Who is afraid of FDI in retail?

Given the debate that's raging over opening the retail sector to foreign direct investment, we bring you the government's view, the opposition's objections and TOI's take on the issue. Government argument * Huge investments in the retail sector will see gainful employment opportunities in agroprocessing, sorting, marketing, logistics management and front-end retail. At least 10 million jobs will be created in the next three years in the retail sector. * FDI in retail will help farmers secure remunerative prices by eliminating exploitative middlemen. * Foreign retail majors will ensure supply chain efficiencies. * Policy mandates a minimum investment of $100 million with at least half the amount to be invested in back-end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing. This is expected to considerably reduce post-harvest losses. *This will have a salutary impact on food inflation from efficiencies in supply chain. This is also because food, which perishes due to inadequate infrastructure, will not be wasted. * Sourcing of a minimum of 30% from Indian micro and small industry is mandatory. This will provide the scales to encourage domestic value addition and manufacturing, thereby creating a multiplier effect for employment, technology upgradation and income generation. * A strong legal framework in the form of the Competition Commission is available to deal with any anti-competitive practices, including predatory pricing. * There has been impressive growth in retail and wholesale trade after China approved 100% FDI in retail. Thailand has experienced tremendous growth in the agro-processing industry. * In Indonesia, even after several years of emergence of supermarkets, 90% of fresh food and 70% of all food is still controlled by traditional retailers. * In any case, organized retail through Indian corporates is permissible. Experience of the last decade shows small retailers have flourished in harmony with large outlets. Opposition's argument * Move will lead to large-scale job losses. International experience shows supermarkets invariably displace small retailers. Small retail has virtually been wiped out in developed countries like the US and in Europe. South East Asian countries had to impose stringent zoning and licensing regulations to restrict growth of supermarkets after small retailers were getting displaced. India has the highest shopping density in the world with 11 shops per 1,000 people. It has 1.2 crore shops employing over 4 crore people; 95% of these are small shops run by self-employed people

* Global retail giants will resort to predatory pricing to create monopoly/oligopoly. This can result in essentials, including food supplies, being controlled by foreign organizations. Fragmented markets give larger options to consumers. Consolidated markets make the consumer captive. Allowing foreign players with deep pockets leads to consolidation. International retail does not create additional markets, it merely displaces existing markets. * Jobs in the manufacturing sector will be lost because structured international retail makes purchases internationally and not from domestic sources. This has been the experience of most countries which have allowed FDI in retail. * Argument that only foreign players can create the supply chain for farm produce is bogus. International retail players have no role in building roads or generating power. They are only required to create storage facilities and cold chains. This could be done by governments in India. * Comparison between India and China is misplaced. China is predominantly a manufacturing economy. It's the largest supplier to Wal-Mart and other international majors. It obviously cannot say no to these chains opening stores in China when it is a global supplier to them. India in contrast will lose both manufacturing and services jobs. Times View In principle, governments should not prevent anybody, Indian or foreign, from setting up any business unless there are very good reasons to do so. Hence, unless it can be shown that FDI in retail will do more harm than good for the economy, it should be allowed. A major argument given by opponents of FDI in retail is that there will be major job losses. Frankly, the jury is out on whether this is the case or not, with different studies claiming different findings. Big retail chains are actually going to hire a lot of people. So, in the short run, there will be a spurt in jobs. Eventually, there's likely to be a redistribution of jobs with some drying up (like that of middlemen) and some new ones sprouting up. Fears of small shopkeepers getting displaced are vastly exaggerated. When domestic majors were allowed to invest in retail, both supermarket chains and neighbourhood pop-and-mom stores coexisted. It's not going to be any different when FDI in retail is allowed. Who, after all, will give home delivery? The local kirana. Why would anyone shun them? If anything, the entry of retail big boys is likely to hot up competition, giving consumers a better deal, both in prices and choices. Mega retail chains need to keep price points low and attractive - that's the USP of their business. This is done by smart procurement and inventory management: Good practices from which Indian retail can also learn. The argument that farmers will suffer once global retail has developed a virtual monopoly is also weak. To begin with, it's very unlikely that global retail will ever become monopolies. Stores like Wal-Mart or Tesco are by definition few, on the outskirts of cities (to keep real estate costs low), and can't intrude into the territory of local kiranas. So, how will they gobble up the local guy? Secondly, it can't be anyone's case that farmers are getting a good deal right now. The fact is that farmers barely subsist while middlemen take the cream. Let's not get dreamy about this unequal relationship.

