No need to fear FDI in retail

K. T. Chacko Organised retail would thereby bring more stability to prices Unfounded apprehensions that small retailers will be affected are not reason enough to deny consumers access to world-class products. With the government's conditional nod to FDI (foreign direct investment) in multi-brand retail seemingly around the corner, the question arises: does organised retail really require FDI? The unequivocal answer: Yes'. Although Indian retailers have made steady progress in the past decade, their efforts fall short in matching global norms in a sector estimated to be worth more than $450 billion. Consequently, organised retail has barely more than 4 per cent market share in India. Indian retailers simply lack the deep pockets and in-depth domain expertise required to be on a par with global models. The presence of foreign retailers through joint ventures and other means could certainly speed up the process of transforming India's retail trade.

Multiple intermediaries
There's a broad consensus on the need to enhance efficiencies in the domestic trade of consumer goods. Efficient management practices and economies of scale, coupled with the adoption of global best practices and modern technology, could vastly improve systemic efficiency. Presently, retail trade is disorganised and largely inefficient. As in other economic activities, minimising costs and maximising efficiency are imperative in retail trade. Like their foreign counterparts, Indian consumers too are entitled to receive quality products, produced, processed and handled under hygienic conditions via professionally-managed outlets. Unfounded apprehensions that small retailers will be adversely affected are not reason enough to deny millions of consumers access to world-class products. Moreover, today's intermediaries between producers and consumers add no value to the products, but add immensely to final costs. By the time the products travel from the farmgate to the marketplace via various intermediaries reduces, they lose freshness and quality resulting in huge wastage. Nevertheless, intermediaries reap huge profits by spreading wastage losses between producers and consumers. This is achieved by buying products at low prices from producers, but selling at highly marked-up prices to

consumers. In an unsound system with multiple intermediaries simply for logistics, only intermediaries benefit. With organised retail, every intermediate stage procurement, processing, transport and delivery adds value to the product. This happens because it uses global best practices and modern technology, ensuring optimum efficiency and minimum wastage. Organised retail enables on-site processing of produce, scientific handling and quick transport through cold storage chains to the final consumer. Once modern retailers introduce an organised model, other vendors, including small retailers, would automatically copy this model to improve efficiencies, boost margins and stay in business. Organised retail would thereby bring more stability to prices, unlike the present system where hoarding and artificial shortages by profiteering intermediaries push up product prices.

Convenience of kiranas
Concerns about kiranas closing down after the advent of organised retail are not based upon facts. Given the huge population and large number of cities and towns , it's erroneous to conclude that organised retailers would drive small stores out of business. Small stores offer customers the convenience of quick doorstep delivery, even extending a month's credit. No organised retailer can match such convenience. This is one reason why FDI in retail in other nations, including China, did not lead to closure of Mom-and-Pop stores. China's experience indicates that both organised retail as well as Mom-and-Pop stores can co-exist. China first allowed FDI in retail in 1992, capping it at 26 per cent, while India capped FDI in single-brand retail at 26 per cent. Only in 2004 did China permit 100 per cent FDI. Since then, Chinese Mom-and-Pop stores have grown from 1.9 million to more than 2.5 million. Conversely, organised retail has just 20 per cent penetration , despite operating there for almost 20 years.

More jobs
Some stakeholders speculate that millions of jobs would be lost due to FDI in retail. Actually, it will be the other way around. With the entry of modern retailers, the market will expand, creating millions of additional jobs in retail and other tertiary sectors. Given their professional approach, organised retailers will allocate some amount of resources towards the training of people they hire. This has already happened with the Bharti-Walmart joint venture, which has joined hands with some State Governments in opening training centres in Amritsar, Delhi and Bangalore to train local youth for jobs in retail. Training is totally free and more than 5,600 local youth have already been trained . Retail jobs don't require higher education or highly specialised skills. Finally, considering the conditions incumbent for the opening of multi-brand retail, it should be clear that this will be a win-win situation for all parties. One of the crucial norms in the formal proposal for permitting FDI is that 50 per cent investment will be

mandatory in back-end infrastructure, which includes cold storage chains and warehousing. The minimum FDI investment would have to be $100 million. Retail stores would only be allowed in cities with more than one million people. Front-end operations would be allowed only in States that agree to permit FDI in multi-brand retail. It will also be mandatory for retailers to source minimum 30 per cent of the value of manufactured goods, barring food products, from small and medium enterprises. Such stipulations will serve as sufficient safeguards for small retailers. Ultimately, farmers and small producers will benefit from better prices for their products and produce, while consumers will receive quality products at lower prices along with better service. (The author is Director, Indian Institute of Foreign Trade. The views are personal.)

