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    FDI in Retail: Integrating India’s Economy Backwards

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    India’s young population, higher disposal income, and upgradation in living standards, coupled with growing consumer demand, have made the country an attractive destination for FDI, says  , Manager – Strategic Planning, (a division of Enpro Oil). Given the low confidence level of the Indian business community and investors at the moment, the liberalization of the FDI policy will act as a life-saving drug that will provide a big boost to the retail industry.

    FDI in retail has the potential to bring into India foreign capital, technology, and managerial expertise of big international retailers. It can develop an efficient linkage between the back-end supply chain and the front-end via capital investment and technological inputs. FDI will also transform the way perishable agricultural produce is acquired, stored, preserved, and marketed, and thus help control India’s persistent food inflation.

    India is the second largest producer of fruits and vegetables but lacks an integrated cold-chain infrastructure and storage facilities. Inefficient supply chain infrastructure is evident from the fact that 35–40 percent of fruits and vegetables and nearly 10–15 percent of food grains produced in India get wasted.

    Typically, if a farmer were to sell his produce, he needs to bring it to the local market where he usually auctions it to a retailer, who, in turn, sells it to the final consumers. This process of auctioning in the market is facilitated by middlemen who charge a commission from the farmers. The cost of transporting agricultural produce to the local market is also borne by the farmer. The price difference between what the farmers get and what the consumers pay is what the society loses out due to inefficiency. More intermediaries add to the inefficiency in the chain, leading to wastage and a drop in the product quality.

    In India, organized retail currently stands at only 6–7 percent of the total retail market, while only 2–3 percent of food is sold through the organized sector, the least compared to other product categories. The country badly needs corporatization of the agriculture sector to even out distribution of income. Companies like ITC, , , and Pepsi have shown that corporates can directly get in touch with the farmers and give them the necessary information on how to increase crop output and productivity. The farming community in India has very low efficiency in terms of production. Our productivity in food and agriculture is at rock-bottom compared to the rest of the world. There is a significant opportunity for India to raise agricultural output with investment in better farming practices.

    FDI in retail will provide the farming community a new support group with a common interest that is likely to give a big push to its productivity. It will cut layers between the farm price and the consumer price through a strong supply chain and back-end logistics. The condition of 50 percent mandatory investment in back-end infrastructure should help overcome supply chain inefficiencies.

    Back-end infrastructure includes activities such as processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture, marketing infrastructure, etc. related to the produce. Apart from this, the sophisticated front-end that international players are likely to bring with them will also boost investment in infrastructure.

    So far, Indian economy has been heavily geared towards the service sector that contributes around 56 percent of the country’s GDP. Having such a high contribution from services is an attribute typical of developed economies, not of the developing ones. Ironically, it would seem that the Indian economy is getting a postindustrial profile without having been industrialized! With only 20 percent of India’s total workforce employed in industry (manufacturing) which contributes altogether only 26 percent of its GDP, this sector can hardly absorb more people without a major expansion.

    However, the proposed 50 percent investment by foreign partners in the back-end, subject to a minimum investment of US $100 mn and 30 percent of sourcing to be done from the SMEs in India, will give the manufacturing sector a boost. It will increase employment in the industries.

    China Story

    China permitted FDI in retail way back in 1992. It has since attracted huge investments in the sector without affecting either small retailers or the domestic retail chains. Endowed with the world’s largest population, China has virtually become the focal point of global corporations who seek cheap labor as well as the potential of reaching the world’s largest market of consumers in an environment of policy preferences given by the Chinese government to attract FDI.

    The manufacturing sector has become the engine of economic growth and globalization post-FDI in China, and this sector has been expanding since 1992. India has also adopted a similar path of liberalization since 1991-1992 by slowly shedding its FDI restrictions.

    China has consistently maintained its highest rank over the decade among the top 10 FDI destinations in Asia. It got around $78 bn worth FDI in 2009. FDI inflows to India have risen by leaps and bounds too, from $7.6 bn in 2005 to $35 bn in 2009.

    India’s credit worthiness can improve with more FDI inflows that will result from economic reforms. International rating agencies usually look at the total foreign exchange reserves and the FDI inflow as a criteria for rating any country. The recent clamor about opening up the retail sector to FDI becomes a very sensitive issue, with arguments to support both sides of the debate.

    It should be kept in mind that retailing is not an activity that can increase the GDP by itself. It is only an intermediate value-adding process. If there are not many goods being manufactured, there will obviously not be many products to be retailed! FDI can increase the productivity of all inputs in the manufacturing process by bringing new technologies and know-how, which in turn can spill over to the rest of the economy.
    It is widely acknowledged that FDI can have positive results for the Indian economy, triggering a series of reactions that in the long run would lead to greater efficiency and improvement of living standards, and greater integration into the global economy.

    *This article was originally published in January 2012 issue of Images Retail.