AAP Government in Delhi has addressed a letter to Ministry of Commerce, Department of Industrial Policy & Promotion (DIPP) – nodal point for foreign direct investment (FDI) related issues – saying that it will not permit FDI in multi-brand retail.
FDI in multi-brand retail has been on reforms agenda of UPA Government for several years now. Due to intense opposition from various quarters, it was forced to take a vote in Parliament which approved in November 2012 subject to foreign investor taking prior permission of concerned state.
Delhi is one of the 9 Congress-ruled states including AP, Rajasthan (prior to Assembly elections held in November, 2013), Maharashtra etc which decided to go along. In this backdrop, decision of AAP Government is a volte face.
This was not un-expected as being a promise in party’s election manifesto, AAP is redeeming its commitment made to people of Delhi. Yet, it is an embarrassment to central Government especially when we consider that Delhi accounts for about 10-12% of organized retail and presented huge opportunity to MNCs.
Indian retail market is around US$ 500 billion. It is dominated by mom-and-pop stores even as organized sector hardly occupies about 5% of space. The stores source their requirements from small and medium enterprises besides, body corporates.
Supply and distribution chain for a vast variety of items that stores stock and sell are riddled with numerous rigidities and constraints. These lead to inefficiencies, high cost and poor quality thus compromising on customer satisfaction.
Lack of proper storage & transport facilities leads to substantial losses of agri-produce. Post harvest losses in fruits & vegetables alone are around Rs 50,000 crores (US$ 8 billion). Quality of foodstuff reaching breakfast/dining table is often a casualty.
There are a large number of ‘intermediaries’ viz., marketers, wholesalers etc between farmers/producers and consumers. That leads to cascading effect of margins and taxes/duties at various stages in supply line. High cost is eventually borne by consumers.
Retailers are virtually at a receiving end. They do not have muscle power to push for much needed improvements in logistics chain. The presence of Indian corporate big-wigs in this space – for almost a decade now – has failed to make any dent.
FDI was contemplated as a game changer. Government believed that MNCs could fill the void in infrastructure, bring modern technology and practices and have direct interface with farmers/producers – all leading to full customer satisfaction.
The biggest advantage is assurance of un-interrupted supplies at competitive prices. The presence of foreign controlled super-market chains will act as buffer against vulnerabilities that consumers are exposed under extant dispensation.
In 2013, we have seen how traders acting in collusion with officials of state controlled mandis exploited even slight dip in production of vegetables and fruits to raise prices to exorbitant levels. This happened especially in onion and tomato.
Alternate channels of supply such as hyper markets will take appropriate steps including investment in handling, cold storage, transportation etc to prevent supplies from drying up even when traditional sources ditch as happened last year.
Under existing arrangements, farmers are at mercy of traders. They are not assured of a steady income stream from their produce as prices received are not only low but also, widely fluctuate from season to season depending on crop output and demand.
Bringing more players – including foreign hyper markets – to their doorsteps will undoubtedly improve their pricing power. Farmers will not only receive remunerative prices but also an un-interrupted income stream. Better infrastructure will help this process.
According to independent studies, FDI in retail has a potential to enhance farmers price realization by around 10-30%. It can lead to ‘direct’ employment generation of 3-4 million besides indirect jobs to the tune of 4-6 million.
Opponents of foreign investment including Mr Kejriwal, leader of AAP and CM, Delhi have expressed fear that that MNCs would indulge in ‘predatory’ pricing that will decimate tens of thousands of Indian retailers/small businesses resulting in loss of jobs.
During debate in Parliament (November, 2012), several MPs across political spectrum narrated what happened in USA & EU countries – consequent to entry of Walmart et al to buttress their argument. Comparison with India is flawed. Their experience cannot be transposed to Indian situation.
First, unlike USA/EU, ours is a growing market. It can accommodate more players posing no threat to shops in street corner or so called mom and pop stores. However, there is more potent reason as to why they will remain un-shaken.
A mom-and-pop store has a natural bond with customers. The former serves needs of latter in several ways – including door-to-door service – that an MNC store cannot even dream of matching. Hence, there can be absolutely no threat to a small retailer.
Reliance, Birlas, Bharati et al, big business houses of India have been operating in this segment for a decade. They have deep pockets and operate free from any encumbrances (being put on foreign stores). Yet, we have not seen any displacement of mom-and-pop stores.
Significantly, Indian big-wigs have their stores located in neighbourhood of small retail shops. Still, two have co-existed, operating in harmony with each other. Why would things be different with Wal-Mart?
Clearly, entry of MNCs in retail segment will be a win-win for all stake holders viz., farmers, consumers, workers and small businesses.
The states need to seize the opportunity to reap all the benefits that India has waited for so long,
Central Government on its part should fine tune caveats appended to extant policy to come up with an environment that encourages MNCs to establish long-term bond with Indian market, feel ‘comfortable’ and do business ‘without any hassles’.
At present, foreign equity in multi-brand retail is capped at 51%.
The policy ought to have allowed 100% FDI in retail. Without making any material difference (in both scenario, MNC has ‘majority’ ownership), this will give them added comfort.
While, these are desirable outcomes, we need to wait and see as BJP which is the main contender for next Government is opposed to FDI in retail for now.