• Created on Sunday, 27 November 2011 00:00
  • Published on Sunday, 27 November 2011 00:00
  • Written by Punyatma Sharan, Founder/CEO - PolityIndia.Com, has a BA (Political Science) from India and MBA (Finance) from USA.

MallIs it "Wal-martization" of Retail India?

India's affair with an open economy reached a crescendo when the government took a Cabinet decision last week to allow 51 per cent FDI (foreign direct investment) in multi-brand retail and increased the FDI in single-brand to 100 per cent. It would not be an exaggeration to say that India, on that day, got married to the free market economy.

This issue was being worked on for sometime and we got an inkling of it when minister of state for commerce and industry Jyotiraditya Scindia said in a written reply to the Rajya Sabha sometime back that "The objective will be to enhance operational efficiency of back-end infrastructure in the retail sector, reduce wastage in the agriculture sector, enhance benefit to producers...and benefit consumers through greater consumption".

As it is almost customary with any major political decision, this issue has also generated a very heated debate and is scheduled to be discussed in the parliament on Monday. It seems that the UPA government on this issue, is on one side (except Mamata Banerjee's group), and all the other political parties, on the other.

I am going to quote some statements made by a group of people from different sectors to get an idea of their views and I would also try to come up with my own analysis:

- Leading NRI entrepreneur Lord Karan Bilimoria, who is also the President of the India-UK Business Council has described the decision of the Indian government to allow 51 per cent foreign direct investment in the multi-brand retail sector as 'fantastic'

- Finance Minister Pranab Mukherjee said allowing Foreign Direct Investment (FDI) in multi-brand retail will help contain prices

- Reserve Bank of India Governor D Subbarao said FDI in multi-brand retail would help improve supply chain and also contribute to reducing inflation

- Small retail in the country will not only co-exist with big retail but it will also grow at a minimum rate of 13 per cent in the coming decades, said Anand Sharma, Union Minister for Commerce and Industry

- BJP national chief spokesperson and Rajya Sabha member Ravi Shankar Prasad said this is a disastrous move which will have great adverse impact on the country's service sector, bringing in an era of monopoly by foreign companies. The move would weaken the domestic manufacturing sector and encourage predatory pricing

- UP Chief Minister Mayawati vowed to never allow any foreign retailer to set up a shop in UP, while declaring that her party would oppose the decision in Parliament and outside

- Backing Central government's decision to allow Foreign Direct Investment (FDI) in multi-brand retail, former union minister Shashi Tharoor said that it would generate additional employment opportunities

- "In multi-brand retail, the things can be shipped at a cheaper rate from the producer to the consumer," said the central bank's deputy governor Kamalesh Chandra Chakrabarty

All these statements are a mix of semblance of political rhetoric and substance. I am for all those policies which culminates in the betterment of the country and the benefits of which permeates to all sections of the society. There is a stipulation in this decision that the overseas companies must invest at least $100 million, half of which has to be spent on developing back-end infrastructure. Most countries have understood from experience that FDI brings in more investments from abroad. In most countries, FDI is a way of contributing to additional employment.

Raj Jain, president of Wal-Mart India, said the company can help reduce prices by improving supply chain and infrastructure to cut waste. According to government estimates, about 40 percent of fruits and vegetables in the country rot before they are sold because of a lack of cold-storage facilities and poor transport infrastructure. Bharti-Walmart, the local venture, buys fresh produce directly from about 1,200 farmers in Punjab. It has been estimated that India's decision to allow overseas ownership in retail will create up to 10 million jobs and give farmers better prices and India's retail industry will get $8 billion to $10 billion in fresh investments over the next 5 to 10 years. Overseas retailers will be required to purchase at least 30 percent of goods sold in the ventures from small industries. Stores will be permitted only in 53 cities with a population of 1 million or more and the government will retain the first right to buy farm products.

The face value of this decision taken by the UPA government seems to be fine but we would not know the full effects for another couple of years. The government has to make sure that the interest of the have-nots are protected. India is not only about the cash rich 330 million middle class people, this is only 1/3 of the population, the government is also responsible for another 2/3. If a US domiciled company like Walmart make huge profits on their operations in India and if they want to bring that money back to USA, they would have to pay 35% corporate tax on their income. Instead, if they keep their money in India and re-invest, they would have to pay only 17% (corporate tax rate of India for foreign companies). This is an incentive for them to expand their operations in India which is going to be good for the country.

