Is FDI the Only Cure for Indian Retail?

FDI in multi brand retail in India has become one of the most contentious topics of today. Government flip flops on policy decisions have only added fuel to the fire of the FDI debate. There is huge political opposition to FDI, with some sections of the polity claiming that it will drive small traders out of business thereby creating mass unemployment. Is there any truth in this or is it just fear-mongering?

Modern Retail in India today is reeling under the weight of debt and looking for capital injection to fund the supply chain, cold chain and logistics development. International retail giants are looking to expand their operations in India due to poor growth in their home markets and are keen to invest in India to exploit the market. India could be their best hope with a market potential of $470 billion coupled with strong economic growth and consumer spending.

What are the benefits of FDI in retail? India needs huge investments in infrastructure development for sustained GDP growth. International retailers are keen to invest in the areas of supply chain, cold chain and logistics to develop the retail ecosystem. They also want to bring modern technology to farming to increase the output and partner with farmers to provide them market access. The supply-side changes they envision will improve efficiency, reduce intermediation and increase competitiveness. Competition is a good antidote against price increases. Some of the likely benefits of these investments are:

  • Reduction of post- harvest losses for grains, vegetables and fruits.
  • Efficiency gains due to dis-intermediation
  • Reduction in transportation costs
  • Increase in export volumes due to efficiency gains
  • Creation of direct and indirect employment to millions of people

What are the arguments against FDI in retail? The protagonists argue that the international giants, through their sheer buying power, will dictate terms to suppliers on quality, quantity and price. They also argue that these retailers will push prices paid to farmers and manufacturers down rather than raising them, and the suppliers, who are unable to accept such concessions, will simply go out of business.  There is also opposition from small traders to the entry of international retailers for the fear of losing their livelihood.

Everyone latches on to FDI in retail because it makes headlines, but there are other anti-competitive policies pursued by the state and central governments such as APMC (Agriculture Products Marketing Committee) act and ECA (Essential Commodities Act) which equally impact Modern Retail. There are physical government-imposed restrictions on production, marketing and distribution. Some of these impediments are:

  • Until recently organised retailers were not allowed to source agriculture products directly from farmers and instead have to go through state APMC intermediaries
  • Intermediaries’ costs are very high with farmers’ share being just only 40-60% of the final price paid by consumers. Direct sourcing alone could reduce the consumer price by 26%
  • Inter-state level barriers, which are particularly serious for perishable agricultural products like fruit and vegetables. Removal of these alone could contribute to 1% GDP growth
  • Central and state taxes which amount to 20% require retailers to have multiple warehouses to save taxes. This loading/unloading of goods not only increases lead times, but also increases the cost of goods sold. Implementation of GST will align supply chain systems, reduce storage, handling and transportation costs for Modern Retailers

Taking the above impediments into account, it is naïve and dangerous to think that FDI in retail alone is going to cure all the problems. FDI in retail will solve supply-side problems, reduce intermediation and check food prices; it is only small piece of the jigsaw. The bigger challenge is that of harmonisation and unification of the country’s market with proactive reforms in GST, APMC and other anti-competitive laws.

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3 Responses to Is FDI the Only Cure for Indian Retail?

  1. Given the poiltical opposition. do we have any insititutional monitoring system in India to monitor FDI in retail in india , the way we have IRDA in Insurance sector?. Capital muscle can be juggernaut on small farmers. Though it might help the consumer. A fair insititutional monitoring will go a long way in ensuring balanced growth of the retail sector.

    Sridhar iriventi

    • pvnsastry says:

      Dear Sridhar,

      Thanks for your valuable insights. Political opposition to this issue is casing policy paralysis. I personally think on issues of national of importance there should be bi-partisan approach. I agree with you on the need to set up a regulatory body to monitor the FDI implementation. I do not think farmers are opposing FDI, because they will benefit from it. A stakeholder approach that addresses the concerns of all parties is required allay the fears.

      Warm regards,

      Sastry

  2. Peyush Gupta says:

    We Indians are obsessed with farmers. And we will continue to remain one till we become wide-minded (we are very broad minded!!) and start looking at larger pictures. We have many small and large players who keep entering and leaving the retail space due to lack of leadership, management and SCM related issues. The indian retailer is obsessed with numbers – the compnay should be highest in number of stores. Indian retailer also goes mad looking at hard cash collection at his store. Indian retailer will have to discipline himself then only FDI will come. Discipline is required in terms of corporate governance, recruitment and retention policies, SCM and above all CRM activities. If one proves himself as good retailer not only FDI but farmers will also join the Indian Retail Market.

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