By Jaideep Shergill, CEO,Hanmer MSL India : In the Indian retail firmament, for too long FDI (foreign direct investment) was akin to a four-letter word. The retail sector in general and those in power treated it like a shadow in the dark – the perception of danger overpowered all logical thought.
A fortnight ago, the Indian government finally shrugged off this fear of the dark and opened the gates for the Walmarts and TESCOs of the world by allowing 51% FDI in multi-brand retail. Also given the thumbs up was 100% FDI in single-brand retail. Though there were riders – 50% of the investment and jobs should go to rural areas, 30% of the inputs should be sourced from medium-sized and small enterprises, retail chains can only be opened in towns with a population of more than 1 million – the decision marked the return of big-ticket economic reform.
But many still feared the political impact of the decision, including members of the ruling coalition. The storm of protest that ensued seems to have forced the Indian government to put FDI in retail on hold.
What a pity. India’s retail sector would have been transformed by FDI. Here’s why I think so:
* There will be major investments in retail, creating at least 10 million jobs in industries such as agro-processing and logistics.
* Though organised retail is growing at a staggering 35% and unorganised retail at 6%, the industry has grown slower than expected. Blame it on lack of retail experience and capability. FDI will pave the way for inflow of international expertise.
* Opponents of FDI claim that farmers will be the worst hit. In reality, FDI in retail will help them secure remunerative prices by eliminating middlemen.
* Foreign retail majors have immense supply chain expertise and they will guarantee efficiencies in this critical component of the economy. In fact, the FDI policy mandates a minimum investment of $100 million with at least half the amount allocated to the back-end – cold chains, refrigeration, transportation, packing, sorting, etc. This too will benefit farmers as it will reduce post-harvest losses.
* India has been reeling from food price inflation (it was 12% a couple of months ago). The efficiencies of superior supply chains will reduce wastage and costs, thus lowering prices.
* The minimum sourcing requirements will help small industries and boost incomes.
Now, here’s what those against FDI say:
* Supermarkets will wipe out small retailers, leading to loss of employment.
* Global retail giants will resort to predatory pricing and take control of the supply of essentials.
I disagree. China permitted 100% FDI in retail in the 1990s, but has had impressive growth in the sector. This year, for instance, it grew more than 20% for six of the eight months for which data is available. China has seen neither loss of employment, nor predatory pricing.
Don’t forget the advantages India has – the highest shop density in the world (11 shops per 1,000 people). It has 12 million shops employing 40 million people, and 95% of these are small shops run by the self-employed.
This is an unorganised, yet powerful force. Foreign chains are not a threat because they can never offer the convenience of – or loyalty enjoyed by – small neighbourhood stores.
Indonesia is a telling example. Even after several years of the establishment of supermarkets, 90% of fresh food and 70% of all food is still controlled by traditional retailers.
We would likely witness a similar scenario in India.
The consumer would have had reason to rejoice, too. Organised retail provides high-quality goods at competitive prices. Some estimates put consumer savings at 10% on purchase of daily-use goods from organised retail outlets.
I don’t believe FDI in retail can be put in cold storage for much longer; it’s around the corner even if it’s run into problems now.
I, for one, am looking forward to WalMart opening in Mumbai, where I live. I might drop in to pick up a batch of Toblerone, after I finish buying veggies from the neighborhood vendor.