Even though I agree with the basic decision of the UPA government, I want to make it very clear that they are also responsible to make sure that retail India is not totally hijacked by foreign entities. We are a country in transition and we should be very careful. Since this was a major policy decision, UPA government should have called an all party meet to discuss this issue and not taken a unilateral decision. According to Business Monitor International, India's retail market is supposed to double to $785 billion by 2015 from $396 billion this year and as Narayanan Ramaswamy, executive director at KPMG India, rightly said, 'Foreign retailers must be licking their lips at this opportunity'. Let us hope that all Indians, as consumers, would have better options, both in terms of product choices and pricing and we can also prevent the wal-martization of retail India.


# Kalpana Singh 2011-11-28 22:03
Punyatma, I am sorry to disagree with you this time. There are 33 million people involved in India working as small retailers. They just do not have either the money or the skills to compete with giants like Walmart. They have no place to go.
# Sanjay Pawar 2011-11-28 22:11
If we want to have a socialist approach, FDI in retail is not good. But if we follow a capitalist line of thinking where you have to be good to survive and consumers are supreme, this is the way to go. Both Coke and Pepsi sell their products in India but Thums Up is still the most selling drink in India. The reason is very simple. They saw the stiff competition and they did their best to stay the market leader. Punyatma, I totally agree with you.
# Alka Jindal 2011-11-28 22:12
I agree with Punyatma's views - 100%.
# Atul Shastri 2011-11-28 23:03
UPA is doing the right thing for the country. BJP should come out of their shell and start thinking global.
# K Prabhakar 2011-11-28 23:46
Apprehensions mostly are unfounded. Opposition does not mean - oppose each and every move. I am sure BJP would also have done the same thing, had they been in power. Mr. Narendra Modi is the example in this case, he is OK with the decision. Loss of job for small traders were the concern when Indian retailers came - Big Bazaar, Reliance, ABG etc. Today, it is generating more employment and farmers are getting their due. Computerisation of Banks was opposed tooth and nail for fear of loss of jobs. See where Banking is today. I live in Singapore, country of posh shopping malls every few KMs but each area still have many Mamma shops run by small traders and all of them are surviving. Backend infrastructure development will benefit one and all: farmers to service providers to consumers - the requirement is honest implementation. Be positive and let us hope for the best.
# Sandhya Sinha 2011-11-30 09:19
The major reason of my opposing FDI is that the money does not rotate within the community, it is siphoned off. This is exactly why I do not encourage any multinational bank also.
# Kalpana Rastogi 2011-11-30 11:11
This is an interesting article. Although as rightly said, the effects of such measures cannot be fully fathomed as of now but every move carries some pros and cons and basically, the pros have to be outweighed by cons or cons be so manipulated so as to minimize them. We should see to it that we put certain checks and balances to make optimum use of FDI. Taking in view the PMs experience and his financial knowledge, we should make ourselves believe in his policies such as this one which is his forte but unfortunately, the country has lost faith in his credibility and he is not perceived as the PM in the true sense any more but as a puppet. So, basically my point of view is a bit different on this issue...I am not talking of the economic viewpoint but politically, Congress is again losing ground for certain. The Congress should have moved a public consensus in favour of FDI before forcing it upon them.
# Ajay Gupta 2011-11-30 23:37
This is a very good question and one that clearly will bring forth very different and polarizing responses from one and all. From a market economy perspective the answer, is a resounding 'yes'. From a socialistic perspective, the answer would be 'no' as it impacts a variety of other 'channel' stakeholders from small merchants to our 'sabziwala'. Although the same argument could be made for several other categories/indu stries too...no automation, no motorized transportation etc...fact of life is that we live in a globalized economy and we have to move with the times in adopting new technologies, retail formats and modern ways that bring with them increased efficiency and quality of life for consumers. Yes, there will be some people who will be adversely affected, but then there will be others who will benefit. The entire supply chain will see a major improvement. Potentially, Walmart and others can see the benefits of lower cost base in India and use this as one of the bases for their global procurement, leading to other second order benefits to the economy and more job creation down the road. Bottom-line, there is no easy (or right) answer to this loaded question...ther e is a philosophical angle to this and there is a pure economic angle to this. We all need to take a very strategic & long term dispassionate view of this subject.
