FDI in Indian Retail

FDI in Indian Retail

The Indian Government has finally approved the FDI in the Indian Retail Sector. A lot has been said about the decision. Obviously, as with most of the decisions, this one too comes with bouquets and brickbats. Before we analyse the scenario, let us have a look at the Indian market.

The decision: The Indian Government has approved 100% FDI in Single-brand retailing (which was 51% earlier) and 51% FDI in Multi-brand retailing (which was not allowed earlier). For more details about single-brand and multi-brand retailing, please visit http://invinciblehardik.blogspot.in/2011/12/fdi-in-indian-retail-much-to-be-done.html

Many of the critics argue that the decision will destroy the local market and the local grocery store owners too! However, the multinational retail giants (like Walmart, Tesco, et al) themselves are also not much ecstatic about the decision taken by the Indian Government inspite of the fact that the decision was arrived at after continuous lobbying by these very giants. The reasons why these giants are not gung-ho about the decision are the “conditions” attached.

* The Famous Asterisk *

We have been habituated to see this now-famous asterisk (*) mark on almost every offer, which normally reads further as “Conditions Apply”. The FDI gate has opened in India*, * - Conditions Apply.

 
1) Investment related: Foreign multi-brand retailers must invest at least $100 million over a period of three years and half that amount must be ploughed into back-end infrastructure in rural areas.

   2) Decision: State governments will decide if they want foreign players or not. Moreover, stores will be permitted only in cities of at least 1 million people.                                   3) Sourcing:  Retailers must also source 30% of the value of goods purchased from small- and mid-sized domestic suppliers.

Why the Giants worry?

Sourcing the goods from India and that too from MSMEs (Micro, Small and Medium Scale Enterprises) is a cause of worry. Most of these giants are quite finicky about their quality. The big question is whether their quality standards will be maintained by these MSMEs or not! The giants claim that they can uplift the standards of these MSMEs but it will take time. Till that time, to source the goods from these MSMEs does not sound to be so feasible.

How can we forget China?

Most of us compare India with China in almost every aspect and so is in this case too. China allowed FDI without much of restrictions. However, China benefited out of it because China already has a very good manufacturing set up. The Chinese invite to foreign retail was a boon because the companies were already sourcing majority of the products (sold) from the country and they invested money in improving infrastructure. The result was that the country used the resources and know-how of foreign players. This is not the case with India. India has a reasonably good manufacturing base, but, not comparable to China’s. Companies like Tesco, Walmart, IKEA, etc. do source from India, but mostly imports comprise of items like textiles and not items in which quality is of supreme importance.

The Pros and cons:

The Advantages:

The benefits that would be reaped are:

1)    It will improve supply chain logistics, including cold storage, and broadly bring India further in tune with 21st century western style market economy.

2)     It will save the 30 per cent wastage of perishables that we have been moaning about for 30 years.

3)   Initially, It will provide better prices and returns to farmers through better yields, productivity, and distribution.

4)    It could also offer more choice, better quality, greater uniformity, improved display and packaging.

The Disadvantages:

The possible disadvantages are:

1)  The small and marginal farmers might be edged out and might be having no option but to work for some giant.

2)   The food produce especially, may be of poor quality, as most of the giants in order to improve the yield use genetically modified versions of the crop.

3)    The local market and the local goods might be out of the market, if these MNCs are not controlled.

Considering the overall scenario, the current policy with its all terms and conditions seem to be workable for the benefit of India and the Indian Market. We should also note that the State Government has been given the power to take decision in such cases. The interests of the farmers and the local vendors have been mostly accounted for. Hope it works out! Let India rise further!

(This article is meant for academic purpose. With inputs from the web, especially from The Economic Times and The Hindu)