Retailing in India

FDI in Retail – The Harsh Reality

Government’s arguments for FDI in retail are a proof of the fact, that this government does not understand India, and looks at Indians from USA’s businessmen’s perspective. Congress government has become the biggest lobbyist for pursuing the business interest of nuclear & retail corporations from USA & Europe at the cost of India’s middle class

Today’s Economic Times (26th November 2011) headline ‘ Govt Sells Multi-Brand FDI with best bargains’ gives a list of reasons why the government is supporting, (rather pushing FDI ) in retail. Let me put the Common Man’s view and take on each of these arguments

1.     It will create 10 million jobs in the next 3 years

A) According to the CII report in 2007, ‘India will need 10 to 12 million skilled workers every year for the next five years to meet the growing demand from the support services and there is a need for strong intervention to ensure the availability of the workforce’. So is the government trying to say that it is only the retail chains that will create 10 million jobs in the next three years?

B) Let us examine how many jobs Wal-Mart created in America & how many jobs did Wal-Mart create in India for the past 3 years of operations both as a wholesaler and as a retailer ? How many jobs our Indian retailers like Future group, Aditya Birla retail and Reliance retail created in the past 3 years?  We will clearly see that they did not even create a million jobs!

C) Also, government does not talk how many Kirana stores will shut down in the next 5 years and how many homes will be denied of a source of income ?

D) Wal-Mart or for that matter any retailer works on the least number of workers per square feet (lean management structures ) ,and so it will kill the 50 Kirana stores thereby get at least 250 people out of jobs and then create 50 jobs per super market.  Is this factored in the statement? I am willing to prove this in the current retail scenario leave alone the scenario when the foreign retailers come in?

 2.     Several billion dollars of investment in retail

A) If retail is a great business, the government banks should give loans from domestic financial institutions and let the homegrown retailers grow and build scale and size and let the profits remain in India. Why should we give 51 % of the ownership to foreign players, as these people will sell to Indians and take the profits out of our country.  USA / Europe will solve their income and earnings problems and India will get into problems of high inflation and more volatile stock market. Also, Indian retailer being less than 50 % of their share in the retail will become servants to these MNC chains under the current 51 % FDI norms.

B) Why did the government not start with 26 % FDI in multi brand retail for the first five years? Why suddenly start with 51 %. Please justify?

C) Often it has been quoted that the foreign retailers will bring technical know how to Indian retail market and boost the economies of scale and productivity? Which technical know how is the government talking, it needs to explain? I have been a COO / Board member of a major fortune 20 company’s retail operations in India, and I can tell you that these foreign retailers only bring money and no other expertise! They work on high profits, highly automated environment and lean man power structures.  So government’s reason of the technical know how is fallacious and is showing that we Indians do not understand retail. Let us look inward and see our home-grown retailers like Future group and Aditya Birla retail .They are certainly growing . Government must bring out a detailed white paper on the so-called ‘Technical Know how’ these foreign retailers bring to Indian retail market?

D) With these billions of dollars coming in India, India’s real estate will become expensive thereby, contributing to keep the inflations levels high for the medium class not just for real estate but for all the sectors

E) Also, these billions of dollars are not charities to India or Indians . These are investments by retailers which follow a ROI ( return on investment concept ) for every dollar spent. So for sure , they people will invest in retail one dollar and take out 10 dollars from India over the next couple of years . Retail is mostly done on inventory management which is on credit from vendors . These retailers follow a credit cycle which ranges from 15 days to over month . So with a double-digit profit margin , these retailers will only be investing one time into infrastructure and then make money without investing at all ,as all the inventory is on a credit cycle . ‘Sell and pay’ is the mantra for these FMCG retailers ! Even the space which is rented by these retailers is leased to product companies for hefty display charges. These retailers charge a heavy fee for listing products in its store before selling .Our policy makers , wake up and understand the real dangerous game of FDI in retail and don’t get carried away by the billions of dollars of investment . It is not true . One time investment by these retailers will be a life long profit for their parent company’s home country

3) Farmers will get more than 12-15 % of the consumer price they get for fruits and vegetables

A)    In reality, farmers will never get a higher price but will be exploited by these MNC Chains  .In fact, these MNC retailers will push in for stringent quality checks and other prohibitively expensive conditions for these farmers thereby, forcing the poor Indian farmer out of his livelihood. Most of the retailers will take to contract farming, and thus the farmers will be reduced to being laborers in the hands of these MNC chains.

B)    The History of these MNC chains has shown the these chains are out to squeeze blood out of their vendors and farmers will certainly be vendors for these MNC chains and nothing else . Wal-Mart and other retailers are facing dozens of cases of exploitation and gender bias in developed country where the legal system is strong . Imagine what will happen in our country ?

4) Consumers will get producers at Cheaper Prices, as competition will bring down the prices

A)    Even without competition the prices will come down by a few paisas or may be a few rupees, but, all these chains will increase the MRP  (Maximum retail prices) of the products, and so the consumer will end up paying more than what s/he pays today. Take an example of the MNC pharma companies. Since there is a ceiling of price increase by 10 %, so every year the pharma companies increase the prices by 9-9.5 % and thereby, circumventing the price increase regulations.

