UPA government has indeed taken a bold step in deciding to open up Indian retail sector to foreign players. This bold move has come in the wake of need for economic reforms to safeguard the falling rupee. The decision assumes importance since it has been taken in the atmosphere marked by vociferous opposition voiced by not just oppostion parties but also by the allies of congress in UPA government. Here, a sincere attempt has been made to concisely discuss the issue.
The Issue
The cabinet has approved to allow FDI in multi-brand retail with a majority of 51% stake and 100% stake in single-brand retail.
First, let us understand what this FDI is. FDI stands for Foreign Direct Investment. It implies the investment of a firm in a company other than from its own country in return for a management stake.
Since foreign players are allowed FDI in retail sector, they are motivated to invest in Indian retail sector. This implies more super markets, departmental stores and retail outlets. Since these retail outlets operate on large scale, they are in a position to enjoy economies of scale (benefits arising from operating on a large scale) and hence can offer goods at a lower price in relation to Kirana shops. The advantage of finding all the requirements under a single roof induces customers to prefer these super markets to Kirana shops. This is likely to be a big blow to petty merchants. But the Government claims that it has formulated adequate provisions to safeguard small merchants. Let us now briefly examine the provisions of the proposal to opening up retail sector.
However, the opening up of retail sector is not without advantages. It is claimed that the new proposal would help farmers by offering better prices and eliminating middlemen. The advantages also encompass increased employment opportunities and reduced prices and increased choice to consumers.
- The minimum investment limit has been kept as high as $100 million(Rs 500 crore). This is to ensure that only serious players will invest in the sector and the investment shall not be withdrawn in short-run.
- It is mandated for foreign players to invest atleast 50% of investment in back-end infrastructure. This primarily means half the money will go in creating logistics, supply chain, processing of fruit-based products, development of farm produce along with farmers. The rationale behind this stipulation is that the investment will also be in physical assets. Investment in physical assets would leave behind infrastructure even when the investment is withdrawn.
- The proposal also mandates that there shall not be branding of fresh agricultural produce, fresh poultry, fishery and meat products. The idea is to offer these products at a lower price by doing away with price premium associated with branding.
- The policy also makes it compulsory for foreign retail players to source atleast 30% of manufactured goods from small and medium-scale units in India. This norm is applicable to single-brand retail as well. This is an impressive condition given the fact 60% of retail sales comes from food products which have to be procured locally and of the balance, 30% will have to be sourced from local manufacturers.
- The FDI proposal stipulates that retail sales locations can be set up in cities with more than one million population based on 2011 census data. Accordingly, only 53 cities will qualify for foreign retail stores. This provision is to insulate small merchants located in small towns.
It is too early to decide whether FDI in retail would benefit Indian economy and contributes to the well-being of its citizens. The utility of safeguards to protect petty Kirana merchants will have to be decided only by time.
