Column : The logic of retail FDI

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SummaryWith multi-brand retail FDI finally set to be allowed in India, it is useful to reflect on what we know and don’t know.

Though the effects of FDI are still not known, the policy debate needs clarity on the facts of the matter

With multi-brand retail FDI finally set to be allowed in India, it is useful to reflect on what we know and don’t know. Reviewing various surveys, opinion pieces and expert reports, one finds copious statistics on various aspects of the retail market in India, the character of potential entrants (especially Walmart, of course) and long lists of possible negative and positive impacts. But we actually do not learn too much that will help us predict what exactly will happen. The best we can do in this situation is try to clarify the logic of possible effects. Here is my attempt to take us forward in that direction. My goal is not to argue for or against retail FDI, but to sharpen the policy debate.

The primary case being made for FDI in retail is that it will increase efficiency. One source of this is improvements in the supply chain. In particular, this argument is applied to perishable agricultural produce. The claim is that increased investment will reduce wastage. Efficiency gains can potentially lead to gains for producers, intermediaries and consumers. There is some evidence that, starting out in the US, Walmart improved the efficiency of wholesale and retail distribution, and later of manufacturing, through its hub-and-spoke distribution system and use of information technology to link different stages of the supply chain. But the US story was not one of building an agricultural supply chain from scratch. In fact, groceries were a later addition to Walmart’s offerings. This kind of history does not provide a solid base for the claim.

Turning to the recent Indian experience, Walmart and other foreign firms have been involved in the wholesale trade for some years. For example, the Bharti Walmart joint venture works with over 6,000 small farmers across six states. Indian corporations have tried to create retail chains without foreign help. What do these experiences teach us about the potential for transformation? In neither case has there been a huge change in the supply chain. Logically, either FDI in wholesale or domestic retail chains could have made investments to improve the efficiency of the supply chain. There have been small improvements, but no great transformation.

One can counter that domestic retail chains do not have either the capital or the managerial quality to do what needs to be

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