FDI in Retail in India


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Details of Indian retail, community retail, dependent population, realities of big giants, scope, government's role, positives and perils

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FDI in Retail in India

  1. 1. FDI in Retail in India A prospect or peril for India? 09.03.2013 Submitted to: Dr. Mihir K. Mahapatra Prepared by: Abhishek Singh (PGDM 12122) Arun K. P (PGDM 12129) Juhi Lalwani (PGDM 12141) Rheetam Mitra (PGDM 12156) Shreetha T. S. (PGDM 12176)
  2. 2. Table of Contents INTRODUCTION ........................................................................................ 02 RETAIL SCENARIO IN INDIA ...................................................................... 03 HIGHLY FRAGMENTED INDIAN RETAIL SECTOR ........................................ 04 PROSPECT OF INDIAN REAL SECTOR ........................................................ 05 Economic growth .................................................................................. 05 Demographics ....................................................................................... 05 Urbanization. ........................................................................................ 05 Credit availability .................................................................................. 05 FDI IN RETAIL IN INDIA ............................................................................. 07 POSITIVES OF FDI IN RETAIL ..................................................................... 08 Strengthen infrastructure ..................................................................... 08 Improve supply chain ............................................................................ 09 Better warehousing............................................................................... 09 Greater employment opportunities ...................................................... 10 PERILS OF FDI IN RETAIL ........................................................................... 11 The role of the small retailers................................................................ 13 Involved workforce – Muslims going to be hurt the most .................... 14 Procurement Clause – Tweaking the rules…………………….……..............17 Livelihood Issues……………………………………………..…………………………. 18 Lessons from the past…..……………………………………………………………. 18 SUMMARY & CONCLUSION…………………………………………………………… 20 REFERENCES…………………………………………………………………………………. 23 Page 1 of 23
  3. 3. INTRODUCTION Retailing in India is one of the pillars of its economy and accounts for 14 to 15 per cent of its GDP. The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world by economic value. India is one of the fastest growing retail markets in the world, with 1.2 billion people. India's retailing industry is essentially owner manned small shops. In 2010, larger format convenience stores and supermarkets accounted for about 4 per cent of the industry and these were present only in large urban centers. India's retail and logistics industry employs about 40 million Indians (3.3% of Indian population). Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets. Even single-brand retail was limited to 51% ownership and a bureaucratic process. In November 2011, India's central government announced retail reforms for both multibrand stores and single-brand stores. These market reforms paved the way for retail innovation and competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike, and Apple. The announcement sparked intense activism, both in opposition and in support of the reforms. In December 2011, under pressure from the opposition, Indian government placed the retail reforms on hold till it reaches a consensus. In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership, but imposed the requirement that the single brand retailer must source 30 per cent of its goods from India. Indian government continues the hold on retail reforms for multi-brand stores. On 14 September 2012, the government of India announced the opening of FDI in multibrand retail, subject to approvals by individual states. This decision has been welcomed by economists and the markets, however has caused protests and an upheaval in India's central government's political coalition structure. On 20 September 2012, the Government of India formally notified the FDI reforms for single and multi-brand retail, thereby making it effective under Indian law.* On 7 December 2012, the Federal Government of India allowed 51% FDI in multi-brand retail in India. The Feds managed to get the approval of multi-brand retail in the parliament despite heavy uproar from the opposition. Some states will allow foreign supermarkets like Walmart, Tesco and Carrefour to open while other states will not. * http://dipp.nic.in/English/acts_rules/Press_Notes/pn5_2012.pdf Page 2 of 23
  4. 4. RETAIL SCENARIO IN INDIA Most Indian shopping takes place in open markets or millions of small, independent grocery and retail shops. Shoppers typically stand outside the retail shop, ask for what they want, and cannot pick or examine a product from the shelf. Access to the shelf or product storage area is limited. Often the shopkeeper substitutes the product, claiming that it is similar or equivalent to the product the consumer is asking for. The product typically has no price label in these small retail shops; although some products do have a manufactured suggested retail price (MSRP) pre-printed on the packaging. The shopkeeper prices the food staple and household products arbitrarily, and two consumers may pay different prices for the same product on the same day. Price is sometimes negotiated between the shopper and shopkeeper. The shoppers do not have time to examine the product label, and do not have a choice to make an informed decision between competitive products. India's retail and logistics industry, organized and unorganized in combination, employs about 40 million Indians (3.3% of Indian population)*. The typical Indian retail shops are very small. Over 14 million outlets operate in the country and only 4% of them being larger than 500 sq. ft. (46 m2) in size. India has about 11 shop outlets for every 1000 people. Vast majority of the unorganized retail shops in India employ family members, do not have the scale to procure or transport products at high volume wholesale level, have limited to no quality control or fake-versus-authentic product screening technology and have no training on safe and hygienic storage, packaging or logistics. The unorganized retail shops source their products from a chain of middlemen who mark up the product as it moves from farmer or producer to the consumer. The unorganized retail shops typically offer no after-sales support or service. Finally, most transactions at unorganized retail shops are done with cash, with all sales being final. Until the 1990s, regulations prevented innovation and entrepreneurship in Indian retailing. Some retails faced complying with over thirty regulations such as "signboard licenses" and "anti-hoarding measures" before they could open doors. There are taxes for moving goods to states, from states, and even within states in some cases. Farmers and producers had to go through middlemen monopolies. The logistics and infrastructure was very poor, with losses exceeding 30 per cent. *http://www.atimes.com/atimes/Global_Economy/FA31Dj03.html Page 3 of 23
