Sukhpal Singh, Associate Professor, Center for Management in Agriculture, IIM Ahmedabad, talks to Deputy Editor Sanjay Choudhry about why the new retail FDI policy of the government is facing so much opposition.
Q. Do you support the government’s decision to allow FDI in multi-brand retail?
I am not against FDI in retail. Such a decision was expected. It is nothing new because FDI is already permitted in wholesale cash’n’ carry and foreign players are present in the Indian retail sector through single-brand stores.
The problem is with the content of the FDI policy and the way it has been brought in. A lot of political interests have not liked this decision of the government announced without reaching any consensus with all the stakeholders.
Q. What is the main issue in the FDI debate?
The main issue is that if FDI in retail is going to be allowed, then how can we leverage it for the development of the Indian economy especially agriculture sector in terms of benefits to farmers, supply chain efficiency, wastage reduction and so on. The second issue involves the front-end i.e. retail – how traditional retailers are going to cope with the competition which is much larger in scale and backed with financial muscle. The third issue is inflation. We have to see if price inflation can be contained with the arrival of the new foreign players which can sell things at a cheaper rate due to their bulk-buying capacity. To judge the merit of the retail FDI policy, we have to evaluate it on these three dimensions.
Q. How do you see the new FDI policy from the point of view of farmers?
As far as the farmer interest is concerned, one doesn’t see as much attention to the farmers as one would have liked. Farmers would benefit if the government lays down mandatory guidelines or restrictions on procurement by modern foreign retail chains. The FDI announcement mentions that 30 percent of procurement of foreign players has to be from the SME segment. However it is not clear if these SMEs would belong only to India or anywhere in the world because restricting the procurement to India would fall foul of the WTO agreement. No such condition has been placed on farm produce procurement.
About 85 percent of Indian farmers are small or marginal. The issue is how to benefit them by providing new marketing channel to be set up by foreign retailers. What are the mechanisms, policies and institutions we have that will ensure this objective is met? The problem is that there is nothing in the retail FDI policy that is tailored specifically to the requirements of the Indian farm sector which is dominated by smallholdings.
Q. What about small retailers? Does the new policy take care of their interests?
There is nothing in the policy to protect the front-end. We understand that once these bigger players enter the country, the kirana stores are going to lose sales because everybody will be taking a chunk of the same market. The new policy mandates that foreign players can open shop only in 53 Indian cities with a population of more than a million each. But these cities together account for 42 percent of the total urban population! So, half of the urban market is opened to these players. Infact, the intensity of traditional retail is higher in such cities.
Secondly, there is no provision in the policy specifying the locations in a city where foreign retailers can open stores. Many countries have imposed restrictions on FDI retail. Big retailers are often prevented from setting up stores within the municipal limits of a city. Sometimes, these can only be located a particular distance away. There are different types of stores – hypermarkets, supermarkets, discount stores, etc. There is no mention in the new policy about what kind of a store a foreign player can open and where. Small retailers are understandably worried that some big-box store of a foreign retailer will open in their neighborhood and cut into their sales.
Secondly, there is no provision in the policy specifying the locations in a city where foreign retailers can open stores. Many countries have imposed restrictions on FDI retail. Big retailers are often prevented from setting up stores within the municipal limits of a city. Sometimes, these can only be located a particular distance away. There are different types of stores – hypermarkets, supermarkets, discount stores, etc. There is no mention in the new policy about what kind of a store a foreign player can open and where. Small retailers are understandably worried that some big-box store of a foreign retailer will open in their neighborhood and cut into their sales.