Govt should have taken a calibrated approach

Written by Ajay Dua | Updated: Nov 29 2011, 07:36am hrs
In opening up the retail trade to foreign equity last week, the Union government demonstrated uncharacteristic courage and conviction. While this policy measure might help dispel doubts about its ability to take decisions, it has raised a political storm, more intense and widespread than had probably been bargained for.

Taking a view on liberalising FDI norms for multi-brand retailing had been on the governments agenda for many years, but announcing a decision while Parliament was in session was singularly inappropriate. This has given the opposition an opportunity to come together and haul the government over the coals, as we might see in the next few days and weeks. By a strange coincidence, both the ruling party and those not in favour are able to marshal only generic arguments to support or oppose the forward-looking measure. There is little reliable evidence or relevant experience available with either side to make a convincing case.

The Union government has, through media statements and ads in national dailies, extolled the potential benefits of permitting 51% FDI in multi-brand retailgiving more choice and better prices to the consumer, better realisation for produce to farmers, and greater sourcing from small entrepreneurs. All these developments promise numerous new jobs. In hoping for such results, the government has referred to the general experience of Brazil, China, Chile and Indonesia. But there are no scientific studies being quoted from any of these countries. In any case, the realisation of expectations is dependent on a host of other related measures. For example, until APMC Acts are amended by each state, direct procurement by retailers from farmers is not permissible. The requirement of putting 50% of the capital in back-end infrastructure is open to wide interpretation and difficult to operationalise, since investments would have to be made through other businesses not core to those familiar with only selling.

The fast-uniting opposition is not on firmer ground. Till 2004, BJP saw merit in permitting FDI in retail and had even included this in the India Shining manifesto. Its change of heart took place only when it vacated the treasury benches. Its concern about the 8-million-odd kirana shopkeepers, many of whom reportedly tend to be its political supporters, may be genuine but is more an apprehension than based on well-founded empiricism. The large store modern format run by domestic giants has been around in India for about 15 years. Its effect on mom and pop stores has been to make them more nimble in operations and creative in customer service. Almost all have managed to survive the competition, with the consumer being the ultimate beneficiary. Investments and operations by foreign chains should not have a vastly different impact on the traditional format, while providing a run for the money to the rapidly growing, domestically-funded-and-operated modern stores. Surprisingly, this set of stakeholders has welcomed the government initiative, probably because they hope to offload portions of their stake at a premium to the new entrants. In any case, over 80% of the family-run traditional shops are not likely to feel any impact since FDI-invested retail outlets can come up only in 53 million-plus cities, leaving the entire rural belt and about 8,000 other cities and towns to continue to be serviced by the friendly neighbourhood grocer.

Still, to allay the widely expressed uneasiness of the Left, BJP, and more recently of almost all the member-parties of the erstwhile NDA, as well as some within the UPA alliance, the government could have adopted a more calibrated strategy. Even the government-commissioned report by ICRIER in 2007 had been ambivalent and conceded that its study showed suffering by small shopkeepers in the immediate vicinity of larger, modern stores. The oft-quoted experience of China could also have been made use of. It took that country 14 years to completely open up its retail trade to foreign investment, with the final concession in 2003 being necessitated by its urge to gain membership of WTO. An option was to limit the foreign-entry to only the 3 ten million or the 8 five million plus cities and to wait to see the impact before liberalising further. China, starting the process in 1989, had initially opened up only Beijing and Shanghai and also limited the number of stores that could be opened there. If the window had been opened only for two years or so, then, depending on the outcome, the subject could have been revisited in about five years time and a more informed policy adopted.

Even a desirable policy measure can sometimes go awry if it is ill-timed or not brought in with adequate care to meet local political and social points of view. Years of deliberations and dithering of the government had given ample proof of the powers within not being fully convinced about the opening up of retail to FDI. It was, therefore, necessary to be more politically sensitive and to package the proposal as an experiment to test the ground.

