FDI in Retail -II

Arguments against FDI in Retail

The most important argument against modern retailing and supply chain integration is that it displaces labour in a labour-surplus society. Till such time that we are in a position to create jobs on a large scale in manufacturing and construction, it would make eminent sense to keep on hold any policy that results in the elimination of jobs in the unorganised retail sector.

The primary task of the government is still providing livelihoods and not create so-called efficiencies of scale by creating redundancies. If we assume 40 million adults in the retail sector, it would translate into around 160 million dependents

Opening the retailing to FDI means dislocating millions from their occupation and pushing vast number of families under the poverty line. The Western concept of efficiency is maximising output while minimising the number of workers involved. This will only increase social tensions in a developing country like India, where tens of millions are still seeking gainful employment

Consider a chain such as Wal-Mart with a single point of procurement entering India. Since it already procures huge quantities from China, this make for a massive entry point of China's largely state-owned consumer goods industry into the insatiable market made up of the new consuming elite.

The global retailers would collude and exercise monopolistic power to raise prices and monopsonistic (big buying) power to reduce the prices received by the suppliers.

Clearly, the number of points in favor of FDI exceeds points against it however, asan observer, that makes little and sense and wisely so. What matters is the gravity of these points which clearly indicates that for every argument that is against FDI, there is a point countering it in favor of it.

Our nation is one of the fastest growing economy in the world and any step that needs to be taken has to be with utmost care but is the question of fair play too big here?

UPA govt. would be putting a big question mark on the jobs of many of those who voted in their favor which might be the biggest “against” for FDI however with the introduction of 51% FDI in single brand retailing, Govt. has sent out a positive signal. But does that mean Menzer should start smiling?... well the answer is no, not immediately and when it would be only Govt policies and time will tell.

FDI in Retail -I

Ask 10 selected americans about their purchase store for daily needs or almaost everything they buy and the answer would be Walmart.
Ask any 1o randomly selected Indians and now atleast 5 would say Big Baaar or Spencer’s
The journey from unorganized to organized has certenely started as far as Indian Retail Scenario is concerned, then what would be the net thing that would take this transition to a higher level or as many have argued might even bring down the level playing field for Indian Retailers. The Answer is Foreign Direct Investment (FDI), Unlike other sectors such as insurance, banking, Retailing has not seen the day light as far as the FDI is concerned.

Earlier this year, A.T. Kearney identified India as the top destination for global retailers and with John Meneer making his high profile visit in may emphasizing upon the importance of Wal Mart’s entry in to India, the case for FDI is only becoming stronger. Also British’s top Retail store TEsco’s CEO is epected to visit India later this year, the scene is definitely getting hotter and the pressure on Govt. getting higher to allow FDI in Retail.
To allow FDI in Retail or not is long standing debate and it would only be fair to consider both sides of the coin before coomenting about its future.

Arguments in favor of FDI in Retail

FDI in retail sector to benefit India, says World Bank
Opening up the retail sector to foreign direct investment (FDI) would be beneficial for India in terms of price and availability of products, according to the World Bank.

FDI in retail — A question of jobs, not ownership

AFTER farming, retailing is India's major occupation. It employs 40 million people. A sizeable majority of owner/employees are in the business because of lack of other opportunities. The decade of liberalisation has so far been one of jobless growth.
Since the agriculture sector is over-crowded and the manufacturing sector stagnant, millions of young Indians are virtually forced into the service sector. The presence of more than one retailer for every hundred persons is indicative of how many people are being forced into this form of self-employment, despite limitations of capital and space.
Trade/retailing is the single largest component of the services sector in terms of contribution to the gross domestic product. It accounts for 14 per cent of the service sector, i.e., twice that of the next largest economic activity in the sector — banking and insurance

. Organised retail trade employs roughly 0.5 million people and unorganised 39.5 million. The fact that about 4 per cent of the population is employed in the unorganised retail trade speaks volumes about how vital this business is to the socio-economic equilibrium in India.
In 2004, Wal-Mart had a turnover of $256 billion and it recorded a net profit of $9 billion. Its 4,806 stores employs 1.4 million persons. The average size of a Wal-Mart outlet is 85,000 square feet and the average turnover about $53 million. The turnover per employee is $1,82,000.
By contrast, the Indian retailer had a turnover of Rs 1,86,075 ($4,100 approximately) and only 4 per cent of the 12 million retail outlets occupied space larger than 500 square feet. The total turnover of the unorganised retail sector, which employs 39.5 million persons, was Rs 735,000 crore. India has 35 towns each with a population of over one million. If Wal-Mart were to open, on an average, one store in each of these 35 cities and if each achieved the average Wal-Mart performance per store, the turnover would amount to over Rs 8,033 crore and number of employees to only 10,195.
Extrapolated to the rest of the country, it would mean displacing around 4,32,000 persons. In other words, every new Wal-Mart employee will render 40 retailers surplus. If FDI retailers with deep pockets were to take over 20 per cent of the retail trade, this would mean a turnover of Rs 1,47,000 crore. This represents an employment of about 43,000 persons, displacing nearly eight million persons in the unorganised retail sector.

Indian Council for Research on International Economic Relations (ICRIER) pushes for FDI in Retail
ICRIER has recommended that at least 49 per cent FDI be allowed in the retail industry initially, but since the sector is highly fragmented and domestic retailers are still in the process of consolidating their position, the opening up should be gradual.
Opening up the sector to foreign investment, will actually help the existing retailers on several fronts.
· It would speed up the growth of organized formats in the country.

· It found that organised retailing has significant backward linkages through setting up of supply chains, investment in food processing industry and manufacturing units, increased productivity of agriculture, growth of interlinked sectors such as tourism and IT.

· Consumers have also gained from organised retailing since it leads to lower prices, improves the quality of products and widens the choice of products available to consumers

· It added that since foreign retailers are allowed to enter the market through other routes, the existing ban on FDI has not really acted as an entry restriction. On the contrary, the country is losing foreign investment while the entry process has become non-transparent and complicated.


· All major developed and developing countries have allowed foreign investment in retailing. Some have imposed certain other restrictions (for example, minimum capital requirement, sourcing conditions and so on) while others have opened up the sector in a phased manner to allow the domestic retailers to adjust to the changes. However, the experience of other countries shows that a major part of FDI is now directed towards the retail sector

· The biggest benefit, would flow from higher exports. They point to the Chinese experience.

· The global retailers taken together buy about $60 billion of goods each year from China for exports. Contrast this with India where less than $1 billion of exports are accounted for by global retailers (mostly metro dairy farm). Clearly, the scope of exports through the global retailers is enormous, indeed.

· Entry of sophisticated branded products affects the unbranded mass market only marginally in a vast poor country such as India. Moreover, in malls where the large retail chains set up their stores, typically, there will also be many small shops which will attract people.

· The street-corner shops will have some advantages over big stores located many miles away in shopping plazas. In India, transportation and parking are big problems for people who want to visit shopping malls

· Farmers would get better prices and bigger markets while the consumers would benefit in terms of lower prices, better quality and greater variety. The resultant rural prosperity may open up markets for other industrial goods and help a more balanced regional development as also job creation in other sectors.

Next: Arguement against FDI and conclusion