FDI in retail: Unnoticed facts are larger than debated issues

While there has been a lot of media coverage on the hot debate on the benefits and pitfalls of allowing 51% FDI in multi-brand retail, several important issues have not been properly highlighted either by the Government or by those opposing the move. A leading retail consultant the Bangalore-based Asipac - has come out with a white paper covering some of the important issues related to FDI in retail. The white paper touches upon issues like the impact on direct and indirect tax revenues for the exchequer, a realistic estimate of the foreign investment India can expect and the number of kirana .shops that will actually be affected. The white paper highlights some of the less known facts like: 1. By 2015, Urban India will have 423 million people and will need 635 million sq.ft. of space for food retail (includes pharma, beauty & FMCG), compared to 511 million sq.ft. Today (total space occupied by modern trade and neighbourhood kiranas). 2. Assuming that the organized sector (including existing players) captures7.5% market share in 4 years, we will have 47.63 million sq.ft. Of hypermarkets, supermarkets and pharmacies by 2015, compared to 15.3 millon sq.ft. today.Even if foreign retailers capture 50% of this and have 23.82 million sq.ft., at average ownership of 1200 sq.ft.per kirana owner, this will only affect 19,850 businessmen and not crores of businessmen, as has been hyped. 3. Theres much more to retail than just food & grocery. 423 million urban Indians will need 3680 million sq.ft.of spaces for non-food retailing. Assuming 20% market share, the organized sector is estimated to have 736 million sq.ft. of non-food retail space. 4. Thus, organized retail will have a maximum of 783.63 million sq.ft. (47.63 + 736.00). 5. At one direct job for every 180 sq.ft.of retail space, 4.354 million people will be employed across the 783.63 million sq.ft. of space occupied by organized retail. With 1.5 indirect jobs (in supply chain and logistics) per direct job, it adds up to a total of 10.89 million jobs. 6. A vast majority of the employees will be primary school drop-outs. Organized retailers will give those benefits such as PF, ESI and insurance, and hone their skills through training &development. What does the kirana do to increase Indias Human Development Index? So, FDI = HDI. 7. Why would any political party want to favour 19,850 small businessmen over 10.89 million youth who dont have many other other job opportunities? 8. At estimated sales of Rs.2000 per sq.ft. per month in 2015, the 783.63 million sq.ft.of organized retail space will generate revenues of Rs. 18.807 trillion p.a. and taxable profits of Rs.564 billion (assumed at only 3% of revenues). 9. This translates to Rs.2.594 trillion in GST collections (@ 16% GST) and Rs.174.28 billion in corporate income tax. The government is losing minimum 50% of this potential tax revenue

because half of the business of the unorganized retail trade is probably escaping the tax net. 10. Organized sector will have 780,000 managers earning average taxable salary of Rs.1 million p.a. This will generate at least Rs.195 billion of additional personal income tax collections. 11. The total Rs.1576 billion in additional tax collections (Rs.1294 billion in GST [50% of total] + Rs.87 billion in corporate income tax [50% of total] + Rs.195 billion in personal income tax) translates to an increase of more than 11% in the tax collection of the centre and states, wiping out the revenue deficit and making India a revenue surplus economy. 12. Of the 783.63 million sq.ft. of organized retail space, about 103.9 million sq.ft. already exists so we are talking about 680 million sq.ft. to be added anew. This will need infrastructure investments of Rs.4.76 trillion (at an average Rs.7000 per sq.ft. at 2012-2015 costs, for building construction, interiors and shop fit-ins) and Rs.1.904 trillion in inventories (@ Rs.2800 per sq.ft.), or a total investment of Rs.6.664 trillion ($128 billion). 13. If 50% of this is foreign investment (by foreign retailers as well as financial investors), we are talking about FDI of $64billion in four years, or $16 billion p.a., 80% increase over the actual inflows of fiscal 2010-11. This will help the Rupee to bounce back. 14. Most importantly, about $180 billion will get converted from the black market economy to the accountable economy, and we may need a much smaller Lokpal authority

Recent indications that the government is considering foreign direct investment in retail trade have sparked off a debate on
the advisability and consequence of this policy.

