FDI in Retail: The Darker Side

akash gupta , Last updated: 20 September 2012  
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Over the past week the topic FDI in multi brand retail has become a platitude with most of us professionals painting a rosy picture of the supposed benefits that such a policy will usher and the sweeping change it will bring. However, I hold a little divergent view on this reformist measure and I have my own strong arguments for it.

For those obsessed with the geographical reach and demographic boundaries that multi brand FDI in retail will help to cross, we must remember that such FDI will only aid the establishment of stores in urban agglomerations whose cumulative population as per 2011 census comes to 14,06,87,573, which is approximately merely 11.5% of our 120 crore population. As such its target area seems to be to limited in the medium term

Secondly, we have seen many experts holding the view that it would bring in the much needed finance in the retail sector. However, we must not ignore the fact that many of India's leading business houses such as Reliance, Tatas, Bharti, Aditya Birla have already jumped into the retail bandwagon and by no stretch of imagination do they seem to be in short supply of funds. Therefore, I don't agree with the idea that the funds to fuel the retail boom into our economy needs to be imported from outside.

Thirdly, while we draw parallels with the western economy to forecast the potential economic benefits of opening up the multi brand retail segment to foreign investors, we must understand that there is a chalk and cheese difference between the composition of the Indian and western economy. For a labour surplus economy like India such standalone retail stores, perhaps, provide the most convenient means of self employment. Therefore, while we speak about the employment opportunities such organized retail would bring we must not forget that the fact that it seeks to convert a large chunk of our populace into the salaried class, in the process crushing the entrepreneurial spirit of our country and further widening the already rising inequality.

Further, many are of the view that it would lead to positive backward linkage effect thereby improving the condition of farmers as well as SME's. However, the minimum requirement of sourcing such goods from domestic market is only 30%. This is merely a token requirement as compared to the market we are throwing open to such retailers and will inevitably lead to dumping of foreign manufactured goods. Moreover, it will sooner or later result in creation of market where a few buyers will dominate the scene, especially, in areas near urban agglomerations, thereby adversely affecting the interest of the farmers for whom it is now considered to be a boom.

Lastly, but definitely not the least we must acknowledge the fact that the Indian consumers have markedly different characteristics as against western countries. Whereas the need for such organized retail stores is generated due to the preferences of the buyers for one stop purchase, in a country like ours where the majority of the population still dwell in the rural areas, such time crisis seem to be a distant dream. We have ourselves witnessed the fall of many retailers such as Subhiksha and more recently the sale of retail behemoth Pantaloons. All such factors hint at a single point- India is still at a premature stage for such organized retail to rush in and FDI will cause further harm in the consolidation of this sector as we are likely witness a situation of excess supply. Further, there are several legislative changes which are required to make the benefits of organized retail a reality, the most prominent among them being the introduction of GST in the absence of which the goods can never be made available at low prices due to the existence of multiple points of taxation. In the absence of such changes organized retail will fail to attract much investments 

Thus, to conclude I can just say that while FDI in multi brand retail seems to be a bed of roses, in reality it is a mixed blessing where perhaps, the disadvantages far outweigh the advantages as things stand today in our economy. We need to open up those areas to foreign investors where there is shortage of funds or domestic investors are apprehensive about investing such as infrastructure, power, etc. The need of the hour is to expand our economy and not just to increase the competitive environment without any real growth as with such FDI in retail the consumption side is not likely to rise but the sellers are merely replaced. We need to make our vision clear before we embark on such reforms which according to me will not bring any real growth to our economy.  

CA Akash Gupta

Kolkata

CCI Pro

Published by

akash gupta
(Business)
Category Others   Report

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Comments

04 October 2012 Partha Pratim Sen

That was indeed a very well written article. The Analysis was superb... Partha Pratim Sen,CPA Australia..


27 September 2012 ayyappa

I really appreciate your analysis Infact govt should allow FDI in storage facilities, lackof these facilities we are lossing nearly 30 % of our produce & it effects on Inflation.


