Ah yes I know every second soul on this earth is ranting about FDI. Well, here is a little piece from me. I had written it while applying for a research internship on Public Policy.
Like a coin with two sides, every issue can be interpreted to have its own merits and demerits and FDI in multi-brand retail is no exception. However, the key lies in differentiating between foresight and myopia. Allowing 51% FDI in multi-brand retail will surely impact already established system in India’s largely unorganized retail sector, resulting in a redistribution of profits and dividends, which may benefit a large number of other people while it may not be in the best interests of some others. As was the case with the economic reforms of 1991, there are uncertainties surrounding the opening up of our large retail sector to foreign forces. However, we must set aside our xenophobia and look at the issue rationally in its right perspective.
With over 50% of our working population practicing agriculture, but contributing less than 20% to our GDP(CRISIL, November 2010), it is evident that Indian farmers are largely denied their dues and most of the profits are reaped by the middlemen who source their produce to the markets. In India, farmers receive only ~30% of the end consumer price as compared to 50-70 percent in more developed countries (Mall and Singhi, BCG/CII, Feb 2011). Moreover, due to the fragmentation of the current retail sector, the inefficient supply chain infrastructure results in large quantities of produce being wasted. This not only hurts the farmers but also increases prices, thereby affecting the consumers. Professional multi-national companies that will enter markets following the reform would deal directly with the producer and eventually develop cutting edge infrastructure to carry the produce directly to the market. This would eliminate the intermediaries, thus increasing price realization by the farmer by 10-30 percent and reduce handling and wastage by 25-30 percent (Mall and Singhi, BCG/CII, Feb 2011). The farmer not only earns better but his produce is also free from being at the mercy of the inefficient supply chain infrastructure of the fragmented industry.
While India has a rich human capital, lack of quality institutions for higher education and low literacy rate result in large number of youth with an education level of class XII or below. They are not prepared to compete in India’s service based economy. With the set of qualifications that they possess, such individuals, largely from lower middle class families, would benefit from the millions of jobs that the organized retail would create. Moreover, the additional vocational training that the multinationals would provide would not only enhance their personality but also add to their skill set. Additionally, due to increased competition and free market dynamics, it is the consumer who stands to gain. The prices will be curbed leading to higher savings and an overall improvement in the living standard of an average Indian. Not only will the prices of commodities go down, consumers will also benefit from the enhanced variety and quality.
According to a random survey of 1.6 million samples in 2008 by the Government under the Prevention of Food Adulteration Act, about 7 percent of food products are adulterated (Mall and Singhi, BCG/CII, Feb 2011). Organized retail through FDI will not only ensure quality standards but will also bear accountability towards the common man. A greater transparency in the entire procurement process will result in reduced tax evasion. This will eventually lead to huge savings for the exchequer, which can be invested in the country’s other development initiatives such as education or healthcare. The estimated investment required in the supply chain infrastructure for post harvest agricultural produce during the 11th Five Year Plan is Rs. 64,312 crores (Kumar, FICCI, JIPF). Such a large investment requires crucial participation from the private sector and FDI will pave a way for the same.
As discussed, the primary losers in the new system would be the intermediaries and for good. Another set of people who may face certain difficulties are the local kirana shop dealers and ‘Mom and Pop’ stores, who would not be able to compete with the advanced setups and lower prices of the multinational companies and may thus run out of business. However, the impact of organized retail on this fragmented sector would not be as severe as it is projected to be. Firstly, the multinationals would only be permitted to set up their stores in cities with a population of over one million. As per the census of 2011, there are only 46 such cities in India (Census 2011). These cities already have a certain sector of organized retail dominated by local players such as Reliance and Bharti among others. Entry of global players in such markets will only increase efficiency and benefit the consumer. Secondary, kirana stores share certain chemistry with their customers through services such as credits, discounts and convenience among other which no multi-national can provide. Hence, they would retain a certain loyal customer base. Thirdly, the sons and daughters of the owners of these ‘Mom and Pop’ stores would find well paying jobs in these companies resulting in a better standard of living of the family in the long run. Lastly, I believe there is plenty of market both for organized and unorganized retail to thrive even after the entry of global players. McDonald’s did not kill Haldiram’s, neither did Vodafone kill Idea.
Thus, the benefits of FDI in the form of better returns to the farmer, better supply chain infrastructure, increased employment, benefits to the consumer and transparency outweigh a few strict measures that are required to be carried out. FDI in multi-brand retail is a huge leap and as is usually the case with reforms, this bitter-tasting medicine will reap high dividends in the long run.
References:
1. Dharmakriti Joshi, Vidya Mahambre and Poonam Munjal , ‘Skilling India – The Billion People Challenge’, (A report by CRISIL Centre of Economic Research), November 2010.
2. Abhishek Singh and Amitabh Mall, ‘Building a New India – The Role of Organized Retail in Driving Inclusive Growth’, (A report by Boston Consulting Group and Confederation of Indian Industry), February 2011.
3. Rajiv Kumar, FDI in Multi-Brand Retail in India,( A Report presented as Secretary General of FICCI, Japan India Partnership Forum).
4. Demographics of India, Wikipedia, Last modified 27th October, 2012. (http://en.wikipedia.org/wiki/Demographics_of_India)
5. Ravi Aron, “FDI in Indian Retail: The Big Benefits Will Come Tomorrow, Not Today”, Law and Public Policy, India Knowledge@Wharton, September 20, 2012 (http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4702)
6. Census 2011, (http://censusindia.gov.in)
