Context

 

Indian retailing industry has seen phenomenal growth in the last few years. The "conflict" between organised, large-scale, chain shops and the round-the-corner Mom and Pop stores has also engaged political parties, where there is very little consensus on allowing foreign dierct investment in retail sector.

 

Requested By- A first timer MP from TN

 

Due Date- 15 th May

 

Response

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BACKGROUND

 

 

 

The retail sector has been repeatedly hailed as the “sunrise sector” but has also been caught in the crossfire of differences in policy directions. While proponents of FDI in retail say that opening the sector is only a question of time, opposition has stemmed from many fronts. Much research has been done to show the number of people (farmers, traders and other middlemen) dependent on retail trade and many say that they will be adversely affected if the sector is opened up to FDI. The current round of discussion comes in the face of rising global prices of oil and foodgrains. In 2004, the UPA government allowed up to 51% FDI in retail but only for “single brand retailing”. FDI inflows for the period April 2007 to February 2008 amounted to a little over US$ 20,000 million with Services (financial and non-financial) and Computer Software and Hardware the leading recipients of FDI in India.

 

 

 

INTRODUCTION

 

Retailing is the part of sales between producers and consumers without their direct interface. Producers sell their produce to traders and other middlemen who then sell to final consumers at a profit. Understandably, the retail sector is both organised as well as unorganised. The organised section, the part where retailers are licensed and pay sales tax, already has several Indian players such as Reliance, Pantaloon, Shoppers’ Stop and Bharti. The unorganised sector, which constituted 93% of our total workforce, is comprised of small kirana shops, handcart and street vendors, and hawkers.

 

 

Divergent views have been voiced on the impact of FDI in the retail sector. Concerns on the adverse impact on unorganised sector retailers have been able to slow the opening up of the sector. Yet, the argument that growth of the sector will yield efficiencies that will lead to better market access to farmers and other small producers, as well as lower prices for consumers has been most compelling. Yet, many corporate groups in India have opposed this sector being deemed an industry. Giving ‘industry’ status to the sector will invoke regulations that will require corporates to adhere to. However, it should be noted that even without FDI the retail sector is growing at an amazingly fast pace with the Indian corporate sector expanding furiously. This implies that there is no dearth of capital in the country.

 

 

EXTERNALITIES

 

Employment

 

The informal sector, by its very definition, implies the absence of wage contracts, PF, health benefits, etc. If the number of malls increases then the impact will be felt on petty traders and small shop owners, who can be termed as "micro accumulators", thus forcing them to become "micro subsistence seekers". Critics often stress that such a deterioration of business conditions within the informal sector will further erode the rights and bargaining powers of those dependent on this sector. On the other hand, "formalisation" of the informal sector ensures better working conditions and wages and one would assume that this will ensure that migrants seek work in this sector. However, the catch here is that fresh immigrants are typically unskilled and acquiring the requisite skills is costly. Even shop floor staff necessarily has at least school level education.

 

 

Investment

 

A 2005 report commissioned by the Department of Consumer Affairs on FDI in Retail Sector researched by ICRIER recommends that FDI be allowed to the extent of 49% straightaway and later to 100%. However, the report remains silent on local sourcing or manufacturing or conditions on minimum capital requirements.

 

 

 

Linkages

 

FDI links small local farmers to large producers and global markets. In reality, however, the benefits of these linkages are received only by a few preferred suppliers while there are a large number of small suppliers who are excluded because they are unable to quickly adjust to stringent requirements.

 

 

Changes in land use and Environmental considerations

 

With increasing rural-urban migration the strain on land use in urban spaces is intensifying. Large corporate sector retail chains open large malls, thus increasing the pace of change in land use. There are not enough zoning laws in place that will prevent fertile agricultural land from being converted for the purpose of malls. Urban cities are not able to keep pace in providing employment for the influx of un-organised sector migrants, causing incomes within the sector to drop. The unorganised retail sector allows for a lot of disguised unemployment as many youth are forced in to this sector and cannot find jobs in the already stagnant agricultural sector. It is a natural decision for an individual to set up a small shop which is in the traditional low-cost and small-size pattern, and not eligible for taxes.

 

 

 

 

GUIDELINES FOR FDI IN RETAIL TRADE OF ‘SINGLE BRAND’ PRODUCTS

 

Press Note 3 (2006 Series) Dated 10-2-2006

 

The Government has decided to allow FDI up to 51%, with prior Government approval, in retail trade of ‘Single Brand’ products. This is, inter alia, aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices.

 

2. FDI up to 51% in retail trade of ‘Single Brand’ products would be subject to the following conditions:

 

i. Products to be sold should be of a ‘Single Brand’ only.

 

ii. Products should be sold under the same brand internationally.

 

iii. ‘Single Brand’ product-retailing would cover only products which are branded during manufacturing.

 

3. FDI would be allowed only with prior approval of the Government. Application seeking permission of the Government for FDI in retail trade of ‘Single Brand’ products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The application would specifically indicate the product/ product categories which are proposed to be sold under a ‘Single Brand’. Any addition to the product/ product categories to be sold under ‘Single Brand’ would require a fresh approval of the Government.

 

4. Applications would be processed in the Department of Industrial Policy & Promotion, to determine whether the products proposed to be sold satisfy the notified guidelines, before being considered by the FIPB for Government approval.

 

 

INTERNATIONAL EXPERIENCE

 

Walmartisation

 

Wal Mart is able to compete on the basis of low prices and large range of products, thereby conveying benefits to consumers. It is accepted that Wal Mart’s success can be attributed not just to low wages-prices but to genuine technological and organisational innovation. However, across the world Wal Mart has come under criticisms for blatantly flouting labour laws, poor wages and other employee benefits, and forbidding unionisation of its labour. A study conducted by David Neumark with his colleagues at the University of California analysed the effects of Wal Mart on wages and jobs and found that retail employment actually fell when Wal Mart opened a new store.

