The Indian retail sector which, till less then a decade ago was touted as a ‘hot' new sector, has since remained only ‘promising' and has failed to live up to its initial billing. It has been beset by a combination of lack of clarity in government policy and paucity of funds which have put paid to its lofty ambitions. But hopes were rekindled last week by the government's initiative towards opening up the country's retail segment to foreign direct investment (FDI) through a policy discussion paper floated by the Department of Industrial Policy and Promotion (DIPP).
The present policy allows 100 per cent FDI in cash-and-carry wholesale formats and 51 per cent in single brand retailing. Also, 100 per cent FDI is allowed under the automatic route in storage and warehousing, including warehousing of agricultural products with refrigeration (cold storage). In the cash-and-carry wholesale segment, multinationals like Walmart and Metro have entered India while others like Marks & Spencer and Hamleys have entered the single brand retail format.
The amount of FDI that has entered the sector to-date is only around $2 billion and India's retail industry is $400 billion, growing at 8 per cent. It accounts for about 10 per cent of India's gross domestic product (GDP) and according to Kumar Rajagopalan, Chairman, Retailers Association of India (RAI), an industry body comprising large retailers of modern retail trade, “with FDI coming in, the industry can go up to around $600 billion in three years. Once opened, around $20-30 billion will come in immediately. The size of organised modern retail, which accounts for 5 per cent of the retail industry, can go up to 8-10 per cent.”
Speaking to The Hindu, Thomas Verghese, MD and CEO, Aditya Birla Retail, and Chairman, Confederation of Indian Industry (CII) National Committee on Retail, said, “There is a clear case that modern retail is good for the country presenting employment opportunities, and stimulating business for the small and medium enterprises (SMEs) and the farmers. In fact, in the south, modern retail has been successful, achieving 20-25 per cent penetration.”
The DIPP discussion paper talks of strategic investment and not financial investment which is in fact, the need of the hour — the industry is in need of capital infusion, amply borne out by the fact that over the last few years, only the largest Indian corporates with deep pockets like the Tatas, Birlas and Reliance have met with any success. The reason is that these companies can absorb losses for 8-10 years, the typical gestation period till pay-back commences.
Arvind Singhal, Chairman, KSA Technopak, a leading consultancy in retail and other industry verticals, said “Indian retailers are unable to raise funds and certainly not foreign capital. FDI coming into the sector will have a multiplier effect engendering competition between the players leading to a positive investment cycle.”
Range of benefits
“When FDI flows into retail, there are a whole range of benefits. For the end-consumer, prices will be kept in check by the large scale competition and beneficiaries would encompass all from ‘farm to folk'. Also, the supply chain will become a value chain,” said Mr. Rajagopalan.
For the Indian economy to grow at 8-10 per cent, the agricultural sector has to grow at 4 per cent and for this, reforms in the agricultural sector are needed in the way agricultural produce is procured, stored and marketed. This calls for huge investments in the supply and distribution chain and most importantly for ushering in competition in the supply and distribution chain where the farmer decides to whom to sell and at what price, said Mr. Verghese.
According to the CII's submission to DIPP discussion on multi-brand retail trading, FDI in multi-brand retail will help make Indian agriculture more competitive by bringing in the strengths of modern science and technological base of doing agriculture, produce aggregation, movement and marketing. “This will help eliminate middlemen who take away a major share of profits of the farmers. It will also bring in expertise and best practices to the country along with investment in the entire agricultural value chain and help scale up the entire business.”
Another significant issue is of wastage. FDI in retail trade can bring advanced technology and management leading to reduction in food wastage (wastage of about 25-30 per cent of fruits and vegetables and 5-7 per cent of foodgrains can be curbed) along the supply chain. It will provide better costs and quality to consumers and provide structural efficiencies for farmers through yield improvements. It will also help farmers realise better prices. “Currently Indian farmers realise only one-third of the total price paid by the final consumer against two-thirds by farmers in nations with a higher share of organised retail. Foreign investments in food-based retailing will lead to adequate flow of capital and augment the supply chain.”
Also, employment can increase significantly with more recognised employment coming in, giving employee benefits and job security which the unorganised trade can scarcely offer. Mr. Varghese pointed out that Aditya Birla Retail's ‘More' stores have created 11,000 jobs in three years and “there is tremendous potential for more. This industry creates jobs at the entry level at its front-end with employees needing only basic qualification. It employs the otherwise unemployable.”