Is FDI in retail good or bad?

With the government campaigning for FDI in retail, the question is, is it really going to help? If yes, then whom?

Today, the ministry of commerce and industry took its campaign to promote FDI (Foreign Direct Investment) in retail to the literate population of India, with full page advertisements in newspapers.

 

The advertisement claims that such direct investment will bring huge benefits not only to the farmers but to the society at large and that it will generate over 10 million new jobs and so on. Naturally, it does not give any time frame to achieve this end.

 

 The ministry calls this as “another revolutionary leap” for the Indian economy. Reading such an ad makes it nice, but whether it will truly benefit the people in the long run remains to be seen. At least in US, it did not do so, according to the media.

 

The first and foremost fear is that farmers will be exploited by the predatory pricing policy of the large retailers, a job that is probably and already being done by a host of middlemen. So, instead of many such middlemen, there will one source where the farmer will face a single-window ‘clearance’, and that of the FDI retailer!

 

Having said that, will this process reduce the ultimate cost that the actual consumer has to pay for the farm products? Yes, in more ways than one, as the present Indian retails and supermarkets reveal.

 

Let's take a look at any Indian major city, like Bangalore, for instance.  There are several big business houses in retail, such as Reliance, Tatas, Goenkas, and supermarkets like Spar, Big Bazaar, etc to name a few.  In this category, we could include government sponsored HOPCOMs too.

 

There is intense competition amongst all these organizations. The pricing is sharp and the range of products covered is going up by the day.

 

And who are the buyers? They are the growing middle-class rich consumer society, where the chances are that both husband and wife earn a living and have a reasonably comfortable lifestyle. In all probability, they shop once in a week to make the purchases and do it methodically; no spur of the moment purchase, but needs are listed and shopping is done at leisure on chosen days.

 

The only thing that is left to buy is the odd item that may fall short which the family member at home or the cook may resort to purchase from the nearest Kirana shop or buy from the cart vendor, whose prices are at least 50% higher than the retailers mentioned above. This is based on the actual experience of the writer’s family.

 

FDI in retail is not a simple exercise to be covered in a single article but an in-depth study will take quite sometime and its impact cannot be visualized easily. If Reliance and Big Bazaar have come to stay, so will the FDI in retail, in due course.

 

FDI in retail will be subject to a lot of discussions and scrutiny. To generalize and compare how other countries have fared and still let kirana (small shops in road corners) survive or bring about better returns to farmer is a futile exercise. The conditions in India are different. We need to clearly spell out some basic pre-conditions that have to be complied within a specified time-frame, failing which, the licensee will have to pack up and go home.

 

a) At least 30% of the indigenous farm produce will have to be retailed

b) Each FDI-R licensee be given the choice of seven to 10 locations where it can commence its actual retail operations

c) These operating centres will have to be supported by actual infrastructural development of warehouses, cold storage and transportation logistics in identified sources of supply at the produce points

d) The next set of new cities will be after successful performance, a minimum of 18-24 months later, with the same conditions relating to infrastructure development or by expansion of existing ones

e) The activities of the FDI-R licensee will be subject to a close check and follow-up by a regulator who will maintain a watchdog committee for keeping a track of purchase pricing to retail selling; of the actual commitments in terms of fulfilling employment growth and how these actually are benefiting the country in terms of taxes earned

f) These FDI-R licensees should not become the single largest selling point for marketing products of other countries when identical or similar products of indigenous makes are readily available.

 

These measures would be the first of many that one can think of as a start.

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US. He can be contacted at [email protected].)

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    COMMENTS

    MOHAN

    8 years ago

    The following will be the News CNN IBN likely to broadcast a few years after Wal-Mart enters India.

    ( CNN - IBN changes its name. Now it is called CNN - KALAVATI )

    This is CNN -IBN broadcasting live from its headquarters at Bhatta Parsaul

    Headlines

    Rolls Royce opens its first ever mega show room in India at Nandigram in West Bengal. CEO of Wal-Mart India, Mr. Montek was present on the occasion.

    Large queues were seen in front of Raymond show room across Indian metropolitan cities, especially in "Erumapetty" in Tamil Nadu, Nargundu in Karnataka, Jadchrala in Andhra Pradesh, Podiya in Orissa, Dantewada in Chhattisgarh on the occasion of Holy. The police had to be called in to control the mob. The Raymond dealer at Singur in West Bengal said that he had to close the show room as there was scarcity of "SUITING MATERIALS AND NECKTIES".

