FDI in Retail has been put on hold but it has triggered a fierce debate with wildly opposing claims. This is somewhat ironic given that every argument that is made for and against it can be tested against the current Indian Big Retails.
Argument 1: Have Big Retails Worked in India till date
When India’s first modern retail stores opened for starting business 15 years ago it triggered breathless headlines but today the organized retail is a tiny fragment of the Indian Retail Market. Most big players are struggling to break even. Reliance the biggest player in modern retail in India has posted a net loss of Rs. 44 crore. As for Big Bazaar, the next largest chain; its parent company has debt in their record books of around Rs 4352 crore. The Shoppers Stop chain of stores posted a net loss of Rs 1.5 crore this past year. Aditya Birla Retail with its chain of More grocery stores is still loss making and looking for investors. Some like Subhiksha which at one time had more than 1600 stores has shut down all together. India’s oldest modern retail stores Spencer has posted a Rs 170 crore loss in this financial year. So India is one of the few countries in which Indian big retailers actually want their foreign rivals to come in. They claim, it will bring more funds. Experts say this is an indirect way of saying that the Global Big Boys will buyout few of the struggling Indian Retail companies. Now the question remains even if the Big Boys buyout or partner Indian retailers, can the WallMart and Carrefour do better. Some say they can because they are fully experienced in retail unlike Indian companies like Reliance, Birlas who don’t have that experience. But others argue that there are challenges unique to the Indian Market which will be applied to all players regardless of nationality and experience. The single biggest challenge for any retailer of any size or scale is how do they are going to find affordable real state for retailing operations. Most parts of India don’t have just enough space to start with and whatever limited space is available, the pricing of that land make it very difficult out of the retail business. So the Government's figure of Foreign Investors waiting to invest $ 600 billion becomes somewhat unrealistic. If we look at the record of the overall record of the FDI in India, whichever sector we opened to overseas investors the results aren’t success stories. Our infrastructure sector is opened for foreign investment from quite some time, so is our Power sector but we haven’t seen a stampede of investors coming into India because merely allowing them to invest in India is just a starting point.
Argument 2: Will small traders go out of Business?
The loudest most vocal opponents of FDI in retail are small traders who say they will go bust. They staged a violent protest when the first Indian retail chain opened. In reality, there is no comprehensive study so far that maps the impact on small retailers after the entry of big retails. In the first week of this very month NDTV conducted a straw poll. The team of correspondents in four metro cities talked to local shopkeepers to know if their business was impacted after the entry of big corporate retailers in their neighborhood. The result showed that most of the shopkeepers were unruffled. They say the impact on their business is so little that it is pretty marginal. Their loyal customers are still with them.
Quite apart from anecdotal evidence if any empirical proof is needed for the innovativeness and resilience of the small traders, it’s in the Government own figures which finds that the growth of organized retail has dipped from 27% in 2005 to 15% in 2009.
This calls into question of the logic of Government’s glowing prospect of the big retails in India as well as the logic of small traders who claim that they gonna be wiped out of the business. The bottom line is that Retail in India is a complex fragmented mosaic made up of pavement vendors, kirana stores, Government stores, Cooperative networks etc. Organized networks have so far remained just one small part of that mosaic.
Argument 3: Will big retail modernize agriculture process
The Big Retailers have made farmer’s collection center near the farmlands in rural areas where they can purchase the produce directly from the farmers. In past the farmers used to bring their produce to Mandi and most Indian retailers would buy from there. But now Bharati, Big Baazar, Reliance Fresh, have setup centers to source directly from farmers after taking permissions from Mandis. The farmers say they have to travel less and get a price which is close to the Mandi price. The farmer may get a same price at Mandi as compared to say Big Bazaar but he has to pay to commission agent and also for transport. In Delhi’s Azadpur’s Mandi for instance a kilo of Gobhi(Cauliflower) is priced Rs 6.75 per kilo and the farmers pays a commission of Rs 0.40 per kilo and transport cost of Rs 3 per kilo, So he only makes a Rs 3.35 per kilo. Many of the times the farmers produce get wasted due to lack of storage amenities. On other hand at the Big Bazaar collection center farmers get tips on how to save the produce from wastage. Big Retailers says they have killed the middleman by employing local villagers for the centers who contact farmers. But this is tough going baring a few states, India’s agricultural land holding are too fragmented to let the big retailers get contract of large supplies with individual farmers. [Average landholding in India is 0.67 acres ]. So the big retailers do informal agreements with large grouping of farmers. Overall even those who are wary of the entry of multinationals into sensitive areas like food say that the entry of organized retails might have some benefits with conditions.
Economist Sudha Narayan says “Wherever there is contestability where farmers have more alternatives that will empower them ultimately. On other hand the contestability not necessarily should come from FDI retailers; it can come from Mandis, domestic players, domestic processors. So there is nothing unique about the FDI which can make the market contestable.” [ In reference links at the bottom you can check a paper submitted at Cornell University by Sudha Narayan regarding Agro Retail in India]
Definitely agricultural reforms is the responsibility of the Government and by overstating the benefits of the big retails, the Government is trying to shift their responsibility of reforms to a third party. Of the 180 million tons of fruits and vegetables that India produces, almost a third of it is wasted because the Government says existing cold storage has only capacity of 20 million tons. This is where they believe the multinational retails can come and rescue with money and technology. But will Multinational retails will be able to bridge this gap ? Learning from past, we know when Government opened FDI in cold storage chains, nobody invested. Indian retailers say even if the MNCs are allowed to sell it is unlikely they build such a massive storage backend. Definitely they will either force the Government to build the storage backend or in worst possible scenario will get it done by some other body but they will try to make it happened. Technology isn’t a rocket science anybody can import it, it’s just there is no enough money. Even if they build cold storages it isn’t clear if the Indian consumers are ready to pay more.
Argument 4 : Inflation control by Retail
Initially Government wanted to come up with FDI retail the focus was the benefits to the farmers but with the price rise turning up the political heat, the Government began to argue that FDI Retail will check inflation. It’s true that stores like Big Bazaar will advertise cheaper prices for certain food and products but across the board if you do a quick test of prices of organized retailers vs street retailers, the difference is marginal. All of which questions the Government’s logic that Big Retails will control inflation. For that, most Retailer will have to become big enough what Economists called "Economies of Scale" to reduce prices but as far as we have seen, organized retail is tough, expensive and it will take a long while before we will have Wallmart like stores where everything is cheaper than rest of the market.
Argument 5: Alternative to Retails
Reading through the reports by Government or by Corporate Chambers that sell the Retail story of India there is little mentioning of how the grass root networks have evolved through which Indians buy and sell as well as the success stories within those like that of AMUL which is an example of successful rural marketing from front-end to back-end with zero foreign investment or technology. AMUL collects milk twice in a day from over 3 million farmers with the help of 16,000 village cooperative societies. AMUL even argues that the model they have created is even better structured than any model in the West. Also, the India’s largest network of retailers, The Invisible Street Vendors who after years are finally getting organized by Nation Association of Street Vendors of India. A central law for Street Vendors is also going to be discussed in future parliamentary sessions to improve this model's growth.
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