Exploring the pros and cons of FDI in retail

Dec 2, 2011, 07.28am IST

Tags: foreign investment| FDI in retail

By: Bibek Debroy Professor, Centre For Policy Research Policy paralysis has an alliterative tone to it. There is no ready antonym with quite that characteristic. However, policy paralysis is defined, malaise is internal and domestic, no matter how much we blame the external world for our travails.

Therefore, it is odd that the decision to open FDI in retail is being described as symptomatic of government climbing out of the rut it has dug itself into. FDI in retail isn't going to be manna. It won't lead to deluge in FDI inflows. It won't stem rupee depreciation. It won't dampen food inflation. It won't lead to a revolution in retail trade and make it organised. But nor will be it be a bane that will drive kirana stores into oblivion. Outside TV studio debates, truth is never in black-and-white. As a shade of grey, the present decision is no more than the thin edge of liberalisation. All liberalisation is good for consumers. The colour of competition (national versus foreign) doesn't matter. There is choice, better quality and better service. There is downward pressure on prices. Post-1991, this elementary proposition of economics has been empirically vindicated whenever competition has been allowed to seep in. There is no reason for consumers to be exploited by kirana stores, just as there is no reason for consumers to be exploited by the Future Group, Shoppers Stop or Vishal Retail. Having said this, there is also another elementary proposition. Perfect competition is a figment of imagination. It doesn't exist. The world is one of unfair and restrictive business practices. Hence, we need competition policy instruments. So far, thrust of competition policy intervention has been on manufacturing and some services. Retail trade hasn't figured prominently. While that focus has to change, this isn't an argument against opening up. Acrossthe-board opening up is infinitely preferable to selective and segmented opening up. Selective liberalisation distorts markets and allows opportunities for arbitrage. Take this business of opening up wholesale cash-and carry. Who has this benefited? It hasn't helped consumers, at least not directly. It has helped hotels and so-called kirana stores, anyone who obtained a licence or got access to one. Why did we first allow 51% FDI in single-brand retail and why are we now opting for 100%? Who has benefited from this transition in policy between 2006 and 2011? There are foreign single-brand retailers who will now rework their joint ventures and jack up foreign equity to 100%. There are Indian joint venture partners who are cash-starved. The beneficiaries will thus be Indian joint-venture partners who will sell off 49% equity. Single-brand or multi-brand, wholesale (cash-and-carry) or retail are artificial distinctions. We should simply have had 100% across-the-board. At some future date, Indian jointventure partners will benefit again when FDI multi-brand equity is jacked up to 100%. Other than this, geographical segmentation remains. Why should liberalisation be restricted to one-million-plus cities? Do consumers elsewhere not deserve choice? As it is, as public subsidies go, there are pronounced prourban biases. We will pamper them more through this new policy.

Real-estate costs being what they are, big-bang benefits for retail should actually be outside onemillion-plus cities. It gets worse if you read the Constitution. Delhi provides a framework policy. Implementation is up to states. While Seventh Schedule doesn't quite use the expression retail, production, supply and distribution of goods is Entry 27 in the State List. To the best of my understanding, this means a state may choose not to open up retail trade. It gets worse in Sixth Schedule, since no person, "who is not a member of the Scheduled Tribes resident in the district shall carry on wholesale or retail business in any commodity except under a licence issued in that behalf by the District Council". In general, deprived and backward states and regions are reluctant to open up. That's the reason they aren't mainstreamed and continue to remain deprived and backward. Stores will be in one-million-plus locations and consumers there will benefit. I have no problems with minimum threshold levels of foreign investment, or requirements that 50% has to be in back-end infrastructure. Retail today straddles assorted segments. Food is a small component, less than 10%. It doesn't have to be that way.

Readers' opinions (7)

