The Cabinet decision on permitting Foreign Direct Investment (FDI) of up to 51 per cent in multi-brand retail is a very welcome and a long overdue step.
Modernisation of retail is a critical and necessary condition for sustaining high growth impulses in the economy. The entry of FDI with its modern inventory management practices, supply chain management, new storage and vending technologies and advanced organisational skills will go a long way in the modernisation of this sector. With greater investment and new technologies, the sector can act as a growth driver rather than a drag with its outdated practices and inability to take advantage of either economies of scale or of scope.
As we have seen in the last few years, the mere entry of large format retail has not resulted in the desired level of modernisation of the sector. Those who entered this space were largely from the real estate sector and did not have the necessary technological and management experience to put retail on a qualitatively different growth trajectory. It is to be hoped that FDI will make a difference. While it is true that retail trade does not require rocket science for its modernisation, it is also equally evident that relying exclusively on indigenous efforts would require a significantly longer time.
Bust the myth
It is important to bust the myth that the entry of FDI will sound a death knell for the ‘self-organised’ or small-format retail trade. Currently, the share of modern retail is a mere five per cent in the total retail trade sector. From all estimates, this is expected to, at best, quadruple over the next 20 years. That would still leave a healthy 80 per cent of total retail trade — the volume is expected to rise from current $500 billion to $900 billion — to the self-organised sector. Thus 20 years later, ‘mom & pop’ stores will still have a business turnover of more than $650 billion as compared to the current $450 billion. By no stretch of imagination is there going to be an annihilation of the self-organised retail trade sector.
The ghost of the East India Company has to be finally buried. It is simply inconceivable that modern Indian business will not be able to hold its own, either independently or as a joint venture partner, vis-à-vis the foreign investor.
As many studies citing empirical evidence and survey-based results have shown, a modernised retail sector will offer significant benefits for farmers, small producers and, of course the consumers. But the most important contribution will be in the generation of a large number of ‘semi-skilled’ or skilled jobs for India’s young population. These jobs are not being generated by the self-organised sector, whose labour practices are not of the highest standards. Estimates show that given the high labour intensity of modern large format retail, millions of youth will be trained and new jobs will be created. All those who oppose FDI in retail must pause to think and suggest alternatives in a situation that demands the creation of 10 million new jobs in our economy simply to absorb new entrants to the work force.
For the farmer
Farmers will benefit in more than one way. The investment in backend infrastructure by modern retailers would reduce wastage and allow greater shelf life for farm products This much needed investment will connect the farm-gate to retail stores, an investment and process that cannot be undertaken by small retailers. This will also minimise the layers of intermediaries as a result of which farmer get much lower prices than they could if they supplied directly to retail stores. Moreover, modern retailers will also provide farmers with new high yield varieties of seeds and better technologies that will help bring down the cost and more yields. Therefore, the entry of FDI in multi-brand retail is likely to have a significant positive impact on the modernisation of the agricultural sector.
In their attempt to position themselves better vis-à-vis established FMCG (fast moving consumer goods) brands, modern retailers encourage their own brands for which they depend upon small-scale suppliers. Thus, we can expect a strong impetus for the growth of MSMEs (medium and small enterprises) that will be mobilised by large retailers to produce their own ‘house brand’ across the entire range of FMCG and other consumer products.
The fear that these retailers will inundate our economy with cheap imports is somewhat misplaced because it will be more profitable, and thus in their interest, to procure locally rather than pay high transport cost and custom duty in importing supplies. Let us hope that the States, which have now been given the option for attracting FDI in the retail sector, will adopt this measure quickly and in large numbers so as to usher in a new era of modern retail in the country.
(Rajiv Kumar is secretary-general of Ficci.)
Global retail brands will bring in better management practices and backend infrastructure that benefit farmers