The author is former secretary, Union Ministry of Commerce and Industry

Govt has really unleashed farmer productivity

Chandrajit Banerjee

In a country where almost 60% of the population is dependent on agriculture for livelihood, the goal of inclusive growth can be best met by unleashing farmer productivity. The decision of the Cabinet to allow foreign direct investment in retail will go a long way in attracting the necessary capital towards this. Organised retail has high benefits for the overall economy, imparting efficiency in the supply chain, raising incomes, providing employment and infusing technology. It plays a crucial role in driving inclusive growth through positive impacts on three key stakeholders, namely producers, workers and consumers.

The growth of the Indian economy has shifted consumer preferences in a variety of ways. But lack of a smooth and efficient supply chain both pressures prices and lowers remuneration for farmers. A BCG-CII study estimates that building modern retail supply chains in India entails an investment of around R3,00,000 crore ($60 billion). To meet this requirement, its essential to facilitate fund inflows from overseas investors. Plus, overseas players have significant expertise and global linkages that can bring greater efficiency and productivity to the Indian economy.

For producers, including farmers and small and medium enterprises, organised retail has stabilised prices and increased incomes in many countries, especially rapidly-growing emerging economies like Thailand or Indonesia.

In India, the BCG-CII study illustrates that an inefficient supply chain leads to significant income losses. For example, for tomatoes, farmers in India receive only about 30% of the price paid by consumers, while this is as high as 50-70% in more developed markets. So, for small producers, the link with organised retailers helps in reaching larger markets, improving productivity, obtaining finance, and getting technical inputs.

In the case of consumers too, organised retail offers many advantages. As much as two-fifths of agri produce is wasted due to spoilage, insects and other factors in the absence of adequate storage and handling facilities, constricting supply for consumers and raising prices.

As consumer expectations of better quality and choice at affordable prices go up, modern retail formats are better equipped to meet aspirations. Consumers often suffer due to non-compliance of unorganised retailers with food safety standards. Testing of 1.6 million random samples in 2008 by the government reported adulteration of over 7% in food products. Enforcement of food safety laws becomes easier with larger retailers who are bound by laws, inspections and branding.

Large-scale retail formats can also help in aggregating benefits, which are then passed on to consumers in the form of lower prices. A survey by ICRIER shows that typical savings can range from 5-10%, with households earning less than R10,000 per month saving the most when buying from organised retail. Also, larger stores offer more variety to customers due to better expertise in managing complex supply chains. At a time when demand for choice is increasing among all classes, the organised retail format is better equipped to provide differentiated consumer products.

For workers, organised retail offers an opportunity to shift from the uncertainties of the unorganised sector to better wages and more security. In fact, this could be a high employment area for less-skilled workers wanting to shift from farm labour to jobs with better benefits such as provident fund, sick leave, etc.

It is estimated that about 7-10 million new jobs could be created directly and indirectly in organised retail and related logistics sectors, adding some $35-45 billion to incomes annually.

Higher productivity is also ensured as workers operate in superior work environments with better facilities and tools. Dignity of labour is assured for such workers. The sector also offers opportunities for personal growth and progression. Several large retailers are already providing training or investing in skill development.

Finally, the government too would be a beneficiary of higher investments in organised retail. Tax revenues would be generated through organised retailers, while transparency and accountability would also increase.

Currently, the size of the retail market in India is estimated at some $425 billion, which is projected to expand to $1,250 billion by 2020. Organised retail contributes just $28 billion, with a penetration rate of 6-7%. In the best scenario, the size of the organised retail component will be just about 21% of the total by 2020. Smaller players would continue to dominate the overall retail sector. Even in the last few years, a study by ICRIER found no evidence of a decline in employment in the unorganised sector as a result of entry of organised retailers.

At a time when inflation continues to be a concern, the announcement of FDI in retail comes as a major policy reform for the overall supply chain. The country needs the technology, innovation, scale and expertise of foreign retailers for unlocking supply values.

The author is director general, CII