The government must protect the weakest links of the supply chain instead of relying on foreign and domestic ‘big-wigs’ to do so, argues Dharmendra Kumar at India FDI Watch
Amid protests from allies and political opponents, the Indian government first announced that it would allow foreign direct investment (FDI) in multi-brand retail trade (MBRT) in December 2011, but reversed its decision within a fortnight. The plans to allow FDI in MBRT had many conditions attached to them.
Foreign investors could invest 51% and open retail outlets only in cities with a population of 1 million or more; they had to bring in a minimum of US$100 million as part of their investment; and at least 50% of the total FDI brought in had to be invested in back-end infrastructure. Back-end infrastructure would entail capital expenditure on all activities, excluding front-end units. At least 30% of the procurement of manufactured processed products had to be sourced from small Indian industries with a total investment in plant and machinery not exceeding US$100 million.
[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”3″ ihc_mb_template=”2″ ]
The government proceeded to liberalize the MBRT sector almost a year later, but with even more conditions attached. Among the new conditions, state governments were empowered to allow or ban transnational corporation (TNC) superstores and decide where a TNC superstore would be permitted.
Almost all non-Congress-ruled states expressed reservations about granting permission to TNC superstores in their territory and the new conditions for investment made interested foreign investors uncomfortable. Retailing giants such as Walmart, Carrefour and Tesco were reluctant to move forward unless those conditions were relaxed.
In August, spurred on by a growing current account deficit, the government finally eased some of the conditions. It now allows TNC superstores to open retail sales outlets in cities with a population of more than 1 million as per the 2011 census (53 cities if the states agree) or any other cities as per the decision of the respective state governments.
The requirement that foreign partners must spend 50% of their investment in back-end infrastructure is now only for the first US$100 million brought in by them and not for their total investment. The condition that 30% of procurement must be from Indian “small industries” with total investment of less than US$1 million has been revised to include medium-scale industries with a total investment not exceeding US$2 million. Entities will continue to qualify as “medium-scale” if their total investment in plant and machinery exceeds US$2 million following any FDI investment.
However, TNC superstores are unlikely to race to India following these relaxations. The stores appear to be wary of political opposition to their entry and may be waiting to see the outcome of national elections due early next year before making investment commitments.
Meanwhile, many stakeholders, particularly independent retailers and street vendors, feel threatened and continue to oppose corporatizing Indian retail trade. The absence of any regulation on the number, size, location or prices of these stores is keeping smaller vendors on their toes. Foreign investors in India are not required to take an economic needs test before opening a department store as is the case in many countries, including France, Bulgaria, Denmark, Italy, Malta and Portugal.
One way to support local vendors is through the formation of cooperatives so that their bargaining position in the marketplace increases. Another solution is to equip small retailers with new skills and technologies so that they can increase operational efficiency and cut down their own transaction costs while simultaneously reaching out to larger sections of the market.
As far as wastage and the need for investment in logistics are concerned, India’s retail sector is not alone. There is wastage in all kinds of retail supply chains. Even companies such as Walmart, which boasts of a very efficient supply chain, has an unacceptable level of wastage.
There is certainly a need for investment in logistics to reduce wastage, however, the state should play a bigger role in improving current conditions rather than relying solely on foreign or domestic big-wigs in the retail sector. Moreover, the government has the capacity to invest in logistics.
Reducing the difference between farm-gate and retail prices is also vital. Various models of marketing cooperatives may offer some solutions to the problem. India can benefit from its experience with the greatest and most successful cooperative endeavour in the world – the White Revolution of Amul. Such cooperatives have taught us how to organize production, transportation and sales.
Setting up a democratic cooperative structure at the product level in the agricultural sector is the need of the hour. India’s FDI policy must be introduced together with a new and enhanced social security policy.
[/ihc-hide-content]
Dharmendra Kumar is the director of India FDI Watch. He can be contacted at dkfordignity@yahoo.co.uk.
