Instead of putting curbs on investment and sourcing, govt can impose export obligations on retailers
The current policy for permitting FDI in multi-brand retail comes with many riders including several that are fundamentally and practically infeasible to comply with. The policy, to start with, limits the foreign shareholding to 51%. There is specific justification from the government as to why this limit has been set since it would only give an opportunity to select large Indian businesses to become ?partners? and then hope that they can make a profitable exit whenever this foreign shareholding limit is scrapped or revised upwards. If global retailers are a threat to the small, independent retail businesses of India, then how would their partnering with large Indian conglomerates such as the Tatas, Birlas, Ambanis, Goenkas and Mittals mitigate this risk?
The next rider is related to sourcing wherein the government wants all multi-brand retailers to source at least 30% of the merchandise sold through their retail operation in India from Indian micro and small (and not small and medium) enterprises. Almost all large international retail businesses work on the backbone of an efficient supplier base and a high quality, quick responsive supply chain. It takes several years, and sometimes several decades, to develop such supply chains. To succeed in India, most retail businesses and especially those who are targeting their attention to the low and middle income customers will have no option but to source most of their merchandise locally since importing them into India will most probably make their retail prices uncompetitive. However, to deliver reasonably good quality merchandise at very aggressive (i.e. low) prices to the end-consumers, the suppliers have to be ultra-efficient and capable of making significant investment in money, technology and people in creating product development and manufacturing capabilities that can deliver the right product at low price for the Indian consumers. While the government?s motives to promote micro and small enterprises in India are laudable, it is na?ve for it to expect large global retailers become the promoters and mentors for India?s small scale sector. Some sourcing will anyway happen through small (and medium) scale enterprises, and some of these MSMEs, if capable, would become large companies in their own right (such as Mrs Bector?s Cremica foods post their relationship as a supplier to McDonald?s) over time. Further, there are many product categories where sourcing from MSMEs is simply not possible. These include branded consumer durables and appliances, consumer electronics and information technology products, pharmaceuticals, medical devices and medical consumables for consumers, and then even books and music and other entertainment.
The third rider relates to the requirement of a minimum investment of $100 million within first three years, of which 50% has to be invested in the ?backend? excluding land and building for such backend operations. The condition is infeasible to implement from almost all types of multi-brand retailers barring a handful like Tesco and Carrefour. Most retailers do not own most of their capital-intensive backend operations any more and, instead, there are third parties who do so for them. Other than in food-related businesses, there is little processing required for merchandise, and there is no requirement for cold-chains either. In some other kind of retail businesses, such as those dealing in consumer electronics and durables, replenishment at the store level is done directly by the manufacturers such as Samsung, LG, Videocon and others.
The fourth rider stipulates that to open retail stores, the international retailer would still require to take permission from each state that it wishes to operate in, i.e. effectively speaking, 28 individual permissions to start operations in from each of the 28 states in India. Further, there is no clarity if permission has been accorded by a particular state, e.g. Delhi, and if there is a change in government, can the new government withdraw such a permission if it wishes to do so? Or, if a retailer wishes to start operations in the NCR, then it would have to take permissions from UP to open stores in Noida and from Haryana to open them in Gurgaon and Faridabad. This makes it tougher for a foreign retailer to do business in India than, say, in the EU where there are no such conditions that require operating permissions to be obtained from each member country in the EU.
The fifth rider stipulates that such international retailers can open stores only in cities having a population of more than 1 million. If large format, corporatised retail stores are such a big threat in smaller cities, then how is it that similar large format corporatised retail businesses having no foreign investment would not be a threat?
Finally, the policy explicitly prohibits such multi-brand retailers to offer any e-commerce channel to their consumers even though just about every major retail business in the world is moving towards a multi-channel operation and when e-commerce is potentially one of the most promising one even in India.
India needs large quantum of global financial and intellectual capital if it were to sustain a high economic growth rate in the coming years and decades. India also needs to integrate its own manufacturing supply chains with global customers and such linkages can only happen when the government welcomes and supports such initiatives rather than trying to create all kinds of policy firewalls that inhibit or prohibit India?s integration with the rest of the world.
As far as the retail sector is concerned, rather than tying itself in more knots, the government should come out with a simple, pragmatic policy for the entire sector itself. There is room and need for all kinds of retail businesses to coexist and flourish and it is no one?s case to encourage growth of large, mega-scale retail businesses at the cost of the small, independent ones.
One such policy relating to FDI in India?s retail could be to do away with any cap on the equity investment and do away with all of the onerous conditions and riders as listed above. Instead, the government could impose a significant export obligation, to be fulfilled out of merchandise manufactured or processed in India, linked to the value of retail turnover such international retailers do in India. Such an export obligation, say 50% of the entire retail turnover in India, net of taxes, over first 10 years of starting up a retail store in India or during the first 10 years from making an investment in an existing retail business in India can give a much bigger fillip to manufacturing (and thereby to job creation) in India. The government only has to look at the quantum of sourcing from China by major global retailers to realise the potential of such a condition (superseding all other conditions) and its manifold benefit to India?s manufacturing sector.
To prevent predatory pricing and any anti-competitive activity, the government must ask the Competition Commission of India to develop its own expertise in understanding of distribution and retail businesses, and if there is any activity that is deemed to be anti-competitive, CCI should proactively step in.
Finally, the government must actively work with various state governments to come up with a pragmatic ?zoning? policy that restricts entry of large format, big box stores or restricts the number of such stores (irrespective of their ownership pattern) in various districts across the country in order to provide some protection to small, independent retail businesses. Zoning as a concept is fairly widespread in most countries including the US, UK, Germany and others. Large corporate retail businesses across the world may not like zoning restrictions but have learned to accept and live with them. There is no reason why they would not grudgingly accept the same in India too.
Given the right (simple and pragmatic) policy framework, India can attract tens of billions of dollars of direct and then tens of billions of dollars of indirect investment in India?s retail sector and India?s manufacturing and distribution sectors creating efficiencies, jobs and additional exports. The government should apply its mind to do so, and then confidently wait for the investment to flow in.
(Concluded)
The author is chairman of Technopak Advisors Pvt Ltd
arvind.singhal@technopak.com
