Sunday, November 27, 2011

Do we need FDI in retail sector ?

Foreign Direct Investment (FDI) in retail sector has currently become a hot topic for national debate since the day the proposal by the current government headed by CONgress has passed in its cabinet. According to the proposal, the government will allow 51% FDI in multi-brand retail and increase the current 51% to 100% in single brand retail. This decision by the government has created troubles in the political circles of India. Voices favoring this bill is focusing on modernization of supply chain and inflation control whereas the opposing voices are coming from the existing retail sector which foresees eminent jobless and ultimate situation of suicide. Now let us understand the whole issue in different subtopics.

Single-brand vs multi-brand retail
It is very important to understand what does each of these terminology mean. Single-brand retail means that a shop can sell a product under its brand name only. These shops are very popular in sectors such as garment, shoes, electronics, cars, etc. where a single brands products are only available. The shops can procure material from any supplier, but finally it can be sold under one brand name only. In India, primary single-brand shops are Pantaloon, Titan, Tata, etc. On the contrary, multi-brand retails is clear by its name. These shops can sell anything right from a single needle to a car. They can have any number of brands, and any kind of product. A major section of these shops are fast-moving consumer good such as vegetables, cosmetics, grocery, stationary, etc. However, there is no limit to these shops. A common grocery shop is an example of multi-brand retail. The shop area can range from a 4x4 feet to a few million sq feet.

FDI in multi-brand retail – What it means ?
The existing retail sector in India is largely considered as an unorganized system because it is operated by millions of small grocery shop owners for whom the government does not provide any direct remuneration and who work on their own. Accordingly, this sector is largely presumed to be inefficient leading to poor link in the supply chain of any product right from the field to the customer. The main argument by the proponents of FDI in retail is that a lot of food product and other goods are wasted due to inefficiencies in lack of handling of good by the retailers and poor coordination between the producer and the sellers. On the other hand, the same system if controlled by big retailers would handle the whole supply chain properly with their huge supporting infrastructure. They can directly procure the produce from farmers, transport them to cold-storage and then bring in to retail in their shops. Here comes the role of lobbyists from Wal-mart, Carrefour, Tesco, Metro, and many more who are pressing hard to open the retail sector in India. Retail business in India is about 400 billion $ per year.

Voices from the Government
There is a strong support from within the government to open FDI in retail. Their main argument is based on the following presumptions which is necessary to be addressed.
a) Retail handled by many small shopkeepers is inefficient because of lack of coordination between producers and buyers. The supply and demand is not managed according to the cutting edge IT-infrastructure and inventory assessment tools used by big corporate giants like Walmart and co.
b) The supply chain from the producer to consumers involves a wastage of 30% of perishable goods because necessary infrastructure such as cold-storage facilities, good connectivity roads, procurement from farmers at market rates are either not available or not properly handled.
c) Big players like Walmart have very efficient management skills which involves fast movement of goods from fields to showrooms thus minimize overall loss due to stagnant inventory. They also provide multi-brand products which increases the options for the consumers.
d) Big players would introduce competitive atmosphere and would create conducive atmosphere for retail business. It will increase the number of employment opportunities in showrooms, cold-storage facilities, procurement facilities, etc. which is estimated to be about 10 million in the next 5-10 years.
e) Inflation would be controlled because the wastage in food supply chain would reduce and it will increase in the overall supply of goods in the market and hence will bring down the prices.

In total, the picture presented by the government is very rosy. It only presents the beauty of the moon on a new moon day. I totally agree that the moon is crescent and beautiful, but I cannot forget that 99% of the moon is dark and it does not provide me any light. In the same proportion, the government's propaganda is a myth and it is in total contrast with the reality.

Arguments that entirely demolish the need for FDI in retail
a) The main presumption that the current retail sector is inefficient by itself is ill fetched. Just labeling the sector as inefficient without justification is an insult to an industry which directly employs 4 crore (40 million) people. This translate to food security of 20 crore (200 million) people. What contributes to the inefficiencies is not the people but the policies of the government who regulate the sector with more than 20 indirect taxes which leaves no room for innovation or upgradation.
b) Who is responsible for waste in food grains ? Should Indian farmer be blamed for producing more than he can sell ? But nobody will take into account that it is the problem of infrastructure. Provision of roads, cold-storage facilities etc. is the responsibility of the government. But the government never gave priority to the development of infrastructure.
c) Walmart is efficient because of economy of gigantic scale and use of advanced Information-Technology in handling goods from producer to buyers. Comparison of Walmart with a local grocery store is like comparing an elephant with a mouse. This comparison is totally flawed.
d) Walmart has a glorious history of destroying the local grocery retail sector by upto 50% within 10 years of its introduction in that area. If it generates an employment of 1 crore in 10 years, then it will push 2 crore people out of business. This translates to about 10 crore people pushed below poverty line. It doesn't seem to be a profitable deal.
e) Inflation in India is not because of unavailability of essential good. Inflation is because of hoarding of goods. Who prevents these big shopping mall owners not to hoard the goods and create a situation of artificial inflation ?

