FDI in Retail Sector – Is India ready for it?

Chinese Philosopher Lao Tzu said, “If you do not change direction, you may end up where you are heading”.

So, UPA-II took a bold decision this month to introduce some reforms in the direction of India’s new growth policy by announcing FDI in retail; by deciding to allow 51% FDI in multi-brand retail and a 100% in single brand. The decision although welcomed by corporate sector, took a huge beating by other political parties.

As the common man stands confused by various opinions on whether and why the decision is right or wrong, I tried to explore whether we are ready for this much needed step for economic reform.

FDI, by definition is Foreign Direct Investment into production in a country by company located in another country, either by buying a company in target country or by expanding operation of existing business in that country. No doubt, it will boost growth prospects: A look at world’s largest recipient of FDI, USA and our neighbor China will clear out the doubt, as the numbers tell their own story. According to a UNCTAD survey, India is second most important destination, after China, for FDI in retail.

                                        

It will benefit farmers and SMEs as they will get better price for their produce, which currently is less than half of the final cost at which end user buys the product. It will reduce inflation too probably, by decreasing the wastage of vegetables and fruits (which is about 40% of total production as of now) by providing better cold storage facilities.

Story is good for end user too; he will have a broader range to choose from, as different players hustle for space to stand in front of him. With knowledge of various products through sources of advertisements, modern consumer emphasizes on quality and this need will positively be satisfied too.

 

Now you must be thinking, what these political parties are crying for? Let me get to it. A drawback of FDI would be the loss of job, as it will hamper business of small retailers and chain of middlemen. This problem could be compensated up to an extent by the jobs that will be created by implementation of this plan. The critics say that it will put farmers and SMEs on mercy of big retail players. The answer to this would be appropriate regulation by government to help the suppliers. Our Honorable PM. Manmohan Singh has clearly stated the benefits of the Kirana store by pointing out many benefits such as the free home delivery system, the credit system and the convenience factor.

As far as market is concerned, the jump on Dalal Street on Friday, after notification of FDI by government, clearly indicated of the future prospects. Retail sector stocks were getting hammered since April. Shares of Pantaloons, Koutons and Vishal retail went down by 30-37%, not to mention the significant debt that these companies have incurred. The FDI pill could help solve their problem too. Real Estate sector will see boost too as Walmart, Tescos and others will need huge structures to set themselves up.

All in all, the pros overweigh the cons and let us hope this necessary step by government helps bring some much needed change.