FDI in Multi- brand Retail Trading: MSE Sector Need Level Playing Field

By V.N Prasad1 & Perumal Koshy2

Introduction

India being a signatory to World Trade Organisation (WTO)’s General Agreement

on Trade in Services (GATS), which include wholesale and retailing services
also, has no option but to open up the retail trade sector to foreign
investment/participation. The process of allowing foreign direct investment (FDI)
in trade sector has, in fact, began a long ago when the Country permitted 100
percent FDI in ‘cash-and-carry wholesale trade’ in 1997 and nine years later, 51
per cent FDI in ‘single brand retail’ segment.

Recently, the Department of Industrial Policy and Promotion (DIPP) has brought
out a ‘Discussion Paper’ to solicit suggestions, opinions to form a consensus on
the subject of FDI in ‘Multi-brand retail trading’. A number of issues, ranging from
livelihood concerns, likely disturbance in existing supply chain scenario, impact
on India’s micro and small enterprise (MSE) manufacturing sector as well as
retail trading enterprises - the major economic enterprise-establishment
constituent of the Indian economy - are involved in this.

Retail MSEs: Economic and Political Force

Some 25.1 million people are employed in the retail trade enterprise sector, 41.8
per cent of total non-agricultural establishments’ falls under the category of retail
trade category. The high employment in the segment is also reflected in the
NSSO 64th round data quoted by the ‘Discussion Paper’ when it observed that
“More than 2/3rd of the total employment, in the broad category of trade, hotels
and restaurants, is in the retail sector“. Contribution of trade sector in general to
gross GDP is placed at 15 per cent, out of which 8 per cent comes from retail

1
V. N Prasad , formerly Economic Advisor with World Association for Small and Medium
Enterprises( WASME) and is currently associated with Global SME News – an e-magazine and
can be reached at < vnpj@yahoo.com >
2
Perumal Koshy, formerly Economist with World Association for Small and Medium Enterprises (
WASME) and is currently associated with Global SME News, an e-magazine, and can be
reached at < caushie@gmail.com >
trade sector. However, these figures need not truly and fully reflect the size of the
sector and its contribution, given the limitations in collecting data and information.

The retail industry can be divided into (i) organized large, (ii) unorganized and (iii)
informal sector enterprises. The first category retailers comprise traders who
possess legal permissions or licenses to undertake the activity, are registered
with sales tax/VAT etc. Such enterprises are super markets, hypermarkets, retail
chains, and also the privately-owned large retail businesses. Their presence on
scene, though of a recent origin, is gradually gaining in importance, and slowly
eating in to the business of second category of retailers.

By unorganized retail trade enterprises, we mean all those local kirana & general
shops, family managed – Own Account trade enterprises (Mom-Pop shops),
registered under the Shops and Establishment Act (s), administered by the local
authorities. Their number is very large and this category of enterprises dominate
Indian scenario with a whopping 98 per cent estimated share in the total
establishments. At this juncture, they, apparently, are providing tough
competition to large retail outlets.i

The third category of retailers includes small shops such as tiny grocery and
vegetable shops run from a room of a house, paan/beedi kiosks (often selling a
variety of items, like small toothpaste tubes, tooth brushes, soaps, pouches of
shampoo, etc), way-side vendors, and hand carts operating without any licences.
This is not any past-time activity for owners, but is an economic necessity.

The Government in all probability could face severe resistance from the second
and third category of retail trading enterprises as a large number of workers --
either paid and/or unpaid -- would likely to be affected. Such a perceived impact
on a huge chunk of our population could make it a political issue. Already
Bharatiya Janta Party advised against taking “any hasty step”.

MSEs Concerns need to be addressed

This article is an attempt to address some of the issues that might come up if FDI
in multi-brand retailing is permitted and to suggest possible measures that the
government may consider prior to initiating this step in order to safeguard the
interests of Indian MSEs, retail small and micro enterprises and also the informal
sector enterprises. We do recognise that large, domestic or FDI-funded, can’t
evict altogether MSE retailers from the scene, but there would be some
causalities, depriving of that may or even more persons of economic activity and
thus income.

The DIPP Discussion Paper contains several interesting proposals and

suggestions, such as reservation of jobs for rural youth; sourcing a certain
percentage of products from SMEs; stipulation of a certain percentage of FDI
towards ‘building up of back-end infrastructure, logistics or agro processing’,
resulting in better price realisation for farmers and creation of new job
opportunities; and limiting their siting in towns with certain size of population.

Though the Discussion Paper heavily focuses on perceived benefits to

agricultural sector and rural areas, it also believes that the new policy would
benefit Indian MSEs, if a certain percentage (say 50 per cent) of their products is
sourced directly by these new stores, as well as would help them overshadow
some of the crippling disabilities of Indian MSEs in the context of globalization, its
failure to reach out to the global market, marketing, branding and technology up-
gradation.

