FDI in retail: Who won, who lost?

December 07, 2011 05:57 PM

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Moneylife Digital Team

The face saving act by the Manmohan Singh-led UPA government and the show of strength by the opposition seems to have defeated and denied consumers a chance to buy good quality items at reasonable rates The deadlock in Parliament created on the issue of allowing 51% foreign direct investment (FDI) in multi- brand retail and 100% FDI in single-brand retail was finally broken when the Union government led by Dr Manmohan Singh decided to put on hold its decision on FDI in retail. While the political parties may have their reasons for opposing the decision by putting it on back-burner the government has denied a fair chance to consumers to buy at reasonable price. The sad part is that the proposal comes after nearly 14 years when the government first liberalised FDI in the trade sector by permitting 100% FDI in cash-and-carry wholesale trade and nine years later, 51% FDI in single brand retail segment. We dont expect the government to revive this (FDI in retail) legislation anytime soon given the lack of numbers and impending state government elections in the next 12 months. We expect the proposal to remain in cold storage and meet the same fate, which several other government proposals like the urea policy, goods and services tax (GST), direct taxes code (DTC) and land acquisition have met. We will be positively surprised if it goes through during the tenure of the current government, said Prabhudas Lilladher Pvt Ltd in a research note. The governments decision not only brought forward the differences between political parties, but also showed different tones of industry bodies. Initially, the Confederation of Indian Industries (CII) took a cautious approach by calling for a calibrated approach for introducing FDI in the retail sector in terms of the percentage and minimum capitalisation requirements. On the other hand, the Federation of Indian Chambers of Commerce and Industry (FICCI) welcomed the decision and said that it would create big employment opportunity in the country. Within a day CII came out strongly in support of FDI in retail. In a release, it said, FDI in multi-brand retail will give a boost to the organised retail sector, which positively impacts several stakeholders including farmers, consumers, MSMEs and hence, the overall economy. FDI in retail would not only have brought more investment in the sector but would also have brought higher efficiency and more jobs. The Indian retail sector requires a new level of efficiency in the chain that will bring higher value to farmers, create millions of new jobs in the organized sector, and lower prices for the final consumer. From the farmers perspective, organized retail has the potential to drive efficiencies in this chain by increasing price realization for farmers by 10%-30% through sourcing directly or closer to the farm, by reducing handling and wastage by 25%-50% through consolidation as well as investments in technology, either directly or through aggregators and

by upgrading the farmers capabilities by providing know-how and capital. However, this would be distant dream now. While there is a remote possibility that this decision would become reality through some give and take or appeasement of allies, watering down of the proposal, evolving a consensus amongst all stakeholders is a cumbersome process and will take its own time. Going by the fate of several other policy proposals, it would be a big surprise if the proposal goes through during the remaining term of the Manmohan Singh government. According to a CII study, opening up of FDI in retail can increase organized retail market size to $260 billion by 2020. This would result in an aggregate increase in income of $35$45 billion per year for all producers combined; 3-4 million new direct jobs and around 4-6 million new indirect jobs in the logistics sector, contract labour in the distribution and repackaging centres, housekeeping and security staff in the stores. The government also stands to gain by this move and can be expected to receive an additional income of $25-$30 billion by way of increased tax collection and reduction of tax slippages, the study said. Organized retail share in countries of comparative development such as China and Malaysia is much higher. For instance, in China, the organized retail is estimated at 20% of the total retail sales, whereas in India, it stands at a miniscule 4%. Other South East Asian countries, too, have much larger shares with Indonesia at 30%, Thailand at around 40% and in Malaysia as high as 55%. A doctor, an engineer, and a politician were arguing as to which profession was older. The doctor said, Well, without a physician mankind could not have survived, so I am sure that mine is the oldest profession. No, said the engineer, before life began, there was complete chaos and it took an engineer to create some semblance of order from this chaos. So engineering is older. But, who created the chaos? the triumphant politician calmly said. Chaos appears to be indeed made by politicians, as one can see.
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Reasons to oppose FDI in Retail, A Big No to FDI in Retail.

