Yehi hai right choice! Financial Express 28th November 2011

If organised retail is acceptable and adds value to the food chain by delivering superior results through better logistics, shopping experiences and prices, then getting in FDI is really no different. Logically, the fact that investment is by a foreigner and not an Indian should not be a limitation. Against this premise, the government’s decision to permit up to 51% in multi-brand retail is more than welcome.

There are basically three sets of issues that should be understood: the advantages of FDI, the concerns on this score and lastly the issues for foreign investors in this space.

FDI is actually a win-win situation for us in India where there is limited infrastructure for fully harnessing our farm production. By putting in conditions of back-end investment, we are actually ensuring that the requisite infrastructure in the form of warehousing including cold storage, transport, processing, packing and packaging develop along with this model. Also, by putting a 30% norm on procurement from small units, the issue of inclusion is addressed. The build-up of strong logistics support can actually change the shape of our farm sector by cutting down on wastages, improving efficiency and lowering costs. At the end of the day, prices have to come down or else there will not be takers.

The interesting aspect of FDI in this space is the procurement process. While it will be through the regular channels, a difference will be made in terms of quality and pricing. Quality enhancements are a corollary of such models as there will be insistence on specifications. Curiously, this has worked well in India ever since futures trading were restored. Farmers now have migrated to growing exchange specified qualities, which, in turn, has set benchmarks. Hence, the NCDEX sugar or NCDEX chana or NCDEX soybean has become a norm, which provides better prices to the farmer.

The other issue is on pricing. The entry of large corporates in India, like ITC’s e-chaupal, has actually led to better prices being provided to farmers with added transparency. FDI here will only accelerate this process. An interesting thought here is whether we will actually see the proliferation of contract farming, which will greatly assist our agricultural sector as it will go according to the investors’ specifications.

Therefore, from the point of view of the system as well as consumers, FDI should be welcome as this will also bring along higher employment along the entire value chain and create the necessary skill sets. Will this be what in economics is called a Pareto Optimal situation, where some are better off and no one worse off?

There are some concerns here on what happens to the mom-and-pop (M-P) stores with the Walmarts and Tescos making strong inroads. The experience of organised retail in India shows that nothing has actually changed though, admittedly, their scale of operations is limited. The M-P stores actually have certain distinct advantages over organised retail stores. They can be located anywhere and closer to the consumer. They provide credit facilities and home delivery services. Further, they are flexible with their packaging and deal with all brands—the lesser known indigenous ones to the bigger ones, hence catering to all price segments. The same cannot be replicated by organised retail. Also, the fact that you can phone in and get your stuff makes a difference. Further, Indians, as a rule, like to physically feel the products, which is not possible in case of packaged goods. Therefore, the fear of displacement is not really founded. One must remember that, given the space required for organised retail, they cannot be there everywhere and the M-P stores have an advantage.

The challenge is more for the investors. Given the limited success of organised retail and the 5-10 years break-even, there will be serious thinking on their part. The fact that our market is large with growing population and incomes is a teaser. Further, given that less than 5% is organised means that there is space for more operators. Their experience in other developing markets will help in replicating these models with modifications. But, two issues stand out. The first is the cost of operations, given that property is expensive as are rents and other operating costs. Second, a practical problem relates to resistance from local population. It has already been seen that organised retail has been driven out in certain states. Hence, while the entry into metro cities may be easier, as they proliferate to tier-2 and tier-3 cities and rural areas, there would be a lot of resistance. This is beyond Parliament and legislation.

What then can we expect? We can expect FDI of around $5-10bn to come in the first few years. Such investment will strengthen in a limited way the infrastructure needed in the farm sector. It will be confined to the metro and larger cities to begin with, which will not really cause distortions to the M-P stores. The impact on improved supplies and inflation will be felt only when organised domestic and FDI retail is able to actually reach out to around 30-40% of total retail sales. Or else there will only be pockets of improvement in specific geographies and sectors. The policy is definitely progressive and, more importantly, brings in the dollars for us.