Recently, the Government announced the decision to permit foreign direct investment (FDI) up to 51% in multi-brand retail sector. It has received knee-jerk reactions from various political parties, some expected and few unexpected. The issue of FDI in retail sector is a sensitive issue. It certainly has many repercussions.The Government believes that a tax payer can avoid payment of taxes by following a particular method of accounting and the standards issued by the Institute offer flexibility.
In the city of Mumbai we have had for many years Sahakari Bhandar, Apana Bazar and the likes. In the last 10 years Reliance, Birlas, Future Group, Subhikksha have opened big retail outlets in various cities and towns. It is a tide which cannot be stopped. Business models change and one needs to accept that change. Before the refrigerator became a household gadget and hotels installed their own ice making machines ice factories made good business. Not many years back there was at least one laundry and a flour grinding mill (atta chakki) in every locality. Do we see these today? How many of us get our shirts stitched today? Many of us even buy ready-made trousers rather than getting them stitched. Do we stop sale of refrigerators, washing machines, ready to use flour or ready-made garments? With cheap and convenient mobile phones PCOs are nearly out of business. Closer home, do we not know that large firms of chartered accountants have sounded the death knell of medium-sized firms? Every change offers opportunities to some while is threat to others.
We need to look at the issue of FDI in retail sector in a holistic way. Today the farmers do not get good prices for their produce. They are completely dependent on middlemen for marketing their products. Large amount of food grain, fruits and vegetables rot due to lack of good storage and transportation facilities. Our country cannot afford this. With organised retail trade various infrastructure facilities can be developed so as to make the supply chain efficient and economical. This can happen only if sufficient capital comes in this sector. Foreign investment in this sector will bring in experience and competition along with the capital. We have experienced in the automobile sector the kind of quality cars that became available once foreign investment was permitted. Prior to that, we had to accept the good old Ambassadors and Premiers for decades together. Mobile call rates have come down sharply due to competition.
While we talk about interest of grocers and small retailers, one must also keep in mind that their interest will any way be impacted because of large home-grown retailers and not because of FDI in the sector. The fear of affecting interest of small retailers is possibly over blown. Large retail outlets necessarily require a large space. This makes it impossible for such retail outlets to be anywhere and everywhere. Often these are located at a certain distance from the prime localities. Further, even in countries where large retailers have opened outlets, the mom and pop shops, small round the corner stores have not been wiped out; they co-exist with large retailers and have a role to play. There is also a significant component of retail trade which will not be affected at all by large retail organised outlets. Small paan shops, retailers in rural India, niche stores, convenience stores, outlets at railway stations, airports, handcart and pavement vendors etc. will not be impacted in any major way.
Various researchers in their studies have indicated that organised retail trade will have cascading effect on employment and economic activity particularly in rural areas. Realisation by the farmers would be higher by around 25%. Prices for the consumers will be lower and there will be less of wastage of food grain and other perishables. These are significant benefits.
What is required is proper regulation of the organised retailers so that there are no arm-twisting tactics by them. While the retailers may invest in warehouses, refrigerated transport vehicles and similar infrastructure, it will be necessary for the government to develop good roads and reliable transportation by railways. It may also be necessary to amend or completely scrap Agricultural Produce Market Committees Acts. These legislations were enacted by various States to protect farmers from exploitation by the intermediaries and to ensure that the farmers get reasonable price. However, the regulated markets (mandies) set up under these Acts have failed to achieve this objective. The average realisation by farmers in our country is about 25% to 30% of the final price to consumers as compared to about 65% in other countries. Simultaneously with opening up of organised retail sector to foreign investment, if steps are taken to form farmers’ cooperatives to negotiate with organised purchasers it will go a long way in serving farmers’ interests.
True, FDI in retail sector is not panacea for all ills. It has its own disadvantages. To an extent, it will impact small retailers. At the same time it is also true that due to inherent limitation that small retailers face, they cannot offer choice and competitive prices to consumers. In many cases established stores closed down and have sold their premises. If we look around we will realise many stores that existed ten years back are nowhere seen today in the vicinity. This is the reality.
The decision to permit FDI in retail sector is the first policy decision that the present government has taken in a long time. Let us hope the reform agenda is back on track.
Along with the other countries of the world, India is also passing through a difficult phase. Rupee is at its lowest. Most listed companies have reported substantial losses on account of falling rupee. India’s foreign debt burden is high. In Europe, Greece and Italy are already facing serious problem due to their high debt. We are far better placed but we cannot be complacent.
On this backdrop, Opposition parties have to engage in constructive debate in the Parliament rather than stalling the Parliament. Bills should be passed after full debate and not with the Opposition outside the Parliament. Many of the Bills are of great importance and will have a long-term impact. Let us hope that all the political parties understand this and work towards the progress of the country rather than continuously disrupting the Parliament.
