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FDI in India's retail sector

India is currently evaluating the costs and benefits of opening up its retail sector to foreign direct investment (FDI). 98% of its retail trade is in the unorganised sector. Its unique features are its predominantly traditional set-up, family owned, highly dispersed, with a small average size of outlet. The paan-beedi shops, kirana shops, local bazaars, convenience stores, hardware shops, weekly haats, etc. identify strongly with the local neighbourhood. In contrast, the organised sector that accounts for just 2% of retail trade has witnessed dramatic transformation in recent years. A variety of retail formats have emerged such as hypermarkets, supermarkets, department stores and discount stores. In the non-store category, there are television shopping, direct selling and e-tailing opportunities. The retail sector contributes to around 10% of GDP and 6-7 % of total employment. Its varied segments are food and grocery, textiles and apparel, consumer durables, jewellery, music and books, wooden furniture, handicrafts, leather footwear, fast-food chains, real estate, fuel retailing and non-store formats involving direct selling. The country has the distinction of having the highest density of retail outlets - over 15 million - in the world. It now stands poised to move into a high growth trajectory.

FDI in retail has been a contentious issue for quite some time now. Opposition to it comes from trading associations, industry associations and chambers and some leftist political parties. They fear are that:

• This will result in large- scale unemployment, as foreign technology will be labour-displacing.
  
  
• Foreign retailers will depend on global outsourcing of supplies.
  
  
• They will resort to predatory pricing tactics and will buy cheap and sell cheap at first and hike prices once they have consolidated their position.
  
• Their sheer size will enable them to sustain losses on a large scale. Scattered domestic small-time retailers will be unable to withstand such tactics.
  
• Competition will be replaced by monopoly, followed by a trend towards cartel formation.
  
  According to this view, the benefits of FDI in retail are exaggerated and, in particular, the technology transfer argument is not really relevant to this sector.
  
  It is the potential impact on unemployment that is worrisome. Since organised retailing would depend on direct dealing with actual producers, the entire chain of intermediaries would become redundant and this would only add to the reserve army of unemployed labour. However, we know that this category of persons have little skills and low productivity. They are also the victims of various kinds of exploitation. Should we allow such an iniquitous system to continue? Are we not doing them more harm by keeping them permanently in that subservient state? In an efficiency-driven modern economy, rational thinking must override all else. Lip service for the downtrodden is an old ploy used by vested interests. What we really need is concrete action by both government and civil society to empower them to widen their choices.
  
  It can be argued that any impact of FDI on domestic retailers will depend on factors such as the rate of growth of national income and its distribution, especially the share of the middle class with its high propensity to consume. Will foreign retailers replace their domestic counterparts or is there space for both?
  
  In this context, the concept of "interstices of growth" comes to mind. Edith Penrose in "The theory of the growth of the firm" refers to interstices in the economy, which provide opportunities for the growth of smaller firms alongside large firms. It means growth itself encourages a number of complementarities and coexistence of big and small. This perception can apply even more to a rapidly growing economy poised for a 10% GDP growth and backed by an upwardly mobile middle class. Moreover, the steep hike in wages and salaries in recent years, along with increasing consumerism, gives you mind- boggling estimates of "spending power." It gets reflected in the insatiable appetite for fast food and wines, branded garments and accessories, designer homes, hi-tech consumer durables, jewellery, health spas, exotic holidays, theme parties and more.
  
  Add to this the traditional arguments for FDI in retail: large investment flows, superior technical know-how and organizational skills, best management practices, improved supply chain networks and the immense potential that India has to transform itself into a major sourcing hub, thereby consolidating its global presence. In fact, renowned global players such as Wal-Mart, Metro, JC Penny, Lee Cooper and Levi's have already evinced considerable interest in sourcing products from India. The IT, Tourism, Entertainment, Hotel and Real estate are some of the other sectors which are likely to experience a favourable impact. In fact, retails' significant backward and forward linkages will itself ensure a huge and beneficial multiplier effect.
  
  The organised retail segment in India is dominated by a few large domestic players. Their high profit margins have been at the expense of consumers. Like in the automobile industry, the telecommunications and the financial services sector, increased direct foreign participation will strengthen competition with its concomitant effect on productivity and efficiency and consumers would experience real gains in shopping. Realising the inevitability of direct foreign participation, the majority of organised domestic retailers are projecting optimistic expectations. Joint Ventures and other collaborative agreements will give them a chance to tap the huge capital, superior technology, market expertise and efficient logistics networks that are expected to flow in with foreign investment in retail.
  
  The reactions of the large unorganised domestic retail sector to foreign players on their home turf are both surprising and exciting. Their threat perception regarding large foreign and domestic retailers is the same. To start with, they have already got accustomed to foreign presence as the latter have entered the Indian market through various routes such as franchising, test marketing, wholesale cash-and-carry as well as manufacturing and local sourcing to name a few. They do not see any fundamental differences between the market strategies of big domestic retailers and foreign retail giants. Barring a few, most have adapted and survived rather than shut down shop in the face of active competition from organised retailing. The threat of more competition has made them conscious of the need to reorganise themselves, form associations to enjoy scale economies, adopt rigorous selling practices including attention to weights and measures, informative labeling, attractive packaging, clean accounting standards, effective pre-sales campaigning and after sales services. The message is clearer than ever: the customer is king and can no longer be taken for granted.
  
  Thus, if FDI in retail is only a matter of time, what policy initiatives can we support?
  
• A gradual or calibrated opening of the retail sector with a time frame. This gives domestic players some lead time to get ready for the onslaught.
  
• Laying down some safeguards to prevent overseas players from virtually strangling domestic counterparts. For this, the government needs to have complementary regulations in place.
  
• Granting an "industry" status to retail activity.
  
• Allowing foreign equity and FII participation in retail joint ventures. Also, giving them a majority stake to motivate them to invest funds and share technology.
  
• Adopting a selective approach by permitting FDI in less sensitive sectors at first such as garments and lifestyle products, consumer durables, houseware and entertainment.
  
• Classifying small retailers in the unorganised segment as part of the SME category so that they can avail of all assistance and consolidate their position.
  
  Above all, it is the desired attitudinal change that must be addressed.