Originally Published 2011-12-05 00:00:00 Published on Dec 05, 2011
Opening up retail trade should not have happened at a time when inflation is high, GDP growth rate is falling, industrial growth and exports are declining. Unfortunately, it would take a long time for the multi-brand retailers to establish their own supply chains and hence inflation is unlikely to come down in the near future.
FDI opening timed wrongly
By opening up Foreign Direct Investment (FDI) in multi-brand retail trade up to 51 per cent and allowing 100 per cent FDI in single brand retail, the government has made a mistake as the timing is wrong. Opening up retail trade should not have happened at a time when inflation is high, GDP growth rate is falling, industrial growth and exports are declining and there is much discontent regarding corruption and black money. In these uncertain times, people are scared of losing their jobs like in the EU and US. It could have been 'better calibrated' as the CII thoughtfully proclaimed recently.
Few can believe that opening up the Indian market to supermarket giants like Walmart, Carrefour, Tesco or Metro would actually bring down food prices in the near future just because they would eliminate the middlemen who pocket a large share of the final price paid by consumers. Unfortunately, it would take a long time for these multi-brand retailers to establish their own supply chains and hence inflation is unlikely to come down in the near future.

Walmart, however, is already here and has 9 cash and carry stores. It runs a joint venture with Bharti retail and supplies fruits and vegetables to more than 100 Bharti supermarkets. Inflation has not come down due to their operations so far. While it is true that middle class people love to shop in supermarkets where they can find everything under one roof, recent experience has shown that in many western countries, people are buying their food stuff from weekly markets (also common in Indian cities) rather than from supermarkets because the foodstuff sold there is fresh and therefore tastes better, and the prices are actually lower. The low income group continues to buy from street vendors as they feel intimidated by the posh interiors of the food marts.

World experience in supermarkets, according to Shankar Gopalakrishnan, shows that supermarket food items require much more energy and water consumption than their counterparts in small kirana stores and grocery shops. For a long shelf life, supermarket food has to go through processing which consumes a lot of energy and water. Consumption of plastic and Styrofoam required for packaging is also much more which is environmentally unfriendly.

The clause specifying 50 per cent investment in back end infrastructure especially aligned with the commercial requirement in the Food and Grocery segment is welcome but why didn't such investment come in the last ten years even when it had been granted permission? Perhaps it is because organised retail sales form only 2 per cent of total retail turnover. Retail trading employs 40 million people or 7 per cent of workforce of 459 million and unorganised retail comprises 98 per cent. Most retail workers or the maligned 'middlemen' are in unorganised retail and are often disguisedly unemployed. Most people without skills, education or capital when they cannot find jobs enter the retail sector. If they are out of job as they will lose their economic and social status and face many problems.

The employment potential of the retail business after the multinationals come in is also doubtful and remains to be tested. If they are sourcing only from the Indian small scale sector, it is good for creating jobs but they could source also from internationally small businesses in accordance to WTO rules. They would employ more capital intensive technology for increasing competitiveness and maintaining their cutting edge. They have deep pockets and can sustain losses in the short run and make sure they give a tough time to small traders.

While small traders may survive only because the poor (around 370 to 400 million people) will invariably buy from them, others with higher incomes will patronise supermarkets, creating another kind of social divide in India. It is also unlikely that the semi-literate middlemen who have lost out to supermarket chains or average unemployed youth would find employment in these supermarket chains unless given training. Walmart does claim to be training men and women.

No doubt the consumer is 'king' and with imports from all countries, people would be able to access international lifestyle goods e.g. from IKEA. It would offer competition to others making less stylish furniture and decorative items and India's upwardly mobile youth would be thankful that they can buy fashionable and reasonably priced stuff from big multinational stores. But our own industries making Indian style glassware, furnishings and furniture will languish. Millions of people are involved in these industries and instead of emulating the bland western interiors we could have our own brand in the future.

It has been claimed that opening up retail will mean establishing a 'cold chain' which will eliminate waste of fruits and vegetables which perish because they cannot be collected and sent to towns and cities, and remunerative prices would be paid to farmers. It will also mean improving agricultural productivity as innovative suggestions regarding how to raise productivity and improve quality will come from the supermarket owners.

Why are we relying on the foreign supermarket chains to do what we should have done decades ago through producers' and consumers' cooperatives? Agriculture has many problems which range from small size of farms to low quality inputs, low productivity, lack of adequate irrigation facilities, lack of storage and inadequate public investment. How can contract farming solve all these problems? Also when supermarkets are sourcing, say tomatoes from small farms, it may be fine in the beginning but as quality control tightens, the rejected stuff will be dumped on them and they will not know what to do with it. They would have to produce according to exact specifications-- otherwise face rejection and price cuts. Also many small farmers would be left out of the loop because they do not have the means to supply produce on a regular basis. Farmers would be left with no options if Walmart dumps them. They would be vulnerable to being squeezed by the giant buyers who are not going to come here for charity.

According to Crisil, the rating agency, FDI flows in retail would increase to $2.5 billion to $3 billion in the next five years. But the share of foreign retailers in multi brand organized retail will remain moderate. Fifty three cities will be eligible to have state of the art retail outlets. The states would play a very important role in the functioning of multi brand retail and it is significant that out of 58 cities in which the new supermarkets will be located, 28 of them are ruled by opposition parties. No wonder there has been much ruckus in Parliament and protests across the country.

(Jayshree Sengupta is a Senior Fellow at 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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