Is the Government true and fair in its calims on FDI in Retail

The government has made a few claims in favor of FDI in retail. However, all of them seem to be either false or made without a proper due diligence. Following are a few examples:

1. It will create Jobs, and millions of it: what kind of jobs? Most of the employees in large retail outlets are sub-contractors. Foreign retailers will never employ more than the management staff on their rolls. Rest of the staff (salespersons, security, store keepers, transport staff etc.) will be managed by 3rd party agencies, which will exploit the poor employees to maintain their margins. The large retailers will supposedly leverage the low cost labor arbitrage of our country. Moreover, these jobs where even basic employee benefits are not made available, should not be treated as huge benefits. In fact, this will not help much and is merely a gimmick. So, again the votaries of FDI in retail and the pro-reformist are painting a false picture.

2. It will reduce inflation: We are basically facing food inflation. Large retailers don’t sell food grains and other basic food items in large quantities. Even if they have 20% of their total revenue from the basic food items, it will be around 4000 crores assuming that large retailers will have 20,000 crores in the next 2-3 years. Will this reduce inflation? Also, will it mean anything for the farmers? Certainly NOT. They are anyway selling their produce to the likes of PepsiCo, Nestle and other food processing companies on a much larger scale.

3. Small traders will not be affected: How? Will large retailers create new markets? Will they stimulate a latent need of the consumer? Certainly Not. Therefore, they will ultimately eat the market share of small traders. Statistics are being been shown to prove that McDonalds have existed well with the Udipi restaurants and Dominos have survived with the Dhabas. However, we fail to notice that McDonalds and Dominos have created new demand. Also, there has been a significant change in the consumer behavior whereby people have started to eat out more often.

The prime minister and his ministers seem to be making a false promise. Common man doesn't have anything to gain from FDI in retail. Moreover, small traders will certainly loose some business. Therefore, FDI in retail doesn't make any sense for the common man and the general masses. It will certainly provide the upper middle urban population a good shopping experience. However, is than enough a reason to go ahead on this policy?

We may also discuss the challenges before the retail Industry due to lack of proper reforms and regulations in the related areas. I am providing a few of them below:

1. Will foreign retailers succeed without a proper Real Estate reforms: Absolutely NOT. The lease/rent cost has already affected the Modern Trade to a very large extent. Any positive leverage of their global supply chain will be crowded out (lost) by the high real estate prices.

 2. Don’t we not need Labor reforms before opening the retail sector? Maruti could sustain the labor unrest because it is now not that labor intensive whereas distribution and retailing is much more labor intensive. Labor reforms means laying out the ground rules which will be fair to both the labor unions and the industry. Therefore, Industry should also be aware of the impending threats before diving deep into the congress's world of false hopes. Any retailer is carrying a huge risk of disruptions due to poor labor reforms.

3. Without GST, will large retailers be able to optimize arithmetic of an efficient Supply chain: A large distribution, cross docking, storage and retaining system needs a clean and uncomplicated tax structure. The arithmetic of a large global retailer will go haywire in the current indirect taxation regime where they will have to encounter a complex web of excise, sales tax and VAT.

4. Will Cost of Transportation and state of roads affect the Supply Chain efficiency? Any large retailer works on very efficient supply chain. In the current context, with high diesel prices and pathetic roads (we hardly have added expressways in the last 7-8 years); the supply chain efficiency can't be made optimum. It will be difficult to compete with similar efficiencies as global retailers are able to achieve in other markets.

5. Is this sector bleeding due to lack of capital? Looks unlikely. Please note that almost all the corporate Indian retailers have very deep pockets e.g. Tata, Bharti, Reliance, Aditya Birla, RPG, DLF, ITC, Azim Premji backed Subhiksha etc... Still most of them are making losses and had to cut down the number and the size of their stores. Some of them like Subhiksha have already closed down. There is a lesson for the global players. There is something structurally wrong in this sector and they should wait for things to change before leaping at the Indian story.

The government is raising false hopes for the global retailers. Unfortunately, industry often works on sentiments rather than core logic. Therefore, it is going berserk but reality may bite it sooner or later. It is high time that the Indian Industry also realizes the real situation. The current government will neither be able to bring reforms in the real estate sector as it is the most suitable place for parking the black money, nor will it be able to push GST due to its political mismanagement.

So, FDI in retail is a loose-loose for all of us. It is therefore amusing to see such keenness among our policymakers to take this up.