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The detail in retail

The FDI move is pro-farmer. The government can turn the tables on the Opposition by portraying it as representing entrenched interests, writes PK Vasudeva.

india Updated: Nov 29, 2011 21:45 IST

At a late night meeting on November 24, while the winter session of Parliament was on, the Union cabinet cleared a proposal to allow international firms such as Walmart and Tesco to acquire a 51% stake in multi-brand retailers. It also raised the foreign direct investment (FDI) cap to 100% from 51% for single-brand retail operations such as Gucci, Nokia and Reebok.

Opposition parties including the BJP, the Left, the AIADMK, the Samajwadi Party and the BSP, as well as coalition partners within the UPA such as the Trinamool Congress and the DMK, have vehemently opposed FDI in multi-brand retail. The move, they insist, will be against the interests of small retailers. On its part, the Congress-led UPA government has been seeking to fend off charges of ‘policy paralysis’ after being engulfed by a string of corruption scandals. The FDI decision is seen as a sign of its intention to press ahead with its reformist agenda.

In February 2006, the government had permitted 51% FDI in single-brand retail. The new policy will now allow multi-brand foreign retailers to set up shop only in cities with a population of more than one million, as per the 2011 census. There are 53 such cities. Which means that big retail chains can move beyond the metropolises to smaller cities. The final decision, however, lies with the state governments.

The FDI clearance comes with several riders. Foreign investors will be required to put up 50% of total FDI in back-end infrastructure. Such infrastructure will include capital expenditure on all activities, excluding that on front-end units. Expenditure on land cost and rentals will not be counted for the purpose of back-end infrastructure. Retailers will need to source at least 30% of manufactured or processed products from small industries. However, there will not be any obligation on the part of retailers to source agricultural produce such as fruit and vegetables.

The government has also retained the first right on sourcing agricultural produce. It has proposed to allow self-certification by the company with regard to the 50% spent on back-end infrastructure, but with the rider that the government can go in for surprise checks. In terms of single-brand retail, just one important condition has been added to the existing one. It makes 30% sourcing from small and medium enterprises mandatory as soon as the FDI limit exceeds 51%. The opening up will facilitate greater FDI inflows, besides creating additional and quality employment. It will also bring benefits to consumers and farmers in terms of quality, price and removal of inefficiencies in the agricultural sector.

For years, foreign multinationals have lobbied to sell directly to consumers in India, seeking access to a market estimated to be worth $470 billion a year. Multi-brand foreign groups such as the US-based Walmart currently operate as wholesalers in India but are prevented from selling directly to the public. The vast majority of consumers currently shop at small local markets. With the entry of foreign supermarket players, farmers across India’s 600,000 villages stand to gain from greater market access, higher profits, better technology and direct linkage with consumers.

The government has little reason to be defensive. It can actually turn the tables on the Opposition by projecting it as a pro-farmer move, and pitch the parties not wanting it as representative of entrenched trading interests. It can buttress the claims by pointing to the handsome support price increases for crops and the farm loan waivers granted in recent times — and how organised retail takes these a step forward by eliminating the layers of intermediaries standing now between producers and customers.

The current brouhaha over Walmart’s or Tesco’s entry can even be converted into a debate on the Agricultural Produce Marketing Committee (APMC) laws of the states. They bar anyone from directly buying from farmers without an APMC licence, which is seldom given. The opposition to opening up retail comes primarily from those who have successfully blocked APMC reforms.

Which brings us to the real issue: promoting competition for the benefit of producers and consumers. If the entry of foreign retailers enables that, why should such a move be stopped? The government’s focus should be to ensure that there are no predatory practices that may shut out competition in the long run. This can’t be ruled out, considering the deep pockets of multinational chains, a luxury few domestic corporate houses, let alone kirana shop-owners, have. Farmer and consumer interests are, ultimately, best served from having a multiplicity of players at the opposite ends of the transaction.

Farmers can also benefit from the investment in supply chains and the logistics provided by retailers. “Direct purchase from farms has hugely benefited small farmers who were not getting good returns by selling in the local mandi,” says Abdul Majid from Malerkotla in Punjab, who has been selling vegetables from his one-acre farm to Bharti Walmart ever since it opened its first cash-and-carry store in Amritsar. “Payments are directly credited into bank accounts and are free from commission agents.”

Large retailers can expect to save 10-15% in commissions by purchasing fruits and vegetables directly. Indian consumers pay up to two-and-a-half times the price paid to a farmer, compared with one-and-a-half times in developed markets. Modern retail has also improved the quality of produce globally. About 30% of India’s total production of fruits and vegetables is wasted every year due to inadequate cold storage and transport facilities. Almost half of this wastage can be prevented if fruit and vegetable retailers have access to specialised cold storage facilities and refrigerated trucks.

Some stakeholders speculate that millions of jobs would be lost due to FDI in retail. Actually, it will be the other way around. With the entry of modern retailers, the market will expand, creating millions of additional jobs in retail and other tertiary sectors. Given their professional approach, organised retailers will allocate some amount of resources towards the training of the people they hire. This has already happened with the Bharti Walmart joint venture, which has joined hands with some state governments in opening training centres in Amritsar, Delhi and Bangalore to train local youth for jobs in retail. So once one looks at the FDI move rationally, it’s a win-win-win situation for all.

( PK Vasudeva is a former senior professor, ICFAI Business School, Chandigarh )

The views expressed by the author are personal

First Published: Nov 29, 2011 21:43 IST