Foreign Direct Investment (FDI) In Retail A Prudent Step to Strengthen the Economy
Foreign Direct Investment (FDI) In Retail
A Prudent Step to Strengthen the Economy
It seems quite ironic that the United Progressive Alliance (UPA) led by the Congress, which was voted to power by people for a second consecutive term due to its strong people-friendly measures, was called in its second term a "cesspool of scandals", "spineless government", etc. suffering from "policy paralysis". Actually, a number of scams like misuse of money during the XIX Commonwealth Games, Aadarsh Housing Cooperative Scam, 2G Spectrum irregularities, Coalgate, etc. kept it busy defending itself against the charges too big to be dismissed or refuted. It did not have time to think over any new policy that could have had a long-lasting impact. And finally on September 14, 2012, the Government tightened up on economy going awry showing a slowing trend as well as detractors ruling the roost by allowing 51 percent foreign direct investment (FDI) in multi-brand retail, 100 percent in single-brand retail and 49 percent in civil aviation, 49 percent FDI in two power exchanges and increasing the limit from 49 percent to 74 percent in the broadcasting sector along with hike in diesel prices and reduction in subsidised cooking gas cylinders. While industry bodies and organised domestic retail companies welcomed the Government decision to allow51 percent FDI in multi-brand retail, 100 percent in single brand retail and 49 percent in civil aviation, the Government had to face a pincer attack over its reform decisions with opposition parties ranging from the BJP to the Left who peaked their campaign against this Government move. Regional parties like the Samajwadi Party and the Janata Dal. (U) also joined the chorus of protests, demanding a rollback of the hike in diesel prices along with FDI decisions being put on hold. A UPA constituent, the Trinamool Congress, miffed with the decision even withdrew its support from the Government, thus reducing the Government to minority. The Trinamool Congress chief and West Bengal Chief Minister Ms.Mamata Banerjee said that "This is a big jolt... We cannot support anything that is against the interests of the poor and common people. Loot cholchhe, loot (A loot is on.)" In defence of the Government's decision to hike diesel prices and rationalise the supply of subsidised LPG cylinders, Planning Commission Deputy Chairman Dr. Montek Singh Ahluwalia said that the measure was aimed at changing the perception of global rating agencies and creating the fiscal space to thwart downgrade of India's sovereign rating. The FDI move allows global firms such as Wal-Mart Stores to set up shop with a local partner and sell directly to consumers for the first time, which the supporters said could transform India's $450 billion retail market and tame inflation. Taking into account all types of responses across the different sections of industry as well as various political parties, we can only say that the FDI issue opened up "Pandora's Box". Many protests including the nationwide "Bharat Vvapar Bandh" had been called by the Opposition parties.
Earlier, in the last week of November 2011 also, the UPA Government had indulged in a policy-making exercise and came out with the policy i.e. FD I in retail which forced the whole country to think over the consequences of the Government decision, if the policy was implemented. When the Government had announced on November 24, 2011, its decision about the Foreign Direct Investment in Retail Sector of up to 51%, the layman could not ' decide whether the Government's decision should be welcomed or discarded. The Opposition and some of the important constituents of both the ruling and Opposition parties had expressed their disgust, whereas some sections of the Opposition like the Akali Dal and most of the politicians belonging to the ruling coalition had supported and lauded the decision at that time. The media reaction was also mixed. Many senior journalists, however, seemed to be in favour of the Government decision, while some appeared quite opposed to the idea.
We should first analyse the reach and nature of retailing in the country, before we try to analyse the views regarding the granting of permission to global retailers to carry out full-fledged business in the country Retailing is one of the pillars of the Indian economy, as it accounts for 15% of the nation's Gross Domestic Product. From the global market share point of view, India is considered one of the five largest retail markets in economic output. Indian retail sector is divided into two sectors organised and unorganised. Organised retailing is, however, absent in most rural and small towns in India. It is referred to as trading activities undertaken by licensed retailers. Licensed retailers are registered for sales tax, income tax, etc. These retailers are, in fact, publicity- traded supermarkets, corporate-backed hypermarkets and retail chains. Organised retailers also include privately- owned large retail businesses. Unorganised retailing, however, encompasses all the traditional formats of low-cost retailing, i.e. local kirana shops, owner-manned general stores, betel/beedi/cigarette shops, convenience stores, handcart and pavement vendors of vegetables, fruits, etc.
If we look closely at the shares of organised and unorganised retailing in India, we find that most Indian shopping takes place in open markets or in millions of small, independent grocery and other retail shops. Generally, the product does not have any price label in these shops, though some branded products do have a manufacturer-suggested retail price (MRP) on them. The shopkeeper, as is in practice, fixes arbitrarily the prices of most of the products to be sold. The result is that two customers buying the same item at two different stores pay two different prices on the same day. It is because of the fact that given the margin of profit, the shopper and the shopkeeper negotiate the price between themselves. In most of the cases, the customers do not have time to examine the product label and do not have any choice to make any informed decision between competitive products. Compared to these open markets and retail shops, supermarkets and similar organised retail account for only a few percent. India's retail and logistics industry, both organised and unorganised, employs about 40 million Indians.
Generally, typical Indian retail shops are very small More than 14 million outlets operate in India and only 4 percent of them are larger than 500 sq. feet in size. India has about 11 shops/ outlets for every 1,000 people. Vast majority of the unorganised retail shops in India do not employ people from outside their families and lack the resources to procure or transport products at wholesale scale. Small retailers have, as it has been experienced for long, Limited or no quality control or mechanism to check the authenticity of products. They also lack training on safe and hygienic storage, packaging or logistics. The unorganised retail shops source their products from a chain of middlemen who mark up the product as it moves from farmer or producer to the consumer. The unorganised retail shops typically offer no after-sales support or service. In other words, most transactions at unorganised retail shops are done in cash with all sales being final.
