Opening Up Retail Trade

FDI could be a powerful catalyst in the Indian retail revolution if handled carefully.

By B G Verghese

New Indian Express, 19 July, 2010

The Government’s discussion paper of July 6 on opening up retail trade in India to foreign direct investment has aroused as much interest as concern. This was only to be expected in response to mooting liberal reform in this huge and largely unorganised sector that impinges on the lives of virtually every citizen.

Statistics vary, but according to credible estimates, Indian retail trade is valued at something of the order of Rs 13.5 lakh crore (approx US$300bn) of which barely two percent is in the large scale organised sector, represented by branded outlets, mega stores and malls. The vast bulk of retailing is done by family-run kirana stores and hole-in-the-wall or street vendors like the ubiquitous paan seller. The numbers employed is placed at over 33 million, far more than any other sector outside agriculture.

Agricultural produce including fruit and vegetables necessarily accounts for a considerable part of retail vending. However, in the absence of back end infrastructure, the farmer gets only a modest part of the consumer’s rupee – maybe just a third or less. There is little grading and quality can be extremely variable. The middleman rules.

The Department of Industrial Policy and Promotion’s discussion paper sets out the scene and seeks the widest cross-section of stakeholder views on opening up the retail sector to foreign direct investment on a controlled basis before firming up a policy paper. Multi-brand retailing is closed to FDI but has since 2006 been permitted up to 51 percent in single brand retailing and 100 percent in wholesale trade. Foreign investment in single brand retail is currently about Rs 900 crore. In view of the high investment cost of back-end infrastructure such as warehousing, grading, cold chains and so forth, the Government has made out a case for foreign investment in the retail sector, but only with appropriate safeguards for small local traders and against significant labour displacement. The present, loss of fresh agricultural produce through spoilage is estimated at Rs 1 lakh crore of which half or more could be saved if suitable infrastructure were in place. Both farmers and consumers would gain.

However, the cost of this back-end infrastructure is estimated by the Planning Commission at around Rs 64,000 crore and it is this cost that FDI could significantly defray. With small retail growing annually at 15 percent, even as the momentum of large retail has slowed down over the past couple of years, there could be room for both big and small and domestic and foreign brands in catering to the rapidly growing market.

The official discussion paper is sensitive to several fears variously expressed. Could large retailers compete against the public distribution system and threaten buffer stocks? To counter this, one option suggested is that the government retain priority over procurement from farmers through a right of first refusal. It is also suggested that at least half the jobs created in FDI-funded retail outlets be reserved for rural youth and that manufactures be compulsorily sourced from small and medium enterprises to ensure reasonable market shares. Such a regulatory framework would require legal backing and monitoring. Small family kirana stores can also be sought to be integrated with large foreign chains which could be initially limited to million-plus cities, currently numbering 35.

One useful innovation might be to bring the 35,000 or more khadi and village industry outlets into the modern retailing chain with FDI backing on the condition that KVIC products, handlooms and handicrafts are also made part of the innovation and marketing chain. This could give an enormous fillip to a once live but somewhat moribund sector that remains a major employer and producer. The Gandhians will have to wake up to the future instead of continuing to live in the past. The potential here for both technological conversion and scaling up is enormous as the basic structure and outlets exist with tremendous goodwill.

The debate on liberalising FDI in retailing meshes well with the current farm crisis. The second green revolution projected has to rest in significant part on high-productivity diversified agriculture, including fruit and vegetable farming, dairying, poultry and special crops, with agro-processing, marketing and by-product utilisation adding to the value chain. Grain production must increasingly come from the vast Gangetic plain which is presently performing well below its agricultural potential on account of feudal land relations and related factors that require close and careful attention. In the dry farming zone, spread over a very large area, new technologies of water conservation such as sprinklers and drip are required. Networking these sectors with larger players with the necessary competence and technological, managerial, marketing and financial wherewithal also seems indicated. The process has begun and the farm sector can no longer be kept away from modernisation and change with innovative backward and forward linkages, with safeguards, enhancing production, productivity, incomes and employment all among the chain.

Sharad Pawar’s desire to be relieved of some of the burdens of his official portfolio of Food and Agriculture is coincidentally timely. Agriculture needs to be hived off from Food. Both call for dynamic leadership in effecting the second green revolution and in promoting agricultural marketing and processing and steering forward FDI in this crucial sector. There is a special place for the Northeast in this programme for fruit and vegetable farming, plantation cropping, herbi- and floriculture and organic farming.

Indian agriculture can no longer sustain the population dependent upon it. The land-man ratio is becoming increasingly adverse with population growth. A 2006 National Sample Survey showed that 40 per cent of those engaged in farming would leave if given alternative opportunities. Off farm employment and related services must fill the bill. This has to be the wave of the future. Things like the e-choupal are no longer “experiments”. They are part of the proven reality of modernization and rural change though mutually beneficial partnerships between farm and industry, rural and urban, especially small-town, India.

Pressures are mounting and the country must move fast to keep ahead of numbers and rising expectations. The way ahead must obviously be navigated skillfully and with due care, and with safeguards and safety nets for those who need protection. But proceed with caution. Multiple transitions must be made to ensure stability, equity and inclusive growth. A retail revolution, with FDI as a catalyst, is part of the kind of opportunity whose time has come.

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