FDI in Retail in India - Short Article

I posted the long version of the analysis (Title: FDI in Retail Business in India (Old analysis by me)) I did elsewhere on this Blog. Here is a shorter version. Upon the suggestion of a friend in India, I prepared this article and sent it to a Daily newspaper. The Editor said that he would publish it. But, the article never saw the daylight on that newspaper. You frequently hear about paid news; this is an opposite case. But here is the article.

How Can FDI in Retail Benefit India?

Som Karamchetty*

Indian government is intent on opening up the retail sector to 100% Foreign Direct Investment (FDI) and the opposition and some commentators in the media have been expressing vehement opposition. Mr. Pradeep S. Mehta in the Business Line article suggested that parliamentarians should take a reasoned view of FDI in retail in this monsoon session. If the expectation is for foreign retailers to invest in the agricultural and food processing & storage operations in India, there should be a firm and measurable commitment as US retailers are not the ones that invest in these sectors.

A vigorous debate is going on in India about Foreign Direct Investment (FDI) in the retail business. While a growing Indian economy needs foreign investment, the question is at what cost. How will FDI in retail impact the domestic small retailers and the labour force in this sector? Are the claims that the foreign retailers would invest in agricultural and food processing and food preservation sectors realistic?

It is now well established that China had benefitted significantly by foreign investments in the last several decades, including in the retail sector, that its economy is now second only to the US. In the overall, India has also benefited from such foreign investment since the economic reforms of 1991. Foreign retailers see an opportunity to invest in the Indian retail sector to introduce their methods and technology to the supply chain and customer relationships and of course, they see a good return on their investment.

When strong investment, advanced technology, business methods, and the economies of scale are applied advantageously, the system productivity improves, costs are reduced. In such a scenario, the investor, retailer, supplier, and consumer would all be winners. When productivity-enhancing improvements are introduced, the traditional retailers and workers trudging along in the old system will be affected. In the larger scheme of things, the benefits to a majority of people are likely to outweigh the losses to a few and in consideration of such an outcome the government is expected to provide some measures to provide relief to the losers.

The antagonists of FDI in retail cite Walmart as an example of a big retailer that would vanquish the small Indian retailer. Walmart has net sales of $419 million in 2011 with $260 million of sales coming from Walmart US representing only 10% of the US retail sector. The ten thousand Walmart stores represent only one percent of the number of retail establishments in the US market. Many small and medium sized businesses thrived in the US despite the fierce competition from the giant wholesalers and retailers. Walmart operates large stores in major cities. Shoppers with automobiles go to these “big box” stores and buy their requirements. With high gas (petrol) prices, Indians are not likely to go long distances to buy their routine needs, but would continue to go to the “corner stores” and buy their daily or weekly needs. In that sense, the future will have room for the many small stores as well as the few big stores.

Would foreign retailers invest in the Indian food chain? The roles played by the retailers in the US economy may be seen from an analysis of the descriptions of the North American Industry Classification System (NAICS) codes assigned by US Bureau of Census. Agriculture (NAICS Sector 11), Food Manufacturing (NAICS Sector 311) (part of Manufacturing industry (NAICS Sector 31)), Transportation and Warehousing of Goods (NAICS Sectors 48-49), Refrigerated Warehousing and Storage (NAICS Sector 493120), Wholesale (NAICS Sector 42), and Retail Industry (NAICS Sectors 44 and 45) span the chain from the farm to the fork. Archer Daniels Midland Company (NAICS Sectors 311223), Cargill (NAICS Sectors 311221 and 311119) are a couple of prominent companies that invest and work close to the farming sector. The top ten companies in the list of the top 100 food processing companies (2011) are Pepsico (NAICS Sector 488119), Nestle, Kraft Foods (NAICS Sector 311999), Tyson Foods (NAICS Sector 311615), Anheuser Bush, JBS USA, General Mills, Dean Foods, Mars, Smithfield Foods. Walmart (NAICS Sector 452910), Home Depot, Kroger, Costco, and Target are the big retail chains. None of these big retailers play any significant role in the other parts of the food chain.

In the case of fresh food storage, NAICS 493120 Refrigerated Warehousing and Storage plays a critical role. This industry comprises establishments primarily engaged in operating refrigerated warehousing and storage facilities. The services provided by these establishments include blast freezing, tempering, and modified atmosphere storage services. The technologies and methods employed by these companies could be helpful in preventing the spoilage and losses on the Indian farms. Companies in the retail sector (e.g. Food and Beverage Stores NAICS Sector 445) are involved in storage of food products to a limited extent i.e. during wholesale and retail logistics. In short the role of the retailers in preventing food spoilage is minimal and limited.

 

Examining the US retailers’ current roles in that country, it is natural to not expect them to play significantly in the prevention of losses of food products on the farm or in storage in India. But, if the foreign retailers agreed to expand their traditional roles and made firm commitments to introduce necessary improvements to the food chain in India, that is of course a strong reason to welcome them to India.

Retailers play a role in multiple products and manufactured goods also fall into this category. It is feared that foreign retailers have a long reach and bring products from low cost sources consistent with the quality acceptable to consumers. Thus, their impact can be felt in the manufacturing sector through international sourcing by retailers. The recent competitive ability of the Indian manufacturing sector suggests that they may be willing to take up such a challenge and actually benefit from a competitive retail sector on an international level playing field. Again, small Indian players in the manufacturing sector may need the help of the government in terms of a removal of bureaucratic hurdles, and injection of capital investment.

For a long time, India had supply shortages and rationing in essential commodities. Government ran ration shops and the bureaucrats treated shoppers with disdain and shopping experience has been uniformly unpleasant. Shoppers’ experience even at private shops is not worth writing home about. Even today, the Indian consumer does not have a pleasant shopping experience. With competition and increased availability of goods, the survival of a business depends on excellent customer service. That should be a welcome improvement.

Although the 1950s India was apprehensive of the computer technologies, the 1990s India embraced Information Technology and benefitted immensely from it. The country’s experience with modern manufacturing and communication technology was also similarly beneficial. Indian leaders and people are very likely to be deeply disappointed if they expect that FDI in retail would by itself improve the farming sector in India. They should take a comprehensive look at the roles played and commitments made by the various companies and develop an overall strategy to orchestrate a highly productive, and efficient end to end chain. India has to make a choice if it would like to compete in the international trade arena or erect barriers and live in an isolated stodgy economy.

*The author lives in Potomac, MD, USA, and can be reached at somkdsr@verizon.net