Tuesday, May 27, 2008

The debate over organized retail in India

With the big names of foreign retail knocking on India's doors, it is no surprise that there is a raging debate on whether foreign investment should be allowed. The Left backed UPA government is under increased pressure to not opening up retail sector to foreign investors. However the government has provided a "back door" entry to foreign retailers allowing them access to the Indian market by way of "franchises"

The Proponents of Organized Retail argue that

  1. Foreign investment will hasten the pace of organised retailing. Their case in point: China.In just ten years after China permitted FDI in the sector, the share of organised retail has grown from 10 per cent to 20 per cent.

  2. Current laws allow foreign retailers to access the Indian market via the franchisee route, as has been done by the likes of Marks & Spencer and Mango. Foreign retailers are allowed outlets if they manufacture products in India or source their goods domestically.Foreign retailers therefore, have access to the Indian retail market, while India loses out on the foreign direct investment(FDI).

  3. Foreign retailers would be inclined to source from the Indian market to ensure that goods reach customers on time. As they grow familiar with Indian products, they are also likely to increasingly source from India for their international operations. This will benefit the farmers and help improve quality of their produce.

  4. Some argue that the the "mom & pop" stores have unique advantages such as an understanding of local needs and superior service in the form of home delivery, which will help them retain their edge over the large supermarkets, foreign or Indian.

  5. Competition for the neighbourhood "mom & pop" store could come just as easily from the Big Bazaars and Food Worlds of modern Indian retail.

The Opponents of Organized Retail argue that

  1. The entry of big foreign retailers will displace labour in the retail sector, which employs a massive unskilled workforce.
  2. Any retailer Indian or foreign will have to to invest huge sums of money in setting up a supply chain, cold chains and train farmers to produce goods that meet quality standards.Most retailers have succeeded in this only at the regional level. They do not have the financial muscle to set up a supply chain on a national level. This would give foreign competition an edge and hence the government should not allow foriegn players into the retail space.

I believe preventing foreign investors from entering the Indian retail space only delays the inevitable. Just like any other developed country, the "mom & pop" shops will need to go but most of the unemployed will probably find jobs with the Large retail chains-foriegn or Indian. Big retail chains will fancy the work experience of folks running the "mom & pop" shops and will probably hire them. Historically, such changes have always resulted in the betterment of the consumer and the worker. Furthermore ,Increased competetion is likely to benefit the consumer, the farmer and the worker.

Hopefully the next government elected will not be a coalition government and will be able to take bold decisions to end this debate and take steps to reform the retail sector in India.