After 2 decades of procrastination, it seemed that India was finally opening up its underdeveloped retail market to Foreign Direct Investment (FDI). The landmark announcement was made on Nov 24th, when the Union Cabinet cleared the bill allowing 100% FDI in Single-brand retail (think: IKEA, LV, Apple, etc.), up from 51% as it was until now. The announcement also included a controversial decision to allow 51% FDI in Multi-brand retail (think: Wal-Mart, Tesco, Carrefour, etc.).
While FDI in
Single-brand retail segment has been welcomed, Multi-brand segment has caused
hysteria in the Parliament, and cascaded on to the streets with retail stores
across the country closing down for a day in protest against FDI (protesting
seems to be the biggest trend of the year 2011). These strikes were
organized by wholesale traders’ unions and other middlemen in
the retail supply-chain, the biggest losers if the likes of Wal-Mart
& Tesco come in. The non-functioning parliament cost the nation Rs. 1.5 Cr (15 million)
per day, but the opportunity cost
of loss of productivity & the cost of impairment of India’s reputation are
anybody’s guess. The Prime Minister’s executive authority has now been
questioned too. As his Congress Party pitched the idea to other MPs and
citizens citing benefits like job creation and modernization of Indian retail, they
did not get any support even from their own allies, let alone the opposition
parties. The naysayers’ argument was that FDI in Multi-brand retail would put millions
out of smaller shopkeepers (kirana shops) out of business, and also that
international giants will form monopolies and exploit farmers.
Why would anyone in
their right minds participate in such folly? Is it confusion caused by political
noise? Or is it ignorance that’s fueling such
dissent? Don’t people know better? Do they lack independent judgment? I think it’s absurd
that people protest against something that they would actually benefit from. So
in this post, I will share my views on the matter. As you can probably tell
already, I not only support it, but also encourage it to be rolled out ASAP. I
do think that a few tweaks should be made to the finer print. But before l
share my views, let me list down some of the features of what the Government’s
proposal says.
Salient features of the
Multi-brand Retail FDI :
- There has to be a minimum investment of $ 100 million.
- 50% of the total investment has to be in back-end infrastructure.
- Stores are permitted to open only in cities with a population of at least 1 million (10 Lac) people.
- At least 30% of manufactured / processed products must be sourced from Indian MSMEs.
- The government retains the right to be the first to source agricultural produce.
- The Bill is just an enabler; it is essentially up to individual states to allow or disallow the retailers to open shop.
- Brand must already have presence in other countries too.
- 30% mandatory sourcing from Indian MSMEs.
- Must be branded during manufacturing.
- Investor must be Brand Owner, and not a franchisee or a regional license holder.
At this point, allow me
to throw some light on the situation. The backdrop has been that of a global
slowdown, with Indian government being in the news for all the wrong reasons,
ranging from scams to policy paralysis. With painfully high inflation, stunting
economic growth and a weakened Rupee, permitting FDI was the Indian
government’s stimulus package. Here’s how. Firstly, it attracts long-term capital into India which is
both, less speculative and more productive in nature. Such capital
investments in India (by both, international and domestic businesses)
had declined recently. Secondly, this move would have brought technological knowhow and spur backward integration in organized retail in
India. This would lead to drastic improvements in supply-chain infrastructure, especially in the
domain of perishable goods, by replacing intermediaries who do not add any value with those who do.
Before you jump to conclude that intermediaries are not being removed, but just
replaced, let me explain what I mean. Consider the following numbers:
- Currently, there are about 5-7 intermediaries between the farmers and the
retailers. This causes the price of vegetables and fruits to increase
multiple folds. For instance, potatoes cost only Rs. 2/Kg in Nasik,
Maharashtra (closer to the farms) but by the time it reaches New
Delhi, consumers pay Rs. 18/Kg for it. That is a 9-fold price difference, and neither the farmers, nor the customers benefit
from it.
- About 40-45 % of the perishable food produce
gets perishes before even making it to the
marketplace.
