On 14 September, 2012, when the cabinet decided to allow FDIin multi-brand retail, it raised a question. Why did Manmohan Singh initiatethis move, opposed by most political parties, including Congress’ coalitionpartners, now? Some said this was his way to re-establish his image as the‘Father of Reforms’. Others felt his ‘perform or perish’ mantra was to escapethe clutches of policy paralysis.
However, the real culprit was another foreigner “ the globalcredit rating agency, Standard & Poor (S&P). The Damocles’ sword ithung over the government’s head was to either reform or face the prospect ofbeing reduced to junk status.
But the question remains: why now? In earlier meetings withS&P, the government said it was on the reforms path and would pass pendingbills, and introduce new ones during the monsoon session. When the sessionturned out to be a washout, it had to take a few dramatic measures to save itsface ahead of the next meeting with S&P.
A case was built to prove that FDI in retail was the panaceafor the farmers and consumers. The anti-FDI critics tried to convince us thatthe move will not change the ground realities, and yield little benefit to thetwo sections.
In the process, the issue was clouded with myths perpetratedby both sides. Here is an attempt to clear the retail skies.
Myth # 1: FDI will fuel farmers’ income
About a third of the country’s perishable vegetables andfruits are wasted annually because of lack of adequate storage facilities. Theentry of global retail giants like Wal-Mart, Tesco, and Carrefour will stemthis rot. Moreover, the new players will eliminate series of middlemen in thetrade, who exploit the growers. The combination will boost the returns to thefarmers.
There is little evidence to prove such conclusions. InIndia, local retail giants like Reliance, Tata, and Bharti haven’t made muchdifference to the farmers’ lives. Many buy their food produce from the samemiddlemen and mandis, whom they are supposed to destroy.
Myth # 2: FDI will curb food inflation
In the past two years, the prices of food products,especially vegetables, have zoomed. Food inflation has consistently remained indouble-digits despite past average monsoons and decent production. The FDIsupporters contend that investment in back-end logistics will drasticallyreduce the farm-to-market time, which is the only immediate solution to lead asuccessful attack on the price front.
FDI’s overall impact on the retail trade will happen over thenext decade or two. Nothing will change in the short run, over the next fewyears.
Myth # 3: Millions of small retailers will lose jobs
The Confederation of All-India Traders (CAIT) has estimatedthat the unorganised retail sector, which accounts for almost 96 percent ofoverall trade, employs 100 million shopkeepers and another 400 million peopleindirectly. Wal-Mart, for example, with an annual turnover of $446 billion,provides direct employment to 2.2 million. FDI in retail cannot substitute for thejob losses in the informal sector.
Past experience has shown that organised retail takes timeto capture market share. Despite being in business for 5-10 years, large Indianretailers have a market share of 4.2 percent. FICCI predicts that by 2032, FDIwill enable the big players to capture almost 17 percent of the then $900billion market. Therefore, the small retailers and mom-and-pop stores willcontinue to thrive; their market share will rise from $455 billion now to $750billion in the same two-decade period.
Myth # 4: MNCs will pursue predatory models
A major concern is that the Wal-Marts of the world will dumpcheap and low-quality products in India through import from other developingnations. It will create an uneven level-playing field between the MNCs andsmall local retailers. In fact, this is possibly why Wal-Mart, which procuresproducts from 15 countries, is able to undercut even online retailers likeAmazon; a study by consulting firm Kantar, found Wal-Mart products were on anaverage 20 percent cheaper than Amazon.
While this is partially true, global retailers buy fromlocal vendors. This is true of single-brand players, like furniture-sellerIKEA, who wish to set up their own manufacturing units in India. It is becauseof this reason that IKEA successfully lobbied with the government to ease theclause to procure 30 percent of the goods from local small and medium sizefirms.
Myth # 5: FDI will have a huge economic impact
Minister for Commerce & Industry, Anand Sharma, feelsthat foreign retailers will revolutionise the ailing manufacturing sector. Asthey will set up factories locally, or buy products from other vendors to cutcosts, they will act as revival catalysts. IKEA has an Indian procurementnetwork in place to feed its global supply chain.
Facts belie such optimism. Wal-Mart’s business model ishyped. In 2010, Nelson Fraiman, a professor in Columbia Business School,concluded that “large firms like Wal-Mart have gone to countries like Braziland failed “ the same way they’ve gone to countries like Korea and failed, thesame way they’ve gone to countries like Germany and failed “ mainly because ofnot understanding the local culture.” Wal-Mart’s much touted strategy may workin the US, but not necessarily in other countries.
Myth # 6: India will access global best practices
The entry of global retailers will introduceglobally-accepted best-management practices in the agriculture sector. With itsrenowned internal processes and systems, it will force allied sectors “ coldstorage, transportation and food processing “ to adopt the same.
In August 2012, minister of state for commerce &industry, Jyotiraditya Scindia, told parliament that a paper by Swiss UNIGlobal Union on Wal-Mart’s global track record concluded that “without adequatesafeguards in place, FDI in multi-brand retail will lead to widespreaddisplacement and poor treatment of workers in retail logistics, agriculture andmanufacturing.” In the past, Charles Kernaghan, director, US National LaborCommittee, said that “Wal-Mart is the nastiest company we’ve dealt with.”
Myth # 7: Finally, consumers will benefit
At the end of the day it boils down to the consumer. Ofcourse, with discounted retail prices offered by global chains all over theworld, she would welcome Wal-Mart with open arms.
However, as we said earlier, the share of organised retailis expected to be only 17 percent by 2032. Therefore, the price benefits willonly percolate to urban sections, largely the middle and upper classes. Eventhe global chains will want to set up more retail stores in the cities, whichhave larger population with higher spending powers.
(Alam Srinivas is a business journalist with several booksto his credit)
