MIND THE GAP
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- Published 1.12.11
The government has finally allowed 51 per cent foreign direct investment in multi-brand retail. The idea was initiated during National Democratic Alliance rule and has been under consideration for more than seven years. That is the second major reform that has taken us seven years to implement — the first being the hugely successful telecommunications reform. This gestation period for reforms must be reduced if we are to successfully tackle the most important task of generating 12 million additional jobs every year for the next 15 years.
It may be useful here to try to address some of the misgivings that have arisen. The misgivings run thus: FDI in retail will result in India’s re-colonization as happened with the East India Company, cause the closure of and hardship to the owners of mom-and-pop stores, lead to unemployment as the self-organized retail sector that is likely to be driven out employs 40 million people, practise predatory pricing to drive out smaller retailers and gain market dominance which will hike prices to fleece consumers, and result in a surge of imports as foreign retailers fill their shelves with imported goods, implying the demise of the Indian manufacturing sector. More, retail trading is not rocket science, so why can we not do this ourselves? Foreigners will repatriate the profits and this will impoverish India.
First, 2011 is not 1612. India is not divided into sultanates that can be played off one against the other. Indian strategic strength is as good as or better than that of the retail traders’ countries of origin, except for the United States of America.
Second, small format neighbourhood stores have stood competition from their larger peers very well during the past decade. Spencers, Trends, Big Bazaar, all have entered retail space and are being given a run for their money. Large and small stores co-exist as consumers patronize both to meet different needs. There is no reason to believe that the entry of foreign retailers will lead to a vastly different outcome.
It is estimated that the retail market will grow from the present size of $490 billion to nearly $1 trillion in the next 20 years. During this time the share of large retailers, including foreign ones, is expected to increase from 4-16 per cent. That still leaves 84 per cent of the retail market to small stores, implying a market of $840 billion for them. Finally, foreign stores are being permitted only in larger cities with populations of one million and above. These number 53 now and may become 76 by 2030, still leaving a huge market for the small stores.
With 84 per cent of market share still remaining with small stores, there is no question of large-scale unemployment. Besides, large-scale retailers will generate higher quality employment.
Predatory pricing can be practised only by monopolies and foreign retailers will not enjoy market dominance. Indian competitors apart, there will be a number of foreign players, many with Indian partners, competing for market share. This combined with the monitoring of the Competition Commission would suffice to rule out predatory pricing practices.
Further, it will be difficult for foreign retailers to find cheaper imports across the board. But this fear of domestic manufacturing capacity being wiped out could be better alleviated by putting a cap on the share of imported products to be sold by large format retail stores. Because of our membership of the World Trade Organization we have to offer ‘national treatment’ to all businesses, so we cannot impose this condition only on foreign stores. Then, while retail trade is indeed no rocket science, it does involve scale, infrastructure development and logistics and supply chain management. The operation of large format stores will have positive spill-over effects for both large and small domestic retailers.
Finally, there is hardly any reason to believe that foreign investors will forgo the opportunity to expand capacity in India by reinvesting their profits here instead of repatriating them. And even if they do so, our main concern should be to generate jobs. FDI will help do that. More than 300 million people will move into urban centres in the next two decades. The present retail format cannot cope with that scale of demand. The traders associations and their leaderships, largely political, are encouraging the misgivings.