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September 3, 2011

The fruits of FDI

For years, the debate on Foreign Direct Investment (FDI) in the retail sector has raged on, involving everything from economics, national pride and nostalgia about your friendly neighborhood kirana store. According to estimates quoted in the media, up to 11 percent of employment in the country is employed by domestic retail. That is the second largest sector after agriculture in our country.

Speaking in Parliament, Minister for commerce and industry Anand Sharma said almost 35 million people were employed in retail, both in the agricultural and non-agricultural sectors.The organised sector has a share of only 4 percent in the country’s $ 590 billion retail industry.

Those resisting the entry of foreign companies such as Walmart, Tesco and Carrefour through majority owned joint ventures argue that this will lead to mass unemployment and ruin the fragile ecology of the Indian rural retail dynamics. To put this in political context, it is the standard ant-globalization, pro-nationalism argument. The evil multi-national corporation is going to kick our poor local traders out of business. It is a powerful argument, which resonates politically. People will forget about the lack of freshness of the vegetables they buy, the presence of coloured mineral ore in their rice, wheat and pulses, the lack of guaranteed availability of milk, some assurance that the meat or fish they just bought is good for human consumption and pledge their gold savings to buy onions. After all national pride and aam admi comes first.

Photo: Frank Muller

Photo: Frank Muller

Most of us, particularly those of us raised in a village, have and might live with this scenario. Politically, what kind of politicians would want to be siding with Walmart?

The big elephant in the room is wastage. Sadly, hardly anyone talks about it. Pamela Cheema quotes Pradeep Chechani, vice-president, supply chain, Wadawan Retail in her article in the August issue of LOG. India magazine about how the logistics sector in India is welcoming the entry of foreign players. He states he favors foreign investment in retail, “because of the huge wastage in food and groceries. India is the world’s largest producer of fruits and vegetables and we waste about 25 percent of it worth 50,000 crores.”

That is 25 percent of everything we produce. So if a farmer produces 100 bananas, 25 percent is wasted on the way. Add five layers of middle men and tally up the costs. For that single banana, you are paying for inefficient transportation and warehousing, and padding up for costs at each level of trade to make up for wastage. The only losers in this system are you and the farmer. He has to sell because he can’t store and you have to buy because there is no other choice.

Foreign investment in retail will provide much needed investments in our cool chain and storage infrastructure. Have you ever wondered how McDonalds in India never runs out of chicken? The logistics of the firm ensures that all its suppliers, from the farmer up, have to meet its stringent quality standards in storage and transportation.

What about employment? Will FDI in retail lead to loss of jobs? Speaking to the Business Standard (August 7, 2011), retail consultancy firm Technopak Advisors’ managing director, Arvind Singhal, states there would be a requirement of an estimated 25 to 30 million additional people by 2020. Elixir Consulting, a recruitment process outsourcing firm, put the additional manpower requirement in the next 10 years at a modest 12-15 million. Nitin Sethi, practice leader (consultancy), Aon-Hewitt, said, “In 12-24 months, the manpower requirement would be up by 27 to 50 percent.”

There needs to support on the policy front as well. Especially in the much awaited Goods and Services Tax (GST)—this will encourage the growth and development of large temperature controlled warehouses, particularly in central India, which lacks infrastructure. The government is trying to formulate policy to establish a middle ground of sorts. One of the options is to limit the multinationals to towns with more than a million residents; there are about 50 such cities and towns in India now.

The second option is to adopt the Chinese model. Start with six metros and then expand in a phased manner. In all likelihood, this is how the government is going to let it play out. While it will announce an opening up of the sector, it will try to limit the foreign players to the main metros.

As a first step, on July 22, a panel of secretaries led by cabinet secretary AK Seth, cleared the proposal for FDI in multi-brand retail stores. The proposal now goes to the Union Cabinet and rules will then be notified. Only then will we know how the government is going to play this out. Some riders have been set, including minimum investment of $ 100 million with 51 per cent investment in backend supply chain. The other criteria is that 30 percent sourcing will have to be from domestic small and medium units.

Whatever the rules set, the focus should be on cutting wastage. There is little benefit in boosting agricultural production if we can’t ensure the infrastructure to transport it in good condition to market.


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