Posted in Finance Articles, Total Reads: 2281
, Published on 14 November 2011
Tug-of-war seems to be nearing an end, as government’s nod for the reforms related to Foreign Direct Investment in multi-brand retail seems to be around the corner. Is it really necessary: ‘Yes’.
India is a consumption driven economy with private consumption contributing as much as 60% to the Indian GDP. Retail Sector is estimated to be worth $450 billion thus being biggest contributor to the Indian economy in absolute terms. However modern retail constitutes barely 4% of the market. Modern retail is a reflection of the progress of a nation and thus to transform this sector huge investments are needed and FDI provides an attractive option.
Political class was fragmented on this issue with opposition vehemently opposing the reform with arguments that:
This will hamper the growth of domestic organised retail industry
It will have severe impact on so called mom and pop stores –could lead to their closure
It can impact the social community and the way of life.
However these arguments hardly stand any ground. The big players like Reliance, Tatas are mature businesses to understand the business dynamics and don’t warrant any protection. Instead the reform can benefit them in securing the in-depth domain expertise required to be on par with global models. Domestic players are anyways enjoying the best location advantages. If these big players are protected more they will soon turn into monopolies making it further difficult to open the sector.
Also the second argument is flawed in the sense that empirical studies have shown that such liberalization will lead to economic welfare and not the loss of employment. Markets will definitely have a restructuring effect but local markets will close down is an exaggeration. Each party can co-exist as long as they fulfil different needs and serve different clientele. These arguments lack the factual basis. Considering the large population and geography of our country, it's erroneous to conclude that organised retailers would drive small stores out of business. Small stores offer customers the convenience of quick doorstep delivery, even extending a month's credit. No organised retailer can match such convenience. China’s experience is evidence to this fact where inspite of 100%FDI, Chinese stores have grown from 1.9million to 2.5 million since 2004.
Third argument though has some weight in the sense that it will create a “Mall Mania”. Though it can be beneficial to real estate players it can definitely break down the bazaar culture. However it can impact social life in a positive way by increasing the jobs in the market. Expansion of modern retailers will lead to creation of millions of jobs. Bharti-Walmart joint venture is prime evidence to this argument which has led to job creation in Amritsar, Delhi and Bangalore where local youth is trained for retailing.
Today, it’s estimated that about 40% of all farm products rot by the time they reach the final point of sale. This not only generates enormous waste, it also creates upward pressure on food prices, hitting consumers hard, with no benefit to farmers. The lack of organised storage and transport chains is the main reason for these losses. Efficiency enhancement is imperative and efficient practices, economies of scale, coupled with adoption of best global technologies can vastly aid in this purpose. Unfounded arguments that small shops will be adversely affected are not reason enough to deny millions of consumer access to quality products processed through a high quality and hygienic conditions constructed by eliminating the inefficient intermediaries.
With organised retail, every intermediate stage – procurement, processing, transport and delivery – adds value to the product. This is primarily because the cost adding intermediaries are eliminated. Allowing FDI will not only bring financial capital into the market, it will also bring in new technologies for storage and transport which increases the freshness and the quality of products when they travel from the farm-gate to the market place. Organised retail not only improves systems and processed but also brings more stability to prices, unlike the present system where hoarding and artificial shortages by profiteering intermediaries push up product prices. Thus there is general consensus on efficiency enhancement and organised retail can be a blessing in achieving this objective.
However rising food inflation has brought about quick shift in the policy. Inflation is the biggest challenge for policy makers as it is of prime concern to each individual-so called “Aam Aadmi”. Studies have shown that the current inefficient farm-to-store supply chain contributes to high levels of wastage and inefficiencies: as high as 25-30% for some fruit and vegetables, and more than 10% for food grains. The reason for such high food inflation is of structural in nature and thus needs to be tackled by means of such policy measures. FDI in retail would allow for investments in the food supply chain that will reduce these losses and result in increased food supply.
Some of the crucial norms that his policy will bring about are:
50 per cent investment will be mandatory in back-end infrastructure, which includes cold storage chains and warehousing.
The minimum FDI investment would have to be $100 million.
Retail stores would only be allowed in cities with more than one million people.
Front-end operations would be allowed only in States that agree to permit FDI in multi-brand retail.
Mandatory for retailers to source minimum 30 per cent of the value of manufactured goods, barring food products, from small and medium enterprises.
Thus considering the overall policy direction, it appears to be beneficial to all parties with sufficient safeguards for small retailers who in turn will benefit from the better prices for their products and consumers receiving quality products at lower prices.