FDI in Retails: Some Interesting Aspects

Here are certain inferences from some studies, some data and some views of wise men for retroinspection:

There is not going to be a calamity because of allowing FDI in multi-brand retail as some opposition parties claim. But the government’s claim of a ‘win-win’ with higher prices for farmers and lower prices for customers with the advent of FDI is not only somewhat but highly exaggerated. If at it happens, it’s not going to happen overnight as the government spokesmen keep on posturing on TV channels. 

Again, the fear of many in opposition about the bleak future of the thousands of existing kirana shops is highly mistaken. The huge size of the rural market consisting of all categories of families including a large number of  poor people  will keep on sustaining the growth of kirana shops generating a substantial demand for low quality food with lower mark-ups.

The claim that FDI in retail would dampen inflation, particularly of food items, is difficult to fathom. The exponentially increasing demand of milk, vegetables and fruits requires matching increase in its production and reduction of wastage because of lack of sufficient and right cold storage facilities, its processing and fast enough transportation to the retail outlets and to the actual users. 

The government must mop up grains only to the extent it can store properly, as presently a huge lot get stored in open and is allowed to rot. Presently, to be on safe side and perhaps to satisfy certain vested interest, the government presently mop up the entire surplus of the farmers. It must allow the private players such as ITC to procure directly. No private players will allow it to rot.  

Here are some hopes for a better day for the farmers:

“Average price realisation for cauliflower farmers selling directly to organised retail is about 25 per cent higher than their proceeds from sale to regulated government mandi [agricultural market. Profit realisation for farmers selling directly to organised retailers is about 60 per cent higher than that received from selling in the mandi.”
Will the MNCs in retail go for buying directly from the farmers? Will the government amend the law that allows the purchase only through the mandis? Even ITC couldn’t expand it’s e-chaupal initiative as it wanted , because of this restriction.

Moreover, unlike US the MNCs in India will have to deal with many small marginal farmers. It will have to innovate some new model for procurement

The MNCs such as Walmarts and Tescos will set up direct procurement mechanisms with sophisticated procurement systems that will require the elimination of the middlemen.  But it will require support of the government of the statewide years.

Farmers make up more than half the Indian population. The retail trade accounts for only about a tenth.

Those dreaming for a huge employment in the sector may get morose. According to Professor of economics at Jawaharlal Nehru University, Jayati Ghosh, one Walmart will replace 1400 small retailers at the cost of 5000 jobs. It is doubtful if overall employment will increase significantly because of the entries of MNCs in retail.

“Walmart’s expansion in Iowa in 2005 shut down 555 grocery stores, 298 hardware stores, 293 building suppliers, 161 variety stores, 158 women’s stores and 116 pharmacies. A Chicago study showed businesses closest to Walmart were most vulnerable: 40% of those in “immediate proximity” would close in two years. But, by a process called “creative destruction” new businesses spring up to replace them, showed a 2008 West Virginia study.”
No doubt, India’s retail market is one of the fastest growing in the world expected to grow at 15 to 20% over the next five years, according to global consultancy firm AT Kearney’s Global Retail Development Index. 

While the share of retail in GDP is 14%, organised retail only accounts for around 6% of this total while 94% comprises of small businesses or kirana stores. Moreover, the industry employs 8% of the population.

Whenever one talks  of MNCs in retail, Wal-Mart comes the first. Wal-Mart:Founded in 1962, Wal-Mart operates 10,000 retail units under 69 banners in 27 countries. It employs 2.2 million people with sales of $444 billion in 2012. It is one of the biggest companies in the world.

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