Should India lift FDI in Retail as Obama pushed?
The Indian retail industry has been hailed as sunrise sectors of the economy. India has been recognized as leading Retail destination and whole world is eying on it. Retailers globally are effected by stagnation in consumer demand in their home countries, and so double digit growth in consumer demand in India looks like hot cake to them but the same is secured by FDI policies in India. Keeping these facts in mind, it was no news that US President Barack Obama was pushing India to liberalize and open its FDI policy for multi-brand retailing. He said that the stereotype concern that small shopkeepers in India will be impacted, ignores today’s reality.
As we know, currently India allows 51% FDI in single-brand retail and 100% FDI in cash-and-carry stores who can only sell to other retailers and business concerns and not to individual consumers who shops for home consumption.
FDI in Retail has always been a very sensitive issue in India. Supporters of FDI have been highlighting positivity it will bring to Indian economy like greater efficiency, better selection, improvement of living standards, integration with global economy and of course price reduction as a result of better technology and knowhow. But at the same time, people opposing it feels that it is a labor displacing act and will jeopardize unorganized and small retailers of India as well as Indian Retail Players. They believe it will effect balance of our economy when these foreign investors will draw billions of rupee as profit out of our consumer spending.
But if we see many other developing nations like China, Malaysia, Thailand etc., have opened up there Retail Sector without much problems. They faced some hiccups but then they introduced conditional laws to check expansion of foreign Retailers in their country and hence restored wellbeing of locals too. India also need to adopt similar approach where they analyze possible barriers to FDI and ensure that they are addressed in their policies while lifting FDI.
If we see GDP composition of Indian economy, Service sector contributes most, followed by Manufacturing and then Agriculture. But for a developed economy, contribution of Manufacturing sector should be most as it indicates more of saving for the economy. Opening up Retail may result in some losses in Service Sector but if it is accompanied with proper conditions and policies safeguarding interest of domestic retailers and small players it will be fruitful. We need to open it up with conditions which will boost our Manufacturing and Agriculture sector which will not only compensate loss in share of Service sector, but will also bring Profits from rise of Manufacturing and Agriculture sector. Some of the conditions and their benefits which I can think of are as follows:-
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Fixing quota of Indian make products in their offerings in India. Say for example if they are offering Rs. 100 values of products, than Rs. 80 worth products should be made in India. This would increase demands of Indian Products and will boost Manufacturing sector too.
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Above clause will encourage them to get manufactured some goods in India as there private label. Cost of manufacturing some of these labels may be too less and so Retailer may export it to their outlets in other countries boosting India’s export.
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Govt. can impose that 100% of Fruits & Vegetables they are offering are produced in India. This will encourage contract farming by these Retailers in agreement with farmers ensuring high quality produce and better earnings to poor farmers of India.
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Further Govt. needs to monitor Prices in order to ensure that price efficiency of these retailers is not killing small Indian players. One of the way will be higher taxation on foreign Retailers.
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Government need to analyze the possible harm it could do to Indian Retailers and put appropriate conditions to ensure safeguarding their interest.
But again a big question which arises in our mind is that is our Govt. capable of finding such conditions and open Retail Sector in structural way? Keeping in mind corruption and bureaucracy in India, implementing it would be a challenging job. And if Retail is opened up without such terms and conditions, then it may turn as a grave error for India!
Loading ...- Rajeev Damani
Sphere: Related ContentTags: FDI, FDI in Retail
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Sudip Says:
November 11th, 2010 at 3:42 pm
Hey Rajeev,
Glad you brought this topic up again. As keenly mentioned, i also believe that we are capable yet so paralyzed to implement regulations. However, i disagree to your point of manufacturing, since its not a healthy clause for the retailer who is looking to bringing its products directly and not through a franchise route. The interest of the retailer cannot be thus ignored.
However the only way out that remains is a public-private partnership, of boosting the Agri sector, as the produce will get better markets and of course the nod for contract farming, which is highly debatable.
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Jeba Abraham Says:
November 11th, 2010 at 5:07 pm
Interesting Read… The persons who would be affected the most here would be the smaller traders who own small shops and make a living out of it. How would it be possible to include them in this change or safeguard their livelihood. There are millions of such small traders… They would be either forced to give up their business or sell their goods only to these big retailers as they would never be able to compete with the bigger retailers who have international business. Maybe the govt. should have some policies for that as well. And as rightly pointed out by you, the bigger evil of corruption would make such a change almost impossible to manage… really good thoughts from your side though!
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rajeev Says:
November 11th, 2010 at 6:44 pm
Hi Sudip,
Thanks for your comment. Your point on public private partnership is true. But at the same time my point of Manufacturing is also valid to not only boost India’s mfg sector but also to safeguard interest of local manufacturer who may get hurt by their efficiency and most importantly to ensure that India does not become a dump yard of their inferior/waste goods. At the same time interest of Retailer can be safeguarded as we are giving them liberty manufacture the products he wants to import. Basically rather than importing there private labels, manufacture them here. And if they are able to produce it at lower cost, which is very much possible, they may export same.
For example, 30% of goods offered by a leading Swedish home furnishing Retailer are made in India. And not to mention, they are very cheap in Europe even in Indian Standard. Now assume when this retailer starts operations in India, govt ask them to manufacture 60% of their products in India only. And while doing so they realize that almost 80% of these are manufactured cheaper in India than other countries where they were manufacturing it earlier and so they will interested to import these new products also from India. So it will increase India’s contribution to their product line from 30% to 48%
Jeba,
Thanks to you too for the comment.
Main aim is to safeguard interest of small traders which can be done by higher Taxation to these retailers. This will also increase govt. income from taxation. Moreover this change will generate million of new business opportunity in terms of manufacturing, construction, supply chain and other infrastructural development. Problem is this that as we have mounting pressure from all over the world to relax our FDI, Indian Govt. will be forced to lift FDI today or tomorrow to ensure bilateral trade relations with global economy. So, the only option left will be to do it in a structural way and convert this threat to an opportunity. However, practically this has to survive corruption which in itself is bigger challenge
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Shrivastava Says:
November 29th, 2011 at 8:47 pm
Great info on the current FDI matter. I have not gone into a detail research on this matter but with a little understanding I DO NOT think it is a good idea to get the Wall Mart to India. While, I have visited to several of the Wall Mart stores and agree that it is an excellent chain of stores internationally, yet NO to have it in India. This is not conservative thinking.
I am happy that this matter has been taken up nationwide as this has raised a great awareness on:
- Strength of Indian consumer market
- Weaknesses of Indian consumer market
- NEEDs
I personally feel that India is competent enough to build within the capacity that could provide the same advantage that government is expecting by Wall Mart to bring in to the consumer market and to the Indian Economy.
The advantage of building the capacity within is that there will be on external beneficiary. Definitely, Wall Mart is a commercial entity and is not coming to India to do free service.
Government and those who are in opposition should not only oppose FDI but should together initiate to build internal capacity to create our own wall mart. We have enough of resources and people who can do it, need is of encouragement.
Hope some one who can understand my point of view could spread this message and we can see Indian Version of Wall Mart, we do not need to be international, India itself is equal to 10s, 20s of countries.