51% FDI In Retail: Indian government has allowed 51% FDI in multibrand retail and 100% FDI in single brand retail, a move for which Indian government is getting praised by foreign companies like WalMart, Carrefour, Tesco, Adidas, Gucci etc . Now what is FDI in multibrand retail and single brand retail or what do you mean by FDI in retail. Multibrand is many brands under one store i.e. Big Bazaar where multiple brands can be found under one store is multibrand retail. Single brand retail is the store that sells only one brand i.e. you must be knowing exclusive showroom of Spykar or Levi Strauss, these are single brand retails. Companies like WalMart, Carrefour, Tesco, Adidas, Gucci etc. companies have their eyes set on huge still unexplored retail sectorin India but they were not able to set foot in India because of the restrictions imposed by Indian government. Are We Not Capable Enough to Run Our Own Business: The decision of government to allow FDI in retail raises doubts on our own ability to create an ever-growing retail business in the country. The question is not just about allowing FDI in retail but also its about how much foreign participation should Indian government allow in our economic system and take care of its own people. Government is saying that it will create 1 crore jobs in the next 10 years, but its forgetting the fact that selfemploymentopportunities on which our retail system at present works will get destroyed, and at a time when we needed to promote selfemployment in our country as getting a job is getting tougher and tougher and bringing FDIin retail would even add fuel to the fire. I have to say Thailand is a recent victim of FDI in retail. Nearly 60% of small businesses got shut down within no time and there exist a monopoly of few such big players. Does Money Mean Everything to Our Government: Our government has been sold out to the idea of bringing $590 billion and hence took this decision to bring FDI in retail. Our retail business never fell short of funds then why do we

need to bring FDI in retail. The fact is our retail business ran out of customers in many cities, however, street-corner shops kept doing fabulous business all over the country apart from the 53 major cities that the government has decided to open mega stores for international retail business giants. Theres really no need to bring FDI in retail at this present moment in Indian conditions. The retailers would get affected adversely. One suggestion is government should allow it in wholesale so as to make wholesale distribution equal to root out inflation from the country rather than forcing it on retailers. Doing it in wholesale will create boost for retailers and also for the consumers which in turn result in smooth supply of the products. Save The Street Corner Shops: Our government is simply not interested in verifying truth, and is interested in drawing its own conclusion by bringing FDI in retail and showcasing its own way about it and saying its better than everything else. Reforms need to be done and nobody would have an opposition to that if theyre doing for the right reasons, but please dont make reforms look ridiculous than being practical at all. The government lacks true vision to go ahead with reforms. Reforms as I said are all right but that doesnt mean we keep opening up areas in which we can do well without reforms. A quarter of a century ago in United States WalMart was doing exceptionally well, but wherever WalMart store came up, dozens of Pop-and-Mom stores in small neighbourhood around the mega store went out of business, no matter how good those small stores were and no matter how good those couples. This is Not Our Way of Doing Business: Obviously, a Pop-and-Mom store cant compete with a giant like WalMart. As in the US the free market economy exists death of innumerable Pop-and-Mom stores didnt make any difference because Survival of the fittest is the ultimate slogan of the free market economy there. India isnt US, thered be uproar if such stores keep dying everyday and there would be a sense of instability within the system as a whole. People will lose theiremployment, a business that they were running from years. Do we want such a system in our country? Basically, street corner grocery shops have a very personalised style of doing business where each customer is special and gets customised treatment. In contradiction to this when we go to a megastore we realise how impersonal are the services there. There, a customer is only a person who flaunts his wallet, stuffs things in his cart and, pays the bill and walk away. On almost every occasion, he doesnt know the name of any person in the store nor does the person behind the counter know what the customer name is, the relationship is so impersonal. Do you want such stores in our country? So, 51% FDI in retail business in 53 big cities is like adopting a new culture of doing business. Impersonalised culture has already replaced personalised culture in many cities and things are getting bad to worse and yet the common Indian man prefers personalised store more than impersonalised ones. Government doesnt wish to consider this subtle difference of the economic system in the retail sector. Government says FDI will control food inflation, I wonder how are they interconnected to each other. There's no proof that FDI in retail will control inflation, hence this claim lacks credibility. Nothing Against WalMart or Any Other American Company: It has nothing to do against WalMart or Carrefour or Tesco or any other multinational. This is only offering a reasoning why 51% FDI is not welcome in Indian conditions. Theres

