FDI in retail is much ado about nothing

Business Standard, December 26, 2012

E-commerce and poorly designed regulation are bigger enemies to the kirana shop than the Walmarts of the world

With the recent victory of the ruling United Progressive Alliance ( UPA) government in both Houses of Parliament, it appears that the ghosts of foreign direct investment ( FDI) in multi-brand retail may have been laid to rest at last. It may be reasonably surmised that notwithstanding the voices of aggression and dissent, even in the case of a change in the ruling coalition in the 2014 national elections, the policy will be unchanged.

The formal approval by Parliament to allow FDI in multi-brand retail – an executive decision that normally doesn’t require either prior or post facto parliamentary approval – reversed the stalemate and other important legislations critical to improving economic growth, such as amendments to the Banking Bill and the Companies Bill, were passed. Though this modest success appears insignificant in view of the fact that nearly 25 critical economic legislations have been languishing in Parliament for years, it is clearly a positive turn for the battered investor sentiment in the country. According to an industry head, “Every new Bill that is going through shows that Parliament collectively is certainly in the mood for getting India back on track.”

The salient issue, however, is that allowing 51 per cent FDI in multi-brand retailing in India is per se going to do very little to boost foreign investment inflows into the sector. The policy allows retailers to set up outlets with majority foreign investment only in those cities that have more than one million population. Though 53 cities in the country meet the population criterion, only 18 of those are in the 10 states and union territories that have agreed to permit FDI in multi-brand retail. Thus, the policy is de facto akin to a “lab experiment” in the compliant states, since retailing is a state subject under the federal law. It is, therefore, safe to conclude that it will take years before the policy’s impact is felt on the economy and stakeholders whose interests the dissenters are pretending to protect. Since the retail FDI reform is by nature only an enabling legislation, few foreign investors are hopeful of a rapid rollout of the measures that were announced; they have justifiably taken a wait-and-watch approach when it comes to investing in retail projects.

But, more importantly, even while acknowledging the inherently opportunistic nature of the political uproar on the subject, one cannot but be awed by the utter misguided/misguiding nature of the popular discourse in the past few months. Research on impact of retail sector regulations by the author for a CUTS international report on Competition and Regulation in India, 2011 revealed that:

(a) Globally, in densely populated countries like India (with consequent higher real estate prices), small-store formats thrive, and even flourish in the face of the competition from big-box retail;

(b) On the other hand, the introduction of foreign competition forced manufacturers to cut costs in their supply chains and small stores become more efficient, and provide more serious competition to large-store formats and centralised operation that the multinational retailers prefer;

(c) This latter trend is already becoming apparent in India, in many localities in Delhi that the study surveyed, as small store-owners are responding by upgrading to modern formats with convenient and better organised displays, ICT (information and communications technology)-enabled storage and procurement management and electronic billing counters, while building on their own areas of strength.

The study also found that information technology is a more credible threat to traditional retail than the foreign big-box retailers. It is apparent that:

(a) An Indian consumer’s tastes and shopping preferences continue to remain old school for the most part, especially in the general discomfort to make credit-/debit-card purchases. As a result, local online stores like Flipkart are out-competing the global giant Amazon, simply by virtue of tweaking the online advance payment by credit cards to the more acceptable cash-on-delivery mode. Similar payment models are being used by all the online consumer goods portals, such as jabong.com, pepperfry.com, among others.

(b) The traditional retailer, in fact, faces more competition from e-commerce sites that offer significant discounts on foreign labels – premium fashion and lifestyle brands and electronic goods with aspirational value – the penchant for which is growing among younger Indians. Experience from around the globe also suggests that in the coming decades, the Indian small trader will need to worry more about the spread of e-commerce, or home shopping, than the presence of foreign corporate retail.

Finally, the study found that with respect to the regulatory impediments, organised retailing in India suffers from over-regulation, or rather over-inspection, in some aspects, while there are other key areas in urgent need of regulation that is missing or requires updating. Setting industry performance, business conduct, health and quality standards and e-commerce regulations that are benchmarked with the global best practices will benefit both consumers and producers. Hence, rather than wasting an insane amount of time resisting FDI liberalisation, politicians would have served their constituents better if they focused on designing these key regulations that are critical in ensuring that the organised retailing business practices are conducted in a fair manner.

The author is an economist and independent professional (trade policy and economic regulations)

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