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FDI in multi-brand retail in India: tread the path cautiously.



India remains one of the most favourable destinations for international retailers. Global supermarket chain operators have been eyeing for a long time to enter India. According to an estimate based on forecasts from Boston Consulting Group, the Indian retail market is estimated to be worth about $500 billion currently and is pegged to cross $1 trillion mark by 2020, given the rising personal income and growing consumer spending trends. Organized retail is about 5-7 percent of the overall retail market in India and is expected to double this to 10-12 percent in the next three years (MINT, November, 5, 2012).

FDI in retail trade had been a subject of intense controversy over the years. The debate relating to foreign direct investment in the retail sector has now reached a crescendo. The various players--politicians, economists, academics, industry's wise men and women, and other assorted commentators--who have been arguing 'for' or 'against' the same seem to have (knowingly or unknowingly) become participants in the arena. Both sides have been extremely economical with facts and truths, and many on either side of the FDI- induced cacophony are now trying to buttress their position with absolute fiction (Singhal, 2012 'a'). The most important fact, very surprisingly ignored by the supporters and opponents of modernised, corporatised retail, is that India s consumption is growing very steadily, and will continue to grow for the next many decades.

With this backdrop, for analytical convenience the paper is organised into seven sections. Section I, discusses FDI policy in multi-brand retail; section II, describes problems of marketing of agricultural produce in India; section III, highlights arguments in favour of FDIMBR; section IV, illustrates case against FDIMBR; section V, analyses debates about FDIMBR; section VI, indicates the challenges being faced by FDIMBR; finally, section VII, provides conclusions of the study.

I Policy of Allowing FDI in Multi-Brand Retail

Multi-brand retail was opened to foreign participation in September 2012, but even earlier some Indian and foreign companies had used a maze of relationships between themselves and their subsidiaries to bypass the restrictions. While prohibiting FDI in multi-brand retail trade (MBRT), India allowed 100 percent FDI participation in wholesale cash and carry business initially in 1997 under the approval route and subsequently in 2006 under the automatic route. Up to 51 percent FDI was allowed in single-brand retail trade (SBRT) in February 2006. In mid-September 2012 the government hurriedly announced its policy to open up MBRT along with civil aviation and power exchanges to greater FDI. It also simultaneously increased the limits for FDI in the broadcasting sector and relaxed the norms in SBRT.

The announced policy has allowed the foreign investor to hold only 51 percent of the total shares leaving the remaining 49 percent for its domestic counterpart. Joint ventures are, therefore, built into the corporate structure which the new policy would entail. This has made the domestic capitalists happy. They expect to gain access to state of the art storage technologies and international markets through collaborations with giant international retailers and thereby increase their own profits. The domestic big retailers are, therefore, welcoming 51 percent FDI in multi-brand retail with open arms. It is a few others who are apprehensive.

Foreign multi-brand retailers are embedded with a minimum investment requirement of $100 million. There is still ambiguity over whether this is supposed to be a bullet investment or a phased investment. Furthermore, retailers are required to invest 50 per cent of the total FDI in backend infrastructure within three years of the first tranche of the FDI. The rider explicitly excludes expenditure on land cost and rentals from backend infrastructure. This will likely worry some players as the principal chunk of backend cost may comprise land cost/ rent of warehouses and cold storage spaces. Without these, retailers may find it challenging to meet the 50 per cent criterion. Under the policy, sourcing from small industries would restrict the retailer in achieving economies of scale, consistencies in product range and technical specialisations.

Amendments in FDI policy: The recent government's approval for relaxation of the foreign direct investment (FDI) policy on multi-brand retail announced in July 2013 , removes three out of the many contentious 'issues' which have made foreign retailers rethink their India expansion strategies. The investor scepticism towards FDI policy has been coloured more by their imperative to influence policy in a direction favourable to foreign retailer interest. In this regard important relaxations are:

(i) the government has tweaked the mandatory 30 per cent sourcing rider to include micro, small and medium enterprises (MSMEs) with total investments of up to $2 million in plant and machinery (from the earlier $1 mill ion) from whom foreign retailers can source manufactured and processed products. Pertinently, the retailers will also be able to continue sourcing from such medium scale industries after they outgrow the investment limit of $2 million. The sourcing norms would need to be met within the first five years;

