FDI IN RE­TAIL−DIS­SECT­ING THE RE­AL­ITY

Economic Challenger - - CONTENTS - − Kisholoy Roy

IN­TRO­DUC­TION

On De­cem­ber 5th 2012 and sub­se­quently on De­cem­ber 7th 2012, the Lok Sabha and Ra­jya Sabha ap­proved FDI in multi−brand re­tail re­spec­tively through vot­ing. It was af­ter a gap of many years that an ex­ec­u­tive de­ci­sion of the government was put to vote in Par­lia­ment. BJP, the ma­jor po­lit­i­cal party against the pro­posed FDI pol­icy of the government wit­nessed its stand de­feated in the Par­lia­ment. While leader of the Op­po­si­tion Sushma Swaraj lamented the ap­proval stat­ing that the government "won tech­ni­cally but lost on mo­ral grounds". The com­merce min­is­ter Anand Sharma men­tioned that out of 21 states which re­sponded to the Cen­tre’s com­mu­ni­ca­tion on the FDI is­sue, 11 sup­ported them in writ­ing. Sharma fur­ther ob­served, "No one can take away the right of an elected government to take de­ci­sion" apart from men­tion­ing, "Con­sen­sus means gen­eral agree­ment and not una­nim­ity." The vot­ing on the FDI is­sue and the sub­se­quent ap­proval has put an end to the long drawn de­bate on the FDI in multi−brand re­tail­ing is­sue. The government’s move to raise the cap of FDI in multi−brand re­tail­ing to 51% has been a topic of heated de­bate in var­i­ous cir­cles. The mat­ter has wit­nessed enough of politi­ciz­ing in re­cent months that has only added to the dilemma sur­round­ing the mat­ter among the masses. It needs to be un­der­stood over here that although FDI in re­tail is mostly opined to ben­e­fit the In­dian pop­u­lace, the government should not wholly and solely de­pend on FDI for the over­all devel­op­ment of the re­tail in­dus­try as such. As on date, the government has al­ready im­ple­mented 100% FDI in sin­gle brand re­tail­ing which has trig­gered the pro­posed en­try of IKEA in In­dia. In the con­text of FDI in multi−brand re­tail­ing, the government at the Cen­tre has to take cer­tain im­por­tant de­ci­sions and ini­ti­ate cer­tain cru­cial ac­tiv­i­ties that will al­low holis­tic re­turns to re­tail­ers, pro­duc­ers and cus­tomers from the en­hanced FDI in re­tail­ing.

FDI Pro­posal & Present Sce­nario

Let us first look at some of the salient as­pects of the FDI pro­posal put forth by the government of In­dia: At least half of the FDI should be made in back−end in­fra­struc­ture such as ware­hous­ing. The min­i­mum FDI in any multi−brand re­tail project should be $100 mil­lion (INR 450 crore). State gov­ern­ments can pro­hibit FDI in re­tail if they wish to. Stores can be set up only in cities with a pop­u­la­tion of at least one mil­lion. At least one − third of the sales should be made to small re­tail­ers. At least 30% of the sales should be made to small re­tail­ers, ei­ther di­rectly or through whole­sale units set up for this pur­pose. States will be em­pow­ered to put con­di­tions for in­te­grat­ing small re­tail­ers and ki­rana mer­chants in the value chain. At least 30% of the value of man­u­fac­tured items pro­cured (ex­clud­ing food items) should be sourced from small and medium en­ter­prises. States will be em­pow­ered to set up frame­work for mon­i­tor­ing com­pli­ance with th­ese con­di­tions. This will en­able Walmart, Tesco and Car­refour to set up deep dis­count stores in In­dia.

As it can be found that there are cer­tain as­pects of the FDI pro­posal that have al­lowed the mat­ter to es­ca­late over a pe­riod of time. Em­pow­er­ing the states in the said mat­ter has cre­ated a great po­lit­i­cal di­vide where each re­gional or na­tional party is lev­er­ag­ing the mat­ter for their own po­lit­i­cal mileage. Those states that are presently in fa­vor of the FDI pro­posal are Delhi, As­sam, Ma­ha­rash­tra, Andhra Pradesh, Ra­jasthan, Odisha, Ut­tarak­hand, Haryana, Ma­nipur, Da­man & Diu, Dadra & Na­gar Haveli while states like West Ben­gal, Bi­har, Kar­nataka, Ker­ala, Mad­hya Pradesh and Tripura are against the pro­posal. The state of Jammu & Kash­mir has re­port­edly been found to en­dorse the pol­icy but then they haven’t given their as­sent in writ­ing. [Ex­hibit−I.I] high­lights the stand of var­i­ous ma­jor po­lit­i­cal fig­ures as far as en­hanced FDI in multi− brand re­tail­ing is con­cerned.