When we analyse the employment scenario in India, we are at once acquainted with the novel trend that has gained momentum. An ever-increasing number of people in India are turning to the services sector for employment. They are doing so because of the relatively low compensation offered by the traditional agriculture and manufacturing sectors. The organised retail market is growing at a very high speed, while traditional retail sector is growing at a snail's pace. According to the ICRIER Report (2007), the retail business in India was estimated to grow at 13 percent from $322 billion in 2006-2007 to $590 billion in 2011-12. But organised retail, or large chains, making up less than 10 percent of the market, is expanding at .20 percent a year. This is driven by the emergence of shopping centres and malls, and a middle class of close to 300 million people that is growing at nearly 2 percent a year. The fact, however, is that the retail sector in India is estimated to have annual sales of $500 billion with nearly 90 percent of the market still controlled by family run shops.
As far as opening the retail industry inside India is concerned, debates and discussions both on the risks and prudence have taken place for years. Numerous economists have, however, repeatedly recommended to the Indian Government that legal restrictions on organised retail must be removed. For example, in an invited address to the .Parliament in December 2010, Mr.Jagdish Bhagwati, Professor of Economics and Law at the Columbia University, had analysed the relationship between growth and poverty alleviation and then urged the Parliament to extend economic reforms by freeing up of the retail sector, further liberalisation of trade in all sectors, and introduction of labour market reforms. According to Mr.Bhagwati, such reforms would accelerate growth and make a sustainable difference in the life of India's poorest, though many intellectuals are not convinced.
Dr. Manmohan Singh-led UPA Government had announced on November 24, 2011 the following :
· India will allow foreign groups to own up to 51 percent in "multi-brand retailers", as supermarkets are known. in India, in the most radical pro- liberalisation reform passed by an Indian Cabinet in years.
· Single brand retailers, such as Apple and Ikea, can own 100 percent of their Indian stores,. up from the previous cap of 51 percent.
· Both multi-brand and angle brand stores in India will have to source nearly a third of their goods from small and medium-sized suppliers.
· All multi-brand and single brand stores in India must confine their operations to 53-odd cities with a population over one million, out of some 7,935 towns and cities in India. It is expected that these stores will now have Full access to over 200 million urban consumers in India.
· Single brand retailers must have a minimum investment of $100 million with at least half of the amount invested in back-end infrastructure, including cold chains, refrigeration, transportation, 7 packing, sorting and processing to considerably reduce the post harvest losses and bring remunerative prices to farmers.
· The opening of retail competition will be within India's federal structure of government. In other words, the policy is an enabling legal framework for India. The states of India have the prerogative to accept it and implement it, or they can decide not to implement it if they so choose. Actual implementation of policy will be within the parameters of state laws and regulations.
The Government perception is that the opening of retail industry to global competition will spur a retail rush to India. It has the potential to transform not only the retailing landscape, but also the nation's ailing infrastructure. Currently, retailing is dominated by millions of "mom-and-pop" stores, and it lacks adequate modern product sourcing management, logistics, supply- chain management, including cold storage. Before 2011, India had prevented innovation and organised competition in its retail industry. Several studies claim that the lack of infrastructure and competitive retail industry is a key cause of India's persistently high inflation. Furthermore, because of unorganised retail, in a nation where malnutrition remains a serious problem, food waste is rife. Well over 30% of food staples and perishable goods produced in India goes in vain, because poor infrastructure and small retail outlets prevent hygienic storage and movement of the goods from the farmer to the consumer. One report estimates the 2011 Indian retail market as generating sales of about $470 bon a year, of which a miniscule $27 billion comes from organised retail.
All agree that opposition to FDI in the retail sector stems from a number of unfounded fears. The FDI in retail will, no doubt, introduce competition from large players with deep pockets and international- sourcing capabilities. They would be capable of exploiting economies in procurement, storage and distribution to out-compete small suppliers. The immediate and direct effect would be, as it seems, a significant loss of employment in the small and unorganised retail trade displaced by the big retail firms. The Government has, however, tried to convince people that their fears are the result of the propaganda campaign of the parties opposed to the FIJI. All the claims of the Government are being questioned. An erosion of the incomes earned by petty producers, in all likelihood, according to the parties opposed to the idea of the FDI, will accompany the loss of employment. Prices paid to and returns earned by small suppliers, specially in agriculture, would be depressed, because a few oligopolistic buyers dominate the retail trade, according to them. On the contrary, Dr. Manmohan Singh-led UPA Government looks quite confident that the FDI in retail will curb the ever- rising inflation rate. The Government should focus on improving public distribution and enhancing agricultural productivity as well to allay the fears of the masses. Permitting the FDI retail and civil aviation can only be a start, much more is needed to rev up the economy. Finance Minister Mr.P.Chidambaram’s move to thrash out a consensus on contentious issues with the empowered group of State Finance Ministers seems encouraging. So far as opposition to the FDI is concerned, it does not have any logic. The entry of big international retail chains will not entail the exit of the neighbourhood daily needs shops. Both will coexist peacefully and prosper with each passing day. Small retail shops thrive on personalized service and retail giants have a proven record of supplying quality-controlled goods at competitive prices with minimal wastage.
Foreign Direct Investment (FDI) In Retail A Prudent Step to Strengthen the Economy Reviewed by sambasivan srinivasan on 9:24:00 PM Rating: