Tuesday, December 6, 2011

FDI in Retail: Tailing out the Local Kiryana Store

By Prof Ved Parkash Kumar

On this land of 15 million retailers, most of them owning small mom and pop outlets. FDI driven modern retailing is displacing labour  in India. A study by Sahoo and Mathiyazhagan (2003) support the view that FDI in India is not able to enhance the growth of the economy. Irony of situation is that “small traders will not be able to withstand the competitions”. This will lead to the monopoly of foreign players and the farmers will have to sell their produce dictated solely by organised retail” said one the member of Board of National Agricultural Cooperative Marketing Federation. 

Foreign Direct Investment means investment made to acquire lasting interests in enterprises operating outside of the economy of the investor.  It consists of a parent enterprise and foreign affiliate, which together form a MNC. So in simple lay man terms for FDI in Retail:

Goods to a great extent will be purchased from country manufactures, farmers  and production units  and sold to the people of our country. The question is that is there really a need of Foreign Investment in Retail?

Myths with FDI in Retail Sector

1. It will create more job opportunities.

In Retail Store, requirement happens at supply chain and selling end. Involvement of transportation, execution, timely delivery and at customer interaction end involvement of activity based, product based or zone based jobs or maximum requirement floor managers will arise. How come it will create more jobs is big dilemma. Higher extent of FDI in an industry leads to higher wage rate, it has no impact on its employment. FDI, trade and technological progress have different impact on wages and employment.

2. Lower price of the products to end consumers.

How can we forget huge travelling cost involved in going to big retail stores for buying even small items or even buying for one month then what about fresh eatables. Who will bear huge front and back end infrastructure  and Supply Chain  Cost of Retail Stores.

3.Comparatively betters prices  for farmers  and suppliers

Once monopolistic market is created, then drastically prices for farmers and suppliers will change. In present scenario, if crops and other production is not purchased, government agencies are buying  in a way of helping the farmers.

4. Increase in exports

The repatriation of profit may drain out the capital of the host country. It contributes 14 per cent to the national GDP and employs seven per cent of the total workforce.

5. Retail sector will be  organised

Our country has around six lakhs villages, farmers are going to nearby  local mandies  and central and local state governments owned agencies to sell their output. How can we say that retail sector is not organised, more rationing and controlled is required that too from government side instead of passing the ball. Organised trade employs roughly five lakh people whereas the unorganised retail trade employs nearly 3.95 crores.

6. Direct Linkage with consumers

“Survival of the fittest  may be western thought  but our culture has taught us that even the weakest has got right to survive. Foreign retail firms have deep pockets and can cause even the organised retail sector to go out of business.

7. Inflation will be Controlled

Local firms may loose business because of the oligopolistic power of foreign firms  and major players of FDI  can only expand by destroying the traditional retail sector in India which ultimately transferring the control in few hands, leads to increase in prices even for essential commodities.

Indian middle class market is world largest buyer  market with having purchasing  power of money as per Garner Research in 2006 and 2009. FDI investment is not a kind of social welfare plan for our country. Naturally for earnings profits, earned by our retailers. “Foreign retailers will impact supply chains that are being fed by SMEs and there will be displacement of SMEs if it is not checked” said, Secretary General of the Federation of Indian Micro, Small and Medium Enterprises. (See Table)

Higher export intensity of an industry increases employment in the industry but has no effect on its wage
rate. In comparison our Indian Corporate bigwigs such as Reliance, AV Birla, Tata, Godrej, Bharti, Mahindra, ITC, RPG, Pantaloon, Raheja and Wadia Group are expected to invest close to  Rs one trillion in the business of retail over the next five years.

The major reasons for attraction towards our Great India

1. A ‘Vibrant Economy’, India topped A T Kearney’s list of emerging market for retail investments for three consecutive years.

2. The 2nd fastest growing economy in the world, the 3rd largest economy in terms of GDP in the next five years and the 4th largest economy in PPP terms after USA, China and Japan, India is rated among the top 10 FDI destinations.

3. India can be reasonably proud of having put in place some of the most widely accepted Corporate Ethics (labour laws, child labour regulations, environmental protection lobby, intellectual property rights, and social responsibility) .

4. The major tax reforms including implementation of VAT, all of which make India a perfect destination for business expansion.

5. In terms of international tourist spending, India is the fastest-growing market in Asia Pacific, according to the Visa Asia Pacific release. The economy has been growing at about nine per cent a year, which shows that India’s growth rate can actually exceed that of China by 2015.

6. The Indian economy is expected to grow larger than Britain’s by 2022 and Japan’s by 2032, to become the third-largest economy in the world after China and US, and finally become the second largest economy after China by 2050,.

7. A report by investment banker Goldman Sachs, credits India with the potential to deliver the fastest growth over the next 50 years with an average rate of more  than five per cent a year for the entire period. All these are clear portends in terms of investments and returns.

8. At the heart of the India growth story is its population, the generators of wealth, both as producers and consumers. With the largest young population in the  world over 890 million people below 45 years of age, India indeed makes a resplendent market.

9. The country has more English speaking people than in the  whole of Europe taken together. Its 300 million odd middle class, the “Real” consumers, has attracted the attention of the world

10. It is estimated that 70 million Indians earn a salary of over US $19,500 a year, a figure that is set to rise to 140 million by 2011.

11. The number of effective Indian consumers is expected to swell to over 600 million, very much sufficient to establish India as one of the largest consumer markets of the world.(IMAGES F&R Research)

Now the question arises, Can foreign retail units ready to divest a certain percentage of their equity in the Indian financial markets or institutions? Can their commodities certain percentage be purchased from our SMEs? Will it possible to retain  management level jobs be reserved for Indians? As we are living in the era of  “Repair” and not at all believe in “Dispose off” until and unless repaired. So this high spending in advertisements in the name of show off and brand building where this mad rush will leads to…


Sales           $ 419 b   $ 79 b      $ 94.76b    $ 120.73b 

Stores           9,800      2,200        5,380          9,500 

(‘lakhs)            20            3.21        4.70             4.71

Country            US            US            UK        FRANCE

(The writer is  Executive Director  with  Vedaant Consultancy Group)

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