FDI: Retail Goes Global, Politics National!
By Ayush Prasad
Nov 29: Every fish is scared of a new fish in the pond- it could compete for food and when it finds no food, it could eat the other fishes. We all like status quo and change is usually not welcome. Change is never easy and it usually has to be forced. It is said Rajiv Gandhi wanted to bring about Globalization and Liberalization after his visit to China in 1988, but only when IMF forced us to change in 1991, did we change. It is easier for political parties to paint a picture of gloom and spread fear than to stand up and help people face the new environment.
Competition is very important as it brings out the best in people. It eliminates the weak and promotes efficiency. The good outperform their abilities while the weak perish. It forces us to work hard and push ourselves to do much better.
Over 90% of Indian entrepreneurs are in the Retail Sector- a child carrying a few magazines at a traffic signal to street vendors to shopkeeper to large mega-marts- all are retailers. It is easy to be a small retailer: one does not have to register a company and in most cases one does not register with the municipality. In several cities, most retailers operate out of illegal structures by building an extra floor for their shops or encroaching on the pavements. After agriculture, it is amongst the most unorganized sector of the Indian Economy and the single largest source of black money due to massive evasion of commercial and income taxes.
The Union Cabinet approved the proposal to allow 100% Foreign Direct Investment in Single Brand Retail and 51% Foreign Direct Investment in Multi Brand Retail. It has been met with expected reaction of fear, rhetoric and has become another reason to disrupt Parliament. It seems impossible to bring about change in the polarized political environment. The Government says that it will create jobs, while the opposition says it will lead to mass bankruptcy and unemployment.
Single Brand Retail refers to stores selling products of one company. At present, franchisees sell such products, with this new regulation the company can directly set up stores and sell their products. This segment would see most profound impact in the textile business. Foreign Brands would be able to set up more stores quickly and create jobs. This would lead to employment opportunities in these stores. But smaller retailers and their non-branded suppliers would face stiff competition. Both would try to increase customer base and price wars would occur.
Foreign Brands would try to woo lower middle-class customers from unbranded stores by reducing costs. Due to high import taxes, they would be forced to locally manufacture their inventory, thereby leading to factory jobs. They would have to research and adapt their fashion to Indian trends leading to investment in retail and jobs for fashion designers. The unbranded stores would also cut costs and improve quality in attempt to retain customers and attract poorer customers. Poor people would be able to afford better quality clothes. Government would benefit from higher tax collection as it can control and check tax evasion more effectively in larger stores.
Multi-Brand Retail would face a huge challenge to raise sufficient funds for 49% investment from India and the several riders’ makes it difficult to compete in the Indian Markets. The multi-brand retail stores would face stiff competition from players like Big Bazaar, Reliance Mart etc. If the stock market is to be believed, most foreign players would invest into existing players rather than start independent stores. The much needed funds would make the stores larger and extend them to new towns and areas.
Large retail stores have actively worked on backward integration of the supply chain. Several retailers have set up storage capacities and contracted farmers to produce quality produce. Farmers get a fair price and are not entirely dependent on Government for procurement. Investments such as mechanization, better seeds quality, private irrigation etc have helped the agrarian sector. Loans are cheaper in abroad and those funds would help in the process of backward integration. The consumers would benefit with goods at cheaper prices and quality. They would also get a clean environment to shop from and get choice.
Smaller stores who do not evolve with the changing times would shut down and some jobs may be lost. But more jobs would be created in these stores and the supporting ecosystem, thereby absorbing the jobs lost. Indian Retail is going to be worth US $ 1.2 Trillion in another 10 years; hence the pie is sufficiently large enough for everyone.
We are Indians and world-beaters. We should not fear anyone, but work hard to compete and win.
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