The raging debate on the proposed opening of FDI in Retail sector has degenerated into the usual name-calling.

Anyone opposing the move is termed ‘parochial’, ‘xenophobic’, ‘leftist’ (yes, I do treat it as an insult if anyone calls me that!). I am making an argument here that why opposing FDI does not make me a leftist.  A good starting point would be to put the importance of Retail sector in India in context, with some global comparisons.

India’s rank in every key global comparison – doctors per 1000 population, per capita consumption of sugar, amount of paper / steel / cement / power consumed per 1000 population – all are ranked at between 100 and 150 among the comity of 190 countries in the world! But in number of retail outlets per 1000 population, India ranks 1st in the world! See the data below:

Country Number of retail outlets per Thousand Population
USA 3.8   (down from 6.1 in 1992)
Canada 0.9
Germany 5.9
UK 6.1
India 11 (up from 5.6 in 1996)

                Source: US Census Bureau, Columbia University research paper, Wikipedia

The data makes one wonder ‘Why, in this sector alone, India is an outlier in global comparison’?

The answer is: Retail industry in India is a huge source of self-employment. For large sections of semi-literate and illiterate population, the lack of opportunities for growth in manufacturing sector and dwindling returns in agriculture has left retailing (aka trading) as the only meaningful option to sustain their livelihood.

These miniaturised shops, 96% of which operate at less than 500 sqft. and with a vast majority of them mushrooming in emerging sub-urban localities and across the towns and villages,  have been a significant source of self-employment for the bottom half of the population.  (To call many of them as ‘entrepreneurs’ is a travesty. Most of them do this for a livelihood and keep themselves out of poverty, not for creating a large business that can list in a stock exchange some day!)

Depriving them of this livelihood and saying that ‘they can seek employment in Carrefour or Tesco if their shop closes down’ to someone who can barely speak anything outside his native language is like saying ‘if they don’t have bread, let them eat cakes’! We all know what happened after that, don’t we?

The above data also demolishes another favourite inanity by many ‘pro-reform’ columnists that “opening FDI in retail will increase choice for customers”! How can Big Retailers from countries where consumers have less choice today, offer more choices to consumers in India when the number of choice to Indian consumer is already the highest in the world?

Retail sector is our Holy Cow

I am all for competition and free markets, which has improved the livelihoods of millions of people in India in the last 20 years. But then, the last 3 years have been testing times for proponents of free markets across the globe and many ‘protectionists’ have come out of the closet and have argued for placing restrictions on capital flows and trade flows.

Even in normal times, every country has its own holy cow subjects that are not open to foreign competition. Energy sector in US, Telecommunications in Japan or Fisheries in Australia [Check references 2 & 3] are classic examples of such ‘protectionism’ in countries that are otherwise paragons of the virtue of ‘free market’.

A OECD study [Check reference 1] looked at 28 OECD countries in terms of their FDI restrictions; and found that not a single country is fully open; while UK and Netherlands fare reasonably well on ‘openness to FDI’, the other end contains countries such as Japan, Korea, Australia and Canada that have several sectors that have prohibitions or restrictions on foreign ownership!

Retail sector is India’s holy cow, given the enormity of size of the sector and the number of livelihoods that are dependent on the sector. Terming this as ‘leftist rant’ only shows the shallow understanding of how the governments of the day go all out to protect their sectors of vital interest.

Some existing retail players are just looking to sell and encash their holdings (atleast 51% now, and the rest later) and get the hell out of the sector!

Indian Organized Retail Vs. Global Players

The overwhelming support that this proposal has got from Biriyanis and Arrownails (ask your Tamil friend to translate) should surprise everyone – those who object as well as those who support this move.  “Why will existing Indian retail players welcome this move to increase competition?”

The answer lies in the fact that Indian retail industry is intensely competitive, and the existing players are barely able to survive, with already few big ones biting the dust. The remaining ones are just looking to sell and encash their holdings (atleast 51% now, and the rest later) and get the hell out of the sector.

Only unfair competitive practices such as predatory pricing to sustain losses for a limited period to kill local competition – which are well-rehearsed in country after country by Big-box retailers – can shake the incumbent players who operate at wafer-thin overheads.  So, comparing domestic Organized Retail players with MNC retail companies – as is repeatedly done by semi-literate TV anchors in late evening shows these days – only shows the shallow understanding of the sector.

I may be accused of generalizing, and there may be many mid-size retailers who compete in a fair manner, but then policy initiatives do not allow for such ‘subjective scrutiny’ before allowing entry.

Another example there that I am not a leftist; I am all for domestic industrial houses entering the retail segment and compete fairly against the incumbent players.

Cold storage and back-end infrastructure

A carrot that is dangled by the Government in its advertisements to justify FDI in retail, as well as many other columnists supporting the move have cited the investment that FDI can help in cold storage and back-end infrastructure, as reasons to justify FDI in retail.

Apparently, this minimizes wastage (which, in some perishables are as high as 40% of the produce) and thereby helps improve the economics for everyone across the chain – from farmers to retailers to consumers. What many of them do not realize is, this segment is already long open for FDI – the cash & carry segment is open for FDI for 14 years now!

Except for the front-end retailing, the value chain for sourcing, transportation, storage, and wholesale distribution is open for any amount of FDI. So the argument that FDI in Retail is a must to improve this chain and reduce wastages is a specious one!

One more example that I am not a leftist; I would any day lay a red-carpet welcome to any FDI coming into the back-end infrastructure. My poor brethren can source from such ‘cash & carry’ outlets and retail it to consumers to sustain their livelihood in an honourable manner.

Financial inclusion – the Big Chasm

One key handicap that Indian small retail industry faces is the poor access to capital. Many of them operate with loans borrowed at usurious interest rates from money-lenders, because of the lack of financial inclusion in the mainstream financial sector.

In contrast, MNC retailers can avail unending source of ultra-low cost (or even free) debt capital from their parents through low-cost External Commercial Borrowings, which even large Indian organized retailers cannot boast of! This single unfair competitive landscape, if corrected through rigorous financial inclusion measures, can help Indian small retailers to compete with any player across the world and give them a run for their money!


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