Foreign Direct Investment in Retail: Understanding the Choices for India.

View: Dharmendra Kumar, director, India FDI Watch, Delhi
There has been a sort of political consensus on FDI for almost all sectors but for likes of multi-brand retail, defence, aviation, banking and insurance. The political consensus has been there for most of the sectors because FDI is seen as a crucial factor to create jobs, bring in new technology and enhance the domestic base of productivity. But, the issue of FDI in multi-brand retail is altogether a different ballgame because it fails to meet any criteria of the political consensus. Eventually FDI has to come even in the field of FDI in multi-brand retail. What is more important is to place adequate safeguards to make it deliver to small farmers, poor consumers and workers in the supply chain along with protecting the existing jobs in the traditional retail sector. The FDI deregulation was announced with a huge democratic deficit without even taking on board major political parties, state governments and key stakeholders. The worst is that there was hardly any safeguard. Defying the cautious approach, the Cabinet all of a sudden decided to allow FDI in multi-brand retail with commanding position of FDI in the joint venture. Global retailers were enabled to open their outlets in 50-plus cities without any zoning restriction or minimum and maximum cap on the store area. There was nothing to regulate superstores relationship with farmers. Terms of contract with farmers and other suppliers need to be kept in public domain to protect them from retailers’ abuse.

Thousands of family-run shops have gone out of business in the developed world as they were not able to compete with companies like Walmart and Tesco. More than 4 lakh shops closed down in Europe between 1970 and 1980. Walmart after entering in Mexico took a sizeable portion of the country’s retail trade. In Thailand, multinational retail chains entered in 1997 and within a few years took over 10 per cent of the retail market causing widespread closure of small and traditional retail outlets. The multinational retail chains employed ‘predatory pricing’ where they cut prices so low to drive out their competitors. In Indonesia, in 1997-98 riots erupted against multinational mega-retailers. Malaysia, Indonesia, Thailand and Japan have enforced zoning restrictions for mega retailers.

Small- and medium-sized Indian shopkeepers face an immediate threat with the rise of corporate retail. Many shops have already shut down or lost significant business due to malls. The closing of small businesses due to large retail chains has been a worldwide experience. Many supporters of retail chains claim that the Indian retail market is large enough to accommodate all players, however, it must be understood that their intent and business model is dependent on capturing as much of the retail market to ensure constant profit and growth. Through market power and “predatory pricing” they will be easily able to drive local shopkeepers out of business.

We were allowing FDI in retail without sufficient regulations. This is certainly a recipe for disaster.

Global retailers would seek to achieve a scale to build a strong position in the Indian retail market and for this merger and acquisitions of existing organised retailers would be one of the first things in their plan of scheme.

FDI would bring giant retailers in the country who operate on scale and their business model is such that they always need to expand. So, FDI retailers would continue growing the share of organised retail trade. If Indian economy goes in stagnation this growth could be a doom for small players as the total retail pie may not grow that rapidly.

A regulatory framework for FDI retail must be framed. Since the operations of organised retailers impact upon various sectors of the economy, policy guidelines should be framed involving all the relevant departments, namely commerce, agriculture and urban development. Moreover, since regulation of the large format retailers would mainly be in the domain of the states and local bodies, state governments have to be consulted and involved in the process of framing policy guidelines. A Central legislation may also be considered for this purpose. A separate regulatory authority is a must before we allow FDI retailers.

Counter View: Mohan Gurnani, chairman, Moraj Infratech Pvt Ltd, owns small-time sugar business in Kerala and associates with kirana shop
Following the 1991 economy, we welcome that, but the prime minister, Dr Manmohan Singh, said in his historic speech that we were opening up our economy and that he would invite foreign direct investment to those areas where the nation seems to be attractive, for example, infrastructure and technology. But from then, till today, no multinational companies have built infrastructure.

The foreign companies have only squeezed us. FDI in retail does not have any high technology. There is no money coming in. One should analyse that the FDI is coming to India not for investments but for the simple reason that the European and American economies have collapsed.

There is no money coming in retail space and that we know that they are penetrating into the Indian market as the European and American economies have collapsed and that they are here to mint money. They are not here to do social work. It is said that our farmers would be benefited, how would they be? When the US and Europe are themselves not paying subsidies to their farmers about $400 mn, they are not in a position to afford for their farmers. Therefore how is it possible for them to afford our farmers?

Secondly, It is also claimed that they would pose a competition and therefore the prices would go down .The fact is that the giant players are only around a handful (5-6). Once, these are entertained the competition would not be on a wider aspect, rather be within the 5-6 players. What is competition? This is just cleaning the competition. I am not against the competition let them come and compete with us fairly. What does the Walmart do worldwide? They would just wipe out the competition. The intention of the FDI is not clear. The approach is strategical. They will come and compete but after a while when the things are put in place they will increase the prices. They would provide the goods for a cheaper rate but would then increase the prices.

This is nothing but the pressure that is put by the American government on India and I do not find any relevant reason for Obama to take this as an agenda. Is it that important aspect of our nation? Giant players like the Reliance and Tata have already secured us. My simple question is did Walmart build roads in the US? I fear that though it is only 51 per cent penetration into the Indian market, it encompasses the majority and I fear if this is the case then what would be the fate of 120 crore of the population of India who would suffer from unemployment? As a kirana shop I am in direct contact with the customer. How is the government going to tackle the problem of unemployment in the country?

Though it is claimed that they will employ, but I believe it is a fake assurance given to people and misleading. Walmart would employ only 100 people but what about the 10,000 people on the other end who would be in a state of unemployment? In countries like the US and the UK, when there was unemployment, the citizens were given some security, but what about in India?

I fear colonialism as you turn the history pages, the Britishers came to India for trade but slowly and steadily, it took the shape of power and dominance taking away the lives of many people such as Subhas Chandra Bose, Bhagat Singh and other freedom fighters.

I welcome the constructive approach but not the selfish motive of the FDI into India. They should have the right approach and not claiming wrong things.

Source : fnbnews.com