FDI in retail: Global players to challenge mom-and-pop shops

Last week’s decision of allowing FDI in multi-brand retail, opening domestic airlines to foreign carriers, throwing open broadcasting sector, tweaking norms on single brand retail and allowing divestment in four PSUs, all at one stroke, may have helped the government shed its image of past eight years’ policy inertia, but they have also raised many eyebrows.

The stock market opened at its 2012 highest after the decision was unveiled implying investors have applauded the measures (though it didn’t last long), but concerns on implementation remain. India Inc too has been celebrating that their demand on reforms has been heard, finally.

But, the decision has sparked protest across the political spectrum, with the government’s own ally Trinamool going ballistic and threatening ‘hard measures.’ It was Mamata Banerjee’s threat that led to the UPA reversing its decision last year to allow foreign firms like Wal-Mart and Carrefour to invest in Indian supermarkets. Concerns have been raised that permitting more foreign investment in Indian retail, airlines and broadcasting will hurt small-time local operators. Several traders’ associations have asked their members to shut their establishments to protest the government’s moves. Economists too have joined in flaying the move. Analysts say the government has flung back into reforms agenda. Not just that, finance minister P Chidambaram has promised more reforms by October 30.

The September 14 decision –bold one considering the fact that the government has been on the backfoot for long in the backdrop of alleged scams and charges of policy paralysis -- comes at a time when India’s economic growth has slowed and ratings agencies have been warning of the drying of capital inflows and urging slashing of subsidies.
The decision on retail is a big step in strengthening organised retail in the country, says Rajan Bharti Mittal, Vice Chairman and MD of Bharti Enterprises and a 50:50 partner with Wal-Mart in cash and carry operations. Mittal says once the decision comes into force, it will take 12 to 15 months for the retail companies to open their first stores in India and it will help create more jobs. Bharti Wal-Mart is a major supplier to Bharti Retail, which runs over 205 retail stores in different formats under the ‘easyday’ brand. Other protagonists of the new reforms say foreign players will have access to a large consumer base, while Indian companies will benefit by global best management practices and technological know-how. There will be investment in storage and transportation infrastructure, technology and supply chain operations, they say.

Fierce competition

Those opposing the move are of the opinion that the neighbourhood ‘mom-and-pop’ stores will gradually vanish as they will not be able to withstand fierce competition. “For a few hundred jobs, the government is going to take away a few thousand livelihoods,” remarks Mahesh C Purohit, eminent economists and director, Foundation for Public Economics and Policy Research. He opines, the experience of these foreign players opening stores in other countries have not shown any encouraging results.

“Moreover, these are the people, who will run away with their capital at the first opportunity if the country plunges into any kind of economic crisis,” he argues.  The government too has cited in Parliament last month a global report on Wal-Mart saying FDI in multi-brand retail without adequate safeguards will lead to widespread displacement and poor treatment of Indian workers in logistics, agriculture and manufacturing.

The world’s largest retailer Wal-Mart is among several other global chains waiting for implementation of 51 per cent FDI in multi-brand retail. Metro, Carrefour and Tesco are others. The government on its part has tried to take some steps to protect Indian interest. It has said that such outlets have to be set up only in cities with a population of more than 10 lakh, with flexibility assured for hill states. The Centre also left the decision to actually give permission for such enterprises to the state governments.  A high-level group under the minister of consumer affairs has been assigned to monitor the retailers, hoping that steps would check malpractices and help the retail industry contribute more to India’s GDP.

At present, retail accounts for 14 to 15 per cent of country’s GDP. The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world. According to CII, the organised retail trade in the country is estimated at $28 billion, just about 6-7 per cent of the total retail market. This is expected to shoot up to $ 260 billion by 2020. The total retail market, according to the CII-BCG study, is projected at $1,250 billion by 2020. India’s retail employs about 40 million people or 3.3 per cent of the total population. A vast majority of the unorganised retail shops in India employ family members, do not have the scale to procure or transport products at high volume. The entry of foreign brands are expected to solve these problems. There are still some states, which are not convinced.

While Bihar, Kerala, Madhya Pradesh, Tripura, West Bengal, and Odisha besides BJP-ruled states like Gujarat, Madhya Pradesh etc had opposed the decision, chief ministers of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttrakhand, Haryana, Manipur and Jammu and Kashmir have gone in favour of it. The divisive FDI, which has polarised the Congress and other Opposition parties, is a battle which has just begun.