    In the meanwhile, the CEO of famous underwear brand Jockie lamented that their company is passing through a very difficult time. He said that the rural rich still prefer Indian ties under their costly trousers. He requested the Nobel Laureate Mr. Vivian Fernandez, who won the Nobel Prize for his research on "Pepsi assisted farming" in Punjab, to intervene in this matter. Mr. Fernandez assured him that he will meet Prime Minster Rahul Gandhi and request him to levy an excise duty of 53.5% (advalorem !) for the Indian ties in order to discourage the rural rich from wearing the Indian tie.

    The Indian MULTI- national Tata Motors is coming out with a new model with a MULTI-jet diesel engine. A top executive of TATA Motors said "We will be soon selling our cars through MULTI-brand retailer Wal-Mart. We also had talks with MULTI- level marketing company Amway". But since they cannot enter into Andhra Pradesh we have decided not to proceed further !




    REPLY

    Gaurav Mittal

    In Reply to MOHAN 6 years ago

    This comment is better than the article itself. Please keep up your sense of humor.

    Sucheta Dalal

    In Reply to MOHAN 8 years ago

    Mohan

    I agree with Krishnan B S... your post is truly hilarious. But instead of Facebook, how about a satire column for moneylife??
    Do write to us at [email protected] or [email protected] or both!

    Krishnan B S

    In Reply to Sucheta Dalal 8 years ago

    Wow ! Suchetaji, thats a very good suggestion. We support you in this approach, we need humor with substance.
    Thats why I also put the links of Prof R Vaidyanathan's of IIM Bangalore links, who has a great sense of humor. You will like the links given below of his if you have time to read it !

    Krishnan B S

    In Reply to MOHAN 8 years ago

    MOHAN Hilarious One ! Are you there in Facebook, so that I can read more of your humor ! ?

    N Kanitkar

    8 years ago

    FDI in the retail sector will seriously impact our bio-diversity primarily as far as our food is concerned . The retail sector will want standardised market produce grown under conditions that they really do not care about. It is like the big food corporates in the USA.As it is , thanks to the population, food has become a commodity, no longer something that nourishes. For that we have all kinds of tonics, medicine and food supplements which is also a super industry.

    Krishnan B S

    8 years ago

    ThankU Mohan & Dr Anantha K Ramdas
    1. Can only Foreign companies bring in modernity to this sector?
    A) The fact is we have got $120 Billion FDI in the last 10 years. And at least $70B is through Mauritius or P Notes routes, which is all Politicians money. So that itself proves we are not short of money. Even if 10% of Corruption is curtailed we can have at least double this amount ($20B)annually for investments in our country. (See 2G itself was $35 Billion)

    For other valid questions raised, Please read :
    2)http://www.freepressjournal.in/news/3262...
    3)http://www.firstpost.com/economy/should-...

    MOHAN

    8 years ago

    Mr. Montek Singh Ahluwalia says in a interview FDI is welcome because we need to modernize Retail Business. He also says it will give quality jobs to young people.

    1. Can only Foreign companies bring in modernity to this sector?

    2. What is is meant by "modernization of retail industry"? (A computer and an electronic weighing machine?)

    3. What is meant by "quality jobs"? (A suit and and a necktie" ?)

    4. Is it not a fact that modernization reduces chances of unskilled jobs? (How many of our poor youths are computer literate? )

    5. If a young man gets an employment in a foreign retail shop as a salesman, what are his promotion chances? Can he ever become the GM etc? (btw, What is the rate of attrition in this industry in foreign countries)

    6. Many of the workers employed in supermarkets are employed on temporary basis. Can the government assure that there will not be any temporary employees in foreign retail chains?


    7. What will happen to middle aged and old people who are now running small retail shops? (Will the Government give them Pension ?)

    Dr Anantha K Ramdas

    8 years ago

    Mr Krishnan, thanks for expressing similar views on the subject of FDI entry in retail biz in the country.

    Sir, if charity begins at home, so does inflation. You and I pay a high price to buy our daily requirements, be it a kilo of potatoe or tomato, which can vary from Rs 15 to 11 in a supermarket; it is ultimately, and regretably, the producer i.e. farmer does not get even Rs 3 when it is literally taken away from him by the middlemen - chain of them.

