India is finally ready to let foreign multi-brand retailers in. But the conditions being proposed betray a multiplicity of hesitations

For over a decade, Arvind Singhal met politicians and bureaucrats, gave lectures, and wrote articles in the media to influence India’s policies on the organised retail business. As chairman of Technopak Advisors, a leading consultancy on consumer and retail trends, and a vocal proponent of reforms in the retail sector, he fought endlessly in favour of allowing foreign retailers into the domestic market.

Over the past few years, India has allowed foreign direct investment (FDI) in single-brand outlets and wholesale businesses, but it has kept its ban on foreign firms setting up shops that sell multiple brands and other retail products, such as supermarkets.

It is reasonable to expect that Singhal would be pleased by the fact that recommendations have finally been placed before the Union Cabinet on FDI in multi-brand retail, which, if approved, would let chains like Wal-Mart, Metro and Carrefour open outlets in India. But the truth is that he is an angry man today. “After 10 years, the FDI document prepared by the Government is nothing short of being idiotic,” he fumes, “Each recommendation in it is illogical. The babus who wrote it don’t understand organised retail.”

For example, Singhal is opposed to policy proposals that envisage a minimum investment of $100 million by each foreign entrant, as also those related to giving state governments veto power over the opening of these stores, and stipulating that they must sell a minimum percentage of their goods to small retailers and/or distributors.

To be fair to the bureaucrats who drafted the FDI note, their aim was more to counter the political and diplomatic ramifications rather than take into account the commercial consequences of the proposals. They wanted to stymie the ongoing opposition to organised retail from small traders and kirana stores that have the backing of several political parties. They also hoped to appease the US Administration, which has been pressing India to open up the sector fully.

The FDI proposals for multi-brand retail also seem an exercise in balancing varied objectives within the UPA Government. Prime Minister Manmo- han Singh is keen to signal a reformist intent, which could counter his growing image as a spineless administrator. Sonia Gandhi wants the policies to address the concerns of small traders across the country. The UPA’s coalition partners, on their part, hope to have a say in the expansion of foreign retail chains in their respective states. It’s fair to say that almost each of the proposals has its own history and rationale.

THE WAL-MART WAY

The main point of the proposals is to let a prospective foreign company own up to 51 per cent in a multi-brand retail venture, a key rider being that it must invest at least $100 million. According to a note by the Ministry of Commerce and Industry, accepted by the Committee of Secretaries that passed it on to the Cabinet for final approval, five of nine government departments and ministries approved an FDI level of between 49 and 100 per cent. While three did not comment, only one, the Ministry of Micro, Small and Medium Enterprises, wanted a much lower initial cap of 18 per cent. The note for the Cabinet now recommends an upper limit of 51 per cent.

The $100 million figure has apparently been set to restrict market entry, so that only large foreign chains such as Wal-Mart, Metro and Carrefour can come in. Only such players—with fast-moving items like food as their mainstay—can invest a lumpsum as big as that. This, says Singhal, goes against the underlying idea of allowing FDI. “Setting up retail stores is not like building a factory,” he explains, “Most of the speciality retailers in segments such as jewellery, clothing and electronics don’t deploy money in one go. They open one or two stores and put in $4–5 million initially.”

However, some homegrown retailers argue in favour of an even higher investment barrier for foreign players. Kishore Biyani, head of Future Group, an Indian company that runs chains like Big Bazaar and Pantaloons, for example, insists that for foreign food retailers like Wal-Mart and Metro, $100 million is not much money at all. Since 2007, when the American mega-retailer Wal-Mart entered the Indian wholesale business (dubbed cash-and-carry), it has, along with its Indian partner, Bharti Group, pumped in $45 million just to open six wholesale stores; over the next two years, the figure may rise to $195 million for 20.

Potentially, much more money could come in, and a barrier higher than $100 million, by this argument, would benefit India. “There should be a greater trade-off,” says Biyani, “Indian consumers should not be given so cheap to foreign chains. I’d like to see a condition that envisages a higher investment by each firm so that we can attract huge FDI in retail.”