(ii) relaxing the 10 lakh population threshold for cities to be eligible to hold mega multi-brand retail initiatives makes sense. Retailers are to now be allowed to open stores in all states that have agreed to implement FDI in multi-brand retail, even if such states do not have cities of more than a million population. States will now have a choice of city for the location of the retail stores. 12 states have so far have allowed FDI policy in MBRT. But land acquisition in India's tier II cities is as complicated as the metros, coupled with commercial real estate prices escalating steeply. Hence, foreign retailers could vastly reduce the scope of floor operations (and by implication, investments) in tier II cities;

(iii) the FDI policy now benchmarks investments in back-end infrastructure at 50 per cent of the mandatory $100 million invested by foreign retailers to set up shop in India, but bends backwards to please them by leaving subsequent investments at the pleasure of the retailer.

II Problems of Marketing of Agricultural Produce in India

In India, as many as 80 percent of the farmers are small farmers with less than 1 hectare of landholding. These marginal farmers do not have access to cold storage (and hence waiting capacity), and have no option but to sell their produce to the middlemen or traders. It is interesting to note that in the state go downs that offer storage facilities, it is difficult to get space without any political connection. The marginal farmers, with no alternatives to hoarding the perishable vegetables and fruits items, accept the lower price offered by the middlemen.

Merely opening up multi-brand retail will not suffice. Other complementary state-level reforms are needed. States should scrap the Agricultural Produce Marketing Committee (APMC) Act that denies farmers the freedom to buy and sell freely and only empowers middlemen. The chain of trade intermediaries between the farmer and the consumer is long--pre-harvest contractor, commission agents, primary and secondary wholesalers, retailers. They leave little for the farmer--between 40-60 percent of consumer prices. Speculation in times of shortage is often conducted by these intermediaries rather than the farmers. Farmers sell to contractors or intermediaries. Rarely is there an open auction. There is no transparency in price determination. Prices are decided on a one-on-one basis, to the farmers detriment.

Can FDI in retail lead to better prices for these farmers? Without reforming the laws governing the agricultural produce marketing committees which run the mandis, or agricultural markets, direct procurement by big retail will remain a pipe dream. The absence of transparency in pricing that marks the functioning of these mandis and the information asymmetries that plague farmers need to be addressed first. The inability to make these and other agents redundant leaves the supply chain long. No large-format organized retail venture in fresh fruits and vegetables in India are making money.

Rural roads are in poor condition. Infrastructural facilities such as cold storage, pre-cooling facilities and refrigerated transport are absent. The consequence has been that Indian farm produce, which is competitive by world standards at the farm-gate, ceases to be so by the time it reaches the market or the port. Further, Indian agricultural produce has difficulty finding a place on the shelves of the foreign supermarkets because of the general ignorance about sanitary and phyto-sanitary standards (SPS). FDI in multi- brand retail trade will provide almost direct access to the shelves since it will also work as SPS monitors or supervisors.

Packaged manufactured consumer products are branded, but not fresh products like fruits and vegetables. For consumers to get lower prices for fresh fruits and vegetables, a total transformation of agricultural and rural infrastructure is required. Fruits and vegetables might be sorted for quality and pre-packed but are not branded. Alternatively, the Act can be amended to exclude perishables from its fold and organised structures are needed for farmers to enhance their bargaining power vis-a-vis big retail chains. Amul is a successful example of how farmers have enhanced their capacity to negotiate prices with big buyers. Its organised supply chain links farmers with consumers, raises income for producers and lowers retail prices. Political parties should get into the act and organise farmers into larger collectives, companies or producer cooperatives. This, in turn, will ensure a vibrant and functional futures market for commodities.

To earn better prices, farmers need a transformed environment. Poor storage and transport must improve. From the farmer to the consumer, there must be streamlining and consistency in pre-and post-harvest operations, assembling, grading, storage (in many cases cold storage), transportation and distribution, forward linkages to more distant markets through transportation, storage, processing, packaging and retailing to the consumers. Regulation of agricultural operations must work in farmers interests (Rao, 2012).

Caring the small farmers. Besides organising small farmers into groups, a whole set of institutions needs to be created to ensure that they get better prices. The web of 7,700 regulated markets (APMCs) in India is accessible throughout the year and has been handling a range of commodities for decades. However, small and marginal farmers have remained out of the ambit of these markets. In spite of the fact that contract farming has been allowed for strengthening farmer linkages to the market through a Model Act, the actual experience has been mixed.

