDI makes a real contribution to address the inadequacies of back end infrastructure. The government should keep a check so that the companies do not adopt monopolistic practices. The government should prepare legal and regulatory framework and enforcement mechanism to ensure that large retailers are not able to dislocate small retailers by unfair means. Fair play should be ensured. Only time and changing policies of Government can decide Whether FDI in multibrand will turn out to be a gain or pain for traditional retailers.