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FDI in retail: Status quo may prove costly

Employment opportunities in China's retail sector have grown in direct proportion to FDI inflows

india Updated: Jan 22, 2006 23:32 IST

India's debate on FDI in retail is gridlocked between extreme perceptions. It is either hailed as the biggest revolution awaiting rural India or condemned as a conspiracy to kill small businesses.

That is why economists on both sides of the ideological divide were in for a big surprise when the left stalwart Budhadev Bhattacharjee made a passionate pitch for FDI in West Bengal's farm sector.

Officially, the CPM shares the extreme right view (of BJP's 'swadeshi' lobby) that FDI in retail would ruin nearly 30 million small traders. Both welcome FDI, with conditions and caveats, if it brings new technology and promotes employment without snatching livelihoods.

HT research team attempts to simplify the issue in these columns. Drawing on several recent studies and surveys, we weigh the potential advantages against disadvantages. We look at the farm sector opportunities through other countries' experiences and examine its likely impact on employment, exports and small industries.

Retailing is the world's largest private industry with sales over $6 trillion. India remains the world's second largest market (after China) and is set to grow from the present $394 billion to $608 billion by 2009, according to The Economist's Economic Intelligence Unit.

China opened its markets in 1992 in a phased manner. FDI was initially capped at 49 per cent and was restricted to limited areas.

The cap and the restriction have now ended and a major part of China's $22 billion retail FDI has gone into labour intensive manufacturing. A robust GDP growth rate has created more jobs than redundancies. Most other developing countries have gained in employment as the reforms have accelerated their growth rates.

The Chinese example is significant for India. Having started over a decade earlier, the impact of Chinese reforms can dispel some of India's worst apprehensions. Organised sector retail stands at 20 per cent in China and 40 per cent in Brazil against 3 per cent in India. The graphic below shows that the employment in China's retail sector has grown in direct proportion to its FDI growth.

Post reforms, India's successive governments have been anxious to revitalize the farm sector and to reduce the criminal wastage of up to 40 per cent of its produce. We have on our wish list all the advantages of a modern retail industry such as new technologies, better farm productivity and a vibrant food processing industry.

We can also learn from many other countries where FDI was initially allowed with conditions for minimum capital, product sourcing or export commitments. In the middle of reforms, it might be too expensive for India to let the status quo continue.

First Published: Dec 14, 2005 14:15 IST