FDI in MBRT: a Gateway to progress or digress?

Last week the Union Government of India, suddenly out of the blue, came out with an announcement which had all the potency to have a deep impact on our economy. We are talking about the government’s efforts to open up Multi Brand Retail Trade sector (herein referred to as MBRT) to FDI. Finance Minister Mr. Pranav Mukherjee surely under the auspices of our economist Prime Minister Sh. Manmohan Singh told the whole world (literally) that FDI to the tune of 51% will be hence forth allowed.

As expected, this bill or the announcement, as of now, ran into rough weather with hues & cries raised by almost all the political parties. It augmented those rare scenarios within parliament when all the opposition parties rallied together against the bill and suitably supported by some UPA Allies too namely Smt. Mayawati & Smt. Mamta Banerjee clearly voicing their strong opposition to the bill. In fact reportedly, there was a major exchange of words between some Senior Congress Ministers.

So basically a Pandora’s box was opened by the UPA and it is time we have a look at it. Before we go ahead, let us understand the key provisions of the bill

·         The policy rollout will cover only cities with a population of more than one million (as per 2011 census). There are only 53 such cities; there are 7935 towns and cities in India overall.

• Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded. 

• Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million
• At least 50% of total FDI brought in shall be invested in `backend infrastructure
• At least 30% of the procurement of manufactured/ processed products shall be sourced from `small industries` which have a total investment in plant & machinery not exceeding US $ 1.00 million. The units can be Across d world
• It may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.
• Government will have the first right to procurement of agricultural products;

• Experts feel that it will generate employment of 1.5 million people in front-line in and another approx 10% required for the back end, the total jobs to be generated will be around 1.7 million next 5 years whereas mr. Anand Sharma of Congress promised 10Million jobs! In next 3 years.

To permit 100% FDI in single brand retail trading, subject to the following conditions:

• FDI in single brand retail trading may be permitted up to 100% with Government approval;

• Products to be sold should be of a ‘Single Brand’ only.

• Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.

• ‘Single Brand’ product-retailing would cover only products which are branded during manufacturing.

Rationale for enhancing FDI ceiling to 100% in single brand retail trading.

Govt says that In the last 5 years, under the current regime of 51% FDI in single brand retail, foreign direct investment of only US$ 44.45 million have been received, constituting barely 0.03% of total FDI inflows.  Globally, single brand retail follow a business model of 100% ownership and global majors have been reluctant to establish their presence in a restrictive policy environment.  

Another critical argument promoted by the government

Govt & supporters say that a visible lack of lack of investment in the logistics of retail chain creating inefficiencies in the food supply chain. Even if we are the world’s second largest producer of fruits & vegetables, our cold chain storage infrastructure is very weak. We have only 5386 stand alone storages. Moreover, the total capacity of these storages is 23.6million MT but 80% of these are used only for potatoes.

So naturally farmers too suffer as lack of storage leads to wastage. It has been estimated that the loss of produce esp Fruits &Vegetables is close to Rs.1 Trillion per annum! 57 per cent of this is due to avoidable wastage and the rest due to avoidable costs of storage and commissions.

Again as per some industry estimates, 35-40% of fruits and vegetables and nearly 10% of food grains in India are wasted. Presently, we allow 100% FDI in cold storage industry but the participation has been minimal as potential investors were not enthused by absence of FDI in front retail.

So basically govt says that if FDI in NMRT is allowed, it will set of a chain of good FDI in cold chain and thus leading to less wastage of Fruits&Vegetables and thus farmers are happy.  VOW, we have such a visionary government.

Another argument passed on by the advocates of 51% FDI in MBRT is that it has been successfully implemented by other countries.

In all fairness, there have been other countries like China, Thailand, Russia & Indonesia which have benefited by their own policy of FDI in MBRT and they all allowed 100%. I am not sure about what all their policy guidelines entailed but feel that socio-economic fabric of our country is much different than that of these four especially Indonesia & Thailand. Both these countries are dependent on Foreign economy for everything.

Same was the case with Russia which was literally bankrupt and literally it was one of the easiest ways to earn quick foreign exchange.