Retail trade takes place through five types of outlets -- kirana shops, more modern retail shops, departmental stores, supermarkets, and hypermarkets. Kirana shops and retail shops are a feature of our landscape. Every village and town has them. They are usually family-owned and -managed. Most kirana shops store goods unpacked in bulk containers, from which they are measured or weighed out in paper packets by the owner. Many of them also serve as paan bidi outlets. They take cash but give credit to known customers. As generations pass and villages become small towns, kirana shops graduate into modern retail outlets with shelves and cupboards and packaged goods. They then begin to store packaged goods and over-the-counter drugs. But at this stage they may give up the paan bidi trade, which gets taken over by dedicated paan shops.

As the populations of towns are larger than those of villages, retail shop owners cannot know all customers and therefore credit becomes more selective. When towns become cities, departmental stores appear. Supermarkets are the next stage in the evolution of retailing. They are viable only in the bigger cities. The fear expressed by some people is that allowing FDI in retail trade and the entry of international retailers could lead to a diminution of kirana shops and retail stores. It is worthwhile analysing the advantages and disadvantages of the proposed policy of allowing FDI in retail trade. One key point is that we must differentiate between the interests of consumers, who constitute our population of nearly 1,100 million, from the interests of retailers, who may number over one million. It is obvious that the interests of the consumer should take precedence over those of the retailer. FDI in retail and the development of larger stores and supermarkets have the following advantages from the point of view of consumers: FDI will provide access to larger financial resources for investment in the retail sector and that can lead to several of the other advantages that follow; The larger supermarkets, which tend to become regional and national chains, can negotiate prices more aggressively with manufacturers of consumer goods and pass on the benefit to consumers; They can lay down better and tighter quality standards and ensure that manufacturers adhere to them. Many consumer goods manufacturers will find that supermarkets account for an increasing share of their sales and will be afraid of losing this valuable and reliable customer to competition. The fact that a well-known chain of supermarkets sources from a manufacturer becomes a stamp of quality. With the availability of finance, the supermarkets can invest in much better infrastructure facilities like parking lots, coffee shops, ATM machines, etc. 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 argument that the advent of FDI and supermarkets will displace a large number of kirana shops is similar to the argument used during the era of industrial licensing, which was meant to protect small-scale industries. But eventually the inefficiencies and quality standards of the protected small-scale companies become apparent even to socialist politicians and licensing was abolished. Small-scale industries have not died. Instead, they have learnt to co-exist as suppliers to large-scale industries. In the case of retail trade, the kirana shops in large parts of the country will enjoy built-in protection from supermarkets because the latter can only exist in large cities. On the other hand, the ability of supermarkets to demand pricing and quality standards from manufacturers will benefit even kirana shops, who can even buy from the supermarkets to sell the same products in smaller towns and villages.

It can be argued that since the advantages cited above are due to the scale of operations rather than the involvement of foreign capital, why should we allow FDI in retail trade? The case for FDI has more to do with the confidence and willingness to invest large amounts in a short period as well as the expertise based on experience. Even a modest chain of 200 supermarkets, to be set up all over India [ Images ] in selected towns and cities in the next three years, will require an investment of about Rs 2,000 crore (Rs 20 billion), at the rate of Rs 10 crore (Rs 100 million) per supermarket to cover the infrastructure and working capital. Each supermarket may take 2 or 3 years before it becomes profitable. There is a risk that a few of them may even fail. How many Indian entrepreneurs will be willing and able to commit this level of investment and undertake the risks involved? That is where the international experience and skills that may come with FDI would provide the confidence and capital. Apart from this, by allowing FDI in retail trade, India will become more integrated with regional and global economies in terms of quality standards and consumer expectations. Supermarkets could source 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. The advent of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all these segments. That will benefit not only the Indian consumer but also open the door for Indian products to enter the wider global market. It is therefore obvious that we should not only permit but encourage FDI in retail trade. Just as in the case of most products, the brand name of the supermarket chain is a strong element in its growth and success. People have confidence in names like Sainsbury, Asda, Marks & Spencer, etc. just as they have confidence in Indian brands like the Tatas and Godrej [ Get Quote ]. A possible outcome can be that Indian groups with strong local brand quality like the Tatas will collaborate with international supermarket chains like Sainsbury, to set up supermarket chains in India. It will be unwise for a government to interfere in this process.