The retail policy muddle

India surely doesn't need a new retail FDI policy; it only needs to scrap all existing ones

Now well into its fifth year of being in power, the National Democratic Alliance (NDA) government continues to ignore one of the most vital growth drivers of the Indian economy — its retail sector. Inexplicably, the government and its babus’ muddled thinking on this crucial sector has persisted since NDA 1, and through United Progressive Alliance (UPA) 1 and 2. Over the last 16 years or so, successive governments and their top bureaucrats have attempted several times to come up with a pragmatic policy that addresses the needs of the various constituents of the retail sector ecosystem, but each time, the outcome has been more ludicrous and more impractical than the previous one. The last instance of the addition to confusion was to supposedly offer some relaxation in FDI regulations for retail of food and grocery. Whosoever in the current government thought that it would open the floodgates of investment while giving impetus to the upstream agriculture and processed foods sector can easily check the actual outcome.

Why should the PM himself take up modernisation of India’s retail sector as one more item on his agenda, especially since his cabinet colleagues who should be looking at this seem to be oblivious of the urgent need to do so? There are several reasons to do so, and indeed, a modern retail sector could actually provide a much-needed fillip to many of his own flagship programmes and economic imperatives such as doubling of farmers’ incomes, creating millions of relatively high-quality jobs across India, provide Make-in-India a real thrust beyond rhetoric, and boost the currently highly anemic overall FDI performance. India’s current private merchandise consumption (and therefore the size of India’s retail sector) is nearly US$ 700 billion (over 25 per cent of the entire GDP of the country). It provides direct employment to over 30 million Indians spread across the country, and has a crucial role to play in managing consumer price inflation if the sector is encouraged to organise, modernise and become more competitive.

The biggest (and most misplaced) mind block, cutting across the entire political spectrum, is the vilification and demonitisation of foreign direct investment in retail. Over the last two decades, myths have been propagated consistently that FDI in India’s retail will lead to massive destruction of jobs, and kill domestic consumer goods manufacturing because of dumping of imported merchandise by foreign retailers. The fact that job losses haven’t happened despite several Indian retailers having crossed annual revenues of more than ~100 billion each. Reliance would probably cross retail segment revenues of ~750 billion (excluding fuel and telecom recharge sales) in current financial year. The Future Group, across its various formats, may cross ~300 billion in revenues this year, while Avenue Supermarket (D’Mart) will cross ~200 billion in revenues. Tata, Birla, and many other business groups have retail businesses that now aggregate well over ~100 billion in revenues. These Indian players have already created millions of direct and indirect jobs (even as the neighbourhood kiranas and others continue to thrive and grow in absolute numbers), helped in a successful implementation of a nationwide GST and assist the government in plugging revenue leakages and help in creating thousands of new entrepreneurs as a part of their supply chain development. They have also helped immensely in keeping consumer price inflation moderate in their respective consumer catchment areas. A similar benefit (to the nation) has also been provided by etailers such as Amazon and Flipkart (and dozens of others). Both physical online retailers have also provided a big boost to the construction and real estate sectors because of their voracious appetite for large footprint distribution centres and physical retail space across the country.

However, one big limitation of India’s’ homegrown (and largely domestically owned) retail businesses is their inability to directly provide a boost to merchandise exports from the country. This is where India has missed, and continues to miss, the great opportunity that the likes of Ikea, H&M, Walmart, Tesco, and many other global retail giants can provide to India. Each of these giants annually source merchandise amounting to tens of billions of US dollars every year. A red carpet (rather than never ending red tape, and politically/ideologically directed agitations against them such as the ones some domestic retailer organisations launch from time to time) to these retail behemoths to actually encourage them to invest in India for domestic Indian operations can not only bring tens of billions of dollars in new foreign direct investment (Walmart’s proposed investment of over US$ 18 billion in Flipkart is a testimony of both the potential, as well as government's idiosyncratic policies that have resulted in this mega investment benefit also going to international, offshore investors in Flipkart rather than to domestic investors) but also bring their global supply-chain partners (especially those engaged in handling and processing of perishable goods) to invest in India to support the domestic Indian retail operations. The government can surely provide a soft nudge to the managements of these global retailers to substantially increase their sourcing from India of goods made in India thereby giving a boost to exports and also to tens of thousands of Indian small and medium enterprises who currently work as/could work as vendors to these retailers.

Finally, in a world that is facing unprecedented challenges to free trade, it would help India if retailers such as Walmart, Tesco, Carrefour, Metro Cash & Carry and even the Chinese retail/technology ecosystem behemoths such as Alibaba actively take up India’s cause in Washington, London, Paris, Berlin, and Beijing rather than having to use their significant influence in those capitals to put more pressure on India to allow them to operate in India.

India’s politicians and bureaucrats urgently need modernisation of their own ideological thinking on this subject and then just liberate the retail sector. India, indeed, needs no new FDI in retail policy — it only needs to scrap all existing ones. Thereafter, India only needs to work closely with various retail sector stakeholders (that include large physical and digital players — Indian and international, and also the 18-plus million independent retailers) to take steps that can make this vital sector more efficient and vibrant.