FDI in Retail- The Grand Game and its Winners

A slew of reform measures announced on Big Bang Friday is still dizzying to some and perhaps that was the intention too. The most contentious has been the FDI in retail which was put into cold storage in November 2011 due to protest from UPA allies and opposition parties. The retail sector in India is worth 411.28billion US dollars in 2011, is still growing and is expected to reach 804billion dollars by 2015. Current proposal aims at opening of retail sector to FDI in 50 cities with a population of over 1million and for stores that have large space requirements, they will be allowed to operate within 10km of cities.

Proposed Conditions on FDI
1) 50% to be spend on back-end infrastructure, logistics, agro-processing- to ensure it promotes development of infrastructure and logistics. This is one of the main reasons to allow FDI in retail as about 1/3 of agricultural produce is wasted due to lack of storage facilities (space and cold storage) and transport facilities
2) Sourcing of 30% of the products of SME sector in India (This might not possible due to WTO rules and so the  30% sector could be sourced from anywhere in the world)
3) 50% of jobs to set aside for rural youth (it says that the stores will be in urban areas and offering job opportunities for rural youth seems ambiguous)

Advantages-
1) Foreign exchange earner (16billion in the next 3 years according to some estimates)
2) Investment in logistics and supply chain will reduce wastage and reduce prices for consumers
3) Better prices for farmers as they can sell directly to stores or engage in contract farming
4) Technology in logistics
5) Lower price for consumers as wastage and middle men are reduced

Disadvantages-
1) Foreign retail giants like Walmart, Tesco, Danone etc have a history of actually leading to unemployment in the neighbourhood as they create price wars and bankrupt nearby stores. Walmart alone has revenues of 450billion dollars worldwide, putting it at around 20th place based on revenue if it was a country.
2) After other stores are closed, they have a monopoly and can jack up prices
3) Due to removal of other buyers of produce, retailers become the only buyers of farmer produce and hence can determine terms of trade
4) Difficult to track the condition sourcing of SMEs and restricting to India might not be possible. Also difficult to track the investment requirement in logistics
5) 16 billion USD is the expected FDI in retail over a period of 5 years. India’s trade deficit is 185 billion dollars and current account deficit is 4% of GDP (almost 78billion dollars) so the foreign exchange argument falls flat
6) Walmart is known for driving up unemployment in areas that it operates by closing down other stores in its neighbourhood

Uncertainties-
1) Since states have the freedom to decide FDI in retail, it respects India’s federal structure. But most of the Bilateral Investment Promotion Agreements (BIPA) provide uniform treatment of all investors across the country and due to this, investors can force states to open up their markets.
2) Kirana stores or the usual stores that we use provide many facilities door delivery, credit and also have friendly relations with customers. Large scale retailers might not be able to replicate this
3) Lack of quality retail space in the large scale format and the high rent for such outlets might reduce profitability and the fact that they can operate only in cities will mean that rents will always be high.
4) Indian organised retailers are suffering large losses currently with Reliance losing Rs.247 crores, More losing Rs.423 crores and so asking questions about the viability
5) Inability of large retailers to turn a profit in places like China also makes their future uncertain
6) India is not a uniform market as tastes and preferences change even within the state and so responding to this would be huge challenge that top-down management of large retailers might not be able to respond to

The impact is limited by the fact that only 9 states are going to permit FDI in retail and restriction to cities with population above 1million. And so, if restricted to current levels, their impact would be minimal. But this is perhaps only the first step to a larger freedom that will be given to FDI in retail as far as geographical spread and investment caps are concerned and if that expansion happens, it will be definitely negative for our neighbourhood stores, farmers and consumers. The simple fact that foreign retailers are highly interested in the Indian market is alone enough proof that they intend use the opportunity and get a slice of the huge Indian retail market pie but whether the pie is big enough for all or not and whether they will add to the pie is something to be seen. In such a situation, for the government, it would have been wiser to let retailers open stores only in a smaller number of cities. Perhaps that is exactly what retailers will do, test the waters first instead diving deep and choking, considering the high uncertainty in the sector and challenges. Due to the cap of 51%, foreign investors would in all probability resort to Joint Ventures with existing organised retailers (Walmart has wholesale partnership with Bharti and Tesco with Trent from Tata). This would provide these retailers with much needed cash, technology and logistics expertise.

Although a leftist ideology, Walmart chains spread a consumerist culture under the shadow of consumer choice, whereas consumers are really left with just an illusion of choice ( http://www.ritholtz.com/blog/2012/05/the-illusion-of-choice/ ).

But it is not just about the actual policy that one must consider. A few questions must be asked about the purpose of such a step. Hillary Clinton met with Mamta Banerji on her visit to India and the purpose of such an act is not yet clear. Although officially nothing was discussed, the US Secretary of State meeting a Chief Minister must have some heavier interests than just congratulating a woman on reaching the post and reading this with the fact that Walmart sought US government help in entering India raises some questions (a, b). The Joint Ventures will also allow large Indian retailers sell off part of their stake in ventures that are loss-making. It will also have to be seen whether this will lead to opening of more stores or just expansion of existing ones and streamlining the process which could actually result in direct job loss through downsizing.

The biggest beneficiaries of the current policy will be foreign investors in the long term, Indian organised retailers in the short term and the government since its shock and awe tactics have diverted attention from the coalgate scandal. The possible losers are farmers who will lose any bargaining power they had, smaller stores that employed a large number of people and consumers who will face higher prices in the long run and who will have to bear the brunt of products forced on their pockets.

References
http://www.thehindubusinessline.com/opinion/article3911207.ece?homepage=true
http://www.firstpost.com/business/kirana-vs-wal-mart-busting-the-big-myths-of-big-retail-459490.html
http://www.business-standard.com/india/news/wal-mart-facts-fdi-lobbyists-may-not-like-you-to-know/183849/on