This shows the value-destruction of the current intermediaries.
- According to rating agency
CRICIL, India’s organized retail loses Rs. 10,000 Cr ($ 2 bn) annually due to wastage, mostly of perishable products
like fruits, vegetables, fish, meat & poultry. While 15% of these losses occur at the farmland itself,
another 25% is lost during transportation.
- The ratio of traders to actual retailers is 0.001. This means that for every 1000 retailers, there is only 1 trader. So the argument that single stores, or (Kiranas) will shut is flawed, and the number of traders who lose jobs is overhyped too. The intermediaries (about 15,000 currently) won’t be left unemployed; instead, they will get new jobs that actually add value in the supply-chain. Direct sourcing from the farmers can reduce supply-chain costs by 10-15%.
- About 85% of all farmers
own only about 2.5 hectares of land or less. This gives then no bargaining power, and they end up getting
exploited by the agents. Also, they are not working on a contract-basis,
but on a contact-basis. Hence, they have no defense against
current exploitation either.
On the other hand, for example, Tata Chemicals helps the farmers working
with Trent (contractually of-course) in assessing their land, and
recommending the most suitable fertilizers and other technologies that
could help farmers get a higher output from their land.
- According to consultancy firm
A.T. Kearney, organized retail is currently only 7% of
the $435 billion (approx Rs. 21 Lac Crore) Indian retail market but
is expected to rise to 21% within the next few years. Food
accounts for 70-80% of this. This is led by a
consumption class of 400 million people with rising disposable
incomes, and a steady rate of urbanization.
Considering the above
numbers, the case for organized retail is self-imposing. Indian conglomerates
such as the Tatas, AV Birla, Reliance, etc have already been trying to
strengthen their foothold in the Indian organized retail market. While they and
other domestic players like Bharti, Future Group, etc. are already trying to
eliminate the intermediaries, their scale of operations is not significant enough to bring about a
substantial change in the condition of the farmers, or curb prices on a
national scale. Furthermore, they lack adequate experience and
technical knowhow in the retail domain to introduce any breakthrough
innovations. The international players, on the other hand, can leverage their experience to bring the much needed
reforms in the Indian supply-chain network by innovating logistics, introducing
cold-storage systems, food-processing, IT systems, etc.
Thirdly, Micro & Small-Scale
Enterprises (MSMEs) will have a direct market to sell to and therefore will reap benefit similar to the
farmers. In fact, the challenge for them will be to scale up their operations to meet
the demand of these organized retailers. In such a scenario, they too will ramp
up production scale and hire more workers. Some might even innovate and adopt newer
technologies, thereby generating a larger positive spillover
effect in their community.
The fourth benefit of
FDI in retail will come in the form of a positive externality of making our workforce more employable. At present, several
employers often complain of India’s current workforce lacking
several key skills and hence being unemployable. Many workers in
the current retail sector will not lose jobs like the politicians have been
suggesting, but instead, be hired for their experience & understanding of
the Indian consumer, and get trained for the new retail landscape. According to reports
from the consultancy firm Boston Consulting Group (BCG), organized
retail could right away create about 10 million jobs – 4 million direct and
another 6 million indirect jobs. It would generate additional incomes of Rs.
73,000 Cr (approx $14.6 billion), and consumers would save about
1.5 Lac Crore (approx $31.25 billion) annually in their shopping bill.
However this is only possible if significant scale is achieved and technology
is applied, which is only achievable by allowing FDI in Multi-brand retail. The illustration below shows the current employment generated by Retail trade in some cities. These numbers will only grow post FDI reforms.
These are just some of
the more obvious benefits that we can foresee already, and I am sure there are
more too. But there’s more to the retail FDI story than just the numbers I
presented. I will do a follow-up post on this topic highlighting the bigger picture,
and state my case as to why I feel FDI is going to benefit India. Until then, I leave you with this Illustration which appeared in Hindustan Times, showing how some other countries have opened their doors to FDI in their Retail Industry.
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