Retail debate

FURTHER liberalisation of the retail sector seems to have been put on the back burner, if the absence of any mention about foreign direct investment (FDI) in retail in the Union Finance Ministers Budget speech on July 6 is any indication. Expectations had risen after the Economic Survey suggested increasing FDI in multi-brand retail in order to push overall economic growth. It said a beginning could be made by strengthening the supply chain management system in the food retailing segment. But the United Progressive Alliance (UPA) government has decided to adopt a cautious approach, apparently in view of the blanket ban on FDI in retail in the grocery, fruits and vegetables segment recommended by the Parliamentary Standing Committee on Commerce.

The 31-member committee, headed by Murli Manohar Joshi of the Bharatiya Janata Party (BJP), tabled its report on June 8. The report, which also opposed the entry of domestic corporate heavyweights in modern retailing, created ripples in the retail industry, which is the second largest provider of employment after agriculture in India. The retail sector had expected a further opening up of the economy to allow more investment in view of the absence of the Left parties pressure on the governments economic policies.

While the predominant opinion is against unbridled entry of big retailers, a section of economists is rooting for the opening up of the sector. These economists argue that the sector has a huge potential to generate employment and contribute to the gross domestic product. In order to understand why the retail sector is such an important component of Indias growth story, it is necessary to know its dimensions. The retail industry contributes about 10 per cent of the GDP. India, with over 15 million retail outlets, has the highest retail density in the world. Over 95 per cent of its retailing activity is in the unorganised sector and provides employment to about 8 per cent of the total workforce, roughly 40 million people.

The sheer size of the retail sector and its inherent potential make it a lucrative destination for both domestic and foreign organised retail industry. Of late, the retail sector in India has witnessed frenzied activity and, according to some rough estimates, it has been growing at a whopping 20 per cent a year. Many domestic corporate houses have entered the sector. It is in this context that the committees recommendations acquire significance as there is a fear that organised retail will finish off the traditional kirana or pop-and-mom stores.

India allows 51 per cent FDI in retail for single-brand retailing. Up to 100 per cent FDI is permitted under the automatic route in wholesale\cash-and-carry trading, including business-to-business trade and export trading. Also, up to 100 per cent FDI is permitted with prior government approval in the trading of items sourced from the small-scale sector and also for test-marketing. As for all other retail activity, no FDI is permitted.

The case for allowing FDI in retail has acquired strength since it is permitted in most Asian countries. China has allowed 100 per cent FDI since 2004.

Malaysia permits up to 70 per cent in the retail trade and beyond 70 per cent on a case-to-case basis. Thailand, Indonesia and Brazil also permit 100 per cent FDI in the retail sector.

The parliamentary committee, after interactions with policymaking bodies, trade and government organisations and trade representatives, came to the following conclusion:

Allowing FDI in single-brand retailing and only cash-and-carry wholesale retailing is not adhered to strictly, and multi-brand retailing and consumer retailing are resorted to by the companies through the back door in violation of policies.

Big retail chains, by offering cheap prices initially, would wipe out competition, thereby destroying small retailers, and then they would dictate prices. The same would be the fate of farmers who will be forced to sell produce at cheap rates as a result of the existence of a monopolistic situation.

The committee recommended that a blanket ban be imposed on domestic corporate heavyweights and foreign retailers from entering into retail trade in grocery, fruits and vegetables and restrictions be imposed on their entry into retail in other consumer products.

The government should establish in-built policy mechanisms to relocate or re-employ those dislocated owing to the opening of big malls.

A regulatory framework and enforcement mechanism should be put in place to ensure that small retailers are not forced out by unfair means by the big players.

The government should establish a national retail commission to study the problems facing this sector.

There should be a retail regulatory authority before this sector is opened up.

The government should take appropriate steps to provide credit facilities to small retailers to empower them to face the competition.

A model central trade law should be put in place after consulting the State governments to regulate the sector as a whole.

Economists, who are opposed to the opening up of the retail sector, are relieved by the committees recommendations. At the same time, they are not sure if the government can stand up to the pressure from organised retailers, all the more so as the government itself is in favour of opening up the sector. The pressure exerted by the Left parties on the previous UPA government was an effective deterrent. This is missing now. The economists are worried that the government may eventually open the retail sector to FDI.

It is a fact that any organised retailing is a huge threat to small retailers as it adversely affects them. Besides, farmers are also adversely hit, and there is proof of this available in countries such as Thailand, which have allowed 100 per cent FDI. Since big players have deep pockets, they can afford to buy dear and sell cheap in the beginning. Once the immediate competition is destroyed, they can resort to buying cheap and selling dear. Besides, foreign retailers would be free to source from anywhere globally, which will hit our domestic producers, said C.P. Chandrasekhar, Professor at the Centre for Economic Studies and Planning, School for Social Sciences, Jawaharlal Nehru University, Delhi. Another threat was that the sheer volume of sourcing by big retailers would mean they would be in a position to dictate as to what the farmers should produce, and this would destroy the indigenous cropping pattern totally, he said.

