The Cleansing of Indian Retail

(FDI in multi-brand retail is the most progressive and the most radical reform in the economic history of India since the opening up of economy in 1991.  The Advent of FDI in Retail will lead to a definitive churning in the Industry.  The supply chain systems shall be subjected to trial by fire, to instil discipline, efficiency, productivity and technology which will bring significant and enduring benefits for all those who add value to the system.  Contrary to popular belief this will not obliterate and destroy the kiranas, who will also co-exist just as KFCs and Pizza Corners do with the roadside eateries both serving their own patrons)

The Government finally comes up with the Boldest Economic reform of all, nothing less than the Opening up of FDI in Multi Brand Retail itself.  There is a raging and furious debate (with sweeping generalisations and vacuous polemics) which seems to be focussed only on Traders and Middlemen in the system.  The correct way to debate would have been to consider the other players in the Retail Space as well.  One must be debating “what is benefit or otherwise of FDI to Indian Retail Industry, Consumers and Supply chain system as a whole?”  Sadly, the unprecedented benefits that FDI in Retail can have on Consumers and Producers have been largely ignored or dishonestly disregarded in these very intellectual discussions.

To understand the issues involved, let us first look at some simple facts to appreciate the enormity of the beast that we are dealing with

• India is short by 10 million tonnes of cold storage capacity due to which over 30 percent of agricultural produce goes waste every year.  
• Atleast 20% of food grain that India produces annually is eaten by rodents resulting from improper storage facilities.
• India, the world’s second largest fruit and vegetable producer encounters a waste of close to 50% worth of produce
• India is the largest producer of milk in the world.  However, the amount of Milk that it wastes each year is said to be equal to the total Milk produced in the European Union.

Now these are serious issues but how does one solve these problems of wastages at a scale that perhaps has no parallel anywhere in human history? It is clear that the Government has no money to make these investments.  The Indians don’t have that kind of money too.  Therefore the government opened FDI in Cold storage facilities but it attracted no response as there is little money to be made in it.  The Government then realised that unless a profitable venture is coupled with the creation of these permanent facilities in India, perhaps it will never be created.  So what do we do?  The answer comes in the form of a simple brilliant idea of Multi-brand FDI.  Let the foreigners create these permanent facilities and also earn money from them. Even if 50 per cent of the above loss can be translated into savings, the benefits to the nation and the Retail Industry as a whole are nothing less than “significant and spectacular”.

Secondly, one must also note that the Farmers will benefit hugely from this scheme.  According to a recent report by CII and Boston Consulting Group, an Indian farmer of tomatoes earns 30 per cent or less of the final price whereas in the developed countries, the farmer can receive as much as 70 per cent.  This scheme therefore would be a game changer and significantly increase farm incomes.

Thirdly, many claim that large retailers with the power of finance and volume on their side would adopt predatory pricing that would eliminate the other players in the field.  However there is no empirical evidence to support this claim; at best it is a sweeping generalisation.

Contrary to popular belief, the profits made by Wal-Mart or any organised retailer are not due to large volumes alone.  The volume game has serious limitations.  The boom and bust of the Chennai Retailer Subikhsha is a shining example to understand this simple economic truth that one cannot use economies of scale alone to lead oneself into the road of profitability and growth.
 
In reality, profits in organised retail are made from super-efficient supply chain systems and food handling technology that cuts down costs by eliminating non-value adding processes, wastages, avoiding decay and by increasing shelf life in stores etc.  Efficiency is the name of the game in the modern retail.  By calculating the inventory of a store on a dynamic basis the reporting of the stock levels happens in real time systems leading to sharply accurate purchases.  Advanced cold storage systems with standardised grading & quality checks lead to better produce for the consumer and savings for the Retailer.  These benefits to Indian retail cannot be ignored.  Again, a large organised retailer can be easily scrutinized by the regulatory agencies for monopolistic tendencies than many unorganised retail rulers in the present setup.

To those who speak of job losses of unprecedented scale to the trader population, firstly it must be said that there is no evidence to suggest the same.  The research study done by Indian Council of Research in International Economic Relations (ICRIER) has come to a conclusion that investment by large corporates and FDI in the retail sector would in the long run not harm interests of small, traditional retailers.

Even if we ignore the study and grant concession that this would be partly true, it is those who do not add value to the system that will be removed.  The removal of inefficiencies is inevitable part of any business system which the economist Joseph Schumpeter describes as a process of “creative destruction”.  This should be looked as a positive phenomenon which provides opportunity for middle men to change their roles, re-model and add value to the system rather than demand that the system should not change to protect their inefficiencies.

In 1992 China opened up its FDI in retail under incessant protests, by 2001 in a span of 9 years the share of employment in retail doubled from 4 % to 7%, the number employed almost doubled from 28 million to 54 million and the small stores also grew from 1.9 million to 2.5 million.  Thus it was one of the most promising economic decisions in the Chinese history which led to commendable rise of employment levels and enormous increase of their country’s GDP.  This successful empirical evidence from Chinese experience clearly demonstrates that the incursion of the International Retailers does not necessarily mean a death knell to the kirana stores and a fall in retail employment levels.  Both can co-exist serving their own patrons like KFC’s and Pizza corners co-exist with roadside eateries.  
Lastly we must also remind ourselves that an FDI in retail is no substitute for investment in Basic infrastructure by the state. Without the active support of the state the FDI can fail to achieve its objectives, for eg, the Wal-Mart can invest in large and technologically advanced cold storage warehouses but it is for the state to provide continuous electric power to run them. Tesco can bring in large modern freezer trucks to transport their produce from warehouses to its stores but it is for the state to build good roads to support that. What India needs is massive investments in its crippling infrastructure but let’s make a beginning somewhere through the process of FDI.

FDI in multi-brand retail is here to stay, sooner or later it had to come and radically change the Indian Retail space and transform the supply chain systems.  The process has now begun.   To quote from Victor Hugo whose words were echoed by Dr Manmohan Singh when he started it all in 1991 Budget Speech.  "No power on earth can stop an idea whose time has come".
References and Citations:
1. Study of Foreign Direct Investment in India’s Retail Bazaar: Opportunities and Challenges Paper by Anusha Chari (University of North Carolina) and T.C.A. Madhav Raghavan (Indian Statistical Institute)
2. Discussion Paper on FDI in Multi Brand Retail Trading from Department of Policy and Promotion
3. Research study done by Indian Council of Research in International Economic Relations (ICRIER) on Effect of FDI on small trader and unorganised retailers