Sunday, December 04, 2011

Why is the Indian Consumer Being Shortchanged? - An Opinion on Retail FDI

On November 24, the Union Cabinet decided to permit 100% foreign direct investment (FDI) in single-brand outlets and 51% in multi-brand stores. The opposition as well as some allies of the UPA have been vehemently opposing the decision, saying it would affect the small shopkeepers (kiranas), demanding a reversal of decision.

India has been known as the nation of shopkeepers, for every 1000 people there are 11 shops, and these shops include the paanwallah, sabziwallah, the barber etc. Unlike other nations which have densities of around 5 (UK and USA), the Indians are serviced far better by the neighbourhood store. According to a study by industry body FICCI, the total retail trade in India was worth Rs 11,00,000 crore in 2003. Of the approximately 12 million retail shops, 96% occupy floor space of less than 500 sq ft.

With over 120 crore consumers India is a land of opportunity, modern trade has only tapped 5% of the business. This is just a start. 

The proliferation of the neighborhood stores is to exploit the systemic deficiencies in India. Poor supply chain, poor cost control, archaic rules etc. have resulted in a mushrooming of such stores. Agreed that the there are certain outlets like the paanwallah which cannot be replaced.

The lacunae in the system cannot be reasons for the opposition from the 'opposition'.  Some of the issues which will be tackled are:

Supply Chain

  • Thanks to our public distribution system, more than 50% of the production goes waste or is siphoned off illegally . More than a third of the fresh produce goes waste because of lack of distribution.  Rs. 8,000,000 crore is worth of farm produce traded annually through a network of 28000 wholesale agents and primary rural markets and 7500 regulated markets across the country. Wastage is high because India has only 5400 cold storages most of which are used for potatoes. Imagine 50% of produce going waste!
  • Moreover in the existing supply chain there are 7 layers between the farmer and end consumer resulting in a commission or added cost

  • It has been projected that with efficient SCM, thanks to modern retail, there will be a  reduction in layers from 7 to 4.
  • There will be a huge reduction in wastage and thereby improve earnings for the farmers to the tune of 15%
  • End consumer prices may also be reduced due to increased efficiency
    • Columbia University, in a study has mentioned that inflation can be controlled.
  • Indirectly agricultural  productivity which was  far below potential would work towards maximizing outputs as the life of the produce would increase. So in non seasonal months - agri produce could be sold. Seasonal fluctuations could be avoided

Archaic Rules

  • A law which was meant to help farmers but proved to be a bane is the Agricultural Produce Market Committee (APMC) Act. Rather than protect the interest of the farmers it is the middle men who gained from this. With a 70 - 80% increase between farm and final store prices, the middlemen make the maximum money. 

  • With the middlemen ruling the roost, reduction in this will actually benefit both the end consumer with lesser prices and farmers with more earnings (pl refer earlier example)


  • With only 5% of trade covered by modern retail there is huge potential for more employment. Experts feel that FDI in the  retail sector will boost employment and has the potential to create about 80 lakh jobs in the country.


  • Efficiency is the crux of the retail business. Single digit margins are achieved by use of expertise gained over the years. This expertise requires huge investments in technology and other infrastructure. Given the experience till date, Indian companies have only scratched the surface and they lack the capital to take modern trade to the next plausible level. Hence it becomes more imperative that the FDI will bring in the necessary financial investments.

The Chinese Story
When China opened up its retail industry  in 1992, it brought in over $22-billion FDI in the span of a decade.  Today, 40 foreign retailers with hundreds of local retailers make up a $1-trillion industry, expected to double in five years.  The retail industry grew at 19.4% annually since 1992.

Interestingly traditional outlets increased (not decreased) from 1.9 million to 2.6 million over a five-year period. Retail employment shot up from 4% to 7% of the labour force.

The Indian Story (Other)
Whenever we talk about opening up the market there is talk about selling our soul to the devil. It seems to be a crime to ask a foreign company to do the job more efficiently.

In 1991,  the then-finance minister Dr. Manmohan Singh opened up the economy much to the disdain of the naysayers. The results speak for themselves - GDP growth has accelerated from just 1¼% in the three decades after Independence to 7½% currently, a rate of growth that will double average income in a decade.

Every industry which has been opened up from electronics to automotive have only served to increase the options for consumers. With stiff competition, Indian players have also played catch up and are giving their foreign counterparts a run for their money. 

Final Shots

  •  Why should the end consumer pay the price for inefficiency?
  • Why should they pay the price so that certain sections (especially the politically connected) are able to fatten their bank balances? 
  • Why should these few hold hostage to the majority?

Do we want to perpetuate the past or take the future road to prosperity?

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