Its Not The FDI, Stupid!

Updated: Apr 26 2004, 05:30am hrs
The NDA manifesto talks of allowing 26 per cent foreign direct investment (FDI) in retailing and it seems to be the major policy initiative that foreign retailers and some part of Indian industry have been waiting for. This is because it is understood that with FDI being allowed in retailing in India foreign retailers that see the opportunity of the vast market in India, and have been making exploratory visits here, will now see their way free to come in.

At the same time, Indian retailers who have been experimenting with multiple formats, and building scale with a view to being a viable proposition for sale to these foreign chains, would also be happy. Further, the various service providers to retail who feel they will be able to offer these companies a local perspective of the market and industry can also see the opportunity of doing business with these chains.

Similarly, economists will love it because it is likely to provide a major fillip to the economy, as a study by the McKinsey Global Institute in the 2004 McKinsey quarterly shows. What it says is that the income level of a nation is determined by the productivity of its largest industries i.e., those that employ the largest number of people. So, while studying the rapid growth in productivity in America in the 1990s the McKinsey study found that this was caused by a few industries including retailing and wholesaling, and not by the new economy. It specifically goes on to mention that in India the IT boom has not succeeded in raising the living standards of more than a minuscule part of the population.

While this would seem like a great opportunity for someone in the retail trade, Im not so sure that a Wal-Mart will come to India in a very big hurry. In fact there is a view that the opening up of FDI in itself may not be enough to bring in foreign retail chains in droves. This seems apparent when you look at studies such as AT Kearneys Global Retail Development Index for 2003 where they have ranked Russia, Slovak Republic, China and Hungary ahead of India as representing the best opportunities for major food retailers to enter that year. In 2002, first on the list was China, India was sixth; in 2003 it is Russia, India is fifth. One of the major reasons India is even fifth is that out of the four parameters the index considers, India scores highest on the two counts of current lack of saturation of modern retail formats and lack of international retailers in the country.

With FDI being allowed, these parameters will presumably come down, and so India would fall further in the index. This is because in the other two parameters of country risk (where India is viewed as mid-risk) and time pressure where India is ranked 34 (time pressure=GDP growth-growth in modern retail formats) India does not make an urgent case for global food retailers to want to enter.

The study reiterates the non-happening nature of Indian retail. While discussing Indias rank, it talks about India being a difficult market to enter because FDI in retail is regulated (this, of course, will change), along with other issues such as the fact that 17 licenses are required to enter the market today as well as the fact that taxes are high.

Another point, brought out by a Deutsche Bank study in February last year, is that despite the billion plus population, Indias market isnt really that big. Mexicos disposable income, to cite the study, is 30 per cent larger than Indias. And, though the study doesnt mention this, the market is probably a lot more easily accessible than Indias, 70 per cent of which is in rural areas. Clearly it makes more sense for a retailer to focus on a geographically dense market as compared to a dispersed one. Presumably this is another reason why markets like Slovakia and Hungary are higher on the Kearney index.

The FDI issue apart, a really serious challenge facing the Indian retail sector is the absurd zoning laws and tax codes that it has to comply with. Due to these laws, two things happen. One, it is often not possible to get contiguous space for large retail formats in most metros. Second, the zoning laws also drive up rentals to levels where large format retail becomes unviable.

The McKinsey study cites a great example of Japan in this context where a combination of the zoning laws, tax policies and subsidies have promoted inefficient retailers, such that they account for over half of all retail employment compared to less than 20 per cent in the US.

So, in one small shop in central Tokyo, the author of the study has been seeing the same hat sit unsold, gathering dust, for the last 15 yearseach year that he visits the store, the hat is still there. Essentially, the proprietors dont need to sell the hat to stay in business, since they get subsidised loans. And since the shop sits on some fairly valuable land, they know their estate will repay the loans.

Basically, then, the markets not sufficiently attractive enough yet to bring in FDI by the droves. And, itll take a lot more than just FDI to make the market viable for large format operations.

Namita Jain is a retail consultant. She can be contacted at nami_jain@hotmail.com