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Muddling through retail reform

Why the UPA is unconvincing and the NDA mendacious about FDI in retail

Written by Ajay Dua |
November 29, 2011 3:06:32 am

In opening up the retail trade to foreign equity last week,the Union government demonstrated uncharacteristic courage and conviction. While this policy measure might help dispel doubts about its ability to take decisions,it has raised a political dust-storm more intense and widespread than it had probably bargained for.

No doubt,taking a view on the issue of liberalising FDI norms for multi-brand retail had been on the government’s agenda for several years,but announcing a decision while Parliament is in session was singularly inappropriate. It has provided the disparate opposition an opportunity to come together and rake the government over the coals. By a strange coincidence,both the ruling party and those not in favour are able to marshal only generic arguments to support or oppose the forward-looking measure. There is very little reliable evidence or relevant experience available with either side to make a convincing case.

The Union government has,through media statements and full-page advertisements in national dailies,extolled the potential benefits of permitting 51 per cent FDI in multi-brand retail — such as giving more choice and cheaper prices to the consumer,better realisation for his produce to the farmer,and greater sourcing from the small entrepreneur. All these developments are expected to hold out the promise of numerous new jobs. In hoping for such results,it has referred to the general experience of Brazil,China,Chile and Indonesia. There are no scientific studies or analyses being quoted of any of these countries,or India,to buttress the claim of a wide range of possible benefits. In any case,many of these are expectations,the realisation of which is dependent on a host of other related measures. Unless the Agriculture Produce Marketing Committee Acts are amended by each state government,direct procurement by retailers from farmers is not permissible. The assurance of 30 per cent compulsory procurement from SMEs is not confined to local manufacturers,and the obligation has been made more global in nature. The requirement of putting 50 per cent of the capital in back-end infrastructure is open to wide interpretation and difficult to operationalise,since investments would have to be made through other businesses not core to those familiar with only selling.

The fast uniting opposition is not on firm ground either. Till 2004,the BJP saw merit in permitting FDI in retail and had even included it in the “India Shining” manifesto. Its change of heart took place only when it vacated the Treasury benches. Its concern about the viability of operations of the eight million-odd “kirana” shopkeepers,many of whom reportedly tend to be its political supporters,may be genuine,but is more in nature of an apprehension than based on well-founded empirical facts. The modern large-store format of retailing run by domestic giants has been around in India for about 15 years. Its effects on the mom-and-pop stores that dot the Indian retail landscape has been to make them more nimble in operations and creative in customer service. Almost all have managed to survive the competition,with the consumer being the ultimate beneficiary.

Investments and operations by foreign chains should not have a vastly different impact on the traditional format,while providing a run for their money to the rapidly growing domestically-funded and operated modern stores. It is,in fact,they who should be as concerned as the protectors of neighbourhood stores. Surprisingly,this set of stakeholders has welcomed the government initiative,probably because they hope to offload portions of their stake at a premium to the new entrants. In any case,over 80 per cent of the family-run traditional shops are not likely to feel any impact since the new FDI-invested retail outlets can come up only in the 53 million-plus cities,leaving rural areas and about 8,000 other cities and towns to continue to be serviced by the friendly neighbourhood grocer.

Nevertheless,to allay the widely-expressed unease of the Left,the BJP,and more recently of almost all the member-parties of the erstwhile NDA,as well as some within the UPA alliance,the government could have adopted a more calibrated strategy. Such an approach was necessary as the government-commissioned report by ICRIER in 2007 had been ambivalent,and conceded that its study showed suffering by small shopkeepers in the immediate vicinity of larger modern stores. The oft-quoted experience of China could also have been made use of. It took that country 14 years to completely open up its retail trade to foreign investment,with the final concession in 2003 being necessitated by its urge to gain membership of WTO.

An option was to limit foreign entry to only the three 10- million-plus or the eight 5-million-plus cities,and to wait to see the impact before liberalising further. China,starting the process in 1989,had initially opened up only Beijing and Shanghai,and also limited the number of stores that could be opened there. Another way out for us was to consider imposing a similar numerical limit on the aggregate number of such stores which could be set up in the million-plus cities,and alongside,define the criteria for selecting among the entrants. A simpler decision could have been to indicate that the reform measure has time limits,and the window is open only for two years or so. Depending on the outcome,the subject could have been revisited in about five years’ time,and a more informed policy adopted.

Even a desirable policy measure can sometimes go awry if it is ill-timed or not brought in with adequate care to meet local political and social points of view. Years of deliberations and dithering by the government had given ample proof that the powers within were not fully convinced. It was therefore necessary to be more politically sensitive and to package the proposal as an experiment to test the waters.

The writer is a former secretary in the commerce and industry ministry

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