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Political
issues aside, opening up the retail
sector has a significant impact both
from an economic and social perspective.
The total estimated size of the retail
sector (both organised and unorganised)
is in the range of $400 to 500 billion,
of which organised retail accounts for
approximately 4 percent. The number of
people who are self-employed in
unorganised retail exceeds 40 million
and the majority lack anything other
than basic education. |
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The backdrop to this article is the current debate and uncertainty regarding
permitting Foreign Direct Investment (FDI) into the Multi-Brand Retail Trade (MBRT)
sector. It is surprising that the Government took a step with such significant
economic, political and social ramifications without the consensus of its
coalition members as well as the opposition. A possible trigger could have been
public statements by high profile business leaders that the Government was in
‘policy paralysis’ mode, which was affecting business sentiments and suffocating
growth. The furore over the unilateral decision was only to be expected and it
culminated in a rollback of the decision. The rollback has only served to
reinforce the impression that this Government is unable to carry through
significant decisions.
Far Reaching Social and Economic Impact
Political issues aside, opening up the retail sector has a significant impact
both from an economic and social perspective. The total estimated size of the
retail sector (both organised and unorganised) is in the range of US$400 to 500
billion, of which organised retail accounts for approximately 4 percent. The
number of people who are self-employed in unorganised retail exceeds 40 million
and the majority lack anything other than basic education, if at all. The
estimate of additional employment that organised retail will create is in the
range of 2 million or so. The requirement will be for a low-cost English
speaking workforce. A large percentage (35-40%) of fruits and vegetables and
close to 10 percent of food grains is wasted due to lack of appropriate storage
and transportation facilities.
Those in favour of opening up the sector to FDI underscore several advantages as
a compelling reason for doing so. The move would help the sector become more
organised. It would introduce latest modern technology and increased investment
in backend infrastructure. FDI in retail would pave the way for the re-organisation
and efficiency in the supply chain and would assist in securing remunerative
prices for farmers by ensuring direct procurement of agriculture produce. It
would also enable customers to benefit from lower prices on account of increased
competition, and would enhance quality and choice of goods for the consumer. FDI
is also expected to control inflation in the medium term. One expects less
wastage of perishable goods due to improved storage facilities. There would be
significant employment generation and a reduction in disguised unemployment.
Analysing the Flip Side
However, the majority opinion appears to be that the following disadvantages far
outweigh any perceived benefits:
• Potential Labour Displacement and Unemployment: Unorganised retail is highly
fragmented. This provides employment and self employment opportunities to the
uneducated and marginal populace of both urban and rural India. It is feared
that the additional jobs created by the retail boom would be for the educated
youth and may be at the cost of employment of larger numbers of uneducated
personnel at kirana stores.
• Adverse Impact on Unorganised Retailers: As stated above, it is estimated that
almost 40 million people are employed in the unorganised retail sector, whereas
organised retail is likely to contribute an additional 2 million jobs. Assuming
that only one out of every ten small kirana stores goes out of business, the
jobs taken away will be far more than new jobs generated.
• Disintegration of the Established Supply Chain and Monopolistic Pricing:
Traditional retail also provides livelihood to several intermediaries involved
in the supply chain. The retail giants would source directly from the producers
thereby wiping out the intermediaries. There is an apprehension that with their
deep pockets, large retailers would be able to sustain losses for several years,
till their immediate competition is wiped out. This may slowly result in a
situation, that would later lead to buying low and selling high.
To compound the confusion, other countries that have opened up retail to
overseas investment have had mixed results. China, for example, has seen the
share of organised retail go up to just 20 percent over the past two decades,
while the number of small retailers has actually increased over the same period.
In other countries such as Argentina, Malaysia and Thailand, the share of
organised retail is in the range of 40-50 percent, and small retailers have been
significantly impacted. The reason for the variation appears to be whether there
is government policy to protect the interests of small retailers as well as
restrict the proliferation of organised retail.
Inbuilt Safeguards that Assuage Concerns
In order to address some of the above concerns, the proposal to permit FDI in
MBRT and allow 100 percent in SBRT came with certain safeguards in the form of
the following riders:
• Only 51 percent FDI under MBRT was allowed;
• FDI in MBRT required prior approval of the GOI;
• Government has the first right to procure agricultural products;
• Minimum FDI to be brought in is $100 million;
• Minimum 50 percent of the total FDI had to be invested in the ‘backend
infrastructure’, which was defined in order to avoid ambiguity;
• At least 30 percent of the procurement of manufactured and processed products
had to be sourced from ‘small industries’; and,
• Retail stores were allowed to be set up only in cities with population of more
than 1 million (2011 census) in order to mitigate impact on rural India.
The actual impact of permitting FDI in retail would be known several years after
FDI actually flows into the sector. What India will do well is to learn from the
safeguards that other countries have incorporated in their models in order to
ensure that the ill-effects are mitigated while bringing about supply chain
efficiencies and modern technology. However, given the extent of current
opposition to the move, these may be lessons that India might never be required
to learn.
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