Opening India’s retail sector to foreign direct investment (FDI) has been one long-winding saga of policymaking. After much deliberation, testing of water and trepidation, the inter-ministerial group on inflation recommended that FDI be permitted in multi-brand retail—the area in which most international firms want to invest.
Now, it appears, there’s been another twist in the story. The Union government is likely to throw the ball to the state governments. The argument being that as trade is a state subject— under the Constitution—their nod is required. If that happens, it could well mark the end of the chase. Politics apart, coordinating approvals, permissions and rules in 28-odd jurisdictions is likely to defeat any firm. The cost of doing so will make doing business difficult, if not unviable.
State governments will find it hard to take a decision. For one, most states have one or another regional party that is a serious participant in local politics. Very often petty traders and shopkeepers are a serious constituency for such parties. That will be a potent source of opposition.
The choices are stark: either invite firms that have proven ability to manage supply chains—and thus minimize costs that rise due to thick layers of intermediation—or continue with business as usual. The latter course will keep on building inflationary pressures that afflict the economy. Much has been said about how the benefits of FDI in retail have been overplayed. It is not evident how continuing with the present system confers any benefits.
Saying that small traders and mom-and-pop stores will be wiped out does injustice to the Indian tradition of trading that has done well under a variety of conditions. For example, most traders who operate in neighbourhoods do brisk business as they know local conditions— tastes and pricing among others—much better than any big store is likely to. That knowledge will be difficult for big chains to acquire: the scale of their operations will make that difficult. But the presence of two options—big chain and small store—will ensure competition that will only benefit consumers. Policymakers should look at decision making from this point of view, not the other way round.
Should states have a say in allowing FDI in retail? Tell us at firstname.lastname@example.org