The Hindu Business Line : FDI and retail

A short note of caution by the Congress president, Mrs Sonia Gandhi, to the Prime Minister, Dr Manmohan Singh, that she has "received suggestions from many quarters about the desirability first to study the possible impact of transnational supermarkets on livelihood security of those engaged in small-scale operations" so that the relevant issues are weighed before decisions are taken, has caught the Government off guard. So much so that the party spokesperson and rattled officials had to go on a damage-control exercise.

Yet, in the ensuing melee, even policy consultations for allowing foreign direct investment (FDI) into sectors such as stationery, construction equipment and electronic hardware have come to a halt, as reported by the media.

SEZ policy

No doubt the fears of small retailers over the impact of entry into India of MNC retailing giants in collaboration with local corporates, and the current spurt in retail prices of grocery and vegetables have slightly unnerved the ruling coalition, especially with elections to five State Assemblies looming.

As it is, the Special Economic Zone (SEZ) policy is caught up in issues of land acquisition, rehabilitation of the displaced and questionable tax-breaks provided to developers and units. The policy, unveiled last year to act as a magnet for FDI and to boost exports, has been put on hold.

FDI in retail

In retail, FDI remains barred, save in single-product retailing with the rider that products should be of `single brand only', that is, sold under the same brand internationally and would cover only products that are branded during manufacturing.

Since the policy of permitting 51 per cent FDI in single-brand product retailing was announced on February 10, 2006, only a few global brands such as Nike (footwear), Louis Vuitton (shoes, travel accessories, watches, ties, textiles ready-to wear), Lladro (porcelain goods), Fendi (luxury products), Damro (knock-down furniture), Argenterie Greggio (silverware, cutlery, traditional home accessories and gift items) and Toyota (retail trading of cars), have obtained approvals for trading.

It is not as if global firms will wait patiently through policy flip-flops and arbitrary suspension of rules and regulations that would upset their investment plans.

Yet, whether it is the SEZs or FDI in retail, the Government buckles under pressure from various lobbies that do not seem to have any fixed purpose in their opposition.

Benefits assured

According to a study by the Indian Council for Research on International Economic Relations on the size of the organised retail market, the CAGR (compound average growth rate) from 2001-02 to 2007 of the sector would be 18 per cent and account for 10 per cent of GDP. No wonder the FDI interest in retail.

Indeed, the policy claims that FDI is to supplement and complement the Indian industry to make it globally competitive, open up export markets, provide backward and forward linkages and access to international quality goods and services.

In retail, which is growing at a robust pace, benefits to growers and farmers through backward linkages are assured because large companies have the logistics capability to reach fresh produce to the consumer through cold chains.

The growers and farmers will benefit too from bulk sales to large retail outlets.

If India's high growth ambition is to be realised and it is to raise resources to invest in social and physical infrastructure to make a dent on the living standards of millions of people bypassed by economic liberalisation, FDI could provide an opportunity through technological upgradation, optimal utilisation of human and natural resources, and backward and forward linkages.

Undoubtedly, FDI in retail could do all this. Middle-class consumers and above-average income family groups deserve the benefit of modern retailing as it gives them a wider choice.

Policy analysts rightly caution the political dispensation to refrain from playing politics to wreck the wishes of consumers and producers alike by short-sighted ad hocism and whipping up fears of the corner-stores being decimated by the entry of retail giants, both domestic and foreign.

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