The main problems attributed to contract farming implementation are contract designs, limited power of small farmers to bargain, lack of understanding of the legal framework, lack of inputs, knowledge for using technology or a new practice, shortage of labour during harvest, limited resources for risk coverage, etc. In order to link the small farmers to the contract farming, a multi lateral (producer group+ buyer+ input supplier+ bank+ facilitator+ insurance agencies) set-up should be developed (Gangopadhyay, 2012).

Thus, it is imperative that the larger issue that the nation has to address is to come up with suitable reforms in the agriculture sector that can improve the lives of the farmer, undertake suitable reforms to smoothen the entire internal trade within India, improve rural and urban road connectivity to reduce the wastages in perishables because of bad logistics and make suitable changes to bring the small farmers and producers in direct contact with the final consumers (Singhal, 2012 'a').


The major gains which the multinationals are expected to bring about are.

(i) the multinational retailers are likely to introduce is state of the art storage technology that the multinational retailers possess and which is not known to big domestic retailers. This technology is expected to improve the supply chain and prevent wastage in a big way. In particular, this argument is applied to perishable agricultural produce. The claim is that increased investment will reduce wastage. Efficiency gains can potentially lead to gains for producers, intermediaries and consumers.

(ii) the primary effect of advanced storage technology is gain in efficiency. A rise in the prices of agricultural goods in rural markets is likely to benefit farmers who sell parts of their products in the market. These are essentially large and medium sized farmers. A price rise would certainly benefit these farmers. The higher price would also induce these farmers to invest more in agriculture, the re by raising production and productivity (Sarkar, 2013).

(iii) more international trade depends on the extent to which arbitrage possibilities across countries can be made use of. One can buy a commodity in a country where it is cheaper and sell it in another country where it is dear. It stands to reason that a giant multinational trader, with its more elaborate procurement and distribution networks, will do the job more efficiently and extensively than a relatively small domestic retailer.

(iv) the scale of operation of big retail in India would be quite large. The giant multinationals along with the domestic retailers with whom they are going to form joint ventures are going to have much greater financial power than the domestic big retailers alone. Therefore, in the new setup, big organised retail is likely to cover a much larger portion of the market than before.

(v) the major advantage is the enhanced flow of investments in overall infrastructure and the establishment of new supply chains. 'When FDI comes in, it would be an evolutionary phenomenon rather than a revolutionary one . Global retailers will look for a guarantee in consistency of laws.

(vi) the problem in potato and most other horticulture produce is one of segmented markets, where information does not flow freely and are naturally prone to speculation. Potato farmers and consumers both stand to benefit from large players--whether Amul' like cooperatives or foreign retail chains--who would help consolidate a fragmented post-harvest value chain.

(vii) dispensing with high mandi taxes and outdated state laws banning direct purchases from farmers would give further fillip to creating a single national market, enabling supply-demand imbalances to be corrected faster across space and time.

(viii) the growth of the retail industry is expected to add jobs in both the organized and traditional segments as overall consumption is seen growing. While modern retail is expected to add 2.7 million jobs in the coming decade, traditional retail is seen creating nine million more in the coming decade . Questions have been raised about the fate of some 12 million small grocers and retailers (this figure does not include street-side vendors) whose livelihood may be threatened.

IV Cass against FDIMBR

It is necessary to remember that FDI in retail is at best an incremental reform, and at worst a useless step. The following arguments are advanced against FDIMBR:

(i) even if efficiencies do come about they will come at the cost of employment.

(ii) large foreign entrants will lead to the traditional groups of powerful, profit-squeezing intermediaries being replaced by another, even more powerful. In this view, gains in efficiency, if any, will be swamped by losses through redistribution of the surplus generated in the value chain. Evidence for this fear is often drawn from the history of companies like Walmart in other countries. The analogies used are often too loose and the conditions too different to allow for convincing logical claims, whether for or against retail FDI (Singh, 2012).

(iii) even claims about reductions in inflation are suspect, since they do not distinguish between one-time and continuing efficiency gains.

(iv) the focus is on food and food products, without considering the experience of food processors or restaurant chains.

(v) the neglect of any systematic discussion of non-food items, by different categories, including fast moving consumer goods as well as various consumer durables.

