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Friday 2 December 2011

Twists in Indian Retail Tale


Policy paralysis has an alliterative tone to it. There is no ready antonym with quite that  characteristic. However, policy paralysis is defined, malaise is internal and domestic, no matter how much we blame the external world for our travails. Therefore , it is odd that the decision to open FDI in retail is being described as symptomatic of government climbing out of the rut it has dug itself into.

FDI in retail isn’t going to be manna. It won’t lead to deluge in FDI inflows. It won’t stem rupee depreciation. It won’t dampen food inflation. It won’t lead to a revolution in retail trade and make it organised . But nor will be it be a bane that will drive kirana stores into oblivion. Outside TV studio debates, truth is never in black-and-white.

As a shade of grey, the present decision is no more than the thin edge of liberalisation . All liberalisation is good for consumers. The colour of competition (national versus foreign) doesn’t matter. There is choice, better quality and better service. There is downward pressure on prices. Post-1991 , this elementary proposition of economics has been empirically vindicated whenever competition has been allowed to seep in. There is no reason for consumers to be exploited by kirana stores, just as there is no reason for consumers to be exploited by the Future Group, Shoppers Stop or Vishal Retail.

Having said this, there is also another elementary proposition . Perfect competition is a figment of imagination. It doesn’t exist. The world is one of unfair and restrictive business practices. Hence, we need competition policy instruments . So far, thrust of competition policy intervention has been on manufacturing and some services. Retail trade hasn’t figured prominently . While that focus has to change, this isn’t an argument against opening up. Acrossthe-board opening up is infinitely preferable to selective and segmented opening up. Selective liberalisation distorts markets and allows opportunities for arbitrage.

Take this business of opening up wholesale cash-andcarry . Who has this benefited? It hasn’t helped consumers, at least not directly. It has helped hotels and so-called kirana stores, anyone who obtained a licence or got access to one. Why did we first allow 51% FDI in single-brand retail and why are we now opting for 100%? Who has benefited from this transition in policy between 2006 and 2011? There are foreign single-brand retailers who will now rework their joint ventures and jack up foreign equity to 100%. There are Indian joint venture partners who are cash-starved. The beneficiaries will thus be Indian joint-venture partners who will sell off 49% equity.

Single-brand or multi-brand , wholesale (cash-and-carry ) or retail are artificial distinctions . We should simply have had 100% across-the-board . At some future date, Indian jointventure partners will benefit again when FDI multi-brand equity is jacked up to 100%. Other than this, geographical segmentation remains. Why should liberalisation be restricted to one-million-plus cities? Do consumers elsewhere not deserve choice? As it is, as public subsidies go, there are pronounced pro-urban biases. We will pamper them more through this new policy.

Real-estate costs being what they are, big-bang benefits for retail should actually be outside one-million-plus cities. It gets worse if you read the Constitution . Delhi provides a framework policy. Implementation is up to states. While Seventh Schedule doesn’t quite use the expression retail , production, supply and distribution of goods is Entry 27 in the State List. To the best of my understanding , this means a state may choose not to open up retail trade. It gets worse in Sixth Schedule, since no person, “who is not a member of the Scheduled Tribes resident in the district shall carry on wholesale or retail business in any commodity except under a licence issued in that behalf by the District Council” . In general, deprived and backward states and regions are reluctant to open up. That’s the reason they aren’t mainstreamed and continue to remain deprived and backward. 

Stores will be in one-million-plus locations and consumers there will benefit. I have no problems with minimum threshold levels of foreign investment, or requirements that 50% has to be in back-end infrastructure. Retail today straddles assorted segments. Food is a small component, less than 10%. It doesn’t have to be that way. However, reforming the agro economy involves much more than opening up FDI in retail. There are supply-side constraints . There is low productivity . There are infrastructure problems, storage and processing. There are controls on storage and distribution , APMC isn’t the only one.

If all that is reformed, with disintermediation, farmers should get higher prices, without consumers paying higher prices. Depending on the study and product — it is higher for fruit and vegetables and lower for food grains — disintermediation efficiencies are between 10% and 30%. But why should government have rights of purchase over farm produce and what does it mean? As it is, high procurement prices have driven out private grain trade.

Finally, we are left with kirana stores, and this business of mandatory sourcing of 30% of purchases from MSMEs (or is it MSEs?) . No reforms are positive sum. There are gainers and losers. In this context, kirana stores will be losers. One shouldn’t deny that. However, getting organised retail to work takes years and years. China is the obvious example, where organised retail penetration is still less than 10%. Kirana stores have resilience. They change their line of business. They adapt. One should have faith in that resilience.

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