 

 

 

 

The European Experience

 

Wal Mart has not seen the same success in Europe as it has in America and many cite the reasons as the culture not being dependent on automobiles and where labour unions are strong. This is also because Europe has been able to provide and environment conducive for malls as well as small shops and traders. The European Union’s Competition policy is stringent and has been implemented effectively against European and foreign firms alike. The policy has economic rationale for evaluating whether a company has engaged in predatory pricing or not and whether it can undertake certain mergers if it makes it a market leader. The EC has slapped heavy penalties on Microsoft, Mecedes-Benz and Vodafone, among others, for anti-competition policies.

 

 

 

 

RECOMMENDATIONS (FDI in India’s Retail Sector More Bad than Good?   1. The retail sector in India is severely constrained by limited availability of bank finance. The Government and RBI need to evolve suitable lending policies that will enable retailers in the organised and unorganised sectors to expand and improve efficiencies. Policies that encourage unorganised sector retailers to migrate to the organised sector by investing in space and equipment should be encouraged.   2. A National Commission must be established to study the problems of the retail sector and to evolve policies that will enable it to cope with FDI – as and when it comes.   3. The proposed National Commission should evolve a clear set of conditionalities on giant foreign retailers on the procurement of farm produce, domestically manufactured merchandise and imported goods. These conditionalities must be aimed at encouraging the purchase of goods in the domestic market, state the minimum space, size and specify details like, construction and storage standards, the ratio of floor space to parking space etc. Giant shopping centres must not add to our existing urban snarl.   4. Entry of foreign players must be gradual and with social safeguards so that the effects of the labour dislocation can be analysed & policy finetuned. Initially allow them to set up supermarkets only in metros. Make the costs of entry high and according to specific norms and regulations so that the retailer cannot immediately indulge in ‘predatory’ pricing.   5. In order to address the dislocation issue, it becomes imperative to develop and improve the manufacturing sector in India. There has been a substantial fall in employment by the manufacturing sector, to the extent of 4.06 lakhs over the period 1998 to 2001, while its contribution to the GDP has grown at an average rate of only 3.7%17. If this sector is given due attention, and allowed to take wings, then it could be a source of great compensation to the displaced workforce from the retail industry.   6. The government must actively encourage setting up of co-operative stores to procure and stock their consumer goods and commodities from small producers. This will address the dual problem of limited promotion and marketing ability, as well as market penetration for the retailer. The government can also facilitate the setting up of warehousing units and cold chains, thereby lowering the capital costs for the small retailers.   7. According to IndiaInfoline.com, agro products and food processing sector in India is responsible for $69.4 billion out of the total $180 billion retail sector (these are 2001 figures). This is more than just a sizeable portion of the pie and what makes it even more significant is the fact that in this segment, returns are likely to be much higher for any retailer. Prices for perishable goods like vegetables, fruits, etc. are not fixed (as opposed to, say, branded textiles) and therefore, this is where economies of scale are likely to kick in and benefit the consumer in the form of lower prices. But due attention must be given to the producer too. Often the producer loses out, for example, when the goods are procured at Rs.2 and ultimately sold to the consumer at about Rs.15 as in the case of tomatoes now. The Government themselves can tap into the opportunities of this segment, rather than letting it be lost to foreign players. And by doing so, they can more directly ensure the welfare of producers and the interest of the consumers.   8. Set up an Agricultural Perishable Produce Commission (APPC), to ensure that procurement prices for perishable commodities are fair to farmers and that they are not distorted with relation to market prices.

 

 

 

CONCLUSION

 

 

Many countries have faced this dilemma of whether or not to allow FDI in various sectors. Many developing countries like China, Brazil and Thailand have allowed FDI gradually but in the interim, they have instituted several safeguards to protect small traders and suppliers as well as consumers. India also needs to debate on what are the safety measures it can institute to protect its people. The recommendations could be looked at as options for intervention at this stage, integrating them as policy at a later stage. This can be done to protect domestic suppliers and producers for a while and then giving equal treatment to both foreign and domestic players. Rather than debate whether FDI should be allowed or not, policy makers need to understand that Indian corporates have also displaced small traders and producers and this has caused protests in many parts of the country. It is imperative to instil safeguard measures for small retailers to provide them with an environment where they can adapt to competition.

 

 

  

 

REFERENCES

 

 

 

1.      Ministry of Commerce and Industry, Department of Industrial Policy and Promotion http://dipp.nic.in/

 

2.      http://indiafdiwatch.org/fileadmin/India_site/FDI_Broch_1_.pdf

 

3.      http://economistsview.typepad.com/economistsview/2005/12/paul_krugman_wa.html

 

4.      http://ec.europa.eu/comm/competition/index_en.html

 

5.      Neumark, David, Zhang, Junfu, Ciccarella, Stephen The Effects of Wal Mart on Local Labour Markets http://www.econ.ucdavis.edu/seminars/papers/106/1061.pdf

 

6.      Krugman, Paul The Great Wealth Transfer www.rollingstone.com/politics/story/12699486/paul_krugman_on_the_great_wealth_transfer/print

 

7.      Mohan Guruswamy, Kamal Sharma, Jeevan Prakash Mohanty, Thomas J. Korah FDI in India’s Retail Sector More Bad than Good? Centre for Policy Alternatives

 

8.      E A S Sharma Need for Caution in Retail FDI, EPW  Nov 12, 2005

 

9.      Kalhan, Anuradha Impact of Malls on Small Shops and Hawkers EPW June 2, 2007

 

10.  Whither the Small Trader EPW June 28, 2007