FDI in Indian retail :The pros and cons

    One thing that has been doing the rounds the past few days on the news is about Government allowing Foreign Direct Investment in retailing sector and the political storm it has sparked in the opposition parties.So what is the hoopla all about?

The decision:
   After a decade long debate , the Govt has allowed the foreign retailers to hold upto 51% stakes in multibrand retail and has raised the investment in single-brand from 51% to 100%

What does that mean??
   Lets put is this way. 10 years ago a wealthy foreigner saw India as a booming market for investment in retail shop for his brand "X". But he was allowed to hold only 51% stake in the retail shop.He had to partner up with an Indian for the remaining.5 years after that ,he thought that now that his retail shop for brand X is doing well,why not team up with his other friends with brands "Y" and "Z" and open a multi-brand retail store.But the Indian FDI policy didn't allow him to do that.
    But now,after the govt's move to encourage FDI in retail , he can hold 100% stake in his retail shop for brand "X". Not only that he can also go ahead with his idea of a multi-brand store with at max 51% stakes.


The restrictive clauses:
1.)Companies can open up the stores only in towns with population more than 1 milion.
2.)At least 50% investment has to be in back-end infrastructure like storages and warehouses.

What do these clauses mean?
- By means of the first clause , the companies will be allowed to target only those consumers who are already into "mall shopping culture" in urban cities . The small retailers in the towns with population less than a million will be kept
at bay from suffering.

- India is the second largest producer of fruits and vegetables . But lack of storage facilities , lack of adequate post harvest steps and cold chain infrastructure causes heavy losses to farmers . By the second restrictive clause,the government aims at trying to bring a world class back-end infrastructure which would reduce the losses.

The pros:

  1. Consumers can get quality goods at a cheaper price.

  2. Inflow of foriegn investment and hence growth opportunities.

  3. It would fuel competition in local retail markets to survive . Healthy competition would mean improved quality and is in customer's benefit.

  4. Increased labour force in back-end infrastructure services.

  5. Increased employment in the front-end services

  6. Prosperity of the small and medium scale enterprises as the retailers have been told to source 30 % of their requirement from small and medium enterprises.

  7. Increased export as the retailers would want to export local goods to their outlets outside country

  8. The retailers can resort to contract farming programmes along with measures like direct buying from the farmers which will dilute the role of profit siphoning intermediaries.This can enhance the income of the farmers and give them direct access to markets.



The cons:

  1. Huge losses to unorganized retailing in the urban areas

  2. In order to create monopoly ,the markets would resort to selling the goods at a very low price.
    This would continue till the competition is eliminated.(predatory pricing)

  3. Increase in real estate prices

  4. Add to the already increasing muddle in the urban areas



Sources:

  1. article by Hemant Batra
  2. Article at mbaknol
  3. An article in TOI


Reviews and opinions, please??

6 comments:

Beena Chavan said...

nice..that helped a lot to understand the thing !

prashant chaudhari said...

So that's why Wal-Mart is trying to enter indian retail market!

Rishit Desai said...

I dont know what is going to happen in the future.
But my grandfather always used to say: Be Indian, Buy Indian. (He said think of it this way, if your brother has a shop, would you buy from your neighbor?)
It is nice to get $ inflow in the country but not at the cost of a aam baniya.

kaka said...

chhan lihlay re step by step...easy to understand...
10 paiki 10 marks... :p

Md Tareque Khan said...

great article ! It helped understanding the issue for a common man like me ;)

Mahesh said...

You are very correct while saying - "In order to create monopoly ... a very low price".
I just want to add that to FDI giants will never incur losses - that what FDI is all about - earning profits. So, how they will keep prices artificially low?
-> One of the ways is by paying farmers less than market value for produce.

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