By CA Parag V. Kulkarni
parag0488@icai.org
9370223957
Please watch following video for better understanding.
FDI in Retail: Good Economics Vs. Bad
Politics?
We
are coming with our 3rd article simplifying the most talked issue of
November, 2011 of FDI in Retail Sector. Some patriotic called “going
international and liberalizing the economy” is “selling the country”.
Some raised questions on unscrupulous system and emphasised the issue of
bringing back black money rather than inviting foreign funds. Many came out on
roads and the notion became: “Anarchy is my road right and I shall have it”. In
the name of protecting retailers, political parties set their spokes persons
24*7 on news channels. Environment created to put the issue in media trials and
protestors stopped parliament. The largest democratic nation seems to be paralysed
by its own strength of Democracy putting people first than parliament. The
issue is not just about FDI but now the issue is about “Good Economics Vs. Bad
Politics.”
The
article runs into pages but I request you to go through all as it’s the
national issue. Reading all pages will give you the macro level understanding
of the current scenario.
What
is Retail?
The retail industry in India is of late often being hailed as
one of the sunrise sectors in the economy. Indian retail sector accounts
for 22 per cent of the country's gross domestic product (GDP) and contributes
to 8 per cent of the total employment. Retailing is the last link that connects the
individual consumer with the manufacturing and distribution chain. The retail
industry is divided into:
1.
Organised
Sector and
2.
Unorganised
Sector.
Organised retailing refers to trading activities undertaken by licensed retailers,
that is, those who are registered for sales tax, income tax, etc. These include
the corporate-backed hypermarkets and retail chains, and also the privately
owned large retail businesses.
Unorganised retailing, on the other hand, refers to the traditional formats
of low-cost retailing, for example, the local kirana shops, owner manned
general stores, paan/beedi shops, convenience stores, hand cart and pavement
vendors, etc.
Status of Organised Retailing in India:
Organised
retail is still in the stages of finding its feet in India even now. According to AT Kearney's
2011 edition of Global Retail Development Index (GRDI), Organized retail
accounts for 7 percent of India 's roughly US$ 435 billion retail market and is
expected to reach 20 percent by 2020. (Source:
http://www.indiainbusiness.nic.in)
Though organised trade makes up over
70-80% of total trade in developed economies, India’s figure is low even in comparison
with other Asian developing economies like China, Thailand, South Korea and
Philippines, all of whom have figures hovering around the 20-25% mark. These
figures quite accurately reveal the relative underdevelopment of the retail
industry in India.
Becoming Retailer by Choice or by Chance?
One of the
principal reasons behind the explosion of retail and its fragmented nature in
the country is the fact that retailing is probably the primary form of
disguised unemployment/underemployment in the country. Given the already
over-crowded agriculture sector, and the stagnating manufacturing sector, and
the hard nature and relatively low wages of jobs in both, many million Indians
are virtually forced into the services sector. Here, given the lack of opportunities,
it is almost a natural decision for an individual to set up a small shop or
store, depending on his or her means and capital. And thus, a retailer is born,
seemingly out of circumstance rather than choice. This phenomenon quite rightly
explains the millions of kirana shops and small stores. The explosion of retail
outlets in the more busy streets of Indian villages and towns is a visible
testimony (proof) of the above comment.
The typical
traditional retailer follows the low-cost-and-size format, functioning at a
small-scale level, rarely eligible for tax and following a cheap model of
operations. India, being a free and democratic country, provides its people
with this cushion of being able to make a living for oneself through
self-employment, as opposed to an economy like China, where employment is
regulated.
In this light,
one could brand this sector as one of “forced employment”, where the retailer
is pushed into it, purely because of the paucity of opportunities in other
sectors.
Current
Scenario:
1.
FDI in retail sector is prohibited in
India (Department of
Industrial Policy and Promotion Ministry of Commerce and Industry Government of
India CONSOLIDATED FDI POLICY EFFECTIVE FROM OCTOBER 1, 2011; Chapter 6)
2.
FDI in
wholesale trading sector is allowed as of date by automatic route. Cash &
Carry. Wholesale trading, would mean sale of goods/merchandise to retailers,
industrial, commercial, institutional or other professional business users or
to other wholesalers and related subordinated service providers.
3.
FDI is
allowed in Single Brand, it is allowed in Cash & Carry.
4. A Wholesale/Cash &
carry trader cannot open retail shops to sell to the consumer directly.
5. China is having 100%FDI
allowance.
Proposed
policy:
1. Government proposed FDI in
retail sector upto 51%. Foreign investor is required to ask for central level
approval and then it will further require the state level approval. It is to be
noted that FDI in Retail is the STATE SUBJECT.
2. The question is whether
the red tape of approval will slow down the process of roll out? Even presently
the same procedure is adopted in single brand and wholesale market.
3. It is proposed that the
retail outlets where FDI is present are allowed only in cities having
population not less than ten lakhs.
4. The requirement of minimum
Investment worth 100 million is estimated by experts. Experts further clarify
that most of the investment will go into back end.
Is FDI really
necessary for the economy?
The debate is on FDI in Food retailing.
Food retailing supply chain is required to be improved and it is need of an
hour to adopt the technology. It is right time to invite FDI when USA and
Europe both are under crisis and India is on the verge of facing heat of
Inflation.
Lets have a
Debate:
1. Inflation Argument: high
inflation is reasoned to invite FDIs. Since last 60 years we were not able to
build strong network for food business. What we require is modern supply chain
system. And the same can be created by political willingness and eager to
implement the policy at right time.
