India’s retail reforms – a boon or bane?


Background

India is looking to reform foreign direct investment in the retail sector. The major liberalisation changes announced last week could see the arrival of large, multi-brand international supermarkets like US’ Walmart, Britain’s Tesco and France’s Carrefour, in India. This potentially opens up India’s estimated US$500 billion retail market to international chains and allows easier access to India’s growing affluent middle class.

However, lawmakers, interestingly from both the ruling AND opposition parties, have strongly resisted the plans for reform and liberalization. Regional leaders of some of India’s most populous states – Uttar Pradesh, Bihar, West Bengal and Tamil Nadu – have said they oppose any plan to allow in supermarket giants. As foreign retailers each have to obtain a license from individual states to operate there, resistance by state governments means that the reforms may potentially be scuppered in major parts of the country.

The proponents of this reform, including Kaushik Basu, one of Prime Minister Manmohan Singh’s advisers have decided to intimidate the people through scaremongering and claiming that that hundreds of millions of the poorest people in India will have to pay more for staple foods like rice and vegetables if foreign supermarkets are refused permission to open. It is claimed that foreign supermarkets will help India deal with food inflation (which is in its double digits). The proponents of this reform (particularly from the government) also correctly argue that India currently lacks infrastructure, logistics know-how, good roads and transportation and lack of wholesale refrigeration and this means that there exists within the system plenty of wastage and inefficiencies. It is felt that foreign investment in the retail sector will serve to mitigate these issues and help keep food prices down and support economic activity.

The vociferous opponents to proposed reforms, which include trade unions, local government, small traders and enterprises, small farmers, argue that if the reforms were to go ahead, small businesses will be hit hard and it will also have a strong impact of small farmers who will lose even further bargaining rights subsequently. They argue that small farmers will be forced to sell out their land holdings to large corporate as they will be unable to compete with the financial might of the retail megastores.

The Indian government’s concessions

The government has faced significant opposition to their plans and has outlined a series of measures to ensure that the potential negative consequences of the reforms are mitigated. They include:

  • The Commerce Minister, Anand Sharma claims that there is a provision for procurement of 30 per cent goods from small and medium enterprises required under the new policy allowing FDI in the Indian retail sector. The ministry’s statement reads: “sourcing of a minimum of 30 per cent from Indian micro and small industry having capital investment of not more than $ 1 million has been made mandatory.” The statement goes on to add that, “This will provide the scales to encourage domestic value addition and manufacturing, thereby creating a multiplier effect for employment, technology upgradation and income generation.”
  • The policy mandates a minimum investment $100 million with at least half the amount to be invested in infrastructure developments such as cold storage and packaging, which is expected to reduce the post-harvest losses (estimated to be about 40% of total harvest annually).
  • Sharma also argues that the FDI will create up to 10 million jobs for Indians over a three year period, particularly in the supply chain management space.

My views and concerns

I agree that India needs to overhaul its infrastructure, improve roads and transportation links, increase cold warehousing facilities across the country and reduce wastage of agricultural produce in particular. These have been deep seated problems but widespread liberalization in itself is not a panacea to these deeper issues.

India cannot turn away the expertise, skills and know-how that the foreign retailing giants like Walmart, Tesco, Carrefour can bring into the country. India does not have these skill sets, we need the expertise in supply chain management and we need the investment and professionalism that these firms can bring.

However, I do have some concerns:

  • How will the interests of small retailers, businessmen and farmers be protected?
  • What guarantee do we have that these supermarket giants will simply be conduits for low-cost Chinese goods into India, further exacerbating India’s trade deficit with China (which currently stands at over US$18 billion).
  • How effective will the technical know-how, expertise and infrastructure transfer be from the international supermarkets to India?
  • There’s been an in-depth study into benefits (including increased employment, improved efficiency, lower wastage, etc) – but has there been a study into the costs of this reform (including social – labour welfare; economic – particularly from the perspectives of small enterprises and farmers; political – potential worsening of trade deficits, etc)?

My proposal is as follows:

  • India needs the Walmarts and Tescos of the world – we need the know, expertise and knowledge – and India needs to embrace globalization. But there are a few caveats:
  • Part of the investments made by the international retailers must go towards university tie-ups in the areas of global retailing, supply chain management, infrastructure, etc. This will help in the transfer of knowledge to Indians.
  • The government also needs to, alongside with the reforms, address the concerns of small retailers and include provisions within the reforms or separately a series of measures designed to support small retailers – including ensuring that a minimum percentage of supplies to the international supermarkets must come from Indian SMEs and this percentage should increase over the years and this should be mandated.
  • There needs to be better protection of small farmers – and there should be further investment towards protecting their rights and interests. A panel to support small farmers at regional levels should be set up to avoid price fixing and collusion by the larger supermarkets (a charge that’s been leveled against Walmart and Carrefour in China in the past).
  • The Indian government must make commitment to also support small enterprises by improving the infrastructure and overall supply chain logistics in India.
  • There should also be a venture capital fund (with seed funding provided by the government?) to support aspiring entrepreneurs in India to also establish their own retailing businesses. India needs its own Walmart, its own Tesco.
  • The government can also consider the possibility of a higher, graduated tax/duty regime for the larger supermarkets that are looking to access the market. Some may argue that this will deter FDI – but in a world of depleting new markets and consumers (particularly affluent middle class ones) – the international supermarkets will take this to be the cost of doing business in India. Even if nobody comes into the market as a result of this – will it make India worse off? I doubt it. So it’s a chance the country should take.
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