Can FDI in retail displace small shops?

Can FDI in retail displace small shops?

Annapoorna is a street vendor who is watching her booming business slowly slip through her hands. She manages two carts full of fresh vegetables and fruits. She occupies a shady spot near the apartment where I live.

She brings fresh vegetables and fruits every day, which is not to be seen in the bigger retail shops like Big Bazaar.

The secret is she sells all that she gets in a day. Leftovers are sold to small hotels at the end of the day. The only problem is the price. She is a little high priced compared to the big retail outlets, but it is worth it, considering the quality and the convenience of shopping at the doorstep, for the apartment residents and several houses in the neighbourhood. Recently, however, a HOPCOMS (The Horticultural Producers' Co-operative Marketing and Processing Society Limited) van has taken a priced spot opposite her cart. Her regular customers are flocking to the HOPCOMS van that has fairly fresh produce at much more reasonable prices.

While Annapoorna buys the produce from a middleman, HOPCOMS is in direct contact with the farmer and hence is able to avoid middlemen commission, while pricing the produce to be sold to the final consumer. Annapoorna on the other hand has to pay a price to cover not only the farmer’s price but the middleman’s commission as well. In addition, she needs a marginal profit at least to sustain her family.

Therefore, her price is a lot higher than the HOPCOMS price. This is the scenario that the unorganised retail sector in India is worried about. This sector constitutes over 90 per cent of the retail market. There is a lot of debate and discussion about the Indian Government’s decision to increase FDI (Foreign Direct Investment) in retail. The question we need to seriously consider is which one of the two - foreign big retailers or government initiated cooperatives such as HOPCOMS - would eliminate these street vendors and other mom and pop stores.

FDI in retail would mean large-scale establishment of big retail stores across the country. What these stores cannot provide over the street vendors is proximity and the convenience of shopping at the doorstep, especially for commodities such as fruits and vegetables that are required on a daily basis. As for local kirana stores, they provide similar convenience especially when the consumer needs to buy only a couple of commodities at short notice. It would obviously be preferable to visit a neighbourhood local kirana store for something urgent than having to travel to a big retail store, giving discounts on large purchases. Moreover, big retail stores obviously need a lot of space, which is hard to find in our country.  To be able to shop in these places, most consumers will have to travel long distances. On the other hand, cooperatives like HOPCOMS are mobile and can set up shop in any location. Being endowed with government subsidy, these cooperatives might be even able to sustain losses, which are not going to be the case with huge retail giants arising from FDI.

Given that FDI is less likely to displace small shop vendors, it is necessary to understand the need for FDI and the benefits that can be derived thereof. Over the last few years, we have been facing a steady increase in inflation rate. Though our incomes are also rising, our per capita consumption has been on the decline. This is because along with increasing incomes, the prices have also been increasing, leaving very little disposable income in the hands of the consumers.

One of the reasons attributed to inflation is the inefficiency of the distribution networks owing to middlemen who deny fair prices to both farmers and the consumers. On average, agricultural produce worth $12 billion gets spoilt every year on account of poor transport links and inadequate storage and marketing facilities.

FDI in retail can reverse this situation by instilling more efficiency in distribution networks. This can be done by retail giants who have sufficient experience in managing massive distribution networks in their respective countries.

They could establish direct contact with the farmers, totally eliminating middlemen who are the root cause of inefficiency in the distribution networks. They could also provide technical assistance to the farmers in the form of better farming techniques. Bharti Wal-mart in India, for instance, buys fresh produce directly from about 1,200 farmers in Punjab and also helps farmers to improve their yield through better farming practices.  

This step would go a long way in reducing wastage along the distribution network. Delegating this responsibility to these huge corporations is a good move given their ability to exercise economies of scale and thereby reduce costs substantially. This eventually would lower prices.

Those against FDI in retail argue that foreign retail giants might resort to predatory pricing and once competition, especially from the unorganised sector, has been eliminated, they might push up prices to compensate for the loss incurred.

Big retail stores like Big Bazaar and Reliance co-exist with these local neighbourhood stores. There is no reason why this harmony cannot continue even when FDI in retail prevails on a large scale. A more probable scenario would be where these small shops get their supplies at reasonable rates from the business to business channels and still provide the convenience of shopping to consumers who prefer to shop for essentials at the doorstep, instead of having to travel long distances. Nothing can displace street vendors.

(The author is a freelance writer)