The Wal-Mart Effect: Why Foreign Direct Investment in Multi Brand Retail is Good for India

By Dhiraj Singh

The author is Director (M&C), P.I.B.

New Delhi, Dec 2, 2011 (Washington Bangla Radio / PIB India) The Government has decided to allow Foreign Direct Investment  (FDI) upto 51% in multi brand retail. This means that global retailers can come to India with a local partner and set up stores in the country.  Till now FDI was not allowed in multi brand retail.  However, there were big multi brand retail outlets owned by Indian entities.

This decision is an enabling policy that will open up new windows of opportunity to modernize the retail sector particularly for agricultural products and the small-scale sector.

The benefits would be for all:

The farmer will get a better price for their produce as middlemen will be removed   and retailers will buy directly from farmers.  Farmers’ losses from wastages specially  in vegetables and fruits will come down.

The small scale sector will find new buyers and cheap and better quality source for their products.

Consumers will get better prices and greater variety from these stores.  The entry of global players will encourage existing traders and retail outlets to upgrade and become more efficient, thereby providing better services to the consumers as also better remuneration to the producers from whom they source their products.

This is also one of the most effective ways to tackle rise in food prices and inflation due to availability of food items on lower prices.

Today India is one of the largest producers of fruits and vegetables in the world. However 30-40% of food and vegetable products go waste due to lack of storage and cold chain facilities. This decision will bring in funds for investment to improve supply chain infrastructure such as cold storage, transportation and procurement along with bringing in investment for growth of the economy.

This will bring huge employment opportunities in agro-processing, sorting, marketing and the frontend retail business.  As per some estimates upto 10 million jobs will be created in coming years.

Government has provided safeguards to protect national interest such as:

· Minimum investment by the global retailer will be $ 100 million and 50% of which will be in backend infrastructure that will control wastage and help local farmers. Backend infrastructure will be in or near villages and will be of immense value for rural economy.

· It has been made mandatory that 30% sourcing will be done from Indian small industry. This will promote local manufacturing, as Indian small industries will feel encouraged to expand capacities in manufacturing thereby creating more employment and also strengthening the manufacturing base of the country.

·These stores can be set up only in cities with the population of more than 10 lakh.   This provision along with the requirement of master/zonal plans will make sure that small retailers are not affected.  Moreover small retailers can benefit from sourcing their products from deep discount wholesale cash-and-carry big retailers.  This will improve quality of their product and reduce their cost.

· In order to ensure supply to ration shops (PDS) government will have the first right to the procurement of agricultural products.  This is important from food security point of view also.

Some people fear that big retailers will destroy small traders by keeping low prices initially (predatory pricing).  However, Competition Commission of India will not allow this to happen.  As the policy will be implemented in only 53 cities (with population over 10 lakh) which will make it difficult for big retailers to crush competition.  In many developing countries like China, Thailand, Indonesia, Brazil, Argentina, and Singapore, where 100% FDI is allowed, small retailers are successfully co-existing with big retailers.

Indian labour will continue to be protected by Indian labour law. It is an enabling policy framework.  States are free to adopt it or leave it. Those states that do not want to have FDI in retail are free not to allow them. This is done to maintain the freedom of states in federal structure. FDI policy does not override the existing laws governing, trade and commerce in the country.  The State Government laws and regulations in this regard would apply as much to the foreign players as to the establishment of any domestic businesses in the retail sector.

- PIB Features

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