India opens up to Walmart

Mon, 28 Nov Pre-Open

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From the start of the winter session, the Indian parliament has been witnessing a complete logjam on account of various burning issues such as inflation and corruption. Amidst all this, the cabinet approved a new policy for Foreign Direct Investment (FDI) in retail.

What is this policy all about? Why is the government so keen to bring this policy now? On what grounds is it facing so much opposition, not only from the opposition party but also from its allies?

Well, the history of FDI in retail goes back to 1993 when the then finance minister had changed the law to permit FDI in retail trade. Since then, the policy witnessed several changes. At present, FDI in single-brand retail is allowed up to 51% with Government approval. However, FDI in multi-brand retail is totally restricted. In the new policy, approved by the cabinet, complete restriction on FDI in multi-brand retail was lifted. According to the new policy, foreign players can own a 51% stake in multi-brand retail. At the same time, the new policy allows 100% FDI in single-brand retail.

This move would certainly attract foreign retail giants such as Walmart, Carrefour and Tesco to invest in the Indian retail sector. After all, as a fast emerging economy, India presents a huge opportunity on account of its 1.2 bn population. As per estimation, Indian retail market is worth US$ 450 bn a year.

But the moot question remains why we need FDI in the retail sector. Who will gain from all this? It is no secret that India lack in terms of infrastructure and needs a good amount of investment to boost the utilisation of its existing resources. Development in infrastructure would enable the farmers to sell their agricultural produce directly to the big retailers, not to the local mundi. This is likely to fetch them better pricing for their produce. At the same time, due to abolishment of several intermediaries, retailers would be able to offer the products to the final consumers at lower prices. Hence, both farmers as well as consumers would be benefited. That is the key underlying rationale for FDI in retail. Another point is that this move would generate a good amount of employment across the country. It will help existing Indian retail companies to expand with the technical as well as financial support of foreign retail giants.

If all is well with this policy, then why so much hue and cry! Well, this is a definitely a bad news for smaller family-managed businesses (kirana shops). They will not be able to withstand the competition from the big players. They would be forced to shut down their shops. In turn, there would a loss of a large amount of employment opportunity as well. This policy would also hurt the micro, small and medium domestic industries. They fear that after some time, big retailers would start displacing the entire supply chains of the products. And, if not properly checked by the government, their businesses may get severely hurt. According to industry experts, to keep things in balance, the provision for 30% compulsory sourcing from Small and Medium Enterprises (SMEs) in the draft policy should also be gradually increased.

In the policy, the government has allowed FDI in multi-brand retail in cities only with population of 1 million, and for the rest of the country, the current policy regime will apply. Only 53 cities out of nearly 8,000 towns and cities in the country meet such a requirement. Hence, at present, it is not going to affect all kirana stores across the country.

The biggest threat of this policy may prop up in the long run. After the forced extinction of existing retail system to a large extent, big retail players may start abusing their dominant positions in the market. They may not offer good prices to the farmers and lower prices to the consumers, which are being advertised by the promoters of the new policy.

Policy makers have been debating this for more than 15 years. And all these concerns definitely demand a good discussion. However, considering all the reforms this new policy can bring, it would be unfair to oppose it just for the sake of opposing. With proper checks and balances, this policy may go a long way in the development of the Indian retail sector.