Financial Daily from THE HINDU group of publications
Saturday, May 20, 2006
Industry & Economy - Foreign Direct Investment
Gradualism, key to FDI in retail
Anil K. Kanungo
With the Government thinking of opening single brand retailing to foreign investment, the issue of foreign direct investment in retail is hotting up once again. The leader of the ruling alliance and its constituents are in sharp disagreement. The debate is whether in the larger interest of the country, this should be allowed.
The is bound to draw strong mixed reactions. The opponents argue that in a poor country like India, where unemployment is still a major problem and a considerable segment subsists on small-scale retailing, the advent of such giants Wal-Mart and Carrefour will pose mammoth risks and dangers.
The proponents, on the other hand, argue that FDI in retailing will enhance the country's exports and open job prospects for millions.
On an issue, which is socially and economically so sensitive and stakeholders such as the Government, farmers or producers, middlemen and consumers have contrasting viewpoints, an analysis of its pros and cons holds significance.
The real advantage of large retailing is for well-developed industrialised society.
Because such a country would have a high per capita income, negligible unemployment rate, least fear of social replacement or displacement, and high quality consciousness. Besides, such society is usually strapped for time, and large stores that carry everything are very useful.
Always looking to source cheap, these mega-stores outsource everything from low-wage, quality-producing countries such as China. As a result, China's exports have gone up and it has become the world's manufacturing hub.
Alongside, it has created employment for millions of Chinese. This is what proponents of FDI in retail are arguing for India also. Global retailers buy about $60 billion of goods each year from China whereas their sourcing is for less than $1 billion from India. So, the scope is enormous.
But can not these mega-stores outsource from India without setting up shop here? In principle yes, but in reality it does not happen because these global giants would like to source their products on a sustained basis and look to establishing close linkages with the local producers and suppliers and that is possible only once they are allowed to open their stores.
Another advantage would be by being closely associated with the local suppliers and consumers, these stores would be in a better position to develop and control the supply chain, including the quality input, the manufacturing process, the design, the standardisation, the labelling, and so on, to suit the changing global requirements.
But these advantages can come only at a price. While these mega-stores may boost exports and buy directly from farmers, invest in food processing and raise the standards of agricultural products, they would affect the livelihood of 15 million small retailers across the country. Though largely unorganised, this segment constitutes 98 per cent of the country's retail trading and contributes 11 per cent of GDP.
With the entry of the mega-stores, many of them are bound to collapse, and add to the already large pool of unemployed. With little formal education/training, these people may not land the jobs that the retail giants will create.
Even vis-à-vis sourcing products, there is really no guarantee that the mega-stores would buy from India. They may well source from equally low-wage countries such as Thailand, Bangladesh, Nepal or China. Similarly, there is no guarantee, or obligation, that they will invest in food processing or bring in modern inventory management techniques that would help farmers sell their produce directly to them and earn a better price. What happens when the farmers are unable to meet the exact specifications and their produce is rejected?
The Government's decision to allow 51 per cent FDI only in single brand retailing confirms that the Government is quite cautious and gradual in its approach to opening up retailing.
This approach of giving local players time to consolidate themselves is the right way to go.
(The author is with Indian Institute of Foreign Trade, New Delhi)
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