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Thursday, December 1, 2011

Will FDI in retail be good or bad for India?

Let me make it clear at the outset that the people of India should respond to that question. Or, at least a small subset of the people of India who have access to the Internet and may read this post. In other words, you, dear reader, get a chance to voice your opinion.

An opinion based on gut feel, or hearsay, or belief does not count for much. So, I’m going to present some cold, hard facts (from a reasonably reliable though may be a biased source – the current Secretary General of FICCI – published in a newspaper article today). Please read the facts, and then decide.

1. The idea of FDI in retail was proposed by the NDA government 7 years back. (It also found a place in BJP’s election manifesto in 2009. Yes, the same BJP which is now making a song and dance about opposing it and stalling Parliament proceedings.) The UPA is finally taking steps to implement this important economic reform.

A very uncomfortable Yashwant Sinha, when cornered by a TV journalist about the above, said: “Lot of water has flown down the Ganges. I have become older and wiser.” (Why is it that people become wiser when they are no longer in power? It’s a rhetorical question – no need to answer it!)

2. The retail market is expected to double from its current size of $490 Billion to $1 Trillion over the next 20 years. The current share of organised retail (including foreign ones) is expected to quadruple from 4% to 16%. That means, the market size for the ‘kirana’ type stores will go up from the current $470 Billion to $840 Billion over the next two decades. (Forget about job losses!)

3. Large format retail stores with FDI will be permitted in cities and towns with a population of 10 Lakhs or more. About 53 such cities and towns will make the cut today. This number is expected to increase to 76 in the next 20 years. (Not likely to be a plunder of the country like the East India Company did.)

4. More than 30 Crore people are expected to migrate to urban locations from the hinterland over the next two decades. The ‘kirana’ stores are unlikely to be able to meet the extra demand or employ a significant percentage of the influx.

5. To maintain India’s GDP growth rate at 9%, 1.2 Crore additional jobs will need to be created every year for the next 15 years. Such a large number of jobs are unlikely to be created by manufacturing units (which rely more and more on automation) or IT services (which is reaching growth limits).

6. Despite presence of large format retail stores like Spencers, Big Bazaar, Reliance Fresh, Trends - ‘kirana’ stores haven’t gone out of business. Both small and big format stores are co-existing.

7. The real differentiator in retail business is not at the front-end, the actual stores where we go to buy clothes or lipstick or kitchenware. It is the back-end operations involving logistics, supply chain management and sophisticated computer systems. These require knowledge, experience and large investments.

Large format retailers in India have managed the front-end well, raising the shopping experiences of Indians. But they have fallen way short in the back-end operations.

You have the facts. Now, it is your turn to opine. Will FDI in multi-brand retail be good for India, or will it be bad?

Related Post

Is Organised Retail a Great Business or a Mediocre Business?

13 comments:

Ram said...

Though this argument looks fine from the positive perspective. what about life after 30-40 years,when the big guns control the supply chain and every aspect of retail.

It would pay to be a large scale farmer. Mega farms will become the norm in 50 years. Meaning small farmers will get squeezed out of their lands, that's many more millions than the jobs that will be created.

The big names will eventually control the pricing leaving the farmers to their mercy.

The amount of retail spending given area is a function of how many people live there and what their incomes are. You cannot create more consumer spending just by building a new store. the market will become distorted, the mega-retailers will use their power to undermine the local businesses. they will flood a market with excess retail capacity, and capsize independent retailers. No matter how well-run or popular a local kirana is, they will not withstand the sustained price point pressure from the biggies.

Chakradhar Reddy said...

It is like allowing a foreigner into your home to manage your affairs ! Initially we may get infrastructure, but, we loose our money to foreigners in the long run.

Jasi said...

More, Spender, Big Bazaar, no one can beat the comfort and assurance of my neighbourhood kirana store where I can just walk down to buy that urgent pack of bread I need at 7 in the morning :)
Having said that, I look at he number of employment that even the current crop of malls and stores have generated. Even the so called class IV jobs have been cornered for cleaning etc, look at the number of ppl manning floors and point of sale machines.
Finally, I thought Mr Anna's comments on FDI were unfortunate. Comparing what East India Company did to India some 300 years ago to what Walmart and likes might do to us now, was so naiive that I would not even go into dissecting them. Just goes on to say, never blindly trust opinions. Understand the facts and then form your own judgements.
Thanks Sir for your side of the story, it took a long time coming though :)

Suresh said...

Let us just look back.

We opposed introduction of Computers. We opposed intrdoduction of Tractors and Tillers in Farm Land. Introduction of Computers did not cause any loss of job. In fact IT industry created million of new jobs. Sames success story goes as far as mechanisation of farm land is concerned. Therefore there is no reason for us to worry about large format retail stores managed and controlled by foreigners.

Finally we are a country with 1.2 billion people and growing! There is enough for everyone.

Jasi said...

@Chakradhar
Sir with due respect, we all know how our very own people are managing our affairs and infrastructure. As for losing our money to foreigners, i have to admit im not an expert but I would like to believe it isn;t that simple.

jawaharlal bansal said...

