Column : A big transformational move

Written by RAJAN BHARTI MITTAL | Rajan Bharti Mittal | Updated: Nov 30 2011, 05:59am hrs
The recent Cabinet decision to further liberalise the retail sector for FDI has created a lot of commotion in political circles. The traditional arguments opposing foreign investment into the sector, multi-brand in particular, have once again come out of the cupboards to deter one of the most revolutionary policy initiatives in the post-1991 period. As an entrepreneur who has been associated with the sector, I wish to make a few humble submissions as to why this liberalisation has not come a day too soon and carries with it a huge potential to transform several aspects of the economy.

Like any responsible government, the current UPA establishment has treaded ever so carefully on the issue, keeping in view the deeply entrenched fears with regard to foreign investment, particularly in front-end retail. Not only did the Department of Industrial Policy and Promotion undertake a detailed stakeholder impact assessment study before recommending a cautious opening of the sector, the Committee of Secretaries too decided in favour of opening the sector after careful deliberations. The point I want to make here is that the decision is anything but a rushed one.

The importance of the move needs to be carefully weighed in terms of its impact across the retail ecosystemfrom farmers to consumers to small retailers. The current fragmented retail structure does make the supply chain inefficient, almost by design. With multiple middlemen and numerous handling points across the chain, inefficiency and wastage become inevitable. In fact, close to 30% of our perishable produce gets wasted while moving from the farm to fork. This is where a condition like 50% investment in the back-end infrastructure such as warehouses and cold storages assumes importance. Along with foreign capital will come superior technology and management expertise to supplant the current inefficient ones.

An efficient back-end will surely have a positive effect on the two key stakeholders at both ends of the supply chainfarmers and consumers. While it can mean better price realisation for the farmer, it will also ensure lower prices for the consumers and help contain inflation. This is precisely the reason why the inter-ministerial group on controlling inflation extended its unequivocal support to opening the multi-brand retail sector to foreign investment. In fact, the RBI Governor has also supported this view.

Another rider with far reaching implications for the economy as a whole is the 30% sourcing stipulation from the small-scale sector. Thousands of small industrial set-ups in the country will get a ready marketing platform in the shape of organised retailers. It is well known that large organised retailers in the country are already sourcing a big part of their merchandise from the SME sector.

The argument that small neighbourhood kiranas will progressively go out of business as foreign retailers enter the space is a huge myth, if experience of big Indian retailers over the last several years is anything to go by. Impact on small retailers operating in close proximity to the large organised stores has been marginal. In fact, the neighbourhood stores have turned out to be smart and innovative to withstand any pressure from their large format counterparts. Given the rising consumption in the Indian cities, introduction of large format stores has only helped expand the overall retailing pie. Small retailers, too, have benefited immensely from this, particularly by sourcing products from cash & carry stores. There is no reason to believe that this will be any different after the entry of foreign retailers.

By limiting the scope of FDI-funded stores to cities with 1-million-plus population, the government has carefully insulated a large majority of the small retailers in the country from any new competition. There are only 53 cities in the country that will qualify for such investment under this criterion. The scope for foreign investment could be further limited by the fact that state governments would be free to take their own decisions with regard to allowing foreign investment in retailing.

A big benefit to the common man, I believe, could come from 10 million new employment opportunities to be created both at the front-end stores and back-end infrastructure. This would obviously mean a huge transformation as far as the overall employment potential of the sector is concerned. Given the fact that a large majority of employment in the sector today is informal and unorganised, these emerging formal employment opportunities will be a huge plus for Indias youth.

The current situation does take me back to the early 1990s when the economic reforms were first ushered in. As India opened its doors to foreign investors and foreign brands, there were plenty of detractors who predicted that Indian entrepreneurs and their brands will fall by the way side. Contrary to those prognostications, two decades down the line, Indian entrepreneurs and brands have not only stood firm but have excelled in their own domains and, in fact, raised the bar for foreign players, creating a more competitive ecosystem that ensures consumer welfare.

I sincerely believe the fears are unwarranted. The myths need to be debunked and primacy of the basic economic rationale driving this policy initiative established. There is a clear and urgent need to take the issue beyond the usual political rhetoric. Organised retailers must be given an opportunity to demonstrate how it can benefit India and add to its growth story.

The author is vice-chairman & MD, Bharti Enterprises