(Originally Posted on SIMSR Newsletter eGlobuzz in October – December 2012 Issue)
The 1991 crisis in India highlighted one key weakness of Indian economy, Protectionism. This protectionism cost us high growth, development and prosperity. In the process of avoiding the competition Indian government ended up protecting the industries. Competition is always beneficial for an economy to prosper.
The Change
14th September 2012, was the day when government of India announced major reforms, raising FDI in retail to 51% and FDI in aviation up to 49%. These reforms were well received in the industry, in spite of some politicians making it into their political agenda, supposedly on behalf of small retailers. Both the parties came up with some valid and some not so valid points.
In the time of recession, when we are struggling to sustain growth rates of 8% or even substantially lower than that, and global markets are struggling to come out of the crisis, reforms are the need of the hour. One major concern for Indian businesses is to get the required capital to fuel the economy. Since domestic loans are costly and funds from foreign countries have so many restrictions, a slowdown is bound to happen. By announcing FDI in retail government cautiously allowed to inject that capital in the sector.
Who Benefits
A major benefit slated to be provided by lifting restrictions on FDI in retail is to improve the supply chain management‘ and reduce the loss of perishable goods. Also they advocated that it should add a substantially high number of jobs, and also help the depreciating rupee from sliding down further.
The opposition said that there will be unemployment, high inflation and retailers will be out of the game. Looking at the global retail giants, China, Brazil and many other developing countries allow 100% FDI in retail. In USA and UK, 80% retail is dominated by large retailers. In the 80‘s and the 90‘s more than 20000 independent retailers have closed down in UK.
Global Scenario
A major reason for this is because they could not compete with the large retailers. New York does not allow big retailers to open their stores in the interest of small retailers. Wal-Mart had to exit its business from Germany, because they could not make much money from there. They have succeeded in China because they had to purchase most of the products from the domestic market and sell it there itself. Thus allowing FDI in retail in China was a big boost to their economy. But thanks to globalization and retail chains, Leather and footwear industry in USA is struggling for survival. Looking at these scenarios, we can perhaps infer that large retailers have done more damage than good. But all these changes have also caused many major developments. Retailers have transformed the way shopping was done. Countries have benefited and so did the customers.
Looking at the Indian scenario, Indian retail contributes to around 11-12% of its GDP. Indian retail is currently worth Rs 12, 00,000 Crore and consists of around 12 million retail stores. We have few major players in the organized retail.
Indian Retail scenario
Future group, Reliance, etc. have made their presence felt within few years of their entry in the segment. They have followed the similar structures of operating as the global giants in the sector. These Indian players purchase directly from the farmer or from the manufacturing market. They bypass the middle man from the chain. This has allowed the retailers to offer products at cheaper rates to the consumers. They have created jobs for people. Moreover they have also created demand for new products. For e.g. big bazaar sells mushroom at Rs 120 per KG. To get this mushroom they ask farmers to produce it. The farmer involved in this transaction has not much to do. It creates a win-win situation for all (farmer who gets 30 to 40 rupees for producing, the customer since he will get the mushrooms cheaper than the imported ones and of course the retail chains).
The famous Bharti- Wal-Mart tie-up was waiting for this FDI in retail keenly. By tie-up with Wal-Mart Bharti can not only get the required capital, but also have Wal-Mart‘s vast experience in the sector. WalMart is considered to have one of the best Supply chain management (SCM) networks. India is set to benefit not only in terms of inflow of capital but the expertise that comes in along with the big names. The government advocated that new efficient and productive practices implemented by organized retail will help reduce the wastage caused currently.
This wastage which affects supply to a larger extent will make a huge difference. The question stays will these global giants care about the wastage? Will they implement the best practices in India? As per the rules, retailers must sell a minimum of 30% domestic products in their stores. If the retailers import a lot of their material it will be an area of concern, since if retailers start importing more, then domestic producers will have a tough time. Consumers will benefit from the good quality of the products. But, this will lead to increase in imports and hence might lead to widening CAD and weakening rupee. The retailers in China use 90% domestic products. This helps boosting the domestic production to a larger extent. Domestic benefits are to be taken care of. Retail sector can help provide extensive employment and hence improved standard of living can be expected for BPL families. Not only that, with better services, it can enhance the purchasing pattern of all sections of societies. There are concerns of the tricks retailers have been implementing across the globe when it comes to paying wages. Government has to keep a check on the minimum wages to be paid to the employees.
Also Read My Publication on GAAR