I am neither economist nor a politician.China is superpower today due to FDI in 1980s.Dollars poured like rain in chinese economy.But we looked otherway on FDI.One day someone said,recession in USA is due to walmart.It is ignorance.Pepole in usa and developed economies spend on borrowed money through credit cards.China was able to sell its cheap and substandarad products to these well educated people in developed economies through walmarts and rake in trillions of dollars.FDI in retail should with riders:1.All products sold in these retail outlets should be made in India.No chinese good made in china should be sold.2.All the kirana stores throughout India,should have acess to wholesale outlets of walmarts and given 20% discount on MRP,like retail chemists in India.

Titu said...

Hello Sir,

Any thing which will increase efficiency or Productivity is good for person, society or country.

I still remember 1991 or 1992 people were saying the same things about Indian businesses that they will not stand in front of global majors, but nothing happen like that…

-titu

Piyush said...

I would just like to quote an experience i had at a very small 'kirana' store right opposite to the Park Circus market, kolkata.

I happen to buy some basic groceries from this store for the simple reason that he offers me very good quality as he gets some of the stuff from his native village in Bengal. He also gives me very good 'deals' on some of the groceries like Dals, Guud,Honey etc.
This gentleman has been operating the shop at this location from decades now & is now planning to close down. The reason behind is Govt thrust on min. wage( which was in the news recently) i.e 3000 + Fooding which is to be provided by the employer. This bengali gentleman says with 3-4 people working with him in the shop and the rising cost of food articles have made the business enviable. This shop owner had a customer list who exclusively bought stuff from him but now have shifted to big retail stores because of Convenience factor and 'all under one roof'.
Govt facts and figures look rosy on paper but small kirana stores have already been hit hard and with this big retail outlets( that will hit Indian shores), it would just be the right nail to close the coffin.
Note- I have just quoted a experience which happened to me in early Nov'11.

AMN said...

I think you have hit the bulls eye with your comment about large format retailers failing to manage the back end efficiently.

Logistics for retailers in India is a nightmare due to both external & internal factors. External factors include inadequate infrastructure in rail/roads, multiple laws/agencies restricting free cross country movement of goods, multiple taxes and lack of suitable warehouse space especially for goods requiring specialised storage conditions like a cold chains. Internal factors include poor inventory management and capacity constrains at each stage of the supply chain.

Foreign retailers like Walmart have almost reached perfection as far as control over the internal factors are concerned. It remains to be seen how they will tackle the external factors when they come to India.

However, if the organised retailers are successful as they are in the developed world, it will definitely mark the end of the local kirana shops. There is simply no way these guys will be able to match the big chains in pricing and the overall shopping experience. Even the location advantage of being having an outlet next to the cosutomer's house can be easily eroded by the door delivery system introduced by the retail chains.

GreyFool said...

I came across another fact about food inflation in the US where there is the most developed infrastructure as far as retailing backend goes. It has never gone above 3% in the past 50 odd years since there is hardly any wastage of agri produce. As far as squeezing of small farmers goes is the present situation any better where he gets 15% of the retail value for his efforts ? Eventually in a few decades the small farmers will migrate to cities & land will be used for more productive purpose. That is what the experience of developed nations tell us. If China can open retail for FDI 20 yrs ago(100% FDI since 2004) surely we should not be so worried at this stage of our economic growth...

GreyFool

Suresh said...

@ Mr. Piyush
I read from the comments that one of the rasons you were getting good quality products at low price is because your Kirana Owner was paying his employees lower than the minimum wages required. Keeping the end consumer price low by paying emplyees a very low wage, is not a heathy practice. And one can be rest assured that employees will get decent pay once organised retail comes into play.

Piyush said...

@ Mr. Suresh
I guess you missed out on the bigger picture i.e. this guy could get some of the best produce from his native place and sell it directly to his list of dedicated customers. The lower wages provided him the scope of minimizing on the cost. Any business thrives on viability( no shop keeper can afford to operate at breakeven).

Subhankar said...

This comment is from Donald Dsouza:

Regarding FDI in retail I have couple of points to share

1) Is FDI good for India ? Since the time of Narsimaha Rao Govt, reforms have helped India to grow and become global. FDI in retail means more is available at less price at good quality you are no longer at the mercy of kinara shop.
So if you are a consumer then who cares for kinara shop. (Would it put them out of business? Certainly not.)

2)To understand the impact of FDI on Kinara shops we must look beyond India. Take the example of Gulf Countries whose population and demography is far far less than India's vast population and land.

In Gulf countries, there are huge Chain of retailers like CARREFOUR, IKEA & INDIAN RETAILER LIKE LULU & LAMCY + there are MANY super market in every location (just like reliance fresh) and there are Grocery shops in every second bldg.
It means that even if there are Huge Retailers still other Super markets and Grocery shop can survive and make good business as well.

3) Regarding impact on small farmers: From first hand knowledge that I have, most of the land of small farmers is not cultivated due to high labour cost and availability. So where is the issue of impacting small farmers?

Kinara shop owners will always protest as they have to now move from their comfort zone and start thinking different ways of increasing the service level to their customers as they do it in GULF countries.

In short, YES FDI will be good for India.