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Author Topic: FDI in Retail can boost Farm Sector... Read it...!!!  (Read 3090 times)

Offline gkunalin

FDI in Retail can boost Farm Sector... Read it...!!!
« on: January 05, 2008, 11:44 AM »
FDI in retail can boost farm sector

The Government seems to be in a fix over the issue of allowing FDI in retail. Conflicting reports have emerged in the last couple of weeks on the investment ceiling to be permitted for opening up the sector to foreign competition. While one report states that only 49% FDI will be allowed initially, another piece pegs that cap at 51%. Anything over 50% gives a company majority control. That would be fairly difficult to achieve given the stiff opposition from the Left parties, the chief prop of the Congress-led coalition. On the other hand, anything less than majority could keep big MNCs at bay. A few of them have made it clear that they won't enter the Indian retail sector unless given a majority control in their ventures. Which way the cookie will crumble only time will tell.

The media reports also talked of restrictions to be placed on foreign players. The Government may initially allow overseas retailers to set up shops only in major cities. Again, there will be limits on the number of outlets for each company, the size and nature of the outlets. Besides, FDI will be allowed in phases and in select areas only, something that China did when it allowed FDI in its retail sector back in 1992. Could it be that the New Delhi is following in the footsteps of the Middle Kingdom, which has benefited a great deal in the 13 years since it first dismantled the entry barrier in retail. Or, is it the fear of opposition by the communists that has prompted the Government to adopt a 'go slow' approach on this critical but controversial issue.

The Government's cautious stance on the politically sensitive issue is understandable since he Left parties have made no bones about their opposition to opening up retail to foreign investors. Their main fear is that the entry of MNC giants like Wal-Mart, Tesco and Carrefour will throw the hundreds of thousands of the neighborhood kirana store owners out of business, leading to millions of job losses. Another concern is with regard to the pricing power of the global retail giants which the communists say will squeeze out the suppliers and hurt farmers. The Left are also worried that the foreign retail majors will hurt domestic players with the practice of predatory pricing and become monopolies. Plus, they say most of these stores will be focused on major cities and big towns, resulting in a skewed urban development. "The negative effects in terms of job losses and the displacement of traditional supply chains by the monopoly power of multinational retailers far outweigh the supposed benefits..." the Left parties said in a recent note that reiterated their opposition against FDI in retail.

There are others who also argue against FDI in retail. And, they are the Indian retail players like Pantaloon. Though one must add that they are not totally against FDI in retail, but are seeking more time to scale up before they come face to face with their global counterparts. Pantaloon chief Kishore Biyani says its not whether FDI should be allowed in retail or not, but when and how. The Chinese allowed 100% FDI only in 2004. For a decade it allowed only one foreign outlet per province, something that the Indian Government is likely to emulate, when it formally announces the opening up of the sector to FDI. Biyani, also the Chairman of CII's retail panel, says Indian players need at least Rs200bn to build scale. Surely, they can't mop-up such huge sum of money in a few months. Even 2-3 years may not be enough. At least 5 years is what they are asking for. May be they are afraid of the global retail giants dominating the local landscape as they possess a lot of financial muscle vis-a-vis the Indian retailers.

But, if one looks at the experience of countries like China and the US, one gets a feeling that the apprehensions of the Left parties as well as the local retailers are misplaced. In America, which is by far the most matured retail market in the world, 95% of retailers are single store operations. Now, they may not be as small as our grocery shops, but are still small when looked at from the US perspective. Some of the world's largest retailers, like Wal-Mart, JC Penney, Target, etc. are American. Notwithstanding the dominance by these large players, the smaller 'mom-n-pop' stores still co-exist with them, though one may not find them in the same vicinity as the big retailers. And, even though their market share is getting eroded slowly, they still account for just under 50% of the total American retail trade.

Similarly in China, the top 10 retailers (both domestic and international), had only 9.6% share of the $628-bn retail market in 2004. This was up from 2.9% in 2000. Moreover, only 17 out of the total 78 foreign retailers in China are in this list, including Wal-Mart, Tesco, Metro and Carrefour. These 17 retailers totted up a turnover of $13.8bn, giving them a miniscule share of 2.2%. However, it must be noted here that the foreign retailers got full access to the Chinese market only last year and hence the above data must be looked at in a different angle i.e. against only the top 100 players. Seen through this prism, the foreign retailers' accounted for 23% sales while China's public sector retailers had a 32% market share and private retailers owned 45%.

Meanwhile, the kirana store owners in India also face a threat from the domestic players, who have aggressive expansion plans for the future. In addition, few of the country's large corporate houses like Reliance, the Tatas and the Munjals, etc. too have mega plans for the retail sector. So, the grocery shopkeepers will feel the heat from these companies in any case, which is a point the communists ally of the Government fail to appreciate. According to John Menzer, Vice-Chairman and CEO, Wal-Mart, "Small businesses have their own competitive advantages. They have their own model, offer a different product mix, and keep their customers happy. I think small businesses can grow and prosper with Wal-Mart". Even in China, where FDI in retail was allowed long time back, small vendors of vegetables and fruits coexist with the hundreds of superstores, who are perceived to be the biggest threat to the kirana shops. Even in India, where organised retailers have started mushrooming in big cities, the grocery shop owners have not been wiped out.

Those who are against FDI in retail are also missing an even bigger point. The one concerning backward linkages with the agriculture sector, efficiency in supply chain that foreign retailers can bring and the huge opportunity in farm exports. India can attain huge savings by merely improving the supply chain. Some 20-40% of all fruits and vegetables grown in the country goes waste due to poor transportation, storage and handling infrastructure. Also, for every rupee that an Indian consumer spends, the farmer gets only 20-22 paise, as against 70-80 paise in developed markets. If large retailers, whether domestic or foreign, directly source through farmers, realisations will go up for the farmers, consumers will have to pay less and the retailers will get higher margins.

Though one may argue that the supply chain efficiency can also be brought in by the local retailers too, the moot point is that the global giants like Wal-Mart can substantially improve the fortunes of India's farm sector by directly linking it with the global supply chain. Remember, China's agriculture exports to the US nearly trebled from $3.86bn in 1999 to $9.96bn last year. India, on the other hand has made only a marginal progress, with its farm exports to America rising from $3.19bn in 1999 to just $4.28bn.

In the recent past, the Prime Minister, the Finance Minister, the President, the Vice-President, the Deputy Chairman of Planning Commission, all have spoken of boosting agriculture growth to have a GDP growth in excess of 8% on a sustained basis. This Government came to power on the promise of making life better for the large section of India's rural poor. The retail sector is one such opportunity for the Congress-led coalition to turnaround the rural sector. The Prime Minister and his colleagues in the Cabinet are aware of this. All that is needed now is a strong political will. Just do it Dr. Singh
 
 

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