FDI in retail: Single brand is no less harmful

Foreign direct investment (FDI) in single brand was first allowed to the extent of 51 per cent in February 2006. FDI in multi-brand retail remains prohibited till date.

The Indian retail sector witnessed FDI for the first time when 100 per cent FDI was permitted in cash and carry wholesale trading under government approval route.

It was brought under automatic route in 2006. In November 2011, the Union cabinet approved 51 per cent FDI in multi-brand retail and increased the limit in single brand retail to 100 per cent subject to government approval.

Following stiff political resistance, traders’ associations and social organisations, the government was forced to back track from its earlier of 51 per cent FDI in multi-brand retail. But in the face of strong opposition to FDI in multi-brand retailing, perhaps negative implications of 100 per cent FDI in single brand retailing could not be discussed. Taking advantage of this, the government has now notified 100 per cent FDI in single brand retailing.

100 per cent FDI in single brand retail would mean 100 per cent ownership to multinational retail giants with a brand name. Single brand retail implies that a retail store with foreign investment can only sell one brand which could be for products or services or could be single and multiple products, or could be manufacturer brands and own label brands. Examples of such brands in food chains are Pizza Hut, McDonald’s, KFC etc. Electronic brands include Phillips, Samsung, Sony, LG, Nokia etc. Volkswagen, Nissan, Toyota, BMW etc. are major automobile brands.

Allowing these companies to open oulets with 100 per cent ownership will have long-term implications for the Indian economy in general and enterprises in this sector in particular. If we look at the international experience, multinational food chains have edged out small food outlets in the UK, which has specifically affected Indians settled in the UK. There is no reason that the same would not be repeated in India as millions of people are engaged in food outlets. These small food outlets face the danger of extinction due to multinational food chains.

If we try to a relate the government’s decision to allow 100 per cent FDI in single brand retail with a legislation called ‘Food Safety and Standards Act 2006’ and recently notified ‘Food Safety and Standards Rules 2011’, then the implication of opening up of in multinational retail chains would be clearer. Recently, notified rules impose stringent conditions with regard to sale of food products which would make the survival of small food outlets almost impossible. Imposing stringent conditions on these small vendors, are destined to favour big companies in food chains.

Brand retail

Opening up FDI in the retail sector has already affected our electronic and telecom industry adversely. A nation which is a world leader in space technology, missile technology, IT and software sector, has been pushed backward by FDI in single brand retail.

Indian brands could not grow because of intense competition from foreign brands and the nation's dependence on foreign countries for telecom equipments has increased manifold during this period, due to FDI in single brand retail. With more than 50 crore mobile connections in the country, there is no significant presence of Indian brands in cellular phones; foreign brands still have the major market share in home entertainment and appliances.

Despite security risks, our government has failed to restrict imports of telecom equipments from China. According to industry’s estimates, if we continue to increase our telecom imports at this speed, telecom imports may exceed even our oil imports bill in the near future.

Thanks to the cost effectiveness, Indian brands in apparel sector have made headway in international markets in recent years. The same is likely to get reversed because of the government’s decision. The government’s notification of 100 per cent FDI in single brand retail is paving the way for foreign brands like Reebok and Nike to have complete stake in their retail outlets in India. As of now, Indian brands rule the markets in India. They may lose markets to multinational giants, as stores opened by them will not sell Indian brands.

The government, which is counting on benefits of FDI in single and multi brand retailing, is perhaps ignoring the adverse impact of off shoring by these multinational retail giants. The government notification says that foreign single brand retailers will have to procure their products from domestic small firms to the tune of 30 per cent.

However, the same is not acceptable to the international trade experts. They believe that this decision could be challenged in the World Trade Organisation where India has given a binding commitment that it will not discriminate between domestic and foreign procurement. Thus this decision would not be maintainable in the WTO.

Therefore. apprehensions of the Federation of Indian Micro, Small and Medium Enterprises (FISME) seem to be true that it would affect the domestic small industries adversely. The government’s argument that 100 FDI in single brand retail would benefit the economy by way of creating jobs in small industries is a misnomer.

(The writer is an associate professor atPGDAV College, University of Delhi)