Friday, December 16, 2011


Government of India seems to be on the back foot while defending its sudden decision to allow foreign direct investment in the retail business with a hope to attract some of the global retail chains so that the rapid slide in Rupee's value could be stemmed. While there is considerable opposition to the move, some genuine and others political, there is no denying the fact that the decision was not timely and such a decision could have been taken after in-depth consideration of the impact of foreign retailing giants establishing their foot prints in the country. No doubt there are significant advantages as well as disadvantages for the country and a final decision can be taken only after the risk-benefit aspects are fully studied.

Look at the position taken by GOI as reflected by the grand statement by the Commerce Minister extolling the virtues of opening the retail sector to foreign direct investment through a series of glittering advertisements in almost all news papers immediately after the announcement. It gives a rosy picture to the citizens about the advantages of major global retail giants coming to India. However a close look at the ground reality will tell a different story.There appears to be a goof up regarding the number of towns, each with more than a million population eligible for setting up shop by the MNC retail chains and now it turns out that in stead of 53 cities mentioned by the minister, only 46 urban entities exist in the country that are eligible to attract FDI! Besides 25 of the above are under the administrative control of non-UPA governments which are hostile to the new policy leaving only 21 urban entities available to foreign companies to invest. The opposition party BJP is so hostile to the policy that one of its senior members from Uttar Pradesh even threatened to firebomb the foreign controlled super markets if established in that state!

Keeping aside the politics those who are stake holders in this development must introspect regarding the outcome of this policy under which global giants like the Wal-Mart, Tesco and others interested can set up modern state of the art super markets in some states in the country. A moot question is whether these MNCs will be interested in entering India under such a hostile environment and whether the potential business volume can justify huge investments in the area. Also to be pondered by these companies is how any one can manage access to agricultural and horticultural produce from the distant hinterlands of the country where average holding of a grower is hardly two acres. There are at least 200 million farmer families who need to be approached and linkage established for a cooperative partnership can only ensure regular supplies to the super markets. Is this not a mega nightmare that can haunt any investor? If GOI is to be believed these MNCs would invest 100 million dollars for back end operations like procurement, sorting, cold storage, refrigerated transportation etc and also would buy 30% of their product portfolio from SMEs though this provision does not apply to food products. But who will invest on the power generation, water accessing, roads and bridges and other accessory infrastructure so vital for protecting the quality and nutrition of the food handled by them? 

The claim that the new "policy" would generate 10 million jobs in 3 years seems to be a pipe dream and on the contrary with automated handling machines with capacity to be used by these giant companies, likelihood of some unemployment cannot be ruled out. Allowing for an attrition of 10% of the small traders, it is to be expected that about a million families will be adversely affected forcing them to seek their fortunes elsewhere. The earlier policy of allowing MNCs into wholesale sector was indeed sound because these outlets serve the small traders admirably well and many traders operating in far away areas, at considerable distances from major towns and cities use these "cash and carry" business organizations to procure their requirements for selling at a higher price locally, eking out a decent living. Even allowing 100% FDI in single brand retail may be acceptable because it can again serve as a feeder to thousands of small retailers operating in distant places.  

It is claimed that under the new FDI policy in retail, farmers would get a better price for their produce as there might not be middle men in such transactions between the Retailer and the Farmer but if the experience in other countries is seen such a dream may be transient till the competition from the local players is killed during the first few years. What prevents the MNCs from accessing materials from out side the country where they are cheaper and shun the local suppliers in the long run? China is a predatory country that can out price suppliers from any part of the world and some of the large retail players have established and cozy presence in this country. Under such a scenario can the farmers in the country expect higher prices to their commodities? If some of the large farmers in Punjab are to be believed entry of PepsiCo two decades ago has improved their productivity and profits very significantly but it must be borne in mind that PepsiCo is not known for its retailing business, being best in manufacturing processed food products of global repute. Will the retail MNCs provide support to the farmers the same way as PepsiCo has done for tomato and orange or ITC has done for wheat in Madhya Pradesh? Doubtful!

As for consumers there might be some initial advantages because of the ability of MNC retailers to practice predatory pricing for pushing out the local traders and domestic organized retail chains for establishing their supremacy in the market. The variable pricing practices in vogue in many developed countries cannot be repeated in India as the Maximum Retail Prices (MRP) have to be printed on the label as per Indian law. The usual strategy of a product being priced differently from shop to shop and for varying prices in the same shop over a period of time, for cross subsidization, cannot be deployed in this country because of the MRP provision. History is replete with examples as to the long term endurance of MNCs, sustaining losses for more than a decade, eventually able to recover their losses by extinguishing the competition. A look at the experience of Indian companies like Fortune group or Reliance group in retailing during the last 5 years will tell a different story and some of them have not been able to reach even 10% of their targeted volume of business with accumulated losses estimated at billions of rupees during this period. Domestic retailing giants have not been able to capture even 5% of the retail market which is predominated by more than 8 million small traders even to day.

There are some apprehensions that the unorganized sector of retailing might suffer if FDI is allowed but if the history of Indian retail industry is examined one can see the role played by them in making the life of Indian families comfortable through their friendly service in contrast to the "mechanical" or 'Robot" like service offered by super markets. Indian traders, most of them, thrive because of the confidence they enjoy from their customers and friendly service provided. It is inexcusable on the part of GOI not to have done a scientific study regarding the impact of large retail chains on small traders during the last few years from which valuable lessons could have been learned before formulating the new FDI policy. There is a feeling, not supported by any data, that Indian families are returning to their familiar "mom and pop" stores in increasing numbers after the initial euphoria of shopping experience in large super markets has declined. The reason for this, if true, must be found by field studies which only can bring out the ground realities.   

Whether the FDI policy on retail has been rolled back or suspended or on hold, the ability of the Central Government to clear the same is doubtful because of the "coalition dharma" to which most policy failures are attributed. Political survival seems to be more paramount than the interest of the country and if and when the policy is resurrected the country must  ask hard questions regarding various uncertainties cited above. Assuming that the doors are opened for retail FDI eventually, another million dollar question is how many major players will actually enter the country against the pre-conditions imposed and restricted areas of operation available to them. Any how the road ahead for the foreign companies may not be as smooth as they hope for and it may take years, if not decades, before they can establish any sizable presence on Indian soil!


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