Economists at the Centre for Policy Alternatives (CPAS), which has been campaigning against FDI in retail ever since the government made the first initiative to open up this sector in 2004, concur with this argument. According to a paper titled FDI in Indias retail sector published by Mohan Guruswamy, Kamal Sharma, Jeevan Prakash Mohanty and Thomas J. Korah in 2005, FDI in retail would mean dislocating millions from their occupation, which they say is disguised employment and provides them their bread, and push them further below the poverty line. According to the paper, in India the economic dynamics of maximising output while minimising the number of workers involved would simply not work as here the problem is of providing jobs to millions of unemployed people, even if it is in the guise of disguised employment as a small trader.

The agriculture sector in India is already overburdened as it employs nearly 60 per cent of the total workforce, so it cannot absorb any more. The manufacturing sector, which absorbs only 21 per cent of the workforce, cannot accommodate more because there has been no capacity addition to it in recent years, so services sector is the only alternative and in this sector too, retail is the biggest employment provider, the study says. So any interference with this sector, the experts say, has to take into account the existing socio-economic realities of India and no government can afford to go by economic parameters alone.

Another section of economic experts, however, differ. They argue that with the right checks and balances, opening up of the retail sector is the need of the hour to give a push to the GDP growth rate.

According to experts at the Indian Council for Research on International Economic Relations (ICRIER) and the National Council for Applied Economic Research (NCAER), the two institutions that have been approached by the government for their feedback, the apprehensions expressed by the committee are misplaced and are not supported by empirical data. The ICRIER, which studied the impact of FDI in retail on unorganised retailers, consumers, intermediaries, farmers and manufacturers, submitted its report in May 2008. It has made the following key observations:

Unorganised retailers were adversely affected only in the initial years and the adverse impact weakened over time;

There was no evidence of decline in overall employment in the unorganised retail sector as a result of the entry of organised retail;

The rate of closure of small shops on account of competition is minimal;

Small retailers have been able to innovate and stand up to competition but they need to be empowered more by the government by way of better credit facilities;

Consumers were overall beneficiaries as they saved more on their shopping;

No evidence of adverse impact on intermediaries;

Farmers benefit significantly from the option of direct sale to organised retailers;

No significant impact on small manufacturers while big ones have started feeling the pressure of competition and responded through building and reinforcing brand strength.

Experts at the ICRIER say that the concern expressed by the parliamentary committee that organised retail will result in massive unemployment and have an adverse impact on farmers is not supported by evidence. According to an ICRIER fellow, the Indian retail sector has tremendous growth potential. It is expected to grow to $590 billion by 2011-12, rising by 83.22 per cent from the level of $322 billion in 2006-07, and hence should be given the needed impetus.

Experts at the NCAER, who are also studying the impact of FDI in retail on farmers, hawkers and unorganised retailers, agree with the ICRIER. They say that there is no empirical data to suggest that unorganised retail will be wiped out by the entry of organised retail. Similarly, there is nothing to suggest that farmers will be affected either.

In fact, experience shows that farmers are benefited by the option of direct sale to retailers because 20-30 per cent of their perishable produce (fruits and vegetables) goes waste in any case. Once they have the option of selling directly to retailers they will not only get better prices for their produce, but will also be incentivised to innovate and upgrade, an NCAER fellow, who did not want to be named, said.

The entry of organised retail, he said, would strengthen the supply chains in the fruit and vegetable segment, and the farmers would get better returns than they do at present. Another welcome outcome would be the opening of food processing units, which would further ensure that the farmers produce did not go waste.

Nevertheless, experts on both sides, agree that since the retail industry is a sensitive sector it should not be left unregulated and unmonitored. What we need is a strict regulatory and enforcement mechanism. Then unorganised and organised retail can coexist peacefully, an NCAER fellow said.

Senior officials in the Ministry of Commerce and Industry, however, opined that the parliamentary committee report was being over-hyped because its recommendations were not binding on the government. If the government wanted to go ahead and open up the sector, then there was nothing to prevent it. Retail sector being such a growth driver, we need to unshackle it. We cannot keep ourselves shut for very long, said a senior official. In fact, Congress members on the committee, who had a difference of opinion on recommending a blanket ban, say there was nothing wrong in opening up the sector with the right checks and balances.

We all want growth, we all want investment to come into the country, but we dont want it at the cost of our own people. Our farmers, traders and small shop owners should not suffer as a result of the entry of big money, said Dr K. Keshava Rao, Congress member and convener of the committee. He said there was unanimity on the need for a regulatory and enforcement mechanism to be in place before the sector was opened up.