  5. 5. HIGHLY FRAGMENTED INDIAN RETAIL SECTOR The retail sector in India is highly fragmented and organized retail in the country is at a very nascent stage. There are about 12 million retail outlets spread across India, earning it the epithet of a “nation of shopkeepers.” More than 80% of these 12 million outlets are run by small family businesses which use only household labour. Traditionally, small-store (kirana) retailing has been one of the easiest ways to generate self-employment, as it requires limited investment in land, capital and labour. Consequently, India has one of the highest retail densities in the world at 6% (12 million retail shops for about 209 million households).India’s peers, such as China and Brazil, took 10-15 years to raise the share of their organized retail sectors from 5% when they began, to 20% and 38% respectively.* India too is moving towards growth and maturity in the retail sector at a fast pace. Retail is amongst the fastest growing sectors in the country. India ranks 1 st, ahead of Russia, in terms of emerging markets potential in retail and is deemed a ‘Priority 1’market for international retail. Indian market has high complexities in terms of a wide geographic spread and distinct consumer preferences varying by each region necessitating a need for localization even within the geographic zones. India has highest number of outlets per person (7 per thousand) Indian retail space per capita at 2 sq. ft. (0.19 m2)/ person is lowest in the world. Indian retail density of 6 per cent is highest in the world. 1.8 million households in India have an annual income of over 45 lakh (US$81,900).# *The Great Indian Retail Story by Ernst & Young # http://en.wikipedia.org/wiki/Retailing_in_India Page 4 of 23
  6. 6. PROSPECT OF INDIAN REAL SECTOR India’s GDP, which currently stands at USD 690 billion, is slated to touch US$740 billion by the end of 2006. India is the world’s 4th largest economy as regards GDP (in PPP terms) and is expected to rank 3rd by 2010, just behind the US and China. The country is on the brink of becoming an economic powerhouse ready to unleash its largely untapped potential for those who are willing to take the right step forward. In the retail sector, in spite of a 1.07 billion strong population, the target consumer base for most retailers in India stands at about 405 million. Of this, about 30 million have a combined purchasing capacity of US$230 billion. The country’s 6 million ‘rich’ population shops worth USD 28.36 billion every year. Indians with an ability to spend over USD 30,000 a year (in PPP terms) on conspicuous consumption represent 2.8% of the entire population. But with a population base of 1.07 billion people, this number amounts to 30 million people, a market next only to USA, Japan and China. While consumer demand is driving retail growth, it is in turn being driven by the following factors:  Economic growth: This has meant greater disposable incomes for the booming Indian middle class, which currently comprises 22% of the total population. This figure is expected to increase to 32% by 2010. Disposable incomes are expected to rise at an average of 8.5% p.a. till 2015.  Demographics: More than 50% of the population is less than 25 years of age and strong growth is expected to continue in this age bracket.  Urbanization: The Indian urban population is projected to increase from 28% to 40% of the total population by 2020 and incomes are simultaneously expected to grow in these segment.  Credit availability: Retail loans have doubled in the last three years to reach US$38.7 billion by 2005. India has 209 million households, of which the 6 million classified as ‘rich’, have annual incomes of over US$4700 and 75 million, classified as ‘consuming’, have annual incomes between US$1000 - US$4700. Over half of these ‘rich’ families live in Delhi, Mumbai and Bangalore and spend around US$18 billion annually. 62% of the market for premium products in India is also concentrated in these three cities. 85% of India’s retail market is also concentrated in the country’s 8 largest cities. An estimated 1 million households at the top of India’s income map constitute the ‘super-rich’ in the country. Growing by 20% every year, this segments’ buying behaviour is in line with its corresponding international segments. While this segment is worth targeting for high-end premium products, it is not the key driver of the organized retail sector. The real driver of the Indian retail sector is the bottom 80% of the first layer and the upper half of the second layer of the income map. Page 5 of 23
  7. 7. This segment of about 40 million households earns USD$4,000 – US$10,000 per household and comprises salaried employees and self-employed professionals. This segment is expected to grow to 65 million households by 2010 and is currently the key driver behind explosive growth in passenger car sales (US$5 billion in 2004) and mobile phone penetration (over 70 million).* The top 6 Indian cities - Mumbai, Delhi, Chennai, Kolkata, Bangalore and Hyderabad - are the darlings of India’s exploding economy. They represent 6% of the population, but contribute 14% of India’s GDP.# They are the centers of business, finance, politics and the emerging sunrise industries such as IT, pharma and ITeS, which have put India on the global map. These cities are also the barometer of India’s economic development and most foreign investors have flocked here. Besides the 6 metros, India has 61 other cities with populations greater than 0.5 million – these cities represent 80% of India’s population and contribute about 14% to the country’s GDP. Even though the 6 metros have the greatest concentration of India’s wealth, the other 61 cities have consistently outpaced the metros in growth rates since 1995. These cities are witnessing higher incomes and a fundamental change in consumer mindset. Increasing awareness levels in Tier II cities are eroding the earlier difference between metros and Tier II cities in terms of ‘urban aspirations.’ International brands increasingly relying on Tier II cities to drive growth are Nokia, Pizza Hut, Ford, Reebok and Adidas. * The Great Indian Retail Story - Ernst & Young # The Great Indian Retail Story - Ernst & Young Page 6 of 23
  8. 8. FDI IN RETAIL IN INDIA In November 2011, when the UPA government announced in Parliament that it had cleared the entry of big retail chains like Wal-Mart and Tesco into India through 51 per cent FDI in multi-brand retail, it justified the decision saying that FDI in retail will boost food security and benefit farmers’ livelihoods. But the assurance that FDI in retail would ease inflation did not resolve the political crisis the government was facing; it deepened it. Parliament was stalled for several days of the Winter Session after which the government was forced to withdraw its decision. The story of FDI in retail goes back to 2005 when Prime Minister Manmohan Singh signed an agriculture agreement with the US, along with the nuclear agreement. On the board of the US-India Knowledge Initiative in Agriculture, as it is called, sit Monsanto (the world’s leading producer of GM seed), ConAgra (among the world’s big agribusiness along with Cargill) and Wal-Mart (the world’s biggest retail giant). Protests had prevented Wal-Mart’s entry into retail, but in 2007 it did get a backdoor entry through a joint-venture with Bharti (their stores go by the names of Easyday and Best Price Modern Wholesale). No backend infrastructure has been built so far, one of the other claims of the government about why we need retail giants. “The way the UPA government tried to ram through the decision on FDI in retail — without consulting the Opposition parties, or even its allies — was clearly undemocratic. But the decision itself is also flawed. It illustrates a disconnect between an ideology based on market fundamentalism which is the leaning of the present government, and the Indian reality of small farms and small retail. There is also a disconnect between that ideology with its codeword of “reform”, and the crisis that market fundamentalism is facing, worldwide as well as in India. If anything needs reform, it is the failed paradigm of corporate globalisation.” – Dr. Vandana Shiva on FDI in Retail Sector in India.