Convenience of existing kirana stores. The Indian retailer runs a tight operation: (i) holding a wide range of products, (ii) pack sizes, (iii) in many cases gives credit, (iv) free delivery, (v) procures unavailable products at short notice, (vi) retailers make low margins, (vii) they provide low level employment to the family, and (viii) fresh fruits and vegetables require long supply chains to urban markets, retailers purchase afresh every day. Mobile retailers vend fresh vegetables and fruits door-to- door. Others take a permanent place in a street. Some large shops specialise in selling fresh vegetables and fruits. FDI will thus not be of much consequence for most Indian retailers. The old-style retail stores are staffed by the owner family. They have no bargaining power and get no special prices. Their hold on customers is because of convenient location near residences, free delivery, credit, etc.

Pushing local trader out. It is well known that rural markets in India witness a lot of interlinked contracts. In this context, Sarkar (2013) has highlighted that there exists a common inter-linkage between the product market and the credit market. The local moneylender, who also happens to be a trader, typically enters into an interlinked contract with a farmer by giving him a production loan with the stipulation that the farmer has to sell his output exclusively to the trader-cum-lender. Since the multinational is likely to have access to a cheaper source of funds, it can drive out the local trader by offering a lower rate of interest to the farmer. But this does not improve the condition of the farmer, who will have to receive a lower price as well. His fate will simply shift from the grip of the local moneylender to that of the multinational, and the latter would squeeze as much profit out of the farmer as possible just like the local moneylender.

The rise in price would be beneficial to net sellers in the open market and harmful for net buyers. For those under interlinked contracts, the economic condition would hardly change. Given that multinational retailers sell mostly consumers goods, it is reasonable to assume that the giant retailers will be importing manufactures from abroad, especially from China and other southeast Asian countries, and exporting agricultural goods to other countries through their overseas stores. Have to source 30 percent of their domestic sales from the domestic market. This would imply that they would have to market some Indian manufactures also, but the bulk of their sales should consist of foreign manufactures and Indian agricultural goods (Sarkar, 2013). In competition, most old-style retailers will lose many customers for manufactured packaged goods to the new neighbouring retail chains which can cut prices. The new retail chain stores are convenient. They will take much business away from neighbouring small family-run retail stores. Old loyal customers and others out to make small purchases might remain but business will decline. In our huge country, with over five million shops and establishments, most shops will not die. Further, the new retail chains will be confined to a few states and some large cities. Research on impact of retail sector regulations revealed that:

(i) Globally, in densely populated countries like India (with consequent higher real estate prices), small-store formats thrive, and even flourish in the face of the competition from big-box retail;

(ii) On the other hand, the introduction of foreign competition forced manufacturers to cut costs in their supply chains and small stores become more efficient, and provide more serious competition to large-store formats and centralised operation that the multinational retailers prefer;

(iii) In many localities in Delhi small store-owners are responding by upgrading to modern formats with convenient and better organised displays, ICT (information and communications technology)" enabled storage and procurement management and electronic billing counters, while building on their own areas of strength.

(iv) Information technology is a more credible threat to traditional retail than the foreign big-box retailers. Experience from around the globe also suggests that in the coming decades, the Indian small trader will need to worry more about the spread of e-commerce, or home shopping, than the presence of foreign corporate retail.

The lower prices of Walmart are much trumpeted as its virtue for keeping inflation in check but the total effect turns out to be too costly for the country in terms of losing its small retail shops, small-scale manufacture, even big scale manufacture, employment and other features which make an economy grow. An August 2011 report by Indian Council for Research and International Economic Relations (ICRIER) concludes that kirana shops will co-exist but the study is based on a survey of only 300 people, without including kirana shops, and is unreliable due to scant and superficial handling of the issue (M ukhopadhyay, 2012). Relentlessly hammering down the prices, Walmart ensures that the buyers dont go to other stores but come flocking to them. The suppliers are forced to reduce prices and squeeze the labourers. They are made to work in sub-human conditions in China and Bangladesh. Cheap labour is at great human cost. Walmart now dominates consumer markets so thoroughly that the suppliers have no choice. They become captive suppliers with the percentage of profit going down with each marginal sale.

Locally owned business pack is more powerful economic punch. Smaller, locally-owned businesses and start-ups tend to generate higher and long-term economic growth and income for people in a community than big, non-local firms, which can actually depress local economies. To survive in the face of the sort of pricing demands Walmart made of famous companies such as Vlasic, Huffi, Loveable, Levi Strauss and some other consumer product companies, they had to lay off employees and close the US plant in favour of outsourcing products overseas. The impact, therefore, on the employment sector was that there have been more retail jobs at the expense of manufacturing jobs. Not every cost squeezed out is good. Walmart becomes a combination of monopoly and monopsony which constitutes threat to the free market.

Monopoly is the exclusive possession or control of the supply of or trade in a commodity or service. It is characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods.

Monopsony is a market similar to a monopoly except that a large buyer not seller controls a large proportion of the market and drives the prices down. Sometimes referred to as the buyers monopoly. Monopsonistic elements are found wherever there are many sellers and few purchasers. The ability of any business to manage the cost of supplies. As for example, people have accused the big wine makers Ernest and Julio Gallo of being a monopsony. They had such power buying grapes from growers, that sellers had no choice but to agree to their terms. Economists prefer to understand changes in the balance of power between buyers and sellers in different markets and how this affects prices, profit margins and incentives. Walmart has built a business model based on demanding price sensitive supplier contracts.

It creates a whole hidden universe of squeezed suppliers, manufacturers and labourers. The argument is that once the multinationals are into the market, the local supply chains will be destroyed and the big retailers will emerge as monopoly procurers. Can this actually happen? Apparently, there are a number of factors which might prevent this from happening (Sarkar, 2013):

(i) there could be competition between multinationals over procuring farm products which will keep prices from falling too low;

(ii) even if multinationals enter into tacit collusions of not entering into one another's procurement territory and each one emerges as a local monopoly as far as procurements is concerned, there is always the possibility and incentive of domestic traders reentering the market as buyers if multinationals are offering very low prices. This will prevent the multinationals from actually reducing their buying price below a certain level; and

(iii) the minimum support price offered by the government will act as another barrier to price reduction. If multinationals offer very low prices, the farmers will have an incentive of selling to the government which, in turn, will prevent multinationals from offering very low prices.

V Policy Debate About FDIMBR

In the ensuing debate, lots of comparisons are being made with the U.S. , the U.K., China and Japan. The question is: are we at the same level of development to indulge in the luxury of comparing ourselves with them? Historically, no economy has ever developed on foreign capital. Cases of foreign investment are few and far between. Let us keep in mind that foreign capital is both a boon and bane, to determine which each of its inflow needs to be individually assessed for its costs and benefits, before allowing it (Bhargava, 2012). In the Indian retail context, whatever the intentions, the devil is in the execution. India faces infrastructure limitations, be it transport or storage functions.

The retail revolution about to happen in India will have a ripple effect throughout the economy. The stakeholders will need to work together to make retail a success story. There were six stakeholders in the retail FDI debate (Sabharwal, 2012):

(i) incumbent organised retail,

(ii) current workers in unorganised retail,

(iii) future workers in retail,

(iv) consumers,

(v) domestic and foreign capital, and

(vi) producers.

Foreign retailers have used six models to come to India:

(i) 100 percent owned India operations,

(ii) India subsidiary,

(iii) joint ventures,

(iv) master franchisee,

(v) distribution, and

(vi) licensing.

At the time of India entry, 71 percent of the companies chose a low commitment model--franchisee, licensing or distribution. These models typically require lower capital investment and need fewer operational controls. However, they also result in lower returns and require handing over of controls of the brand to the local partner. Over time and enabled by regulatory changes, companies have shown more commitment to India and have moved from the low commitment models to 100 percent owned operations, India subsidiary or joint ventures. The retailers did not get their India operating model and partnership right at the first time: these companies either changed the operating model or India partner or both, or exited the market. Key reasons for this state of affairs are:

(a) underestimating the potential and complexity of the market,

(b) developing an operating and partnership model not fit for the purpose,

(c) selecting a partner without fully defining roles and business goals, and

(d) building cultural alignment. Success of these partnerships is key to delivering the promise of FDI in retail to India's consumers, farmers and the retail industry overall (Malhotra and Gupta, 2012).