The size of or­ga­nized re­tail in the coun­try was $20 bil­lion in the year 2010. In the year 2011, it was re­ported that while the over­all re­tail mar­ket was val­ued at $ 4450 bil­lion, or­ga­nized re­tail was about 6% of the value. An­a­lysts fur­ther ob­serve that by 2015, value of the over­all re­tail in­dus­try will reach $ 720 bil­lion with the share of or­ga­nized re­tail ex­pected to reach 9%−10%. It is re­ported that till date FDI in sin­gle brand re­tail has been re­ceived to the tune of $ 45 mil­lion. If we take a closer look at share of var­i­ous prod­uct cat­e­gories in the re­tail mar­ket, we find that ’cloth­ing’ as a cat­e­gory leads fol­lowed by ’durables’ and ’foods & bev­er­ages’. It is fur­ther be­lieved that the true po­ten­tial of the In­dian re­tail in­dus­try can be reached by go­ing for en­hanced FDI in the re­tail sec­tor [Ex­hibit−I.II (a) and (b)].

Re­search stud­ies have re­vealed that the states of Delhi, Ma­ha­rash­tra, Andhra Pradesh, Gu­jarat and Tamil Nadu have the high­est pen­e­tra­tion of mod­ern re­tail out­lets. It is fur­ther in­ter­est­ing to find that sig­nif­i­cant per­cent­age of mod­ern re­tail out­lets is ex­ist­ing in var­i­ous non−FDI com­pli­ant states (Ex­hibit−I.III)

If the present sce­nario re­gard­ing FDI in re­tail­ing is looked at, it is ob­served that while the var­i­ous po­lit­i­cal par­ties and po­lit­i­cal per­son­al­i­ties are rub­bish­ing the claims be­ing made by the Congress led UPA government at the cen­tre, the government is de­ter­mined to go ahead with im­ple­men­ta­tion of the FDI pro­posal for multi−brand re­tail. In this con­text, it has been found to pub­lish ad­ver­tise­ments in var­i­ous news­pa­pers and in var­i­ous other mass me­dia ve­hi­cles stat­ing the ben­e­fits of en­hanced FDI in multi−brand re­tail. The ad­ver­tise­ments talk of ben­e­fit to farm­ers due to 50% in­vest­ment by re­tail chains in the devel­op­ment of back−end in­fra­struc­ture. The ads fur­ther state that FDI in re­tail will help in the cre­ation of lakhs of jobs and will also serve the greater in­ter­ests of the cus­tomers. How­ever po­lit­i­cal par­ties like the BJP and BSP have al­leged that the Congress government at the cen­tre is try­ing to in­tro­duce videsi sen­ti­ments by and large.

In­dian multi−brand re­tail­ers have been found to be quite en­thused with the idea of 51% FDI in multi−brand re­tail and there are many who have ex­pressed their thoughts about split­ting their busi­nesses to in­duct for­eign part­ners in the states where FDI pol­icy is be­ing en­cour­aged. San­jiv Goenka of the RP San­jiv Goenka Group has been one such per­son­al­ity who is toy­ing with the idea. How­ever one con­cern that faces him is that some 60% of his out­lets are in the 11 states where FDI pol­icy has been op­posed. Peo­ple at Fu­ture Group also have seen merit in the idea of club­bing re­tail stores and other as­sets lo­cated in states fa­vor­ing FDI where a for­eign com­pany can pick up eq­uity. Ra­jiv Luthra of Luthra & Luthra law firm men­tions, "A new for­eign re­tailer can al­ways forge an agree­ment in a way where the In­dian part­ner opens stores in states op­posed to this de­ci­sion while the joint ven­ture opens in states not op­posed to it. Once

the ban is lifted, for­eign re­tailer can buy into the In­dian part­ner’s com­pany."

