Sunday, June 12, 2005

FDI in Retail – A share in the Pie

previous post

Having dealt with some of the facile arguments, it is necessary to bear in mind some other equally important points:

Demand – supply imbalances on Real Estate:

Real Estate for shops in the main consuming centres viz. Metros and A category cities is at a premium. The supply is extremely slow and the real battle for business really begins with acquiring the shop space in the right size at a reasonable price. These are the very areas where the Global players, with their deep pockets, would like to make a splash, gobbling up premium shopping locations. In this game, the local players, howsoever big, do not stand a chance at this point of time. To allow entry of the Global players at this point of time would, in many ways, strike at the root of having a level playing field between the domestic and the foreign entities.

It is also submitted that as the issue of real Estate is primarily the domain of the State and the concerned Municipalities, sufficient consultations ought to take place with them before this major decision is taken.

Urban Sprawl:

Experience of other countries shows the creation of urban sprawls around the mega stores creates a lot of undesirable problems for State and City administrators and for this reason as well, the concerned administrations need to be consulted beforehand.

Threat from Imports:

It is true that the imports of consumer products have virtually been freed of restrictions. In recent years, the country has seen an increase in imports especially cheaper products from China, which is already affecting the local industry. It is true that this type of global competition is a fact in today’s world. However, when the Global Players establish shop, the imports can take the shape of a more determined and organised effort in order for them to become increasingly competitive in the Indian market. It should also be borne in mind that as of today, there is talk only of the Western Giants like Wal-Mart, Carrefour, Tesco and Casino setting foot. In the future, however, as even Chinese Retailers gain status, their entry into India would be a matter of time. We could then see the real Chinese competition with greater force.

A word about Wal-mart:

Wal-Mart is the largest Retailer in the world. Its turnover at US $ 285 bn. is 40% larger than the TOTAL RETAIL MARKET OF INDIA AS A COUNTRY, placed at US $ 200 bn. Inviting or allowing such a giant in the country is in itself and by itself a major decision for the entire Country, for the brute power that such a large company can wield.

While on the one hand, it is a much admired company for the growth that it has been achieving, there are many issues on which it has been criticized and a sampling of what many perceive as the negative side of the company and the way it does business, can be found on various websites listed in a previous article.

Inter alia, the company record as an employer has been consistently receiving adverse comments and these bear reading while assessing the argument that it is a model employer.

In the market place at the micro level, if Global players like Wal-mart are allowed entry in the key grocery and food retail, they will certainly be able to draw customers in large numbers to their other product lines. As anyone connected with modern retailing knows, it is the Grocery and Foods section that primarily draws the customer to the store who eventually ends up making purchases of other products in the store. A global player like Wal-mart, if allowed entry into the sensitive Grocery and Foods Sector, will certainly use predatory prices for these products to lure customers to the store and thereby gain customers for their other products as well. For a global player, offering low prices to gain market share is a normal strategem and the initial cost/loss, if any, is taken as cost of market entry. Such predatory pricing practices would be enough to result in loss of customers as well as financial loss for the much smaller competitors.

In allowing a company of the size of Wal-Mart in the Retail sector, the country also needs to be aware of the inherent risk and danger that such strong retailers can lead to corporate control of the food chain. Opposing such corporate control of the food chain should be a policy objective of the Government.

A share of the Pie for Free? :

As stated earlier, the Indian Retail market is going to reach a level of US $ 300 bn. in a few years’ time. Even the share of Organised Retail is going to be US $ 30 bn., if not more.

As any novice involved in International Business knows, “Market” is what every company wants and any Multinational would go through great lengths to get an entry into such a huge market with enormous potential as India. This is precisely the reason why MNCs look to establish joint ventures with or buy out existing players in the market and pay huge amounts to achieve their objectives. Typically, these MNCs promise the sky and the moon to get an entry and once this is done, such illusory benefits quickly disappear. The history of modern business, even in India, is replete with instances where the company who agreed to take a MNC partner was forced to sell its share in the business for a pittance in a short time. Every housewife in the Indian cities and villages knows about the conman who promises that the precious jewellery that one has would be doubled because of the supernatural properties the conman possesses. The gullible housewife who parts with the jewellery only wakes up to find that even what she had, is already gone. There is a moral in this story somewhere.

The Government seems to be ready to grant a share in the enormously huge and profitable Indian market to the Global players for the vague and nebulous promises held out by them and the Government’s own imagination running wild about the benefits such a move will bring. It would mean granting entry into a potentially huge market for FDI which may not be more than just a few billion dollars.

If the Government sees reason and does not change the existing rules of the game as far as entry in the Retail sector is concerned, would the Global players not come? For sure, they will find a way to enter the market even accepting the existing restrictions, for India is too important a market for them to keep away, as the growing number of franchises for foreign brands shows.

And finally, on FDI:

The country certainly does need large doses of FDI; of this, there is no doubt. However, FDI is warranted primarily in areas:

a. Where the requirements for finance are very high such as infrastructure and heavy industry

b. Where FDI is linked with critical technology to improve the capabilities of the Manufacturing Industry in terms of quantity, quality, production efficiency or new products

c. Of critical services such as Banking, Insurance, Transportation, Health, Construction, etc.

Even China, with all the large inflows of FDI it received in the earlier years, is becoming selective and planning to obtain more ‘quality’ FDI, in the context of their needs. see

As far as India is concerned, there are many areas that are more basic, in Infrastructure, Manufacturing and critical services where there is imminent need to boost the FDI inflow. The Government would do well to focus its attention on such areas.


At July 10, 2014, Blogger Vinay Singh said...

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