Sustainable Growth Through Retail FDI

Sustainable Growth Through Retail FDI

Swaniti Initiative | November 21, 2012 | The Swaniti Blog

Writing For The Motion: Gagandeep Bhatia
Gagandeep is a recent graduate of Punjab Engineering College and now works for Tata Motors. He is also a part of the Swaniti Governance Labs.

Foreign Direct Investment (FDI) refers to the direct investment of a multi-national company in a country other than its origin. There has been a rather long-standing debate on whether to allow FDI in the retail industry in India. Following arguments are to be made in favor of FDI. My arguments would be ordered as: Background, fighting apprehensions and need of implementable policies.

  • India today enjoys the status of being one of the fastest growing economies around the world. Let us remind ourselves of how we reached such a status. Right up till 1991, India followed a socialistic pattern of policy, which almost brought us to our knees. The government was close to default as the Forex had reduced to such a low that India could be barely financed to about three weeks’ worth of imports. We don’t remember 1991 for this economic crisis though; we remember it for being the year that India turned the tides. We remember it for the path-breaking neo-liberal policies that gave birth to free market initiatives and opened the economy to global trade. Starting from a baseline $1 billion FDI in 1990, it was $50.8 billion last year, making it the second most important FDI destination after China. So let us realize that it is not a new phenomenon out to make us suffer.
  • With respect to FDI in retail specifically, the major concerns are that the big corporations are greedy and do not care about the local folk; that they will drive out the local kiryanas out of business further creating a wealth gap and FDI will benefit only the small segment of the population and is anti-inclusive.
    • Whether we allow FDI or not, there is general outflow of business to become organized in nature. Today, we see that happening in retail regardless of entry of MNCs. This is seen through Big Bazaar, Reliance chain of stores, Trent Retail etc. Hence, the movement in retail is on nonetheless.
    • The most often cited company, Wal-Mart’s success grew from rural areas in the US. They competed as a cost effective solution for rural/sub-urban American who has the capacity to do bulk purchasing. Whereas, in markets like India/China, Wal-Mart is going to setup shop in major cities where the educated middle class can spend. The foreign retail chains will thus have to make very expensive real estate investments, making them operate at a much higher price point than the local kiryana store. We have to realize that the real competition will be domestic retail companies mentioned above rather than those small shops. Not only is this good for our economy but will help in strengthening the local food supply chain and will have repercussions in improving the public distribution system.
    • Finally, apart from infusing the economy with massive investments, they will have to create a local supplier network and employ a large workforce, all resulting in generous benefits to the lower and middle class society.
    • A CII-Boston Consulting Group study found that an Indian tomato farmer earns about 30% or even less of the final price paid by the consumer (in developed countries, that percentage can be as much as 70%). This is primarily due to unfair practices by the middlemen or traders. These are the people who have the maximum to lose in the development of a streamlined supply chain, not the farmer.
    • The only bone of contention remains that the government must be stringent with policies framed for growth of the local industry. For instance, strict enforcement of policy that governs the percentage amount of local produce procured by the MNC is ensured. The company cannot be allowed to go scot-free on breaking policies kept in measure to prevent exploitation.

We have to understand that FDI in retail industry is a long term benefit. We will not see instantaneous impact and it is rather short-sighted to disparage it based on the effect it may be perceived to generate. Allowing entry of FDI in retail will only lead to more competition, which has been seen time and again to benefit to the end customer.

[notice_box]The views represented in this blog are those of the author. It does not represent the thoughts, intentions or plans of the Swaniti Initiative.[/notice_box]