@ The sectors where FDI is already allowed are witnessing major decline. This is due to India’s instability in the political arena, depreciating rupee value, inflation, decline in growth rate etc. along with global economic uncertainties. India’s Foreign Direct Investment (FDI) inflows declined to a nearly two-year low of USD 1.05 billion in November 2012 against US$2.53 billion in November 2011. Sectors which received large FDI inflows during the eight months of the current fiscal include services (US$3.63 billion), hotel and tourism (US$3.13 billion), metallurgical (US$1.26 billion), construction (US$1.01 billion) and automobile (US$760 million). India received maximum FDI from Mauritius (USD 7.2 billion), Japan (US$1.56 billion), Singapore (US$1.5 billion) the Netherlands (US$1.09 billion) and the UK (US$615 million).* The previous low was recorded in January 2011 when the FDI inflows slipped to US$1.04 billion. The inflows had aggregated to US$36.50 billion in 2011-12 against US$19.42 billion in 2010-11 and US$25.83 billion in 2009-10.# @ Commentary by Dr. Vandana Shiva on FDI in Retail in India * The Hindu Business Line # The Hindu Business Line Page 7 of 23
  9. 9. POSITIVES OF FDI IN RETAIL With the intention of signalling a strong commitment to reforms, the UPA government has announced a hike in the price of diesel and liberalisation of foreign direct investment (FDI) in multi-brand retail, justifying the measures as growth-enhancing and inflation-dampening. They have been termed bold by India’s corporate sector and burdensome by an Opposition united across the ideological spectrum. In his speech to the nation on September 20, the Prime Minister stated that the government’s move is motivated by concern for the ordinary Indian. Strengthen infrastructure One of the pre-requisites of the success of FDI in any sector is infrastructure. Poor condition of infrastructure in terms of power, road, logistics etc. hampers the growth opportunities. It increases operating costs which in turn results in reduced profit margin. This aspect is surely worth considering before coming to any conclusion as such. In December 2011, over 300 million Indian citizens had no access to electricity. Over one third of India's rural population lacked electricity, as did 6% of the urban population. Of those who did have access to electricity in India, the supply was intermittent and unreliable. In 2010, blackouts and power shedding interrupted irrigation and manufacturing across the country. The per capita average annual domestic electricity consumption in India in 2009 was 96 kWh in rural areas and 288 kWh in urban areas for those with access to electricity, in contrast to the worldwide per capita annual average of 2600 kWh and 6200 kWh in the European Union. India has a road network of over 4,245,429 kilometres (2,637,987 mi) in 2012, the third largest road network in the world. At 0.66 km of roads per square kilometer of land. Adjusted for its large population, India has less than 4 kilometers of roads per 1000 people, including all its paved and unpaved roads. In terms of quality, all season, 4 or more lane highways, India has less than 0.07 kilometers of highways per 1000 people, as of 2010. These are some of the lowest road and highway densities in the world. For context, United States has 21 kilometers of roads per 1000 people, while France about 15 kilometers per 1000 people - predominantly paved and high quality in both cases. In terms of all season, 4 or more lane highways, developed countries such as United States and France have a highway density per 1000 people that is over 15 times as India. *# Having the statistics with us, we can say that FDI in Retail may improve the condition of the basic infrastructure by the way of investment from the government or the private side. From the past experience we can say that opening up FDIs in sectors like construction, tourism etc. resulted in better growth and efficiency in those sectors. * http://en.wikipedia.org/wiki/Indian_road_network # http://en.wikipedia.org/wiki/Electricity_sector_in_India Page 8 of 23
  10. 10. Improve supply chain India is the world’s largest producer of fruits and vegetables, has the largest area under wheat, rice and cotton and is the second-largest producer of rice and wheat. That is the good news. But, at the other end of the spectrum, India loses about Rs 50,000 crore annually just on account of frail post-harvest infrastructure. A major scoop of these farm losses can be traced to a feeble supply chain system that includes storage, transportation and distribution. Inadequate warehouses and cold storages and poor road and rail transportation are some of the red flags in the Indian logistics landscape. Experts indicate that this could beef up the existing logistics infrastructure to a significant extent, which could translate into better prices for farmers and consumers. However, there is one rider. Retailers feel that unless there is a seamless implementation of this programme across states, robust supply chain architecture cannot be built. If some states chose not to open up FDI in their retail sectors, there would be a break in the chain. Organised food retailing in India still accounts for less than two per cent of the total food market, according to a recent study by Nabard. Estimates indicate that the size of this segment is Rs 19,400 crore, as against the total food market of Rs 12,45,000 crore. By 2020, this segment is estimated to grow to Rs 62,000 crore, the study points out. Indeed, direct procurement by retailers in the new format is seen to deliver better deals, both for the farmers and producers, especially due to improvements in supply chain operations. In a paper presented during a recent Confederation of Indian Industries (CII) seminar, Sunitha Raju from the Indian Institute of Foreign Trade, points out that direct procurement format resulted in an increase in farmers’ net income by eight per cent, while consumers paid six per cent less and transportation wastage fell by seven per cent. This could further improve if supply chain logistics is strengthened. * Better warehousing Inadequate warehousing is one of the biggest bottlenecks in the entire supply chain structure. Statistics show that at 108 million tonnes (MT), the present agriculture warehousing capacity is short of the requirement by about 25 MT. A major portion of this is with Food Corporation of India (32 MT), Central Warehousing Corporation (10 MT) and # State Warehousing Corporation (21.30 MT). The fact that the Government needs to further incentivise this sector to attract private players is indicated by the fact that in the last ten years hardly 35 million tonnes capacity has been created by the private sector. In this context, the Andhra Pradesh Government has taken an initiative to bring out a separate agri-warehousing policy. “The new policy is part of the State Government’s *The Hindu Business Line # The Hindu Business Line Page 9 of 23
