Sindhu J. Bhattacharya

What do various players in the retail industry and trade think of the Government's intentions on FDI in retail? Catalyst reports.

COMMERCE Minister Kamal Nath's statements on FDI recently appear to have set the cat among the pigeons. He asserted that the Government does, after all, want to partially open the $190-billion retail industry to foreign direct investment (FDI). This may yet be good news for chains such as Wal-Mart, JC Penney, Costa Coffee and Dixy Chicken which are believed to be keen to sample the Indian retail pie. (As Catalyst goes to press, Reuters reports that the international president of Wal-Mart Stores Inc., the world's largest retailer, is scheduled to visit India this week amid signs the Government may soon lift the ban on foreign investment in retail.)

Even now, the amount of investment inflow expected if FDI is allowed in retail is not clear. The Minister appeared keen to provide global majors access to the food and beverages and grocery segments of Indian retail to begin with. Nath said that as much as three-quarters of the initial opening for foreign investment could be in food and related establishments.

However, aware of the stiff opposition this decision may face back home, he hastened to assure the powerful trader lobby that the opening-up would be done in a manner that encourages investment while protecting the jobs of millions of small shopkeepers who dominate trade. These traders are up in arms against the Government's "folly."

Says the General Secretary of the Confederation of All India Traders (CAIT) Praveen Khandelwal: "Of course, there is a need for India to go with the rest of the world if it has to remain at the centre-stage of global activities. But we must analyse the cost we would have to pay if FDI is allowed in retail business. If it is allowed, big shopping malls will eat into the business of the small traders who are already burdened with innumerable trade laws and earn low profit margins." He said the international players would come in with modern infrastructure and professional skills, harming small traders. "Instead of opening up retail to FDI, Government should allow technology to be imported and efforts should be made to strengthen the basic fabric of domestic trade."

Not only the small traders, even some big names in the retail industry have been expressing their displeasure at the prospect of FDI. Says a leading retailer who did not wish to be named: "The debate should be centred on whether FDI should be allowed now or later. Retailers in India today lack nothing. Perhaps the Government should consider allowing FDI in related areas such as infrastructure before actually opening up the sector to foreign investment." He said the Government must clarify its position on what would be gained by allowing FDI now, as opposed to later.

Regarding the 'entry' of foreign players, he said a number of them already have sourcing offices in India; if they are allowed to invest here, such companies have to grapple with a host of issues such as finding retail space, trained manpower and then developing a thorough understanding of the Indian consumer.

And opposition to FDI in retail trade is not just confined to the trader lobby. RSP MP Abani Roy endorsed Khandelwal's views, saying that not only will FDI hurt small traders, it will also hamper job creation. In fact, his party has written a letter to the Prime Minister, Dr Manmohan Singh, opposing the move.

However, retail consultancy KSA Technopak's Arvind Singhal cannot but wonder at this stiff opposition to a move he finds "forward-looking." He said the Government should, instead of considering a mere 26 per cent FDI, open up retail to 100 per cent foreign participation. "Not only will small traders not be affected, consumers will be the ultimate beneficiaries as opening up this sector will allow consumers to buy at lower prices through discount stores. Besides, FDI will mean that the overall quality in service and other aspects of retail trade gets upgraded." Singhal gave the example of McDonald's and Pizza Hut, saying that international chains like these have created jobs and improved the domestic benchmarks in retail in terms of service and back-end linkages.

Giving the example of China, Singhal says there has been no perceived adverse impact on the country's economy after it opened retail trade to FDI. Singhal's views are endorsed by the Managing Director and Chief Executive Officer of Shoppers' Stop, B. S. Nagesh. He says that not only will FDI benefit the sector overall, it will also help existing retailers in sourcing as global suppliers can then set up shop in India.

R. Subramaniam, Managing Director of discount retail chain Subhiksha, asks why a country which allows FDI in other sectors such as insurance and banking should treat retail any different. "This is not logical. Also, if the argument is that large retailers from abroad with FDI can come in and kill the mom-&-pop corner stores, it could even happen if large Indian houses set up large retail formats. The country has enough laws to prevent unfair trade and market practices," he said.

The key to avert an ugly situation is to allow FDI with sufficient riders against predatory pricing. "India is a huge country, with many different markets catering to different segments of consumers and varied formats can co-exist." Raghu Pillai, President, Retail, RPG Enterprises, explains that FDI in retail is only one of the prongs of building organised retail. "Enabling investments through FDI is only part of it; there are so many other initiatives that the Government needs to take." He referred to property-related issues, free movement of goods across States, amendments to the APMC Act, building a common market, providing incentives to States as some other areas the Government needs to work upon. "So far, we seem to be obsessed with only part of what should be a comprehensive policy; it is being overshadowed by one argument of FDI," he added.

Last week, the third largest pizza chain in the US, Papa John's, announced its intention to set up shop in India. And while it has roped in an Indian joint venture partner, the company appears to be waiting to see whether the Government goes ahead with its proclamation of partially opening up FDI. Said Grant Miller, Managing Director (International), Papa John's, "If FDI is allowed, we can invest in upgrading our systems in India. As of now, there is no problem, but FDI permission would mean better scale of operations."

Analysts point out that growth in Indian retail has been driven by the country's economic fundamentals over the past few years, including an increase in the proportion of upper income households, rising consumption expenditure and greater use of credit cards. Consumers are showing a growing preference for organised retail, resulting in its increased penetration. Rating agency Fitch has said that organised retail's contribution to the total retail industry is likely to grow from 3 per cent in 2004 to about 8-10 per cent over the next five years. Analysts say the hue and cry over whether FDI should be permitted or not is a bit misplaced as only a very small segment of retail trade is likely to get affected initially.

This means that while the kirana stores and small-time traders will continue to grow, organised retail will grow at a faster pace and may need substantial investments.

As RPG's Pillai explains: "The retail market universe is huge and FDI will impact only 2-3 per cent of it at present. Instead of debating for or against FDI, we should discuss whether the Government / trade wants retail consolidation or not. And if the answer to this is yes, then we should proceed to examine whether the required investment can be generated in India itself; if it cannot be, then there is no alternative but to allow FDI."

Management consultant A.T. Kearney has ranked India as the second most attractive retail destination among emerging markets globally, ahead of China, despite the ban on FDI in the sector and a relatively low market attractiveness of the country. In its 2004 `Global Retail Development Index (top 30 Emerging Markets)' report, A.T. Kearney has ranked India 88 on a scale of 100, aggregating points earned over parameters such as economic and political risks, market attractiveness, market saturation and time pressure. So, any liberalisation in the retail sector should be debated while keeping in mind future growth prospects.

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