A bugbear from the beginning of the 1990’s in the Indian political arena has been the issue of FDI in retail. It is a very, very prickly issue because India as a nation has failed in creating any environment for organized entrepreneurship to flourish. In its absence, a mushrooming of what could be termed ‘ultra micro’ entrepreneurs has taken place in India.

From driving auto rickshaws to running small restaurants and tea shops, Indians have learnt to fend for themselves.

One giant industry of this kind is that of small retail outlets (commonly called Kiranas), millions of them across the country dotting the landscape. They sell everything imaginable in a tiny area, from freshly prepared snacks to packaged FMCG commodities from leading multinationals. At last count, there were 33,100,000 people employed in such stores across India.

In comes the new FDI policy on retail

The Department of Industrial Policy and Promotion has released a new policy where they are considering allowing 100% FDI in multi brand retail. This will pave the way for behemoths like Wal-Mart and Carrefour to enter India. With the economies of scale and the organization which these companies bring, in the long term, it spells a blow to the small retailer around the corner.

While it is silly to take a view like that taken by politicians that these stores need to be “burnt”, we really need to think about whether this move is appropriate in the current context.

Undoubtedly, from the point of view of the individual customer, a store like Wal-Mart is beneficial. In a market economy, what is best for the customer must always prevail. So to keep an inefficient sector on life support is not wise.

At the same time, the Government should consider the immediate implications of such a move. Reforms have to be accompanied with a vision, a road-map, a goal for the future. With a vision, a goal for development and economic growth, the market itself would have paved the way for these large retail stores to enter India and flourish.

Tying it up

What we need is a vision and roadmap for planned economic growth. Specifically, we need to focus on creating jobs in manufacturing and smaller service sectors to employ the roughly 25 million youth who join the labour force every year.

Once we have robust job creation in these areas, people will not have to fend for themselves and can enter the workforce. At such time, if FDI in retail is introduced, the economic impact will be less severe.

At this stage, when we are (ironically) a labour rich work force with a (high-tech) service driven economy, this is not the right move.

Arguments in favour of FDI (and whether they make sense)

Argument 1:

One big argument is that these retailers will improve storage and warehousing infrastructure in villages and towns and thus reduce the criminal wastage of grain and vegetables that happens. This inturn will reduce food inflation.

Response:

Warehousing and storage systems can be disaggregated from retailing. There has been a crying need for storage systems and warehousing for a long time. The Government ought to have included that as a priority item in infrastructure creation and social spending. Indeed, that is one of the mandates of the Food Corporation of India as per the Food Corporation of India Act, 1964.

To abdicate that responsibility is taking the easy way out. That is certainly not an argument.

Argument 2:

These stores will not affect the small retailers. Countries like China have Wal-Marts but their retail industry is still flourishing.

Response:

Maybe not, if they are not located in the city centre but far from the city centre. In that case, people will still frequent the around-the-corner store for their basic needs. But if they are built in cities, in close proximity to urban centres, they will definitely have an impact on retailers. That is plain common sense.

Conclusion:

As a nation, if we want to move over to a new & more efficient system, we need to create an alternative for the people who currently depend on unorganised retail to earn a living. Investing in creating a robust manufacturing sector, for instance, may create alternatives and absorb some of the people working in the unorganised retail sector.

We can and should gradually bring in such reforms (FDI in multi-brand retail) over time. Now may not be the right time.

Agree/Disagree? What’s your take on FDI in multi-brand retail?

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more).]

[Image credit: Yeshwanth Rao/Flickr]