The headlines these days are filled with the stories of Foreign Direct Investment (FDI) in Retail sector which has become the point of disagreement, and seems to have split the country into two camps. One group is supporting it and the other is opposing and denouncing it. But interestingly, both are offering examples from economic sectors to prove their points in the contention. As everyone else has sided with one group or the other, I too have taken a stand on the issue and have decided to go in its favour.
In India there are two types of protests. One is genuine and inevitable, like the protest against the indifference by the successive federal and state governments in dealing with the Bhopal Gas victims or the kins of victims of Uphaar cinema etc, which by any means are an absolute necessity, as it is a move to awaken the otherwise lethargic administration. The other kind of protests is born out of political interests, mostly to earn brownies against the political opponents. They are not only wrong, but are misleading too.
Until the liberalisation of 1991, India had been largely and intentionally isolated from the world markets, to protect its economy and to achieve self reliance. Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while foreign direct investments (FDI) were restricted by upper–limit equity participations, restrictions on technological move. But in a historic decision on 14 September 2012, Government of India allowed FDI in the country. In aviation up to 49%, in broadcast sector up to 74%, in multi-brand retail up to 51% and in single-brand retail it allowed an FDI up to 100%.
FDI is nothing new to the world nor to India as we had make some major changes in 1991 which has helped our economy grow at steady pace even after the downslide trend on world’s business index. And starting from a reserves of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (only next to China) for international corporations during 2010–2012. As per the statistics, the sectors which fascinated higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, USA and UK were among the foremost sources of FDI. According to Ernst and Young, foreign direct investment in India in 2010 was $44.8 billion, and in 2011 experienced an increase of 13% to $50.8 billion, and so India has seen an eightfold enhancement in its FDI in March 2012.
FDI threats and real scenario:
The major justification offered by opposing detractors are that the FDI in retail sector shall harmfully impact the small retailers, farmers and consumers, and will give rise to domination by large trans-national retailers, which may negatively affect the pricing and supply of the goods. They also claim that the unorganized retail sector in India is one of the major employment generators, and granting permission to FDI in this sector could mean loss of livelihood for the small traders. The dispute that the introduction of FDI and supermarkets will relocate a large number of small traders is similar to the argument used during the era of industrial licensing, which was meant to protect small-scale industries. But eventually the inefficiencies and quality standards of the protected small-scale companies become evident even to the communist politicians consequently the said licensing was abolished. But then too small-scale industries have not died. As an alternative, they have learnt to co-exist as suppliers to large-scale industries. Apart from it, the small traders in large parts of the country will enjoy built-in safeguard from superstores because the latter can only exist in large cities. On the other hand, the ability of supermarkets to demand pricing and quality standards from manufacturers will benefit even small shops, who can even buy the same quality product from the same manufacturers to sell the same in smaller towns and villages.
It surely can be disputed, that since the reward cited above are due to the scale of operations rather than the input of foreign capital, why should we allow FDI in retail trade then? The case for FDI has more to do with the assurance and eagerness to invest hefty amounts in a short period as well as the proficiency based on knowledge. Even to set up a modest chain of 200 supermarkets in selected towns and cities acrossw India in the next three years, will require an investment of about Rs 2,000 crore (Rs 20 billion), at the rate of Rs 10 crore (Rs 100 million) per supermarket to cover the infrastructure and working resources. Each supermarket may take 2 or 3 years before it becomes fully operational and gainful. There is also a risk that a few of them may even fail. And in that scenario how many local Indian entrepreneurs will be enthusiastic and able to entrust this level of investment and agree to the risks involved therein? That is where the intercontinental know-how and skills that may come with FDI would provide the assurance and capital. Apart from this, by allowing FDI in retail trade, India will become more incorporated with provincial and an international economy in terms of quality standards and consumer prospects. These Supermarkets could supply several consumer goods from India for wider international markets. India undoubtedly has a benefit of being able to produce several categories of consumer goods, viz. fruits and vegetables, beverages, textiles and garments, gems, jewellerys, and leather goods. The advent of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all these segments. That will benefit not only the Indian consumers but also open the door for Indian products to enter the wider global market. It is therefore obvious that we should not only permit but support FDI in retail trade.
Job opportunities:
Apart from it the development of organized retail has the probable of generating employment for both the skilled and unskilled people. Furthermore, the government of India can protect the interest of small retailers by restricting FDI to be permitted only for stores having floor size greater than say 2,000 square feet. Moreover, monopolies of large MNC retailers can also be checked by the government by enforcing strict regulations and, whoever needed, through the Competition Commission of India. Like in China, even after many years of emergence of multi-brand retailing and supermarkets, 90% of fresh food and 70% of all food is still controlled by traditional retailers. An impressive growth has been noticed in the retail and wholesale trade there after Chinese government approved 100% FDI in retail sector.
