Talking shop

Media reports indicate that the government might permit 49 per cent foreign investment in retail. This is an improvement over the cap of 26...

Media reports indicate that the government might permit 49 per cent foreign investment in retail. This is an improvement over the cap of 26 per cent that was expected to be the limit on FDI in retail until now. At the same time, there is no fundamental difference as it will still not give controlling share to FDI. The Left should therefore not have any objection, although the traders8217; lobbies may continue to oppose it. The proposed FDI limit of 49 per cent is qualitatively inferior to the 100 per cent FDI that China offers. The argument that FDI in retail will hurt the local grocers, who today control 98 per cent of retail business, is reported to have been shot down by the PMO on the grounds that the presence of big local retail malls has not hurt the local kirana stores.

One of the biggest beneficiaries of FDI in retail will be the customer. The benefits of supply chains that foreign retailers can offer have not been seen in India yet. The malls today are mainly for the upper income consumer. Stores like Walmart have made quality goods accessible to the poorest households in the US, raising their real incomes and standards of living. It will be a boon for the Indian consumer when she gets similar products at low prices. Today, Chinese produced goods available in India at cheap prices are often of poor quality. When brought in by retail chains, they will come with quality assurance and guarantees. The cutting down of the profit margins of a number of traders along the way will also benefit the consumer. Opposition from Indian industrialists who are inefficient, traders who have a stake in the existing supply chains and local stores, should not be allowed to stop steps that can bring major benefits to the poor and middle classes of India. It must be remembered that the millions who gain from lower prices are far fewer than the few who lose due to greater competition. Moreover, the competition will put pressure on the Indian retail stores to provide better services at lower prices.

The other big beneficiary of FDI in retail will be the exchequer. The informal grocery stores are still in the cash economy. Whenever there is a cash economy, it becomes easy for both parties to hide the transaction and escape paying taxes. The way out is to increase the share of the formal sector and reduce the component of the cash economy. While the local shop does not provide a receipt, the supermarket does. The entry of FDI in retail will help bring trade into the white economy. Today wholesale plus retail trade constitute 14 per cent of GDP. This can be a significant source of tax revenue for the government.