THE KIRANA CLAUSES

There are other stipulations as well. By one of these, for example, foreign chains can operate retail stores either in cities with a population of over 1 million, or only in the metros. This is apart from the one specifying that one-third of their annual turnover has to come from sales to local small retailers and/or distributors. The Government hopes that such conditions will help neighbourhood shops and small manufacturers survive and integrate themselves over time with the organised sector’s supply networks.

But will it benefit small retailers? According to R Sriram, co-founder, Next Practice Retail, “Today, small shops are regularly visited by distributors of FMCG and food companies every second or third day. These shops are offered doorstep delivery, attractive discounts and easy credit periods. There is, therefore, no need for shopkeepers to travel all the way to a cash-and-carry store set up by an organised retail player. It is a model that can work in the US, but not in India.”

Many experts also question the assumption that big retailers hurt the interests of smaller ones. This is a myth, according to a 2011 research paper on the Indian retail sector by Rajiv Kohli and Jagdish Bhagwati, both of Columbia University. ‘First, total retail sales increased by approximately 70 per cent between 2004 and 2009… Second, sales grew over this period by about 43 per cent for retailers in the formal sector (big retailers) and about 97 per cent for retailers in the informal sector (small retailers),’ states the paper.

Despite the growth of large domestic retail chains—Future Group, Reliance Retail and Tata Group—the share of organised retail is still 5–7 per cent of the total ($400–$550 billion), or 10 per cent of the urban retail market. The note by the Ministry of Commerce and Industry contends that ‘the recent failure of large retailers in India, like Subhiksha, demonstrates that small retailers can offer significant competition to organised retail, through better and more personalised services’.

However, the same note concedes that during the initial years after the entry of large-format players, ‘unorganised retailers in the vicinity of organised retailers experienced a decline in their volume of business and profit. The adverse impact on sales and profits… weakens (or is negated) over time’. According to the Association of Small Traders, the experience in other countries is that neighbourhood stores struggle to operate viably, even in the long run, when pitched against the big boys.

Restricting foreign retailers to big cities or metros is also a red herring. The reason: foreign chains have already found loopholes to wriggle out of it. Many of them, allowed 100 per cent ownership of cash-and-carry businesses in India, use their wholesale outlets to sell goods to ‘small buyers’. By the rules, every individual or institutional customer’s bill must be no less than Rs 500 (or some other figure going up to Rs 1,000, since it varies from retailer to retailer). This is a limit easily crossed by a household’s monthly or weekly shopping nowadays. And housewives on a shopping spree at wholesale stores is quite a common sight. “My experience has been that buyers in these shops in places like Bangalore are ordinary people, not retailers or distributors,” says a retail consultant.

THE COALITION COMPULSIONS

Perhaps the condition most attuned to political realities is the one about letting foreign firms start front-end retail operations ‘only in those states [that] agree to allow FDI… under this policy’. This offers leeway to those political parties—principally, UPA members—that oppose the Wal-Marts of the world to protect their own regional vote banks. In the past, several state governments have opposed organised retail chains, even those wholly-owned by Indian companies.

Take the example of Reliance Retail, owned by the Mukesh Ambani Group, whose stores were ransacked in 2007 by small traders in Jharkhand, West Bengal, Tamil Nadu, Kerala, Uttar Pradesh and Orissa. In those days, the Left parties that were in power in Kerala and West Bengal were also UPA’s coalition partners at the Centre; as also the ruling party in Tamil Nadu. Today, too, the Central Government is worried that running roughshod over the views of state governments on retail FDI policies could spark off similar protests. This could happen not only in states ruled by coalition partners, but also in those under opposition parties.

Experts feel that the Government should not bother itself with the above restrictions, and instead look at other ways to achieve its objectives.

Sriram says that if the Centre wants to ensure that foreign retailers expand operations in India, and take small retailers along with them, it should ban repatriation of profits for a specific period.

Biyani, meanwhile, worries about predatory pricing practices; he wants a rule that prevents foreign retailers from selling products below their cost prices to kill competition.

The entry of foreign multi-brand retailers looks near inevitable now—the only question is when that happens. That being the case, what is needed are policies that serve the larger interest of the country, not policies that curry favour with politicians and other vested interests. Policies ought to be outcome-oriented, not input-driven, and should benefit Indian farmers, suppliers, big businesses, small retailers, and—last but most importantly—retail customers.