  11. 11. initiative to have an additional 50 lakh million tonnes of warehousing capacity in the next three to four years through public-private participation. We expect to finalise it in the next one or two months,” I.Y.R Krishna Rao, Special Chief Secretary (Agriculture Marketing), said. CII estimates that the shortfall in warehousing capacity for the next five years is expected to be about 40 million tonnes at current rate of production. However, the Government is targeting to create about 35 million tonnes of new capacity in the next five years, involving an investment of Rs. 14,390 crore. The shortfall is even more acute for cold storage facilities. There are an estimated 5,400 cold storages with a total capacity of about 25 million tonnes. Nearly 80 per cent of this is used for potatoes. Further, these are available in only nine per cent of the markets. It is estimated that to expand cold chain facilities to handle 40 per cent of the food and vegetables in the next five to six years would require an investment of a whopping Rs. 55,000 crore. Greater employment opportunities Though this argument was refuted many times, by many economists, in many countries including USA, the Government of India claims otherwise. One of the rationale it gave behind allowing FDI in Retail was better employment opportunities especially in the organised sector. India’s unorganised sector is highly penetrated and complex. Labour is mostly human and accountability is minimal. The poor segment of the retail sector is very difficult to bring under the radar. Moreover, the minimum wage rates set by the government is often tinkered with, resulting in poor living condition. Bringing in FDI will effect in more employment and better human indexes. “FDI in multi-brand retail to boost food processing industry” The Government of India said FDI in multi-brand retail would boost the growth of the food processing industries and invited private players to invest in this sector to tap the huge potential. "The steady emergence of the organised food retail and the decision to allow FDI in multi-brand retail will surely take the Indian food processing industry to greater heights," Minister of State for Agriculture and Food Processing Tariq Anwar said at the Third International Potato Expo 2012 organised by Indian Chamber of Commerce. Potato and potato-based products, which contributes 85 per cent of the USD 3 billion Indian snack market, would be a major contributor to the growth in the food processing sector, he added. "I would urge the Indian Chamber of Commerce to rope in investors and entrepreneurs interested to set up processing units for potato and also other food items," Anwar said, adding that Food processing Ministry is providing fiscal incentives for setting up projects. The Minister said that the government is targeting to increase the level of processing of perishable items from 6 per cent to 20 per cent, value-addition from 20 per cent to 35 per cent and share in global food trade from 1.5 per cent to 3 per cent by 2015. *The Indian Express Page 10 of 23
  12. 12. “FDI in multi-brand retail to push growth: Goldman Sachs” “FDI in retail is necessary to push GDP growth and deal with high current account deficit, besides bringing in technological improvements into the sector” - US investment banking giant Goldman Sachs. "Every 1.7 dollar of foreign investment can generate one dollar of GDP growth, which is the lowest amount, simply because it has so many different linkages as opposed to putting in an additional dollar in banking," Goldman Sachs India Managing Director and Chief Economist Tushar Poddar said after announcing its India outlook for 2013. He said that in the mediumterm there are several benefits of FDI in retail to the economy. "There is very high current account deficit, so we need FDI, we need inflows. * PERILS OF FDI IN RETAIL Before dogging deep into the rationale of FDI in Retail we must understand a few fundamental issues that are inclusive and have cascading effect in Macroeconomic perspective. Firstly, price rise is driven by commodification of food and speculation on food commodities. Industrialization and globalisation of food and agriculture has transformed food from a source of life into a commodity, and as a commodity, food is divorced from its sources — the seeds, the soil, the farmer — and from its end use as nourishment for our bodies. Industrialisation of agriculture and commodification of food is justified on grounds of producing more food and reducing hunger. However, industrial agriculture wastes and destroys resources — the soil, the water, the biodiversity — which produce food. The book, American Wasteland, by Jonathan Bloom, reveals that the US wastes 50 per cent of the £591 billion of food it grows a year. Industrialisation of food also degrades and denitrifies food. We, therefore, have a dual malnutrition crisis — the crisis faced by one billion people who do not get access to food, and another two billion who have access to industrial food but not to healthy food and suffer from food-related diseases such as obesity diabetes and hypertension. Industrialisation, thus, creates hunger. And by increasing the costs of production, it creates a negative economy, locking farmers and food producers into debt. In the Third World, debt translates into hunger. Hunger is also created by the commodification of food. The industrial model of food production is producing commodities, not food. More commodities do not mean less hunger, but more. And when food becomes a commodity it becomes an object of speculation for profits, robbing the poor of their entitlements. *The Indian Express Page 11 of 23
  13. 13. As a commodity it does not matter what food is used for. Food can be transformed into feed for animals in factory farms, or into fuel to run cars. Seventy per cent of the food grain in the US is used to feed animals, 30 per cent to feed cars. The proposed increase through FDI will take this to 40 per cent, creating a conflict between feed and fuel, and pitting both against food. This diversion of food to feed and fuel competes with the food needs of the poor. It creates food scarcity and contributes to the rise in food prices. Secondly, the entry of big corporations into the food chain polarises prices, decreasing the share of the farmer and increasing the retail costs. This polarisation of prices is structural; corporations make their profits through vertical integration and controlling the entire food chain. They buy cheap from farmers and sell at high cost when they have a monopoly. The control of big retail over the food system has brought down the farmers’ share to as little as two per cent. Before liberalisation, the difference between wholesale prices and retail prices was a mere six per cent. After the removal of Quantitative Restrictions, which opened up India to dumping of subsidised products, wholesale prices started to go down while retail prices continued to climb. The entry of retail giants will further push wholesale prices down, without taming the price rise. It is not the number of middlemen that matters but the size of a middleman. A giant retailer is a giant middleman. It might be a single player, but it harvests super