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Shanthi Venkataraman

The big daddies of foreign retail are knocking on India's doors even as the Government is yet to make up its mind.

EARLIER this year, global management consultant A.T. Kearney identified India as the top destination for global retailers. And when John Menzer, CEO of Wal-Mart International, made a high-profile visit to India in May, he made no secret of Wal-Mart's plans to enter India should FDI be allowed in the sector. Now British retailer Tesco's Chief Executive, Sir Terry Leahy, is expected to make his first business trip to India later this month to make a case for his company.

With the big daddies of foreign retail knocking on India's doors, it is no surprise that there is now a raging debate on whether foreign investment should be allowed. The entry of big foreign retailers threatens to displace labour in the retail sector, which employs a massive workforce, the majority of which is unskilled. This makes retail FDI a contentious issue for the Left-backed Government.

But with every passing week, the FDI buzz only grows louder, with a strong case being built for allowing foreign investment. There is a growing demand for modern retailing formats that offer a clean and hygienic environment to shop in. But organised retail at present accounts for a mere 2 per cent of the total retail market in India, as against 20 per cent in China and 40 per cent in Thailand.

Proponents of FDI in retail believe that only foreign investment can hasten the pace of organised retailing. Their case in point: China. In just ten years after China permitted FDI in the sector, the share of organised retail has grown from 10 per cent to 20 per cent.

Those in favour of FDI argue that India has already provided `backdoor' entry to international retailers. Current norms allow foreign retailers to set up shop in India via the franchisee route, as has been done by the likes of Marks & Spencer and Mango. Foreign retailers are allowed outlets if they manufacture products in India (Benetton) or source their goods domestically. FDI is also permitted in cash-and-carry outlets, where goods are sold only to those who intend using them for commercial purposes (Metro, Shoprite). Foreign retailers therefore, have access to the Indian retail market, while India loses out on the investment, so goes the argument.

The argument that the unorganised retail market would be affected by the entry of foreign players has also been contested. Competition for the neighbourhood kirana store could come just as easily from the Big Bazaars and Food Worlds of modern Indian retail. This point was also made by the Minister for Commerce and Industry, Kamal Nath, at a recent conference of economic editors. As he said, the country's retail trade was expanding 22 per cent each year with the addition of 25 million middle-class consumers. In this scenario, he said, the interests of small-time grocers had to be protected, not by the "colour of money" alone.

Menzer of Wal-Mart International argues that kirana stores have unique advantages such as an understanding of local needs and superior service in the form of home delivery, which will help them retain their edge over the large supermarkets/ hypermarkets, foreign or Indian.

The most compelling argument that has liberal policymakers sit up and take notice has been the significant backward linkages in organised retail. For retailers to succeed, they will have to invest substantially in setting up a supply chain, cold chains and training farmers to produce goods that meet quality standards. In order to offer inexpensive, quality products, retailers need to cut down on the number of intermediaries. Through contract farming, some Indian retailers have been able to ensure that farmers adhere to quality standards and eliminate middlemen. By the same token, farmers get better realisation for their produce. But most retailers have succeeded in this only at the regional level. They do not have the financial muscle to set up a supply chain on a national level.

Foreign retailers would in this respect be better placed. Fast-food chain McDonald's, for instance, invested Rs 800 crore in building its supply chain and improving the quality of lettuce that its suppliers grow.

The benefits are not limited to farmers alone. Foreign retailers would be inclined to source from the Indian market to ensure that goods reach customers on time. As they grow familiar with Indian products, they are also likely to increasingly source from India for their international operations.

Will this store in Kochi feel the impact?

The argument draws strength from the fact that China has, after opening its markets to foreign retailers, emerged as one of Wal-Mart's most important suppliers. If Wal-Mart were an individual economy, it would be China's eighth-biggest trading partner.

Wal-Mart is already considering sourcing more from India, which appears a good alternative to China, and this scenario can only improve once it set up shop here, pro-FDI sections contend.

But there are also enough people lobbying against FDI, from trade associations to political parties to organised retailers.

They believe that foreign retailers will squeeze suppliers and engage in predatory pricing to wipe out competition, only to raise prices again once they gain monopoly over the market. Their fear is understandable. Even in the US, Wal-Mart's reputation for marginalising mom-and-pop stores has often preceded it.

There are others who believe it is too early to allow FDI in retail. Organised retailers feel they need to be given time to gain critical mass so that they can hold their own against FDI. In China, the top four retailers are domestic retailers, thanks to China's policy of allowing domestic retailers to merge and grow in size.

The ruling Government, in the meantime, is under pressure to ensure alternative jobs for displaced workforce.

But with the benefits too many to ignore, the decision to allow foreign retailers may not be too far away.

The Government appears to be considering a policy of allowing FDI in a phased manner by way of joint ventures with domestic players. It may also study the experience in other countries, where restrictions were initially imposed on the locations and formats in which foreign retailers could operate.

However, going by the Commerce Minister's comments at a recent conference, a decision on retail FDI could be delayed as the Government has been unable to evolve a model that protects the interests of small shopkeepers, as also generate additional employment. "It makes no difference whether the investment is domestic or foreign. The debate now is big versus small and not FDI versus small kirana stores," said the Minister in a report that appeared in this newspaper.

Meanwhile, the middle-class with its growing purchase power, stands with purses ready.

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