THE RE­AL­ITY CHECK

Let us now look into cer­tain brighter as­pects of the government’s pro­posed FDI pol­icy and the ar­eas of con­cern and doubts. In In­dia, the Bharti Wal−Mart’s di­rect farm pro­gram has seen re­tail­ers as­so­ci­at­ing them­selves with ac­tiv­i­ties like soil test­ing for nu­tri­ent lev­els to cap­ture de­fi­cien­cies and map­ping of agri−in­put re­quire­ments with the help of agron­o­mists to en­sure qual­ity of pro­duce. The out­come of which has been that in­comes of farm­ers have risen by 7%−10% in the last few years. How­ever in this con­text, Arvind Sing­hal of Technopak ob­serves, "Mod­ern re­tail, whether it is lo­cal or for­eign, can­not make a huge and im­me­di­ate im­pact on farm­ers, the real change will hap­pen by bring­ing about re­forms in the agri­cul­ture sec­tor." There are cer­tain re­forms re­quired for the var­i­ous past leg­is­la­tions that have been found to cre­ate hic­cups as far as re­al­iz­ing the full po­ten­tial of the FDI pol­icy is con­cerned. The Es­sen­tial Com­modi­ties Act which re­stricts the quan­tity that one can pur­chase, store or move across the bor­ders of a state is one. Then there is the For­ward Con­tracts Reg­u­la­tion Act that in­flu­ences de­riv­a­tive trad­ing of fu­tures and op­tions. With th­ese kinds of re­stric­tions in place, it is dif­fi­cult to scale up for the re­tail­ers or the pro­duc­ers. While the domestic re­tail in­dus­try has wel­comed the FDI pol­icy and has en­dorsed the government’s view point that the said pol­icy will ben­e­fit farm­ers and con­sumers, there are many who feel that the real pos­i­tive ef­fect will not take place till the time re­forms in the Agri­cul­ture Pro­duce Mar­ket­ing Com­mit­tee Act and a uni­fied Goods and Ser­vices Tax are made.

There are many who opine that or­ga­nized re­tail in the coun­try will help counter food in­fla­tion and bring down prices. How­ever ex­perts main­tain that presently the share of or­ga­nized re­tail pie in the coun­try that stands at around 7% is too minis­cule and when it comes to foods, the im­pact of or­ga­nized re­tail­ing is even lesser. So in the next 10 years or so, the over­all im­pact of or­ga­nized re­tail­ing on agri­cul­ture and con­sumer price in­fla­tion con­trol will be min­i­mal. It is only af­ter some 15−20 years that con­sumers and farm­ers can hope to see some real ben­e­fits and by that time the reach and share of cor­po­ra­tized re­tail will be close to 35%.

Fur­ther, when it comes to for­eign di­rect in­vest­ments, while the FMCG MNCs will need to in­vest in plant, ma­chin­ery and mar­ket­ing, re­tail en­ti­ties like Walmart and Car­refour will re­quire in­vest­ing in large tracts of land and that will be a crit­i­cal is­sue. The for­eign re­tail ma­jors may have the will­ing­ness to in­vest big but then they in all prob­a­bil­ity will not have the pa­tience to wait for 15− 20 years for their in­vest­ments to break−even.

CON­CLU­SION

So as we see, FDI in re­tail has its ad­van­tages but then there are cer­tain is­sues that are to be con­sid­ered and worked upon so that FDI is ac­cept­able to a wider sec­tion of the In­dian pop­u­lace. As far as politi­ciz­ing the mat­ter is con­cerned, that is need­less and least called for since the pro­posal as such is sure to ben­e­fit a greater cross−sec­tion of the so­ci­ety. While the BJP men­tions that FDI in multi−brand re­tail will cre­ate more sales boys and sales girls in the coun­try, Anand Sharma of the Congress coun­ters, "By say­ing that FDI in re­tail will cre­ate sales girls and sales boys, BJP is dis­re­spect­ing those who earn their liv­ing sell­ing prod­ucts in shops not owned by them." Th­ese sorts of need­less ver­bal du­els can def­i­nitely not fa­cil­i­tate the un­der­stand­ing of the nu­ances sur­round­ing FDI in re­tail is­sue. In­stead of fight­ing for po­lit­i­cal gains, the po­lit­i­cal par­ties need to work more co­he­sively to erad­i­cate is­sues that are caus­ing a road­block to the over­all devel­op­ment of or­ga­nized re­tail­ing in the coun­try. The re­tail sec­tor as such is look­ing for in­vest­ments but then the global play­ers need to get clear pol­icy di­rec­tions to take a cal­cu­lated move as far as in­vest­ing In­dian re­tailscape is con­cerned. The ob­ser­va­tions of De­bashish Mukher­jee of AT Kear­ney best sum­ma­rizes the is­sue as he opines, "To be­gin with, the most vis­i­ble change will be that for­eign re­tail­ers will start set­ting up stores and have front−end pres­ence, or­ga­nized re­tail will see con­sol­i­da­tion and si­mul­ta­ne­ously peo­ple will see a lot of devel­op­ment in sup­ply chains. We need to look at the in­vest­ments from a long term per­spec­tive. Ben­e­fits will come about for farm­ers and con­sumers but a whole host of other re­forms need to be in place too. How­ever, this is the first step in that di­rec­tion."

Ex­hibit−I.I

Ex­hibit−I.II (a)

Ex­hibit−I.II (b)

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