# Ajay Chopra 2011-12-01 12:53
India is on the right path of embracing capitalism and free market economy. BJP is just doing politics with this issue. If they were in power, they would have done the same thing. I agree with Punyatma that the UPA government should have called an all party meet before making the FDI announcement. By not doing so, they have insulted and demeaned the opposition and it is not good for democracy.
# Rani Dixit 2011-12-01 12:58
I am in support of Punyatma's analysis. The protectionist policy of any country does not work. We had a closed economy for decades and we had nothing to show for it. We have started to grow because of the competition.
# Kumar Raunak 2011-12-01 14:44
In the hysteria surrounding this particular piece of legislation, it is very easy to lose sight of the key issues involved. First of all, the plank on which government is hard-selling this bill is that 30% of sourcing by foreign retailers would be done from local SMEs which goes against the arrangements made under WTO, so it remains to be seen how government implements this. Given the fact that India is perhaps the only emerging country with the current account deficit, it needs big impetus from capital account through means like FDI. With retail FDI, big retailers are sure to pump in money, but this would certainly put small retailers in jeopardy, so a built-in protective mechanism needs to be created to protect small retailers. This can be done by promoting cash & carry model under which small retailers would be able to buy goods at cheaper rates from big cash & carry players, who would also provide them training with regards to better customer and retail management practices. German major, Metro cash & carry in West Bengal and Andhra Pradesh is actually doing so. Hence, I believe that the need of the hour is to find a middle ground so that both small and big retailers can thrive.
# Dhananjay Singh 2011-12-01 21:06
An article based on a very good understanding of the global economy. It has also very good comments...I really like the comments made by Ajay Gupta and Kumar Raunak.
# Mukta Dhar 2011-12-01 21:11
There was a time in India when there were only two cars in the country - Ambassador and Fiat. Why BJP and other parties did not stop the entry of Toyota, Honda and other brands? BJP is making a mockery of themselves by opposing FDI.
# Piyush Sopory 2011-12-01 21:50
I think India needs to pass this bill ASAP. At this stage, it has potential to do more good than bad for the country as a whole. Good for end consumers, farmers, job market, infrastructure and logistics, service industry. Bad for may be traders, kirana stores,sabji walas. A very important thing to note is that giants like Walmart would source the products from all over the world at the cheapest prices. Now if they source some soap from China and sell it at a cheaper price than say Cinthol, Godrej, it will be a hit. This is just an example. Small Indian manufacturing companies may shut down and bigger ones may move out of the country to manufacture at a cheaper cost. In short, the government along with the private sector must include clauses to protect the interests of the different industries and farmers.
# Sanjay Sahay 2011-12-04 02:17
You have rightly said 'India got married to free market economy'. But it was a love marriage and you very well know that there is always hue and cry in our society when love marriage takes place. Had it been an arranged one(with the consent of all parties), it would have been successful. In fact the UPA failed to generate people awareness and the result is, it failed.
# Ajay Kumar Sinha 2012-09-27 02:33
FDI in retail, everyone is talking about it, some in favour some against it and some are neutral. Now what I understand is that the FDI will invest in Indian retail market, which will help to generate additional employment and to a certain extent help the farmers and producers if they procure their requirement directly from them by passing the middlemen. We have already desi mega retailers who are doing business in India for last ten years, but the difference with that they are sourcing their requirement through middlemen and selling them through their retail outlet at slight discount. Therefore neither the producer nor farmers are benefited by this system. We hope this will improve with the FDI as they in principle source the material directly from the farmers and producers.

Now the big question is where they will operate, they operate in cities with population over 10 lacs, there are not many cities with population over ten lacs in India. So they will be operating in big cities only and the rest of India will be still buying from their traditional Kirana and departmental stores, who extend credit facility to the buyers, which is not available with these Malls and Mega Marts.

The system is operating in so many countries and there is no report that this has hurt the local interest. Let people have the choice to buy their best requirements from their choice of outlet and at the terms they wish to. Please do not make a political issue out of this.


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