FDI in Multi-brand Retail- Background and arguments

January 9, 2012

Up till now, the successive Governments in India have kept denying the Foreign Direct Investment (FDI) in multi-brand Indian retail. So, foreign groups have been forbidden from any ownership in supermarkets, convenience stores or any retail outlets, to sell multiple products from different brands directly to Indian consumers.

FDI in Single-Brand Retailing was, however, permitted in 2006, to the extent of 51%. An FDI inflow of US $ 194.69 million (Rs. 901.64 crore) was received between April, 2006 and March, 2010, comprising 0.21% of the total FDI inflows during the period, under the category of single brand retailing.

Single brand retail outlets with FDI generally pertain to high-end products and cater to the needs of a brand conscious segment of the population, mainly attracting a brand loyal clientele, which often has a pre-set positive disposition towards the specific brand. This segment of customers is distinctly different from one that is catered by the small retailers/ kirana shops.

Current Policy:

Current Policy in FDI investment allows up to 51% in retail trading of single brand products, subject to the following conditions:

Products should be sold should be of a single brand only
Products should be sold under the same brand internationally
Single brand product retailing would cover only products which are branded during manufacturing.

FDI in cash and carry wholesale trading was first permitted, to the extent of 100%, under the Government approval route, in 1997. It was brought under the automatic route in 2006. Between April, 2000 to March, 2010, FDI inflows of US $ 1.779 billion (Rs. 7799 crore) were received in the sector. This comprised 1.54 % of the total FDI inflows received during the period.

India’s Retail Sector:

Retail sector in India is the second largest employer after agriculture. As per the latest NSSO 64th Round, in 2007-08 retail trade employed 7.2% of total workers and provided job opportunities to 33.1 million persons.
The share of employment in the broad sector of trade, hotels and restaurants in 2007-08 was significantly higher compared to its share in 1993-94 for both males and females, in rural, as well as urban areas. More than 2/3rd of the total employment, in the broad category of trade, hotels and restaurants, is in the retail sector.
Another concern is that it would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector.
Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.
One more argument says that the Indian retail sector, particularly organised retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors

What are the Limitations of the Present Set up in retail?

There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes.
The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales.
Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular. Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over Rs. 1 trillion per annum, 57 per cent of which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions. As per some industry estimates, 25-30% of fruits and vegetables and 5-7% of food grains in India are wasted.

But FDI is permitted in cold chains. Why it does not solve the problem?

Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, but in the absence of FDI in retailing; FDI flow to the sector has not been significant.
The Government has been receiving proposals related to retail trading of sportswear, luxury goods, apparel, fashion clothing, jewellery, hand bags, life-style products etc., covering high-end items and wanted to open the sector for foreign players.

What are problems in India’s current market value chain?

Intermediaries dominate the value chain. They often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character.
Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail.
A study commissioned by the World Bank attributes the export non-competitiveness of India’s horticulture produce to its weak supply chain. The study shows that the average price that the farmer receives for a typical horticulture product is only 12–15 per cent of the price the consumer pays at a retail outlet.
India’s food supplies have been controlled by tens of millions of middlemen (less than 5% of Indian population).
Traders add huge mark-ups to farm prices, while offering little by way of technical support to help farmers boost their productivity, packaging technology, pushing up retail prices significantly.

Is PDS questionable in India?

Yes, the efficacy of the public procurement and PDS set-up is questionable and the bill on food subsidies has been rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a ‘farm-to-fork’ retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.

What happened recently?

On 24 November, Manmohan Singh government announced the following:

India will allow foreign groups to own up to 51 per cent in “multi-brand retailers”, as supermarkets are known in India, in the most radical pro-liberalisation reform passed by an Indian cabinet in years.
Single brand retailers can own 100 percent of their Indian stores, up from the previous cap of 51 percent
Both multi-brand and single brand stores in India will have to source nearly a third of their goods from small and medium-sized Indian suppliers.
All multi-brand and single brand stores in India must confine their operations to 53-odd cities with a population over one million, out of some 7935 towns and cities in India. It was expected that these stores will now have full access to over 200 million urban consumers in India.
Multi-brand retailers must have a minimum investment of US$100 million with at least half of the amount invested in back end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing to considerably reduce the post harvest losses and bring remunerative prices to farmers
The opening of retail competition will be within India’s federal structure of government. In other words, the policy is an enabling legal framework for India. The states of India have the prerogative to accept it and implement it, or they can decide to not implement it if they so choose. Actual implementation of policy will be within the parameters of state laws and regulations.

