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FDI in multi-brand retail

Foreign direct investment (FDI) in multi-brand retail has faced both political and ideological opposition, quite oblivious of expert studies that rank India as the most attractive retail destination.

But, finally, there may be some good news, with the department of industrial policy and promotion (Dipp) issuing a discussion paper inviting views and suggestions on permitting FDI in multi-brand retail trading.

And while it is heartening that the discussion paper doesn’t suggest an upper limit on FDI in multi-brand retail, caution also needs to be exercised before the floodgates are opened.

At present, 100% FDI is permitted, under the automatic route, for wholesale cash-and-carry trading subject to certain end-sale limitations and restrictions. And while as a general rule, FDI in retail trading is prohibited, an exception for FDI up to 51%, with government approval, is permitted in single-brand retail.

But no FDI is permitted in multi-brand retail on the belief that it would adversely impact the large unorganised retail sector, and the small mom-and-pop shops will not be able to stand up to the challenges that FDI in this sector may pose. Concerns have also been expressed that FDI in multi-brand retail may lead to large-scale unemployment of the workforce employed by this sector.

Dipp’s openness to permitting FDI in multi-brand retail would appear to be driven as much by compulsions as by a genuine desire to provide for economic prosperity in the rural areas. The Dipp acknowledges the need to address issues relating to farmers through removal of structural inefficiencies, as also to improve post-harvest management that requires investment in backend logistics and storage infrastructure.

A weak supply chain results in largescale wastage and, more often than not, the ultimate consumer pays a lot more than what reaches the farmer.

It is important to provide for steadier incomes to farmers either through direct marketing or contract farming programmes. From the perspective of the consumers, there is an urgent need to check food inflation and control demand-supply imbalances.

The retail sector needs large-scale investments. A substantial portion of these investments are expected from private enterprises; hence, it is imperative to make it financially worthwhile for them. It has long been argued that the entry of foreign retailers through joint ventures would help develop backward linkages to sources of supply and, thus, develop a domestic supply chain of international standards.

Eventually, this would improve productivity, benefiting the farmer, and the competition may eventually help bring down prices for consumers. The government believes that permitting FDI in the sector will also help bring in technical and management knowhow, all of which is in India’s long-term interest.

Dipp has invited suggestions on whether there should be stipulations on minimum investment and on investments to build backend infrastructure, logistics and agroprocessing. While such stipulations may be justified, to expect that 50% should be invested in such operations may be commercially-imprudent and it is also necessary that a time period be imposed on such stipulations.

The proposal that 50% of retail jobs be reserved for rural youth may be legitimate, but credence needs to be given to the ICRIER finding that ‘there was no evidence of a decline in overall employment in the unorganised sector as a result of the entry of organised retailers’.

Also, what if there are not enough rural youth available for employment? Additionally, while it is astute to have a calibrated approach, should the government restrict investments to cities that have a population of more that 10 lakh?

Does the government really believe that the Wal-Marts of this world would be able to sustain their business models in such cities, and if they can, then why restrict them?

What really needs to be avoided is over-regulation and the government must endeavour to provide a congenial environment where synergies can be created between the small retailers and large multi-brand retail players.

It has often been stated that FDI can be a great catalyst to spur competition in industries characterised by low competition and poor productivity. The proposal of the government to allow FDI in retail is, therefore, laudable.

But it would be wise that the entry of foreign players, including the percentage of such investments, should be in a phased manner with adequate social safeguards so that the effects of such investments can be analysed and the policy finetuned, if required.

What is key is to ensure strict compliance with any proposed regulations, which can perhaps best be achieved by simplification of the licensing norms and moving to a uniform and centralised system, both for considering investments and for monitoring compliance.

First Published in the Economic Times on July 14, 2010

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