Scrap the current retail FDI policy

Written by Arvind Singhal | Updated: May 22 2014, 01:44am hrs
It is a matter of deep disappointment that all discussions relating to retailing ecosystem in India end up converging on a single themewhether India should allow FDI in the sector or not Worse, in these last 15 years of cacophonic arguing, both the protagonists and antagonists have resorted to taking subterfuge behind myths, lies, half-truths, or plain ignorance about the actual impact of allowing big business (irrespective of the country of origin of its ownership) to enter the business of retailing. Meanwhile, the business of retailing has been undergoing fundamental changes that have started to make a presence in India too. Indian consumers needs and shopping behaviour have also been undergoing a significant change. It is high time that the various stakeholders in the discussions relating to retailing in India start making a serious effort to understand how efficient or inefficient Indias retailing infrastructure is today. And then how to make it more efficient for the consumers, the producers of consumer goods, those whose livelihood rests upon the retailing value-chain and, finally, the state and central governments who have to expand their tax revenue base to meet their revenue needs to provide better physical and social infrastructure to Indias masses.

The most crucial fact about the retail sector is that it provides the largest employment in India and offers the best hope for employment for tens of millions of Indians in the years to come. Further, this is the only sector where relatively less-skilled or even unskilled workers can make a living. Hence, any threat to this employment-creation potential of this sectorespecially when India suffers a major deficit in creating jobs or self-employment opportunitieshas to be carefully studied keeping personal ideologies aside.

It is true that Indias existing retailing ecosystem is highly inefficient. There is an unacceptable value-loss in both, the manufacturer and consumer prices, thereby depriving the manufacturer of a fair value for his effort while forcing millions of inflation-ravaged, low-income Indians to pay much more at the retail than what they should be paying. This ecosystem is also inefficient for the state governments in particular when it comes to getting their fair share of local taxes, and inefficient for the central government when it comes to getting its share of indirect taxes since many small and medium scale manufacturers can successfully evade the taxation net by using the current distribution channels comprising an abundance of middlemen. The highly fragmented and unorganised retail ecosystem also allows entry of spurious consumer goods in the supply chain; if any evidence is needed, one only has to visit retail outlets catering to relatively lower-income strata in the major cities or those located in the tier-2 or small cities and in rural India. The frequently articulated fear of those against FDI in retail (that international retailers will dump cheap consumer goods produced in China and elsewhere) is seemingly unaware of the ground reality that such cheap and poor quality goods are indeed being imported (or smuggled into India) for retailing through the unorganised sector, thereby causing loss to the exchequer of customs duties while making the unsuspecting customers buy poor quality merchandise.

The third fact is e-commerce and e-tail is here to stay and will create a fundamental shift in consumers shopping behaviour, thereby transforming the retailing ecosystem. No amount of legislative protectionist measures can stop or even slow down this transformation.

So, what should be the action areas for the states and the Centre The first step for the government is to focus on making the sector more efficient and give it ideological and regulatory support for powering job creation. Perhaps the single biggest enabler of the sector is the availability of legal, low-cost, rightly-located space to establish new outlets. If Indias GDP were to grow at about 6% per year over the next decade, it would need at least 3-4 billion square feet of additional retail space (even after accounting for e-tailing). To make this happen, suitable amendments must be made in urban planning norms to provide for adequate space as close as possible to the residential areas. The current markets are dilapidated and must be renovated or redeveloped to create some of this additional space.

The next step is to come up with an equitable zoning policy that acknowledges both the need for large format stores and their potential to cause disruption for independent retail stores in select locations. Every developed country has an appropriate zoning policy relating to big-box and relatively large format chain stores that try to balance the existence of the big and the small and organised independents.

The government must acknowledge growing e-commerce as a promising development that can provide millions of small producers and small retailers outreach to a much larger customer base through the so-called market-place and other e-tail models. It must support the growth of e-commerce while having clear (and fair) policies on its taxation and relating to protection of consumer rights.

Finally, as far as FDI in retail is concerned, the government should scrap the current policy that is riddled with inconsistencies and impracticalities, and do away with the single-brand and multi-brand nomenclature. Instead, FDI in retail can be effectively used to promote exports from India by linking the FDI approval to exports of manufactured goods rather than sourcing from MSMEs to sell within India. Large global retailers buy billions of dollars worth of merchandise from China and other low-cost manufacturing countries. There is no reason why they cannot be gently nudged to buy more from India for their global operations if they were to retail in India. Beyond putting export obligation on such international retailers, they should be allowed to operate under the same regulations as large-format/chain-store operators of Indian origin. This will spur investment in the upstream segments of the retail value-chains as more competition among the Indian and international giants will force all players to make their sourcing reliable and efficient.

One hopes that the new government would put modernisation and growth of Indias retail sector on a high priority, and move the discussion beyond the pros and cons of FDI in multi-brand retail.

The author is chairman of Technopak Advisors Pvt Ltd

arvind.singhal@technopak.com