Crucial FDI boost
100% FDI retail is a big positive for India as costly inefficiencies in supply chain will diminish. The government will also gain substantially by sending the right policy signal.
15 Jan 2018 3:58 PM GMT
Foreign Direct Investment (FDI) in retail sector has been at the epicentre of national debate. India, by allowing 100 per cent FDI in single-brand retail, has sent out a strong signal that reforms are picking up pace. Consumers are happy as they will now have access to well-established foreign brands. Global investors are happy as the Indian government is showing that it is serious about bringing back an investor-friendly environment. For example, India has massively improved its ranking in terms of Ease of Doing Business, Global Competitive Index, and Logistic Performance Index. Couple this with reforms in single-brand retail, and one would soon see brand likes IKEA, Walmart, Apple, Tesco etc. coming and setting up shops on their own. Earlier, 49 per cent FDI was allowed in single-brand retail, which means these foreign biggies had to tie-up with some Indian counterparts to open their stores in India. Also, there was a relaxation in the domestic input content requirement (from the earlier 30 per cent) for these foreign entities. Possibly, they couldn't have asked for more. What this would mean: A higher FDI inflow.
Considering the anticipated level of inflows on account of FDI in retail, there may not be much reason to worry. During 2000, India attracted significantly lower FDI ($3.5 billion) than many other South-East Asian countries, such as South Korea ($10. 5 billion), Thailand ($6 billion) and Malaysia ($5 billion). However, an interesting pattern has started to emerge since 2005. FDI inflow into India increased by leaps and bounds, from $7.6 billion in 2005, to $35 billion in 2009, and finally to $44 billion in 2017.
In 2000, India's share among middle-income countries, in terms of attracting FDI, was only 2.4 per cent, compared with China's 26 per cent. In 2016, China's share fell to 22 per cent, whereas India's share increased to 10 per cent (Global Development Finance: Country and Summary Data 2017). India's gain has been at the cost of China losing out in terms of being a favourable FDI destination. Cost of inputs— labour and land— has been on the rise in China, something from which India stands to gain.
Critiques argue that the government making a U-turn from the earlier position of 30 per cent domestic content requirements for single brand retails is going to hurt India's Make in India campaign. This fear seems to be farfetched. If IKEA wants to build showrooms, it cannot build it in thin air. It will require land, labour, and utilities, such as electricity, to run its showroom. There will be many splintering effects, for instance, it will also require sufficient manpower to guard the showrooms. They will also need Indian sales agents and managers. All of these will have an impact on the domestic employment generation. Contrary to popular perception, IKEA may also source some wood domestically. If all of these culminate in Indian consumers receiving direct access to world-class furniture one should not object to it.
These days the world has become flat. With Apple setting up their manufacturing unit in Hyderabad, there is going to be the advent of newer technologies. Also, these days, the components of telephone and computers come from all over the world. Therefore, the apprehension that the removal of the domestic content requirement clause is going to hurt the Indian economy is also not correct. But India stands to gain by having access to world-class technology and products.
FDI in retail will bring down inflation by investing in supply chain logistics, that is, by investing in transport and refrigerated storage necessary for perishable items. Typically, if a farmer were to sell his produce, he needs to bring it to the local market where he usually auctions it to the retailer, who, in turn, will sell to the consumers.
This process of auctioning in the mandi (central market) is facilitated by the middleman, who charges a commission from the farmers. Add to this the cost of bringing the agricultural produce to the local market; the price difference between what the farmers get and what the consumers pay is what society loses out due to internal inefficiency.
By investing in supply chain logistics, the players in multi-brand retail will reduce the cost, and bring down inflation. They will procure the produce directly from the farmers, keep it in their storage, and transport it directly to their retail outlet. It is worthy to note that there is a huge investment involved to get the supply chain logistics in place — something that FDI in retail promises.
Those who have been arguing that the local kirana and the marginal farmers may be hurt — the former losing out on business, and the latter not getting the right price – are not right. Currently, the local kirana, and retail outlets such as Reliance Fresh, Tata-Tesco, and Spencer, to name a few, are co-existing comfortably with each other.
Marginal farmers also stand to gain. Recent evidence suggests that marginal farmers who have entered into contracts with Pepsi India have, on average, realised double the price in comparison with the local mandi and the local mahajan (in absence of the local mandi). This is an eye-opener for those who suggest that multinationals will squeeze the farmers by not offering them the right price.
Experience from around the globe suggests that the local kirana needs to worry from the spread of e-commerce, and not the presence of corporates in the retail sector. India badly needs corporatisation of the agriculture sector to even out the distribution of income. The ITC and Pepsi examples have shown that, in their best interest, corporates directly get in touch with the farmers, and give them the necessary information on how to increase crop output and productivity. It is to be noted that the agriculture sector receives minuscule investment while supporting the livelihoods of around 55 per cent of the population.
The Modi government also stands to gain substantially by sending the right policy signal. Moreover, FDI in retail can bring in forms of FDI, at a time when our trade figures aren't doing really well. India's credit-worthiness can improve, with more FDI inflow resulting from reforms. International rating agencies usually look at total foreign exchange reserves and the FDI inflow as criteria for rating any country.
(The author is Professor, Bennett University. He has authored the book 'The Indian Economy: A Macroeconomic Perspective'. The views expressed are strictly personal)
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