Proposed FDI ban 'no justification'

No sooner did the Parliamentary Standing Committee on Commerce headed by former Union HRD minister Dr Murli Manohar Joshi recommended a blanket ban on foreign investment in retail on June 8, the decision drew howls of protests from the industry. The first casualty was the iconic $31-billion Scandinavian home products giant, IKEA, which said it had put on hold its plans to set up 25 showrooms across India for an investment of around $1 billion. Soon after, global consultancy major KPMG released a study which said that Indian retail may lose FDI up to Rs 400 crore this fiscal because of June 8 recommendations. “After the IKEA debacle, India Inc could lose as much as another Rs 4 billion (Rs 400 crore) in 2009-10 due to the stand in the parliamentary report,” KPMG Advisory Service Manager Anand Ramanathan said.

The recommendations

So what exactly does the Parliamentary Panel recommend. “A blanket ban should be imposed on domestic corporate heavyweights and foreign retailers from entering into retail trade in grocery, fruits and vegetables,” the Committee said. It added that opening FDI in retail by allowing single brand foreign firms would result in unemployment. It asked the government not to issue further licenses for wholesale “cash-and-carry” business to both foreign and domestic investors. Reacting to the development, Arti Singh, vice-president, corporate affairs, Bharti Wal Mart said, “Retail can be an engine of growth, not just in urban India but also in Tier 2 and Tier 3 cities, and investments will only help that.”

Is it right?

So is a blanket ban on foreign investment in retail a step in the right direction? “In the case of foreign entry of retailers, my own sense is that a gradual opening is appropriate for India.  A ban on domestic corporate investment in retail has no justification,” says Dr Mathew Joseph, Ph D, Senior Consultant, Indian Council for Research on International Economic Relations (ICRIER). ICRIER’s had last year brought out a detailed all-India study based on the largest-ever survey of all segments of the economy which showed that the entry of large retailers will not lead to huge displacement of small retailers. 

The Retailers Association of India is of the view that the government should set up a ministry for retail. “The Parliamentary committee’s recommendation is pre-mature since there is no single onus for the sector. A blanket ban can be detrimental to the growth of consumption and retail best practices in the country,” says Mr Kumar Rajagopalan, CEO, Retailers Association of India (RAI). “The ban does not look justified. It looks rather short-sighted. While there are benefits to local players from a short-term perspective, it will not help the market to expand and consumer benefit,” says Mr Narayanan Ramaswamy, Executive Director – Consumer Markets & Retail, KPMG Advisory Services Private Limited.

The impact

What will be the overall impact on the retail industry if the recommendations are implemented. “The growing demand in a fast expanding economy like India cannot be met through traditional retailers alone and India requires large growth of organized retail. This is the demand side of the equation. On the supply side, organized retail brings along with it huge benefits to the economy by modernizing the entire supply chain and giving better prices to farmers,” says Dr Joseph. “A modern India cannot shut its doors for modernizing the second largest sector in the country,” says RAI’s Rajagopalan.. “On the positive side, it will give local players more time to shape-up, become more organised, perhaps even have some mergers/acquisitions etc. On the negative side, this will slow down the retail sector growth and deny Indian consumer good shopping experience, quality products and world-class service,” says KPMG’s Ramaswamy.

Who gains?

At present 51% FDI is allowed in single brand retailing and there is no provision in multi-brand retailing. So does it serve the interest of the unorganized retail sector in India? “The Parliamentary Panel notes that the provision of single brand is not strictly observed and shops sell other branded products along with the brand for which they have been given permission. If this is the case then, the government has to take action against violations of the licensing rule and not a complete ban of foreign entry,” says Dr Joseph. Firstly, retail in India is divided into those that are legal and those that are not legal. The  illegal retail trade does not follow the laws of the land since such businesses do not even give cash memos to the customers. “If the trade that offers cash memos to customers is to be termed organised , the question of FDI becomes relevant. Any country has the onus of protecting local industry and the same is the case for the government to be careful about FDI norms for retail,” says Rajagopalan.  

The issue of monopoly

So, if the government does not issue further licenses to cash-and-carry formats, can it curtail monopoly by large retailers? “Cash-and-carry are important links between manufacturers and retailers. I am not sure if Govt. can benefit out of this. This might actually mean we go back on our essential principle of economic reforms (of increasing efficiency through lesser direct involvement from government or govt becoming an operator/player in the process),” says KPMG’s Ramaswamy.

Rather than having a blanket  ban, it would be better if the government can pronounce judgment and valuate on case to case basis, lest we should loose investments which can bring a new ray of hope to India.