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31 May 2010 Business retail: fdi

IKEA’s Time Come?

FDI in retail evokes mixed feelings in rulers, industry and farmers
Bhupinder Singh

Whispers In The Aisles

Is FDI in retail back on the agenda?

Slowly but surely, the  government is laying the ground for FDI in multi-brand retail. Currently 51% FDI is allowed in single-brand retailing, 100% FDI in wholesale business.

When will it all happen?

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It's a political hot potato—opening up multi-brand retail would impact small kirana stores. Currently, a discussion paper is being finalised. The government insists there is no time-frame.

Who's supporting FDI?

UPA-II has been sending out clear signals in favour of FDI, saying competition is crucial to reduce high food prices, cut out gains made by the middleman, and reduce wastage.

Who's against it?

The biggest opponents are the Left parties. On the face of it, BJP-supported trader groups and farmer groups have been voicing protests too. Some big domestic retail majors have been stealthily
lobbying against FDI, but are lying low for now.

Who will be the first movers?

Global retailers like WalMart, Metro, Carrefour, Ikea, Auchan, Tesco and so on will be quick to start front-end operations and not be restricted to wholesale.

***

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The rumble in the retail jungle is getting louder. Four years after allowing global brands to enter the retail scene via the franchise route, the government is now looking at the next step—allowing multinationals to enter multi-brand retailing (or your neighbourhood supermarket) and not restricting FDI to high-end single-brand or wholesale operations.

Make no mistake, this is the Holy Grail for a nation of shopkeepers—and shoppers. It’s also controversial. There is no consensus, not even within the Opposition, on whether further opening up the retail sector to foreign investors will boost the economy. Or whether it will spell the kiss of death for millions of neighbourhood kirana stores. While the UPA has been drumming up support for FDI in multi-brand retail, it’s treading cautiously. With big domestic retail willing but cautious, the stakes are high.

The government hopes to serve up some answers once its detailed discussion paper on FDI in the retail sector (on the lines of a similar paper on FDI in defence, hosted on the Department of Industrial Policy and Promotion—DIPP—website) is finalised. “Some stated positions will come out through the discussion once the paper (including all the diverse views) on retail has been put in the public domain,” says Gopal Krishna, joint secretary in DIPP, without specifying which way the report will swing.

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Two years back, ICRIER, a leading think-tank, came out with a study saying there would only be a “short-term impact” on kirana stores within two km of an organised retail chain. But, the report concluded, their niche appeal, together with some sprucing up, would help kirana stores sustain. A year later, another report by an all-party 30-member parliamentary committee chaired by M.M. Joshi came out with a contrary view.

High food inflation is forcing a rethink: a push toward organised retail, aided by FDI inflows, will help keep it in check.

Expressing fears of a large number of small retailers being wiped out either through competition or strongarm tactics, the committee pointed out that MNCs and big retail chains were violating the restrictions on single-brand retail. In the wholesale business, in which 100 per cent FDI is permitted, the committee report states, “Government should stop issuing further licences for ‘cash and carry’...as it is merely a camouflage for doing retail trade through back door.”

The fact that the government recently brought in new, restrictive norms for wholesale operations shows that some of the parliamentary committee’s observations were valid. High food inflation, however, has been an ally in forcing a rethink in the government’s stand on FDI in multi-brand retail. Since early this year, several ministers—including the prime minister—have been advocating that a greater push towards organised retail, helped by FDI inflows, could check high inflation and generate more jobs.

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It helps for now that the opposition to such a move—led by the Left—is muted. CPI(M) leader Brinda Karat says the claim of greater employment generation through organised retail “does not reflect in the numbers”. Fellow partyman Nilotpal Basu points out that if farmers were benefiting, “we wouldn’t be clocking negative agriculture growth”. While Basu echoes the parliamentary committee demand for “regulation” of corporate retail chains, observers feel the Left will wait for more clarity from the government’s discussion paper before moving forward.

Farmers too, for the most part, don’t repose much faith in the modern retail story, “as the retail chains are looking at their own profit and trying to force farmers to sell below market price”, alleges Raju Shetti, founder, Swabhimani Shetkari Sanghatana. But despite the cynicism, Shetti feels there is more to fear from the present system of political patronage than an arrangement that ensures firm buying arrangements and technical support. Wary of being “let down” as in the past, farmer groups will watch carefully to “protect their interests”.

That the opposition is easing is evident when, contrary to the tough stand being mounted by the Confederation of Indian Traders’ Association (CAIT), the convenor of bjp’s economic cell, Jagdish Shettigar, takes a more pragmatic view. Emphasising that practically everybody as a consumer stands to benefit when service as also the price are favourable, Shettigar regrets that the benefits of organised retail, which currently has only five per cent market share, are still to be realised. “Politically, no one’s comfortable due to misconceptions about its impact,” he warns.

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As decision-makers point out, besides small traders and some political parties, a few of the domestic retail biggies—like the Future Group, Tatas and Reliance—have been playing on the “bogey of small retailers” to keep foreign competition out. “Almost certainly the resistance has come from select Indian players, though on the face of it they may support FDI in retail,” says Arvind K. Singhal of retail consultancy Technopak Advisers. Apart from the Bharti-WalMart joint venture, he points out, none of the others have a firm alliance. Instead, they have used the restrictions to entrench themselves.

Dismissing the notion of being an opponent, Future Group chairman Kishore Biyani alleges that “too much was being read into my stance”. He adds, “Retail is the last leg of economic activity. Whatever needs to be done should be done to promote it. It would help if FDI in multi-brand retail is opened up to 49 per cent in a calibrated approach.” If domestic industry seems open to FDI, it also wants to seek foreign alliances without handing over the reins.

It helps that retailers are lying low after the slowdown. “Now everybody concurs that we need more FDI in retail to allow people to access funds from those who understand the business and will also infuse some technical know-how,” avers Kumar Rajagopalan, CEO, Retailers’ Association of India. With many retail majors having overexpanded, an infusion of foreign funds and management expertise seems inevitable. But there will be many “ifs and buts and qualifications galore” before alliances are allowed to be forged. The UPA will shop around carefully—but shop around it will.

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