The Retail FDI imbroglio

Posted: February 24, 2007 in FDI, india, kirana, retail

I usually do not comment on economic policy and things like that. I do not feel I am qualified to do so, as there are just far too many facets to issues like these, and they are best left to economists who know their jobs.

Yet, I feel this particular issue deserves a comment. There is just a lot of news coming in, on the subject, each day now. My take on this is as follows.

That yes, more organised retail will definitely hurt small shops and traders. We (like the English) are a country of shopkeepers and a large part of our working population is engaged in small trading businesses, of the kind that will get affected by organised retail.

Whatever they say about organised retail and mom-and-pop stores co-existing in the US, the reality is not only different from what is portrayed about the US, it will probably be worse in India. I know for a fact that the mom-and-pop stores, although they still exist in large numbers, in the US, have been severly affected by big box stores coming up in their areas. They have had to go to smaller and smaller niches, and find new ways to survive. And their profitability has gone down dramatically. It is never easy, as was seen so vividly in the film, “You’ve got mail”.
Coming to the India situation, only the other day, I was seeing a news report on TV that talked about the increasing prices of fruits and vegetables. And what it showed very clearly was that the organised retailers like Reliance and Subhiksha were selling these, at the lowest rates. Lower than the small roadside stalls! Now, if you can go to an organised retail outlet, perhaps with air-con and other conveniences, and get your veggies cheaper, what incentive is left to visit the roadside vendor?? The fact that there were and are, huge inefficiencies in say, the distribution network in India, only means that someone who can remove these inefficiencies, saves a lot of money, and is able to pass that benefit to the consumer!

So the stark reality IS that the small store is going to find it hard to stand up to the organised retailers. Some may still survive, many may not.

So where does that lead us on the fundamental debate on FDI in retail??

What I can see from the above is that none of what I mentioned earlier, had anything to do with foreign retailers! It is all about organised retail vs kirana stores, to put it simply. There was a day and age in India when certain industries were reserved for the small scale sector alone. I guess those days are gone. Whatever wisdom the government has acquired over the years, tells that that industry has to scale up, where possible, and the priority is not to stay small and protect jobs temporarily, but to grow as big as we can, and create new jobs in that new scenario.

That being the case, they will not stop the Reliances or the Pantaloons or the Kumar Mangalam Birlas or RPG group or Tatas or ITC from getting into organised retail. As soon as that happens, the small store is threatened, and that part has been accepted by the GOI.

Then the only debate on FDI is if these Indian groups require protection. Do we need to shield the Reliances and the Pantaloons from Wal-mart and Tesco?? I guess that argument is very plain. No other industry is getting any such protection in this world. An Infosys has to taken on IBM or CapGemini, and does not look for any protection there, nor does an Indian cement company seek protection against the Lafarges of this world. Why should the big boys in Indian retail be given special status? They are all making good money in their existing businesses, they are going out and acquiring globally, they are raising money in the world markets, they are recruiting the best of talent from anywhere in the world. They should be able to take on the competition from the big global brands as well.

On the other hand, such competition will only make it more attractive for the consumer in India. There will be more to choose from, better prices, better deals, etc. So heck, why not?

And as for the small retailers who are going to get impacted, really, that is the price of progress. A Nehruvian philosophy of job creation and job protection was good for its times. But its behind us now. The 1991 opening up of the economy took its toll. Many small industries could not stand up to the international competition. Some of them restructured, improved processed, tightened their belts, and are world beaters today. The ones which closed down, found other ways to survive in this world. Same will have to be the natural course of things, as far as the retail trade goes. Some may become franchisees of larger retailers, some may get into niches that organised retail may not touch at this time, the rest may have to fend for themselves.

Transitions take their toll. It is a price to pay, to get what comes after the transition…

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