The politics and economics of foreign investment in multi-brand retail have the potential to seize the imagination of large sections of India's population. There is a new political polarisation happening around the issue of FDI in retail. The way FDI in retail trade has been approached raises many questions not merely the ones relating to circumvention of the extant laws. For instance, over the years, the objectives in attracting FDI have become increasingly blurred: (i) one of the expectations from FDI in multi-brand retail trade (MBRT) was that it will create the much-needed infrastructure, and (ii) meeting the curren t account gap is another important expectation from FDI. The subject of FDI in retail invariably evokes images of cold chains. To be sure, cold storages can minimise rot and wastages, but to operate them, one needs power, in which India is deficient. It is here that the ingenuity and business acumen of foreign chains would be really tested--especially if they are mandated to start with the back-end operations--or do the disagreeable part of the deal first (Murlidharan, 2012).

Sarkar (2013) has rightly emphasised that 'one would be going against progress if one fails to take advantage of the capital and the advanced technology FDI in retail can offer. The new policy, however, will involve huge losses of jobs and livelihood among traditional traders. At the same time, new jobs would be created in the giant stores and their newly built supply chains. In the short run, the net outcome on aggregate employment is still likely to be negative, at best ambiguous. But in the longer run, as profits are reinvested and organised retail keeps on expanding, and as newer avenues open up for the underprivileged, the policy would payoff. This has happened more recently when computers came into our lives in a big way. But this long-run view should not make us think for a moment that the short run can be ignored. We must realise that like in the past, the techno" logical and organisational changes that the giant multinationals are likely to bring about entails short-run sacrifices. Unfortunately, like always, the brunt of these sacrifices will be borne by the less affluent. Therefore, the government should take enough protective measures to guard the interests of these helpless people. This is required not only on moral grounds but also for the sake of making the policy politically feasible.

A new phase in India's federalism. For the first time in India since Independence, the government has introduced an investment policy for a specific sector, whose applicability has been left to the state governments. So far, policies governing investment used to be qualified by the nature of its ownership or capital, but no restriction was imposed on its location. For an investor, the entire country was treated as a single market. But given the manner in which the FDI policy for retail has been introduced, the investor's right to access a certain market will now be determined by the state government. One might call it a new phase in India's federalism--for investors, however, fragmented or limited access that depends on the states can often be counterproductive, taking away a lot of the advantages that accrue from the large size of the Indian market.

At a time that attempts are being made to introduce a uniform goods and services tax (GST) regime for the entire country to facilitate easy and barrier-free trade across states, different FDI policy regimes for retail in states would negate the very advantages that should otherwise accrue from the indirect tax reform initiative. An associated risk would be a demand from political parties and lobbies to extend the same principle of state-specific FDI policy to other sectors. If that were to happen, governance is bound to suffer and the government will wonder if its hard-fought victory on the retail FDI issue has imposed a bigger cost on the nation (Bhattacharya, 2012).

VI Challenges Before Multi-Brand Retail

Any new entrants have to contend with various issues that plague the industry.

(i) lack of direct access to farmers for sourcing,

(ii) constraints related to the interstate movement of goods,

(iii) tax structures and inadequate capacities in the food supply chain,

(iv) due to the lack of supporting policies, challenges such as.

(a) one of the important factors cited for the viability of retail business is the availability of real estate at affordable prices and at suitable locations. Major Indian cities with retail penetration have witnessed a considerable increase in rentals in the last five years. Additionally, the majority of the primary Indian cities are crunched to provide quality and quantity of real estate to the likes of global retailers. Real estate will remain a challenge, especially buildings that meet quality standards, and this will push rentals even higher, rentals as a percentage of revenue are higher in India than in other markets.

(b) high attrition rates will continue to persist as the number of retailers increase and existing ones expand.

(c) there are at least five very fundamental issues currently engaging the attention of leading multinational retailers as they grapple with low growth or even no growth and flat or declining profitability (Singhal, 2012 'b').

* the very future of retailing itself as it is understood and practiced today,

* the viability of taking their successful home' growth retail formats to new countries,

* the potential disruption of relatively recently established supply chains,

* enforcing a supply chain-wide compliance with ethics, workers right and fair-trade practices without adding very significantly to the overall cost of sourcing, and

* to maintain differentiation from competitors. In India's case, the challenges are even more intense, starting from the current multi-brand retail policy itself that has several highly- restrictive operational clauses.