profits at the cost of society. That is how the Walton family, which owns Wal-Mart owns US$100 billion of personal wealth, which is equivalent to the wealth of the bottom 30 per cent of the US society. You do not accumulate that kind of money by paying farmers higher prices and bringing consumers cheaper products. Wal-Mart and Tesco are not friends of farmers as is being projected by the government and corporate spokesmen. The Financial Times said on November 28, 2011: “A consolidated retail sector would require consolidated agriculture to supply.” Consolidation means concentration, concentration means displacement of small farmers, destruction of small farmers means deepening both the food crisis and the agrarian crisis. Big retail means big agribusiness. About 250,000 farmers have already committed suicide in India since 1997 because of increasing monopolies on seeds and chemicals, rising costs of inputs and deepening debt. Big retail will uproot small farmers, as it has done worldwide. India’s future cannot be “retail dictatorship” and “seed dictatorship”. It has to be “retail democracy” and “food democracy”, based on small retail and small farms. Whatever the merits of the official case there is one issue that remains controversial: the impact that liberalisation would have on existing players operating in the fields where foreign presence is to be expanded. That question is particularly important in retail, which is known to be populated by small players, who often enter this activity because of lack of opportunities in the commodity producing sectors. Returns earned by these enterprises are extremely low since, given the lack of social security; they need to engage in something to survive. Now, we should understand the most likely effects and consequences of FDI in Retail based on facts, figures and history. The effects of allowing deep-pocket retail giants are undoubtedly macroeconomic and hence we should analyse it on a subjective basis. Page 12 of 23
  14. 14. The role of the small retailer The government’s claim is of course that large retail would not encroach on the areas of operation of the small and existing players, and that this has also been partly guaranteed by the requirement that foreign retailers will only be allowed to operate in cities with a population of more than 1 million. However, this is just the first step, as is clear from the provision that in states where there are no cities that match this population size, the state governments can choose where to allow foreign chains to operate. It is no doubt true that big retail will not seek to cater to small, dispersed and remote markets. But cities and large towns other than the major metropolitan centres are bound to be targets for a system that requires scale to garner adequate profits. This has generated interest in the role that small players play in India’s trade. Unfortunately, the evidence is limited. One source of recent evidence on the role of the unorganised sector in trade (including wholesale trade and repair facilities) is a recent survey report from the National Sample Survey Organisation relating to 2010-11, which provides information on both employment and gross value added in enterprises engaged in trade. It also provides information on certain structural features of these enterprises. Data on aggregate value added in trade, covering both the organised and unorganised sector is estimated and included in the National Accounts Statistics for that year. And employment in the trading sector as a whole is available for 2009-10 from the large sample survey on employment and unemployment conducted by the NSS. While these different sources are not strictly comparable in terms of both coverage and time, some broad orders of magnitude relating to the relative importance of the organised sector in trade can be gleaned from these numbers. What emerges from these data sources is that the unorganised sector in trade accounts for more than three-fourths (78.1 per cent) of employment in the sector as a whole in the country. On the other hand, gross value added in the unorganised enterprises engaged in trade amounts to just 22 per cent of the value added in the trading sector as a whole in the country. Thus, the unorganised trading sector does indeed provide for employment for a substantial majority engaged in the sector, though with net earnings that are clearly very much lower than in the organised sector. Page 13 of 23
  15. 15. So, if the expansion of the organised segment in the retail trade, which would be accelerated by the entry of foreign investors and chains with deep pockets, does adversely affect the unorganised sector, the impact on employment and already fragile livelihoods can be damaging in both scale and intensity. The government’s argument is that restricting organised retail to the urban areas would substantially reduce its impact on the unorganised sector. However, 55 per cent of even the unorganised trading enterprises are located in urban areas. There are an estimated 18.8 million people engaged in the unorganised trade in the urban areas. In particular, an overwhelming majority (82 per cent) of units in the nature of “establishments”, which (as opposed to “own account enterprises” of the selfemployed) employ at least one hired worker on a fairly regular basis, are located in the urban areas. These are the units that are likely to be subject to competition from the organised sector, resulting in possible loss of employment and livelihood. Thus the evidence does point to the strong likelihood of an adverse fall-out of the policy of pushing organised retail, domestic and foreign, in the name of improving the quality of the supply chain. That evidence has to be assessed in the light of international experience, especially in similarly placed developing countries, which suggests that employment losses can indeed be substantial. Official claims that FDI in retail would spur growth and augment employment choose to ignore that evidence, given the focus on attracting and appeasing foreign investors. Involved workforce – Muslims going to be hurt the most The general belief is that Muslims came into India with their invasion of the sub-continent and the formation of the Mughal Empire from the early 16th century. However, historical facts show that Arab traders visited the Malabar coast of Kerala as early as the 7th century, brought Islam with them, and engaged the local population in a robust and profitable trade in pepper and other spices. They intermarried with the local people and this resulted in the evolution of the large Muslim Maplah community of Kerala. The Muslims of India thus have a rich tradition of engaging in trading activities for over 1,300 years. Trading is amajor source of sustenance for them all across the country. However, their trading activities in Kerala were rudely interrupted by the arrival of the Portuguese, in the early 16th century. As often happened in those times, the Portuguese attacked, looted and set fire to the town of Calicut. The Mappila community lost the spice trade — and a whole lot more — that they had carefully built over centuries to the invaders. We can review this with the help of the Government’s study of the status of the minority community conducted by the Sachar Committee. Appointed in 2005 by the Prime Minister, the Sachar Committee was commissioned to prepare a report on the social, economic and educational condition of the Muslim community of India. The committee’s extensive report was presented to Parliament on November 30, 2006. The classification of Wholesale and Retail trade employs 17 per cent of the working Muslim population, compared with 8 per cent for Hindus and 10 per cent for other minorities. The Muslim community is twice as Page 14 of 23
