Understanding FDI in Retail in India

The decisions taken by the Manmohan Singh government in last cabinet meeting have evoked sharp and varied reactions from different quarters. One of the long debated and perhaps equally awaited decisions has been relaxing the norms for FDI in retail, both single brand and multi-brand. The voice of dissent seems louder than the assenting one. The market, however, has responded positively with stock market beginning to fly north. But, the two contrasting behaviour or reactions to the decisions taken by the UPA government apparently killing the bug of policy paralysis have left ordinary people confounded. Confusion is over the nature of the FDI in retail and its impending impact on Indian economy and employment scenario.

Let’s first understand the nature of FDI in retail. The foreign capital can come into India either in collaboration with a home player or via single handed investment by a global player. The government has relaxed the norms for both. It has allowed FDI in multi-brand retail upto 51% and single brand retail 100%, albeit with certain conditions.

Retail is a lucrative business in India as the industry is valued at over USD 450 billion. Interestingly, 90% of it is controlled by unorganized small and medium scale traders. They fear that the big organized corporate retailers would ruin the prospects of the age old profit making gallawallas. However, the government argues that the entire scheme will benefit bot the producers, that is, farmers and the consumers, that is, the aam aadmi. It also says that the move will create more employment in comparison to the job creation by traditional retailers. Moreover, the government allays the fear of elimination of traditional retailers.

The initial reactions from the economic experts are somewhat positive. But, many believe that in the long run neither the aam aadmi nor the farmers will be benefitted. The argument here is this; the global retail giants would have their monopoly in the Indian market in few years from now and then they would manipulate procurement price while dealing with the farmers and selling price while selling the articles to the consumers, the aam aadmi.The answer lies in the realm of future.

The union cabinet has put certain significant conditions for the FDI in retail. It says that only those players will be allowed to operate in India, who will invest a minimum capital of USD 100. Secondly, retail outlets by foreign players can only be opened in the million-plus cities. It effectively means that only 35-40 cities would be entitled to have an FDI-based retail outlet. The state governments can, however, make some amendments to make ineligible cities eligible. Thirdly, the states are not compelled by the centre to give licence to such stores under their respective shops and establishment acts. So, if a state government does not want to have a Walmart store or a Best Buy store, it won’t have one.

However, this argument of the centre that the latest decision is only an enabling policy and the states will have the final authority in this matter looks misleading. If states decide not to issue licence to any such player, it will be in direct conflict with the government of India’s commitment of ‘national treatment’ to investing countries. India has signed the Bilateral Investment Promotion and Protection Agreement (BIPAs) with 83 nations. 72 such agreements have already come into force and according to the information available with the official websites of the government, remaining are in the process of being implemented. This commitment of national treatment means that if one store is allowed in Uttar Pradesh, Gujarat can not say ‘NO’ to that store if it applies for a licence there. One such instance has happened in Kerala where the matter was decided by the court in retail chain’s favour.

The government has argued repeatedly that inviting foreign capital was the last but the most required resort lest India slipped into deeper economic crisis comparable only to Eurozone crisis and the balance of payment crisis of our own in 1991. Moreover, it also says that adequate protection has been given to small traders. The global retailers will have to bring at least USD 100 million to be able to open a store in India with 30 percent of the capital going into creating basic infrastructure. And, such stores can only be opened in a million plus cities, numbering just over 35.

But, here government has failed to satisfy the people as it has shied away from coming up with figures suggesting as to how many jobs will be created annually should global retailers come over here while giving a comparison as to how many local retailers and their employees would lose their jobs.

The opponents of the FDI in retail policy fear that the global players will change the contour of Indian markets and make it skewed rendering many jobless and wealthless. The age old truth is that the markets have been the chief source of wealth generation and livelihood for many. Millions of retailers, traders and vendors make a living off the markets in India. And, this is precisely the reason which will attract global retail capital to India, and obviously they will work towards creating their own wealth. They will analyze before investing as to whether there will be net gain in wealth should they come to India, which may be the net loser in that case. If and when this happens, the local markets would end up serving the interests of a few multinationals. There is also possibility that the multinational retailers would restrict farmers/ producers access to market on one hand and manipulate prices of commodities on the other.

A recent research by researchers at IIM-Ahmedabad suggests that the globalization of retailers has not succeeded. “A study of top 250 global retailers reveals that 110 of them operate in single local home country. 175 retailers operate in less than 5 countries, mainly neighboring countries. Only 50 retailers operate in more than 10 countries. Only 36 of them have entered into China since the opening up of retail sector in late 1990s. Out of these, 17 retailers are already present in India. Therefore the scope for entry of global retailer entry into India is limited,” says the research.

So, the FDI in retail in India is still an inconclusive matter and most of its aspects can only be understood in future.