FDI in Retailing: Long Overdue

Article by - B V Kiran, ICMR Case Studies and Management Resources. The government should allow FDI in the retail sector taking a cue from China. The Indian retail market, which was largely unorganized till the 1980s, as undergone an immense transformation in the post-liberalization era. Due to the wide range of products available, the increasing purchasing power of consumers, superior supply chain management leading to economies of scale and a world-class customer service, the Indian retail market has been witnessing tremendous growth. Alongside, there has been an increasing pressure from international agencies on the government, to allow Foreign Direct Investment (FDI) in the retail sector. Many industrial giants like Tatas (Westside), Eureka Forbes, RPG (Food World, Giant, Music World, Health & Glow), Pantaloons, Big Bazaar, Shoppers' Stop, and Lifestyle have entered the Indian retail market. These big corporate houses have managed to attract a large number of customers over a period of time and have significantly improved this sector. Moreover, these companies invested huge resources, in terms of capital, personnel and technology, which allowed them to garner a significant market share in this industry. The increase in the double income households (as a result of multinational companies entering the country and creating potential employment opportunities), has given a tremendous boost to the spending power of consumers, thereby opening a plethora of opportunities for retailers. Unlike earlier, consumers now are spending a major chunk of their income on buying goods and services. A growing number of families with both the spouses working gave impetus to instant and ready-made products (ITC's ready-to-eat foods) and services, which help save time. Retailers are now offering an entire range of convenience products, which a typical household requires. There are several reasons that have led to the retail sector being more organized. Increased urbanization, growth in the demand for newer and varied products by consumers, and branded goods penetrating the market on a large scale are some of the reasons. Segments in retailing like consumer durables, furniture, healthcare, garments, food and services, personal care products, apparel, music, and books are increasingly getting organized.

Globally, there has been a significant change in the retail sector over the past two decades. More than 70% of retailing in developed countries is organized. The organized retail sector in China is 10 times that of India's. India is next only to China in market size and is the fourth largest economy in the world after the US, China and Japan. (The US accounts for 21.1% of the world's GDP, China 12.6%, Japan 7% and India 5.7%.) The World Trade Organization (WTO) and international agencies have been pushing the Indian government to allow FDI in the retail sector. The WTO has also been planning to withdraw tariff and trade privileges provided to India under the new General Agreement on Tariffs and Trade if FDI is not allowed.

However, in India, the government is still apprehensive about allowing FDI in the retail sector. It is high time that the government allows FDI in this sector. The average Indian deserves consumption of good quality products at prices he can afford. In a developing country like India, a major chunk of a consumer's expenditure is on retail products. This expenditure is only likely to increase in the near future. Retailing in India, in spite of industry majors entering, is still at its nascent stage. According to India's Ministry of Commerce and Industry, only 2% of the retail sector is organized, leaving a huge margin for other players to enter the market. Moreover, the volume of retail turnover in the country is estimated at Rs. 4 lakh crore, which is about 10% of our Gross Domestic Product (GDP). The retail industry is the second largest sector after agriculture in terms of turnover and employment. The growth rate of the retail sector is estimated at about 5% per annum. It is also interesting to note that retailing in India by 2010 will be a $300 bn industry, provided our economy continues to register a growth of 6% of the GDP annually. Such overwhelming statistics is forcing the government to take firm and positive steps towards allowing FDI in the retail sector. The government is gradually preparing the base for allowing FDI in this sector. It recently allowed 100% FDI in the real estate sector. The opening up of the real estate sector for FDI will greatly help the organized retailing industry in developing worldclass infrastructure. Providing concessions on import of capital goods for certain retailers and implementation of Value Added Tax (VAT) are certain other steps towards this direction. However, certain political parties like the Left are strongly opposing any such moves. One of their main contentions is that it will destroy employment opportunities in this sector. But the fact is, allowing FDI in this sector offers a host of benefits. Primarily, it enhances the standard of living of the people by providing high quality products at cheaper rates. It will also increase employment opportunities in the entire value chain of organized retailing, right from procuring materials to packing and selling them. On the other hand, the application of information technology in the retail sector has been on the rise over the past few years, across the world. It has significantly improved the effectiveness of various activities like operating the stores, merchandise management, inventory management, sales forecasting, etc. Technological advancements have also prompted retailers to focus on television shopping and online shopping. All these developments create a host of employment opportunities. The unorganized sector in retailing does not provide advanced and technological facilities as provided by the organized sector. The change in customer preferences helps organized retailers provide a wide variety of products with state-of-the-art display and stocking capabilities. The retailers in the organized sector set up stores on a large scale with different kinds of products. This allows them to bargain with their suppliers, thus, giving them the advantage of lower costs and supply chain efficiencies. These advantages combined with a highly trained staff increase productivity and lead to competitive pricing of the products. The McKinsey report that India is poised to witness an explosive growth in the organized retail sector has inspired many national and international companies to enter this sector in a big way. Apart from the existing industry giants such as the TATA, RPG, ITC, etc., new players like Reliance Industries are planning to enter this segment in a big way by establishing shopping

malls, in India's major cities and pumping insignificant investment. Many of the international retailers are waiting at the country's doorstep to enter the market. Recently, global retail giant Wal-Mart International's CEO and President, John B Menzer, met the Prime Minister, Manmohan Singh, to discuss the opening up of the retail sector. Wal-Mart is planning to invest substantially once this sector opens up. Concerns about the future of the existing retailers in the country, especially those in the unorganized sector are largely unwarranted. The small-time retailers will still have their business as their target market is completely different from the targeted consumers (probable) of global retail giants like Wal-Mart (if it enters India). The small-time retailers act as next door stores that help in purchasing items of daily usage. However, this is not the case with large organized retailers and, therefore, the local Kirana stores will anyway have their business. A case in point is, China, which has allowed 49% FDI straight away in the retail sector and improved its stand in international trade. As regards the future of unorganized retailing in China, according to a study, allowing FDI did not displace the conventional local retailers but on the contrary, these traditional outlets in China have increased significantly from around 19 lakhs in 1996 to almost 26 lakhs in 2001. The government should, therefore, go ahead and allow FDI in the retail sector. In fact, it should take a cue from China in this regard. Planning to withhold the decision until the December WTO meeting in Hong Kong, so that the government can use this as a bargaining tool for service sector negotiations, is a good move. Whatever the outcome, the government should allow FDI in retailing, if not today at least tomorrow.