FDI in Retailing: Long Overdue

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Authors: B V Kiran,
Faculty Associate
ICMR (IBS Center for Management Research).

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Such overwhelming statistics is forcing the government to take firm and positive steps towards allowing FDI in the retail sector. The government is gradually preparing the base for allowing FDI in this sector. It recently allowed 100% FDI in the real estate sector. The opening up of the real estate sector for FDI will greatly help the organized retailing industry in developing world-class infrastructure. Providing concessions on import of capital goods for certain retailers and implementation of Value Added Tax (VAT) are certain other steps towards this direction.

However, certain political parties like the Left are strongly opposing any such moves. One of their main contentions is that it will destroy employment opportunities in this sector. But the fact is, allowing FDI in this sector offers a host of benefits. Primarily, it enhances the standard of living of the people by providing high quality products at cheaper rates. It will also increase employment opportunities in the entire value chain of organized retailing, right from procuring materials to packing and selling them. On the other hand, the application of information technology in the retail sector has been on the rise over the past few years, across the world.

It has significantly improved the effectiveness of various activities like operating the stores, merchandise management, inventory management, sales forecasting, etc. Technological advancements have also prompted retailers to focus on television shopping and online shopping. All these developments create a host of employment opportunities. The unorganized sector in retailing does not provide advanced and technological facilities as provided by the organized sector. The change in customer preferences helps organized retailers provide a wide variety of products with state-of-the-art display and stocking capabilities. The retailers in the organized sector set up stores on a large scale with different kinds of products. This allows them to bargain with their suppliers, thus, giving them the advantage of lower costs and supply chain efficiencies. These advantages combined with a highly trained staff increase productivity and lead to competitive pricing of the products.

The McKinsey report that India is poised to witness an explosive growth in the organized retail sector has inspired many national and international companies to enter this sector in a big way. Apart from the existing industry giants such as the TATA, RPG, ITC, etc., new players like Reliance Industries are planning to enter this segment in a big way by establishing shopping malls, in India's major cities and pumping insignificant investment. Many of the international retailers are waiting at the country's doorstep to enter the market. Recently, global retail giant Wal-Mart International's CEO and President, John B Menzer, met the Prime Minister, Manmohan Singh, to discuss the opening up of the retail sector. Wal-Mart is planning to invest substantially once this sector opens up.

Concerns about the future of the existing retailers in the country, especially those in the unorganized sector are largely unwarranted. The small-time retailers will still have their business as their target market is completely different from the targeted consumers (probable) of global retail giants like Wal-Mart (if it enters India). The small-time retailers act as next door stores that help in purchasing items of daily usage. However, this is not the case with large organized retailers and, therefore, the local Kirana stores will anyway have their business. A case in point is, China, which has allowed 49% FDI straight away in the retail sector and improved its stand in international trade. As regards the future of unorganized retailing in China, according to a study, allowing FDI did not displace the conventional local retailers but on the contrary, these traditional outlets in China have increased significantly from around 19 lakhs in 1996 to almost 26 lakhs in 2001.

The government should, therefore, go ahead and allow FDI in the retail sector. In fact, it should take a cue from China in this regard. Planning to withhold the decision until the December WTO meeting in Hong Kong, so that the government can use this as a bargaining tool for service sector negotiations, is a good move. Whatever the outcome, the government should allow FDI in retailing, if not today at least tomorrow.