2. Congress puts decision of
allowing FDIs in Retail not just technically right but even politically right. Congress
is accused of unilateralism on taking decision without considering opinions of
other parties.
3. BJP invited Bharati
Wallmart in Chattisgarh, even Honourable Chief Minister of Gujarath Narendra Modi
is appreciating orgainised chain of retailers. The question is then why now it
is opposing FDIs? The BJP spokesperson answers in very brilliant way stating-
“we don’t oppose organizing retail sector but we oppose the source of funding”.
4. When Retail trade is a
state subject; why to block parliament? Parliament is there to have debate. Let
the policy should be debated in parliament. Opposition leaders put their point
saying once you allow retail trade, you are setting a policy framework. You
cannot set a policy framework without consulting opposition. BJP leaders
further ask Government “who are you consulting? You are consulting USA
companies, Indias CEO forum? Have you consulted each and every state of the
country?”
5. Opposition aggressively
asks “You have already questioned on black money then what is the pressing need
to go with issue without consulting your allies? “ Government tactfully handles
the question stating the basis of decision to be the advise of Expert
Committee.
If you cant
give jobs, at least don’t take away livelihood.
Anna Hazare makes a controversial statement
saying “Liberalizing trade will repeat history of British Rule in India. We
cannot allow East India Company happen again”. Big companies in USA in
organized retail sector are controversial for penetrating pricing or for
misbehavior with employees. If you invite FDIs in Retail, you are going to kill
small retailers.
Corporate world backs government decision arguing
the growth of other retailing for fashion business, electronic business, home
appliance business etc. One can understand the supply chain with respect to
food retailing but what you imagine as supply chain in other retail business?
Wal-Mart:
Wal-mart Annual
Report 2010/11 shows following figures:
1.
Turnover :
$4,18,952 million
2.
Net Profit
(before tax) : $ 23,538 million
Report by CPAS:
India has 35 towns each with a population over 1
million. If Wal-Mart were to open an average Wal-Mart store in each of these
cities and they reached the average Wal-Mart performance per store – we are
looking at a turnover of over Rs. 80,330 mn with only 10,195 employees.
Extrapolating this with the average trend in India, it would mean displacing
about 4,32,000 persons. If large FDI driven retailers were to take 20% of the
retail trade, as the now somewhat hard-pressed Hindustan Lever Limited
anxiously anticipates, this would mean a turnover of Rs.800 billion on today’s
basis. This would mean an employment of just 43,540 persons displacing nearly
eight million persons employed in the unorganized retail sector.
Conclusion:
If you don’t accept that the proposed FDI
policy is potentially disruptive but it’s the wisdom and that too without
explaining rationale behind the policy to parliamentarians, then you are
expecting something wrong.
21 Days of Anarchy showed the issue has
been politicized. When parliament starts at 11.00am in the morning and adjourned
at 12.00pm because of disruption then parliament is redundant.
Empirical evidences backing policy shall
be put on table in the parliament and if required shall be convinced to
opposition the good economics behind the strategy.
Inflation
has been a part of our life since long and consumers have caliberated/ adjusted
to the inflation in comparison with what they used to do earlier. Nonfood
inflation is coming down and lot of positive signs which could be noticed.
Interest rate is the big concern.
The most
important factor against FDI driven “modern retailing” is that it is labour
displacing to the extent that it can only expand by destroying the traditional
retail sector. Till such time we are in a position to create jobs on a large
scale in manufacturing, it would make eminent sense that any policy that
results in the elimination of jobs in the unorganised retail sector should be
kept on hold.
Primary task of
government in India is still to provide livelihoods and not create so called efficiencies
of scale by creating redundancies.
Imagine if
Wal-Mart, the world’s biggest retailer sets up operations in India at prime
locations in the 35 large cities and towns that house more than 1 million
people. The supermarket will typically sell everything, from vegetables to the
latest electronic gadgets, at extremely low prices that will most likely
undercut those in nearby local stores selling similar goods. Wal-Mart would be
more likely to source its raw materials from abroad, and procure goods like
vegetables and fruits directly from farmers at preordained quantities and
specifications. This means a foreign company will buy big from India and abroad
and be able to sell low – severely undercutting the small retailers. Once a
monopoly situation is created this will then turn into buying low and selling
high.
If you assume 40 million adults in the retail sector,
it would translate into around 160 million dependents using a 1:4 dependency
ratio. Opening the retailing sector to FDI means dislocating millions from
their occupation, and pushing a lot of families under the poverty line. Also,
one must not forget that the western concept of efficiency is maximizing output
while minimizing the number of workers involved – which will only increase
social tensions in a poor and yet developing country like India, where tens of
millions are still seeking gainful employment. Retailing is not an activity
that can boost GDP by itself. It is only an intermediate value-adding process.
If there aren’t any goods being manufactured, then there will not be many goods
to be retailed!
Issues for
Consideration:
As far as organized sector is concerned
there should be regulatory framework. On the one hand because of penetrating
pricing and because of the fact that it definitely creates monopolistic market
and because it has potential to create loss to crores of families which will
occur to unorganized sector; FDIs shall not be allowed in Retail sector.
Whereas on the other hand the concept of
global village forces the theme of liberalization. By closing door of your home
world outside will not stop from upgradation. Accepting changes and challenges
is the truth of life.
Backing efficiency of the system at a cost of potentially
social disruptive policy is the main concern. As a countrymen I hope for the
best but at last its all about natures law: “Survival of the Fittest!”
