In recent times there has been a lot of debates and opposition with respect to the Indian govt. policies for bringing FDI in Multi-Brand Retail. Everyone of us knows that single brand retail FDI had already been permitted by the Indian Govt., which has not raked in much opposition because there were not many companies in the fray. The issue though has been much politicized but the real concern of the people was that the Kariana business will be wiped off with the result that they will become jobless. FDI is not the culprit as made out to be nor would it solve all the problems of the sector in some magical way.
FDI in India is allowed up to 100% in wholesale cash-and-carry and many of small kirana shop owners are buying from such wholesalers but with more international brands they may get better prices for many products but many of small stores have fear in their minds that they will be out of business but that really is not the case. Many people in bigger cities, metros are already buying from big stores still they go to small shops. They can’t make a trip to big stores for all their scattered purchases. In smaller towns, many people including small shop owners buy goods on credit and pay later. Big stores like Walmart do not give credits so these buyers will not go to Walmart.
Further, a few limitations in Indian scenario might be comprehensible yet these can be mitigated. We may have some hiccups while implementing the FDI policy but these can get addressed by adopting remedial measures while gaining actual experience.
1. A Healthy Competition in market
FDI will set in a healthy competition in Indian market which would lead to better quality goods and better price for the customers. It would result in increasing consumer surplus in the form of household savings, which the customer right now would welcome. But over the time it may effect consumer’s interest adversely since few big MNC in retail might use their deep pockets and political links to gain monopoly in the goods they deal in. due to their dominant position they might not abuse the provision of Competition Act,2002. Their monopolistic position will not only affect small Kirana Shops but also big retailers in market.
There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. India being the second largest producer of fruits and vegetables after china, it has very limited integrated cold chains infrastructure that too concentrated in few states like Uttar Pradesh, West Bengal, Gujarat and Punjab where 65% of cold stores are situated in Uttar Pradesh and West Bengal. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. FDI in cold store is allowed 100% thorough automatic route since union budget 2011-12 was presented before parliament.
In 2012 India has produced 180 million tones with merely 5386 cold stores having storage capacity of 23.6 million tons while in 2011, 147 million was produced with 9 million tons capacity. NABARD scheme is there for providing subsidy for such cold storages but the results have not ensued even after fiscal benefits under tax laws and subsidies.
3. Intermediaries dominate the value chain
Supreme Court has issued a statement saying ‘‘Consumer is the king and if that is the philosophy working behind the policy what is wrong. The FDI policy is to free the economy from the middleman who operate to the disadvantage of the the farmers. These are middlemen exploit the poor and marginal farmers by offering unrealistic prices while selling it at exorbitant prices. If FDI is aiming to dislodge middlemen as its objective what is wrong with it.’’
Intermediaries often flout mandi norms and their pricing lacks transparency. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail. But under FDI farmer would get better remunerative prices for their products, as they would be a direct link in supply chain circumventing the middlemen route.
Coming back to ‘consumer is the king’ statement- consumer is king for few years until brand is established and people are used to their brand but when there is less competition consumer may get cheated and they will turn to pauper.
4. FDI policy stipulate strickter norms undoubtedly but with huge legal expertise at their beck and call these MNC power houses may manipulate with laws. A notice was issued to Marks & Spencer in May with regard to dealing in their sub-standard brands under their single brand license and they were required by FIPB to seek license under Multi Brand Retail Policy. There appears to be a snag in the FDI policy as no where sub-standard branded goods are barred .
5. Last year in September while permitting 51% FDI in multi brand retail it was mandated that at least 30% of sourcing would be from small industries and 50% fresh investment from backend infrastructure, retail sector in India would be benefited by such policy initiatives.
But if we go through past, retailers have repeatedly tried to exploit their relationships with the suppliers. In 1970s, Sears sought to dominate the household appliances market. Sears laid down very high standards for quality; suppliers that did not meet those standards were dropped from the Sears supply chain. This could also happen in cases of big stores like Walmart and Tesco who may also laid down strict quality controls on its suppliers. A contract with a big retailer like Walmart can make or break a small supplier. In multi-brand retail industry suppliers tend to have very little power as they depend on their sole demand for better prices.
6. Telecom Industry
FDI in telecom has been allowed up to 100% from 74%, whereas 49% of investment can be done through automatic route and FIPB approval will be required for raising further stake. The idea behind the proposal to increase FDI limit in telecom sector is to get fresh funds to lower financial burden of Indian Partner.
During 2011-12 cumulative debt on telecom industry was 1,85,720 crore while it has increased to 2,50,000 crore in 2012-13.
The sector’s overall debt burden will rise further over the next few years. Over the next one to two years, telecom will need more money to pay the one-time fee of about Rs 31,000 crore for holding additional spectrum beyond 4.4 MHz. They’d also need to invest about Rs 1.5 lakh crore if the government goes ahead with reframing of the 900 MHz spectrum.
But if we are allowing FDI in our Information & Broadcast then Indian Govt. have to take proper concern regarding security concerns since even with in India it has already been a serious issue with many political and influential personalities. Looking to China, it has allowed FDI in retail since 1996 but China has not allowed it in Information & Broadcasting to help it to save itself from invasion on its culture as well as real peep into china’s controlled political environment and google is the live case in recent times.
While concluding I would like to mention a statement issued by Anil Talreja, partner, Deloitte that the government is slow in clarifying on the policy, which is not going to help foreign investment. The government needs to be proactive in making such announcements. The clarifications on states and investment are not conducive for foreign chains to go ahead and invest in the country. Also, the clarification on the entities to not just own but also operate will not support a franchise model..
And once again FDI is neither a culprit nor a magic wand to solve India’s Economic problems in this area of multi brand retail.