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Saturday 10 December 2011

FDI in retail: Who won, who lost?

FDI in retail: Who won, who lost?
December 07, 2011 05:57 PM |
Moneylife Digital Team
The face saving act by the Manmohan Singh-led UPA government and the show of strength by the opposition seems to have defeated and denied consumers a chance to buy good quality items at reasonable rates

The deadlock in Parliament created on the issue of allowing 51% foreign direct investment (FDI) in multi- brand retail and 100% FDI in single-brand retail was finally broken when the Union government led by Dr Manmohan Singh decided to put on hold its decision on FDI in retail.

While the political parties may have their reasons for opposing the decision by putting it on back-burner the government has denied a fair chance to consumers to buy at reasonable price. The sad part is that the proposal comes after nearly 14 years when the government first liberalised FDI in the trade sector by permitting 100% FDI in ‘cash-and-carry wholesale trade and nine years later, 51% FDI in ‘single brand retail’ segment.

“We don’t expect the government to revive this (FDI in retail) legislation anytime soon given the lack of numbers and impending state government elections in the next 12 months. We expect the proposal to remain in cold storage and meet the same fate, which several other government proposals like the urea policy, goods and services tax (GST), direct taxes code (DTC) and land acquisition have met. We will be positively surprised if it goes through during the tenure of the current government,” said Prabhudas Lilladher Pvt Ltd in a research note.

The government’s decision not only brought forward the differences between political parties, but also showed different tones of industry bodies. Initially, the Confederation of Indian Industries (CII) took a cautious approach by calling for a calibrated approach for introducing FDI in the retail sector in terms of the percentage and minimum capitalisation requirements. On the other hand, the Federation of Indian Chambers of Commerce and Industry (FICCI) welcomed the decision and said that it would create big employment opportunity in the country.

Within a day CII came out strongly in support of FDI in retail. In a release, it said, “FDI in multi-brand retail will give a boost to the organised retail sector, which positively impacts several stakeholders including farmers, consumers, MSMEs and hence, the overall economy.”

FDI in retail would not only have brought more investment in the sector but would also have brought higher efficiency and more jobs. The Indian retail sector requires a new level of efficiency in the chain that will bring higher value to farmers, create millions of new jobs in the organized sector, and lower prices for the final consumer.
From the farmers perspective, organized retail has the potential to drive efficiencies in this chain by increasing price realization for farmers by 10%-30% through sourcing directly or closer to the farm, by reducing handling and wastage by 25%-50% through consolidation as well as investments in technology, either directly or through aggregators and by upgrading the farmer’s capabilities by providing know-how and capital. However, this would be distant dream now.

While there is a remote possibility that this decision would become reality through some give and take or appeasement of allies, watering down of the proposal, evolving a consensus amongst all stakeholders is a cumbersome process and will take its own time. Going by the fate of several other policy proposals, it would be a big surprise if the proposal goes through during the remaining term of the Manmohan Singh government.

According to a CII study, opening up of FDI in retail can increase organized retail market size to $260 billion by 2020. This would result in an aggregate increase in income of $35–$45 billion per year for all producers combined; 3-4 million new direct jobs and around 4-6 million new indirect jobs in the logistics sector, contract labour in the distribution and repackaging centres, housekeeping and security staff in the stores. The government also stands to gain by this move and can be expected to receive an additional income of $25-$30 billion by way of increased tax collection and reduction of tax slippages, the study said.

Organized retail share in countries of comparative development such as China and Malaysia is much higher. For instance, in China, the organized retail is estimated at 20% of the total retail sales, whereas in India, it stands at a miniscule 4%. Other South East Asian countries, too, have much larger shares with Indonesia at 30%, Thailand at around 40% and in Malaysia as high as 55%.

A doctor, an engineer, and a politician were arguing as to which profession was older. The doctor said, “Well, without a physician mankind could not have survived, so I am sure that mine is the oldest profession.” “No,” said the engineer, “before life began, there was complete chaos and it took an engineer to create some semblance of order from this chaos. So engineering is older.” “But, who created the chaos?” the triumphant politician calmly said. Chaos appears to be indeed ‘made by politicians’, as one can see.

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