    Our economic system has to change and our approach to pay a fair price for the farmer for his produce. Only the Banks have to take over the job of moneylenders in the villages and bring wealth to the farmer.

    It is the government policy that matters and that only can bring an effective change.

    Krishnan B S

    8 years ago

    Regarding this above article, the argument of competition and discounts and other things will be there till the MNC's achieve their medium term targets of achieveing a sizable portion of the market.
    Then it will be a monopoly where the prices will sky rocket as it happened in the last 4 years. All the grocery from Milk to Green Chilly went up by 100 = 150%. We have seen this in reality recently and still dont see the writing on the wall. I guess it is the story of 6 blind men describing an Elephant known as FDI in retail !

    Krishnan B S

    8 years ago

    I am not against FDI in retail perse, however we are not ripe for it. why? So we have a story!
    A father has 3 sons. The father educates the First son well and he gets a good job. When the second son is ready for education the father is not in a good state so he makes him study some technical education in institutes like ITI. He grows up and has job now and then, but no permanent employment. Then the third son is ready for education, the father is in a really bad shape, he is not able to educate him at all. And he has to do manual labour. That is the story of India.
    The first son is the 25% of population who are in the elite and middle class who are ready for FDI in retail.
    The second son is the 30% people who are just above poverty line, ( just above Rs.30 income daily) in semi urban status.
    The third son is below poverty line (45%) who dont have skill sets or education, in villages.

    The second and third section of the population do not have money for even food, clothing and shelter. And once these people have at least means for food and education, and clothing, it would be okay to bring in FDI in retail. And it would be possible with a good active, Honest PM like Dr S Swamy or N Modi in 5-10 years depending on the progress we make.
    My colleague felt convinced on this reply ! Are you ? I dont know, but no bad feelings even if you don't ! :)

    Meenal Mamdani

    8 years ago

    A thoughtful article that outlines the potential benefits but also possible negative outcomes.
    One had hoped that the big name Indian firms listed in the article would have pushed for reform of the ancient laws governing selling of farm produce, establish cold chains, etc. But they have not done so and one wonders why. Any way, now that new players are coming in, may be they will shake up the lethargic system with eventual benefits for both farmers and consumers.

    REPLY

    Ravindra

    In Reply to Meenal Mamdani 8 years ago

    This is what puzzles me also. Why the Indian bigwigs who have been very successful in many fields of commerce and industry do not try their hands at the Retail Business except very few honorable exceptions like Reliance?
    Why we need Foreign Companies to do this? Is it that complicated a business, more complex than manufacturing a car right from the design stage?
    The main reason for the high prices to the final buyer of vegetables is the middlemen, the people who are in the 'Agricultural Produce Market', the one in Vashi in Navi Mumbai.
    With the famous slogan of Wallmart 'Everyday lower prices' how much the farmers will be squeezed is a moot question.
    Also there must be a restriction of Maximum 15% imports if we want the FDI Retail activity not to kill the Indian suppliers at the cost of the Chinese. Only 30% Local Produce is not enough. Does it mean that Walmart will have the freedom to import 70% from China. There are umpteen examples in USA where the US Companies got killed by Walmart due to Chinese Imports.

    ICICI, HDFC Bank follow SBI; revise FD rates by up to 0.5%

    Following SBI's move to cut interest rates on deposits to 1%, both ICICI Bank and HDFC Bank also reduced their interest rates on fixed deposits by 0.5%

    Mumbai/New Delhi: Country's two largest private sector lenders ICICI Bank and HDFC Bank have revised interest rates on fixed deposits by up to 0.50% each, a week after State Bank of India (SBI), the largest lender in the country, reduced term deposits rates, reports PTI.

     

    ICICI Bank has reduced interest rates of retail fixed deposits by 0.5% for tenures ranging from 91 days to less than 5 years, the bank said in a statement. "ICICI Bank has also rationalised the interest rate on retail fixed deposits of tenure up to 45 days," it said.

     

    Under the revised rates effective from 11th September, the bank, which earlier had a peak offering of 9.25%, will now offer 8.75% for a deposit under Rs15 lakh in the 390-day to less-than-two-year period, according to the information available on its website.

     

    Meanwhile, HDFC Bank has revised interest rate on fixed deposits by up to 0.50% on select maturities.

     

    For deposits of maturity between six months 17 days and nine months 15 days, the upward revision is 0.5% to 7.75%. Term deposits for nine months 16 days would earn 0.25% lower interest at 7.75%.