  16. 16. likely as the majority community to be engaged in trading and retail, the source of their livelihood that going to be affected by FDI. A category of employment related to Wholesale and Retail Trade is Transport, Storage and Communication. This category employs 6 per cent of all Muslim workers, compared with 4 per cent of all Hindus. At an all-India level, there are an estimated 16 million people in this category who are under threat by retail FDI. The likely impact on this group is not even under any consideration from any quarter. If we try to look at the worker participation rate and applying it to the population, we can estimate the actual number of workers by socio-religious category and by employment category. 20 per cent of the people engaged in Wholesale and Retail trade are Muslims, although they represent only 13 per cent of the total population, and just 11 per cent of total worker population. There is thus a disproportionate dependence of the Muslim community on Wholesale and Retail Trade. Of course in sheer size, the majority Hindu community has nearly four times the number of people as Muslims engaged in wholesale and retail trade. Page 15 of 23
  17. 17. If one looks at Muslims by States, it will be no surprise that the top three States in terms of Muslim population — UP, West Bengal and Bihar — have promptly said they will not entertain FDI in retail in their States. The leaders of these States know their voters and the state of this community. The Congress-run government of Kerala, where one-fourth of the population is from this community, has also refused to agree to FDI in retail. The problem arises in States such as Maharashtra, Assam, Andhra, J&K, Rajasthan, Delhi and Haryana that have agreed to FDI in retail. The Government claims to have put in safeguards in the policy. Unfortunately, such claims ring hollow since the rules are easily changed by administrative notifications and everyone is aware of how lobbies are adept at getting this done. Whenever it is pointed out that huge numbers of people will be displaced by the multinationals for whom the doors have been thrown open in retail, even educated and Page 16 of 23
  18. 18. responsible people blithely argue that such people will have to be retrained and redeployed. What are the possibilities of this happening for the Muslim community? With nearly twothird of the literate Muslims just at the Upper Primary School level — the highest proportion at this level among all communities — it will be well near impossible for those displaced to find any other employment. FDI in retail is an issue that will have a major impact on all communities. This is going to be one case where everyone will have to come together to send a clear message to the Government on what is acceptable and what is not. This is already evident in the united opposition of all political parties to this development. Procurement Clause – Tweaking the rules The Department of Industrial Policy & Promotion (DIPP) Press Note 5 (2012 series) issued on October 20, said that 30 per cent of the value of procurement of manufactured/processed products purchased by multi-brand retail giants, should be sourced from Indian ‘small industries’ with a total investment in plant and machinery not exceeding $1 million. This valuation refers to the value at the time of installation, without providing for depreciation. Besides, if, at any point of time, this valuation is exceeded, the industry would not qualify as ‘small industry’ for this purpose. The other stipulation is that the procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the manufactured/processed products purchased, beginning April 1, of the year during which the first tranche of FDI is obtained. Thereafter it would have to be met on an annual basis. The rationale for this clause is that the FDI entry should benefit small-scale industries. Again, the rider that at least 50 per cent of total FDI brought in should be invested in ‘backend infrastructure’ within three years of the first tranche of FDI (the minimum amount to be brought in as FDI by the foreign investor would be $100 million) that covers capital expenditure on all activities such as processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure. A moot point is that the rules provides for self-certification by the company to ensure compliance of the twin conditions, “which could be cross-checked, as and when required”. The onus is on the purchaser to fulfil the conditions that may be duly ‘certified by statutory auditors’ through self-certification. Big foreign companies with deep pockets would find it facile to manufacture such certification from complaisant auditors to play ball with them, instead of scouring the country to obtain the requisite supply from MSEs. It would not be off the mark to note that policy reservation for small-scale industries (SSIs) which later morphed into MSEs, was set off in 1967. But over the years and particularly after India’s liberalisation of trade and industrial policies in 1991, 887 items had been de-reserved from time to time. With the last deletion in 2010, Page 17 of 23
  19. 19. the number of items in the reserved list has been brought down to 20, which cover only food and allied industries, wood and wood products, paper products, other chemicals and chemical products, glass and ceramics, mechanical engineering excluding transport equipment such as steel almirah, rolling shutters, padlocks, stainless steel utensils and domestic utensils-aluminium. This was stated by the Minister for Micro, Small & Medium Enterprises K. H. Muniyappa in Rajya Sabha on December 10. With the space for MSMEs thus reduced, can they be expected to provide 30 per cent of the requirements of multi-brand retail stores, comprising assorted goods and items? Apart from the 30 per cent mandatory reservations which may be easily circumvented, the rest of the 70 per cent can be imported from cheaper sources such as China and Bangladesh, further harming domestic industry. Already, the air is rife with troubling tidings that Wal-Mart is being subjected to inquiry under the Foreign Corrupt Practices Act, US, into the allegations of potential violations in certain countries, including India. Following the uproar in Parliament, the Government has been compelled to set up an inquiry committee under a retired judge. The Reserve Bank has said that issues related to Bharti Wal-Mart/Cedar Support Services Ltd and Flipkart Online Services Pvt Ltd, respectively, have been referred to the Directorate of Enforcement for further probe. This was stated in the Lok Sabha on December 3 by Minister of Commerce and Industry Anand Sharma. Livelihood Issues Unorganised retailing in India encompasses low-cost retailing, for instance, the local kirana shops, owned and operated general stores, pan/beedi shops, convenience stores, hand cart, pavement vendors that one is inured to here. Organised retail chains such as Pantaloon, Shoppers’ Stop, Marks & Spencer, Hyper City, Trent, Reliance Retail, Subhiksha constitute only five per cent of the total retail market. India’s retail business provides livelihood security to lakhs of self-employed people. Without providing manufacturing-driven job opportunities to millions, the Government would be fostering social problems of huge dimensions, if it believes FDI in retail would deliver. Lessons from the past Why focus on Walmart? It is world’s most powerful retailer; it has ‘spent’ a lot to get the UPA nod for FDI in retail. Even as lobbyists here celebrate Walmart, it has become untouchable where it was born, in the US. Why is Walmart so hated in the US? “Walmart will devastate local businesses,” say New York trade unions and local communities. The mass protesters at Los Angeles too cited the same reason: “small business will close down”; and screamed “Walmart has no heart and no morals. We don’t want you in Los Angeles.” Page 18 of 23
