FDI IN RETAIL - A BALANCED VIEW IS ESSENTIAL..
FDI IN RETAIL – TAKE A BALANCED VIEW OF PROS AND CONS...
After I published my note on FDI in Retail and termed it boldly as a 'welcome move' - I have been flooded with posts - congratulating me and criticizing me.
There has been lot of hoopla over Foreign Direct Investment in the Retail sector. With the elections coming up in few states, the central government has finally bit the bullet and approved the 100% FDI in multi-brand retail. FDI in Retail is likely to usher in further economic reform.
Let us discuss the Pros and Cons of FDI in Retail. Before discussing that let us have a look at the overall economic status of retail sector at present.
Let us have a look at the Indian retail industry
The Indian retail industry has scaled impeccable growth over the last decade with an amiable acceptance to organised retailing formats. The industry is maturing towards modern concept of retailing, cornering the conventional unorganised family-owned businesses.
India has been ranked as the fourth most attractive nation for retail investment among 30 emerging markets by the US-based global management consulting firm, A T Kearney, in its Global Retail Development Index (GRDI) 2011.
AT Kearney has also conducted a different study which says that organised retailers should follow hypermarket concept to penetrate through India’s multi billion industry. According to the report, given the gigantic size of the Indian retail market, it is no surprise that many Middle East retailers, most recently Lulu, have announced their interests to extend their retail operations to India.
Retail in India
The Rs 18,673 billion (US$ 401 billion) Indian retail market entails only 6 per cent of itself as organised retail segment as of 2010, according to Booz and Co (India) Pvt Ltd. Hence, there is a great potential to be explored by domestic and international players.
The Business Monitor International (BMI) India Retail Report for the fourth-quarter of 2011 forecasts that the total retail sales will grow from US$ 411.28 billion in 2011 to US$ 804.06 billion by 2015. The report has underlined factors like economic growth, population expansion, increasing wealth of individuals and rapid construction of organised retail infrastructure as major drivers for the optimistic forecast figures.
According to a research report named ‘Retail Sector in India’ by Research and Markets, Indian retail sector accounts for 22 per cent of the country's gross domestic product (GDP) and contributes to 8 per cent of the total employment. The report further highlighted that hypermarkets (currently accounting for 14 per cent of mall space) will witness immense progress in the Indian landscape.
Government move on FDI in Retail
The government has decided to open up the retail sector to global investors through FDI in multi-brand retail with a ceiling of 51%, and 100% FDI in single-brand retail.
It means that global retailers such as Walmart, Carrefour, Tesco and others can set up mega deep-discount stores in the country through joint ventures with Indian firms, where the foreign partner can hold up 51% equity.
Single brand retail companies such as Swedish furnishing giant Ikea or sporting goods and equipment major Reebok can set up stores of their own in India through their own subsidiaries. Till now they were required to set up stores through joint ventures in India that allowed the foreign partner to own up to 51% equity.
The FDI approval will come with a string of conditions. At least half of the FDI should be made in back-end infrastructure such as cold-chain and warehousing, the minimum FDI in any multi-brand retail project should be $100 million (around Rs 500 crore), state governments can prohibit FDI in retail in their states if they wish to, stores can be set up only in cities with a population of at least 1 million, and at least 30% of the value of manufactured items procured should be sourced from Indian small and medium enterprises.
FOR
-- Opposition parties and small traders are worried that large deep-discount stores of transnational corporations will drive street vendors and neighbourhood mom-and-pop kirana stores out of business, endangering their livelihood. But this is unlikely because large deep discount stores cannot offer the convenience and loyalty of neighbourhood kirana stores who are available at the customers’ beck and call, literally.
-- FDI in retail will ensure procurement, at least of fruits and vegetables directly from farmers offering them higher income. At present, the price that a farmer gets for a kilo of onions is about half of what it is sold to by vendors and retailers to final consumers. By engaging local producers, organised retail provides them with an access to a much broader consumer set. For instance, a leading retailer operating in north India has engaged a local pickle manufacturer in Amritsar and invested to upgrade its equipment.
-- Organised retail provides higher quality of goods on account of the pre–defined and stringent standards adopted by the retailers. And of course the price will be cheaper. Studies have shown that consumers, on an average, will save at least 10% on daily use goods.
AGAINST
-- Though most of the high decibel arguments in favour of FDI in the retail sector are not without some merit, it is not fully applicable to the retailing sector in India, or at least, not yet. This is because the primary task of government in India is still to provide livelihoods and not create so called efficiencies of scale by creating redundancies.
-- Allowing FDI will have immediate and dire consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy; will render millions of small retailers jobless by closing the small slit of opportunity available to them.
-- The supermarket will typically sell everything, from vegetables to the latest electronic gadgets, at extremely low prices that will most likely undercut those in nearby local stores selling similar goods. WalMart would be more likely to source its raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at preordained quantities and specifications. This means a foreign company will buy big from India and abroad and be able to sell low – severely undercutting the small retailers. Once a monopoly situation is created this will then turn into buying low and selling high.
-- Such re-orientation of sourcing of materials will completely disintegrate the already established supply chain. In time, the neighbouring traditional outlets are also likely to fold and perish, given the ‘predatory’ pricing power that a foreign player is able to exert.
-- It is easy to visualise from the discussion above, how the entry of just one big retailer is capable of destroying a whole local economy and send it hurtling down a spiral. One must also not forget how countries like China, Malaysia and Thailand, who opened their retail sector to FDI in the recent past, have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets.
