Retailing is no rocket science

Last Tuesday, the Cabinet announ-ced FDI liberalisations in a slew of sectors. The decisions were timed to catch the attention of the participants of the World Economic Forum at Davos, where India was represented by a very high-powered delegation. The intention was to signal that reforms and liberalisation were on track, and that FDI was not only welcome, but also keenly needed in several sectors. At Davos, the finance minister invited FDI in infrastructure, for railways and for five mega power projects. The relaxations announced in the Cabinet decisions, were, however, fairly cautious steps. FDI in airports, LNG pipelines, power trading, removal of certain post-entry divestment conditions and certain relaxations in the conditions for transfer of shares were among those that were approved.

Most interestingly, the Cabinet took the first steps towards opening the retail sector. The decision allows 51% FDI, subject to FIPB approval, for single brand shops, though FDI in multiple brand shops continues to be banned. At present, these single brand entities operate through the franchisee route, and the decision would benefit firms like Reebok, Nike and others. Simul-taneously, the wholesale cash and carry and export trading entities were freed from FIPB approvals, into the automatic route. Though these concessions are incremental to the regime already in place, the stage has now been set for the full-scale opening of retail, after adequately softening the Left.

The debate over retail has been raging for several years now. The earlier NDA government, confronted with the traders lobby, shied away from the decision for its entire tenure. As major international chains like Wal-Mart increased their procurements from India, they increased lobbying for permission to open retail malls in India. The objections of the Left are that thousands of small grocery shops would be put out of business, as also the middlemen that are a vital link in this supply chain. Apart from the bogey of multinational takeover of grocery shops, the Left is also apprehensive about the labour policies that most of these major retail chains follow. The debate has been shrill, often more rhetoric than substance.

First, it is un-likely that investments of the order that Wal-Mart and others would make, with huge parking areas and multiple brand-multiple product, one-stop stores, would make sense in all but a very few cities. And these are the very locations that require standardisation and tested delivery of home-need products, with the growing affluence of the double-income, educated, young, urban middle class. Chennai has been the trailblazer?Subhiksha, Nilgiris and Food World are department stores that you find anywhere, except that they focus on home needs and are smaller in size. There are stores that cut and deliver fresh vegetables according to your daily menu, and also cut fruits. The demand has arisen as servants disappear and the shopping is done by the couple, and not by the servant (which is still true in Delhi). In parallel, there are stores that have come up for other home needs, clothes and accessories, and all varieties of necessities. The large retail chains would bring in economies of scale, standardised packaged products and reduced prices.

Second, and most important, these stores are not just for white goods and textiles, but much more for household needs like food articles and other groceries. The stores are likely to set in a trend of availability of standardised products at fixed prices that would add value to the agriculture production chain. Revolution in agriculture needs to come from value addition, processing and marketing, and these retail stores are an important ingredient to achieve this.

There is also the argument that by aggregating demand, these stores would source more and more products from India and, hence, serve as a catalyst for production and service-based employment.

The flaw in the above arguments is that none of these requires the presence of international entities. The consumer market in India is a stratified market with very different, discrete tastes in the rural, as well as the urban segments. The small town agriculturist would buy potatoes and onions in five kg packets, the young urban housewife in half or one kgs. It has taken even major players like Hindustan Lever and others several decades to discover the intricacies of the Indian consumer market. There is little that the major chains can contribute, other than inventory management and bulking. The retail revolution has not taken off because the time has not yet been ripe for it. Now there are a number of local players willing to invest the capital and technology to make it happen. Retailing is not rocket science?and as far as products are concerned, with lowered tariffs, these products are available anyway.

Further, there is the small town retail store. All over the world, the big chains have ensured the demise of the small mom-and-pop stores. There is no need to accelerate this trend. These stores, apart from being able to provide quantities and quality suited to the local market, also serve cultural and social functions in the community.

The need, therefore, is for retailers that understand the Indian market and the psyche?there are already multinationals like J&J here that do so?and not for bringing a US model. Let us learn from Subhiksha and other successful experiments. FDI in retail is neither a requirement of capital nor of technology, only of certain partisan interests. As in some other cases, the argument of the Left is right?there is no need to accelerate the arrival of multinational retail chains. And, hence, there is no need to rush with relaxations of FDI in this sector.

The writer is a former finance secretary and economic advisor to the PM