Retail FDI: Boon Or Curse?
The announcement of allowing FDI in multi-brand retail to an extent of 51 per cent on Friday, 14 September 2012 was a firework. While it wooed the markets and gave it a spark, ending the infamous ‘political paralysis’, it created a series of repercussions on the political playground. A ‘Bharat Bandh’ was announced by opposition parties and some ruling coalition allies on Thursday, 20 September 2012. Mamata Banerjee, chief of Trinamool Congress withdrew her support to the United Progressive Alliance on her views that were paradoxical to welcoming retail FDI. However, Mulayam Singh Yadav-led Samajwadi Party extended support to the UPA today thus strengthening the decision. The government’s bold steps of implementation of reforms regardless of political antagonism got validated by the release of the notification operationalising the Cabinet decision by the Department of Industry Policy and Promotion (DIPP).
Meanwhile there is no significant issue around single-brand retailing due to the nature of the business and its ability to not cause any major disruptions in the current model of the Indian retail scenario. With such a big debate over the effects of multi-brand retail in India, what really are the possible effects of big players coming in and making investments in India?
There are innumerable local grocery stores in India that have been operational for generations in some cases. These family owned establishments have a stronghold in their vicinity and are highly dependent on their geographical whereabouts for sustainability. According to the Confederation of All India Traders, the number of these small commercial developments (kiranas or general stores) is estimated to be 50 million. The likely population that is dependent on these businesses for their livelihoods is expected to be 220 million. This indeed is a large chunk of the population and it is undoubtedly threatened by the entry of massive global players like Walmart and Tesco who have millions of square feet under management.
Business owners and politicians feel the entry of large scale organised retail would distort the current picture and wipe out unorganised retail. However, the point to be remembered is that multi-brand retail players would have to set shop at limited number of locations due to the sheer space that their business demands. With the requirement of copious amounts of space comes the question of proximity. Multi-brand outlets are thus more likely to develop away from densely populated areas. Facing facts, India’s no developed nation for the entire population to start doing their groceries on weekends by going to a Walmart and bringing back a dickey-full of necessities.
Kiranas are known for their fixed customer base, close proximity to residential areas, ad hoc requirements, small deliveries, petty credit accounts, among others. Frankly, this is like comparing apples and oranges. Moreover, the government’s norm to allow multi-brand outlets to set up in cities with a population of over 10 lakh and covering an area of 10 kms around the municipal/urban agglomeration limits eliminates the apparent threat to a massive population.
Meanwhile, assuming the unorganised retail sector in India remains minimally affected in terms of shops closing operations, this investment policy would bring about a series of benefits to the economy. Leaving aside the most obvious prospective employment generation capacity that this move creates, the conditions laid under which foreign investors are allowed to invest up to 51 per cent in multi-brand retail turn out to be quite advantageous.
The minimum amount to be brought in, as FDI, by the foreign investor would be USD 100 million (roughly Rs.550 crore). At least 50 per cent of this amount would be invested in back-end infrastructure that includes processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agricultural market produce infrastructure, etc. Do we need any more explanation on how this could improve the various stages involved in the retail supply chain?
At least 30 per cent of the value of procurement of manufactured/processed goods is to be sourced from small industries which have a total investment in plant and machinery not exceeding USD 1 million on a mandatory basis. This would give a major boost to smaller players in the chain, boosting their business and adding on to employment on this front as well.
While on one hand there is the apparent threat of loss of jobs and small businesses, there are investments, employment, infrastructure development and boost to small and medium industries on the other. It boils down to how you look at the placement of local stores as compared to big players and how they can disrupt the system, or not. They are both positioned differently and would not risk the existence of the other in a way that is being perceived.
Though it remains to be seen whether the government stays firm on allowing FDI in retail which has a severe social impact rather than an economic impact, our sources suggest that the government taking a step backward is unlikely. However, the impact of FDI in retail would be seen in the long run and not in the short term.
