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FDI in retail : A giant leap forward

Posted by Shreyans Jain Wednesday, 12 December 2012 0 comments

Foreign direct investment (FDI) may be termed as the direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is undertaken primarily  to take advantage of cheaper wages or for special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region.
The retail industry is mainly divided into: 

  1.  Organised Retailing - Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses (eg. Walmart, Tesco).  
   2.  Unorganised Retailing - Unorganised retailing refers to the traditional format of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, confectioners and milk dairies, hand cart and pavement vendors, et cetera. 

The Government of India’s decision to allow FDI in aviation up to 49%, in the broadcast sector up to 74%, in multi-brand retail up to 51% and in single-brand retail up to 100% is a welcome step.

Modernisation of the Indian retail sector is a critical and necessary move towards developing a competitive market framework that does not rely exclusively on indigenous and traditional techniques of production.  The entry of global retail brands like Walmart and Tesco with their modern inventory management practices, supply chain management, new storage and vending technologies and advanced organisational skills will go a long way in fuelling the growth of Indian industries.

Over the last few years, it has been observed that the mere entry of large format retail like Big Bazaar, Big Apple, Reliance, Spencer’s et cetera has revolutionised the retail sector, thereby catapulting the retail sector to a quantitatively different and higher growth trajectory. However, the difference was felt only in a few affluent cities where these retail giants could poach on the clientele who could part with a little  extra money to purchase apparel, cosmetics, grocery, fruits and vegetables, accessories and other general merchandise. Their deeper pockets gave them an unfair advantage to mobilise resources and acquire prime space for their high-volume, low-margins business model. Due to lack of capital, technological expertise and managerial experience, those who entered this arena were largely from the real estate sector and FMCG sector. It is hoped that FDI will lead to a metamorphosis of the retail sector in India. 

It is important to bust the myth that the entry of FDI will sound a death knell  for the traditional self-organised or small-format retail trade. The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India’s GDP. The Indian retail market size is estimated to be $ 500 billion and is one of the top five in the world by economic value. Organised retail accounts for about 5 per cent, which is estimated at $ 25 billion. According to the government, a whopping 10 million jobs are expected to be created as a consequence of FDI in retail in the next 10 years.

Secondly, the ghost of the East India Company that continues to haunt the Indian retailers needs to be buried. It is inconceivable that even after 65 years of independence; some unscrupulous  politicians try to develop fear in the minds of credulous citizens, of the colonial era and the miseries inflicted on the Indian masses by a foreign power that disguised itself as traders and gradually swallowed up the nation’s wealth and resources. Today, the Indian government is capable enough to step in to prevent its own  small trade from being subjugated by foreign giants. 

The self-organised sector suffers profoundly from disguised unemployment and underemployment. The mom and pop stores have been employing increasingly more number of family members over generations, contributing neither to a hike in wages nor to the profits earned. On the contrary, the modernised retail sector will led to the generation of a quantum of semi-skilled and skilled jobs for the youth. Given the high labour intensity of the modern retail sector, a large number of youth will be trained and offered opportunities to earn their living. This will go a long way in enhancing the standard of living of the aam admi (common man) and the development of an abled work force possessing great dexterity and organisational skill. 

The need of the hour is to connect the farm-gate to retail stores. This will greatly benefit the farmers in their upliftment. The investment in backend infrastructure by modern retailers would reduce wastage and allow greater shelf life for farm products. Moreover, this will minimise the layers of intermediaries who provide extremely low price for the crops accrued from the farmers to earn huge profits. As a consequence of this, the farmers would get better price for their crops and would be shielded from the exploitation of middlemen. In addition, the high yielding variety of seeds and better agricultural technologies provided to the farmers will help bring down the cost of production and enhance yields. The traditional kirana stores will become stronger and co-exist and compete with the retail giants.

The modern retailers encourage a healthy competition with the indigenous traders. They seek cooperation of the local ancillary firms in terms of transport and banking services, supply of raw materials and other inputs necessary for production.  This will provide a strong impetus to the FMCG (fast moving consumer goods) sector of India and help it achieve high standards of quality.

Those who are in opposition of FDI in retail must pause to think and realise the immense benefits it will shower on our retail sector and the overall growth of our economy. Had there been no FDI in the Indian automobile, communication, aviation and banking sectors, we would have taken decades to reach global standards and compete in the globalised and liberalised modern world. Let us shun this misplaced fear that FDI will inundate our economy with cheap imports. Instead, these retail chains will help farmers and small and medium scale enterprises to create a market and discover the price of their produce.


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