Government kicks off debate on FDI in Retail

In a move that is sure to generate heat, the government has kicked off a debate on allowing FDI in the politically sensitive multibrand retail business. The government has released a discussion paper, arguing that such a decision will raise income of farmers and keep prices in check by shaving layers in the distribution chain between producers and buyers. Understandably, industry was quick to welcome the move, seeing it as the first definitive step towards ushering in quality and competition besides giving consumers a wider choice. Ficci president Rajan Bharti Mittal said, “If the policy process is done strategically, it can create a synergic relationship between the small retailer and the larger retail chains. India can develop its own model... perhaps limiting FDI to 49% initially.’’ The discussion paper released by the industry ministry said, “Keeping in view the large requirement of funds for back-end infrastructure, there is a case for opening up of the retail sector to foreign investment.’’ The argument, however, came with the caveat that there should be enough safeguards for domestic traders as also employment opportunities. The paper set July 31 as the deadline to submit comments. While FDI in multi-brand retail is banned, foreign investment in single-brand retail was opened in April 2006 and so far has attracted about Rs 900 crore, the paper said. Pointing out that India was losing farm products, fruits and vegetables worth Rs 100,000 crore annually, the paper said establishment of cold chains and back-end infrastructure could reduce the losses by more than half. The idea of allowing FDI in multi-brand retail has so far remained a political hot potato and faced strong opposition from major parties who forwarded the argument that global players would swamp the neighbourhood ‘mom-and-pop (kirana)’ stores out of business. But industry, including big players in domestic organised retail, have been supporting FDI in multi-brand retail. Prime minister Manmohan Singh earlier this year sought a debate on opening up the sector pointing to the vast difference between prices at the farm gate and market place. The paper said farmers in the present system get just a third of the consumer price of their produce. “FDI in retail may, therefore, be an efficient means of addressing the concerns of farmers and consumers.’’ Besides, the paper also sought to make a strong case in favour of small retailers in the unorganised sector, saying they recorded a constant annual growth rate of around 15%, while organised retailers saw their margins decline. “It is therefore clear that organised retail cannot have a cake walk and will face a growing challenge from the unorganised sector,’’ the paper said, in an obvious bid to dispel fears of threat to livelihood from corporate giants and multinationals.The move by the government to consider foreign direct investment (FDI) in multi-brand retail has the potential of augmenting investments to the tune of $20-30 billion in the retail sector, which also includes backend functions such as distribution and logistics. According to Kumar Rajagopalan, CEO, Retailers Association of India (RAI), the move, if implemented, would result in consumer prices coming down owing to competition. This would augur well for the consumer as well as for the industry Rajagopalan said. It also bring respite to the consumer from the runaway food inflation. Rajagopalan said investments into distribution and logistics would bring down wastage in the supply chain—from the farmer to the consumer—by over 50%. According to industry analysts, the move could impact margins of companies as modern retailers would gain from the growth in the sector through larger volumes and reduction in wastage in the supply chain. But Rajagopalan ruled out the need for a regulator for the industry. CII said the move would help make Indian agriculture competitive by bringing in the strengths of modern science and technological base. Assocham, however, cautioned against 100% FDI in the retail, which employs about 33 million people. Assocham secretary general D S Rawat said the government should cap the foreign investment at 49%.