Aug 23, 2010

Exposing the myths surrounding FDI in retail

Only a few days back the Minister of State for Industries Jyotiraditya Scindia had made a strong plea to allow FDI in multi-brand retail. He told Parliament that his ministry has formed a five-member committee which will talk to stake-holders and take a final decision. The Department of Industrial Policy and Promotion had earlier come up with a discussion paper, which ostensibly was written by Wal-Mart.

The Business TV channels had gone ga-ga over it. They have a task to perform on behalf of the businesses which controls them, and since they thrive on advertisements they have a clear vested interest. That is where their 'national interest' as well as 'economic analysis' ends. Aamir Khan's Peepli Live has already brought out the sordid truth behind media motives.    

The ongoing debate is therefore heavily backed in favour of the commercial interests of the retail industry. More worrying is the way the private business schools (and you have a large number of them) have been teaching this subject, more in line with the DIPP discussion paper, without any fruitful discussion. Of course, there have been exceptions.

This did not dampen my efforts to bring the realities to the fore. I am sure you have seen my analysis, a part of which had also appeared in one of my blog posts. In case you missed it, here it is: FDI in retail: Importing a failed model ( I am aware that the UPA-II government is under pressure from G-20 to open up to FDI in multi-brand retail, and all these justifications are simply to hoodwink the masses to believe all is well.

At last, after long I came across an analysis that really measures up to what should be dubbed as 'academic excellence'. Prof Janat Shah (along with an independent researcher M G Subramaniam) of the Indian Institute of Management (IIM), Bangalore, have come out with an analysis that should serve as an eye-opener. Every college/university and the plethora of business schools should prescribe this as part of the curriculum. Every business journalist worth the name should read this.

I am not expecting the five-member team to follow this analysis. The poor chaps have a mandate, and despite the public face they will put up, they will eventually sign on the dotted line. But you and me have a responsibility. We do not want our farmers and  consumers to suffer. Let us therefore stand up and try to show the mirror to the people who govern us (and never get tired of telling us about the virtues of governance), but in reality are working for business and industry.

Mythical benefits of retail FDI

By Janat Shah and M G Subramanian

Popular business press articles today vehemently support FDI in retail often leaving readers with this perception that once FDI is allowed in multi-brand retail, the Wal-Marts and Tescos of the world would enter India and revolutionise the agricultural practices and supply chains for food products.

It is further assumed that our farmers would receive higher share of the retail price and consumers would enjoy food products at lower prices. Such similar notions have often been supported through discussion papers produced by the department of industrial policy and promotion as well as studies in organised retail by IFPRI and ICRIER.

The entire debate is often based on certain assumptions (‘ myths’ ) which need to be questioned. We outline these major myths and question their validity by looking at experience from the US and Europe.

Myth 1. Farmers would get higher share of retail income with the entry of global organised retail chains: Empirical studies in both the US and Europe have shown that farmers share of retail income has steadily declined over time. In an empirical study using US data it has been shown that farm value share of consumer expenditure for domestically produced farm foods has steadily declined from 33% to 21% from 1970 to 1994. According to a European study, the real farm producer price index of total farm production fell by 27% over the period 1990-2002.

Myth 2. Increase in share of global organised retail would lower prices in food articles : This is a major argument used by most of the studies which strongly favour entry of FDI in retail. However, trends in the BLS (Bureau of Labour studies) food price index in US from 1950 to 2007 tend to somewhat mirror the general Consumer Price Index, with no steady decrease or increase. So expecting the retail price in food products to decline with entry of global retail chains is like chasing a mirage.

Myth 3. Global retail chains would procure directly from farmers: This is not simply true. Currently Wal-Mart procures only 20% (mainly non-food category) of goods directly from manufacturers. Most of the organised retailers procure from large wholesalers and other intermediaries.

Myth 4. Global retail chains would invest in cold chain and we would see immediate benefits in terms of reduction in wastages in fruits and vegetable sector: As has been seen world over, organised retail usually starts with non-food items and slowly moves to dry food category and over a period of time enters into fresh food category. In general, perishables are difficult to manage world over and it is unlikely that it would receive too much attention from global retail chains in the initial stages.

Myth 5. Models and practices followed by global retailers like Wal-Mart represent the best supply chain practices and same models and practices would continue to be valid/optimal in future for world in general and India in particular: The current global model of organised retail was established when crude prices were relatively low and one was not worried about carbon footprint in the supply chain deployed in the process. This model worked with hub and spoke model involving concentrated production and storage systems. The current model is highly energy and carbon intensive in nature. We believe this is neither desirable nor sustainable in long run.

Myth 6. Entry of organised retail would result in higher jobs: This seems to be wishful thinking. Of course higher growth of Indian economy would result in more jobs in retail in general but there is no reason to believe that capital-intensive global retail chains would relatively create more jobs compared to the unorganised sector.

Myth 7. There is level playing field between organised and unorganised retailers: One of the major components of cost in retail is the cost of financing working capital. Unfortunately unorganised retail does not have easy access to finance. Most of the retailers end up borrowing money from informal money markets and with a result we are dealing an uneven playing field loaded against the unorganised sector.

The war as we believe is not between ideologies . What worries one is the wishful thinking on the part of public in general and industry and policymakers in particular who assume that FDI in organised retail in India is the one stop solution to all problems . Yes, we have problems for which we do not have ready-made solutions. Yes, we need to improve productivity in agriculture and reduce wastage in supply chains.

But, it would be naive for us to assume that global organised retail chains would do the tough task of solving these complex set of problems in agriculture production and distribution . We need to look at FDI in retail as just another approach and not look at it as panacea for all our problems in agriculture. #

Read this article in sync with my analysis (the blog link has been posted above) and you will get a true picture of what FDI in retail actually means, and who it stands to benefit.

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