FDI in multi brand retail: Boon or Bane?

 

FDI in multi brand retail: Boon or Bane?

 

What is FDI?

Before we can debate on the pros and cons of FDI in multi-brand retail sector, it is important to understand a few key things about FDI and Retail in India.

Foreign Direct Investment refers to capital inflows from abroad, investment of which enhances the production capacity of the economy.

However, FDI in retail is slightly different from the investment in corporate, manufacturing, or infrastructural sectors. Retail can be single or multi-brand and may be described as a sale to the ultimate consumer at a margin of profit. 

 

Single-brand retailing refers to businesses selling their goods to individual customers under a single brand umbrella. Multi-brand retailing, on the other hand, is selling of goods to individual customers by businesses under several brand names.

 

FDI in single brand retailing in India has been allowed since 2006, but FDI in multi brand retailing has been permitted recently. This means that a retail store with a Foreign Direct Investment can sell multiple brands under one roof. Hence, it serves as the link between the producer or manufacturer and the individual consumer. As a signatory to the World Trade Organization’s General Agreement on Trade & Services which included wholesale and retail services, India had to open up its retail trade sector to foreign investment.

 

How will FDI benefit the nation?

The retail sector of India is highly fragmented, characterized by 97% of its business being run by the unorganized retailers while the organized retail sector is still in its infantile stages.

It is expected that with the infusion of Foreign Direct Investment, the retail sector will become more organized.

 

FDI in agricultural sector

Investment in food-based retailing especially will ensure adequate flow of capital into the country and promote its productive uses.

Additionally, this investment will promote the welfare of farmers by contributing to agricultural growth and thereby, increase their income levels.

 

Intermediaries, known by different names in different parts of the country, flout the most basic of business ethics. Prices lack transparency, farmers are not paid their due share, and even regulated markets have come to take on a monopolistic character. 

Farmers in countries with a greater share of organized retail are easily able to realize 2/3^rd of the price paid by the final consumers. However, in India the situation is such that farmers consider themselves lucky if they manage to earn even 1/3^rd of the price in the final market. We can expect FDI to assist in reducing the dominance of intermediaries on the value chain of the agricultural sector.

 

How does FDI serve the consumers?

FDI in retail will ultimately make the consumers happy. In the absence of intermediaries, the consumers will have to pay, for the same product, a lesser price than before.

Also, in the unorganized sector the consumer has to argue or fight for their consumer rights and most of the times, they have to accept defeat. For example, it is very difficult for them to return or exchange a faulty product. This process will become more standardized, though, with the advent of FDI.

 

FDI will also serve as an antidote to inflation. The producer will be able to get direct payment from the retailer and the same will be higher than what they are used to getting, due to the absence of intermediaries.

In accordance to the provisions made, any company which opts to go for 51% partnership in retail shall have to tie up with a local partner. This will usher in an era of low-priced quality products. It will also improve the income levels for all concerned as a direct consequence of the partnership, investment and increased sales.

FDI will give rise to a wave of investment in the logistics of the retail chain leading to efficient market mechanisms.

 

FDI and Horticulture

In spite of being the biggest producer of fruits and vegetables (more than 180 million MT), India doesn’t have a strong integrated cold-chain infrastructure with a meagre 5400 cold storages which add up to a total capacity of about 24 million MT.

The irony is that about 80% of the capacity is used only for preservation of potatoes. The perishable horticultural commodities find it difficult to reach distant markets, including the overseas market. FDI will become a catalyst in avoiding any distress sales of these products, erosion of quality and wastage of the produce.

 

FDI in retail sector will give way to healthy competition. Some may consider it to be a negative, but rising competition is a boon for the Indian market, paving the way for superior quality products, innovation and high consumer expectations.

 

Is FDI to be feared?

The fears that entry of FDI in multi-brand retail may cause unemployment as a consequence of firms importing materials from the global market instead of buying it from domestic suppliers  are unfounded as it has been seen that the entry of big corporates like Reliance and Tata have substantially improved the living standards of farmers and villages supplying the raw materials.

 

The present Public Distribution System (PDS) will also be strengthened owing to better products and storage facility.

 

In short, allowing FDI in multi-brand retail would bring about supply chain management, increase investment in technology, lead to manpower and skill development, upgradation in agriculture sector, and benefit the nation as a whole through increased GDP and tax income. Greater production will lead to greater employment and bring about a positive change and prosperity to the retail industry, and by extension to all the stakeholders in this sector.