FDI in Retail

The below was written when the Government had just introduced the FDI policy, keeping the MSME sector in mind. Subsequently, it 'suspended' the policy.

FDI in Retail – Boon or bane?

The wait is over: Central Government has signaled that it will allow 51% Foreign Direct Investment (FDI) in multi-brand retail trade in the country. While it is busy shining and dangling carrots like 10 million new jobs over the next 3 years in the retail sector and a mandatory sourcing from SMEs, Opposition parties and allies alike are drumming up support to the view that it is a body blow to the small retailer. They have even blockaded the winter session of Parliament in support of this issue. Some industrial bodies and retailers however have added a third dimension by expressing support to and showing enthusiasm about this move.

Naturally, the question that is doing the rounds is: What is this all about? Is FDI in Retail really a boon or a bane? Apparently the answer to this depends on which side of the table you are standing. SMEs especially are viewing this with interest as encouraging noises are being made, with even the RBI Governor expressing an opinion that FDI in Retail can ease inflation. However there are many small entrepreneurs who do not buy this view either.

The size of India’s retail sector is estimated to be at about 30, 00, 000 crore rupees. Earlier FDI was not allowed in multi-brand retail and for single brand retail it was at 51%. The present move seeks to enhance these figures to 51% and 100% respectively. Both moves have been opposed, though multi-brand retail investment going up to 51% has drawn more flak.

The Central Government has tried to soften the impact by inserting a clause that it will be mandatory to do 30% of the sourcing from MSMEs. However this will apply only to proposals for FDI greater than 51%. Besides, not all MSMEs stand to benefit: for instance, there are many manufacturers and processors in the plastic industry who cater to special requirements and multi-brand retail does not help them in any way. This is just one example while the MSME sector has a long list of industries that would continue to languish.

Likewise, the norm that multi-brand retail will be allowed in places with more than 1 million population is also regarded as beneficial to the foreign investors only since they would be naturally interested to cater to bigger concentrations of population, which typically attract many more small businesses as well.

Another statistic says close to 70% of the retail trade happens in food items and these are sourced locally because they are perishable. It is said that farmers can earn up to 15% of the consumer price for fruits & vegetables – however, it implies the end consumer will continue to pay the same as before, while the intermediaries are edged out by the large format retail players. Hence, only packers and re-packers of food items may be able to participate in this activity, which means the prospect of MSME segment garnering any share is quite limited in the majority 70% business.

Supporters of the FDI move point out that significant investment will be made in backend infrastructure that would improve the supply chain and reduce wastage. Critics point out this is an area in which the longest reigning party had failed utterly during the post-independence period and was now looking for outside support to establish the same. This assistance will naturally come at a price which consumers will have to bear in the future.

It is also said that the inherent competition among big retailers will drive the prices down and consumers can buy products at cheaper prices. Small business owners strongly feel that competitive prices regularly emerge irrespective of the presence or absence of big retailers. In fact, big retailers – in their quest for the most competitive price – have run several small businesses to the ground in the past.

Government spokespersons have pointed out that State Governments will have the final say in this matter because they have to allocate land and permit other infrastructure to the retail players. However this is hardly an effective roadblock. Overseas players are keen at this point of time to establish a foothold, which is expected to be provided by a few States ruled by the party at the Centre. Making an entry and sustaining the presence is important for the moment - growth can come later.

Since the 2008 global economic depression, Asian & other emerging economies have demonstrated better inherent strength, hence these are the places that big economies like USA wish to fish in. America is an economy of consumers. The system puts money in your hands only to take it away on one pretext or the other, including taxes. Credit card is king – owing someone money is fine. So everyone goes out and buys no matter what they do with their shopping later on. This is the habit America wants to spread worldwide.

Detractors argue that, unlike charity, business is an economic activity generating revenues, so any overseas player would love to have a piece of that cake. Allowing them to increase their stake only means they can also take a greater share in the profits out of this country.

One of the commentators on this situation expressed that luxury goods might see an improvement in sales and therein probably lies a partial truth – that the change in norms would primarily benefit traders of high-end goods, as young buyers with money to burn continue to look for newer acquisitions and experiences. However, despite healthy margins the numbers do not add up very attractively as majority of retail trade lies elsewhere.

All these pointers seem to suggest strongly that India is not looking forward to FDI in large format retail and there is no tangible benefit to the MSME sector. From another angle, it is not at all clear how their association with multi-product retail can deliver MSME from their woes. There are about 35 million units in this sector. More money in their pockets could only make them bigger consumers as individuals but as businesses they need something more substantial from the Government than allowing 51% FDI in multi-product retail.