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Why FDI in retail is good news
T Thomas |
July 22, 2005
Recent indications that the government is considering foreign direct investment in retail trade have sparked off a debate on the advisability and consequence of this policy.
Retail trade takes place through five types of outlets -- kirana shops, more modern retail shops, departmental stores, supermarkets, and hypermarkets.
Kirana shops and retail shops are a feature of our landscape. Every village and town has them. They are usually family-owned and -managed.
Most kirana shops store goods unpacked in bulk containers, from which they are measured or weighed out in paper packets by the owner.
Many of them also serve as paan bidi outlets. They take cash but give credit to known customers. As generations pass and villages become small towns, kirana shops graduate into modern retail outlets with shelves and cupboards and packaged goods.
They then begin to store packaged goods and over-the-counter drugs. But at this stage they may give up the paan bidi trade, which gets taken over by dedicated paan shops.
As the populations of towns are larger than those of villages, retail shop owners cannot know all customers and therefore credit becomes more selective.
When towns become cities, departmental stores appear. Supermarkets are the next stage in the evolution of retailing. They are viable only in the bigger cities.
The fear expressed by some people is that allowing FDI in retail trade and the entry of international retailers could lead to a diminution of kirana shops and retail stores.
It is worthwhile analysing the advantages and disadvantages of the proposed policy of allowing FDI in retail trade.
One key point is that we must differentiate between the interests of consumers, who constitute our population of nearly 1,100 million, from the interests of retailers, who may number over one million.
It is obvious that the interests of the consumer should take precedence over those of the retailer.
FDI in retail and the development of larger stores and supermarkets have the following advantages from the point of view of consumers:
FDI will provide access to larger financial resources for investment in the retail sector and that can lead to several of the other advantages that follow;
The larger supermarkets, which tend to become regional and national chains, can negotiate prices more aggressively with manufacturers of consumer goods and pass on the benefit to consumers;
They can lay down better and tighter quality standards and ensure that manufacturers adhere to them.
Many consumer goods manufacturers will find that supermarkets account for an increasing share of their sales and will be afraid of losing this valuable and reliable customer to competition.
The fact that a well-known chain of supermarkets sources from a manufacturer becomes a stamp of quality.
With the availability of finance, the supermarkets can invest in much better infrastructure facilities like parking lots, coffee shops, ATM machines, etc. All this will make shopping a pleasant experience.
The supermarkets offer a wide range of products and services, so the consumer can enjoy single-point shopping.
The argument that the advent of FDI and supermarkets will displace a large number of kirana shops is similar to the argument used during the era of industrial licensing, which was meant to protect small-scale industries.
But eventually the inefficiencies and quality standards of the protected small-scale companies become apparent even to socialist politicians and licensing was abolished.
Small-scale industries have not died. Instead, they have learnt to co-exist as suppliers to large-scale industries.
In the case of retail trade, the kirana shops in large parts of the country will enjoy built-in protection from supermarkets because the latter can only exist in large cities.
On the other hand, the ability of supermarkets to demand pricing and quality standards from manufacturers will benefit even kirana shops, who can even buy from the supermarkets to sell the same products in smaller towns and villages.
It can be argued that since the advantages cited above are due to the scale of operations rather than the involvement of foreign capital, why should we allow FDI in retail trade? The case for FDI has more to do with the confidence and willingness to invest large amounts in a short period as well as the expertise based on experience.
Even a modest chain of 200 supermarkets, to be set up all over India in selected towns and cities in the next three years, will require an investment of about Rs 2,000 crore (Rs 20 billion), at the rate of Rs 10 crore (Rs 100 million) per supermarket to cover the infrastructure and working capital.
Each supermarket may take 2 or 3 years before it becomes profitable. There is a risk that a few of them may even fail.
How many Indian entrepreneurs will be willing and able to commit this level of investment and undertake the risks involved? That is where the international experience and skills that may come with FDI would provide the confidence and capital.
Apart from this, by allowing FDI in retail trade, India will become more integrated with regional and global economies in terms of quality standards and consumer expectations.
Supermarkets could source several consumer goods from India for wider international markets. India certainly has an advantage of being able to produce several categories of consumer goods, viz. fruits and vegetables, beverages, textiles and garments, gems and jewellery, and leather goods.
The advent of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all these segments.
That will benefit not only the Indian consumer but also open the door for Indian products to enter the wider global market.
It is therefore obvious that we should not only permit but encourage FDI in retail trade.
Just as in the case of most products, the brand name of the supermarket chain is a strong element in its growth and success.
People have confidence in names like Sainsbury, Asda, Marks & Spencer, etc. just as they have confidence in Indian brands like the Tatas and Godrej.
A possible outcome can be that Indian groups with strong local brand quality like the Tatas will collaborate with international supermarket chains like Sainsbury, to set up supermarket chains in India.
It will be unwise for a government to interfere in this process.