FDI is no panacea

Some experts have slammed the Aam Aadmi Party and the BJP for being against foreign direct investment in retail.

They appear to look on opponents of retail FDI as Luddites, hostile to new technologies and management methods.

The arguments given by the proponents are three. One, it will signal our openness to foreign investment and will bring in billions in FDI by the largest retail chains in the world. Two, it will transform our dormant agriculture by such new investors investing in warehouses, cold stores, using information technology to track stocks and their shelf lives, employing trained personnel, and innovating robust supply chains from rural to urban areas. Three, it will introduce modern retailing and improve the consumers’ shopping experience.

The opponents have three arguments. One, it will destroy livelihoods of lakhs of small retailers (and commission agents and wholesalers) who will not be able to compete with these behemoth retail chains, with deep pockets and access to cheap loans from their home countries. Two, organized retail chains will use their buying power to exploit small farmers, with most of the savings enhancing retailers’  profits, not to lowering prices for consumers. Three, there will be a flood of cheap Chinese and other goods that will destroy many Indian manufacturers whose costs are high because of government procedures and restrictions.

FDI in retail can be guaranteed not to bring in the billions of dollars as FDI that government expects. This is because these investors are businessmen. Their purpose is to make profits, not to transform Indian agriculture by major investments in infrastructure-cold stores, cold transport, warehouses, apart from improving seeds and agricultural practices etc. In any case they will make such investments only if they are exclusive to themselves or can be rented. Reliance promised all these infrastructure investments when it entered retail. It is now  buying from the same commission agents and wholesalers it was going to replace.

Retail in India will get volume and profits from selling manufactured goods, eggs, meat and milk products, not fruits and vegetables. The investments required for them are huge and not commercially viable. They must be made by government.

Indian agriculture suffers from small land holdings, many intermediaries who take away much of the large margin between farm gate and retail prices. Poor credit facilities for farmers, and government regulations that restrain farmers from selling directly are other constraints. Our agriculture suffers from poor physical infrastructure of warehouses, cold storages, cold transport, urban warehouses, etc. These call for huge investments. They must be made by governments or private investors who see them as commercial propositions.

Governments have not made these investments attractive to private capital. Robust supply chains require investment in infrastructure. Without strong rural presence, it is only marginally effective. ITC’s rural stores have done well in moving urban products to rural consumers. The converse is not yet happening well.

Modern retail chains

Even family owned small retailers can offer modern conveniences to their customers. Some have started doing so. Computers have entered many, for tracking stocks and their shelf lives, making bills quickly, etc. The small Indian retailer has a personal equation with many of his customers. He offers the more impecunious among them, credit, and to many, free home delivery. No retail chain, foreign or domestic, does this anywhere, and not in India.

The best scope for profit in retail chains in India si from selling brands, packaged manufactured products, not fresh products like fruits and vegetables. Yet every proponent of FDI in retail, juxtaposes the ‘logic’ that it will lead to consumers getting  lower prices for fresh fruits and vegetables, consistent quality, farmers getting better prices for them, and profit for retailers. FDI in retail it is said, will transform Indian agriculture, lead to increased agricultural productivity and production, and put India on a sustainable path of high growth.

In practice, multi-brand retail is about selling branded packaged products. Fruits and vegetables are also sold in such retail stores, along with other fresh products like breads, cakes, pastries, etc. These latter might be branded; fruits and vegetables would be sorted for quality and pre-packed but not branded except as being from that store. Some stores are recognized for the quality of their fruits and vegetables. Retail chains are large buyers. Manufacturers of packaged goods are delighted to sell to them because of the quantities they buy over a year.

In the vast geography of india and with limited persona transport, many customers will not go far to a modern retailer. From over 5 million shops and establishments, most will not die. Confined to a few states and mostly to large urban agglomerations, retail chains will have limited penetration. Small retailers will modernize, form cooperative chains to derive purchasing clout, and compete effectively with the new stores. There may not be any large-scale sudden disruption.

Much needs to be done to improve the return to the farmer. Institutional mechanisms, laws and investments, better regulated open markets, open auctions, preventing the estimated 30 per cent that perishes, better roads, storage, cold stores, and lorry transport on a regular basis,  will bring more buyers and sellers to the markets. If there is less perishing of products, fewer  intermediaries, the farmer can pay for these services of information, cold and normal storage, etc.

Retail chains like Reliance, Spencers, the departed Subhiksha, etc have not created these facilities. Policies must encourage and stimulate private investment in agricultural supply chains and information systems. It does not need FDI or retailers to come and do it. It can be done by any investors.

Government suggested a regulator for multi-brand retail. Instead government should encourage cooperatives of retailers to bargain prices with manufacturers and let the CCI regulate for competition. Proponents of FDi in retail exaggerate greatly its possible beneficial effects for the Indian economy. Opponents who cry of doom are also over reacting. There is no harm in approving FDI in retail. It will not transform Indian agriculture, investment or benefit many consumers.

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