Unlocking an open door

The government’s official view, articulated as recently as two days ago by Commerce and Industry Minister Kamal Nath, is that allowing foreign investment in multi-brand retailing, of the Wal-Mart and Carrefour type, will hit the millions of small mom and pop (kirana) stores in India. Hence the circuitous and limiting freedoms given so far: allowing foreign direct investment (FDI) for only single-brand retail stores (such as Mont Blanc and Louis Vuitton) or in the cash-and-carry business which does not affect the kiranas since it is aimed at eliminating the wholesaler. Indeed, Mr Nath had said that even if the Left parties, who have been opposed to FDI in retail, were to change their stance, he did not think multi-brand retailing should be opened up to foreign investment. Well, imagine the surprise now that Mr Nath is talking of opening this FDI window just that much more, while ensuring that the kirana is under no threat. The areas which are being thought of for this include electronics, sports goods, building equipment, stationery and possibly furniture. The argument is that since these items are not really stocked by the neighbourhood kirana, the latter will not be hit.

The question is whether this is akin to unlocking a door that has already been opened by someone else. FDI in organised, multi-brand retailing is already here; to persist therefore with the fiction that India allows FDI in only single-brand retail or in the wholesale cash-and-carry type of business is to fool no one. The policy as it already exists allows FDI in the cash-and-carry business and it also allows foreign retailers to operate in the country through franchisees. It is using a combination of precisely these two elements of the package that Sunil Mittal of Bharti is planning a huge retail empire in partnership with Wal-Mart. If Wal-Mart is going to be here anyway, why keep up the pretence of not allowing multi-brand retail FDI? And since Bharti-Wal-Mart can stock any manner of sports goods or electronic items, why talk of allowing multi-brand retail in just these limited areas?

The reason why this subterfuge continues has little to do with the Left parties that Mr Nath chose to speak of the other day; it has more to do with the government’s own lack of firm conviction and the possibility that it has not fully studied the impact of FDI in retail. Since Indians spend 40 per cent of their annual expenditure on groceries, if a Wal-Mart type of multi-brand retailer lowers prices by (say) 20 per cent through better supply chain management, the impact on saving and spending patterns will be substantial, given that 60 per cent of GDP is accounted for by household consumption. As for the impact of the cash-and-carry business on kiranas—there is an obvious complementarity between the two since cash-and-carry is a wholesale business which offers lower prices for clients like kiranas due to superior logistics. Indeed, when Metro AG first began operations in Bangalore, one of the arguments made was that there was a large swathe of kiranas that did not get serviced by the existing distribution network of large consumer product firms like Hindustan Lever, and that it was going to benefit them—cash-and-carry did not offer credit like Lever did, but it sold goods at a lower price. Perhaps the government needs to educate itself on these issues.