AFTER a long, arduous struggle to build consensus on opening the multi-brand retail sector to Foreign Direct Investment (FDI), the government has finally decided to put the decision on hold. The development has come as a big disappointment for stakeholders in India and investors across the world. After two decades of economic reforms, this has definitely come as a big surprise to India watchers. The progressive piece of economic reform has obviously fallen victim to an intriguing mix of imaginary fears, ideological stubbornness and lack of awareness about the transformational possibilities that such a decision can usher in.

In view of the extraordinarily large stakeholder base, successive governments have been quite conservative in their approach as far as FDI in the sector is concerned. In fact, it has been quite a calibrated approach over the last 14 years. While the cash and carry sector was opened to 100% FDI in the year 1997, it took another nine years to open the single brand retail sector to 51% FDI in 2006. After widespread consultations in the last two years and a detailed impact assessment study by ICRIER (Indian Council for Research on International Economic Relations), the present government had decided to allow FDI in the multi-brand sector up to 51%. The single brand sector was sought to be opened up to 100%. Thus the present decision to open the sector to foreign investment not only appeared a logical extension of this process but a well considered one. One hopes political parties and pressure groups will see reason to revisit this initiative at the earliest.

 

Now that the ‘big decision’ has been pushed to the back burner, it’s perhaps time to take another hard look at the sector in the evolving economic scenario and the importance of FDI therein. The retailing landscape in India continues to be dominated by small neighbourhood stores that account for close to 95% of the sector’s total turnover. The very fact that the Indian retail chains and foreign companies running cash and carry operations together still account for just about 5-6% of the overall retail pie, despite being in operation for over a decade, clearly shows that the 12 million odd small retailers in the country have held their ground quite well against organized retailing. So the entire argument that the small family owned retailer will simply be overwhelmed by the entry of foreign organized retailers is a myth that has been blown out of proportion.

I sincerely believe the market dynamics of this sector have often been misunderstood, generating too many irrational apprehensions among key sections of stakeholders. The small stand alone stores bring a unique value to their customers through physical proximity and robust human relationships. The convenience factor delivered by a neighbourhood kirana store while selling everyday groceries on credit and delivering them at ones doorstep can never be replicated by a big retail chain, howsoever creative and efficient it might be in terms of formal management practices. Similarly, the informal bonding these retailers develop with their customers over a period of time also holds them in good stead when big retailers enter their localities.

There are two parts to the current debate. One, whether entry of organized retailers is in the interest of the people (consumers and producers); two, whether we need foreign investment to facilitate this transformational shift in the retailing environment.

You don’t have to be extraordinarily intelligent to make out that the current fragmented retailing structure is utterly inefficient both in terms of cost economics, quality control and consumer interest. The fragmented supply chain, with numerous middlemen (handling points) in between the source of production and the retailers, results in enormous wastage, poor quality and cost escalation. Take for instance the food sector. The lack of an efficient back-end infrastructure (cold storage and related supply chain linkages) today results in wastage of 30-35% of fruit and vegetables produced in the country. That is to say for every 100 kg of fruits and vegetables produced in the country, only 65-70 kgs are actually consumed. Price realization for the farmer also drops proportionately. The lack of an efficient sourcing and storage infrastructure also results in wastage of 5-7% of food grain. Both these combined translates into losses of over INR one trillion annually. In a country of 1.2 billion people where food security continues to be a critical public policy issue, nothing can be more relevant than this.

 

As we all know, this loss can be plugged only through sustained investment in the back-end. The opponents of FDI in the retail sector often argue that such investment can happen from domestic sources if appropriate incentives are passed onto Indian entrepreneurs. Nothing can be more far-fetched than this if previous experience is anything to go by. Under the National Horticulture Mission, which extends investment subsidy to entrepreneurs in this area, just 453 cold storages (including controlled and modified atmosphere facilities) have come up in the entire country between 2005-06 and 2010-2011. Today, with just 5300 cold storages, with a cumulative capacity of 23 million tonnes in the entire country, we are woefully short on capacity to handle our perishable produce.

 

In order to create more capacity at the back-end, we need investments from the retailers themselves. But given the predominance of small stand alone retailers in India, and the limited investment capacity of Indian retail chains, this sector is unlikely to witness any significant incremental investment in the near future. Allowing FDI in the multi-brand retail sector can change the situation considerably. The provision that 50% of FDI will mandatorily go towards developing a back-end supply chain would have come really handy. In fact, such a provision would have helped us address a serious infrastructural weakness with direct implications for the agriculture sector.

An efficient back-end can have a positive impact on the two key stakeholders standing at both ends of the supply chain – the farmers and consumers. While it can mean better price realization for the farmer, it will also ensure lower prices for consumers. This is precisely the reason why the Inter Ministerial Group (IMG) on inflation control extended its unequivocal support to opening of multi-brand retail sector to foreign investment. Global experience in emerging and developing markets have consistently showed that entry of foreign multi-brand retailers creates a downward pressure on consumer prices and acts as an effective antidote against food inflation. In a country which has been struggling with food inflation for close to two years now, the importance of an anti-inflationary initiative need not require any further elaboration.

The correlation between organized retailing and consumer price is not difficult to comprehend. Direct sourcing from producers (both farmers and industrial producers) helps shorten the supply chain, further helping reduce wastage. The introduction of technology into warehousing and logistics systems also helps reduce the per unit cost of transportation from farm gate/factory gate to shop shelves. Working with large volumes also helps. The savings, thus created, are passed onto consumers and farmers/producers.

 

I have a few simple examples from our own experience at the Easyday stores of Bharti Retail operating in the National Capital Territory (NCT). In the month of December a kilo of cauliflower sold for Rs 5-6 compared to Rs 8-9 in the local unorganized market. Similarly, a kilo of apples sold for Rs 120 when the going rate in the local market was Rs 145-150. The size of savings that consumers get on a basket of purchase can be really substantial. Direct sourcing by organized retailers also helps keep perishables in better shape till they reach the customers.