absolutely nothing wrong in learning good things from anybody, we shouldnt weigh profit and loss only in terms of money, which government is at present doing. However, advocates of this idea would say that WalMart, Carrefour and Tesco and others would only operate in 53 major cities where a personalised system of doing business doesnt work, but this argument is hollow and has little substance. Major Indian cities, too, are made up of smaller neighbourhoods where still a nukkad like atmosphere exists and its not vanished completely yet, where a Mr Mishra knows Mr Gupta and Mr Gupta knows Mr Tripathi and where marriages and deaths are matters of everybodys concern. Mega stores may have certain advantage but the weight of lost advantages would be more than the weight of advantages gained, hence the 51% FDI in retail business is not welcomed. We dont want Indian culture to die just for the sake of those $590 billion, theres something called humanity and culture that we need to preserve and that means more than money.

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Anonymous | December 9, 2011 - 5 weeks 3 days

I really do not see the reasoning behind saving the mom and pop retails shops. Many of these shops are not managed properly, you will find expired products lying there, sometimes not clean and not many product choices. The owner of the shop is sitting on the counter and has employees which may be paid not that well at all! So I am really not understanding the reasoning behind "protecting" these shops against FDI retailers. I really

feel that its majority and efficiency should always lead the way...if the majority(that is citizens/consumers) feel they benefit shopping at these mom and pop stores they would chose to go there and if they feel they would benefit shopping at FDI supported Retail stores, they would go there. This is exactly like supporting govt. owned industries. We,the tax payer have to support these govt owned companies even though they make losses! These companies make losses due too many reasons like in efficiency, no vision, crap and inefficient employees, nonexistent accountability...why should citizens pay for something so lousy! Its like we promote lousiness! We as humans/citizens should always promote constructive growth, efficiency and ethical vision and good of all not protect the good of minority at the expense of inefficiency and marring growth. If there is something which govt. should strive for is eradicating poverty and standard of living of the poor and its citizens. It can start by passing policies and laws which stop corruption in Govt., then focus of ways to improve infrastructure of the nation, generate employment for poor (not protect business of the minority!)...the list can go on... reply shailesh549 | December 1, 2011 - 6 weeks 4 days

FDI will enslave India and I've no doubt about it, we will lose our freedom of expression with FDI coming in retail, I can't tell right now because it's not been implemented yet, but sooner than later as government is so adamant and have the power and strength to implement it will go ahead and it'll definitely hurt the retail business for sure, you can't ignore the fact that Thailand was so miserably affected with the inclusion of FDI in retail and I see the same thing happening with India. Pro FDI people giving examples like if you need milk you won't go to Walmart you'll obviously go to local grocery shops, by giving such inane examples won't answer the question as to why people are opposing FDI, the present government wants to make India enslave just like East India company did a couple of centuries ago. This is harmful for our economy and it's a high time we think how much foreign participation we should allow in our economy. reply Anonymous | November 30, 2011 - 6 weeks 4 days

