Gainers and losers

Gainers and losers

FDI in retail

The Central government has finally mustered the political courage to allow FDI in multi-brand retail up to 51 per cent foreign ownership,  subject to a number of stipulations. These include minimum investment of $100 million, 50 per cent investment in back-end infrastructure, at least 30 per cent sourcing from domestic small scale enterprises, stores only in cities with at least 1 million population (only 42 such cities in India) and the state governments having the veto power to decide whether to allow such stores or not. After the uproar in Parliament, though there is some uncertainty now, the government will do well to go ahead with the decision.

No policy benefits everyone. There will be gainers and losers. The question is whether the gains will be significantly more than the losses. The first and the foremost beneficiaries would be the urban consumers who will get lower prices, better quality and wider choice. The fear of predatory pricing where the big foreign retailers will drive out all competitors by first lowering prices and then raising prices by exercising monopoly power is totally misplaced. There will be many players - domestic and foreign along with small local retailers. It is impossible to drive all of them away or prevent new players to enter. In any case, the job of the Competition Commission would be to ensure that such a case does not develop. The rural consumers who are net buyers of farm products would lose if the prices of farm products go up in the rural areas as a result of purchases by the new players.

The next big gainers would be the local producers, specially of agricultural products. If the big foreign retailers procure directly from the farmers by eliminating many layers of middlemen, the farmers will get a better price while the final (urban) consumer will also get a lower price.  In addition, there will be less wastage (about 30 per cent of farm produce is wasted in India) if more cold storage facilities, refrigerated transportation and sorting and packaging services are created in the process of developing the back-end supply chain; better quality products. The current local big retailers have not provided these services. That is why many framers’ organisations are supporting FDI in retail.
The many layers of middlemen and mandis which often operate like a cartel (preventing entry of new players and sustaining a huge margin) would definitely be the losers.

Would the owners of local kirana stores be wiped out? First, if they lose from competition from organised modern retail, then they are already losing because of the existence of local big retailers. The entry of a few MNCs with local partners would not make matters worse for them. The kind of stuff that these foreign retailers would sell would be mostly for the upper income classes who can afford to pay the cost of a few miles’ drive (and parking fees)  to a hypermarket and buy branded consumer products in bulk.

Different market segments

The kiranas will retain their advantages in terms of nearness, selling in small quantities (often unbranded stuff) and on credit, no waiting at check-out lane, home delivery and freshness of products – specially of things like vegetables and fish. Many kiranas are already buying products at discount from the cash-and-carry modern wholesalers (like Metro) and selling retail at a profit. So, it is not very unlikely that many kiranas (that too only in big cities) would be wiped out. Second, in an economy growing annually at 7-8 per cent, all the players can prosper at the same time by targeting at different market segments. For example, in China where foreign retail has been permitted some 20 years back, unorganised retail still accounts for only 80 per cent of the retail sector. Third, the sons and daughters of  kirana stores, after getting a school education, are not willing to sit in their father’s store. Given the choice, they would prefer to work in a Pantaloons or Walmart  outlet.

The government would gain in tax revenue from expansion of organised retail.  The unorganised retail sector mostly evade taxes, though they often have to pay regular bribes to local inspectors and political bosses.

Some are arguing that the foreign biggies, because of their global sourcing network, will bring in cheap products from countries like China which will destroy our manufacturing industries. Yes, that is a possibility but note a few points. First, cheap Chinese goods (like batteries, calculators, electrical supplies) are readily available even now in small local stores all over India. Second, consumer durables (like TV, refrigerator, washing machines) made in China (under Chinese brand like Haier) exist side by side with Indian and other brands in modern electronic stores in all Indian cities. Third, some Chinese made products like garments, shoes etc would be legally available in larger quantities. But, then, these goods will be subject to the same import duties, anti-dumping duties etc as permitted under our trade policy. Fourth, if Indian manufacturers can produce good quality products at internationally competitive prices (focus should be on providing the necessary infrastructure and policy support), then Indian manufacturers should also be able to export by using the same global sourcing and distribution channels of Walmart, Gap or Tesco. In a nutshell, the potential gains would far outweigh the losses.   
(The writer is a former professor of economics at IIM, Calcutta)

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