It seems the Government has finally decided to completely do away with the policy change regarding FDIs in the Retail sector and there have been a wide range of mixed reactions coming in from every direction.
I remember having first read about such a proposal in The Economic Times around 3 months back and it did seem promising. The article elaborated on how FDIs would be beneficial for the "Indian economy".
3 months to that day, there is much talk about whether or not FDIs in the retail sector should be looked upon as an opportunity to benefit or as a grave threat to the domestic retail sector.
Most of the articles I read covered the issue either in black or in white. However, it is important that we understand such issues are best understood in the grey. Before I begin an amateur assessment of the issue, let us first quickly recapitulate what status quo permits.
a) FDI in Multi Brand Retail Trading (MBRT) is NOT allowed.
b) FDI in Single Brand Retail Trading (SBRT) is allowed.
The Government has sighted a increase in foreign investment in the supply side infrastructure as its principle rationale in adopting this change in policy. The principle arguments for the move includes removal of a certain "middleman" between the farmers and the retailers who are responsible for a lot of inefficiency in the food supply chain. Lack of Infrastructure is noted in figures like how India's cold storage capacity is 23.6 million MT whereas its annual production is 200 million MTs - principally causing huge losses to farmers as their produce literally, is left rotting.
In the absence of FDIs in the retail sector, any development in building infrastructure capacity has be low and insignificant. The government wishes to raise a minimum of $100Million from such a change in policy. Talking of numbers, another lucrative figure is the supposed creation of $1.7Million jobs over the next 5 years. In status quo, due to the presence of so many intermediate players between retailers and the farmers, the latter get only 1/3rd of the prices at which the products are sold. Apparently, in countries which allow 100% FDIs in the Retail sector, the professionalism ensures a stricter, more efficient supply side chain which ensures farmers receive as much as half the price at which the products are sold.
However, in spite of the obvious gap in status quo and the need of change, there has been rampant criticism of the move. Professor Sukanta Choudhury of Jadavpur University wrote a very justified article in The Telegraph yesterday and his points do really make a lot of sense. He speaks how this policy change is misleading and is not going to help - but only worsen the present situation of the retail market and associated employment. Professor Choudhury's principle argument is hinged on a sympathetic view towards the small shopkeeper down the street - The
kinara store. The incredibly humongous number of such retailers shall be threatened with extinction if big players of international reputation like Walmart is allowed inside with exploitative market power.
The Professor makes more points which seem to make the proposal's idea look just too naive to have even been conceived in the first place. He talks about the common economic jargon - competition begets monopo
ly. My small understanding of economics leads me to believe that this point is largely based on the fact that retail "chains" have huge initial capital investments due to infrastructure development. Fair, enough. He builds on the argument of the local retailer's extinction to point out how any creation of jobs by adopting such a policy is at the cost of a greater number of jobs that are linked unofficially to the existing network of retailing existing in India.
He speculates how the Government's idea of removing the "middleman" is at the cost of creating and legalizing another set of middlemen - the foreign brands - who, in due course of time, might even lead on to deciding land use patterns in India (Since such retailers will be directly dealing with farmers and might coerce them to grow upmarket crops only).
These points, more or less, very well summarize the overall dissatisfaction that several commentators have made over the proposal.
However, what every single one of these commentators have missed out on, is the proposal itself. The first two lines of the proposal - upto 51% FDIs in MBRT and 100% in SBRT - is just a prologue to the story which unfolds. Here's a link everyone should go through :
PBI, GoI
As you might have noticed, the proposal has made several riders, sighted several examples and has made it more than convincing that it is quite feasible. Lets first discuss the MBRTs.
In such cases, the proposal strictly prohibits branding of food commodities like fruits, vegetables, grains, pulses, fishery, meat products, etc from being branded. This shall ensure the absence of any Brand-Image when it comes to daily utility goods. An important rider in the expansion of FDIs in MBRTs is that at least 50% of such investments "shall be in developing back end infrastructure". This is ideal since India primarily faces huge inefficiencies in this exact section of the supply side of the Retail sector - processing, manufacturing, etc.
Examples of China and Thailand show how such measures have shown positive results. Other economies close to India's, South Africa and Brazil also have such liberal policies in as far as the retail sector is concerned!
Another important, probably the most important rider, is that for SBRTs, for procurement of holdings more than 51% (allowed in status quo) at least 30% of manufactured products should be from Small scale industries indigenous based in India. For those who feel the proposal is inconsiderate towards the local industries, there is hardly any need for more to prove the fallacy in your thoughts.
The last absolutely important point I shall ask you to read is how this proposed policy shall be applicable only in 53 cities across the city (which qualify with population more than 10 lakh) out of the 8000 prominent towns and cities.
Now, let me tackle the point on extinction of local retailers. In the short run, it is quite obvious that such local players already have an existing network of supply chains. As long as these international players don't establish their own infrastructure, such retailers, as well as retain chains like the Future Group in India, will stay in an advantageous position. So, the extinction point is non-applicable in the short run.
Lets talk about the long run now. The retail sector in India is tending towards perfectly competitive. This is because there are just so many retail shops. The idea of a
kinara shop comes from the fact that there is a retail shop in India, round the corner. Its easy to understand how, with two retail shops right next to each other, no one will try to sell the 'same' product at a different price. Thus, there exists equilibrium prices for every commodity. Retail chains like Big Bazaar already exist in India, and over the years NO retail shop has had to close because of people abandoning them for Big Bazaar.
The reason? Simple consumer psychology. Big Bazaar does give considerable discount for items when you buy them together. You won't see someone going inside the big supermarket outlets for, lets say, one loaf of bread. This is where the
kinara shop comes in. Even if tomorrow, we have a Walmart next to a Big Bazaar, understand that their supply side economics wont be very different and consumer psychology is not going to go through a radical metamorphosis overnight.The retail shops round the corner has always thrived on such dispersed small pockets of sales. And they have, and will definitely not, run into losses. This also nullifies the argument on how the projected increase in employment is misleading. It is definitely not.
The point on "Competition begetting monopoly" is also wrong because unlike a natural monopoly where competition does beget monopoly, with the expansion of the industry (by increased capital investment) does not reduce a single firm's profits since the relevant demand is not in the region of economies of scale, but hugely more.
Also, if I may add, this proposal strongly asserts that only the government shall be procuring agricultural output instead of the corporates. This will ensure events like Reliance Fresh's pull out from UP a few years back don't repeat.
So that's about a refutation to all major issues that have cropped up against the proposal. I certainly don't see a reason for the bureaucracy to not discuss the issue more and maybe try and arrive at solution.
(PS. I am open to accepting that my logic might be at fault since my economic knowledge is barely 5 months old. But, I'd definitely like positive criticism so I can better my arguments).
