In India the debate on foreign direct investment (FDI) in retail is one of the burning topics of to-day. The topic is in itself very vast and varied that covering all the issues is not possible.
To begin with the retail industry in India is one of the pillars of the economy as it contributes to GDP and provides employment to a large section of population. The growth in retail industry is mainly due to growing middle class incomes, increasing consumer ambitions and demand from rural markets etc. The retail industry is divided into the organized and unorganized sectors. The former refers to the corporate-backed hypermarkets and retail chains etc. The latter refers to the local kirana shops, owner-manned general stores, paan/beedi shops, handcart and pavement vendors etc. If Organized retail industry is seen as one of the sunrise sectors with enormous growth potential, the existing unorganized sector is the backbone of our economy and provides employment and livelihood to a large number of unskilled and economically weaker section of the society.
By allowing FDI in retail, there are apprehensions that even though it would give big boost to the organized sector but the workforce in the un-organized sector would suffer.
Small retail stores are an important source of employment. Anyone without a job can set up a local retail outlet which provides employment of the last resort. People fear that the entry of large global retailers would wipe out the local shops and millions of jobs. India being a vast country with varying culture and requirement of its local population, the unorganized sector which caters to their daily needs is hard to be displaced by the large retailers. Hence, the pop-and-mom shops at the street corner can stay in the business and survive very well. Also the benefits from higher exports are likely to offset any direct job loss in the local kiranas as result of competition from big global retailers.
The other fear is that large retailers would have monopoly on products and its price. In this case both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up. India is one of the fastest growing economies and large numbers of overseas players are looking forward for an entry into the Indian retail market. Fierce competition among them would mitigate this concern.
In the farm sector there is a tremendous amount of wastage and value loss due to shortage of warehouses, cold-storages, means of transport and processing units. Post-harvest, there is no effective support system to take care of storing, processing, trading and exporting farm products. This whole chain is left to the mercies of middle-men. As a result, farmers get lower price while the consumers end up paying a higher price. By allowing FDI in this sector, the large retailers will establish a direct link with the farmers, eliminate the middlemen, develop the processing facilities and export the products. This will help farmers to get better prices and bigger markets while the consumers would benefit by getting lower prices, better quality and greater variety. Thereby, resulting rural prosperity will open up markets for other industrial goods thus creating employment and help in a more balanced regional development. The fear of lopsided growth in different part of the country, discontent among citizens and social tension will also be reduced to a large extent.
Opening up of the retail sector would not only see premium-end luxury brands but also mid-range mass appeal brands. International experience has shown that the entry of organized retailers who invest in the supply chain of developing economies has benefitted the local population. Retailing in other countries has helped in many ways. It has increased the speed of development of modern formats, led to in-flow of improved productivity, reduced capital constraints of domestic retailers, efficiency and global competitiveness. It also improves quality of employment, enhances sourcing by global retailers and encourages investment in supply chains besides assuring consumers of better product quality and better services.
The biggest benefit of FDI in retail would come from higher exports. For this to take place the foreign retailers would like to be in close contact with local suppliers and customers. This will help them to control and monitor the entire supply chain including the designing and of quality products, the manufacturing process, the distribution network and modifying product according to changing needs. The supply chain and the infrastructure, which they would develop for their local stores, would also help to meet their global needs in a cost effective manner. All this is possible if government makes clear cut policy and allows them to have local stores.
Any policy that creates jobs leading to economic growth is a good and healthy policy.
Current FDI policy allows 100% FDI in Cash-and-carry wholesale formats and 51% FDI is allowed in single brand retailing. Also foreign retailers are allowed to enter the Indian market through other routes (the franchisee route). By allowing 51% FDI the government wants the foreigners to take local partners to start with. Once the local partners have enough capital and gained experience to compete with established global giants, the FDI cap can be raised gradually. Foreigners can be allowed to set up 100 per cent foreign-owned retail chains.
If the politicians and policy makers ignoring their selfish interest and frame policies in general interest of the country and its people and allow FDI in retail in phased manner, it will greatly enhance the economy and will improve the livelihood of the AAM-AADMI.