Legal scrutiny of trade must before foreign direct investment in retail

  • Manoranjan Kalia, Hindustan Times, Chandigarh
  • Updated: May 14, 2014 14:09 IST

Retailing in India, which accounts for 14-15% of the gross domestic product (GDP), is one of the pillars of the country’s economy. The Indian retail market is estimated to be worth $500 billion, thus one of top five retail markets in the world by economic value. Also, India is among the fastest growing markets in twhe world with 1.2 billion people.

The retail trade in India is essentially owner-manned small shops. The largerformat convenience stores and super-markets having presence only in large urban centres account for about 4% of the trade. The sector employs about 40 million Indians, that is, 3.3% of the country’s population.

In such a scenario, foreign direct investment (FDI) in retail is a vexed proposition. The opinion of political parties varies, keeping in view their interests. While opening up the gates for FDI in single- and multi-brand retail, the union government left it to the states, whether to accept it or not. The states where the Congress is in power have welcomed FDI in retail, but the other states have reservations.

The idea of FDI in wholesale or retail is the brain child of the West to garner new business avenues for the saturated economies of the developed countries, all in the name of bringing foreign investment and technology to give a boost to the economies of developing countries. But the concept is a double-edged weapon. If the fiscal health of a country is robust and the rate of inflation is marginal, it will add to healthy competition in local trade or vice versa.


FDI in multi-brand wholesale was introduced during the Vajpayee regime. The economy of India was then quite buoyant; there was low inflation, surplus cash for short-term expenses, low external debt, and no dearth of foreign exchange; and the rupee was stronger. At the time of introducing FDI in retail, the plight of Indian economy is quite precarious resulting in lower wealthcreation due to high inflation; more borrowings for short-term expenses; high external debt; and a weak rupee.

This means the economic atmosphere is conducive for big sellers to make hefty profits. Bulk buying of goods at cheapest rates from all over the world and selling at higher prices in inflationary economies culminates into higher profits for business houses like Wal-Mart, Carrefour, Tesco and Ikea. It is worth mentioning that the selling prices of articles are marginally lower as compared to the local market, thereby resulting in squeezing of the local trade.


The rationale behind introducing multi-brand stores in wholesale is to curtail the long chain of traders between manufacturers and retailers, so as to reduce the profiteering with the change of hands; thereby making goods available to the ultimate consumer at cheaper rates. Now the question remains: Is it really happening?

Multi-brand stores in wholesale definitely sell goods at wholesale rates. Advertisements giving tempting discounts on different articles for bulk buying in different newspapers bear it out. These stores sell goods to any firm that has a VAT number. It is immaterial whether the firm having VAT number deals in retail trade or not. The stores have no objection in selling goods to manufacturing units having VAT number or even to retail trade units that do not deal in particular goods in which the multi-brand wholesale store does.

In fact, these wholesale stores are so liberal in issuing membership cards meant for retail traders that the said cards are issued not only to the firms having VAT number but also to every person who has a shop licence receipt from the municipal body along with his personal identity card. But every bill issued by these stores has a noting: “The goods purchased… are to be used for business/resale and not for personal consumption.”

There is no mechanism to check if the goods are really meant for business or for personal consumption. Printing the said note on the bill is an attempt to absolve these wholesale stores from legal responsibility and to shift the onus on the purchasing firms. The fact is that these stores, through this methodology, are thus de facto selling goods to the ultimate consumer, thereby crushing retail trade, earning huge profits, and siphoning out the foreign exchange, resulting in weakening of the Indian economy further.


If these foreign firms in wholesale trade are playing havoc with Indian trade, what will be the scenario when FDI in retail comes to India fully? Have the unfair trade practices not remained unchecked till now? Is the present law potent enough to check this menace, or a new law has to be enacted? Does the political will exist to take up the cudgels? Everything now depends on the new government at the centre. The fact of the matter is that this issue needs to be addressed without delay, lest colossal damage is done to the Indian economy.

Manoranjan Kalia The writer is a former minister, and a member of the national executive of the BJP. Views expressed are his personal.

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