Foreign Direct Investment is type of investment allowed in a
country for foreign players to setup Company / Shops / Organisation. FDI in
retail would mean allow foreign players to setup shops in India giving the
power to own 51% of their ownership in the Shop, which simply means they are
the owner for the shops.
Presently retail sector in India works as follows.
Let us take example of Vegetables you buy from grocery shop.
It starts with farmer producing the crop with cost of Rs 5 for 1KG. And middle-man
buys the Vegetables from the farmer with Rs 6 for 1KG, with mere profit of 1 Re
for farmer and sells it to consumer in the urban city with for a price of Rs 10
for 1 KG, with huge profit of Rs 4 for 1 KG.
Above is hypothetical scenario, in real world, middle-man would
make more profit, leaving customer and farmer under loss.
There are two types of retail business in India (Both food retailing
and non food retailing)
- Organised Sector
- Unorganized sector.
Organised
Sector retailing refers to trading activities undertaken by licensed organised retailers,
that is, those who are registered for sales tax, income tax, etc. These include
the corporate-backed Hypermarkets and retail chains, and also the privately
owned large retail businesses. In India this accounts for 2 % of the retail
activities.
Unorganised
retailing, on the other hand, refers to the traditional formats of low-cost
retailing, for example, the local kirana shops, owner manned general stores,
paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. In
India this accounts for 98% of the retail activities.
Among
the total retailing activities, food retailing accounts for 63% in total sales
in retail.
Since
98% of retail activities are contributed by unorganised sector, so this shows major
employment comes from the unorganised sector.
Now the
Debate is – should we allow FDI - foreign player to play in retail game or
should it’s up to domestic players to enjoy their own game ?
Let’s
see what if the rules for game changes and if there is foreign player participating
in the game. Let’s assume if foreign player is allowed in India, so he
brings Investment in setting up the shop in all major cities in India, His
investment portfolio would be.
- % of investment would go for setting up the supply chain infrastructure( Procurement & its machines, Transport infrastructure, Cold Storage , Warehouse infrastructure, retail outlet)
- % of investment would go for operating cost.
Since major portion of the investment would be on developing
the Supply chain infrastructure because foreign player would try to achieve the
low cost in procurement and eventually sell at low price to consumer. This
would give many opportunities which are as follows
- Development of rural India,
- improve the standard of living of rural India and end consumer,
- would ensure better profits for farmers,
- would ensure products available at low price for consumer,
- would ensure more purchase from consumer,
- would ensure more employment in retail sector,
- Less wastage of the products, because of improved storage facilities.
- Introduction of Technologies from the foreign countries.
- Farmers suicide can be prevented
- Overall improvement in economy, and this would lead to reducing inflation in the country.
Now the fear is
protecting the domestic players in the game from ambushing foreign players.
Since Indian retail industry is highly fragmented industry with 11 million
outlets operating in the country and only 4% are larger than 500 Square feet in
size.
· Modern retailing is labour displacing to the
extent that it can only expand by destroying the traditional retail
- Job losses in unorganised retail sector.
- Foreign players will disrupt the current balance of the economy.
So only concern is unemployment in unorganised sector, but
this concern is major and very critical.So to protect their livelihoods job needs to shifted to
other sectors so here few options
- Agriculture is already overcrowded & manufacturing sectors needs to improved
- Training can be provided in Supply chain
- Creation of infrastructure for retailing at mandis
- Community welfare
- Government providing credit facility & Private – Public co-operation.
- So these are very few recommendation for tackle after effect of FDI policy.
I am keeping my fingers crossed to see the debate being concluded very soon. :):)