India: FDI in Retail

Here are the notes I had prepared as Aide Memoire for myself, for yesterday's Panel Discussion on FDI in Retail at the India Retail Forum 2010

With AT Kearney's Global Retail Attractiveness Index placing India at the very top since the mid 2000s, many MNCs and the Foreign Governments have been advocating liberalised FDI inflows into the sector for a while now. Their primary argument is that the FDI is a powerful catalyst to spur competition, especially in the retail industry which is characterised by low competition and poor productivity along the whole supply chain...

Some benefits are clear, while some are arguable! And, there are some genuine concerns too... A very calibrated reform process adopted by the Indian Government, to date, made sense. As the pressure mounts to open up the FDI in the hitherto reserved multi-brand retail, what should the Government do? Here is my analysis of the pros & cons. And the recommendations follow!

A. Clear Benefits:

1. More competition leads to more choice. And, more choice leads to greater value to the consumer.
2. Interactive engagement between the product and the consumer on the modern retail shelf leads to higher consumption. This means faster GDP growth at macro level, and better quality of life for the people at micro level

B. Arguable Benefits:

1. Retail sector generates large employment opportunities. Or, are they actually the jobs from the informal sector getting recognised as employment in the formal sector? Is there a metric such as "Relative Employment Intensity per Rupee of Sales" that resolves this argument?
2. Price paid to the small farmers will increase. Higher share of organised trade, the argument goes, results in higher farm gate prices. Or, will the small farmers actually get squeezed further, to pass the benefits on to the consumer in a hyper competitive market?

C. The Concerns:

1. Modern Retail will displace small retailers. In a nation of shopkeepers, is this justified? The counter-argument is that the small retailers are very savvy, they will find their own niches and co-exist; it's not as if modern retail will take 100% market share. Empirical studies prove that the small retailers in the vicinity of newly set up modern stores do suffer badly...
2. Big Box modern retail has adverse side effects on the environment. Huge energy consumption through ACs & lighting, besides large concrete constructions that skew the green ratios.

D. Some Related Issues:

1. When domestic large companies can invest in modern retail, what's the big deal in allowing FDI? On the other hand, is it not that every firm - however globally spread it is - has a dominant home nation orientation? What are the implications of such orientation on the gross value captured within the boundaries of a "market nation" for its people & economy?
2. FDI was allowed in cold chains some time ago, but no investment has come into cold chain! What's the reason? Does India really need large investments in cold chain, given that most perishable products are grown within a small vicinity of consumption geographies, taking advantage of its conducive agro-climatic conditions? Are we better-off with investments in information infrastructure and farmer-market linkages that enable rapid response by the production system to demand signals? Isn't that a more viable means to cut wastage than the expensive cold chains? Actually, where the cold chains are required (eg. for exports of perishables, for products that can be grown in some corner of the country), the investments (whether FDI or domestic) are not happening because of regressive Agricultural Laws (eg Essential Commodities Act, Agricultural Produce Marketing Act, Forward Contracts Regulation Act).

So, how do we gain from the positive outcomes listed in these arguments, and neutralise the negative outcomes?

Is a gradual 24, 49, 74% FDI permission the good route, taking stock of the outcomes at each stage? Or should we place some specific conditions? In a world where the flag-bearer of free markets - USA - advocates "Be American & Buy American", I believe, some conditions are apt! Otherwise, the benefits could remain "kehuni-pe-gur"!

E. My Recommendations:

1. Mandate that a proportion of the investments must be made in the back-end. Say 30% in logistics and another 30% in farm level infrastructure (including agricultural extension services). In today's world of specialisation, instead of insisting that the mandate be executed by the Retailers directly, let them decide which of these legs they would like to execute themselves, or which they would like to outsource to domain specialists.
2. Impose a special surcharge (say 1%) on the Sales Value of the modern retail that can be built into a "Displaced Small Retailer Rehabilitation Fund". Somewhat along the lines of the Universal Service Obligation Fund in telecom.
3. Reform Essential Commodities Act, Agricultural Produce Marketing Act, Forward Contracts Regulation Act while permitting FDI in multi-brand retail.
4. Leave the rest to the market.