FDI in Multi Brand Retail

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Foreign Direct Investment (FDI) in multi brand retail was one of the serious issues that created a big debate in India last year. When the UPA government announced its decision of allowing 51% foreign direct investment in the Indian multi brand retail, it spurred controversies and agitation from the opposite party, major activists and farmers. India is still considered as an agrarian country as agriculture being the prime activity and source of income to the farmers.  Ever since the importance given to the industrial revolution leading to rapid economic growth the agricultural sector has taken a back seat among the political fraternity.  But a country like India where agriculture has been in existence for years and continue to provide livelihood for many, should not neglect this sector at any cost. The government over the years has ignored this one particular sector and the plight of Indian farmers. This has lead to the situation of stagnating agricultural growth and increasing suicides among the desperate farmers. The only period in which agriculture was given due importance and huge expenditure was implemented in this sector was during the first five year plan. At this present scenario, where is the meaning to the concept of inclusive growth and sustainable development?

The western civilization is known for its robust technological advancement and extravagant spending. India of late has become immune to these western practices due to globalization and as a resultant of the change in taste and preferences of the Indian consumers. Consumerism has grown over the years and people are now open to new innovative products. The younger generations of India have become more resilient and familiar with foreign brands. The urban youth are comfortable and are gaga over foreign goods from English music to cosmetics and apparels. Barack Obama, the president of the USA came in power with the election slogan “Change is what America need and we will make the change happen” on the wake of the financial crisis. He did know where to go for this change. Obama targeted the Indian market to boost the American economy. The Indian retail sector is growing tremendously since the new economic policy opened Indian market to the global market in 1991. The Indian retail sector is the second largest source of employment after agriculture and accounts for over ten percent of the total GDP. This gives us a point that these two are the most important sectors that generates employment opportunities for the mass of Indian population. The Indian retail market is expected to grow at a faster rate in coming years and hit $700 billion by 2015. The continuous growth in this sector is mainly attributed to the increasing population and urbanization. India has the highest rate of change in its urban population of all the BRICS nations. These have created the interests of foreign investors and Obama to push the FDI policy in multi brand retail in India.

Given the growing transformation of the Indian retail sector the question is whether FDI in this segment will create any good to the Indians. The answer could be not much because of the varied composition of the Indian retail sector and keeping in mind the informal nature of the Indian economy. The retail space in our economy is highly fragmented and dominated by the unorganized sector namely the local kirana stores and pavement vendors. However, issues such as this always have its own good and bad. Let us analyze the various aspect of this decision. The motive behind allowing FDI in the retail sector will act as a catalyst to spur competition in the industry. The Indian retail sector in the recent years has given importance to quality products and brands and this has encouraged foreign investments. On this regard people of India now have easy access to quality and new products. The FDI in Indian retail sector will develop infrastructure and logistics which is now highly necessary for India to achieve its potential growth target.  This will also result in increased global reach of the Indian goods and efficient production and distribution system. The domestic demand in the recent years has declined as a result of which India’s current GDP is low at 5.3 percent.  The FDI in the retail sector will boost domestic demand and take india on the path of increasing growth trajectory. The foreign investment will improve storage facilities as India is the second largest producer of vegetables and increase the shelf life of perishable goods. This aspect is very important right from the time of production to the sales. An efficient cold storage system avoids distress sales.  As an increase in migration and urbanization FDI in retail sector is likely to pay more for the workers. The FDI will attract technological development and give Indian retail sector the touch of sophisticated high end products and sevices. Many agricultural lands in India are fertile but face drought and lack good monsoon and that has resulted in low production and supply. Because of this there is a huge demand supply mismatch. The big retail chains solve this problem to a great extent. The Public Distribution System (PDS) in India is inefficient with lot of leakages and the FDI in retail sector will improve the distribution process and control inflation in the short run. India is also facing the problem of twin deficit. The widening Current Account Deficit and fiscal deficit is of serious worry. There has been huge trade imbalance as exports have come down and imports are increasing sharply. In such a state it is high time that we start attracting capital inflows and foreign cash flows to boost the exports and domestic demand and finance the deficit. These are the only notable major advantages of allowing FDI in multi brand retail in India.

The major concern and claim over the FDI in retail space is that it will affect the small retail shops and local kirana stores. On this regard the FDI in retail sector and the welcoming of big foreign retail giants like walmart and carrefour will definitely affect the local kirana stores but only to a certain extent. This is because the foreign retailers concentrate only on the urban areas and the rural people can still buy from their local stores and groceries with whom they are comfortable with. Even in the urban area the majority of the people are in middle class who often visit these small stores keeping in mind about their budget and continuing increase in the prices of the FMCG goods. So the FDI in multi brand retail will only favour the rich and the middle class on certain aspects. It will definitely not increase employment opportunities in the long run. They have their own terms and condition and that will only be given emphasis on the long run. They take control of price and charge beyond the market price once they gain monopolistic power. They follow predatory pricing. The FDI in retail sector is likely to drain out the country’s share of revenue to foreign countries. The FDI in multi brand retail will definitely affect the Indian farmers. Though they claim that there exists transparency and the big retail giants directly buy the produce from the farmers and pay them the correct price, this will never happen so. By allowing FDI in retail sector it is likely to create an unhealthy competition by not providing a level play for the domestic producers. The FDI policy is bound to affect and dump the domestic producers.

FDI in multi brand retail is good and can reap benefits only in the long run. The FDI policy is such an important concept that has serious implication in the domestic economy and foreign reserve of the country. The wise question to ask is what sectors need the FDI policy? It is not all the sectors that need FDI. So it is wise to allow foreign investment in particular sector that actually need FDI like defense and health sector for instance. The current FDI limit in defense is just 26% and now the union minister for commerce and industry, Anand Sharma urged the government to raise the FDI to 74%.  The FDI policy should be implemented and liberalized in such a way that it benefits everyone and is in line with our objectives. The finance minister in his recent budget has clearly defined and distinguished between Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII). This will reduce the ambiguity around foreign investments.One of the good part of this decision is that the central government has given the choice to the state government whether to welcome FDI in multi brand retail or not in their respective states. At the current situation with slow economic growth and stagflation the FDI in retail sector will boost the domestic demand and infrastructure. The finance minister in recent times has also stressed many times the importance of FDI in retail and it is necessary to meet the huge CAD and fiscal deficit. But recent reports reveal that walmart spent about Rs. 125 crore lobbying Indian lawmakers to enter the Indian market. This is something serious, government should be in favour of the citizens and particularly farmers and not allow FDI with the motive of bribery and increasing their own pocket. This is so easy to happen as corruption is deep rooted in Indian politics. If this is going to be the primary concern of our government then the FDI policy will not achieve the desired results.