B)    It is clear that the consumer is not a winner, no one pay’s from its pocket OR profits to the consumer. If there is a price increase on the input costs, the same is passed on to the as an increased MRP or the quantity is reduced for the same price. So the consumer’s pocket is always ripped apart by these retailers

5) 30 % mandatory sourcing from small-scale sector will help small industry

A)    This has not been a convincing argument, so we are trying to tell that a small company out of Varanasi will compete with HUL and win? Come on Dr.Manmohan Singh, are you trying to fool Indians? I understand that you studied at Oxford, doesn’t mean that rest of the Indians are going to get carried away with these statements

B)    Also, these MNC chains will put conditions that are either too stringent to be complied to or prohibitively expensive to be implemented by these SME’s, and so finally, these chains will find a reason to evade buying from these SME’s. Also, that the SME’s are not just limited to India, but across the world, so probably, Chinese SME’s would benefit more than Indian SME’s

C)    These retailers charge a heavy fee for listing products in its store before selling. How will SME’s afford that ? The fee currently for Indian retailers varies from few thousand to over a lac for products for companies . SME’s will never be able to benefit from these chains even if they are able sell to them, as they will pay for listing and then cry for the payment – which will depend on the vendor payment cycle varying for weeks to months and small vendors (SME’s ) cannot survive this big box retail game

6) 70 % of retail is in food items and these are mostly sourced locally

A) If 70 % of the retail is in food items and this is sourced locally, why allow 51 % of the profits to go out of India? So FDI should not have crossed more than 30 %!

B) Local Indian retailers (existing Kirana stores ) must be trained to deal in these food items and deliver better value for the country and its economy.

C) This argument of the government goes against its own policy. So whereas, 70 % of the products would be food items, 51 % profits from these categories would go out of our country, thereby, clearing pushing the inflation higher perpetually for the next couple of decades. As there will be less money in our country chasing more goods ( as money would have found its way to parent MNC)  – Simple economics Mr. Kaushik Basu!

7) Ikea already sourcing 30 % of inputs from India

A) So if Ikea is already sourcing 30 % inputs from India, let other chains also do the same before starting their shop in India.

B) If these MNC chains buy from India and sell in India and take 51% of the profits abroad, what is India’s gain? The government must come out clean on this?

8) Approval only after investors meet all conditions, including 50 % investment in back end

A) This statement of investment in backend is a foolish statement. Already 100 % FDI is allowed in wholesale, why justify it for retail and link it up? Let these retailers first invest in back-end for the first five years and next five years invest in front end

B) Government has FCI (Food corporation of India) godowns and what is the government doing for enhancing the efficiency of this biggest warehousing corporation – Can this FCI not  become the Cash and Carry for small retailers ? A drastic improvement in supply chain of FCI godowns can bring down the wastage of food grains by hundreds of tons if not thousands of tons. Please pursue the project of Mr.Atal Behari Vajpayee of Golden Quadrilateral and link up all the FCI godowns, and start a national Agriculture produce transport corporation to start weekly transport during the harvesting season from the farms to FCI and nearest towns. The farmers co-operative and IFFCO should manage this. With this, farmers will not only get good prices but the wastage will be reduced substantially. Why are you looking at FDI to solve this simple problem of inflation . This will not only solve the inflation problem but also improve productivity at all levels , create more jobs ( may be , millions of low & middle-income but high productivity jobs ) and reduce inflation .

C) Learn from ‘operation flood’ by AMUL and how it solved the shortage of milk problem of our country and created a world-class brand. See what M.S.Swaminathan did with ‘Green Revolution’ to increase the production of grains in our country. Please do not justify that foreign retailers will help you bring down inflation. Remember that ‘Inflation is reversible but FDI is not’ and do not sell our country to foreigners for a short-term gain of a few billion dollars to our economy. This is anyway not the dollars to our economy, but the investment of dollars to take back dollars. I am sure that all these MNC chains a ROI (return of investment) method of calculating the investment returns. So I wish to ask our government that what does the ‘retail FDI dollar’ bring to India, which Indian government cannot do with its own money?

9) Government will have the first right over procurement of farm produce

A) This statement has no value. Government has shown no concern for farmers except considering them as voters and leaving them at the mercy of rain gods.

Questions that the government must answer

1. What has the government spent to train local Kirana stores in the past five years?  When yesterday only the government asked for Rs.56000 crore of the tax payers money despite a huge budget deficit, why did it not ask for even a Rs. 1000 crore for retailers training and up gradation?
2. Why did the government not start with FDI in retail at 26 %? Why suddenly at 51 %? Has the government become a lobbyist for MNC chains?
3. Has the government done its own independent studies for the impact of retail chains on Kirana stores?
4. The biggest plank of allowing the FDI is that inflation will come down. So despite allowing FDI, if the inflation does not come down, will the government revoke FDI in retail? Does that rider appear in the CP (Condition Precedents) for allowing FDI in retail?
5. Government needs to prove that FDI in retail can create million jobs every year. How and why, and which retailer will do that. All this must be put in the business case for allowing FDI? Why is government becoming the spokesperson for these MNC retail chains? What is the deal?
6. Where and how much wills the retailers invest in back-end? This has not been specified?
7. Why has the government not capped the retail margins of foreign retailers in India?
8. See point 5 B, why have women self-help groups / handicrafts been excluded from being the beneficiaries of the retail entry
9. Why are retailers not mandated to invest in retail training ?
10. More questions to follow