Monday, November 28, 2011


It took a decade of "indecision" for India to throw open its retail sector to Foreign Direct Investment though with extra ordinary caution. Uncertainty still plagues regarding the eventual fate of the policy which has just been orchestrated a couple of days ago with the government itself sharply divided on the desirability of allowing multinationals with its potential adverse impact on millions of small scale traders straddling the country, serving neighborhood families admirably well. Without entering into the raging controversy unleashed by the new policy, an insight into the rationale and logic behind the latest decision can be discernible from the following report on the issue. 

"India's commerce minister said Friday that the decision to open the country's $400 billion retail sector to global chains such as Wal-Mart has a built-in safety net for small shops and farmers. Anand Sharma told reporters that the Indian cabinet's decision late Thursday allowing 51 percent foreign ownership of supermarkets would vastly improve decrepit infrastructure that causes massive food waste in a country plagued by malnutrition and high inflation. Sharma said the new rule would only apply in cities with more than one million people. The minimum investment would be $100 million and half of this would have to be invested in rural infrastructure and refrigerated transport and storage. Thirty percent of the produce sourced by the retailer would also have to come from small and medium enterprises. Top retailers such as Wal-Mart and Tesco have lobbied for years for a chance to build stores in the nation of 1.2 billion people and political deadlock on long-promised reforms in retail and other areas has helped cool foreign investor interest in India. Foreign retailers have Indian partners in wholesale operations, but no retail stores. The Cabinet also allowed 100 percent foreign ownership of single-brand retail operations, up from 51 percent. Advocates see the move as a way to strengthen India's creaking food distribution system. The country suffers chronically high malnutrition and soaring inflation, but it's not for lack of food. It is the world's second largest grower of fresh produce, yet loses an estimated 40 percent of its fruit and vegetables to rot because of a lack of refrigerated trucking and warehouses, poor roads, inclement weather and corruption. That translates into lower incomes for farmers and higher prices for consumers. If companies like Wal-Mart and Tesco can open shops of their own, the investments they make in improving farming techniques and getting produce into stores more efficiently, could bring down food inflation -- which has averaged 10.5 percent over the last year -- and possibly improving rural incomes. Sharma said the policy would have a "multiplier effect" and tens of millions of people would gain jobs. Wal-Mart, British-based Tesco PLC and French-based retailer Carrefour welcomed the decision. "This legal evolution should contribute to modernize the Indian food supply chain and to fight against food inflation for the benefit of Indian customers," Carrefour said in a statement. It said the decision would help India's farmers and the nation's general economic development. Opposition parties and even a key ally of the government has been opposed to the move. The country has struggled to find consensus because of concerns that competition from the foreign retail giants could hurt millions of small shopkeepers, as well as the poor. Sharma said the new policy had been reached through a "transparent and democratic process of consultation with all the stake holders." The main opposition, the right-wing Bharatiya Janata Party, has decried the move. "The government has clearly bowed to international pressure," spokesman Chandan Mitra told the NDTV news channel Thursday. India's $400 billion retail sector is the nation's second-largest employer, after agriculture, according to consulting firm Deloitte. The Ministry of Commerce says it will cost 76.9 billion rupees ($1.7 billion US) to build the additional 35 million metric tons of food storage India needs".

An issue which is not yet clear is why the government did not make an assessment regarding the impact, both negative and positive, of the establishment of several retail chains owned by some of the Indian lead players like Fortune group, Reliance, Godrej etc during the last five years?. Admittedly these Desi retail conglomerates have been able to conquer about 5% of the business and a critical study on their performance and effect of their operation on farmers, consumers and the small traders nearby, could have given a clearer picture, before taking the decision on FDI. How far the ruling dispensation at New Delhi will be able to garner the support of the its coalition partners, opposition parties and the state governments remains to be seen. 

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