Beneficial to farmers as well:
It can be understood that, with the establishment of multi-brand retail, the essential goods industry like food and packaging industry will also get benefits and improve too. As we are aware India is one of the largest producers of fruits and vegetables; but it has limited integrated cold-chain infrastructure. Non-availability of ample storage facilities is a cause for heavy losses to the farmers, as well in terms of wastage in quality and quantity of fruits and vegetables in particular. With adoption of liberal, there could be a complete revamp of the currently uneven supply chain infrastructure. Extensive backward integration by MNC retailers, coupled with their technical and equipped proficiency, can optimistically remedy such structural drawback. Also, farmers can get benefit with the “farm-to-fork” the chain of food supply, from the farm where it is produced to the consumer ventures with retailers which helps (i) to reduce number of mediators ; (ii) give fair prices to farmers, and (iii) provide steadiness and economies of scale which will benefit, in the ultimate analysis, both the farmers and consumers.
Even the Journal of International Economics, supports the idea of FDI with an analyzed example that about 69 developing countries which welcomed FDI ultimately grew into stronger economies in the past two decades. Their results suggest that FDI is in fact an important vehicle for the transfer of technology, contributing to growth in larger measure than domestic investment. Moreover there is a strong complementary effect between FDI and human capital, that is, the contribution of FDI to economic growth is enhanced by its interaction with the level of human capital in the host country.
Major flaw in the policy who oppose FDI in retain.
We know that India's economy was largely reliant on its large domestic market with external trade accounting for just 20% of the country's GDP. But during the past 15 years, the importance of FDI in the world economy has increased rapidly. The total stock of FDI increased from 8% of world GDP in 1990 to 26% in 2006. Although the bulk of FDI continues to take place between OECD countries, the increase in FDI has been particularly pronounced in developing countries, largely reflecting the integration of large emerging economies, like the Brazil, Russia, and China. Even The share of non-OECD countries in the global stock of inward FDI has risen from 22% in 1990 to 32% in 2005. China by far has remained the most important non-OECD country as a recipient of FDI, accounting for about one-third of FDI in non-OECD countries in 2005.Frankly speaking, since the mid-1990s inward FDI has become the main source of external finance for developing countries and is more than twice as large as official development aid.
Therefore it is advisable to analyse the advantages and disadvantages of the planned policy of allowing FDI in retail trade. One key point is that we must differentiate between the benefit of consumers, who comprise India’s population of nearly 120 crores, from the interests of small traders or retailers, who may number over one million. It is obvious that the welfare of the consumers should be on priority over those of the retailers. FDI in retail and the development of larger stores and supermarkets have many advantages from the point of view of the consumers. FDI will provide right of entry to larger financial resources for investment in the retail sector and that can lead to several of the other advantages that follow; The larger supermarkets, which tend to become regional and national chains, can bargain prices more insistently with manufacturers of consumer goods and is expected to pass on the advantage to customers; They can lay down better quality standards and guarantee that manufacturers adhere to them. Many consumer goods manufacturers will find that supermarkets account for a growing share of their sales and will be afraid of losing this important and reliable customer to competition. The fact that a well-known chain of supermarkets sources from a manufacturer becomes a stamp of quality. With the availability of finance, the supermarkets can invest in much better infrastructure facilities like parking lots, coffee shops, ATM machines, etc. All this will make shopping a pleasant experience. The supermarkets offer a wide range of products and services, so the consumer can enjoy single-point shopping. And optimistically speaking with this kind of liberalization in retail, who knows some day an Indian group with strong local brand quality and international network like the Reliance or Tata can collaborate with international supermarket chains and may set up supermarket chains all across the globe!
When Rajiv Gandhi introduced computers in India and Atal Bihari Vajpayee planned the golden quadruple highways in the country, the Communists and also some other groups resisted the projects. Even when Indira Gandhi announced the plan to set up underground railway service in Kolkata, the communists went berserk. But now we all know how all these projects benefited us. Now the communists, BJP and many others are resisting the FDI in retail in India. Let the government ignore the protests and push ahead with the plan on the FDI. I am sure after sometime most in India will say that FDI in retail has benefited the country, and those who are resisting the foreign investment today will fall on line soon.
