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Arguments regarding FDI in retail

After months of discussion,  the issue of FDI in retail is being deliberated in the Lok Sabha today.  In September 2012, the Cabinet had approved 51% of FDI in multi-brand retail (stores selling more than one brand).  Under these regulations, foreign retail giants like Walmart and Tesco can set up shop in India.  Discussions on permitting FDI in retail have focused on the effect of FDI on unorganised retailers, farmers and consumers.

Earlier, the central government commissioned the Indian Council for Research on International Economic Relations (ICRIER) to examine the impact of organised retail on unorganised retail. The Standing Committee on Commerce also tabled a report on Foreign and Domestic Investment in the Retail Sector in May, 2009 while the Department of Industrial Policy and Promotion (DIPP) released a discussion paper examining FDI in multi-brand retail in July, 2010.  Other experts have also made arguments – both in support of, and in opposition to, the move to permit FDI in retail sales. The table below summarises some of these arguments from the perspective of various stakeholders as collated from the above reports examining the issue.

Stakeholder

Supporting arguments (source)

Opposing arguments (source)

Unorganised retail
  • No evidence of impact on job losses (ICRIER).
  • The rate of closure of unorganised retail shops (4.2%) is lower than international standards (ICRIER).
  • Evidence from Indonesia and China show that traditional and modern retail can coexist and grow  (Reardon and Gulati).
  • Majority of small retailers keen to remain in operation even after emergence of organised retail (ICRIER).
  •  Unorganised retailers in the vicinity of organised retailers saw their volume of business and profit decline but this effect weakens over time (ICRIER).
  • Other studies have estimated that traditional fruit and vegetable retailers experienced a 20-30% decline in incomes with the presence of supermarkets (Singh).
  • There is potential for employment loss in the value chain. A supermarket may create fewer jobs for the volume of produce handled (Singh).
  • Unemployment to increase as a result of retailers practicing product bundling (selling goods in combinations and bargains) and predatory pricing (Standing Committee).
Farmers
  • Significant positive impact on farmers as a result of direct sales to organised retailers.  For instance, cauliflower farmers receive a 25% higher price selling directly to organised retailers instead of government regulated markets (mandis).  Profits for farmers selling to organised retailers are about 60% higher than when selling to mandis (ICRIER).
  • Organised retail could remove supply chain inefficiencies through direct purchase from farmers and investment in better storage, distribution and transport systems.  FDI, in particular, could bring in new technology and ideas (DIPP).
  •  Current organised retail procures 60-70% from wholesale markets rather than farmers. There has been no significant impact on backend infrastructure investment (Singh).
  • There are other issues like irrigation, technology and credit in agriculture which FDI may not address (Singh).
  • Increased monopolistic strength could force farmers to sell at lower prices (Standing Committee).
Consumers
  • Organised retail lowers prices. Consumer spending increases with the entry of organised retail and lower income groups tend to save more (ICRIER).
  • It will lead to better quality and safety standards of products (DIPP).
  •  Evidence from some Latin American countries (Mexico, Nicaragua, Argentina), Africa (Kenya, Madagascar) and Asia (Thailand, Vietnam, India) reveal that supermarket prices for fruits and vegetables were higher than traditional retail prices (Singh).
  • Even with lower prices at supermarkets, low income households may prefer traditional retailers because they live far from supermarkets, they can bargain with traditional retailers and buy loose items (Singh).
  • Monopolistic power for retailers could result in high prices for consumers.
Source: ICRIER 1; Standing Committee 2; Singh (2011) 3;  Reardon and Gulati (2008)  4; DIPP 5

 

  1.  ”Impact of Organized Retailing on the Unorganized Sector”, ICRIER, September 2008
  2.  ”Foreign and domestic investment in retail sector”, Standing Committee on Commerce, May 13, 2009
  3. “FDI in Retail: Misplaced Expectations and Half-truths”,  Sukhpal Singh, Economic and Political Weekly, December 17, 2011
  4. “Rise of supermarkets and their development implications,” IFPRI Discussion Paper, Thomas Reardon and Ashok Gulati, February 2008.
  5. “Discussion Paper on FDI in Multi-brand Retail Trading”, Department of Industrial Policy and Promotion, July 6, 2010
  1. Aditya
    December 4th, 2012 at 19:02 | #1

    Excellent article on pros and cons of FDI in retail. But considering that there are both advantages and disadvantages of approving 51% on FDI in multi-brand retail, I am not sure whether a debate in Lok Sabha will make us any wiser.

  2. December 5th, 2012 at 19:15 | #2

    FDI in retail, debate reminds the era of license-permit raj, license-permit raj was let grow into fetters over the period of 3 decades. Political indolence to fix APMC Act is similarly lingering for long time and now we seek FDI as cure to our systemic wrongs.

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