Hey guys, cool ....... You actually are diverging from the core issue of the FDI to retailers. FDI stands for Foreign Direct Investments, and even it comes into the picture the PAAN-BIDI stockist may not be affected as others. In such sense the FDI is not the appropriate elective. Please see some graphs about the sharing of income of these multi-brand / single brand companies, you can use google for this, of-course. That will focus who does FDI need !! Are there any scenarios where these actually invest for the development of the manufactures/producers, rather the output (the goods)? So, if you are a businessman or want to be, think about and mind... As I believe, no one chooses to loose the freedom of trading than off-trade the others and own-self A so called 'employment' reply shailesh549 | November 30, 2011 - 6 weeks 4 days

Don't compare Paan Shops with FDI in retail, your excuse is inane, FDI in retail is not acceptable at present Indian conditions. We need reforms and even I do support that, but that doesn't mean we should bring reforms on things where we can do well without reforms, you see an example of Thailand where 60% of retailers lost their source of income due to FDI in retail, Thailand is a developing country too like India, we can prosper by own first and then allow FDI in retail, at the present moment I don't support it. reply Anonymous | November 30, 2011 - 6 weeks 4 days

I totally disagree with above reasons. Just because of nukkad shop we should not bring big business is insane. I have a shop in authorized govt shopping area but my business is hampered just because people like you opened shops in their home. I suffered just because I followed the right way. Secondly see all the paan shops you'll find all over the places in India. Yes they provide job for some people but how many people are suffering because of those shops. Health problem, messy areas look spitting all over and empty satches of paan masala and growing bad habit of tobaco amoung youngesters. So don't be shellfish and promoto FDI in retail. reply

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The big picture on FDI in retail

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FDI in retail will bring down inflation by investing in supply chain logistics.

India's FDI inflows have improved since 2005, perhaps at China's expense. In this context, the expected FDI inflows from retail are not significant. However, retail FDI can lead to FDI flows in other sectors and improve our BoP situation.
Foreign direct investment (FDI) in the retail sector has been at the epicentre of national debate. Much has been said on India possibly losing out on investment by sending a wrong policy signal. But do we really need to get so worked up?
INDIA AS FDI DESTINATION

Considering the anticipated level of inflows on account of FDI in retail, there may not be much reason to worry. During 2000, India attracted significantly lower FDI ($3.5 billion) than many other South-East Asian countries, such as South Korea ($10. 5 billion), Thailand ($6 billion) and Malaysia ($5 billion). However, an interesting pattern has started to emerge since 2005. FDI inflow into India increased by leaps and bounds, from $7.6 billion in 2005, to $35 billion in 2009. FDI flow in the whole of East Asia and the Pacific remained more or less constant during this period $104 billion in 2005 and $102 billion in 2009. For China, the figure is $79 billion in 2005, and around $78 billion in 2009. In 2000, India's share among middle-income countries, in terms of attracting FDI, was only 2.4 per cent, compared with China's 26 per cent. In 2009, China's share fell to 22 per cent, whereas India's share increased to 10 per cent (Global Development Finance: Country and Summary Data 2011). India's gain has been at the cost of China losing out in terms of being a favourable FDI destination.

CHINA'S PROBLEMS

India has outdone China due to the high inflation rate in the latter country. Wages of migrant workers, land, property rents and power prices, have all registered an increase in China. Measured as a year-on-year basis as of November 2010, labour costs went up by 21 per cent, and the home prices across 70 cities in China went up by 7.7 per cent. Property prices have also been on the rise, despite the government having ownership rights over land indicating a real-estate bubble. What is evident from data is also being witnessed in reality. Multinationals such as Ford and Hyundai are shifting their manufacturing base from China to India. During the early part of last fiscal, India exported 2,30,000 cars, vans, sports utility vehicles, and trucks a growth of 18 per cent, whereas Chinese exports have tumbled 60 per cent to 1,65,000 units. Perhaps due to these reasons, Nokia and Lotte, are setting up their manufacturing base in India. It is no surprise, therefore, that India has attracted, on an average, an annual FDI inflow of $20.4 billion per annum between 2006 and 2009. The estimated inflow from FDI in retail, of $3 billion over the next five years, seems modest in comparison. To get a sense of proportion, the Reserve Bank of India generally uses this sum of money daily in the foreign exchange market. Even so, there are reasons to be concerned if FDI in retail were to be stalled in the long run. So, what are the problem areas?
SUPPLY LOGISTICS

