By Nitesh Kansara

XI- D

WHAT IS FDI?The Foreign Direct Investment means “cross border investment made by a resident in one economy  in an enterprise in another economy, with the objective of establishing a lasting interest  in  the investee economy”.  

FDI is also described as “investment into the business of  a country by a company in another country”. Mostly the investment is into production  by either  buying a company in the target country or by expanding operations of an existing business in that country”. Such investments can  take place  for many reasons,  including to take advantage of cheaper wages, special investment privileges  (e.g. tax exemptions) offered  by the country.

FDI Inflows to India

WHY COUNTRIES SEEK FDI? • Domestic capital is inadequate for purpose of economic

growth.

• Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development.

• Foreign capital usually brings it with other scarce productive factors like technical know how,  business expertise and knowledge.

WHY FDI IN RETAIL? Since the last few years, domestic enterprises have already entered into the arena of MBRT, with consumers welcoming them. While consumers have benefited, farmers have not benefited as expected. The reason for that is neither the government nor the domestic players have been able to create the necessary back-end infrastructure which could provide a seamless flow of goods from the farm to the fork.

Prima facie, this failure can be attributed to inappropriate policy and regulatory frameworks, including wide variations and uncertainty amongst states, lack of agriculture marketing reforms and backlash in certain states against organised retailers (such as against ‘Reliance Fresh’ in Uttar Pradesh, Jharkhand etc.). Furthermore, lack of relevant technology and managerial capacity on part of domestic players, if not the capacity to invest on such a large scale, are other valid reasons.

RETAILING IN INDIA• The Indian retail industry accounted for 9.4% employment and 22% of the

country's GDP in the financial year 2011

• The inflation rate also fell from double digits in 2010 to a single digit figure in 2011 thereby driving growth of grocery retailing

• One of the key drivers in the growth in retailing is the increased consumer demand resulting due to the growth of consumer groups with disposable income between USD 2,500 and USD 10,000 per annum which grew from 47% in 2010 to 50% in 2011

• In grocery retailing, hyper markets were growing rapidly boosting growth in modern retailing in 2011

• Private label products for grocery retailers were most prominent across supermarkets and hypermarkets, accounting for between 15% and 30% of total value sales of these two sectors respectively

TIMELINE OF FDI POLICY

ADVENT OF FOREIGN RETAILERSMany global retailers whosoever wanted to come to India are already here leveraging on the policy of 100% in cash and carry wholesales route for multi-brand retailing like Walmart, Metro, Woolworth, Staples or 51% for single brand retailing like Zara, Mark & Spencer, Hamleys, Debanham, Espirit, Nokia and many more. Significant foreign retailers’ presence is seen in Apparel, Fashion, Luxury and food retailing using either the franchise or licensing route. Table 2 list the category wise presence of 17 foreign retailers out of Top 250 retailers in the world.

Many online global retailers like Amazon are operating in India. Recently many global players taking advantage of online retailing are targeting Indian consumer by setting up relationship with supply chain companies to deliver products to end customer therefore bypassing the need to create physical retail stores. For example Crate and Barrel has launched India specific website to attract Indian consumer to buy their products online.

BENEFITS• Improves forex position of the country;

• Employment generation and increase in production ;

• Helps in capital formation by bringing fresh capital;

• Helps in transfer of new technologies, management skills, intellectual property

• Increases competition within the local market and this brings higher efficiencies

• Helps in increasing exports;

• Increases tax revenues

FDI Confidence Index

LIMITATIONS OF FDI• Domestic companies fear that they may lose their ownership

to overseas company

• Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business;

• Large giants of the world try to monopolise and take over the highly profitable sectors;

• Such foreign companies invest more in machinery and intellectual property than in wages of the local people;

• Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company;

These persons will be affected.

MAJOR MYTHS AND REALITIESMyth 1: Crowding out of small retailers/kirana store

Research shows that in recent years, the growth rate of domestic organised retail in India has been faster than that of the traditional retailers. This, however, does not prove that small retailers in unorganised sector have been crowded out in an absolute sense of the term.

From global experience it can be said with some certainty that small retail outlets in many countries have remained largely unaffected from introduction of foreign investment in retail. Innovative government interventions can further mitigate the remaining adverse effects on small retailers. Apart from consumer preference, in India, the advantages of close proximity of kirana stores or even the itinerant hawkers, inter-personal relationships between the customer and retailers, credit availability for all customers and home delivery facility are major factors which will continue to favour existing small retailers.

Myth 2: Adverse effect on domestic manufacturing sector

Domestic retailers source the bulk of their produce domestically. International retailers, on the other hand, operate on the principle of buying internationally at the cheapest cost. It is true that for countering this, we need to improve physical infrastructure, low-cost utilities, competitive interest rates, reduction in transaction costs, and trade facilitation. Once these reforms bring down the cost of our manufacturing goods, we can expect global retailers to source domestically and also export to their chains outside India.

The growth of organised retail has the potential of providing market access to manufactured products from small and medium enterprises (SMEs) in rural and distant places by integrating into the product supply chain of the large retailers. The trend is already visible in India, and could further increase its pace with the entry of big-box retailers, in view of the mandatory requirement of 30 percent sourcing from SMEs. Small and regional are already tying up with retail giants to push their merchandise. As a result, the share of organised retail in total sales of these brands has risen from near zero to about 15 percent.

