Sunday, November 27, 2011

51% FDI in Multi-Brand Retail: Boost to Jobs and Investments

The federal government has approved a proposal to allow 51 per cent Foreign Direct Investment (FDI) in multi-brand retail, and decided to scrap the 51 per cent cap in single-brand retail, where 100 per cent FDI will be permitted.
The government also cleared the Companies Bill, 2011 that seeks to tighten norms on insider trading, prevent corporate frauds and introduce new concepts like class action suits. Once approved by Parliament, it would replace a 55-year-old legislation.
The Bill has introduced ideas like Corporate Social Responsibility (CSR), class action suits and a fixed term for independent directors.
Among other things, it also proposes to tighten laws for raising money from the public. The Bill also seeks to prohibit any insider trading by company directors or key managerial personnel by treating such activities as a criminal offence.
The objections to it have centered around foreign multinationals swallowing up mom-and-pop stores, which have on the whole functioned rather inefficiently but do provide a living to large numbers of people. It has also been argued that in time leading foreign brands — that dispense a range of goods of everyday use — would come to enjoy near monopolistic advantage in price negotiations with farmers. There may well be something in these suggestions, but all things considered there appears to be a fear of the unknown in the political class in regard to foreign investments.No proper calculations are made in gauging the employment effect of the entry of foreign capital, but it is evident foreign stores will hire Indian hands to run retail chains supplying quality goods at better prices to consumers. Some of these are likely to be the present family-run stores in which workers are poorly paid. In any case, it is hard to foresee a complete end to small family-run kirana stores.
Creation of Jobs and Investments
The present decision would lead to creation of 10 million jobs and billions of dollars in investments during the next three years.
Brushing aside the criticism by the Opposition parties, including from key UPA ally Trinamool Congress, that necessary guidelines and press note would be issued by next week giving details of the approved policy. “Our initial estimates are that it will create over 4 million jobs in the small and medium industries and another 5-6 million jobs in the logistics sector in the coming three years.
Significant Gain
Undoubtedly, a significant gain from the entry of global retailers could be the strengthening of supply chains. Because of poor storage, air-conditioning and transportation a huge amount of food grains and perishables like fruits and vegetables go waste. This may stop.
The FDI will help build infrastructure apart from providing support to the rupee. Farmers will be able to access world markets too. Effective producer-seller linkages will eliminate middlemen like arhtiyas, who exploit small farmers no less. If an effective monitoring mechanism is put in place, prices too may fall since waste and inefficiencies in supplies will get eliminated.
Advantage Small Farmers
The operations of domestic fresh food supermarkets in India have not made any difference to the producer’s share in the consumer’s rupee so far (one of the arguments of the DIPP discussion paper for permitting FDI in retail) other than lowering the cost of marketing of the producers as supermarkets have collection centers in producing areas unlike the Agricultural Produce Market Committee (APMC) markets (mandis) which are in distant cities.
But these supermarkets will buy only ‘A ‘grade produce, that too on open market-based prices, and only a part of the output of farmers, who end up going to an APMC mandi to dispose of the remaining/rejected produce. The chains procure from “contact” farmers without any commitment to buy regularly as they do not want to share the risk of growers. Thus, the involvement of supermarket chains with producers is low and there is no delivery of supply chain efficiency as many of them have already wound up e.g., in Gujarat.
Supermarket Expansion
The supermarket expansion also leads to employment loss in the value chain as compared to 18 jobs created by a street vendor, 10 by a traditional retailer and eight by a shop vendor in Vietnam, a supermarket like Big C needed just four persons for the same volume of produce handled. Metro Cash & Carry employed 1.2 workers per ton of tomatoes sold in Vietnam compared with 2.9 persons employed by traditional wholesale channel for the same quantity sold. The spread of supermarkets led to 14% reduction in the share of “mom and pop” stores in Thailand within four years of FDI permission. In India 33-60% of the traditional fruit and vegetable retailers reported 15-30% decline in footfalls, 10-30% decline in sales and 20-30% decline in incomes across the cities of Bangalore, Ahmedabad and Chandigarh, the largest impact being in Bangalore, which is one of the most supermarket penetrated cities in India.
Rate of Inflation
So far as the role of FDI-driven food supermarkets in containing food inflation is concerned, the evidence from Latin American (Mexico, Nicaragua, Argentina), African (Kenya, Madagascar) and Asian countries (Thailand, Vietnam, India) shows that the supermarket prices for fruits and vegetables and other basic foods were higher than those in traditional markets.
Also, the lower procurement prices through direct procurement from farmers need not lead to lower consumer prices in supermarket chains as procurement prices are more about the bargaining power of buyers and suppliers. Even if it is accepted that supermarkets are able to offer lower prices, the low-income households may face higher food prices because of reasons of distance from supermarkets, and higher prices charged by supermarkets in low-income areas. Thus, there is no direct correspondence between modern retail and lower food prices and, thus, better food security of the poor consumers. Therefore, the inflation containment logic for FDI in food retail does not stand ground given the empirical evidence from across the globe.
India has put out its own policy on FDI in multi-brand retail with 51 per cent limit. China, Indonesia, Russia, Thailand, South Africa, Argentina and Chile have allowed 100 per cent FDI in multi-brand retail. We are not following any nation but guided by national interest.
Cash and Carry Trade
Until now only 51% FDI in single-brand retail and 100% FDI in wholesale cash and carry trade was allowed. The paper put up by the Department of Industrial Policy and Promotion (DIPP) for public discussion and comments in mid-2010 and the Economic Survey for 2010-11 had argued for FDI in food retail trade in India. In mid-2011 an inter-ministerial group also recommended FDI in retail to control food inflation. The following policy initiatives can be taken to safeguard the interests of local stake-holders:
* Slow down food supermarket expansion through mechanisms like zoning, business licenses and trading restrictions.
* Strengthen competition laws and regulation of supermarkets
* Give legal protection to farmers and suppliers as is done in Japan
* Permit only formal contract farming, not ‘contact’ farming
* Set up an independent retail commission to supervise and regulate supermarkets to protect interests of suppliers, consumers and labor and support to local retailers and farmers
* Establish multi-stakeholder initiatives in food value chains and provide support to small producers and traditional food retailers.
* Producers’ organizations and the Non-Governmental Organizations (NGOs) need to monitor and negotiate more equitable supply contracts with the supermarkets.
* The government should encourage producer companies and farmers’ co-operatives for collective bargaining with supermarkets

Campaign Launched
The government has launched a campaign to sell advantages of FDI in multi-brand retail. The Commerce and Industry Ministry said that FDI in multi-brand retail will help farmers, create more jobs and benefit consumers.

On the other hand, the reality is that domestic retailers will benefit from sourcing their requirements from wholesale cash and carry store at a discount, it said.
The government said in countries like China, Thailand, Indonesia, Brazil and Singapore, where there are no caps on FDI, small retail stores have flourished.The government advertisement said that there is another myth that FDI in multi-brand may result in job losses.

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