FDI in retail will bring down inflation by investing in supply chain logistics, that is, by investing in transport and refrigerated storage necessary for perishable items. Typically, if a farmer were to sell his produce, he needs to bring it to the local market where he usually auctions it to the retailer, who, in turn, will sell to the final consumers. This process of auctioning in the mandi (central market) is facilitated by the middleman, who charges a commission from the farmers. Add to this the cost of bringing the agricultural produce to the local market; the price difference between what the farmers get and what the consumers pay is what society loses out due to inefficiency. By investing in supply chain logistics, the players in multi-brand retail will reduce the cost, and bring down inflation. They will procure the produce directly from the farmers, keep it in their storage, and transport it directly to their retail outlet. It is worthy to note that there is a huge investment involved to get the supply chain logistics in place something that FDI in retail promises. Those who have been arguing that the local kirana and the marginal farmers may be hurt the former losing out on business, and the latter not getting the right price are not right. Currently, the local kirana, and retail outlets such as Reliance Fresh, Tata-Tesco, and Spencer, to name a few, are co-existing comfortably with each other. Marginal farmers also stand to gain. Recent evidence suggests that marginal farmers who have entered into contracts with Pepsi India have on average realised double the price in comparison with the local mandi and the localmahajan (in absence of the local mandi). This is an eye-opener for those suggesting that multinationals will squeeze the farmers by not offering them the right price.

Experience from around the globe suggests that the local kirana needs to worry from the spread of ecommerce, and not the presence of corporates in the retail sector. India badly needs corporatisation of the agriculture sector to even out distribution of income. The ITC and Pepsi examples have shown that, in their best interest, corporates directly get in touch with the farmers, and give them the necessary information on how to increase crop output and productivity. It is to be noted that the agriculture sector receives minuscule investment, while supporting the livelihoods of around 55 per cent of the population.
RIGHT POLICY SIGNAL

The UPA government also stands to gain substantially by sending the right policy signal. Moreover, FDI in retail can bring in forms of FDI, at a time when our trade figures aren't doing really well. The trade deficit for April-October, 2011-12, was estimated at $94 billion, which was higher than the deficit of around $85 billion during April-October, 2010-11. India's credit-worthiness can improve, with more FDI inflow resulting from reforms. International rating agencies usually look at total foreign exchange reserves and the FDI inflow as a criteria for rating any country. Tailpiece: Mamata Banerjee is smart, and is playing her cards right. She has already got Rs 8,750 crore, out of her demand for Rs 19,000 crore as part of the Bengal package. Who knows, she might actually give in if the UPA government meets her demand. (The author is Associate Professor, IFMR. The views are personal.)
(This article was published on December 14, 2011)

Keywords: FDI, Retail, national debate, government policy

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NEWS 100% FDI in single-brand retail may be notified soonBenefits of FDI on farmingFDI will wipe out small tradersWhy the headlong rush for FDI in retail?UPA II a Govt that does not actNo need to fear FDI in retail TOPICS consumer goodsretail economy (general)foreign direct investment COMMENTS:

FDI in retail will benefit India in many ways: 1)introduce modern logistics such as efficient supply chain & cold storage that will cut down the estimated 40% wastage in farm produce helping to tame inflation & putting more money in farmers' pocket. This will raise GDP growth with additional purchasing power of the farmers & consumers, 2)reduce middlemen who pocket most of the profit today thereby letting farmers get better price & reduce price for the consumers, 3)create jobs in retail without requiring high education level such as in IT, 4)help make medium-small suppliers more efficient since foreign retailers work with their vendors to help them improve quality (look at China example), 5)with the improvement in competitiveness of Indian suppliers the foreign retailers may export more items from India, 6)better quality since organized foreign retailers have to observe quality control for fear of bad publicity, 7)tax revenue for the govt as organized retail will collect sales tax.
from: Jitendra Dutta

