Beneficial effects of FDI in retail

Beneficial effects of FDI in retail

The government recently came out with a concept note on foreign direct investment (FDI) in multi-brand retail trading. This is an emotional issue, and has been placed on the back burner by successive governments in response to fears about its impact on small retailers, who are large generators of employment.

This fear is worthy of examination. Trade constitutes around 15% of our gross domestic product, of which retail trade makes up at least half. The retail sector is the second largest employer after agriculture, providing job opportunities to at least 33 million people. Few can underestimate the importance of being circumspect with regard to any legislation that will affect so many jobs.

The main driver for this policy seems to be the recognition that the Indian economy faces serious supply-side constraints, particularly in the food-related retail chains. The government would like to improve back-end infrastructure, and ultimately reduce post-harvest losses and other wastage. There is also a general concern, highlighted by the persistence of food inflation, that intermediaries obtain a disproportionate share of value in this chain and farmers receive only 15% of the end consumer price.

In its concept note, the government has asked 12 questions, which relate to the regulatory framework that ought to be in place to protect farmers and small retailers. The intent of this article is to ask a few more questions that may in turn enable a response to those 12.

A crucial argument against foreign investment in retail is the belief that small retailers will suffer. This, in some sense, suggests that low price is all that counts in the retailing industry. Small retailers’ offer of personalized service, home delivery and credit seems to have been given little importance. One question is whether customers, used to these services for long, will give them up easily.

Second, large retail has typically succeeded where consumers have been willing to buy in large quantities to avail volume-related discounts. In a country where the marketing ethos has been dominated by the paisa pack, and marketeers obsess about the fact that the unit outlay for a commodity must be small for it to be attractive, another question is whether there is a willingness to make large outlays. There is also the so-called “car" problem in retail: Only if large parts of the population own cars would they be able to carry 24 cartons of orange juice and 2kg tubs of ice cream conveniently. If only car owners are targeted by big retail, one wonders if there would be a material impact on the small store.

Undoubtedly, lower prices psychologically propel buyers to spend more than they otherwise would. The resulting growth in private consumption creates jobs. It is not clear if this aspect has been considered. What we must avoid is a situation similar to the one in the US, where increased consumption does take place, but actually creates jobs in China. If we can ensure that procurement from large-format retail takes place within India, it may have a beneficial impact on jobs.

India has had several retailers with deep pockets and access to skills. That they have not been able to swamp the domestic small retailer says something about consumer behaviour and small retail’s resilience.

Answers to these questions will suggest that FDI in retail could have a profound impact, but not necessarily on small retailers. One should also examine whether greater benefits to farmers due to greater consumption, and the consequent impetus to manufacturing, can offset a marginal impact on the small retailer. Most importantly, we should not write off the inherent entrepreneurship of small retail in India. Hence, it should be possible for the government to manage this FDI in a calibrated manner, ensuring that its benefits—through development of infrastructure, provision of rural employment, and support for local sourcing—balance potential risks to the retail trade.

Govind Sankaranarayanan is chief financial officer, Tata Capital Ltd. He writes on issues related to governance.

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