China is a different case study all together. They have  a huge size and a huge highly nationalistic population who will adopt a MBRT but perhaps not completely give up on their own indigeneous retails.

So perhaps the promoters of this policy who give examples of other countries need to look at the overall scenario with a broader perspective.

Here goes my contention on the FDI in MBRT

A) 51% -  the first question is why did the government start with 51% and why not 49% or 40%. I am sure even then the possible investors would have remained enthused. BJP, in its vision book 2004, had thought of FDI but only 26%. By doing 51%, we are literally giving away the control of the business.

B) 30% of the procurement of processed/manufactured products to come in from small sector industries with upto 1million USD investment and can be from any country. 1 million USD means roughly Rs.4.50 crores. How many Indian ‘small sector’ are there which have invested upto Rs.4.5crores . so what happens, the Investors question the ‘quality’ of the raw material supplied by these Indian small units and start looking worldwide (it is provisioned in the bill!) and which country answers their demands. Any Guesses!  And by the way what about the 70%? Where does it come from. From the choice  AGAIN of the investor.

C) How does it really help if fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, remain unbranded

D) Now the question about the jobs -10 Million in 3 years or 1 crore in 3 years. We all visit Big Bazars, Croma, reliance Fresh etc , how many people do we see working there? Assuming a very safe average of say 400 employees per outlet, there wuld be 25000 such FDI units in 53 cities!!! And 471 outlets in each of the 53 city??? You really think it will not effect the small kirana shops. Because, we also like to seek convenience, more choice and a feel good factor which unfortunately the local kirana outlets do not provide…

E) Today it is 53 cities, what is the guarantee that tomorrow it will not become 153 cities. Of course it won’t take too long for the FDI to see the scope & potential of the tier II cities and it will be lapped up by the people staying there. Do you indeed think that if tomorrow Wal mart opens an outlet say in Jodhpur, it will not do good business, I don’t think so.

F) What did the government do to create a level playing field before announcing this bill. But, why the urgency to implement it so fast? Why can’t government offer some friendly loans, under proper monitoring, to the willing retailers to do up their out lets. After all, the government offer so many packages to farmers (of course bang before any state or union elections) and I guess that why there will be no such relief for the trader community as there is no union election in near future.

G) Moreover, what did the government do to help the back end logistics and infrastructure-namely cold storage facility? Going by their rationale on this core issue (mentioned above), it will not be very late before we see foreigners gaining 100% control on our cold storages. Why, are our ‘native’ businessmen so ineffective. Did the government offer any olive branch to our native cold storage owners? it did not.

H) what is the guarantee that FDI will indeed change the lives of the farmers. What is the guarantee that FDI will offer them a very high rate for their produce. Govt says it will have the first right on procurement of farm produce. What if it doesn’t? at least the very apathetic way of how FCI works, I don’t see a very positive picture emerging.

I) Marginal consumers – here I mean those daily wage labourers who work incities and buy their daily requirements on CREDIT and they resort to kirana outlets. No Reliance Fresh will ever offer credit, forget assuming about the FDIs. Tomorrow, when WalMart opens its outlets, will they offer credit. Forget it, then will even the local kirana outlets be keen on offering them credit because there is a feeling of fear on their minds and would like to manage their cash flow. So what will happen to these marginal consumers.

When I see people like Mr. Kishore Biyani supporting FDI, I really wonder what happened to their self confidence. Why are they inviting foreigners when they have themselves taken major steps in this industry. Rather than supporting FDI, shouldn’t they be asking governmenfor more support to create more such names from within the country??? And if it is 51% FDI, how can the likes of Biyani say that they own the business.

Yes the FDI will result in perhaps 10billion revenue in nect 7-8 years but aren’t we paying a high cost. Isn’t 51% ownership self detrimental to our interests. There is nothing wrong in Foreign Investment but we could have done it at say 40%, even then investment would have come in. may be, we would not have earned 10 billion but still we would have earned enough to maintain the balance in the sector.

This is going to be a very long war between the Desi Kirana Walas ( i would rather love to call them Swadesi stores) and Wal Marts of the world. We will all see if there is any clear winner in the war or both happily coexist. But in this war, we as the consumers, will have a very big role to play. And better, if we play it sensibly…