Retail will stay local, even after FDI: IIMA

Fears that allowing foreign direct investment (FDI) in the multi-brand retail sector will force local retailers out of business and hurt farmers’ interests, may be exaggerated if not totally unfounded. In fact, a working paper by Indian Institute of Management, Ahmedabad’s (IIMA) Prof Piyush Sinha and adjunct faculty Srikant Gokhale says that opening the retail sector to FDI is unlikely to attract new transnational retailers.

The authors of the paper titled, FDI in Retail: A Global Perspective, have come to this conclusion after analyzing transnational retailers’ (TNR) limited success in emerging economies, bottlenecks in India, diverse customer demographics, and India’s fragmented industry.

Giving figures from a study of top 250 global retailers, the paper says that FDI in retail may not generate huge employment, as many think it would. Nor will it trigger an influx of foreign capital in supply chain or attract backend investment. Instead, global retailers may prefer to enter the Indian market through the online route to attract consumers before setting up a physical presence here, the paper states.

The study of top 250 global retailers reveals that 175 TNRs operate in less than 5 countries, mainly neighboring nations, while a large number have operations in only one local country, the paper says.

“Only 50 retailers operate in more than 10 countries. Only 36 of them have entered China since the opening up of retail sector in the late 1990s. Out of these, 17 retailers are already present in India. Therefore the scope for entry of [new] global retailers into India is limited,” the paper says. It adds that, at best, the global players already present in India will expand faster if FDI is allowed into multi-branded retail.

The new FDI policy has been designed to attract the large food and grocery hypermarket retailers like Walmart, Carrefour and Tesco. These, however, already have a presence in India in various ways and are pushing their expansion plan through their Indian partners, states the paper.

“As retailing is still a very local industry (over 90%), FDI in multi-brand retailing will only benefit existing organized players in terms of attracting foreign capital. It will not change the retail landscape significantly in terms of formats proliferations, benefiting customers, generating huge employment or investment in supply chain or backend investment as has been envisaged in the policy. With global uncertainties, slowdown of growth and cash flow issues, the TNR will be cautious in terms of expansion into unchartered territories in the near to medium-term,” the paper states.

The paper also has a word of advice for the Central government. It states that instead of banking on FDI as a game-changer, the Indian government should fast-track infrastructure development (especially roads); set up economic zones for warehousing facility; streamline labour laws; encourage planned urbanisation to ensure adequate availability of quality real estate; and implement GST to facilitate take-off of modern organized retail in the country.