There is compelling evidence to show how much FDI in organised retailing could help both farmers and consumers. So it?s good news that the subject, as one newspaper put it, is back on the table, even if it?s a discussion paper and even if it suggests the final policy would contain a couple of caveats. Also, it?s courageous of the government to have raised a politically sensitive issue now. But then, this might just be the right time to be talking about FDI in retail, since food inflation is raging and shows few signs of coming down meaningfully. Let?s face it, there?s way too much wastage of farm produce in this country, at Rs 1 trillion a year. What?s a bigger shame is that more than half of this, or 57%, can be avoided.
FDI is allowed in the cold-chain business but foreign retailers probably want a bigger bite of the Indian consumer story. While they should not be unwilling to commit to minimum spends to develop the back-end, 50% appears to be too high a level. Maybe one-fourth of the investment could be channelled into the back-end. Also, while they should not mind sourcing a reasonable share of products from SMEs, it?s not a desirable criterion because it could affect the quality of merchandise in the stores and consumers will suffer. The reason FDI needs to be encouraged is that farmers in this country realise only a third of the total price paid by the end-consumer as compared with two-thirds earned by farmers in countries with a higher share of organised retail. Indeed, that?s the clincher because in a study conducted a couple of years ago, Icrier found that farmers are much better off selling directly to organised retailers rather than to intermediaries or to the mandis?their profits, believe it or not, are 60% higher when they sell to the former. So, it?s unfair to let a few intermediaries flourish at the cost of the farmer.
Moreover, the public distribution system doesn?t deliver the goods. So if the government wants to help low-income groups, organised retail could be the way. Icrier discovered that it is low income consumers, rather than affluent shoppers, who save more when they shop at organised retail outlets because they target discounts. Should retailers get it right with their private or store labels, as many are threatening to do, FMCG companies will be compelled to start giving customers better deals. Indeed, retailers believe that if they are allowed to access the farm gate for fruit and vegetables, with time and scale, they will be in a position to sell at competitive prices. So if customers get access to greater variety at lower prices, what can be better?
As for elbowing out kirana stores, it is unlikely to happen for a long time because the convenience and credit facilities that they offer cannot and should not be underestimated. Icrier found that very few small shops in the country actually close down every year?just 4%, which is way below international levels. And fewer than 2% of smaller retail outlets are actually hurt by their organised counterparts, so it?s not as though they?re losing out in big numbers. A shopping mall regulation is not needed.
With access to money and expertise, Indian retail chains can scale up faster and create more employment opportunities. The government wants some reservation for the rural youth?half the jobs created by the retail chains, to be precise. That should really not be such an issue, although owners should have the right to hire and fire. Again, a calibrated approach to opening the doors for foreign retailers should work; it wouldn?t be easy for the government to allow 100% investment right away and foreign chains shouldn?t have a problem with owning a minority stake for now.
The two biggest casualties in the history of Indian organised retail, Subhiksha and Vishal Retail, are enough evidence that this business needs financial wherewithal; banks stand to lose close to Rs 800 crore that they have lent Vishal Retail, unless the business is revived. Pantaloon Retail?s debt is nudging Rs 3,000 crore. In fact, many organised players, like the Aditya Birla group, which runs the ?more.? chain of stores, want FDI because they realise how important the money and the expertise can be. The cost of rolling out a store can range anywhere between Rs 1,000 per sq ft and Rs 1,500 per sq ft, depending on how you want it to look. Not every promoter has the luxury of writing off Rs 5,000 crore or maybe more. So, the argument that the organised sector is underdeveloped and in a nascent stage, and therefore should be allowed to grow and consolidate, doesn?t really hold. Moreover, even the two million jobs that organised retail is supposed to create in five years sounds ambitious. Icrier found no evidence of a decline in ?overall employment in the unorganised sector as a result of the entry of organised retailers.?
?shobhana.subramanian@expressindia.com