  20. 20. Yet, the Government of India certifies Walmart and its competitor cousins as compassionate to small retailers and farmers. It promises they will employ millions here. The evidence in the US is to the contrary. According to the Atlanticcities article, Walmart entered in Austin neighbourhood of Chicago in 2006. And by 2008, some 82 of the 306 small shops had closed down. The Economic Development Quarterly study found the closure rate around Walmart location at 35-60 per cent. Walmart radiated closure of 20 per cent of drug stores every mile from its stores; and 15 per cent home furnishing, 18 per cent hardware and 25 per cent toy stores. Studies in the US nail the UPA lie that FDI in retail will not hurt small shops. On job creation, a latest report (January 2010) titled ‘Walmart’s Economic Footprint’ prepared for the New York City Public Advocate says that Walmart kills three local jobs for every two it creates. So the job creation argument too is a lie. The third justification that the ‘farmers will get better prices’ is a clever lie, and so needs a closer look. It suppresses the vital fact that Walmart does not buy, or pay, over the counter. It buys the nation’s next harvest in futures market and fixes farm prices. It also imports cheap goods — from China — and destroy local production like it has done in the US. Take the first case, with the recent experience of the US and the world. Rice prices in the US and world markets shot up by three times in April 2008 as compared to January 2007. It was then that the US President George W Bush made the funny remark that prices had gone up because the newly prosperous Indians had begun eating more! What was the truth? The USA Today (April 23, 2008) and CNN (April 24, 2008) quoted the California Rice Commission and USA Rice Federation as denying shortage of rice and saying there was enough stock. Why then were prices rising? It was because, said the CNN, Sams Club (Walmart’s wholesale division), holding huge stocks, was pushing up the prices. US farmers accused speculators and futures market for the high prices. It was not farmers who traded in farm futures. Investment funds accounted for 40 per cent of wheat futures trade in the US in January 2008, which rose to 60 per cent by April. Wheat futures that was $4 a bushel in early 2007, rose to $14 per bushel in April 2008. The US farmer, who had sold his harvest in futures market, lost and Walmart, which had bought the futures, gained. Even if some farmers had some stocks Walmart, which had stocked at cheaper prices, refused to buy at higher prices, pointed out the media. Look at it this way. If the US farmers get remunerative prices from Walmart why does the US, with two per cent farming population, grant annual farming subsidies of $20 billion and the European Union, for its five per cent farming population, gift a subsidy of $74.5 billion annually. The experience of the US and West nail all three justifications for the FDI in retail as lies. Foreign direct investment in retail will incrementally hit the 12 million family retailers in India; it will not help farmers; it will cut jobs. Even more dangerous, it will destroy the rural food security. Two of UPA government’s reports — of the Planning Commission Working Group on Agriculture for the XI Plan (2007-2012), and the 19th report of the Standing Committee of Parliament on Food (2006-2007) to Parliament — themselves nail the lie that Walmart will link farm-gate to its gate and make Indian farmers rich. The reports describe the farm-gate thus: a total of 59 million of farming families (32 crore rural people) live on subsistence farms of five acres or less (while US farms are 250 times and the Australian, 4000 times, Page 19 of 23
  21. 21. larger); about 60 per cent of food products is barter-exchanged and consumed by farmers and farm labour, and as seed and animal feeds within villages; only 40 per cent move out of villages for commercial marketing. Even if a small part of the large local needs is drawn by an efficient Walmart from the farm gate to its gate, that will mean urban pricing in rural areas that will destroy the food security of two-thirds of Indians in villages. The Montek Ahluwalia-led Planning Commission report laments that ‘the marginal farmers are certainly goingto stay for a long time’ and ‘what happens to them has implications for the entire economy.” However, the small farmer is no waste. He is more efficient. His productivity a third higher, than in large farms. Small farmers use one-third of the total cultivated area and produce 41 per cent of nation’s food and 110 million tonnes of milk. If large ones replace them, the nation’s food production will fall by 7 per cent. The reformers do not know that recent global researches have confirmed that economy of scale that applies to industries does not apply to agriculture, where small ones are more efficient than large ones. SUMMARY & CONCLUSION Nobel laureate American economist Joseph Stiglitz said that FDI in multi-brand retail in India would promote instability due to exploitative and corrupt practices adopted by MNCs to monopolise the retail markets in any country. "The FDI in retail can promote instability by way of the exploitative and corrupt ways of the MNCs to hold sway over retail markets," Stiglitz said. "India must take into account a prospect of instability before allowing FDI in multi-brand retail," he said while delivering a lecture on "Redefining Capitalism" here. MNCs will bring in corruption and exploitation of labour force after setting up shops in India, he said. Pointing that the retail giant Wal-Mart bribed officials at various levels in Mexico to monopolise the retail market there, he said, "May be, you want to learn bribery. But I don't understand what India is trying to get out by allowing FDI in multi-band retail." Stiglitz said it would bring exploitation of the labour force and promote corruption. "FDI can bring with it capital, technology, know-how, training and access to market and can promote growth and job creation. But the foreign firms can be even more efficient at exploitation, in one way or the other," he said. Denouncing the pro-FDI in retail theory that it will improve the supply chain and enhance welfare of the farmers, producers and consumers, Stiglitz painted a gloomy picture of the retail scenario in India. "Some of the MNCs are noted for their poor labour relations, workers' exploitation, discrimination and bribery," he said after pointing to the widespread agitation by the people of Mexico against the retail giant Wal-Mart recently. More than two decades after the first wave of reforms were introduced in the year1991; the country’s socio-economic health has by no means become better. In the midst of these galloping problems, the announcement by the UPA government about FDI in multi brand retail comes not as a relief but as a matter to be given a serious thought. The debate so far is threefold: (a) one section which is drooling over the reforms and projecting huge surge of Page 20 of 23
