US retail major Walmart has recently opted out of the joint venture with Bharti to make fresh investments in the country which may adversely impact our economy in terms of infusion of foreign direct investment (FDI). While the new FDI policy of November 2012 allows foreign companies to invest in front end business operations it appears to have an element of ambiguity. Apparently there is no clarity on — whether or not the earlier investments of foreign companies — already made in the retail sector fulfills the criteria to formalize existing joint ventures. While Walmart has already invested heavily in backend infrastructure the new FDI policy now allows foreign companies to also invest in frontend retail operations.
Complexities characterize the new FDI policy which is restrictive with vague clauses that requires foreign retailers to invest at least 50 per cent of their first tranche of investment in the country in backend infrastructure. This includes investment made towards manufacturing, processing and ware-housing among others. The other aspect of the policy is that a minimum 30 percent of the sourcing has to be done locally. Considering the retail sector is integral to India’s growth story it has evolved dramatically from traditional village fairs, street hawkers to resplendent malls and plush outlets, growing from strength to strength. According to the Indian Council for Research on International Economic Relations (ICRIER), India is the seventh-largest retail market in the world, and was expected to grow at a CAGR of over 13 percent till fiscal year 2012, but has actually grown at the rate of 14.86 percent. CARE Research expects the Indian retail industry to grow at a CAGR of 14.8 percent during fiscal 2012-15.
Today the retail and wholesale trade sectors are the single largest component of the services sector in terms of contribution to the Gross Domestic Product and at 15 percent second only to agriculture. According to a Reuter’s press release of May, 2011, the retail sector is expected to expand to 22 percent of the GDP. While retail employs about 7 percent of the total work force, the retail industry comprises both organised and unorganised sectors. The organised retail refers to trade activities undertaken by licensed retailers, namely those registered with sales tax, income tax etc. These include corporate backed hypermarkets and retail chains, and also privately owned large retail businesses. According to the 2012 Outlook India Retail report even though the income is likely to be depreciated due to inflation and high interest rates, the retail market sales is estimated at $540 billion and the share of organised retail will be around 5 percent. Traditional retail is growing at the rate of 10 percent and modern retail at the rate of 25 percent. In fact the larger format convenience stores and supermarkets contributed to 4 percent of organised retail in 2010.
Today food retail accounts for a large chunk of the sector at 63 percent and requires special attention. The country is characterized by a high degree of fragmentation with street markets and convenience stores (kiranas) which account for more than 96 percent of the retail business. There are over 10 million outlets and 96 percent of them are very small with an area of less than 500 square feet.
In comparative terms retail penetration in our country remains low compared to China, Thailand, Indonesia and the US — which means there is a huge potential for organised retail in India. Despite the fact that all economic indicators point towards a positive outlook for organised retail in the long term, the current global economic downturn tends to have a cascading effect on our economy which also impacts the retail sector.
Clearly FDI can to an extent mitigate food inflation or other economic problems. For instance FDI in multi brand retail would benefit the economy, especially farmers and consumers. Clearly this economic policy would help marginal farmers, who gamble with the monsoons, and also lack capital. For instance, tomato prices often vary from Rs 50 per kg to Rs Five which puts the poor farmer into a quandary. Therefore they hesitate to cultivate the crop after a drop in prices which then leads to short fall in supply and in turn results in rising prices. Thereafter, the sudden surge in prices once again prompts farmers to cultivate tomatoes. As a result, the demand-supply mismatch creates huge volatility in agro-product prices. This phenomenon of price volatility is known as cob-web dilemma in economics. Here FDI can help farmers tide over such problems through fair and stable price mechanisms.
While FDI is certainly not a panacea for all our economic ills it would be imprudent to ignore its capability to contribute to the economy. Over the last decade India Inc has evolved expertise in the retail as evident from names of home grown companies like Reliance, More, Spencer and Food world among others.
