Public Policy - Challanges in India for FDI in Multi-Brand Retailing and the Way Forward

FDI in Multi-Brand Retailing in India

 – Challenges and the Way Forward -

By:

Vijay Sardana

On 7th Dec. 2012 Parliament of India has authorized Government of India to allow FDI in multi-brand retailing in India. Retailing in India is traditional occupation and corporate investment in retailing is also not a new development. Existing model of street retailing and neighborhood retailing is quite widespread and successful. The success of existing model is based on low capital investment and personalized services to retail consumers.

FDI in retailing in India is an important development not only for the policy makers but also for the business and policy managers. It will be like driving a heavy truck on small narrow lane with lot of pot holes filled with mud with many small huts on both sides. Success will depend upon careful driving without damaging the existing livelihood options and without splashing mud all over.

The success of FDI in retailing will depend upon many factors ranging from enabling policy environment to enabling rules impacting regulations and execution of business processes.

There will be many challenge for the foreign investors as well as policy makes in the days to come, some of them are mentioned below.

·         Acquiring affordable real estate to meet their requirements to suit their efficient logistics and display requirements will be challenging. Large cities are already suffering from high prices of real estate, over-crowded cities and shortage of parking space. Large stores in middle of cities will imbalance the traffic movement. Increased air and noise pollution levels in those areas will be another challenge. This will force the authorities to relook into the town planning and traffic movement plans.

·         Arguments that FDI will bring investment in storage infrastructure. Why they should invest when Essential Commodities Act will not allow them to store as per their requirements? What will happen in case of price rise of essential commodities? Will Essential Commodities (EC) Act apply or not? If government is planning to give concession to FDI retail chains under EC Act, why not the same for domestic traders and players as well? In brief, will there be pressure to scrape the EC Act itself to provide level playing field to all.

·         All the investment will lead to high cost of supply chain. This will force the retailers to charge more. Will supplies in large retain stores have different MRP than open market for the same product? This will force manufactures to print highly inflated MRP and consumers will be again at the mercy of retail outlets. Pl. visit your nearest retail out and check edible oil prices of the same brand in same pack size inside and outside modern retail. You will come to know the fact about MRP. My suggestion is, why not introduce taxation system based on MRP in place of cost of manufacturing. This will resolve many problems at consumers end and government will get additional revenue. Alternative option is have different MRP for different retail outlets. Will this be in line as per the spirit of Consumer Protection Act and Packaged Commodities Act?

·         There are many products which cannot be imported or manufactured as per existing food laws. Imported foods will have issues related to quarantine and banned food additives and ingredients like GMOs. How long government of India will be able to resist the pressure of retail chains to keep Indian foods safe from these challenges when our food laboratories and quarantines points are ill equipped. Indian food laws will be forced to change to accept the global rules to suit large retail chains.

·         Predatory pricing through subsidized and under invoiced imported goods and impact on domestic SSI is also a reality. Toy industry and confectionary industry in India virtually doesn’t exist. Oil seed farmers and edible oil industry is suffering due to large scale import of edible oils. Many more products may enter like butter oil to mix in desi ghee, garments, electronic and auto components, etc. will impact SSI in these sectors. Will Competition Commission and Anti-dumping directorate look into these cases?

·         Current regime of APMC forces sourcing from mandies. State governments are biggest gainer of mandi taxes. Sourcing from farmers and existing APMC Act adds about 5 to 12% on the price of raw material. Will government dilute APMC Act for retail chains, if so; why not scarp the APMC Act all together for level playing field for domestic players as well.

·         Large retail stores will add pressure on municipal wastes as well due to increase in packing of consumer goods to meet display requirements. Will there be additional tax on packaged goods to offset the cost of waste management by municipalities? Will retail chains have mandatory recycling schemes to collect garbage and recycle it? They should create incentive for consumers to bring back waste to stores for dumping and recycling.

·         With large scale operations impact of bad product or unsafe food will also be on larger population. Consumer Protection Act and Liabilities needs to be looked at because of change in scale of businesses. These laws must ensure that no one goes for corner cutting. Cost of non-performance has to higher than cost of doing right thing.

·         Bargaining power of large buyers’ vis. a vis. small farmers and traders will make many SSI to surrender to these large corporates. Who will ensure that large players make timely payment to small manufacturers and don’t force undue credit and discounts? Will there be any law to ensure timely payments and ensure Fair Trade Practices Act. This is essential so that Indian SSIs sustain their profit margins for survival.

·         Unresolved political issues like should there be taxation on agriculture commodities and services sold to urban rich because these stores are in major metros only so that suitable resources can be generated for creating infrastructure for poor farmers and urban and rural poor.

These are some of the issues which policy makers and corporate manages have to think before game starts. It will be difficult to change the rules midway because large number of vested interest will at full play. It will be difficult to have fair play when all are fighting for their share of pie.

FDI in retail is good development because it will shake-up many old laws and existing non-performing systems in government as well as in private domain.

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About Author: Vijay Sardana is well known food security and agribusiness expert. Views are personal.

Email: sardana.vijay@gmail.com