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Policy
 
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RETAIL FDI: THE COUNTER POINT
Are we still in the Dark Ages?
FDI in retail has been stalled by allies and opposition parties alike. The critical view on this issue betrays a very myopic vision on India’s future
Issue Date - 22/12/2011
 
While we keep talking about a resurgent India that looks at new possibilities rather than one that intends to stick to a comforting yet illogical comfort zone, certain developments from time to time serve as grim reminders that this need not necessarily be true. By the time of this going to press, a lot had been spoken, written, declared and retracted about the proposed opening up of the multi-brand retail (51% of it, that is) in India for foreign players. The final word is that it is on the backburner now and Finance Minister Pranab Mukherjee has declared that the decision will only be taken after a consensus is reached among all stakeholders. Considering how consensus is typically reached in India, hope rests on a sticky wicket. Expectedly, India Inc. has described it as a setback in terms of both economic rationale and symbolism. On the day the decision was announced, the markets saw a precipitous decline in stock prices of listed retailers Pantaloon (by 12.86%) Koutons (by 6.49%) and Store One (by 2.49%). The reform, which was meant to kick-start approvals for a long queue of pending reforms and was termed as the initiation of a mini-liberalization has been gutted at the onset.

Currently, organised retail is expected to account for 6-7% of total retail in the country with a turnover of around $28 billion. It is expected to increase its share to around 20% by 2020, when the industry as a whole will reach a size of $1.25 trillion (BCG report), and FDI could in fact make even these predictions look pessimistic. Consider the case of the telecom sector in India. The increase in FDI beyond the 49% cap to 74% acted as a welcome catalyst for the industry. The sector has since been one of the largest recipients of FDI in India (contributing around 8% of the total FDI to the country) with $7.55 billion invested in FY 2010-11 and $12.34 billion received in FY 2009-10 as per data from Department of Industrial Policy & Promotion. It has been critical for the execution of the strategic plans of domestic players. The National Telecom Policy of 1999 projected a subscriber base of 500 million in India by 2010, while the actual number easily crossed 700 million in that year. Amit Bagaria, Founder Chairman & CEO, ASIPAC, asserts, “Telecom in India developed much faster after FDI was allowed and this helped bring down telephone call charges by 99% in 16 years.” FDI in retail, in turn, means a welcome overhaul of the supply chain in the country. Supply chain costs in India are 12-13% of GDP compared to around 8% in developed countries. A CII report in 2010 projects that supply chain inefficiencies in India cost the exchequer around $65 billion every year. With a $100 million minimum investment benchmark proposed by the government and at least 50% mandated for back end operations, a massive overhaul can be visualised. The setting up of cold storage in the nation shall help reduce the enormous 30% wastage of farm products. It may not be a mere coincidence that the call for FDI in retail saw some initial support from the Badal government of Punjab, where Wal-Mart set up shop with Bharti in a cash & carry format. Later on, of course, the Badal government had to succumb to the whims and fancies of its political ally BJP.

A major stumbling block in Indian back end operations is the large number of middlemen. Between the farmer and the consumer, the product goes through upto four intermediaries including the aggregator, the market trader, the wholesaler and the sub-wholesaler. In western countries, there is normally just one point of contact. These unnecessary levels can significantly increase the price of the commodity for the consumer by as much as 100% in some cases. According to a study by Boston Consulting Group, while a farmer in India gets at most 35% of the market price for his produce, the figure can rise as high as 65-70% for farmers in developed nations like Australia.

 
The prime reason cited for a rollback of the reform by the opposers is the possible closure of mom & pop stores and the huge unemployment it would result into. According to Tamil Nadu CM Jayalalitha, the move would lead to massive job losses among the 40 million employed in the trading sector in India. Factually though, as industry bodies argue, out of the 40 million employed in the trading industry in India, 35 million are employed in smaller cities where population is less than a million (the government has initially restricted the FDI leeway to 53 cities with 10 million plus population). So they would be largely unaffected by foreign multi-brand retail establishments. Furthermore, large retail setups require high quality labour and would need to make massive investments in hiring, training and development. In addition, the catch that 30% of the inventory has to be sourced from local SMEs also provides a wonderful opportunity for Indian companies to scale up and become more powerful brands, the way it’s been for counterparts in countries like China & South Korea. Consider, for instance, how Wal-mart stores in China sources over 95% of their merchandise locally.

Anand Sharma, Union minister of Commerce, claims that over 10 million jobs shall be created within three years post the implementation of the policy. According to a projection by ASIPAC, 4.35 million jobs will directly be generated from organised retail in another 4 years, assuming that this segment will occupy 783.63 million sq. ft. of retail space by that time. The report argues that organised retail will only affect around 19,850 businessman rather than the many millions that are talked about.

Leave alone the ministry and industry honchos, even some local retail associations feel that the reform is a step in the right direction. According to K. S. Khamba, President, Hauz Khas Market Association, which represents a number of mom & pop stores, the entry of foreign retailers shall instigate improvement in the retail industry with a shift towards service oriented retailing. The mom & pop stores, who thrive on strong personal relationships with customers and services like credit and home delivery have the ability to compete with organised retailers. Also, while it has been taken for granted that the cost of products sold by organised retailers will be lesser, it may not necessarily be true. A survey by Assocham claims that kirana stores provide price undercutting to the extent of 25% and also offer options for avoidance of payment of duties such as VAT & other local levies on articles sold by them.

Even the governments, at both the central and state level, are set to gain in the long run since FDI would bring into the tax net a huge section of daily sales which go unchecked at the moment. According to an ASIPAC study, a total of Rs.1.58 trillion shall be generated as additional tax if FDI is implemented by means of GST collections at various points that was previously unaccounted, corporate tax generated by these firms, and the personal income tax garnered due to the creation of new taxable labour.

With so many multiple benefits for the Indian economy, the entire hullabaloo about the perils of FDI is illogical. And so is the logic that Indian farmers and businesses are unprepared. We were not prepared in 1991 for liberalisation either. We always seem to put our house in order when a much debated change happens and presents real & present challenges along with opportunities. Stalling parliament and preventing FDI liberalisation in retail tantamount to preventing one very critical transformation. Only a very short sighted & ignorant vision on India’s future can be behind the backlash that the retail liberalisation agenda faces currently.

          

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