27 September 2012 Joydeb Chatterjee

While not taking away the credit for the issuues raised cogently in this article, I would like to ask the writer if he has solid evidence to sunstantiate what he says. I mean, have the farmers from whom the Indian retailers (like big baaar, Pantaloons etc) procure their requirements, lost anything in the process by getting lower realisations ? What about the middlemen, who with political patronage, corner most of the margins and the hapless customer suffers ? Yes, we certainly need to watch out for expolitattive business practices that these MNC'S may resort to. But proper regulations may help in keeping such practices under check. To con clude, let us have an open mind in this matter. CA Joydeb Chatterjee


26 September 2012 CA Priyaadarshini

I really appreciate your view that FDI im retail will convert a large section of population into salaried persons... already in India entrepreneurship is very low... this will reduce it further


26 September 2012 CMA Ankur Pandey

Very Well Explanation of your views and describing the cons of FDI in retail...You had touched all the affected areas very nicely...thanks for such nice article..


25 September 2012 Radhakrishnan

Now comes generating employment, how many of us have seen people aged over 30 - 35 years working in all these retail giants, no one, all are sacked or forced to leave before these age.At this age where can one get employed


25 September 2012 Radhakrishnan

The strong legal background makes sure that they remove your pants if ever you have to confront them. On any day you will ahve the truck full load of goods which didnt sell and lying in their warehouse for years together


25 September 2012 Radhakrishnan

The first is when no one else is able to buy your produce, you are forced to sell to these giants, they buy on their own terms with credits ranging from 30-90 days


25 September 2012 Radhakrishnan

Foreign retail, those who say will benefit India, would become like the Bata, the Pepsi / coke in India. No Indian benefits for sure. We don’t need to look to US, instead look to Malaysia and Thailand as to what retail chains have done here


23 September 2012 Narendra Singh

Pls Pls friends... follow the link for more Clarity... ... http://www.facebook.com/photo.php?fbid=278688332241079&set=a.135071216602792.24327.135053696604544&type=1&theater


23 September 2012 Narendra Singh

They will break this decentralized mkt n try to create centralized mkt..eg big malls Even president Obama himself said to their citizens to buy product from small retailers.


23 September 2012 Narendra Singh

u are 100% right Bro. FDI will not bring real growth to our economy. Our retail mkt is decentralized,it means we can buy products from anywhere,from any place,and around 10cr population earns bread n butter from this.


23 September 2012 CA Amit Talada

Nice article but biggest advantage i see from this is the technology advancement these investors would bring to india and wastage will be reduced to a great extent which i dont think india would be able to bring...so we can ignore other things for this


23 September 2012 suraj kadam

Good article, but there are cons. Such as we not require capital that much but we are in need of technology and scale of operation


23 September 2012 gbalakrishnan

TRUE, THAT WHAT INDIA WILL BENEFIT ALLOWING ONLY ABT 12% BE BENEFITED WHILE ALLOWING NEW REPLACEMENT OF EMPLOYMENT MEANS NO JOB GROWTH AND IT STRANGLES ENTREPRENEURSHIP! FDIs ARE INTERESTED TO GENERATE HIGHER PROFITS FROM HIGH INTEREST REGIMES


22 September 2012 pooja

moreover i think the money earned by these companies entering india through FDI will be more then they invest in india..resulting in loss to india


21 September 2012 Shail

A nice article. If the foreign retailers like Walmart are expecting a return like that in the U.S., that is in any way not possible in India. Currently, proper organised retailers operationg in India are only two; Big Bazaar and Reliance mart.


21 September 2012 saket mehrotra

I'm afraid i will have to go with the opinion of FICCI, CII and the stock markets. This is so because i feel that if there such huge amounts of funds available in india we would not have the current situation and i do believe farmers will benefit since all the middlemen will be eliminated


21 September 2012 Anand Raghavendra

I fully endorse your view.The multinational Brand FDI will one day quit the scene and the farmers promised of direct revenues will be left in the lurch


21 September 2012 Krishnaswami R

good analysis


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