It was claimed by an article published in Wall Street Journal that fresh investments in Indian organized retail will generate 10 million new jobs between 2012-2014, and about five to six million of them in logistics alone; even though the retail market is being opened to just 53 cities out of about 8000 towns and cities in India.

Why there were oppositions?

The Government’s decision was vehemently opposed by millions of small retailers, who see large foreign chains as a threat.

Is the policy shelved now?

Yes. On December 7, 2011, the government announced suspension of its decision to allow FDI in retail, bringing Parliament back to business after nine days of logjam. India Inc. said it was a regressive move. The CII said that decision to hold back FDI in multi-brand retail will have a strong impact on the domestic and foreign investor sentiment and it would be a “missed opportunity”

What were the Government arguments in favour of FDI in multi-brand retail?

Huge investments in the retail sector will see gainful employment opportunities in agro-processing, sorting, marketing, logistics management and front-end retail.
At least 10 million jobs will be created in the next three years in the retail sector.
FDI in retail will help farmers secure remunerative prices by eliminating exploitative middlemen.
Foreign retail majors will ensure supply chain efficiencies.
Policy mandates a minimum investment of $100 million with at least half the amount to be invested in back-end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing. This is expected to considerably reduce post-harvest losses.
This will have a salutary impact on food inflation from efficiencies in supply chain. This is also because food, which perishes due to inadequate infrastructure, will not be wasted.
Sourcing of a minimum of 30% from Indian micro and small industry is mandatory. This will provide the scales to encourage domestic value addition and manufacturing, thereby creating a multiplier effect for employment, technology upgradation and income generation.
A strong legal framework in the form of the Competition Commission is available to deal with any anti-competitive practices, including predatory pricing.
There has been impressive growth in retail and wholesale trade after China approved 100% FDI in retail. Thailand has experienced tremendous growth in the agro-processing industry.
The Government said that in Indonesia, even after several years of emergence of supermarkets, 90% of fresh food and 70% of all food is still controlled by traditional retailers.
In any case, organized retail through Indian corporates is permissible. Experience of the last decade shows small retailers have flourished in harmony with large outlets.

What were opposition’s arguments against FDI in multi-brand retail?

The opposition said that the move will lead to large-scale job losses. International experience shows supermarkets invariably displace small retailers. Small retail has virtually been wiped out in developed countries like the US and in Europe.
South East Asian countries had to impose stringent zoning and licensing regulations to restrict growth of supermarkets after small retailers were getting displaced. India has the highest shopping density in the world with 11 shops per 1,000 people. It has 1.2 crore shops employing over 4 crore people; 95% of these are small shops run by self-employed people.
The opposition also argued that the global retail giants will resort to predatory pricing to create monopoly/oligopoly. This can result in essentials, including food supplies, being controlled by foreign organizations.
Fragmented markets give larger options to consumers. Consolidated markets make the consumer captive. Allowing foreign players with deep pockets leads to consolidation. International retail does not create additional markets, it merely displaces existing markets.
Jobs in the manufacturing sector will be lost because structured international retail makes purchases internationally and not from domestic sources. This has been the experience of most countries which have allowed FDI in retail.
Argument that only foreign players can create the supply chain for farm produce is bogus. International retail players have no role in building roads or generating power. They are only required to create storage facilities and cold chains. This could be done by governments in India.
Comparison between India and China is misplaced. China is predominantly a manufacturing economy. It’s the largest supplier to Wal-Mart and other international majors. It obviously cannot say no to these chains opening stores in China when it is a global supplier to them. India in contrast will lose both manufacturing and services jobs.

Conclusion:

A major argument given by opponents of FDI in retail is that there will be major job losses. It can be a debatable judgement. Initially the big retail chains are going to hire a lot of people and in the short run; there will be a spurt in jobs.
Eventually, there’s likely to be a redistribution of jobs with some drying up (like that of middlemen) and some new ones sprouting up. The fear about large-scale job losses seems to be exaggerated.
Fears of small shopkeepers getting displaced are also vastly exaggerated. When domestic majors were allowed to invest in retail, both supermarket chains and neighbourhood pop-and-mom stores coexisted. It’s not going to be any different when FDI in retail is allowed.
Mega retail chains need to keep price points low and attractive – that’s the USP of their business. This is done by smart procurement and inventory management: Good practices from which Indian retail can also learn. (inputs from wikipedia, TOI, ET and Bloomberg)

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