Current Affair for Students: FDI in Retail

FDI in retail sector has been a recent topic of discussion for our policy makers. This topic is drawing attention from political parties, national unions and retail industry think tanks. Most of the MBA entrance test and GD requires a good grip on current affair, and FDI being a hot topic of discussion recently, we believe MBA aspirants should be well equipped with the basics of the whole story. This article is intended to enlighten students to understand what is the retail industry, FDI and why our country’s best minds are debating on FDI in retail sector?

A quick glance at India’s retail sector

As per definition adopted by Indian government – it’s a sale of finished or final product to the consumers. And not the intermediate goods which are further processed before sale (whole sale market).

Thus the retail market connects the producer of product (through a value chain) with the ultimate consumer of the product. Of course it involves an act of selling at a profit.

Primarily, the retail market in India is divided in 2 sections organised and unorganised retail. Organised retail is operated by licensed retailers who have registered sales tax, income tax etc as per the government protocol for businesses.   Whereas the unorganised section of the retail market refers to traditional low cost operating model owned and managed by an individuals or their family (e.g. local general store – kirana, pan/ beedi shop, pavement vendors).

The Indian retail sector is highly fragmented with close to 97% businesses is unorganised retail. This section is main source of income for millions in India and connects closely with agricultural produce by farmers. It has a very high penetration in rural India with a contribution of up to 10% of GDP.

What is FDI?

FDI is an acronym to ‘Foreign Direct Investment’ – it is a form of investment by foreign entities in local market. India accounts for the equity capital investment in local companies as FDI. And other forms of investment/ flow of money is accounted separately like bringing equipment/ expertise from strategic partner abroad is accounted under import trade and not FDI (unlike other countries like China).

Reserve Bank of India (RBI) and Foreign Investment Promotion Board (FIPB) are 2 key government entities who control and monitor FDI in India. FDI in general is allowed in India except few sectors which are been controlled by government and a prior approval from RBI and FIPB is needed to carry out business in India.

Current state of FDI in retail

1. FDI is allowed upto 100% in cash and carry wholesale trading and export – e.g. Walmart has invested with Bharti in wholesale cash and carry business.

2. FDI upto 51% with prior approval from government in retail sale of ‘single brand’ products.

3. FDI not allowed in ‘multi-brand’ retail products. [The recent political debate is related to multi-brand retail sector]

So what is the debate about?

1. Infrastructure: Currently India lacks optimal investment in the infrastructure and logistics of the retail value chain. This has led to inefficiencies in the market and hence improper retail market mechanism. For example, India is the second largest producer of fruits and vegetable, about 180 million metric ton, but there’s limited cold-chain infrastructure to store and distribute fruits and vegetable. The current capacity, mostly used for potato storage, is approximately 24 million metric ton – leading to a loss of perishable agro products and inability to cover wider distribution area. This also creates a seasonal nature in the product which means produce has an overall short period of availability. In a nutshell, it leads to a high value loss for Indian farmers in quality and quantity of fruit and vegetable.

Experts believe that if a properly regulated and well thought FDI policy is brought in Indian retail sector, it could lead to superior infrastructure for the retail value chain.

2. Lack of transparency in retail value chain: There are various irregularities in the intermediaries (like mandi) and a total lack of transparency on how the market decides price of farmer’s produce. The wholesale regulated market, governed by state policies, is a prey of corruption and lacks transparency. It has developed monopolistic characters undermining the fair market pricing based on demand/ supply and quality of produce. Studies in past have quoted that Indian farmers on an average receive 33% of the final price paid by the ultimate consumer, unlike 66% in countries where retail sector is totally organised.

It’s easy to then conclude that FDI in retail sector would lead to bringing much needed transparency in intermediaries and would lead to more fair play in the value chain. Primarily for the reason that organised retail chains would invest in enhancing the supply chain and competing on price in the market.

3. Inadequate access of latest technologies: Our home grown small and medium sized enterprises (SME), do not fully exploit latest technology in production system and other business operations like marketing, distribution etc, mostly because they lack investment and have a limited local reach. Hence unable to grow (organically or inorganically via consolidation) and build big brands.

One of the conditions implied on FDI in retail (still under discussion) is to source at least 30% of total produces from SMEs. Experts believe that FDI would incentivise SMEs to enhance the quality of products and gain efficiencies by utilizing latest technology and management practices.

There are various ‘for’ and ‘against’ discussion for FDI in retail sector due to which government is not able build a consensus on this. Currently, FDI in retail has been kept on hold unless a majority in the parliament is achieved through constructive debate.

We at take this in an entirely different perspective and want to evaluate the prospects for our young generation in involving in this sector. Specially, how India can utilise its current potential in building the much wanted future retail sector which is valuable for both the end consumers and the suppliers and has a fair trade throughout the value chain.

What do you think? Share your views.

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