FDI in Retail- Boon or Bane
Changing lines,
Into lanes
Segmenting picture,
Into frames .
The world is on a move, India on a run
The retail industry in India is of late often being hailed as one of the sunrise sectors in the economy. AT Kearney, the well-known international management consultancy, recently identified India as the 'second most attractive retail destination' globally from among thirty emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes.
Retailing- the focus of new India
A retailer is one who stocks the producer's goods and is involved in the act of selling it to the individual consumer, at a margin of profit. As such, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain.
With a contribution of 14% to the national GDP and employing 7% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy.
The retail industry is divided into organized and unorganized sectors.
Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.
Unorganized retailing is by far the prevalent form of trade in India ' constituting 98% of total trade, while organized trade accounts only for the remaining 2%.
FDI should be permitted because it is a matter of
International Integration
- Especially, after the World Trade Organization's Doha Round of talks. The WTO mandate now requires that India lift the ban or face WTO’s ‘cross-retaliation’ measures.
Overcoming Sociological fear
- There is a fear of retrenched but this is already happening without FDI For example, ready-made garments have displaced the family tailor (but not tailoring) and dharamshalas have been replaced by hotels (but not the cuisine). Labour has been retrenched, but re-tooled and made more productive. That is what happened with development in Thailand, South Korea and now in China
Consumers Fundamental Rights
- Modern retailing is designed not only to provide consumers with a wide variety of products under one roof at cheap prices, but also of assured home delivery and information feedback between consumers and producers. A modern retail outlet will also make it easy to buy on credit and provide for servicing and repair of products sold.
Sustaining Growth with new technology and foreign capital
- India is targeting for its GDP to grow by 8 to 10 per cent per year. This requires raising the rate of investment as well as generating demand for the increased goods and services produced. Exports and encouraging private consumption expenditure is another way. Both these can be facilitated by allowing market-savvy, market-intelligent and best management practices, through corporations such as Wal-Mart, Carrefour, Ahold, JC Penny, et cetera to enter India. Their better managerial practices and IT-friendly techniques will cut wastage (India wastes nearly Rs 50,000 crore in the food chain itself report by McKinsey) and set up integrated supply chains to gradually replace the presented disorganized and fragmented retail market. These international retail outlets can help develop the food processing industry which requires $28 billion of modern technology and infrastructure.
Change or die
- FDI in retail trade has forced the wholesalers and food processors to improve, raised exports, and triggered growth by outsourcing supplies domestically. The availability of standardized products has also boosted tourism in these countries.
- The local retailers faces the same problem from the big Indian retail players looking to expand their operations like Shopper’s Stop, Pantaloon, Lifestyle, Subhiksha, Food World, Vivek’s, Nilgiris, Ebony, Crosswords, Globus, Barista, Qwiky’s, Wills Lifestyle, Raymond, Titan, Bata and Westside
Learn the lessons from successful ones
- FDI in retail sector has been a key driver of productivity growth in Brazil, Poland and Thailand. This has resulted in lower prices to the consumer, more consumption and higher profit for the producer.
- India is today the only major economy that still does not permit FDI in retail trade. In China, 35 of the world’s top 70 retailers have already entered and set up business. They have helped boost exports. Wal-Mart alone exported in 2002 about $12 billion worth of goods. These retailers source their goods from inside China (refer the case study presented below).
Killing the growth eating demon called Inflation
- According to the World Bank, opening the retail sector to FDI would be beneficial for India in terms of price and availability of products and hence will keep the Inflation in control. At Wal-Mart, for instance, prices have not increased in real terms for almost a decade
China's Case studies
China represents a very fine example of enjoying the fruit of FDI in retail. The Chinese government approved FDI in retail in 1992. It was restricted to 6 major cities (including Beijing, Shanghai and Guangzhou) and SEZs. Foreign ownership restricted to 49% of JVs. Forty foreign retailers has secured approval since 1992 and $22 billion of FDI attracted. The qualities of experience, choice and prices have improved dramatically for ordinary Chinese shoppers. The saving on 1 kg of rice, cooking oil and can coke is 20%, 9% and 24% respectively. Though Traditional retailer lost the market share but there number grow from 19,20,604 in 1992 to 25,65,028 in 2001 despite the presence of 1,70,878 organized retail shop. Employment in retailing has grown at 6% p.a. since 1992 to 53 million. Seven Chinese owned retailers appear in top ten lists. The policy concerns expressed about permitting FDI in retail in India are not supported by the Chinese data. (Study was conducted in 2001).
