Originally Published 2005-11-30 06:59:58 Published on Nov 30, 2005
There has been a heated debate about opening up the retail trade sector in India to foreign direct investment (FDI). Allowing foreign investment to come in retail trading is supposed to indicate that economic reforms are on track and that like in China , Walmart, Carforre, MAKRO, 7 Eleven and many more giant retail store chains, would be seen in India.
FDI in Retail Trading
There has been a heated debate about opening up the retail trade sector in India to foreign direct investment (FDI). Allowing foreign investment to come in retail trading is supposed to indicate that economic reforms are on track and that like in China , Walmart, Carforre, MAKRO, 7 Eleven and many more giant retail store chains, would be seen in India. If you go to a Walmart store in the US or Canada, you would be puzzled by the huge variety of goods on sale and the cheap prices that they are sold at. From books, to jewellery, clothes, tyres, medicines, food to gadgets are available under one roof. Goods from all over the world are available mostly under the brand name of Walmart. You could furnish your entire house from one store and also buy groceries for the house from the same place. Such stores occupy huge shopping spaces and the consumer is confronted with many bargains and incentives that are hard to resist. It is a sort of store that Indians would love and they would flock there to buy all that they need. They will forget the corner stores in their residential areas and the kirana stores which sells groceries. The customers would get used to this sort of 'one stop' shopping in no time just like they are so fond of visiting shopping malls that are cropping up all over the country. There has been a big rise in organized retailing in India and the popularity of shopping malls in recent years goes to show the changing habits of more globalized consumers. If retail trading is opened up to foreign investment, we shall have big malls which comprises of individual retail stores like Walmart or Makro or IKEA in every city.

In fact, Walmart is one of the biggest retail store chains in the world and they are operating in 12 countries. They have 3700 outlets in US alone with $285.2 billion in sales. They are waiting to enter India and the President of Walmart John B. Menzzer has already visited India in May 2005. He is one of the richest men in the world. Walmart is supposed to bring in millions of dollars , technology, inventory management and the use of IT in catering to consumer demand. They will sell very cheap too-because of their sourcing their supplies from low wage countries. They are also likely to buy from Indian suppliers and give them specifications about the quality of product to be sold in their stores that would be world class. People who support the opening up of retail trade hope that this will bring about a huge increase in Indian exports because Walmart and others would buy in India and sell in different countries. They will also impart latest quality control techniques and this will upgrade the quality of Indian exports-something that is badly needed. 

The flip side of allowing FDI in Retail trading should also be examined. While Walmart would boost exports and buy directly from farmers, invest in food processing and generally lead to higher standards in Indian agricultural products, it would also affect the livelihood of 15 million small retailers scattered around the country. They constitute 98 per cent of the country's retail trade business and are contributing to 10 per cent of the country's GDP. These small traders may be selling from hand pushed carts, or from baskets, or small corner shops but they do cater to the population's immediate needs quite adequately. Many of these small retailers will go out of business and though competition will strengthen a few who may be able to survive, there will be a huge rise in unemployment. In a country with more than 41 million unemployed, retail trading has offered a means of livelihood for many in recent years. These people who are eking out a small monthly income from selling from pavements and small shops could be wiped out. While it is true that big retail chains will employ many more people but they may be those who are educated and skilled and can be trained. The small retailers who are neither educated nor skilled are least likely to find employment in Walmart. These retail giants also are likely to use more machinery than people. 

Secondly, what guarantee is there that Walmart will source its supplies from India alone? They could be selling goods from Thailand, Nepal, Indonesia or China, Hondurus or Bangladesh in their shops. How can we be sure that the giant retailers would invest in food processing and refrigerated trucks and help the small farmers sell their produce to the big retailers? What happens when the farmers are unable to supply according to the exact specifications and there is a problem of 'rejected' produce? How does the farmer get rid of such produce? It would of course be most desirable if the retail giants invest in storage, and give farmers better inputs and loans. But would they do so? If they went deep into the problems of low productivity in Indian agriculture and tried to solve it by introducing new technology, better irrigation methods and better post harvest management, they should be most welcome. They would then give a boost to many other sectors in the economy linked with farming activities. 

Similarly if they source their garments, socks and shoes from Indian manufacturers, it would boost manufacturing activity in India. China has become the manufacturing hub of the world because of the retail giants have been sourcing all their garments, shoes, bags, belts from China. Would they do so in India? Or are they just interested in the big market India offers with its middle class of 150 million people where they can sell products from everywhere else? After all they are interested in their profits most . 

More studies are needed to see the linkages that such giant retail trading would offer with the rest of the economy. How much investment would they bring and what proportion would be spent in raising the quality and standard of products in India ? How much of their total turnover would be sourced from India? How many million jobs would they create?

Thus opening up the retail sector has to be gradual and cautious because its immediate impact will be on the small scale retailers who will lose their jobs. Many people think that small retailers in any case, have to become more competitive or move on to other sectors and activities. If it can be done easily, then there would be no problem. But can they do so when jobs in the organized sector are already stagnant?

The author is Senior Fellow, Institute of Economy and Development, Observer Research Foundation.

* Views expressed in this article are those of the author and do not necessarily reflect those of Observer Research Foundation.
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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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