Effects of FDI in retail

Today many unions and retailers opposed the Government of India’s plan to allow Foreign Retail Chains to open up shops in India. So I thought about putting together how Walmart, Tesco etc. will effect us.

1.Consumers:
Nobody can force a consumer to visit a small retailer, a sabji mandi, or a mega store. They will shop where ever they get the lowest price, max variety, and a good consumer experience. So a consumer can only stand to benefit from this move. They can expect the prices to go down, better selection. More and more shops will make an active effort in catering to their demands and sell their merchandise below the MRP.
Since the Consumer Inflation Index is primarily determined by the retail price, the price wars will only lower the inflation and benefit the economy. Consider this far fetched, but this lowering of inflation might actually lower the interest rates of the EMIs on Home Loans.
BTW a good economy is one where the interests of the consumers (common man) is first and not the businessman.

2.Farmers/Producer:
Currently Indian farmers often do not get the right price for their produce. The middle man/ transporter makes huge bucks at their expenses. The government might be paying them the right price, but the payment is always delayed and bribes often needs to be payed. Around a fourth of our produce gets wasted because of lack of proper handling and refrigeration. Years of neglect and lack of capital influx has started taking its toll and prices of perishable commodities fluctuate drastically.
I foresee that more initiatives like the contract farming and ITC’s E-chowpal would be taken by the big retailers (Indian or Foreign). The farmers will get a better price of their produce and huge investments shall be made in refrigeration of the perishables. Many retailers will take an active interest in helping farmers gain access to to seeds, technology and farm machines so that their quality improves. The fact that less fruits and vegetables shall be spoiled and that the Mandi’s and the middleman’s margins would go down would result is lowering in prices or perishables.

3.Government:
Big shops produce more traceable sales records and evade Sales Tax/ VAT less then the street side hawkers and small shops. This additional tax collection would only reduce the fiscal deficits. Then the turnover of the retail sector constitutes to over 65% of the Indian GDP. Even a minuscule 2% efficiency brought by this competition would only control the inflation and lead to an additional GDP growth by over 1%.
Also a big retailer is likely to pay its employees far more generously then a small merchant, so lots of new avenues of employment shall be created and more people shall be moving up the economic ladder. The government can expect more private capital influx in agricultural and logistics.

4. Labor Force.
The kirana store does employ labors to stock the shelves, home deliver goods, and as a helping hand. However these assistants never got their due share of profits. They are always underpaid. The Corporate retail is going to change all this.
The starting salary in a corporate chain is about 9,000 INR (which is about 2 times the country’s average per capita income) Imagine how much productivity gain and increase in the standard of living will happen because of this phenomenon.
A lot of underpaid assistants would move to the corporate and earn big bucks, while the scarcity hence induced would increase the wages in the whole sector and benefit the masses.

5.Retailers:
An Indian who never had any formal education is the most creative and innovative person in this sub-continent. He is street smart, a thinker and is able to smell an opportunity much before it can crop up in any analysis. He knows his customer better than any Harvard educated foreigner can ever hope to understand. In the short run he might lose some market share, but in the long run he can potentially drive most of the big foreign corporates out of business. How?

I look at a small hawker who peddles vegetables on his hand cart. His investment in Real Estate = Rs. 0/-. Usually he himself or his family helps him sell, so his labor charges and fixed expenses are also Rs 0/- (except a weekly 50p which he pays to inflate his cart tires) Compare it with a 50,000 square feet of prime retail space and 100s of employees which Reliance employs in its mega-marts.
My hawker buys his merchandise fresh every morning based on the sales data he collected yesterday evening (a delay of 10 hours) and fix his price based on customer response he received just 5 minutes ago. Now tell me who will have a better control over his inventory?

In India, it is tough to find a household which is situated more than 100m away from a retail store. A street where a hand cart does not deliver fresh vegetables. Do you really think they will be intimidated by those big stores which require an hour of driving on congested Indian streets?

BTW the small shops have one very important secret tool in their arsenal… Rent Control Act. the mall culture and indian consumerism has increased the rentals and cost of commercial property many folds. All new corporate stores pay the full market price for their new stores. While the most of the small retail shops are still paying the historical prices (which is a fraction of the real market price). Rental being the single largest fixed cost of this industry, shall be the determining factor. The small shops can use this edge to lower the prices and bleed the big corporates to deep red.

I agree these big store is a big threat to their livelihood. But stalling Fdi is not a solution to that. Already Big Bazaar, Reliance Fresh, Westside, Food World, Subhiksha etc. are opening up super markets all across the nation. Both Tata and Birla have recently raised tens of billions of dollars to fund their businesses abroad. Can’t they raise capital to do a similar investment in India? So FDI or No FDI large retail is a culture that will inevitably come to India.
The competition is always good for the country and the common man. Look at the case of Telecom, Banks, Airlines, insurance etc. Retail constitute to a very large chunk of the economy. Big retailers will only benefit the consumers, reinvigorate the economy, help the farmers and industry.
Many of the small retailers who are currently prospering might be forced to change their businesses. But the majority of them will be able to adapt to the situation and benefit from the efficiencies this culture will bring. Some of them might even grow into big chains and a lot of them will be employed by this big giants at salaries which they could never imagine.

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BTW while mayawati is busy protecting the small shops from the corporate retail, In reality most small shops have beaten these giants black and blue. Most retail stores are in deep losses and their return on investment is minuscule.
The corporates which were forced by market (and not mobs) to shut shop and sell the businesses off are:

1) Fabmall: owned by Trinethra Retails
They were the first to start retailing in bangalore (largely on 7-11 style) and were consistently making losses Hence had to sell their stores to Aditya Birla’s More
2) Kempfort:
Although it was very popular in the early nineties and pioneered the mall culture in bangalore, the store could not keep pace with the changing Bangalore and soon fell out of favor. So the owner had to shut shop and rent out the space.

 

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32 thoughts on “Effects of FDI in retail

  1. although u r somehow able to vindicate the retail f d i,but india being a developing country i.s not able to cop with the problems of foreign giant .specially create problems for middle class people.
    .

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  2. @anonymous… to me there are 2 important stake holders the producers/farmers and the consumers/citizens. as long as both of them are getting a better deal, I am happy. and i don’t care much about the middlemen (retailers, FDI or e-commerce)

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