Two Reports, One Aim

Recently, two reports have come, one from the American consultancy firm A.T.Kearney and the other from the Ministry of Consumer Affairs, Government of India. Their aim, however, is the same: paving the way, unmindful of harmful consequences, for FDI (Foreign Direct Investment) in India’s retail trade.

A.T.Kearney’s report is entitled “Emerging Market Priorities For Global Retailers: The 2005 Global Retail Development Index”. It underlines the growing importance of India for Western retailers. They are told that the “global retail game is changing.” The focus is not only on Asia but it is also shifting from East to South Asia. India has come to occupy the top position on the GRDI (Global Retail Development Index), computed by A.T.Kearney. India’s attraction to Western retailers is due to many factors.

To begin with, it has a retail market worth $330 billion, growing at an average rate of 10 per cent per annum since the turn of the present century. The consultancy firm has termed it as “underserved” and “among the most fragmented in the world; the combined market share of the top five retailers totals less than 2 per cent.” Further, it has described India as a powerhouse in terms of people. In fact, as the forecasts go the country’s population of more than one billion may overtake China’s by 2050. Notwithstanding the fact that more than 30 per cent of the population is below the poverty line, the size, purchasing power and mobility of the middle and upper classes have been increasing rapidly. These, along with the rising pace of urbanization, have been accelerating the pace of the expansion of Indian retail market. Lastly, the recent change in the law has created favourable conditions for the FDI. Earlier, no foreign investor was earlier allowed to own retail business. He could operate only through franchises. The present Indian government is ready to relax the rules to facilitate the entry of the FDI in retail trade, at least to 26 per cent of the total capital of a firm. Maybe, it will be increased up to 49 per cent.

Obviously, Western retailers will be attracted by the proposed legislative changes. A.T.Kearney wants them to “be quick to take advantage of these more favourable FDI rules. Wal-Mart, Carrefour, Tesco and Casino are among those actively seeking local partners. Foreign retailers currently operating through franchises, such as Marks and Spencer, and the Benetton Group, will most likely switch to a hybrid model. Levi is already taking advantage of shifting demographics and growing interest in branded products, and has laid out plans to build 300 stores in India by 2008. At the same time, leading domestic retailers, such as Pantaloon, Westside, and Big Bazaar are ramping up their business by increasing their scale and enhancing their logistics and technology processes.”

A.T.Kearney has warned international retailers of the difficulties or obstacles present in India. Inadequate infrastructure is the biggest of them. Reliable, regular and sufficient power supply has yet not been guaranteed. The absence of good and safe roads is another big obstacle. It means, 40 per cent of perishable commodities may rot during transportation owing to a lack of refrigerated distribution networks. Besides, Indian market is heterogeneous “with 28 different states, and a plethora of languages, customs and traditions, developing local market knowledge and choosing the best store locations will be critical. Indeed, India’s retailing landscape has more than 12 million mom-and-pop stores that are not likely to idly watch their businesses erode as foreign companies encroach on their territory. But gaining early-mover advantage could make tackling all of these issues worthwhile.” Thus the advice of A.T.Kearney to foreign retailers is not to have second thoughts and rush in.

The other report, commissioned by the Indian Ministry of Consumer Affairs, as reported by Financial Times (July 15), calls for the immediate opening of country’s $200bn retail trade sector to foreign direct investment despite an opposition by the Left allies. To quote: “The report… “strongly advocates” that foreign group such as Wal-Mart be allowed to own 49 per cent of their  retailing operations under a phased liberalisation that would lift all capital restrictions within three to four years.” It is argued that by allowing FDI in the retail sector, “India can protect its fast-growing outsourcing industry from a protectionist backlash in the US that has been given fresh ammunition by news reports claiming IBM is planning to hire 14,000 Indian workers and lay off a similar number in the US and Europe.”

To counter the opposition from the Left, it is being asked: if a socialist country like China can permit FDI in retail trade, why not India? The problem, however, is not that simple. If FDI is allowed, whether putting the cap at 26 per cent or 49 per cent, it will create veritable economic, political and social problems, leading to grave repercussions to the ruling alliance in general and the Congress in particular.

Looking back, one finds that the issue of FDI has been hanging fire for more than a decade. It was in 1993 that Dr. Manmohan Singh as finance minister in the Narasimha Rao government changed the law to allow FDI in retail trade. Dairy Farm, an MNC, was among the first to enter country’s retail sector. This change was, however, reversed by the Dave Gowda government’s finance minister P. Chidambaram. It was argued that the reversal was due to the pressure from the Left. In practice, it did not mean any big change because the foreign retailers, by taking advantage the legal loopholes, took resort to franchise and began doing business through their local agents.

The protagonists of FDI in retail trade advance a number of arguments. They contend that it will go a long way to benefit the fast expanding middle class, which will get quality goods at cheaper rates as costs of holding inventory, distribution and delivery will be reduced. Moreover, since FDI in retail trade will bring here companies like Wal-Mart that will have large stores where consumers will get all the goods needed by them, from medicines, books, vegetables and spare parts of cars to rice, flour, spices and so on. They will have the freedom to look at the goods carefully and compare the prices. These stores can arrange for home delivery and provide for servicing and repair of the durables. If MIT-based Prof. Sanjay Sharma’s innovation RFID (Radio Frequency Identification) is adopted, cash registers and clerks handling them will become redundant and this will lead to a reduction in the expenses which will benefit consumers through reduced prices of goods. It is further argued that the Western retailers entering India will boost India’s export earnings, as they will buy goods from India for their stores in foreign lands. It is pointed out that it is happening on a large scale in China.

As against them, it is argued that FDI in retail trade will have great adverse impact on employment situation, which has been deteriorating for quite some years. At present, 98 per cent of retail trade is in the unorganized sector. It employs 7 per cent of the work force, which in absolute terms comes to 42 million. Most of the retail stores are small ones owned by the families of those running them. They have been engaged in managing them for generations and they know the localities and their inhabitants where they operate. They are also familiar with likes and dislikes of their customers. They are knowledgeable about the festivals and celebrations and the requirements of their customers on those occasions. They also accord the facility of credit. No protagonist of FDI in retail sector denies that it will render a large number of existing workers in retail shops unemployed. Even Thomas L. Friedman in his latest book The World Is Flat admits it. What will happen in the long run is not very relevant in a country like India. Did not Keynes say, in the long run we all will be dead?

With the state withdrawing from its responsibility of providing employment opportunities and selling off public sector undertakings resulting in total or partial reduction in jobs when the record of the organized sector so far as job creation is concerned is quite dismal, the political and social repercussions may be quite serious. Those losing their livelihood as a result of FDI in retail sector do not have special skills nor can they be retrained for other vocations. Even Indian business community has begun voicing its opposition.   

Leave a comment