How the world burnt its fingers

SHEKHAR SWAMY THE HINDU Big Retail has steadily edged out smaller players The story has been one of concentration of economic power, with anti-trust laws in Germany and Japan mitigating the effects somewhat. There has, of late, been a public relations overdrive for foreign direct investment in multibrand retail. The bureaucrats want to move ahead with it. And politicians from the ruling party have expressed the need to build a political consensus. There appears to be a divide between the two. Those facing the electorate know the ground reality. In this matter, I hope the survival instinct of the politician prevails. This business cannot be about ramming policy changes through, using PR. It is about the lives of people. How will they be affected? Who will pay the price? What are the likely social consequences? What can we learn from other countries, to protect India's interests? First, some explanation about the nomenclature FDI in multi-brand retail. A leader of a national trade group told me that many of his constituents do not even understand what it means. The phrase is classic bureaucratic obfuscation. The bureaucrats are justifying such FDI by saying it will improve supply-chain infrastructure for perishables, which is but a fraction of the retail industry. Using this excuse, what is proposed is that the entire retail world will be thrown open to foreign retailers. They should really call it Inviting foreign companies to compete with all retailers and traders so that everyone understands what it means.

The foreign retailers are likely to start with dry goods, as they tend to do around the world. These dry goods can be sourced from any part of the world. Every class of retailer, across product lines garments, footwear, home furnishings, personal products, laundry, cleaning products, pharmaceuticals, furniture, kitchen and home appliances, white and brown goods, auto parts you name it will come under attack. All sorts of retailers, and traders and intermediaries, run the risk of elimination. Manufacturers of merchandise will come under pricing pressure, and face the threat of a shut-down. All of this in the guise of improving supply chain infrastructure, which has no relevance to these categories. Concentration is the game In markets around the world, Big Retail has steadily edged out smaller players, leading to unfair concentration. In the grocery business, market shares range from 20 per cent to as high as 80 per cent plus for just a few retailers. Entire countries depend on them, as they control the supply of food. Their shares, by country, are: Sweden 86 per cent, Belgium 79 per cent, Australia 78 per cent, Germany 75 per cent, Mexico 70 per cent, Canada 69 per cent, the UK 63 per cent, France 55 per cent, Brazil 38 per cent, Thailand 32 per cent, the US 30 per cent and Indonesia 20 per cent. In Brazil, Thailand and Indonesia, these shares have been achieved in just over a decade (see Table). The social upheaval comes about because Big Foreign Retailers will aim for concentration, and this results in elimination of local retailers, fewer number of stores, and less employment. In Thailand, over 30 per cent of independent small retailers were taken out in 10 years! We have 25 million chief wage earners in retail (Source: IRS). One percentage loss equals 250,000 jobs, comprising people who are not easily redeployed. If 30 per cent is lost, as in Thailand, this would impact 75 lakh jobs and 3.75 crore people (at five people per household). Readers can make their own estimates. The most poignant example of reduction in number of stores, and employment, is in the US. Between 1951 and 2011, the population of the US doubled from 155 million to 312 million. Yet the number of stores has actually declined from 1.77 million in 1951 to 1.5 million in 2011. The number of independent stores (with less than ten employees) has declined from 1.6 million to 1.1 million in the same period (see Table). It is misleading to suggest that Big Foreign Retail will enter India and improve employment. While these players will employ people, at the same time, they will be knocking off employment in large numbers in the overall economy. It is the net numbers that we should be looking at. Protecting India's interests

Two nations that have not permitted their retail market to fall into foreign hands are Germany and Japan. While they have a concentrated retail sector, their major players are home-grown. They both have had strong laws regulating the retail sector, protecting the self-interests of the respective countries. The centrepiece of German anti-trust legislation is the Gesetz gegen Wettbewerbsbeschrnkungen, or GWB. Section 20(4) of this Act Against Restraints of Competition' bans all undertakings with superior market power from selling a range of goods, not merely occasionally, below its cost price, unless there is an objective justification for this. In essence, this means it is illegal for German retailers to sell below cost to knock out competition. German zoning laws are strict and they ensure that big stores cannot be put up, except in designated city areas. Store hours are restricted, and big retailers have to use union labour. After a decade, and unable to turn in a profit in Germany, Walmart exited that country in 2007, taking a 1-billion loss. In Japan, the daikibokouritenpohou the Large-Scale Retail Store Law came into effect in 1973 to protect small retailers. This law, unchanged till 2000, regulated the amount of selling space, store opening hours, and number of business holidays in a year. Most importantly, any proposal for a big store had to be notified and the views of the affected parties had to be sought before approval. In effect, this reduced the build-up of big stores for decades. Predictably, the US protested, and called the Japanese distribution system antiquated. The US missed the point completely. The law was designed to serve Japan's interests, and it did that well. There is an uncharacteristic haste in India to rush through FDI in multibrand retail. There are ways to protect national interests. The policy guidelines that have come out do not reflect them. The politicians would do well to understand how the 10-plus crore voters in this sector will be affected. If the policy is notified, there will be a groundswell that could well sow the seed for a government change in the next elections. (The author is Group CEO, RK SWAMY HANSA and Visiting Faculty, Northwestern University, US. The views are personal.) READ the above articles and prepare a case FOR and AGAINST FDI in retail.