The Hindu Business Line : FDI in retail will not displace labour

By now, there have been several arguments for and against FDI in retail in a debate that has attracted wide-ranging participation. But few have gone to such lengths to articulate their arguments on the subject as has Mr B. S. Nagesh, Managing Director and Chief Executive Officer of Shoppers' Stop, one of India's leading department store chains. If domestic retailers stand to lose from the entry of foreign retailers, Mr Nagesh does not appear threatened by the prospect. Talking to Business Line, he built a strong case for permitting FDI in the retail sector.

Excerpts from the interview:

What is your view on FDI in retail?

I am one of the proponents of FDI in retail. The only thing that I would say is that a framework should be set. In the absence of FDI, there are still enough avenues (for foreign retailers to enter India). You are getting all the products and brands but at the risk capital of the Indian entrepreneurs.

If a Mothercare can come in, and a Shoprite can set up a hypermarket here, Marks & Spencer can come in and now, I am told, Debenhams is trying to enter. Then what are we trying to avoid?

Also, now foreign retailers are allowed through the licensing and franchise route. FIIs are allowed to invest in listed companies.

If you do not put higher investment at a higher pace, then the pie will not expand and if the pie does not expand, we do not get larger shares. And who is expanding the pie? Just four or five of us, which is not enough for the size of the country and the size of the business we are talking about. I think many more of us have to do this.

I also believe it will bring a lot of opportunities for people. Today, I would like to hold on to my management. But they are not bonded labourers. They want to grow. If they want to move, where will they go... Pantaloon, Westside, Piramyd and then back again to Shoppers' Stop? People are not coming in because the growth opportunity is limited.

Today, we pay Rs 2.5-3 lakh annually to a management trainee. That is why we do not go to the IIMs. HDFC Bank and ICICI Bank never took in IIM graduates. But Citibank and Standard Chartered did, at Rs 5 lakh, and now ICICI Bank does the same. So maybe these competitive forces will make us upgrade our business. This is my personal view and not my company's.

The Government wants to allow FDI only in a manner that ensures there is no displacement of labour. Is this is a risk?

But labour will not get displaced. You stay in Chennai. Let's say Mount Road was the main road where you had all the retailers, though it no more has. And let's say there were all these by-lanes. From Mount Road to point A is five km. Next to point A is a residential catchment where there are small shops of 50-100 sq feet.

Three years ago, it took five minutes to go to Mount Road. Now it takes 15. Three years ago, the small shop offered 50-100 items. Today, the market offers you 500. But you will still shop for your 50 items at the small shops because of convenience.

Nowhere in the world is there this kind of penetration that is so convenient. Because this was not there, what did they (the West) evolve? Seven-Elevens, 24/7s, small petrol-pump stores... Why? Because they did not have this cost-effective, efficient model that exists in our country.

You make a phone call and a fellow comes and delivers you a loaf of bread for Rs 10 at 10-30 in the night and says "goodnight" or "namaskar". Where will you get this kind of service? So I do not think this labour will get displaced.

Also, what are these stores? There is a mom, a pop and one labourer, who is totally uneducated and gets Rs 1,500 a month. An Indian entrepreneur never closes his shop. So there is absolutely no impact on this store.

If the Indian pie is $200 billion, food and grocery is 45 per cent, which is $90 billion. This is growing by 5 per cent annually, which is $4.5 billion. What is the turnover of Food Bazaar and Trent and all of us put together? $0.5 billion. Mr Biyani (Pantaloon MD, Mr Kishore Biyani) says he is going to do $2 billion by 2010.

Let's say, for argument's sake, all the others put together do $3 billion by 2010. That's $5 billion by 2010. This year, the growth is $5 billion! So we are all fooling ourselves. I do not think there is any issue of displacement of labour until the time Indian organised retail is 20-25 per cent. What it will do then is that it will start affecting specific catchments.

Let's take an example of catchments which should have been affected by organised retail, but which have not been so far. Let's take Linking Road in Mumbai. Go to every shop there and ask them how many shops have, in the last five years, closed their existing business, how many have modernised, how many have changed hands at a gain, and how many have changed at a loss. I will bet my job that not even one per cent would say they have changed hands at a loss.

You know what is happening? A Louis Philippe is coming to take the shop as a franchise and offers to pay five times the rental. Great retail business, no? The mom and pop were once struggling to make Rs 3,000 a month, but now the mom is at home, the pop is whiling away his time and the son is driving a Hyundai Elantra and making a commission of Rs 5 lakh a month!

By saying it is affecting these people we are stopping the growth of the economy.

What would be the right framework for FDI?

First, define what the FDI is. If Wal-Mart wants to come, let it commit a $1-billion equity investment. Second, in India, the pyramid is too wide at the bottom.

You do not want to hurt the 70 per cent at the bottom half. What stops you from getting FDI into luxury retailing?

Somebody who is buying a watch for Rs 1 crore does not need FDI protection. He will pay VAT in London. I want him to pay it in India. So allow FDI here. The Esprits and the Tommy Hilfigers are coming in, fine. Protect the attawala and the chakkiwala. This is as far as customer hierarchy is concerned.

In terms of cities, there are the Tier 1, Tier 2 and Tier 3. Allow all the luxury guys to come up in Tier I. Allow all the food guys to come up in Tier 2. And ensure that these guys set up the supply centres and distribution zones between Tier 2 and Tier 3. So, identify 100 areas along the Golden Quadrilateral and the north-south, east-west corridor, and say that these are the 100 places where we would like you to set up distribution centres. And tomorrow, if you are giving them land at Rs 2, give me that same benefit too. I will also set up shop.

The significant backward linkages in the form of supply chain investments and higher sourcing from India in retailing, particularly food and grocery businesses, has been one of the compelling arguments for FDI in retail. If FDI is brought into the luxury segment, will these backward linkages really be triggered?

They won't. But this makes it a matter of wanting to have the cake and eat it too. Here you are getting the benefits of foreign investment and are not losing anything. Bring the retailers in one by one. Let them also taste the environment.

It has worked for our country in all other sectors. We do not see a case where FDI has destroyed the country. If competition had not been allowed in airlines, we would not have such cheap fares today.

Do you think it is too early to allow FDI in retail? Should we wait until domestic retailers gain critical mass?

See, delay always helps. We can wait another 10 years and (organised retail) could secure another two per cent. We are forgetting that consumption is a driver of the economy. If economists say that it is good to maintain consumption in such a way that growth continues at 7-8 per cent and for which FDI is not required, then I would salute them.

If you say that your vision is to take the country to 10 per cent growth and you think that growth will happen without consumption, fine.

But if you say that it has to happen through consumption, then somebody would have to explain to me how consumption would increase without modernised retail? I am not able to see a scientific reason for not allowing FDI, if consumption is to grow.

Imagine if there were no modern retail showrooms for cars. The Indian company retailer who has to retail Honda's cars is the one who bleeds for three years. All the areas where manufacturing of branded products is allowed should be opened up for retailing. LG and Samsung should be allowed to retail.