Loopholes regime

Each time you think the government has given up on its plans to open up the retail sector to foreign direct investment (FDI) because of opposition from the Left, the government comes up with some new compromise formula.

A few weeks ago, the “solution” was to allow only big brands (like a Hugo Boss) to set up shop here.

When this died a natural death, helped along presumably by Indian franchisees since allowing foreign brands a direct entry would kill off their raison d’etre, there were reports that the government was planning to put a cap on the number of branches/shops that could be set up each year and, China-style, even specify the cities in which such shops could be set up.

I must confess here that I am in favour of retail FDI for what it will do to efficiency levels and the creation of viable sourcing chains, and am not convinced by the argument that it will ring the death knell of the unorganised retail sector--the crux of the argument against allowing firms like Wal-Mart to come in is that this company alone has a turnover of $250 billion, which is marginally higher than that of the entire retail industry in India, and that it employs just 1.4 million people, versus the 30-40 million employed in India.

So, by lowering prices so much, Wal-Mart will kill the kirana since everyone will flock to it. The argument doesn’t really hold water.

For one, anyone familiar with the industry knows that it’ll take decades for a Wal-Mart to be able to achieve the kind of volumes being talked of, given just how poorly organised retail has fared in the country so far and the fact that there are simply not enough large local suppliers for Wal-Mart to base its India-operations on--if, on the other hand, the business is to be based on Chinese imports, these become more costly, thanks to import duties, which can be jacked up at any time, and the customs nightmares are an altogether different matter.

The real issue, of course, is not even this. If Wal-Mart is to kill off local kiranas, it has to be cheaper by at least 10-15 per cent, right?

Apart from the fact that kiranas have vastly lower costs and offer personalised/flexible service (why do you think organised retailers like Big Bazaar are still to make a dent in the market?), what this means is that Wal-Mart will have to cut prices by around $25-35 billion (10-15 per cent of the industry’s turnover).

While this is highly doubtful, given that it’s nearly three times Wal-Mart’s global profits of $9 billion, surely a $25 billion increase in household savings will have a major impact on stimulating the economy and creating jobs, given that India’s total savings are around $125 billion?

Sadly, economic think-tank Icrier, which has just completed a study for the government to make a case for FDI in retail, has not done this elementary macro-economic impact exercise and has instead made a case based on an all-India survey of just 391 respondents, which puts out conclusions as flimsy as Indian “retailers do not compete with each other but make a local cartel in each pocket across the country … they sell their products at the MRP irrespective of the price that they buy the product for”.

But this article is not about the impact of FDI on retail. It is about the fact that FDI in retail is already here, that there are enough gaps in the law that allow it.

So, you had German-US retail chain Nanz, which set up shop 10-12 years ago (and flopped due to poor supply chain logistics!); US firm Dairy Farm operates the Foodworld grocery chain with the RPG Group; Dubai-based Lifestyle International operates the Lifestyle chain of stores; Metro of Germany operates out of Bangalore and is planning to expand to perhaps Kolkata; South African chain Shoprite has just set up shop in Mumbai; and Amway sells directly to housewives, as does Oriflame.

Fashion retailer Mango has outlets here, and UK retail chain Marks & Spencer has not only expanded its network, it is even planning to buy out its Indian franchisees and convert the venture into a wholly-owned subsidiary.

If so many foreign players are already in the market, what’s all the fuss about keeping FDI out?

Of course this curious strategy of allowing people to come in contravening the supposed spirit of the law is not unique to retail alone.

In the case of telecom, for instance, while the FDI limits were kept at 49 per cent, firms were allowed to hold equity through a series of holding companies, and this brought the effective FDI limit to 70-80 per cent, even more.

In which case, why go through the farce of saying the FDI is lower? Simple, by keeping the permissions a bit grey, it offers enough scope for brokers/consultants to do business, and that can only be good for a whole lot of people, including those in the government.