FDI in Multi Brand Retail: Will the Cash Infusion Derail

the Colossal Retail Structure?

An Introduction to the Current Debate

Foreign Direct Investment (FDI) has yet again become a political football.
After a much debated opening up of single brand retail sector a few years
ago, which led to the entry of multi-national retail giants like Wal-Mart, the
Government this time is eyeing the multi-brand joints. In July 2010, the
Department of Industrial Policy and Promotion (DIPP) issued a discussion
paper for inviting views and suggestions on permitting FDI for multi-brand
retailing (hereinafter ‘retailing’). Amongst the many over-stressed
rationales for considering allowing FDI in retail, the paper also cites
reasons like removal of structural inefficiencies, improving post-harvest
management, and investment in back-end and storage infrastructure.

To start with, why bring FDI in any sector? There is no denying the fact
that FDI benefits customers, economy and infrastructure. The experience
in telecom, automobile and insurance sectors clearly shows the success of
the FDI policy. With large-scale investments in each of these sectors,
customers are getting the best of services and products, and the resultant
competition is spurring the players to improve further. However, it should
be noted that a large chunk of the Indian population was not engaged in
any of the abovementioned sectors, though the same is not true for the
retail sector. The recognition of this distinction, along with others, is
imperative in making out a case for, or against, allowing FDI in retailing in
India.

Analysing the FDI Impact!

The potential impact of FDI can at best be seen from the direct, and the
most immediate effect it will have on the society. Loss of jobs is cited as
the major drawback of allowing FDI in retail sector. In India, an estimated
4 crore people are engaged in retail sector, which is also the primary form
of disguised unemployment. Allowing FDI is most likely to affect adversely
these people, with no likely provision of compensation for loss of jobs, or
displacement. In England, when the Government allowed FDI in retail
sector in 1980, it saw over 4.5 lakh people lose employment and over
25,800 shops being shut down owing to this decision. The situation is also
comparable to that of Thailand, when the decision to allow foreign
retailers led to the loss of thousands of jobs and severe dislocation of
supply chain, during the 1997-98 financial crises. In the face of massive
protests by traditional shopkeepers, the Government was forced to
provide a safety net for those affected.

It is sometimes argued that the entry of a foreign retailer in a particular

area leads to an increase in jobs, as the gigantic retailers would need
massive manpower for efficient functioning. However, a study by Emek
Basker at the University of Missouri (2004) concluded that although there
was a slight increase in employment after the Wal-Mart stores started
operations in various areas; most of the gains were lost within the next
five years as the medium and small sized establishments closed down,
unable to compete with the giant retailer.1

The paper released by DIPP argues that the Indian supply chain is
currently dominated by intermediaries. Elimination of these intermediaries
by foreign retailers will reduce the prices of goods. However, what cannot
be ignored that these intermediaries are bullock cart men, transporters,
and small shopkeepers. Elimination of such intermediaries though on one
hand will reduce the prices of some of the products; on the other hand it
will also result in massive unemployment and resultant consequences.
The argument that it will be a win-win situation for farmers, as the
elimination of intermediaries will wipe out transitional costs, hence more
remuneration for the farmers, also does not hold good. It has often been
seen that once the massive retailers have fully established themselves,
they change the distribution structure and procure goods primarily from a
selected group of farmers, as bulk buying further reduces the price of the
1
Emek Basker, Job Creation or Destruction? Labour Market Effects of Wal-Mart
Expansion, 2004. Accessed from http://ideas.repec.org/p/umc/wpaper/0215.html. Last
retrieved 03/09/2010.
goods. However, other farmers usually don’t have anywhere to go, as
even the other potential buyers are generally wiped out by the entry of
retail giants in a particular area.

There’s no denying the fact that the FDI will benefit the consumers in the
form of better quality products and lower prices. However, it’s important
to analyse which section of the consumers will be benefitted the most. The
retailers, due to their obvious profit-seeking motive, will be reluctant to
open their stores in rural or semi-rural areas. Even in urban areas, these
retailers will cater to a small minority of wealthy card-swiping customers,
as the absence of cheap public transport or credit facility will make such
stores inaccessible to the poorer sections of the society. Thus, while these
retailers are adversely affecting large sections of the society in the form of
distorted supply chain, unemployment and displacement, it is benefitting
only a small section in the form of better services.

A lesser emphasized, but nonetheless a major threat from FDI in retail is in

the form of increasing imports of goods. In a rush to make the goods
available at competitive prices and in pursuance of the cost-cutting
strategies, the big chains of retailers will import goods from the cheapest
sources in the world. Currently, the use of imported manufactured goods
exceeds the use of domestically produced manufactured goods by a
whopping 38%. Thus, any further increase in use of imported goods over
domestically produced goods will also give a further push to de-
industrialisation and export of job opportunities, and will potentially affect
even the organized retail sector adversely.

FDI in Multi-Brand Retail- How to make it work?

With over 94% of the retail still under the garb of unorganised structure,
India can safely be said to be not ready for such investment by foreign
entities now. Such investment will adversely impact the unorganized
sector to a great extent, which may lead to severe imbalances in long
term.
A more viable strategy would be to provide the unorganized sector a
breathing space of at least five years. During this term, the unorganized
sector should be categorically upgraded to the pattern of Micro, Small and
Medium Enterprises Act and a cluster approach should be adopted to
convert the unorganized retailers to organized retailers. This can be done
through measures like providing credit facilities at a lower interest rates,
and setting up a retail regulatory authority to supervise and study the
problems of the existing structure. While this strategy will gradually alter
the structure of unorganized retail, it will also give the organized retail
enough time to face the foreign competition.

Conclusion

With 15 million outlets, the Indian retail outlet density is one of the
highest in the world. However, it is still one of the least evolved industries.
The Government currently needs to bring out massive reforms in the
existing retail structure of India, before opening it up to foreign investors.
Blindly importing FDI without tailoring it to suit the needs of the Indian
economy can spell disaster not only for the gigantic unorganized sector,
but the Indian retail industry as a whole.