Some Inputs for Policy Framework

Our observations are limited to concerns, and possible solutions to issues that
arise vis-a-vis SME sector. We would like to highlight some of them that the
government may address and measures that might help Indian MSE sector, both
trading as well as manufacturing enterprises.

We shall start with the small retail enterprises. Firstly, they are currently not
treated on par with micro, small and medium enterprises (MSMEs).ii In fact, no
official definition of small and micro trading enterprises is available in the
Country. MSME Act 2006 also did not address this issue. They, undoubtedly,
need recognition as MSEs in view of their sizeable contribution to economic and
social aspects. Absorbing some 25 million persons is no small contribution!

Bringing retail sector under the purview of MSMEs would enable them to access
benefits, schemes, bank-finance at better rates & terms. Further, this would
strengthen retail MSEs and help them emerge strong to face the challenges that
the big retail chains throw upon them.
Secondly, there is no fair estimate about the size of the unorganized retail sector
in the country, implying that vast majority may face a hidden suffering. In order to
address their concerns, special measures, such as: (a) facilities to strengthen
their businesses in the event of strong competition from malls; special packages
of rehabilitating them into better locations, in case of a need, and extending
subsidized loans for those in the unorganized sector can be considered.

Thirdly, the Government can consider introducing MSE identity card, based on
registration with authorities overseeing the implementation of Shops and
Establishment Act and on electricity bill for others in order to ensure that above
benefits reach the targeted group. In addition, this would enable building a better
data-base to formulate the future programmes.

Fourthly, authorities can stipulate a spatial distance of say two kilometres

between two large retailers to provide some space to small players to operate
while permitting FDI in multi-brand retail trade. Such an approach would also
eliminate competition between and among corporate or large retailers and
eventual casualty of one, as well as provide operational space and scope for
small players to live along (See the end- note on Hyderabad).

Fifthly, authorities could restrict FDI funded-retail outlets from selling mass-
consumption items such as low and middle-end cosmetics, toiletries, grocery,
food and vegetables and small packages of several food-based, cosmetic,
toiletries, etc. Such an approach would help small enterprises retain a market for
themselves and possibly prevent their customers to shift their sourcing of such
products from large stores.

Lastly, the government could consider putting in place a mechanism to shield

micro and small retail enterprises from competitive practices adopted by large
stores to woo customers. These practices presently include offering gifts,
discounts and other ‘offers’, which can be termed as ‘unfair’ in view of the
former’s fragile position. The proposed mechanism could be such as providing
access to low-cost credit and subsidising their promotional/operational expenses
through NGOs and retail traders’ association. What is needed here is a firm
decision and a ‘will’ to do. Are not their cousins in manufacturing segment
enjoying fiscal and monetary benefits?
Including the provision of procuring a certain percentage of goods by FDI-funded
retail outlets from manufacturing MSEs in the discussion paper is indeed a
welcoming measure, if implemented. However, some issues in this regard needs
to be sorted out:

• How can the government make sure that large number manufacturing
MSEs that are not registered with the MSME ministry (over 90 percent of
the total about 14 million) and those who are in the unorganised sector
can also benefit?
• How can the government ensure that proposed procurement of a
percentage of products from MSME sector will not be cornered by
medium-sized and relatively larger among small enterprises?
• How could the government make certain this will not lead to
monopolization and that new foreign retail stores would not get filled up
with domestic-made foreign goods by establishing subsidiaries (already
FDI to the extent 24 per cent is permitted in SMEs) and farm products
from retail chains owned highly-mechanized farms?

We are already witnessing fruits from Australia, U.S etc being making their
mark in our minds with their advanced branding and marketing strategies.
The argument that Indian farmers would benefit heavily is not quite
convincing at this point. Import of fruits or vegetables by these retail
chains as well distribution of their own domestic farm products would be
the most probable eventuality.
• Further, how to make certain that the procurement policy of retailers can
be effectively & successfully implemented foolproof?
• Private labelled goods: The trend of big retail chains eventually entering
into selling products in their own brand name, by replacing existing brands
from the shelves is a trend that is being observed. This is happening in the
Indian context as well. For most of the branded products, alternative and
cheap Carrefour or Wal-Mart or Lulu brands are available, some of them
produced & processed internally and the rest sourced from private label
manufacturing units in several countries. With the eventual collapse of
supply chain network, these retail chains may potentially enter more
actively into manufacturing as some of them -- Wal-Mart, Walgreens,
Carrefour, Lulu are already doing.
 In the Indian context, retail groups getting into non-trade manufacturing
activity is something that needs to be restricted, as it may likely impact
local brands and question their survival. In this context, the government
may consider restricting retailers engaging in selling private labelled goods
as well as processing, packaging & re-packaging within the premises.
Also, must seriously consider not permitting their subsidiaries or other
partnership ventures in the manufacturing or related activities.