  22. 22. investment in infrastructure and thereby increment in the employment levels. (b) The second group is the one which is sceptical about the opening of markets for foreign retail giants like Walmart, Carrefour, Kmart etc. not because they fear that it would affect the overall development of the economy. Rather, this group fears competition from the big foreign companies which have deep pockets to procure products from the world market. Thus, it would affect their profits by a huge margin. (c) The third group comprises of the unorganized retail sector which fears its elimination from the market in the long run. Various claims made by UPA seem to fall flat on any reason if we take into consideration the outcomes of previous reforms. Employment in formal sector has not increased by any count since 1991, informalization of labour in the formal sector is a clear indication of this fact. Productivity in agriculture, where almost 54 per cent of the population is dependent has declined. It is no longer a profitable venture as the input costs have gone up in the post green revolution phase. Rise in the phenomena of rural to urban migration, rural non-farm employment, farmer suicides, show what precarious condition agriculture has landed into. Gradual shift of the economy from agriculture to industry, as expected in the prospects of reforms, has proven to be a fallacy. Instead, the existing industries have become more capital intensive leading to the displacement of labour on a mass scale. Trade liberalisation has given the global players a free hand to rein the economy. As a consequence rate of inflation is rising unchecked as the price of crude oil is fluctuating globally. These examples showcase that reforms and liberal policies have not led to the overall development of the economy. In the light of the above observations, announcement of FDI in multi brand retail does not give much hope. The Indian retail sector is not only very vast but also varied in its composition. The huge population of the country, the rise of the middle class and its purchasing power and a huge market for foreign investment in India are factors that have invoked the interest of the foreign investors. But, it becomes imperative to see what this FDI would entail for the retail sector when it is analysed by keeping the informal economy at the centre of the debate. When only 4 per cent of the retail trade in India comes under the organized retail it becomes essential to evaluate or assess the viability of FDI taking into consideration not this 4 percent but the 96 per cent which belongs to the unorganized retail sector. The unorganized retail sector is not a homogeneous category, it comprises of peddlers, street vendors, kiosks, push-cart vendors, weekly traders. It is not unknown that the majority of those engaged in retailing at the lower end of the economy depend on the small and medium enterprises for their supplies. It has been reiterated time and again, by many economists, how and under what conditions the unorganized sector has risen to such heights in India and other developing countries via the route of the neo-liberal regime. Indian retail market is quite diverse in terms of scale, culture and structure. Some reasons for this diversity can be attributed to the divide that exists between rural and urban India. Traditional forms of marketing (neighbourhood markets, mandis, and periodic/weekly markets) coexist with modern day markets (supermarkets, hypermarkets, Single brand outlets etc.). Decline of the rural economy coupled with lack of employment in the manufacturing sector (organized sector) created a vast pool of surplus labour in the country in the post reform Page 21 of 23
  23. 23. period. This multitude of labour started migrating to urban centres in search of employment and many of them landed up with self-employment in the service sector of which retailing forms a huge part. Annihilation of small scale and self-employed lower middle class will lead to large scale poverty and destitution because the unorganised sector is absorbing the shocks of migration and rural distress. It manages by catering to middle classes in the metropolis. If this market is gone, they will all be unemployed. The adverse impact of the FDI would befall the unorganized retail sector with great intensity if the State makes more stringent rules of zoning and regulation. I have been researching the local weekly markets of Delhi for the past three years. These markets are very prominent feature in all parts of Delhi and NCR. There are around twelve hundred weekly markets of which only one fourth are recognized by the Municipal Corporation of Delhi (consequence ofzoning). Approximately 2.5 million people are employed through these markets. This figure would just double if we take in to account additional employment that is created around these markets. Various own account and household enterprises are producing commodities on a daily basis for such low end markets. Local weekly markets provide a very easy channel of distribution of commodities produced not only in local small scale industries but also in the neighbouring States. For instance, rubber chappals and shoes made in Agra, sarees made in Surat, hosiery made in Coimbatore, woollens made in Ludhiana are all sold at affordable prices here in these very markets. FDI in multi brand retail would either displace various wholesale markets or the size of such markets would shrink. Today the local markets run on capital which has a fluid or floating nature. But with the coming of multi brand retail stores this floating capital would freeze and small retailers and vendors will be evicted from the market. It is argued by the government that FDI in retail would create employment opportunities. But employment for whom is the crucial question? It would create employment for those who are educated and have professional experience. “Taking cue from my observation in the weekly markets of Delhi I would argue that majority of those now employed in these markets have minimal education and have no professional degrees apart from their marketing knowledge. Now if FDI in multi brand retail comes, it is not in any way going to benefit these traders if they lose their sole means of survival.” Suvrata Chowdhary, PhD student at the Centre for the Study of Social Systems, JNU. Page 22 of 23
  24. 24. REFERENCES http://www.outlookindia.com/article.aspx?282494 “FDI in multi-brand retail can strengthen supply chain links” – The Hindu Business Line “ED probing Bharti Walmart, Flipkart cases: Govt” – The Hindu Business Line “Dangers posed by FDI in retail” - The Hindu Business Line FDI In Indian Retail Sector: Analysis Of Competition In Agri-Food Sector “FDI in multi-brand retail to boost food processing industry” – The Indian Express “Retail FDI: Bane or boon for farmers?” – The Indian Express “Retail FDI supported by farmers, will benefit them and consumers: Manmohan Singh” – The Indian Express The FDI Report 2012 – FT Business The Great Indian Retail Story – Ernst & Young “Reform in name only” – The Indian Express http://www.wikipedia.org/ “The FDI cliff” – The Indian Express Page 23 of 23