Retail sector is one of the pillars of the Indian economy which accounts for nearly 22% of the GDP of the country. The retail sector in India can be classified as: Organised sector and unorganised sector.
Organised sector refers to the retailing activities undertaken by licensed retailers, or put in simple words activities undertaken by those retailers who have registered themselves for sales tax, income tax, etc. On the other hand, unorganised sector refers to the mom and pop stores or the kiraana stores.
The retail sector is a whopping USD 400 billion industry in the country with the organised sector growing at an annual rate of 35%. However, the organised sector in India does not even account for 10% of the retail industry. This is particularly because of the government rules and regulations which does not allow 100% FDI.
The government has recently proposed to allow multi-brand foreign retailers a 51% stake, while a 100% stake in case of single brand retailers in India. This will attract foreign retail biggies like Wal-Mart. Tesco, Carrefour, etc. to India. However, there is a long ongoing debate on the viability of the proposal. Here’s a small analysis.
The major concern, as pointed out by the opposition party and many others, is the fact that the full-fledged entry of big players like Wal-Mart may significantly have a negative impact on the unorganised retail sector. India has the highest shopping density in the world with 11 shops per 1,000 people. It has 1.2 crore shops employing over 4 crore people and nearly 95% of these are small shops run by self-employed people. Entry of the big players will negate the importance of these shops, as in case of the developed countries like the U.S or Canada and displace the shopkeepers and lead to unemployment. In countries like U.S.A you can only find supermarkets, hypermarkets, and other big multi-chains. It’s not the same as in India where you walk down for 2mins and find a kiraana waalah stocking necessary items for you. You may have to drive long for acquiring necessary items.
Well, honestly, I don’t find the argument quite convincing. We already have players like Big Bazaar, D-Mart, etc. The same argument was put forth when these domestic players were allowed to enter into the market. However, what we noticed was that there merely was a shift in the buying pattern. A person would walk down to Big Bazaar or D-Mart only to buy consolidated packs or when the person has to make multiple purchases. When it comes to small purchases, people still walk down to the kiraana stores. Will you go to Big Bazaar to buy a Rs.5 Maggi pack or a Dairy Milk? Of course not! Therefore you mostly find consolidated or large/bulk packs at such outlets. Not only do these small shops have locational advantage, but also they can provide some extra facilities which supermarkets and hypermarkets cannot provide, viz. Credit facility, home delivery on small purchases, personalised selling efforts, etc. And competition is no excuse for not allowing FDI. If competition is a valid excuse, government should even accept Mallya’s plea for bailout. So the fear of small shopkeepers getting displaced is vastly exaggerated. When domestic majors were allowed to invest in retail, both supermarket chains and neighbourhood small stores coexisted and still coexists.
Secondly, it is true that some jobs may dry up, but on the other hand a lot of job opportunities will be created. Big retails will hire a lot of people. Moreover, the policy mandates a minimum investment of $100 million with at least half the amount to be invested in back-end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing. This will create a lot of opportunities in logistics management. Also, sourcing of a minimum of 30% from Indian micro and small industry is mandatory. This will encourage domestic value addition and manufacturing, thereby creating a multiplier effect for employment, technology upgradation and income generation. So in short, huge investments in the retail sector will lead to gainful employment opportunities not only in marketing and front-end retail but also in sorting, manufacturing and logistics management. At least 10 million jobs will be created in the next three years in the retail sector.
Now the other major concern today in front of the country is the escalating inflation. Entry of the biggies will help in curbing inflation. Firstly, the role of exploitative middlemen will be eliminated which will give good returns to the producers, and at the same time retailers will be in a position to provide it to the consumers at a lower price. Secondly, presently nearly 30% of the food grains and over 50% of the perishable items like fruits and vegetables are lost due to inefficient and inadequate storage, cold storage and transportation facilities. Mandatory investment of $100 million will again prove to be immensely beneficial, although this essentially is the responsibility of the government.
Next argument put forward by the opposition party is that Global retail giants may resort to predatory pricing to create monopoly which may result in essentials, including food supplies, being controlled by foreign organizations. However, there is a strong legal framework in the form of the Competition Commission to deal with any anti-competitive practices like formation of cartels. And hence, this argument is baseless.
In principle, governments should not prevent anybody, Indian or foreign, from setting up any business unless there are very good reasons to do so. Hence, unless it can be shown that FDI in retail will do more harm than good for the economy, it should be allowed. But multi-brand retails like Wal-Mart, Carrefour, etc. may face hurdle in 28 of 53 cities opened for FDI. With BJP, JD(U), AIADMK, BSP and Trinamool Congress strongly opposing FDI in multi-brand retail, global chains may face problems in opening stores in 28 approved cities.
What we must not forget is that Competition is the only force which urges any organisation to perform in the best possible manner and offer the best quality products at the most attractive prices.
