Organised retail positive on FDI entry to meet increasing costs, improve and expand operations
Shukti Sarma 21 June 2011

Experts say it is too optimistic to hope that FDI will curb inflation which is the outcome of restrictive laws, poor infrastructure and wastage

The chief economic advisor to the government and the National Planning Commission have said that allowing foreign direct investment (FDI) in retail will help tame inflation. However, a section of experts are not so sure that allowing FDI will bring about any changes.

"Most retailers are suffering losses and are having problems with staffing and cost management. FDI may bring some relief, but overall neither will it have any impact on inflation or change the retailing scene," said an analyst. He was commenting on the government allowing foreign investment in Delhi, Mumbai, Kolkata, Hyderabad, Bangalore and Chennai.

The Confederation of All India Traders (CTAI) has raised serious objections to FDI in retail, saying that the idea that FDI in retail will tame inflation in imaginary.

"The argument that FDI in retail will tame inflation is nothing but an imaginary exercise by the people who have the tendency to ignore the ground realities," CTAI said in a statement last week, in view of the poor infrastructure and archaic laws that have hampered effective distribution and marketing of goods in the country.

At a meeting last month, Dr Kaushik Basu, the government's chief economic advisor, said, "The gap between farm gate prices of agricultural produce and the retail prices (in India) are amongst the highest in the world as also amongst the emerging markets. China, which opened its retail sector to FDI in 2004, has shown the benefits of opening of the sector and having in more players." This idea that FDI-backed modern retail could curb inflation has been repeated by big global retail chains like Wal Mart and Carrefour, who are trying to enter the Indian market.

According to some sector experts, the idea that FDI will bring in advanced business acumen and management know-how, does not answer how it will eliminate the problems which has plagued the public distribution system, and the supply of goods-problems of corruption, wastage and the lack of legal and infrastructure facilities.

According to a study published by Nielsen, sales at modern retail stores grew by 34% in 2006 and 29.3% in 2010. Traditional kirana stores could increase sales by only 1.5% in 2006, but improved growth to 6.2% last year. Organised retail makes up less than 10% of the retail market in India, which is estimated at close to $400 million. The Boston Consulting Group has estimated the size of the organised retail market at $28 billion and expects it to grow nine times to $260 billion in 10 years.

"It is well known that organised retail constitutes a very small space in India's retail sector. Allowing FDI in that space will not constitute any major upheaval," another analyst said. "Moreover, companies like HUL are reaching out to rural customers themselves, often in the absence of modern retail. So it may be too soon to perceive that the kirana sector is under a threat."

Shortage of retail space, a steep rise in rents at premium locations, problems with inventory and goods management have emerged as the main concerns for retailers. FDI could help them in a sort of financial recovery and aid their expansion plans.

In the next 18 months, the Future Group plans to open 250-300 stores, Aditya Birla's More and Reliance Retail are looking at more hypermarkets and 150 stores each. By 2013, Spencers wants to add 1 million square feet of retailing space to the chain.

While the suggestion that the presence of FDI in retail could help reduce inflation appears unconvincing, it could give hope to retailers who are looking for financers during a lull in the market.

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