(v) With the reduced space for MSME's can they be expected to provide 30 per cent of the requirements of multi brand retail stores, comprising assorted goods and items? Apart from the 30 per cent mandatory reservations which may be easily circumvented, the rest of the 70 per cent can be imported from cheaper sources. It would not be off the mark to note that policy reservation for small-scale industries (SSIs) was set off in 1967. But over the years and particularly after India's liberalisation of trade and industrial policies in' 1991,887 items had been de-reserved from time to time. With the last deletion in 2010, the number of items in the reserved list has been brought down to 20 , which cover only food and allied industries, wood and wood products, paper products, other chemicals and chemical products, glass and ceramics, mechanical engineering excluding transport equipment such as steel almirah, rolling shutters, padlocks, stainless steel utensils and domestic utensils-aluminium (This was stated by the Minister for Micro, Small & Medium Enterprises K. H. Muniyappa in Rajya Sabha on December 10, 2012 (The Hindu Business Line, Dec. 20, 2012)).

How to meet the challenges in FDIMBR? It is always said if there is a problem there is a solution. So India should explore the proper solution which is must to prevent any future damage.

(i) real estate constraints suggest a joint venture or joint-development kind of model with developers or land owners,

(ii) to negate the effect of rising rentals, one entry approach that may find flavour with global retailers is scouting for stressed retail assets at an appropriate location,

(iii) the other important real estate play here is the creation of backend infrastructure, which suggests investments in assets such as cold storage and warehouses. Presently, very few players in India operate cold-storage chains or warehouses. An interesting opportunity maybe generated in such a situation, where foreign retailers are likely to approach developers to create and own backend infrastructure,

(iv) the indirect impact of investment in multi-brand retail is also expected to generate additional demand for residential real estate.

(v) the ability of global retailers to manage and sustain operations will, to a large extent, depend on the availability of an appropriate financing vehicle. Globally, retail assets follow a real estate investment trust (REIT) model to access finance. In the Indian context, REITs and real estate mutual funds (REMFs) have been discussed in the past without any logical outcome. However, it is a possibility that retail investments may attract the attention of decision makers in future.

The Union government can design a model retail regulatory law covering issues mainly in terms of location of the large scale stores so as to assuage the fears of small retailers, suppliers and farmers which are very critical and vocal. The Centre cannot be blase about an issue which it knows pretty well goes beyond shops and shopkeepers. Foreign direct investment (FDI) is in the Union List, and hence the issue comes very much under the Centres remit.

The retail chains started by foreign investors would be no ordinary shops because they would be bankrolled by FDI and sustained by imports to a large extent. It could thus impact our already fragile foreign exchange position, with imports gaining ascendancy, given the fact that the foreign retail chains view the world as their oyster (Murlidharan, 2012).

Policy focus has to be on creating the marketing infrastructure and linkage between retail demand and the farmer, than on production. To improve the return to the farmer, there must be institutional mechanisms, laws and more investments. Market infrastructure must improve, with loading and weighing facilities in good condition, adequate and protected storage, and better information to neighbouring villages on market arrivals each day, with ruling auction prices. With less damaged products and fewer intermediaries, the farmer will have means to pay for these services of information, cold and normal storage, etc.

The government has shown it is unable to provide these facilities. It is unable to plan, implement and operate such services efficiently and honestly. Conditions must be created to enable private investment in them. This will happen if markets are better regulated and are transparent in price determination. Chains that have come up in the last few years (Reliance, Spencer's, the now-closed Subhiksha, etc) have not created these facilities. Policies must encourage and stimulate many private investors to invest in agricultural supply chains through infrastructure and information systems. This does not need FDI, but needs an enabling environment. Policies should be designed to ease the MSME sector pain and make MSMEs competitive. With respect to the regulatory impediments, organised retailing in India suffers from over-regulation, or rather over-inspection, in some aspects, while there are other key areas in urgent need of regulation that is missing or requires updating. Setting industry performance, business conduct, health and quality standards and ecommerce regulations that are benchmarked with the global best practices will benefit both consumers and producers.

