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FDI Investment in Indian Retail Inudstry. Do we need Multi-Brand Retail in India?

It’s been a long wait for global retail giants like Wal-Mart, Tesco, Carrefour and others to set up shop in India. As the winter session started on 22nd November, the ruling party of India decided to lift the ban on big-box retailers’ investment in multi brand FDI. Soon the topic raised the political storm in the Parliament with several other issues like including price rise, separate Telangana and safety of Mullaperiyar dam and more.

Market Views

The BJP announced that it would not allow foreign MNCs to set shop in states ruled by it. At the same time, BJP admitted it had first proposed the full opening up of the retail trade sector nearly a decade ago in May 2002. In a note for a group of ministers on FDI chaired by the then finance minister Yashwant Sinha, the ministry of commerce and industry under DMK’s Murasoli Maran recommended permitting 100 per cent FDI in retail trade, subject to a minimum capitalisation of $10 million in 2002. BSP chief and UP Chief Minister Mayawati, AIADMK supremo and Tamil Nadu Chief Minister J Jayalalithaa, BJD chief and Odisha Chief Minister Naveen Patnaik and Trinamool chief and West Bengal Chief Minister Mamata Banerjee are also opposed to the FDI move.

CII supported FDI in multi-brand retailand stated that it would go a long-way in boosting confidence would give a boost to the organised retail sector which positively impacts several stakeholders including farmers, MSMEs and consumers. CII noted that Foreign investments in the sector would not affect the traditional trade (Kirana shops), and it would continue to grow.

SURVEY QUESTIONS

DART Views

What is FDI in Multi Brand Retail?

FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. Now, the global retailers can come to India with a local partner and can set up stores. Till now FDI was not allowed in multi brand retail.

Organized Retailing

The organized retailing can negotiate prices more aggressively with manufacturers and pass on the benefit to consumers. They can lay down better and tighter quality standards and ensure that manufacturers adhere to them. With the availability of finance, the supermarkets can invest in much better infrastructure facilities like parking lots, coffee shops, ATM machines, etc., and all this will make shopping a pleasant experience. The supermarkets offer a wide range of products and services, so the consumer can enjoy single-point shopping.

The organized retail could help tackle inflation, particularly with wholesale prices. This is underscored by the fact that the weight of food in rural and agricultural household consumption baskets is approximately 65-70%.

Kiranas – Mom and Pop Stores of India & Existing Retailers

Indian retailing is generally known as Kiranas, the Desi Mom and Pop shops. According to a report from National Sample Survey Organization, the retail sector is the second largest employer in India – employs 7.2% of the total workforce roughly around 3.4 crore jobs (34 million) just after agriculture which employs nearly 60% of total workforce. There is not any specific data about the number of people employed under Kirana shops in major cities. Obviously, the Kirana jobs are not an important vocation in major cities compared to small places where Kirana is plays as a nerve centre of village supply chain. The Kirana retail segment survives based on the price difference between wholesale and retail market. This price difference shared at different points in the supply chain. Ultimately, this cost is passed on to the consumer who ends up in paying higher price for products. Thus, around 34 million jobs are generated on account of this price differences at various points of the supply chain.

The media report mentions that the entry of foreign players will most definitely disrupt the current balance of the economy, and will cost the above 3.4 crore jobs. It is a fact that Kirana shops in places other than major cities will enjoy built-in protection from supermarkets because the latter can only exist in large cities. The concern by domestic firms in the organized retail sector as an infant industry cannot be taken in its face value since many of the retailers have already stabilized in major cities.

As of now, the current status of organized retailing in India is much better than its position compared to year 2002. As per A.T. Kearney Global Retail Development Index (GRDI) India stands fourth position in terms of top 30 emerging countries for retail development which is an indication of higher opportunities.

Advantages of the Policy of Allowing Multi Brand FDI in Retail Sector

The global retailer will play a big role in sourcing several consumer goods from India for wider international markets. India certainly has an advantage of being able to produce several categories of consumer goods, viz. fruits and vegetables, beverages, textiles and garments, gems and jewellery, and leather goods. By allowing FDI in retail trade, India will become more integrated with regional and global economies in terms of quality standards and consumer expectations. In effect if the global retailer finds that onion can be sourced for 10 cents per KG or sauce can be bought for 10 cents per sachet then Indian onion/sauce will move globally. Thus, a major beneficiary would be farmers and small manufacturers, who will gain substantially through some of the best-practices of international retail companies. Thus, the traditional Indian farmers will get better remuneration and this will ultimately lead them to modernise agri-retail marketplace. This will improve the life of 60% of Indians who depend on farming, and 100% Indian consumers at the cost of a small percentage of existing Kriana shops in major cities.

Indian Government recommends that retail firms source a percentage of manufactured products from the small and medium domestic enterprises. The opening up of the retail sector to FDI could therefore provide a boost to small-and medium enterprises. At the juncture government can go for bringing safety nets in the form of strengthening the marketing of the products sold by small retailers/Kiranas, the provision of soft loans, and setting up a central logistics system to act on behalf of the small retailers.

Also it is to be watched with the rising salary pattern of Indian employees if the global retailer can compete with the existing retail chains which have already established in major cities. The rising operating cost in the organized retailing and the rising wages of employees will give smiley face to Kiranas to bring innovative methods and float in the competitive market with its inborn low cost operations and long working hours. Kiranas get an opportunity to enhance their customer proposition through steps like adding new product lines and brands, better display, renovation of the store, introduction of self service, enhanced home delivery, more credit sales, and acceptance of credit cards.

Wal-Mart has the history of exiting from Germany (2006) and from South Korea (2006) both under difficulties. Carrefour which set up shop in Russia even failed to sell its Russian assets after it decided to abandon its operations in the country in 2010. If Indian retailers are equipped to meet the challenges the incoming global retailers, their entry will just remain as another competitor in the market and an opportunity for innovation for ingenious Kirana shops. These types of competition will be negligible for existing retailers taking into account of India’s market size and the purchasing power of its growing middle class. Moreover, country has successfully opened up its telecom and banking sector for investment and consumers have experienced such benefits already.

This article is written by Surendra Kumar Parida, Senior Analyst with DART Consulting. He can be contacted at surendra@dartconsulting.co.in

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