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Vivian Fernandes
Friday , September 14, 2012 at 23 : 34

Why Fear FDI in Retailing?


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While approving foreign direct investment in multi-brand retailing, the central government says states have the discretion to deny them entry. Though investment policy is decided centrally licenses to operate shops is given by municipalities. But they cannot discriminate. If they do, they will be violating World Trade Organization covenants, which require member countries to give equal treatment to both national and foreign investors. The clause (if one can call it that) is meant to secure political buy-in to the policy; it can be challenged in the WTO. But state governments that are not in favour can tire out the foreign joint ventures by sitting on their applications for a license. It would be a brave retailer who would dare to annoy state governments run by autocratic chief ministers. Even stores of Reliance Fresh, owned by the supposedly almighty Mukesh Ambani, were vandalised in Uttar Pradesh a few years ago when Mayawati was heading the government. (But then again, what can't a little palm grease accomplish in this country?!)

As usual the Left parties are warning of gloom and doom. Never mind, that a large number of organised (Indian) retail stores sprang up in Kolkata when the Communists were ruling. Foreign discount stores like Wal-Mart will certainly crank up the competition. But Indian retailers, both organized and unorganized, will learn to cope. The Communists have never built; they only tear down. Their pathological hatred of America (and capitalism) blinds them to the national good. They will oppose organized retailing and biotechnology, if that can keep out Wal-Mart and Monsanto, whom they regard as flag bearers of American imperialism. As head of Parliament's standing committee on agriculture, Communist MP Basudeb Acharya advised a ban on Bt cotton and punishment of the officials who approved it. Why? Bt Cotton accounts for 90 per cent of India's cotton crop and has made India the second largest exporter in the world from being a net importer. Farmers know what is good for them.

Why do we need foreign investment when some of the country's biggest moneybags are in the business of retailing? Reliance Industries has investments that can be readily cashed for Rs 70,000 cr. So what can Wal-Mart do that Reliance cannot? Why would it buy from the farmers directly (which is one of the reasons for allowing FDI in), and not from the mandis like most Indian large format stores do?

Wal-Mart may initially, but as it grows in scale it will be compelled to contract suppliers from farmers. Manu Anand, the CEO of PepsiCo says the company buys 300,000 tons of potatoes annually. With those volumes it cannot depend on the mandis.

Capital is also not alike. There is such a thing a patient capital. Why does McDonald's invest in a supply chain for poultry meat, potatoes (through McCain) and iceberg lettuce while Indian restaurant chains do not? Why do Coca-Cola and Pepsi each invest a billion dollars over a decade without earning a profit? Why does Nestle invest in Maggi over two decades and turn it into a mega brand? That is because they have profits from rich markets to underwrite losses in those that are not.

When India abolished import quotas early in the last decade there was an outcry. Manufacturers cried doom. Commerce Minister Murasoli Maran even set up a 'war room' to monitor the imports of 300 'sensitive' commodities. Have Chinese products swamped us?

Marketing maven Rama Bijapurkar says much of the fuss is overdone. Indians get into retailing because they have little education and little else to do, she says. Most Indians buy in such miniscule quantities that big organized retailers will pass them over. "The challenging economics of organised retail in India because of the income structure (a lot of people earning, and buying, a little bit each) and the diversity of habits, as well as the cost of real estate and need for higher service levels, will make those (foreign investors) coming in restrict themselves to the well-heeled Indians and to a certain kind of merchandise mix that makes them profitable. Retail needs patient capital, usually strategic investors, and there aren't all that many of them in the world. Therefore we don't really have to worry about the small retailer with no other livelihood - unless Wal-Mart decides to lose money forever and secure the market," says Bijapurkar.

If Wal-Mart will subsidize us on such a large scale, should anyone complain?


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More about Vivian Fernandes

Vivian Fernandes is a senior journalist with nearly 30 years of practice, 19 of them in television, all of which he spent at TV18. Vivian’s last assignment was as executive editor of a book on India and China written by the founder of the Network 18 group, Mr Raghav Bahl. He has been an observer of Indian business and politics, and had reported on economic policy making as reporter, chief of Delhi bureau of correspondents and economic policy editor. Vivian has traveled abroad with Prime Ministers Narasimha Rao, Atal Behari Vajpayee and Manmohan Singh. He was also reported on the World Trade Organization’s trade talks from Cancun, Hong Kong and Geneva. He continues his association with the Network18 group, but not as an employee.
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