Sort by:Newest|Oldest Nare (PUNE) 03 Dec, 2011 08:48 AM My comments are as under: (1) I agree that the Kirana stores have the resilience to face challenging situations. Consumers is value for money. . My suggestion is that let all small retailers join hands to form a company in every district/big metro city. This company can handle middlemans functions which would result in reduction in distribution costs. Thus difference between the price charged or a commodity by the producer/ manufacturer and final price paid by consumers, would be reduced.(2) Incidentally it is clear that State governments of political parties opposed to the FDI in retail as well UPA governments are not making any serious efforts to see that there are direct transactions between the manufacturers, farmers etc and the retailers. This way distribution cost in retail business, particularly the middleman's profit, would be considerably reduced. (3) Lastly, discerning consumers want to know what is the alternative to FDI in retail that BJP/ other parties have in mind to serve the cause of consumers? Ajay (Atlanta) 03 Dec, 2011 03:35 AM As long as there are severe infrastructure bottlenecks in India (read pain of getting from point A to point B), big box retail set ups like traditional Walmart will not be a successful model in India. I think those guys are smart to know that anyway...if you don't go to a Walmart that is outside of the city with a car to lug all your stuff back home, it doesn't make economic sense, and you'd rather pay up a small premium for the convenience of shopping near your home. I think the game is going to be one of consolidation and umbrella brand name retailers. I think the small kiranas will make way to the mid sized kiranas in your neighborhoods which would get consolidated under brand names with the promise of a consistent quality of offerings and service. I think the pros outweigh the cons in many ways, both for consumers and for the kiranas. As for the restrictions of greater than 1 million population, etc, I agree with the author. Economic decisions are better left to the wisdom of those involved in the business. Rocky (India) 03 Dec, 2011 02:26 AM Vivek Debroy, I wonder how do you know so much about a local Kirana Store? Have you ever run a Kirana Store in your life or did somebody in your family? Don't tell me, you have read that in some Planning Commission Reports & Memos or via some KPMG/TechoPark/ A C Nielsen funded paid reports. You are an Economist right, your job & place belongs to somewhere else. Guess Where,Inside Walmart/Goldman Sachs Backoffice. Shoe off.Will you please.

v b sastry (secunderabad) 02 Dec, 2011 07:45 PM It is observed that consumers prefer to purchase from retail stores nearest their places of residence in as much as proximity of the stores makes it convenient for the stores to make home delivery and for the consumers to carry the purchased articles home, besides credit being allowed by the retail stores when necessary. There will be very few small stores in the vicinity of the large-sized stores that may be opened with contribution in the form of FDI. Besides, only a few dozen cities will be eligible to have large-sized stores with FDI; the number of small retail stores--certainly nowhere near the several millions of retail stores talked about by BJP--at these few dozens of cities. As explained above, there will be very few retail stores which are located within close distance of the large-sized stores. Therefore the loss of self-employment by means of close of small-sized retail stores may be negligible. The opposition to allowing FDI in retail in centres with population of 10 lakhs or more may Namesake (India) 02 Dec, 2011 05:09 PM I quite dont agree with it, there would be increase in employment which in turn would contribute towards the GDP ( By what % we need to wait and watch). 51 % FDI would increase in the competition , which means perform or perish for the players who cant sustain the competition. It is a consumer driven market and they would definitely benefit from this move.

FDI in Retail in India - Pros and Cons

ANALYSIS OF Allow FDI in multibrand retail in regulated fashion (in India)
July 06, 2011

Premise Foreign Direct Investment (FDI) in Retail Sector in India has been discussed ad nauseum and there is thinking that this can turn out to be an important inflation-busting measure. There are pros and cons to allowing FDI in multi-brand retail in India. Discussion Pros: (1) Consolidation of Retail front-end (customer facing) activities into various retail formats, thus allowing efficiencies to be gained through economies of scale. For example, Retail Point of Sale (PoS) technologies and collection of retail sale data can provide important insights into customer buying behavior. (2) Introduction of various food and fresh vegetable storage techniques, especially at front end, for example frozen vegetables, irradiation techniques to increase shelf life, etc... (3) Generation of mass-scale employment for various specialized retail skills, including sales, marketing, inventory management, etc... (4) Possible access to lower cost produce through appropriate import-deregulation for most products that are retailed (so categories such as electronics, furniture/ home accessories should gain from a customer perspective). Cons: (1) The entire back-end of sourcing/ growing, logistics and supply chain activities is an area where a lot more liberalization of policies is needed for example in land buying and growing (large-scale farming) and improving the farmer's co-operatives movement for better sourcing/ growing or at least allowing farmer's to access front-end retail without the use of intermediaries. (2) Pricing for small-scale farmers (less than 2 hectare ownership) will probably not improve since they will still be subject to existing collection and consolidation setups and systems (based on local/

regional strongmen having access to regional farm clusters). (3) Wastage and rotting at the farming end is a big issue today in Indian retail scenario. This will probably not improve since the back-end investment and development/ utilization of supply chain (cold storages, warehousing) is still dependant on business/ political issues that have nothing to do with introduction of only front end retailers like Wal-mart, Tesco, etc....