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FDI In Retail

Written By Unknown on Monday, October 22, 2012 | 12:57 PM

Evolution is my favorite word these days. I find myself justifying changes, right from technological progress to social changes and behavioral improvements under the garb of evolution. 

If there is anything constant, it is Change. And as with all evolution, it is all for the better. 

Then why not FDI in Retail? (If you have missed the bus, it's the hottest potato in India at the moment).

FDI in Retail
The Government of India has announced FDI in Retail Business. 

What exactly is FDI? FDI stands for Foreign Direct Investment. FDI allows organizations located in one country to make a direct productive investment in another country.

Tell this to a pessimist and he would say - "OK. Here they come, to exploit my country. All they want is to take advantage of the my resources and market for their own benefit." 

But business was never a one way street. No one does business for the benefit of someone else. Business is done with the aim of making a profit in respectable conditions. 

FDI in retail too would allow the sellers to make some kind of profit, but would also ensure significant benefit for the nation and its people.

This major policy change has some interesting and subtle highlights.
  • The country would welcome retail businesses from across the world to set shop in India. However, an approval will be needed from the State, based on the city where the shop needs to be setup.
  • 100% FDI is allowed in Single Brand Retail. These include retail outlets which sell stuff belonging to a single brand (e.g. Nike)
  • 51% FDI is allowed in Multi Brand Retail. These include retail outlets which sell stuff belonging to multiple brand (e.g. WalMart)
  • Such retail outlets can be setup only in those cities which have a population of 1 Million (10 Lakhs).
  • If a particular state or union territory does not have any city with a populace of more than a million, then the retail outlets can be setup in the cities preferable to the state. The largest city is recommended in such cases.
  • 100% FDI in single brand retail would need 30% local sourcing. It means that 30% of the resources needed for the business need to come from India itself.
  • 50% of the FDI has to be invested in "back-end infrastructure". This includes investment made towards manufacturing, processing, storage, packaging, quality control, distribution, logistics and its like.
What has the GOI done with these changes?
  • It has welcomed international businesses to set shop in India. Such investment would mean that India would have some new capital inflow.
  • The rules would ensure that there are some infrastructure improvements in the hinterland of India. The ultimate producers are expected to benefit.
  • The ultimate consumers are expected to benefit due to these changes, with world class products being made available to them.
However, every change has opponents. The band of opponents for FDI in Retail is led by a certain Mamata Banerjee. 

FDI in India
The Chief Minister of West Bengal, with her myopic vision, and only 19 Members of Parliament (which is less than 4% of total India's MPs in the Lok Sabha) intends to derail this big ticket reform. I truly hope that she does not succeed.

We have a few examples of how Foreign Investment in Indian industries have improved the quality of the Indian life.

Let us take the example of automobile industry. Till the 1990s, the only cars you would have heard of were Premier Padmini and Ambassador, from Premier and Hindustan Motors respectively. 

Then came Suzuki. Tying up with Maruti, it has produced one iconic brand after another. Do you think you will ever forget the pocket size Maruti 800? Then came the biggies - Ford, BMW, Honda, Hyundai, Toyota et al. 

Have you heard anyone complain why these big guys are in India? The very politicians who complain that FDI is bad are seen traveling  in these flashy cars. Jayalalitha, another politician who is an opponent of FDI, is seen traveling in a Mercedes. So much for opposition for FDI!!

If these guys were not welcome to India, we would have been travelling in the Ambassador. And we would have to wait for 2-3 years to get the cars delivered after an order. 

And if you think that cars are for the slightly better off people, let me take the example of mobile phones. (FDI in communication).

For long, India had only one vendor for phones - the state run BSNL (Bharat Sanchar Nigam Limited). With its inherent public company nature, the organization found it difficult to serve the communication needs of modern India. 

When the Indian market was opened, the likes of Hutchison Essar, Bharti Airtel, Vodafone, Reliance etc setup shop in India. They improved the quality of land line and wireless communication in India. 

FDI in Communication
The price of communication have dropped significantly and has made the usage of mobile phone affordable. 

Just a few days back, the news papers said that the country had a Billion cell phone connections.  What do these numbers mean? India has a population of 1.2 Billion. And you have 1 Billion mobile phone connections. Isn't it awesome? 

The technology has made usage of cell phones economical and put them in the reach of the common man. If these guys were not welcome to setup shop in India, you and me would be struggling to get a land line connection. And yes, Apple would not have done business - who would have a cell phone after all?

Net in net, what do all these examples signify? 

FDI in retail would not be completely bad. Yes, the retail kirana vendors would face challenges from the big guns. However, they would also be driven to innovate and serve the consumers in a different and better manner.

And as history has proven, such changes would ultimately rev up the economy and make the lives of people simpler and better.

Economics, after all, is not a simple science. The relation between cause and effect cannot be easily identified and cannot be completely estimated. However, I can only hope that FDI in retail would translate into effective results in the coming decade. Fingers Crossed!!

After all, it is an Evolution

FDI is Welcome
P.S. I await the day when Mamata Banerjee and her ilk realize that opposition to FDI in Retail was a big mistake.
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