-- It is true that it is in the consumer’s best interest to obtain his goods and services at the lowest possible price. But this is a privilege for the individual consumer and it cannot, in any circumstance, override the responsibility of any society to provide economic security for its population. Clearly collective well-being must take precedence over individual benefits
Based on the pros and cons, we can conclude like this debate like this:
Let us have a look at the Indian retail industry
The Indian retail industry has scaled impeccable growth over the last decade with an amiable acceptance to organised retailing formats. The industry is maturing towards modern concept of retailing, cornering the conventional unorganised family-owned businesses.
India has been ranked as the fourth most attractive nation for retail investment among 30 emerging markets by the US-based global management consulting firm, A T Kearney, in its Global Retail Development Index (GRDI) 2011.
AT Kearney has also conducted a different study which says that organised retailers should follow hypermarket concept to penetrate through India’s multi billion industry. According to the report, given the gigantic size of the Indian retail market, it is no surprise that many Middle East retailers, most recently Lulu, have announced their interests to extend their retail operations to India.
Retail in India
The Rs 18,673 billion (US$ 401 billion) Indian retail market entails only 6 per cent of itself as organised retail segment as of 2010, according to Booz and Co (India) Pvt Ltd. Hence, there is a great potential to be explored by domestic and international players.
The Business Monitor International (BMI) India Retail Report for the fourth-quarter of 2011 forecasts that the total retail sales will grow from US$ 411.28 billion in 2011 to US$ 804.06 billion by 2015. The report has underlined factors like economic growth, population expansion, increasing wealth of individuals and rapid construction of organised retail infrastructure as major drivers for the optimistic forecast figures.
According to a research report named ‘Retail Sector in India’ by Research and Markets, Indian retail sector accounts for 22 per cent of the country's gross domestic product (GDP) and contributes to 8 per cent of the total employment. The report further highlighted that hypermarkets (currently accounting for 14 per cent of mall space) will witness immense progress in the Indian landscape.
Government move on FDI in Retail
The government has decided to open up the retail sector to global investors through FDI in multi-brand retail with a ceiling of 51%, and 100% FDI in single-brand retail.
It means that global retailers such as Walmart, Carrefour, Tesco and others can set up mega deep-discount stores in the country through joint ventures with Indian firms, where the foreign partner can hold up 51% equity.
Single brand retail companies such as Swedish furnishing giant Ikea or sporting goods and equipment major Reebok can set up stores of their own in India through their own subsidiaries. Till now they were required to set up stores through joint ventures in India that allowed the foreign partner to own up to 51% equity.
The FDI approval will come with a string of conditions. At least half of the FDI should be made in back-end infrastructure such as cold-chain and warehousing, the minimum FDI in any multi-brand retail project should be $100 million (around Rs 500 crore), state governments can prohibit FDI in retail in their states if they wish to, stores can be set up only in cities with a population of at least 1 million, and at least 30% of the value of manufactured items procured should be sourced from Indian small and medium enterprises.
FOR
-- Opposition parties and small traders are worried that large deep-discount stores of transnational corporations will drive street vendors and neighbourhood mom-and-pop kirana stores out of business, endangering their livelihood. But this is unlikely because large deep discount stores cannot offer the convenience and loyalty of neighbourhood kirana stores who are available at the customers’ beck and call, literally.
-- FDI in retail will ensure procurement, at least of fruits and vegetables directly from farmers offering them higher income. At present, the price that a farmer gets for a kilo of onions is about half of what it is sold to by vendors and retailers to final consumers. By engaging local producers, organised retail provides them with an access to a much broader consumer set. For instance, a leading retailer operating in north India has engaged a local pickle manufacturer in Amritsar and invested to upgrade its equipment.
-- Organised retail provides higher quality of goods on account of the pre–defined and stringent standards adopted by the retailers. And of course the price will be cheaper. Studies have shown that consumers, on an average, will save at least 10% on daily use goods.
AGAINST
-- Though most of the high decibel arguments in favour of FDI in the retail sector are not without some merit, it is not fully applicable to the retailing sector in India, or at least, not yet. This is because the primary task of government in India is still to provide livelihoods and not create so called efficiencies of scale by creating redundancies.
-- Allowing FDI will have immediate and dire consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy; will render millions of small retailers jobless by closing the small slit of opportunity available to them.
-- The supermarket will typically sell everything, from vegetables to the latest electronic gadgets, at extremely low prices that will most likely undercut those in nearby local stores selling similar goods. WalMart would be more likely to source its raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at preordained quantities and specifications. This means a foreign company will buy big from India and abroad and be able to sell low – severely undercutting the small retailers. Once a monopoly situation is created this will then turn into buying low and selling high.
-- Such re-orientation of sourcing of materials will completely disintegrate the already established supply chain. In time, the neighbouring traditional outlets are also likely to fold and perish, given the ‘predatory’ pricing power that a foreign player is able to exert.
-- It is easy to visualise from the discussion above, how the entry of just one big retailer is capable of destroying a whole local economy and send it hurtling down a spiral. One must also not forget how countries like China, Malaysia and Thailand, who opened their retail sector to FDI in the recent past, have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets.
-- It is true that it is in the consumer’s best interest to obtain his goods and services at the lowest possible price. But this is a privilege for the individual consumer and it cannot, in any circumstance, override the responsibility of any society to provide economic security for its population. Clearly collective well-being must take precedence over individual benefits
Based on the pros and cons, we can conclude like this debate like this:
Entry of foreign players must be gradual and with social safeguards so that the effects of the labour dislocation can be analysed & policy finetuned. Initially allow them to set up supermarkets only in metros. Make the costs of entry high and according to specific norms and regulations so that the retailer cannot immediately indulge in ‘predatory’ pricing.
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