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Flattering to deceive PDF Print E-mail
Wednesday, 25 January 2006 00:00
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The Cabinet decision to allow foreign direct investment up to a limit of 51 per cent in single-brand retail stores (like McDonald’s, Reebok and Nike) creates a sense of movement on policy, but is unlikely to lead to a flood of foreign investment into retail trade. This is because the single-brand retailers who want to be in India are already here. The difference now is that they can come on their own, instead of through Indian franchisees. To that extent, the country can expect a faster roll-out of (say) Reebok outlets than is the case now, if the Indian franchisee’s finances have been the constraining factor. What this limited decision by the Cabinet means is the government has not been able to convince its allies, notably the Left parties, about the benefits to be extracted from opening up the retail sector more fully. This would have included the creation of a reliable supply chain, which is important (among other things) for India’s export sector, and an anti-inflation factor because cost inefficiencies would have been driven out by purchase efficiencies.
 
To take the obvious example of Wal-Mart, whose price negotiation with suppliers is legendary, it has developed a major supply base in China and seeks to do the same in India—if nothing else, then to diversify supply. The country would have benefited from export growth as well as the supply of low-cost items to large numbers of people in the domestic market. Given that the average difference between farm-gate prices of fruits and vegetables and the wholesale markets can be as much as four-fold, the first beneficiaries of direct buying and the setting up of cold chains by stores that deal in fresh produce (like Carrefour, for instance) would be the Indian farmer as well as the Indian consumer. Why the Left or anyone else would want to prevent this, in the name of protecting mom-and-pop stores (which are fewer than both producers and consumers), is hard to understand. Besides which, as well-informed observers have argued, the mom-and-pop stores are not at risk in terms of survival because they will continue to serve a purpose and a market, which big retail chains will not be able to reach—in the metros and in smaller towns and villages.
 
What the Cabinet could have kept in mind is that, whether it decrees it or not, the organised retail sector is poised to make an entry even without foreign investment. While Shopper’s Stop and Pantaloon expand rapidly, Mukesh Ambani is putting together a war chest of over Rs 20,000 crore for a retail foray, ITC is looking at setting up rural hypermarkets, Godrej and Bombay Dyeing are converting their large land banks into malls… the list goes on. Indeed, the total organised retail space is expected to treble from the current 26 million square feet to 88 million square feet by the end of next year. So, whether foreigners are allowed or not, the march of organised retail is not going to stop and from under 1 per cent in 1999, its share in the total retail trade has risen to 3.5 per cent and is projected to rise to 8 per cent by the end of the decade. It is obvious, therefore, that the decision to not open up multi-brand retail to foreign investment is more to do with protecting local big players than with protecting the neighbourhood kirana. Organised retail, then, would be the only area in the country not open to competition from abroad. And you thought the BJP was the original shopkeepers’ party!

 

 

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