VII Concluding Remarks

The Government has confused everyone by inking FDI in multi-brand retail to better agricultural development. It has been argued by some that FDI in multi-brand retail would take time to yield benefits on the ground. Policy-making in such cases needs more data as well as better reasoning. Though the effects of FDI are still not known, the policy debate needs clarity on the facts of the matter (Singh, 2012). India's decision to ease overseas investment rules in retail may not necessarily benefit farmers in the country. Stiglitz was not convinced with the view that bringing in foreign firms will make supply chains more efficient and benefit local farmers. Indian policymakers need to figure out the real impediments to the development of organized retail. Its not shortage of capital. India has been exporting capital. Some forms of foreign funding are important, as they provide access to technology and markets. India, with its abundance of entrepreneurs, must tread the path of foreign direct investment with caution in the light of the overwhelming evidence other countries have to offer on the issue. Professor Stiglitz was not against FDI as it However, its purpose was to reap capital, technology, access to markets and training. It needs to increase its savings rate more. Moreover, retail technology was widely available. And one of the successes of India's entrepreneurs is they know how to apply the technology. (Stiglitz was speaking at a media interaction in Bangalore, organized by the Azim Premji F oundation, MINT, January 8, 2013)

Urban consumers would certainly benefit from a wider variety of manufactured consumer goods from abroad. They would also enjoy the ambience provided by the giant retail stores. But what about the producers? What about employment? One has to concede that the Indian manufacturing sector is not yet mature enough to face Chinese competition. It is more than likely, therefore, that the giant retailers will flood the Indian market with low priced Chinese trinkets and as a result Indian medium and small manufacturing units will suffer. Loss of employment is quite on the cards. It is not at all clear as to what extent it is necessary at this point in time to indulge in such unequal competition. Walmart has been lobbying with the US lawmakers since 2008 to facilitate its entry into the highly lucrative Indian market. According to lobbying disclosure reports filed by Wal-Mart with the US Senate, the company has spent close to $25 million (about Rs125 crore) since 2008 on its various lobbying activities, including on the issues related to enhanced market access for investment in India (Business Standard, Dec., 2012).

The Supreme Court upheld the government policy of allowing FDI in multi-brand retail, holding that as a policy, it did not suffer from any constitutional or statutory infirmity*. A parliamentary panel asked the government to set up a 'Retail Regulatory Authority' to deal with issues concerning FDI in the multi-brand segment and cautioned that the unregulated entry of foreign giants could create joblessness. If multi-brand retail chains are not regulated well, it will impact micro, small and medium enterprises (MSMEs), farmers and domestic mandis. Multi-brand chains should be regulated so that customers are not fleeced and farmers are not under-paid for their produce *.

FDI in retail is not deserving of the pivotal position given to it in reform. 'FDI in retail is no magic lamp,' success lies in how the policy is implemented. Our organised retail sector is still at a nascent stage. Instead of introducing FDI, our government should rather support the industries and retailers in the country itself with better policies and financial aids. All in all, despite the widely divergent sentiment surrounding the opening of the retail sector to FDI , the policy has evolved quite a bit over the years. One hopes, however, that the pulls and pushes of politics would only be stepping stones and not stumbling blocks in the journey towards 100 per cent FDI across the sector. Of course, sufficient consideration should be given to the interests of MSME s, farmers and consumers.

With the change in government at the centre the policy is in limbo, forcing retail players to make their choices in a mixed-up regulatory environment. Carrefour of France, the second largest retailer in the world after Walmart, for instance, recently announced its exit from India. Primarily a supermarket chain, Carrefour had set up five cash' and carry stores in the country as a stepping stone to full operations. Along with its internal issues, Carrefour failed to firm up an Indian partner for its multi-brand foray due to policy hurdles. American retailer Walmart too parted ways with its cash-and-carry partner Bharti over policy issues, among other things. Walmart, which has been waiting to start multi-brand venture in India for years, is now considering expansion of its cash-and-carry business instead. UK's Tesco is the only foreign player to have taken a chance in multi-brand, having applied in equal partnership with Tata group's Trent to invest $100 million in stores across Karnataka and Maharashtra. Policy confusion has spilled over to e-commerce too, an integral part of the retail business. For instance, while foreign investment in online retail is not otherwise allowed, FDI in e-commerce for manufacturing companies has been permitted through the automatic route. The country needs a bureaucracy that understands complex issues across sectors to come out of this policy confusion. But it is the political masters who have to take the final policy call.


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Shrawan Kumar Singh

Professor of Economics and Director, School of Social Sciences, IGNOU, (Retd.), Delhi.
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