September 19, 2012

Impact of FDI in Retail: A 360-Degree View



There is whole lot of mayhem about FDI in retail ever since it knocked the doors of Indian Economy. The mere word “FDI” has haunted the corridors of parliament, big retail outlets, mom n pop store owners, the middle men and even the end consumers. The arguments citing the advantages of FDI in retail mostly revolve around the following:
  • Improvement in Retail capability building
  • Improvement in management of supply chain
  • Push to productivity
With the recent development in this context, it is very much essential to analyse the impact of FDI in retail without any bias. To cut the long story short:

What is FDI in Retail?

Now after all this media show, let’s try to figure out how it will affect entities across the supply chain.

Single Brand Retail: FDI investment till now was 0.03 % (INR 204 Cr) of total FDI investment from April 2000 to September 2011. This relaxation will increase FDI in retail sector through the entrance of new players (Foreign or Domestic), increase or buy outs in stake, M&A amongst existing single brand retailers, Joint ventures with foreign and existing players.
There will be sourcing norm of only 30% from local sources. This will lead to lower procurement locally. So MSME sector will lose but the luxury retail market will witness growth. This will surely lead to outflow of money from India. Growth in luxury retail market and low or no growth in MSME sector will lead to negligible employment generation.
Possibly, there will be changes in existing licensing/ distributor/ franchise arrangements being converted into joint ventures or complete buy out by foreign entrants.

Multi brand Retail: FDI here will lead to increased investments and growth in Indian retail sector. In this case too, new JV’s and M&A will be seen. Tactics of buying stakes or complete buyout will be played. This should provide options for existing Indian retail companies to raise long term capital for expansion.

This financial inflow will lead to development of retail infrastructure and value addition to the existing supply chain. The sector will see investment in setting up supply chain mechanism, transport infrastructure, cold storage, technology etc. This will directly enhance the operational efficiency of the entire supply chain.

Agriculture: The farmers/producers will be benefitted as they will get better price for their produce. Although the buy will be completely based on bulk buy i.e. entire stock based on quality. This means if the company decides to purchase only the quality produce then the not so good produce will find its way to local market (if it exists) or in garbage. Either way the farmer/producer will get paid for the quality produce. This in turn will encourage farmers/producer to improve their existing ways of farming/production. Again this will require investment in technology. 
Companies may go for contract farming and this again will lead to improvement in the method of farming by introduction of better seeds, better fertilizers, new farming equipment etc. provided by the companies.

FDI in retail to benefit the farmers & consumers

Middlemen: Another very visible impact will be the eradication of middlemen from the supply chain. It is usually believed that this would lead to lesser exploitation of the farmers/ producers and at the same time competitive process for the end consumers. But at the same time, the big retail brings in new breed of middlemen- quality controller, standardiser, certification agency, processor, packaging consultants etc. It is these middlemen who would now take their share from the farmers’ profits and the consumers’ savings.
Thus, it is premature to comment on how much the farmers and end consumers will gain out of this elimination of traditional middlemen and introduction of the new middlemen.

Employment: the Indian retail market is estimated to be around $ 400 billion with more than 12 million retailers employing 40 million people. A contrasting picture will be seen as the small retailers, “Kirana shops”, departmental stores etc. will find a tough time to compete or even exist in such scenario. In such scenario, the landless farmers or labours that turned into small time retailers will be worst hit. Government will have to face the question of how to compensate for their loss. This problem will further get intense considering the very low employability of such landless farmers/laborers
Another viewpoint is that the damage will not be so extensive as the big retailers will operate in the outskirts or in a very few locations in any city or town and the “Kirana shops” will co-exist in the interiors. In any of the cases, the sheer magnitude of impact to society will be intolerable.

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What Retailers Think

Role of State government: As clarified by the central government, it will be on the state governments whether or not to allow multi-brand FDI in the respective state. But India, being a signatory to Bilateral Investment promotion and Protection Agreements (BIPAs), has to provide national treatment to the foreign investors. The fact that such agreements have been signed with more than 70 countries will certainly force the state governments to open up for big retailers.
It will be interesting to see the regulation norms set by the state governments as it will clearly guide the extent of FDI in their respective states. One thing is for sure that State government will be able to get more revenues by keeping FDI in place. But how that increased revenue will justify the lost livelihood of millions of people or what steps will the government take to minimize this loss.

India Speaks about FDI in Retail

Consumers: The consumer in this entire exercise will be delighted with increased number of choices, better quality and decreased prices due to tougher competition in the retail sector. But clearly the winners will be the foreign players who will able to make attractive market share and profits. The tale of FDI in retail sector may lead to monopolistic behaviour of retail players once the small time competitors are eliminated from the market.



This article has been contributed by Harish Verma, who is presently a second year PGP student of IIM Raipur. He has worked with Essar Power Ltd. for 19 months. His areas of interest include project management, supply chain management & customer service. He can be reached at pgp11015.harish@iimraipur.ac.in.

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