“Club of Knowledge Hunters”

FDI in retail for development

Posted by superstar23 on October 4, 2008

An intense debate has been raging in the country on the policy towards FDI in the organised retail sector. The protagonists argue it will bring technology to develop logistics and supply chains, helping food processing industry to grow, provide employment to millions, and enhance competition in the retail space.

The critics highlight the deleterious effect of retail FDI on the unorganised sector comprising around 12 million the so-called ‘pop and mom’ stores. While the government dithers as the debate rages, organised retail operations of large local business houses are expanding, and MNCs are finding backdoor entries to the country by forming cash and carry JVs with local business houses. Are we losing some opportunities in the process?

Organised retail would obviously affect unorganised players adversely. But do we expect a foreign-owned organised retailer to displace more unorganised retailers compared to a locally-owned organised player? If not, the potential damage to the unorganised sector is already being done by locally-owned retail chains that are rapidly expanding throughout the length and breadth of the country in grocery, apparel, jewellery, pharmacy, consumer durables, among other segments.

In most respects the favourable and downside effects of locally- and foreign-owned organised retail are quite similar except for one. That is captive access of foreign multinational retailers to their global procurement chains. This privileged access can lead to foreign-owned retail chains relying on a greater proportion of their procurement outside India compared to their locally-owned counterparts. One would find that even locally-owned organised retailers stock quite a variety of imported goods largely procured from China or Thailand, the proportion of imports could be higher in the case of foreign-owned ones.

Seen against the background of deteriorating balance of trade situation, it could be a matter of concern. However, it is also possible to turn it to our advantage and make use of their captive global procurement networks to push Indian products abroad especially those produced by SMEs through a balanced policy regime.

The policy towards FDI in retail can try to maximise the gains from foreign entry while minimising the threats by insisting on certain performance requirements. These include JV requirements and export performance requirements. The JV requirement will assist in absorption of technology brought by them by their local partners.

The export performance ones will encourage foreign retailers to procure from India for their other markets through their global procurement chains. Sceptics might say that it would happen on its own if our products are competitive. But it may not.

The experience from several developing countries suggests that such performance requirements can be effective instruments for developing linkages with global supply chains.

In India, the growth of auto component exports virtually from the scratch to nearly $4 billion over the past few years owes largely to the foreign exchange neutrality condition that used to be imposed on foreign auto producers among other consumer goods industries during the 1990s. It pushed Ford among other auto majors to recognise the potential of Indian component vendors and incorporate them in their global sourcing strategies.

The export performance requirement imposed on retail FDI in the form of say 25%-50% of sales depending upon the extent of foreign ownership could push the foreign retailers to procure a growing quantity from the country as their domestic sales expand.

There is a huge potential of foreign retailers working with Indian SMEs, as they do globally to develop private label goods, to upgrade their products and packaging requirements to global standards and procuring them for their Indian as well as global operations. Walmart alone procures over $15 billion worth of goods in China annually.

Therefore, we have an opportunity to leverage the interest of foreign retailers in India’s booming market for expanding their procurement from India through export performance requirements. Such requirements are fully consistent with our obligations under WTO’s General Agreement in Trade in Services and Trade-Related Investment Measures Agreement. Such requirements will also help offset their imports and other remittances that their operations in India may entail.

Government may employ additional requirements such as on minimum floor space per outlet to confine them outside thickly populated areas to minimise the competition with unorganised retail. It could also provide access to cheaper credit and assist them in creating self-help groups to develop and manage supply chains for them.

To conclude, India has an opportunity to leverage access to her expanding consumer market for developing a vibrant SME sector catering to the global market. We should do it before it is too late and foreign players losing interest in taking obligations in return for entry having exploited the backdoor opportunities.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: