Friday, September 21, 2012

FDI in Retail: Advantages

This post will simply enumerate the advantages of having FDI up to 51% in multi-brand retail. Mark the choice of words. I am not touching power exchanges or single brand retail or aviation, just the multi brand retail notification and its positive implications. Yes, I may be mistaken in one or many of my opinions, but nevertheless, here they are:

1. A major problem with Indian agricultural sector is the lack of logistics and infrastructure such as cold storage or more efficient market access system. This problem will probably be solved to a large extent with the entry of multibillionaire giants who can afford to invest in such infrastructure for long term gains. Apparently, at least 50% of the FDI is to be invested in back-end infrastructure within three years of market-entry, and the minimum FDI acceptable is 100 million USD.

2. While it will definitely not kick out the small kirana wallahs because of their traditional bond with the Indian society, this move will at least force them to innovate in terms of reaching out to customers through say, Facebook or sms.

3. Such FDI will bring with it strong backward linkages: more orders for, say, trolleys; more revenue from electricity; more jobs in the transportation sector and so on.

4. If Wal-mart or Carrefour decide to register themselves with the BSE or NSE, it may even bring about greater FII in the long run.

5. The states have been given autonomy in the implementation for the same, which means that if a capitalism oriented state like Gujarat or Karnataka allows FDI in retail, and such pilot projects taste success, then slowly the opposition against the same will disappear from other states and who knows? This may pave the way for further reforms.

6. Employment generation is too obvious an advantage for me to write anything on.

7. According to the Economic Times, about 40% of India's foodgrain production rots away in warehouses. This contributes to a large extent to food inflation. (largest factor is of course petrol/diesel prices) Would it be too optimistic to hope that if this wastage of 40% comes down to 20 or 10%, with greater food availability, the artificially created food inflation will go down?

8. If we observe the Amul or Sumul model, we can see that these co-operatives identify milk-shed villages for themselves, i.e. villages with good cattle population that can provide them with an assured milk supply. Over the years, these companies have undertaken excellent developmental activities in these villages in the form of CSR, such as building schools, operating captive bio-gas plants in villages and so on. If the bigger brands can similarly identify "grain-shed" villages for themselves, it may also result in development of these villages in time. Too optimistic, I know, but I feel it has a chance.

9. Finally, the consumer. We'll finally be able to buy Figaro Olives, Pringles or even plain old taters all in the same place. Meaning, the quantity and quality of available goods will improve.

10. Oh, and how can one forget the farmer? While one may argue that the provision saying 30% of the goods are only supposed to be bought preferably from locals, and not mandatorily neutralizes any advantage to the Indian farmer; the fact remains that if I can get potatoes both from Maharashtra and Texas, for my shop in Mumbai, I will obviously prefer those from Maharashtra. Thus, with more customers vying for his goods and the elimination of middlemen who add no value to the goods, the Indian farmer stands at an advantage, vague wording of the notification regardless.

11. A brief look at the Chinese experiment in the same sector tells us of a fantastic sectoral growth story. If India can see the same spurt in sectoral growth, it may subsequently contribute to overall economic growth, including a greater agricultural growth rate. See figure for Chinese growth story in retail sector. Although this is too long a shot, as 97% of Indian retail sector is unorganized.

There will be a post will examine the disadvantages of the same.

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