Hence, time is now for us to shake off the last vestiges of Soviet-style socialism and comply happily with the WTO mandate to permit FDI in retail trade. The Indian consumer and the poor farmer will be the two biggest gainers from it.
FDI in Retailing ' India on a wrong lane
Retailing is not an activity that can boost GDP by itself. It is only an intermediate value-adding process.
If there aren't any goods being manufactured, then there will not be many goods to be retailed! This underlines the importance of manufacturing in a developing economy.
It is evident that the manufacturing sector has been the engine for economic growth in China, which has been growing at 10.1% since 199116. In India, the credit for its 5.9% growth over the corresponding period goes mostly to the service sector. Ironically it would seem that the Indian economy is getting a post-industrial profile without having been industrialized!
Retail as a 'Forced Employment' Sector:
It is important to understand how retailing works in our economy, and what role it plays in the lives of its citizens, from a social as well as an economic perspective. India still predominantly houses the traditional formats of retailing, that is, the local kirana shop, paan/beedi shop, hardware stores, weekly haats, convenience stores, and bazaars, which together form the bulk. Most importantly, Indian retail is highly fragmented, with about 11 million outlets operating in the country and only 4% of them being larger than 500 square feet in size. .
One of the principal reasons behind the explosion of retail is the fact that retailing is probably the primary form of disguised unemployment in the country. Given the already over-crowded agriculture sector, and the stagnating manufacturing sector, and the hard nature and relatively low wages of jobs in both, many million Indians are virtually forced into the services sector. Here, given the lack of opportunities, it is almost a natural decision for an individual to set up a small shop or store, depending on his or her means and capital. And thus, a retailer is born, seemingly out of circumstance rather than choice.
The foreign eye ' signals not in our favour
The largest retailer in the world 'Wal-Mart' has a turnover of $ 256 bn. and is growing annually at an average of 12-13%. The average size of a Wal-mart is 85,000 sq.ft and the average turnover of a store was about $ 51 mn. By contrast the average Indian retailer had a turnover of Rs. 186,075. Only 4% of the 12 million retail outlets were larger than 500 sq.ft in size.
Let alone the average Indian retailer in the unorganized sector, no Indian retailer in the organized sector will be able to meet the onslaught from a firm such as Wal-Mart ' when it comes. Given their economies of scale and huge resources, a big domestic retailer or any new foreign player will be able to provide their merchandise at cheaper rates than a smaller retailer. This is a normal predatory strategy used by large players to drive out small and dispersed competition. This entails job losses by the millions.
India ' a society respecting values, responsibilities & relationships
Indian society is always based on values. We always seek relationships & commitment. We don't like intervention of machines or technology. Unlike other societies which are based on competition we still believe in going out to purchase fruits and vegetables from the nearby vendor.
We still look for different location and expertise for different requirements and needs.
Conclusion- A Balanced Approach
The Government can try to ensure that the domestic and foreign players are approximately on an equal footing and that the domestic traders are not at an especial disadvantage. The small retailers must be given ample opportunity to be able to provide more personalized service, so that their higher costs are not duly nullified by the presence of big supermarkets and hypermarkets.
The Government and RBI need to evolve suitable lending policies that will enable retailers in the organized and unorganized sectors to expand and improve efficiencies.
A National Commission must be established to study the problems of the retail sector and to evolve policies that will enable it to cope with FDI.
The proposed National Commission should evolve a clear set of conditionality on giant foreign retailers on the procurement of farm produce, domestically manufactured merchandise and imported goods. This conditionality must be aimed at encouraging the purchase of goods in the domestic market.
The government must actively encourage setting up of co-operative stores to procure and stock their consumer goods and commodities from small producers.
Quality regulation, certification & price administration bodies can be created at district and lower levels for upgrading the technical and human interface in the rural to urban supply chain.
Hand in hand.
Sailing on the bay
Giving space to grow,
Expanding the horizons
Beyond the sky .but the value still persists
Technology with emotions, Growth with balance !!
1 comment:
Nice overview of the burning issue
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