The Union government, after the recent petrol price increase, may be in a mood for reforms. Opening multi-brand for foreign direct investment (FDI) seems to be the next logical step. Thinking about international retailers, the US-based retailer Wal-Mart often springs to mind. Wal-Mart is symbolic of foreign retailers so this is not surprising. It may, however, be useful to take Wal-Mart as a case in point and examine the implications of the possible “opening” of retail for Wal-Mart and other foreign retailers. For India, there is much to gain and little to lose.
Wal-Mart already has a presence in India, albeit as a joint venture with Bharti (which manages the retail end of the business). Majority ownership is the thorn in the flesh for those opposed to foreign retail. Responding to concerns about its impact on small-scale industry, Union minister for micro, small and medium enterprises, Virbhadra Singh commented last year: “India is a very big country. There are retailers in every village and city. How many stores will open?” There is no escaping from this fact. According to the 2011 census, India has 45 cities with a population of over one million. With a total population of approximately 113 million in these cities, less than 10% of the country’s population is likely to be directly affected. Indeed, how many stores will be opened or can be opened?
The small sector is unlikely to remain unaffected if big retail chains enter the Indian market. But from the perspective of the Indian economy the gains to, or protection for, any particular group should be viewed in the context of losses or costs to the country as a whole. To the extent global retailers improve efficiency (for instance, through lower prices or less wastage via improved supply chain management), the cost of protecting the neighbourhood kiranas, or the small grocery stores, means that consumers —a far greater proportion of Indians —will be short-changed. Moreover, this concern for small-scale industry assumes that large retailers will necessarily drive away the traditional mom-and-pop stores. Evidence suggests otherwise. A 2008 study published in Economic Inquiry examines, in a spatial context, the effect of Wal-Mart on self-employed and small-scale industry in the US and finds no evidence of negative effects. This is not surprising. Even though small competing businesses in the geographical vicinity will be affected, on aggregate, several small businesses that are not competing but are potential consumers benefit. And as these small businesses expand, additional employment will be generated. Of course, the retailers themselves generate employment as well.
Nonetheless, much of the reaction to the opening of retail sector does not take into account an important fact: businesses fail. And Wal-Mart is no exception. For instance, both in Germany as well as in South Korea, Wal-Mart has been an utter failure. And retail in India is not without its challenges. In fact, several features of the Indian retail market undermine the ability of international retailers to attract customers from local retailers. Kiranas can offer credit to local clients who may—often due to income constraints—trade-off bulk purchases with frequent shopping. Local groceries can also provide home delivery for orders for very few or inexpensive items—a feature unlikely to be matched by the global retail chains. Success for global retailers is by no means guaranteed. The success of any enterprise will necessarily imply an ability to provide goods and services more efficiently, be it the small grocery stores or large retailers.
Another concern is the degree of buyer concentration in the hands of global retailers, especially with respect to the food supply chain. Given competitive forces, it is far more likely that suppliers of food products will experience substantial gains.
On balance, benefits of further opening the retail market far outweigh the costs (perceived or otherwise). And the notion that individual entities as producers and consumers, when faced with choices that affect their well-being—be it about where to shop at or decisions regarding what goods to produce in response to changing economic milieu—will make decisions that are to their detriment seems both naive and paternalistic. The opportunity cost of shutting the door to FDI in the retail sector would be to say no to the gains that can be had. Surely India is wiser than that.
Nikhil Jha is a post-doctoral research fellow at the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne
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