     

    The rate on nine months 17 days to 1 year fixed deposit would go up by 0.5% to 7.75%, as per the data posted on the bank's website.

     

    Last week, state-run lender SBI slashed interest rate on fixed deposits up to 1% across various maturities.

     

    SBI Chairman Pratip Chaudhuri had said its deposit rate cut of up to 1% was aimed at protecting the margins as deposits have grown much faster than advances in recent months.

  • User 

    Price war among stock exchanges to break out soon?

    With MCX-SX pricing its charges most competitively for brokers, what would be the reaction of other exchanges? NSE, the most expensive, but the richest exchange is yet to react. If it does, a bloody price war would break out

    With MCX Stock Exchange’s (MCX-SX) announcement to begin its operations around Diwali, its ‘attractive’ transaction fee structure for members trading in equity cash, futures and options segments, is out. The comparative analysis of charges of the three exchanges show that the overall costs for brokers at MCX-SX are nearly 50% lower than that of BSE and NSE.
     

    Comparative transaction charges in Equity Cash Segment

     

    In the cash segment, while NSE’s price is on the higher side, BSE and MCX-SX seem to be on par. BSE’s charges are uniform across value segments, and even more for active orders. Remember, BSE offers add-on incentives for trading higher volumes. Data collected by Moneylife in August 2012 indicated an incentivised trading volume of Rs3,420 crore by broker members of BSE.

     

    Comparative transaction charges in Equity Futures Segment

    In the equity futures segment, MCX-SX’s charges are sharply lower than that of NSE.
     

    Comparative transaction charges in Equity Options Segment

     

    Interestingly, it is in the options segment that MCX-SX has decided not to compete hard; it is the most expensive. It may be recalled that BSE has been trying to promote its volumes in the options segment. BSE is by far the cheapest but applies that rate to active orders only. BSE incentivises brokers for trading volume, open interest, quoting obligations and overall transactions. According to Joseph Massey, MD and CEO of MCX-SX, the exchange has kept its transactions charges lower in order to create a deeper market penetration. According to Mr Massey, the lower transaction fee allows members to enjoy the additional, notional capital released, that would otherwise be blocked.
     

    Moneylife had earlier written about how BSE has sharply reduced its charges in order to attract volumes (http://www.moneylife.in/article/stock-exchanges-bses-gambit/27913.html ), and pointed out that BSE’s strategy of introducing lower costs as having a dual advantage. One, that BSE would take away business from the NSE in case the latter did not reduce charges. On the other hand, if NSE did, its huge profitability would suffer. In addition to that, BSE’s significantly lower charge structure was designed to raise entry the barrier for MCX-SX. But MCX-SX has now countered this with the most competitive charges in the market, except in the options segment where it has chosen to be expensive.
     

    While BSE provides its brokers with incentives based on daily average trading volumes, MCX-SX, as of now, does not want to follow this strategy, said an MCX-SX spokesperson. MCX-SX has, however, decided to widen its membership reach. It has extended its membership offer to different categories of people, including rural entrepreneurs, which it claims, is expected to work towards financial inclusion.
     

    A price war among the exchanges is brewing. It will be a matter of time before NSE reacts to MCX-SX’s pricing. It will impact the bottomline of all three players directly, mainly MCX-SX which is losing money from the currency options segment—all at a time when the business volumes are down and equities are widely seen to be unattractive.

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    COMMENTS

    SUNIL KUMAR HEMNANI

    8 years ago

    The entry of another exchange will no doubt bring a price war out.But lets see just how much the retail is able to benefit from this .Currently the taxes on every transaction take away a substantial amount on every trade .Even though a cut in brokerage would be welcome by the trader community ,a cut on STT would go a long way in reducing costs per transaction.The fact is with reduced costs retail investors should use this and try to make some beneficial wealth for the short term as well.

    K G Krupal

    8 years ago

    IF THE NEW STOCK EXCHANGE ALSO FOCUSES ON THE VOLUME IN LIEU OF QUALITY then it will add up for evaporation of Wealth and Investment cult, which will make markets more unstable.

    When SEBI is thinking of demerging the DEBT Market from the existing Stock Exchanges and making a Separate Stock Exchange, new Stock Exchange can focus on this and try to spread the tentacles into the rural area and develop equity cult INVESTMENT.

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