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Is FDI in retail really a welcome move?

Last Updated: Saturday, July 17, 2010 - 16:49

Reema Sharma

The government’s inclination towards allowing foreign direct investment (FDI) in the multi-brand retail sector has the potential of opening up a Pandora’s Box. The fate of mom-and-pop stores and big retail chains is at crossroads.

The country’s retail sector accounts for over 7 percent of the total workforce and some 30 million people are dependent on it. Therefore, FDI in retail is definitely a politically sensitive issue. With over 98 percent of India`s retail trade in the unorganised sector, FDI here has the potential to wreak havoc. Keeping in view the risks to small retailers, the government’s floating of a discussion paper is a matter of serious concern.

India allows 51 percent FDI in single brand retail; mostly in sportswear and luxury brands; and 100 percent FDI in cash-and-carry wholesale and retail, but multi-brand retail, for the moment, remains off limits. It is still not clear how much FDI the government is willing to allow in the latter. With all the fuzzy speculations of investment in this sector, it is certainly not a win-win situation.

With the rise of Indian supermarket chains belonging to corporations such as Reliance, Birla and Bharti, the retail sector has seen a growth of 40 percent in the organized, modern retail in the last five years. From the initial 3 to 4 percent growth, the retail chains have come a long way. Small kirana stores are already feeling the pressure of competition from these indigenous supermarket giants. Multinationals like Kafu, Ikia, Shoprite, Wal-Mart, Tesco, Carrefour and Woolsworth will further add to their woes.

It is believed that foreign investment will help optimize the country’s retail supply chain. That refrigerated foodstuffs including dairy products, fruits and vegetables will have proper storage facilities. It is also argued that big retailers will carry out handling, distribution and transportation of agro goods more efficiently. Is that all? Well, one can look at the other side as well.

Predatory pricing by retail giants will marginalise the small retailers in the country. Big Supermarket chains, which opt for bulk buying, will easily meet costs, but for local vendors or traditional retailers the competition will be too tough to handle.

The government has said FDI should be allowed with stiff conditions to ensure that companies invest in creating agricultural infrastructure. But, how will it ensure that small farmers do not become slaves to the supermarket giants? Will a regulatory body constantly keep a tab on the buying and selling of agro goods? With a ‘Consumer is King’ agenda, foreign retailers will do their best to maximize profits and not bother about our farmers. They will also crush the large number of family-run shops, small and medium traders and street vendors.

Conclusion

No one can argue for a blanket ban on FDI in retail, but the key question is that whether we are prepared to give multi nationals full access to our retail industry. Look at what the Chinese did in the retail sector.

China, despite its economy’s (over)-dependence on export, adopted an extra cautious approach vis-à-vis retail reforms. Beijing started allowing minority investment in 1992. Till 2001, the year China joined the World Trade Organisation, Beijing restrained retail FDI in just 11 cities. It was in 2004, China opened up its retail industry, which gave a much needed boost to China’s exporting sector. But the Chinese state still offers financial help to its domestic retailers, indicating that it won’t give a free hand to the global retail giants.

India should also take such a cautious stand while opening up the sensitive retail industry. A reckless approach will be insidious for small retailers. If proper regulation and monitoring are not put in place, the losers will be the country’s small scale retailers and unorganized farmers.

First Published: Saturday, July 17, 2010 - 16:49

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