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FDI Hue and Cry

The huge potential in the organised retail that remains unexploited in India andthe risks of allowing Foreign Direct Investment (FDI) though it may generateemployment or benefit the end-user 

State governments will have a big say in whether the international retail giants are able to set up shopor not through the foreign direct investment (FDI) route and even when they do, it will take 5-10 yearsfor the largest players to put up even a dozen stores particularly in the Cash & Carry segment.

CII National Retail Committee Chairman and Aditya Birla Retail CEO Thomas Verghese said potentialentrants into the retail sector required 35 licences to set up a super market and 43 licences to set up ahyper market, all granted by the States. “To date, 11 States are potentially opposing FDI in retail, soclearly, we will look at the progressive State governments and even if there are a few States that are infavour, international players will come in.''

Reacting to fears that smaller shop owners will lose livelihood with the entry of the multinationals, Mr.Verghese said, “Over the last five years, modern retail's proportion in the total Indian retail sector hasgrown from 2 to 7 per cent, growing at 24 per cent annually. Over the same period though, smaller ‘kirana' shops have grown at 10-14 per cent. The larger kirana shops closing down has less to do withthe entry of modern retail but more to do with the younger generation owners choosing not to remain inthe business.''

CRISIL ESTIMATES:

Rating agency Crisil estimates FDI inflow of $2.5-3 billion over the next five years in multi-brand retail.The food and grocery (F&G) vertical could attract a larger share of the likely FDI inflows. The clausespecifying 50 per cent investment in back-end infrastructure especially aligns with the commercial

requirement in the F&G segment. F&G accounts for two-thirds of Indian retail sales, but has organisedretail sales of only around 2 per cent. “To improve profitability in the F&G segment, retailers need tocontrol their supply chain costs and build scale,'' said Ajay D'Souza, Head, Crisil Research. “Everypercentage point reduction in supply chain cost and resultant gain in operating margin can improveequity internal rate of return of an F&G store by 250-300 basis points. Foreign retailers, with their access to capital and technology, are well placed to leverage this opportunity.'' The retail sector requires heavy investment and despite FDI being permitted in back-end infrastructure ten years ago, nosignificant player came in. Indian firms have built back-end infrastructure but do not have thewherewithal to expand. Foreign players will not come here if the front-end is not allowed and needassurance that presence in the whole chain would be allowed.

“The aggressive growth plans of leading Indian retailers, which are under pressure due to increasingdebt stock and moderation in customer footfalls in the current year, will get a strong boost from theavailability of capital. However, for smaller and regional retailers, the scale of operations and controlover costs will determine their ability to weather pressures of aggressive expansions by large retailers,''said Anuj Sethi, Head, Crisil Ratings.

The FDI proposal offers good prospects for large established Indian retailers. FDI would enable theseplayers to attract capital for driving their expansion plans and in addition, benefit from scale, costefficiencies and technology brought in by foreign retailers. The FDI proposal is likely to catalyse jointventures between Indian and foreign organised retailers. Depending on whether they buy into existing

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retail chains or set up new joint ventures, the share of foreign retailers in multi-brand organised retailwill remain moderate

Though one thought is that the FDI will take the retail sector to global standards in terms of pricing,product quality and link to global markets, the perception that organised retail had wiped out smalltraders in countries like Thailand was also stressed. The threat of retail majors making hugeinvestments to capture and monopolise the market in the long run was one area of concern voiced by

many.

  Fear of Threat: “The FDI will come in and displace existing traders. There is no doubt that it willgenerate employment…but many will lose jobs too. There will be a global sourcing of products and lossof livelihood cannot be ruled out over a period of time. We have seen this happening in other countries,”

The ‘farmer-will-benefit' propaganda was not true as it did not happen in the West. “If allowed, foreignretail majors will make huge investments and withstand losses for years. Ultimately they will wipe outsmall/medium traders and take over the market. Their core operating philosophy will usually beconcentration and monopoly,” he said. Terming the FDI in retail trade as “anti-national,” Three retailershad taken over 38 per cent of the market in Thailand where the local traders were displaced.

Opportunity : Retail Consultant and Trainer V. Rajesh sought to set aside the apprehensions sayingthat any well-regulated industry would serve the purpose greatly with or without FDI. Pointing out thatthere was no instance of any small trader closing down business following the entry of retail majors inmetros, he said FDI would bring in finance, technology and efficient supply chain managementsystems.

Garment makers: Favouring the Centre’s move to allow 51 per cent FDI in multi-brand retail, garmentmakers say it will bring in more opportunities for them in the shape of getting big size orders from globalbrands like Wal-Mart and forging exclusive partnerships with international players.

However, local garment brands who are also into manufacturing, are wary of opening of large shops byglobal retailers, suggesting that it could hurt their “well-established” domestic market. Despite the factthat there was a hue and cry over allowing FDI into multi-brand retail across the country, garmentsmakers have termed it as move in right direction.

“Because of the 51 per cent FDI allowed into multi-brand retail, garment units here will open morepossibilities for local players to supply their garments by giving large volume of order size to us whichwill further boost the local garment and terry towel making in the state,” Local players also see theopportunity in having a joint venture with global retailers like Wal-Mart for producing exclusively for them to cater to Indian market.

“We can have an exclusive arrangement with international retailers for making garments for them onlyand it will provide a fillip to the manufacturing sector who usually gets small size of orders from bigbrands at present,” he said. On the other hand, local garment brands are apprehended over the entry of brands big brands into retail sector. “If companies like Wal-Mart opens their shops here, they can posestiff competition to domestic brands like ours as they have the capacity and resources to offer widevariety of items to customers,”

INDIAN ECONOMY NEEDS SWOT ANALYSIS AND IT SHOULD START FROM DISCUSSION IN PARLIAMENT .

** Note : The content is collected views of experts, Businessmen and Public views.