Myth 3: Adverse effect on small farmers

The main rationale behind permitting FDI in organised retail sector is that it will benefit farmers when these firms buy directly from them. It must be noted that the status quo is also not working for farmers and new opportunities for assured and remunerative market for farmers has long been felt. According to NSSO survey, more than 40 percent of farmers are willing to quit farming for any opportunity of a job. Permitting FDI in organised retail sector is likely to open opportunities for assured and remunerative marketing for farmers.

However, some concerns for small farmers also arise viewing the inequality of power in favour of global retailers, which can be dealt by suitable government interventions, and by the Competition Commission of India. Most Indian farmers, by virtue of being small, ignorant and cash-crunched, are vulnerable to exploitation by corporate retailers. Therefore, there is a need to develop a comprehensive, clean, equitable and farmer-centric model procurement agreements with special attention to clauses dealing with quality standards, withdrawal conditions, pricing standards, so that the farmers do not get a raw deal.

Myth 4: Harm to consumers due to anti-competitive practices

According to a survey conducted by ICRIER, consumers from low income groups have found to be benefitted more from the growing organised retail in India. With foreign retailers operating in the Indian market, there will be more competition within and between organised retail and unorganised retail, and hence more benefit to consumers. Another benefit to consumers can come through proper weights and measures, which traditional stores are able to easily bypass. Secondly, in India we also have the curse of revenue losses to the government because small retailers do not often issue cash memos, which large retailers cannot indulge in.

Viewing the Indian market structure, the fear of predatory pricing and subsequent abuse of dominance seems unfounded as this strategy is unlikely to succeed. If at all such strategy is adopted by foreign players, the CCI is well equipped to tackle such anti-competitive practices.

STUDYA recent study by University of North Carolina economist Anusha Chari and T C A Madhav Raghavan shows that the potential benefits of allowing large retailers into the country significantly outweigh the costs. These benefits largely accumulate through productivity gains. From roughly the mid-1990s to 2004, the last year for which relevant data exists, many reputed economists, including Princeton’s Nobel laureate Paul Krugman and Harvard’s Kenneth Rogoff, a former chief economist at the International Monetary Fund, attribute big-box retail, most pivotally Wal-Mart, as a significant driver of US productivity growth, which surged during this period. Rather than restricting entry of large foreign retailers, creating the right regulatory conditions in India is important to ensure that a similar experience is seen at home.

POLITICAL STUNTSBe that as it may, one of the main reasons for the present standoff in this policy appears to be that of political opportunism6 and playing to the gallery of vested interests in an election cycle. BJP’s response at the moment seems to be the same as that of the Congress Party, when they were in opposition. It may be recalled that in 2002, when the BJP-led National Democratic Alliance (NDA) government wanted to allow FDI in retail, it was the Congress Party that opposed it, branding the decision as anti-national, among other things. One wonders if anything substantive has changed in the last decade that merits such radical swings in positions, other than the quirky principle that when in opposition, just oppose.

POLITICAL VIEWS

The proposed Policy speaks about opening the FDI in MBRT to cities above 1 million population and that too if the concerned States agree to implement the policy. This means that there will be no compulsion on any state to allow Foreign MBRT. It also signifies a gradual approach rather than a wholesale approach. In policy terms this is a good process.

More importantly, the debate on FDI in retail has been sending wrong signals to the world that our FDI policies can be thwarted by polemics rather than logic. Another important issue which has not been mentioned in the debate is that Indian FDI is also happening in foreign countries, and hence when Indian MBRTs can gain the experience and skills, they can also invest abroad. For instance, in UK, Indian FDI is the largest employer in the manufacturing sector.

SUGGESTIONS• Modernization of traditional markets through Public Private Partnerships.

• Modernization of APMC markets with incorporation of the Model Act in all the states.

• Initiating a uniform license regime applicable nationwide and doing away with the numerous permits that are currently required for the establishment of retail outlets.

• Replication of the metro Cash-and-Carry outlets of China, for sale to unorganized retail and procurement from farmers.

• Facilitate the formation of associations and cooperatives of unorganized retailers for procuring directly from suppliers and farmers.

• Encourage farmers to form similar cooperatives to sell to organized retailers.

• Facilitate innovative banking solutions to ensure credit availability to unorganized retailers and farmers from financial institutions.

• Stringent rules to be formed against collusion and predatory pricing and a code of conduct to be drafted for the organized retail sector for dealing with their suppliers

CONCLUSIONAs retailing still is very local industry, the FDI in multi-brand retailing will only benefit existing organized players in terms of attracting foreign capital and will not change significantly the retail landscape in terms of formats proliferations benefiting customers, generating huge employment or investment in supply chain or back end investment as has been envisaged in the policy.

Instead of paying too much attention to FDI, the Government should fast track infrastructure especially road development, set up economic zones for warehousing facility, streamline labour laws, planned urbanisation to ensure adequate availability of quality real estate, high street and implement GST to facilitate modern organized retail to take-off in India.

The polity and state governments need to reconsider their decision in light of the pressing needs of farmers and their own present endeavours to reform the distorted agriculture procurement and marketing system. There are instances, where state governments had shown reluctance in the beginning but later adopted certain reform measures realising net societal gains, but not before losing out to the first movers in this competitive environment. Whether it was adoption of Value Added Tax, or reform of APMC Act or allowing private universities, all had faced initial resistance by some states but later they realised the merits of compliance. Is FDI reform in retail headed the same way?

At the end of the day, It does not matter whether it the local or foreign retail players leading this next wave of retail revolution in India as long as Indian consumer benefits in terms of access to innovative retails formats, best practices and availability of goods and services from all over the world along with great shopping experience.

THANK YOU

THAT’S ALL