Feb 18, 2012

FDI in Indian Retail- Lost in translation!

Victor Hugo once famously wrote- ‘One cannot resist an idea whose time has come’. 
FDI in retail in India would have been one such idea. As India is eager to make the transition into a developed nation with a robust economy and infrastructure to sustain the growth, opening up the markets in the retail sector would have been the next logical step. But then history has its way of scripting a twist in the tale.

India as a concept of nationhood is quite paradoxical- we have some of the poorest people in the world surviving on zilch and some of the richest people in the world who feature prominently in the FORBES billionaire’s list. Just like we cannot translate western ethos into an Indian setting and hope that it will work every other time, similarly we cannot afford the type of Western influenced Pareto efficiencies in India where the competitive forces will work their way to some sort of efficiency equilibrium without intervention or supervision or guidance. For a nation of billion people what we really need is an all-inclusive equitable growth keeping in mind the needs of the bottom-of-the-pyramid socio-economic groups amongst others; this is not a matter of choice or convenience or dogmatic one-upmanship but a matter of polity based on our socialist moorings.

TIME magazine named 'The Protester' as the Person of the Year for 2011. India also had its share of protests with the common people getting together to voice their anguish and resentments. Some of those protests were bonafide, some were ill-timed and some were utterly uncalled for. The protest against FDI in retail by a vested section of the population was one such rare aberration. There has been a deluge of arguments and counterarguments from all the estates of the realm; everybody worth their value in salt is debating the introduction of FDI in the retail sector in India. If we were to believe the top brass of India Inc. then 51% FDI in multi-brand retail sector was meant to be a boon and would have provided maximum benefits to the farmers and the consumers (the set of people whose welfare should be of paramount importance). Alas! For now, we will continue to see pesticides being used by the farmers for all the wrong reasons going by the statistics in Maharashtra, Andhra Pradesh and a host of other states!!

The Indian retail market, which is pegged at $450billion, figures prominently in the boardroom discussions of all major retailers and CPG manufacturers. The burgeoning middle class population and increase in disposable income has made India a strategically important and a lucrative market for the foreign retailers to join in. Moreover, it is still a monumental challenge to address the supply chain dynamics in the agriculture/aquaculture sector in India. Some of the pain-points are-
  • Under-developed infrastructure
  • Over dependence on weather Gods
  • Numerous intermediaries without much value addition
  • Colossal losses due to lack of storing facilities
According to conservative estimates, close to 30-40 percent of India’s fruits/vegetables perish before they reach the end-consumers because of insufficient cold-storage facilities and poor transport infrastructure. These losses in turn, are passed on to the consumers who end up paying more than they bargained for. The wheel that can set the whole efficiency thing into motion is healthy competition- domestic or int’l. Foreign retailers would have brought their proven and effective supply chain methods, efficient inventory control, economies of scale and backward integration to the Indian retail scene. The homegrown retailers would have scaled up their operations to match the competition or risk being marginalized. The retail pie would have increased and positively impacted the food inflation rate, created countless jobs and resulted in the expansion of the realty sector in India with the creation of shopping districts and malls.

Contrary to what the anti-FDI lobby wants us to believe, the small retailers have always thrived in all other geographies where they already have modern format retailers. They are irreplaceable for the kind of service, inventory, unique credit system (salaried people could buy throughout a month and pay during salary day at zero % interest), free home delivery, and most of all- convenience!! Nothing can beat the neighborhood kirana store for those quick shopping needs. Realistically speaking, the small sundry retailers will survive, but we will definitely see some traction in the fledgling Indian large retail chains. Either they will be up for grabs or will have to constantly innovate to stay in business. By conservative estimates modern format retail stores would require a catchment of at-least a million people to make their venture profitable. This leaves out 72% of India which lives in the rural areas and smaller towns and they would continue to shop from the neighborhood retail shops.

The policy makers, through means of legislations can ensure that the legitimate rights of the 175 million farmers for better prices doesn’t get lost in the chaos. These agricultural producers are waiting to get a better deal for their yield- a gap that the organized retailer can fulfill through means of technology and economies of scale. Hence, throwing the FDI baby along with the bath water of opportunistic, myopic policies isn’t something that is advisable. Vested lobby groups representing the ill-informed group of wholesalers, retailers, middle-men and the lack of a political might put us back by eons. FDI would have given real benefits to the Consumers and the farmers and would have removed the unproductive, money wasting bottle-necks. Consumers would have saved money while shopping; farmers’ would have got a better price for their produces, jobs would have been created in the retail sector, Government would have got back millions in taxes which are evaded by the sundry retailers. Can we ask for more?

I’m not entirely sold out on the idea of FDI as a cure-all remedy for all thing retail in India. They must be regulated, controlled in such a way that the SMEs are not marginalized by means of cheaper imports alone. Level playing field is what is required so that we give consumers the choice- to buy better, cheaper, quality products. Having said that, I don’t prophesize the Wal-Marts and TESCOs of the world coming to India and closing down the neighborhood kirana store, the hole in the wall Mom and Pops, the mithaiwallah, the standalone saree shop. I am pretty confident that they will improvise, innovate, provide better service and continue to thrive. The existing distribution system is archaic yet it provides life’s essentials to places where there are no roads, no means of travel. That is India- we always have a jugaad way of managing things.

Change is not always bad or for that matter good- and more often than not there will be resistance against change- maintaining the status quo is part of our Indian-ness and in a queer way defines us. We need to look at things from a neutral frame of reference- the greatest good for the greatest numbers most of the times. FDI in retail is not a zero sum game between the foreign retailers and the home grown retail/wholesale businesses; it was never meant to be that way. Obviously as with every change there will be a bit of collateral damage and we will all have to live with. Let us give consumers the choice- the flexibility to make their choice- with whom they want to do business with.

I have high hopes for India and surely it deserves better in the coming days.

2 comments:

Ross Taylor said...

Nice article, As India is willing to make the transition into a developed nation with a robust economy and infrastructure to maintain the growth, opening up the markets in the retail sector would have been the next logical step. But then history has its way of scripting a twist in the tale. India as a concept of nationhood is quite paradoxical we have some of the poorest people in the world surviving on nothing and some of the richest people in the world who feature prominently in the FORBES billionaire’s list. Online Market Report

Amit Sahu said...

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