Saturday, September 15, 2012

Critical Analysis of FDI in Multi Brand Retail

Arguments supporting the FDI in Multi Brand Retail

Modernisation of retail is a critical and necessary condition for sustaining high growth impulses in the economy. The entry of FDI with its modern inventory management practices, supply chain management, new storage and vending technologies and advanced organisational skills will go a long way in the modernisation of this sector. With greater investment and new technologies, the sector can act as a growth driver rather than a drag with its outdated practices and inability to take advantage of either economy of scale or of scope.

Bust the myth

It is important to bust the myth that the entry of FDI will sound a death knell for the ‘self-organised’ or small-format retail trade. Currently, the share of modern retail is a mere five per cent in the total retail trade sector. From all estimates, this is expected to, at best; quadruple over the next 20 years. That would still leave a healthy 80 per cent of total retail trade — the volume is expected to rise from current $500 billion to $900 billion — to the self-organised sector. Thus 20 years later, ‘mom & pop’ stores will still have a business turnover of more than $650 billion as compared to the current $450 billion. By no stretch of imagination is there going to be an annihilation of the self-organised retail trade sector.

Generating Skilled Job:

As many studies citing empirical evidence and survey-based results have shown, a modernised retail sector will offer significant benefits for farmers, small producers and, of course the consumers. But the most important contribution will be in the generation of a large number of ‘semi-skilled’ or skilled jobs for India’s young population. These jobs are not being generated by the self-organised sector, whose labour practices are not of the highest standards. Estimates show that given the high labour intensity of modern large format retail, millions of youth will be trained and new jobs will be created. All those who oppose FDI in retail must pause to think and suggest alternatives in a situation that demands the creation of 10 million new jobs in our economy simply to absorb new entrants to the work force.

For the farmer:

Greater shelf life for farm products:

Farmers will benefit in more than one way. The investment in backend infrastructure by modern retailers would reduce wastage and allow greater shelf life for farm products This much needed investment will connect the farm-gate to retail stores, an investment and process that cannot be undertaken by small retailers. This will also minimise the layers of intermediaries as a result of which farmer get much lower prices than they could if they supplied directly to retail stores. Moreover, modern retailers will also provide farmers with new high yield varieties of seeds and better technologies that will help bring down the cost and more yields. Therefore, the entry of FDI in multi-brand retail is likely to have a significant positive impact on the modernisation of the agricultural sector.

Impetus for the growth of MSMEs:

In their attempt to position themselves better vis-à-vis established FMCG (fast moving consumer goods) brands, modern retailers encourage their own brands for which they depend upon small-scale suppliers. Thus, we can expect a strong impetus for the growth of MSMEs (medium and small enterprises) that will be mobilised by large retailers to produce their own ‘house brand’ across the entire range of FMCG and other consumer products.The fear that these retailers will inundate our economy with cheap imports is somewhat misplaced because it will be more profitable, and thus in their interest, to procure locally rather than pay high transport cost and custom duty in importing supplies. Let us hope that the States, which have now been given the option for attracting FDI in the retail sector, will adopt this measure quickly and in large numbers so as to usher in a new era of modern retail in the country

Arguments against the FDI in Retail Multi Brand Retail


It has projected FDI in retail as a boon for agriculture. Unfortunately, this is not true. Even in the U.S., big retail has not helped farmers — it is federal support that makes agriculture profitable. In its last Farm Bill in 2008, the U.S. made a provision of $307 billion for agriculture for the next five years. .Where is the justification for such massive support if big retail was providing farmers better prices? And let us not forget, despite these subsidies studies have shown that one farmer in Europe quits agriculture every minute.

The second argument is that big retail will squeeze out middleman and therefore provide a better price to farmers. This is again not borne by facts. In the U.S., some studies have shown that the net income of farmers has come down from 70 per cent in the early 20th century to less than four per cent in 2005.

This is because big retail actually brings in a new battery of middlemen — quality controller, standardiser, certification agency, processor, packaging consultants etc. It is these middlemen who walk away with the profits and the farmer is left to survive on the subsidy dole. Monopolistic power enables these companies to go in for predatory pricing. Empirical studies have shown that consumer prices in supermarkets in Latin America, Africa and Asia have remained higher than the open market by 20 to 30 per cent.


The Indian retail market is estimated to be around $400 billion with more than 12 million retailers employing 40 million people. Ironically, Wal-Mart’s turnover is also around $420 billion, but it employs only 2.1 million people. If Wal-Mart can achieve the same turnover with hardly a fraction of the workforce employed by the Indian retail sector, how do we expect big retail to create jobs? It is the Indian retail sector which is a much bigger employer, and big retail will only destroy millions of livelihoods.

State government’s prerogative:

Very cleverly, the Central government has allowed the State governments the final say in allowing FDI in retail. This may to some extent pacify those State governments opposed to big retail. However, the industry is upbeat and knows well that as per international trade norms, member countries have to provide national treatment. Being a signatory to Bilateral Investment promotion and Protection Agreements (BIPAs), India has to provide national treatment to the investors. Agreements with more than 70 countries have already been signed. State governments will, therefore, have to open up for big retail. Industries will use the legal option to force the States to comply.

And more importantly, let us look at how the virus of big retail spreads, even if the promise is to keep it confined to major cities. Recently, a New York Times expose showed how Wal-Mart had captured nearly 50 per cent of Mexico’s retail market in 10 years. What is important here is that as per the NYT disclosure “the Mexican subsidiary of Wal-Mart, which opened 431 stores in 2011, had paid bribes and an internal enquiry into the matter has been suppressed at corporate headquarters in Arkansas”.

Source : The HINDU

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