Strengthening MSEs

To nullify possible impact on manufacturing MSEs, the government must plan

and take measures well in advance to strengthen domestic industry and
strengthen policies, programs and schemes to help them reach out to the global
market, technology adoption etc. in addition to helpful procurement policy.

These could include (a) building up technological capacities of SMEs so that they
turn out quality products, (b) bringing unregistered enterprises in to mainstream
by evolving a system to enable them access the benefits of various policies and
programmes, and stipulating that the foreign-funded retail outlets source a
prescribed percentage of their inventory/procurement from micro and small
enterprises out of the proposed policy, and finally establishing an effective
Regulatory Authority. If necessary, a separate legislation, as hinted in the
Discussion Paper, could be considered in the interest of very large MSE sector.

It is important to approach the issue very cautiously. Millions of vendors in the

informal sector are involved in India’s retail trading sector. The discussion paper
says, “Post-harvest losses of farm produce, especially of fruits, vegetables and
other perishables, have been estimated to be over Rs. 1 trillion per annum, 57
per cent of which is due to avoidable wastage”. It is, thus, the suggestion of
building up of back end infrastructure, which is a good thing. This will then be
sold through hyper markets.

There are millions of people involved in the supply chain that help reach
vegetable and fruits to the end-customers, beginning with farmers/ producers to
the vendors who sell them. There is a need to build capacity of those in this
chain. Just for instance, waste at vendors’ end can be reduced substantially by
facilitating a technology adoption by millions of vegetable & fruit vendors, i.e., by
way of providing carts with battery-operated refrigeration facility (refrigerated
carts/ insulated ice boxes as being practiced by ice-cream vendors), financed
through banks.

To conclude, it can be said that in the context of free trade regime, and India too
being part of that global market, opening up of retail sector is imminent. We are
now part of the global market. Indian traders and business communities might
survive the competition. However, there would be causalities initially, particularly
among MSE retailers. The Government’s role is to bring down the causality rate
during the transition phase to the minimum.

The challenge before the government, therefore, is to maintain symmetry

between safeguarding the interests of MSEs, both retail trading and
manufacturing, and respecting WTO agreements. It is important to plan the
details carefully in consultation with all the stake holders.

While planning the details, the Government must also take into account factors
that can create a level playing field for MSEs and leave a space for competition
to remain, as the time passes. All stakeholders involved must get benefited.

Notes
i
In the middle-class dominated Vanasthalipuram, Hyderabad, there were dozen such
retail outlets in an area of about 15 square kms. until some two years back. The breakup
was: Aditya Birla’s More, 4; Spencers, 1; Reliance Fresh, 2; Heritage’s Fresh, 2; Magna,
2 (one of these was Cash and Carry type) and Subiksha, 1. Of these, five are no longer
in business now (one each of Reliance, Heritage Fresh, Spencers and Subhiksha and
both the Magna stores).
ii
Retail and whole sale trade establishments, general merchandize stores are not
recognized as Small Scale Service Business Enterprises (SSSBEs). Also, they do not
come under the purview of MSME ministry.<
http://business.gov.in/Industry_services/illustrative.php>

References
DIPP. (2010). DISCUSSION PAPER ON FOREIGN DIRECT INVESTMENT (FDI) IN
MULTI-BRAND RETAIL TRADING. New Delhi: Department of Industrial Policy and
Investment Promotion .
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Statistics and Program Implementaion.

Guruswami, M., Sharma, K., Mohanty, J., & Korah, T. FDI in India’s Retail Sector: More
Bad than Good? New Delhi: Centre for Policy Alternatives .

Mahoney, S. (2009, April 24). Private-Label Use Tops 97%. Retrieved July 18, 2010,
from http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=104792

McGuire, M. (2009, April 27). The Rise of Private Label Goods—Can Manufacturers
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MITRA, S. (2010, May 31). Private labels shine in retail. Retrieved July 13, 2010, from
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http://www.telegraphindia.com/1100531/jsp/business/story_12505126.jsp

Prasad, V. N. (2009, July). Indian MSEs: Trading and other Enterprises Need a
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http://samadhanfoundation.com/indian-mses-trading-and-other-enterprises-need-a-
common-policy-treatment

The Economic Times. (2010, July 8). BJP opposes FDI in multi-brand retail. Retrieved
July 13, 2010, from http://economictimes.com :
http://economictimes.indiatimes.com/news/politics/nation/BJP-opposes-FDI-in-multi-
brand-retail/articleshow/6140941.cms