Alongside savings for consumers, organized retailing has the ability to make a distinctive difference to farmer incomes in the countryside, who currently realize less than one-third of the price that the consumer pays. In some cases of bumper harvest, the realization can be as low as 1/6th or 1/7th of consumer price. Middlemen who make no contribution to the value chain become real gainers of the current exploitative system of sourcing of farm produce. Entry of organized retailers not only brings transparency into the agricultural marketing process but adds to farmer incomes significantly. Under Bharti Walmart’s Direct Farm Programme, farmer incomes have gone up by 7-10%. Under a similar programme by Walmart in Central America, where more than 4,500 small and medium farmers are associated with the company, earnings have gone up by 15%. More than 2,75,000 farmers have benefited from a similar programme in China.

 

The best part of the entry of organized retailing in the lives of farmers lies in the fact that retailers tend to develop a direct interest in promoting farming activities around their warehouses/cold storages to ensure a continuous supply of farm products. Retailers even go to the extent of associating themselves with activities like soil testing for nutrient levels to capture deficiencies and mapping agri-input requirements with the help of agronomists to ensure quality of produce.

Another big beneficiary of organized retailing is the SME sector that has generally struggled against their bigger counterparts in terms of market access. Because of lack of size and financial constraints, they are generally not able to invest adequately in branding and marketing, thereby facing an unequal market situation vis-a-vis the big brands. In the organized retail chains, they find a great marketing platform to retail their wares. By stipulating that the foreign funded multi-brand retailers needed to source 30% of their requirements from the SME sector, the government had clearly sought to protect the interests of the sector.

Detractors of organized retail often argue about the sector’s adverse impact on the overall employment situation in the economy, assuming that employment in small neighbourhood stores goes down when big retailers enter the fray. On the contrary, experience across emerging markets like China, Malaysia, Thailand, Mexico and Brazil shows that overall employment opportunities increases with the entry of foreign retailers. The case in India is no different if you look at the experience of the big Indian retail chains. A typical Easyday store covering 2500-3000 sq ft of retail space employs 15-17 persons on an average. Given this employment intensity of the sector, the government estimates that opening the sector to FDI can easily create nearly 10 million additional employment opportunities in the country in the next three years. Four million new jobs can be created in the front-end stores alone. The back-end warehousing and logistics systems will be able to create another five to six million job opportunities. This would obviously mean a transformational change in the employment potential of the sector.

 

More important than the additional number of opportunities would be the change in the nature of employment. Given the fact that employment in the sector today is largely informal and unorganized, the emerging formal job opportunities will be a huge plus for India’s youth. This will complement the changing dynamics of youth aspirations in the country. It is foolhardy to believe that the offsprings of the present generation of shopkeepers will necessarily be interested in running their family-owned shops in the future. I have always believed that occupational mobility is a necessary ingredient of a liberal market society.

In countries like China, Russia, Malaysia and Thailand where there is no restriction on FDI in multi-brand retailing, the mom and pop stores have coexisted with the modern retail formats quite easily. I see no reason why things will be any different here. Given the rising consumption in the Indian cities, introduction of large format stores have in fact helped expand the overall retailing pie. A cursory glance at the shop shelves would reveal how fast they have expanded over the last few years to accommodate new product categories, new brands and new stock keeping units (SKUs). Small retailers too have benefited immensely from this. This will continue to happen in the future as well given the rising level of discretionary incomes in the country.

 

Keeping in view the widespread fears among key stakeholders, the government has decided to limit the scope of FDI funded stores to cities with one million plus population. With this the government had sought to insulate a large majority of the small retailers in the country from any new competition. In fact there are only 53 cities in the country which will qualify for such investment under this criterion. The scope for foreign investment was sought to be further limited by the fact that state governments would be free to take their own decisions with regard to allowing foreign investment in retailing. Nothing could have been more calibrated and democratic than this.

The general aversion to foreign capital is deplorable. In today’s world it is futile to attribute any colour to capital. I sincerely believe that the nature of ownership of a retail chain cannot have any impact on its overall implication for society. If Indian retail chains have coexisted with the small family-owned stores for over a decade now without posing any danger to each other, I see no reason why a chain funded by foreign capital would be any different. We already have seen the impact of FDI in areas like telecom. The country is ready for another revolution in the retail sector. The only difference will be that in telecom we witnessed a completely new ecosystem being created where none existed, whereas in the case of retailing it will be about transforming an existing ecosystem to a higher level of operational efficiency and value creation. We definitely need more capital to achieve such a transformation.

The debate today stands completely vitiated by a strident misinformation campaign. I sincerely believe the fears are unwarranted. Since a large part of these apprehensions are created and sustained by ignorance, there is a clear need to drive an information campaign among stakeholders to debunk the myths and help resurrect the basic economic rationale of such a move. Political parties and pressure groups need to see reason and move beyond the usual political rhetoric.

 

The present situation does take me back to the early 1990s when economic reforms were first introduced in the country. As the doors were opened to foreign investors and foreign brands, cries of protectionism filled the air. Detractors came up with doomsday predictions for the Indian economy in general and Indian entrepreneurs and their brands in particular. Nothing of that sort has happened. On the contrary, the country has moved from its customary Hindu growth rate to a sustained 8-9% rate, registering sharp gains in terms of productivity and job creation. Indian entrepreneurs and brands have not only stood firm and excelled in their own domains, but in fact raised the bar for foreign players, creating a more competitive ecosystem that ensures consumer welfare.

I am sure things are not going to be any different this time too. You cannot stop an idea whose time has come.