Posted on: Dec 15, 2011 at 03:37 IST Kirana shops do not need protection to survive, they will do fine with their personalized service and convenient neighborhood locations. The threat to the shop around the corner is a straw man. The Indian Council for Research on International Economic Relations, a think tank commissioned by the government in 2007 to study the potential impact of modern retail, surveyed 2,020 small businesses and found that they wouldn't see a decline in overall employment. Small stores can exist side-by-side with corporate giants, beating the latter at some traditional areas like customer service (Wal-Mart typically doesn't do home delivery) and innovating easily to match their new competitors in other ways (such as accepting credit cards). The reality is that at the rates India is growing, the tide will lift both small and big businesses.
from: Jitendra Dutta

Posted on: Dec 15, 2011 at 03:38 IST

New Delhi-based Technopak Advisors estimates that, if foreign investment were permitted, "organized retail" would see sales rise to $314 billion in 25 years from $26 billion today. But traditional stores could see sales rise to $2.18 trillion over the same span, from $453 billion today. As long as growth continues to boost Indians' purchasing power, the retail pie will expand for everyone. ...The biggest losers from investment liberalization would be the middlemen who currently do today's organizing of Indian retailand do it badly. Consider that currently, the Indian farmer sells a kilogram of tomatoes for three rupees to the first intermediary in the chain. Four more intermediaries later, the mom-and-pop store sells that same kilogram for 15 rupees. Most of the difference goes to the middlemen, not Mom and Pop. Meanwhile, some 20% of the tomatoes rot in transit. On average across the country, vegetables see a markup of 60% by the time they arrive in cities.
from: Jitendra Dutta

Posted on: Dec 15, 2011 at 03:39 IST The middlemen and their political backers may think they've won an important battle last week. But they haven't won the war. Blocking foreign investment may delay the moment of India's supplychain modernizationhomegrown improvements could take a decade or more to flowerbut change is inevitable. We all remember the fear of computerization in the 1990s and now computers became a must at every office without the job loss that was feared, rather it improved efficiency and performance thereby helping raise India's GDP growth. Same would happen with modern retail and FDI.

Govt firm to bring FDI in retail, says Rahul

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Notwithstanding the move to bring foreign direct investment in retail being put on hold in the face of stiff opposition, Rahul Gandhi [ Images ] on Fruday asserted the Congress-led UPA government was determined to implement the decision.

Addressing a series of meetings in Uttar Pradesh [ Images ], he said FDI in retail would be of immense help to farmers who could save their produce from rotting by taking advantage of cold storage chain that will come with FDI and get the right price. At a meeting in Farrukhabad, which is the largest potato growing district in the country, Gandhi said 60 per cent of vegetables go waste and FDI would provide a chance to the farmers to directly sell their produce. On the fourth day of his five-day mass contact programme here, Rahul said "farmers are facing problems as 60 per cent of vegetables go waste.. we brought FDI in retail so that they could sell their produce directly". But the opposition stalled the move as they are "anti-farmer", he said. At another meeting in Kannauj, Rahul, Congress general secretary, said while Uttar Pradesh Chief Minister Mayawati [ Images ] and all opposition parties dourly resisted FDI in retail, the UPA government would certainly bring FDI in retail. Rahul said when he on his way to Kannauj, some farmers showed him how pigs were eating potatoes littered on the road "After a year's hard work, farmers have to see this situation", he said adding had FDI in retail been there the farmers would not have seen such "bad days". The FDI in retail move had to be put on the backburner in the face of a united resistance from opposition parties and a section of UPA.
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