FDI in Retail in India

As the debate continues about the decision of the Government of India to allow FDI in retail upto 51 %, the Government came out with full page advertisements justifying their decision in all major national dailies. The Government justified its decision on the basis that the policy would benefit various stakeholders including the farmer (better back-end infrastructure and remunerative prices for their products) and the consumer (competition, choice and reduced prices, thus impacting inflation) and would create more employment opportunities.

In the context of world trade, one normally refers to the nation's interest as being a determining factor in strategizing one's negotiation stand. What exactly do we mean by a nation's interest? Is it he local producer's interest ? Is it the local consumer's interest? Is it the economy as a whole which should be seen as being benefitted? On many occasions, the interests of the local producer may not be the same as the consumer's interest.

Take a hypothetical case of a local product manufacturer in a country. Reduction in trade barriers would threaten the local manufacturer and open the sector to competition. It might ultimately wipe out the local manufacturer if it is not able to compete in the international market. For the consumer, international trade provides him with choice, competition and the best goods at competitive prices. The consumer is greatly benefitted. In such a case, what is in the country's interest? Would it not be in the country's interest that there is competition and choice for the consumer?

The scenario in the case of the retail sector in India has been explained in a paper by Anush Chari and T.C.A Madhav Raghavan. Supporting the case for FDI in retail, the paper states.

"In the past few decades large retailers have experienced substantial growth around the world. Evidence suggests while the impact of entry by large retail chains on employment and incumbent mom-and-pop stores is mixed, there can be substantial benefits to  consumers in the form of lower prices and lowered food price inflation in particular.  Similarly, by employing improved distribution and warehousing technologies, large retail chains are in a position to provide better price signals to farmers and to serve as a platform for enhanced exports.  

At the same time, public outcry over the impact of these chain stores on other retailers and local communities is reported around the world. Small retailers, farmers, and even large organized competition have concerns about the entry of large global chain stores. On balance, however, in this paper we argue that opening up FDI in India to multi-brand retailers from abroad may be a catalyst to growth and the development of the retail industry, with positive externalities for the rest of the economy."

It concludes by saying,

"In this paper we argue that the potential benefits from allowing large retailers to enter the Indian retail market may outweigh the costs. Evidence from the United States suggests that FDI in organized retail could help tackle inflation, particularly with wholesale prices. It is also expected that technical know-how from foreign firms, such as warehousing technologies and distribution systems, for example, will lend itself to improving the supply chain in India, especially for agricultural produce. Creating better linkages between demand and supply also has the potential to improve the price signals that farmers receive and by eliminating both waste and middlemen also increase the fraction of the final sales prices that is paid to farmers. An added benefit of improved distribution and warehousing channels may also come from enhanced exports."

Only time will tell if the local, neighbourhood, shop would be able to withstand the competition and scale of the Walmarts of the world.