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Retail Nonsense

The fear of job losses in traditional small retailers is over-done

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India attracted a record $60 billion in Foreign Direct Investment (FDI) in 2016-17 and is clearly an increasingly attractive destination for international investment. To encourage more inflows, the Modi administration has so far liberalised 87 controls on FDI, including in sensitive sectors like defence, aviation and insurance. Most sectors are now open automatically to 100 per cent FDI and the Foreign Investment Promotion Board has been scrapped.

Retailing, India’s second biggest industry, remains an unwelcome exception to this positive policy trend. While foreign investors can fully own a company making weapons or running sensitive infrastructure like telecom networks, they cannot, with convoluted exceptions, operate a humble shop.

Until 1999, retailing was as open for FDI as other sectors. The Vajpayee government closed retailing to foreigners after lobbying from traders who feared the impact of modern retailing. The Congress government from 2004 maintained the ban, citing concern over the potential impact on India’s millions of kirana shops. No doubt Indian groups with an interest in retailing also advocated protectionism.

The economic argument to liberalise retailing is compelling. As modern retail develops, spurred by foreign capital and skills, Indian consumers would benefit from more choice, better quality and lower prices.

Farmers would gain from modern supply chains and the development of the food processing industry. The huge waste of fresh food in the current supply chain would be reduced. The fear of job losses in traditional small retailers is over-done. Experience in other countries, such as China, is that modern retailing creates more jobs than it destroys. While a big-box store may impact small outlets nearby, India’s urban and rural geography and poor transport system will mean that a high proportion of sales will continue through small, local stores. Indian families don’t do a weekly shopping trip to a destination store in the same way as consumers in other countries.

Accepting this logic, successive governments have tinkered with the restrictions, while remaining overly sensitive to the vested interests defending the status quo. We have ended up with a bizarre, mongrel policy. Uniquely to India, single brand retailing is open to 100 per cent FDI but multi-brand retailing is subject to controls. Foreigners can now own up to 51 per cent in multi-brand retailing if they invest more than $100m and procure at least 30 per cent of their goods from the small-scale sector. Their stores must be located in cities with more than a million people and in states that approve FDI in retail (with the risk that such sanction could be rescinded). Only one company, Tesco, has applied for permission under this policy. Others, including Walmart, have remained as BTB Cash & Carry operators, where 100 per cent is permitted.

The absurdity is exposed in e-commerce, where India’s leading companies (whether Amazon or Flipkart) are foreign-controlled. Foreign Direct Investment in e-commerce is now permitted in marketplaces but not where inventory is owned by the e-commerce company, and a maximum of 25 per cent of goods can be sourced from any single supply-chain partner. Lawyers, not consumers, benefit from such regulatory gymnastics.

The government should have the courage to fully scrap the remaining restrictions on FDI in retailing. It is patent nonsense that retailing is somehow more sensitive than other industries. If foreign investors can serve Indian consumers better and create employment they should be welcomed with garlands. Strong Indian competitors, of course, will not permit foreign chains an easy ride or excess profits.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Magazine 28 October 2017 fdi policy retail

Alan Rosling

The author is an entrepreneur and strategic adviser. He co-founded Kiran Energy and was earlier an Executive Director of Tata Sons. He was a Special Advisor to the British Prime Minister during 1991-93. He now lives in Hong Kong but is frequently in India. He is the author of Boom Country? the New Wave of Indian Enterprise.

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