Some things about FDI which are not talked about
a) Foreign retailers are restricted to purchase atleast 30 % produce from local supplies. This means that they are free to import the rest 70% of goods from the markets which are cheaper than local produce. It is very probable that the government in its red-carpet treatment might have reduced or even removed custom and excise duties on the goods imported by these foreign retailers. This move is suicide for Indian industry. I don't understand why nobody talks about it.
b) 50% employment should be done from rural sector. What about the rest 50% percent ? Can these companies hire people from abroad ? If it is so, then we should start preparing for a social time bomb. These multinational companies know very well that Indians are mentally obsessed with white skin. What if these companies hire blonde white girls from eastern european countries to boost their sale? This is not a fiction. This trend has already begun in Bollywood where all the dancers in background are white skinned blonde from eastern European countries like Ukraine, Kazakhstan etc.
c) It is very clear that FDI would directly affect the jobs of about 2 crore people in the retail sector. Is there any plan down the pipeline that would provide employment to these people in the coming 10 years ? Walmart, Carrefour, Tesco are coming in India with a plan of next 50 years in mind. But does our government even have any simple roadmap for even the next 5 years ?

Do we really need a big retail shopping mall in Indian retail sector ? Youngsters of India who are dazzled by the beauty of globalisation would say yes within no time. These youngsters belongs to a very special niche comprising of IT professionals, MBA graduates, rich city youths, tweeters and facebookers who have never been taught the real Economics of India. They think that USA is the best, US model should be adopted in India, etc. But let me sound the bell right now without going further in this matter. We need to understand that USA is not India and India is not USA. These big shopping malls are not the achievement but are a compulsion for US. This is something they are really ashamed to talk about. This is one of the biggest truths in US which is never mentioned in the media. Ask any average USite about the pain of travelling 50 KM (32 miles) to get a tablet of Anacin from their shopping mall. The message I want to convey is that in India almost everything that is necessary to live is available everywhere. But in US everything is not available everywhere. They need to be transported in large trucks from one corner of the country to another corner. Let me explain by an example. Wheat grows in almost 80 % of the total number of districts in India which is roughly spread across the whole country. Similarly, major spices grow almost every where in India. But in US, roughly 4-5 states out of 50 grows wheat. For the rest of the country, it needs to be transported on big trucks. If you happen to be on any highway in US, out of 10 trucks passing by, almost 8-9 trucks would be shipping wheat or flour or bread. Now in the end of the supply chain lies the distribution. To make it simple, they go with big shopping mall in between 3-4 towns where they dump all the necessary stuff and people from these town come in their cars to buy. Thus US has gone for a centralised system of mall. But India doesn't need this kind of centralisation. The inherent distributed system in India requires less transport and small scale mechanism of distribution reaching right till the next door kirana shops.

The distributed system of India has been attacked time and again. Britishers tried to break this system for 200 years, but they failed. Before them, Islamic dynasties tried to centralise, but they never succeeded. Now Dr. Manmohan Singh (MMS) want to break this decentralised system. History suggests that everyone has met with failure in doing so. MMS is next in line. But in short run, he would create heavy damages which might take decades to rectify.

This article is homage to Shri Rajiv Dixit who passed away on Nov 30, 2010. Most of the ideas in this article are inspired from his teachings from the following video :-

Also Read:

Relation of Inflation with the Central Governments in India

Multi-facet consequences of Black Money


  1. Though your article is pretty well written I would like to point ;

    Can you tell me where you got the number that retail sector employes 4 crore people and it supports one sixth of our population ?
    Even if your numbers are correct the current FDI is only allowed in cities with a million plus population and won't affect most of the people.

    If 50% employees is from rural sector do you think other 50% will be from abroad ? you seriously think so .. think about costs ? think about work visa ? and can you compare entertainment industry which employs a few highly paid models with retail sector ?

    Now for taxes .. how many of the small retail stores do you think pay taxes ? I know personally a bunch of them and they paid "zilch" as income tax as they can hide their income . How many times in India you get a proper receipt for things you buys ? what about the revenue loss to the government because of this ? I also wonder why no one ever talks about this.

    You talk about supply chain is government's problem but government is inherently inefficient and more so in India , just see Air India or IR for example. Wouldn't it be nice if we let Indian entrepreneurs develop better ideas for our unique problems rather than blaming government ?

    Organized retail will lead to efficiency in the system and competition will decrease prices by most goods by 10-15% that will definitely reduce inflation.

    What we need is not dear but freedom to let people decide more openly on what they want and FDI in retail in big cities is a good start it will spur more innovation and more local solution. It will push companies like Big Bazaar to innovate and compete. What fears you are talking about are similar to what we always thought before opening our economy .. why would we be trampled by foreign companies , I think we are more efficient and companies like Tata , to Reliance to TCS have time and again proved it.

    WHy be afraid of it .. its a next step in evolution .. every son and daughter of a small store owner does not want to be a small kirani .. he/she wants to do something else and more innovative and thus the economy diversifies. We need to move more people from inefficient jobs such as agriculture , retail into more productive jobs to sustain growth and lift people out of poverty !!

    I hope I answer to some of your questions.

  2. Very well written article Mohit.... The entry of giants like walmart will eliminate competition from the society... will lead to black marketing (increase it). After farmers it would be the turn of small traders to commit suicides. Agree all your points. Not that this is the first time the govt has thought of bringing FDI in retail sector... They wanted it since they came to power after BJP. But thankfully atleast in this matter the opposition is strong enough to stop them.History has proven that Walmart destroys the local market more or less. I am sure there is international pressure from IMF/world bank as there was in 1991, when the market was opened which was a result of the conditional -loan lending from IMF, WB. Agree with all your points. If India can find water on the moon by itself, building cold storages and providing facilities to farmers/traders is not a big thing. The only thing requred is good intentions, which are clearly lacking here.